$13,320,000 $1,080,000

Transcription

1 NEW ISSUE BOOK-ENTRY ONLY NOT RATED SERIES 2017A BONDS NOT BANK QUALIFIED In the opinion of Dorsey & Whitney LLP, Minneapolis, Minnesota, Bond Counsel, based on present federal and Minnesota laws, regulations, rulings and decisions, interest to be paid on the Series 2017A Bonds (as hereafter defined) is excluded from gross income for federal income tax purposes and from taxable net income of individuals, estates, and trusts for Minnesota income tax purposes, and is not an item of tax preference for federal or Minnesota alternative minimum tax purposes. Such interest is included in taxable income for purposes of the Minnesota franchise tax on corporations and financial institutions and in adjusted current earnings of corporations for federal alternative minimum tax purposes. Interest on the Series 2017B Bonds (as hereafter defined) is not excludable from gross income and is subject to both federal and Minnesota state income taxation. See TAX MATTERS in this Limited Offering Memorandum. $13,320,000 City of Deephaven, Minnesota Charter School Lease Revenue Bonds (Seven Hills Preparatory Academy Project) Series 2017A Dated: Date of Issuance $1,080,000 City of Deephaven, Minnesota Taxable Charter School Lease Revenue Bonds (Seven Hills Preparatory Academy Project) Series 2017B Due: October 1 as shown on page ii hereof The above-referenced Charter School Lease Revenue Bonds (Seven Hills Preparatory Academy Project), Series 2017A (the Series 2017A Bonds ), in the original aggregate principal amount of $13,320,000 and Taxable Charter School Lease Revenue Bonds (Seven Hills Preparatory Academy Project), Series 2017B (the Series 2017B Bonds ), in the original aggregate principal amount of $1,080,000, are special, limited obligations of the City of Deephaven, Minnesota (the Issuer ). The Series 2017A Bonds and the Series 2017B Bonds are together referred to as the Series 2017 Bonds. The Series 2017 Bonds are being issued pursuant to an Indenture of Trust, dated as of October 1, 2017 (the Indenture ), between the Issuer and U.S. Bank National Association, as trustee (the Trustee ). Undefined capitalized terms used herein are defined in the text hereof or APPENDIX E of this Limited Offering Memorandum. Pursuant to a Loan Agreement, dated as of October 1, 2017 (the Loan Agreement ), all proceeds of the Series 2017 Bonds will be loaned by the Issuer to SHPA ABC (the Company ), a Minnesota nonprofit corporation and 501(c)(3) organization. Proceeds of the Series 2017 Bonds will be applied by the Company to: (i) finance the acquisition, construction, improvement, and equipping of an approximately 75,000 square foot facility located at 1401 West 76th Street, Richfield, Minnesota (the Facility ) to be owned by the Company and leased to Seven Hills Preparatory Academy (the School ), a Minnesota nonprofit corporation and 501(c)(3) organization, which operates the public charter school authorized by Friends of Education known as Seven Hills Preparatory Academy ( Seven Hills Preparatory Academy ); (ii) fund a debt service reserve fund; (iii) pay capitalized interest on the Series 2017 Bonds; and (iv) pay costs of issuing the Series 2017 Bonds (the Project ). See DESCRIPTION OF THE SERIES 2017 BONDS and SECURITY AND SOURCES OF PAYMENT FOR THE SERIES 2017 BONDS herein. The Series 2017 Bonds are not secured by or payable from any taxes, revenues or assets of the Issuer except for the Issuer s interest in the Loan Agreement and amounts held pursuant to the Indenture as described herein. The Series 2017 Bonds will be payable from the money held by the Trustee under the Indenture. The Series 2017 Bonds will be secured by a mortgage lien on and security interest in the Mortgaged Property (as defined herein) and an assignment of all rents, revenues and profits thereof (excluding certain rights of the Company to reimbursement and indemnification payments). The Facility will be leased by the Company to the School pursuant to a Lease Agreement, dated as of October 1, 2017 (the Lease ), which the Company will assign to the Trustee, and under which the School will be required to make Lease Payments in amounts sufficient to pay debt service on the Series 2017 Bonds, plus certain other payments. The Series 2017 Bonds will be issued as fully registered bonds in the denomination of $5,000 or any integral multiple of $5,000 in excess thereof and will initially be registered in the name of Cede & Co., as registered owner and nominee for The Depository Trust Company, New York, New York ( DTC ). Purchases of the Series 2017 Bonds will be made in book-entry form only. Purchasers of beneficial interests will not receive certificates representing their interest in the Series 2017 Bonds. See APPENDIX H BOOK-ENTRY ONLY SYSTEM. THE SERIES 2017 BONDS ARE SPECIAL, LIMITED OBLIGATIONS OF THE ISSUER AND WILL NOT CONSTITUTE A DEBT, LIABILITY, GENERAL OBLIGATION OR PLEDGE OF THE FULL FAITH AND CREDIT OF THE ISSUER, THE HOST CITY, THE STATE OF MINNESOTA (THE STATE ), OR ANY POLITICAL SUBDIVISION THEREOF. THE ISSUANCE OF THE SERIES 2017 BONDS DOES NOT DIRECTLY OR INDIRECTLY OR CONTINGENTLY OBLIGATE THE ISSUER, THE HOST CITY, THE STATE, OR ANY POLITICAL SUBDIVISION THEREOF TO PAY THE SERIES 2017 BONDS FROM TAXES OR TO MAKE ANY APPROPRIATION THEREFOR. NO BONDHOLDER WILL HAVE THE RIGHT TO DEMAND PAYMENT OF THE PRINCIPAL OF, PREMIUM, IF ANY, OR INTEREST ON THE SERIES 2017 BONDS OUT OF ANY FUNDS OR FROM ANY SOURCES OF REVENUE OTHER THAN THOSE EXPRESSLY PLEDGED TO THE PAYMENT OF THE SERIES 2017 BONDS PURSUANT TO THE INDENTURE. The Series 2017 Bonds are subject to optional, mandatory, and extraordinary redemption as described herein under THE SERIES 2017 BONDS - Redemption of Series 2017 Bonds. An investment in the Series 2017 Bonds is subject to certain risks. See BONDHOLDERS RISKS in this Limited Offering Memorandum. This cover page contains certain information for quick reference only. This cover page is not intended to be a summary of the Series 2017 Bonds or the security therefor. Investors must read the entire Limited Offering Memorandum, including the Appendices hereto, to obtain information essential to the making of an informed decision. The Series 2017 Bonds are offered when, as and if issued and accepted by BB&T Capital Markets, a division of BB&T Securities, LLC (the Underwriter ), subject to the opinion as to the validity of the Series 2017 Bonds and tax-exempt status of the Series 2017A Bonds by Dorsey & Whitney LLP, Minneapolis, Minnesota, Bond Counsel to the Issuer. Certain legal matters will be passed upon for the Underwriter by Ice Miller LLP, Columbus, Ohio, and for the Company and the School by Rupp, Anderson, Squires & Waldspurger, PA, Minneapolis, Minnesota. BerganKDV, Farmington, Minnesota, is serving as financial manager to the School in connection with the issuance of the Series 2017 Bonds. It is expected that the Series 2017 Bonds will be delivered on or about October 3, For information with respect to the Underwriter, see UNDERWRITING herein. The date of this Limited Offering Memorandum is September 19, 2017

2 The Facility prior to the commencement of the Construction Project

3 MATURITY SCHEDULES $13,320,000 City of Deephaven, Minnesota Charter School Lease Revenue Bonds (Seven Hills Preparatory Academy Project) Series 2017A $1,000, % Term Bond due October 1, 2027; Price: %; Yield: 4.375% CUSIP: 24380HBJ0 * $4,020, % Term Bond due October 1, 2037; Price: % C ; Yield: 4.900% C CUSIP: 24380HBK7 * $8,300, % Term Bond due October 1, 2049; Price: %; Yield: 5.000% CUSIP: 24380HBL5 * C Price and yield calculated to first optional redemption date of October 1, 2024 $1,080,000 City of Deephaven, Minnesota Taxable Charter School Lease Revenue Bonds (Seven Hills Preparatory Academy Project) Series 2017B $1,080, % Term Bond due October 1, 2024; Price: %; Yield: 6.125% CUSIP: 24380HBM3 * THIS LIMITED OFFERING MEMORANDUM, INCLUDING THE APPENDICES HERETO, CONTAINS STATEMENTS WHICH SHOULD BE CONSIDERED "FORWARD-LOOKING STATEMENTS," MEANING THEY REFER TO POSSIBLE FUTURE EVENTS OR CONDITIONS. SUCH STATEMENTS ARE GENERALLY IDENTIFIABLE BY WORDS SUCH AS "PLAN," "EXPECT," "ESTIMATE," "BUDGET" OR SIMILAR WORDS. THE ACHIEVEMENT OF CERTAIN RESULTS OR OTHER EXPECTATIONS CONTAINED IN SUCH FORWARD- LOOKING STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS THAT MAY CAUSE ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS DESCRIBED TO BE MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. THE COMPANY AND THE SCHOOL DO NOT EXPECT OR INTEND TO ISSUE ANY UPDATES OR REVISIONS TO THOSE FORWARD-LOOKING STATEMENTS IF OR WHEN THEIR EXPECTATIONS, OR EVENTS, CONDITIONS OR CIRCUMSTANCES ON WHICH SUCH STATEMENTS ARE BASED, OCCUR. THE FINANCIAL PROJECTIONS OF THE SCHOOL CONTAINED IN APPENDIX C ATTACHED TO THIS LIMITED OFFERING MEMORANDUM ARE NOT HISTORICAL STATEMENTS OF FINANCIAL PERFORMANCE OF THE SCHOOL, BUT ARE FORWARD-LOOKING PROJECTIONS OF FUTURE, PROJECTED FINANCIAL PERFORMANCE OF THE SCHOOL. NO DEALER, BROKER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED BY THE ISSUER, THE COMPANY, THE SCHOOL, OR THE UNDERWRITER TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION WITH RESPECT TO THE SERIES 2017 BONDS OTHER THAN THOSE CONTAINED IN THIS LIMITED OFFERING MEMORANDUM, 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 LIMITED OFFERING MEMORANDUM DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY AND THERE SHALL NOT BE ANY OFFER, SOLICITATION, SALE OR DELIVERY OF THE SERIES 2017 BONDS BY ANY PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL FOR SUCH PERSON TO MAKE AN OFFER, SOLICITATION, SALE OR DELIVERY. * CUSIP is a registered trademark of the American Bankers Associations. CUSIP Global Services is managed on behalf of American Bankers Association by S&P Capital IQ. Copyright 2017 CUSIP Global Services. All rights reserved. CUSIP data herein is provided by CUSIP Global Services. This data is not intended to create a database and does not serve in any way as a substitute for CUSIP Global Services. CUSIP numbers are provided for convenience of reference only. None of the Issuer, the Company, the School, the Underwriter, or the Trustee or their agents or counsel assumes responsibility for the accuracy of such numbers. ii

4 IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT TRANSACTIONS THAT STABILIZE OR MAINTAIN THE MARKET PRICE OF THE SERIES 2017 BONDS AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. The descriptions of the documents in the Limited Offering Memorandum are summaries thereof and reference is made to the actual documents for a complete understanding of the contents of such documents, copies of which are available from BB&T Capital Markets, a division of BB&T Securities, LLC, 150 East Broad Street, Suite 406, Columbus, Ohio. The Trustee assumes no responsibility for this Limited Offering Memorandum and has not reviewed or undertaken to verify any information contained herein. The order and placement of materials in this Limited Offering Memorandum, including the Appendices, are not deemed to be a determination of relevance, materiality or importance, and this Limited Offering Memorandum, including the Appendices, must be considered in its entirety. The offering of the Series 2017 Bonds is made only by means of this entire Limited Offering Memorandum. References to web site addresses presented herein are for informational purposes only and may be in the form of a hyperlink solely for the reader's convenience. Unless specified otherwise, such web sites and the information or links contained therein are not incorporated into, and are not part of, this Limited Offering Memorandum. THE INFORMATION SET FORTH HEREIN HAS BEEN OBTAINED FROM THE COMPANY, THE SCHOOL, AND OTHER SOURCES THAT ARE BELIEVED TO BE RELIABLE, BUT IT IS NOT GUARANTEED AS TO ACCURACY AND COMPLETENESS, AND IS NOT TO BE CONSTRUED AS A REPRESENTATION BY THE UNDERWRITER OR BY THE ISSUER (EXCEPT FOR INFORMATION FURNISHED BY THE ISSUER UNDER THE CAPTIONS "THE ISSUER" AND "ABSENCE OF LITIGATION THE ISSUER"). THE INFORMATION AND EXPRESSIONS OF OPINION HEREIN ARE SUBJECT TO CHANGE WITHOUT NOTICE AND NEITHER THE DELIVERY OF THIS LIMITED OFFERING MEMORANDUM NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE THE IMPLICATION THAT THERE HAS BEEN NO CHANGE IN ANY OF THE INFORMATION SET FORTH HEREIN SINCE THE DATE HEREOF. OTHER THAN WITH RESPECT TO INFORMATION CONCERNING THE ISSUER UNDER THE CAPTIONS "THE ISSUER" AND "ABSENCE OF LITIGATION THE ISSUER", NONE OF THE INFORMATION IN THIS LIMITED OFFERING MEMORANDUM HAS BEEN SUPPLIED OR VERIFIED BY THE ISSUER AND THE ISSUER MAKES NO REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, AS TO: (I) THE ACCURACY OR COMPLETENESS OF SUCH INFORMATION; (II) THE VALIDITY OF THE SERIES 2017 BONDS; OR (III) THE TAX STATUS OF THE INTEREST ON THE SERIES 2017 BONDS. In making an investment decision, investors must rely on their own examinations of the Company, the School, Seven Hills Preparatory Academy, and the Facility and the terms of the offering, including the merits and risks involved. The Series 2017 Bonds have not been approved or disapproved by the Securities and Exchange Commission or any state securities commission, nor has the Securities and Exchange Commission or any state securities commission passed upon the accuracy or completeness of this Limited Offering Memorandum. Any representation to the contrary may be a criminal offense. The Company and the School have covenanted to provide continuing disclosure as described in this Limited Offering Memorandum in APPENDIX G "FORM OF CONTINUING DISCLOSURE AGREEMENT," pursuant to Rule 15c2-12 of the Securities and Exchange Commission. The Issuer has not, and will not, undertake any responsibilities to provide continuing disclosure with respect to the Series 2017 Bonds and will have no liability to owners of the Series 2017 Bonds with respect to any such disclosures. The Underwriter has reviewed the information in this Limited Offering Memorandum in accordance with, and as part of its responsibilities to investors pursuant to federal securities law as applied to the facts and circumstances of this transaction, but the Underwriter does not guarantee the accuracy or completeness of such information, except for the information provided by the Underwriter under the captions "UNDERWRITING," "SOURCES AND USES OF FUNDS" and "DEBT SERVICE REQUIREMENTS." The Series 2017 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 each. iii

5 Issuer City of Deephaven, Minnesota Bond Counsel to the Issuer Dorsey & Whitney LLP Minneapolis, Minnesota Company SHPA ABC Bloomington, Minnesota School Seven Hills Preparatory Academy Bloomington, Minnesota School's Financial Manager BerganKDV Farmington, Minnesota Company's and School's Counsel Rupp, Anderson, Squires & Waldspurger, PA Minneapolis, Minnesota Underwriter BB&T Capital Markets, a division of BB&T Securities, LLC Columbus, Ohio Underwriter's Counsel Ice Miller LLP Columbus, Ohio Trustee and Paying Agent U.S. Bank National Association Cleveland, Ohio Auditor Redpath and Company, Ltd. St. Paul, Minnesota iv

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7 Table of Contents SUMMARY INFORMATION... i INTRODUCTORY STATEMENT... 1 General... 1 Loan of Series 2017 Bond Proceeds... 1 Mortgage... 2 Disbursing Agreement... 2 Lease... 2 Pledge Agreement... 2 Reserve Fund... 3 Special Covenants of the Company and the School... 3 Bondholders' Risks... 3 Miscellaneous... 3 THE ISSUER... 3 THE COMPANY, THE SCHOOL, AND SEVEN HILLS PREPARATORY ACADEMY... 4 THE PROJECT... 5 THE SERIES 2017 BONDS... 6 Interest; Maturity; Payment... 6 Redemption of Series 2017 Bonds... 6 Notice of Redemption; Payment... 9 SECURITY FOR THE SERIES 2017 BONDS Special, Limited Obligations Payments under the Loan Agreement; Assignment of Loan Agreement Reserve Fund Mortgage Subordination, Non-Disturbance, and Attornment Agreement Lease Pledge Agreement Additional Bonds Additional Indebtedness Various Operating Covenants of the School SOURCES AND USES OF FUNDS DEBT SERVICE SCHEDULE BONDHOLDERS' RISKS Speculative Investment Nature of Special, Limited Obligations Dependence on Company's Ability to Pay Loan Repayments; Ability of School to Pay Lease Payments Risks Related to the Bloomington Campus Lease Risks Related to Property Interests in the Richfield Campus Historical State Budget Issues No Taxing Authority; Dependence on State Payments Reliance on Projections Non-Renewal or Termination of Charter School Contract by Authorizer... 23

8 Department of Education Approval of Authorizer Financial Statements Property Tax Exemption Competition for Students Effect of Student Enrollment upon Receipt of State Payments Reputational Risk Key Personnel Charter Schools Generally Factors Associated with Education Tax-Exempt Status of the Company and the School IRS Compliance Program Tax-Exempt Status of the Series 2017A Bonds Legislation Affecting Tax-Exempt Status of Interest on the Series 2017A Bonds Changes in Law; Annual Appropriation; Inadequate State Payments Default under the Lease; No Assurance Regarding Subsequent Tenant Value of Mortgaged Property Appraisal of the Facility Construction Risks Environmental Regulations Maintenance of the Project Damage or Destruction Bankruptcy Enforcement of Remedies Secondary Market No Rating on the Series 2017 Bonds; Market for Series 2017 Bonds Failure to Provide Ongoing Disclosure Private School Vouchers Unionization of Charter School Workforce Minnesota Department of Education Rulemaking Litigation Education Reform and Desegregation Litigation Forward-Looking Statements Additional Indebtedness Risk of Loss from Nonpresentment upon Redemption Legal Opinions Summary ENFORCEABILITY OF OBLIGATIONS LEGAL MATTERS TAX MATTERS Tax Exemption Other Federal Tax Considerations Bond Premium The Series 2017B Bonds Legislative Proposals CONTINUING DISCLOSURE FINANCIAL STATEMENTS OF THE SCHOOL THE BUDGET PROJECTION RELATIONSHIPS AMONG THE PARTIES... 34

9 ABSENCE OF LITIGATION The Issuer The Company The School UNDERWRITING MISCELLANEOUS Registration of Series 2017 Bonds Interest of Certain Persons Named in this Limited Offering Memorandum Limited Offering Memorandum Certification of the Company and the School APPENDIX A - THE SCHOOL, THE COMPANY, AND SEVEN HILLS PREPARATORY ACADEMY... A-1 APPENDIX B - FINANCIAL STATEMENTS... B-1 APPENDIX C - BUDGET PROJECTION... C-1 APPENDIX D - MINNESOTA LAWS RELATING TO CHARTER SCHOOLS... D-1 APPENDIX E - DEFINITIONS OF CERTAIN TERMS AND SUMMARIES OF DOCUMENTS... E-1 APPENDIX F - FORM OF BOND COUNSEL OPINION... F-1 APPENDIX G - FORM OF CONTINUING DISCLOSURE AGREEMENT... G-1 APPENDIX H - BOOK-ENTRY ONLY SYSTEM... H-1

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11 SUMMARY INFORMATION The following is a summary of certain information contained in this Limited Offering Memorandum. The summary is not comprehensive or complete and is qualified in its entirety by reference to the complete Limited Offering Memorandum. Undefined capitalized terms used below are defined in APPENDIX E hereto or elsewhere in this Limited Offering Memorandum. Purpose of the Issue... The City of Deephaven, Minnesota, Charter School Lease Revenue Bonds (Seven Hills Preparatory Academy Project), Series 2017A (the "Series 2017A Bonds"), in the original aggregate principal amount of $13,320,000 and the City of Deephaven, Minnesota, Taxable Charter School Lease Revenue Bonds (Seven Hills Preparatory Academy Project), Series 2017B (the "Series 2017B Bonds"), in the original aggregate principal amount of $1,080,000, are special, limited obligations of the City of Deephaven, Minnesota (the "Issuer"). The Series 2017A Bonds and the Series 2017B Bonds are together referred to as the "Series 2017 Bonds." The Series 2017 Bonds are being issued pursuant to an Indenture of Trust, dated as of October 1, 2017 (the "Indenture"), between the Issuer and U.S. Bank National Association, as trustee (the "Trustee"). Pursuant to a Loan Agreement, dated as of October 1, 2017 (the "Loan Agreement"), all proceeds of the Series 2017 Bonds will be loaned by the Issuer to SHPA ABC (the "Company"), a Minnesota nonprofit corporation and 501(c)(3) organization. Proceeds of the Series 2017 Bonds will be applied by the Company to: (i) finance the acquisition, construction, improvement, and equipping of an approximately 75,000 square foot facility located at 1401 West 76th Street, Richfield, Minnesota (the "Facility") to be owned by the Company and leased to Seven Hills Preparatory Academy (the "School"), a Minnesota nonprofit corporation and 501(c)(3) organization, which operates the public charter school authorized by Friends of Education known as "Seven Hills Preparatory Academy" ("Seven Hills Preparatory Academy"); (ii) fund a debt service reserve fund; (iii) pay capitalized interest on the Series 2017 Bonds; and (iv) pay costs of issuing the Series 2017 Bonds (the "Project"). The Issuer... The Issuer is a municipal corporation, and political subdivision under the laws of the State of Minnesota duly organized and existing by virtue of the Constitution and laws of the State. Pursuant to Minnesota Statutes, Sections through , as amended, and Section , as amended (collectively, the "Act"), the Issuer is empowered to issue the Series 2017 Bonds. The Issuer is not pledging its faith and credit or its taxing powers to the Series 2017 Bonds. The Issuer does not and will not in the future monitor the financial condition of the Company or the School, the operation of the Facility or Seven Hills Preparatory Academy, or otherwise monitor payment of the Series 2017 Bonds or compliance with the documents relating thereto. The responsibility for the operation of Seven Hills Preparatory Academy will rest entirely with the Company and the School. The Company, the School, and Seven Hills Preparatory Academy... The Company is a Minnesota nonprofit corporation and an organization described under Section 501(c)(3) of the Internal Revenue Code of 1986, as amended (the "Code"). The Company is organized and operated exclusively in support of the School and in particular to purchase, own, and/or construct a public schoolhouse, for lease to the School, on real estate owned by the Company. The School, a Minnesota nonprofit corporation and an organization described under Section 501(c)(3) of the Code, was incorporated on October 8, 2004, for the purpose of forming and operating a public charter school in the State of (i)

12 Minnesota (the "State"), including operating the charter school known as Seven Hills Preparatory Academy ("Seven Hills Preparatory Academy"). The School operates Seven Hills Preparatory Academy pursuant to Minnesota Statutes, Chapter 124E, as amended (the "Charter School Act") and a renewal Charter School Contract effective July 1, 2014 (the "Charter School Contract"), between Friends of Education (the "Authorizer") and the School. The Charter School Contract will expire on June 30, 2019, if not renewed prior to such date. See "BONDHOLDERS' RISKS Nonrenewal or Revocation of Charter School Contract." Seven Hills Preparatory Academy commenced operations for the school year and for the school year serves students in grades K-8, and offers a Classical Education model with a shared emphasis upon lifelong learning and citizenship, and a dual focus upon academic rigor and character development. Effective July 1, 2014, the School merged with Beacon Preparatory School, a Minnesota nonprofit corporation that operated the charter school known as Beacon Preparatory School ("Beacon Preparatory School"). Prior to the merger, Seven Hills Preparatory Academy and Beacon Preparatory School operated from leased space located at 8600 Bloomington Avenue South, Bloomington Minnesota (the "Bloomington Campus"), at which Seven Hills Preparatory Academy served students in grades K-5 and Beacon Preparatory School served students in grades 6-8. The merger leveraged operating efficiencies, connected enrollment procedures, alleviated attrition related to uncertain matriculation due to separate enrollment policies, and allowed Seven Hills Preparatory Academy to replicate its grade K-5 program and expand its grade 6-8 program. For the school year, Seven Hills Preparatory Academy moved its grade 6-8 operations to the Facility, which is currently leased from an unrelated third party (the "Facility Seller"). For the school year, Seven Hills Preparatory Academy implemented the first year of its grade K-5 high-quality replication program at the campus on which the Facility is located (the "Richfield Campus" and, together with the Bloomington Campus, the "Campuses"), adding grades K-1. Seven Hills Preparatory Academy will add an additional grade each year until the Richfield Campus serves grades K-8. The Bloomington Campus, which is leased from an unrelated third party (the "Bloomington Campus Landlord") pursuant to a Lease Agreement dated July 19, 2017 (the "Bloomington Campus Lease"), will continue to serve grades K-5. In connection with the planned purchase and expansion of the Richfield Campus, the Company was incorporated on December 9, The Company is organized and operated exclusively in support of Seven Hills Preparatory Academy and in particular to purchase, own, and/or construct a public schoolhouse, for lease to Seven Hills Preparatory Academy, on real estate owned by the Company. The Project... In furtherance of its purpose, the Company will apply the proceeds of the Series 2017 Bonds to (i) finance the acquisition, construction, improvement and equipping of the Facility; (ii) fund a reserve fund; (iii) pay capitalized interest on the Series 2017 Bonds; and (iv) pay costs associated with the issuance of the Series 2017 Bonds. On the date of issuance of the Series 2017 Bonds (the "Closing Date"), the Company will acquire the Richfield Campus from the Facility Seller for a (ii)

13 purchase price of $9,310,745. On the Closing Date, the Facility will consist of approximately 60,000 total square feet. After the Closing Date, the Company will undertake the expansion of the Facility to include an approximately 13,000 square foot gymnasium to include a multipurpose room, offices, locker rooms, and storage space, and expanded and renovated interior space, including a larger cafeteria, special education resource rooms, and science laboratories, and exterior improvements, including a playground and reorganized parking and loading spaces (collectively, the "Construction Project"). The Company anticipates that it will enter into four separate AIA Document A Standard Form of Agreement Between Owner and Contractor where the basis of payment is a Stipulated Sums (collectively, the "Construction Contract") between the Company and Rochon Corporation (the "Contractor") for the Construction Project. The Construction Contract is expected to include a total stipulated sum of $2,375,460.99, consisting of $1,478, allocable to labor and $897, allocable to materials. In addition, the Company will carry contingency of $175,000. The portion of the Construction Project consisting of playground preparation is expected to be completed during fall The remainder of the Construction Project is expected to be completed on or before May 1, Due to the relatively small size of the Construction Project and the fact that the Construction Project primarily consists of recreational spaces, rather than core instructional spaces, the Construction Contract does not impose liquidated damages if all or a portion of the Construction Project is not delivered on or before any date certain. None of the School, the Company, Welsh Architecture, LLC, a subsidiary of Colliers International (the "Architect"), or the Contractor has applied for or received site grading and utility permits, structural footing and foundation permits, or a general building permit. The submission for site grading and utility permits was made on or about September 1, 2017, with approval expected to be obtained within four-to-six weeks of submission; the submission for structural footing and foundation permits was made on or about September 15, 2017, with approval expected to be obtained within four-to-five weeks of submission; and the submission for a general building permit was made on or about September 15, 2017, with approval expected to be obtained within four-to-five weeks of submission. Individual trade permits and a boulevard encroachment permit for landscaping work are expected to be applied for when related work is ready to begin and to be received in due course. There can be no assurance that approvals of the foregoing permits will be obtained within the expected timeframes set forth above or that the submission or approval processes for any of the permits set forth above will not entail unexpected time or cost to be incurred by the School or the Company in connection with the Construction Project or otherwise. The Facility is currently subject to leases for cell tower space and advertising, which will remain in place after the Closing Date. The Company is evaluating the possibility of renting additional space in the Facility to one or more tenants on a single-use or recurring basis during times when the School is not using certain portions of the Facility. (iii)

14 See "BONDHOLDERS' RISKS Construction Risks" and APPENDIX A "THE SCHOOL, THE COMPANY, AND SEVEN HILLS PREPARATORY ACADEMY THE PROJECT" herein. Special, Limited Obligations... THE SERIES 2017 BONDS ARE SPECIAL, LIMITED OBLIGATIONS OF THE ISSUER AND WILL NOT CONSTITUTE A DEBT, LIABILITY, GENERAL OBLIGATION OR PLEDGE OF THE FULL FAITH AND CREDIT OF THE ISSUER, THE CITY OF RICHFIELD (THE "HOST CITY"), THE STATE OR ANY POLITICAL SUBDIVISION THEREOF. THE ISSUANCE OF THE SERIES 2017 BONDS DOES NOT DIRECTLY OR INDIRECTLY OR CONTINGENTLY OBLIGATE THE ISSUER, THE HOST CITY, OR THE STATE OR ANY POLITICAL SUBDIVISION THEREOF TO PAY THE SERIES 2017 BONDS FROM TAXES OR TO ANY APPROPRIATION THEREFOR. NO BONDHOLDER WILL HAVE THE RIGHT TO DEMAND PAYMENT OF THE PRINCIPAL OF, PREMIUM, IF ANY, OR INTEREST ON THE SERIES 2017 BONDS OUT OF ANY FUNDS OR FROM ANY SOURCES OF REVENUE OTHER THAN THOSE EXPRESSLY PLEDGED TO THE PAYMENT OF THE SERIES 2017 BONDS PURSUANT TO THE INDENTURE. Registration and Denominations... The Series 2017 Bonds will be dated their date of delivery and will be issued as fully registered bonds in the denomination of $5,000 or any integral multiple of $5,000 in excess thereof. Book-Entry-Only Registration... The Series 2017 Bonds will be issued in fully registered form and will be registered initially in the name of "Cede & Co." as nominee for The Depository Trust Company, New York, New York ("DTC"), a securities depository. Beneficial ownership interests may be acquired through participants in the DTC system (the "Participants"). Such beneficial ownership interests will be recorded in the records of the Participants. Persons for which Participants acquire interests in the Series 2017 Bonds (the "Beneficial Owners") will not receive certificates evidencing their interests in the Series 2017 Bonds so long as DTC or a successor securities depository acts as the securities depository with respect to the Series 2017 Bonds. So long as DTC or its nominee is the registered owner of the Series 2017 Bonds, payments of principal, premium, if any, and interest on the Series 2017 Bonds, as well as notices and other communications made by or on behalf of the Issuer pursuant to the Indenture, will be made to DTC or its nominee only. Disbursement of such payments, notices and other communications by DTC to Participants, and by Participants to the Beneficial Owners, is the responsibility of DTC and the Participants pursuant to rules and procedures established by such entities. See APPENDIX H "BOOK-ENTRY- ONLY SYSTEM" for a discussion of the operating procedures of the DTC system with respect to payments, registration, transfers, notices, and other matters. Payment Provisions... The Series 2017 Bonds will bear interest as set forth on page ii hereof. Interest will be payable semiannually on April 1 and October 1 (each an "Interest Payment Date") of each year, commencing on April 1, Interest on the Series 2017 Bonds will be calculated on the basis of a 360-day year with 12 months of 30 days. Redemption... The Series 2017 Bonds are subject to optional, mandatory sinking fund and extraordinary redemption prior to maturity. See "THE SERIES 2017 BONDS Redemption of Series 2017 Bonds." Security... Monthly Loan Repayments from the Company are required under the Loan Agreement to be paid directly to the Trustee in amounts that will be sufficient, if paid promptly and in full, to pay when due all principal of and interest on the (iv)

15 Series 2017 Bonds. Under the Indenture, the Issuer has pledged its interest in the Loan Agreement (including the payments payable thereunder to the Issuer by the Company, but excluding certain rights of the Issuer to payment of fees, expenses and indemnification) to the Trustee to secure the Series 2017 Bonds. Under the Mortgage, the Company will grant to the Trustee a mortgage lien on and security interest in the Mortgaged Property, subject to certain Permitted Encumbrances as described in the Mortgage. Under the Mortgage, the Company also will grant a security interest in all leases and rents (excluding certain rights of the Company to reimbursement and indemnification payments) with respect to the Project. Payments due under the Lease will be in amounts sufficient to pay debt service on the Series 2017 Bonds. Pursuant to the Mortgage and the Assignment of Lease, the Company will assign its interest in the Lease (excluding certain rights of the Company to reimbursement and indemnification payments) to the Trustee as additional security for the Series 2017 Bonds. No portion of the Bloomington Campus will be subject to the Mortgage and there has been no collateral assignment of the Bloomington Campus Lease in favor of the Trustee. Under the Pledge Agreement, the School grants to the Trustee a security interest in certain revenues and assets of the School as additional security for the Lease Payments under the Lease. The School has further agreed in the Pledge Agreement to establish and maintain a depository account (the "State Aid Revenue Account") at Sunrise Banks, N.A. or another FDIC insured banking institution into which there shall be deposited twice each month all funding provided to the School from the State of Minnesota Department of Education, including but not limited to General Education Revenues, Building Lease Aid, other special funds and pass-through payments of federal education funds. This State funding is generally disbursed to the School twice monthly on the 15 th and last day of each month (or the next preceding Business Day). The State Aid Revenue Account will be subject to the terms of the Account Control Agreement. Under the terms of the Account Control Agreement, there shall be automatically transferred to the Trustee (as assignee of the Company) an amount from the State Aid Revenue Account equal to all amounts then-due and payable by the School as Gross Rent (as defined in the Lease) pursuant to the Lease. Each Lease Payment from the School is structured to include an amount sufficient to pay then-due and payable principal and interest on the Series 2017 Bonds. Such transfers to the Trustee are to be made on the fifth day of each month or the next succeeding Business Day. In the event that such payment is insufficient to pay the amounts due under the Lease, the amount of any such insufficiency shall be transferred to the Trustee from the next succeeding monthly deposit of State funds. The amounts in the State Aid Revenue Account are available to the School and shall be available to the School to use for any authorized purposes. Days Cash on Hand Covenant... Pursuant to the terms of the Pledge Agreement, the School covenants and agrees to maintain unrestricted Cash on Hand in its operation fund such that on each testing date the amount on deposit in such fund shall be equal to or greater than 25 Days Cash on Hand at the end of the Fiscal Year ending June 30, 2018; 35 Days Cash on Hand at the end of the Fiscal Year ending June 30, 2019; and 45 Days Cash on Hand at the end of the Fiscal Year ending June 20, 2020, and at the end of each Fiscal Year thereafter (the Cash on Hand Requirement ). "Days Cash on Hand" means (a) Cash on Hand of the School, as shown on the financial statements for each Fiscal Year of the School divided by (b) the (v)

16 quotient of Operating Expenses, as shown on the financial statements for such Fiscal Year, divided by 365. The Cash on Hand will be tested as of the last day of each Fiscal Year, commencing June 30, Amounts on deposit in such operating fund may be used to pay Operating Expenses or may be used for any other lawful purpose. The foregoing is subject to the qualification that if applicable state or federal laws or regulations, or the rules and regulations of agencies having jurisdiction (including, without limitation, changes in State or federal funding schedules), will not permit or enable the School to maintain such level of Cash on Hand, then the School will, in conformity with the then prevailing laws, rules or regulations, maintain its Cash on Hand equal to the maximum permissible level. If the Cash on Hand for any testing date is less than the Cash on Hand Requirement, then the Trustee shall give notice thereof to the Bondholders and, upon the written direction of the Majority Bondholder, the School will promptly employ an Independent Consultant to review and analyze the operations and administration of the School, inspect the Project, and submit to the School and Trustee written reports, and make such recommendations as to the operation and administration of the School's charter school as such Independent Consultant deems appropriate, including any recommendation as to a revision of the methods of operation thereof. The School agrees to consider any recommendations by the Independent Consultant and, to the fullest extent practicable, to adopt and carry out such recommendations. So long as the School is otherwise in full compliance with its obligations under the Loan Agreement, and to the fullest extent practicable, the recommendations of the Independent Consultant, it shall not constitute an Event of Default if the Cash on Hand for any testing date is less than the Cash on Hand Requirement. The Trustee has no duty or obligation to monitor the School's compliance with any recommendations and the Trustee's sole responsibility is to forward such recommendations to any Bondholder upon receipt of a written request from such Bondholder. Debt Service Coverage Ratio Covenants.. In addition to the Days Cash on Hand covenant discussed above, the School shall, for the Fiscal Years ending June 30, 2018, and June 30, 2019, maintain an Income Available for Debt Service that will be at least 110% of the Principal and Interest Requirements on Long-Term Indebtedness during such Fiscal Years. Commencing with the Fiscal Year ending June 30, 2020, the School shall maintain an Income Available for Debt Service in each Fiscal Year, that will be at least 110% of the maximum Principal and Interest Requirements on Long-Term Indebtedness for such Fiscal Year or any subsequent year. The School shall provide the Trustee with a written certification that the School is in compliance with this covenant. If the School is unable to provide the required certification, then the Trustee shall give notice thereof to the Bondholders, and upon the written direction of the Majority Bondholder, the School will promptly employ an Independent Consultant to review and analyze the operations and administration of the School, inspect the Facility, and submit to the School and Trustee written reports, and make such recommendations as to the operation and administration of the School as such Independent Consultant deems appropriate, including any recommendation as to a revision of the methods of operation thereof. The School agrees to consider any recommendations by the Independent Consultant and, to the fullest extent practicable, to adopt and carry out such recommendations. The Trustee has no duty or obligation to monitor the School's compliance with any recommendations and the Trustee's sole responsibility is to forward such recommendations to the Bondholders. (vi)

17 So long as the School is otherwise in full compliance with its obligations under the Pledge Agreement and the Lease, including following, to the fullest extent practicable, the recommendations of the Independent Consultant, it shall not constitute an Event of Default under the Loan Agreement if the Income Available for Debt Service (as evidenced by the School's audited financial statements for such Fiscal Year), is: (a) for the Fiscal Years ending June 30, 2018, and June 30, 2019, less than 110% but not less than 100% of Principal and Interest Requirements on Long-Term Indebtedness for such Fiscal Years, or (b) for any Fiscal Year ending on or after June 30, 2020, less than 110% but not less than 100% of maximum Principal and Interest Requirements on Long-Term Indebtedness for such Fiscal Year or any subsequent year. Upon request, the School shall provide the Trustee with a written certification that the School is in compliance, to the fullest extent practicable, with the recommendations of the Independent Consultant and the Trustee shall be fully protected in relying on such written certification. If the Income Available for Debt Service is: (a) for the Fiscal Years ending June 30, 2018, and June 30, 2019, less than 110% of Principal and Interest Requirements on Long-Term Indebtedness for such Fiscal Years, or (b) for any Fiscal Year ending on or after June 30, 2020, less than 110% of maximum Principal and Interest Requirements on Long-Term Indebtedness for such Fiscal Year or any subsequent year, then upon written direction of the Majority Bondholder, the School will promptly employ an Independent Consultant selected by or acceptable to the Majority Bondholder to review and analyze the operations and administration of the School, inspect the Project Buildings, and submit to the School and Trustee written reports, and make such recommendations as to the operation and administration of the School's charter school as such Independent Consultant deems appropriate, including any recommendation as to a revision of the methods of operation thereof. The School agrees to consider any recommendations by the Independent Consultant and, to the fullest extent practicable, to adopt and carry out such recommendations. Upon request, the School shall provide the Trustee with a written certification that the School is in compliance, to the fullest extent practicable, with the recommendations of the Independent Consultant and the Trustee shall be fully protected in relying on such written certification. Notwithstanding the immediately preceding paragraph, regardless of whether the School has retained an Independent Consultant, if at the end of the Fiscal Years ending June 30, 2018, and June 30, 2019, the Income Available for Debt Service as of the end of such Fiscal Years is less than 100% of the Principal and Interest Requirements on Long-Term Indebtedness of such Fiscal Years (as evidenced by the School's audited financial statements for such Fiscal Years) or if at the end of the Fiscal Year ending June 30, 2020 or any subsequent Fiscal Year, the Income Available for Debt Service as of the end of such Fiscal Year is less than 100% of the maximum Principal and Interest Requirements on Long- Term Indebtedness of such Fiscal Year or any subsequent year (as evidenced by the School's audited financial statements for such Fiscal Year), then the Trustee shall give notice thereof to the Bondholders and the Majority Bondholder may either (A) direct the Trustee to declare an Event of Default or (B) direct the Trustee to exercise one or more of the remedies permitted under the Loan Agreement and the Indenture. Bondholders' Risks... Investment in the Series 2017 Bonds involves a degree of risk. Anyone considering investing in the Series 2017 Bonds should carefully examine this Limited Offering Memorandum, including the Appendices hereto. INVESTMENT IN THE SERIES 2017 BONDS SHOULD BE UNDERTAKEN (vii)

18 ONLY BY PERSONS WHOSE FINANCIAL RESOURCES ARE SUFFICIENT TO ENABLE THEM TO ASSUME SUCH RISK. PROSPECTIVE INVESTORS SHOULD FULLY UNDERSTAND AND EVALUATE RISKS, IN ADDITION TO THE OTHER FACTORS SET FORTH IN THIS LIMITED OFFERING MEMORANDUM, BEFORE MAKING AN INVESTMENT DECISION. See "BONDHOLDERS' RISKS" herein. Tax Matters... In the opinion of Dorsey & Whitney LLP, Minneapolis, Minnesota, Bond Counsel, based on present federal and Minnesota laws, regulations, rulings and decisions, interest to be paid on the Series 2017A Bonds (as hereafter defined) is excluded from gross income for federal income tax purposes and from taxable net income of individuals, estates, and trusts for Minnesota income tax purposes, and is not an item of tax preference for federal or Minnesota alternative minimum tax purposes. Such interest is included in taxable income for purposes of the Minnesota franchise tax on corporations and financial institutions and in adjusted current earnings of corporations for federal alternative minimum tax purposes. Interest on the Series 2017B Bonds (as hereafter defined) is not excludable from gross income and is subject to both federal and Minnesota state income taxation. See "TAX MATTERS" in this Limited Offering Memorandum. Continuing Disclosure... Rule 15c2-12, promulgated by the Securities and Exchange Commission under the Securities Exchange Act of 1934 ("Rule 15c2-12"), imposes continuing disclosure obligations on the issuers of certain state and municipal securities to permit participating underwriters to offer and sell the issuer's securities. In order to comply with the requirements of Rule 15c2-12, the Company, the School, and Digital Assurance Certification, LLC ("DAC"), as dissemination agent, will enter into a Continuing Disclosure Agreement, dated as of October 1, 2017 (the "Continuing Disclosure Agreement"). See APPENDIX G "FORM OF CONTINUING DISCLOSURE AGREEMENT." Financial Statements of the School... The financial statements of the School for the fiscal years ended June 30, 2015 as audited by Malloy, Montague, Karnowski, Radosevich & Co., P.A., certified public accountants ("MMKR"), and for the fiscal year ended June 30, 2016 as audited by Redpath and Company, Ltd., certified public accountants ("Redpath") are included as APPENDIX B "FINANCIAL STATEMENTS." The financial statements of the School for the fiscal year ended June 30, 2014, were restated in the audited financial statements for the fiscal year ended June 30, 2015, in order to accurately present the comparative position of the post-merger School. These financial statements were prepared using the standards applicable to governmental entities. The audited financial statements included in Appendix B are an integral part hereof and should be read in their entirety. Neither MMKR nor Redpath has been engaged to perform and neither has performed, since the date of its reports included in Appendix B, any procedures on the financial statements addressed in those reports. Neither MMKR nor Redpath has performed any procedures relating to this Limited Offering Memorandum. See APPENDIX B "FINANCIAL STATEMENTS" in this Limited Offering Memorandum. The Budget Projection... The School has prepared the budget projection and related assumptions included in APPENDIX C to this Limited Offering Memorandum. The Budget Projection is based on the assumptions made by management of the School as to, among other things, future enrollment levels, future costs and future revenues. The Budget Projection is for the five fiscal years of the School ending June 30, 2018 through June 30, The Budget Projection (including the notes thereto) should be read in its entirety. (viii)

19 The Budget Projection is based on various assumptions that represent only the beliefs of the School's management as to the most probable future events and are subject to material uncertainties. No assurances can be given that the School will, in fact, be able to generate sufficient revenue and attain the enrollment levels as stated in the Budget Projection, and variations from the Budget Projection for each of such matters should be expected to occur. Accordingly, the operations and financial condition of the School in the future will inevitably vary from those set forth in the Budget Projection, and such variance may be material and adverse. See "BONDHOLDERS' RISKS Budget Projection" in this Limited Offering Memorandum. The School has not assumed any responsibility after the issuance of the Series 2017 Bonds to update the Budget Projection or to provide any financial forecasts or projections in the future. The Underwriter and the Issuer have made no independent inquiry as to the assumptions on which the Budget Projection is based and assume no responsibility therefor. See APPENDIX C "BUDGET PROJECTION" in this Limited Offering Memorandum. Relationships Among the Parties... In connection with the issuance of the Series 2017 Bonds, the Issuer, the Company, the School, and the Underwriter are being represented by the attorneys or law firms identified above under the heading "LEGAL MATTERS" and Dorsey & Whitney LLP, is acting as Bond Counsel. In other transactions not related to the Series 2017 Bonds, each of these attorneys or law firms may have acted as Bond Counsel or Underwriter's Counsel or represented the Issuer, the Company, the School, the Underwriter, the Trustee, or their respective affiliates, in capacities different from those described under "LEGAL MATTERS," and there will be no limitations imposed as a result of the issuance of the Series 2017 Bonds on the ability of any of these firms or attorneys to act as Bond Counsel or Underwriter's Counsel or represent any of these parties in any future transactions. Potential purchasers of the Series 2017 Bonds should not assume that the Issuer, the Company, the School, the Underwriter, the Trustee, or their respective counsel or Bond Counsel or Underwriter's Counsel have not previously engaged in, or will not after the issuance of the Series 2017 Bonds engage in, other transactions with each other or with any affiliates of any of them, and no assurances can be given that there are or will be no past or future relationship or transactions between or among any of these parties or these attorneys or law firms. BerganKDV, Farmington, Minnesota, is serving as financial manager to the School in connection with the issuance of the Series 2017 Bonds. Delivery Information... The Series 2017 Bonds are offered when, as and if issued and accepted by BB&T Capital Markets, a division of BB&T Securities, LLC (the "Underwriter"), subject to the opinion as to the validity of the Series 2017 Bonds and tax-exempt status of the Series 2017A Bonds by Dorsey & Whitney LLP, Minneapolis, Minnesota, Bond Counsel to the Issuer. Certain legal matters will be passed upon for the Underwriter by Ice Miller LLP, Columbus, Ohio, and for the Company and the School by Rupp, Anderson, Squires & Waldspurger, PA, Minneapolis, Minnesota. It is expected that the Series 2017 Bonds will be delivered on or about October 3, For information with respect to the Underwriter, see "UNDERWRITING" herein. [Remainder of page intentionally left blank] (ix)

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21 LIMITED OFFERING MEMORANDUM $13,320,000 CITY OF DEEPHAVEN, MINNESOTA CHARTER SCHOOL LEASE REVENUE BONDS (SEVEN HILLS PREPARATORY ACADEMY PROJECT) SERIES 2017A $1,080,000 CITY OF DEEPHAVEN, MINNESOTA TAXABLE CHARTER SCHOOL LEASE REVENUE BONDS (SEVEN HILLS PREPARATORY ACADEMY PROJECT) SERIES 2017B INTRODUCTORY STATEMENT The following is a brief introduction as to certain matters discussed elsewhere in this Limited Offering Memorandum and is qualified in its entirety as to such matters by such discussion and the text of the actual documents described or referenced. Any capitalized term not required to be capitalized is used with the meaning assigned in APPENDIX E or in the Indenture, the Loan Agreement or other document with respect to which the term is used. Definitions contained in the text hereof are for ease of reference only and are qualified in their entirety by the definitions in APPENDIX E or the documents with respect to which such terms relate. The Appendices hereto are an integral part of this Limited Offering Memorandum and each potential investor should review the Appendices in their entirety. General The City of Deephaven, Minnesota (the "Issuer") will issue its (i) Charter School Lease Revenue Bonds (Seven Hills Preparatory Academy Project), Series 2017A (the "Series 2017A Bonds"), in the original aggregate principal amount of $13,320,000, and (ii) Taxable Charter School Lease Revenue Bonds (Seven Hills Preparatory Academy Project), Series 2017B (the "Series 2017B Bonds" and together with the Series 2017A Bonds, the "Series 2017 Bonds"), in the original aggregate principal amount of $1,080,000. The Series 2017 Bonds will be issued by the Issuer pursuant to (i) a resolution of the governing body of the Issuer, and (ii) an Indenture of Trust, dated as of October 1, 2017 (the "Indenture"), between the Issuer and U.S. Bank National Association (the "Trustee"). The City of Richfield, Minnesota (the "Host City"), granted host approval to issue the Series 2017 Bonds pursuant to a resolution adopted on August 8, The Issuer will loan (the "Loan") the proceeds of the Series 2017 Bonds to SHPA ABC (the "Company"), a Minnesota nonprofit corporation and 501(c)(3) organization, pursuant to a Loan Agreement, dated as of October 1, 2017 (the "Loan Agreement"), between the Issuer and the Company. See APPENDIX E "DEFINITIONS OF CERTAIN TERMS AND SUMMARIES OF DOCUMENTS" in this Limited Offering Memorandum. Proceeds of the Series 2017 Bonds will be used by the Company to: (i) finance the acquisition, construction, improvement, and equipping of an approximately 75,000 square foot facility located at 1401 West 76th Street, Richfield, Minnesota (the "Facility") to be owned by the Company and leased to Seven Hills Preparatory Academy (the "School"), a Minnesota nonprofit corporation and 501(c)(3) organization, which operates the public charter school authorized by Friends of Education known as "Seven Hills Preparatory Academy" ("Seven Hills Preparatory Academy"); (ii) fund a debt service reserve fund; (iii) pay capitalized interest on the Series 2017 Bonds; and (iv) pay costs of issuing the Series 2017 Bonds (the "Project"). See "SOURCES AND USES OF FUNDS" in this Limited Offering Memorandum. See APPENDIX A "THE SCHOOL, THE COMPANY, AND SEVEN HILLS PREPARATORY ACADEMY" in this Limited Offering Memorandum. The Series 2017 Bonds are special, limited obligations of the Issuer, payable solely from amounts pledged under the Indenture to the payment of principal, interest and premium, if any, on the Series 2017 Bonds (which includes Loan Repayments from the Company, amounts in the Reserve Fund, Lease Payments from the School and other amounts held by the Trustee under the Indenture and proceeds realized under the Mortgage), and do not give rise to a general obligation or general liability of the Issuer or a charge against its general credit or taxing powers and shall never constitute nor give rise to a pecuniary liability of the Issuer. The Series 2017 Bonds do not constitute a debt, moral obligation, liability or loan of credit or a pledge of the full faith and credit or taxing power of the Issuer, the Host City, the State of Minnesota (the "State"), or of any political subdivision thereof. Loan of Series 2017 Bond Proceeds The Loan will be made by the Issuer to the Company under the terms of the Loan Agreement. The Loan Agreement requires the Company to make monthly payments ("Loan Repayments") which, if fully and promptly paid, will be sufficient 1

22 to pay when due the scheduled principal of and interest on the Series 2017 Bonds. See APPENDIX E "DEFINITIONS OF CERTAIN TERMS AND SUMMARIES OF DOCUMENTS THE LOAN AGREEMENT" in this Limited Offering Memorandum. Pursuant to the Indenture, the Issuer will pledge to the Trustee, for the benefit of the Registered Owners of the Series 2017 Bonds, all of its interest in the Loan Agreement (other than certain unassigned rights) to secure payment of the principal of, premium, if any, and interest on the Series 2017 Bonds. Pursuant to a Tax Certificate (the "Tax Certificate"), by the Company and the School, the Company and the School will make certain representations and covenants related to maintaining the exclusion from gross income for federal income tax purposes of interest on the Series 2017A Bonds. Mortgage Pursuant to a Combination Mortgage, Security Agreement, Assignment of Leases and Rents, and Fixture Financing Statement, dated as of October 1, 2017 (the "Mortgage"), to be executed by the Company in favor of the Trustee, relating to the Facility, the payment of the principal of, premium, if any, and interest on the Series 2017 Bonds will be secured by a mortgage lien on and security interest in the Mortgaged Property (as defined in the Mortgage), subject to certain "Permitted Encumbrances" described in the Mortgage. See APPENDIX E "DEFINITIONS OF CERTAIN TERMS AND SUMMARIES OF DOCUMENTS THE MORTGAGE" in this Limited Offering Memorandum. No portion of the Bloomington Campus will be subject to the Mortgage and there has been no collateral assignment of the Bloomington Campus Lease in favor of the Trustee. Disbursing Agreement Except for certain funds reserved for expenses, the proceeds of the Series 2017 Bonds deposited in the Project Fund will be disbursed to pay Project Costs pursuant to the terms of the Disbursing Agreement, dated as of October 1, 2017 (the "Disbursing Agreement"), between the Company, the Trustee, and Commercial Partners Title, LLC (the "Disbursing Agent"). The obligation of the Trustee to disburse funds for Project Costs under the Disbursing Agreement is subject to a number of conditions precedent, including a determination by the Trustee and Disbursing Agent that amounts remaining in the Project Fund are sufficient to complete the construction and equipping of the Facility (the "Construction Project," as more completely described herein under the heading "THE PROJECT" and in APPENDIX A "THE SCHOOL, THE COMPANY, AND SEVEN HILLS PREPARATORY ACADEMY THE PROJECT"). Pursuant to the Disbursing Agreement, the Disbursing Agent is obligated to collect lien waivers with respect to each disbursement of funds prior to approving the next disbursement. Lease Pursuant to a Lease Agreement, dated as of October 1, 2017 (the "Lease"), between the Company, as lessor and the School, as lessee, the Company will lease the Facility to the School. The School will use the Facility for the charitable purpose of operating a public charter school in accordance with Minnesota Statutes, Section 124E. The term of the Lease is greater than the term of the Series 2017 Bonds. Payments due from the School, as lessee, to the Company, as lessor, under the Lease will be withdrawn by the Trustee from the School's State Aid Revenue Account (as defined herein) for deposit in the Revenue Fund, and are expected, in the aggregate, to exceed the amount necessary for the Company to pay semi-annual debt service on the Series 2017 Bonds, certain other fees and costs in connection with the Series 2017 Bonds, and certain ongoing expenses. Lease payments made by the School shall be paid, in part, from building lease aid received by the School from the State under the provisions of Minnesota Statutes, Section 124E.22, as amended. See APPENDIX E "DEFINITIONS OF CERTAIN TERMS AND SUMMARIES OF DOCUMENTS THE LEASE" in this Limited Offering Memorandum. Pledge Agreement As additional security on the Series 2017 Bonds, the School pledges certain of its revenues to the Trustee for payments on the Series 2017 Bonds as necessary, pursuant to a Pledge and Covenant Agreement, dated as of October 1, 2017 (the "Pledge Agreement"), from the School to the Trustee. The Pledge Agreement also provides that in the event building lease aid is insufficient to make lease payments under the Lease, general education funding from the State, and other State and federal pass-through education funding sources shall be applied to the payment of such insufficiency. See APPENDIX E "DEFINITIONS OF CERTAIN TERMS AND SUMMARIES OF DOCUMENTS THE INDENTURE" and " THE 2

23 PLEDGE AND COVENANT AGREEMENT" in this Limited Offering Memorandum. Under the Pledge Agreement, the education revenues received by the School from the State will be deposited into a State Aid Revenue Account, from which the Trustee shall withdraw the payments due from the School as Gross Rent (as defined in the Lease) pursuant to the Lease. Reserve Fund On the Closing Date, proceeds of the Series 2017 Bonds in an amount equal to the Reserve Fund Requirement ($940,693.76) will be deposited in the Reserve Fund created by the Indenture. Earnings on amounts in the Reserve Fund will be deposited therein so long as the balance therein is less than the Reserve Fund Requirement. Amounts in the Reserve Fund may be used by the Trustee to pay principal of, premium, if any, and interest on the Series 2017 Bonds in the event sums in the Bond Fund are insufficient for such purpose. All amounts in the Reserve Fund are available for payment of the Series 2017 Bonds. Amounts in the Reserve Fund are valued semi-annually as provided in the Indenture. In accordance with the Loan Agreement, the Company is required to cure any deficiency in the Reserve Fund within 30 days that occurs as a result of a valuation, and if the deficiency occurs as a result of a withdrawal, the Company is required to restore such withdrawal in six equal monthly installments. Amounts in the Reserve Fund may be invested in Permitted Investments. See "SECURITY FOR THE SERIES 2017 BONDS Reserve Fund" and APPENDIX E "DEFINITIONS OF CERTAIN TERMS AND SUMMARIES OF DOCUMENTS THE INDENTURE The Reserve Fund" in this Limited Offering Memorandum. Special Covenants of the Company and the School The Loan Agreement places certain restrictions on the incurrence of indebtedness by the Company and requires the Company to impose certain restrictions on the School pursuant to the Lease or the Pledge Agreement. In particular, the Loan Agreement prohibits the Company from incurring any additional Indebtedness other than Additional Bonds issued pursuant to the Indenture. See APPENDIX E "DEFINITIONS OF CERTAIN TERMS AND SUMMARIES OF DOCUMENTS THE LOAN AGREEMENT Additional Bonds and Additional Indebtedness" in this Limited Offering Memorandum. The School has agreed to make certain covenants in the Lease and Pledge Agreement to (a) limit additional Indebtedness, (b) provide certain periodic financial reports, (c) make all applications for applicable state and federal funds, and (d) maintain unrestricted Cash on Hand in the amounts required by the Loan Agreement and Pledge Agreement. See APPENDIX E "DEFINITIONS OF CERTAIN TERMS AND SUMMARIES OF DOCUMENTS THE LOAN AGREEMENT Covenants of Seven Hills Preparatory Academy" and " THE LEASE" in this Limited Offering Memorandum. Bondholders' Risks Certain risks associated with an investment in the Series 2017 Bonds are discussed under "BONDHOLDERS' RISKS" in this Limited Offering Memorandum. Miscellaneous This Limited Offering Memorandum (including the Appendices hereto) contains descriptions of, among other matters, the Indenture, the Loan Agreement, the Mortgage, the Lease, the Pledge Agreement, the Issuer, the Project, the Company, the School, and the Series 2017 Bonds. Such descriptions and information do not purport to be comprehensive or definitive. All references to documents described herein are qualified in their entirety by reference to such documents, copies of which are available for inspection at the principal corporate trust office of the Trustee. THE ISSUER The Issuer is a municipal corporation, and political subdivision under the laws of the State of Minnesota duly organized and existing by virtue of the Constitution and laws of the State. Pursuant to Minnesota Statutes, Sections through , as amended, and Section , as amended (collectively, the "Act"), the Issuer is empowered to issue the Series 2017 Bonds. The Issuer is not pledging its faith and credit or its taxing powers to the Series 2017 Bonds. The Issuer does not and will not in the future monitor the financial condition of the Company or the School, the operation of the Facility or Seven Hills Preparatory Academy, or otherwise monitor payment of the Series 2017 Bonds or compliance with the 3

24 documents relating thereto. The responsibility for the operation of Seven Hills Preparatory Academy will rest entirely with the Company and the School. The Series 2017 Bonds are special, limited obligations of the Issuer. No recourse by any Holder of the Series 2017 Bonds will be had for the payment of the principal of, premium, if any, or interest on any of the Series 2017 Bonds or for any claim based on thereon or upon any obligation, covenant, or agreement in the Indenture or the Loan Agreement, against any past, present, or future officer, member, counsel, advisor or agent of the Issuer or any successor thereto, as such, directly or through the Issuer or any successor thereto, under any rule of law or equity, statute or constitution, or by the enforcement of any assessment or penalty or otherwise, and all such liability of any such officer, member, counsel, advisor or agent as such has been expressly waived as a condition of and in consideration of the execution of the Indenture, the Loan Agreement and the issuance of the Series 2017 Bonds. All payments made by the Company pursuant to the Loan Agreement will be made directly to the Trustee. None of the revenues to pay the Series 2017 Bonds will come from the Issuer and therefore the Issuer's financial information and status is irrelevant to any investment decision with respect to the Series 2017 Bonds. As a result, no information regarding the Issuer will be provided in respect of any continuing disclosure requirement relating to the Series 2017 Bonds. The Issuer has not assumed responsibility for any information in this Limited Offering Memorandum, except for the information under this caption and the caption "ABSENCE OF LITIGATION The Issuer" in this Limited Offering Memorandum. THE COMPANY, THE SCHOOL, AND SEVEN HILLS PREPARATORY ACADEMY The Company is a Minnesota nonprofit corporation and an organization described under Section 501(c)(3) of the Code. The Company is organized and operated exclusively in support of Seven Hills Preparatory Academy and in particular to purchase, own, and/or construct a public schoolhouse, for lease to Seven Hills Preparatory Academy, on real estate owned by the Company. In connection with the planned purchase and expansion of the Richfield Campus, the Company was incorporated on December 9, To date, the Company has conducted no business, other than in connection with the development of the Project and the offering of the Series 2017 Bonds. The Company has no operating history and has no significant assets or liabilities. The School, a Minnesota nonprofit corporation and an organization described under Section 501(c)(3) of the Code, was incorporated on October 8, 2004, for the purpose of forming and operating a public charter school in the State of Minnesota (the "State"), including operating Seven Hills Preparatory Academy. The School operates Seven Hills Preparatory Academy pursuant to Minnesota Statutes, Chapter 124E, as amended (the "Charter School Act") and a renewal Charter School Contract effective July 1, 2014 (the "Charter School Contract"), between Friends of Education (the "Authorizer") and the School. The Charter School Contract will expire on June 30, 2019, if not renewed prior to such date. See "BONDHOLDERS' RISKS Nonrenewal or Revocation of Charter School Contract." Seven Hills Preparatory Academy serves students in grades K-8, and offers a Classical Education model with a shared emphasis upon lifelong learning and citizenship, and a dual focus upon academic rigor and character development. Seven Hills Preparatory Academy commenced operations for the school year. Effective July 1, 2014, the School merged with Beacon Preparatory School, a Minnesota nonprofit corporation that operated the charter school known as Beacon Preparatory School ("Beacon Preparatory School"). Prior to the merger, Seven Hills Preparatory Academy and Beacon Preparatory School operated from leased space located at 8600 Bloomington Avenue South, Bloomington Minnesota (the "Bloomington Campus"), at which Seven Hills Preparatory Academy served students in grades K-5 and Beacon Preparatory School served students in grades 6-8. The merger leveraged operating efficiencies, connected enrollment procedures, alleviated attrition related to uncertain matriculation due to separate enrollment policies, and allowed Seven Hills Preparatory Academy to replicate its grade K-5 program and expand its grade 6-8 program. For the school year, Seven Hills Preparatory Academy moved its grade 6-8 operations to the Facility, which is currently leased from an unrelated third party (the "Facility Seller"). For the school year, Seven Hills Preparatory Academy implemented the first year of its grade K-5 highquality replication program at the campus on which the Facility is located (the "Richfield Campus" and, together with the Bloomington Campus, the "Campuses"), adding grades K-1. Seven Hills Preparatory Academy will add an additional grade 4

25 each year until the Richfield Campus serves grades K-8. The Bloomington Campus, which is leased from an unrelated third party (the "Bloomington Campus Landlord") pursuant to a Lease Agreement dated July 19, 2017 (the "Bloomington Campus Lease"), will continue to serve grades K-5. No portion of the Bloomington Campus will be subject to the Mortgage and there has been no collateral assignment of the Bloomington Campus Lease in favor of the Trustee. See "BONDHOLDERS' RISKS Risks Related to the Bloomington Campus Lease." The School receives its funding from a combination of (a) State aids under the following programs: General Education Aid (which coincides with enrollment), Special Education, Limited English Proficiency, Compensatory Aid and Building Lease Aid (which coincides with enrollment), and (b) Federal programs administrated by the State including Title I, Part A of the No Child Left Behind Elementary and Secondary Education Act ("NCLB/ESEA"), Improving Basic Program, Title II, Part A of the NCLB/ESEA, Teacher/Principal Training and Recruitment, Title II, Part D, Enhancing Education Through Technology, Title III, Limited English Proficient Students, and Title V, Part A Regular Innovative Programs. Additional information about THE SCHOOL, THE COMPANY, AND SEVEN HILLS PREPARATORY ACADEMY is located in APPENDIX A "THE SCHOOL, THE COMPANY, AND SEVEN HILLS PREPARATORY ACADEMY" in this Limited Offering Memorandum. See also APPENDIX D "CHARTER SCHOOLS IN MINNESOTA State Payments" and " MINNESOTA LAWS RELATING TO CHARTER SCHOOLS" in this Limited Offering Memorandum for further information regarding State funding of charter schools. For additional information about the Company, see APPENDIX A "THE SCHOOL, THE COMPANY, AND SEVEN HILLS PREPARATORY ACADEMY The Company." THE PROJECT In furtherance of its purpose, the Company will apply the proceeds of the Series 2017 Bonds to (i) finance the acquisition, construction, improvement and equipping of the Facility; (ii) fund a reserve fund; (iii) pay capitalized interest on the Series 2017 Bonds; and (iv) pay costs associated with the issuance of the Series 2017 Bonds. On the date of issuance of the Series 2017 Bonds (the "Closing Date"), the Company will acquire the Richfield Campus from an unrelated third party for a purchase price of $9,310,745. On the Closing Date, the Facility will consist of approximately 60,000 total square feet. After the Closing Date, the Company will undertake the expansion of the Facility to include an approximately 13,000 square foot gymnasium to include a multipurpose room, offices, locker rooms, and storage space, and expanded and renovated interior space, including a larger cafeteria, special education resource rooms, and science laboratories, and exterior improvements, including a playground and reorganized parking and loading spaces (collectively, the "Construction Project"). The Company anticipates that it will enter into four separate AIA Document A Standard Form of Agreement Between Owner and Contractor where the basis of payment is a Stipulated Sums (collectively, the "Construction Contract") between the Company and Rochon Corporation (the "Contractor") for the Construction Project. The Construction Contract is expected to include a total stipulated sum of $2,375,460.99, consisting of $1,478, allocable to labor and $897, allocable to materials. In addition, the Company will carry contingency of $175,000. The portion of the Construction Project consisting of playground preparation is expected to be completed during fall The remainder of the Construction Project is expected to be completed on or before May 1, Due to the relatively small size of the Construction Project and the fact that the Construction Project primarily consists of recreational spaces, rather than core instructional spaces, the Construction Contract does not impose liquidated damages if all or a portion of the Construction Project is not delivered on or before any date certain. None of the School, the Company, Welsh Architecture, LLC, a subsidiary of Colliers International (the "Architect"), or the Contractor has applied for or received site grading and utility permits, structural footing and foundation permits, or a general building permit. It is expected that (i) the submission for site grading and utility permits will be made on or about September 1, 2017, with approval expected to be obtained within two-to-four weeks of submission; (ii) the submission for structural footing and foundation permits will be made on or about September 15, 2017, with approval expected to be obtained within four-to-five weeks of submission; and (iii) the submission for a general building permit will be made on or about September 15, 2017, 5

26 with approval expected to be obtained within four-to-five weeks of submission. Individual trade permits and a boulevard encroachment permit for landscaping work are expected to be applied for when related work is ready to begin and to be received in due course. There can be no assurance that submissions for the foregoing permits will be made on the expected dates set forth above, that approvals of such permits will be obtained within the expected timeframes set forth above, or that the submission or approval processes for any of the permits set forth above will not entail unexpected time or cost to be incurred by the School or the Company in connection with the Construction Project or otherwise. The Facility is currently subject to leases for cell tower space and advertising, which will remain in place after the Closing Date. The Company is evaluating the possibility of renting additional space in the Facility to one or more tenants on a single-use or recurring basis during times when the School is not using certain portions of the Facility. See "BONDHOLDERS' RISKS Construction Risks" and APPENDIX A "THE SCHOOL, THE COMPANY, AND SEVEN HILLS PREPARATORY ACADEMY THE PROJECT" herein. Interest; Maturity; Payment THE SERIES 2017 BONDS The Series 2017A Bonds will be issued in the original aggregate principal amount of $13,320,000 and the Series 2017B Bonds will be issued in the original aggregate principal amount of $1,080,000. The Series 2017 Bonds will bear interest as set forth on page ii hereof. Interest will be payable semiannually on April 1 and October 1 (each an "Interest Payment Date") of each year, commencing on April 1, Interest on the Series 2017 Bonds will be calculated on the basis of a 360-day year with 12 months of 30 days. The Series 2017 Bonds will be issued in the form of fully registered bonds without interest coupons in the denomination of $5,000 or any integral multiple of $5,000 in excess thereof. The principal of, interest on, and premium, if any, on the Series 2017 Bonds shall be payable when due by wire of the Trustee to The Depository Trust Company, New York, New York ("DTC"), which will in turn remit such principal, interest and premium, if any, to Participants (as defined below), which Participants will in turn remit such principal, interest and premium, if any, to the Beneficial Owners (as defined below) of the Series 2017 Bonds as described herein. See APPENDIX H "BOOK-ENTRY ONLY SYSTEM" in this Limited Offering Memorandum. In the event the Series 2017 Bonds are not registered in the name of Cede & Co., as nominee of DTC, or another eligible depository as described below, the principal of, interest on, and premium, if any, on each Series 2017 Bond will be payable only at the corporate trust operations center of the Trustee in Cleveland, Ohio, as described in the Indenture. Payment of interest on the Series 2017 Bonds will be paid by check or draft mailed on each Interest Payment Date by the Trustee to the Registered Owners of record appearing on the registration books kept by the Trustee as of the applicable Regular Record Date preceding each Interest Payment Date or upon request, as provided in the Indenture, of any Significant Bondholder (an owner of at least $1,000,000 in aggregate principal amount of Series 2017 Bonds), by electronic wire transfer on each Interest Payment Date to the account designated by such Registered Owner to the Trustee in writing on or before the Regular Record Date for any interest payment. The Registered Owner of any Series 2017 Bond will be the person or persons in whose name or names a bond is registered on the registration books kept for that purpose by the Trustee in accordance with the terms of the Indenture. Redemption of Series 2017 Bonds Optional Redemption. Series 2017A Bonds. The Series 2017A Bonds are subject to optional redemption on October 1, 2024, and any Business Day thereafter at the option of the Company, in whole or in part, and in inverse order of maturity except as otherwise directed by the Company, and, if less than all of a maturity, then by lot within a maturity, at a price of par, plus accrued interest to the date fixed for redemption, without premium. Series 2017B Bonds. The Series 2017B Bonds are not subject to optional redemption. 6

27 Mandatory Sinking Fund Redemption. Series 2017A Bonds are subject to mandatory sinking fund redemption prior to maturity, and are to be redeemed randomly by lot or such other manner as the Trustee may determine, at 100% of the principal amount thereof plus accrued interest to the date of redemption, on the following dates and in the following principal amounts: Series 2017A Bonds Maturing on October 1, 2027 Redemption Date (October 1) Principal Amount 2020 $20, , , , , , , * 305,000 *Stated Maturity. Series 2017A Bonds Maturing on October 1, 2037 Redemption Date (October 1) Principal Amount 2028 $320, , , , , , , , , * 495,000 *Stated Maturity. [Remainder of page intentionally left blank] 7

28 Series 2017A Bonds Maturing on October 1, 2049 Redemption Date (October 1) Principal Amount 2038 $520, , , , , , , , , , , * 890,000 *Stated Maturity. Series 2017B Bonds are subject to mandatory sinking fund redemption prior to maturity, and are to be redeemed randomly by lot or such other manner as the Trustee may determine, at 100% of the principal amount thereof plus accrued interest to the date of redemption, on the following dates and in the following principal amounts: Series 2017B Bonds Maturing on October 1, 2024 Redemption Date (October 1) Principal Amount 2020 $190, , , , * 240,000 *Stated Maturity. At the option of the Company exercised not less than 45 days prior to any sinking fund redemption date, the Company may (i) deliver to the Trustee for cancellation Series 2017 Bonds of the applicable series in any aggregate principal amount desired, or (ii) receive a credit in respect of such sinking fund obligation for any Term Bonds which prior to such date have been purchased or redeemed (otherwise than through the operation of the sinking fund) and not otherwise previously applied as a credit against sinking fund payments. Extraordinary Redemption. The Series 2017 Bonds are subject to redemption at the option of the Company in whole, and not in part (except pursuant to (a) below in which case partial redemption is permitted), at their principal amount plus accrued interest, if any of the events set forth below shall occur: (a) If, at any time the Facility or any portion thereof is damaged or destroyed or taken in a condemnation proceeding and the Company elects to apply Net Proceeds (as defined in APPENDIX E) to redemption of a portion of the Series 2017 Bonds. (b) If at any time, the Facility shall have been damaged or destroyed (i) to such extent that it cannot be reasonably restored within a period of six months to substantially the condition thereof immediately preceding such damage or destruction, (ii) to such extent that the Company or the School is thereby prevented, in the Company's judgment, from carrying on its normal operations at the Facility for a period of six months or more, or (iii) to such extent that the cost of restoration thereof would exceed the Net Proceeds of insurance required to be carried thereon pursuant to the requirements of the Loan Agreement. 8

29 (c) If, at any time, title to, or the temporary use for a period of six months or more of all or substantially all of the Facility, or such part thereof as shall materially interfere, in the Company's judgment, with the operation of the Facility for the purpose for which the Facility was designed, shall have been taken under the exercise of the power of eminent domain or be effectively taken through the exercise of police or other similar power by any governmental body or by any person, firm or corporation acting under governmental authority (including such a taking or takings which results in the Company or the School being thereby prevented from carrying on its normal operations at the Facility for a period of six months or more). (d) If, at any time, changes which the Company cannot reasonably control or overcome in the economic availability of materials, supplies, labor, equipment and other properties and things necessary for the efficient operation of the Facility for the purpose contemplated by the Loan Agreement shall have occurred, or technological or other changes shall have occurred, which in the judgment of the Company render the continued operation of the Facility uneconomic for such purposes. (e) If, at any time, as a result of any changes in the Constitution of the State or the Constitution of the United States of America or of legislative or administrative action (whether state or federal) or by final decree, judgment or order of any court or administrative body (whether state or federal) entered after the contest thereof by the Company in good faith, the Loan Agreement shall have become void or unenforceable or impossible of performance in accordance with the intent and purposes of the parties as expressed in the Loan Agreement, or unreasonable burdens or excessive liabilities shall have been imposed on the Company in respect to the Facility, including, without limitation, federal, state or other ad valorem, property, income or other taxes not being imposed on the date of the Loan Agreement which in the judgment of the Company render the continued operation of the Facility uneconomic. (f) Upon acceleration because of an Event of Default under the Indenture. To exercise its options under (a), (b), (c), (d) or (e) above, the Company must, within 60 days following the event authorizing or requiring such redemption, give notice to the Issuer and the Trustee, specifying a redemption date not less than 30 days nor more than 45 days from the date such notice is mailed. The Company must also make arrangements with the Trustee for redemption and the giving of required notice in connection therewith. Mandatory Redemption Upon Determination of Taxability. The Series 2017A Bonds are subject to mandatory redemption in whole, at their principal amount, plus accrued interest, plus a 3% premium, upon the occurrence of a Determination of Taxability (as defined in APPENDIX E), on a redemption date not later than 30 days following the finalization of such Determination of Taxability. Acceleration. Upon an Event of Default under the Indenture, all Series 2017 Bonds are subject to acceleration and prepayment on any date selected by the Trustee at their principal amount, plus accrued interest, without premium. Notice of Redemption; Payment The Trustee is required to cause notice of redemption to be mailed to the owner of each Series 2017 Bond to be redeemed, by first class mail not less than 30 days nor more than 45 days prior to the redemption date. Failure to mail or any defect in any such notice shall not affect the validity of any proceedings for the redemption of any Series 2017 Bond not affected by such failure or defect. Interest on any Series 2017 Bonds or portions thereof called for redemption ceases to accrue on the date established for redemption. In the case of an optional redemption under the Indenture (except in the event of acceleration), the notice may state (a) that it is conditioned upon the deposit of money, in an amount sufficient to effect the redemption, with the Trustee on or before the redemption date, or (b) that the Company retains the right to rescind such notice on or prior to the scheduled redemption date (in either case, a "Conditional Redemption"), and such notice and optional redemption shall be of no effect if such money is not so deposited or if the notice is rescinded as hereinafter described. On or before the redemption date, funds sufficient to redeem such Series 2017 Bonds, including accrued interest thereon to the redemption date, shall be deposited with the Trustee. The Series 2017 Bonds thus called shall not, on or after the specified redemption date, bear any interest and, except for the purpose of payment, shall not be entitled to the lien of the Indenture. Any Conditional Redemption may be rescinded in whole or in part at any time on or before the redemption date if the Company delivers a certificate of the Company to the Issuer and the Trustee at least five days prior to the effective date of the rescission, which shall be no later than five days prior to the redemption date instructing the Trustee to rescind the redemption notice. The Trustee shall give prompt notice of such rescission to the affected Registered Owners. Any Series 2017 Bonds subject to Conditional 9

30 Redemption where redemption has been rescinded shall remain outstanding, and the rescission shall not constitute an Event of Default. Further, in the case of a Conditional Redemption, the failure of the Company to make funds available in part or in whole on or before the redemption date shall not constitute an Event of Default, and the Trustee shall give immediate notice to DTC or the affected Registered Owners that the redemption did not occur and that the Series 2017 Bonds called for redemption and not so paid remain outstanding. Special, Limited Obligations SECURITY FOR THE SERIES 2017 BONDS THE SERIES 2017 BONDS ARE SPECIAL, LIMITED OBLIGATIONS OF THE ISSUER AND WILL NOT CONSTITUTE A DEBT, LIABILITY, GENERAL OBLIGATION OR PLEDGE OF THE FULL FAITH AND CREDIT OF THE ISSUER, THE HOST CITY, THE STATE OR ANY POLITICAL SUBDIVISION THEREOF. THE ISSUANCE OF THE SERIES 2017 BONDS DOES NOT DIRECTLY OR INDIRECTLY OR CONTINGENTLY OBLIGATE THE ISSUER, THE HOST CITY, OR THE STATE OR ANY POLITICAL SUBDIVISION THEREOF TO PAY THE SERIES 2017 BONDS FROM TAXES OR TO ANY APPROPRIATION THEREFOR. NO BONDHOLDER WILL HAVE THE RIGHT TO DEMAND PAYMENT OF THE PRINCIPAL OF, PREMIUM, IF ANY, OR INTEREST ON THE SERIES 2017 BONDS OUT OF ANY FUNDS OR FROM ANY SOURCES OF REVENUE OTHER THAN THOSE EXPRESSLY PLEDGED TO THE PAYMENT OF THE SERIES 2017 BONDS PURSUANT TO THE INDENTURE. Payments under the Loan Agreement; Assignment of Loan Agreement Monthly Loan Repayments from the Company are required under the Loan Agreement to be paid directly to the Trustee in amounts that will be sufficient, if paid promptly and in full, to pay when due all principal of and interest on the Series 2017 Bonds. Under the Indenture, the Issuer has pledged its interest in the Loan Agreement (including the payments payable thereunder to the Issuer by the Company, but excluding certain rights of the Issuer to payment of fees, expenses and indemnification) to the Trustee to secure the Series 2017 Bonds. See APPENDIX E "DEFINITIONS OF CERTAIN TERMS AND SUMMARIES OF DOCUMENTS THE LOAN AGREEMENT" in this Limited Offering Memorandum. The Trustee is authorized to exercise the rights of the Issuer and enforce the obligations of the Company under the Loan Agreement. Payments are due from the Company on a full-recourse basis. Reserve Fund On the Closing Date, proceeds of the Series 2017 Bonds in an amount equal to the Reserve Fund Requirement ($940,693.76), will be deposited in the Reserve Fund created under the Indenture and held by the Trustee. Thereafter, unless needed to maintain the amount in the Reserve Fund at the Reserve Fund Requirement, investment income on amounts in the Reserve Fund will be deposited in the Bond Fund. Amounts in the Reserve Fund may be used by the Trustee to pay principal of, premium, if any, and interest on the Series 2017 Bonds in the event sums in the Bond Fund are insufficient for such purpose. All amounts in the Reserve Fund are available for payment of the Series 2017 Bonds. Amounts in the Reserve Fund are valued semi-annually as provided in the Indenture. In accordance with the Loan Agreement, the Company is required to cure any deficiency in the Reserve Fund within 30 days that occurs as a result of a valuation, and if the deficiency occurs as a result of a withdrawal, the Company is required to restore such withdrawal in six equal monthly installments. Amounts in the Reserve Fund may be invested in Permitted Investments. Mortgage Under the Mortgage, the Company will grant to the Trustee a mortgage lien on and security interest in the Mortgaged Property, subject to certain Permitted Encumbrances as described in the Mortgage. Under the Mortgage, the Company also will grant a security interest in all leases and rents (excluding certain rights of the Company to reimbursement and indemnification payments) with respect to the Project. See APPENDIX E "DEFINITIONS OF CERTAIN TERMS AND SUMMARIES OF DOCUMENTS - THE MORTGAGE" in this Limited Offering Memorandum. No portion of the Bloomington Campus will be subject to the Mortgage and there has been no collateral assignment of the Bloomington Campus Lease in favor of the Trustee. 10

31 Subordination, Non-Disturbance, and Attornment Agreement In connection with the issuance of the Series 2017 Bonds, the Trustee, the Company, and the School will enter into a Subordination, Non-Disturbance, and Attornment Agreement, dated as of October 1, 2017 (the "SNDA"). Pursuant to the SNDA, the Trustee, the Company and the School agree, among other items, that (i) the lien of the Mortgage is at all times superior to the rights of the School under the Lease, (ii) the Trustee and the Company will not disturb the School and its use of the Project under the terms of the Lease (even during a foreclosure event) unless the School is in default under the Lease, (iii) if a transfer of the Project occurs, then the purchaser/transferee taking possession of the Project will attorn to the rights of the School under the terms of the Lease (for the balance of the Lease term), and (iv) the School will not take any action to assign, cancel, or terminate the School's obligations under the Lease and the Pledge Agreement, except as expressly permitted. Lease Payments due under the Lease will be in amounts sufficient to pay debt service on the Series 2017 Bonds. Pursuant to the Mortgage and the Assignment of Lease, the Company will assign its interest in the Lease (excluding certain rights of the Company to reimbursement and indemnification payments) to the Trustee as additional security for the Series 2017 Bonds. See APPENDIX E "DEFINITIONS OF CERTAIN TERMS AND SUMMARIES OF DOCUMENTS THE LEASE" in this Limited Offering Memorandum. Pledge Agreement Under the Pledge Agreement, the School grants to the Trustee a security interest in certain revenues and assets of the School as additional security for the Lease Payments under the Lease. The School has further agreed in the Pledge Agreement to establish and maintain a depository account (the "State Aid Revenue Account") at Sunrise Banks, N.A. or another FDIC insured banking institution into which there shall be deposited twice each month all funding provided to the School from the State of Minnesota Department of Education, including but not limited to General Education Revenues, Building Lease Aid, other special funds and pass-through payments of federal education funds. This State funding is generally disbursed to the School twice monthly on the 15 th and last day of each month (or the next preceding Business Day). The State Aid Revenue Account will be subject to the terms of the Account Control Agreement. Under the terms of the Account Control Agreement, there shall be automatically transferred to the Trustee (as assignee of the Company) an amount from the State Aid Revenue Account equal to all amounts then-due and payable by the School as Gross Rent pursuant to the Lease. Each Lease Payment from the School is structured to include an amount sufficient to pay then-due and payable principal and interest on the Series 2017 Bonds. Such transfers to the Trustee are to be made on the fifth day of each month or the next succeeding Business Day. In the event that such payment is insufficient to pay the amounts due under the Lease, the amount of any such insufficiency shall be transferred to the Trustee from the next succeeding monthly deposit of State funds. The amounts in the State Aid Revenue Account are available to the School and shall be available to the School to use for any authorized purposes. Upon the occurrence of any Event of Default under the Pledge Agreement, the Trustee will have, in addition to all other rights and remedies provided in the Pledge Agreement or by law, the rights and remedies of a secured party under the Minnesota Uniform Commercial Code, and the Trustee may appropriate (by set-off or otherwise) all amounts held in the Revenue Fund or otherwise under the Indenture and apply the same to the payment of amounts due under the Loan Agreement with respect to the Bonds in such order and manner as provided in the Indenture. See APPENDIX E "DEFINITIONS OF CERTAIN TERMS AND SUMMARIES OF DOCUMENTS THE PLEDGE AGREEMENT" in this Limited Offering Memorandum. See BONDHOLDERS RISKS Risks Related to the Bloomington Campus Lease in this Limited Offering Memorandum. Additional Bonds Pursuant to the Indenture, the Issuer, or another municipality authorized by the Act (the "Alternate Issuer"), at the request of the Company, is authorized to issue Additional Bonds secured and payable on a parity basis with the Series 2017 Bonds provided that, prior to the issuance of any such Additional Bonds, the following terms and conditions have been met: (a) the Trustee has received a copy, duly certified by the Issuer or Alternate Issuer, of the resolution adopted by the Issuer or Alternate Issuer authorizing the issuance of such Additional Bonds and the execution and delivery of (i) a supplemental indenture, supplementing and amending the Indenture, which supplemental indenture shall not require the approval of any Registered Owner of the Series 2017 Bonds, providing the date, interest rates and maturities of such Additional Bonds, options and requirements for redemption prior to maturity with respect to such Additional Bonds, deposit 11

32 of proceeds to the various funds and accounts, and such other terms as may be required by reason of the foregoing and which adopts the applicable provisions of the Indenture, (ii) an amendment supplementing and amending the Loan Agreement, (iii) an amendment supplementing and amending the Mortgage, (iv) an amendment supplementing and amending the Pledge Agreement, (v) an amendment to the Lease, or a new lease, pursuant to which the School is obligated to make additional Lease Payments sufficient to pay the principal and interest due with respect to such Additional Bonds and any related costs or expenses, and (vi) if applicable, any other agreement or any other amendment supplementing and amending a bond document relating to the issuance of such Additional Bonds and to be executed and delivered by the Issuer or Alternate Issuer; (b) the Trustee has received the applicable certification required by the Loan Agreement with respect to the School's ability to incur Long-Term Indebtedness; (c) the Trustee has received a certificate of the Company Representative to the effect that there is no Event of Default then existing under the Loan Agreement or the Indenture; (d) the Trustee has received a Certificate of School Representative to the effect that no Event of Default has occurred and is continuing under the Account Control Agreement, Pledge Agreement or the Lease; (e) the Trustee has received an opinion of Bond Counsel to the effect that the issuance of such Additional Bonds will not affect adversely the exclusion from gross income for federal income tax purposes of interest on any Outstanding Tax-Exempt Bonds; (f) the Trustee has received original executed counterparts of the agreement or agreements regarding the Additional Bonds that either are new or are supplementing and amending the Loan Agreement, the Lease, the Mortgage, the Pledge Agreement, the Account Control Agreement, the Indenture, or any other bond document; (h) the Trustee has received a request and authorization to the Trustee on behalf of the Issuer or Alternate Issuer and signed by its Issuer Representative (or Alternate Issuer Representative) to authenticate and deliver such Additional Bonds to the purchasers therein identified, upon payment to the Trustee, but for the account of the Issuer or Alternate Issuer, of a sum specified in such request and authorization, plus accrued interest thereon, if any, to the date of delivery; and (i) the Trustee has received an executed opinion of Bond Counsel to the effect that (i) the Additional Bonds have been duly authorized, executed and delivered and constitute the binding limited obligations of the Issuer, enforceable in accordance with their terms, subject to normal bankruptcy exceptions, and (ii) the interest on such Additional Bonds is excluded from gross income for federal income tax purposes (unless it is intended that such interest be taxable). The Pledge Agreement also provides similar limitations on the School's ability to incur Indebtedness. See "SECURITY FOR THE SERIES 2017 BONDS Additional Indebtedness" and APPENDIX E "DEFINITIONS OF CERTAIN TERMS AND SUMMARIES OF DOCUMENTS THE LOAN AGREEMENT - Additional Bonds and Additional Indebtedness" in this Limited Offering Memorandum. Additional Indebtedness The Loan Agreement places certain restrictions on the incurrence of indebtedness by the Company and requires the Company to impose certain restrictions on the School pursuant to the Lease or the Pledge Agreement. Additional Indebtedness of the Company Unless it receives the consent of the Majority Bondholder, the Company has covenanted in the Loan Agreement that it will not incur any indebtedness other than (a) the Indebtedness with respect to the Bonds, or (b) Additional Bonds issued pursuant to the Indenture and with respect to which the Lease has been amended to provide for additional Lease Revenues sufficient to pay the principal, interest and any related fees for such Additional Bonds. See APPENDIX E "DEFINITIONS OF CERTAIN TERMS AND SUMMARIES OF DOCUMENTS - THE LOAN AGREEMENT - Additional Bonds and Additional Indebtedness" in this Limited Offering Memorandum. 12

33 Additional Indebtedness of the School The School has covenanted in the Pledge Agreement that it will not incur any indebtedness unless it (a) receives the consent of the Majority Bondholder or (b) can satisfy certain requirements described in the Loan Agreement and Pledge Agreement. Long-Term Indebtedness. Pursuant to the Loan Agreement and Pledge Agreement, the School may incur Long- Term Indebtedness, if, prior to incurring or otherwise becoming liable with respect to any Long-Term Indebtedness, the School shall furnish to the Trustee a certificate of School Representative which shall: (a) state the general purpose for which such Long-Term Indebtedness is proposed to be incurred; (b) state the maximum aggregate principal amount of proposed Long-Term Indebtedness to be incurred, the maturity date or dates thereof, and the interest rate or rates with respect thereto; and (c) be accompanied by an opinion of Independent Counsel for the School to the effect that all conditions precedent specified in the Indenture and in the Loan Agreement for incurring such Long-Term Indebtedness have been satisfied. (i) Notwithstanding the provisions of paragraphs (ii), (iii), and (iv) below, the School shall not incur any Long- Term Indebtedness that refunds or may refund less than all of the Outstanding Bonds unless, in addition to the filing of the items described in the preceding paragraph, the School shall file with the Trustee (A) a report of an independent certified public accountant to the effect that the proceeds of the Long-Term Indebtedness, together with any other funds deposited with the Trustee for such purpose, will be not less than an amount sufficient to pay the principal of and the redemption premium, if any, on the Outstanding Bonds to be refunded and the interest which will become due and payable thereon on or prior to the redemption date or stated maturity thereof, or that the principal of and interest on Governmental Obligations purchased from such proceeds or from other funds provided by the School and deposited in trust with the Trustee, which Governmental Obligations do not permit redemption thereof at the option of the Issuer, when due and payable (or redeemable at the option of the holder) will provide sufficient money, together with any other money which shall have been deposited irrevocably with the Trustee for such purpose, to pay such principal, redemption premium, if any, and interest thereon; and (B) an opinion of Bond Counsel to the effect that such Long-Term Indebtedness and the refunding of Bonds with the proceeds thereof will not cause interest on any Tax-Exempt Bonds to become included in gross income for federal income tax purposes. (ii) Except as provided in the Loan Agreement and Pledge Agreement, the School shall not incur any Long- Term Indebtedness unless the School shall furnish to the Trustee (A) a certificate of Seven Hills Preparatory Academy Representative, verified by an independent certified public accountant, to the effect that the Income Available for Debt Service for the two Fiscal Years immediately preceding the date on which such Long-Term Indebtedness is to be incurred for which audited financial statements are available, plus Eliminated Expenses, totals at least 110% of maximum Principal and Interest Requirements on Long-Term Indebtedness (including such requirements for the proposed Long-Term Indebtedness but excluding such requirements for any Indebtedness to be refinanced thereby) payable in any Fiscal Year, or (B)(i) a certificate of Seven Hills Preparatory Academy Representative, verified by an independent certified public accountant, to the effect that the Income Available for Debt Service for the Fiscal Year immediately preceding the date on which such Long- Term Indebtedness is to be incurred for which audited financial statements are available totals at least 120% of maximum Principal and Interest Requirements on Long-Term Indebtedness payable in any Fiscal Year, and (ii) a projection prepared by an Independent Consultant, to the effect that Income Available for Debt Service for the next two Fiscal Years beginning after the Fiscal Year in which any improvements being financed by such proposed Long-Term Indebtedness are to be placed in service or, if no improvements are to be financed thereby, beginning with the first Fiscal Year after the Fiscal Year in which the proposed Long-Term Indebtedness is to be incurred, will be at least 125% of the maximum Principal and Interest Requirements on Long-Term Indebtedness (including such requirements for the proposed Long-Term Indebtedness but excluding such requirements for any then outstanding Long-Term Indebtedness or Bonds to be refinanced by the proposed Long-Term Indebtedness) for each such Fiscal Year. (iii) Notwithstanding the provisions of paragraph (ii) above, the School may incur Long-Term Indebtedness: (A) if and to the extent necessary to provide additional funds for completing payment of the cost of any improvements or alterations for which any Long-Term Indebtedness shall have been incurred at one time or from time to time under this heading " Long-Term Indebtedness"; or (B) for refinancing the principal amount of any outstanding Long-Term Indebtedness provided the Principal and Interest Requirements on Long-Term Indebtedness (including such requirements for the proposed Long-Term Indebtedness but excluding such requirements for the Long-Term Indebtedness to be refinanced thereby) for each Fiscal Year after the Fiscal Year in which the proposed Long-Term Indebtedness is to be incurred but before the final stated maturity of all then Outstanding Bonds will not exceed the amount of Principal and Interest 13

34 Requirements on Long-Term Indebtedness that would have been required for each such Fiscal Year had such proposed Long- Term Indebtedness not been incurred. (iv) The School may incur Long-Term Indebtedness without regard to the limitations set forth in this " Long- Term Indebtedness" if: (A) such Long-Term Indebtedness is secured solely by a security interest in personal property financed with such Long-Term Indebtedness; or (B) the aggregate payments required to be made by the School in each Fiscal Year with respect to all Long-Term Indebtedness incurred pursuant to this paragraph (v) shall not exceed 5% of the Gross Revenues of the School, as reported in the most recent audited financial statements of the School, determined as of the date of such Long-Term Indebtedness; or (C) such Long-Term Indebtedness amortizes within a 60 month period of the incurrence thereof. Purchase Money Indebtedness. The School may also incur Long-Term Indebtedness without regard to the limitations set forth in the Loan Agreement if: (a) such Long-Term Indebtedness is secured solely by a security interest in personal property financed with such Long-Term Indebtedness; (b) the aggregate payments required to be made by the School in each Fiscal Year with respect to all Long-Term Indebtedness incurred as such purchase money indebtedness does not exceed five percent (5%) of the Gross Revenues of the School, as reported in the most recent audited financial statements of the School, determined as of the date of such Long-Term Indebtedness; (c) such Long-Term Indebtedness amortizes over a period of not more than sixty (60) months; and (d) the School certifies that the incurrence of such Long-Term Indebtedness will not cause it to be in violation of the Operating Covenants of the School. Short-Term Indebtedness. The School may incur Short-Term Indebtedness in an amount that does not exceed in any Fiscal Year the lesser of: (i) $500,000, secured by General Education Funding; or (ii) the amount by which $500,000 exceeds the proceeds of Authorized Receivable Sales (as defined in the Loan Agreement) in the same Fiscal Year; provided, however, that such Short-Term Indebtedness shall be payable after debt service on the Bonds and secured, if at all, by a lien on revenues subordinate to the lien of the Indenture. The average monthly outstanding balance of any such Short-Term Indebtedness in any Fiscal Year may not exceed ten percent (10%) of the Gross Revenues of the School in the preceding Fiscal Year. Any Short-Term Indebtedness incurred by the School, including a line of credit, must be subordinate to the lien of the Trustee and may not be secured by any security interest in or lien against the Project. Authorized Receivable Sales. The School may conduct Authorized Receivable Sales in an amount that does not exceed in any Fiscal Year the lesser of: (a) $500,000; or (b) the amount by which $500,000 exceeds the proceeds of Short- Term Indebtedness in the same Fiscal Year; provided, however, that such Authorized Receivables Sales shall be payable after debt service on the Bonds and secured, if at all, by a lien on revenues subordinate to the lien of the Indenture. The Loan Agreement defines "Authorized Receivable Sale" as the sale of receivables if such receivables are due and payable no later than the date one (1) year from the date of such sale. Subordinate Indebtedness. Other than Short-Term Indebtedness as described above, the School may only incur subordinate indebtedness with the consent of the Majority Bondholder. Any such indebtedness shall be payable after debt service on the Bonds and secured, if at all, by a lien on revenues subordinate to the lien of the Indenture. See APPENDIX E "DEFINITIONS OF CERTAIN TERMS AND SUMMARIES OF DOCUMENTS THE LOAN AGREEMENT Additional Bonds and Additional Indebtedness" and "Covenants of the School" in this Limited Offering Memorandum. Various Operating Covenants of the School The Loan Agreement and the Pledge Agreement also contain other financial requirements and covenants that the School must comply with in the future. See APPENDIX E "DEFINITIONS OF CERTAIN TERMS AND SUMMARIES OF DOCUMENTS THE LOAN AGREEMENT" and "THE PLEDGE AGREEMENT" in this Limited Offering Memorandum. Days Cash on Hand Covenant. Pursuant to the terms of the Pledge Agreement, the School covenants and agrees to maintain unrestricted Cash on Hand in its operation fund such that on each testing date the amount on deposit in such fund shall be equal to or greater than 25 Days Cash on Hand at the end of the Fiscal Year ending June 30, 2018; 35 Days Cash on Hand at the end of the Fiscal Year ending June 30, 2019; and 45 Days Cash on Hand at the end of the Fiscal Year ending June 20, 2020, and at the end of each Fiscal Year thereafter (the Cash on Hand Requirement ). "Days Cash on Hand" means (a) Cash on Hand of the School, as shown on the financial statements for each Fiscal Year of the School divided by (b) 14

35 the quotient of Operating Expenses, as shown on the financial statements for such Fiscal Year, divided by 365. The Cash on Hand will be tested as of the last day of each Fiscal Year, commencing June 30, Amounts on deposit in such operating fund may be used to pay Operating Expenses or may be used for any other lawful purpose. The foregoing is subject to the qualification that if applicable state or federal laws or regulations, or the rules and regulations of agencies having jurisdiction (including, without limitation, changes in State or federal funding schedules), will not permit or enable the School to maintain such level of Cash on Hand, then the School will, in conformity with the then prevailing laws, rules or regulations, maintain its Cash on Hand equal to the maximum permissible level. If the Cash on Hand for any testing date is less than the Cash on Hand Requirement, then the Trustee shall give notice thereof to the Bondholders and, upon the written direction of the Majority Bondholder, the School will promptly employ an Independent Consultant to review and analyze the operations and administration of the School, inspect the Project, and submit to the School and Trustee written reports, and make such recommendations as to the operation and administration of the School's charter school as such Independent Consultant deems appropriate, including any recommendation as to a revision of the methods of operation thereof. The School agrees to consider any recommendations by the Independent Consultant and, to the fullest extent practicable, to adopt and carry out such recommendations. So long as the School is otherwise in full compliance with its obligations under the Loan Agreement, and to the fullest extent practicable, the recommendations of the Independent Consultant, it shall not constitute an Event of Default if the Cash on Hand for any testing date is less than the Cash on Hand Requirement. The Trustee has no duty or obligation to monitor the School's compliance with any recommendations and the Trustee's sole responsibility is to forward such recommendations to any Bondholder upon receipt of a written request from such Bondholder. Debt Service Coverage Ratio Covenants. In addition to the Days Cash on Hand covenant discussed above, the School shall, for the Fiscal Years ending June 30, 2018, and June 30, 2019, maintain an Income Available for Debt Service that will be at least 110% of the Principal and Interest Requirements on Long-Term Indebtedness during such Fiscal Years. Commencing with the Fiscal Year ending June 30, 2020, the School shall maintain an Income Available for Debt Service in each Fiscal Year, that will be at least 110% of the maximum Principal and Interest Requirements on Long-Term Indebtedness for such Fiscal Year or any subsequent year. The School shall provide the Trustee with a written certification that the School is in compliance with this covenant. If the School is unable to provide the required certification, then the Trustee shall give notice thereof to the Bondholders, and upon the written direction of the Majority Bondholder, the School will promptly employ an Independent Consultant to review and analyze the operations and administration of the School, inspect the Facility, and submit to the School and Trustee written reports, and make such recommendations as to the operation and administration of the School as such Independent Consultant deems appropriate, including any recommendation as to a revision of the methods of operation thereof. The School agrees to consider any recommendations by the Independent Consultant and, to the fullest extent practicable, to adopt and carry out such recommendations. The Trustee has no duty or obligation to monitor the School's compliance with any recommendations and the Trustee's sole responsibility is to forward such recommendations to the Bondholders. So long as the School is otherwise in full compliance with its obligations under the Pledge Agreement and the Lease, including following, to the fullest extent practicable, the recommendations of the Independent Consultant, it shall not constitute an Event of Default under the Loan Agreement if the Income Available for Debt Service (as evidenced by the School's audited financial statements for such Fiscal Year), is: (a) for the Fiscal Years ending June 30, 2018, and June 30, 2019, less than 110% but not less than 100% of Principal and Interest Requirements on Long-Term Indebtedness for such Fiscal Years, or (b) for any Fiscal Year ending on or after June 30, 2020, less than 110% but not less than 100% of maximum Principal and Interest Requirements on Long-Term Indebtedness for such Fiscal Year or any subsequent year. Upon request, the School shall provide the Trustee with a written certification that the School is in compliance, to the fullest extent practicable, with the recommendations of the Independent Consultant and the Trustee shall be fully protected in relying on such written certification. If the Income Available for Debt Service is: (a) for the Fiscal Years ending June 30, 2018, and June 30, 2019, less than 110% of Principal and Interest Requirements on Long-Term Indebtedness for such Fiscal Years, or (b) for any Fiscal Year ending on or after June 30, 2020, less than 110% of maximum Principal and Interest Requirements on Long-Term Indebtedness for such Fiscal Year or any subsequent year, then upon written direction of the Majority Bondholder, the School will promptly employ an Independent Consultant selected by or acceptable to the Majority Bondholder to review and analyze the operations and administration of the School, inspect the Project Buildings, and submit to the School and Trustee written reports, and make such recommendations as to the operation and administration of the School's charter school as such 15

36 Independent Consultant deems appropriate, including any recommendation as to a revision of the methods of operation thereof. The School agrees to consider any recommendations by the Independent Consultant and, to the fullest extent practicable, to adopt and carry out such recommendations. Upon request, the School shall provide the Trustee with a written certification that the School is in compliance, to the fullest extent practicable, with the recommendations of the Independent Consultant and the Trustee shall be fully protected in relying on such written certification. Notwithstanding the immediately preceding paragraph, regardless of whether the School has retained an Independent Consultant, if at the end of the Fiscal Years ending June 30, 2018, and June 30, 2019, the Income Available for Debt Service as of the end of such Fiscal Years is less than 100% of the Principal and Interest Requirements on Long-Term Indebtedness of such Fiscal Years (as evidenced by the School's audited financial statements for such Fiscal Years) or if at the end of the Fiscal Year ending June 30, 2020 or any subsequent Fiscal Year, the Income Available for Debt Service as of the end of such Fiscal Year is less than 100% of the maximum Principal and Interest Requirements on Long-Term Indebtedness of such Fiscal Year or any subsequent year (as evidenced by the School's audited financial statements for such Fiscal Year), then the Trustee shall give notice thereof to the Bondholders and the Majority Bondholder may either (A) direct the Trustee to declare an Event of Default or (B) direct the Trustee to exercise one or more of the remedies permitted under the Loan Agreement and the Indenture. Capital Improvements Fund. The Company has covenanted to deposit (commencing in November 2017) a portion of the Lease Payment to be made by the School to the Company to the Capital Improvements Fund established pursuant to the Indenture in an amount equal to the monthly deposit described in the Indenture. Amounts in the Capital Improvements Fund will be used by the Company to pay costs for the repair, replacement and maintenance of the Project. Amounts in the Capital Improvements Fund may also be used to pay principal of, premium if any, and interest on the Series 2017 Bonds in the event of a deficiency in the Bond Fund, Reserve Fund or Revenue Fund and prepay the Loan in accordance with the Loan Agreement. See APPENDIX E "DEFINITIONS OF CERTAIN TERMS AND SUMMARIES OF DOCUMENTS" in this Limited Offering Memorandum. Capital Assessment Plan. Commencing with the Fiscal Year ending June 30, 2022 and every fifth anniversary thereof, the Company agrees to furnish to the Trustee, the Original Purchaser (and, upon request, to the Issuer), by no later than 150 days after the close of such Fiscal Year during the term hereof, within 30 days of approval by the Board of the Company, a five-year comprehensive capital assessment plan (which may be sent electronically) to be prepared by an independent engineer, building inspector or other qualified professional with respect to the Company's capital facilities, detailing the condition and projected sources of funding such needs. If funds on hand are not sufficient to meet the capital needs set forth in the capital assessment plan, the Company shall budget for such capital needs such that the capital needs can be met within the five-year period covered by the capital assessment plan. The monthly deposit to the Capital Improvements Fund shall be increased to an amount sufficient to satisfy such needs over the five year period covered by the capital assessment plan. Post-Closing Vacation of State Easement and City Easement. Pursuant to the Loan Agreement, the Company represents that it has begun a petition process with the City of Richfield to vacate the City Easement (as defined in the Indenture). The Company will use its best efforts to diligently pursue the vacation of the City Easement to the extent it affects the portion of the Project Site currently used for signage and parking. The Company represents that it has begun working with the State to vacate the State Easement (as defined in the Indenture) and that it has requested the State to transfer title to that portion of the Project Site currently used by the Company to the Company. The Company will use its best efforts to diligently pursue the vacation of the State Easement and the transfer of title. Within 60 days after the completion of the transfer of title (the "60-Day Period"), the Company will amend the Mortgage as permitted by the Indenture to reflect a grant to the Trustee of the vacated portion of the Project Site. The Company will obtain an updated survey and date-down endorsement on the lender s policy of title insurance issued by the Title Insurer, including to the survey endorsement, and deliver the survey and date-down endorsement to the Trustee within the 60-Day Period. See APPENDIX E "DEFINITIONS OF CERTAIN TERMS AND SUMMARIES OF DOCUMENTS" in this Limited Offering Memorandum. The State Easement and the City Easement are described herein under the heading "BONDHOLDERS' RISKS Risks Related to Property Interests in the Richfield Campus." 16

37 SOURCES AND USES OF FUNDS Following are the expected sources and uses for funds (excluding investment income) associated with the Series 2017 Bonds and the Project: Series 2017A Bonds Series 2017B Bonds Total Sources of Funds Par Amount $13,320, $1,080, $14,400,00.00 Net Original Issue Premium 23, , Total Sources of Funds $13,343, $1,080, $14,423, Uses of Funds Acquisition of the Facility $8,593, $717, $9,310, Construction Project 3,243, , ,247, Deposit to Bond Fund (Capitalized Interest) 370, , , Deposit to Reserve Fund 870, , , Costs of Issuance 1 266, , , Total Uses of Funds $13,343, $1,080, $14,423, Includes Underwriter compensation, legal fees and expenses, printing, Trustee fees, Issuer fees, accountant fees, real estate fees, and other expenses associated with the issuance of the Series 2017 Bonds. [Remainder of page intentionally left blank] 17

38 DEBT SERVICE SCHEDULE The table below sets forth the amounts required to be paid with respect to the Series 2017 Bonds, assuming no prepayments other than from scheduled mandatory sinking fund redemptions. All amounts shown in the table below are gross debt service prior to the application of any earnings on amounts deposited in the Reserve Fund or other funds and accounts established under the Indenture. Interest on the Series 2017 Bonds will be paid on April 1 and October 1 of each year, commencing April 1, Principal of the Series 2017 Bonds will be paid on October 1 of each year, commencing October 1, On the Closing Date, neither the School nor the Company will have outstanding any Indebtedness other than the Series 2017 Bonds. The School has in the past incurred and may in the future incur debt that would constitute Indebtedness for the purposes of the Loan Agreement and the Pledge Agreement. Year Ending October 1 Principal Amount Series 2017A Bonds Interest Amount Principal Amount Series 2017B Bonds Interest Amount Total Debt Service 2018 $656, $65, $721, , , , $20, , $190, , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , Totals $13,320, $14,805, $1,080, $338, $29,543,

39 Specifically, the School has in the past obtained a secured line of credit and a secured loan from a local bank, which will be repaid and terminated on or prior to the Closing Date. The foregoing would constitute Short-Term Indebtedness for the purposes of the Loan Agreement and the Pledge Agreement. After the Closing Date, the School will evaluate the possibility of obtaining secured or unsecured Short-Term Indebtedness, the incurrence of any of which would be subject to the Short-Term Indebtedness incurrence tests set forth in the Loan Agreement and the Pledge Agreement. In the Pledge Agreement, the School has covenanted that it will only incur Long-Term Indebtedness, Short-Term Indebtedness, or Purchase Money Indebtedness in accordance with the restrictions imposed by the Loan Agreement and Pledge Agreement. See "SECURITY FOR THE SERIES 2017 BONDS Additional Indebtedness," "BONDHOLDERS' RISKS Additional Indebtedness," and APPENDIX D "DEFINITIONS AND SUMMARY OF CERTAIN DOCUMENTS Summary of Certain Provisions of the Agreement Limitations on Incurrence of Additional Indebtedness." BONDHOLDERS' RISKS Investment in the Series 2017 Bonds involves a degree of risk. Anyone considering investing in the Series 2017 Bonds should carefully examine this Limited Offering Memorandum, including the Appendices hereto. INVESTMENT IN THE SERIES 2017 BONDS SHOULD BE UNDERTAKEN ONLY BY PERSONS WHOSE FINANCIAL RESOURCES ARE SUFFICIENT TO ENABLE THEM TO ASSUME SUCH RISK. THIS SECTION SETS FORTH A BRIEF SUMMARY OF SOME OF THE PRINCIPAL BONDHOLDERS' RISKS. PROSPECTIVE INVESTORS SHOULD FULLY UNDERSTAND AND EVALUATE THESE RISKS, IN ADDITION TO THE OTHER FACTORS SET FORTH IN THIS LIMITED OFFERING MEMORANDUM, BEFORE MAKING AN INVESTMENT DECISION. The following discussion of some of the risk factors associated with the Series 2017 Bonds is not, and is not intended to be, exhaustive, and such risks are not necessarily presented in the order of their magnitude. Speculative Investment Purchase of the Series 2017 Bonds involves a degree of risk and the Series 2017 Bonds are a speculative investment. Any investor who, because of financial condition, is unable to bear the loss of an investment in the Series 2017 Bonds, or who, because of investment policies or otherwise, does not desire to assume, or have the ability to bear, the risks inherent with an investment in the Series 2017 Bonds, should not purchase the Series 2017 Bonds. The Series 2017 Bonds may experience price fluctuations due to changes in interest rates and yield levels. As a result, the value of the Series 2017 Bonds may fluctuate significantly in the short-term. Further, such securities generally have a less liquid resale market. As a result, potential investors may have difficulty selling or disposing of the Series 2017 Bonds quickly in certain markets or market conditions. Nature of Special, Limited Obligations The Series 2017 Bonds are special, limited obligations of the Issuer, payable solely from amounts pledged under the Indenture to the payment of principal, interest and premium, if any, on the Series 2017 Bonds (which includes Loan Repayments from the Company, amounts in the Reserve Fund, Lease Payments from the School and other amounts held by the Trustee under the Indenture and proceeds realized under the Mortgage), and do not give rise to a general obligation or general liability of the Issuer or a charge against its general credit or taxing powers and shall never constitute nor give rise to a pecuniary liability of the Issuer. The Series 2017 Bonds do not constitute a debt, moral obligation, liability or loan of credit or a pledge of the full faith and credit or taxing power of the Issuer, the Host City, the State, or of any political subdivision thereof. Dependence on Company's Ability to Pay Loan Repayments; Ability of School to Pay Lease Payments Payment of principal of, premium, if any, and interest on the Series 2017 Bonds is intended to be made from payments of Loan Repayments by the Company under the Loan Agreement, except to the extent payment is intended to be made from other amounts held under the Indenture such as Series 2017 Bond proceeds or investment earnings. The Company has no significant assets or business other than the assets and business related to the Facility. The ability of the Company to make Loan Repayments will depend on the Company's ability to generate revenues sufficient to pay the Loan 19

40 Repayments from the Lease to the School. Future revenues of the Company from the Facility will primarily depend on the ability of the School to make payments under the Lease. The School's ability to make payments under the Lease is dependent on its revenues, including building lease aid received from the State, which are largely dependent on student enrollment and educational funding from the State. Because lease aid is limited to 90% of the lease amount, subject to certain caps as described in APPENDIX D "MINNESOTA LAWS RELATING TO CHARTER SCHOOLS CHARTER SCHOOLS IN MINNESOTA State Payments Building Lease Aid" in this Limited Offering Memorandum, lease aid alone will be insufficient to make the total payments due under the Lease. See APPENDIX A "THE SCHOOL, THE COMPANY, AND SEVEN HILLS PREPARATORY ACADEMY," and APPENDIX C "BUDGET PROJECTION" in this Limited Offering Memorandum. The School's general revenues are a combination of (a) State aid provided under the following programs: General Education Aid (which coincides with enrollment), Special Education, Limited English Proficiency, Compensatory Aid and Building Lease Aid (which coincides with enrollment), and (b) Federal programs administrated by the State including Title I, Part A of the ESEA, Improving Basic Program, Title II, Part A of the ESEA, Teacher/Principal Training and Recruitment, Title II, Part D, Enhancing Education Through Technology, Title III, Limited English Proficient Students, and Title V, Part A Regular Innovative Programs. Prior enrollment history is no guaranty of future enrollment and revenue. In addition, State aid payments are not always received by the School from the State on a timely basis, which may result in late payments by the School under the Lease and Pledge Agreement, which may, in turn, result in late payments by the Company under the Loan Agreement. Future revenues and expenditures of the Company will be subject to the amounts and the timing of future revenues to the School, which cannot be determined with assurance. Prior revenues and expenditures of the School are no guaranty as to future revenues and expenditures of the School. Risks Related to the Bloomington Campus Lease The Bloomington Campus Lease will expire according to its terms on June 30, The Bloomington Campus Landlord is permitted to terminate such Bloomington Campus Lease upon at least 14 months' notice, with such notice to be given by June 30 for termination effective the August 31 occurring 14 months later. Termination of the Bloomington Campus Lease by the Bloomington Campus Landlord due to a default thereunder by the School constitutes an event of default under the Pledge Agreement. In addition, a default by the School under the Bloomington Campus Lease is an event of default under the Pledge Agreement. There is no subordination, nondisturbance and attornment agreement or similar agreement in place with respect to the Bloomington Campus Lease. As such, the Trustee will not receive notice of any potential default or default by the School under the Bloomington Campus Lease and will have no opportunity or ability to cure any such potential default or default. While the School expects to continue to operate Seven Hills Preparatory Academy from the Bloomington Campus for the foreseeable future, (i) the term of the Bloomington Campus Lease is shorter than the final maturity date of the Series 2017 Bonds and (ii) the Bloomington Campus Landlord is permitted to terminate the Bloomington Campus Lease prior to its scheduled expiration. There can be no assurance that (i) the Bloomington Campus Landlord will not terminate the Bloomington Campus Lease, (ii) the School will be able to renew the Bloomington Campus Lease after its scheduled expiration, (iii) that the School will be able to renew the Bloomington Campus Lease on terms that make doing so financially viable, or (iv) that the School will be able to lease alternative space on terms that make leasing alternative space financially viable. Termination of the Bloomington Campus Lease by the Bloomington Campus Landlord, whether in connection with a default under the Bloomington Campus Lease by the School or not, or failure by the School to renew the Bloomington Campus Lease upon its scheduled expiration or the exhaustion of any potential renewal term may have a material adverse effect on the operations of the School or the Company. For information regarding enrollment at Seven Hills Preparatory Academy by Campus, see APPENDIX A "THE SCHOOL, THE COMPANY, AND SEVEN HILLS PREPARATORY ACADEMY." 20

41 Risks Related to Property Interests in the Richfield Campus The Company's ownership interest in the Richfield Campus is affected by two easements. The State holds an approximately 135' highway easement (the "State Easement") that affects portions of the Richfield Campus currently used for revenue-producing signage and parking. The City holds an approximately 30' easement (the "City Easement"), which fits within the State Easement, that affects the portion of the Richfield Campus currently used for revenue-producing signage. The School and the Company expect to request that the State vacate the State Easement or enter into an easement use agreement that would permit the continued use of the affected portions of the Richfield Campus for revenue-producing signage and parking. There can be no assurance that the State will vacate the State Easement or enter into an easement use agreement related to the State Easement. While the School and the Company have no indication that the State will seek to enforce its legal right to the State Easement, if the State were to do so, the portions of the Richfield Campus currently used for revenue-producing signage and parking could be adversely affected. The School and the Company have requested that the City vacate the City Easement. The City holds the City Easement due to a prior transaction in which the State deeded a portion of the State Easement to the City, which the City then deeded to the then-owner of the Richfield Campus. However, the City failed to vacate the City Easement in connection with that transaction. The School and the Company believe that they have reached agreement in concept with with the City for the City to vacate the City Easement, consistent with the City having deeded the subject property to the then-owner of the Richfield Campus. If for any reason the City does not vacate the City Easement, the School and the Company expect to request that the City revise the City Easement so that it excludes the portion of the Richfield Campus currently used for revenue-producing signage. There can be no assurance that the City will vacate the City Easement or revise the City Easement to exclude the portion of the Richfield Campus currently used for revenue-producing signage. While the School and the Company have no indication that the City will seek to enforce its legal right to the City Easement, if the City were to do so, the portion of the Richfield Campus currently used for revenue-producing signage could be adversely affected. See "SECURITY FOR THE SERIES 2017 BONDS Various Operating Covenants of the School Post-Closing Vacation of State Easement and City Easement." The Trustee will be the named insured of a lender's policy of title insurance (the "Title Policy") insuring the Company's interest in the Richfield Campus, but such Title Policy may not ensure the right of the Company to use the portions of the Richfield Campus currently used for revenue-producing signage and parking park as so used and the Title Policy will not include an access endorsement due to the presence of the State Easement and the City Easement. As such, there can be no assurance that the Trustee would have any right to successfully collect on all or any portion of the Title Policy if the Company's ownership interest in or use of the portions of the Richfield Campus affected by the State Easement or the City Easement were adversely affected by the assertion of the State in the State Easement or the City in the City Easement. Historical State Budget Issues The State has experienced budget shortfalls in recent bienniums. Rather than relying upon increased tax revenue to fund K-12 education costs (except for a minor increase of $50 per student in both Fiscal Year 2011 and Fiscal Year 2012), the Minnesota Legislature has enacted a number of funding reductions/spending shifts and holdbacks to close such budget shortfalls. Although the holdback was set at 10% for Fiscal Year 2017 and is currently set at 10% for Fiscal Year 2018, the holdback was 35.7% in recent years, including The current State budget biennium runs from July 1, 2017 through June 30, During the 2013 legislative session, the State Legislature made substantive changes in State funding for charter schools, including a change to the Average Daily Membership ("ADM") formula to create funding for all-day every day kindergarten. The new formula went into effect for the State's Fiscal Year 2015 (commencing in July 2014). The 2015 and 2017 Legislative sessions also added certain slight increases to education funding for public schools. See APPENDIX D "MINNESOTA LAWS RELATING TO CHARTER SCHOOLS CHARTER SCHOOLS IN MINNESOTA State Payments General Education Revenue" in this Limited Offering Memorandum. Future State budget agreements may involve further revisions to State education funding that cannot be determined at this time. See "No Taxing Authority; Dependence on State Payments" and "Changes in Law; Annual Appropriation; Inadequate State Payments" below in this BONDHOLDERS' RISKS section, APPENDIX D "MINNESOTA LAWS 21

42 RELATING TO CHARTER SCHOOLS CHARTER SCHOOLS IN MINNESOTA" and " MINNESOTA LAWS RELATING TO CHARTER SCHOOLS" in this Limited Offering Memorandum. No Taxing Authority; Dependence on State Payments The School does not possess any taxing authority and is substantially dependent upon the State to continue to provide funding for public charter schools. Moreover, the Company does not have any taxing authority. The obligation of the State under state law to fund the School is conditioned upon the availability of funds appropriated or allocated for the payment of such obligation. If funds are not allocated and available for the building lease aid or others State aids, no liability accrues to the State in such event. In the event the State were to withhold the payment of money from the School for any reason, even a reason that is ultimately determined to be invalid or unlawful, it is likely that the School would be forced to cease operations. State aid payments are distributed to all public schools according to a "holdback" system that allows adjustments to be made after the end of each fiscal year. Legislation passed for the school year increased this holdback amount to 35.7%. Due to an improvement in the State's budget situation, in late 2012, the State reduced the 35.7% holdback to 17.3%, and in early 2013, the holdback was further reduced to 13.6%. In late 2013, the State's budget situation further improved and the holdback amount decreased to 10% and is projected to remain that amount in the future. See APPENDIX D "MINNESOTA LAWS RELATING TO CHARTER SCHOOLS CHARTER SCHOOLS IN MINNESOTA" and APPENDIX A "THE SCHOOL, THE COMPANY, AND SEVEN HILLS PREPARATORY ACADEMY STATE AID PAYMENTS" in this Limited Offering Memorandum. Reliance on Projections The School has operated Seven Hills Preparatory Academy since The School's projections of revenues and expenses contained in APPENDIX C "BUDGET PROJECTION," were prepared by Management and have not been independently verified by any party other than the School. No feasibility studies have been conducted with respect to operations of the School pertinent to the Series 2017 Bonds. The projections are "forward-looking statements" and are subject to the general qualifications and limitations described on the inside cover hereof. The Underwriter has not independently verified the School's projections, and makes no representations nor gives any assurances that such projections, or the assumptions underlying them, are complete or correct. Further, the projections relate only to a limited number of fiscal years, and consequently do not cover the entire period that the Series 2017 Bonds will be outstanding. Management has prepared its projections based on its operating history with respect to Seven Hills Preparatory Academy and School management's assumptions about future State funding levels and future operations of Seven Hills Preparatory Academy, including student enrollment and expenses. There can be no assurance that actual enrollment revenues and expenses will be consistent with the School's assumptions underlying such projections. Moreover, no guarantee can be made that the School's projections of revenues and expenses included herein will correspond with the results actually achieved in the future because there can be no assurance that actual events will correspond with the projections' underlying assumptions. Actual operating results may be affected by many factors, including, but not limited to, increased costs, lower than anticipated revenues (as a result of insufficient enrollment, reduced State or federal aid payments, or otherwise), employee relations, changes in taxes, changes in applicable government regulation, changes in demographic trends, changes in education competition and changes in local or general economic conditions. Refer to APPENDIX C to review the projections, their underlying assumptions, and the other factors that could cause actual results to differ significantly from projected results. Refer to the inside cover hereof for qualifications and limitations applicable to forward-looking statements. NO GUARANTEE CAN BE MADE THAT THE PROJECTED INFORMATION CONTAINED HEREIN WILL CORRESPOND WITH THE RESULTS ACTUALLY ACHIEVED IN THE FUTURE BECAUSE THERE CAN BE NO ASSURANCE THAT ACTUAL EVENTS WILL CORRESPOND WITH THE ASSUMPTIONS UNDERLYING SUCH PROJECTED INFORMATION. ACTUAL OPERATING RESULTS MAY BE AFFECTED BY MANY FACTORS, INCLUDING, BUT NOT LIMITED TO, INCREASED COSTS, LOWER THAN ANTICIPATED REVENUES (AS A RESULT OF INSUFFICIENT ENROLLMENT, REDUCED STATE OR FEDERAL AID PAYMENTS, OR OTHERWISE), DIFFICULTIES IN EXPANSIONS, IF ANY, EMPLOYEE RELATIONS, CHANGES IN TAXES, CHANGES IN APPLICABLE GOVERNMENTAL REGULATION, CHANGES IN DEMOGRAPHIC TRENDS, CHANGES IN EDUCATION COMPETITION AND LOCAL OR GENERAL ECONOMIC CONDITIONS. 22

43 Non-Renewal or Termination of Charter School Contract by Authorizer Under the Charter School Act, a charter school sponsor (known as an "authorizer" under State law) may or may not renew the Charter School Contract at the end of any renewal term, or may unilaterally terminate the Charter School Contract (subject to certain reasonable notice and appeal procedures available to the School) upon any of the following grounds: (a) failure to meet the requirements for pupil performance contained in the Charter School Contract; (b) failure to meet generally accepted standards of fiscal management; (c) violations of law; or (d) other good cause shown. Decisions made by the School's Authorizer will depend upon the policies and evaluations of future board members and staff of the Authorizer. Although the School expects that the Charter School Contract will be renewed and extended for the term of the Series 2017 Bonds, no assurance can be given that future boards or administrative staffs of the Authorizer will continue to renew the Charter School Contract. See APPENDIX A "THE SCHOOL, THE COMPANY, AND SEVEN HILLS PREPARATORY ACADEMY SEVEN HILLS PREPARATORY ACADEMY The Charter School Contract" and APPENDIX D "MINNESOTA LAWS RELATING TO CHARTER SCHOOLS" in this Limited Offering Memorandum. Department of Education Approval of Authorizer Every charter school in Minnesota must be authorized by a 501(c)(3) organization, school district, or post-secondary institution approved by the Commissioner of the Department of Education (the "Commissioner"), pursuant to State law as an "authorizer". The Authorizer of the School is Friends of Education, a Minnesota nonprofit corporation. Each authorizer must be approved by the State Department of Education and is subject to review every five years. If the Commissioner finds that an authorizer has not fulfilled its requirements under State law, the Commissioner may subject the authorizer to corrective action, which may include terminating the charter contract with any schools the Authorizer has chartered. Further, State law was amended in 2009 to change the criteria for becoming an authorizer and the oversight and accountability requirements applicable to authorizers. As a result, a number of previously-approved authorizers are no longer eligible to sponsor charter schools. There can be no guaranty that the Authorizer will continue to remain in good standing with the State as an approved authorizer. See APPENDIX A "THE SCHOOL, THE COMPANY, AND SEVEN HILLS PREPARATORY ACADEMY THE CHARTER CONTRACT AND THE AUTHORIZER" and APPENDIX D "MINNESOTA LAWS RELATING TO CHARTER SCHOOLS" in this Limited Offering Memorandum. Financial Statements The Audited Financial Statements (as defined herein) of the School attached hereto as APPENDIX B "FINANCIAL STATEMENTS" reflect the last three years of operation of the School for which audited financial statements have been prepared. For information regarding the School's expectations after the issuance of the Series 2017 Bonds, see APPENDIX C "BUDGET PROJECTION" in this Limited Offering Memorandum. The financial statements of the Company are not included in this Limited Offering Memorandum because the Company does not have significant financial resources and is not anticipated to have significant assets other than the Facility. Property Tax Exemption Under present State law and rulings, generally, public charter schools are exempt from property taxes levied by political subdivisions of the State so long as such property is used for public school purposes (although such property is subject to special assessments for local improvements to the property). Other than with respect to property taxes payable in 2018, the Budget Projection does not anticipate the payment of property taxes by either the Company or the School. Laws, regulations and rulings are subject to change, and no assurance can be given that any future change in exempt status would not have a material adverse effect on the Company. Competition for Students A significant portion of the School's revenues is based on the number of students enrolled in Seven Hills Preparatory Academy. The School faces competition from other schools and could face additional competition in the future as a result of the organization of new, the construction of new, or the renovation of existing, public schools or other public charter schools in the areas served by Seven Hills Preparatory Academy. No assurance can be given that the enrollment of Seven Hills Preparatory Academy will not be adversely affected by the availability of other schools in the service areas of Seven Hills Preparatory Academy and elsewhere. 23

44 The primary service area of Seven Hills Preparatory Academy includes multiple public school districts, as well as private schools and other public charter schools located within or near the primary service area, all as more fully described in Appendix A. See APPENDIX A "THE SCHOOL, THE COMPANY, AND SEVEN HILLS PREPARATORY ACADEMY SEVEN HILLS PREPARATORY ACADEMY Service Area" in this Limited Offering Memorandum. No assurance can be given that Seven Hills Preparatory Academy will attract and retain the number of students that are needed to produce the Pledged Revenues that are necessary to pay the principal of and interest on the Series 2017 Bonds, or that additional schools will not be created in or near Seven Hills Preparatory Academy's service area. Effect of Student Enrollment upon Receipt of State Payments The State General Education Revenues and Building Lease Aid payments to the School are based on the number of students enrolled in Seven Hills Preparatory Academy. See APPENDIX D "MINNESOTA LAWS RELATING TO CHARTER SCHOOLS CHARTER SCHOOLS IN MINNESOTA State Payments" and " MINNESOTA LAWS RELATING TO CHARTER SCHOOLS Funding for Charter Schools" in this Limited Offering Memorandum. The School's State Aid payments will be adjusted to reflect the Average Daily Membership of students at Seven Hills Preparatory Academy. In addition, the Budget Projection contains certain assumptions regarding enrollment of Seven Hills Preparatory Academy in future school years and the assumptions set forth in the Budget Projection also make certain assumptions regarding State education funding payments in the future. No assurance can be given that Seven Hills Preparatory Academy will attract or retain the number of students set forth in the Budget Projection or that are needed to produce the Pledged Revenues in amounts sufficient to pay the principal of and interest on the Series 2017 Bonds. See APPENDIX A "THE SCHOOL, THE COMPANY, AND SEVEN HILLS PREPARATORY ACADEMY SEVEN HILLS PREPARATORY ACADEMY Demographics and Enrollment" and APPENDIX C "BUDGET PROJECTION" in this Limited Offering Memorandum. Reputational Risk The School is subject to financial and other risks that differ from those of other for-profit and nonprofit institutions and public schools. These risks include, among others, (a) changes in the reputation of the School or Seven Hills Preparatory Academy, its faculty or student body, either generally or with respect to certain academic or extracurricular areas which may affect enrollment; (b) litigation brought against the School or Seven Hills Preparatory Academy by parents, civil authorities, students or former or potential employees; (c) the potential inability to raise funds through gifts, grants and donations; and (d) competition from other public, charter and private schools for students, trained faculty and administrative staff due to differences in salary and other costs. There can be no assurance that these or other factors will not adversely affect the School's financial condition and its ability to make payments under the Lease representing debt service on the Series 2017 Bonds. Key Personnel The School's creation, curriculum, educational philosophy, and day-to-day operations reflect the vision and commitment of the individuals who serve as the School's administrators or serve on the School's Board of Directors (the "Key Personnel"). In the absence of an outside manager, the School is highly dependent upon its Key Personnel. The loss of any Key Personnel could adversely affect the School's operations, its ability to attract and retain students, and ultimately its financial results. The School has not obtained any "key person" insurance policies with respect to any of its Key Personnel. For more information regarding the School's Key Personnel see APPENDIX A "THE SCHOOL, THE COMPANY, AND SEVEN HILLS PREPARATORY ACADEMY THE SCHOOL, THE COMPANY, AND SEVEN HILLS PREPARATORY ACADEMY - Governance" in this Limited Offering Memorandum. Charter Schools Generally The operations of the School currently consist of the operation of Seven Hills Preparatory Academy. Such operations are dependent on sufficient demand for such charter school, adequate revenues from enrollment at the facilities and control of expenses. The operation of a charter school is regulated through the Charter School Contract. A charter school may not charge tuition to a student attending the charter school. The failure of Seven Hills Preparatory Academy to meet the requirements of State law, termination, revocation or non-renewal of the Charter School Contract, or the inability to secure a charter from another authorizing body would have a materially adverse effect on the ability of the Company to make the payments under the Loan Agreement to be used to pay debt service on the Series 2017 Bonds. See "BONDHOLDERS' RISKS Non-Renewal or Termination of Charter School Contract by Authorizer" herein. 24

45 Factors Associated with Education There are a number of factors affecting schools in general, including Seven Hills Preparatory Academy, that could have an adverse effect on the School's financial position and its ability to make the payments required under the Lease. These factors include, but are not limited to: (a) the ability to attract a sufficient number of students; (b) future legislation and regulations affecting charter schools and the educational industry in general; (c) increasing costs of compliance with federal or state regulatory laws or regulations, including, without limitation, laws or regulations concerning environmental quality, work safety and accommodating persons with disabilities; (d) increased costs of attracting and retaining or a decreased availability of a sufficient number of teachers, including as related to any unionization of the School's work force with consequent impact on wage scales and operating costs of the School; (e) cost and availability of insurance for charter schools in the State; and (f) changes in existing statutes pertaining to the powers of the School and legislation or regulations which may affect program funding. The School cannot assess or predict the ultimate effect of these factors on its operations or the financial results of operations. Tax-Exempt Status of the Company and the School The Company and the School are currently exempt from federal income tax. The School is a public charter school. The Company and the School are Minnesota nonprofit corporations and organizations described in Section 501(c)(3) of the Code. Under present federal law, regulations and rulings, the income and revenue of nonprofit, 501(c)(3) qualified exempt organizations are exempt from federal income tax, except for any unrelated business income as defined in the Code. If the Company or the School fails to continue to meet the requirements necessary to preserve their status as nonprofit corporations and tax-exempt charitable organizations under Section 501(c)(3) of the Code, the interest on the Series 2017A Bonds may become taxable retroactive to the date of issuance of the Series 2017A Bonds. The Company and the School have covenanted in the Tax Certificate that neither will take any actions or fail to take any actions, the result of which would adversely affect the Company's or the School's respective status as nonprofit corporations or the Company's and the School's status as tax-exempt charitable organizations under Section 501(c)(3) of the Code. IRS Compliance Program The Internal Revenue Service has an active program of conducting examinations of tax-exempt bonds through its Tax-Exempt and Government Entities Division (the "TE/GE Division"). In recent years, the number of Internal Revenue Service tax-exempt bond examinations has increased, and public statements made by individual Internal Revenue Service officials indicate that the number of Internal Revenue Service Examinations of tax-exempt bonds may continue to increase in the future. However, the School has not sought and is not expected to seek a ruling from the Internal Revenue Service with respect to the tax-exempt status of the Series 2017A Bonds. No assurance can be given that the Internal Revenue Service will not examine the Series 2017A Bonds. If the Internal Revenue Service examines the Series 2017A Bonds, such examination may have an adverse impact on the marketability and price of the Series 2017A Bonds. See "THE SERIES 2017 BONDS Redemption of Series 2017 Bonds Mandatory Redemption upon Determination of Taxability," and "TAX MATTERS" in this Limited Offering Memorandum. Tax-Exempt Status of the Series 2017A Bonds The tax-exempt status of the interest on the Series 2017A Bonds is conditioned upon the Company and the School complying with the requirements of the Code and applicable Treasury Regulations as they relate to the Series 2017A Bonds and the Company and the School's continuing to be a tax-exempt organization under Section 501(c)(3) of the Code. Failure of the Company and the School to comply with the terms and conditions of the Loan Agreement, Indenture, Lease, and other documents as described herein, or failure of the Company and the School to continue to be recognized as tax-exempt organization under Section 501(c)(3) of the Code, may result in the loss of the tax-exempt status of the interest on the Series 2017A Bonds retroactive to the date of issuance of the Series 2017A Bonds. See "TAX MATTERS" in this Limited Offering Memorandum. Registered Owners of Series 2017A Bonds will not receive additional interest to compensate them for federal income taxes, interest and penalties which may be assessed with respect to interest on the Series 2017A Bonds. The Series 2017A Bonds are subject to mandatory redemption upon a Determination of Taxability, at a redemption price equal to par, plus accrued interest, and a premium of 3% on the outstanding Series 2017A Bonds. There can be no assurance that, in the event of a Determination of Taxability, sufficient money would be available in such event to redeem the Series 2017A Bonds. Further, there can be no assurance that a Determination of Taxability will follow promptly the events which give rise to the Determination of Taxability, so that tax obligations may accrue for substantial periods preceding the redemption of Series 2017A Bonds upon a Determination of Taxability. If interest on the Series 2017A Bonds should become includable in 25

46 gross income for purposes of federal income taxation, the market for and value of the Series 2017A Bonds would be adversely affected. See "THE SERIES 2017 BONDS Redemption of Series 2017 Bonds Mandatory Redemption upon Determination of Taxability" and "TAX MATTERS" in this Limited Offering Memorandum. Legislation Affecting Tax-Exempt Status of Interest on the Series 2017A Bonds Proposals for various amendments to the Code have been considered in connection with federal tax reform. No assurance can be given that amendments to the Code or other federal legislation will not be introduced or enacted which would cause the interest on the Series 2017A Bonds to be subject, directly or indirectly, to federal income taxation or adversely affect the market price of the Series 2017A Bonds or otherwise prevent the holders of the Series 2017A Bonds from realizing the full current benefit of the federal tax status of the interest thereon. Changes in Law; Annual Appropriation; Inadequate State Payments Future changes to the Charter School Act by the State Legislature could be adverse to the financial interests of the School and could adversely affect the security for the Series 2017 Bonds. There can be no assurance given that the State Legislature will not in the future amend the Charter School Act in a manner which is adverse to the interests of the Registered Owners of the Series 2017 Bonds. Minnesota may experience downturns in its economy and tax revenues in the future. The provisions of the Charter School Act are subject to amendment by the State Legislature, including the reduction of State funding, which could adversely affect the School. STATE BUDGET CONSIDERATIONS MAY ALSO ADVERSELY AFFECT APPROPRIATIONS FOR CHARTER SCHOOL FUNDING. See "No Taxing Authority, Dependence on State Payments" above. Default under the Lease; No Assurance Regarding Subsequent Tenant If there is a default by the Company under the Loan Agreement attributable to a default by the School under the Lease, the Company would very likely not have funds to satisfy its remaining obligation to make payments under the Loan Agreement. If the School defaults under the Lease, there can be no assurance that the Company would be able to find a new tenant for the Facility which could generate revenues in a sufficient amount to allow the Company to make payments under the Loan Agreement representing debt service on the Series 2017 Bonds. This risk is heightened by the fact that the Facility is equipped specifically for use as a charter school. Value of Mortgaged Property Security for the Series 2017 Bonds includes a mortgage lien on the Mortgaged Property evidenced by the Mortgage from the Company to the Trustee. Attempts to foreclose under the Mortgage may be met with protracted litigation and/or bankruptcy proceedings, which proceedings cause delays. See "ENFORCEABILITY OF OBLIGATIONS." Thus, there can be no assurance that upon the occurrence of an Event of Default, the Trustee will be able to obtain possession of the Mortgaged Property and generate revenue therefrom in a timely fashion. Because of the special nature, location, and other factors relating to the Mortgaged Property, there can be no assurance that proceeds derived from the sale of the Mortgaged Property upon default and foreclosure of the Mortgage would be sufficient to pay all amounts due in respect of the Series 2017 Bonds. Furthermore, the Mortgage contains several Permitted Encumbrances as described in the Mortgage. See APPENDIX E "DEFINITIONS OF CERTAIN TERMS AND SUMMARIES OF DOCUMENTS THE MORTGAGE" in this Limited Offering Memorandum. Appraisal of the Facility Colliers International Valuation & Advisory Services (the "Appraiser") has been engaged by the School to appraise the Facility. In that connection, the Appraiser has prepared its appraisal report, with a report date of August 27, 2017 (the "Appraisal Report"). The Appraisal Report estimates the "As-Is Market Value" of a fee simple interest in the Facility to be $10,000,000 as of August 10, 2017, the "Prospective Value Upon Completion" of a fee simple interest in the Facility to be $13,100,000 as of June 1, 2018, and the "Prospective Value Upon Stabilization" of a fee simple interest in the Facility to be $13,500,000 as of June 1, All appraised values listed in the Appraisal Report are less than the amount of Series 2017 Bonds to be issued. 26

47 The Appraisal Report states that the Appraisal Report relies on the extraordinary assumptions, among others, that (i) the City Easement described herein under the heading "BONDHOLDERS' RISKS - Risks Related to Property Interests in the Richfield Campus" will be resolved such that "there is no negative impact on the subject property" and (ii) the Construction Project is "constructed in a good, workmanlike manner consist[ent] with the plans and renderings" supplied to the Appraiser. The summary of the Appraisal Report contained in this section is not meant to be exhaustive, and reference should be made to such report for a complete recital of its terms. The value of the Facility as estimated in the Appraisal Report represents only the opinion of the Appraiser, and only as of the effective date of such report. The Appraiser will not be engaged to update or revise the estimates contained in the Appraisal Report after its date. The actual value of the Facility in the future will vary from conclusions in the Appraisal Report, which variance may be material and adverse. In the event of a foreclosure of the Mortgage on the Facility, the value of the Facility in such event cannot be determined and may be substantially less than the value indicated in the Appraisal Report. The Facility, like other real property consisting of buildings, require ongoing capital repairs and improvements to maintain their value and, although the School intends to maintain the Facility in good condition, and a Capital Improvements Fund will be established pursuant to the Indenture, no assurance can be given that the School will have sufficient revenue to be able to maintain a regular capital improvements program for the Facility in the future. Construction Risks The Company anticipates that it will enter into the Construction Contract between the Company and the Contractor for the Construction Project. The Construction Contract is expected to include a total stipulated sum of $2,375,460.99, consisting of $1,478, allocable to labor and $897, allocable to materials. In addition, the Company will carry contingency of $175,000. The portion of the Construction Project consisting of playground preparation is expected to be completed during fall The remainder of the Construction Project is expected to be completed on or before May 1, Due to the relatively small size of the Construction Project and the fact that the Construction Project primarily consists of recreational spaces, rather than core instructional spaces, the Construction Contract does not impose liquidated damages if all or a portion of the Construction Project is not delivered on or before any date certain. None of the School, the Company, the Architect, or the Contractor has applied for or received site grading and utility permits, structural footing and foundation permits, or a general building permit. The submission for site grading and utility permits was made on or about September 1, 2017, with approval expected to be obtained within four-to-six weeks of submission; the submission for structural footing and foundation permits was made on or about September 15, 2017, with approval expected to be obtained within four-to-five weeks of submission; and the submission for a general building permit was made on or about September 15, 2017, with approval expected to be obtained within four-to-five weeks of submission. Individual trade permits and a boulevard encroachment permit for landscaping work are expected to be applied for when related work is ready to begin and to be received in due course. There can be no assurance that approvals of the foregoing permits will be obtained within the expected timeframes set forth above or that the submission or approval processes for any of the permits set forth above will not entail unexpected time or cost to be incurred by the School or the Company in connection with the Construction Project or otherwise. Construction or improvement of any facility (such as the Construction Project) is subject to the risks of cost overruns and delays due to a variety of factors including, among other things, site difficulties, labor strife, delays in and shortages of materials, weather conditions, fire and casualty. Any delay in completion of the improvements of the Facility could materially adversely affect projected increased enrollment of students in Seven Hills Preparatory Academy, which could affect receipt of future revenues. Noncompletion of the improvements of the Facility would materially adversely affect the value of the security under the Mortgage. See "BONDHOLDERS' RISKS Construction Risks" and APPENDIX A "THE SCHOOL, THE COMPANY, AND SEVEN HILLS PREPARATORY ACADEMY THE PROJECT" herein. 27

48 Environmental Regulations The Facility is 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 Facility (and to any beneficiary of a mortgage on the Facility, particularly following any sale or foreclosure proceeding) for remediating adverse environmental conditions on or relating to the Facility, whether arising from preexisting conditions or conditions arising as a result of the activities conducted in connection with the ownership and operation of the Facility. Although the School believes that it is in material compliance with applicable environmental laws for the Facility, costs incurred by the Company with respect to environmental remediation or liability could adversely affect its financial condition and its ability to own and operate the Facility. If excessive costs are incurred by the Company in connection with remediating environmental problems or from liability to third parties, such costs could make it impractical for the Loan Agreement to be continued pursuant to its current terms or such costs could make it more difficult to successfully relet the Facility. Nova Consulting Group, Inc. ("Nova") conducted a Phase I Environmental Site Assessment of the land on which the Facility is located (the "Site") and summarized its findings in a report dated August 22, 2017 (the "Phase I"). The Phase I states that Nova found no evidence of recognized environmental conditions ("RECs"), controlled RECs, or historical RECs in connection with the Site. A flammable waste trap was observed on the property, which Nova deemed "unlikely to have impacted subsurface conditions that would represent a [REC]" and recommended to "be pumped out and inspected on a routine basis by a license contractor to prevent inadvertent overflow/releases and ensure continued integrity of the unit." The Facility Seller has agreed to have the flammable waste trap serviced prior to the Closing Date. See APPENDIX A "THE SCHOOL, THE COMPANY, AND SEVEN HILLS PREPARATORY ACADEMY THE PROJECT Environmental Report." Costs incurred by the Company or the School with respect to environmental remediation or liability related to this recognized environmental condition and this known or suspect environmental condition or any other environmental condition could adversely affect the Company's or the School's financial condition. The Company believes that it is in material compliance with applicable environmental laws for the Facility. Owners of real estate such as the Company may, in the future, be adversely affected by legislative, regulatory, administrative and enforcement actions involving environmental controls. Maintenance of the Project The Company will at all times and at the Company's own expense, the Company will maintain, preserve and keep the Facility open as school facilities, or cause the School to maintain, preserve and keep the Facility, with the appurtenances and every part and parcel thereof, open as a public school facility and in good repair, working order and condition and that the Company will from time to time make or cause the School to make all repairs, replacements and renewals deemed proper and necessary by it. A Capital Improvements Fund is established pursuant to the Indenture with a Monthly Deposit requirement, no assurance can be given that the Company and the School will have sufficient revenues in the future to be able to maintain a regular capital improvements program for the Facility in the future. Damage or Destruction Although the Company and School will be required to obtain certain insurance, as set forth in the Loan Agreement and the Lease, there can be no assurance that the Facility will not suffer losses for which insurance cannot be or has not been obtained or that the amount of any such loss, or the period during which the Facility cannot generate revenues, will not exceed the coverage of such insurance policies. Bankruptcy Bankruptcy or other insolvency or similar proceedings affecting the Company or the School may delay and otherwise adversely affect the enforcement of rights in the property granted as security for the obligations related to Series 2017 Bonds, including those granted by the Indenture, the Loan Agreement, the Lease and the Mortgage. For example, if the Company or the School became a debtor in bankruptcy proceedings under Federal bankruptcy law, those proceedings would stay any proceeding to foreclose the lien of the Mortgage pending further order of the bankruptcy court, and could affect the 28

49 Trustee's ability to obtain direct payments pursuant to the Loan Agreement. If the Company's or the School's obligations in connection with the Series 2017 Bonds exceeded the value of the collateral security for the obligations, then in Federal bankruptcy proceedings, the recovery for the Series 2017 Bondholders might be limited to the value of that collateral. In such a bankruptcy proceeding, a reorganization plan containing provisions, for example, backloading loan or bond payment amounts on the Series 2017 Bonds, could be confirmed and become effective even if the plan were not supported by some or all of the holders of the Series 2017 Bonds. Each of the legal opinions delivered in connection with the issuance of the Series 2017 Bonds will be qualified as to the effect of State and federal laws, rulings and decisions, including bankruptcy laws, affecting remedies and affecting the enforceability of remedies, creditors' rights generally, and the documents described herein. Enforcement of Remedies The remedies available to the Trustee or the Registered Owners of the Series 2017 Bonds upon an Event of Default under the Indenture or the Loan Agreement are in many respects dependent upon judicial actions which are often subject to discretion and delay. Under existing constitutional and statutory law and judicial decisions, the remedies provided in the Indenture and the Loan Agreement may not be readily available or may be limited. The various legal opinions to be delivered concurrently with the delivery of the Series 2017 Bonds will be qualified as to the enforceability of the various legal instruments by limitations imposed by the valid exercise of the sovereign powers of the State and the constitutional powers of the United States of America, bankruptcy, reorganization, insolvency or other similar laws affecting the rights of creditors generally. Secondary Market The Underwriter expects to effect secondary market trading in the Series 2017 Bonds. However, the Underwriter is not obligated to repurchase any Series 2017 Bonds at the request of the Registered Owners thereof and cannot assure that there will be a continuing secondary market in the Series 2017 Bonds. In addition, adverse developments, including insufficient cash flow, may have an unfavorable effect upon prices for the Series 2017 Bonds in the secondary market. No Rating on the Series 2017 Bonds; Market for Series 2017 Bonds The Series 2017 Bonds are not rated by a rating agency. None of the Company, the School or the Issuer requested or applied for a rating on the Series 2017 Bonds from any rating service. Typically, unrated bonds lack liquidity in the secondary market. Because of the lack of credit rating, Bondholders may not be able to sell their Series 2017 Bonds in the secondary market and should therefore plan to hold the Series 2017 Bonds to maturity. Failure to Provide Ongoing Disclosure The Company and the School will enter into the Continuing Disclosure Agreement with a dissemination agent pursuant to Rule 15c2-12, promulgated by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended ("Rule 15c2-12"). Failure by the Company or the School to comply with the Continuing Disclosure Agreement and Rule 15c2-12 may adversely affect the liquidity of the Series 2017 Bonds and their market price in the secondary market. See "CONTINUING DISCLOSURE" and APPENDIX G "FORM OF CONTINUING DISCLOSURE AGREEMENT" in this Limited Offering Memorandum. Private School Vouchers Various proposals offering private school vouchers to families to assist with the cost of private schools have been considered across the country and in the State, and enacted in several locations. No such voucher program is currently in place in the State. However, if a private school voucher program were enacted in the future, private schools may become more desirable, due to the availability of financial assistance. If private school vouchers are provided for in the State, this may lead to the organization of more private schools and increased competition for Seven Hills Preparatory Academy. Unionization of Charter School Workforce As of the date of this Limited Offering Memorandum, the workforce of the School is not unionized and management of the School is not aware of any active unionization efforts with respect to its employees. There are currently several charter schools in the State that have union teachers. In the event that the labor relations of the School and its employees change in 29

50 the future and, if the employees of the School were to vote to unionize; then the operational costs of the School would likely rise, and such increase could be significant. If the employees of the School were to unionize, no assurance could be given that such change would not adversely affect the amount of general State Education Aid available for the portion of the Lease payment not covered by State Lease Aid. Minnesota Department of Education Rulemaking The Minnesota Department of Education ("MDE") has the ability to promulgate administrative rules that relate to the operation of public schools (including charter schools such as Seven Hills Preparatory Academy). The rulemaking authority of MDE is broad and could affect the operations of public schools, such as Seven Hills Preparatory Academy, in the future. Any future increase in the scope or amount of rules promulgated by MDE in the future that affect the operations of the School could have the result of increasing reporting requirements, increasing operational costs, or affecting the operations of the School in a way that cannot be determined at this time. Litigation Schools are often the subject of litigation. Educator's professional liability and other actions alleging wrongful conduct and seeking punitive damages often are filed against education providers such as Seven Hills Preparatory Academy. Litigation may also arise from the corporate and business activities of Seven Hills Preparatory Academy, the School or any other School-run schools or the Company as to employee-related matters. As with educator's professional liability, many of these risks are covered by insurance, but some are not. For example, some business disputes and workers' compensation claims are not covered by insurance or other sources and, in whole or in part, may be a liability of the School or the Company if determined or settled adversely. Although the School maintains insurance policies covering educator's professional and general liability, management of the School is unable to predict the availability, cost or adequacy of such insurance in the future. Any inability of the School in the future to secure affordable, adequate insurance may expose the School to litigation risks which may adversely affect the School's ability to make payments under the Lease representing debt service on the Series 2017 Bonds. See APPENDIX A "THE SCHOOL, THE COMPANY, AND SEVEN HILLS PREPARATORY ACADEMY SEVEN HILLS PREPARATORY ACADEMY Litigation." Education Reform and Desegregation Litigation The operations of the School could be adversely affected in the future by judicial decisions relating to education reform litigation and/or litigation relating to segregation in public schools in Minnesota. Cases could be filed in Minnesota and federal court in the future that could alter the operations of public schools in Minnesota (including the School) in the future. Any education reform and/or desegregation litigation in Minnesota State Court may take a long time to resolve and the outcome of any such litigation cannot be known at this time. Forward-Looking Statements This Limited Offering Memorandum contains certain statements that are "forward-looking" statements within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical fact included in this Limited Offering Memorandum, including without limitation statements that use terminology such as "estimate," "plan," "budget," "expect," "intend," "anticipate," "believe," "may," "will," "continue," and similar expressions, are forward-looking statements. These forwardlooking statements include, among other things, the discussions related to the School's operations and expectations regarding student enrollment, future operations, revenues, capital resources, and expenditures for capital projects. Although the Company and the School believe that the assumptions upon which the forward-looking statements contained in this Limited Offering Memorandum are based are reasonable, any of the assumptions could prove to be inaccurate and, as a result, the forward-looking statements based on those assumptions also could be incorrect. All phases of the operations of the Company and the School involve risks and uncertainties, many of which are outside the control of the Company and the School and any one of which, or a combination of which, could materially affect the results of the Company's or the School's operations and whether the forward-looking statements ultimately prove to be correct. Factors that could cause actual results to differ from those expected include, but are not limited to, general economic conditions such as inflation and interest rates, both nationally and in the State where Seven Hills Preparatory Academy is located; the willingness of the State to fund charter school operations at present or increased levels; competitive conditions within Seven Hills Preparatory Academy's market, including the acceptance of the education services offered by Seven Hills Preparatory Academy; lower enrollments than projected; unanticipated expenses; the capabilities of Management; changes in government regulation of the education industry or in the 30

51 Charter School Act; future claims for accidents at the Facility and the extent of insurance coverage for such claims; and other risks discussed in this Limited Offering Memorandum. No representation or assurance can be given that the Company will realize revenues in amounts sufficient to make the required payments under the Loan Agreement or that the School will realize revenues in an amount sufficient to make the required payments under the Lease. No market study or demand analysis has been prepared for the School to analyze the existing or future demand for the School's educational services. The realization of future Revenues is dependent upon, among other things, the matters described in the foregoing paragraphs and future changes in economic and other conditions that are unpredictable and cannot be determined at this time. The Underwriter does not make any representation as to the accuracy of the projections contained herein or as to the assumptions on which the projections are based. Additional Indebtedness The Loan Agreement requires the Company to impose certain restrictions on the School pursuant to the Lease or the Pledge Agreement. The Company has covenanted in the Loan Agreement that it will not incur any indebtedness other than the Series 2017 Bonds or Additional Bonds issued pursuant to the Indenture without the consent of the Majority Bondholder. In the Pledge Agreement, the School has covenanted that it will only incur Long-Term Indebtedness, Short-Term Indebtedness, or Purchase Money Indebtedness in accordance with the restrictions imposed by the Loan Agreement and Pledge Agreement. See "SECURITY FOR THE SERIES 2017 BONDS Additional Indebtedness" in this Limited Offering Memorandum. Risk of Loss from Nonpresentment upon Redemption The rights of the registered owners of the Series 2017 Bonds to receive interest will terminate on the date, if any, on which the Series 2017 Bonds are to be redeemed pursuant to a call for redemption, notice of which has been given under the terms of the Indenture. Legal Opinions The various legal opinions to be delivered concurrently with the delivery of the Series 2017 Bonds will express the professional judgment of the attorneys rendering the opinions on the legal issues explicitly addressed therein. By rendering a legal opinion, the opinion giver does not become an insurer or guarantor of that expression of professional judgment, of the transaction opined upon, or of the future performance of parties to such transaction, nor does the rendering of an opinion guarantee the outcome of any legal dispute that may arise out of the transaction. In addition, such opinions will be qualified as to the enforceability of the various legal instruments by, among others, limitations imposed by State and federal laws, rulings and decisions affecting remedies, and by bankruptcy, reorganization or other laws affecting the enforcement of creditors' rights generally. Summary The foregoing is intended only as a summary of certain BONDHOLDERS' RISKS attendant to an investment in the Series 2017 Bonds. In order for potential investors to identify BONDHOLDERS' RISKS and make an informed decision, potential investors should be thoroughly familiar with this entire Limited Offering Memorandum and the appendices hereto. ENFORCEABILITY OF OBLIGATIONS On the date of delivery of the Series 2017 Bonds, Dorsey & Whitney LLP, Minneapolis, Minnesota, Bond Counsel to the Issuer, will deliver its opinion, dated the delivery date, that the Series 2017 Bonds, the Loan Agreement, the Bond Purchase Agreement, and the Indenture are valid and legally binding on the Issuer, enforceable against the Issuer in accordance with their respective terms. Rupp, Anderson, Squires & Waldspurger, PA, Minneapolis, Minnesota, as counsel to the Company, will deliver its opinion that the Loan Agreement, the Mortgage, the Lease, the Pledge Agreement, the Bond Purchase Agreement, the Continuing Disclosure Agreement, the Disbursing Agreement, and the SNDA are valid and legally binding agreements of the Company, each enforceable in accordance with its respective terms. Rupp, Anderson, Squires & Waldspurger, PA, Minneapolis, Minnesota as counsel to the School, will deliver its opinion that the Lease, the Bond Purchase Agreement, the Continuing Disclosure Agreement, the Account Control Agreement, the Pledge Agreement, and the SNDA are valid and legally binding agreements of the Company, each enforceable in accordance with its respective terms. 31

52 The foregoing opinions will be generally qualified to the extent that the enforceability of the respective instruments may be limited by laws, decisions and equitable principles affecting remedies and by bankruptcy or insolvency or other laws, decisions and equitable principles affecting creditors' rights generally. While the Series 2017 Bonds are secured or payable pursuant to the Indenture, the Loan Agreement, the Mortgage, the Lease, and the Pledge Agreement, the practical realization of payment from any security will depend upon the exercise of various remedies specified in the respective instruments. These and other remedies are dependent in many respects upon judicial action, which is subject to discretion and delay. Accordingly, the remedies specified in the above documents may not be readily available or may be limited. LEGAL MATTERS Legal matters incident to the issuance and sale of the Series 2017 Bonds and with regard to the tax-exempt status of interest on the Series 2017A Bonds under existing laws are subject to the legal opinion of Dorsey & Whitney LLP, Minneapolis, Minnesota, as Bond Counsel. Certain legal matters in connection with the Series 2017 Bonds will be passed upon for the Underwriter by Ice Miler LLP, Columbus, Ohio, and for the Company and the School by Rupp, Anderson, Squires & Waldspurger, PA, Minneapolis, Minnesota. Tax Exemption TAX MATTERS In the opinion of Dorsey & Whitney LLP, Minneapolis, Minnesota, as Bond Counsel to the Issuer, under existing laws, regulations, rulings, and decisions, and assuming continuing compliance by the Company and the School with covenants made to satisfy requirements of the Internal Revenue Code of 1986, as amended (the "Code"), interest on the Series 2017A Bonds is excluded from gross income for federal income tax purposes and is excluded to the same extent, from net income of individuals, estates, and trusts for State income tax purposes. Interest on the Series 2017A Bonds is not an item of tax preference for purposes of the computation of the alternative minimum tax imposed on individuals and corporations under federal law and on individuals, estates, and trusts under State law. Interest on the Series 2017A Bonds is included in adjusted current earnings of corporations in determining alternative minimum taxable income for purposes of the federal alternative minimum tax imposed on corporations. Interest on the Series 2017A Bonds is subject to State franchise tax imposed on corporations, including financial institutions. Interest on the Series 2017B Bonds is taxable as ordinary income for federal income tax purposes. In expressing its opinion, Bond Counsel will rely on an opinion of Rupp, Anderson, Squires & Waldspurger, PA, Minneapolis, Minnesota, as counsel to the Company and the School, as to those matters with respect to which their opinion is rendered. The Code establishes certain requirements (the "Federal Tax Requirements") that must be satisfied subsequent to the issuance of the Series 2017A Bonds in order that, for federal income tax purposes, interest on the Series 2017A Bonds will continue to be excluded from gross income for federal income tax purposes. The Federal Tax Requirements include, but are not limited to, requirements relating to the expenditure of proceeds of the Series 2017A Bonds, requirements relating to the operation of the facilities financed by the Series 2017A Bonds, restrictions on the investment of proceeds of the Series 2017A Bonds prior to expenditure, and the requirement that certain earnings on the "gross proceeds" of the Series 2017A Bonds be paid to the federal government. Noncompliance with the Federal Tax Requirements may cause interest on the Series 2017A Bonds to become subject to federal and Minnesota income taxation retroactive to their date of issue irrespective of the date on which such noncompliance occurs or is ascertained. In expressing its opinion, Bond Counsel will assume compliance by the Issuer, the Company, the School, and the Trustee with the tax covenants contained in the Loan Agreement, the Pledge Agreement, the Tax Certificate, and the Indenture. Other Federal Tax Considerations Interest on the Series 2017A Bonds may be included in the income of a foreign company for purposes of the branch profits tax imposed by Section 884 of the Code. In the case of an insurance company subject to the tax imposed by Section 831 of the Code, the amount which otherwise would be taken into account as losses incurred under Section 832(b)(5) of the Code must be reduced by an amount equal to fifteen percent of the interest to be paid on the Series 2017A Bonds that is received or accrued during the taxable year. Under the circumstances described in Section 86 of the Code, recipients of certain social security and railroad retirement benefits may be required to take into account interest on the Series 2017A Bonds in determining the taxability of such benefits. Passive investment income, including interest on the Series 2017A 32

53 Bonds, may be subject to federal income taxation under Section 1375 of the Code for an S corporation that has Subchapter C earnings and profits at the close of the taxable year if greater than 25% of its gross receipts is passive investment income. The Series 2017A Bonds have not been designated by the Issuer as "qualified tax-exempt obligations" within the meaning of Section 265(b)(3) of the Code. Bond Premium The Series 2017A Bonds having a stated maturity of October 1, 2037, are being issued at a premium to the principal amount payable at maturity. Except in the case of dealers, which are subject to special rules, Bondholders who acquire Series 2017A Bonds at a premium, even Series 2017A Bonds that were not initially offered at a premium, must, from time to time, reduce their federal and Minnesota tax bases for the Series 2017A Bonds for purposes of determining gain or loss on the sale or payment of such Series 2017A Bonds. Premium generally is amortized for federal and Minnesota income and franchise tax purposes on the basis of a bondholder's constant yield to maturity or to certain call dates with semiannual compounding. Accordingly, bondholders who acquire Series 2017A Bonds at a premium might recognize taxable gain upon sale of the Series 2017A Bonds, even if such Series 2017A Bonds are sold for an amount equal to or less than their original cost. Amortized premium is not deductible for federal or Minnesota income tax purposes. Bondholders who acquire Series 2017A Bonds at a premium should consult their tax advisors concerning the calculation of bond premium and the timing and rate of premium amortization, as well as the state and local tax consequences of owning and selling Series 2017A Bonds acquired at a premium. The Series 2017B Bonds Interest on the Series 2017B Bonds is included in (a) gross income for federal income tax purposes, (b) taxable net income of individuals, estates, and trusts for Minnesota income tax purposes, and (c) taxable income for purposes of the Minnesota franchise tax on corporations and financial institutions. Legislative Proposals Bond Counsel's opinion is given as of its date and Bond Counsel assumes no obligation to update, revise, or supplement such opinion to reflect any changes in facts or circumstances or any changes in law that may hereafter occur. Proposals are regularly introduced in both the United States House of Representatives and the United States Senate that, if enacted, could alter or affect the tax-exempt status of municipal bonds. The likelihood of adoption of this or any other such legislative proposal relating to tax-exempt bonds cannot be reliably predicted. If enacted into law, current or future proposals may have a prospective or retroactive effect and could affect the value or marketability of tax-exempt bonds (including the Series 2017A Bonds). Prospective purchasers of the Series 2017 Bonds should consult their own tax advisors regarding the impact of any such change in law. The above is not a comprehensive list of all federal tax consequences which may arise from the receipt of interest on the Series 2017 Bonds. The receipt of interest on the Series 2017 Bonds may otherwise affect the federal or state income tax liability of the recipient based on the particular taxes to which the recipient is subject and the particular tax status of other items or deductions. Bond Counsel expresses no opinion regarding any such consequences. All prospective purchasers of the Series 2017 Bonds are encouraged to consult with their personal tax advisors as to the tax consequences of, or tax considerations for, purchasing or holding the Series 2017 Bonds. CONTINUING DISCLOSURE Rule 15c2-12, promulgated by the Securities and Exchange Commission under the Securities Exchange Act of 1934 ("Rule 15c2-12"), imposes continuing disclosure obligations on the issuers of certain state and municipal securities to permit participating underwriters to offer and sell the issuer's securities. In order to comply with the requirements of Rule 15c2-12, the Company, the School, and Digital Assurance Certification, LLC ("DAC"), as dissemination agent, will enter into a Continuing Disclosure Agreement, dated as of October 1, 2017 (the "Continuing Disclosure Agreement"). DAC provides its clients with automated filing of rating events, templates consolidating all outstanding filing requirements that accompany reminder notices of annual or interim mandatory filings, review of all template filings by professional accountants, as well as a time and date stamp record of each filing along with the unique ID from EMMA accompanying the copy of the actual document filed. DAC also offers its clients a series of training webinars each year qualified for NASBA certified CPE credits, as well as model secondary market compliance policies and procedures. 33

54 Neither the Company nor the School has been subject to any prior disclosure undertakings under Rule 15c2-12. See APPENDIX G "FORM OF CONTINUING DISCLOSURE AGREEMENT" in this Limited Offering Memorandum. The Issuer does not have any obligation with respect to the Continuing Disclosure Agreement because the Issuer is not an "obligated party" under the terms of Rule 15c2-12. The Issuer will not monitor the compliance by the Company or the School with the terms of the Continuing Disclosure Agreement. FINANCIAL STATEMENTS OF THE SCHOOL The financial statements of the School for the fiscal years ended June 30, 2015 as audited by Malloy, Montague, Karnowski, Radosevich & Co., P.A., certified public accountants ("MMKR"), and for the fiscal year ended June 30, 2016 as audited by Redpath and Company, Ltd., certified public accountants ("Redpath") are included as APPENDIX B "FINANCIAL STATEMENTS." The financial statements of the School for the fiscal year ended June 30, 2014, were restated in the audited financial statements for the fiscal year ended June 30, 2015, in order to accurately present the comparative position of the post-merger School. These financial statements were prepared using the standards applicable to governmental entities. The audited financial statements included in Appendix B are an integral part hereof and should be read in their entirety. Neither MMKR nor Redpath has been engaged to perform and neither has performed, since the date of its reports included in Appendix B, any procedures on the financial statements addressed in those reports. Neither MMKR nor Redpath has performed any procedures relating to this Limited Offering Memorandum. See APPENDIX B "FINANCIAL STATEMENTS" in this Limited Offering Memorandum. THE BUDGET PROJECTION The School has prepared the budget projection and related assumptions included in APPENDIX C to this Limited Offering Memorandum. The Budget Projection is based on the assumptions made by management of the School as to, among other things, future enrollment levels, future costs and future revenues. The Budget Projection is for the five fiscal years of the School ending June 30, 2018 through June 30, The Budget Projection (including the notes thereto) should be read in its entirety. The Budget Projection is based on various assumptions that represent only the beliefs of the School's management as to the most probable future events and are subject to material uncertainties. No assurances can be given that the School will, in fact, be able to generate sufficient revenue and attain the enrollment levels as stated in the Budget Projection, and variations from the Budget Projection for each of such matters should be expected to occur. Accordingly, the operations and financial condition of the School in the future will inevitably vary from those set forth in the Budget Projection, and such variance may be material and adverse. See "BONDHOLDERS' RISKS Budget Projection" in this Limited Offering Memorandum. The School has not assumed any responsibility after the issuance of the Series 2017 Bonds to update the Budget Projection or to provide any financial forecasts or projections in the future. The Underwriter and the Issuer have made no independent inquiry as to the assumptions on which the Budget Projection is based and assume no responsibility therefor. See APPENDIX C "BUDGET PROJECTION" in this Limited Offering Memorandum. RELATIONSHIPS AMONG THE PARTIES In connection with the issuance of the Series 2017 Bonds, the Issuer, the Company, the School, and the Underwriter are being represented by the attorneys or law firms identified above under the heading "LEGAL MATTERS" and Dorsey & Whitney LLP, is acting as Bond Counsel. In other transactions not related to the Series 2017 Bonds, each of these attorneys or law firms may have acted as Bond Counsel or Underwriter's Counsel or represented the Issuer, the Company, the School, the Underwriter, the Trustee, or their respective affiliates, in capacities different from those described under "LEGAL MATTERS," and there will be no limitations imposed as a result of the issuance of the Series 2017 Bonds on the ability of any of these firms or attorneys to act as Bond Counsel or Underwriter's Counsel or represent any of these parties in any future transactions. Potential purchasers of the Series 2017 Bonds should not assume that the Issuer, the Company, the School, the Underwriter, the Trustee, or their respective counsel or Bond Counsel or Underwriter's Counsel have not previously engaged in, or will not after the issuance of the Series 2017 Bonds engage in, other transactions with each other or with any affiliates of any of them, and no assurances can be given that there are or will be no past or future relationship or transactions between or among any of these parties or these attorneys or law firms. 34

55 BerganKDV, Farmington, Minnesota, is serving as financial manager to the School in connection with the issuance of the Series 2017 Bonds. The Issue ABSENCE OF LITIGATION To the knowledge of the Issuer, there is no litigation pending against the Issuer seeking to restrain or enjoin the issuance or delivery of the Series 2017 Bonds, questioning or affecting the legality of the Series 2017 Bonds or the proceedings and authority under which the Series 2017 Bonds are to be issued or questioning the validity or enforceability of the Indenture, the Bond Purchase Agreement, or the Loan Agreement. The Company In connection with the issuance of the Series 2017 Bonds, the Company has represented that there is no litigation pending, seeking to restrain or enjoin the issuance or delivery of the Series 2017 Bonds or questioning or affecting the legality of the Series 2017 Bonds or the proceedings and authority under which the Series 2017 Bonds are to be issued. There is no litigation pending which in any manner questions the undertaking of the financing by the Company or the validity or enforceability of the Indenture, the Loan Agreement, the Bond Purchase Agreement, the Tax Certificate, the Continuing Disclosure Agreement, the Account Control Agreement, the Lease, the Pledge Agreement, the Disbursing Agreement, or the Mortgage. The School In connection with the issuance of the Series 2017 Bonds, the School has represented that there is no litigation pending, seeking to restrain or enjoin the issuance or delivery of the Series 2017 Bonds or questioning or affecting the legality of the Series 2017 Bonds or the proceedings and authority under which the Series 2017 Bonds are to be issued. There is no litigation pending which in any manner questions the undertaking of the financing by the School or the validity or enforceability of the Bond Purchase Agreement, the Tax Certificate, the Continuing Disclosure Agreement, the Account Control Agreement, the Lease, the Pledge Agreement, the SNDA, or the Mortgage. UNDERWRITING The Series 2017 Bonds will be purchased by BB&T Capital Markets, a division of BB&T Securities, LLC, Columbus, Ohio (the "Underwriter"). The Underwriter has agreed to purchase the Series 2017A Bonds for a purchase price of $13,161, which amount represents the principal amount of the Series 2017A Bonds ($13,320,000.00), less the Underwriter's discount of $181,596.00, plus original issue premium of $23, The Underwriter has agreed to purchase the Series 2017B Bonds for a purchase price of $1,065,276.00, which amount represents the principal amount of the Series 2017B Bonds ($1,080,000.00), less the Underwriter's discount of $14, The Underwriter is purchasing the Series 2017 Bonds pursuant to the terms of a Bond Purchase Agreement (the "Bond Purchase Agreement") between the Issuer, the Company, the School, and the Underwriter. The Bond Purchase Agreement also provides that the Company will pay miscellaneous out-of-pocket expenses of the Underwriter. The Bond Purchase Agreement provides that the Underwriter will purchase all Series 2017 Bonds if any are purchased, and that the obligation to make such purchase is subject to certain terms and conditions set forth in the Bond Purchase Agreement, the approval of certain legal matters by counsel, and certain other conditions. Expenses associated with the issuance of the Series 2017 Bonds are being paid by the Company from proceeds of the Series 2017 Bonds. The right of the Underwriter to receive compensation in connection with the Series 2017 Bonds is contingent upon the actual sale and delivery of the Series 2017 Bonds. The initial offering prices set forth on page ii hereof may be changed from time to time by the Underwriter. The Underwriter reserves the right to join with dealers and other investment banking firms in offering the Series 2017 Bonds to the public. The Company and the School have agreed under the Bond Purchase Agreement to indemnify the Underwriter and the Issuer against certain liabilities, including certain liabilities under federal and state securities laws. MISCELLANEOUS The foregoing does not purport to be comprehensive or definitive, and all references to any document herein are qualified in their entirety by reference to each such document. All references to the Series 2017 Bonds are qualified in their entirety by reference to the forms thereof and the information with respect thereto included in the aforesaid documents. 35

56 Copies of these documents are available for inspection during the period of the offering at the office of the Underwriter, and thereafter at the principal corporate trust office of the Trustee. In addition to certain information provided herein, all information contained in the Appendices A, B, C, and D along with information regarding the Budget Projection and projected debt service coverage under the caption "Summary Information" has been provided by the Company or the School or been derived from information provided by the Company or the School. The Underwriter makes no representation or warranties as to the accuracy or completeness of the information in any of the Appendices. The Company, the School, and the Issuer have authorized and approved the use and distribution of this Limited Offering Memorandum, although the Issuer has not reviewed or approved any matters herein and assumes no responsibility for the accuracy or completeness of the information herein except for the information under the caption "THE ISSUER" and "ABSENCE OF LITIGATION The Issuer" in this Limited Offering Memorandum. Registration of Series 2017 Bonds Registration or qualification of the offer and sale of the Series 2017 Bonds (as distinguished from registration of the ownership of the Series 2017 Bonds) is not required under the federal Securities Act of 1933, as amended. THE COMPANY AND THE SCHOOL ASSUME NO RESPONSIBILITY FOR QUALIFICATION OR REGISTRATION OF THE SERIES 2017 BONDS FOR SALE UNDER THE SECURITIES LAWS OF ANY JURISDICTION IN WHICH THE SERIES 2017 BONDS MAY BE SOLD, ASSIGNED, PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED. Interest of Certain Persons Named in this Limited Offering Memorandum Certain of the fees to be paid to Bond Counsel, counsel to the Company and the School, counsel to the Underwriter, the Trustee, and the Underwriter are contingent upon the sale and delivery of the Series 2017 Bonds. [Remainder of page intentionally left blank] 36

57 Limited Offering Memorandum Certification of the Company and the School The preparation of this Limited Offering Memorandum and its distribution has been authorized by the Company and the School. This Limited Offering Memorandum has been "deemed final" by the Company and the School in compliance with the provisions of Rule 15c2-12. This Limited Offering Memorandum is not to be construed as an agreement or contract between the Company or the School and any purchaser, owner or Registered Owner of any Series 2017 Bond. SHPA ABC, a Minnesota nonprofit corporation By: /s/ Ryan Grutsch Name: Ryan Grutsch Title: Chair SEVEN HILLS PREPARATORY ACADEMY, a Minnesota nonprofit corporation By: /s/ Carl Schlueter Name: Carl Schlueter Title: Executive Director S-1

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59 APPENDIX A THE SCHOOL, THE COMPANY, AND SEVEN HILLS PREPARATORY ACADEMY

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61 THE SCHOOL, THE COMPANY, AND SEVEN HILLS PREPARATORY ACADEMY General Seven Hills Preparatory Academy (the "School"), a Minnesota nonprofit corporation, was incorporated on October 8, 2004, for the purpose of forming and operating a public charter school in the State of Minnesota (the "State"), including operating the charter school known as Seven Hills Preparatory Academy ("Seven Hills Preparatory Academy"). The School is an organization described under Section 501(c)(3) of the Internal Revenue Code of 1986, as amended (the "Code"). The School operates Seven Hills Preparatory Academy pursuant to Minnesota Statutes, Chapter 124E, as amended (the "Minnesota Charter Schools Act") and a renewal Charter School Contract effective July 1, 2014 (the "Charter School Contract"), between Friends of Education (the "Authorizer") and the School. The Charter School Contract will expire on June 30, 2019, if not renewed prior to such date. See "BONDHOLDERS' RISKS Nonrenewal or Revocation of Charter School Contract." Seven Hills Preparatory Academy commenced operations for the school year and for the school year serves students in grades K-8, and offers a Classical Education model with a shared emphasis upon lifelong learning and citizenship, and a dual focus upon academic rigor and character development. Effective July 1, 2014, the School merged with Beacon Preparatory School, a Minnesota nonprofit corporation that operated the charter school known as Beacon Preparatory School ("Beacon Preparatory School"). Prior to the merger, Seven Hills Preparatory Academy and Beacon Preparatory School operated from leased space located at 8600 Bloomington Avenue South, Bloomington Minnesota (the "Bloomington Campus"), at which Seven Hills Preparatory Academy served students in grades K-5 and Beacon Preparatory School served students in grades 6-8. The merger leveraged operating efficiencies, connected enrollment procedures, alleviated attrition related to uncertain matriculation due to separate enrollment policies, and allowed Seven Hills Preparatory Academy to replicate its grade K-5 program (sometimes referred to herein as the "Elementary School") and expand its grade 6-8 program (sometimes referred to herein as the "Middle School"). For the school year, Seven Hills Preparatory Academy moved its grade 6-8 operations to an approximately 38,000 square foot portion of an approximately 60,000 square foot facility located at 1401 West 76th Street, Richfield, Minnesota (the "Facility"), which is currently leased from an unrelated third party (the "Facility Seller"). For the school year, Seven Hills Preparatory Academy implemented the first year of its grade K-5 high-quality replication program at the campus on which the Facility is located (the "Richfield Campus" and, together with the Bloomington Campus, the "Campuses"), adding grades K-1. Seven Hills Preparatory Academy will add an additional grade each year until the Richfield Campus serves grades K-8. The Bloomington Campus, which is leased from an unrelated third party (the "Bloomington Campus Landlord") pursuant to a Lease Agreement dated July 19, 2017 (the "Bloomington Campus Lease"), will continue to serve grades K-5. In connection with the planned purchase and expansion of the Richfield Campus, SHPA ABC (the "Company"), a Minnesota nonprofit corporation and an organization described under Section 501(c)(3) of the Code, was incorporated on December 9, The Company is organized and operated exclusively in support of Seven Hills Preparatory Academy and in particular to purchase, own, and/or construct a public schoolhouse, for lease to Seven Hills Preparatory Academy, on real estate owned by the School. In furtherance of this purpose, the Company will apply the proceeds of the Series 2017 Bonds (as defined in the forepart of this Limited Offering Memorandum) to (i) finance the acquisition, construction, improvement and equipping of the Facility; (ii) fund a reserve fund; (iii) pay capitalized interest on the Series 2017 Bonds; and (iv) pay costs associated with the issuance of the Series 2017 Bonds (the "Project"). On the date of issuance of the Series 2017 Bonds (the "Closing Date"), the Company will acquire the Richfield Campus from an unrelated third party for a purchase price of $9,310,745. On the Closing Date, the Facility will consist of approximately 60,000 total square feet. After the Closing Date, the Company will undertake A-1 CO\

62 the expansion of the Facility to include expanded and renovated interior space, including a larger cafeteria, special education resource rooms, and science laboratories, and exterior improvements, including a playground and an approximately 13,000 square foot gymnasium (collectively, the "Construction Project"). The Facility is currently subject to leases for cell tower space and advertising, which will remain in place after the Closing Date. The Company is evaluating the possibility of renting additional space in the Facility to one or more tenants on a single-use or recurring basis during times when the School is not using certain portions of the Facility. Governing Body The School is governed by a Board of Directors (the "School Board"), which is comprised of a model of at least one parent, one teacher, and one community member. The number of directors (the "Corporate Directors") constituting the School Board shall be at least five and not more than eleven, with the exact number to be determined from time to time by resolution of the Board. The School Board shall adhere to a non-teacher majority governance structure with a minimum of three teacher members required and maximum determined by the size of the School Board, with at least one teacher member from each Campus. The School Board holds regular meetings each month, and special meetings and emergency meetings of the School Board may be held as provided in the Bylaws of the School (the "School Bylaws"). A quorum is required to hold a School Board meeting and to transact any business at a School Board meeting. A majority of the directors constitute a quorum for the transaction of business at any meeting of the School Board. The School Board must take action by the affirmative vote of a majority of directors who are present and entitled to vote at a duly held meeting, except in those cases, if any, where the School Bylaws require the affirmative vote of a larger proportion. The School Board is divided into three classes so that School Director terms are staggered. All newly elected School Directors begin their terms on July 1 of the year elected and serve for a three-year term ending on June 30 of the third year of service, provided that each School Director will remain on the School Board until expiration of the term for which such School Director was elected or appointed and until a successor is elected and qualified, or until the death, resignation, removal, or disqualification of the director, whichever occurs first. On or before February 15 of each school year, the Chair (as defined herein) will appoint an election committee (the "Election Committee") consisting of one or more parents of students enrolled at Seven Hills Preparatory Academy, one or more staff members employed by the School, and such other individuals as the Chair sees fit. The Election Committee and the School Board may both nominate candidates, and the School Board must accept the Election Committee's nominations and nominations of any licensed teacher who is employed as a teacher at Seven Hills Preparatory Academy, or a parent or legal guardian of a child enrolled at Seven Hills Preparatory Academy, or a community member submits a written notice to the School Board seeking to be nominated for election to the School Board. On or before May 15, the School Board must hold an election in a manner that the School Board sees fit to determine which candidates will be elected to the School Board. The following individuals may vote in the election: staff members who are employed as a teacher at Seven Hills Preparatory Academy, members of the School Board, and all parents or legal guardians of children enrolled at Seven Hills Preparatory Academy. The School must notify eligible voters of the School Board election date at least thirty days before the election. Voting is by ballot, with the persons receiving the greatest number of votes shall be elected for the open seats on the School Board. The School Board has the following officers: President; Vice-President; Treasurer; and Secretary. The President is also referred to as the Chair, and the Vice-President is also referred to as the Vice-Chair. By majority vote of a quorum of the School Board, the School Board may appoint any non-staff School Director to serve as an officer of the School. Each officer serves a one-year term, and holds office until the expiration of the term for which A-2

63 the officer was appointed and until a successor is appointed, or until the death, resignation, removal, or disqualification of the officer, whichever occurs first. Current School Directors and officers of the School Board are listed in the following chart. Name Position Profession Employer Year Joined Term Expires Kim Hubertus Chair Accounting Magid Kelly Bartsh Vice Chair Nursing Medtronic Mark Quistad Secretary Sales ABILITY Network Michael Meyer Treasurer Law Retired Lisa Barnidge Director Data Manager State of MN Lisa Carlin Director Education The School Kate Docken Director Education The School Nick Freiheit Director Special Agent USDA Molly Lee Director Physical Therapy Alina Health Janeen Raaen Director Education Jefferson High School Celeste Wiederholt Director Education The School Source: Management Kim Hubertus/Chair Ms. Hubertus holds a Bachelor of Science in Business with an emphasis in Accounting from the University of Minnesota and a Master of Business Administration from Metropolitan State University. She is the Controller at Magid, has more than 25 years of experience as a financial/accounting professional, and is an active CPA. In addition, she has experience in human resources. Ms. Hubertus is serving her eighth year as a School Director and has previously served as Secretary and Treasurer. She is the parent of a student at Seven Hills Preparatory Academy. Kelly Bartsh/Vice Chair Ms. Bartsh received an Associate of Arts Degree in Nursing from the College of Saint Catherine, a Bachelor of Science Degree in Nursing from Augsburg College, and attended the University of Minnesota. She is a Registered Nurse at Medtronic. Ms. Bartsh is the parent of two students at Seven Hills Preparatory Academy. Mark Quistad/Secretary Mr. Quistad received his Bachelor of Arts in Business Management/Marketing from Evangel University and the University of Minnesota's Carlson School of Management. He is a regional sales manager with ABILITY Network. Mr. Quistad's daughter graduated from Seven Hills Preparatory Academy and his son attends Seven Hills Preparatory Academy. Michael Meyer/Treasurer Mr. Meyer holders a Bachelor of Arts and a juris doctor from the University of Minnesota. He is a retired attorney. Mr. Meyer has been a softball coach, school committee member, and past member of the board of directors and President of Minnesota Valley Country Club. Lisa Barnidge/Director Ms. Barnidge earned a Bachelor's of Science in Computer Science from Creighton University and received a Master of Public Affairs from the University of Minnesota's Humphrey Institute. She is an Integrated Data Manager with the Department of Human Services, State of Minnesota. Ms. Barnidge has more than ten years of experience in education policy, including managing public programs and budgets. She is the parent of two students currently attending Seven Hills Preparatory Academy. Lisa Carlin/Director Ms. Carlin received her Bachelor of Arts and Master's Degree in Elementary Education along with her Teaching License from the University of Minnesota. She is a second-grade teacher at the Bloomington Campus, and has been a teacher at Seven Hills Preparatory Academy since its inception. Kate Docken/Director Ms. Docken received a Bachelor of Arts in Child Psychology and her Master of Education and Teacher's License from Augsburg College, and she received her Administrative License in Special A-3

64 Education from the University of Saint Mary's. Ms. Docken is the Special Education Director at Seven Hills Preparatory Academy. Nick Freiheit/Director Mr. Freiheit received his Bachelor of Arts in Political Science and Law Enforcement from Mankato State University. He is a Special Agent in the USDA Office of Inspector General. Mr. Freiheit has more than 25 years of experience in law enforcement. His two children attend Seven Hills Preparatory Academy. Mr. Freiheit is involved in the community as a volunteer at his church and a former Cub Scout leader. Molly Lee/Director Ms. Lee holds a Bachelor of Arts in Biology from Gustavus Adolphus College, and both a Master of Arts and a Doctorate Degree in Physical Therapy from Northwestern University, Chicago. She is a physical therapist for Alina Health. Two of Ms. Lee's children attend Seven Hills Preparatory Academy. Janeen Raaen/Director Ms. Raaen attended Southeastern University for two years prior to obtaining her Esthetician license and is an ASD Program Management Aid. She has had two daughters graduate from Seven Hills Preparatory Academy and has two other daughters currently enrolled in Seven Hills Preparatory Academy. Celeste Wiederholt/Director Ms. Wiederholt received her B.S. in Elementary Education as well as her Teaching License from the University of Minnesota, Mankato. She is a founding Kindergarten teacher at the Bloomington Campus and the parent of two children who graduated from or currently attend Seven Hills Preparatory Academy. Committees of the School Board. In addition to the focus on operations, the members of the Board of Directors also oversee and chair Board committees. These committees may include volunteers from the school community and serve to ensure that the SHPA academic programming is successful, that the multiple elements of school and community life are addressed efficiently, and that the organization remains economically viable. These committees include Finance, Public Relations, Human Resources, Governance, and Facilities. The Finance Committee is a committee of the School Board. The purpose of this committee is to review the financial performance of the School, ensure that the School does not operate in a statutory deficit position, strive to achieve and maintain a 25% fund balance, and recommend and manage to an annual budget that accomplishes these goals. The committee is chaired by the Treasurer of the School Board. This committee also performs periodic reviews of the managerial controls of public funds and record keeping. The Public Relations Committee is a committee of the School Board. Its purpose is to actively communicate and promote Seven Hills Preparatory Academy and its activities to the greater community and to interested families. This committee also coordinates annual Seven Hills Preparatory Academy and community events. This committee is chaired by a School Director. The Human Resources Committee is a committee of the School Board. The purpose of this committee is to review specific topics as assigned by the School Board for the purpose of making a recommendation to the School Board of the appropriate action to take. Common topics that may be discussed by this committee include common personnel functions such as compensation and employee benefit structures, staffing practices such as attracting and retaining staff, as well as communications among employees. The committee does not handle specific employee performance concerns, which are handled by the Executive Director in coordination with the full School Board. This committee is chaired by a School Director. The Governance Committee is a committee of the School Board. Membership is comprised of School Directors, parents, and community member volunteers. The purpose of this committee is to maintain and adhere to the School's bylaws, review and make recommendations on issues of new policy, change existing policy, recommend any modifications or deletions from existing policies. The Governance Committee also coordinates and maintains the board member training requirements and ensures compliance with all applicable regulations. This committee is chaired by a School Director. The Facilities Committee is a committee of the School Board. The purpose of this committee is to ensure that Seven Hills Preparatory Academy has high quality facilities that match the needs of Seven Hills Preparatory Academy and its community while maintaining fiscal responsibility. The committee is encouraged to strive to A-4

65 secure membership from volunteers with facility planning and financial management experience. This committee is chaired by a School Director. In addition to other actions relating to committees, the School Board may: (1) establish standing or ad hoc committees as it sees fit; (2) define the powers and responsibilities of any committee that it has established; (3) designate and determine the members of any committee that it has established; (4) select or provide a method for selecting a chairperson for a committee; (5) designate one or more individuals to replace any absent or disqualified member of a committee; (6) direct and oversee any committee that it has established; and disband any established committee as it sees fit, regardless of whether the committee is a standing committee or an ad hoc committee. An ad hoc committee is considered disbanded once its designated task has been completed. Fiscal Policies Budget and Financial Reporting. The School has various reporting requirements imposed on it by the School Bylaws, the Charter School Contract, and State law. The School Board shall cause to be established and maintained, in accordance with generally accepted accounting principles and standards of fiscal management for a public charter school, an appropriate accounting and financial reporting system for the School. The School Board shall cause the records and books of account of the School to be audited, in accordance with Minnesota law, at least once each fiscal year and at such other times as it may seem necessary or appropriate, and may retain such person or firm for such purposes as it may deem appropriate. Pursuant to the Charter School Contract, the School will furnish the Authorizer with monthly financial reports, no later than the 20th of the month for the prior month, unless a different frequency is agreed to in writing by the Authorizer. The reports must contain budget and actual revenue and expenses (both by current month and year-to-date) and contain explanations for all items exceeding budget and the manner in which the excess items will be resolved, as well as cash-flow statements and fiscal year-end fund balance projections. The financial reports will also include the total dollar amount of unpaid accounts payable more than thirty days past due with an explanatory note for the total amount of any such past due amounts disputed by the School, if applicable; and the current average daily membership of Seven Hills Preparatory Academy. Should the School continually exceed its budgeted expenses with no corresponding increase in revenue, not report properly or timely to the Department of Education or the Authorizer, evidence any fiscal or legal noncompliance, the School will engage resources to resume budgeted performance and operate in fiscal management. The School will execute a release to enable the Authorizer to discuss the School's financial matters with both its external auditor and accounting service provider if any. Seven Hills Preparatory Academy will submit the release to the Authorizer no later than September 1 of each school year. The School consents to the Authorizer conducting reviews of Seven Hills Preparatory Academy's accounts payable, at such times as the Authorizer may require, either at Seven Hills Preparatory Academy or at the School's accounting service provider, if any. The School Board is responsible for establishing, approving, and amending an annual budget in accordance with applicable law. The School will submit to the Authorizer a draft budget for the following school year by May 1. By June 15 of each year, the School Board shall submit to the Authorizer a copy of its final budget for the following school year. The budget must detail budgeted expenditures at the object level. In addition, the School Board is responsible for approving all revisions and amendments to the annual budget. Within ten business days after School Board approval, revisions or amendments to the School's budget shall be submitted to the Authorizer. In addition, the School is required to comply with all reporting requirements established by the Department of Education. Seven Hills Preparatory Academy shall at all times comply with generally accepted public sector accounting principles, generally accepted standards of fiscal management, and accounting system requirements that comply with Department of Education requirements. A-5

66 Seven Hills Preparatory Academy shall engage an annual external audit of all financial and accounting records. The audit will be prepared and reviewed by an independent certified public accountant. By December 15 of each year, the School shall submit two copies of the annual financial statement audit and auditor's management letters, including any required supplemental information, for the school year ending the previous June 30 to the Authorizer. By January 1 of each year, the School Board shall provide to the Authorizer a copy of any responses to auditor's management letters. The School will comply with the same financial audits, audit procedures, and audit requirements of school districts, except to the extent deviations are necessary because of the program of the School. Financial, program, or compliance audits may be conducted by the Department of Education, or the State Auditor, or the Legislative Auditor. The School will submit its state-required annual report to the Authorizer no later than seven days before the date specified by the Minnesota Department of Education, and if the Department of Education does not specify a due date, no later than October 1 for the immediately preceding school year ending June 30. The annual report shall be approved by the School Board prior to the submission to the Authorizer and will include such information as the Authorizer may require. Other Reporting Requirements. In addition to the foregoing reports, the School must also provide the Authorizer with periodic reports regarding student enrollment, teacher licensure, and instructional days and hours. Conflict Relationships. No School Director may violate any common law or statutory prohibition on conflicts of interest. Any director who has a personal financial interest in a transaction that is being contemplated by the School Board, or who has a relationship with any person who may be involved in such a transaction, must fully disclose to the School Board the existence of the interest or relationship before the transaction is initiated. School Directors must comply with all conflict-of-interest policies adopted by the Board and must submit any annual statement required by such policies. Financial Manager BerganKDV (the "Finance Manager") is the Finance Manager of the School. Pursuant to the terms of a Financial Management Services Agreement between the School and the Finance Manager (the "Finance Management Agreement"), the Finance Manager provides the School with comprehensive financial services and support. On July 1, 2017, the Finance Manager acquired Beltz, Kes, Darling & Associates ("BKDA"), which had provided financial management services to the School since The Finance Manager currently works with 48 charter schools serving approximately 24,000 students throughout Minnesota, including the School. Under the Finance Management Agreement, the Finance Manager is responsible for certain financial services to the School, including but not limited to budgeting, accounts payable and receivable, payroll and payroll tax, state and federal reporting requirements, financial statements and cash flow analysis, and other financial services. The Finance Management Agreement is effective from July 1, 2017 through June 30, 2020, and is based on a flat monthly fee of $8,690 per month for up to 925 students, $8,767 per month for up to 1,000 students, and $8,967 per month for up to 1,100 students, terminable by either party with a 60-day notice. The Finance Manager and the School believe that the Finance Management Agreement complies with safe harbors contained in Internal Revenue Service revenue procedures regarding management contracts (the "Safe Harbors"). The following individuals are key administrators of the Finance Manager: Judith Darling, CPA, MBA. Ms. Darling joined the BKDA in 2004 after providing business management services to several metro charter schools. After receiving a bachelor's degree from St. Olaf College, Ms. Darling earned an MBA from the University of St. Thomas. Prior to joining the BKDA, Ms. Darling worked for Designs for Learning as a financial manager for various charter schools. Prior to working as a financial manager, Ms. Darling A-6

67 was an auditor at Malloy, Montague, Karnowski, Radosevich, and audited traditional school districts. During her tenure as an auditor, serving traditional school districts, Ms. Darling earned her CPA license. Nick Taintor, CPA. Mr. Taintor joined BKDA in 2010 as a manager working with several charter schools in the Twin Cities area. He has eight years of public accounting experience which includes six years at Redpath and Company CPAs. He specializes in accounting services as well as business management advising for charter schools. Mr. Taintor was on the Minnesota Society of Certified Public Accountants ("MNCPA") General Industries Review Task Force ( ) and the MNCPA Leadership Cabinet ( ). Mr. Taintor also was a member of the Nonprofit Financial Group and is a member of the Minnesota Society of Certified Public Accountants. Mr. Taintor has his Certificate of Public Accounting and obtained a Bachelor of Arts Degree in Accounting from Gustavus Adolphus College. Kara Schneeberger, CPA. Ms. Schneeberger joined BKDA in 2013 as a manager after spending the past ten years as an audit manager at the accounting firm BerganKDV where she managed audits of cities and schools. She is responsible for financial management and review of charter schools, including: budget development, monthly and annual financial review, cash flow analysis, communication of legislative changes, oversee audit process and 990 preparation and communication with board and school management. Chuck Herdegen. Mr. Herdegen has worked with Minnesota school districts providing accounting, business management, and personnel management services since He has worked with school districts in Litchfield, Little Falls, and Westonka (western metro area), an education district, and currently provides services to charter schools. Throughout his career Chuck has been an active member of the Minnesota Association of School Business Officials ("MASBO"), having served as the association's president in and as the Chair of the Legislative Committee. He has been certified by MASBO as a school business official. During his career he has developed expertise in all areas of school business management, including the proper accounting and reporting of data, the negotiation and administration of personnel contracts, and the operation of school district support service programs. General THE COMPANY The Company is a Minnesota nonprofit corporation and 501(c)(3) organization. The Company is organized and operated exclusively in support of the School and in particular to purchase, own, and/or construct a public schoolhouse, for lease to the School, on real estate owned by the Company. Under Minnesota law, charter schools cannot purchase facilities using state funds. For this reason, most Minnesota charter schools lease their facilities. To purchase a facility, many charter schools form a separate nonprofit company, referred to as an "affiliated building company", to purchase and own the facility and lease it to the school. Charter schools receive lease aid money from the state for the specific purpose of paying rent under these leases. Currently, the School leases the Facility from the Company. Section 124E.13, Subd. 3 of the Charter Schools Act sets out the circumstances under which a charter school may form an affiliated nonprofit building corporation to own the facility and lease it to the charter school. The School received permission from MDE to form the Company. The Company received its IRS determination letter on May 2, As set forth in the Company's Bylaws (the "Company Bylaws"), the mission of the Company is to support the mission and vision of the School through the ownership of real property. In furtherance of this purpose, the Company will apply the proceeds of the Series 2017 Bonds (as defined in the forepart of this Limited Offering Memorandum) to (i) finance the acquisition, construction, improvement and equipping of the Facility; (ii) fund a reserve fund; (iii) pay capitalized interest on the Series 2017 Bonds; and (iv) pay costs associated with the issuance of the Series 2017 Bonds (the "Project"). A-7

68 Governing Body As set forth in the Company's Bylaws (the "Company Bylaws"), the mission of the Company is to support the mission and vision of the School through the ownership of real property. The Company's Board of Directors (the "Company Board") is comprised of at least three nonrelated members selected or appointed in a manner that does not create a conflict of interest with the School Board. The Company Board is required to hold at least one meeting annually and is permitted to hold regular meetings at the call of the President or the request of the majority of the directors serving on the Company Board (the "Company Directors"). In addition, special meetings of the Company Board may be called at any time, for any purpose, by the President. A majority of the Company Directors then in office constitute a quorum for the transaction of business by the Company Board. Each Company Director shall have the power to exercise one vote, and the affirmative vote of a majority of a quorum constitutes a duly authorized action of the Company Board. Officers of the Company Board include the President, Treasurer, and the Secretary. Current Company Directors and officers of the Company Board are listed in the following chart. Name Position Profession Employer Year Joined Term Expires Ryan Grutsch President and Chair Education The School Jonathan McClellan Secretary Firefighter City of Minneapolis Brent Peterson Treasurer Education The School Source: Management Ryan Grutsch Mr. Grutsch received his Bachelor of Science Degree in History from North Dakota State University and his Master of Arts in Secondary Education from the University of Saint Thomas. He has a spouse that teaches at the Richfield Campus, which is where Mr. Grutsch works as the Academic Program Director; they have a son who attends Seven Hills Preparatory Academy. Johnathan McClellan Mr. McClellan is a Minneapolis Firefighter who has also served as the Associate Legal Coordinator for the City of Minneapolis Regulatory Services. He has four children who currently attend Seven Hills Preparatory Academy. Brent Peterson Mr. Peterson earned his Bachelor of Arts in English from Saint John's University and his Master of Arts in Educational Leadership from the University of Saint Mary's. He has been with Seven Hills Preparatory Academy since its inception, and currently serves as the Director of Assessment. His spouse is also a teacher at the Bloomington Campus. Fiscal Policies Financial Reporting. The Company Board shall cause to be established and maintained, in accordance with provisions of Minnesota law and, to the extent not in conflict with the law, with generally accepted accounting principles applied on a consistent basis, an appropriate accounting and financial reporting system for the Company. The Company Board is required by law to and shall cause the records and books of account of the Company to be audited at least once each fiscal year as of June 30 of any year (or such other date as the law may require) and at such other times as it may deem necessary or appropriate, and may retain such person or firm for such purposes as it may deem appropriate. Conflict Relationships. The Company Bylaws set forth a conflict of interest policy, which provides that contract or other transaction between the Company and one or more of the Company Directors, or between the Company and an organization in or of which one or more of the Company Directors are directors, officers or legal A-8

69 representatives or have a material financial interest, is not void or voidable because the director or directors or the other organizations are parties or because the director or directors are present at the meeting of the Company Board or a committee at which the contract or transaction is authorized, approved or ratified, if: (i) the contract or transaction was, and the person asserting the validity of the contract or transaction sustains the burden of establishing that the contract or transaction was, fair and reasonable as to this corporation at the time it was authorized, approved or ratified or (ii) the material facts as to the contract or transaction and as to the director's or directors' interests are fully disclosed or known to the Company Board or a committee, and the Company Board or committee authorizes, approves or ratifies the contract or transaction in good faith by a majority of the Company Board or committee, but the interested director or directors shall not be counted in determining the presence of a quorum and shall not vote. For the purpose of such policy (i) a Company Director does not have a material financial interest in a resolution fixing the compensation of the director or fixing the compensation of another director as an officer, employee or agent of the Company, even though the first director is also receiving compensation from this; and (ii) a Company Director has a material financial interest in each organization in which the director, or the spouse, parents and spouses of parents, children and spouses of children, brothers and sisters and spouses of brothers and sisters of the directors, or any combination of them have a material financial interest. Failure to comply with the provisions of the conflict of interest policy shall not invalidate any contract or transaction to which the Company is a party. THE PROJECT The Company will apply the proceeds of the Series 2017 Bonds to (i) finance the acquisition, construction, improvement and equipping of the Facility; (ii) fund a reserve fund; (iii) pay capitalized interest on the Series 2017 Bonds; and (iv) pay costs associated with the issuance of the Series 2017 Bonds. On the Closing Date, the Company will acquire the Richfield Campus from an unrelated third party for a purchase price of $9,310,745. On the Closing Date, the Facility will consist of approximately 60,000 total square feet. After the Closing Date, the Company will undertake the Construction Project. Construction Project The Construction Project consists of the expansion of the Facility to include an approximately 13,000 square foot gymnasium to include a multipurpose room, offices, locker rooms, and storage space, and expanded and renovated interior space, including a larger cafeteria, special education resource rooms, and science laboratories, and exterior improvements, including a playground and reorganized parking and loading spaces. The Construction Contract. The Company anticipates that it will enter into four separate AIA Document A Standard Form of Agreement Between Owner and Contractor where the basis of payment is a Stipulated Sums (collectively, the "Construction Contract") between the Company and Rochon Corporation (the "Contractor") for the Construction Project. The Construction Contract is expected to include a total stipulated sum of $2,375,460.99, consisting of $1,478, allocable to labor and $897, allocable to materials. In addition, the Company will carry contingency of $175,000. The portion of the Construction Project consisting of playground preparation is expected to be completed during fall The remainder of the Construction Project is expected to be completed on or before May 1, Due to the relatively small size of the Construction Project and the fact that the Construction Project primarily consists of recreational spaces, rather than core instructional spaces, the Construction Contract does not impose liquidated damages if all or a portion of the Construction Project is not delivered on or before any date certain. See "BONDHOLDERS' RISKS Construction Risks." A-9

70 Estimated Construction Project Budget. The following table shows the total Construction Project budget, developed by Management. Construction Project Component Projected Costs Labor $1,478, Materials 897, Contingency Held by the Company 175, Total $2,550, Estimated Construction Project Timeline and Permitting Schedule. None of the School, the Company, Welsh Architecture, LLC, a subsidiary of Colliers International (the "Architect"), or the Contractor has applied for or received site grading and utility permits, structural footing and foundation permits, or a general building permit. The submission for site grading and utility permits was made on or about September 1, 2017, with approval expected to be obtained within four-to-six weeks of submission; the submission for structural footing and foundation permits was made on or about September 15, 2017, with approval expected to be obtained within four-to-five weeks of submission; and the submission for a general building permit was made on or about September 15, 2017, with approval expected to be obtained within four-to-five weeks of submission. Individual trade permits and a boulevard encroachment permit for landscaping work are expected to be applied for when related work is ready to begin and to be received in due course. There can be no assurance that approvals of the foregoing permits will be obtained within the expected timeframes set forth above or that the submission or approval processes for any of the permits set forth above will not entail unexpected time or cost to be incurred by the School or the Company in connection with the Construction Project or otherwise. See "BONDHOLDERS' RISKS Construction Risks." Contractor. The Contractor is a commercial construction company focusing on general contracting and design build. Founded in 1985, the Contractor's projects include those in the educational, office, industrial, multifamily, religious and retail building markets. The Contractor is guided by three senior level principals with integrated expertise and leadership and over 75 years of senior level project management experience, and is supported by project managers, assistant project managers, superintendents, and office personnel. The Contractor's total staff consists of full time employees, and its annual sales are approximately $40-$60 million. The Contractor focuses on establishing defined time schedules, accurate budgeting and complete dedication to the end result, and considers precise cost estimating critical for setting the path and direction of the entire project. Architect. Pursuant to an Agreement for Professional Services between the Architect and the School, the Architect is serving as architect in connection with the Construction Project for a fixed fee of $142,000. The Architect was established as PM Design in 1985 as a part of Welsh Companies commercial real estate firm. It later became Genesis Architecture, which incorporated in The firm eventually was re-named Welsh Architecture, LLC in Welsh Companies was founded in 1977 and provided brokerage, construction, real estate management and design services. In 2017, Welsh Companies and the Architect were acquired by Colliers International. Colliers International is a leading global commercial and residential real estate services organization. The Colliers team includes more than 15,000 professionals worldwide who are dedicated to providing customized services that transform real estate into a competitive advantage. Recent projects undertaken by the Architect for educational clients include a $1.5 million renovation of a primary and secondary school co-location for a charter school and a $12.6 million renovation of a Minneapolis public school. A-10

71 Owner's Representative. Pursuant to a letter agreement dated June 2, 2017, between Wildamere Capital Management, LLC (the "Owner's Representative") and the School, the Owner's Representative is providing project management services to the School in connection with the Construction Project for a fee equal to 5% of the project costs as defined in the letter agreement. The Owner's Representative is a privately held commercial real estate ownership company headquartered in Edina, Minnesota, and provides the following real estate services to its partners and clients: acquisitions, capital and asset management, consulting and advisory, credit enhancement, real estate development, and acquisition sourcing for section 1031 tax strategies. While originally established in 2013, the Owner's Representative is the family office to Mr. Dennis Doyle, who co-founded the Welsh Companies in The Owner's Representative's recent charter school experience includes serving as developer, owner, and manager of a project consisting of securing entitlements, financing, and building a ground-up, 42,000 square foot educational facility in connection with a $20.5 million bond offering; real estate representative in connection with securing a site for a new, ground-up development in connection with a $15 million bond offering; and developer, owner, and manager of a project consisting of securing city approvals, financing, designing, and expanding school from 27,000 square feet into the entire building of 76,000 square feet in connection with a $9.5 million bond offering. The Lease The School will lease the Facility from the Company pursuant to a Lease Agreement dated as of October 1, 2017 (the "Lease"), between the School and the Company. See "THE COMPANY" and "SECURITY FOR THE BONDS The Lease" in the forepart of this Limited Offering Memorandum. Mortgaged Property The Series 2017 Bonds will be secured in part by a Combination Mortgage, Security Agreement, Assignment of Leases and Rents and Fixture Financing Statement, dated as of October 1, 2017 (the "Mortgage"), from the Company in favor of the Trustee. No portion of the Bloomington Campus will be subject to the Mortgage and there has been no collateral assignment of the Bloomington Campus Lease in favor of the Trustee. See "BONDHOLDERS' RISKS Risks Related to the Bloomington Campus Lease." See "THE PROJECT" above for a more detailed description of the Facility and see " Appraisal" below for a description of the appraised value thereof. Appraisal Colliers International Valuation & Advisory Services (the "Appraiser") has been engaged by the School to appraise the Facility. In that connection, the Appraiser has prepared its appraisal report, with a report date of August 27, 2017 (the "Appraisal Report"). The Appraisal Report estimates the "As-Is Market Value" of a fee simple interest in the Facility to be $10,000,000 as of August 10, 2017, the "Prospective Value Upon Completion" of a fee simple interest in the Facility to be $13,100,000 as of June 1, 2018, and the "Prospective Value Upon Stabilization" of a fee simple interest in the Facility to be $13,500,000 as of June 1, issued. All appraised values listed in the Appraisal Report are less than the amount of Series 2017 Bonds to be The Appraisal Report states that the Appraisal Report relies on the extraordinary assumptions, among others, that (i) the issues presented by the State Easement and the City Easement described herein under the heading "BONDHOLDERS' RISKS - Risks Related to Property Interests in the Richfield Campus" will be resolved such that "there is no negative impact on the subject property" and (ii) the Construction Project is "constructed in a good, workmanlike manner consist[ent] with the plans and renderings" supplied to the Appraiser. A-11

72 The summary of the Appraisal Report contained in this section is not meant to be exhaustive, and reference should be made to such report for a complete recital of its terms. The value of the Facility as estimated in the Appraisal Report represents only the opinion of the Appraiser, and only as of the effective date of such report. The Appraiser will not be engaged to update or revise the estimates contained in the Appraisal Report after its date. See "BONDHOLDERS' RISKS Value of Property May Fluctuate; Limitations of Appraisals." Environmental Report Nova Consulting Group, Inc. ("Nova") conducted a Phase I Environmental Site Assessment of the land on which the Facility is located (the "Site") and summarized its findings in a report dated August 22, 2017 (the "Phase I"). The Phase I states that Nova found no evidence of recognized environmental conditions ("RECs"), controlled RECs, or historical RECs in connection with the Site. A flammable waste trap was observed on the property, which Nova deemed "unlikely to have impacted subsurface conditions that would represent a [REC]" and recommended to "be pumped out and inspected on a routine basis by a license contractor to prevent inadvertent overflow/releases and ensure continued integrity of the unit." The Facility Seller has agreed to have the flammable waste trap serviced prior to the Closing Date. The Phase I speaks only as of its date, and Nova has not been asked to perform any additional assessment since the date thereof. Further, the Phase I is subject to the limitations specified therein. More generally, no environmental assessment can completely eliminate uncertainty regarding the potential for recognized environmental conditions in connection with a subject property. Potential investors must refer to the complete Phase I for a full understanding of such limitations, and for additional information pertinent to the assessments. Copies of the Phase I are available upon request, as described under "MISCELLANEOUS Additional Information." Costs incurred by the Company or the School with respect to environmental remediation or liability related to any environmental condition could adversely affect the Company's or the School's financial condition. See "BONDHOLDERS' RISKS Environmental Regulation." Geotechnical Report Terracon Consultants, Inc. ("Terracon") conducted a subsurface exploration on the Site and provided geotechnical engineering recommendations in a report dated September 27, 2017 (the "Geotechnical Report"). As more completely set forth in the Geotechnical Report, Terracon identified certain loose soils "anticipated to be prone to consolidation settlement" in connection with the Construction Project and stated that the expansion to the Facility could be supported using one of several specialty ground improvement systems or intermediate foundations, with the possible need for "uniform overexcavation and backfill procedure beneath the foundations" if unsuitable soils are encountered in foundation excavations. In addition, Terracon made certain recommendations regarding slab support and fill materials. The School, the Company, and the Contractor believe that they have accounted for these recommendations in their plans and budget for the Construction Project as set forth herein. The Geotechnical Report speaks only as of its date, and Terracon has not been asked to perform any additional assessment since the date thereof. Further, the Geotechnical Report is subject to the limitations specified therein. More generally, no subsurface exploration can completely eliminate uncertainty regarding the potential for geotechnicaly risks related to the Construction Project. Potential investors must refer to the complete Geotechnical Report for a full understanding of such limitations, and for additional information pertinent to the assessments. Copies of the Geotechnical Report are available upon request, as described under "MISCELLANEOUS Additional Information." A-12

73 Property Condition Reports Nova provided a Property Condition Assessment Report of the Facility dated August 23, 2017 (the "Property Condition Report"). The Property Condition Report was undertaken to estimate the cost of repairs of the Facility needed for immediate repair and replacement and deferred maintenance expenditures. The Property Condition Report recommended reserves of $41,210-$47,320 for the next 12 years. There can be no guarantee that the actual costs of repairs, replacements, and deferred maintenance will be less than or equal to the recommended reserves. Further, while the Company and the School are required to fund the Capital Improvement Fund established pursuant to the Indenture, there is no covenant in either the Loan Agreement or the Pledge Agreement that the Company or the School set aside or apply any of the funds therein to any specific repairs, replacements, or deferred maintenance. The Property Condition Report speaks only as of its date, and Nova has not been asked to perform any additional assessment since the time of the Property Condition Report. Further, the Property Condition Report is subject to the limitations specified in such report. Potential investors must refer to the complete Property Condition Report for a full understanding of such limitations, and for additional information pertinent to the report. Copies of the Property Condition Report are available upon request, as described under "MISCELLANEOUS Additional Information." Administration SEVEN HILLS PREPARATORY ACADEMY Seven Hills Preparatory Academy's administrative team currently consists of an Executive Director, a Principal of the Bloomington Campus, and a Principal of the Richfield Campus. Carl Schlueter/Executive Director Mr. Schlueter earned a Bachelor of Arts in English Literature and Political Science from Loras College in Dubuque, Iowa, a Master of Arts in Theology from Saint John's School of Theology in Collegeville, Minnesota, and a Master of Public Administration from the Humphrey Institute at the University of Minnesota. In nearly 20 years as an educator, he has served as a teacher, a curriculum researcher and developer, dean of students, American director, and director of public and private schools in Minnesota and Japan. Daniel Woodle/Principal of the Bloomington Campus Mr. Woodle holds a Bachelor of Science in Elementary Education from Southwest Minnesota State University in Marshall, Minnesota, and a Master of Education in Leadership in Schools (PK-8) from the University of Sioux Falls in Sioux Falls, South Dakota. Prior to joining Seven Hills Preparatory Academy in 2017, he served as a 4 th and 5 th grade teacher in two South Dakota public schools and the principal of a Nebraska public school. Carolyn Farrell/Principal of the Richfield Campus Ms. Farrell holds a Bachelor of Science in Criminal Justice and a Bachelor of Arts in Special Education from the University of Wisconsin and a Master of Arts in Education from Saint Mary's University. She has more than ten years of experience as a special education teacher in Minnesota. Ms. Farrell has served as the Principal of the Richfield Campus since 2016, prior to which she served in special education coordinator, dean of students, director of special education, and associate principal roles. Faculty and Employees; Expansion and Retention Plans. For the school year, Seven Hills Preparatory Academy employs 62 general education teachers, two general education paraprofessionals, and 15 general education administrative personnel. Seven Hills Preparatory Academy's salary range for full-time teacher is $35,000 to $70,000. A-13

74 The table below sets forth projected staffing data, which is based Management's projections. Name General Education Teachers General Education Paraprofessionals General Education Administration Total General Education Personnel Student to Teacher Ratio 1:15 1:15 1:15 1:15 1:15 Professional Development. The School offers staff professional development opportunities, including reading and literacy, diversity and inclusion, behavioral management and mental health, positive staff culture and high-functioning teams, Special Education and English Language Learning, and other areas involving curriculum, instruction, and assessment. For example, during the school year, the School offered staff training in building a culturally competent, inclusive learning community and for the school year, the School will offer training in positive behavior interventions and supports. Teacher Retention Rate. The table below shows the teacher retention rate for Seven Hills Preparatory Academy for each listed school year, calculated by dividing the number of teachers returning to Seven Hills Preparatory Academy at the beginning of the listed school year by the number of teachers employed by Seven Hills Preparatory Academy as of the last day of the preceding school year. Future Plans Retention Rate 92% 85% 81% 84% 95% The School plans to expand Seven Hills Preparatory Academy to serve students in grades K-8 from the Richfield Campus as described herein, but currently has no other plans to expand or replicate Seven Hills Preparatory Academy. As of the Closing Date, neither the Company nor the School has any plans to incur additional Indebtedness. Bloomington Campus The Bloomington Campus Lease will expire according to its terms on June 30, The Bloomington Campus Landlord is permitted to terminate such Bloomington Campus Lease upon at least 14 months' notice, with such notice to be given by June 30 for termination effective the August 31 occurring 14 months later. Termination of the Bloomington Campus Lease by the Bloomington Campus Landlord due to a default thereunder by the School constitutes an event of default under the Pledge Agreement. In addition, a default by the School under the Bloomington Campus Lease is an event of default under the Pledge Agreement. There is no subordination, nondisturbance and attornment agreement or similar agreement in place with respect to the Bloomington Campus Lease. As such, the Trustee will not receive notice of any potential default or default by the School under the Bloomington Campus Lease and will have no opportunity or ability to cure any such potential default or default. The annual rent due under the Bloomington Campus Lease for the Fiscal Year ending June 30, 2018 is $773,800, and the annual rent due thereunder for all subsequent Fiscal Years is $744,600. The space subject to the Bloomington Campus Lease consists of approximately 62,566 square feet: 29,806 square feet of space exclusively used by the School and 32,760 square feet of space shared by the School and the landlord. The School's use of the leased premises is expressly limited to the hours of 6:30am to 6:00pm on Mondays, Tuesdays, Thursdays, and Fridays, and 6:30am to 5:00pm on Wednesdays. In addition, the School may use the lease premises on evenings, weekends, and for special events with the permission of the landlord. A-14

75 While the School expects to continue to operate Seven Hills Preparatory Academy from the Bloomington Campus for the foreseeable future, (i) the term of the Bloomington Campus Lease is shorter than the final maturity date of the Series 2017 Bonds and (ii) the Bloomington Campus Landlord is permitted to terminate the Bloomington Campus Lease prior to its scheduled expiration. There can be no assurance that (i) the Bloomington Campus Landlord will not terminate the Bloomington Campus Lease, (ii) the School will be able to renew the Bloomington Campus Lease after its scheduled expiration, (iii) that the School will be able to renew the Bloomington Campus Lease on terms that make doing so financially viable, or (iv) that the School will be able to lease alternative space on terms that make leasing alternative space financially viable. Termination of the Bloomington Campus Lease by the Bloomington Campus Landlord, whether in connection with a default under the Bloomington Campus Lease by the School or not, or failure by the School to renew the Bloomington Campus Lease upon its scheduled expiration or the exhaustion of any potential renewal term may have a material adverse effect on the operations of the School or the Company. For information regarding enrollment at Seven Hills Preparatory Academy by Campus, see " Demographics and Enrollment." See also "BONDHOLDERS' RISKS Risks Related to the Bloomington Campus Lease." Service Area Seven Hills Preparatory Academy primarily draws its students from the areas served by Bloomington Public Schools District #271 (the "Bloomington District") and Richfield Public Schools (the "Richfield District"). For the school year, the Bloomington District served approximately 10,645 students in 19 schools, including 10 elementary schools, three middle schools, two high schools, and four alternative learning centers. For the school year, the Richfield District served approximately 4,385 students in seven schools, including two elementary schools, one middle school, one high school, and three specialty schools. Certain schools operated by the Bloomington District and by the Richfield District have been identified by the School as Seven Hills Preparatory Academy's direct competitors. More information about these schools is provided under the heading "Competitive Schools." The following table shows certain population and demographic information for the indicated geographic areas, as reported by the U.S. Census Bureau. Demographic State of Minnesota Hennepin County Population estimate, ,489,594 1,223,149 Population estimate, ,303,925 1,152,388 Population change 3.5% 6.1% Persons under 18 years, % 22.2% Persons under 18 years, % 22.7% Persons under 5 years, % 6.7% Persons under 5 years, % 6.6% Source: United States Census Bureau As of May 2015, Forbes listed 15 Minneapolis-St. Paul companies among the 2,000 largest public companies in the world and listed five Minneapolis-St. Paul companies among the 210 largest private companies in the United States. In addition, 16 Fortune 500 companies are headquartered in Minneapolis-St. Paul. Competitive Schools The table below shows certain basic information and academic performance data for traditional public schools, charter schools, and private schools serving students in grades K-8 identified by Management as competitors for Seven Hills Preparatory Academy's students. A-15

76 Enrollment totals for charter and public schools other than Seven Hills Preparatory School are as of the school report card for School Type Grades Served Enrollment Address Seven Hills Preparatory Academy Charter K The Campuses Hillcrest Elementary School Public K Ridgeview Elementary School Public K Olson Middle School Public Richfield Middle School Public Thomas Rd, Bloomington, MN Nesbitt Ave S, Bloomington, MN W 102nd Street, Bloomington, MN Oliver Ave S, Richfield, MN [Remainder of page intentionally left blank] A-16

77 The following map shows the location of the schools listed in the table on the preceding page in relation to the locations of the Bloomington Campus and the Richfield Campus. A-17

78 Market Demand. For each of the past five school years, the School has had a waitlist of more than 90 students, including waitlists of more than 200 students for each of the past two school years. See "Demographics and Enrollment Waitlist." Transportation. Through contracts with two third party service providers, the School provides bus transportation for students at the Bloomington Campus via 11 before and after school bus routes, students at the Richfield Campus via five before and after school bus routes, homeless students at the Bloomington Campus, and special education students at both Campuses. The Charter School Contract The School operates Seven Hills Preparatory Academy pursuant to the Minnesota Charter Schools Act and the Charter School Contract. The Charter School Contract will expire on June 30, 2019, if not renewed prior to such date. See "BONDHOLDERS' RISKS Nonrenewal or Revocation of Charter School Contract." The Charter School Contract may be revoked or terminated and need not be renewed by the Authorizer upon a determination by the Authorizer that one or more of the following has occurred: (i) failure of the School to demonstrate satisfactory achievement for all students including the requirements for student performance set forth in the Charter School Contract; (ii) failure of the School to meet generally accepted standards of fiscal management; or (iii) failure of the School to comply with all applicable law. In addition to the grounds for revocation or termination and nonrenewal described above, the Authorizer may revoke or terminate or not renew the Charter School Contract upon the Authorizer's' determination that one or more of the following has occurred: (i) the School is unable to pay its bills as they become due, is insolvent, or is bankrupt; (ii) Seven Hills Preparatory Academy has insufficient enrollment or demonstrated financial resources to successfully operate a charter school, or Seven Hills Preparatory Academy has lost more than fifty percent (50%) of its student enrollment from the previous school year, (iii) the School defaults in any of the terms, conditions, promises or representations contained in or incorporated into the Charter School Contract; (iv) the School amends its articles of incorporation or bylaws at any time without first obtaining the Authorizer's' written approval; (v) the Authorizer discovers negligent, fraudulent or criminal conduct by any of the School's applicants, directors, officers, employees or agents in relation to Seven Hills Preparatory Academy's performance under the Charter School Contract; (vi) the School's applicant(s), directors, officers or employees have provided false or misleading information or documentation to the Department of Education or the Authorizer in connection with the Authorizer issuance or oversight of the Charter School Contract, or in connection with any affidavit that the School requests the Authorizer submit to the Department of Education, or in connection with the School's reporting requirements under the Charter School Contract or applicable law; or (vii) other good cause shown. The Authorizer's process for revoking or terminating or not renewing the Charter School Contract is as set forth below. The Authorizer, upon reasonable belief that grounds for revocation/termination or nonrenewal of the Charter School Contract exist, shall notify the School Board of such grounds by issuing the School Board a notice of intent to revoke or terminate or not renew. The notice of intent to revoke or terminate or not renew shall be in writing, shall set forth in reasonable detail the alleged grounds for revocation/termination or nonrenewal, and shall state that the School Board may request in writing, within 15 business days of receiving the notice, an informal hearing before the Authorizer. Within 15 business days of receipt of the notice of intent to revoke or terminate or not renew, the School Board shall respond in writing to the alleged grounds for revocation or termination or nonrenewal. The School Board's response shall either admit or deny the allegations of noncompliance. If the School's response includes admissions of noncompliance with the Charter School Contract or applicable law, the School Board's response must also contain a description of the School Board's plan and time line for correcting the noncompliance with the Charter School Contract or applicable law. If the School's response includes a denial of noncompliance with the Charter School Contract or applicable law, the School's response shall include sufficient documentation or other evidence to support a denial of noncompliance with the Charter School Contract or applicable law. A response not in compliance with this Section shall be deemed to be non-responsive. As part of its response, the School Board may request that an informal hearing be scheduled with the Authorizer. The School Board's failure to provide to the A-18

79 Authorizer a written request for an informal hearing within the 15 business day period shall be treated as acquiescence to the Authorizer proposed action. Upon receiving a timely written request for an informal hearing, the Authorizer shall give 10 business days' notice to the School Board of the hearing date and time, and the Authorizer shall conduct such hearing. The Authorizer shall review the School Board's response and may, in its sole discretion, determine whether a reasonable plan for correcting the deficiencies may be formulated. If the Authorizer determines that a reasonable plan for correcting the deficiencies set forth in the notice of intent to revoke or terminate or not renew can be formulated, the Authorizer shall develop a plan for correcting the noncompliance ("Plan of Correction"). In developing a Plan of Correction, the Authorizer is permitted to adopt, modify or reject some or all of the School Board's response for correcting the deficiencies outlined in the notice of intent to revoke or terminate or not renew. The Authorizer is not obligated to offer a Plan of Correction to the School. The Authorizer may withdraw its notice of intent to revoke or terminate or not renew if the Authorizer determines any of the following: (i) the School Board's denial of noncompliance is persuasive; (ii) the noncompliance set forth in the notice of intent to revoke or terminate or not renew has been corrected by the School Board; or (iii) the School Board has successfully completed the Plan of Correction. If the Authorizer decides to revoke or terminate or not renew the Charter School Contract, the revocation or termination or nonrenewal shall be effective on the date of the Authorizer's act of revocation or termination or nonrenewal, or at a later date as determined by the Authorizer, such date specified by the Authorizer in its determination of revocation or termination or nonrenewal. The Authorizer must take final action regarding revocation or termination or nonrenewal no later than 20 business days: (i) before the specified date for revocation or termination or non-renewal of the Charter School Contract, or (ii) the Charter School Contract's termination date. Academic and Co-curricular Programs Mission. Seven Hills Preparatory Academy engages students in a rigorous classical education, designed to prepare each one for strong citizenship and life-long learning. Vision. Recognizing that all students have the right to pursue academic and personal excellence, Seven Hills Preparatory Academy challenges students by: Providing a caring and structured small-school environment; Maintaining high expectations of students, staff, and the community; Inspiring critical thinking, creativity, and an appreciation for beauty through active implementation of the Core Knowledge curriculum; Promoting a strong value system that embraces cooperation, assertion, responsibility, empathy, and self-control. The School Board set the following principles of classical education as a guide for Seven Hills Preparatory Academy, using the Core Knowledge curriculum as a foundation: Seven Hills Preparatory Academy focuses on the origin of Western Civilization and culture, while fostering an appreciation of other cultures and the emerging global culture; Seven Hills Preparatory Academy uses the Seven Liberal Arts methodology, as described by Dorothy L. Sayers in her essay "The Lost Tools of Learning," including the foundational learning stages of grammar, logic, rhetoric (the "Trivium"), as well as the subjects of mathematics, music, astronomy (natural sciences), and geometry (including architecture and visual arts). These last four subjects are commonly referred to as the "Quadrivium"; Seven Hills Preparatory Academy promotes a strong value system by embracing Cooperation, Assertion, Responsibility, Empathy, and Self-Control ("CARES") in elementary school; Intellectual rigor and mental discipline with the goal of wisdom and eloquence are instilled; Character development is emphasized through a focus on truth, goodness, virtue, and beauty with the purpose of cultivating strong citizenship; A-19

80 High standards of academic excellence are maintained; Hard work is highly valued within the community; Seven Hills Preparatory Academy maintains a warm community of learners where everyone in the community is in the process of life-long learning; A spirit of inquiry and intellectual curiosity is valued. In the classroom at Seven Hills Preparatory Academy, one sees the following implementations of classical education: The Core Knowledge curriculum, providing a factual foundation for each subject in a content-rich, sequential, systematic, and cumulative curriculum; Study of classic literature and original texts leading into Socratic discussion; Teacher-directed learning that supports the foundational stages of classical education; Language-intensive curriculum as compared to image-intensive curriculum; An integrated curriculum across subject areas that uses history as a backbone; Writing is featured prominently across all subject areas; Memorization of quality prose, literature, facts, dates, people, and geographic locations; Art, music theory, music appreciation, and performance are studied; Physical Education is central to the curriculum; Latin language is incorporated into the curriculum to develop skills identifying root words, to increase literacy skills and lay an important foundation for learning foreign languages; Students prepare and deliver oral presentations to develop skills in rhetoric. Four Pillars of Classical Education. The foundation of classroom instruction at Seven Hills Preparatory Academy is based on four main pillars that are a thoughtful collaboration of classical education methodologies and research based best practices. The following is an overview of each pillar and examples of classroom implementation. Didactic Method. When exposed to didactic teaching methods, a student receives explicit instruction engaging his or her mind and allowing him or her to become an active learner. When a teacher uses a didactic teaching method, they are "telling" the student what to read, say, or write. Dictation, modeling, reading aloud, flashcards, and sound-offs can be examples of didactic teaching methods. Most students in the elementary grades learn through this method. Coaching Method. Coaching teaching methods engage the student in constructive learning in which the teacher closely guides, leads, monitors, or facilitates the activity. The student is "coached" through the task, ensuring that understanding and mastery are achieved. Guided writing, experiments, problem solving, and critiquing can be examples of coaching teaching methods. Socratic Method. Socratic teaching methods encourage the student to use critical thinking and evaluation skills as they share knowledge, thoughts, and ideas in response to teacher-generated questions or topics, through discussion, or writing. Debate, seminars, peer critiques, and self-assessments can be examples of Socratic teaching methods. Character Development. Character development includes holding high ethical standards for students. The combination of the implementation of the core virtues of CARES, a standard clothing uniform, hallway behavior expectations, and the expectation of positive peer relationships ("PPR"), provides students with an environment that allows for academic and social success. A-20

81 Activities. Seven Hills Preparatory Academy offers certain opportunities for students beyond the school day, including academic enrichment, activities, and athletics. The table below lists the extracurricular activities offered during the school year. Elementary School Activities Theater Exercise for Fun Japanese Language Study Floor Hockey Knitting Club Crafts Art Technology Outdoor Games Board Games Basketball Volleyball Suzuki Strings Music Program Chess Club Middle School Activities Soccer (co-ed) Basketball (co-ed) Volleyball (co-ed) Theater Art/Yearbook Club Choir Band Math Counts Chess Club Demographics and Enrollment Demographics. Seven Hills Preparatory Academy attracts an ethnically and economically diverse student population, which generally reflects the demographic population served by the Bloomington District and the Richfield District. The table below shows the percentage of students enrolled at Seven Hills Preparatory Academy and in the Bloomington District and the Richfield District who are identified as members of the demographic groups indicated for the school year. Minnesota Report Card Designation Seven Hills Preparatory Academy Bloomington District Richfield District Hispanic/Latino 9.4% 17.7% 40.0% American Indian/Alaska Native 0.2% 0.5% 1.0% Asian 6.9% 7.7% 6.0% Black/African American 10.4% 17.4% 16.8% Native Hawaiian/Pacific Islander 0.1% 0.1% 0.1% White 66.8% 50.6% 27.5% Two or More Races 6.1% 6.0% 8.2% Special Populations English Learner 10.9% 11.9% 25.7% Special Education 11.1% 15.3% 16.5% Free/Reduced Price Lunch 19.1% 41.5% 63.8% Homeless Not Reported 1.0% 1.4% Source: Minnesota Report Card A-21

82 Historical, Current, and Projected Enrollment. The three tables below shows the historical, current, and projected enrollment at the Bloomington Campus, the Richfield Campus, and both Campuses by grade level as of October 1 of each listed school year. Bloomington Campus Grade Level HK Kindergarten Grade Grade Grade Grade Grade Total Enrollment Source: Management Richfield Campus Grade Level HK Kindergarten Grade Grade Grade Grade Grade Grade Grade Grade Total Enrollment Source: Management A-22

83 Both Campuses Grade Level HK Kindergarten Grade Grade Grade Grade Grade Grade Grade Grade Total Enrollment ,065 1,135 1,142 Source: Management [Remainder of page intentionally left blank] A-23

84 Waitlist. Seven Hills Preparatory Academy's waitlist is only good for one academic year. Applicants who have previously applied to Seven Hills Preparatory Academy and have not been accepted are required to fill out a new application for the new academic year. The table below sets forth the waitlist as of April 1 of the preceding school year for the listed school year. While Seven Hills Preparatory Academy maintains a waitlist throughout the school year, Management selected April 1 as representative of an average waitlist total. Grade Level Kindergarten Grade Grade Grade 3 Capacity Capacity Capacity 4 19 Grade 4 Capacity Capacity Capacity 3 19 Grade 5 Capacity Capacity Capacity 5 13 Grade 6 Cutoff Cutoff Cutoff Grade 7 Cutoff Cutoff Cutoff 15 8 Grade 8 Cutoff Cutoff Cutoff 7 3 Total Includes 86 for the Bloomington Campus and 18 for the Richfield Campus. 2 Includes 28 for the Bloomington Campus and 9 for the Richfield Campus. 3 Includes 31 for the Bloomington Campus. Capacity indicates that capacity was reached and no waiting list was maintained. Cutoff indicates that no students were placed in grades after November 1, so no waiting list was maintained. Source: Management Retention Rate. The table below shows the retention rate for Seven Hills Preparatory Academy for each listed school year, calculated by dividing the number of students re-enrolling at Seven Hills Preparatory Academy at the beginning of the listed school year by the number of students enrolled at Seven Hills Preparatory Academy in grades K-7 as of the last day of the preceding school year. The school year starts on September 5, 2017, so retention rate data for this school year is not yet available Retention Rate (Bloomington Campus) 95% 95% 95% 95% Retention Rate (Richfield Campus) 98% 96% 92% 95% Source: Management Applications and Admissions. Seven Hills Preparatory Academy is a free, public charter school that does not require admission tests and has no specific academic requirements for applying. Admission is open to all students who reside in Minnesota. Seven Hills Preparatory Academy accepts enrollment applications in all grades, however, not all grades may have openings. All applications submitted during the open enrollment period qualify for the lottery and applications received thereafter added to the grade level waitlist in the order that they are received. Any current student at Seven Hills Preparatory Academy whose sibling is entering grade K-2 or grades 6-7 will receive enrollment preference, which means such students will be offered any opening that are available before Seven Hills Preparatory Academy accepts lottery applicants. In addition, staff members also qualify for enrollment preference for their children provided that there is capacity at the applicable grade level. A-24

85 Academic Performance Minnesota Comprehensive Assessments. Annual tests administered by schools to measure student performance against Minnesota's state standards in math, reading and science, the Minnesota Comprehensive Assessments ("MCA") are State tests that help districts measure student progress toward Minnesota's academic standards in reading and math and also meet the requirements of the Elementary and Secondary Education Act ("ESEA"). They are given every year to measure student performance against Minnesota academic standards that specify what students in a particular grade should be able to do. The following three table set forth the percentage of Seven Hills Preparatory Academy's students, of each competitor charter and public school's students identified by Management, and of the State's students for the five most recent school years for which data is available on the indicated MCA test. MCA-III (Math) The Elementary School 83.1% 83.2% 79.9% 80.8% 84.9% Hillcrest Elementary School 80.0% 80.0% 79.8% 75.4% 69.7% Ridgeview Elementary School 79.3% 75.1% 81.0% 78.0% 76.9% The Middle School N/A N/A 66.5% 66.1% 62.6% Olson Middle School 72.7% 66.7% 64.9% 67.2% 59.5% Richfield Middle School 33.0% 35.8% 41.4% 41.8% 36.3% State 62.6% 61.4% 60.2% 59.4% 58.6% MCA-III (Reading) The Elementary School 88.7% 83.6% 87.6% 85.0% 85.3% Hillcrest Elementary School 76.9% 74.9% 71.4% 72.4% 75.1% Ridgeview Elementary School 78.2% 74.0% 80.1% 78.1% 78.5% The Middle School N/A N/A 68.9% 67.7% 73.8% Olson Middle School 69.9% 66.5% 69.9% 67.8% 70.8% Richfield Middle School 36.9% 42.0% 45.5% 42.0% 43.7% State 57.8% 59.1% 59.4% 59.7% 60.1% MCA-III (Science) The Elementary School 88.9% 90.7% 91.2% 84.7% 89.5% Hillcrest Elementary School 79.4% 70.1% 83.1% 72.2% 65.6% Ridgeview Elementary School 78.3% 70.8% 76.7% 73.2% 70.6% The Middle School N/A N/A 48.5% 61.5% 55.2% Olson Middle School 54.3% 52.3% 58.8% 62.9% 51.8% Richfield Middle School 21.4% 30.9% 27.3% 35.9% 34.7% State 59.7% 61.2% 59.1% 61.5% 59.9% Transition from No Child Left Behind to Every Student Succeeds Act. In connection with the implementation of the Every Student Succeeds Act ("ESSA") as the successor to the No Child Left Behind Act of A-25

86 2001 ("NCLB"), Minnesota is in the process of transitioning from an NCLB waiver that was effective for the school year into an ESSA State plan (the "Minnesota Plan"). The Minnesota Plan was developed by assessment, accountability, school improvement, educator quality, and English learner committees, and focuses on data reporting, school quality or student success indicators, school recognition process, and assessment flexibility. The Minnesota Plan has been presented to the public for review and comment, and the public comment period ended on August 31, The Minnesota Plan will be presented to the United States Department of Education ("USDOE") in September 2017, after which USDOE will have 120 days to review and approve the Minnesota Plan. Specific elements of and the anticipated timing and process for implementation of the Minnesota Plan remain to be determined. As of the date of this Limited Offering Memorandum, information regarding the current status of the Minnesota Plan is available at Neither the School nor the Company is responsible for the maintenance of or information provided at such URL. Multiple Measurement Rating and Focus Rating. Prior to the transition to the Minnesota Plan, Multiple Measurement Rating ("MMR") was an accountability system focused on closing the achievement gap and promoting high growth for all students. A MMR was given to all schools in the State on an annual basis and measures school performance in the areas of proficiency, growth, achievement gap reduction and graduation rates. The MMR rating system was introduced in , and measured student proficiency, student growth and achievement gap reduction. The following table sets forth the MMR of Seven Hills Preparatory Academy and of each of the competitor charter and public schools identified by Management for the four most recent school years for which data is available. Multiple Measurement Rating The Elementary School 83.87% 75.04% 67.95% 79.05% Hillcrest Elementary School 80.99% 70.55% 71.07% 64.80% Ridgeview Elementary School 73.52% 70.47% 75.75% 66.54% The Middle School 68.59% 72.41% 55.75% 65.07% Olson Middle School 89.99% 65.34% 68.07% 68.15% Richfield Middle School 44.72% 35.16% 42.88% 40.43% Focus Rating ("FR") was a rating used to measure a school's success in reducing achievement gaps between student groups. [Remainder of page intentionally left blank] A-26

87 The following table sets forth the FR of Seven Hills Preparatory Academy and of each of the competitor charter and public schools identified by Management for the four most recent school years for which data is available. Focus Rating The Elementary School 91.49% 85.14% 72.41% 84.66% Hillcrest Elementary School 87.37% 75.87% 71.32% 51.03% Ridgeview Elementary School 77.72% 71.35% 84.03% 62.42% The Middle School 82.67% 74.32% 68.24% 73.89% Olson Middle School 93.66% 72.76% 68.01% 56.18% Richfield Middle School 50.01% 32.79% 35.62% 34.08% Using the results of the MMR and FR, Title I schools can fall into the following five groups: Reward Schools: These schools are the top 15% of Title I schools in the State based on the MMR. They represent the highest-performing schools on the four domains in the MMR. Currently, the reward for these schools mainly comes through public recognition. The MDE plans to share practices from these schools with Priority and Focus schools in an effort to replicate best practices across the State. These schools are identified annually. Celebration Eligible: These are the 25% of schools directly below the Reward school cutoff. These schools may apply to be Celebration schools, and the MDE selects approximately 10% of Title I schools to receive the Celebration school recognition. Celebration Eligible schools are identified annually, and the application process to become a Celebration school occurs annually as well. Continuous Improvement: These are the bottom 25% of Title I schools that have not already been identified as Priority or Focus. Continuous Improvement schools must work with their districts to create and implement improvement plans as well as set aside 20% of Title I funds to support school improvement efforts. The MDE audits 10% of Continuous Improvement schools to ensure fidelity. These schools are identified annually. Focus: All Minnesota schools receive an FR that measures their contribution to the State's achievement gap. The 10% of Title I schools with the lowest FR are identified as Focus Schools and must work with the MDE and the Regional Centers of Excellence to implement interventions aimed at improving the performance of the school's lowest-performing subgroups. Essentially, Focus schools are designated to attack the achievement gap head on. Focus schools are required to set aside 20% of Title I funds to support school improvement efforts. These schools are identified every three years. Some Focus schools are identified for persistent low graduation rates. These are schools with a six-year graduation rate, averaged over three years, below 60%. This separate group of low graduation rate Focus schools will establish goals and develop improvement plans around increasing the percentage of students fulfilling graduation requirements. Priority: These are the 5% most persistently low-performing Title I schools based on the MMR. Just less than half of these schools are identified through their participation in the School Improvement Grant program. The remaining schools in this group are the Title I schools with the lowest MMR results. These schools must work with the MDE and the Regional Centers of Excellence to implement turnaround plans to make drastic improvements for increased student achievement. Priority schools are required to set aside 20% of Title I funds to support turnaround efforts, and these schools are also identified every three years. A-27

88 The table below sets forth Seven Hills Preparatory Academy's designation for the five most recent school years for which data is available. Designation The Elementary School Reward Reward Reward Celebration-Eligible Reward The Middle School Celebration Celebration-Eligible Celebration-Eligible Celebration-Eligible Reward Other Recognition. For the school year, Seven Hills Preparatory Academy was recognized as the top scoring school in Minnesota for reading proficiency at the elementary level and received Seven Hills Preparatory Academy Finance Award, awarded annually by the Minnesota Department of Education, Division of School Finance, to recognize schools for meeting statutory deadlines for submission of audited fiscal financial data and reporting criteria. Litigation As of the date of the Limited Offering Memorandum, neither the Company nor the School is the subject of any litigation or administrative proceeding related to its operations. Litigation may arise in the normal course of business of either the Company or the School. See "BONDHOLDERS' RISKS Litigation" for an explanation of risks associated with any potential litigation that may arise in the normal course of business for the Company or the School. Statement of Net Position and Statement of Activities The following Statement of Net Position for the School presents a summary of the audited financial position as of the end of the School's fiscal year and the following Statement of Activities for the School presents a summary of the financial activities for the School during the indicated fiscal year, thereby reconciling the beginning and end of year net asset positions contained in the Statement of Net Position. Such summary statements are based on the audited financial statements of the School for the fiscal years ended June 30, 2014, 2015, and 2016 and unaudited financial statements of the School for the fiscal year ended June 30, The financial statements of the School for the fiscal years ended June 30, 2015 as audited by Malloy, Montague, Karnowski, Radosevich & Co., P.A., certified public accountants, and for the fiscal year ended June 30, 2016 as audited by Redpath and Company, Ltd., certified public accountants, are included as APPENDIX B "FINANCIAL STATEMENTS." The financial statements of the School for the fiscal year ended June 30, 2014, were restated in the audited financial statements for the fiscal year ended June 30, 2015, in order to accurately present the comparative position of the post-merger School. These financial statements were prepared using the standards applicable to governmental entities. The audited financial statements included in Appendix B are an integral part hereof and should be read in their entirety. [Remainder of page intentionally left blank] A-28

89 THE SCHOOL STATEMENT OF NET POSITION As of June 30, (Audited) (Audited) (Audited) (Unaudited) ASSETS Cash $858,096 $754,743 $115,565 $437,333 Accounts receivable 10,496 65, ,233 6,692 Due from other governments 772,985 1,031,348 1,145, ,643 Prepaid items 44,074 81, ,893 75,358 Capital assets (net of accumulated depreciation) 147, , , ,287 Total assets $1,832,694 $2,116,057 $1,832,752 2,025,313 Deferred outflows of resources: Related to pensions $- $825,155 $1,010,977 $9,622,581 Total assets and deferred outflows of resources $1,832,694 $2,941,212 $2,843,729 $11,647,894 LIABILITIES Accounts payable $40,702 $113,806 $26,028 $213,269 Salaries, taxes and benefits payable 365, , , ,733 Short-term indebtedness ,000 Net pension liability - 2,907,792 3,680,296 14,499,149 Total liabilities $405,712 $3,444,914 $4,167,028 $15,348,151 Deferred inflows of resources: Related to pensions $- $892,383 $353,665 $95,222 NET POSITION Net investment in capital assets $147,043 $182,848 $323,472 $518,287 Restricted for community services ,711 8,711 Unrestricted 1,279,665 (1,579,207) (2,009,147) (4,322,477) Total net position $1,426,982 $(1,396,085) $(1,676,964) $(3,795,479) Total liabilities, deferred inflows and net position $1,832,694 $2,941,212 $2,843,729 $11,647,894 [Remainder of page intentionally left blank] A-29

90 THE SCHOOL STATEMENT OF ACTIVITIES For the Period Ended June 30, (Audited) (Audited) (Audited) (Unaudited) REVENUES General Revenues: Local sources $59,403 $77,277 $94,318 $2,958 State sources 4,244,149 4,705,967 5,271,694 5,904,147 Charges for Services: Community services 181,061 12,249 19,760 21,423 Special education instruction 2, Regular instruction 209,082 93,797 71, ,201 Pupil support services 59,776 71,446 84,611 89,219 Operating Grants and Contributions: Special education instruction 1,266,511 1,195,220 1,388,767 1,610,958 Regular instruction 53, ,482 55, ,165 Pupil support services 45,925 57,793 62,119 85,953 Site, building and equipment 828, , ,867 1,270,655 Capital Grants and Contributions: Site, building and equipment ,235 70,623 Total Revenues $6,951,457 $7,351,871 $8,114,389 $9,449,344 EXPENSES School support services $849,196 $1,079,578 $1,130,121 $1,122,474 Regular instruction 2,361,573 2,695,799 3,326,084 5,543,154 Community services 181,524 25,461 11,561 27,644 Special education instruction 1,351,922 1,301,358 1,407,816 2,061,301 Instructional support services 85, , , ,023 Pupil support services 722, , ,827 1,028,725 Site, building and equipment 1,114,107 1,292,799 1,437,178 1,584,657 Fiscal and other fixed costs 27,563 18,321 22,310 23,881 Total Expenses $6,693,384 $7,189,013 $8,395,268 $11,567,859 Change in net position $258,073 $162,858 $(280,879) $(2,118,515) Net position - beginning $1,168,909 $1,426,982 $(1,396,085) $(1,676,964) Prior period adjustment - (2,985,925) - - Net position - beginning, as restated $1,168,909 $(1,558,943) $(1,396,085) $(1,676,964) Net position - ending $1,426,982 $(1,396,085) $(1,676,964) $(3,795,479) A-30

91 Debt Upon the issuance of the Series 2017 Bonds, the School will have no outstanding bond debt other than the Series 2017 Bonds. The School has in the past obtained a secured line of credit and a secured loan from a local bank, which will be repaid and terminated on or prior to the Closing Date. The foregoing would constitute Short-Term Indebtedness for the purposes of the Loan Agreement and the Pledge Agreement. After the Closing Date, the School will evaluate the possibility of obtaining secured or unsecured Short-Term Indebtedness, the incurrence of any of which would be subject to the Short-Term Indebtedness incurrence tests set forth in the Loan Agreement and the Pledge Agreement. In the Pledge Agreement, the School has covenanted that it will only incur Long-Term Indebtedness, Short-Term Indebtedness, or Purchase Money Indebtedness in accordance with the restrictions imposed by the Loan Agreement and Pledge Agreement. See "SECURITY FOR THE SERIES 2017 BONDS Additional Indebtedness," "BONDHOLDERS' RISKS Additional Indebtedness," and APPENDIX D "DEFINITIONS AND SUMMARY OF CERTAIN DOCUMENTS Summary of Certain Provisions of the Agreement Limitations on Incurrence of Additional Indebtedness." Financial Projections Management has compiled the financial projections for the School for each of the five Fiscal Years ending June 30, 2018 through 2022 included in APPENDIX C "BUDGET PROJECTION" (the "Projections") based on its assumptions. The Projections constitute "forward-looking" statements of the type described in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of See "INTRODUCTION Caution Regarding Forward-Looking Statements" in this Limited Offering Memorandum. Although Management believes that the assumptions upon which these financial projections are based are reasonable, any of the assumptions could prove to be inaccurate and, as a result, the forward-looking statements based on those assumptions could also be incorrect. All phases of the operations of Seven Hills Preparatory Academy involve risks and uncertainties, many of which are outside of the School's control and any one of which, or a combination of which, could materially affect the School's results with respect to Seven Hills Preparatory Academy's operations. Factors that could cause actual results to differ from those expected include, but are not limited to, general economic conditions; the willingness of Minnesota to fund public schools, including charter schools, at present, reduced, or increased levels; competitive conditions within Seven Hills Preparatory Academy's service area; lowerthan-projected enrollment; unanticipated expenses; changes in government regulation including changes in the law governing charter schools in Minnesota; future claims for accidents against the School, the Company, or Seven Hills Preparatory Academy and the extent of insurance coverage for such claims; and other risks discussed in this Limited Offering Memorandum. See "BONDHOLDERS' RISKS" above. The Projections have not been independently verified by any party other than the School. No feasibility studies have been conducted with respect to operations of the School pertinent to these financial projections or the Series 2017 Bonds. The Underwriter has not independently verified the Projections, and makes no representations nor gives any assurances that the Projections, or the assumptions underlying them, are complete or correct. NO REPRESENTATION OR ASSURANCE CAN BE GIVEN THAT THE SCHOOL WILL REALIZE REVENUES IN AMOUNTS SUFFICIENT TO MAKE ALL REQUIRED DEBT SERVICE PAYMENTS ON THE SERIES 2017 BONDS. THE REALIZATION OF FUTURE REVENUES DEPENDS ON, AMONG OTHER THINGS, THE MATTERS DESCRIBED IN "BONDHOLDERS' RISKS," AND FUTURE CHANGES IN ECONOMIC AND OTHER CONDITIONS THAT ARE UNPREDICTABLE AND CANNOT BE DETERMINED AT THIS TIME. THE UNDERWRITER MAKES NO REPRESENTATION AS TO THE ACCURACY OF THE PROJECTIONS CONTAINED HEREIN, NOR AS TO THE ASSUMPTIONS ON WHICH THE PROJECTIONS ARE BASED. A-31

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93 APPENDIX B FINANCIAL STATEMENTS

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95 SEVEN HILLS PREPARATORY ACADEMY CHARTER SCHOOL NO FINANCIAL STATEMENTS AND INDEPENDENT AUDITOR S REPORT For The Year Ended June 30, 2016

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97 SEVEN HILLS PREPARATORY ACADEMY CHARTER SCHOOL NO TABLE OF CONTENTS Reference Page Number INTRODUCTORY SECTION School Board 3 FINANCIAL SECTION Independent Auditor's Report 7 Management's Discussion and Analysis 11 Basic Financial Statements: School-Wide Financial Statements: Statement of Net Position Statement 1 18 Statement of Activities Statement 2 19 Fund Financial Statements: Balance Sheet - Governmental Funds Statement 3 20 Statement of Revenues, Expenditures, and Changes in Fund Balances - Governmental Funds Statement 4 21 Notes to Financial Statements 23 REQUIRED SUPPLEMENTARY INFORMATION Budgetary Comparison Schedule - General Fund Statement 5 42 Budgetary Comparison Schedule - Food Service Special Revenue Fund Statement 6 44 Budgetary Comparison Schedule - Community Service Special Revenue Fund Statement 7 45 Schedule of Proportionate Share of Net Pension Liability 46 Schedule of Pension Contributions 47 Notes to RSI 48 INDIVIDUAL FUND STATEMENTS Balance Sheet - General Fund Statement 8 50 Balance Sheet - Food Service Special Revenue Fund Statement 9 51 Balance Sheet - Community Service Special Revenue Fund Statement SUPPLEMENTAL INFORMATION Uniform Financial Accounting and Reporting Standards Compliance Table Schedule 1 54 OTHER REQUIRED REPORTS Report on Internal Control over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards 57 Minnesota Legal Compliance Report 59

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99 INTRODUCTORY SECTION 1

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101 SEVEN HILLS PREPARATORY ACADEMY CHARTER SCHOOL NO SCHOOL BOARD June 30, 2016 BOARD OF DIRECTORS Board Position Name During Kim Hubertus Kelly Bartsh Bryan Quevli Mark Quistad Shelly Bartle Lisa Carlin Kate Docken Nick Freiheit Terri Kildow Janeen Raaen Celeste Wiederholt Carl Schlueter Alice Woog Board Chair Vice Chair Board Treasurer Board Secretary Board Member Board Member Board Member Board Member Board Member Board Member Board Member Ex-Officio Executive Director Ex-Officio Executive Director 3

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103 FINANCIAL SECTION 5

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105 INDEPENDENT AUDITOR'S REPORT To the Board of Directors Seven Hills Preparatory Academy Charter School No Bloomington, Minnesota Report on the Financial Statements We have audited the accompanying financial statements of the governmental activities and each major fund of Seven Hills Preparatory Academy, as of and for the year ended June 30, 2016, and the related notes to the financial statements, which collectively comprise Seven Hills Preparatory Academy s basic financial statements as listed in the table of contents. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express opinions on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements White Bear Parkway, St. Paul, MN,

106 We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinions. Opinions In our opinion, the financial statements referred to above present fairly, in all material respects, the respective financial position of the governmental activities and each major fund of Seven Hills Preparatory Academy, as of June 30, 2016, and the respective changes in financial position for the year then ended in accordance with accounting principles generally accepted in the United States of America. Report on Summarized Comparative Information The financial statements of Seven Hills Preparatory Academy as of June 30, 2015 were audited by other auditors whose report dated December 1, 2015, expressed an unmodified opinion on those statements. In our opinion, the summarized comparative information presented herein as of and for the year ended June 30, 2015 is consistent, in all material respects, with the audited financial statements from which it has been derived. Other Matters Required Supplementary Information Accounting principles generally accepted in the United States of America require that the management s discussion and analysis, budgetary comparison information, and pension information, as listed in the table of contents, be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board, who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management s responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. Other Information Our audit was conducted for the purpose of forming opinions on the financial statements that collectively comprise Seven Hills Preparatory Academy s basic financial statements. The introductory section and individual fund financial statements are presented for purposes of additional analysis and are not a required part of the basic financial statements. The Uniform 8

107 Financial Accounting and Reporting Standards Compliance Table is presented as supplemental information as required by the Minnesota Department of Education and is also not part of the basic financial statements. The individual fund financial statements and the Uniform Financial Accounting and Reporting Standards Compliance Table are the responsibility of management and were derived from and relate directly to the underlying accounting and other records used to prepare the basic financial statements. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the basic financial statements or to the basic financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the individual fund financial statements and the Uniform Financial Accounting and Reporting Standards Compliance Table are fairly stated, in all material respects, in relation to the basic financial statements as a whole. The introductory section has not been subjected to the auditing procedures applied in the audit of the basic financial statements and, accordingly, we do not express an opinion or provide any assurance on it. Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated October 7, 2016, on our consideration of Seven Hills Preparatory Academy s internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering Seven Hills Preparatory Academy s internal control over financial reporting and compliance. REDPATH AND COMPANY, LTD. St. Paul, Minnesota October 7,

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109 MANAGEMENT S DISCUSSION AND ANALYSIS (MD&A) This section of Seven Hills Preparatory Academy s (the School) annual financial reporting presents our discussion and analysis of the School s financial performance during the year ended June 30, Please read it in conjunction with the School s financial statements, which immediately follow this section. Financial Highlights Key financial highlights for the fiscal year includes the following: Based on the fund financial statements, total revenues of $8,047,836 were received and total expenditures of $8,421,375 were incurred, which resulted in a $373,539 decrease in fund balance. The School budgeted for 710 students in the fiscal year, where actual enrollment was 714 students in grades K-8. Total fund balance was $1,022,548 or 12% of total expenditures. Overview of the Financial Statements The financial section of the annual report consists of four parts Independent Auditor s Report, required supplementary information which includes the MD&A (this section), the basic financial statements, and supplemental information. The basic financial statements include two kinds of statements that present different views of the School: The first two statements are School-wide financial statements that provide both shortterm and long-term information about the School s overall financial status. The remaining statements are fund financial statements that focus on individual parts of the School, reporting the School s operations in more detail than the School-wide statements. The governmental funds statements tell how basic services such as regular and special education were financed in the short-term as well as what remains for future spending. The financial statements also include notes that explain some of the information in the statements and provide more detailed data. School-Wide Statements The School-wide statements report information about the School as a whole using accounting methods similar to those used by private-sector companies. The statement of net position includes all of the School s assets and liabilities. All of the current year s revenues and expenses are accounted for in the statement of activities regardless of when cash is received or paid. The two School-wide statements report the School s net position and how they have changed. Net position the difference between the School s assets plus deferred outflows and liabilities plus deferred inflows is one way to measure the School s financial health or position. 11

110 MANAGEMENT S DISCUSSION AND ANALYSIS (MD&A) Over time, increases or decreases in the School s net position are an indicator of whether its financial position is improving or deteriorating, respectively. To assess the overall health of the School you need to consider additional non-financial factors such as changes in the School s creditworthiness and the condition of school buildings and other facilities. In the School-wide financial statements the School s activities are shown in one category: Governmental activities all of the School s basic services will be included here, such as regular and special education, transportation, and administration. Fund Financial Statements The fund financial statements provide more detailed information about the School s funds focusing on its most significant or major funds not the School as a whole. Funds are accounting devices the School uses to keep track of specific sources of funding and spending on particular programs: Some funds are required by State law. The School may establish other funds to control and manage money for a specific purpose. The School has the following fund type: Governmental funds the School s basic services are included in governmental funds, which generally focus on (1) how cash and other financial assets that can readily be converted to cash flow in and out and (2) the balances left at year-end that are available for spending. Consequently, the governmental funds statements provide a detailed shortterm view that helps to determine whether there are more or fewer financial resources that can be spent in the near future to finance the School s programs. Because this information does not encompass the additional long-term focus of the School-wide statements, we provide additional information at the bottom of the governmental funds statements to explain the relationship (or differences) between them. 12

111 MANAGEMENT S DISCUSSION AND ANALYSIS (MD&A) FINANCIAL ANALYSIS OF THE SCHOOL AS A WHOLE Net Position The School s net position was ($1,676,964) on June 30, 2016 as shown below: June 30, Current assets $1,509,280 $1,933,209 Capital assets 323, ,848 Deferred outflows of resources 1,010, ,155 Total assets and deferred outflows 2,843,729 2,941,212 Current liabilities 486, ,122 Noncurrent liabilities 3,680,296 2,907,792 Deferred inflows of resources 353, ,383 Total liabilities and deferred inflows 4,520,693 4,337,297 Net position: Net investment in capital assets 323, ,848 Restricted for community service 8, Unrestricted (2,009,147) (1,579,207) Total net position ($1,676,964) (1,396,085) 13

112 MANAGEMENT S DISCUSSION AND ANALYSIS (MD&A) Changes in Net Position The School s total revenue was $8,114,389 for the year ended June 30, There were no unspent restricted grant revenues as of June 30, As of June 30, Revenues: Program revenues: Charges for services $176,131 $177,492 Operating grants and contributions 2,503,011 2,391,135 Capital grants and contributions 69,235 - General revenues 5,366,012 4,783,244 Total revenues 8,114,389 7,351,871 Expenses: School support services 1,130,121 1,079,578 Regular instruction 3,326,084 2,695,799 Community education and services 11,561 25,461 Special education instruction 1,407,816 1,301,358 Instructional support services 124, ,376 Pupil support services 935, ,321 Site, building and equipment 1,437,178 1,292,799 Fiscal and other fixed costs 22,310 18,321 Total expenses 8,395,268 7,189,013 Change in net position (280,879) 162,858 Net position - beginning (1,396,085) (1,558,943) Net position - ending ($1,676,964) ($1,396,085) 14

113 MANAGEMENT S DISCUSSION AND ANALYSIS (MD&A) FINANCIAL ANALYSIS OF THE SCHOOL S FUNDS The financial performance of the School as a whole is reflected in its governmental funds as well. Financial information from the fund statements is as follows: General Food Service Community Service General Food Service Community Service Assets $1,499,958 $12,107 $8,711 $1,930,705 $9,933 $2,470 Liabilities 486,121 12, ,892 9,933 2,196 Fund balance $1,013,837 $ - $8,711 $1,395,813 $ - $274 General Food Service Community Service General Food Service Community Service Revenue $7,881,346 $146,730 $19,760 $7,210,383 $129,239 $12,249 Expenditures 8,251, ,545 11,323 7,075, ,588 21,176 Transfers (11,815) 11,815 - (18,276) 9,349 8,927 Change in fund balance ($381,976) $ - $8,437 $116,148 $ - $ - REVENUE ANALYSIS Total General Fund revenues increased by $670,963, or 9.3%, from the previous year due to the increase in enrollment plus a 2% increase in state per pupil funding. Total Food Service Fund revenues increased by $17,491, or 13.5%, due to student growth and increased participation in the food service program. Total Community Service Fund increased by $7,511, or 61.32%, due to student growth and increased participation in the after school program. EXPENDITURE ANALYSIS Total General Fund expenditures increased by $1,175,548, or 16.61%, from the previous year due to the growth and expansion of the School s programs to include salaries and benefits as well as other operating expenses. Total Food Service Fund expenditures increased by $19,957, or 14.40%, due to student growth and increased participation in the food service program. Total Community Service Fund expenditures decreased by $9,853, or 46.53%, due to changes in staffing for the before and after school program. 15

114 MANAGEMENT S DISCUSSION AND ANALYSIS (MD&A) BUDGETARY COMPARISON An annual budget for was established prior to June 30, Two budget revisions were approved during the fiscal year to better reflect the estimated forecast of the School. The School s board and management use the budget as an important tool to make prudent decisions in the ongoing management of the School. The Board reviews the School s financial progress monthly and values its ability to maintain financial flexibility as circumstances change. The primary metric that is reviewed is the annual surplus and resulting fund balance. The final budget for the General Fund anticipated a deficit of $369,840. The actual result for the year shows a deficit of $381,976. CAPITAL ASSETS As of June 30, 2016, the School had capital assets net of accumulated depreciation of $323,472. These capital assets are related to furniture and equipment growth in the School s facility among other building improvements made to the facility. FACTORS BEARING ON THE SCHOOL S FUTURE The board of directors has mandated that School management builds appropriate fund balance percentage and monitor revenues and expenditures throughout the year. The School is dependent on the State of Minnesota for most of its revenue. This revenue source is mostly impacted by two variables: legislation and school enrollment. CONTACTING THE SCHOOL S FINANCIAL MANAGEMENT This financial report is designed to provide our stakeholders with a general overview of the School s finances and to demonstrate the School s accountability for the money it receives. If you have questions about this report or need additional financial information, please contact: Carl Schlueter, Executive Director,

115 BASIC FINANCIAL STATEMENTS 17

116 SEVEN HILLS PREPARATORY ACADEMY CHARTER SCHOOL NO Statement 1 STATEMENT OF NET POSITION June 30, 2016 With Comparative Amounts for June 30, 2015 Governmental Activities Assets: Cash $115,565 $754,743 Accounts receivable 146,233 65,575 Due from other governments 1,145,589 1,031,348 Prepaid items 101,893 81,543 Capital assets (net of accumulated depreciation) 323, ,848 Total assets 1,832,752 2,116,057 Deferred outflows of resources: Related to pensions 1,010, ,155 Total assets and deferred outflows of resources $2,843,729 $2,941,212 Liabilities: Accounts payable $26,028 $113,806 Salaries, taxes and benefits payable 460, ,316 Net pension liability 3,680,296 2,907,792 Total liabilities 4,167,028 3,444,914 Deferred inflows of resources: Related to pensions 353, ,383 Net position: Net investment in capital assets 323, ,848 Restricted for community services 8, Unrestricted (2,009,147) (1,579,207) Total net position (1,676,964) (1,396,085) Total liabilites, deferred inflows of resources, and net position $2,843,729 $2,941,212 The accompanying notes are an integral part of these financial statements. 18

117 SEVEN HILLS PREPARATORY ACADEMY CHARTER SCHOOL NO STATEMENT OF ACTIVITIES Statement 2 For The Year Ended June 30, 2016 With Comparative Totals for The Year Ended June 30, 2015 Program Revenues Operating Capital Net (Expense) Revenue and Charges for Grants and Grants and Changes in Net Position Functions/Programs Expenses Services Contributions Contributions Governmental activities: School support services $1,130,121 $ - $ - $ - ($1,130,121) ($1,079,578) Regular instruction 3,326,084 71,760 55,258 - (3,199,066) (2,423,520) Community services 11,561 19, ,199 (13,212) Special education instruction 1,407,816-1,388,767 - (19,049) (106,138) Instructional support services 124, (124,371) (113,376) Pupil support services 935,827 84,611 62,119 - (789,097) (533,082) Site, building and equipment 1,437, ,867 69,235 (371,076) (333,159) Fiscal and other fixed costs 22, (22,310) (18,321) Total governmental activities $8,395,268 $176,131 $2,503,011 $69,235 (5,646,891) (4,620,386) General revenues: Local sources 94,318 77,277 State sources 5,271,694 4,705,967 Total general revenues 5,366,012 4,783,244 Change in net position (280,879) 162,858 Net position - beginning, as previously reported (1,396,085) 1,426,982 Prior period adjustment - (2,985,925) Net position - beginning, as restated (1,396,085) (1,558,943) Net position - ending ($1,676,964) ($1,396,085) 19

118 SEVEN HILLS PREPARATORY ACADEMY CHARTER SCHOOL NO Statement 3 BALANCE SHEET GOVERNMENTAL FUNDS June 30, 2016 With Comparative Amounts for June 30, 2015 Food Community Service Service Total Governmental Funds General Fund Fund Assets Cash $118,350 $ - $8,711 $127,061 $764,642 Accounts receivable 144,563 1, ,233 65,575 Due from Minnesota Department of Education 1,069, ,069, ,575 Due from Federal Government through Minnesota Department of Education 50,675 10,212-60, ,773 Due from other governments 14, ,741 - Prepaid items 101, ,893 81,543 Total assets $1,499,958 $12,107 $8,711 $1,520,776 $1,943,108 Liabilities and Fund Balances Liabilities: Cash overdraft $ - $11,496 $ - $11,496 $9,899 Accounts payable 26, , ,806 Salaries, taxes and benefits 460, , ,316 Total liabilities 486,121 12, , ,021 Fund balance: Nonspendable 101, ,893 81,473 Restricted for community service - - 8,711 8, Unassigned 911, ,944 1,314,340 Total fund balance 1,013, ,711 1,022,548 1,396,087 Total liabilities and fund balance $1,499,958 $12,107 $8,711 $1,520,776 $1,943,108 Amounts reported for governmental activities in the statement of net position are different because: Fund balance reported above $1,022,548 $1,396,087 Capital assets used in governmental activities are not financial resources, and therefore, 323, ,848 are not reported in the funds Deferred outflows of resources related to pensions 1,010, ,155 Net pension liability is not due and payable in the current period and, therefore, is not reported in the funds (3,680,296) (2,907,792) Deferred inflows of resources related to pensions (353,665) (892,383) Net position of governmental activities (Statement 1) ($1,676,964) ($1,396,085) The accompanying notes are an integral part of these financial statements. 20

119 SEVEN HILLS PREPARATORY ACADEMY CHARTER SCHOOL NO Statement 4 STATEMENT OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCE GOVERNMENTAL FUNDS For The Year Ended June 30, 2016 With Comparative Totals for The Year Ended June 30, 2015 Food Community Service Service Total Governmental Funds General Fund Fund Revenues: Local sources $166,078 $84,611 $19,760 $270,449 $254,769 State sources 7,501,776 7,221-7,508,997 6,880,429 Federal sources 213,492 54, , ,673 Total revenues 7,881, ,730 19,760 8,047,836 7,351,871 Expenditures: Current: School support services 1,118, ,118,009 1,085,485 Regular instruction 3,185, ,185,670 2,684,702 Special education instruction 1,386, ,386,764 1,291,787 Instructional support services 122, , ,297 Pupil support services 776, , , ,243 Community services ,323 11,323 21,176 Site, building and equipment 1,429, ,429,049 1,289,908 Fiscal and other fixed costs 22, ,310 19,572 Capital outlay 210, ,715 66,553 Total expenditures 8,251, ,545 11,323 8,421,375 7,235,723 Revenues over (under) expenditures (370,161) (11,815) 8,437 (373,539) 116,148 Other financing sources (uses): Transfers in - 11,815-11,815 18,276 Transfers out (11,815) - - (11,815) (18,276) Total other financing sources (uses) (11,815) 11, Net increase (decrease) in fund balance (381,976) 0 8,437 (373,539) 116,148 Fund balance - beginning 1,395, ,396,087 1,279,939 Fund balance - ending $1,013,837 $0 $8,711 $1,022,548 $1,396,087 Amounts reported for governmental activities in the statement of activities are different because: Revenues over expenditures reported above ($373,539) $116,148 Governmental funds report capital outlays as expenditures. However, in the statement of activities the cost of those assets is allocated over their estimated useful lives and reported as depreciation expense: Depreciation (47,693) (29,093) Capital outlay 210,715 66,553 Capital outlay not capitalized (22,398) (1,655) Governmental funds report pension contributions as expenditures, however, pension expense is reported in the statement of activities (47,964) 10,905 Change in net position of governmental activities (Statement 2) ($280,879) $162,858 21

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121 SEVEN HILLS PREPARATORY ACADEMY CHARTER SCHOOL NO NOTES TO FINANCIAL STATEMENTS June 30, 2016 Note 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The basic financial statements of Seven Hills Preparatory Academy (the School) have been prepared in conformity with accounting principles generally accepted in the United States of America (GAAP) as applied to government units. The Governmental Accounting Standards Board (GASB) is the accepted standard-setting body for establishing governmental accounting and financial reporting principles. The significant accounting principles and policies utilized by the School are described below: A. FINANCIAL REPORTING ENTITY The School is a nonprofit corporation that was formed, and began operating in The School s financial statements include all funds, departments, agencies, boards, commissions, and other organizations for which the School is considered to be financially accountable. As required by accounting principles generally accepted in the United States of America, the financial statements of the reporting entity include those of the School (the primary government) and its component units. Generally, component units are legally separate organizations for which the officials of the primary government are financially accountable. The School does not have any component units, nor is it a component unit of any other entity. The School is required to operate under a charter agreement with an entity that has been approved by the Minnesota Department of Education (MDE) to be a charter school authorizer. The authorizer monitors and evaluates the School s performance, and periodically determines whether to renew the School s charter. The School s authorizer is Friends of Education (Friends), a nonprofit organization. Aside from its responsibilities as authorizer, Friends has no authority or control over the School, and is not financially accountable for it. Therefore, the School is not considered a component unit of Friends. Extracurricular student activities are determined primarily by student participants under the guidance of an adult and are generally conducted outside of school hours. In accordance with Minnesota Statutes, school boards can elect to either control or not control extracurricular activities. The School s Board has elected to control extracurricular activities; therefore, the extracurricular student activity accounts are included in the School s General Fund. B. SCHOOL-WIDE AND FUND FINANCIAL STATEMENTS The school-wide financial statements (i.e., the statement of net position and the statement of activities) report information on all of the nonfiduciary activities of the primary government. For the most part, the effect of interfund activity has been removed from these statements. Governmental activities generally are financed through intergovernmental revenues, and other nonexchange transactions. The statement of activities demonstrates the degree to which the direct expenses of a given function are offset by program revenues. Direct expenses are those that are clearly identifiable with a specific function. Program revenues include grants and contributions that are restricted to 23

122 SEVEN HILLS PREPARATORY ACADEMY CHARTER SCHOOL NO NOTES TO FINANCIAL STATEMENTS June 30, 2016 meeting the operational or capital requirements of a particular function. Other items not included among program revenues are reported instead as general revenues. Amounts reported as program revenues include 1) charges to customers or applicants for goods, services, or privileges provided, 2) operating grants and contributions, and 3) capital grants and contributions. Internally dedicated resources are reported as general revenues rather than as program revenues. C. MEASUREMENT FOCUS, BASIS OF ACCOUNTING, AND FINANCIAL STATEMENT PRESENTATION As required by State Statute, the School operates as a nonprofit corporation under Minnesota Statutes 317A. However, State law also requires that the School comply with Uniform Financial Accounting and Reporting Standards for Minnesota School Districts (UFARS) which mandates the use of a governmental accounting structure. The school-wide financial statements are reported using the economic resources measurement focus and the accrual basis of accounting. Revenues are recorded when earned and expenses are recorded when a liability is incurred, regardless of the timing of related cash flows. Grants and similar items are recognized as revenue as soon as all eligibility requirements imposed by the provider have been met. Governmental fund financial statements are reported using the current financial resources measurement focus and the modified accrual basis of accounting. Revenues are recognized as soon as they are both measurable and available. Revenues are considered to be available when they are collectible within the current period or soon enough thereafter to pay liabilities of the current period. For this purpose, the School considers all revenues, except reimbursement grants, to be available if they are collected within 60 days of the end of the current fiscal period. Reimbursement grants are considered available if they are collected within one year of the end of the current fiscal period. Expenditures generally are recorded when a liability is incurred, as under accrual accounting. However, debt service expenditures, as well as expenditures related to compensated absences and claims and judgments, are recorded only when payment is due. Intergovernmental revenues, grants, charges for services and interest associated with the current fiscal period are all considered to be susceptible to accrual and so have been recognized as revenues of the current fiscal period. All other revenue items are considered to be measurable and available only when cash is received by the School. Fund Financial Statements: The fund financial statements provide information about the School s funds. The emphasis of fund financial statements is on major governmental funds, each displayed in a separate column. 24

123 SEVEN HILLS PREPARATORY ACADEMY CHARTER SCHOOL NO NOTES TO FINANCIAL STATEMENTS June 30, 2016 The School reports the following major governmental funds: The General Fund is the general operating fund of the School. The General Fund accounts for all financial resources except those that are required to be accounted for in another fund. The Food Service Special Revenue Fund is used to account for the School s child nutrition program. The Community Service Special Revenue Fund is used to account for the after school program. D. INCOME TAXES The School is classified as a tax-exempt organization under Section 501(c)(3) of the Internal Revenue Code and comparable sections of the Minnesota income tax statutes. However, income from certain activities not directly related to the School s tax-exempt purpose is subject to taxation as unrelated business income. The School has not had any unrelated business activities. A tax expense or benefit from an uncertain income tax position (including tax-exempt status) may be recognized only when it is more likely than not that the position will be sustained upon examination by taxing authorities. Management believes the School has no uncertain income tax positions that would result in an accrual, expense or benefit under the more likely than not standard. E. BUDGETS The budget for each fund is prepared on the modified accrual basis of accounting. Each June, the School s Board adopts an annual budget for the following fiscal year for all governmental funds. Legal budgetary control is at the fund level. Budgeted amounts are as originally adopted or as amended by the Board. Budgeted expenditure appropriations lapse at year-end. Encumbrance accounting is not used. F. RECEIVABLES When necessary, the School utilizes an allowance for uncollectible accounts to value its receivables. However, the School considers all of its current receivables to be collectible. G. PREPAID ITEMS Certain payments to vendors reflect costs applicable to future accounting periods and are recorded as prepaid items in both school-wide and fund financial statements. Prepaid items are recorded using the consumption method and are recorded as expenditures at the time of consumption. 25

124 SEVEN HILLS PREPARATORY ACADEMY CHARTER SCHOOL NO NOTES TO FINANCIAL STATEMENTS June 30, 2016 H. CAPITAL ASSETS Capital assets are capitalized at historical cost, or estimated historical cost if purchased or constructed. Donated capital assets are recorded at acquisition value at the date of donation. The School defines capital assets as those with an initial cost of $500 or more, which benefit more than one fiscal year. The cost of normal maintenance and repairs that do not add to the value of the asset or materially extend asset lives is not capitalized. Capital assets are recorded in the School-wide financial statements, but are not reported in the fund financial statements. Capital assets are depreciated using the straight-line method over their estimated useful lives. Since assets are generally sold for an immaterial amount or scrapped when declared as no longer fit or needed for public purposes by the School, no salvage value is taken into consideration for depreciation purposes. The following estimated useful lives are used for each category of capital assets: Furniture and equipment Leasehold improvements 5-20 years 5-20 years I. VACATION PAY AND SICK LEAVE Substantially all School employees are entitled to vacation pay and sick leave at various rates. Employees are not compensated for unused vacation pay and sick leave upon termination of employment. No long-term liability for unused vacation pay and sick leave has been recorded. J. DEFERRED OUTFLOWS/INFLOWS OF RESOURCES In addition to assets, the statement of financial position will sometimes report a separate section for deferred outflows of resources. This separate financial statement element, deferred outflows of resources, represents a consumption of net position that applies to a future period(s) and so will not be recognized as an outflow of resources (expense/expenditure) until then. In addition to liabilities, the statement of financial position will sometimes report a separate section for deferred inflows of resources. This separate financial statement element, deferred inflows of resources, represents an acquisition of net position that applies to a future period(s) and so will not be recognized as an inflow of resources (revenue) until that time. 26

125 SEVEN HILLS PREPARATORY ACADEMY CHARTER SCHOOL NO NOTES TO FINANCIAL STATEMENTS June 30, 2016 K. USE OF ESTIMATES The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America (GAAP) requires management to make estimates that affect amounts reported in the financial statements during the reporting period. Actual results could differ from such estimates. L. FUND BALANCE CLASSIFICATIONS In the fund financial statements, governmental funds report fund balance in classifications that disclose constraints for which amounts in those funds can be spent. These classifications are as follows: Nonspendable - Consists of amounts that are not in spendable form, such as prepaid items, inventory, and other long-term assets. Restricted - Consists of amounts related to externally imposed constraints established by creditors, grantors, or contributors; or constraints imposed by state statutory provisions. Committed - Consists of internally imposed constraints that are established by resolution of the Board. Those committed amounts cannot be used for any other purpose unless the Board removes or changes the specified use by taking the same type of action it employed to previously commit those amounts. Assigned - Consists of internally imposed constraints. These constraints consist of amounts intended to be used by the School for specific purposes but do not meet the criteria to be classified as restricted or committed. In governmental funds, assigned amounts represent intended uses established by the Board itself or by an official to which the governing body delegates the authority. The Board has delegated to the School Director and Chief Financial Officer the authority to assign fund balances for specific purposes. Unassigned - The residual classification for the General Fund which also reflects negative residual amounts in other funds. When both restricted and unrestricted resources are available for use, it is the School s policy to first use restricted resources, then use unrestricted resources as they are needed. When committed, assigned, or unassigned resources are available for use, it is the School s policy to use resources in the following order: 1) committed, 2) assigned, and 3) unassigned. 27

126 SEVEN HILLS PREPARATORY ACADEMY CHARTER SCHOOL NO NOTES TO FINANCIAL STATEMENTS June 30, 2016 M. MINIMUM FUND BALANCE POLICY The Board has formally adopted a fund balance policy regarding the level of fund balance for the General Fund. The policy establishes a goal of the School to achieve a fund balance in the General Fund of 25 percent of annual expenditures. At June 30, 2016, the targeted minimum fund balance for the General Fund was $2,225,880. Actual fund balance in the General Fund was $1,013,837. N. COMPARATIVE DATA/RECLASSIFICATION Comparative data for the prior year has been presented only for certain sections of the accompanying financial statements in order to provide an understanding of the changes in the School s financial position and operations. Also, certain amounts presented in the prior year data have been reclassified in order to be consistent with the current year s presentation. O. NET POSITION Net position represents assets plus deferred outflows of resources less liabilities less deferred inflows of resources in the School-wide financial statements. Net position invested in capital assets consists of capital assets, net of accumulated depreciation, reduced by the outstanding balance of any long-term debt used to build or acquire the capital assets. Net position is reported as restricted in the School-wide financial statement when there are limitations imposed on their use through external restrictions imposed by creditors, grantors, laws or regulations of other governments. P. STEWARDSHIP AND ACCOUNTABILITY Expenditures exceeded budgeted amounts in the following funds at June 30, 2016: Budgeted Actual Expenditures Expenditures Excess General Fund $8,007,574 $8,251,507 $243,933 Food Service Fund 152, ,545 6,098 28

127 SEVEN HILLS PREPARATORY ACADEMY CHARTER SCHOOL NO NOTES TO FINANCIAL STATEMENTS June 30, 2016 Q. FAIR VALUE OF FINANCIAL INSTRUMENTS The School defines fair value as the price that would be received to sell an asset or paid to transfer a liability (i.e., the exit price ) in an orderly transaction between market participants at the measurement date. To determine fair value, the School uses a fair value hierarchy categorized into three levels based on the inputs used. Generally, the three levels are as follows: Level 1 Quoted prices in active markets for identical assets. Level 2 Significant other observable inputs. Level 3 Significant unobservable inputs. The School does not have any significant fair value measurements as of June 30, Note 2 DEPOSITS AND INVESTMENTS Cash balances from all funds are combined and invested to the extent available in deposit accounts and securities as authorized by Minnesota Statutes. A. DEPOSITS In accordance with Minnesota Statutes, the School maintains deposits at financial institutions which are authorized by the School Board. Custodial Credit Risk is the risk that in the event of a bank failure, the School s deposits may not be returned to it. The School does not have a deposit policy for custodial credit risk and follows Minnesota Statutes for deposits. Minnesota Statutes require that all deposits be protected by insurance, surety bond, or collateral. The market value of collateral pledged must equal 110% of the deposits not covered by insurance or corporate surety bonds. Authorized collateral include: U.S. government treasury bills, notes, or bonds; issues of a U.S. government agency; general obligations of a state or local government rated A or better; revenue obligations of a state or local government rated AA or better; irrevocable standby letter of credit issued by a Federal Home Loan Bank; and time deposits insured by a federal agency. Minnesota Statutes require securities pledged as collateral be held in safekeeping in a restricted account at the Federal Reserve Bank or at an account at a trust department of a commercial bank or other financial institution not owned or controlled by the depository. The School does not have a deposit policy that is more restrictive than Minnesota Statutes. At June 30, 2016, all of the School s deposits were covered by insurance or collateral. 29

128 SEVEN HILLS PREPARATORY ACADEMY CHARTER SCHOOL NO NOTES TO FINANCIAL STATEMENTS June 30, 2016 B. INVESTMENTS Minnesota Statutes outline authorized investments for Charter Schools. During 2016, the School did not have any such investments. Note 3 RETIREMENT PLANS Substantially all employees of the School are required by state law to belong to pension plans administered by Teachers Retirement Association (TRA) or Public Employees Retirement Association (PERA), both of which are cost-sharing multiple-employer defined benefit pension plans administered on a statewide basis. Disclosures relating to these plans are as follows: A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES For purposes of measuring the net pension liability, deferred outflows/inflows of resources, and pension expense, information about the fiduciary net position of TRA and PERA and additions to/deductions from TRA s and PERA s fiduciary net position have been determined on the same basis as they are reported by TRA and PERA. For this purpose, plan contributions are recognized as of employer payroll paid dates and benefit payments and refunds are recognized when due and payable in accordance with the benefit terms. Investments are reported at fair value. TRA has a special funding situation created by direct aid contributions made by the State of Minnesota, City of Minneapolis and Minneapolis School District. This direct aid is a result of the Minneapolis Teachers Retirement Fund Association merger into TRA in A second direct aid source is from the State of Minnesota for the merger of the Duluth Teacher s Retirement Fund Association in Additional information can be found in section E. B. PLAN DESCRIPTIONS The School participates in TRA s Basic Plan (without Social Security coverage) and its Coordinated Plan (with Social Security coverage) in accordance with Minnesota Statutes, Chapters 354 and 356. TRA is a separate statutory entity and administered by a Board of Trustees. The Board consists of four active members, one retired member and three statutory officials. Teachers employed in Minnesota s public elementary and secondary schools, charter schools, and certain educational institutions maintained by the state are required to be TRA members. The School also participates in the General Employees Retirement Plan (GERF), which is administered by PERA in accordance with Minnesota Statutes, Chapters 353 and 356. PERA s defined benefit pension plans are tax qualified plans under Section 401(a) of the Internal Revenue Code. All full-time and certain part-time employees of the School, other than teachers, are covered by GERF. GERF members belong to either the Basic Plan (without Social Security coverage) or the Coordinated Plan (with Social Security coverage). The Basic Plan was closed to new members in All new members must participate in the Coordinated Plan. 30

129 SEVEN HILLS PREPARATORY ACADEMY CHARTER SCHOOL NO NOTES TO FINANCIAL STATEMENTS June 30, 2016 C. BENEFITS PROVIDED TRA TRA provides retirement benefits as well as disability benefits to members, and benefits to survivors upon death of eligible members. Benefits are established by Minnesota Statute and vest after three years of service credit. The defined retirement benefits are based on a member's highest average salary for any five consecutive years of allowable service, age, and a formula multiplier based on years of credit at termination of service. Two methods (Tier I and Tier II) are used to compute benefits for TRA's Basic and Coordinated Plan members. Tier 1 Benefits a step rate formula of 2.2% per year for the first ten years of service and 2.7% for all other years is applied for Basic Plan members. For years of service prior to July 1, 2006, a step rate formula of 1.2% per year for the first ten years of service and 1.7% for all other years is applied for Coordinated Plan members. For years of service July 1, 2006 and after, a step rate formula of 1.4% per year for the first ten years of service and 1.9% for all other years is applies. Tier II Benefits for years of service prior to July 1, 2006, a level formula of 1.7% per year for Coordinated Plan members and 2.7% per year for Basic Plan members is applied. For years of service July 1, 2006 and after, a level formula of 1.9% per year for Coordinated Plan members and 2.7% per year for Basic Plan members applies. Beginning July 1, 2015, the early retirement reduction factors are based on rates established under Minnesota Statute. Smaller reductions, more favorable to the member, will be applied to individuals who reach age 62 and have 30 years or more of service credit. Members first employed before July 1, 1989, receive the greater of the Tier I or Tier II benefits as described. Members first employed after June 30, 1989, receive only the Tier II calculation with a normal retirement age that is their retirement age for full Social Security retirement benefits, but not to exceed age 66. The benefit provisions stated apply to active plan participants. Vested, terminated employees who are entitled to benefits but not yet receiving them are bound by the plan provisions in effect at the time they last terminated their public service. PERA PERA provides retirement, disability, and death benefits. Benefit provisions are established by Minnesota Statute and can only be modified by the state legislature. Benefit increases are provided to benefit recipients each January. Increases are related to the funding ratio of the plan. Members in plans that are at least 90% funded for two consecutive years are given 2.5% increases. Members in plans that have not exceeded 90% funded, or have fallen below 80%, are given 1% increases. The benefit provisions stated in the following paragraph are current provisions and apply to active plan participants. Vested, terminated employees who are entitled to benefits but are not receiving them yet are bound by the provisions in effect at the time they last terminated their public service. 31

130 SEVEN HILLS PREPARATORY ACADEMY CHARTER SCHOOL NO NOTES TO FINANCIAL STATEMENTS June 30, 2016 Benefits are based on a member s highest average salary for any five successive years of allowable service, age, and years of credit at termination of service. Two methods are used to compute benefits for PERA's Coordinated and Basic Plan members. The retiring member receives the higher of a step-rate benefit accrual formula (Method 1) or a level accrual formula (Method 2). Under Method 1, the annuity accrual rate for a Basic Plan member is 2.2% of average salary for each of the first ten years of service and 2.7% for each remaining year. The annuity accrual rate for a Coordinated Plan member is 1.2% of average salary for each of the first ten years and 1.7% for each remaining year. Under Method 2, the annuity accrual rate is 2.7% of average salary for Basic Plan members and 1.7% for Coordinated Plan members for each year of service. For members hired prior to July 1, 1989, a full annuity is available when age plus years of service equal 90 and normal retirement age is 65. For members hired on or after July 1, 1989, normal retirement age is the age for unreduced Social Security benefits capped at 66. Disability benefits are available for vested members, and are based upon years of service and the member s highest average salary for any five successive years of allowable service. D. CONTRIBUTIONS Employee and employer contribution rates are established by Minnesota Statutes. Rates for the years ended June 30, 2015 and 2016 are as follows: Employee Employer TRA - Basic Plan 11.0% 11.5% TRA - Coordinated Plan 7.5% 7.5% PERA - Basic Plan 9.1% 11.78% PERA - Coordinated Plan 6.5% 7.5% The School s contributions to TRA and PERA for the plan s fiscal year ended June 30, 2015 were $198,220 and $44,535, respectively, which were equal to the required contributions as set by state statute. 32

131 SEVEN HILLS PREPARATORY ACADEMY CHARTER SCHOOL NO NOTES TO FINANCIAL STATEMENTS June 30, 2016 E. MERGER OF DULUTH TEACHER S RETIREMENT FUND ASSOCIATION (DTRFA) Legislation enacted in 2014 merged the DTRFA with TRA effective June 30, The beginning balances of total pension liability and fiduciary net position were adjusted to reflect the merger of DTRFA. TRA CAFR June 30, 2014 Restated Total pension liability $24,901,612,000 $25,299,564,000 Plan fiduciary net position 20,293,684,000 20,519,756,000 Net pension liability $4,607,928,000 $4,779,808,000 F. NET PENSION LIABILITY AND PENSION EXPENSE The net pension liability reported at June 30, 2016 was measured as of June 30, The total pension liability used to calculate the net pension liability was determined by an actuarial valuation as of the measurement date. The School s proportionate share of the net pension liability was based on its contributions to each respective plan in relation to total contributions to the plan. For TRA, total contributions to the plan include direct aid from the State of Minnesota, City of Minneapolis and Minneapolis School District. Pension-related assets reported by the School relating to TRA and PERA are $0. The School s net pension liability, its proportionate share of the plan s net pension liability, and pension expense as of and for the year ended June 30, 2016 are as follows: TRA PERA Total Net pension liability $3,167,227 $513,069 $3,680,296 Proportionate share of net pension liability: Measurement date % % Prior measurement date % % Pension expense $345,758 $48,953 $394,711 The pension liability related to TRA reflected a reduction due to direct aid provided to TRA. The amount recognized by the School as its proportionate share of the net pension liability, the direct aid, and the total portion of the net pension liability that was associated with the School were $3,167,227, $388,625 and $3,555,852, respectively. In addition, pension expense related to TRA includes recognition of $66,553 as an increase to pension expense for the support provided by direct aid. 33

132 SEVEN HILLS PREPARATORY ACADEMY CHARTER SCHOOL NO NOTES TO FINANCIAL STATEMENTS June 30, 2016 G. DEFERRED OUTFLOWS AND INFLOWS OF RESOURCES At June 30, 2016, the School reported deferred outflows and inflows of resources related to pensions from the following sources: Deferred Outflows Deferred Inflows of Resources of Resources Differences between expected and actual economic experience: TRA $167,829 $ - PERA 5,046 25,867 Difference between projected and actual investment earnings: TRA - 255,274 PERA - 51,385 Changes in actuarial assumptions: TRA 280,543 - PERA 33,889 - Changes in proportion: TRA 243,476 - PERA - 21,139 Contributions paid subsequent to the measurement date: TRA 222,096 - PERA 58,098 - Total $1,010,977 $353,665 Amounts reported as deferred outflows of resources resulting from the School s contributions subsequent to the measurement date will be recognized as a reduction to the net pension liability in the year ended June 30, Other amounts reported as deferred outflows and inflows of resources related to pensions will be recognized as pension expense during the following years: Pension Expense Year TRA PERA Total 2017 $61,698 ($17,377) $44, ,698 (17,376) 44, ,701 (36,846) 24, ,477 12, ,620 34

133 SEVEN HILLS PREPARATORY ACADEMY CHARTER SCHOOL NO NOTES TO FINANCIAL STATEMENTS June 30, 2016 H. ACTUARIAL ASSUMPTIONS TRA The total pension liability in the June 30, 2015 actuarial valuation was determined using the following actuarial assumptions, applied to all periods included in the measurement. Actuarial Information Measurement date June 30, 2015 Valuation date July 1, 2015 Experience study October 30, 2009 Actuarial cost method Entry Age Normal Actuarial assumptions: Investment rate of return 8.00% Wage inflation 3.0% Projected salary increase %, based on years of service Cost of living adjustment 2.0% Mortality Assumption Pre-retirement Post-retirement Post-disability RP 2000 non-annuitant generational mortality, white collar adjustment, male rates set back 5 years and female rates set back 7 years. RP 2000 annuitant generational mortality, white collar adjustment, male rates set back 2 years and female rates set back 3 years. RP 2000 disabled retiree mortality, without adjustment. There was a change in actuarial assumptions that affected the measurement of the total liability since the prior measurement date. Post-retirement benefit adjustments are now assumed to be 2% annually with no increase to 2.5% projected. The prior year valuation assumed a 2.5% increase commencing July 1, Also, the assumed investment rate of return and the discount rate used to measure the net pension liability was reduced from 8.25% at the prior measurement date to 8.0% at the current measurement date. The actuarial assumptions used in the June 30, 2015 valuation were based on the results of an actuarial experience study for the period July 1, 2004 to June 30, 2008, and a limited scope experience study dated August 29, The limited scope experience study addressed only inflation and long-term rate of return for the GASB 67 valuation. 35

134 SEVEN HILLS PREPARATORY ACADEMY CHARTER SCHOOL NO NOTES TO FINANCIAL STATEMENTS June 30, 2016 The long-term expected rate of return on pension plan investments was determined using a building-block method in which best-estimate ranges of expected future real rates of return (expected returns, net of pension plan investment expense and inflation) are developed for each major asset class. These ranges are combined to produce the long-term expected rate of return by weighting the expected future real rates of return by the target asset allocation percentage and by adding expected inflation. PERA The total pension liability in the June 30, 2015 actuarial valuation was determined using the following actuarial assumptions: Measurement date June 30, 2015 Valuation date June 30, 2015 Inflation 2.75% per year Active member payroll growth 3.50% per year Investment rate of return 7.90% Salary increases were based on a service-related table. Mortality rates for active members, retirees, survivors and disabilitants were based on RP-2000 tables for males or females, as appropriate, with slight adjustments. Cost of living benefit increases for retirees are assumed to be 1% effective every January 1 st until 2034 and 2.5% thereafter. Actuarial assumptions used in the June 30, 2015 valuation were based on the results of actuarial experience studies. The experience study in the GERF was for the period July 1, 2004 through June 30, 2008, with an update of economic assumptions in There were no changes in actuarial assumptions in The long-term expected rate of return on pension plan investments is 7.9%. The State Board of Investment, which manages the investments of PERA, prepares an analysis of the reasonableness of the long-term expected rate of return on a regular basis using a building-block method in which best-estimate ranges of expected future rates of return are developed for each major asset class. These ranges are combined to produce an expected long-term rate of return by weighting the expected future rates of return by the target asset allocation percentages. 36

135 SEVEN HILLS PREPARATORY ACADEMY CHARTER SCHOOL NO NOTES TO FINANCIAL STATEMENTS June 30, 2016 TRA and PERA The target allocation and best estimates of real rates of return for each major asset class are summarized in the following table: Target Long-Term Expected Asset Class Allocation Real Rate of Return Domestic stocks 45% 5.50% International stocks 15% 6.00% Bonds 18% 1.45% Alternative assets 20% 6.40% Unallocated cash 2% 0.50% Total 100% I. DISCOUNT RATE The discount rates used to measure the total pension liability for TRA and PERA were 8.0% and 7.9%, respectively. The Legislature has since set the discount rate in statute at 8%. Beginning with the June 30, 2016 measurement date, the discount rate used when calculating the total net pension liability for PERA will be increased to 8% to be consistent with the rate set in statute used for funding progress. The projection of cash flows used to determine the discount rate assumed that employee, employer, and state contributions, if any, will be made at current statutorily required rates. Based on those assumptions, each of the pension plan s fiduciary net position was projected to be available to make all projected future benefit payments of current active and inactive employees. Therefore, the long-term expected rate of return on pension plan investments was applied to all periods of projected benefit payments to determine the total pension liability. J. PENSION LIABILITY SENSITIVITY The following presents the School s proportionate share of the net pension liability calculated using the discount rate for each plan, as well as the liability measured using one percent lower (7.0% for TRA; 6.9% for PERA) and one percent higher (9.0% for TRA; 8.9% for PERA). 1% Decrease Current 1% Increase TRA $4,820,928 $3,167,227 $1,787,164 PERA $806,727 $513,069 $270,553 37

136 SEVEN HILLS PREPARATORY ACADEMY CHARTER SCHOOL NO NOTES TO FINANCIAL STATEMENTS June 30, 2016 K. PENSION PLAN FIDUCIARY NET POSITION Detailed information about TRA s fiduciary net position is available in a separately-issued TRA financial report. That report can be obtained at by writing to TRA at 60 Empire Drive, Suite 400, St. Paul, MN, 55103; or by calling or Detailed information about PERA s fiduciary net position is available in a separately issued PERA financial report. That report may be obtained at by writing to PERA at 60 Empire Drive, Suite 200, St. Paul, MN, 55103; or by calling or DEFINED CONTRIBUTION PLAN The School provides eligible employees future retirement benefits through the School s 403(b) Plan (the Plan). The Plan provisions are established and can be modified by the School. All full-time employees of the School are eligible to participate in the Plan commencing on the date of their employment. Eligible employees may elect to have a percentage of their pay contributed to the Plan. The Plan allows for discretionary employer contributions. There were no employer contributions for 2016 or Note 4 INTERFUND ACTIVITY During 2016, the School made a routine transfer of $11,815 from the General Fund to eliminate a deficit in the Food Service Fund. Note 5 CAPITAL ASSETS Capital assets activity for the year ended June 30, 2016 is as follows: Beginning Ending Balance Increases Decreases Balance Governmental activities: Capital assets, being depreciated: Furniture and equipment $481,286 $181,234 $ - $662,520 Leasehold improvements - 7,083-7,083 Total capital assets, being depreciated 481, , ,603 Less accumulated depreciation for: Furniture and equipment (298,438) (47,646) - (346,084) Leasehold improvements - (47) - (47) Total accumulated depreciation (298,438) (47,693) - (346,131) Governmental activities capital assets - net $182,848 $140,624 $0 $323,472 38

137 SEVEN HILLS PREPARATORY ACADEMY CHARTER SCHOOL NO NOTES TO FINANCIAL STATEMENTS June 30, 2016 Depreciation expense for the year ended June 30, 2016 was charged to the following governmental functions: Governmental activities: School support services $2,941 Regular instruction 35,529 Special education instruction 3,460 Site, building and equipment 5,763 Total depreciation expense - governmental activities $47,693 Note 6 COMMITMENTS AND CONTINGENCIES GRANTS Amounts received or receivable from federal and state agencies are subject to agency audit and adjustment. Any disallowed claims, including amounts already collected, may constitute a liability of the applicable funds. The amount, if any, of funds which may be disallowed by the agencies cannot be determined at this time although the School expects such amounts, if any, to be immaterial. The federal financial assistance received may be subject to an audit pursuant to Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance) or audits by the grantor agency. SPACE LEASE The School has entered into lease agreements for each of its schools. The leases, which contain varying terms, renewal options and security deposit requirements, have expiration dates ranging from June 30, 2019 to June 30, Lease payments are either based on the estimated average daily membership (ADM) or required minimum base rent payments. For the year ended June 30, 2016, the School paid $1,116,340 in rent under the terms of the leases. Estimated minimum future rent based on current factors is as follows: Fiscal Year Ended Amount 2017 $1,162, ,197, ,213, ,627 Total $3,998,232 39

138 SEVEN HILLS PREPARATORY ACADEMY CHARTER SCHOOL NO NOTES TO FINANCIAL STATEMENTS June 30, 2016 Note 7 RISK MANAGEMENT The School is exposed to various risks of loss related to torts: theft of, damage to, and destruction of assets; errors and omissions; injuries to employees; and natural disasters. The School carries commercial insurance for these risks. There were no significant reductions in insurance coverage from the previous year or settlements in excess of insurance coverage for any of the past three fiscal years. Note 8 FUND BALANCE At June 30, 2016, a summary of fund balance classifications is as follows: Community Service General Fund Fund Total Nonspendable: Prepaid items $101,893 $ - $101,893 Restricted for: Community services - 8,711 8,711 Unassigned 911, ,944 Total $1,013,837 $8,711 $1,022,548 Note 9 SUBSEQUENT EVENTS In September of 2016, the School s Board approved moving forward with organizing a newly formed affiliated nonprofit building corporation. This affiliated nonprofit building corporation would be formed to purchase, expand, or renovate an existing facility to serve as a school or to construct a new school facility in the future. 40

139 REQUIRED SUPPLEMENTARY INFORMATION 41

140 SEVEN HILLS PREPARATORY ACADEMY CHARTER SCHOOL NO Statement 5 REQUIRED SUPPLEMENTARY INFORMATION Page 1 of 2 BUDGETARY COMPARISON SCHEDULE - GENERAL FUND For The Year Ended June 30, 2016 With Comparative Actual Amounts For the Year Ended June 30, Variance with 2015 Budgeted Amounts Actual Final Budget - Actual Original Final Amounts Over (Under) Amounts Revenues: Local sources $85,200 $125,200 $166,078 $40,878 $171,074 State sources 7,167,017 7,159,452 7,501, ,324 6,873,870 Federal sources 372, , ,492 (139,590) 165,439 Total revenues 7,625,017 7,637,734 7,881, ,612 7,210,383 Expenditures: School support services: Current: Salaries 695, , ,604 (1,207) 512,700 Employee benefits 193, , ,062 (135) 174,806 Purchased services 257, , ,870 30, ,736 Supplies and materials 66,275 66,227 63,417 (2,810) 73,783 Other expenditures 7,200 9,025 6,056 (2,969) 5,460 Capital expenditures 5,000 6,500 6,118 (382) 5,314 Total school support services 1,225,670 1,101,010 1,124,127 23,117 1,090,799 Regular instruction: Current: Salaries 2,056,204 2,261,494 2,251,467 (10,027) 1,918,576 Employee benefits 511, , ,058 11, ,371 Purchased services 151, , ,583 11, ,335 Supplies and materials 165, , ,349 7, ,343 Other expenditures 3, (462) 2,077 Capital expenditures 218, , ,511 (104,389) 36,740 Total regular instruction 3,106,096 3,442,515 3,358,181 (84,334) 2,721,442 Special education instruction: Current: Salaries 820, , , , ,135 Employee benefits 202, , ,877 21, ,328 Purchased services 255, , ,486 (7,767) 262,091 Supplies and materials 28,915 38,854 19,376 (19,478) 8,233 Other expenditures Capital expenditures 9,850 7,144 1,747 (5,397) 5,641 Total special education instruction 1,317,209 1,285,603 1,388, ,908 1,297,428 Instructional support services: Current: Salaries 43,951 36,895 36, ,165 Employee benefits 7,991 7,670 7,632 (38) 8,336 Purchased services 101,386 70,556 74,957 4,401 68,568 Supplies and materials 3, ,284 2,509 4,228 Total instructional support services 157, , ,828 6, ,297 42

141 SEVEN HILLS PREPARATORY ACADEMY CHARTER SCHOOL NO REQUIRED SUPPLEMENTARY INFORMATION Statement 5 BUDGETARY COMPARISON SCHEDULE - GENERAL FUND Page 2 of 2 For The Year Ended June 30, 2016 With Comparative Actual Amounts For the Year Ended June 30, Variance with 2015 Budgeted Amounts Actual Final Budget - Actual Original Final Amounts Over (Under) Amounts Pupil support services: Current: Salaries $67,396 $70,375 $70,379 $4 $47,750 Employee benefits 19,956 21,667 21,635 (32) 16,680 Purchased services 502, , ,287 72, ,664 Supplies and materials 3,550 2,350 2, ,561 Capital expenditures 9,500 2, (1,006) - Total pupil support services 603, , ,156 72, ,655 Site, building and equipment: Current: Purchased services 1,310,648 1,304,550 1,425, ,661 1,289,285 Supplies and materials 650 2,150 3,838 1, Capital expenditures 12,000 17,000 29,345 12,345 18,858 Total site, building and equipment 1,323,298 1,323,700 1,458, ,694 1,308,766 Fiscal and other fixed costs: Current: Purchased services 34,000 34,000 22,310 (11,690) 19,572 Total expenditures 7,766,603 8,007,574 8,251, ,933 7,075,959 Revenues over (under) expenditures (141,586) (369,840) (370,161) (321) 134,424 Other financing sources (uses): Transfers out - - (11,815) (11,815) (18,276) Net change in fund balance ($141,586) ($369,840) (381,976) ($12,136) $116,148 Fund balance - beginning 1,395,813 1,279,665 Fund balance - ending $1,013,837 $1,395,813 43

142 SEVEN HILLS PREPARATORY ACADEMY CHARTER SCHOOL NO Statement 6 REQUIRED SUPPLEMENTARY INFORMATION BUDGETARY COMPARISON SCHEDULE - FOOD SERVICE SPECIAL REVENUE FUND For The Year Ended June 30, 2016 With Comparative Actual Amounts For the Year Ended June 30, Variance with 2015 Budgeted Amounts Actual Final Budget - Actual Original Final Amounts Over (Under) Amounts Revenues: Local sources $69,565 $76,580 $84,611 $8,031 $71,446 State sources 7,000 8,000 7,221 (779) 6,559 Federal sources 40,000 45,000 54,898 9,898 51,234 Total revenues 116, , ,730 17, ,239 Expenditures: Pupil support services: Current: Salaries 13,000 13,000 11,594 (1,406) 11,622 Employee benefits 3,500 3,500 2,287 (1,213) 1,792 Purchased services 1,000 1, (18) 275 Supplies and materials 105, , ,682 8, ,899 Total pupil support services 122, , ,545 6, ,588 Revenues over (under) expenditures (6,135) (22,867) (11,815) 11,052 (9,349) Other financing sources (uses): Transfers in ,815 11,815 9,349 Total other financing sources (uses) ,815 11,815 9,349 Net change in fund balance ($6,135) ($22,867) - $22,867 - Fund balance - beginning - - Fund balance - ending $0 $0 44

143 SEVEN HILLS PREPARATORY ACADEMY CHARTER SCHOOL NO Statement 7 REQUIRED SUPPLEMENTARY INFORMATION BUDGETARY COMPARISON SCHEDULE - COMMUNITY SERVICE SPECIAL REVENUE FUND For The Year Ended June 30, 2016 With Comparative Actual Amounts For the Year Ended June 30, Variance with 2015 Budgeted Amounts Actual Final Budget - Actual Original Final Amounts Over (Under) Amounts Revenues: Local sources $35,700 $20,000 $19,760 ($240) $12,249 Expenditures: Community services: Current: Salaries 20,000 15,000 9,725 (5,275) 18,350 Employee benefits 4,000 2,000 1,471 (529) 2,775 Purchased services 8,700 1,000 - (1,000) - Supplies and materials 3,000 2, (1,873) 51 Total community services 35,700 20,000 11,323 (8,677) 21,176 Revenues over (under) expenditures 0 0 8,437 8,437 (8,927) Other financing sources (uses): Transfers in ,927 Net change in fund balance $0 $0 8,437 $8,437 0 Fund balance - beginning Fund balance - ending $8,711 $274 45

144 SEVEN HILLS PREPARATORY ACADEMY CHARTER SCHOOL NO REQUIRED SUPPLEMENTARY INFORMATION SCHEDULE OF PROPORTIONATE SHARE OF NET PENSION LIABILITY* For The Year Ended June 30, 2016 Proportionate Share Proportionate of the Net Pension Plan Fiduciary Proportion Share (Amount) Liability as a Net Position as (Percentage) of of the Net Covered- Percentage of its a Percentage Measurement Fiscal Year the Net Pension Pension Employee Covered-Employee of the Total Date Ending Liability Liability (a) Payroll (b) Payroll (a/b) Pension Liability Teacher's Retirement Association June 30, 2014 June 30, % $2,414,555 $2,491, % 81.5% June 30, 2015 June 30, % $3,167,227 $2,641, % 76.8% PERA - General Employees Retirement Fund June 30, 2014 June 30, % $493,237 $557, % 78.8% June 30, 2015 June 30, % $513,069 $602, % 78.2% * The schedule is provided prospectively beginning with the School's fiscal year ended June 30, 2015 and is intended to show a ten year trend. Additional years will be reported as they become available. 46

145 SEVEN HILLS PREPARATORY ACADEMY CHARTER SCHOOL NO REQUIRED SUPPLEMENTARY INFORMATION SCHEDULE OF PENSION CONTRIBUTIONS* For The Year Ended June 30, 2016 Statutorily Contributions in Contribution Covered- Contributions as a Required Relation to the Deficiency Employee Percentage of Fiscal Year Contribution Statutorily Required (Excess) Payroll Covered-Employee Ending (a) Contribution (b) (a-b) (c) Payroll (b/c) Teacher's Retirement Association June 30, 2015 $198,220 $198,220 $0 $2,641, % June 30, 2016 $222,096 $222,096 $0 $2,961, % PERA - General Employees Retirement Fund June 30, 2015 $44,535 $44,535 $0 $602, % June 30, 2016 $58,098 $58,098 $0 $774, % * The schedule is provided prospectively beginning with the School's fiscal year ended June 30, 2015 and is intended to show a ten year trend. Additional years will be reported as they become available. 47

146 SEVEN HILLS PREPARATORY ACADEMY CHARTER SCHOOL NO REQUIRED SUPPLEMENTARY INFORMATION NOTES TO RSI June 30, 2016 Note A BUDGETARY INFORMATION The General Fund, Food Service Special Revenue Fund and the Community Service Special Revenue Fund budgets are legally adopted on a basis consistent with accounting principles generally accepted in the United States of America. The legal level of budgetary control is at the fund level. Note B PENSION INFORMATION Changes of benefit terms (TRA) the Duluth Teacher s Retirement Fund Association was merged into TRA on June 30, Changes of assumptions (TRA) Post-retirement benefit adjustments used for the June 30, 2015 valuation are now assumed to be 2% annually with no increase to 2.5% projected. The previous valuation assumed a 2.5% increase commencing July 1, Also, the discount rate used to measure the total pension liability was 8.0%. This is a decrease from the discount rate at the prior measurement date of 8.25%. There were no changes of benefit terms or assumptions for PERA. Additional details can be obtained from the financial reports of TRA and PERA. 48

147 INDIVIDUAL FUND STATEMENTS 49

148 SEVEN HILLS PREPARATORY ACADEMY CHARTER SCHOOL NO Statement 8 BALANCE SHEET - GENERAL FUND June 30, 2016 With Comparative Totals For June 30, Assets Cash $118,350 $762,172 Accounts receivable 144,563 65,575 Due from Minnesota Department of Education 1,069, ,332 Due from Federal Government through Minnesota Department of Education 50, ,153 Due from other governments 14,741 - Prepaid items 101,893 81,473 Total assets $1,499,958 $1,930,705 Liabilities and Fund Balances Liabilities: Accounts payable $26,028 $113,806 Salaries, taxes and benefits payable 460, ,086 Total liabilities 486, ,892 Fund balance: Nonspendable for prepaid items 101,893 81,473 Unassigned 911,944 1,314,340 Total fund balance 1,013,837 1,395,813 Total liabilities and fund balance $1,499,958 $1,930,705 50

149 SEVEN HILLS PREPARATORY ACADEMY CHARTER SCHOOL NO Statement 9 BALANCE SHEET - FOOD SERVICE SPECIAL REVENUE FUND June 30, 2016 With Comparative Totals For June 30, Assets Accounts receivable $1,670 $ - Due from Minnesota Department of Education Due from Federal Government through Minnesota Department of Education 10,212 9,620 Prepaid items - 70 Total assets $12,107 $9,933 Liabilities and Fund Balance Liabilities: Cash overdraft 11,496 $9,899 Salaries, taxes and benefits payable Total liabilities 12,107 9,933 Fund balance: Restricted for food service - - Total liabilities and fund balance $12,107 $9,933 51

150 SEVEN HILLS PREPARATORY ACADEMY CHARTER SCHOOL NO Statement 10 BALANCE SHEET - COMMUNITY SERVICE SPECIAL REVENUE FUND June 30, 2016 With Comparative Totals For June 30, Assets Cash $8,711 $2,470 Total assets $8,711 $2,470 Liabilities and Fund Balance Liabilities: Salaries, taxes and benefits payable $ - $2,196 Fund balance: Restricted for community service 8, Total liabilities and fund balance $8,711 $2,470 52

151 SUPPLEMENTAL INFORMATION 53

152 SEVEN HILLS PREPARATORY ACADEMY CHARTER SCHOOL NO Schedule 1 UNIFORM FINANCIAL ACCOUNTING AND REPORTING STANDARDS - COMPLIANCE TABLE June 30, 2016 Audit UFARS Variance Audit UFARS Variance 01 GENERAL FUND 06 BUILDING CONSTRUCTION Total Revenue $7,881,346 $7,881,345 $1 Total Revenue $ - $ - $ - Total Expenditures 8,251,507 8,251,508 (1) Total Expenditures Non-Spendable: Non-Spendable: 4.60 Non Spendable Fund Balance 101, , Non Spendable Fund Balance Restricted/Reserve: Restricted/Reserve: 4.03 Staff Development Capital Projects Levy Deferred Maintenance Alternative Fac. Program Health and Safety Projects Funded By COP Capital Projects Levy Restricted: 4.08 Cooperative Revenue Restricted Fund Balance Severance Pay Unassigned: 4.13 Project Funded By COP Unassigned Fund Balance Operating Debt Levy Reduction DEBT SERVICE 4.17 Taconite Building Maint Total Revenue $ - $ - $ Certain Teacher Programs Total Expenditures Operating Capital Non-Spendable: 4.26 $25 Taconite Non Spendable Fund Balance Disabled Accessibility Restricted/Reserve: 4.28 Learning and Development Bond Refundings Area Learning Center QZAB Payments Contracted Alt. Programs Restricted: 4.36 St. Approved Alt. Program Restricted Fund Balance Gifted & Talented Unassigned: 4.41 Basic Skills Programs Unassigned Fund Balance Career & Tech Programs First Grade Preparedness TRUST 4.49 Safe Schools Levy Total Revenue $ - $ - $ Pre-Kindgergarten Total Expenditures QZAB Payments Unrestricted: 4.52 OPEB Liab Not In Trust Net Assets Unfunded Sev & Retiremt Levy Restricted: 20 INTERNAL SERVICE 4.64 Restricted Fund Balance Total Revenue $ - $ - $ - Committed: Total Expenditures Committed For Separation Unrestricted: 4.61 Committed Fund Balance Net Assets Assigned: 4.62 Assigned Fund Balance OPEB REVOCABLE TRUST Unassigned: Total Revenue $ - $ - $ Unassigned Fund Balance 911, ,943 1 Total Expenditures Unrestricted: 02 FOOD SERVICE 4.22 Net Assets Total Revenue $146,730 $146,730 $ - Total Expenditures 158, , OPEB IRREVOCABLE TRUST Non-Spendable: Total Revenue $ - $ - $ Non Spendable Fund Balance Total Expenditures Restricted/Reserve: Unrestricted: 4.52 OPEB Liab Not In Trust Net Assets Restricted: 4.64 Restricted Fund Balance OPEB DEBT SERVICE FUND Unassigned: Total Revenue $ - $ - $ Unassigned Fund Balance Total Expenditures Non-Spendable: 04 COMMUNITY SERVICE 4.60 Non Spendable Fund Balance Total Revenue $19,760 $19,760 $ - Restricted/Reserve: Total Expenditures 11,323 11, Bond Refundings Restricted/Reserve: Restricted: 4.26 $25 Taconite Restricted Fund Balance Community Education Unassigned: 4.32 E.C.F.E Unassigned Fund Balance School Readiness Adult Basic Education OPEB Liab Not In Trust Restricted: 4.64 Restricted Fund Balance 8,711 8,711 - Unassigned: 4.63 Unassigned Fund Balance

153 OTHER REQUIRED REPORTS 55

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155 INDEPENDENT AUDITOR S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MATTERS BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS To the Board of Directors Seven Hills Preparatory Academy Charter School No Bloomington, Minnesota We have audited, in accordance with the auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards issued by the Comptroller General of the United States, the financial statements of the governmental activities and each major fund of Seven Hills Preparatory Academy, as of and for the year ended June 30, 2016, and the related notes to the financial statements, which collectively comprise Seven Hills Preparatory Academy s basic financial statements, and have issued our report thereon dated October 7, Internal Control Over Financial Reporting In planning and performing our audit of the financial statements, we considered Seven Hills Preparatory Academy s internal control over financial reporting (internal control) to determine the audit procedures that are appropriate in the circumstances for the purpose of expressing our opinions on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of Seven Hills Preparatory Academy s internal control. Accordingly, we do not express an opinion on the effectiveness of Seven Hills Preparatory Academy s internal control. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, misstatements on a timely basis. A material weakness is a deficiency, or a combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the entity s financial statements will not be prevented, or detected and corrected on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance White Bear Parkway, St. Paul, MN,

156 Seven Hills Preparatory Academy Independent Auditor s Report on Internal Control over Financial Reporting And on Compliance and Other Matters Page 2 Our consideration of internal control was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control that might be material weaknesses or, significant deficiencies. Given these limitations, during our audit we did not identify any deficiencies in internal control that we consider to be material weaknesses. However, material weaknesses may exist that have not been identified. Compliance and Other Matters As part of obtaining reasonable assurance about whether Seven Hills Preparatory Academy s financial statements are free from material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit and, accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards. Purpose of this Report The purpose of this report is solely to describe the scope of our testing of internal control and compliance and the results of that testing, and not to provide an opinion on the effectiveness of the entity s internal control or on compliance. This report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the entity s internal control and compliance. Accordingly, this communication is not suitable for any other purpose. HLB TAUTGES REDPATH, LTD. St. Paul, Minnesota October 7,

157 MINNESOTA LEGAL COMPLIANCE REPORT To the Board of Directors Seven Hills Preparatory Academy Charter School No Bloomington, Minnesota We have audited, in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States, the financial statements of the governmental activities and each major fund of Seven Hills Preparatory Academy as of and for the year ended June 30, 2016, and the related notes to the financial statements, and have issued our report thereon dated October 7, The Minnesota Legal Compliance Audit Guide for Charter Schools, promulgated by the State Auditor pursuant to Minn. Stat. 6.65, contains two categories of compliance to be tested in audits of charter schools: uniform financial accounting and reporting standards, and charter schools. In connection with our audit, nothing came to our attention that caused us to believe that Seven Hills Preparatory Academy failed to comply with the provisions of the Minnesota Legal Compliance Audit Guide for Charter Schools. However, our audit was not directed primarily toward obtaining knowledge of such noncompliance. Accordingly, had we performed additional procedures, other matters may have come to our attention regarding Seven Hills Preparatory Academy s noncompliance with the above referenced provisions. The purpose of this report is solely to describe the scope of our testing of compliance and the results of that testing, and not to provide an opinion on compliance. Accordingly, this communication is not suitable for any other purpose. REDPATH AND COMPANY, LTD. St. Paul, Minnesota October 7, White Bear Parkway, St. Paul, MN,

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159 SEVEN HILLS PREPARATORY ACADEMY BLOOMINGTON, MINNESOTA Financial Statements and Supplemental Information Year Ended June 30, 2015

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161 SEVEN HILLS PREPARATORY ACADEMY Table of Contents Page INTRODUCTORY SECTION BOARD AND ADMINISTRATION 1 FINANCIAL SECTION INDEPENDENT AUDITOR S REPORT 2 4 MANAGEMENT S DISCUSSION AND ANALYSIS 5 13 BASIC FINANCIAL STATEMENTS Entity-Wide Financial Statements Statement of Net Position 14 Statement of Activities 15 Fund Financial Statements Governmental Funds Balance Sheet 16 Reconciliation of the Balance Sheet to the Statement of Net Position 17 Statement of Revenue, Expenditures, and Changes in Fund Balances Governmental Funds 18 Reconciliation of the Statement of Revenue, Expenditures, and Changes in Fund Balances to the Statement of Activities 19 Statement of Revenue, Expenditures, and Changes in Fund Balances Budget and Actual General Fund 20 Notes to Basic Financial Statements REQUIRED SUPPLEMENTARY INFORMATION Defined Benefit Pension Plans GERF/TRA Retirement Funds Schedule of Academy s and Non-Employer Proportionate Share of Net Pension Liability 38 Schedule of Academy Contributions 39 SUPPLEMENTAL INFORMATION Combining and Individual Fund Statements and Schedules Nonmajor Governmental Funds Combining Balance Sheet 40 Combining Statement of Revenue, Expenditures, and Changes in Fund Balances 41 General Fund Comparative Balance Sheet 42 Schedule of Revenue, Expenditures, and Changes in Fund Balances Budget and Actual 43 45

162 SEVEN HILLS PREPARATORY ACADEMY Table of Contents (continued) SUPPLEMENTAL INFORMATION (CONTINUED) Combining and Individual Fund Statements and Schedules (continued) Food Service Special Revenue Fund Comparative Balance Sheet 46 Schedule of Revenue, Expenditures, and Changes in Fund Balances Budget and Actual 47 Community Service Special Revenue Fund Comparative Balance Sheet 48 Schedule of Revenue, Expenditures, and Changes in Fund Balances Budget and Actual 49 OTHER REQUIRED REPORTS Page Independent Auditor s Report on Internal Control Over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance With Government Auditing Standards Independent Auditor s Report on Minnesota Legal Compliance 52 Uniform Financial Accounting and Reporting Standards Compliance Table 53 54

163 INTRODUCTORY SECTION

164 SEVEN HILLS PREPARATORY ACADEMY Board and Administration as of June 30, 2015 BOARD Board Position Bryan Quevli Leah Lellman Mark Quistad Kim Hubertus Kelly Bartsh Lisa Carlin Janeen Raaen John Thomson Nicholas Wetschka Celeste Wiederholt Chairperson Vice Chairperson Secretary Treasurer/CFO Director Director Director Director Director Director ADMINISTRATION Alice Woog Carl Schlueter Executive Director, Lower School Executive Director, Upper School -1-

165 FINANCIAL SECTION

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167 INDEPENDENT AUDITOR S REPORT To the Board and Management of Seven Hills Preparatory Academy Bloomington, Minnesota REPORT ON THE FINANCIAL STATEMENTS We have audited the accompanying financial statements of the governmental activities, the major fund, and the aggregate remaining fund information of Seven Hills Preparatory Academy (the Academy) as of and for the year ended June 30, 2015, and the related notes to the financial statements, which collectively comprise the Academy s basic financial statements as listed in the table of contents. MANAGEMENT S RESPONSIBILITY FOR THE FINANCIAL STATEMENTS Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. AUDITOR S RESPONSIBILITY Our responsibility is to express opinions on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the Academy s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Academy s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinions. -2- (continued)

168 OPINIONS In our opinion, the financial statements referred to on the previous page present fairly, in all material respects, the respective financial position of the governmental activities, the major fund, and the aggregate remaining fund information of the Academy as of June 30, 2015, and the respective changes in financial position and the budgetary comparison for the General Fund for the year then ended, in accordance with accounting principles generally accepted in the United States of America. EMPHASIS OF MATTER As described in Note 1 of the notes to basic financial statements, the Academy has implemented Governmental Accounting Standards Board (GASB) Statement No. 68, Accounting and Financial Reporting for Pensions an amendment of GASB Statement No. 27, during the year ended June 30, Our opinion is not modified with respect to this matter. OTHER MATTERS Required Supplementary Information Accounting principles generally accepted in the United States of America require that the Management s Discussion and Analysis and the required supplementary information, as listed in the table of contents, be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the GASB, who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management s responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. Other Information Our audit was conducted for the purpose of forming opinions on the financial statements that collectively comprise the Academy s basic financial statements. The introductory section and supplemental information, as listed in the table of contents, are presented for purposes of additional analysis and are not required parts of the basic financial statements. The accompanying Uniform Financial Accounting and Reporting Standards (UFARS) Compliance Table is presented for purposes of additional analysis as required by the Minnesota Department of Education, and is also not a required part of the basic financial statements of the Academy. The supplemental information and UFARS Compliance Table are the responsibility of management and were derived from and relate directly to the underlying accounting and other records used to prepare the basic financial statements. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the basic financial statements or to the basic financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the information is fairly stated, in all material respects, in relation to the basic financial statements as a whole. The introductory section has not been subjected to the auditing procedures applied in the audit of the basic financial statements and, accordingly, we do not express an opinion or provide any assurance on it. -3- (continued)

169 PRIOR YEAR COMPARATIVE INFORMATION Effective July 1, 2014, Seven Hills Classical Academy and Beacon Preparatory School merged. The name of the new entity is Seven Hills Preparatory Academy. The merged entity started reporting combined financial information on July 1, The financial data in these statements reflects the financial results of the combined entity for the year ended June 30, Partial comparative financial information as of June 30, 2014 has been modified to reflect financial data for both entities combined. We have previously audited the 2014 financial statements of Seven Hills Classical Academy, and we expressed unmodified audit opinions on the respective financial statements of the governmental activities, each major fund, and the aggregate remaining fund information in our report dated December 8, In our opinion, the partial comparative combined information presented herein as of and for the year ended June 30, 2014 is consistent, in all material respects, with the audited financial statements from which it has been derived. Other auditors previously audited the 2014 financial statements of Beacon Preparatory School, and they expressed unmodified audit opinions on the respective financial statements of the governmental activities, each major fund, and the aggregate remaining fund information in their report dated November 24, In our opinion, the partial comparative combined information presented herein as of and for the year ended June 30, 2014 is consistent, in all material respects, with these audited financial statements from which it has been derived. OTHER REPORTING REQUIRED BY GOVERNMENT AUDITING STANDARDS In accordance with Government Auditing Standards, we have also issued our report dated December 1, 2015 on our consideration of the Academy s internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, grant agreements, and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the Academy s internal control over financial reporting and compliance. Minneapolis, Minnesota December 1,

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171 SEVEN HILLS PREPARATORY ACADEMY Management s Discussion and Analysis Fiscal Year Ended June 30, 2015 This section of Seven Hills Preparatory Academy s (the Academy) annual financial statements presents the management s discussion and analysis of the Academy s financial performance during the year ended June 30, Please read it in conjunction with the other components of the Academy s annual financial statements. FINANCIAL HIGHLIGHTS Key financial highlights for the fiscal year include the following: Based on the fund financial statements, total revenues of $7,351,871 were received and total expenditures of $7,235,723 were incurred, which resulted in a $116,148 increase in fund balance. The Academy budgeted for 700 students in the fiscal year, where actual enrollment was 703 students in Grades K 8. Total General Fund balance grew to $1,395,813, or 19.7 percent, of total expenditures. On July 1, 2014, Seven Hills Classical Academy merged with Beacon Preparatory School. This merged entity was named Seven Hills Preparatory Academy. The Academy recorded a change in accounting principle in the current year for reporting the Academy s participation in the Public Employees Retirement Association (PERA) and Teachers Retirement Association (TRA) pension plans. This change reduced beginning net position in the entity-wide financial statements by $2,985,925. OVERVIEW OF THE FINANCIAL STATEMENTS The financial section of the annual financial statements consists of the following parts: Independent Auditor s Report; Management s Discussion and Analysis; Basic financial statements, including the entity-wide financial statements, fund financial statements, and the notes to basic financial statements; Required supplementary information related to defined benefit pension plan liabilities and contributions; and Supplemental information, which includes the combining and individual fund statements and schedules. -5-

172 The following explains the two types of statements included in the basic financial statements: ENTITY-WIDE FINANCIAL STATEMENTS The entity-wide financial statements (Statement of Net Position and Statement of Activities) report information about the Academy as a whole using accounting methods similar to those used by private sector companies. The Statement of Net Position includes all of the Academy s assets, deferred outflows of resources, liabilities, and deferred inflows of resources. All of the current year s revenues and expenses are accounted for in the Statement of Activities regardless of when cash is received or paid. The two entity-wide financial statements report the Academy s net position and how they have changed. Net position the difference between the Academy s assets, liabilities, and deferred inflows/outflows is one way to measure the Academy s financial health or position. Over time, increases or decreases in the Academy s net position are indicators of whether its financial position is improving or deteriorating, respectively. To assess the overall health of the Academy requires consideration of additional nonfinancial factors, such as changes in the Academy s student population and the condition of academy buildings and other facilities. In the entity-wide financial statements, the Academy s activities are shown in one category titled governmental activities. These activities, including regular and special education, transportation, administration, food service, and community service, are primarily financed with state aids. FUND FINANCIAL STATEMENTS The fund financial statements provide more detailed information about the Academy s funds, focusing on its most significant or major funds, rather than the Academy as a whole. Funds (such as the Food Service Special Revenue Fund and Community Service Special Revenue Fund) that do not meet the threshold to be classified as major funds are called nonmajor funds. Detailed financial information for nonmajor funds can be found in the combining and individual fund statements and schedules. Funds are accounting devices the Academy uses to keep track of specific sources of funding and spending on particular programs. Some funds are required by state law or by debt covenants. The Academy may establish other funds to control and manage money for particular purposes. The Academy s basic services are reported in governmental funds, which generally focus on: 1) how cash and other financial assets that can readily be converted to cash flow in and out, and 2) the balances left at year-end that are available for spending. Consequently, the governmental fund statements provides a detailed short-term view that helps determine whether there are more or less financial resources that can be spent in the near future to finance the Academy s programs. Because this information does not encompass the additional long-term focus of the entity-wide financial statements, we provide additional information (reconciliation schedules) immediately following the governmental fund statements that explain the relationship (or differences) between these two types of financial statement presentations. -6-

173 FINANCIAL ANALYSIS OF THE ACADEMY AS A WHOLE Table 1 is a summarized view of the Academy s Statement of Net Position: Table 1 Summary Statement of Net Position as of June 30, 2015 and Assets Current and other assets $ 1,933,209 $ 1,685,651 Capital assets, net of depreciation 182, ,043 Total assets 2,116,057 1,832,694 Deferred outflows of resources Defined benefit pension plans 825,155 Total assets and deferred outflows of resources $ 2,941,212 $ 1,832,694 Liabilities Current and other liabilities $ 537,122 $ 405,712 Net pension liability 2,907,792 Total liabilities 3,444, ,712 Deferred inflows of resources Defined benefit pension plans 892,383 Net position Investment in capital assets 182, ,043 Restricted Unrestricted (1,579,207) 1,279,665 Total net position (1,396,085) 1,426,982 Total liabilities, deferred inflows of resources, and net position $ 2,941,212 $ 1,832,694 The Academy s financial position is the product of many factors. For example, determination of the Academy s net investment in capital assets involves many assumptions and estimates, such as current and accumulated depreciation amounts. A conservative versus liberal approach to depreciation estimates, as well as capitalization policies, will produce significant differences in the calculated amounts. Total net position decreased by $2,823,067, which reflects an increase of $162,858 from current year operating results, while the change in accounting principle mentioned earlier reduced unrestricted net position by $2,985,925. The Academy adopted new accounting guidance, Governmental Accounting Standards Board (GASB) Statement No. 68, Accounting and Financial Reporting for Pensions an amendment of GASB Statement No. 27 for the year ended June 30, The standard is required to be adopted by all entities following the GASB who provide defined pension plans administered through trusts, such as the TRA and the PERA. Essentially, the standard requires the unfunded portion of cost-sharing multiple-employer pension plans to be allocated pro-rata to participating employers, including the Academy. The net pension liability is noncurrent and does not affect the fund financial statements. Recording the liability does not change the Academy s future funding requirements or obligations under the plans, which are determined by Minnesota Statutes. Net position was negatively impacted by $2,975,020 at June 30, 2015 due to the implementation of this standard. -7-

174 Table 2 is a summarized view of the Academy s Statement of Activities: Table 2 Summary Statement of Activities for the Years Ended June 30, 2015 and Revenues Program revenues Charges for services $ 177,492 $ 452,883 Operating grants and contributions 2,391,135 2,195,022 General revenues General grants and aids 4,705,967 4,244,149 Other 77,277 59,403 Total revenues 7,351,871 6,951,457 Expenses Administration 409, ,531 District support services 670, ,665 Elementary and secondary regular instruction 2,695,799 2,361,573 Special education instruction 1,301,358 1,351,922 Instructional support services 113,376 85,022 Pupil support services 524, ,663 Sites and buildings 1,292,799 1,114,107 Fiscal and other fixed cost programs 18,321 27,563 Food service 138, ,814 Community service 25, ,524 Total expenses 7,189,013 6,693,384 Change in net position 162, ,073 Net position beginning, as previously reported 1,426,982 1,168,909 Change in accounting principle (2,985,925) Net position beginning, as restated (1,558,943) 1,168,909 Net position ending $ (1,396,085) $ 1,426,982 This statement is presented on an accrual basis of accounting and includes all of the governmental activities of the Academy. This statement includes depreciation expense, but excludes capital asset purchase costs, debt proceeds, and the repayment of debt principal. Operating grants and contributions, including special education grants, were more than the prior year due to an increase in charter school lease aid. General grants and aids were more than the prior year mainly due to the increase in the average daily membership (ADM) over the prior year and the increase in the general education funding formula in fiscal

175 Figure A shows further analysis of these revenue sources: Figure A Sources of Revenue for Fiscal Years 2015 and 2014 The largest share of the Academy s revenue is received from the state, including most of the general and operating grants. This significant reliance on the state for funding has placed tremendous pressures on local schools as a result of unpredictable and inconsistent funding from the state. -9-

176 Figure B shows further analysis of these expense functions: Figure B Expenses for Fiscal Years 2015 and 2014 The Academy s expenses are predominately related to educating students. Programs (or functions) such as elementary and secondary regular instruction, special education instruction, or instructional support services are directly related to classroom instruction, while the rest of the programs support instruction and other necessary costs to operate the Academy. -10-