2013 CFO Letter and Audited Financials by The Redwoods Group

2 0 1 3 â&#x20AC;&#x201D; CFO Letter

Resiliency & Resurgence The Redwoods Group believes in building community. Our real estate investments in downtown Durham have provided a healthy return, while contributing to the vibrant turnaround of this once struggling city.

10â&#x20AC;&#x201D;2013 Report

Photo: K. Brown kbrownphotography.com

2 0 1 3 — CFO Letter

2013 will be remembered as a year filled with ebbs and flows for The Redwoods Group. During the second quarter of 2013, we parted company with our Workers’ Compensation carrier and diligently worked to create a new, long-lasting partnership to serve our stakeholders’ needs for employee safety from a mission-aligned perspective.

2013, and I can report that both goals were met. Redwoods began an Employee Stock Grant Program in 2013, granting all employees who participate in our 401k program shares of stock in The Redwoods Group as a part of their matching funds. Additionally, shares have been set aside for direct purchase by any interested employee. I’m happy to note that 62 employees/owners of The Redwoods Group held vested shares on January 1, 2014.

Workers’ Compensation in limited geographies again in the fourth quarter. We are enthusiastic about the opportunities to continue to provide our broad range of coverage and risk consulting to our customers. In the intervening months, “Changing when we were out of the the world was market, Redwoods saw never meant to be a material decline in to our long-term view of sustainability, our employees turned their attention to other important work during those months, and we reduction in work hours.

Also during 2013, there was a change in the capital structure of our related just entity, Redwoods an expression. It’s what you Managers, Inc. This change resulted in a were made to do—and it’s one-time gain for The what you will accomplish when Redwoods Group in you invite your holy discontent 2013, and it means to ignite your heart. “ that for 2014 and beyond you will see —Bill Hybels Redwoods Managers as Founder & Senior Pastor, Willow Creek Community Church a part of the consolidated

I am pleased to report that Redwoods again earned an at the end of 2013 totaled $1.1 million and stockholders’ equity ended the year at $2.5 million. Redwoods saw growth in Written Premium in both the Package/Umbrella and the YMCA and Camp segments were up, with a slight decrease in our JCC business segment. We continue to see new customers in all segments joining our program as well as former partners coming back home to Redwoods.

an organization formed to create shared value for all stakeholders. This mindset extends into all areas of the enterprise, even into our investment invested in two real estate projects in downtown an attractive return while also participating in the transformation of Durham from a tobacco town to a diverse and thriving entrepreneurial hub. The

of The Redwoods Group. I encourage you to review those audited statements and the accompanying footnotes for more detail on this and other

Thanks for all you do to support our

Brian R. Keel CPA, CGMA Senior Vice President and CFO The Redwoods Group, Inc.

Financial Summary Written Premium Total Revenues Net Income Total Assets Stockholders’ Equity

2013 $48,620 $12,139 $138 $15,439 $2,520

2012 $53,276 $12,252 $328 $15,758 $2,546 ($ in thousands)

2013 Report—11

The Redwoods Group, Inc. Audited Consolidated Financial Statements Years ended December 31, 2013 and 2012 with Report of Independent Auditors

The Redwoods Group, Inc. Audited Consolidated Financial Statements Years ended December 31, 2013 and 2012

Contents

Report of Independent Auditors ..................................................................................................................................................................................... 1 Audited Consolidated Financial Statements

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

Report of Independent Auditors Board of Directors The Redwoods Group, Inc. We have audited the accompanying consolidated financial statements of The Redwoods Group, Inc. (the Company) and its subsidiaries which comprise the consolidated balance sheets as of December 31, 2013 and 2012, and the related consolidated statements of comprehensive income, changes in stockholders’ equity and cash flows for years then ended and the related notes to the consolidated financial statements. Management’s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these consolidated 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 consolidated 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 consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the 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 control relevant to the entity’s preparation and fair presentation of the consolidated 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 consolidated 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company and its subsidiaries as of December 31, 2013 and 2012 and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

Raleigh, North Carolina March 31, 2014

The Redwoods Group, Inc. Consolidated Balance Sheets As of December 31, 2013 2012 Assets Cash and cash equivalents Certificate of deposits Investments Restricted cash Premiums and commissions receivable Prepaid expenses Deferred income taxes, net Other current assets Total current assets Property and equipment, net Investment in affiliate Investments - other Property held for investment Deferred income taxes, long-term, net Other long-term assets Total assets

Liabilities and stockholders' equity Liabilities: Accounts payable Funds held for others Premiums and commissions payable Accrued expenses Notes payable Due to affiliate Income taxes payable Stock repurchase payable Deferred revenue Total current liabilities Due to affiliate Stock repurchase payable Deferred revenue, long-term Deferred compensation Deferred rent

Other Total liabilities Stockholders' equity: Common stock; $0.01 par value, 1,000,000 shares authorized and 455,377 and 468,388 shares issued and 439,688 and 468,388 shares outstanding, respectively Treasury stock Additional paid-in capital Retained earnings Accumulated other comprehensive income Total Redwoods Group stockholders' equity Non-controlling interests Total stockholders' equity Total liabilities and stockholders' equity

500,938 107,919 3,539,613 7,518,221 315,480 122,969 158,050 12,263,190 368,587 368,497 755,622 664,271 850,562 15,270,729

211,382 3,539,613 5,826,640 209,642 18,592 41,958 1,121,256 10,969,083 41,958 213,438 776,799 419,504 6,233 12,427,015

150,211 3,892,432 5,324,610 195,190 518,426 25,000 114,488 41,958 1,142,299 11,404,614 453,536 83,916 217,513 706,055 370,785 24,826 13,261,245

4,554 (269,215) 1,094,679 1,434,422 5,172 2,269,612 574,102 2,843,714 15,270,729 $

4,684 983,731 1,549,143 8,610 2,546,168 2,546,168 15,807,413

See accompanying notes to consolidated financial statements

49,750 870,021 113,481 3,892,432 7,136,176 177,872 62,042 147,441 12,449,215 430,780 827,595 250,000 782,176 318,460 749,187 15,807,413

The Redwoods Group, Inc. Consolidated Statements of Comprehensive Income Years ended December 31, 2013 2012 Revenues Commissions and fees Investment and other income Total revenues

11,659,986 $ 533,972 12,193,958

12,105,800 146,393 12,252,193

1,611,696 7,209,757 2,952,692 160,472 11,934,617

1,710,238 7,083,652 2,762,076 141,376 11,697,342

Income before income taxes

259,341

554,851

Income tax expense

101,905

226,906

157,436

327,945

Expenses Commission expense Compensation and benefits Operating and administrative Depreciation and amortization Total expenses

Net income Other comprehensive income: unrealized holding (losses) gains arising during period, net of tax benefit (expense) of $2,198 and ($1,148), respectively

(3,438) Total comprehensive income

153,998 $

See accompanying notes to consolidated financial statements

1,796 329,741

The Redwoods Group, Inc. Consolidated Statements of Changes in Stockholders' Equity

Balance at January 1, 2012

Common Stock

Treasury Stock

Additional Paid-in Capital

Net income Stock grants, including realized income tax benefits of $310 Stock redeemed Stock option expense Stock forfeited Other comprehensive income

Net income Stock grants, including realized income tax expense of $6,454 Stock issued Stock redeemed Stock option expense Initial consolidating entries Other comprehensive income

982,246

1,619,022

327,945

2,612,999

327,945

1,796

23,011 (449,083) 29,500 1,796

22,993 (51,008) 29,500 -

4,684

983,731

1,549,143

8,610

2,546,168

157,436

4,554

(269,215) $

(397,824) -

6,814

Total

90 9 (229) $

18 (251) -

Balance at December 31, 2012

Balance at December 31, 2013

4,917

Retained Earnings

Accumulated Other Comprehensive Non-controlling Income interests

118,416 15,401 (52,369) 29,500 -

(269,215) $

1,094,679

(272,157) $

1,434,422

See accompanying notes to the consolidated financial statements

(3,438) $

5,172

574,102 $

574,102

118,506 15,410 (324,755) 29,500 304,887 (3,438) $

2,843,714

The Redwoods Group, Inc. Consolidated Statements of Cash Flows Years ended December 31, 2013 2012 Cash flows from operating activities Net income

Adj. to reconcile net income to net cash from operating activities Depreciation and amortization expense Amortization of bond discount Stock grants Stock options Deferred tax effects of unrealized capital gains Gain on sale or disposal of assets, net Net realized gain on investments Net (gain) loss from investment in affiliate Services provided to affiliate Net change in operating assets and liabilities: Premiums and commissions receivable Prepaid expenses Other assets Deferred income taxes Accounts payable Premiums and commissions payable Accrued expenses Income taxes payable Deferred revenue Deferred compensation Deferred rent Net cash from operating activities

157,436

327,945

160,472 (75) 118,506 29,500 2,198 (8,675) (71,947) (238,595) (24,621)

141,376 (72) 23,009 29,500 (1,148) 5,408 16,234 (54,878)

(382,045) (136,784) (143,548) (27,636) 106,670 502,030 14,454 (114,488) (25,118) 70,744 48,719 37,197

590,330 (40,724) (151,623) (51,963) (58,597) (525,997) 40,455 (8,625) 4,801 75,710 370,785 731,926

(119,593) 57,115 1,191,968 1,129,490

(497,465) (321,056) 620 (46,166) (864,067)

15,410 (366,710) 310,000 (828,427) (869,727)

(514,416) 1,555,888 (1,012,635) 28,837

Cash flows from investing activities Purchase of property held for investment Purchase of property and equipment Proceeds from disposal of property and equipment Purchase of investments Proceeds from sale of investments Net cash from investing activities

Cash flows from financing activities Proceeds from issuance of common stock Cost of common stock repurchased Borrowings under line of credit and financing Payment to line of credit and financing Net cash from financing activities Net change in cash and cash equivalents Cash and cash equivalents from initial consolidation of affiliate Cash and cash equivalents, beginning of year Cash and cash equivalents, end of year

296,960 154,228 49,750 500,938

(103,304) 153,054 49,750

$ $

4,913 250,000

$ $

7,032 288,300

Supplemental disclosures Interest paid Income tax paid

See accompanying notes to consolidated financial statements

The Redwoods Group, Inc. Notes to Consolidated Financial Statements Years ended December 31, 2013 and 2012 Note A - Organization and Significant Accounting Policies Organization The Redwoods Group, Inc. (the Company) was formed in 1997. The Company is a managing underwriter of property, liability and workers' compensation insurance coverage provided by insurance carriers for the Company's programs for Young Men's Christian Associations (YMCAs), Jewish Community Centers (JCCs), and not-for-profit camps (Camps) throughout the United States. Premiums written under the Company's YMCA, JCC, and Camps programs amounted to $48.6 million and $53.3 million during calendar year 2013 and 2012, respectively. The Company has agreements with insurance carriers through which it provides underwriting, policy administration and claims administration services and receives commissions and fees which are normally paid when policy premiums are collected. The Company's home office is in Morrisville, North Carolina. The Redwoods Group Foundation (the Foundation) is sponsored by the Company. The Foundation is a non-profit organization that works to spread preventive safety solutions that protect and save lives. As of December 31, 2013 and 2012, the Company had an intercompany receivable from the Foundation for $86,250 and $31,990, respectively. On December 31, 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 that was rented to a third party for the entirety of 2013. BWS is a wholly owned subsidiary of the Company and consolidated according to accounting principles generally accepted in the United States of America (GAAP) within these consolidated financial statements. Refer to Note B for further information. Effective December 27, 2013, the Company holds a controlling interest (65%) in Redwoods Managers, Inc. (RMI). RMI's primary business plan is to invest in program administrators and to help them improve their program management expertise and their operating and risk-bearing results. Refer to Note B. Basis of Presentation The accompanying consolidated financial statements have been prepared in accordance with GAAP. Preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The accompanying consolidated financial statements include the accounts of the Company, BWS (effective December 31, 2012) and RMI (effective December 31, 2013). Intercompany activity and balances from the effective date each entity qualifies for consolidation have been eliminated in consolidation.

The Redwoods Group, Inc. Notes to Consolidated Financial Statements (Continued) Note A - Organization and Significant Accounting Policies (continued) Cash and Cash Equivalents The Company considers all highly liquid investments with original maturities of three months or less, including money market funds, to be cash and cash equivalents. The Company maintains certain cash and cash equivalent balances that exceed FDIC insured limits, which management considers to be a normal business risk. Restricted Cash and Funds Held for Others Restricted cash represents premiums collected by the Company that are not yet due to the insurance carriers. The corresponding liability to the insurance carriers is reported as funds held for others. The Company also maintains certain cash accounts, which consist of insurance carrier funds advanced for the payment of claims, that are not reflected in the accompanying balance sheets. The amount of such balances at December 31, 2013 and 2012 were $3,146,094 and $2,300,373, respectively. The inclusion of such accounts in the balance sheets would result in an increase to restricted cash and a corresponding increase to funds held for others, with no net impact on reported stockholders' equity. Fair Value of Investments GAAP 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. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1), the next priority to quoted prices for identical assets and liabilities in inactive markets or similar assets and liabilities in active markets (Level 2), and the lowest priority to unobservable inputs (Level 3). Investments The 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 other comprehensive income, net of estimated tax. Fair values for the Company's debt securities are based 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 the constant yield method. The Company's investments in certificates of deposit are reported at cost. Prior to December 31, 2013, the Company's investment in RMI was accounted for on the equity method. The Company's investment in a residential condominium is reflected at cost and is being depreciated using the straight-line method over an estimated useful life of 27.5 years. BWS holds a building which is reflected at cost and is being depreciated using the straight-line method over an estimated useful life of 39 years. The Company's 9% holdings in an unconsolidated limited liability company real estate venture is carried at cost for 2012. During 2013, this interest was sold, resulting in a realized gain of $71,947. Investments - other at December 31, 2013 includes an investment RMI has in a insurance broker, which is recorded under the equity method of accounting. See Note B for further information. Realized gains and losses on the disposition of investments are determined using the specific identification basis. Realized gains of $71,947 were recognized on the disposition of investments during the year ended December 31, 2013. No realized gains or losses on the disposition of investments were recognized during the year ended December 31, 2012. 7

The Redwoods Group, Inc. Notes to Consolidated Financial Statements (Continued) Note A - Organization and Significant Accounting Policies (continued) Investments (continued) Unrealized losses on investments in debt securities, which are deemed other than temporary, are charged to income when such determination is made. All other invested assets are subject to various impairment testing requirements depending on the nature of the investment and accounting method used for the investment. No impairment of invested assets (including other than temporary impairment of debt securities) was recorded during 2013 and 2012. Premiums and Commissions Receivable The Company bills and collects insurance premiums for the insurance carriers. For the applicable insurance policies, the Company is required to remit premiums to the insurance carriers, net of the Company's commission, regardless of whether or not the Company has collected such premiums when due. Management continually monitors the collectability of receivables, and amounts specifically identified as uncollectible are charged to expense in the year the determination is made. Based upon the Company's past history of negligible uncollectible accounts and management's assessment of its current receivables, no allowance for doubtful accounts has been provided in these financial statements. Property and Equipment Property and equipment are carried at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of assets, which range from 3 to 7 years. Commission Revenue and Expense Recognition The Company records commission and fee revenues on policies and commission expense to be paid 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. Premium adjustments, including policy cancellations, are recorded as they occur. Claim Administration Fees The Company is paid a fee by insurance companies to administer policy claims for the duration of the claims. The Company defers these fee revenues and earns the fees over the period that claims services are expected to be provided, based upon actual historical data. Income Taxes Current income taxes are based upon the fiscal year's income that is taxable for federal and state tax reporting purposes. Deferred tax assets and liabilities are recognized for the tax consequences attributable to temporary differences between the GAAP carrying value of assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The Company considers uncertain tax positions during the preparation of its income tax provision and management does not believe any significant income tax uncertainties exist as of December 31, 2013 and 2012. The Company utilized no tax planning strategies in 2013 or 2012.

The Redwoods Group, Inc. Notes to Consolidated Financial Statements (Continued) Note A - Organization and Significant Accounting Policies (continued) Stock Grants As discussed in further detail in Note H, the Company issued stock grant agreements to certain management personnel. The fair value of shares granted is determined on the date shares are awarded, and compensation expense is recorded over the requisite vesting period with a corresponding credit to additional paid in capital. Share valuation at the date of grant is estimated based upon the Company's annual financial statements, using industry multiples, and is discounted to reflect the stock's limited marketability. Stock Options As discussed further in Note I, the Company granted options, exercisable at a future date, to certain management personnel to purchase common stock. The Company accounts for the stock options using the intrinsic value method. The Company records compensation expense that represents the difference between exercise price and the current company stock value multiplied by the number of stock option shares outstanding. Additionally, the Company records a corresponding credit to additional paid in capital. Subsequent Events The Company evaluated subsequent events for disclosure and recognition through March 31, 2014, the date on which these financial statements were available to be issued, and considered any relevant matters in the preparation of the consolidated financial statements. Note B - Investments As of December 31, 2013 and 2012, the Company's investments included investments in certificates of deposit of $0 and $870,021, respectively. All certificates of deposit were issued by BB&T and matured in 2013. The Company owns a residential condominium real estate property in Chapel Hill, North Carolina, which it paid $302,106. The Company rents the property and as such, it is classified as property held for investment. The Company recognized $10,986 in depreciation expense during both 2013 and 2012. The carrying value of the residential condominium is $273,726 and $284,712 as of December 31, 2013 and 2012, respectively. The Company's 9% interest in a limited liability company real estate venture in downtown Durham, North Carolina amounted to $250,000 as of December 31, 2012 and was reported in investments - other. During 2013, the limited liability company sold its primary real estate asset, which led to the dissolution of the limited liability company. The Company recognized a gain of $71,947 as a result of the dissolution, which is included in investment and other income on the accompanying 2013 consolidated statement of comprehensive income.

The Redwoods Group, Inc. Notes to Consolidated Financial Statements (Continued) Note B - Investments (continued) Amortized cost and fair value of the Company's investment in debt securities at December 31, 2013 and December 31, 2012 are summarized as follows:

At December 31, 2013: Available-for-sale: Bonds - Obligations of states, municipalities and political subdivisions $ Total available-for-sale $

At December 31,2012: Available-for-sale: Bonds - Obligations of states, municipalities and political subdivisions $ Total available-for-sale $

Amortized Cost

Gross Unrealized Gains

99,441 $ 99,441 $ Amortized Cost

Gross Unrealized Losses

8,478 $ 8,478 $ Gross Unrealized Gains

99,366 $ 99,366 $

14,115 $ 14,115 $

Fair Value

- $ - $ Gross Unrealized Losses

107,919 107,919

Fair Value

- $ - $

113,481 113,481

Bonds mature in 2020; however, the expected maturities may differ from the contractual maturities because certain borrowers may have the right to call or prepay obligations with or without penalty. RMI Effective October 1, 2009, the Company entered into a joint venture with Risk Specialists Companies, Inc. (a Chartis U.S. company), and William C. Mecklenburg, Jr. (a Company shareholder/executive), to form RMI. The Company owned 31% of RMI's common stock, which it received in exchange for services to be provided to RMI valued at $710,000. On December 27, 2013, RMI repurchased and retired all of the shares owned by Risk Specialists Companies, Inc., which made up 52 percent of RMI's outstanding common stock at that time. The repurchased shares were subsequently retired and, as a result, the Company's 31% ownership increased to 65%, which now gives the Company control of RMI. The Company did not provide any consideration for the additional ownership. In accordance with equity method accounting guidance, the Company recognized a pre-tax gain of approximately $295,000, resulting from the share buyback RMI transacted with Risk Specialists Companies, Inc., which is included in investment and other income on the accompanying 2013 consolidated statement of comprehensive income. The Company has consolidated RMI's balance sheet as of December 31, 2013. The Company carried the investment under the equity method prior to December 31, 2013. The Company has accounted for this investment on the equity method for the entire year ended December 31, 2013 as there was no significant activity between the transaction date and year-end. The Companyâ&#x20AC;&#x2122;s share of RMIâ&#x20AC;&#x2122;s net operating losses, which are reported as a reduction in revenue from investment and other income in the accompanying consolidated statements of comprehensive income, amounted to net losses of $56,968 and $16,234 for the years ended December 31, 2013 and 2012, respectively. 10

The Redwoods Group, Inc. Notes to Consolidated Financial Statements (Continued) Note B - Investments (continued) RMI (continued) At December 31, 2013 and 2012, RMI holds a 16% and 39% interest, respectively, in an insurance broker investee which RMI accounts for under the equity method of accounting. That investment, which has a carrying value of $368,497 at December 31, 2013 is included in investments - other in the December 31, 2013 consolidated balance sheet. At the inception of RMI, Mr. Mecklenburg exchanged 29,138 shares of the Companyâ&#x20AC;&#x2122;s common stock for shares of RMI common stock. The Company repurchased 13,449 of those shares during 2013 and RMI recognized a loss of approximately $91,000 on the sale. As of December 31, 2013 and 2012, RMI owned 15,689 and 29,138 shares of the Companyâ&#x20AC;&#x2122;s common stock, respectively. In the accompanying December 31, 2013 consolidated balance sheet, in accordance with consolidation accounting guidance, this investment was reclassed to treasury stock. Services valued at $24,621 and $54,879 were provided by the Company to RMI during 2013 and 2012, respectively. The remaining liability for future services as of December 31, 2013 amounts to $453,915 and was eliminated during consolidation. As of December 31, 2012, the remaining liability for future services was $478,536 and is reflected on the accompanying consolidated balance sheets as due to affiliate, of which $25,000 is included in current liabilities and $453,536 is in long-term liabilities. RMI has a Management Agreement with the Company whereby Mr. Mecklenburg works full time for RMI as its President and CEO and other Company employees provide services to RMI as requested by RMI. The cost of services provided by Mr. Mecklenburg are reimbursed by RMI and offset against related Company expenses. The Companyâ&#x20AC;&#x2122;s expense reimbursements during 2013 and 2012 amounted to $320,198 and $319,650 respectively. $32,761 was included in accounts receivable at December 31, 2012. The 2013 balance of $32,615 was eliminated during consolidation. The Company also has a Services Agreement with RMI, whereby RMI provides certain consulting and other program business services to the Company. These service fees to RMI for 2013 amounted to $228,932 and the related payable of $47,075 was eliminated during consolidation. Services for 2012 totaled $216,795, of which $43,351 was included in accounts payable at December 31, 2012. BWS On December 31, 2012, the Company purchased BWS for $500,246. The Company purchased 50% of BWS from a related party, the Redwoods Group Foundation (the Foundation), and the remaining 50% from a third party. The entire purchase price was paid to the Foundation to discharge the note outstanding secured by the property. There are no amounts due to or from the Foundation related to this transaction at December 31, 2013 or 2012. The only substantial asset held in BWS is an office building in Durham, NC. BWS collects rental income on the property and therefore the property is listed as property held for investment on the face of the consolidated balance sheets. The amount paid for BWS approximates the fair value of the assets purchased. The primary purpose of the acquisition is to further develop and market the property utilizing the resources of the Company. In 2013, the Company granted a 2.5% profit interest to Carl Webb, a former partner of BWS. The Company recognized $15,568 in depreciation expense during 2013.

The Redwoods Group, Inc. Notes to Consolidated Financial Statements (Continued) Note B - Investments (continued) BWS (continued) At December 31, 2013 and 2012, the carrying value of the building, which is included in property held for investment, is: Building Land Subtotal Accumulated depreciation Total

2013 428,119 $ 69,345 497,464 (15,568) 481,896 $

2012 428,119 69,345 497,464 497,464

Note C - Property and Equipment Property and equipment as of December 31, 2013 and 2012, consists of the following: Furniture and equipment Computer equipment Vehicles Leasehold improvements Computer software Property and equipment, gross Accumulated depreciation Property and equipment, net

2013 513,729 $ 276,858 212,364 82,179 86,051 1,171,181 (802,594) 368,587 $

2012 530,228 308,443 288,439 82,179 88,413 1,297,702 (866,922) 430,780

Note D - Line-of-Credit In May 2012, the Company renewed a $500,000 working capital line-of-credit bearing interest at the prime rate plus 1%, and was scheduled to mature on June 30, 2013. The line of credit was renewed on June 17, 2013, with an interest rate of 3.25% and a maturity date of August 23, 2014. At December 31, 2013 and 2012, $0 and $500,000 was drawn on the line-of-credit, respectively. The terms of the promissory note require that the Company make regular monthly payments of all accrued unpaid interest. The line-of-credit was secured by personal property of the Company.

The Redwoods Group, Inc. Notes to Consolidated Financial Statements (Continued) Note E - 401(k) Defined Contribution Plan The Company maintains a 401(k) defined contribution plan (the Plan) that covers substantially all employees with more than one month of service. The Company matches 100% of each employee dollar contributed, up to a maximum contribution of 6% of an employee's eligible compensation. Beginning in 2013, the Company changed the funding of the match, so that each employee dollar contributed will be matched with a 50 cent cash contribution and 50 cents worth of Company stock. Shares granted as part of the 401(k) plan vest immediately. During the year ended December 31, 2013, 4,016 shares of Company stock were granted as matching contributions, of which 1,987 shares were repurchased by the Company. The Company's expenses related to the Plan, including the value of the shares granted above, during the years ended December 31, 2013 and 2012 amounted to $218,300 and $214,842, respectively. Note F - Deferred Compensation The Company has non-qualified deferred compensation agreements with certain executives under which future defined benefits are expected to be funded by individual life insurance policies owned by the Company. The deferred compensation benefits are forfeited if future service requirements are not met. The present value of future benefits, discounted using rates of 4.50% 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, 2013 and 2012 amounted to $776,799 and $706,055, respectively, and is included as deferred compensation on the accompanying consolidated balance sheets. At December 31, 2013 and 2012, the aggregate cash surrender value of life insurance policies on such executives, amounting to $775,487 and $668,641, respectively, is included in other long-term assets on the accompanying consolidated balance sheets. Note G - Income Taxes The significant components of the Company's income tax expense for 2013 and 2012 are as follows: Current Deferred Total income tax expense

$ $

2013 118,527 $ (16,622) 101,905 $

2012 279,976 (53,070) 226,906

Actual income tax expense reported during the years ended December 31, 2013 and 2012 differs from that which would result from applying the statutory tax rates to pretax income, primarily due to certain non-deductible expenses and adjustments related to under or over accrual of the prior year income tax provision. The tax returns for years 2010 through 2013 remain subject to examination. BWS is a limited liability company, which is 97.5% owned by the Company. BWS does not record income taxes separately from the Company since BWS is taxed as a passthrough entity and its taxable income is included proportionally in its members' taxable income. RMI files a separate tax return and is not part of a consolidated federal tax return with the Company.

The Redwoods Group, Inc. Notes to Consolidated Financial Statements (Continued) Note G - Income Taxes (continued) The tax effects of temporary differences that give rise to the deferred tax assets and liabilities at December 31, 2013 and 2012 are as follows: 2013 Deferred tax assets: Deferred compensation Deferred revenue Accrued expenses Stock grant expense Charitable contribution carry-forward Federal tax NOL carry-forward State tax NOL carry-forward Stock options Rent abatement Loss from affiliate Other Total deferred tax assets

302,179 $ 77,454 34,110 9,684 31,887 214,915 34,283 23,010 163,607 203,353 5,333 1,099,815

Deferred tax liabilities: Gain from affiliate Depreciation Other Total deferred tax liabilities Deferred tax assets, net

2012

275,361 82,324 15,688 2,427 11,505 144,606 51,638 5,912 589,461

212,769 85,012 14,794 312,575

97,500 87,633 23,826 208,959

787,240 $

380,502

The following table summarizes deferred tax assets and liabilities: Deferred tax assets, current Deferred tax liabilities, current Net current deferred tax assets

Deferred tax assets, non-current Deferred tax liabilities, non-current Net non-current deferred tax assets Deferred tax assets, net

2013 134,272 $ (11,303) 122,969

2012 70,863 (8,821) 62,042

965,543 (301,272) 664,271

518,598 (200,138) 318,460

787,240 $

380,502

The Redwoods Group, Inc. Notes to Consolidated Financial Statements (Continued) Note H - Stock Grants The Company has a stock award plan (the Plan) under which certain management personnel receive stock grant awards subject to shareholder agreements. Up to 125,000 shares have been authorized for awards under the Plan, of which 68,687 shares are available for future grants at December 31, 2013. The shares vest over periods up to three years. The fair value of each stock grant is calculated at the date the grant is awarded, and is recognized as compensation expense using the straight line method over the requisite vesting periods. Compensation expense amounted to $32,455 and $22,701 (net of forfeiture credit of $0 and $9,413) for the years ended December 31, 2013 and 2012, respectively. During the year ended December 31, 2013, the Company granted 7,200 shares with an aggregate grant date fair value of $142,704. During the year ended December 31, 2012, the Company granted 2,500 shares with an aggregate grant date fair value of $44,575. During years ended December 31, 2013 and 2012, 5,000 and 1,834 shares vested with a value of $99,100 and $32,700, respectively. Shares granted but not vested amounted to 9,700 shares as of December 31, 2013, which will vest in years 2015 to 2016. The remaining cost to be recognized in future years for these nonvested awards amounts to $97,242 as of December 31, 2013. There were 7,500 nonvested granted shares as of December 31, 2012. Note I - Stock Options On January 3, 2012, the Company granted options to certain management personnel to purchase up to 25,000 shares of common stock at an exercise price of $16.65 per share based on the Company's 2011 stock value determined by the stock valuation formula specified in the stock award 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 both December 31, 2013 and 2012. The stock valuation at December 31, 2013 was $19.82 per share resulting in compensation expense of $29,500 during 2013 and a deferred tax asset of $23,010 at December 31, 2013. The stock valuation at December 31, 2012 was $17.83 per share resulting in compensation expense of $29,500 during 2012 and a deferred tax asset of $11,505 at December 31, 2012.

The Redwoods Group, Inc. Notes to Consolidated Financial Statements (Continued) Note J - Stockholders' Equity The Company's shareholders are subject to certain rights and limitations, as documented in the underlying shareholder agreements. Shares issued under the Companyâ&#x20AC;&#x2122;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 underlying agreements, with up to 25% of qualified shares eligible for put options in any calendar year during the term of the shareholder's employment. During the year ended December 31, 2013, 20,898 shares were redeemed by shareholders at repurchase values totaling $283,638. Included in the 2013 shares redeemed by shareholders, the Company purchased 5,333 shares from a charitable organization, that had received donated shares, at a purchase price of $105,700. During the year ended December 31, 2012, 33,187 shares were redeemed by shareholders at repurchase values totaling $591,883. Included in the 2012 shares redeemed by shareholders, the Company purchased 2,667 shares from a charitable organization, that had received donated shares, at a purchase price of $47,565. Employees who retire from the Company are required to put 100% of their remaining shares back to the Company. There were 438 shares redeemed at a repurchase value of $8,681 under this arrangement in 2013. In accordance with the terms of these certain share repurchase agreements, the Company will pay proceeds ratably over periods ranging from two to four years. The payable is recorded as stock repurchase proceeds payable on the consolidated balance sheets. Shares repurchased by the Company have been subsequently retired. There were no such purchases under this arrangement in 2012. As of December 31, 2013, 8,236 shares are eligible to be put to the Company during the year ending December 31, 2014 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 the shares as of the calendar year-end immediately preceding the year in which the Company is notified of the intent to exercise the put option. Based on the repurchase value of the shares as of December 31, 2013, such put options have an estimated value of $163,238. Note K - Lease Commitments The Company leases office space and certain equipment under non-cancelable leases with unrelated parties. The aggregate rent expense for the years ended December 31, 2013 and 2012 was $423,572 and $463,665, respectively. In 2012, the Company signed an office lease agreement for eleven years for which the Company received a one year rent abatement. The Company recognizes rental expense on a straight line basis over the life of the lease, resulting in $370,785 of rental expense related to the office lease for both 2013 and 2012. Deferred rent related to the office lease was $419,504 and $370,785 at December 31, 2013 and 2012, respectively.

The Redwoods Group, Inc. Notes to Consolidated Financial Statements (Continued) Note K - Lease Commitments (continued) The following is a schedule of future minimum lease payments under the Company's non-cancelable operating leases: Year ending December 31, 2014 2015 2016 2017 2018 Thereafter Total minimum lease commitments

421,575 433,654 445,965 455,935 460,859 2,025,486 4,243,474

Note L - 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 a majority of these policies are underwritten by one carrier. If this carrier should discontinue providing this insurance coverage, the Company would have some exposure related to finding another primary underwriting company. This risk is mitigated by the fact that the Company’s principal carrier is rated A (excellent) by A. M. Best Company. This risk has been further reduced by limiting the share of risk born by the primary carrier and spreading the excess risk among one or more “A” or better rated reinsurers.

Report of Independent Auditors on Accompanying Information Board of Directors The Redwoods Group, Inc. The report on our audit of the consolidated financial statements of The Redwoods Group, Inc. ("the Company") as of December 31, 2013 and 2012, and for the years then ended is presented on page 1 of this document. Our audit was conducted for the purpose of forming an opinion on the consolidated financial statements taken as a whole. The accompanying Consolidating Balance Sheet of the Company as of December 31, 2013 is presented for purposes of additional analysis and is 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 consolidated financial statements. The information has been subjected to the auditing procedures applied in the audit of the consolidated financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the consolidated financial statements or to the financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the information is fairly stated in all material respects in relation to the consolidated financial statements as a whole.

Raleigh, North Carolina March 31, 2014

The Redwoods Group, Inc. Consolidating Balance Sheet December 31, 2013 The Redwoods Group, Inc. Assets Cash and cash equivalents Investments Restricted cash Premiums and commissions receivable Prepaid expenses Deferred income taxes, net Other current assets Total current assets Property and equipment Investment in affiliate Investments - other Property held for investment Deferred income taxes, long-term, net Other long-term assets Total assets

302,040 $ 107,919 3,539,613 7,518,221 314,656 122,522 190,665 12,095,636 368,013 770,627 273,726 400,885 849,512

BWS

Redwoods Managers, Inc.

Eliminations

Total

44,669 $ 44,669 481,896 -

$14,758,399 $

526,565 $ 1,674,481 $ (1,688,716) $15,270,729

154,229 $ - $ 500,938 107,919 3,539,613 7,518,221 824 315,480 447 122,969 72,075 (104,690) 158,050 227,575 (104,690) 12,263,190 574 368,587 269,215 (1,039,842) 368,497 368,497 755,622 378,655 (115,269) 664,271 429,965 (428,915) 850,562

The Redwoods Group, Inc. Consolidating Balance Sheet (Continued) December 31, 2013 The Redwoods Group, Inc. Liabilities and Stockholder's Equity Liabilities Accounts payable Funds held for others Premiums and commissions payable Accrued expenses Notes payable Due to affiliate Stock repurchase payable Deferred revenue Total current liabilities Due to affiliate Stock repurchase payable Deferred revenue, long-term Deferred compensation Deferred rent Other Total liabilities Stockholder's equity Common stock Additional paid-in capital Retained earnings Accumulated other comprehensive income Treasury stock Total Redwoods Group stockholder's equity Non-controlling interests Total stockholders' equity Total liabilities and stockholder's equity

BWS

Redwoods Managers, Inc.

Eliminations

Total

256,883 $ 3,539,613 5,826,640 207,182 18,592 25,000 41,958 1,116,650 11,032,518 428,915 41,958 213,438 776,799 419,504 6,233

- $ 2,460 4,606 7,066 -

34,191 $ 34,191 -

(79,692) $ 211,382 3,539,613 5,826,640 209,642 18,592 (25,000) 41,958 1,121,256 (104,692) 10,969,083 (428,915) 41,958 213,438 776,799 419,504 6,233

12,919,365

7,066

34,191

(533,607)

519,499 519,499 519,499 526,565 $

1,210,000 1,054,230 (623,940) 1,640,290 1,640,290 1,674,481 $

4,554 1,094,679 734,629 5,172 1,839,034 1,839,034 $14,758,399 $

12,427,015

(1,210,000) 4,554 (1,054,230) 1,094,679 804,234 1,434,422 5,172 (269,215) (269,215) (1,729,211) 2,269,612 574,102 574,102 (1,155,109) 2,843,714 (1,688,716) $15,270,729