Redwoods Group 2012 Audited Financial Statement

The Redwoods Group, Inc.

Audited Consolidated Financial Statements

Years ended December 31, 2012 and 2011with Report of Independent Auditors



Years ended December 31, 2012 and 2011

Contents

Report of Independent Auditors................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................1


Consolidated Balance Sheets................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................2Consolidated Statements of Comprehensive Income................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................3Consolidated Statements of Changes in Stockholders' Equity................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................4Consolidated Statements of Cash Flows................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................5Notes to Consolidated Financial Statements................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................6 - 17

Report of Independent Auditors

Board of Directors


We have audited the accompanying consolidated financial statements of The Redwoods Group, Inc. (theCompany) and its subsidiary which comprise the consolidated balance sheets as of December 31, 2012and 2011, and the related consolidated statements of comprehensive income, changes in shareholders’equity and cash flows for years then ended and the related notes to the consolidated financial statements.

Management’s Responsibility for the Financial StatementsManagement is responsible for the preparation and fair presentation of these consolidated financialstatements 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 preparationand fair presentation of consolidated financial statements that are free from material misstatement,whether due to fraud or error.

Auditor’s ResponsibilityOur responsibility is to express an opinion on these consolidated financial statements based on our audits.We conducted our audits in accordance with auditing standards generally accepted in the United States ofAmerica. Those standards require that we plan and perform the audits to obtain reasonable assuranceabout whether the consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures inthe consolidated financial statements. The procedures selected depend on the auditor’s judgment,including the assessment of the risks of material misstatement of the consolidated financial statements,whether due to fraud or error. In making those risk assessments, the auditor considers internal controlrelevant to the entity’s preparation and fair presentation of the consolidated financial statements in orderto design audit procedures that are appropriate in the circumstances, but not for the purpose of expressingan 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 reasonablenessof significant accounting estimates made by management, as well as evaluating the overall presentation ofthe consolidated financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis forour audit opinion.

OpinionIn our opinion, the consolidated financial statements referred to above present fairly, in all materialrespects, the financial position of the Company and its subsidiary as of December 31, 2012 and 2011 andthe results of their operations and their cash flows for the years then ended in conformity with accountingprinciples generally accepted in the United States of America.

Raleigh, North CarolinaMarch 11, 2013


Consolidated Balance Sheets

As of December 31,2012 2011

AssetsCash and cash equivalents $ 49,750 $ 153,054Certificate of deposits 870,021 823,855Investments 113,481 110,465Restricted cash 3,892,432 2,907,503Premiums and commissions receivable 7,136,176 7,726,506Prepaid expenses 177,872 137,148Deferred income taxes, net 62,042 115,437Other current assets 147,441 119,183

Total current assets 12,449,215 12,093,151Property and equipment, net 430,780 246,143Investment in affiliate 827,595 633,829Investments - other 250,000 250,000Property held for investment 782,176 295,697Deferred income taxes, long-term, net 318,460 213,102Other long-term assets 749,187 625,822

Total assets $ 15,807,413 $ 14,357,744

Liabilities and stockholders' equityLiabilities:Accounts payable $ 150,211 $ 208,808Funds held for others 3,892,432 2,907,503Premiums and commissions payable 5,324,610 5,850,607Accrued expenses 195,190 128,901Notes payable 518,426 -Due to affiliate 25,000 70,000Income taxes payable 114,488 123,113Stock repurchase payable 41,958 65,335Deferred revenue 1,142,299 1,138,323

Total current liabilities 11,404,614 10,492,590Due to affiliate 453,536 253,415Stock repurchase payable 83,916 125,874Deferred revenue 217,513 216,688Deferred compensation 706,055 630,345Deferred rent 370,785 -Other 24,826 25,833

Total liabilities 13,261,245 11,744,745

Stockholders' equity:Common stock; $0.01 par value, 1,000,000 shares authorized and 468,388

and 491,741 shares issued and outstanding, respectively 4,684 4,917Additional paid-in capital 983,731 982,246Retained earnings 1,549,143 1,619,022Accumulated other comprehensive income 8,610 6,814

Total stockholders' equity 2,546,168 2,612,999

Total liabilities and stockholders' equity $ 15,807,413 $ 14,357,744

See accompanying notes to consolidated financial statements

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Consolidated Statements of Comprehensive Income

Years ended December 31,2012 2011

RevenuesCommissions and fees $ 12,105,800 $ 11,713,081Investment and other income 146,393 132,889

Total revenues 12,252,193 11,845,970

ExpensesCommission expense 1,710,238 1,649,295Compensation and benefits 7,099,422 7,092,362Operating and administrative 2,746,306 2,710,765Depreciation and amortization 141,376 142,150

Total expenses 11,697,342 11,594,572

Income before income taxes 554,851 251,398

Income tax expense 226,906 104,504

Net Income 327,945 146,894

Other Comprehensive Income: Unrealized holding gains arisingduring period, net of tax expense of ($1,148) and ($3,261),respectively

1,796 5,099

Total Comprehensive Income $ 329,741 $ 151,993


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Consolidated Statements of Changes in Stockholders' Equity

Common StockAdditional

Paid-in CapitalRetainedEarnings

AccumulatedOther

ComprehensiveIncome Total

Balance at January 1, 2011 $ 5,260 $ 1,029,009 $ 1,988,201 $ 1,715 $ 3,024,185

Net income - - 146,894 - 146,894Stock grants, including realized income tax benefits

of $245 18 32,159 - - 32,177Stock redeemed (352) (69,509) (516,073) - (585,934)Stock forfeited (9) (9,413) - - (9,422)Other comprehensive income - - - 5,099 5,099

Balance at December 31, 2011 4,917 982,246 1,619,022 6,814 2,612,999

Net income - - 327,945 - 327,945Stock grants, including realized income tax expense

of $310 18 22,993 - - 23,011Stock redeemed (251) (51,008) (397,824) - (449,083)Stock option expense - 29,500 - - 29,500Other comprehensive income - - - 1,796 1,796

Balance at December 31, 2012 $ 4,684 $ 983,731 $ 1,549,143 $ 8,610 $ 2,546,168

See accompanying notes to the consolidated financial statements

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Consolidated Statements of Cash Flows

Years ended December 31,2012 2011

Cash flows from operating activities Net income $ 327,945 $ 146,894Adjustments to reconcile net income to net cash from operating

activitiesDepreciation and amortization expense 141,376 142,150Amortization of bond discount (72) (69)Stock grants 23,009 32,177Stock grant forfeiture - (9,413)Stock options 29,500 -Deferred tax effects of unrealized capital gains (1,148) (3,261)Gain on sale or disposal of assets, net 5,408 (17,031)Net loss from investment in affiliate 16,234 33,702Services provided to affiliate (54,878) (69,081)Net change in operating assets and liabilities:

Premiums and commissions receivable 590,330 (1,041,642)Prepaid expenses (40,724) (19,185)Other assets (151,623) (125,636)Deferred income taxes (51,963) (8,742)Accounts payable (58,597) 47,018Premiums and commissions payable (525,997) 962,931Accrued expenses 40,455 15,592Income taxes payable (8,625) 61,520Deferred revenue 4,801 59,773Deferred compensation 75,710 75,412Deferred rent 370,785 -

Net cash from operating activities 731,926 283,109

Cash flows from investing activitiesPurchase of property held for investment (497,465) 6,409Purchase of property and equipment (321,056) (146,347)Proceeds from disposal of property and equipment 620 45,150Purchase of investments (46,166) (43,630)

Net cash from investing activities (864,067) (138,418)

Cash flows from financing activitiesCost of common stock repurchased (514,416) (394,734)Borrowings under line of credit and financing 1,555,888 -Payment to line of credit and financing (1,012,635) -

Net cash from financing activities 28,837 (394,734)

Net change in cash and cash equivalents (103,304) (250,043)Cash and cash equivalents, beginning of year 153,054 403,097Cash and cash equivalents, end of year $ 49,750 $ 153,054

Supplemental disclosuresInterest paid $ 7,032 $ 122Income tax paid $ 288,300 $ 55,096


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Notes to Consolidated Financial Statements

Years ended December 31, 2012 and 2011

Note A - Organization and Significant Accounting Policies

OrganizationThe Redwoods Group, Inc. (the Company) was formed in 1997. The Company is a managingunderwriter of property, liability and workers' compensation insurance coverage provided byinsurance carriers for the Company's programs for Young Men's Christian Associations(YMCAs), Jewish Community Centers (JCCs), and not-for-profit camps (Camps) throughout theUnited States.

Premiums written under the Company's YMCA, JCC, and Camps programs amounted to $53.3million and $51.7 million during calendar year 2012 and 2011, respectively. The Company hasagreements with insurance carriers through which it provides underwriting, policy administrationand claims administration services and receives commissions and fees which are normally paidwhen policy premiums are collected. The Company's home office is in Morrisville, NorthCarolina.

The Redwoods Group Foundation (the Foundation) is sponsored by the Company. TheFoundation is a non-proft organization that works to spread preventive safety solutions thatprotect and save lives. As of December 31, 2012 and 2011, the Company had an intercompanyreceivable from the Foundation for $31,990 and $3,288, respectively. Refer to Note D forfurther related party transactions.

On December 31, 2012, the Company purchased BWS Durham (BWS), a limited liabilitycompany, for $500,246. BWS's main asset is an office building in Durham, NC. BWS is awholly owned subsidiary of the Company and consolidated according to accounting principlesgenerally accepted in the United States of America (GAAP) within these financial statements.

Basis of Presentation The accompanying financial statements have been prepared in accordance with GAAP.Preparation of financial statements in accordance with GAAP requires management to makeestimates and assumptions that affect the reported amounts of assets and liabilities and disclosureof contingent assets and liabilities at the date of the financial statements, and the reportedamounts of revenues and expenses during the reporting period. Actual results could differ fromthose estimates.

Cash and Cash Equivalents The Company considers all highly liquid investments with original maturities of three months orless, including money market funds, to be cash and cash equivalents. The Company maintainscertain cash and cash equivalent balances that exceed FDIC insured limits, which managementconsiders to be a normal business risk.

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Notes to Consolidated Financial Statements (Continued)

Note A - Organization and Significant Accounting Policies (continued)

Restricted Cash and Funds Held for OthersRestricted cash represents premiums collected by the Company that are not yet due to theinsurance carriers. The corresponding liability to the insurance carriers is reported as funds heldfor others. The Company also maintains certain cash accounts, which consist of insurancecarrier funds advanced for the payment of claims, that are not reflected in the accompanyingbalance sheets. The amount of such balances at December 31, 2012 and 2011 were $2,300,373and $2,911,174, respectively. The inclusion of such accounts in the balance sheets would resultin an increase to restricted cash and a corresponding increase to funds held for others, with nonet impact on reported stockholders' equity.

Fair Value of InvestmentsGAAP provides guidance for measuring assets and liabilities at fair value and establishes a three-level hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. Thefair value hierarchy gives the highest priority to quoted prices in active markets for identicalassets or liabilities (Level 1), the next priority to quoted prices for identical assets and liabilitiesin inactive markets or similar assets and liabilities in active markets (Level 2), and the lowestpriority to unobservable inputs (Level 3).

InvestmentsThe Company designates investments in debt securities as available-for-sale and, accordingly,reports these investments at fair value with unrealized holding gains and losses reported as othercomprehensive income, net of estimated tax. Fair values for the Company's debt securities arebased on average bid prices of identical or similar issues with the same life and expected yields(Level 2). Bond premiums or discounts are amortized over the life of the bond using theconstant yield method. The Company's investments in certificates of deposit are reported at cost.The Company's investment in affiliate (Note C) is recorded under the equity method ofaccounting. The Company's investment in a residential condominium (Note B) is reflected atcost and is being depreciated using the straight-line method over an estimated useful life of 27.5years. The Company's purchase of BWS (Note D) included in a building reflected at cost beingdepreciated using the straight-line method over an estimated useful life of 39 years. TheCompany's 9% holdings in an unconsolidated limited liability company real estate venture (NoteB) is carried at cost.

Realized gains and losses on the disposition of investments are determined using the specificidentification basis. No realized gains or losses on the disposition of investments wererecognized during the years ended December 31, 2012 and 2011, respectively.

Unrealized losses on investments in debt securities, which are deemed other-than-temporary, arecharged to income when such determination is made. Factors considered in identifying other-than-temporary impairment (OTTI) include: (1) whether the Company intends to sell theinvestment or whether it is more likely than not that the Company will be required to sell thesecurity prior to an anticipated recovery in value; (3) the likelihood of the recoverability of

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Investments (continued)principal and interest (i.e., whether there is a credit loss); (4) the length of time and extent towhich the fair value has been less than amortized cost; and (5) the financial condition, near-termand long-term prospects for the issuer, including the relevant industry conditions and trends, andimplications of rating agency actions and offering prices. Any such write downs are reported asrealized losses on investments.

Investments carried at cost are qualitatively evaluated for impairment at least annually or morefrequently if circumstances indicate a potential decrease in the fair value of such assets. Noimpairments have been recorded to assets carried at cost as of December 31, 2012 or 2011.

Premiums and Commissions ReceivableThe Company generally bills and collects insurance premiums for the insurance carriers. For theapplicable insurance policies, the Company is required to remit premiums to the insurancecarriers, net of the Company's commission, regardless of whether or not the Company hascollected such premiums when due. Management continually monitors the collectability ofreceivables, and amounts specifically identified as uncollectible are charged to expense in theyear the determination is made. Based upon the Company's past history of negligibleuncollectible accounts and management's assessment of its current receivables, no allowance fordoubtful accounts has been provided in these financial statements.

Property and Equipment Property and equipment are carried at cost less accumulated depreciation. Depreciation iscomputed using the straight-line method over the estimated useful lives of assets, which rangefrom 3 to 7 years.

Commission Revenue and Expense Recognition The Company records commission and fee revenues on policies and commission expense to bepaid to agents as of the date that the policies are written. Policy cancellations are not material;therefore, a provision for potential refunds of commissions has not been provided. Premiumadjustments, including policy cancellations, are recorded as they occur.

Claim Administration FeesThe Company is paid a fee by insurance companies to administer policy claims for the durationof the claims. The Company defers these fee revenues and earns the fees over the period thatclaims services are expected to be provided, based upon actual historical data.

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Income Taxes Current income taxes are based upon the fiscal year's income that is taxable for federal and statetax reporting purposes. Deferred tax assets and liabilities are recognized for the taxconsequences attributable to temporary differences between the GAAP carrying value of assetsand liabilities and their respective tax basis. Deferred tax assets and liabilities are measuredusing enacted tax rates expected to apply to taxable income in the years in which thosetemporary differences are expected to be recovered or settled. The Company considers uncertaintax positions during the preparation of its income tax provision and management does notbelieve any significant income tax uncertainties exist as of December 31, 2012 and 2011. TheCompany utilized no tax planning strategies in 2012 or 2011.

Stock GrantsAs discussed in further detail in Note J, the Company issued stock grant agreements to certainmanagement personnel. The fair value of shares granted is determined on the date shares areawarded, and compensation expense is recorded over the requisite vesting period with acorresponding credit to additional paid in capital. Share valuation at the date of grant isestimated based upon the Company's annual financial statements, using industry multiples, and isdiscounted to reflect the stock's limited marketability.

Stock OptionsAs discussed further in Note K, the Company granted options, exercisable at a future date, tocertain management personnel to purchase common stock. The Company accounts for the stockoptions using the intrinsic value method. The Company records compensation expense thatrepresents the difference between exercise price and the current company stock value multipliedby the number of stock option shares outstanding. Additionally, the Company records acorresponding credit to additional paid in capital.

Subsequent EventsThe Company evaluated subsequent events for disclosure and recognition through March 11,2013, the date on which these financial statements were available to be issued, and consideredany relevant matters in the preparation of the consolidated financial statements.

Note B - Investments

As of December 31, 2012 and 2011, the Company's investments included investments incertificates of deposit of $870,021 and $823,855, respectively. All certificates of deposit areissued by BB&T and mature in 2013. The Company purchased a residential condominium realestate property in Chapel Hill, North Carolina for $302,106, which was classified as available-for-sale as of December 31, 2010. During 2011, the Company elected to rent the property and assuch, it was reclassified Property held for investment during 2011. Subsequent to thereclassification to Property held for investment, the Company recognized $10,986 and $6,408 indepreciation expense during 2012 and 2011, respectively. The carrying value of the residentialcondominium is $284,712 and $295,697 as of December 31, 2012 and 2011. On December 31,

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Note B - Investments (continued)

2012, the Company purchased BWS Durham (BWS), a limited liability company, for $500,246.BWS's main asset is an office building in Durham, NC. The Company has elected to rent theproperty and as such, it has been classified as Property held for investment on the 2012accompanying consolidated balance sheet. The carrying value of the building including the landis $497,464 as of December 31, 2012.

The Company's 9% interest in a limited liability company real estate venture in downtownDurham, North Carolina amounted to $250,000 as of December 31, 2012 and 2011 and isreported in Investments - other for both 2012 and 2011. In January 2013, the limited liabilitycompany entered into a contract to sell its primary real estate asset.

Amortized cost and fair value of the Company's investment in debt securities at December 31,2012 and December 31, 2011 are summarized as follows:

At December 31, 2012:Amortized

Cost

GrossUnrealized

Gains

GrossUnrealized

Losses Fair ValueAvailable-for-sale:

Bonds - Obligations ofstates, municipalities andpolitical subdivisions $ 99,366 $ 14,115 $ - $ 113,481

Total available-for-sale $ 99,366 $ 14,115 $ - $ 113,481

At December 31,2011:Amortized

Cost

GrossUnrealized

Gains

GrossUnrealized

Losses Fair ValueAvailable-for-sale:

Bonds - Obligations ofstates, municipalities andpolitical subdivisions 99,294 11,171 - 110,465

Total available-for-sale $ 99,294 $ 11,171 $ - $ 110,465

Bonds mature in 2020; however, the expected maturities may differ from the contractualmaturities because certain borrowers may have the right to call or prepay obligations with orwithout penalty.

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Note C - Investment in Affiliate

Effective October 1, 2009, the Company entered into a joint venture with Risk SpecialistsCompanies, Inc. (a Chartis U.S. company), and William C. Mecklenburg, Jr. (a Companyshareholder/executive), to form Redwoods Managers, Inc. (RMI). RMI’s primary business planis to invest in program administrators (PAs), and to help them improve their programmanagement expertise and their operating and risk-bearing results. One such investment wasmade during 2010 for 19 percent ownership. In 2012, RMI made an additional 20 percentinvestment bringing RMI's total ownership to 39 percent. Beginning in 2012, RMI accounts forthe investment under the equity method of accounting.

The Company owns 31% of RMI’s common stock, which it received in exchange for futureservices to be provided to RMI valued at $710,000. In 2012, the Company, contributed anadditional $210,000 of future services to increase ownership to 31% from 30% in 2011. For hisinitial contribution, in 2009, Mr. Mecklenburg exchanged shares of the Company’s commonstock for shares of RMI common stock, and accordingly RMI owns 29,138 shares of theCompany’s common stock. Services valued at $54,879 and $69,081 were provided by theCompany to RMI during 2012 and 2011, respectively. The remaining liability for future servicesas of December 31, 2012 amounts to $478,536 and is reflected on the accompanying balancesheets as due to affiliate, of which $25,000 is included in current liabilities and $453,536 is inlong-term liabilities. As of December 31, 2011, the remaining liability for future services was$323,415 and is reflected on the accompanying balance sheets as due to affiliate, of which$70,000 is included in current liabilities and $253,415 is in long-term liabilities.

RMI has a Management Agreement with the Company whereby Mr. Mecklenburg works fulltime for RMI as its President and CEO and other Company employees provide services to RMIas requested by RMI. The cost of services provided by Mr. Mecklenburg are reimbursed byRMI and offset against related Company expenses. The Company’s expense reimbursementsduring 2012 and 2011 amounted to $319,650 and $319,064, respectively, of which $32,761 wereincluded in accounts receivable at December 31, 2012 and 2011, respectively. The Companyalso has a Services Agreement with RMI, whereby RMI provides certain consulting and otherprogram business services to the Company. These service fees to RMI for 2012 amountedto $216,795, of which $43,351 was included in accounts payable at December 31, 2012.Services for 2011 totaled $212,754, of which $45,009 was included in accounts payable atDecember 31, 2011.

RMI represents a variable interest entity (VIE). The Company is not the primary beneficiary ofthe VIE, but it holds a 31% interest and therefore the Company's investment therein is recordedunder the equity method of accounting. The Company’s 31% share of RMI’s net operatinglosses, which are reported as a reduction in revenue from investment and other income in theaccompanying statements of income, amounted to net losses of $16,234 for the year 2012, and$33,702 for 2011. The carrying value of the Company's investment, which represents itsmaximum exposure to loss from the investment, amounted to $827,595 and $633,829 as ofDecember 31, 2012 and 2011, respectively.

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Note D - Purchase of BWS

On December 31, 2012, the Company purchased BWS Durham (BWS), for $500,246. TheCompany purchased 50% of BWS from a related party, the Redwoods Group Foundation (theFoundation), and the remaining 50% from a third party. The entire purchase price was paid tothe Foundation to discharge the note outstanding secured by the property. There are no amountsdue to or from the Foundation related to this transaction at December 31, 2012. The onlysubstantial asset held in BWS is an office building in Durham, NC. BWS collects rental incomeon the property and therefore the property is listed as Property held for investment on the face ofthe consolidated balance sheets. The amount paid for BWS approximates the fair value of theassets purchased. The primary purpose of the acquisition is to further develop and market theproperty untilizing the resources of the Company.

The major classes of asset acquired are summarized below:

2012Building $ 428,119Land 69,345Cash 2,782

Total Assets $ 500,246

In 2013, the Company will grant 2.5% membership interest to Carl Webb, a former partner ofBWS.

Note E - Property and Equipment

Property and equipment as of December 31, 2012 and 2011, consists of the following:

2012 2011Furniture and equipment $ 530,228 $ 434,966Computer equipment 308,443 273,953Vehicles 288,439 233,015Leasehold improvements 82,179 137,547Computer software 88,413 88,413

Property and equipment, gross 1,297,702 1,167,894Accumulated depreciation (866,922) (921,751)

Property and equipment, net $ 430,780 $ 246,143

Note F - Line-of-Credit

In May 2012, the Company renewed a $500,000 working capital line-of-credit bearing interest atthe prime rate plus 1%. At December 31, 2012, $500,000 was drawn on the line-of-credit andmatures on June 30, 2013. The terms of the promissory note require that the Company will payregular monthly payments of all accrued unpaid interest. The line-of-credit is secured bypersonal property of the Company. The outstanding balance on the line-of-credit was repaid inJanuary 2013.

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Note G - 401(k) Defined Contribution Plan

The Company maintains a 401(k) defined contribution plan (the Plan) that covers substantiallyall employees with more than one month of service. The Company matches 100% of eachemployee dollar contributed, up to a maximum contribution of 6% of an employee's eligiblecompensation. The Company's expenses related to the Plan during the years ended December31, 2012 and 2011 amounted to $214,842 and $226,837, respectively.

Note H - Deferred Compensation

The Company has non-qualified deferred compensation agreements with certain executivesunder which future defined benefits are expected to be funded by individual life insurancepolicies owned by the Company. The deferred compensation benefits are forfeited if futureservice requirements are not met. The present value of future benefits, discounted using rates of4.50% to 4.75%, is recognized over the requisite service periods of the individual executives.The accrued present value of future benefits under these agreements as of December 31, 2012and 2011 amounted to $706,055 and $630,345, respectively, and is included as deferredcompensation on the accompanying consolidated balance sheets. At December 31, 2012 and2011, the aggregate cash surrender value of life insurance policies on such executives,amounting to $668,641 and $566,181, respectively, is included in other long-term assets on theaccompanying consolidated balance sheets.

Note I - Income Taxes

The significant components of the Company's income tax expense (benefit) for 2012 and 2011are as follows:

2012 2011Current $ 279,976 $ 116,539Deferred (53,070) (12,035)

Total income tax expense $ 226,906 $ 104,504

Actual income tax expense reported during the years ended December 31, 2012 and 2011 differsfrom that which would result from applying the statutory tax rates to pretax income, primarilydue to certain non-deductible expenses and adjustments related to under or over accrual of theprior year income tax provision. The tax returns for years 2009 through 2012 remain subject toexamination.

BWS is a single member limited liability company wholly-owned by the Company and isconsidered a disregarded entity for tax purposes. BWS does not record income taxes separatelyfrom the Company as the accounts of the BWS are included with those of the Company forincome tax purposes.

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Note I - Income Taxes (continued)

The tax effects of temporary differences that give rise to the deferred tax assets and liabilities atDecember 31, 2012 and 2011 are as follows:

2012 2011Deferred tax assets:

Deferred compensation $ 275,361 $ 245,835Deferred revenue 82,324 77,610Accrued expenses - 35,123Stock grant expense 15,688 14,814Charitable contribution carry-forward - 20,529State tax NOL carry-forward - 16,897Stock options 11,505 -Rent Abatement 144,606 -Other 376 541

Gross deferred tax assets 529,860 411,349Valuation allowance - 4,427

Net deferred tax assets 529,860 406,922

Deferred tax liabilities:Gain from affiliate, net 45,862 52,193Depreciation 87,633 11,685Other 15,863 26,190

Total deferred tax liabilities 149,358 78,383

Deferred tax assets, net $ 380,502 $ 328,539

The following table summarizes deferred tax assets and liabilities:

2012 2011Deferred tax assets, current $ 70,863 $ 125,500Deferred tax liabilities, current (8,821) (10,062)

Net current deferred tax assets 62,042 115,438

Deferred tax assets, non-current 518,598 328,091Deferred tax liabilities, non-current (200,138) (114,990)

Net non-current deferred tax assets 318,460 213,101

Deferred tax assets, net $ 380,502 $ 328,539

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Note J - Stock Grants

The Company has a stock award plan (the Plan) under which certain management personnelreceive stock grant awards subject to shareholder agreements. Up to 125,000 shares have beenauthorized for awards under the Plan, of which 87,839 shares are available for future grants atDecember 31, 2012. The shares vest over periods up to four years. The fair value of each stockgrant is calculated at the date the grant is awarded, and is recognized as compensation expenseusing the straight line method over the requisite vesting periods. Compensation expenseamounted to $22,701 and $23,010 (net of forfeiture credit of $9,413) for the years endedDecember 31, 2012 and 2011, respectively. During the year ended December 31, 2012, theCompany granted 2,500 shares with an aggregate grant date fair value of $44,575. During theyear ended December 31, 2011, the Company did not grant any shares. During years endedDecember 31, 2012 and 2011, 1,834 and 1,833 shares vested with a value of $32,700 and$30,519, respectively. Shares granted but not vested amounted to 7,500 shares as of December31, 2012, which will vest in years 2014 to 2015. The remaining cost to be recognized in futureyears for these nonvested awards amounts to $36,939 as of December 31, 2012. There were6,834 nonvested granted shares as of December 31, 2011.

Note K - Stock Options

On January 3, 2012, the Company granted options to certain management personnel to purchaseup to 25,000 shares of common stock at an exercise price of $16.65 per share based on theCompany's 2011 stock value determined by the stock valuation formula specified in the stockaward plan. The option to purchase shares vests on January 3, 2015, and expires on January 3,2018. All options were outstanding and not vested at December 31, 2012. The stock valuationat December 31, 2012 was $17.83 per share resulting in compensation expense of $29,500 and adeferred tax asset of $11,505.

Note L - Stockholders' Equity

The Company's shareholders are subject to certain rights and limitations, as documented in theunderlying shareholder agreements.

Shares issued under the Company’s stock agreements are eligible to be put back to the Company,at the option of the shareholders, once qualifying time periods have been met per the underlyingagreements, with up to 25% of qualified shares eligible for put options in any calendar yearduring the term of the shareholder's employment. During the year ended December 31, 2012,33,187 shares were redeemed by shareholders at repurchase values totaling $591,883. Includedin the shares redeemed by shareholders described above, the Company purchased 2,667 sharesfrom a charitable organization for $47,565 in 2012. During the year ended December 31, 2011,19,784 shares were redeemed by shareholders at repurchase values totaling $329,400 and 921shares were forfeited in accordance with terms of a certain grant agreement resulting in a creditto stock compensation expense of $9,413. Included in the shares redeemed by shareholdersdescribed above, in 2011, the Company purchased 6,907 shares from a charitable organization,that had received donated shares, at a purchase price of $114,995.

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Note L - Stockholders' Equity (continued)

Employees who retire from the Company are required to put 100% of their remaining sharesback to the Company. There were no repurchases under this arrangement in 2012. 15,408shares were redeemed at a repurchase value of $256,534 under this arrangement in 2011. Inaccordance with the terms of these certain share repurchase agreements, the Company will payproceeds ratably over periods ranging from two to four years. The payable is recorded as stockrepurchase proceeds payable on the consolidated balance sheets. Shares repurchased by theCompany have been subsequently retired.

As of December 31, 2012, 8,749 shares are eligible to be put to the Company during the yearending December 31, 2013 in accordance with the terms of the underlying stock agreements.The purchase price, in the event the put options are exercised, is based upon the fair value of theshares as of the calendar year-end immediately preceding the year in which the Company isnotified of the intent to exercise the put option. Based on the repurchase value of the shares asof December 31, 2012, such put options have an estimated value of $173,405.

Note M - Lease Commitments

The Company leases office space and certain equipment under non-cancelable leases withunrelated parties. The aggregate rent expense for the years ended December 31, 2012 and 2011was $463,665 and $497,326 respectively. In 2012, the Company signed an office leaseagreement for eleven years for which the Company received a one year rent abatement. TheCompany recognizes rental expense on a straight line basis over the life of the lease, resulting in$370,785 of rental expense and deferred rent related to the office lease for 2012.

The following is a schedule of future minimum lease payments under the Company's non-cancelable operating leases:

Year ending December 31,2013 $ 377,9592014 421,5752015 433,6542016 445,9652017 455,935Thereafter 2,486,345

Total minimum lease commitments $ 4,621,433

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Note N - Risks and Uncertainties

The Company is a managing underwriter of property, casualty, liability and workers’compensation insurance coverage for YMCAs, JCCs, and Camps throughout the United States.The Company has several insurance carriers that underwrite its insurance policies, although amajority of these policies are underwritten by one carrier. If this carrier should discontinueproviding this insurance coverage, the Company would have some exposure related to findinganother primary underwriting company. This risk is mitigated by the fact that the Company’sprincipal carrier is rated A (excellent) by A. M. Best Company. This risk has been furtherreduced by limiting the share of risk born by the primary carrier and spreading the excess riskamong one or more “A” or better rated reinsurers.

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Documents

Redwoods Group 2012 Audited Financial Statement