KIPP LA SCHOOLS (A California Non-Profit Public Benefit Corporation)

Transcription

1 (A California Non-Profit Public Benefit Corporation) Independent Auditor s Report and Consolidating Financial Statements For the Year Ended June 30, 2014 School Success Team (SST) KLARE Holdings and Subsidiaries (KLARE) Charter Schools: KIPP Academy of Opportunity (KAO) KIPP Los Angeles College Preparatory School (KLAP) KIPP Raíces Academy (KRA) KIPP Comienza Community Prep (KCCP) KIPP Empower Academy (KEA) KIPP Scholar Academy (KSA) KIPP Philosophers Academy (KPA) KIPP Sol Academy (KSOL) KIPP Iluminar Academy (KIA) KIPP Academy of Innovation (KAI) KIPP Vida Preparatory Academy (KVPA)

2 TABLE OF CONTENTS June 30, 2014 Independent Auditor's Report...1 Consolidating Statement of Financial Position...3 Consolidating Statement of Activities...4 Consolidating Statement of Cash Flows...5 Consolidating Statement of Functional Expenses...6 Notes to the Consolidating Financial Statements...7 Local Education Agency Organization Structure...18 Schedule of Instructional Time...19 Schedule of Average Daily Attendance...20 Reconciliation of Annual Financial Report with Audited Financial Statements...21 Schedule of Expenditures for Federal Awards...22 Statement of Financial Position KIPP LA Schools by Charter School...23 Statement of Activities KIPP LA Schools by Charter School...24 Statement of Cash Flows KIPP LA Schools by Charter School...25 Statement of Financial Position Related Schools...26 Statement of Activities Related Schools...27 Statement of Cash Flows Related Schools...28 Notes to Supplementary Information...29 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...30 Independent Auditor's Report on Compliance for Each Major Program; and Report on Internal Control Over Compliance Required by OMB Circular A Independent Auditor's Report on State Compliance...34 Schedule of Findings and Questioned Costs...36 Status of Prior Year Findings and Questioned Costs...38

3 INDEPENDENT AUDITOR S REPORT Board of Directors KIPP LA Schools Report on the Financial Statements We have audited the accompanying consolidating financial statements of KIPP LA Schools (KIPP LA), a California nonprofit public benefit corporation, which comprise the statement of financial position as of June 30, 2014, and the related consolidating statements of activities, cash flows and functional expenses for the year then ended, and the related notes to the financial statements. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. -1-

4 Board of Directors KIPP LA Schools Opinion In our opinion, the financial statements referred to on page one present fairly, in all material respects, the financial position of KIPP LA as of June 30, 2014, and the changes in its net assets and its cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America. Other Matters Supplementary Information Our audit was conducted for the purpose of forming an opinion on the KIPP LA s consolidating financial statements as a whole. The accompanying schedule of expenditures of federal awards on page 22 is presented for purposes of additional analysis as required by U.S. Office of Management and Budget Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations. The accompanying supplementary schedules on pages are presented for purposes of additional analysis and are not a required part of the basic financial statements. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the financial statements. The information has been subjected to the auditing procedures applied in the audit of the consolidating financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the financial statements or to the financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the information is fairly stated, in all material respects, in relation to the consolidating financial statements as a whole. Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued a report dated October 28, 2014 on our consideration of KIPP LA s internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on the internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the KIPP LA s internal control over financial reporting and compliance. VICENTI, LLOYD & STUTZMAN LLP Glendora, CA October 28,

5 CONSOLIDATING STATEMENT OF FINANCIAL POSITION June 30, 2014 KIPP LA Consolidated Schools KLARE Eliminations Total ASSETS CURRENT ASSETS: Cash and cash equivalents $ 11,874,573 $ 302,881 $ - $ 12,177,454 Investments 753, ,704 Accounts receivable - federal and state 6,308, ,308,001 Accounts receivable - other 666, ,847 Contributions receivable, current portion (Note 4) 1,835, ,835,000 Intercompany receivable 1,756, ,992 (1,923,251) - Prepaid expenses 590, ,825 Total current assets 23,785, ,873 (1,923,251) 22,331,831 LONG-TERM ASSETS: Restricted cash and cash equivalents - 16,115,864-16,115,864 Contributions receivable, net of current portion (Note 4) 4,299, ,299,702 Security deposits 202,065 51, ,940 Line of credit guarantee 429, ,564 Intercompany notes receviable 1,000,000 - (1,000,000) - Debt issuance costs - 974, ,059 Property, plant, and equipment, net 1,943,935 17,063,410-19,007,345 Total long-term assets 7,875,266 34,205,208 (1,000,000) 41,080,474 Total assets $ 31,660,475 $ 34,675,081 $ (2,923,251) $ 63,412,305 LIABILITIES AND NET ASSETS CURRENT LIABILITIES: Accounts payable - federal and state $ 541,144 $ - $ - $ 541,144 Accounts payable - other 923, ,291-1,445,998 Accrued liabilities 236, ,665 Deferred revenue 573, ,645 Notes payable, current portion (Note 7) 17,280 28,969-46,249 Intercompany payable 166,992 1,756,259 (1,923,251) - Total current liabilities 2,459,433 2,307,519 (1,923,251) 2,843,701 LONG-TERM LIABILITIES: Intercompany notes payable - 1,000,000 (1,000,000) - Notes payable, net of current portion (Note 7) 1,033,397 5,007,996-6,041,393 Bonds payable, net current portion (Note 8) - 28,812,269-28,812,269 Total long-term liabilities 1,033,397 34,820,265 (1,000,000) 34,853,662 Total liabilities 3,492,830 37,127,784 (2,923,251) 37,697,363 NET ASSETS: Unrestricted 20,779,239 (2,452,703) - 18,326,536 Temporarily restricted 7,388, ,388,406 Total net assets 28,167,645 (2,452,703) - 25,714,942 Total liabilities and net assets $ 31,660,475 $ 34,675,081 $ (2,923,251) $ 63,412,305 The accompanying notes are an integral part of these financial statements. -3-

6 CONSOLIDATING STATEMENT OF ACTIVITIES KIPP LA Consolidated Schools KLARE Eliminations Total UNRESTRICTED NET ASSETS REVENUE: State revenue: State aid $ 14,525,599 $ - $ - $ 14,525,599 Other state revenue 5,793, ,793,612 Federal revenue: Grants and entitlements 4,008, ,008,128 Local revenue: In-lieu property tax revenue 4,906, ,906,848 Contributions 11,759, ,759,004 Other revenue 1,968,918 1,229,477 (1,342,580) 1,855,815 Total unrestricted revenues 42,962,109 1,229,477 (1,342,580) 42,849,006 EXPENSES: Program services: Educational programs 23,324,928 2,618,676-25,943,604 Support services: General and administrative 9,317,026 18,430 (1,342,580) 7,992,876 Fundraising 800, ,585 Total expenses 33,442,539 2,637,106 (1,342,580) 34,737,065 Change in unrestricted net assets 9,519,570 (1,407,629) - 8,111,941 TEMPORARILY RESTRICTED NET ASSETS Contributions 6,395, ,395,019 Investment return 52, ,031 Change in temporarily restricted net assets 6,447, ,447,050 Change in net assets 15,966,620 (1,407,629) - 14,558,991 Beginning net assets 12,201,025 (1,045,074) - 11,155,951 Ending net assets $ 28,167,645 $ (2,452,703) $ - $ 25,714,942 The accompanying notes are an integral part of these financial statements. -4-

7 CONSOLIDATING STATEMENT OF CASH FLOWS KIPP LA Consolidated Schools KLARE Eliminations Total CASH FLOWS from OPERATING ACTIVITIES: Change in net assets $ 15,966,620 $ (1,407,629) $ - $ 14,558,991 Adjustments to reconcile change in net assets to net cash flows from operating activities: Depreciation and amortization 197, ,141-1,096,894 Loss on disposal of property, plant, and equipment 268,724 25, ,769 Investment return (52,031) - - (52,031) (Increase) and decrease in operating assets: Accounts receivable - federal and state (717,064) - - (717,064) Accounts receivable - other (475,713) - - (475,713) Contributions receivable (5,695,019) - - (5,695,019) Intercompany receivable (155,771) (166,992) 322,763 - Prepaid expenses (290,345) - - (290,345) Security deposit (124,176) - - (124,176) Increase and (decrease) in operating liabilities: Accounts payable - federal and state 522, ,148 Accounts payable - other (554,198) 476,505 - (77,693) Accrued liabilities (96,759) (36,568) - (133,327) Deferred revenue 323,665 (73,207) - 250,458 Intercompany payable 166, ,771 (322,763) - Net cash flows from operating activities 9,284,826 (127,934) - 9,156,892 CASH FLOWS from INVESTING ACTIVITIES: Net purchase of investments (450,000) - - (450,000) Repayments received from intercompany notes receivable 2,200,000 - (2,200,000) - Purchases of property, plant and equipment (1,207,570) (9,433,872) - (10,641,442) Net cash flows from investing activities 542,430 (9,433,872) (2,200,000) (11,091,442) CASH FLOWS from FINANCING ACTIVITIES: Debt issuance costs - (821,213) - (821,213) Line of credit guarantee (201,564) - - (201,564) Payments on intercompany notes payable - (2,200,000) 2,200,000 - Proceeds from notes payable (820,000) - - (820,000) Payments on notes payable (17,280) (28,139) - (45,419) Proceeds from bonds payable - 12,696,405-12,696,405 Net cash flows from financing activities (1,038,844) 9,647,053 2,200,000 10,808,209 Net change in cash and cash equivalents 8,788,412 85,247-8,873,659 Cash and cash equivalents, beginning of the year 3,086, ,634-3,303,795 Cash and cash equivalents, end of the year $ 11,874,573 $ 302,881 $ - $ 12,177,454 The accompanying notes are an integral part of these financial statements. -5-

8 CONSOLIDATING STATEMENT OF FUNCTIONAL EXPENSES Program Services KIPP LA Schools Management and General Fundraising Total Expenses Program Services KLARE Management and General Total Expenses Eliminations Total Expenses Salaries and wages $ 11,691,409 $ 4,766,267 $ 335,408 $ 16,793,084 $ - $ - $ - $ - $ 16,793,084 Pension expense 410, , , ,111 Other employee benefits 1,108, ,316-1,643, ,643,528 Payroll taxes 847, ,385-1,230, ,230,697 Management fees 134,524 53,809 3, , ,176 Legal expenses - 157, ,640 17,260-17, ,900 Accounting expenses - 53,178-53,178-12,375 12,375-65,553 Other fees for services 1,509, ,317 23,988 2,209,062 3,741-3,741-2,212,803 Advertising and promotion - 212, , ,875 Office expenses 568, ,875 12, ,034 2,348-2, ,382 Information technology 591, ,995 7, , ,540 Occupancy expenses 1,796,493 1,015,681 57,392 2,869, , ,432 (1,342,580) 2,151,418 Travel expenses 123, ,058 1, , ,778 Conferences and meetings 112, ,702 3, , ,609 Interest expense - 30,412-30, , , ,466 Depreciation and amortization - 197, , , ,141-1,096,894 Insurance expense 118,420 52,910 3, ,827-6,055 6, ,882 Instructional Materials 2,675,942 5,448-2,681, ,681,390 Other expenses 1,636, , ,668 2,287, , ,593-2,999,979 Total functional expenses $ 23,324,928 $ 9,317,026 $ 800,585 $ 33,442,539 $ 2,618,676 $ 18,430 $ 2,637,106 $ (1,342,580) $ 34,737,065 The accompanying notes are an integral part of these financial statements. -6-

9 NOTES TO FINANCIAL STATEMENTS NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Activities - KIPP LA Schools (KIPP LA) was organized in July 2008 as a not-for-profit corporation under the laws of the State of California for the purpose of operating public charter schools. KIPP LA currently manages eleven charter schools; KIPP Academy of Opportunity, KIPP Los Angeles College Preparatory, KIPP Raíces Academy, KIPP Comienza Community Prep, KIPP Empower Academy, KIPP Scholar Academy, KIPP Philosophers Academy, KIPP Sol Academy, KIPP Iluminar Academy, KIPP Academy of Innovation, and KIPP Vida Preparatory Academy. All eleven charter schools have charters approved by the State of California Department of Education through the Los Angeles Unified School District. KIPP Academy of Innovation and KIPP Vida Preparatory Academy began serving students in August KIPP LA is a participant in the Knowledge is Power Program (KIPP) and follows the KIPP charter school model. KIPP LA charter schools are economically dependent on state and federal funding. In addition to its schools, KIPP LA operates KIPP LA Success Team (SST), which is designed to provide operational, financial, fundraising, advocacy and facilities services, allowing School Leaders to focus their efforts on instructional leadership. Additionally, the SST leads region-wide sharing best practices, data analysis and academic support, as well as oversight and accountability to ensure all schools and the region meet all state, local and federal regulatory requirements. These financial statements also include KLARE Holdings, a wholly owned non-profit corporation, which was formed to finance, develop, lease and maintain certain school facilities for the exclusive support of KIPP LA. Net Asset Classes - Under applicable accounting standards, KIPP LA is required to report information regarding its financial position and activities according to three classes of net assets: unrestricted, temporarily restricted, and permanently restricted. Net assets of KIPP LA consist of the following: Unrestricted: All resources over which the governing board has discretionary control to use in carrying on the general operations of the organization. Temporarily restricted: These net assets are restricted by donors to be used for specific purposes. KIPP LA s temporarily restricted net assets as of June 30, 2014 are as follows: Contributions receivable $ 6,134,702 Karsh Family Teacher Recognition Fund 753,704 KIPP Through College Program 500,000 Total temporarily restricted net assets $ 7,388,406 Permanently restricted: These net assets are permanently restricted by donors and cannot be used by KIPP LA. KIPP LA does not currently have any permanently restricted net assets. -7-

10 NOTES TO FINANCIAL STATEMENTS NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Revenue Recognition - Amounts received from the California Department of Education are recognized as revenue by KIPP LA based on the average daily attendance (ADA) of students. Revenue that is restricted is recorded as an increase in unrestricted net assets if the restriction expires in the reporting period in which the revenue is recognized. All other restricted revenues are reported as increases in temporarily restricted net assets. All retained endowment earnings associated with donor restricted assets are classified as temporarily restricted until appropriated for expenditure, even if those earnings are not restricted by the donor. Cash and Cash Equivalents - KIPP LA defines its cash and cash equivalents to include only cash on hand, demand deposits, and liquid investments with original maturities of three months or less. Investments - In accordance with FASB Accounting Standards Codification (ASC) 820, Fair Value Measurements and Disclosures, KIPP LA reports its investments in marketable securities and other investments at fair value. In addition, ASC 820 effects how KIPP LA measures the fair value of investments in certain entities that do not have a quoted market price but calculate net assets value (NAV) per share or its equivalent. As a practical expedient, the guidance permits, but does not require, KIPP LA to measure the fair value of an investment in an investee within the scope of the amendments based on the investee s NAV per share or its equivalent. As a result of applying the practical expedient, the fair value of KIPP LA s investments with California Community Foundation (CCF) was determined based on the NAV. See note 5 for the fair market value of KIPP LA s investments as of June 30, KIPP LA s investment return for the year ended June 30, 2014 was as follows: Unrealized gains $ 46,984 Interest and dividends 8,531 Management fees (3,484) Total investment return $ 52,031 Use of Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure. Accordingly, actual results could differ from those estimates. Basis of Accounting - The financial statements have been prepared on the accrual method of accounting and accordingly reflect all significant receivables and liabilities. Functional Allocation of Expenses - The cost of providing the 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 supportive services benefited. -8-

11 NOTES TO FINANCIAL STATEMENTS NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Contributions - All contributions are considered to be available for unrestricted use unless specifically restricted by the donor as required by applicable accounting standards. Amounts received that are designated for specific use in future periods are reported as temporarily restricted. When the restriction expires, temporarily restricted net assets are reclassified to unrestricted net assets for expenditure. Contributions Receivable - Unconditional promises to give expected to be received in one year or less are recorded as contributions receivable at net realizable value. Unconditional promises to give expected to be received in more than one year are recorded as contributions receivable at fair market value at the date of the promise. Property, Plant and Equipment Property, plant, and equipment are stated at cost if purchased or at estimated fair market value if donated. Depreciation of buildings and equipment is provided on a straight-line basis over the estimated useful lives of the assets. KIPP LA capitalizes all expenditures for land, buildings and equipment in excess of $5,000. Depreciation expense for the year ended June 30, 2014 was $1,013,054. Consolidation - The consolidating financial statements include the accounts of KIPP LA and its wholly owned subsidiary, KLARE Holdings, a California non-profit public benefit corporation formed exclusively to support KIPP LA, and its single member limited liability company subsidiaries: KLA 2810 Whittier, LLC; 668 Atlantic, LLC; SOLA School 1, LLC; ChaMed, LLC; Florence Bell, LLC; and Vermont Village, LLC. For the year ended June 30, 2014, Florence Bell, LLC and Vermont Village, LLC had no activity. All material intercompany transactions have been eliminated. Income Taxes - KIPP LA is a non-profit entity exempt from the payment of income taxes under Internal Revenue Code Section 501(c)(3) and California Revenue and Taxation Code Section 23701d. Accordingly, no provision has been made for income taxes. KIPP LA has evaluated its tax positions and the certainty as to whether those positions will be sustained in the event of an audit by taxing authorities at the federal and state levels. The primary tax positions evaluated are related to its continued qualification as a tax-exempt organization and whether there are unrelated business income activities conducted that would be taxable. Management has determined that all income tax positions are more likely than not of being sustained upon potential audit or examination. The statute of limitations for federal and California state purposes is generally three and four years, respectively. Functional Allocation of Expenses - The cost of providing the 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 supportive services benefited. Subsequent Events - All events subsequent to the statement of financial position date of June 30, 2014 through October 28, 2014 which is the date these financial statements were available to be issued, have been evaluated in accordance with generally accepted accounting principles. -9-

12 NOTES TO FINANCIAL STATEMENTS NOTE 2: CONCENTRATION OF CREDIT RISK KIPP LA maintains its interest-bearing cash in bank deposit accounts at various institutions. KIPP LA occasionally has a need to maintain a cash balance with a single financial institution in excess of the $250,000 insured by the Federal Deposit Insurance Corporation (FDIC). KIPP LA has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash and cash equivalents. NOTE 3: ACCOUNTS RECEIVABLE Accounts receivable primarily consists of funds due from state and federal governments, and private grants receivable. All amounts are considered collectible; therefore, no provisions for uncollectible accounts were recorded. NOTE 4: CONTRIBUTIONS RECEIVABLE Unconditional promises to give expected to be received in one year or less are recorded as contributions receivable at net realizable value, which approximates fair market value. Unconditional promises to give expected to be received after one year are recorded as contributions receivable at fair value using estimated future cash flows discounted by rates ranging from.56% to 1.45%. At June 30, 2014, KIPP LA had contributions receivable expected to be received in the following periods: In one year or less $ 1,835,000 Between one and five years 4,505,000 Total gross contributions receivable 6,340,000 Less: discount on contributions receivable (205,298) Net contributions receivable $ 6,134,702 KIPP LA also has conditional pledges not recorded in these financial statements totaling up to $31,073,192 expected to be paid over the next four years. NOTE 5: FAIR VALUE MEASUREMENTS KIPP LA has categorized its financial instruments based on the priority of the inputs to the valuation technique into a three-level fair value hierarchy: Level 1 - quoted prices in an active market for identical assets. Level 2 - quoted prices for similar assets and market-corroborated inputs. Level 3 - KIPP LA s own assumptions about market participation, including assumptions about risk, developed based on the best information available in the circumstances. -10-

13 NOTES TO FINANCIAL STATEMENTS NOTE 5: FAIR VALUE MEASUREMENTS If the inputs used to measure the financial instruments fall within different levels of the hierarchy, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument. The fair market value of KIPP LA s investments as of June 30, 2014 was as follows: Level 2 CCF Permanent Pool: Karsh Family Teacher Recognition Fund $ 753,704 The permanent pool investment objectives are the preservation of the inflation adjusted purchasing power of the assets net of annual distributions for grants and expenses. The investment allocation is 50% equities, 20% fixed-income and 30% alternative investment strategies. The fair market value of bonds payable with fixed interest rates is based on rates assumed to be currently available for bond issues with similar terms and average maturities. As of June 30, 2014 the carrying amounts of bonds payable approximated the estimated fair market value. NOTE 6: PROPERTY, PLANT AND EQUIPMENT KIPP LA s property, plant, and equipment as of June 30, 2014 consisted of the following: KIPP LA Schools KLARE Total Construction in progress $ - $ 653,295 $ 653,295 Land 230,640 4,194,998 4,425,638 Buildings and improvements - 6,892,080 6,892,080 Leasehold improvements 2,020,844 6,988,127 9,008,971 Furniture and equipment 369, , ,878 Less: Accumulated depreciation (677,341) (1,777,176) (2,454,517) Total property, plant and equipment $ 1,943,935 $ 17,063,410 $ 19,007,345 NOTE 7: NOTES PAYABLE In December 2008, KLA 2810 Whittier LLC obtained two notes payable totaling $2,750,000 secured by a leasehold deed of trust on the leased property in Los Angeles, California. One note bears an interest rate of 2.44% and requires monthly payments of interest and principal of $3,687 until maturity. The second note bears an interest rate of 7% and requires monthly payments of interest of $11,453 until December 19, 2015 at which time the payment amount increases to $20,526 and includes principal and interest. Both notes mature on April 19, The total balance of these notes payable as of June 30, 2014 was $2,605,

14 NOTES TO FINANCIAL STATEMENTS NOTE 7: NOTES PAYABLE In June 2012, KIPP LA obtained a payment arrangement contract with Los Angeles Department Water and Power for $85,387. The contract requires KIPP LA to make monthly payments of $1,440 from July 2012 to June The balance as of June 30, 2014 was $50,677. In July 2010, 668 Atlantic LLC obtained $3,431,407 through new markets tax credit financing for a tenant improvement project to convert a commercial space into a facility for long-term lease by KIPP Raíces Academy. The financing bears a blended 4.82% interest rate and includes: (a) an intercompany $1,000,000 loan from KIPP LA; (b) a $1,545,544 loan from NCB Capital Impact; and (c) $885,863 in equity invested by U.S. Bancorp Community Development Corporation. The financing matures on July 16, 2040 with partial acceleration options, and it requires interest only payments through July 16, The loan balance, considering elimination of intercompany transactions, as of June 30, 2014 was $2,431,407. KIPP LA had two subordinated loans from CSGF Revolving Facilities Loan Fund LLC totaling $1,320,000. $820,000 was paid off prior to maturity during the year ended June 30, The remaining balance of $500,000 matures in July 2015 and requires annual interest payments at a 3.5% interest rate. In October 2012, KIPP LA obtained a $500,000 loan from the KIPP Foundation to help fund the opening of KIPP Scholar Academy and KIPP Philosophers Academy. This loan carries a 1% interest rate and interest payments are due annually. Principal payments begin in September 2016, with the loan maturing in September Future maturities of notes payable are as follows: Year Ended June 30, 2015 $ 46, , , , ,282 Thereafter 4,513,276 Total $ 6,087,642 NOTE 8: BONDS PAYABLE In June 2014, KLARE obtained financing through the California School Finance Authority (CSFA). The amount loaned to KLARE was $28,725,000 to be applied to the construction, rehabilitation and acquisition of educational facilities. The bonds are considered unconditional general obligations of KLARE, secured by a pledge of certain gross revenues and deeds of trust on the Figueroa and Cesar -12-

15 NOTES TO FINANCIAL STATEMENTS NOTE 8: BONDS PAYABLE Chavez facilities. The loan agreement requires KLARE to comply with various covenants, conditions and restrictions, including maintaining certain financial ratios. The bonds bear interest rates ranging from 4.125% to 5.125%. The LLC is required to maintain in a bond reserve cash account an amount equal to the bond reserve requirement which is currently $1,387,056. Each June 25th and December 25th KLARE must deposit for credit to the bond revenue account an amount sufficient to pay principal and interest payable on the next ensuing payment date. Bonds payable are reported on the statement of financial position at a premium of $87,269. The premium is being amortized over the life of the bonds. There was no amortization of the bond premium recorded against interest expense for the year ended June 30, A portion of the bonds are subject to early redemption at the option of KLARE on any date after July 1, 2024 together with accrued interest. Future maturities of bond payable are as follows: Year Ended June 30, 2015 $ , , ,000 Thereafter 27,190,000 Total future maturities 28,725,000 Bond premium 87,269 Total bonds payable $ 28,812,269 NOTE 9: DEBT ISSUANCE COSTS In connection with the issuance of notes and bonds payable, 668 Atlantic, LLC; SOLA School 1, LLC; and KLARE incurred certain costs of issuance which have been capitalized as a long-term asset. These costs are amortized over the term of the related debt. Amortization costs for the year ended June 30, 2014 were $80,

16 NOTES TO FINANCIAL STATEMENTS NOTE 10: RESTRICTED CASH AND CASH EQUIVALENTS KIPP LA s restricted cash and cash equivalents as of June 30, 2014 consisted of the following: Deposit in trust for repayment of certain notes payable $ 1,972,330 Bond proceeds: Facility projects 11,225,502 Bond reserve 1,387,056 Interest 945,189 Costs of issuance 69,787 CSFA restricted grant for debt service fund 516,000 Total restricted cash and cash equivalents $ 16,115,864 NOTE 11: SUPPLEMENTAL CASH FLOW DISCLOSURES Cash paid for interest for the year ended June 30, 2014 amounted to $389,466. No interest was capitalized for the year ended June 30, NOTE 12: EMPLOYEE RETIREMENT 401(k) Plan KIPP LA has a 401(k) defined contribution plan for those employees who meet the eligibility criteria set forth in the plan. KIPP LA matches employee contributions based upon criteria set forth in the plan up to 6% of compensation. Contributions to the plan for the year ended June 30, 2014 totaled $415,167. STRS and PERS Qualified employees of KIPP Los Angeles College Preparatory (KLAP) are covered under multipleemployer defined benefit pension plans maintained by agencies of the State of California. Certificated employees are members of the State Teachers Retirement System (STRS) and classified employees are members of the Public Employees Retirement System (PERS). The risks of participating in these multiemployer defined benefit pension plan are different from singleemployer plans because: (a) assets contributed to the multiemployer plan by one employer may be used to provide benefits to employees of other participating employers, (b) the required member, employer, and state contribution rates are set by the California Legislature and detailed in Teachers Retirement Law and the Public Employees Retirement Law, and (c) if KIPP LA chooses to stop participating in the multiemployer plan, it may be required to pay a withdrawal liability to the plan. KIPP LA has no plans to withdraw from these multiemployer plans -14-

17 NOTES TO FINANCIAL STATEMENTS NOTE 12: EMPLOYEE RETIREMENT State Teachers Retirement System (STRS) Plan Description KLAP contributes to the State Teachers Retirement System (STRS), a cost-sharing multiple-employer public employee retirement system defined benefit pension plan administered by STRS. Plan information for STRS is not publicly available. The plan provides retirement, disability and survivor benefits to beneficiaries. Benefit provisions are established by State statutes, as legislatively amended, within the State Teachers Retirement Law. According to the most recently available Comprehensive Annual Financial Report and Actuarial Valuation Report for the year ended June 30, 2013, total plan net assets are $166 billion, the total actuarial present value of accumulated plan benefits is $277 billion, contributions from all employers totaled $2.3 billion, and the plan is 66.9% funded. KIPP LA did not contribute more than 5% of the total contributions to the plan. Copies of the STRS annual financial reports may be obtained from STRS, 7667 Folsom Boulevard, Sacramento, CA and Funding Policy Active plan members are required to contribute 8.0% of their salary and KLAP is required to contribute an actuarially determined rate. The actuarial methods and assumptions used for determining the rate are those adopted by the STRS Teachers Retirement Board. The required employer contribution rate for the year ended June 30, 2014 was 8.25% of annual payroll. The contribution requirements of the plan members are established and may be amended by State statute. Public Employees Retirement System (PERS) Plan Description KLAP contributes to the School Employer Pool under the California Public Employees Retirement System (CalPERS), a cost-sharing multiple-employer public employee retirement system defined benefit pension plan administered by CalPERS. Plan information for PERS is not publicly available. The plan provides retirement and disability benefits, annual cost-of-living adjustments, and death benefits to plan members and beneficiaries. Benefit provisions are established by State statutes, as legislatively amended, within the Public Employees Retirement Law. According to the most recently available Actuarial Valuation Report for the year ended June 30, 2013, the Schools Pool total plan assets are $49 billion, the total actuarial present value of accumulated plan benefits is $72 billion, contributions from all employers totaled $1.8 billion, and the plan is 80.5% funded. KIPP LA did not contribute more than 5% of the total contributions to the plan. Copies of the CalPERS annual financial reports may be obtained from the CalPERS Executive Office, 400 P Street, Sacramento, CA and

18 NOTES TO FINANCIAL STATEMENTS NOTE 12: EMPLOYEE RETIREMENT Funding Policy Active plan members prior to January 1, 2013 are required to contribute 7.0% of their salary while new members after January 1, 2013 are required to contribute 6.0% of their salary. KLAP is required to contribute an actuarially determined rate. The actuarial methods and assumptions used for determining the rate are those adopted by the CalPERS Board of Administration. The required employer contribution rate for the year ended June 30, 2014 was %. The contribution requirements of the plan members are established and may be amended by State statute. Contribution to STRS and PERS Year Ended June 30 STRS Required Contribution STRS Percent Contributed PERS Required Contribution PERS Percent Contributed 2012 $ 145, % $ 9, % 2013 $ 141, % $ 7, % 2014 $ 131, % $ 8, % NOTE 13: PARTICIPATION IN JOINT POWERS AUTHORITY KIPP LA is a participant in the California Charter Schools Joint Powers Authority (the CCS-JPA) for risk management services for workers compensation insurance, property insurance and charter school liability insurance. The relationship between KIPP LA and the CCS-JPA is such that the CCS-JPA is not considered a component unit for financial reporting purposes. The CCS-JPA has budgeting and financial reporting requirements independent of member units and therefore the CCS-JPA s financial statements are not presented in these financial statements; however, transactions between the CCS-JPA and KIPP LA are included in these statements. Audited financial statements for CCS-JPA were not available for Fiscal Year at the time this report was issued. However, financial statements should be available from the respective agency. During the year ended June 30, 2014, KIPP LA made payments of $355,560 to CCS-JPA for services received. At June 30, 2014, KIPP LA had no recorded accounts receivable or accounts payable to the CCS-JPA. NOTE 14: LINE OF CREDIT KIPP LA maintains a line of credit with First Republic Bank bearing a variable interest rate equal to the published prime rate. The total amount available to KIPP LA under the agreement is $1,000,000 and the agreement is renewable annually. As June 30, 2014 KIPP LA had no outstanding balance. -16-

19 NOTES TO FINANCIAL STATEMENTS NOTE 15: OPERATING LEASES KIPP LA has operating leases for the school sites and office space. Rent expense for the year ended June 30, 2014 was $1,865,327. The future minimum lease payments are as follows: Year Ended June 30, 2015 $ 1,759, ,649, ,394, ,445, ,453,135 Thereafter 21,414,891 Total $ 29,116,994 NOTE 16: COMMITMENTS As of June 30, 2014, KIPP LA has a signed contract for construction projects at one of its new school sites. NOTE 17: CONTINGENCIES The School has received state and federal funds for specific purposes that are subject to review and audit by the grantor agencies. Although such audits could generate disallowances under terms of the grants, it is believed that any required reimbursement would not be material. NOTE 18: SUBSEQUENT EVENTS KIPP LA opened two new charter schools, KIPP Academy of Innovation and KIPP Vida Preparatory Academy in the August of KIPP LA purchased property in October 2014 for one of its school sites for approximately $650,000. KIPP LA will open two new charter schools, KIPP Promesa Prep Academy and KIPP Ignite Academy in the fall of

20 SUPPLEMENTARY INFORMATION

21 LOCAL EDUCATION AGENCY ORGANIZATION STRUCTURE KIPP LA Schools is a California non-profit public benefit corporation and operates eleven charter schools approved by the Los Angeles Unified School District as follows: KIPP Academy for Opportunity (charter number 530) established in KIPP Los Angeles College Prep (charter number 531) established in KIPP Raíces Academy (charter number 1010) established in KIPP Comienza Community Prep (charter number 1195) established in KIPP Empower Academy (charter number 1196) established in KIPP Scholar Academy (charter number 1377) established in KIPP Philosophers Academy (charter number 1378) established in KIPP Sol Academy (charter number 1379) established in KIPP Iluminar Academy (charter number 1508) established in KIPP Academy of Innovation (charter number 1586) established in KIPP Vida Preparatory Academy (charter number 1587) established in KIPP Academy of Innovation and KIPP Vida Preparatory Academy began serving students in August The Board of Directors and the Administrator as of the year ended June 30, 2014 were as follows: BOARD OF DIRECTORS Member Office Term Expires Frank Reddick Chairman June 2014 Joe Cilic Secretary June 2016 Jeremy Rogers Member June 2016 Gregory McGinity Member June 2016 Randy Bishop Member June 2015 Marc Castellani Member June 2015 Zac Guevara Member June 2016 Alex Rubalcava Member June 2014 Moira Shourie Member June 2016 Allen Narcisse Member June 2017 Loren Bendele Member June 2016 E.J. Kavounas Member June 2017 Debra Somberg Member June 2017 ADMINISTRATORS Marcia Aaron Angella Martinez Kyle Salyer Executive Director Chief Academic Officer Director of Finance and Operations -18-

22 SCHEDULE OF INSTRUCTIONAL TIME Instructional Minutes Instructional Requirement Reduced Actual Days Status KIPP Academy of Opportunity Grade 5 54,000 52,457 73, In compliance Grade 6 54,000 52,457 71, In compliance Grade 7 54,000 52,457 72, In compliance Grade 8 54,000 52,457 71, In compliance KIPP LA Prep Grade 5 54,000 52,457 74, In compliance Grade 6 54,000 52,457 74, In compliance Grade 7 54,000 52,457 74, In compliance Grade 8 54,000 52,457 74, In compliance KIPP Raíces Academy Kindergarten 36,000 34,971 81, In compliance Grade 1 50,400 48,960 76, In compliance Grade 2 50,400 48,960 76, In compliance Grade 3 50,400 48,960 77, In compliance Grade 4 54,000 52,457 77, In compliance KIPP Comienza Community Prep Kindergarten 36,000 34,971 63, In compliance Grade 1 50,400 48,960 62, In compliance Grade 2 50,400 48,960 63, In compliance Grade 3 50,400 48,960 62, In compliance KIPP Empower Academy Kindergarten 36,000 34,971 73, In compliance Grade 1 50,400 48,960 71, In compliance Grade 2 50,400 48,960 72, In compliance Grade 3 50,400 48,960 72, In compliance KIPP Scholar Academy Grade 5 54,000 52,457 81, In compliance Grade 6 54,000 52,457 81, In compliance KIPP Philosophers Academy Grade 5 54,000 52,457 73, In compliance Grade 6 54,000 52,457 75, In compliance KIPP Sol Academy Grade 5 54,000 52,457 76, In compliance KIPP Iluminar Academy Kindergarten 36,000 34,971 76, In compliance Grade 1 50,400 48,960 73, In compliance See auditor s report and the notes to the supplementary information. -19-

23 SCHEDULE OF AVERAGE DAILY ATTENDANCE Second Period Report Classroom Based Total Annual Report Classroom Based Total KIPP Academy of Opportunity Grades 4 through Grades 7 through Total KIPP LA Prep Grades 4 through Grades 7 through Total KIPP Raíces Academy Kindergarten through grade Grades 4 through Total KIPP Comienza Community Prep Kindergarten through grade KIPP Empower Academy Kindergarten through grade KIPP Scholar Academy Grades 4 through KIPP Philosophers Academy Grades 4 through KIPP Sol Academy Grades 4 through KIPP Iluminar Academy Kindergarten through grade ADA Totals 2, , , , See auditor s report and the notes to the supplementary information. -20-

24 RECONCILIATION OF ANNUAL FINANCIAL REPORT WITH AUDITED FINANCIAL STATEMENTS June 30, 2014 Annual Financial Report KAO KLAP KRA KCCP KEA KSA KPA KSOL KIA Fund Balances (Net Assets) $ 1,057,967 $ 2,337,832 $ 676,038 $ 516,381 $ 1,200,361 $ 419,768 $ 15,199 $ 528,379 $ 758,914 Adjustments and Reclassifications: Increasing (Decreasing) the Fund Balance (Net Assets): Cash and cash equivalents (189,550) (304,739) (8,679) 242,239 (22,857) (127,800) (8,592) (66,092) (108,615) Accounts receivable - federal and state 51, , , ,372 39,801 29,348 54,869 8,520 13,542 Accounts receivable - other (333) - - (13,724) - 80,765 44,960 (7,960) (3,064) Prepaid expenses (14,096) (8,025) (57,817) (8,373) (6,515) (6,367) (5,003) (4,080) (5,737) Security deposits - 40, ,276 5,000 24,100 8, Letter of credit gaurantee , Accounts payable - federal and state (500) (1,250) 2,741 6,248 (412) (500) (500) (500) (500) Accounts payable - other 123, , , , , ,571 68, , ,101 Accrued liabilities (10,386) (16,257) (17,811) (15,576) (15,944) (13,488) (11,117) (12,596) (12,246) Notes payable 5,046 3,870 - (214,099) , Net Adjustments and Reclassifications (35,148) 228, , , , , ,895 58,230 94,481 June 30, 2014 Audited Financial Statement Fund Balances (Net Assets) $ 1,022,819 $ 2,565,944 $ 1,098,489 $ 1,238,142 $ 1,453,657 $ 585,397 $ 354,094 $ 586,609 $ 853,395 See auditor s report and the notes to the supplementary information. -21-

25 SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS Pass- Federal Grantor/Pass-Through Grantor/Program or Cluster Title CFDA Through Entity Identifying Number KIPP Academy of Opportunity KIPP LA Prep KIPP Raíces Academy KIPP Comienza Community Prep KIPP Empower Academy KIPP Scholar Academy KIPP Philosophers Academy KIPP Sol Academy KIPP Iluminar Academy KIPP Academy of Innovation KIPP Vida Preparatory Academy School Success Team Total Federal Expenditures U.S. Department of Education Pass-Through Programs From California Department of Education: No Child Left Behind Act: Title I, Part A, Basic Grants Low-Income and Neglected , , , , ,688 83,520 63,137 52,147 74, ,207 Title II, Part A, Improving Teacher Quality ,917 2,834 2,821 2,483 2, ,267 Title III, Part A, Limited English Proficiency ,823 28, ,488 Title V, Part B, Public Charter School Grants ,686 27, ,303 State Charter School Facilities Incentive Grant D n/a - 74, ,538 Special Education: IDEA Basic Local Assistance Entitlement, Part B, Section ,432 84,287 91,450 74,672 79,904 37,159 26,017 24,197 39, ,403 Subtotal: Pass-Through Programs 180, , , , , ,267 89,915 77, , ,725,206 Pass-Through Programs From KIPP Foundation ARRA SFSF: Investing in Innovation A n/a 794 1,212 7,522 21,331 2,951 65,918 70,335 2,251 83, , ,831 Total U.S. Department of Education 181, , , , , , ,250 79, , ,975 2,170,037 U.S. Department of Agriculture Pass-Through Program From California Department of Education: Child Nutrition Cluster: Breakfast Program ,615 1,242 1,757 5, ,890 Especially Needy Breakfast Program ,269 8,802 15,411 24,203 35,564 18,931 11,186 11,686 43, ,338 National School Lunch Program , , , , ,774 87,172 60,168 52,473 83, ,048,524 Meal Supplements n/a 32,630 47,774 51,376 30,221 14,390 20,382 16,530 12,483 22, ,491 Total U.S. Department of Agriculture 150, , , , , ,100 89,126 78, , ,493,243 Total Expenditures of Federal Awards $ 332,062 $ 558,276 $ 537,786 $ 513,917 $ 457,049 $ 315,285 $ 249,376 $ 157,696 $ 352,858 $ - $ - $ 188,975 $ 3,663,280 Reconciliation to Federal Revenue Total Federal Program Expenditures $ 332,062 $ 558,276 $ 537,786 $ 513,917 $ 457,049 $ 315,285 $ 249,376 $ 157,696 $ 352,858 $ - $ - $ 188,975 $ 3,663,280 E-Rate n/a n/a 31,909 46,363 38,986 34,802 10,728 17,162 27,230 35,969 12, , ,848 Total Federal Revenue Reported on Statement of Activities $ 363,971 $ 604,639 $ 576,772 $ 548,719 $ 467,777 $ 332,447 $ 276,606 $ 193,665 $ 365,596 $ 142 $ 445 $ 277,349 $ 4,008,128 n/a - Not applicable and/or not available. See auditor s report and the notes to the supplementary information. -22-

26 STATEMENT OF FINANCIAL POSITION KIPP LA SCHOOLS BY CHARTER SCHOOL June 30, 2014 Total KIPP KAO KLAP KRA KCCP KEA KSA KPA KSOL KIA KAI KVPA SST Eliminations LA Schools ASSETS CURRENT ASSETS: Cash and cash equivalents $ 417,559 $ 1,466,709 $ 455,988 $ 400,552 $ 885,210 $ 254,924 $ 197,898 $ 75,000 $ 99,907 $ 26,426 $ 81,017 $ 7,513,383 $ - $ 11,874,573 Investments , ,704 Accounts receivable - federal and state 618, , , , , , , , , ,808-6,308,001 Accounts receivable - other , ,372 86,270 42,293 25,717 47,295 10, ,847 Net contributions receivable, current portion (Note 4) ,835,000-1,835,000 Due from KLARE Holdings ,756,259-1,756,259 Prepaid expenses 31,258 25,829 35,137 53,446 24,469 44,956 51,822 24,827 16,999 10,441 50, , ,825 Total current assets 1,067,300 2,439,203 1,452,569 1,331,358 1,745,844 1,013, , , ,703 62, ,895 12,165,953-23,785,209 LONG-TERM ASSETS: Net contributions receivable, net of current portion (Note 4) ,299,702-4,299,702 Security deposits - 40, ,276 5,000 24,100 8, ,000 36, ,065 Letter of credit guarantee , , ,564 Intercompany notes receviable ,290,333 (3,290,333) - Notes receivable - KLARE Holdings ,000,000-1,000,000 Property, plant, and equipment, net 230, ,478 8,818 1,223,222 44, ,943,935 Total long-term assets 230, ,478 9,018 1,483,498 49,777 24,100 8, ,000 8,855,599 (3,290,333) 7,875,266 Total assets $ 1,297,940 $ 2,915,681 $ 1,461,587 $ 2,814,856 $ 1,795,621 $ 1,037,345 $ 732,859 $ 666,185 $ 937,703 $ 62,584 $ 206,895 $ 21,021,552 $ (3,290,333) $ 31,660,475 LIABILITIES AND NET ASSETS CURRENT LIABILITIES: Accounts payable - federal and state $ 82,684 $ 103,240 $ 109,473 $ 76,243 $ 77,766 $ 29,688 $ 29,252 $ 12,678 $ 20,120 $ - $ - $ - $ - $ 541,144 Accounts payable - other 63,929 86,883 96,144 95, , ,820 61,097 54,164 51,627 80,936 30,105 20, ,707 Accrued liabilities 10,386 16,257 17,811 15,576 15,944 13,488 11,117 12,596 12, , , ,665 Deferred revenue 118,122 92, ,670 71,572 97,897 25,952 27, ,645 Notes payable, current portion (Note 7) - 17, ,280 Due to KLARE Holdings , ,992 Total current liabilities 275, , , , , , ,765 79,576 84,308 81,462 33, ,645-2,459,433 LONG-TERM LIABILITIES: Intercompany notes payable ,318, ,972,330 (3,290,333) - Notes payable, net of current portion (Note 7) - 33, , , ,000-1,033,397 Total long-term liabilities - 33,397-1,318, , , ,472,330 (3,290,333) 1,033,397 Total liabilities 275, , ,098 1,576, , , ,765 79,576 84,308 81,462 33,495 2,766,975 (3,290,333) 3,492,830 NET ASSETS: Unrestricted 1,022,819 2,565,944 1,098,489 1,238,142 1,453, , , , ,395 (18,878) 173,400 10,866,171-20,779,239 Temporarily restricted ,388,406-7,388,406 Total net assets 1,022,819 2,565,944 1,098,489 1,238,142 1,453, , , , ,395 (18,878) 173,400 18,254,577-28,167,645 Total liabilities and net assets $ 1,297,940 $ 2,915,681 $ 1,461,587 $ 2,814,856 $ 1,795,621 $ 1,037,345 $ 732,859 $ 666,185 $ 937,703 $ 62,584 $ 206,895 $ 21,021,552 $ (3,290,333) $ 31,660,475 See auditor s report and the notes to the supplementary information. -23-