LISA ACADEMY

REGULATORY BASIS FINANCIAL STATEMENTS AND SUPPLEMENTARY INFORMATION

JUNE 30, 2011

with

REPORT OF INDEPENDENTCERTIFIED PUBLIC ACCOUNTANTS

CONTENTS

PAGE

Report of independent certified public accountants 1 - 2

Basic financial statements:Balance sheet - regulatory basis 3Statement of revenues, expenditures and changes in fund

balances - governmental funds - regulatory basis 4Statement of revenues, expenditures and changes in fund

balances - budget to actual - general and special revenue funds - regulatory basis 5

Notes to financial statements 6 - 11

Other reports and supplementary information:Schedule of capital assets 12Report on internal control over financial reporting and other

matters based on an audit of financial statements performed in accordance with Government Auditing Standards 13 - 14

Schedule of findings and responses 15 - 16Independent auditor’s report on compliance with Arkansas state

requirements 17Schedule of statutes required by Arkansas Department of

Education to be addressed in independent auditor’s report on compliance for the year ended June 30, 2011 18

3

General Specialfund revenue

ASSETSCash 293,075$ 39,590$ Accounts receivable 65,726 16,450 Related party receivable 184,250 - Due from other funds 16,450 -

Total assets 559,501$ 56,040$

LIABILITIES AND FUND BALANCESLiabilities:

Accounts payable and accrued expenses 172,200$ -$ Due to other funds - 16,450

Total liabilities 172,200 16,450

Fund Balances:Restricted:

State programs 259,844 - Federal programs - 39,590

Assigned 35,449 - Unassigned 92,008 -

Total fund balances 387,301 39,590

Total liabilities and fund balances 559,501$ 56,040$

Major

LISA ACADEMY

BALANCE SHEET – REGULATORY BASIS

JUNE 30, 2011

See accompanying notes.

4

General Specialfund revenue

REVENUESState assistance 2,954,018$ 1,270$ Federal assistance - 422,058 Activity revenue 137,814 - Donations 5,612 - Food services - 48,350 Other 55,246 -

Total revenues 3,152,690 471,678

EXPENDITURESCurrent:

Regular programs 1,558,209 98,051 Special education 11,708 129,996 Compensatory education - 83,252 Other instructional programs 55,920 - Student support services 108,080 4,775 Instructional staff support services 139,474 6,110 General administration support services 189,240 - School administration support services 161,495 - Business support services 129,350 10,000 Operation and maintenance of plant services 854,319 5,822 Student transportation services 12,250 - Other support services 173 - Food services - 92,968

Capital outlay 34,145 34,811 Total expenditures 3,254,363 465,785

Excess (deficiency) of revenues over expenditures (101,673) 5,893

OTHER FINANCING SOURCES (USES)Program funding return - (1,102)

Net change in fund balances (101,673) 4,791

Fund balance - beginning 488,974 34,799

Fund balance - ending 387,301$ 39,590$

Major

LISA ACADEMY

STATEMENT OF REVENUES, EXPENDITURES, AND CHANGESIN FUND BALANCES - GOVERNMENTAL FUNDS - REGULATORY BASIS

YEAR ENDED JUNE 30, 2011

See accompanying notes.

Budget Actual Variance

REVENUESState assistance 2,839,009$ 2,954,018$ 115,009$ Federal assistance - - - Activity revenue - 137,814 137,814 Donations - 5,612 5,612 Food services - - - Other - 55,246 55,246

Total revenues 2,839,009 3,152,690 313,681

EXPENDITURESCurrent:

Regular programs 1,522,879 1,558,209 (35,330) Special education 15,000 11,708 3,292 Compensatory education - - - Other instructional programs 53,882 55,920 (2,038) Student support services 95,799 108,080 (12,281) Instructional staff support services 189,728 139,474 50,254 General administration support services 156,052 189,240 (33,188) School administration support services 165,423 161,495 3,928 Business support services 144,727 129,350 15,377 Operation and maintenance of plant services 504,420 854,319 (349,899) Student transportation services 24,000 12,250 11,750 Other support services - 173 (173) Food services - - -

Capital outlay 15,000 34,145 (19,145)

Total expenditures 2,886,910 3,254,363 (367,453)

Excess (deficiency) of revenues overexpenditures (47,901) (101,673) (53,772)

OTHER FINANCING SOURCES (USES)Program funding return - - -

Net change in fund balances (47,901)$ (101,673)$ (53,772)$

LISA ACADEMY

YEAR ENDED JUNE 30, 2011

General

STATEMENT OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCES -BUDGET TO ACTUAL - GENERAL AND SPECIAL REVENUE FUNDS -

REGULATORY BASIS

See accompanying notes.

5

Budget Actual Variance

-$ 1,270$ 1,270$

350,409 422,058 71,649 - - - - - -

60,000 48,350 (11,650) - - -

410,409 471,678 61,269

10,000 98,051 (88,051) 88,463 129,996 (41,533) 59,139 83,252 (24,113)

- - - - 4,775 (4,775) - 6,110 (6,110)

7,776 - 7,776 - - -

10,000 10,000 - - 5,822 (5,822) - - -

63,000 92,968 (29,968) - 34,811 (34,811)

238,378 465,785 (227,407)

172,031 5,893 (166,138)

- (1,102) (1,102)

172,031$ 4,791$ (167,240)$

Special Revenue

6LISA ACADEMY

NOTES TO FINANCIAL STATEMENTS

JUNE 30, 2011

Note 1: Summary of significant accounting policies

Reporting entity

LISA Academy (the “School”) was created in 2004 by Little Scholars of Arkansas Foundation, (the “Foundation”) which was incorporated in 2004 in the state of Arkansas as a non-profit organization to operate one or more public charter schools in the state of Arkansas. The Board of Directors of the Foundation is the level of government which has responsibilities over all activities of the School. The School’s financial statements reflect all funds and accounts directly under the control of the School. There are no component units.

Description of funds

Major governmental funds (per the regulatory basis of accounting) are defined as General and Special Revenue.

General Fund - The General Fund is the general operating fund and is used to account for all financial resources, except those required to be reported in another fund.

Special Revenue Fund - The Special Revenue Fund is used to account for the proceeds of specific revenue sources (other than trusts for individuals, private organizations, or other governments or for major capital projects) that are legally restricted to expenditures for specified purposes.

Measurement focus and basis of accounting

The financial statements are prepared in accordance with a regulatory basis of accounting (RBA), which is an Other Comprehensive Basis of Accounting (OCBOA). This basis of accounting is prescribed by Ark. Code Ann. 10-4-413 (c), as provided in Act 2201 of 2005, and requires that financial statements be presented on a fund basis with, as a minimum, the general fund and special revenue fund presentedseparately and all other funds included in the audit presented in the aggregate. The law also stipulates that the financial statements consist of a balance sheet; a statement of revenues, expenditures, and changes in fund balances; a comparison of the final adopted budget to the actual expenditures for the general fund and special revenue funds of the entity; notes to financial statements; and a supplemental schedule of capital assets, including land, buildings, and equipment. The law further stipulates that the State Board of Education shall promulgate the rules necessary to administer the regulatory basis of presentation.

The RBA is not in accordance with generally accepted accounting principles (GAAP). GAAP require that basic financial statements present government-wide financial statements. Additionally, GAAP require the following major concepts: Management’s Discussion and Analysis, accrual basis of accounting for government-wide financial statements, including depreciation expense, modified accrual basis of accounting for fund financial statements, separate financial statements for fiduciary fund types, separate identification of special and extraordinary items, inclusion of capital assets and debt in the financial statements, specific procedures for the identification of major governmental funds and applicable note disclosures. The RBA does not require government-wide financial statements or the previously identified concepts.

7LISA ACADEMY

NOTES TO FINANCIAL STATEMENTS

JUNE 30, 2011

Note 1: Summary of significant accounting policies (continued)

Measurement focus and basis of accounting (continued)

The accompanying financial statements are presented on a fund basis. A fund is defined as a fiscal and accounting entity with a self-balancing set of accounts, which are segregated for purposes of recording specific activities or attaining certain objectives. Revenues are reported by major sources and expenditures are reported by major function. Other transactions, which are not reported as revenues or expenditures, are reported as other financing sources and uses. Transactions related to the recording of capital leases are reported as other financing sources.

Revenue recognition policies

Revenues are recognized when they become susceptible to accrual in accordance with the RBA.

Capital assets

Information on capital assets and related depreciation is reported in the supplemental information. Capital assets are capitalized at historical cost or estimated historical cost, if actual data is not available. Capital assets purchased are recorded as expenditures in the applicable fund at the time of purchase. Donated capital assets are reported at fair value when received. The School maintains a threshold level of $1,000 and a useful life in excess of two years for capitalizing equipment.

No salvage value is taken into consideration for depreciation purposes. All capital assets, other than land and construction in progress, are depreciated using the straight-line method over the following useful lives:

Asset Class Estimated Useful Life in YearsBuildings/improvements 40Equipment 5-20

Fund balance classifications

The Governmental Accounting Standards Board (GASB) released Statement 54 - "Fund Balance Reporting and Governmental Fund Type Definitions" (GASB 54) on March 11, 2009 which is effective for the School’s fiscal year ending June 30, 2011. This Statement is intended to improve the usefulness of the amounts reported in fund balance by providing more structured classifications. Under GASB 54, fund balance is reported under the following five classifications:

1. Nonspendable Fund Balance - includes amounts that are not in a spendable form or are required to be maintained intact. The School does not have any nonspendable fund balance at year end.

2. Restricted Fund Balance - includes amounts that can be spent only for the specific purposes stipulated by external resource providers, constitutionally, or through enabling legislation. The Restricted for State Programs and Restricted for Federal Programs balances reflect amounts restricted for specific state and federal programs as mandated by respective state and federal grant or funding agreements.

8LISA ACADEMY

NOTES TO FINANCIAL STATEMENTS

JUNE 30, 2011

Note 1: Summary of significant accounting policies (continued)

Fund balance classifications (continued)

3. Committed Fund Balance - includes amounts that can be used only for the specific purposes determined by a formal action of the School's highest level of decision-making authority (the Board of Directors) and does not lapse at year end. The School does not have any committed fund balance at year end.

4. Assigned Fund Balance - includes amounts intended for a specific purpose by the Board of Directors or by a School official that has been delegated authority to assign amounts. The assigned fund balance at year end represents funds that are intended for various School activities.

5. Unassigned Fund Balance - includes any remaining fund balance that has not been reported in any other classification.

For the purposes of fund balance classification, expenditures are to be spent from restricted fund balance first, followed in order by committed fund balance (if any), assigned fund balance (if any) and lastly unassigned fund balance.

Budget and budgetary accounting

The School is required by state law to prepare an annual budget. The annual budget is prepared on a fiscal year basis. The School does not prepare and submit amended budgets during the fiscal year. The State Department of Education’s regulations allow for the cash basis or the modified accrual basis. However, the majority of the Schools employ the cash basis method.

The School budgets intra-fund transfers. Significant variances may result in the comparison of transfers at the Statement of Revenues, Expenditures and Changes in Fund Balances - Budget to Actual - General and Special Revenue Funds - Regulatory Basis because only interfund transfers are reported at the Statement of Revenues, Expenditures and Changes in Fund Balances - Governmental Funds -Regulatory Basis.

Budgetary perspective differences are not considered to be significant, because the structure of the information utilized in preparing the budget and the applicable fund financial statements is essentially the same.

Income taxes

The School is exempt from income taxes pursuant to Section 501(c)(3) of the Internal Revenue Code and comparable provisions of state income tax laws.

Note 2: Cash deposits with financial institutions

Cash deposits are carried at cost (carrying value). The bank balance was fully insured under FDIC at June 30, 2011. A comparison of the bank balance and carrying value is as follows:

9LISA ACADEMY

NOTES TO FINANCIAL STATEMENTS

JUNE 30, 2011

Note 2: Cash deposits with financial institutions (continued)

Carrying Bankamount balance

Total deposits $ 332,665 $ 558,557

Note 3: Accounts receivable

The accounts receivable balance of $65,726 at June 30, 2011 was fully comprised of Federal assistance.

Note 4: Related party receivable

The related party receivable consists of $150,000 remaining on a loan made by the School to LISA Academy - North Little Rock which is a related party through common management and Board of Directors. Subsequent to year end, the School received $100,000 of the outstanding balance in November 2011. The remaining balance of $50,000 is expected to be fully repaid by June 30, 2012.

The related party receivable includes $34,250 which is also owed to the School from LISA Academy –North Little Rock.

Note 5: Accounts payable and accrued expenses

The accounts payable and accrued expenses balance in the general fund consists of the following at June 30, 2011:

Accounts payable $ 86,580

Accrued expenses 85,620

$ 172,200

The accounts payable of $86,580 at June 30, 2011 consists of $24,000 in rent payable and $62,580 in vendor payables.

Accrued expenses of $85,620 at June 30, 2011 consists of accrued salary and payroll taxes.

Note 6: Capital lease

In October 2011, the School entered into a three year capital lease for computers. Future minimum lease payments under this lease are as follows:

2012 $ 40,5532013 60,8292014 60,8292015 20,277Total minimum lease payments 182,488Interest (13,354)

Total $ 169,134

10LISA ACADEMY

NOTES TO FINANCIAL STATEMENTS

JUNE 30, 2011

Note 7: Operating leases

The School rents certain real estate under a non-cancellable operating lease. The initial lease term was three years and was based on the square footage rented. A term extension was executed in July 2007,extending the lease through July 2012. Expense for the year ended June 30, 2011 was $262,500. Future minimum rental payments under this lease at June 30, 2011 are as follows:

2012 $ 275,5002013 23,000

Total $ 298,500

The school rents copiers under a 3 year non-cancellable operating lease. Expense for the year ended June 30, 2011 under this agreement was $9,652. Future minimum rental lease payments under this lease at June 30, 2011 are as follows:

2012 $ 9,5332013 4,767

Total $ 14,300

The School rents facilities from Little Scholars of Arkansas, LLC, which is a related party through common management and Board of Directors, under a non-cancellable operating lease. The lease was signed on November 1, 2010 and the current monthly payment is $68,652. The monthly payment will increase once per year until the lease term ends in December 2027, culminating with a monthly payment of $79,085 during the final year of the lease. Expense for the year ended June 30, 2011 was $343,262. Future minimum rental payments under this lease at June 30, 2011 are as follows:

2012 $ 825,0212013 827,4442014 829,9572015 835,2482016 843,347

2017-2021 4,344,0252022-2026 4,572,3462027-2031 1,418,436

Total $ 14,495,824

Note 8: Retirement plans

Arkansas Teacher Retirement System

Plan description: The School contributes to the Arkansas Teacher Retirement System (ATRS), a cost-sharing multiple-employer defined benefit pension plan that covers all Arkansas public school employees, except certain nonteachers hired prior to July 1, 1989. ATRS provides retirement and disability benefits, annual cost-of-living adjustments, and death benefits to plan members and beneficiaries. Benefit and contribution provisions are established by State law and can be amended only by the Arkansas General Assembly. The Arkansas Teacher Retirement System issues a publicly available financial report that includes financial statements and required supplementary information for

11LISA ACADEMY

NOTES TO FINANCIAL STATEMENTS

JUNE 30, 2011

Note 8: Retirement plans (continued)

ATRS. That report may be obtained by writing to Arkansas Teacher Retirement System, 1400 West Third Street, Little Rock, Arkansas 72201 or by calling 1-800-666-2877.

Funding policy: ATRS has contributory and non-contributory plans. Contributory members are required by law to contribute 6% of their salary. Each participating employer is required by law to contribute at a rate established by the Arkansas General Assembly. The current employer rate is 14%.

The School’s contributions to ATRS for the years ended June 30, 2011, 2010, and 2009 were $234,087, $225,525, and $206,673, respectively, equal to the required contributions for each year.

Note 9: Significant concentration

The School is economically dependent on funding received through state and federal awards. During the year ended June 30, 2011, approximately 82% of total revenues were from state sources and 12% of total revenues were from federal awards.

Note 10: Contingencies

The School participates in federally assisted grant programs. The School is potentially liable for expenditures which may be disallowed pursuant to the terms of these grant programs. Management is not aware of any material items of non-compliance which would result in the disallowance of program expenditures.

Note 11: On behalf payments

During the year ended June 30, 2011, health insurance premiums of $26,274 were paid by the Arkansas Department of Education to the Arkansas Employee Benefits Division on behalf of School employees.

OTHER REPORTS AND SUPPLEMENTARY INFORMATION

12

Depreciable capital assets:Building improvements 434,909$ Furniture and equipment 409,462

Total depreciable capital assets 844,371

Less accumulated depreciation for:Leasehold improvements 57,437 Furniture and equipment 275,787

Total accumulated depreciation 333,224

Capital assets, net 511,147$

SCHEDULE OF CAPITAL ASSETS

YEAR ENDED JUNE 30, 2011

LISA ACADEMY

15LISA ACADEMY

SCHEDULE OF FINDINGS AND RESPONSES

YEAR ENDED JUNE 30, 2011

A. FINDINGS - FINANCIAL STATEMENTS AUDIT

None

B. PRIOR YEAR FINDINGS - FINANCIAL STATEMENTS AUDIT

Material weaknesses:

2010-1. Activity fund cash reconciliation

Criteria: Cash accounts should be reconciled regularly to ensure that cash is properly reported.

Condition: The general ledger cash balance was not properly reconciled to the bank cash balance for the activity fund.

Context: As a result of our audit of cash, we noted that there was no reconciliation of the activity account and the reconciliation was incorrect.

Effect: Before audit adjustments, cash was materially misstated for the activity fund.

Cause: The School failed to record numerous expenditures that were made during the year and deposits in transit were not identified at year end.

Previous recommendation: Reconcile the account balance reported by the bank to the amount on the general ledger monthly and record all required adjustments.

Current status: The activity fund cash account was properly reconciled during the current year.

2010-2. Improper accounting of revenue receivable, accounts payable and interfund transfers

Criteria: The School’s financial statements should be complete and include all transactions related to the year end.

Condition: The School’s financial statements do not properly account for accounts payable, revenue receivables, and interfund transfers.

Context: Testing of subsequent receipts and disbursements during the audits of revenuereceivables, accounts payable, and accruals.

Effect: Controls are not in place to accrue expenditures payable and revenues receivable at year-end, and the client does not account for the due to and due from accounts to record interfund activity property.

Cause: The School has not implemented a policy to review subsequent receipts and disbursements for proper inclusion at year end, and does not use due to and due from accounts to record interfund activity.

16LISA ACADEMY

SCHEDULE OF FINDINGS AND RESPONSES

YEAR ENDED JUNE 30, 2011

B. PRIOR YEAR FINDINGS - FINANCIAL STATEMENTS AUDIT

2010-2. Improper accounting of revenue receivable, accounts payable and interfund transfers (continued)

Previous Recommendation: Implement a policy that accounting personnel review collections received and disbursements made during the first months of the new fiscal year to determine whether the related revenues or expenditures should be accrued into the previous year’s activity. Additionally, due to and due from accounts should be used to account for interfund activity.

Current status: Accounting personnel is now appropriately identifying revenue receivables and accounts payable per review of subsequent collections and disbursements.

2010-3: Supporting documentation for expenditures

Criteria: Supporting documentation and approval should be provided for all cash disbursements prior to check issuance.

Condition: Did not adhere to internal control policy that requires supporting documentation and approval of transactions prior to disbursement.

Context: As a result of disbursement testing, it was noted that there were disbursements that lacked supporting documentation for the expenses for which the check was written.

Effect: The lack of a requirement for supporting documentation and approval does not allow the School to acknowledge that the expenditures are allowable under grant/funding requirements and that they are for valid expenditures.

Cause: The School did not follow its internal control policy that requires supporting documentation and an approval signature on each disbursement.

Previous Recommendation: The School should adhere to its internal control policy requiring supporting documentation and an approval signature for all cash disbursements prior to payment. Current status: Based on disbursements testing performed during the current year, the School is maintaining appropriate supporting documentation for all expenditures.

18 LISA ACADEMY

SCHEDULE OF STATUTES REQUIRED BY ARKANSAS DEPARTMENT OF EDUCATION TO BE ADDRESSED IN INDEPENDENT AUDITORS’ REPORT ON COMPLIANCE

YEAR ENDED JUNE 30, 2011 DESCRIPTION STATUTES Bidding & Purchasing Commodities 6-21-301 - 6-21-305 Ethical Guidelines and Prohibitions 6-13-628; 6-24-101 et seq. Collateralization & Investment of Funds 6-20-222; 19-1-504 Deposit of Funds 19-8-104; 19-8-106 District Finances 6-20-402

Bonded & Non-bonded Debt, 6-20-1201-6-20-1208; 6-20-1210 District School Bonds

Petty Cash 6-20-409 Management of Schools

Board of Directors 6-13-604; 6-13-606; 6-13-608; 6-13-611 – 6-13-613; 6-13-617 – 6-13-620; 6-13-1406; 6-24-101; 6-24-104-6-24-105 District Treasurer 6-13-701 Warrants 6-17-918; 6-17-919; 6-20-403

Management Letter for Audit 14-75-101 – 14-75-104 Nonrecurring Salary Payments 6-20-412 Revolving Loan Fund 6-19-114; 6-20-801 et seq. Salary Laws - Classified 6-17-2201 et. seq.; 6-17-2301 et seq. School Elections 6-13-622; 6-13-630; 6-13-631; 6-13-634; 6-14-106; 6-14-109; 6-14-118; 6-13-1412; 6-13-1413 Teachers and Employees

Personnel Policies 6-17-201 et seq. Employment and Assignment 6-17-301 et seq. Teacher’s License Requirement 6-17-401 et seq. Contracts 6-17-801 et seq. Certification Requirements 6-17-309; 6-17-401 Fair Dismissal Act 6-17-1501 et seq.; 6-17-1701 et seq. Sick Leave Policies 6-17-1201 et seq.; 6-17-1301 et seq.

Teacher Salaries, the Minimum Foundation 6-17-803; 6-17-907; 6-17-908; 6-17-911 – 6-17-913; Program Aid Act 6-17-918; 6-17-919 Trust Funds (Education Excellence) 6-5-307 Use of Contractors, Improvement Contracts 22-9-201 – 22-9-205 Use of DM&O Millage 26-80-110 On Behalf Payments The amounts of funds paid by the Arkansas Department of Education to the Employee Benefits Division, on-behalf of School Employees