YELLOWSTONE ACADEMY, INC. FINANCIAL STATEMENTS JUNE 30, 2013 AND 2012

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1 FINANCIAL STATEMENTS

2 CONTENTS Page Independent Auditor's Report Statements of Assets, Liabilities and Net Assets - Modified Cash Basis... 4 Statements of Revenues and Expenses and Changes in Net Assets - Modified Cash Basis... 5 Notes to Financial Statements Supplemental Schedules of Operating Expenses... 10

3 HARPER & PEARSON COMDANY. P.C CERTIFIED PUBLIC r r\, ACCOUNTANTS INDEPENDENT AUDITOR'S REPORT To the Board of Directors Yellowstone Academy, Inc. Houston, Texas We have audited the accompanying statements of assets, liabilities and net assets - modified cash basis of Yellowstone Academy, Inc. (Yellowstone), a non-profit organization, as of June 30, 2013 and 2012, and the related statements of revenues and expenses and changes in net assets - modified cash basis for the years then ended. Management's Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with the modified cash basis of accounting described in Note A; this includes determining that the modified cash basis of accounting is an acceptable basis for the preparation of the financial statements in the circumstances. Management is also responsible for 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 audits. We conducted our audits in accordance with auditing standards generally accepted in 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 risk 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. Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the assets, liabilities and net assets of Yellowstone Academy, Inc. at June 30, 2013 and 2012, and the revenues and expenses and changes in net assets for the years then ended, in accordance with the basis of accounting described in Note A.. 2 One RivelWay Suite 1900' Houston, Texas ' fax harperpearson.com

4 Basis of Accounting We draw attention to Note A of the financial statements, which describes the basis of accounting. The financial statements are prepared on the modified cash basis of accounting, which is a basis of accounting other than accounting principles generally accepted in the United States. Our opinion is not modified with respect to that matter. Report on Supplementary Information Our audit was conducted for the purpose of forming an opinion on the financial statements as a whole. The supplemental schedules of operating expenses on page 10 are presented for the purpose of additional analysis and are not a required part of the 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 audits of the financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying acco\unting 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. In our opinion, the information is fairly stated in all material respects in relation to the financial statements as a whole. Houston, Texas January 14,

5 STATEMENTS OF ASSETS, LIABILITIES AND NET ASSETS MODIFIED CASH BASIS ASSETS cash and cash equivalents Other current assets $ 2,085, $ 2,085,886 $ 2,627,158 1,598 $ 2,628,756 NET ASSETS Unrestricted Temporarily restricted $ 1,483, ,423 $ 1,963, ,710 $ 2,085,886 $ 2,628,756 See accompanying notes. 4

6 STATEMENTS OF REVENUES AND EXPENSES AND CHANGES IN NET ASSETS MODIFIED CASH BASIS YEARS ENDED UNRESTRICTED NET ASSETS SUPPORT AND REVENUE Contributions $ 2,110,965 $ 1,587,626 Tuition and fees 14,438 15,693 Rent 7,800 9,000 Interest, dividends and other 8,165 3,517 Special events, less direct donor benefits of $131,094 and $51,703 in fiscal 2013 and 2012, respectively 1,539,894 2,254,726 Assets released from restrictions 1,099,217 2,814,118 Total Support and Revenue 4,780,479 6,684,680 EXPENSES Operating Expenses Program expenses 4,178,099 4,053,364 Management and general expenses 683, ,375 Fundraising expense 393, ,035 Total Operating Expenses 5,255,806 5,148,774 Principal and interest payments (Note F) 4,256 29,514 Total Expenses 5,260,062 5,178,288 CHANGE IN UNRESTRICTED NET ASSETS (479,583) 1,506,392 TEMPORARILY RESTRICTED NET ASSETS Contributions 774,600 1,478,086 Special events, less direct donor benefits of $102,801 and $145,606 in fiscal 2013 and 2012, respectively 261, ,169 Temporarily restricted net assets released (1,099,217) (2,814,118) CHANGE IN TEMPORARILY RESTRICTED NET ASSETS (63,287) (1,176,863) CHANGE IN NET ASSETS (542,870) 329,529 NET ASSETS, BEGINNING OF YEAR 2,628,756 2,299,227 NET ASSETS, END OF YEAR $ 2,085,886 $ 2 l 628 l 756 See accompanying notes. 5

7 NOTES TO FINANCIAL STATEMENTS NOTE A BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Yellowstone Academy, Inc. (Yellowstone) was incorporated as a not-far-profit organization in August 2001 for the purpose of establishing a high quality private Christian Academy exclusively serving low-income children in Houston's inner city. Yellowstone opened its doors in August 2002 offering classes for three and four year old students. Currently, Yellowstone has expanded its program through the eighth grade, serving 380 students. In May 2004, Yellowstone received its accreditation through The Southern Association of Colleges and Schools (SACS). SACS is the leading accreditation agency serving the 11 states in the Southeastern United States. SACS provides accreditation to public and private Schools from pre-kindergarten through the university level. The accreditation process must be repeated every five years. Yellowstone's accreditation approval was granted again in May Basis of Accounting - The accompanying financial statements have been prepared on the modified cash basis of accounting, which is a comprehensive basis of accounting other than generally accepted accounting principles. Income is recognized when received and expenses are recognized when paid. Modifications to the cash basis of accounting exist for the recording of other assets on the statement of financial position and for the recording of inkind contributions and their related expenses on the statement of activities. Basis of Presentation - Yellowstone reports information regarding its financial position and activities according,to three classes of net assets: unrestricted net assets, temporarily restricted net assets, and permanently restricted net assets. These net assets classifications are described as follows: Unrestricted Net Assets - not subject to donor-imposed restrictions. Unrestricted net assets may be designated for specific purposes by action of the Board of Directors. Temporarily Restricted Net Assets - subject to donor-imposed stipulations that may be fulfilled by actions of Yellowstone to meet the stipulations or become unrestricted at the date specified by the donor. Permanently Restricted Net Assets - subject to donor-imposed stipulations that they be retained and invested permanently by Yellowstone. Yellowstone currently has no permanently restricted net assets. Management's Estimates - Management uses estimates and assumptions in preparing financial statements. These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Actual results could vary from estimates that were used. Concentrations of Credit Risk - Financial instruments which subject Yellowstone to concentrations of credit risk consist principally of cash and cash equivalents. Yellowstone places its cash and cash equivalents with high credit quality financial institutions. Deposits with financial institutions may exceed the amount of federal deposit insurance provided on such deposits; however, these deposits typically may be redeemed upon demand and therefore bear minimal risk. 6

8 NOTES TO FINANCIAL STATEMENTS NOTE A BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Cash and Cash Equivalents - Cash and cash equivalents include demand deposits and money market accounts. Fixed Assets - It is Yellowstone's policy to expense all purchases and donations of property when acquired. Donations of property and equipment are recognized at their estimated fair value. Such donations are reported as unrestricted contributions unless the donor has restricted the donated asset to a specific purpose. Assets donated with explicit restrictions regarding their use and contributions of cash that must be used to acquire property and equipment are reported as restricted contributions. Absent donor stipulations regarding how long those donated assets must be maintained, Yellowstone reports expirations of donor restrictions when the donated or acquired assets are placed in service. Contributions - Contributions are recognized when collected. Contributions that are restricted by the donor for future periods or a specific purpose are reported as increases in temporarily restricted net assets depending on the nature of the restriction. When a restriction expires, temporarily restricted net assets are reclassified to unrestricted net assets and reported in the statement of revenues and expenses as assets released from restrictions. Donated Securities - Yellowstone periodically receives donations of securities, which are recorded at their fair value on the date of the donation. Yellowstone's policy is to immediately sell donated securities minimizing gains and/or losses realized on the donated securities. In-Kind Contributions - Donated assets, materials and use of facilities are recognized at fair value as contributions and expense when received from the donor. Yellowstone uses volunteers in all of its various programs. Contributions of services which would typically need to be purchased, if not provided by donation, are recognized either when services received create or enhance nonfinancial assets or are provided by individuals possessing specialized skills. Income Taxes - Yellowstone is a not-for-profit organization that is exempt from income taxes under Section 50l( c)(3) of the Internal Revenue Code and classified by the Internal Revenue Service as a private school. As of June 30, 2013, the tax years that remain subject to examination by the major tax jurisdictions under the statute of limitations are from the fiscal year 2010 forward (with limited exceptions). Tax penalties and interest, if any, would be recorded when paid and would be classified as management and general expense in the statement of revenues and expenses. Subsequent Events - Yellowstone has evaluated subsequent events through January 14, 2014, the date the financial statements were available to be issued. Except for the renewal of the loan agreement discussed in Note E, no subsequent events occurred which require adjustment or disclosure to the financial statements at June 30, NOTE B EMPLOYEE BENEFITS Yellowstone has a Simple IRA plan available to all employees to which it makes matching contributions up to 3% of a participating employee's salary. During fiscal 2013 and 2012, Yellowstone's matching contributions amounted to $33,570 and $31,760, respectively. 7

9 NOTES TO FINANCIAL STATEMENTS NOTE C SPECIAL EVENTS Yellowstone hosts several special events each year. These events include the Fall Breakfast, Guild Luncheon, Young Friends of Yellowstone Polo Party, and Spring Golf Tournament. The goals of these events are to encourage volunteer interest, to solicit donations, and to increase awareness of Yellowstone's mission and programs to existing and potential donors. NOTE D FACILITY ACQUISITION AND CAPITAL CAMPAIGN In June 2006, Yellowstone purchased Douglass Elementary from Houston Independent School Districted for $1,901,600. As a result of the purchase of Douglass Elementary the board of directors approved a capital campaign for $11.5 million which was expanded to $12.5 million in The purpose of the campaign was to fund the growth of Yellowstone including the acquisition and renovation of the facility with $6.5 million and the increased operating expenses associated with additional grade expansions with the remaining $6 million. The campaign was structured by the board of directors to allow for funds collected in the name of the capital campaign to be used for operating purposes each year. During fiscal year 2012, it was determined that all scheduled facility projects associated with the capital campaign were complete and the capital campaign could be closed and remaining funds of approximately $1,700,000 were released from restrictions. NOTE E DEBT In accordance with the modified cash basis of accounting, it is Yellowstone's policy to recognize proceeds on the issuance of debt as capital loan proceeds income when received and recognize all repayments of debt as an expense when disbursed. Yellowstone has a financing agreement with a bank which provides for maximum borrowings of $1,200,000. The terms of the agreement were modified effective July 1, 2013 to extend the maturity date to July 1, The agreement bears interest at the prime rate plus a commitment fee on the average daily unused portion of the commitment at the rate of 0.25% per annum. The loan is collateralized by the facility and all pledges and receipts resulting from Yellowstone's capital campaign. At June 30, 2013 and 2012, the outstanding balance was $25,000. Yellowstone paid interest and commitment fees amounting to $4,256 and $4,514 during the fiscal years 2013 and 2012, respectively. The loan agreement requires Yellowstone's financial statements to be presented in accordance with generally accepted accounting principles ("GAAp") no later than 120 days after the end of the fiscal year. For fiscal years 2013 and 2012, the lender has waived compliance with these terms of the agreement. 8

10 NOTES TO FINANCIAL STATEMENTS NOTE F TEMPORARILY RESTRICTED NET ASSETS Temporarily restricted net assets consist of the following at June 30: Special Projects: Student Programs $ 209,462 $ 134,410 Student Clubs 5,669 7,991 Facilities 224, ,560 Development 1,327 1,327 Operating Expenses: Student Programs 39,837 14,500 Development 22,000 Yellowstone Guild 100, ,922 $ ~

11 SUPPLEMENTAL SCHEDULES OF OPERATING EXPENSES YEARS ENDED 2013 Management Program and General Fundraising Total Personnel Costs $ Student Curriculum and Programs General Expenses Capital Expenses Development Total Operating Expenses $ 2,849,812 $ 453,615 $ 231,493 $ 3,534, , , , ,077 19, ,027 96,544 5, , , , ~ $ $ l Management Program and General Fundraising Total Personnel Costs $ Student Curriculum and Programs General Expenses Capital Expenses Development Total Operating Expenses $ 2,783,385 $ 448,258 $ 202,155 $ 3,433, , , , ,485 33, ,744 81,248 11, , J ~ $ $ 5 l 148J74 See independent auditor's report. 10