The following discussion and analysis should be read in conjunction with our consolidated financial statements and notes thereto and the other financial data appearing elsewhere in this Form 10-K.

Overview

Management's strategic focus is to support the growth of its operations by increasing revenues and revenue streams, managing costs and creating earnings growth.

Our operations are largely decentralized from the corporate office. Autonomy is given to subsidiary entities, and there are few integrated business functions (i.e. marketing, purchasing and accounting). Day-to-day operating decisions are made by subsidiary management teams. Our Corporate management team assists in operational decisions when deemed necessary, selects subsidiary management teams and handles capital allocation among our operations.

We were incorporated in the state of Delaware in 1988, restructured in 2000 and re-domesticated to the state of Indiana in May 2005.

Key Factors Affecting or Potentially Affecting Results of Operations and Financial Condition

Management considers the following factors, events, trends and uncertainties to be important to understanding its results of operations and financial condition:

Holding Company

Over the past nine fiscal periods, we have completed four key PEO acquisitions. In February 2007, the Company acquired PEM, a PEO located in Arizona. In March 2007, the Company acquired ESG, a PEO located in Utah and Colorado. The Company's acquisition of ESG enabled the Company to expand its geographic presence in the PEO marketplace. In April 2005, we acquired CSM, a PEO located in Nashville, Tennessee. This acquisition of the oldest PEO in the state expanded our PEO service offerings. In October 2003 we acquired PSM, a PEO located in Indianapolis, Indiana. This acquisition allowed us to gain entry into the PEO market.

There are several key factors that have affected or potentially may affect our results of operations including the following:

§ Earnings are dependent on a number of factors including our ability to execute operational strategies and integrate acquired companies into our existing operations. Our historical growth has been due to several significant acquisitions in the past. Future growth in revenues and earnings may not increase at the same rate as historical growth.

§ Certain expenses, such as wages, benefits and rent, are subject to normal inflationary pressures. Inflation for medical costs can impact our reserves for workers' compensation claims.

§ The estate of our majority shareholder effectively owns 60% of the outstanding Common Stock and 100% of the outstanding Preferred Stock of the Company. As a result, it could have a controlling influence in determining the outcome of any corporate matters submitted to our shareholders for approval, including mergers, consolidations, election of directors and any other significant corporate actions. The interests of this shareholder may differ from the interests of the Company's other shareholders and its stock ownership may thereby limit the ability of other shareholders to influence the management and affairs of the Company.

Business Solutions

Our PEOs provide services typically managed by a company's internal human resources and accounting departments, including payroll and tax processing and management, worker's compensation and risk management, benefits administration, unemployment administration, human resource compliance services, 401k and retirement plan administration and employee assessments. The majority of customer operations are concentrated in the Arizona, Colorado, Indiana, Tennessee and Utah markets. Financial results may be affected by changes in the state regulatory environments, results under our fully insured high deductible workers' compensation insurance plans, and economic conditions.

Results of Operations

Results of operations for the fiscal periods ended June 30, 2012, 2011 and 2010, are as follows:

                           Revenue for the Year Ended June 30,                Operating income for Year Ended June 30,
                          2012               2011            2010            2012                2011               2010
                                                     (Dollars in thousands)
Business Solutions    $     60,891       $     64,335     $   60,694     $       2,338       $       1,849       $       810
Holding Company                  0                  0              0                 0                   0                 0
Segment Totals        $     60,891       $     64,335     $   60,694     $       2,338       $       1,849       $       810

Fiscal year ended June 30, 2012 versus June 30, 2011

Net income allocable to common stock shareholders was $0.9 million, or $0.06 per diluted share on revenues of $60.9 million for the year ended June 30, 2012 compared with net income of $1.3 million, or $0.09 per diluted share on revenues of $64.3 million for the year ended June 30, 2011. The decrease in revenue is due to the loss of two large clients as of December 31, 2011 with approximately 1,200 worksite employees. The increase in operating income is primarily due to an increase in the profitability of the benefit administration and agency commissions programs. The decrease in net income available to common shareholders is due to the increase in dividend expense related to the preferred stock of $0.8 million.

Fiscal year ended June 30, 2011 versus June 30, 2010

Net income allocable to common stock shareholders was $1.3 million, or $0.09 per diluted share on revenue of $64.3 million for the year ended June 30, 2011 as compared with net income of $0.06 million, or $0.04 per diluted share on revenue of $60.7 million for the year ended June 30, 2010. The increase in revenue is due to an overall increase in worksite employees and billings. The increase in operating income is due to the reduction of losses on the health care plan and continued efficiency improvements and expense reductions in all aspects of the company's operations.

Results by segment are described in further details as follows:

Business Solutions



Business Solutions segment operating results for the fiscal years ended June 30,
2012, 2011 and 2010 are as follows:



                                                       For The Year Ended June 30,
                                        2012                      2011                      2010
                                                         (Dollars in thousands)
Revenues                        $ 60,891        100.0 %   $ 64,335        100.0 %   $ 60,694        100.0 %
Cost of revenues                  47,793         78.5 %     51,527         80.1 %     48,068         79.2 %
Gross profit                      13,098         21.5 %     12,808         19.9 %     12,626         20.8 %

Operating expenses
Selling, general and admin        10,229         16.8 %     10,346         16.1 %     11,046         18.2 %
Depreciation and amortization        531          0.9 %        613          0.9 %        770          1.3 %
Total operating expenses          10,760         17.7 %     10,959         17.0 %     11,816         19.5 %

Segment operating income        $  2,338          3.8 %   $  1,849          2.9 %   $    810          1.3 %

Revenues

Revenues for the year ended June 30, 2012 were $60.9 million, compared to $64.3 million for the year ended June 30, 2011, a decrease of $3.4 million, or 5.3%. Revenues decreased primarily due to the loss of two large clients effective December 31, 2011 with approximately 1,200 worksite employees.

Revenues for the year ended June 30, 2011 were $64.3 million, compared to $60.7 million for the year ended June 30, 2010, an increase of $3.6 million, or 5.9%. Revenue increased primarily due to an overall increase in worksite employees and billings.

Gross Profit

Gross profit for the year ended June 30, 2012 was $13.1 million, representing 21.5% of revenue compared to $12.8 million, representing 20% of revenue, an increase of $0.3 million, or 2.3%. Despite the decrease in revenue, gross profit increased due to increased profitability in the benefit administration and agency commissions programs.

Gross profit for the year ended June 30, 2011 was $12.8 million, representing 20% of revenue, compared to $12.6 million, representing 21% of revenues for the year ended June 30, 2010. Gross profit did not change significantly.

Operating Income

Operating income for the year ended June 30, 2012 was $2.3 million, compared to operating income of $1.8 million for the year ended June 30, 2011, an increase of $0.5 million or 28%. Despite the decrease in revenue, operating income increased due to increased profitability in the benefit administration and agency commissions programs which increased gross profit by $0.3 million and continued reduction in selling, general and administration costs of $0.12 million and a decrease in depreciation and amortization expense of $0.08 million.

Operating income for the year ended June 30, 2011 was $1.8 million, compared to operating income of $0.8 million for the year ended June 30, 2010, an increase of $1.0 million, or 125%. Operating income increased due to the continued reduction of losses on the health care plan and continued efficiency improvements and expense reductions in all aspects of the company's operations.

Holding Company

Interest Expense

Interest expense was $0.01 million for the year ended June 30, 2012, compared to $0.04 million for the year ended June 30, 2011. Interest expense decreased due to the reduction in the outstanding principal balance of the Company's term note which was paid in full in April, 2012.

Interest expense was $0.04 million for the year ended June 30, 2011, compared to $0.1 million for the year ended June 30, 2010. Interest expense decreased due to the reduction in the outstanding principal balance of the Company's term note.

Income Taxes

There was $0.1 million of income tax expense for each of the years ended June 30, 2012 and June 30, 2011, respectively. A valuation allowance is necessary to reduce the deferred tax assets, if the Company had a federal tax operating loss and based on the weight of the evidence; it is more likely than not that some portion or all of the deferred tax assets will not be realized. Management has determined that a $5.3 million valuation allowance at June 30, 2012 is necessary to reduce the deferred tax assets to the amount that will more likely than not be realized. The change in the valuation allowance for the current period is ($0.9) million.

Liquidity and Capital Resources

Our principal sources of liquidity are cash and equivalents generated from the profitability of our operations. We had $5.3 million and $6.0 million of cash and equivalents at June 30, 2012 and 2011, respectively.

We had working capital of $4.1 million at June 30, 2012 compared with $2.6 million at June 30, 2011. The increase in working capital was primarily due to the positive cash flow generated by operations during the current year. Current assets are composed primarily of cash and equivalents, restricted cash and net accounts receivable.

The Company is required to collateralize its obligations under its workers' compensation plans and for certain states' compliance requirements. The Company uses its cash and cash equivalents to collateralize these obligations. Restricted cash was approximately $2.4 million at both June 30, 2012 and June 30, 2011.

Total debt was $0.0 million and $0.4 million at June 30, 2012 and 2011, respectively. The decrease in debt was due to the pay off of the $1.0 million term note put in place in 2010. In addition, the Company entered into a $2.0 million revolving line of credit agreement on April 15, 2011, which is used to cover a letter of credit to one of our major vendors. There were no draws on the line of credit at June 30, 2012.

Cash Flows

Net cash provided by operating activities was $1.2 million, $5.0 million and $0.8 million for the years ended June 30, 2012, 2011 and 2010 respectively.

Net cash used in investing activities was $0.0 million, $0.0 million and $0.1 million for the years ended June 30, 2012, 2011 and 2010 respectively.

Net cash used in financing activities was $1.9 million, $1.3 million and $0.1 million for the years ended June 30, 2012, 2011 and 2010 respectively.

Contractual Obligations and Commercial Commitments



The following table summarizes our contractual obligations as of June 30, 2012:



                                                 Payments Due By
                                                                                     More
                        Total       Less Than       1-2 Years       3-5 Years        Than
                                     1 Year                                         5 Years
                                               (Dollars in thousands)

Operating Lease (1)   $ 1,200     $       512     $       447     $       241     $       0

(1) Operating leases represent the total future minimum lease payments.

Off Balance Sheet Arrangements

As is common in the industries in which we operate, we have entered into certain off-balance sheet arrangements in the ordinary course of business that result in risks not directly reflected in our balance sheets. Our significant off-balance sheet transactions include liabilities associated with guaranties and letter of credit obligations.

Guaranties

A significant portion of our debt and letters of credit are personally guaranteed by the estate of the Company's Chairman. Future changes to these guarantees would affect financing capacity of the Company. As of June 30, 2012 and 2011, the Chairman of the Board had personally guaranteed Company debt and obligations under irrevocable letter of credit arrangements in the amount of $2.15 million. The Company did not pay any guarantee fees during the years ended June 30, 2010, 2011 and 2012.

Restricted Cash

Certain states and vendors require us to post letters of credit to ensure payment of taxes or payments to our vendors under workers' compensation contracts and to guarantee performance under our contracts. Such letters of credit are generally issued by a bank or similar financial institution. The letter of credit commits the issuer to pay specified amounts to the holder of the letter of credit if the holder demonstrates that we have failed to perform specified actions. If this were to occur, we would be required to reimburse the issuer of the letter of credit. Depending on the circumstances of such a reimbursement, we may also have to record a charge to earnings for the reimbursement. We do not believe that it is likely that any claims will be made under a letter of credit in the foreseeable future. As of June 30, 2012, we had approximately $2.4 million in restricted cash primarily to secure obligations under our PEO contracts.

Majority Shareholder

As of June 30, 2012, our Chairman of the Board, Mr. Carter M. Fortune effectively owned and controlled 7,344,687 shares (or 60%) of our outstanding common stock. Mr. Fortune also is the sole owner of 100% of the 296,180 shares of Series C Preferred Stock outstanding at June 30, 2012. The common stock and preferred stock owned and held by Mr. Fortune serves as collateral for certain personal debt obligations of Mr. Fortune that do not represent liabilities of the Company. Mr. Fortune passed away on August 25, 2012 at which point his ownership interests in the Company transitioned to his estate.

Critical Accounting Policies

The Company has identified the following policies as critical to its business and the understanding of its results of operations. The impact of these policies is discussed throughout Management's Discussion and Analysis of Financial Condition and Results of Operations where these policies affect reported and anticipated financial results. For a detailed discussion on the application of these and other accounting policies see the Notes to the Consolidated Financial Statements. Preparation of this report requires the Company's use of estimates and assumptions that affect the reported amounts of assets, liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported revenue and expense amounts for the periods being reported. On an ongoing basis, the Company evaluates these estimates, including those related to the valuation of accounts receivable reserves, the potential impairment of long-lived assets and income taxes, and valuation of certain liability reserves. The Company bases the estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which forms the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. Senior management has discussed the development, selection, and disclosure of these estimates with the Company's audit committee.

Management believes the following critical accounting policies affect its more significant judgments and estimates used in preparation of its consolidated financial statements.

Revenue and Cost Recognition

PSM, CSM, and ESG and related entities bill clients under their Professional Services Agreement as licensed Professional Employer Organizations (collectively the "PEOs"), which includes each worksite employee's gross wages, plus additional charges for employment related taxes, benefits, workers' compensation insurance, administrative and record keeping, as well as safety, human resources, and regulatory compliance consultation. Most wages, taxes and insurance coverage are provided under the PEOs' federal, state, and local or vendor identification numbers. No identification or recognition is given to the client when these monies are remitted or calculations are reported. Most calculations or amounts the PEOs owe the government and its employment insurance vendors are based on the experience levels and activity of the PEOs. The PEOs bill the client their worksite employees' gross wages plus an overall service fee that includes components of employment related taxes, employment benefits insurance, and administration of those items. The component of the service fee related to administration varies, in part, according to the size of the client, the amount and frequency of payroll payments and the method of delivery of such payments. The component of the service fee related to health, workers' compensation and unemployment insurance is based, in part, on the client's historical claims experience. Charges by the PEOs are invoiced along with each periodic payroll delivered to the client.

The PEOs report revenues in accordance FASB ASC 605-45, "Revenue Recognition - Principal Agent Considerations." The PEOs report revenues on a gross basis, the total amount billed to clients for service fees which includes health and welfare benefit plan fees, workers' compensation insurance, unemployment insurance fees, and employment-related taxes. The PEOs report revenues on a gross basis for such fees because the PEOs are the primary obligor and deemed to be the principal in these transactions under ASC 605-45. The PEOs report revenues on a net basis for the amount billed to clients for worksite employee salaries and wages. This accounting policy of reporting revenue net as an agent versus gross as a principal has no effect on gross profit, operating income, or net income.

The PEOs account for their revenues using the accrual method of accounting. Under the accrual method of accounting, revenues are recognized in the period in which the worksite employee performs work. The PEOs accrue revenues for service fees and payroll taxes relating to work performed by worksite employees but unpaid at the end of each period. The PEOs accrue unbilled receivables for payroll taxes and service fees relating to work performed by worksite employees but unpaid at the end of each period. In addition, the related costs of services are accrued as a liability for the same period. Subsequent to the end of each period, such costs are paid and the related service fees are billed.

Consistent with their revenue recognition policy, the PEOs direct costs do not include the payroll cost of its worksite employees. The Company's direct costs associated with its revenue generating activities are comprised of all other costs related to its worksite employees, such as the employer portion of payroll-related taxes, employee benefit plan premiums and workers' compensation insurance costs.

Valuation of Accounts Receivable Reserves

Collectability of accounts receivable is evaluated for each subsidiary based on the current economic conditions. Other factors include analysis of historical bad debts, projected losses, and current past due accounts. The Company's accounts receivable reserves increased by $0.01 million at June 30, 2012 compared to June 30, 2011 and decreased $0.02 million at June 30, 2011 compared to June 30, 2010.

Goodwill and Other Intangible Assets

Material goodwill was assessed for impairment. In making this assessment, management relies on a number of factors including operating results, business plans, economic projections, anticipated future cash flows, and transactions and market place data. There are inherent uncertainties related to these factors and management's judgment in applying them to the analysis of goodwill impairment. Since management's judgment is involved in performing goodwill and other intangible assets valuation analyses, there is risk that the carrying value of the goodwill and other intangible assets may be overstated or understated. Per review of these qualitative factors, the Company determined that goodwill and other intangible assets were not impaired at June 30, 2012 and June 30, 2011.

Impairment of Long-Lived Assets

The Company evaluates the recoverability of its long-lived assets in accordance with FASB ASC 360, "Property, Plant, and Equipment," which generally requires the Company to assess these assets for recoverability whenever events or changes in circumstance indicate that the carrying amounts of such assets may not be recoverable. The Company considers historical performances and future estimated results in its evaluation of potential impairment and then compares the carrying amount of the asset to the estimated non-discounted future cash flows expected to result from the use of the asset. If such assets are considered to be impaired, the impairment recognized is measured by comparing projected individual reporting unit discounted cash flows to the asset reporting unit carrying values. The estimation of fair value is measured by discounting expected future cash flows at the discount rate the Company utilizes to evaluate potential investments. Actual results may differ from these estimates and as a result the estimation of fair values may be adjusted in the future.

Income Taxes

Deferred tax assets are recognized for taxable temporary differences, tax credit and net operating loss carry forwards. These assets are reduced by a valuation allowance, which is established when it is more likely than not that some portion or all of the deferred tax assets will not be realized. For this purpose, management considered evidence, both positive and negative, regarding various uncertainties identified as risk factors to the Company. Recent events, including significant turmoil within the domestic and foreign financial markets, healthcare legislation and increasing unemployment tax rates and taxable wage thresholds, more than likely are expected to contribute to atypical customer attrition and decreased gross profits. Additionally, since the divesture of certain segments in fiscal 2009 unrelated to the Company's current focus of full service human resources, the Company has had positive results for the last four fiscal periods for financial reporting purposes, including the current period. However, the Company has not evidenced a similar trend for income tax reporting purposes, experiencing net operating losses in four of prior six fiscal periods, with the current and 2011 fiscal years as the exception. These taxable losses are primarily the result of permanent timing differences related to the amortization of certain intangible assets for income tax purposes through 2022. The Company's deferred tax assets and liabilities are susceptible to erratic changes due to the inherent unpredictable nature of the Company's insurance claim liabilities and sensitivity to unemployment and wage volatility. Changes in the economy and federal and state legislature, both favorable and unfavorable, will impact management's assumptions and estimates in future periods.

As of June 30, 2012, management has determined that a 87% valuation allowance against the Company's $4.3 million component of deferred tax assets generated by the net operating loss carry forward of $10.8 million is necessary to reduce the deferred tax assets to the amount that will more likely than not be realized. This represents a decrease from the prior fiscal year's 90% allowance as the Company experienced positive taxable earnings in the current year for the second time in six years. As a result, management elected to limit the valuation allowance release to 13% as the Company has not established a significant historical trend of taxable earnings. As of June 30, 2012, management has also determined that a $1.3 million valuation allowance against the Company's $3.5 million of deferred tax assets generated by book versus tax differences of certain assets and liabilities is necessary to reduce the deferred tax assets to the amount that will more likely than not be realized. This 38% valuation allowance represents a decrease from the prior fiscal year's 40% due to the aforementioned earnings trend. The Company released $0.9 million of the valuation allowance in fiscal 2012 due to the positive earnings in the Company's operations and projected earnings for 2013 and 2014.

As of June 30, 2011, management had determined that a 90% valuation allowance against the Company's $5.1 million component of deferred tax assets generated by the net operating loss carry forward of $12.3 million was necessary to reduce the deferred tax assets to the amount that would more likely than not be realized. This represented a decrease from the prior fiscal year's 100% allowance as the Company experienced positive taxable earnings in the 2011 fiscal year for the first time in five years. As a result, management elected to limit the valuation allowance release to 10% as the Company had not established a significant historical trend of taxable earnings. As of June 30, 2011, management had also determined that a $1.6 million valuation allowance against the Company's $3.9 million of deferred tax assets generated by book versus tax differences of certain assets and liabilities was necessary to reduce the deferred tax assets to the amount that would more likely than not be realized. This 40% valuation allowance represented a decrease from the prior fiscal year's 45% due to the aforementioned earnings trend. The Company released $0.8 million of the valuation allowance in fiscal 2011 due to the positive earnings in the Company's operations and projected earnings in fiscal 2012 and 2013.

Workmen's Compensation Reserves

The Company recognizes significant reserves in relation to its fully insured high deductible workers' compensation programs based on (a) the amount of past claims incurred and (b) the estimated time lag to report and pay such claims. Our deductible under our workers' compensation insurance at PSM and CSM is $0.25 million with an aggregate liability limit of approximately $2.0 million. Our deductible under the ESG LUA policy is $0.35 million with no aggregate liability. The reserve recognized for unpaid workers' compensation benefits on the Company's consolidated balance sheet is $1.3 million (for which . . .