The Redwoods Group, Inc. Audited Consolidated Financial Statements Years ended December 31, 2012 and 2011 with Report of Independent Auditors
The Redwoods Group, Inc. Audited Consolidated Financial Statements Years ended December 31, 2012 and 2011
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
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 subsidiary which comprise the consolidated balance sheets as of December 31, 2012 and 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 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 subsidiary as of December 31, 2012 and 2011 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 11, 2013
The Redwoods Group, Inc. Consolidated Balance Sheets As of December 31, 2012 2011 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 Deferred compensation Deferred rent Other Total liabilities
$
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
$
153,054 823,855 110,465 2,907,503 7,726,506 137,148 115,437 119,183 12,093,151 246,143 633,829 250,000 295,697 213,102 625,822
$
15,807,413
$
14,357,744
$
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
$
208,808 2,907,503 5,850,607 128,901 70,000 123,113 65,335 1,138,323 10,492,590 253,415 125,874 216,688 630,345 25,833 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 Additional paid-in capital Retained earnings Accumulated other comprehensive income Total stockholders' equity Total liabilities and stockholders' equity
4,684 983,731 1,549,143 8,610 2,546,168 $
15,807,413
See accompanying notes to consolidated financial statements
2
4,917 982,246 1,619,022 6,814 2,612,999 $
14,357,744
The Redwoods Group, Inc. Consolidated Statements of Comprehensive Income Years ended December 31, 2012 2011 Revenues Commissions and fees Investment and other income Total revenues
$
12,105,800 $ 146,393 12,252,193
11,713,081 132,889 11,845,970
1,710,238 7,099,422 2,746,306 141,376 11,697,342
1,649,295 7,092,362 2,710,765 142,150 11,594,572
Income before income taxes
554,851
251,398
Income tax expense
226,906
104,504
327,945
146,894
1,796
5,099
Expenses Commission expense Compensation and benefits Operating and administrative Depreciation and amortization Total expenses
Net Income Other Comprehensive Income: Unrealized holding gains arising during period, net of tax expense of ($1,148) and ($3,261), respectively Total Comprehensive Income
$
329,741 $
See accompanying notes to consolidated financial statements
3
151,993
The Redwoods Group, Inc. Consolidated Statements of Changes in Stockholders' Equity
Additional Paid-in Capital
Common Stock Balance at January 1, 2011
$
Net income Stock grants, including realized income tax benefits of $245 Stock redeemed Stock forfeited Other comprehensive income
-
Net income Stock grants, including realized income tax expense of $310 Stock redeemed Stock option expense Other comprehensive income
32,159 (69,509) (9,413) -
1,988,201 $ 146,894 (516,073) -
1,715 $ 5,099
Total 3,024,185 146,894 32,177 (585,934) (9,422) 5,099
4,917
982,246
1,619,022
6,814
2,612,999
-
-
327,945
-
327,945
18 (251) $
1,029,009 $ -
18 (352) (9) -
Balance at December 31, 2011
Balance at December 31, 2012
5,260 $
Retained Earnings
Accumulated Other Comprehensive Income
22,993 (51,008) 29,500 -
4,684 $
983,731 $
(397,824) 1,549,143 $
See accompanying notes to the consolidated financial statements
4
1,796 8,610 $
23,011 (449,083) 29,500 1,796 2,546,168
The Redwoods Group, Inc. Consolidated Statements of Cash Flows Years ended December 31, 2012 2011 Cash flows from operating activities Net income Adjustments to reconcile net income to net cash from operating activities Depreciation and amortization expense Amortization of bond discount Stock grants Stock grant forfeiture Stock options Deferred tax effects of unrealized capital gains Gain on sale or disposal of assets, net Net 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
$
327,945
$
146,894
141,376 (72) 23,009 29,500 (1,148) 5,408 16,234 (54,878)
142,150 (69) 32,177 (9,413) (3,261) (17,031) 33,702 (69,081)
590,330 (40,724) (151,623) (51,963) (58,597) (525,997) 40,455 (8,625) 4,801 75,710 370,785 731,926
(1,041,642) (19,185) (125,636) (8,742) 47,018 962,931 15,592 61,520 59,773 75,412 283,109
(497,465) (321,056) 620 (46,166) (864,067)
6,409 (146,347) 45,150 (43,630) (138,418)
(514,416) 1,555,888 (1,012,635) 28,837
(394,734) (394,734)
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 Net cash from investing activities
Cash flows from financing activities 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, beginning of year Cash and cash equivalents, end of year
$
(103,304) 153,054 49,750 $
(250,043) 403,097 153,054
Supplemental disclosures Interest paid Income tax paid
$ $
7,032 288,300
See accompanying notes to consolidated financial statements
5
$ $
122 55,096
The Redwoods Group, Inc. Notes to Consolidated Financial Statements Years ended December 31, 2012 and 2011 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 $53.3 million and $51.7 million during calendar year 2012 and 2011, 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-proft organization that works to spread preventive safety solutions that protect and save lives. As of December 31, 2012 and 2011, the Company had an intercompany receivable from the Foundation for $31,990 and $3,288, respectively. Refer to Note D for further related party transactions. 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. 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 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 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. 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.
6
The Redwoods Group, Inc. Notes to Consolidated Financial Statements (Continued) Note A - Organization and Significant Accounting Policies (continued) 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, 2012 and 2011 were $2,300,373 and $2,911,174, 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 threelevel 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. The Company's investment in affiliate (Note C) is recorded under the equity method of accounting. The Company's investment in a residential condominium (Note B) is reflected at cost and is being depreciated using the straight-line method over an estimated useful life of 27.5 years. The Company's purchase of BWS (Note D) included in a building reflected at cost 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 (Note B) is carried at cost. Realized gains and losses on the disposition of investments are determined using the specific identification basis. No realized gains or losses on the disposition of investments were recognized during the years ended December 31, 2012 and 2011, respectively. Unrealized losses on investments in debt securities, which are deemed other-than-temporary, are charged to income when such determination is made. Factors considered in identifying otherthan-temporary impairment (OTTI) include: (1) whether the Company intends to sell the investment or whether it is more likely than not that the Company will be required to sell the security prior to an anticipated recovery in value; (3) the likelihood of the recoverability of 7
The Redwoods Group, Inc. Notes to Consolidated Financial Statements (Continued) Note A - Organization and Significant Accounting Policies (continued) Investments (continued) principal and interest (i.e., whether there is a credit loss); (4) the length of time and extent to which the fair value has been less than amortized cost; and (5) the financial condition, near-term and long-term prospects for the issuer, including the relevant industry conditions and trends, and implications of rating agency actions and offering prices. Any such write downs are reported as realized losses on investments. Investments carried at cost are qualitatively evaluated for impairment at least annually or more frequently if circumstances indicate a potential decrease in the fair value of such assets. No impairments have been recorded to assets carried at cost as of December 31, 2012 or 2011. Premiums and Commissions Receivable The Company generally 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.
8
The Redwoods Group, Inc. Notes to Consolidated Financial Statements (Continued) Note A - Organization and Significant Accounting Policies (continued) 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, 2012 and 2011. The Company utilized no tax planning strategies in 2012 or 2011. Stock Grants As discussed in further detail in Note J, 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 K, 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 11, 2013, 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, 2012 and 2011, the Company's investments included investments in certificates of deposit of $870,021 and $823,855, respectively. All certificates of deposit are issued by BB&T and mature in 2013. The Company purchased a residential condominium real estate property in Chapel Hill, North Carolina for $302,106, which was classified as availablefor-sale as of December 31, 2010. During 2011, the Company elected to rent the property and as such, it was reclassified Property held for investment during 2011. Subsequent to the reclassification to Property held for investment, the Company recognized $10,986 and $6,408 in depreciation expense during 2012 and 2011, respectively. The carrying value of the residential condominium is $284,712 and $295,697 as of December 31, 2012 and 2011. On December 31, 9
The Redwoods Group, Inc. Notes to Consolidated Financial Statements (Continued) 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 the property and as such, it has been classified as Property held for investment on the 2012 accompanying consolidated balance sheet. The carrying value of the building including the land is $497,464 as of December 31, 2012. 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 2011 and is reported in Investments - other for both 2012 and 2011. In January 2013, the limited liability company 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: Available-for-sale: Bonds - Obligations of states, municipalities and political subdivisions $ Total available-for-sale $
At December 31,2011: Available-for-sale: Bonds - Obligations of states, municipalities and political subdivisions Total available-for-sale $
Gross Unrealized Gains
Amortized Cost
99,366 $ 99,366 $
14,115 $ 14,115 $ Gross Unrealized Gains
Amortized Cost
99,294 99,294 $
Gross Unrealized Losses
11,171 11,171 $
Fair Value
- $ - $ Gross Unrealized Losses
113,481 113,481
Fair Value
- $
110,465 110,465
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.
10
The Redwoods Group, Inc. Notes to Consolidated Financial Statements (Continued) Note C - Investment in Affiliate 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 Redwoods Managers, Inc. (RMI). RMI’s primary business plan is to invest in program administrators (PAs), and to help them improve their program management expertise and their operating and risk-bearing results. One such investment was made during 2010 for 19 percent ownership. In 2012, RMI made an additional 20 percent investment bringing RMI's total ownership to 39 percent. Beginning in 2012, RMI accounts for the investment under the equity method of accounting. The Company owns 31% of RMI’s common stock, which it received in exchange for future services to be provided to RMI valued at $710,000. In 2012, the Company, contributed an additional $210,000 of future services to increase ownership to 31% from 30% in 2011. For his initial contribution, in 2009, Mr. Mecklenburg exchanged shares of the Company’s common stock for shares of RMI common stock, and accordingly RMI owns 29,138 shares of the Company’s common stock. Services valued at $54,879 and $69,081 were provided by the Company to RMI during 2012 and 2011, respectively. The remaining liability for future services as of December 31, 2012 amounts to $478,536 and is reflected on the accompanying balance sheets as due to affiliate, of which $25,000 is included in current liabilities and $453,536 is in long-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 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 Company’s expense reimbursements during 2012 and 2011 amounted to $319,650 and $319,064, respectively, of which $32,761 were included in accounts receivable at December 31, 2012 and 2011, respectively. 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 2012 amounted to $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 at December 31, 2011. RMI represents a variable interest entity (VIE). The Company is not the primary beneficiary of the VIE, but it holds a 31% interest and therefore the Company's investment therein is recorded under the equity method of accounting. The Company’s 31% share of RMI’s net operating losses, which are reported as a reduction in revenue from investment and other income in the accompanying 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 its maximum exposure to loss from the investment, amounted to $827,595 and $633,829 as of December 31, 2012 and 2011, respectively. 11
The Redwoods Group, Inc. Notes to Consolidated Financial Statements (Continued) Note D - Purchase of BWS On December 31, 2012, the Company purchased BWS Durham (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, 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 untilizing the resources of the Company. The major classes of asset acquired are summarized below: Building Land Cash Total Assets
$ $
2012 428,119 69,345 2,782 500,246
In 2013, the Company will grant 2.5% membership interest to Carl Webb, a former partner of BWS. Note E - Property and Equipment Property and equipment as of December 31, 2012 and 2011, consists of the following: Furniture and equipment Computer equipment Vehicles Leasehold improvements Computer software Property and equipment, gross Accumulated depreciation Property and equipment, net
$
$
2012 530,228 $ 308,443 288,439 82,179 88,413 1,297,702 (866,922) 430,780 $
2011 434,966 273,953 233,015 137,547 88,413 1,167,894 (921,751) 246,143
Note F - 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%. At December 31, 2012, $500,000 was drawn on the line-of-credit and matures on June 30, 2013. The terms of the promissory note require that the Company will pay regular monthly payments of all accrued unpaid interest. The line-of-credit is secured by personal property of the Company. The outstanding balance on the line-of-credit was repaid in January 2013. 12
The Redwoods Group, Inc. Notes to Consolidated Financial Statements (Continued) Note G - 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. The Company's expenses related to the Plan during the years ended December 31, 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 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, 2012 and 2011 amounted to $706,055 and $630,345, respectively, and is included as deferred compensation on the accompanying consolidated balance sheets. At December 31, 2012 and 2011, 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 the accompanying consolidated balance sheets. Note I - Income Taxes The significant components of the Company's income tax expense (benefit) for are as follows: 2012 Current $ 279,976 $ Deferred (53,070) Total income tax expense $ 226,906 $
2012 and 2011 2011 116,539 (12,035) 104,504
Actual income tax expense reported during the years ended December 31, 2012 and 2011 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 2009 through 2012 remain subject to examination. BWS is a single member limited liability company wholly-owned by the Company and is considered a disregarded entity for tax purposes. BWS does not record income taxes separately from the Company as the accounts of the BWS are included with those of the Company for income tax purposes.
13
The Redwoods Group, Inc. Notes to Consolidated Financial Statements (Continued) Note I - Income Taxes (continued) The tax effects of temporary differences that give rise to the deferred tax assets and liabilities at December 31, 2012 and 2011 are as follows: 2012 Deferred tax assets: Deferred compensation Deferred revenue Accrued expenses Stock grant expense Charitable contribution carry-forward State tax NOL carry-forward Stock options Rent Abatement Other Gross deferred tax assets Valuation allowance Net deferred tax assets
$
2011
275,361 $ 82,324 15,688 11,505 144,606 376 529,860 529,860
Deferred tax liabilities: Gain from affiliate, net Depreciation Other Total deferred tax liabilities
45,862 87,633 15,863 149,358
Deferred tax assets, net
$
245,835 77,610 35,123 14,814 20,529 16,897 541 411,349 4,427 406,922 52,193 11,685 26,190 78,383
380,502 $
328,539
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
$
14
2012 70,863 $ (8,821) 62,042
2011 125,500 (10,062) 115,438
518,598 (200,138) 318,460
328,091 (114,990) 213,101
380,502 $
328,539
The Redwoods Group, Inc. Notes to Consolidated Financial Statements (Continued) Note J - 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 87,839 shares are available for future grants at December 31, 2012. The shares vest over periods up to four 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 $22,701 and $23,010 (net of forfeiture credit of $9,413) for the years ended December 31, 2012 and 2011, respectively. During the year ended December 31, 2012, the Company granted 2,500 shares with an aggregate grant date fair value of $44,575. During the year ended December 31, 2011, the Company did not grant any shares. During years ended December 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 December 31, 2012, which will vest in years 2014 to 2015. The remaining cost to be recognized in future years for these nonvested awards amounts to $36,939 as of December 31, 2012. There were 6,834 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 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 December 31, 2012. The stock valuation at December 31, 2012 was $17.83 per share resulting in compensation expense of $29,500 and a deferred tax asset of $11,505. Note L - Stockholders' Equity The Company's shareholders are subject to certain rights and limitations, as documented in the underlying 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 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, 2012, 33,187 shares were redeemed by shareholders at repurchase values totaling $591,883. Included in the shares redeemed by shareholders described above, the Company purchased 2,667 shares from 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 921 shares were forfeited in accordance with terms of a certain grant agreement resulting in a credit to stock compensation expense of $9,413. Included in the shares redeemed by shareholders described 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. 15
The Redwoods Group, Inc. Notes to Consolidated Financial Statements (Continued) Note L - Stockholders' Equity (continued) Employees who retire from the Company are required to put 100% of their remaining shares back to the Company. There were no repurchases under this arrangement in 2012. 15,408 shares were redeemed at a repurchase value of $256,534 under this arrangement in 2011. 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. As of December 31, 2012, 8,749 shares are eligible to be put to the Company during the year ending 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 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, 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 with unrelated parties. The aggregate rent expense for the years ended December 31, 2012 and 2011 was $463,665 and $497,326 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 and deferred rent related to the office lease for 2012. The following is a schedule of future minimum lease payments under the Company's noncancelable operating leases: Year ending December 31, 2013 2014 2015 2016 2017 Thereafter Total minimum lease commitments
$
$
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377,959 421,575 433,654 445,965 455,935 2,486,345 4,621,433
The Redwoods Group, Inc. Notes to Consolidated Financial Statements (Continued) 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 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.
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