PARAGON MANAGEMENT, INC. d.b.a. Paradise Schools ANNUAL REPORT FY

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1 PARAGON MANAGEMENT, INC. d.b.a. Paradise Schools ANNUAL REPORT FY $45,530,000 The Industrial Development Authority of the County of Maricopa Education Revenue Bonds (Paradise Schools Projects), Series 2016 CUSIP* Nos N AUl I 56681N AV9 I 56681N AY3 I 56681N AW7 I 56681N AX5 Please see the attached Annual Report, as required in the Continuing Disclosure Undertaking of the Series 2016 Bonds. Table of Contents - Student Emollment and Waiting List... Page 1 - Student Retention... Page 1 - Audited financial statements for year ended June 30, Appendix - Auditor calculation and compliance with the Debt Service Coverage Ratio and Days Cash on Hand requirements... Appendix Page 13 Note: The annual investor call will be held on Tuesday, February 13, 2018 at 1 p.m MST. The duration of the call is expected to be approximately 60 minutes. The conference will be recorded and access directions posted to EMMA following the live call. TO JOIN THE AUDIO CONFERENCE: Call-In Number: Once connected, follow the instructions provided by the voice prompts. When prompted, key in the following Participant PIN. Participant PIN: # The instruction will request you state your name and press the #key. You may be joined directly to the conference, or you may hear music until the conference begins. * CUSIP is a registered trademark of the American Bankers Association. Copyright Standard & Poor' s, a Division of The McGraw Hill Companies, Inc. All rights reserved. CUSIP data herein is provided by Standard & Poor's CUSIP Service Bureau. This data is not intended to create a database and does not serve in any way as a substitute for the CUSIP Service Bureau. CUSIP numbers are provided for convenience of reference only. None of the Issuer, the Underwriter or their agents or counsel assume responsibility for the accuracy of such numbers.

2 Paragon Management, Inc. dba Paradise Schools Annual Report Student Enrollment and Waiting List January 2018 Grade Enrollment Waiting List KG st nd rd th th th th th th th th th Total 2, Student Retention No. of Students (Gr K-7) - May ,338 Students Retained (Gr 1-8) - October ,235 Percentage Retained 92.3/o No. of Students (Gr 9-11) - May Students Retained (Gr 10-12) - October Percentage Retained 92.0/o Page 1

3 Appendix Paragon Management, Inc. D.B.A. Paradise Schools Financial Statements Year Ended June 30, 2017

4 Paragon Management, Inc. D.B.A. Paradise Schools Financial Statements Year Ended June 30, 2017 Issued by: Finance Office

5 PARAGON MANAGEMENT, INC., D.B.A. PARADISE SCHOOLS TABLE OF CONTENTS INDEPENDENT AUDITOR'S REPORT... 1 FINANCIAL STATEMENTS Statement of Financial Position... 3 Statement of Activities... 4 Statement of Cash Flows... 5 Notes to Financial Statements... 6 REPORT ON INTERNAL CONTROL AND ON COMPLIANCE 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... 19

6 REPORT ON AUDIT OF FINANCIAL STATEMENTS

7 HeinfeldMeech Tucson Phoenix Flagstaff HeinfeldMeech.com INDEPENDENT AUDITOR'S REPORT The Board of Directors Paragon Management, Inc., d.b.a Paradise Schools Report on Financial Statements We have audited the accompanying financial statements of Paragon Management, Inc., d.b.a Paradise Schools (School) which comprise the statement of financial position of as of June 30, 2017, and the related statements of activities and cash flows for the year then ended, and the related notes to the financial statements. Management's Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor's Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Page 1

8 Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Paragon Management, Inc., d.b.a Paradise Schools as of June 30, 2017, and the changes in its net assets and its cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America. Change in Accounting Principle As described in Note 1, the School implemented the provisions of the Financial Accounting Standards Board (FASB) Accounting Standards Update , Interest-Imputation of Interest (Subtopic ), for the year ended June 30, 2017, which represents a change in accounting principle. Our opinion is not modified with respect to this matter. Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated November 7, 2017, on our consideration of Paragon Management, Inc., d.b.a Paradise Schools' internal control over financial reporting and on our tests of its compliance with certain provisions oflaws, regulations, contracts, and grant agreements and other matters. The purpose of that report is solely to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on the effectiveness of the Paragon Management, Inc., d.b.a. Paradise Schools' 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 Paragon Management, Inc., d.b.a Paradise Schools' internal control over financial reporting and compliance. Reinfeld, Meech & Co., P.C. Phoenix, Arizona November 7, 2017 Page2

9 PARAGON MANAGEMENT, INC. D.B.A. PARADISE SCHOOLS STATEMENT OF FINANCIAL POSITION ASSETS Current Assets Cash and cash equivalents Restricted cash and cash equivalents Accounts receivable Due from governmental entities Deposits Prepaid expenses Restricted cash held with trustee Total Current Assets $ 2,616, ,430 3, ,883 76,481 6,392 14,193,181 17,372,942 Noncurrent Assets Restricted assets Property and equipment (net of accumulated depreciation of$7,866,550) Total Non current Assets Total Assets 2,948,071 30,648,870 33,596,941 $ 50,969,883 LIABILITIES AND NET ASSETS Current Liabilities Accounts payable Construction contracts payable Accrned payroll and benefits Due to student groups Deferred revenue Refundable deposits Interest payable Loans payable Total Current Liabilities $ 159,543 1,741, ,422 68,238 44,090 3,453 1,073,875 57,040 3,561,465 Noncurrent Liabilities Loans payable Notes payable (less unamortized debt issuance costs of $933, 772) Total Noncurrent Liabilities 196,441 46,935,522 47,131,963 Net Assets Unrestricted Total Net Assets Total Liabilities and Net Assets 276, ,455 $ 50,969,883 Page 3 The accompanying notes are an integral part of these financial statements.

10 PARAGON MANAGEMENT, INC. D.B.A. PARADISE SCHOOLS STATEMENT OF ACTIVITIES FOR THE YEAR ENDED Revenues State aid Federal revenue Food service sales Contributions and donations Other revenue Interest revenue $ 13,861, , , , ,993 18,346 Total revenues 15,905,803 Expenses Program services Instruction Instructional support Food services Management and general 10,300,146 1,115, ,221 3,278,197 Total expenses 14,955,432 Increase before loss on refunding of note payable 950,371 Loss on refunding of note payable 2,958,274 Decrease in Net Assets (2,007,903) Net Assets, July 1, ,284,358 Net Assets, June 30, 2017 $ 276,455 Page4 The accompanying notes are an integral part of these financial statements.

11 PARAGON MANAGEMENT, INC. D.B.A. PARADISE SCHOOLS STATEMENT OF CASH FLOWS FOR THE YEAR ENDED Increase in Cash and Cash Equivalents Cash Flows From Operating Activities: Decrease in net assets $ (2,007,903) Adjustments to reconcile change in net assets to net cash provided by operating activities: Depreciation Amortization Decrease in accounts receivable Decrease in due from governmental entities Increase in deposits Increase in prepaid expenses Decrease in accounts payable Increase in construction contracts payable Decrease in accmed payroll and benefits Increase in due to student groups Decrease in deferred revenue Increase in refundable deposits Increase in interest payable 877,466 (13,082) ,417 (76,481) (6,392) (40,180) 1,741,804 (120,845) 11,897 (8,870) ,247 Net cash provided by operating activities 1,468,796 Cash flows from investing activities: Increase in restricted cash Purchase of property and equipment (14,910,909) (6,457,795) Net cash used for investing activities (21,368,704) Cash flows from financing activities: Proceeds from note issuance Decrease in unamortized debt issuance costs Payment on loans payable Payment on notes payable 47,921, ,487 (1,947,336) (25,660,000) Net cash provided by financing activities 20,635,429 Net increase in cash and cash equivalents 735,521 Cash and cash equivalents, July 1, ,227,888 Cash and cash equivalents, June 30, 2017 $ 2,963,409 Reconciliation of Cash and Cash Equivalents to the Statement of Financial Position Cash Restricted cash Total cash and cash equivalents $ $ 2,616, ,430 2,963,409 Supplemental data: Interest paid on loans Interest paid on notes, net of interest capitalized as a part ofbuilding construction Interest capitalized as a part of building construction $ 56, , ,024 Page 5 The accompanying notes are an integral part of these financial statements.

12 PARAGON MANAGEMENT, INC., D.B.A. PARADISE SCHOOLS NOTES TO FINANCIAL STATEMENTS NOTE 1- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Paragon Management, Inc., d.b.a. Paradise Schools (the School) is an Arizona not-for-profit organization formed in fiscal year The School provides education for students in grades kindergarten through twelve. The Arizona Charter Schools are intended to provide additional academic choices for parents and students that will improve pupil achievement. Charter school statutes support flexibility and innovation in key areas of operations and organizational structures, including scheduling, curriculum, and instructional methodologies. The School operates under a charter contract with the Arizona State Board for Charter Schools. The Charter expires in June 2032 and is subject to renewal. The School derives program funding from state educational aid and government grants. During the year ended June 30, 2017, the School implemented F ASB Accounting Standards Update No , Interest-Imputation of Interest (Subtopic ). This standard simplifies the presentation of unamortized debt issuance costs related to the notes payable liability and requires those costs to be reported in the Statement of Financial Position as a direct deduction from the carrying amount of the notes payable liability. The more significant accounting policies are described below. A. Basis of Accounting The financial statements of the School have been prepared on the accrual basis of accounting and accordingly reflect all significant receivables, payables, and other liabilities. B. Basis of Presentation The financial statements of the School have been prepared in conformity with accounting principles generally accepted in the United States of America as applied to not-for-profit entities. The Financial Accounting Standards Board (F ASB) is the accepted standard-setting body for establishing not-for-profit accounting and financial reporting principles. The School is required to report information regarding its financial position and activities according to three classes based on the existence or absence of donor-imposed restrictions. Accordingly, net assets of the School and changes therein are classified as follows: Unrestricted net assets-net assets that are not subject to donor-imposed stipulations. Temporarily restricted net assets - Net assets subject to donor-imposed stipulations that may or will be met either by actions of the School and/or the passage of time. Permanently restricted net assets - Net assets subject to donor-imposed stipulations that they be maintained permanently by the School. Generally, the donors of these assets permit the School to use all or part of the income earned on related investments for general purposes. The School had no temporarily restricted or permanently restricted net assets during the fiscal year. Page 6

13 PARAGON MANAGEMENT, INC., D.B.A. PARADISE SCHOOLS NOTES TO FINANCIAL STATEMENTS NOTE 1-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES C. Restricted and Unrestricted Revenue Contributions that are restricted by the donor are reported as increases in unrestricted net assets if the restrictions expire (that is, when a stipulated time restriction ends or purpose restriction is accomplished) in the reporting period in which the revenue is recognized. All other donorrestricted contributions are reported as increases in temporarily or permanently restricted net assets, depending on the nature of the restrictions. When a restriction expires, temporarily restricted net assets are reclassified to unrestricted net assets and reported in the Statement of Activities as net assets released from restrictions. D. Expense Allocation The costs of providing various programs and other activities have been summarized on a functional basis in the Statement of Activities. Accordingly, certain costs have been allocated among the programs and supporting services benefited. E. Estimates In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Actual results could differ from those estimates. F. Donated Services Donated services are recognized as contributions if the services (a) create or enhance nonfinancial assets or (b) require specialized skills, are performed by people with those skills, and would otherwise be purchased by the School. No amounts have been recognized as contributions in the financial statements for volunteer services since the recognition criteria were not met. G. Cash and Cash Equivalents For purposes of the Statement of Cash Flows, the School considers all unrestricted highly liquid investments with an initial maturity of three months or less as well as cash restricted for the Classroom Site Fund to be cash equivalents. Page 7

14 PARAGON MANAGEMENT, INC., D.B.A. PARADISE SCHOOLS NOTES TO FINANCIAL STATEMENTS NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES H. Concentrations of Credit and Market Risk Financial instruments that potentially expose the School to concentrations of credit and market risk consist primarily of cash equivalents and investments. The School maintains its cash and cash equivalents in bank deposit accounts, which, for short periods of time, may exceed federally insured limits. At year end, the School's uninsured cash balances total $2,775,904. To minimize risk, cash accounts are maintained at high-quality financial institutions and credit exposure is limited to any one institution. I. Accounts Receivable and Due from Governmental Entities Amounts due from governmental entities and accounts receivable are considered by management to be collectible in full and, accordingly, an allowance for doubtful accounts is not considered necessary. J. Property and Equipment All acquisitions of land, buildings and improvements with a cost in excess of $3,000 or vehicles, furniture and equipment with a cost in excess of $300 and all expenses for repairs, maintenance, renewals, and betterments that materially prolong the useful lives of assets are capitalized. Property and equipment are carried at cost or, if donated, at the approximate fair market value at the date of donation. Such donations are reported as unrestricted support unless the donor has restricted the donated asset to a specific purpose. Assets donated with explicit restrictions regarding their use and contributions of cash that must be used to acquire property and equipment are reported as restricted support. Absent donor stipulations regarding how long those donated assets must be maintained, the School reports expirations of donor restrictions when the donated or acquired assets are placed in service as instructed by the donor. The School reclassifies temporarily restricted net assets to unrestricted net assets at that time. Depreciation is computed using the straight-line method over the estimated useful lives of the respective assets, ranging from 5 to 50 years. Depreciation expense for the current fiscal year was $877,466. K. Impairment of Long-Lived Assets The School reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. Management does not believe impairment indicators are present. Page 8

15 PARAGON MANAGEMENT, INC., D.B.A. PARADISE SCHOOLS NOTES TO FINANCIAL STATEMENTS NOTE 1- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES L. Deferred Revenue Deferred revenue results from the School recognizing revenue in the period in which the related educational instruction is performed. Accordingly, revenue received for the next school term are deferred until the instruction commences. M. Compensated Absences The School's employee vacation and sick leave policies generally provide for granting vacation and sick leave with pay. All academic term employees are eligible to earn 10 days of PTO during the academic year. All full year employees are eligible to earn 10 days of PTO and vacation leave at various rates depending on length of service. In the event of termination, an employee is reimbursed for accrued sick leave and vacation leave at varying rates depending on position, the number of sick and vacation days accumulated, and length of service. N. Income Tax Status The School is exempt from federal income tax under Section 50l(c)(3) of the Internal Revenue Code and from state income taxes under Arizona Revised Statutes (A.RS.). In addition, the School qualifies for the charitable contribution deduction under Section 170(b )(1 )(A) and has been classified as an organization other than a private foundation under Section 509(a)(l). Accordingly, no provision for income taxes has been provided in the fmancial statements. The School's Form 990, Return of Organization Exempt from Income Taxes, is generally subject to examination by the Internal Revenue Service for three years after the date filed. 0. Advertising The School uses advertising to promote its programs among the audiences it serves. The costs of advertising are expensed as incurred. During the current fiscal year, advertising costs totaled $6,393. P. Subsequent Events Subsequent events have been evaluated through November 7, 2017, which is the date the fmancial statements were available to be issued. Page 9

16 PARAGON MANAGEMENT, INC., D.B.A. PARADISE SCHOOLS NOTES TO FINANCIAL STATEMENTS NOTE 2 - RESTRICTED ASSETS Certain accounts related to the School's IDA notes are classified as restricted on the Statement of Financial Position, because they are maintained in Trust accounts and their use is limited by applicable debt covenants. Arizona Revised Statutes requires Classroom Site Project receipts to be allocated as follows: (1) 20 percent to teacher base salary increases; (2) 40 percent to teacher performance pay; and (3) 40 percent for class size reduction, teacher compensation increases, AIMS intervention programs, teacher development, dropout prevention programs, and teacher liability insurance premiums. Any unused funds in any of these categories are presented as restricted assets. Arizona Revised Statutes requires Instructional Improvement Fund receipts to be expended as follows: (1) up to 50% for teacher compensation increases and class size reduction as defined by ARS ; and (2) the remainder shall be expended for dropout prevention programs and instructional improvement programs including programs to develop minimum reading skills for students by the end of the third grade. Any unused funds in any of these categories are presented as restricted cash until utilized accordingly. Restricted assets at fiscal year end is as follows: Classroom Site Fund Instructional Improvement Fund Cash with Trustee/Paying Agent Total restricted cash $ 330,909 15,521 17,141,252 $ 17,487,682 NOTE 3 -PROPERTY AND EQUIPMENT Property and equipment consist of the following: Land and Improvements Construction in Progress Buildings and Improvements Furniture and Equipment Total property and equipment Less accumulated depreciation and amortization Net property and equipment $ 6,196,994 6,099,674 22,077,988 4,140,764 38,515,420 (7,866,550) $ 30,648,870 The School capitalized interest totaling $578,682 accrued on the Series 2016 Education Revenue Bond during the fiscal year. Page 10

17 PARAGON MANAGEMENT, INC., D.B.A. PARADISE SCHOOLS NOTES TO FINANCIAL STATEMENTS NOTE 4 -DEBT OBLIGATIONS Education Revenue Bonds - The Industrial Development Authority of the County of Maricopa, (IDA) issued $45,530,000 of Series 2016 Education Revenue Bonds (Bonds) of which all was tax-exempt under a Deed of Trust dated as of October 1, The proceeds were loaned to the School to (i) refund Series 2003, 2006 and 2010 IDA Bonds, (ii) refinance an outstanding loan used to finance the costs of acquiring the Middle School Site and completing the initial design and engineering of the Middle School Campus, (iii) financing the costs of constructing, improving and equipping the Middle School Campus, (iv) financing the costs of constructing, improving and equipping additions to the High School Campus, (v) paying capitalized interest on a portion of the Series 2016 Bonds (vi) funding a debt service reserve fund, and (vii) paying certain issuance expenses related to the Series 2016 Bonds. The net proceeds of $46,966,755, which includes a premium of $2,391,278 (after payment of $954,523 in underwriting fees and other issuance costs), were used to refund $25,660,000 of outstanding notes payable, with an average interest rate of percent and also establish a project fund to finance capital acquisition in the amount of $18,350,000. In addition, a deposit of $2,931,250 was made with the bond trustee to fund required reserves. The reacquisition price exceeded the net carrying amount of the old debt by $2,958,274. This amount is recognized on the Statement of Activities as a loss on the refunding of the notes payable. Issuance costs of $933,772 are reported as a contra bond payable and will be amortized over the life of the debt. The School is obligated to the IDA under its respective Loan Agreement and promissory note to make payments sufficient to pay the principal and interest on its loans and to pay its share of ongoing costs. The School has pledged substantially all of its revenues in order to meet its obligation under the Loan Agreement and promissory notes. The primary revenues of the School are state equalization assistance, which are statutorily owed by the State to the School based on student enrollment. The School has irrevocably directed the State to make its equalization payments directly to the trustee of the bonds so long as any of its obligations under the Loan Agreement remain outstanding and unsatisfied. The trustee of the bonds calculates and retains the amount due under the Loan Agreement and remits the remaining state equalization payments to the School. Additionally, the Loan Agreement contains restrictive covenants including minimum amounts of insurance, maintenance of tax exempt status, limits on additional indebtedness, compliance with the Charter School Act, continuing disclosures, issuance of quarterly financials and monthly construction reports, and maintenance of both the debt service coverage ratio and days cash on hand requirements. The notes are payable to the IDA in semi-annual installments through July 2047 including interest at an effective annual rate of 4.73 percent. The notes are collateralized by the School's land and buildings, cash held by trustee, a deed of trust on real property, and pledged revenues. Page 11

18 PARAGON MANAGEMENT, INC., D.B.A. PARADISE SCHOOLS NOTES TO FINANCIAL STATEMENTS NOTE 4 - DEBT OBLIGATIONS The Loan Agreement and promissory notes remain in force until either all payments required by the promissory notes have been paid or there are sufficient monies in the reserve funds to redeem all outstanding bonds. Reserve Funds - The reserve funds are held in trust solely for the benefit of the bondholders. The School does not have a legal, equitable, or reversionary right to the reserve funds. In the event of default of the loan agreement by the School, amounts held in the reserve funds and any proceeds from the sale of collateral will be used to satisfy/repay the promissory notes of the defaulting participant. If at any time the amount in the reserve funds exceeds the aggregate principal amount of bonds outstanding plus any redemption premium, the reserve funds will be used to redeem all outstanding bonds and, accordingly, the School's obligation under the Loan Agreement and promissory note ceases. Therefore, the School's initial and continuing contributions to the reserve funds are accounted for as restricted assets. The future scheduled maturities of bonds payable are as follows: Year Ending: 2018 $ , , , ,000 Thereafter 42,270,000 Less unamortized debt issuance costs (933,772) Plus unamortized bond premiums 2,339,294 Total bonds payable $ 46,935,522 Page 12

19 PARAGON MANAGEMENT, INC., D.B.A. PARADISE SCHOOLS NOTES TO FINANCIAL STATEMENTS NOTE 4 - DEBT OBLIGATIONS Debt Service Coverage Ratio/Days Cash on Hand - In accordance with the aforementioned loan agreement, the School must maintain a Debt Service Coverage Ratio of 1.1 and Days Cash on Hand of 45 days. For the fiscal year ended June 30, 2017 the School maintained a Debt Service Coverage ratio of 1.85 and Days Cash on Hand of 74 days. The detailed calculations are presented below. Debt Service Coverage Ratio Total Revenues Less Non-Pledged Revenues Total Pledged Revenues Total Expenses Less Expenses from Non-Pledged Revenues Total Operating Expenses Net of Expense from Pledged Net Income Available for Debt Service Total Debt Service Requirement Debt Service Coverage Ratio $ Revenues 15,905,803 (2, 720,859) 13,184,944 14,955,432 (4,783,192) 10,172,240 3,012,704 1,627, Days Cash on Hand Cash and Cash Equivalents (Unrestricted) Add Available Line of Credit Available Funds to Determine Days Cash on Hand $ 2,616, ,000 2,866,979 Total Expenses Less Depreciation and Bond Expenses Operating Expense Net of Depreciation and Bond Expenses Operating Expense Divided by 365 Days Days Cash on Hand at 6/30/17 14,955,432 (904,380) 14,051,052 38, Page 13

20 PARAGON MANAGEMENT, INC., D.B.A. PARADISE SCHOOLS NOTES TO FINANCIAL STATEMENTS NOTE 4 - DEBT OBLIGATIONS Loans Payable National Bank of Arizona (NBAZ) Loan 9001, bearing interest at an annual fixed rate of 4.23% (based on the WSJP of 3.25% plus.98%), maturing December 16, The School entered into the loan to complete energy efficiency improvements to School property. The loan is secured with a first lien UCC filing on all business assets. Total Loan Payable Less Current Portion Total Loans Payable, net of Current Portion $ 253,481 57,040 $ 196,441 Year Ending June 30: Total Principal $ 57,040 59,533 62,126 74,782 $ 253,481 NOTE 5 - REVOLVING LINE OF CREDIT The School has a $250,000 revolving line of credit, which was unused at year end. Bank advances on the credit line are payable on demand and carry an interest rate of percent over the LIBOR Rate. Page 14

21 PARAGON MANAGEMENT, INC., D.B.A. PARADISE SCHOOLS NOTES TO FINANCIAL STATEMENTS NOTE 6 - PENSIONS AND OTHER POSTEMPLOYMENT BENEFITS Plan Description. School employees participate in the Arizona State Retirement System (ASRS). The ASRS administers a cost-sharing multiple-employer defined benefit pension plan, a cost-sharing multiple-employer defined benefit health insurance premium benefit (OPEB) plan, and a cost-sharing multiple-employer defined benefit long-term disability (OPEB) plan. The Arizona State Retirement System Board governs the ASRS according to the provisions of A.R.S. Title 38, Chapter 5, Articles 2 and 2.1. ASRS is a component unit of the State of Arizona. The ASRS issues a publicly available financial report that includes its financial statements and required supplementary information. The report is available on the ASRS website at Benefits Provided. The ASRS provides retirement, health insurance premium supplement, long-term disability, and survivor benefits. State statute establishes benefit terms. Retirement benefits are calculated on the basis of age, average monthly compensation, and service credit as follows: Years of service and age required to receive benefit Retirement Initial Membership Date: Before July 1, 2011 On or After July 1, 2011 Sum of years and age equals years age years age years age 60 5 years age 50* 10 years age 62 Any years age 65 5 years age 50* Any years age 65 Final average salary is based on Highest 36 months of last 120 months Highest 60 months oflast 120 months Benefit percent per year of service 2.1% to 2.3% *With actuarially reduced benefits 2.1% to 2.3% Page 15

22 PARAGON MANAGEMENT, INC., D.B.A. PARADISE SCHOOLS NOTES TO FINANCIAL STATEMENTS NOTE 6 - PENSIONS AND OTHER POSTEMPLOYMENT BENEFITS Retirement benefits for members who joined the ASRS prior to September 13, 2013, are subject to automatic cost-of-living adjustments based on excess investment earnings. Members with a membership date on or after September 13, 2013, are not eligible for cost-of-living adjustments. Survivor benefits are payable upon a member's death. For retired members, the survivor benefit is determined by the retirement benefit option chosen. For all other members, the beneficiary is entitled to the member's account balance that includes the member's contributions and employer's contributions, plus interest earned. Contributions. In accordance with state statutes, annual actuarial valuations determine active member and employer contribution requirements. The combined active member and employer contribution rates are expected to finance the costs of benefits employees earn during the year, with an additional amount to finance any unfunded accrued liability. For the current fiscal year, active ASRS members were required by statute to contribute at the actuarially determined rate of percent (11.34 percent for retirement and 0.14 percent for long-term disability) of the members' annual covered payroll, and the School was required by statute to contribute at the actuarially determined rate of percent (10.78 percent for retirement, 0.56 percent for health insurance premium benefit, and 0.14 percent for long-term disability) of the active members' annual covered payroll. In addition, the School was required by statute to contribute at the actuarially determined rate of 9.47 percent (9.17 for retirement and 0.21 percent for health insurance premium benefit, and 0.09 percent for long-term disability) of annual covered payroll of retired members who worked in positions that would typically be filled by an employee who contributes to ASRS. The School's contributions for the current and two preceding years, all of which were equal to the required contributions, were as follows: Year ending June 30: Retirement Fund $ 779,515 $ 744, ,016 Health Benefit Supplement Fund 40,494 $ 34,310 37,980 Long-Term Disability Fund 10,124 8,234 7,725 Page 16

23 PARAGON MANAGEMENT, INC., D.B.A. PARADISE SCHOOLS NOTES TO FINANCIAL STATEMENTS NOTE 6 - PENSIONS AND OTHER POSTEMPLOYMENT BENEFITS Proportionate Share of the Net Pension Liability. ASRS prepares financial statements in accordance with accounting principles established by the Governmental Accounting Standards Board (GASB). GASB standards require that ASRS calculate a proportionate share of the net pension liability for each participating employer. At June 30, 2017, the School's proportion of the net pension liability of the ASRS was $11,650,577. The net pension liability was measured as of June 30, The total pension liability used to calculate the net pension liability was determined using update procedures to roll forward the total pension liability from an actuarial valuation as of June 30, 2015, to the measurement date of June 30, The School's proportion of the net pension liability was based on a projection of the School's longterm share of contributions to the pension plan relative to the projected contributions of all participating employers, actuarially determined. In accordance with accounting principles established by the Financial Accounting Standards Board (F ASB), a liability for the School's proportion of the net pension liability has not been recognized in the financial statements as the School had paid all required contributions to ASRS as of year end. NOTE 7 - CONTINGENT LIABILITIES Compliance - The School's compliance with certain laws and regulations is subject to review by the State of Arizona and the Arizona State Board for Charter Schools. Although such reviews could result in a reduction of state aid, in the opinion of the School's management, any required reductions are not expected to be significant. NOTE 8 - CONCENTRATIONS The School's revenue sources are primarily based on state financial assistance. The amount of these payments is based on student membership. Page 17

24 Page 18 REPORT ON INTERNAL CONTROL AND ON COMPLIANCE

25 HeinfeldMeech Tucson Phoenix Flagstaff HeinfeldMeech.com 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 The Board of Directors Paragon Management, Inc., d.b.a. Paradise Schools 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 Paragon Management, Inc., d.b.a. Paradise Schools, which comprise the statement of financial position as of June 30, 2017, and the related statements of activities and cash flows for the year then ended, and the related notes to the financial statements, and have issued our report thereon dated November 7, Internal Control Over Financial Reporting In planning and performing our audit of the financial statements, we considered Paragon Management, Inc., d.b.a Paradise Schools' internal control over financial reporting (internal control) to determine the audit procedures that are appropriate in the circumstances for the purpose of expressing our opinion on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of Paragon Management, Inc., d.b.a Paradise Schools' internal control. Accordingly, we do not express an opinion on the effectiveness of Paragon Management, Inc., d.b.a Paradise Schools' 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 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. 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. Page 19

26 Compliance and Other Matters As part of obtaining reasonable assurance about whether Paragon Management, Inc., d.b.a Paradise Schools' 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. Reinfeld, Meech & Co., P.C. Phoenix, Arizona November 7, 2017 Page 20