BAY CITY ACADEMY

BAY CITY, MICHIGAN

FINANCIAL STATEMENTS

FOR THE YEAR ENDED JUNE 30, 2014

Vredeveld Haefner LLC

 BAY CITY ACADEMY
TABLE OF CONTENTS

FINANCIAL SECTION PAGE

Independent Auditors’ Report 1-2

Management’s Discussion and Analysis 3-6

Basic Financial Statements

Government-wide Financial Statements

Statement of Net Position 7
Statement of Activities 9

Fund Financial Statements

Balance Sheet - Governmental Funds 10
Statement of Revenues, Expenditures, and Changes in Fund Balances -
Governmental Funds 11
Notes to Financial Statements 13-19

Required Supplementary Information

Schedule of Revenues, Expenditures, and Changes in Fund Balance -
Budget and Actual - General Fund 21
Schedule of Revenues, Expenditures and Changes in Fund Balance -
Budget and Actual - Food Service Fund 22

Independent Auditors’ 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 23-24

Schedule of Findings and Responses 25

 Vredeveld Haefner LLC
CPA’s and Consultants
4001 Granada Ct.
Grand Rapids, MI 49534
FAX (616) 828-0307

INDEPENDENT AUDITORS’ REPORT

September 12, 2014

Members of the Board of Education

Bay City Academy
Bay City, Michigan

Report on the Financial Statements

We have audited the accompanying financial statements of the governmental activities and each
major fund of Bay City Academy, (the “Academy”) as of and for the year ended June 30, 2014, and
the related notes to the financial statements, which collectively comprise the Academy’s basic
financial statements as listed in the table of contents.
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these financial statements in
accordance with accounting principles generally accepted in the United States of America; this
includes the design, implementation, and maintenance of internal control relevant to the preparation
and fair presentation of financial statements that are free from material misstatement, whether due to
fraud or error.
Auditor’s Responsibility
Our responsibility is to express opinions on these financial statements based on our audit. We
conducted our audit in accordance with auditing standards generally accepted in the United States of
America and the standards applicable to financial audits contained in Government Auditing
Standards, issued by the Comptroller General of the United States. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the financial statements
are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures
in the financial statements. The procedures selected depend on the auditor’s judgment, including the
assessment of the risks of material misstatement of the financial statements, whether due to fraud or
error. In making those risk assessments, the auditor considers internal control relevant to the 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 opinions.
Opinions
In our opinion, the financial statements referred to above present fairly, in all material respects, the
respective financial position of the governmental activities and each major fund of Bay City Academy
as of June 30, 2014, and the respective changes in financial position for the year then ended in
accordance with accounting principles generally accepted in the United States of America.

Specializing in services to governmental and nonprofit entities

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Other Matters
Required Supplementary Information
Accounting principles generally accepted in the United States of America require that the
management’s discussion and analysis on pages 3 through 6 and the budgetary comparison
information on pages 21 and 22 be presented to supplement the basic financial statements. Such
information, although not a part of the basic financial statements, is required by the Governmental
Accounting Standards Board who considers it to be an essential part of financial reporting for placing
the basic financial statements in an appropriate operational, economic, or historical context. We have
applied certain limited procedures to the required supplementary information in accordance with
auditing standards generally accepted in the United States of America, which consisted of inquiries of
management about the methods of preparing the information and comparing the information for
consistency with management’s responses to our inquiries, the basic financial statements, and other
knowledge we obtained during our audit of the basic financial statements. We do not express an
opinion or provide any assurance on the information because the limited procedures do not provide
us with sufficient evidence to express an opinion or provide any assurance.
Other Reporting Required by Government Auditing Standards
In accordance with Government Auditing Standards, we have also issued our report dated September
12, 2014, on our consideration of the Academy's internal control over financial reporting and on our
tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements
and other matters. The purpose of that report is to describe the scope of our testing of internal control
over financial reporting and compliance and the results of that testing, and not to provide an opinion
on internal control over financial reporting or on compliance. That report is an integral part of an audit
performed in accordance with Government Auditing Standards in considering the Academy’s internal
control over financial reporting and compliance.

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MANAGEMENT’S DISCUSSION AND ANALYSIS
 Management’s Discussion and Analysis

As management of Bay City Academy (the Academy), we offer readers of the Academy’s financial
statements this narrative overview and analysis of the financial activities of the Academy for the fiscal
year ended June 30, 2014. We encourage readers to consider the information presented here in
conjunction with additional information that is furnished in the financial statements and notes to the
financial statements.

Financial highlights

• The Farragut campus was opened during the year.

• Total revenue from State of Michigan sources increased approximately $515,000 during the year.
• The Academy continues to seek out ways to improve efficiencies and decrease costs.

Overview of the financial statements

This discussion and analysis is intended to serve as an introduction to the Academy’s financial
statements. The Academy’s basic financial statements comprise three components: 1) government-wide
financial statements, 2) fund financial statements, and 3) notes to the financial statements. This report
also contains other supplementary information in addition to the basic financial statements themselves.

Government-wide financial statements. The government-wide financial statements are designed to

provide readers with a broad overview of the Academy’s finances, in a manner similar to a private-sector
business.

The statement of net position presents information on all of the Academy’s assets and liabilities, with
the difference between the two reported as net position. Over time, increases or decreases in net
position may serve as a useful indicator of whether the financial position of the Academy is improving
or deteriorating.

The statement of activities presents information showing how the government’s net position changed
during the most recent fiscal year. All changes in net position are reported as soon as the underlying
event giving rise to the change occurs, regardless of the timing of related cash flows. Thus, revenues
and expenses are reported in this statement for some items that will only result in cash flows in future
fiscal periods (e.g., payments on debt).

Both of the government-wide financial statements display functions of the Academy that are
principally supported by intergovernmental revenues (governmental activities). The governmental
activities of the Academy include instruction, supporting services and food service. The Academy
does not have any business-type activities.

Fund financial statements. A fund is a grouping of related accounts that is used to maintain control over
resources that have been segregated for specific activities or objectives. The Academy, like other state
and local governments, uses fund accounting to ensure and demonstrate compliance with finance-related
legal requirements. All of the funds of the Academy are considered governmental funds.

Governmental funds. 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 near-term
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 a government’s
near-term financing requirements.

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 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 government’s near-term
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. There were no reconciling
items for the current fiscal year.

The Academy maintains two individual governmental funds. Information is presented separately in the
governmental fund balance sheet and in the governmental fund statement of revenues, expenditures,
and changes in fund balances for the General fund and the Food Service fund, which are considered
to be major funds.

The Academy adopts an annual appropriated budget for its General and special revenue funds.
Budgetary comparison schedules have been provided herein to demonstrate compliance with those
budgets.

Notes to the 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.

Other information. In addition to the basic financial statements and accompanying notes, this report also
presents certain required supplementary information. Required supplementary information includes this
management discussion and analysis as well as a schedule of General and Food Service fund budget to
actual information.

Government-wide Financial Analysis

As noted earlier, net position may serve over time as a useful indicator of a government’s financial
position. In the case of the Academy, assets exceeded liabilities by $31,187 at the close of the most
recent fiscal year.

Net Position
Governmental Activities
2014 2013
Assets
Current and other assets $1,964,043 $1,720,177
Total assets 1,964,043 1,720,177
Liabilities
Other liabilities 32,856 60,161
Notes payable 1,900,000 1,640,273
Total liabilities 1,932,856 1,700,434
Net position
Unrestricted 31,187 19,743
Total net position $ 31,187 $ 19,743

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Net position of the Academy increased by $11,444. The increase in net position is primarily due to
increased state aid revenues and contributions from Smart Schools Management of Bay City, LLC.

Activities
Governmental Activities
2014 2013
Revenue
Program revenue
Charges for services $ 16,040 $ 25,933
Operating grants and contributions 1,036,973 891,219
General revenue
Grants and contributions not restricted
to specific programs 3,837,441 3,502,437
Unrestricted investment earnings 11 51
Total revenue 4,890,465 4,419,640
Expenses
Instruction 2,544,566 2,161,852
Supporting services 2,082,691 2,006,583
Food service 251,764 246,745
Total expenses 4,879,021 4,415,180
Increase in net position 11,444 4,460
Net position - beginning of year 19,743 15,283
Net position - end of year $ 31,187 $ 19,743

Governmental activities

During the year the Academy expended 52% of its total expenses on instruction and 43% on support
services such as oversight services, transportation, building operation and maintenance and
administration. The remaining 5% of expenses was used to provide food service.

Financial analysis of the government’s funds

As noted earlier, the Academy uses fund accounting to ensure and demonstrate compliance with finance-
related legal requirements.

Governmental funds. The focus of the Academy’s governmental funds is to provide information on
near-term inflows, outflows, and balances of spendable resources. Such information is useful in
assessing the Academy’s financing requirements. In particular, unassigned fund balance may serve
as a useful measure of a government’s net resources available for spending at the end of the fiscal
year. As of the end of the current fiscal year, the Academy’s governmental funds reported combined
ending fund balances of $31,187, an increase of $11,444 in comparison with the prior year.

The General fund is the chief operating fund of the Academy. At the end of the current fiscal year,
unassigned fund balance of the General fund was $31,187. As a measure of the General fund’s
liquidity, it may be useful to compare unassigned fund balance to total fund expenditures. Unassigned
fund balance represents 1% of total General fund expenditures.

The fund balance of the Academy’s General fund increased by $11,444 during the current fiscal year.

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Budgetary Highlights

Differences between the original and final amended budgets for the General fund are as a result of
the original budget being prepared with uncertain revenue from state and federal categories. These
amounts were amended when student enrollment was finalized. Federal grants were amended as
final award notices were received.

Economic Factors and Next Year’s Budgets

The following factors were considered in preparing the Academy’s budget for the 2014-15 fiscal year:

• An increase in instruction expenditures related to expected increased contracted costs

related to staffing and materials.
• A decrease in school administration costs based on an expected decrease in contracted
costs related to staffing.
• An increase is expected in state aid revenues due to an increase in the per pupil foundation
allowance.

Requests for Information

This financial report is designed to provide a general overview of the Academy’s finances for all those
with an interest in the government’s finances. Questions concerning any of the information provided in
this report or requests for additional financial information should be addressed to Brian Lynch, 400 North
Madison, Bay City, Michigan 48708.

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BASIC FINANCIAL STATEMENTS
 BAY CITY ACADEMY
STATEMENT OF NET POSITION

JUNE 30, 2014

Governmental
Activities

Assets
Cash $ 301,620
Receivable from management company 902,228
Due from other governments 760,195

Total assets 1,964,043

Liabilities
Accounts payable 32,856
Notes payable 1,900,000

Total liabilities 1,932,856

Net position
Unrestricted 31,187

Total net position $ 31,187

The accompanying notes are an integral part of these financial statements.

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 BAY CITY ACADEMY

STATEMENT OF ACTIVITIES

FOR THE YEAR ENDED JUNE 30, 2014

Program Revenues
Operating
Charges Grants and Net (Expense)
FunctionsI Programs Expenses for Services Contributions Revenue
Primary government
Governmental activities
Contracted service fee
Instruction $ 2,544,566 $ - $ 370,160 $ (2,174,406)
Support services 2,082,691 - 438,186 (1,644,505)
Food service 251,764 16,040 228,627 (7,097)

Total governmental activities $ 4,879,021 $ 16,040 $ 1,036,973 (3,826,008)

General revenues
Unrestricted grants and contributions 3,837,441
Interest earnings 11

Total general revenues 3,837,452

Change in net position 11,444

Net position, beginning of year 19,743

Net position, end of year $ 31,187

The accompanying notes are an integral part of these financial statements.

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 BAY CITY ACADEMY
GOVERNMENTAL FUNDS
BALANCE SHEET

JUNE 30, 2014

Food
General Service Total
Assets
Cash $ 291,709 $ 9,911 $ 301,620
Due from other funds - 240 240
Receivable from management company 902,228 - 902,228
Due from other governments 760,195 - 760,195

Total assets $ 1,954,132 $ 10,151 $ 1,964,283

Liabilities and fund balances

Liabilities
Accounts payable $ 22,705 $ 10,151 $ 32,856
Due to other funds 240 - 240
Notes payable 1,900,000 - 1,900,000

Total liabilities 1,922,945 10,151 1,933,096

Fund balances

Unassigned 31,187 - 31,187

Total liabilities and fund balances $ 1,954,132 $ 10,151 $ 1,964,283

The accompanying notes are an integral part of these financial statements.

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 BAY CITY ACADEMY

GOVERNMENTAL FUNDS
STATEMENT OF REVENUES, EXPENDITURES
AND CHANGES IN FUND BALANCES

FOR THE YEAR ENDED JUNE 30, 2014

Food
General Service Total
Revenues
Local sources $ 438,197 $ 16,040 $ 454,237
State sources 4,101,852 2,200 4,104,052
Federal sources 105,749 226,427 332,176

Total revenues 4,645,798 244,667 4,890,465

Expenditures - contracted service fee

Current
Instruction 2,544,566 - 2,544,566
Support services 2,082,691 - 2,082,691
Food service - 251,764 251,764

Total expenditures 4,627,257 251,764 4,879,021

Revenues over (under) expenditures 18,541 (7,097) 11,444

Other financing sources (uses)

Transfers in - 7,097 7,097
Transfers out (7,097) - (7,097)

Total other financing sources (uses) (7,097) 7,097 -

Net changes in fund balances 11,444 - 11,444

Fund balances, beginning of year 19,743 - 19,743

Fund balances, end of year $ 31,187 $ - $ 31,187

The accompanying notes are an integral part of these financial statements.

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 BAY CITY ACADEMY

NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED JUNE 30, 2014

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accounting policies of Bay City Academy, Bay City, Michigan (the “Academy”) conform to
generally accepted accounting principles as applicable to governments. The following is a summary
of the significant policies.

Reporting Entity

Bay City Academy received its charter under Public Act 416 of 1994 from Lake Superior State
University (“University”). As part of the chartering process, Bay City Academy filed Articles of
Incorporation with the Michigan Department of Commerce. Lake Superior State University provides
certain contractual services to Bay City Academy including the approval of the Academy’s operating
plan, monitoring compliance with provisions of the charter contract and selection of members for the
Board of Education. Lake Superior State University is paid 3% of state aid payments received by the
Academy for such services. The Academy provides education and related services to approximately
550 students in grades kindergarten through 12th. The Academy is governed by a five member
Board of Education (“Board”) approved by Lake Superior State University and administered by a
Chief Administrative Officer appointed by the Board of Education.

As required by generally accepted accounting principles, the financial statements of the reporting
entity include those of Bay City Academy. There are no component units to be included. The criteria
for including a component unit include significant operational or financial relationships with the
Academy.

The Board of Education of the Academy has entered into a services agreement with Smart Schools
Management of Bay City, LLC (“SSB”) which requires SSB to provide management and operational
services (including the educational program, human resources, administration, operations and
maintenance as well as accounting) to the Academy.

Government-wide and Fund Financial Statements

The government-wide financial statements (i.e., the statement of net position and the statement of
activities) report information on all of the nonfiduciary activities of the primary government. For the
most part, the effect of interfund activity has been removed from these statements. Governmental
activities, which normally are supported by intergovernmental revenues are reported in total. The
Academy has no business-type activities.

The statement of activities demonstrates the degree to which the direct expenses of a given function
or segment is 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 items not properly included among program
revenues are reported instead as general revenues.

Major governmental funds are reported as separate columns in the fund financial statements.

The Academy reports the following major governmental funds:

The General Fund is the general operating fund of the Academy. It is used to account for all
financial resources, except those required to be accounted for in another fund.

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 BAY CITY ACADEMY

NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED JUNE 30, 2014

The Food Service Special Revenue Fund is used to account for the proceeds of specific revenue
sources that are legally restricted to expenditures for specified purposes.

Measurement Focus and Basis of Accounting

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 related cash flows. Grants and similar
items are recognized as revenue as soon as all eligibility requirements imposed by the provider have
been met.

Basis of accounting refers to when revenues and expenditures or expenses are recognized in the
accounts and reported in the financial statements. Basis of accounting relates to the timing of the
measurements made, regardless of the measurement focus applied.

All governmental funds are accounted for using the modified accrual basis of accounting. Their
revenues are recognized when they become measurable and available. For this purpose, the
government considers revenues to be available if they are collected within 60 days of the end of the
current fiscal period, except for reimbursement-based grants and interest which use one year.
Expenditures are generally recognized under the modified accrual basis of accounting when the
related liability is incurred.

All governmental funds are accounted for on a spending or “flow of current financial resources”
measurement focus. This means that only current assets and current liabilities are generally included
on their balance sheets. Their reported fund balance is considered a measure of “available,
spendable resources”.

Governmental fund operating statements present increases (revenues and other financing sources)
and decreases (expenditures and other financing uses) in net current assets. Accordingly, they are
said to present a summary of sources and uses of “available, spendable resources” during a period.

Budgets and Budgetary Accounting

Comparisons to budget are presented for General and Special Revenue funds. The Academy follows
these procedures in establishing the budgetary data reflected in the financial statements:

1. Prior to June 1, SSB submits to the Board of Education a proposed operating budget for the fiscal
year commencing the following July 1. The operating budget is adopted by function.

2. Public hearings are conducted to obtain comments.

3. Prior to July 1, the budget is legally enacted through passage of a resolution.

4. Formal budgetary integration is employed as a management control device during the year for the
General and Special Revenue funds.

5. Budgets for the General and Special Revenue funds are adopted on a basis consistent with
generally accepted accounting principles (GAAP).

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 BAY CITY ACADEMY

NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED JUNE 30, 2014

6. Adoption and amendments of all budgets used by the Academy are governed by Michigan Law.
The appropriation ordinances are based on the projected expenditures budget of the various
functions of the Academy. Any amendment to the original budget must meet the requirements of
Michigan Law. The Academy amended its budget for the current fiscal year.

Cash and Investments

Michigan law authorizes the Academy to invest in:

a. Bonds, bills or notes of the United States; obligations, the principal and interest of which are
fully guaranteed by the United States, or obligations of the State. In a primary or fourth class
school district, the bonds, bills or notes shall be payable at the option of the holder upon not
more than 90 days notice or, if not so payable, shall have maturity dates not more than 5
years after the purchase dates.

b. Certificates of deposit issued by a state or national bank, savings accounts of a state or

federal savings and loan association, or certificates of deposit or share certificates of a state
or federal credit union organized and authorized to operate in this State.

c. Commercial paper rated prime at the time of purchase and maturing not more than 270 days
after the date of purchase.

d. Securities issued or guaranteed by agencies or instrumentalities of the United States, United

States or federal agency obligation repurchase agreements, and bankers’ acceptances
issued by a bank that is a member of the federal deposit insurance corporation.

e. Mutual funds that are composed entirely of investment vehicles that are legal for direct
investment by a school district.

f. Investment pools, as authorized by the surplus funds investment pool act, composed entirely
of instruments that are legal for direct investment by a school district.

Due to and Due from Other Funds

Interfund receivables and payables are short-term borrowings that arise from interfund transactions
which are recorded by all funds affected in the period in which transactions are executed.

Contribution Receivable

In accordance with the terms of the SSB management agreement, SSB may make contributions to
the Academy in the event the Academy expenses exceed revenues.

State Aid Revenue

The Academy reports State of Michigan school aid in the fiscal year in which the Academy is entitled
to the revenue as provided by the State of Michigan School Aid Appropriation Act. A certain portion
of State Aid received by the Academy is restricted to cover specified expenses of the Academy,
including special education costs. The unrestricted portion is for use in the general operations of the
Academy.

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 BAY CITY ACADEMY

NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED JUNE 30, 2014

Interfund Transactions

Quasi-external transactions are accounted for as revenues, expenditures, or expenses. Transactions

that constitute reimbursements to a fund for expenditures initially made from it that are properly
applicable to another fund are recorded as expenditures in the reimbursing fund and as reductions of
expenditures in the fund that is reimbursed. All other interfund transactions, except quasi-external
transactions and reimbursements, are reported as transfers. Interfund balances and transfers are
used to subsidize operations of the Food Service fund.

Risk Management

The Academy is exposed to various risks of loss related to torts; theft of, damage to, and destruction
of assets; errors and omissions; injuries to employees; natural disasters and medical benefits to
employees. The Academy carries commercial insurance for general liability, property and casualty,
health claims, and workers compensation. The Academy has had no settled claims resulting from
these risks that exceeded their commercial coverage in any fiscal year since the Academy’s opening
in September 2011.

Net Position and Fund Balance Reporting

Governmental funds report fund balance in the following five categories:

1. Non-spendable – the related asset’s form does not allow expenditure of the balance. The
assets are either (a) not in a spendable form or (b) legally or contractually required to be
maintained intact. Nonspendable fund balance would be equal to inventory, prepaid items,
non-current financial assets, and the nonspendable portion of endowments.
2. Restricted – the related assets can only be spent for the specific purposes stipulated by
constitution, external resource providers, or as identified in enabling legislation.
3. Committed – the related assets can only be spent for a specific purpose identified by formal
resolution of the entity’s governing board.
4. Assigned – the related assets can only be spent for a specific purpose identified by
management as authorized by the entity’s governing board.
5. Unassigned – is the residual classification and includes all spendable amounts not contained
in the other classifications.

Net Position and Fund Balance Flow Assumptions

The potential exists for the Academy to fund outlays for a particular purpose from both restricted (e.g.,
restricted bond or grant proceeds) and unrestricted resources. In order to calculate the amounts to
report as restricted – net position/fund balance and unrestricted – net position/fund balance, a flow
assumption must be made about the order in which the resources are considered to be applied. It is
the Academy’s policy to use restricted resources first, then unrestricted resources as they are
needed. Further, when the components of unrestricted fund balance can be used for the same
purpose, committed fund balance is depleted first, followed by assigned fund balance. Unassigned
fund balance is applied last.

2. EXCESS OF EXPENDITURES OVER APPROPRIATIONS IN BUDGETARY FUNDS

State law provides that the Academy shall not incur expenditures in excess of the amount
appropriated.

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 BAY CITY ACADEMY

NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED JUNE 30, 2014

In the body of the financial statements, the Academy’s actual expenditures and budgeted
expenditures for the budgeted funds have been shown at the function level. The approved budgets of
the Academy for these budgetary funds were adopted at the function level. The Academy adopted its
Food Service budget inclusive with its general operations. For the fiscal year ending 2015, the
Academy anticipates adopting separate budgets for each of the General and Food Service funds.
During the year ended June 30, 2014, the Academy incurred expenditures in the Food Service fund
which was in excess of the amounts appropriated.
Negative
Budget Actual Variance
Food Service Fund
Food service $ - $251,764 $(251,764)

3. CASH

The captions on the financial statements relating to cash and investments are as follows:

Governmental
Activities

Cash $301,620

The cash accounts consist of deposits in three financial institutions located in Michigan. All accounts
are in the name of the Academy and a specific fund or common account. They are recorded in
Academy records at fair value. Interest is recorded when earned.

Deposit risk

Custodial Credit Risk - Deposits. Custodial credit risk is the risk that in the event of a bank failure, the
Academy’s deposits may not be returned. As of year-end, $32,060 of the Academy’s bank balance of
$301,620 was exposed to custodial credit risk because it was uninsured and uncollateralized.

4. DEBT

Short-term notes

The following is a summary of short-term debt transactions of the Academy for the year ended June
30, 2014:
Balance Balance
July 1, June 30,
2013 Additions Deletions 2014

Michigan Finance Authority note payable with final

payment due in August 2013; interest payable at
3.45% $ 112,201 $ - $ 112,201 $ -

Wildfire Credit Union note payable with final

payment due in March 2014; interest payable at
5.00% 800,000 - 800,000 -

Chemical Bank note payable with final payment

due in April 2014; interest payable at 1.99% 728,072 - 728,072 -

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 BAY CITY ACADEMY

NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED JUNE 30, 2014

Chemical Bank note payable with final payment

due in March 2014; interest payable at 1.99% - 500,000 500,000 -

Chemical Bank note payable with final payment

due in August 2014; interest payable at 1.99% - 1,200,000 - 1,200,000

Wildfire Credit Union note payable with final

payment due in March 2015; interest payable at - 700,000 - 700,000
5.00%

Total $1,640,273 $2,400,000 $2,140,273 $1,900,000

Short term debt is issued for cash flow purposes. The total amount of interest expense paid during
the fiscal year was $55,294 and is included in supporting services expenditures.

5. LEASES

The Academy conducts a significant portion of its operations with leased equipment and facilities.

Total lease expense was $404,972 for 2014 net of $420,000 in lease expense that was forgiven by
SSB at June 30, 2014.

The following is a schedule of annual future minimum lease payments required under operating
leases with lease terms in excess of one year as of June 30, 2014:

Year

2015 $ 764,972
2016 759,972
2017 690,948
2018 690,948
2019 690,948
2020-2024 3,454,740
2025-2029 3,454,740
2030-2034 2,242,206

Total minimum lease payments due $12,749,474

6. MANAGEMENT AGREEMENT

On May 26, 2011 the Academy entered into an agreement with Smart Schools Management of Bay
City, LLC for management services (“Agreement”). This Agreement contracts SSB, to the extent
permitted by law, for the provision of all labor, materials, equipment and supervision necessary for the
provision of educational, business administration and management services. The Agreement
continues until the termination (pursuant to the terms of the agreement) or until the expiration of the
Charter currently in effect. Subject to oversight and authority of the Board of Education, SSB is
responsible for the implementation of educational programs as well as establishment of operational
practices including employment of personnel working at the Academy, all aspects of the Academy’s
business administration including accounting operation as well as facility operation including
transportation and food service.

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 BAY CITY ACADEMY

NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED JUNE 30, 2014

In accordance with the Agreement, the Board shall appoint the Board Treasurer, or other officer as
determined by the Board, to serve as the Chief Administrative Officer (CAO) of the Academy. For the
2014 fiscal year, the Board appointed a building principal as CAO of Bay City Academy.

SSB receives all revenues as its management fee, from which it pays all operating costs of the
Academy as detailed in the annual operating budget. SSB is entitled to retain as compensation for its
services rendered pursuant to the Agreement the difference, if any, between the amount of the
management fee and the amount actually expended by SSB in operation and/or management of the
Academy during the fiscal year. In the event Academy expenses exceed revenues, SSB may, but
need not, make contributions to the Academy that are acceptable to SSB and the Board of Education
however the Academy shall not be legally obligated to repay SSB for such contributions made to or
on behalf of the Academy.

Each school year during the term of the Agreement, SSB shall pay into the Board spending account
an amount equal to the lesser of (a) 2% of state per pupil aid reflected in the budget for that
respective school year, or (b) $20,000. All funds in the Board spending account are the property of
the Academy and may be used by the Academy at the discretion of the Board. Funds in the Board
spending account that are not spent by the Academy during the school year shall carryover to the
Academy’s next fiscal year.

7. CONTINGENCIES

Under the terms of various Federal and State grants and regulatory requirements, periodic audits are
required and certain costs maybe questioned as not being appropriate expenditures under the terms
of the grants and requirements. Such audits could lead to reimbursement to the grantor or regulatory
agencies. During 2014 the Academy was subject to a Michigan Department of Education (MDE)
review of the Title I, Part A program. MDE issued a report disclosing their recommendations for
which corrective action is required in order for the Academy to be in compliance with legislative
requirements. The report also includes questioned costs totaling $63,027. The exact amount of
costs that will be required to be returned to MDE is currently indeterminable and a liability has not
been recorded in the financial statements for the year ended June 30, 2014.

8. SUBSEQUENT EVENTS

Subsequent to year-end, the Academy revised its payment terms with Chemical Bank for the note
payable due in August 2014. The revised terms extend the maturity date until September 2014.

In August 2014, the Academy received a $430,000 cash contribution from SSB which is included as
receivable from management company and local revenue at June 30, 2014. The Academy also
received a $420,000 cash refund from SSB for property lease payments made during the fiscal year
that were subsequently forgiven. The refund is included as a receivable from management company
and a reduction of lease expense at June 30, 2014. Furthermore, the Academy received a $52,228
cash refund from SSB for management fees that were paid at June 30, 2014 and recorded as a
receivable from management company at year-end.

During August 2014, funds totaling $930,000 were paid from the Academy bank account to SSB
during the same timeframe as receipt of the June 30, 2014 receivable from management company
occurred.

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REQUIRED SUPPLEMENTARY INFORMATION
 BAY CITY ACADEMY
GENERAL FUND
SCHEDULE OF REVENUES, EXPENDITURES
AND CHANGES IN FUND BALANCE
BUDGET AND ACTUAL

FOR THE YEAR ENDED JUNE 30, 2014

Variance
Budget Amounts Actual Positive
Original Final Amount (Negative)
Revenues
Local sources $ 252,000 $ 420,255 $ 438,197 $ 17,942
State sources 5,346,000 3,947,325 4,101,852 154,527
Federal sources 144,000 293,579 105,749 (187,830)

Total revenues 5,742,000 4,661,159 4,645,798 (15,361)

Expenditures - contracted service fee

Current
Instruction 2,765,542 2,547,780 2,544,566 3,214
Support services 2,860,674 2,090,235 2,082,691 7,544

Total expenditures 5,626,216 4,638,015 4,627,257 10,758

Revenues over (under) expenditures 115,784 23,144 18,541 (4,603)

Other financing sources (uses)

Transfers out - (12,361) (7,097) 5,264

Total other financing sources (uses) - (12,361) (7,097) 5,264

Net changes in fund balance 115,784 10,783 11,444 661

Fund balance, beginning of year 19,743 19,743 19,743 -

Fund balance, end of year $ 135,527 $ 30,526 $ 31,187 $ 661

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 BAY CITY ACADEMY
FOOD SERVICE FUND
SCHEDULE OF REVENUES, EXPENDITURES
AND CHANGES IN FUND BALANCE
BUDGET AND ACTUAL

FOR THE YEAR ENDED JUNE 30, 2014

Variance
Budget Amounts Actual Positive
Original Final Amount (Negative)
Revenues
Local sources $ - $ - $ 16,040 $ 16,040
State sources - - 2,200 2,200
Federal sources - - 226,427 226,427

Total revenues - - 244,667 244,667

Expenditures - contracted service fee

Current
Food service - - 251,764 (251,764)

Total expenditures - - 251,764 (251,764)

Revenues over (under) expenditures - - (7,097) (7,097)

Other financing sources

Transfer in - - 7,097 7,097

Net changes in fund balance - - - -

Fund balance, beginning of year - - - -

Fund balance, end of year $ - $ - $ - $ -

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INTERNAL CONTROL AND COMPLIANCE
 Vredeveld Haefner LLC
CPA’s and Consultants
4001 Granada Ct.
Grand Rapids, MI 49534
FAX (616) 828-0307

INDEPENDENT AUDITORS’ 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

September 12, 2014

Members of the Board of Education

Bay City Academy
Bay City, Michigan

We have audited, in accordance with the auditing standards generally accepted in the United States of
America and the standards applicable to financial audits contained in Government Auditing Standards
issued by the Comptroller General of the United States, the financial statements of the governmental
activities and each major fund of Bay City Academy (the “Academy”) as of and for the year ended June 30,
2014, and the related notes to the financial statements, which collectively comprise the Academy’s basic
financial statements, and have issued our report thereon dated September 12, 2014.

Internal Control Over Financial Reporting

In planning and performing our audit of the financial statements, we considered the Academy’s internal
control over financial reporting (internal control) to determine the audit procedures that are appropriate in
the circumstances for the purpose of expressing our opinions on the financial statements, but not for the
purpose of expressing an opinion on the effectiveness of the Academy’s internal control. Accordingly, we
do not express an opinion on the effectiveness of the Academy’s internal control.
Our consideration of internal control was for the limited purpose described in the preceding paragraph and
was not designed to identify all deficiencies in internal control that might be material weaknesses or
significant deficiencies and therefore, material weaknesses or significant deficiencies may exist that were
not identified. However, as described in the accompanying schedule of findings and responses, we
identified certain deficiencies in internal control that we consider to be material weaknesses.
A deficiency in internal control exists when the design or operation of a control does not allow
management or employees, in the normal course of performing their assigned functions, to prevent, or
detect and correct, misstatements on a timely basis. A material weakness is a deficiency, or a combination
of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement
of the entity’s financial statements will not be prevented, or detected and corrected on a timely basis. A
significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe
than a material weakness, yet important enough to merit attention by those charged with governance. We
consider the deficiencies described in the accompanying schedule of findings and responses as finding
numbers 2014-1 and 2014-2 to be material weaknesses.

Compliance and Other Matters

As part of obtaining reasonable assurance about whether the Academy’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.

Specializing in services to governmental and nonprofit entities

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Response to Findings

The Academy’s response to the findings identified in our audit is described in the accompanying schedule
of findings and responses. We did not audit the Academy’s responses and, accordingly, we express no
opinion on them.

Purpose of this Report

The purpose of this report is solely to describe the scope of our testing of internal control and compliance
and the results of that testing, and not to provide an opinion on the effectiveness of the Academy’s internal
control or on compliance. This report is an integral part of an audit performed in accordance with
Government Auditing Standards in considering the entity’s internal control and compliance. Accordingly,
this communication is not suitable for any other purpose.

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 BAY CITY ACADEMY
SCHEDULE OF FINDINGS AND RESPONSES

FOR THE YEAR ENDED JUNE 30, 2014

Finding 2014-1

The Academy has not implemented a system of controls to prepare financial statements in
accordance with accounting principles generally accepted in the United States of America, including
the presentation of financial statement disclosures.

Management response: We have determined that the cost of completing GAAP basis financial
statements internally outweighs the benefit to be received.

Finding 2014-2

The Academy has not implemented written procedures regarding the internal controls over certain
compliance requirements as required by OMB Circular A-133 and the Michigan Department of
Education.

Management response: We are currently in process of developing the required written procedures.

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