IMAGINE SCHOOL AT SARASOTA, LLC D/B/A IMAGINE SCHOOL AT PALMER RANCH A CHARTER SCHOOL AND COMPONENT UNIT OF THE SCHOOL BOARD OF SARASOTA COUNTY

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1 FINANCIAL STATEMENTS June 30, 2011

2 TABLE OF CONTENTS Page INDEPENDENT AUDITOR'S REPORT... 1 MANAGEMENT'S DISCUSSION AND ANALYSIS... 3 BASIC FINANCIAL STATEMENTS Government-wide Financial Statements: Statement of Net Assets... 9 Statement of Activities Fund Financial Statements Balance Sheet General Fund Reconciliation of the Balance Sheet General Fund to the Statement of Net Assets Statement of Revenues, Expenditures and Changes in Fund Balance General Fund 13 Reconciliation of the Statement of Revenues, Expenditures and Changes in Fund Balance General Fund to the Statement of Activities Notes to Basic Financial Statements REQUIRED SUPPLEMENTARY INFORMATION Budgetary Comparison Schedule General Fund Notes to Required Supplementary Information 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 MANAGEMENT LETTER MANAGEMENT S RESPONSE TO MANAGEMENT LETTER... 34

3 Board of Directors Imagine School at Sarasota, LLC d/b/a Imagine School at Palmer Ranch Sarasota, Florida INDEPENDENT AUDITOR'S REPORT We have audited the accompanying financial statements of the governmental activities and General Fund of Imagine School at Sarasota, LLC, d/b/a Imagine School at Palmer Ranch, (a Charter School and component unit of the School Board of Sarasota County) as of and for the year ended June 30, 2011, which collectively comprise the Charter School's basic financial statements as listed in the table of contents. These financial statements are the responsibility of the management of the Charter School. 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 of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Charter School s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our 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 General Fund of Imagine School at Palmer Ranch as of June 30, 2011, and the respective changes in financial position for the year then ended in conformity with accounting principles generally accepted in the United States of America. In accordance with Government Auditing Standards, we have also issued our report dated September 30, 2011, on our consideration of the Charter School's internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts and grant agreements, and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards and should be considered in assessing the results of our audit SIXTH AVENUE WEST, SUITE 600 BRADENTON, FLORIDA FAX MAIN STREET, SUITE 750, SARASOTA, FLORIDA FAX MEMBERS OF THE AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS

4 Accounting principles generally accepted in the United States of America require that the management s discussion and analysis and budgetary comparison information on pages 3 through 8 and pages 27 and 28 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. Bradenton, Florida September 30,

5 IMAGINE-SARASOTA, LLC MANAGEMENT S DISCUSSION AND ANALYSIS June 30, 2011 (Unaudited) As management of Imagine School at Palmer Ranch (the Charter School ), we offer readers of the financial statements this narrative overview and analysis of the financial activities of the Charter School for the fiscal year ended June 30, Readers should review this Management s Discussion and Analysis (MD&A) in addition to the basic financial statements and the accompanying notes to the financial statements to gain an understanding of the Charter School as an operating entity. Financial Highlight At the close of the fiscal year, the liabilities of the Charter School exceeded it assets by $94,928. There are no amounts available to meet the Charter School s ongoing obligations. Overview of the Financial Statements This financial report includes a series of financial statements and notes to those financial statements. These statements are organized so the reader can understand the Charter School as a financial whole, or as an entire operating entity. This discussion and analysis is intended to serve as an introduction to the Charter School s basic financial statements. The Charter School s basic financial statements comprise three components: (1) government-wide financial statements, (2) fund financial statements, and (3) notes to the basic financial statements. This report also contains required supplementary information in addition to the basic financial statements. Government-wide Financial Statements The government-wide financial statements are designed to provide readers with a broad overview of the Charter School s finances, in a manner similar to a private-sector business. The Statement of Net Assets presents information on all of the Charter School s assets and liabilities, with the difference between the two reported as net assets. Over time, increases or decreases in net assets may serve as a useful indicator of whether the financial position of the Charter School is improving or deteriorating. The Statement of Activities presents information showing how the Charter School s net assets changed during the fiscal year. All changes in net assets are reported as soon as the underlying event giving rise to the change occurs, regardless of the timing of the related cash flows. Thus, revenues and expenses are reported in this statement from some items that will only result in cash flows in future fiscal periods. 3

6 IMAGINE-SARASOTA, LLC MANAGEMENT S DISCUSSION AND ANALYSIS June 30, 2011 (Unaudited) Both of the government-wide financial statements distinguish functions of the Charter School that are principally supported by grants and contributions not restricted to specific programs from other functions that are intended to recover a significant portion of their costs through user fees. The governmental activities of the Charter School include various functions as noted in the Statement of Activities; however, the majority of expenses are charged to the Instruction, General Administration, School Administration, and Operation of Plant functions. The government-wide financial statements can be found on pages 9-10 of this report. Fund Financial Statements Governmental funds are used to account for essentially the same functions reported as governmental activities in the government-wide financial statements. However, unlike the government-wide financial statements, governmental fund financial statements focus on nearterm inflows and outflows of spendable resources, as well as on balances of spendable resources available at the end of the fiscal year. Such information may be useful in evaluating the Charter School s near-term financing requirements. Because the focus of governmental funds is narrower than that of the government-wide financial statements, it is useful to compare the information presented for governmental funds with similar information presented for governmental activities in the government-wide financial statements. By doing so, readers may better understand the long-term impact of the Charter School s nearterm financing decisions. Both the governmental fund balance sheet and the governmental fund statement of revenues, expenditures, and changes in fund balances provide a reconciliation to facilitate this comparison between governmental funds and governmental activities. The Charter School maintains one governmental fund the General Fund. The Charter School adopts an annual appropriated budget for its General Fund. The General Fund financial statements can be found on pages 11 and 13, and the Budgetary Comparison Schedule - General Fund can be found on page 27. Notes to Financial Statements The notes provide additional information that is essential to a full understanding of the data provided in the government-wide and fund financial statements. The notes to financial statements can be found on pages

7 IMAGINE-SARASOTA, LLC MANAGEMENT S DISCUSSION AND ANALYSIS June 30, 2011 (Unaudited) Government-wide Financial Analysis As noted earlier, net assets may serve over time as a useful indicator of the Charter School s financial position. A portion of the Charter School s net assets reflects its investment in capital assets (buses, furniture, fixtures and equipment), less any related debt used to acquire those assets that is still outstanding. The Charter School uses these capital assets to provide services to students; consequently, these assets are not available for future spending. Statement of Net Assets Change Current and other assets $ 301, ,371 23,580 Capital assets 204,760 98, ,785 Total assets $ 506, , ,365 Current liabilities $ 315, ,060 56,727 Noncurrent liabilities 285, ,852 Total liabilities $ 601, , ,579 Invested in capital assets, net of related debt $ 93,538 98,975 ( 5,437) Unrestricted (deficit) ( 188,466) 19,311 ( 207,777) Total net assets $ ( 94,928) 118,286 ( 213,214) Total assets consist mainly of cash in the amount of $98,753, amounts due from the school district and related parties in the amount of $159,135, and capital assets in the amount of $204,760. Total liabilities consist mainly of accrued payroll in the amount of $166,429 and notes payable in the amount of $368,436. See Note D in the notes to the financial statements for more information regarding the notes payable. 5

8 IMAGINE-SARASOTA, LLC MANAGEMENT S DISCUSSION AND ANALYSIS June 30, 2011 (Unaudited) Statement of Activities Change Revenues: Program Revenues: Charges for services $ 14,529 31,811 ( 17,282) Operating grants and contributions 109, ,358 ( 111,652) General Revenues: Grants and contributions not restricted to specific programs 3,279,231 2,272,526 1,006,705 Miscellaneous 260, ,817 ( 20,664) Total revenues 3,663,619 2,806, ,107 Expenses: Instruction 1,726,708 1,155, ,726 Pupil personnel services ,213 ( 15,072) Instructional media services 57,433 71,307 ( 13,874) Instruction and curriculum development 10,141 9,074 1,067 Instructional staff training 1,918 1, Board 15, ,064 General administration 422, , ,613 School administration 301, ,537 ( 61,364) Fiscal services 59,886 47,445 12,441 Food services 2,498 7,538 ( 5,040) Central services 665 1,052 ( 387) Pupil transportation services 72,092 70,918 1,174 Operation of plant 1,156, , ,192 Maintenance of plant 21,861 11,873 9,988 Community services 22,463 10,290 12,173 Interest on long-term debt 5, ,713 Total expenses 3,876,833 2,688,226 1,188,607 Change in net assets ( 213,214) 118,286 ( 331,500) Beginning net assets 118, ,286 Ending net assets (deficit) $ ( 94,928) 118,286 ( 213,214) 6

9 IMAGINE-SARASOTA, LLC MANAGEMENT S DISCUSSION AND ANALYSIS June 30, 2011 (Unaudited) Revenue: The largest revenue source for the Charter School is the Florida Education Finance Program (FEFP) revenue and other categorical funds (70%) from the state of Florida via the Sarasota County School Board. The FEFP formula utilizes student enrollment data to determine the funds disbursed to the school. An aggregate count of the student enrollment and attendance (403 students) over two state survey periods yielded the resulting specific revenue amount. Expenses: The largest concentrations of expenses during the year were for purposes of instruction (45%), general administration (11%), school administration (8%), and operation of plant (30%). Salaries and related benefit expenses increased approximately $444,000, facility rental costs increased approximately $480,000, and indirect and loss mitigation costs increased approximately $113,000. General Fund Budgetary Highlights During the year, there was a $637,866 decrease in budget appropriations between the original budget and final amended budget. This decrease was a reduction in estimated revenues and appropriations due to lower enrollment figures than originally projected. The lower than expected enrollment totals attributed to the negative budget variance of $171,388. Capital Assets Below is a schedule of the Charter School's capital assets as of June 30, 2011 and The only major capital asset addition during the year was the purchase of two school buses. Capital Assets Governmental Activities Change Furniture, fixtures and equipment $ 88,360 98,975 ( 10,615) Buses 116, ,400 $ 204,760 98, ,785 See Note C to the financial statements for a detail of the activity during the fiscal year and other related information. 7

10 IMAGINE-SARASOTA, LLC MANAGEMENT S DISCUSSION AND ANALYSIS June 30, 2011 (Unaudited) Debt Below is a schedule of the Charter School's long-term liabilities as of June 30, 2011 and Outstanding Debt Governmental Activities Change Notes payable $ 368, ,436 During the year, the Charter School was assigned a note payable for the purchase of two school buses from another related charter school. In addition, the Charter School received an operating capital advance from a related party. See Note D to the financial statements for more details related to the Charter School s long-term debt. Economic Factors and Next Year s Budget The forecasted budget for the fiscal year is built upon a projected student enrollment of 549 students, with the additional student enrollment resulting from the expansion of the Charter School s scope of grade levels served from K-7 to K-8. The per-pupil funding will remain approximately the same for the upcoming year, and again the state funding will generate the largest portion of the approximately $4,591,161 in budgeted revenue for next year. Requests for Information This financial report is designed to provide a general overview of the Imagine School at Palmer Ranch s finances for those with an interest in the entity s finances. Questions concerning any of the information provided in this report or requests for additional financial information should be addressed to the Principal at 6220 McIntosh Road, Sarasota, Florida,

11 STATEMENT OF NET ASSETS June 30, 2011 ASSETS Governmental Activities Current assets Cash $ 98,753 Accounts receivable 494 Due from school district 106,118 Due from related parties 53,017 Prepaid items 33,549 Other current assets 10,020 Total current assets 301,951 Noncurrent assets Capital assets, net of accumulated depreciation 204,760 TOTAL ASSETS $ 506,711 LIABILITIES AND NET ASSETS Current liabilities Accounts payable $ 869 Due to related parties 65,905 Accrued expenses 166,429 Current portion, notes payable 82,584 Total current liabilities 315,787 Noncurrent liabilities Notes payable 285,852 Total liabilities 601,639 Net assets (deficit) Invested in capital assets, net of related debt 93,538 Unrestricted (deficit) ( 188,466) Total net assets (deficit) ( 94,928) TOTAL LIABILITIES AND NET ASSETS $ 506,711 The notes to financial statements are an integral part of this statement. 9

12 STATEMENT OF ACTIVITIES For the Fiscal Year Ended June 30, 2011 Expenses Program Revenues Charges Operating for Grants and Services Contributions Net (Expense) Revenue and Changes in Net Assets Functions/Programs Governmental activities Instruction $ 1,726,708 2,160 30,243 ( 1,694,305) Pupil personnel services ( 141) Instructional media services 57, ( 57,433) Instruction and curriculum development 10, ( 10,141) Instructional staff training 1, ( 1,918) Board 15, ( 15,586) General administration 422, ( 422,266) School administration 301, ( 301,173) Fiscal services 59, ( 59,886) Food services 2, ( 2,498) Central services ( 665) Pupil transportation services 72, ,263 ( 23,829) Operation of plant 1,156,289 3, ( 1,152,730) Maintenance of plant 21, ( 21,861) Community services 22,463 8,810 31,200 17,547 Interest on long-term debt 5, ( 5,713) Total governmental activities $ 3,876,833 14, ,706 ( 3,752,598) General revenues Grants and contributions not restricted to specific programs 3,279,231 Miscellaneous 260,153 Total general revenues 3,539,384 Change in net assets (213,214) Net assets, July 1, ,286 Net assets (deficit), June 30, 2011 $ (94,928) The notes to financial statements are an integral part of this statement. 10

13 BALANCE SHEET GENERAL FUND June 30, 2011 ASSETS Cash $ 98,753 Accounts receivable 494 Due from school district 106,118 Due from related parties 53,017 Prepaid items 33,549 Other current assets 10,020 TOTAL ASSETS $ 301,951 LIABILITIES AND FUND BALANCE Liabilities Accounts payable $ 869 Due to related parties 65,905 Accrued expenses 166,429 Total liabilities 233,203 Fund balance Nonspendable, prepaid items 33,549 Restricted, instructional materials 35,199 Total fund balance 68,748 TOTAL LIABILITIES AND FUND BALANCE $ 301,951 The notes to financial statements are an integral part of this statement. 11

14 RECONCILIATION OF THE BALANCE SHEET GENERAL FUND TO THE STATEMENT OF NET ASSETS June 30, 2011 Fund balance General Fund $ 68,748 Amounts reported for governmental activities in the Statement of Net Assets are different because: Capital assets used in governmental activities are not financial resources and, therefore, not reported in the General Fund. 204,760 Long-term liabilities, including notes payable, are not due and payable in the current period and, therefore are not reported in the funds. Notes payable ( 368,436) Net assets (deficit) of governmental activities $ ( 94,928) The notes to financial statements are an integral part of this statement. 12

15 STATEMENT OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCE GENERAL FUND For the Fiscal Year Ended June 30, 2011 Revenues Federal through local $ 198,578 State through local 2,547,937 Local 917,104 Total revenues 3,663,619 Expenditures Current Instruction 1,726,708 Pupil personnel services 141 Instructional media services 38,229 Instruction and curriculum development 10,141 Instructional staff training 1,918 Board 15,586 General administration 422,266 School administration 301,173 Fiscal services 59,886 Food services 2,498 Central services 665 Pupil transportation services 59,159 Operation of plant 1,150,033 Maintenance of plant 21,861 Community services 22,463 Capital outlay 144,178 Debt service Principal 12,805 Interest 5,713 Total expenditures 3,995,423 Deficiency of revenues under expenditures ( 331,804) Other financing sources Proceeds from notes 381,241 Net change in fund balance 49,437 Fund balance, July 1, ,311 Fund balance, June 30, 2011 $ 68,748 The notes to financial statements are an integral part of this statement. 13

16 RECONCILIATION OF THE STATEMENT OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCE GENERAL FUND TO THE STATEMENT OF ACTIVITIES For the Fiscal Year Ended June 30, 2011 Net change in fund balance, Statement of Revenues, Expenditures and Changes in Fund Balance General Fund $ 49,437 Amounts reported for governmental activities in the Statement of Activities are different because The General Fund reports capital outlays as expenditures. However, in the Statement of Activities, the cost of those assets is allocated over their estimated useful lives as depreciation expense. This is the amount by which capital outlays exceeded depreciation in the current period. Capital outlays 144,178 Less: current depreciation expense ( 38,393) 105,785 Debt proceeds provide current financial resources to governmental funds, but issuing debt increases long-term liabilities in the statement of net assets. Repayment of debt principal is an expenditure in governmental funds, but the repayment reduces long-term liabilities in the Statement of Net Assets. Proceeds from notes ( 381,241) Principal payments, notes payable 12,805 ( 368,436) Change in net assets of governmental activities $ ( 213,214) The notes to financial statements are an integral part of this statement. 14

17 NOTES TO BASIC FINANCIAL STATEMENTS NOTE A SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Reporting Entity: Imagine School at Sarasota, LLC, d/b/a Imagine School at Palmer Ranch (the Charter School ), is a limited liability company organized pursuant to Chapter , Florida Statutes. The Charter School was organized to establish and operate a public charter school to serve educational and charitable purposes, and to qualify for derivative exempt status within the meaning of Section 501(c)(3) of the Internal Revenue Code by virtue of its relationship with its single member, Imagine Schools Non-Profit, Inc. (the Management Company), a Virginia nonstock corporation. The governing body of the Charter School is a board of directors composed of five members. The general operating authority of the Charter School is contained in Chapter , Florida Statutes. The Charter School operates under a charter of the sponsoring school board, the School Board of Sarasota County, serving grades K-7 which is effective through June 30, The Charter School is considered a component unit of the School Board of Sarasota County. Upon dissolution or termination of the charter, all of the property, furnishings, and equipment purchased with public funds, in part or in whole, automatically revert to the School Board of Sarasota County. Criteria for determining if other entities are potential component units which should be reported within the Charter School's basic financial statements are described in GASB Statement Number 14, as amended by GASB Statement Number 39. The application of these criteria provide for identification of any entities for which the Charter School is financially accountable and other organizations for which the nature and significance of their relationship with the Charter School are such that exclusion would cause the Charter School's basic financial statements to be misleading or incomplete. Based on these criteria, no component units are required to be included within the reporting entity of the Charter School. Basis of Presentation: The basic financial statements of the Charter School have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) as applied to governmental units. The Governmental Accounting Standards Board (GASB) is the accepted standard-setting body for establishing governmental accounting and financial reporting principles. The GASB has issued a codification of governmental accounting and financial reporting standards. This codification and subsequent GASB pronouncements are recognized as GAAP for state and local governments. Government-Wide and Fund Financial Statements: The Charter School's basic financial statements include both government-wide (reporting on the Charter School as a whole) and fund financial statements. The government-wide financial statements (i.e. the Statement of Net Assets 15

18 NOTES TO BASIC FINANCIAL STATEMENTS NOTE A SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) and the Statement of Activities) report information on all of the non-fiduciary activities of the Charter School. The government-wide financial statements present governmental activities only. The Charter School has no business-type activities. Separate financial statements are provided for the governmental fund. In the government-wide Statement of Net Assets, the Charter School recognizes all long-term assets and receivables as well as long-term debt and obligations. The Charter School's net assets are reported in three parts (as applicable): invested in capital assets, net of related debt; restricted net assets; and unrestricted net assets. The government-wide Statement of Activities demonstrates the degree to which the direct expenses of a given function (or segment) are offset by program revenues. Direct expenses are those that are clearly identifiable with a specific function or segment. Program revenues include: (1) charges to customers or applicants who purchase, use, or directly benefit from goods, services, or privileges provided by a given function or segment and (2) grants and contributions that are restricted to meeting the operational or capital requirements of a particular function or segment. Other revenues not properly included among program revenues are reported instead as general revenues. The individual generic fund type in the Charter School's financial statements is a governmental fund. The focus of the governmental fund's measurement (in the fund statements) is upon determination of financial position and changes in financial position (sources, uses and balances of financial resources) rather than upon net income. The only governmental fund utilized by the Charter School is the General Fund. This fund is accounted for by providing a separate set of self-balancing accounts that comprise its assets, liabilities, fund equity, revenues and expenditures. The General Fund is the general operating fund of the Charter School and is used to account for all of its non-fiduciary financial resources. Measurement Focus, Basis of Accounting and Financial Statement Presentation: The government-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 the related cash flows. 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 16

19 NOTES TO BASIC FINANCIAL STATEMENTS NOTE A SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) they are collectible within the current period or soon enough thereafter to pay liabilities of the current period. For this purpose, the government considers revenues to be available, if they are collected within 60 days of the end of the current period. When grant terms provide that the expenditure of resources is the determining factor for eligibility for Federal, State and other grant resources, revenue is recognized at the time the expenditure is made. Expenditures generally are recorded when a liability is incurred, as under accrual accounting. However, debt service expenditures, as well as expenditures related to claims and judgments, are recorded only when payment is due. Revenues for current operations received from the School Board of Sarasota County pursuant to the funding provisions included in the Charter School's charter are 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 Charter School. Cash: The Charter School's cash consists of a demand deposit with a financial institution. The Charter School has no cash equivalents. Receivables: All amounts due from the school district and related parties are deemed collectible. Therefore, no allowance has been recorded as of June 30, Capital Assets: Capital assets, which include property and equipment, are reported in the governmental activities column in the government-wide financial statements and are not reported in the fund financial statements. Capital assets are defined by the Charter School as assets with an initial cost of more than $750 and an estimated useful life in excess of one year. Capital assets are recorded at historical cost if purchased or constructed. Donated capital assets are recorded at estimated fair value at the date of donation. The cost of normal maintenance and repairs that do not add to the value of the asset or materially extend the life of the asset are not capitalized. Capital assets are depreciated using the straight-line method over their estimated useful lives. The useful life is 5 years for buses and varies from 5 to 7 years for furniture, fixtures, and equipment. Fund Equity: Fund equity at the governmental fund financial reporting level is classified as fund balance. Fund equity for all other reporting is classified as net assets. Fund Balance: Generally, fund balance represents the difference between the assets and liabilities under the current financial resources measurement focus of accounting. In the fund financial statements, governmental funds report fund balance classifications that comprise a 17

20 NOTES TO BASIC FINANCIAL STATEMENTS NOTE A SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) hierarchy based primarily on the extent to which the Charter School is bound to honor constraints on the specific purposes for which amounts in those funds can be spent. Fund balances are classified as follows: Nonspendable: Fund balances are reported as nonspendable when amounts cannot be spent because they are either: (a) not in spendable form (i.e., items that are not expected to be converted to cash) or (b) legally or contractually required to be maintained intact. Restricted: Fund balances are reported as restricted when there are limitations imposed on their use either through the enabling legislation adopted by the Charter School or through external restrictions imposed by creditors, grantors or laws or regulations of other governments. Committed: Fund balances are reported as committed when they can be used only for specific purposes pursuant to constraints imposed by formal action of the Board of Directors through the adoption of a resolution. Only the Board of Directors may modify or rescind the commitment. Assigned: Fund balances are reported as assigned when amounts are constrained by the Charter School s intent to be used for specific purposes, but are neither restricted nor committed. Currently there is no one authorized to assign fund balances. Unassigned: Fund balances are reported as unassigned as the residual amount when the balances do not meet any of the above criterion. The Charter School reports positive unassigned fund balance only in the General Fund. Negative unassigned fund balances may be reported in other funds should the Charter School establish other funds at a later time. Net Assets: Net assets represent the difference between assets and liabilities. Net assets invested in capital assets, net of related debt, consist of capital assets, net of accumulated depreciation, reduced by the outstanding balances of any borrowings used for the acquisition, construction or improvement of those assets. Net assets invested in capital assets, net of related debt excludes unspent debt proceeds. Net assets are reported as restricted when there are limitations imposed on their use either through enabling legislation or through external restrictions imposed by creditors, grantors, laws or regulations. All net assets not reported as net assets invested in capital assets, net of related debt and restricted net assets, are reported as unrestricted net assets. 18

21 NOTES TO BASIC FINANCIAL STATEMENTS NOTE A SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Flow Assumptions: When both restricted and unrestricted amounts of fund balance/net assets are available for use for expenditures/expenses incurred, it is the Charter School s policy to use restricted amounts first and then unrestricted amounts as they are needed. For unrestricted amounts of fund balance, it is the Charter School s policy to use fund balance in the following order: Committed Assigned Unassigned Budgetary Information: An annual budget was adopted for the General Fund on the modified accrual basis of accounting, as is used to account for the activity in the General Fund. Appropriations are controlled at the fund level. For the year ended June 30, 2011, expenditures exceeded appropriations $171,388 in the General Fund. These over-expenditures were funded by an operating advance provided by the Management Company. Revenue Sources: Revenues for current operations are received primarily from the School Board of Sarasota County pursuant to the funding provisions included in the Charter School's charter. In accordance with the funding provisions of the charter and Chapter (17), Florida Statutes, the Charter School reports the number of full-time equivalent (FTE) students and related data to the School Board. Under the provisions of Chapter , Florida Statutes, the School Board reports the number of full-time equivalent (FTE) students and related data to the Florida Department of Education (FDOE) for funding through the Florida Education Finance Program. Funding for the Charter School is adjusted during the year to reflect the revised calculations by the FDOE under the Florida Education Finance Program and the actual weighted full-time equivalent students reported by the Charter School during the designated full-time equivalent student survey periods. The Charter School also receives Federal awards for the enhancement of various educational programs. Federal awards are generally received based on applications submitted to and approved by various granting agencies. For Federal awards in which a claim to these grant proceeds is based on incurring eligible expenditures, revenue is recognized to the extent that eligible expenditures have been incurred. 19

22 NOTES TO BASIC FINANCIAL STATEMENTS NOTE A SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates. NOTE B CASH Custodial credit risk is the risk that in the event of bank failure, the Charter School s deposits may not be returned. The Charter School can mitigate this risk by depositing funds in financial institutions insured by Federal depository insurance. At June 30, 2011, the carrying amount of the Charter School's deposits was $98,753 and the bank balance was $129,798. All funds were fully insured at June 30, NOTE C CAPITAL ASSETS Capital asset activity for fiscal year ended June 30, 2011, was as follows: Beginning Balance Ending Additions Deletions Transfers Balance Governmental activities: Capital assets, being depreciated Furniture, fixtures, and equipment $ 118,500 14, ,345 Buses , ,333 Total capital assets being depreciated 118, , ,678 Less accumulated depreciation for Furniture, fixtures, and equipment 19,525 25, ,985 Buses -- 12, ,933 Total accumulated depreciation 19,525 38, ,918 Capital assets, net $ 98, , ,760 20

23 NOTES TO BASIC FINANCIAL STATEMENTS NOTE C CAPITAL ASSETS (CONTINUED) Depreciation expense in the amount of $38,393 for the year ended June 30, 2011, was allocated to the following governmental functions: Instructional media services $ 19,204 Operation of plant 6,256 Pupil transportation services 12,933 $ 38,393 NOTE D LONG-TERM DEBT Long-term debt activity for the year ended June 30, 2011, was as follows: Beginning Ending Due Within Balance Additions Reductions Balance One Year Governmental activities: Notes payable $ ,241 12, ,436 82,584 Notes payable consisted of the following: Note payable for the purchase of two school buses that was assigned to the Charter School in December The remaining balance on the note was $124,027 as of the date of the assignment. Payments in the amount of $2,627, including principal and interest at a rate of 8.07%, are due monthly through September 6, Note payable for an operating advance provided by the Management Company in June 2011 in the amount of $257,214. Payments in the amount of $5,722, including principal and interest equal to the Prime Rate, are due monthly through June 30, $ $ 111, , ,436 21

24 NOTES TO BASIC FINANCIAL STATEMENTS NOTE D LONG-TERM DEBT Annual debt service requirements to maturity are as follows: Year Ending Note Buses Note Advance June 30 Principal Interest Total Principal Interest Total 2012 $ 21,376 7,518 28,894 61,208 7,453 68, ,189 6,331 31,520 63,227 5,434 68, ,298 4,222 31,520 65,312 3,349 68, ,584 1,936 31,520 67,467 1,194 68, , , $ 111,222 20, , ,214 17, ,644 NOTE E RELATED-PARTY TRANSACTIONS Operating Agreements The Charter School has entered into multiple agreements with the Management Company whereby the Management Company has agreed to provide development, operational and financial support to the Charter School. Some of the support provided includes development and defense of the Charter School application, negotiation of the Charter School contract, facility development, procurement and financing of equipment and other contract services, recruitment and hiring of personnel, curriculum development and support, professional development, administrative expertise, enrollment and marketing and support and access to capital. Indirect Cost Allocation The Charter School has contracted to pay the Management Company an indirect cost allocation for the provision of on-going operational and financial support as outlined above. The indirect cost allocation is equal to 12% of the per-pupil funding provided by state and local governments during each fiscal year, plus a monthly administrative fee of $2,500 for the first two hundred forty (240) months of the Charter School s operation payable monthly. The indirect cost allocation and administrative fee charged for operations for fiscal year ending June 30, 2011, was $335,

25 NOTES TO BASIC FINANCIAL STATEMENTS NOTE E RELATED-PARTY TRANSACTIONS (CONTINUED) Operating Capital Advances/Loss Mitigation In the event there are not sufficient funds to pay operating expenses, the Charter School may request operating capital advances from the Management Company. The operating capital advances are to be reimbursed on the first date that funds become available, for which funds are not otherwise reserved under the Charter School budget. Such operating capital advances that remain outstanding as of the first day of the fiscal year immediately following the fiscal year in which the operating capital advances are made, shall accrue interest until paid in full at a rate per annum equal to the Prime Rate compounded monthly. Subject to a loss mitigation limit of $2,500,000, the Management Company agrees to forgive the greater of 90% of any outstanding operating capital advances made in the current fiscal year that are in excess of $250,000, or 90% of the cumulative loss in excess of $500,000 (the Loss Mitigation Contribution). The cumulative loss is the sum of outstanding operating capital advances for the current fiscal year, plus outstanding prior year unmitigated operating advance balances including accrued interest thereon, and the aggregate sum of all previous annual amounts forgiven by the Management Company. The Charter School remains responsible for the repayment of the difference between the Cumulative Loss and Loss Mitigation Contribution, plus accrued interest. For the fiscal year ending June 30, 2011, the Charter School received a $257,214 operating advance which is reported as a note payable. In consideration of the Management Company s commitment to make Loss Mitigation Contributions, the Charter School pays a Loss Mitigation Allocation. This allocation is based on a percentage of annual revenues. For fiscal year ending June 30, 2011, the Charter School paid 2.5% of annual revenues (excluding Federal grants) or $86,514. Future allocations are based on the following percentages: Year Ending June 30 Percentage % % % % 23

26 NOTES TO BASIC FINANCIAL STATEMENTS NOTE E RELATED-PARTY TRANSACTIONS (CONTINUED) Due To/From Related Parties As a result of these agreements with the Management Company and other related parties, the Charter School is reporting an amount due from related parties in the amount of $53,017 for the overpayment of indirect costs, loss mitigation fees, and other amounts due. In addition, the Charter School is reporting an amount due to related parties in the amount of $65,905 for June billings for various miscellaneous charges and amounts owed for various payroll related liabilities. Operating Leases The Charter School entered into an operating sublease agreement with an affiliated entity of the Management Company for real property located at 6220 McIntosh Road, Sarasota, Florida, for the period August 1, 2009 through July 31, During the year, the lease payments under this agreement were amended. The total cost of this lease for fiscal year ending June 30, 2011, was $1,006,632. The Charter School entered into an equipment use lease agreement with the Management Company for various furniture, fixtures, and equipment for the period April 1, 2010 through March 31, Lease payments are $7,081 for the first three months of the lease and decrease to $4,828 for the next thirty three months of the lease. The cost of this lease for fiscal year ending June 30, 2011, was $57,936. The Charter School entered into a bus lease agreement with another affiliated charter school of the Management Company for the period August 17, 2009 through July 31, This lease was extended through December 27, 2010, at which date the Charter School assumed the rights, title, and a note obligation (See Note D). Lease payments of $2,627 per month were made through December 2010, and the total cost of this lease for fiscal year ending June 30, 2011, was $15,

27 NOTES TO BASIC FINANCIAL STATEMENTS NOTE E RELATED-PARTY TRANSACTIONS (CONTINUED) The future minimum lease payments for these leases are as follows: Building Equipment Year Ending June 30 Lease Lease 2012 $ 1,112,768 57, ,205,009 43, ,273, ,312, ,348, ,331, ,050, NOTE F RISK MANAGEMENT PROGRAMS The Charter School is exposed to various risks of loss related to torts; theft of, damage to and destruction of assets; errors and omissions; and injuries to employees for which the Charter School has purchased commercial insurance. The Charter School has not had any reduction in insurance coverage and the amount of claims resulting from these risks has not exceeded insurance coverage. NOTE G RETIREMENT PLAN The Charter School maintains a 401(k) Retirement Savings Plan that covers substantially all employees. Employees may elect to make contributions to the plan on a pre-tax basis up to the maximum permitted by the Internal Revenue Code. The Charter School is currently making matching contributions up to 5% for participating employees. Contributions for fiscal year ending June 30, 2011 were approximately $31,231. Participating employees are 100% vested in their respective account balances. 25

28 NOTES TO BASIC FINANCIAL STATEMENTS NOTE H SCHEDULE OF LOCAL REVENUE SOURCES The following is a schedule of revenue sources and amounts: Source Amount Federal through local Individuals with Disabilities Education Act grant funds $ 67,200 Education jobs grant funds 81,378 Start-up grant 50,000 Subtotal 198,578 State through local Base funding (less administrative fee) 1,592,727 Supplemental academic instruction 83,018 Reading instruction 15,601 Classroom for Kids 460,175 Safe Schools 10,969 Discretionary local effort/millage equalization 303,298 Discretionary lottery 1,490 Instructional materials 32,396 Transportation 48,263 Subtotal 2,547,937 Local Voted referendum funds 405,479 Local capital outlay millage funds 171,000 Voluntary pre-kindergarten funds 32,403 Before and after care fees 1,955 Facility rental fees 3,559 Other miscellaneous revenue 302,708 Subtotal 917,104 Total $ 3,663,619 NOTE I SUBSEQUENT EVENTS The Charter School has evaluated all subsequent events through September 30, 2011, the date the financial statements were available to be issued. No material subsequent events occurred which would have a material impact on the Charter School s financial statements. 26

29 REQUIRED SUPPLEMENTARY INFORMATION

30 REQUIRED SUPPLEMENTARY INFORMATION BUDGETARY COMPARISON SCHEDULE GENERAL FUND For the Fiscal Year Ended June 30, 2011 Budgeted Amounts Original Final Actual Variance with Final Budget Revenues Federal through local $ 75,000 75, , ,578 State through local 3,366,900 2,622,932 2,547,937 ( 74,995) Local 1,020,001 1,016, ,104 ( 99,261) Total revenues 4,461,901 3,714,297 3,663,619 ( 50,678) Expenditures Current Instruction 1,669,543 1,674,183 1,726,708 ( 52,525) Pupil personnel services 21,251 1, Instructional media services 91,376 37,333 38,229 ( 896) Instruction and curriculum development 10,834 10,922 10, Instructional staff training 3,000 1,455 1,918 ( 463) Board 16,400 15,753 15, General administration 603, , ,266 61,376 School administration 303, , ,173 ( 20,919) Fiscal services 54,166 55,970 59,886 ( 3,916) Food services ,498 ( 2,498) Central services 2,950 2, ,050 Pupil transportation services 72,424 49,087 59,159 ( 10,072) Operation of plant 1,303,120 1,126,812 1,150,033 ( 23,221) Maintenance of plant 74,710 43,464 21,861 21,603 Community services 13,600 9,836 22,463 ( 12,627) Capital outlay ,178 ( 144,178) Debt service 11,640 31,524 18,518 13,006 Contingency 209, Total expenditures 4,461,901 3,824,035 3,995,423 ( 171,388) Deficiency of revenues under expenditures -- ( 109,738) ( 331,804) ( 222,066) Other financing sources Proceeds from notes , , ,503 Net change in fund balance ,437 49,437 Fund balance, July 1, ,311 19,311 19, Fund balance, June 30, 2011 $ 19,311 19,311 68,748 49,437 27

31 NOTES TO REQUIRED SUPPLEMENTARY INFORMATION NOTE A BUDGETARY INFORMATION An annual budget was adopted for the General Fund on the modified accrual basis of accounting, as is used to account for the activity in the General Fund. Appropriations are controlled at the fund level. Appropriations lapse at fiscal year-end. For the year ended June 30, 2011, expenditures exceeded appropriations by $171,388, and there was an overall deficiency of budgeted revenues under expenditures of $222,066. The deficiency was funded by operating capital advances from the Management Company. 28

32 REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MATTERS BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS Board of Directors Imagine School at Sarasota, LLC d/b/a Imagine School at Palmer Ranch Sarasota, Florida We have audited the financial statements of the governmental activities and General Fund of Imagine School at Sarasota, LLC, d/b/a Imagine School at Palmer Ranch, (a Charter School and component unit of the School Board of Sarasota County, Florida) as of and for the year ended June 30, 2011, which collectively comprise the Charter School s basic financial statements and have issued our report thereon dated September 30, 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. Internal Control Over Financial Reporting Management of the Charter School is responsible for establishing and maintaining effective internal control over financial reporting. In planning and performing our audit, we considered the Charter School's internal control over financial reporting as a basis for designing our auditing procedures for the purpose of expressing our opinion on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of the Charter School s internal control over financial reporting. Accordingly, we do not express an opinion on the effectiveness of the Charter School s internal control over financial reporting. 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 Charter School s financial statements will not be prevented, or detected and corrected on a timely basis. Our consideration of internal control over financial reporting was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control over financial reporting that might be deficiencies, significant deficiencies or material weaknesses. We did not identify any deficiencies in internal control over financial reporting that we consider to be material weaknesses, as defined above. However, we identified SIXTH AVENUE WEST, SUITE 600 BRADENTON, FLORIDA FAX MAIN STREET, SUITE 750, SARASOTA, FLORIDA FAX MEMBERS OF THE AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS

33 a certain deficiency in internal control over financial reporting described in the accompanying Management Letter as Finding that we consider to be a significant deficiency in internal control over financial reporting. 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. Compliance and Other Matters As part of obtaining reasonable assurance about whether the Charter School's financial statements are free of 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. The Charter School s response to the finding identified in the Management Letter is provided on page 34. We did not audit the Charter School s response and, accordingly, we express no opinion on it. This report is intended solely for the information and use of the Board of Directors, management and pass-through entities and is not intended to be and should not be used by anyone other than these specified parties. Bradenton, Florida September 30,

34 Board of Directors Imagine School at Sarasota, LLC d/b/a Imagine School at Palmer Ranch Sarasota, Florida MANAGEMENT LETTER We have audited the financial statements of Imagine School at Sarasota, LLC, d/b/a Imagine School at Palmer Ranch, (a Charter School and component unit of the School Board of Sarasota County, Florida), as of and for the year ended June 30, 2011, and have issued our report thereon dated September 30, We conducted our audit in accordance with auditing standards generally accepted in the United States of America and Government Auditing Standards issued by the Comptroller General of the United States. We have issued our 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. Disclosures in that report, dated September 30, 2011, should be considered in conjunction with this management letter. Additionally, our audit was conducted in accordance with the provisions of Chapter , Rules of the Auditor General, which governs the conduct of charter school and similar entity audits performed in the State of Florida. This letter includes the following information, which is not included in the aforementioned auditor s reports. Section (1)(e)1., Rules of the Auditor General, requires that we determine whether or not corrective actions have been taken to address findings and recommendations made in the preceding annual financial audit report. There were no findings and recommendations made in the preceding annual financial audit report. Section (1)(e)2., Rules of the Auditor General, requires a statement be included as to whether or not the Charter School has met one or more of the conditions described in Section (1), Florida Statutes, and identification of the specific condition(s) met. In connection with our audit, we determined that the Charter School did not meet any of the conditions described in Section (1), Florida Statutes. Section (1)(e)3., Rules of the Auditor General, requires that we address in the management letter any recommendations to improve financial management. Matters required to be disclosed are listed under the heading Current Year Findings and Recommendations SIXTH AVENUE WEST, SUITE 600 BRADENTON, FLORIDA FAX MAIN STREET, SUITE 750, SARASOTA, FLORIDA FAX MEMBERS OF THE AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS