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SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended March 31, 2004 Commission file number 000-25959 Private Business, Inc.  Tennessee
    
    62-1453841(State or other jurisdiction of
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)
 9020 Overlook Blvd., Brentwood,
Tennessee
    
    37027(Address of principal executive offices)
    
    (Zip Code)
 (615) 221-8400
(Registrants telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes x No o Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes o No x Indicate the number of shares outstanding of each of the issuers classes
of common stock, as of the latest practical date. Class
    
    Outstanding as of April 30, 2004Common Stock, no par value
    
    14,188,989 shares
 1




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PRIVATE BUSINESS, INC. Form 10-Q For Quarter Ended March 31, 2004 INDEX  
 PageNo.Part I  Financial InformationItem 1 - Financial StatementsUnaudited Consolidated Balance Sheets As of March 31,
2004 and December 31, 2003
    
    
    3Unaudited Consolidated Statements of Operations for the
three months ended March 31, 2004 and 2003
    
    
    4Unaudited Consolidated Statement of Stockholders Equity
(Deficit) for the three months ended March 31, 2004
    
    
    5Unaudited Consolidated Statements of Cash Flows for the
three months ended March 31, 2004 and 2003
    
    
    6Notes to Unaudited Consolidated Financial Statements
    
    
    7-12Item 2 - Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    13-24Item 3 - Quantitative and Qualitative Disclosures About Market Risk
    
    
    24Item 4 - Controls and Procedures
    
    
    24-25Part II  Other InformationItem 1 - Legal Proceedings
    
    
    26Item 2 - Changes in Securities, Use of Proceeds and Issuer
Purchases of Equity Securities
    
    
    26Item 4 - Submission of Matters to a Vote of Security Holders
    
    
    27Item 6 - Exhibits and Reports on Form 8-K
    
    
    27Signatures
    
    
    28EX-10.4 CREDIT AGREEMENT 01/19/04EX-31.1  SECTION 302 CERTIFICATION OF THE CEOEX-31.2  SECTION 302 CERTIFICATION OF THE CFOEX-32.1  SECTION 906 CERTIFICATION OF THE CEOEX-32.2  SECTION 906 CERTIFICATION OF THE CFO
   
 2




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##### Table of Contents



Part I  Financial Information 
 Item 1. Financial Statements PRIVATE BUSINESS, INC.
AND SUBSIDIARIES 
 CONSOLIDATED BALANCE SHEETS  UNAUDITED
 March 31,
    
    December 31,(in thousands, except per share data)
    
    2004
    
    2003ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    2,103
    
    
    $
    1,586Accounts receivable  trade, net of allowance for doubtful accounts of $377 and $358, respectively
    
    
    4,699
    
    
    
    4,632Accounts receivable  other
    
    
    111
    
    
    
    371Deferred tax assets
    
    
    776
    
    
    
    859Prepaid and other current assets
    
    
    1,022
    
    
    
    1,563Total current assets
    
    
    8,711
    
    
    
    9,011PROPERTY AND EQUIPMENT, NET
    
    
    3,251
    
    
    
    3,698OTHER ASSETS:Software development costs, net
    
    
    1,226
    
    
    
    1,267Deferred tax assets
    
    
    3,206
    
    
    
    2,980Intangible and other assets, net
    
    
    9,469
    
    
    
    10,129Total other assets
    
    
    13,901
    
    
    
    14,376Total assets
    
    $
    25,863
    
    
    $
    27,085LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)CURRENT LIABILITIES:Accounts payable
    
    $
    1,430
    
    
    $
    1,741Accrued liabilities
    
    
    3,473
    
    
    
    3,786Other short-term borrowings
    
    
    188
    
    
    
    388Dividends payable
    
    
    775
    
    
    
    735Deferred revenue
    
    
    525
    
    
    
    557Current portion of long-term debt and capital lease obligations
    
    
    1,757
    
    
    
    3,849Total current liabilities
    
    
    8,148
    
    
    
    11,056REVOLVING LINE OF CREDIT
    
    
    3,250
    
    
    
    950OTHER NONCURRENT LIABILITIES
    
    
    145
    
    
    
    170LONG-TERM DEBT, net of current portion
    
    
    2,917
    
    
    
    19,277Total liabilities
    
    
    14,460
    
    
    
    31,453COMMITMENTS AND CONTINGENCIESSTOCKHOLDERS EQUITY (DEFICIT):Common stock, no par value; 33,333,333 shares authorized; shares issued and outstanding, 14,110,452 and 14,063,487, respectively
    
    
    0
    
    
    
    0Series A Preferred Stock, nonconvertible, no par value; 20,000,000 shares authorized, 20,000 shares issued and outstanding
    
    
    6,209
    
    
    
    0Series B Preferred Stock, convertible, no par value; 20,000,000 shares authorized, 40,031 shares issued and outstanding
    
    
    114
    
    
    
    114Additional paid-in capital
    
    
    3,389
    
    
    
    (7,326
    )Retained earnings
    
    
    1,691
    
    
    
    2,844Total stockholders equity (deficit)
    
    
    11,403
    
    
    
    (4,368
    )Total liabilities and stockholders equity (deficit)
    
    $
    25,863
    
    
    $
    27,085
 The accompanying notes are an integral part of these consolidated financial statements. 3




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##### Table of Contents



PRIVATE BUSINESS, INC. AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF OPERATIONS  UNAUDITED
For the Three Months Ended March 31, 2004 and 2003 (in thousands, except per share data)
    
    2004
    
    2003REVENUES:Participation fees
    
    $
    6,297
    
    
    $
    7,061Software license
    
    
    53
    
    
    
    76Retail planning services
    
    
    2,251
    
    
    
    2,358Maintenance and other
    
    
    1,242
    
    
    
    1,571Total revenues
    
    
    9,843
    
    
    
    11,066OPERATING EXPENSES:General and administrative
    
    
    4,309
    
    
    
    5,635Selling and marketing
    
    
    4,376
    
    
    
    4,664Research and development
    
    
    113
    
    
    
    238Amortization
    
    
    326
    
    
    
    425Other operating expense, net
    
    
    1,701
    
    
    
    44Total operating expenses
    
    
    10,825
    
    
    
    11,006OPERATING INCOME (LOSS)
    
    
    (982
    )
    
    
    60INTEREST EXPENSE, NET
    
    
    190
    
    
    
    352LOSS BEFORE INCOME TAXES
    
    
    (1,172
    )
    
    
    (292
    )Income tax benefit
    
    
    (457
    )
    
    
    (114
    )NET LOSS
    
    
    (715
    )
    
    
    (178
    )Preferred stock dividends
    
    
    438
    
    
    
    40NET LOSS AVAILABLE TO COMMON SHAREHOLDERS
    
    $
    (1,153
    )
    
    $
    (218
    )LOSS PER SHARE:Basic
    
    $
    (0.08
    )
    
    $
    (0.02
    )Diluted
    
    $
    (0.08
    )
    
    $
    (0.02
    )WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:Basic
    
    
    14,079
    
    
    
    14,064Diluted
    
    
    14,079
    
    
    
    14,064
 The accompanying notes are an integral part of these consolidated financial statements. 4




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PRIVATE BUSINESS, INC. AND SUBSIDIARIES 
 CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY (DEFICIT)  UNAUDITED
For the Three Months Ended March 31, 2004 Shares of
    
    
    
    
    
    Additional
    
    RetainedCommon
    
    Preferred
    
    Paid-in
    
    Earnings(in thousands)
    
    Stock
    
    Stock
    
    Capital
    
    (Deficit)
    
    TotalBalance, December 31, 2003
    
    
    14,063
    
    
    $
    114
    
    
    $
    (7,326
    )
    
    $
    2,844
    
    
    $
    (4,368
    )Series A preferred stock issuance and common
stock warrant issuance
    
    
    
    
    
    
    6,209
    
    
    
    10,685
    
    
    
    
    
    
    
    16,894Preferred stock dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (438
    )
    
    
    (438
    )Exercise of stock options
    
    
    39
    
    
    
    
    
    
    
    23
    
    
    
    
    
    
    
    23Shares issued under employee stock purchase plan
    
    
    8
    
    
    
    
    
    
    
    7
    
    
    
    
    
    
    
    7Comprehensive income (loss):2004 net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (715
    )
    
    
    (715
    )Balance,
March 31, 2004
    
    
    14,110
    
    
    $
    6,323
    
    
    $
    3,389
    
    
    $
    1,691
    
    
    $
    11,403
 The accompanying notes are an integral part of these consolidated financial statements. 5




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PRIVATE BUSINESS, INC. AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF CASH FLOWS  UNAUDITED
For the Three Months Ended March 31, 2004 and 2003 (in thousands)
    
    2004
    
    2003CASH FLOWS FROM OPERATING ACTIVITIES:Net income (loss)
    
    $
    (715
    )
    
    $
    (178
    )Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:Depreciation and amortization
    
    
    803
    
    
    
    1,148Deferred taxes
    
    
    (143
    )
    
    
    (98
    )Write-off of debt issuance cost from Fleet debt facility
    
    
    780
    
    
    
    0Changes in assets and liabilities:Accounts receivable
    
    
    193
    
    
    
    738Prepaid and other current assets
    
    
    140
    
    
    
    185Other assets
    
    
    24
    
    
    
    18Accounts payable
    
    
    (311
    )
    
    
    102Accrued liabilities
    
    
    (312
    )
    
    
    (326
    )Deferred revenue
    
    
    (32
    )
    
    
    8Other noncurrent liabilities
    
    
    0
    
    
    
    (187
    )Net cash provided by operating activities
    
    
    427
    
    
    
    1,410CASH FLOWS FROM INVESTING ACTIVITIES:Additions to property and equipment
    
    
    (37
    )
    
    
    (46
    )Software development costs
    
    
    (173
    )
    
    
    (210
    )Payment received on note receivable
    
    
    15
    
    
    
    0Net cash used in investing activities
    
    
    (195
    )
    
    
    (256
    )CASH FLOWS FROM FINANCING ACTIVITIES:Repayments on long-term debt
    
    
    (417
    )
    
    
    (1,244
    )Repayments on capitalized lease obligations
    
    
    (111
    )
    
    
    (106
    )Repayments of other short-term borrowings
    
    
    (201
    )
    
    
    0Extinguishment of long-term debt facility with Fleet
    
    
    (23,875
    )
    
    
    0Proceeds from revolving line of credit
    
    
    750
    
    
    
    0Proceeds from exercise of employee stock options
    
    
    23
    
    
    
    0Stock issued through employee stock purchase plan
    
    
    7
    
    
    
    21Net proceeds
from sale of Series A preferred shares and common stock warrant
    
    
    17,295
    
    
    
    0Net proceeds from new debt facility with Bank of America
    
    
    7,214
    
    
    
    0Payments of declared preferred dividends
    
    
    (400
    )
    
    
    0Net cash used in financing activities
    
    
    (285
    )
    
    
    (1,329
    )NET CHANGE IN CASH AND CASH EQUIVALENTS
    
    
    517
    
    
    
    (175
    )CASH AND CASH EQUIVALENTS at beginning of year
    
    
    1,586
    
    
    
    1,146CASH AND CASH EQUIVALENTS at end of period
    
    $
    2,103
    
    
    $
    971SUPPLEMENTAL CASH FLOW INFORMATION:Cash payments for income taxes during period
    
    $
    158
    
    
    $
    100Cash payments of interest during period
    
    $
    154
    
    
    $
    352
 The accompanying notes are an integral part of these consolidated financial statements. 6




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PRIVATE BUSINESS,
INC. 
 Notes to Consolidated Financial Statements  Unaudited
 A. Basis of Presentation The accompanying unaudited consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States for interim financial reporting and in accordance with Rule 10-01
of Regulation S-X. In the opinion of management, the unaudited interim financial statements
contained in this report reflect all adjustments, consisting of only normal
recurring accruals, which are necessary for a fair presentation of the
financial position, and the results of operations for the interim periods
presented. The results of operations for any interim period are not necessarily
indicative of results for the full year. These consolidated financial statements, footnote disclosures and other
information should be read in conjunction with the consolidated financial
statements and notes thereto included in our Annual Report on Form 10-K for the
year ended December 31, 2003. B. Summary of Significant Accounting Policies Principles of Consolidation The accompanying financial statements include the accounts of Private
Business, Inc. and its wholly owned subsidiaries. All significant intercompany
balances and transactions have been eliminated in consolidation. Our significant accounting policies include revenue recognition and
software development costs. Please refer to our Annual Report on Form 10-K for
the year ended December 31, 2003 for a more detailed description of these
accounting policies. Stock-Based Compensation The Company has elected to account for its stock-based compensation plans
under the intrinsic value-based method of accounting prescribed by Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees,
and does not utilize the fair value method. 7




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The following table illustrates the effect on net income (loss) available
to common shareholders and earnings (loss) per share if the fair value based
method had been applied to all outstanding and unvested awards for the
three-month periods ended March 31, 2004 and 2003, respectively. (in thousands, except per share data)
    
    2004
    
    2003Net loss available to common shareholders, as reported
    
    $
    (1,153
    )
    
    $
    (218
    )Add: Stock-based employee compensation expense included in reported net loss, net of related tax effects
    
    
    0
    
    
    
    0Deduct: Total stock-based employee compensation expense determined under fair value based method for all
awards, net of related tax effects
    
    
    (92
    )
    
    
    (177
    )Pro forma net loss
    
    $
    (1,245
    )
    
    $
    (395
    )
 2004
    
    2003Earnings (loss) per share:Basic
 as reported
    
    $
    (0.08
    )
    
    $
    (0 .02
    )Basic
 pro forma
    
    $
    (0.09
    )
    
    $
    (0.03
    )Diluted
 as reported
    
    $
    (0.08
    )
    
    $
    (0.02
    )Diluted
 pro forma
    
    $
    (0.09
    )
    
    $
    (0.03
    )
 C. Capital Event On January 20, 2004, the Company completed the sale of 20,000 shares of
Series A non-convertible preferred stock and a warrant to purchase 16,000,000
shares of our common stock ($1.25 per share exercise price) for a total of $20
million (the Lightyear Transaction) to Lightyear Fund, L.P. (together with
its affiliates, Lightyear). The preferred shares carry a cash dividend rate
of 10% of an amount equal to the liquidation preference, payable quarterly in
arrears, when and as declared by the Board of Directors. The Series A
preferred stock has a liquidation preference superior to the common stock and
to the extent required by the terms of the Series B preferred stock, in parity
with the currently outstanding Series B preferred stock. The liquidation
preference is equal to the original $20 million purchase price, plus all
accrued but unpaid dividends. In addition, the Securityholders agreement
between the Company and Lightyear PBI Holdings, LLC, executed in conjunction
with the sale of the preferred stock and warrant, entitles Lightyear to an
additional equity purchase right. The equity purchase right allows Lightyear,
so long as Lightyear continues to hold any shares of Series A Preferred Stock,
all or any portion of its rights under the warrant or any shares of common
stock issued pursuant to an exercise of the warrant, the right to purchase its
pro rata portion of all or any part of any new securities which the Company
may, from time to time, propose to sell or issue. However, in the case of new
security issuances resulting from the exercise of employee stock options which
have an exercise price less than $1.25 per share, Lightyear must still pay
$1.25 per share under this equity purchase right. To the extent that new
security issuances resulting from the exercise of employee stock options occur
which have an exercise price in excess of $1.25 per share, then Lightyear will
be required, if they choose to exercise their equity purchase right, to pay the
same price per share as the employee stock options being exercised. 8




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##### Table of Contents



The net proceeds from the Lightyear Transaction are shown below (in thousands): Cash Received from Lightyear
    
    $
    20,000Less:Broker fees
    
    
    1,255Legal and accounting fees
    
    
    383Transaction structuring fees
    
    
    1,200Other
    
    
    268Net Proceeds Received
    
    $
    16,894
 The net proceeds above were allocated between the preferred stock, the
common stock warrant and the additional common stock equity right based upon
the estimated fair values of each instruments, resulting in
$6.2 million being allocated to the preferred shares and $10.7 million being
allocated to the common stock warrant and additional common stock equity right.
The estimated fair value of the preferred stock was determined based on
valuing the expected preferred stock dividend stream using expected yields
ranging from 20.2% to 30.2%. These yield ranges were arrived at by comparison
to other similar preferred issuances at companies with similar equity ratings.
The estimated fair value of the common stock warrant and additional common
stock equity right were determined by using the Black-Scholes model. The
assumptions used in this valuation for the warrant included the exercise price
of $1.25, the expected life of the warrant of ten years, an interest rate of
4.41% and volatility factors of between 51.9% and 64.3% determined based on
selected comparable companies. The assumptions used in this valuation for the
additional common stock equity right included exercise prices ranging from
$1.25 to $42.64, expected lives between two and seven years, an interest rate
of 4.0% and a volatility factor of 75%. Simultaneous with the closing of the Lightyear Transaction, the Company
entered into the Bank of America Credit Facility. The Bank of America Credit
Facility is an $11.0 million facility that includes a term loan in the amount
of $5.0 million and a revolving line of credit of up to $6.0 million. The
revolving line of credit includes a $1.0 million letter of credit sub-limit. As
of March 31, 2004, $7.8 million was outstanding under the Bank of America Credit
Facility. The Bank of America Credit Agreement expires on January 19, 2007. The
revolving credit commitment reduces by $1.0 million on each of the first two
anniversary dates of the credit facility. The term loan is repayable in twelve equal quarterly installments of
$416,667, along with interest at the applicable margin. Interest is also due on
the outstanding revolving line of credit quarterly at the applicable margin.
The interest rates of the term loan and revolving loan are based on a pricing
grid using the Companys Funded Debt to EBITDA Ratio, as follows: Funded Debt to EBITDA
    
    Libor
    
    Base RateLess than or equal to 1.0
    
    Libor + 2.25%
    
    
    0Greater than 1.0 but less than or equal to 1.25
    
    Libor + 2.50%
    
    
    0Greater than 1.25 but less than or equal to 1.50
    
    Libor + 2.75%
    
    
    0
 The Bank of America Credit Agreement includes certain restrictive
financial covenants relating to net worth, maximum annual capital expenditures,
funded debt to EBITDA ratio and fixed charge coverage ratio. The Bank of America Credit Agreement prohibits the Company from declaring
and paying any cash dividends on any class of stock except for the Series A and
Series B preferred shares outstanding, provided, that no default, as defined in
the Bank of America Credit Agreement, exists as of the date of payment and such
payment will not cause a default. 9




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The total net proceeds of both the Lightyear Transaction and the new
credit agreement were used to extinguish the Companys 1998 credit facility. As a result of the 1998 credit facility extinguishment, the Company
recorded a charge of $780,000 to write-off the unamortized portion of debt
issuance costs as of January 20, 2004. Also, the Lightyear Transaction required
that the Company obtain directors and officers tail insurance coverage for
periods prior to January 20, 2004. The premium for the tail directors and
officers liability insurance coverage totaled approximately $900,000. The
Company expensed the entire premium in January 2004. Therefore, first quarter
2004 other operating expense includes two unusual expense items totaling
approximately $1.7 million. D. Net Loss Per Share Basic loss per share is computed by dividing net loss available to common
shareholders by the weighted average number of common shares outstanding during
the period. Diluted loss per share is computed by dividing net loss available
to common shareholders by the weighted average number of common and common
equivalent shares outstanding during the period, which includes the additional
dilution related to conversion of stock options as computed under the treasury
stock method and the conversion of the preferred stock under the if-converted
method. The following table represents information necessary to calculate earnings
per share for the three-month periods ended March 31, 2004 and 2003: Three Months Ended March 31,(in thousands)
    
    2004
    
    2003Net loss available to common shareholders
    
    $
    (1,153
    )
    
    $
    (218
    )Weighted average common shares outstanding
    
    
    14,079
    
    
    
    14,064Plus additional shares from common stock equivalent shares:Options, warrant and convertible preferred stock
    
    
    0
    
    
    
    0Adjusted weighted average common shares outstanding
    
    
    14,079
    
    
    
    14,064
 For the three months ended March 31, 2004 and 2003, approximately 14.9
million and 2.1 million employee stock options, convertible preferred shares
and stock warrant were excluded from diluted loss per share calculations, as
their effects were anti-dilutive. E. Bank Covenants The Companys new credit facility with Bank of America is secured by a
pledge of all Company assets and imposes financial covenants and requirements
and contains limitations on the Companys ability to sell material assets,
redeem capital stock and pay dividends, among other actions. As of March 31,
2004, the Company was in compliance with all such covenants. F. Legal Proceedings As a result of the merger with Towne, we assumed certain outstanding
litigation against Towne. Except for the lawsuits described below, we are not
currently a party to, and none of our material properties is currently subject
to, any material litigation other than routine litigation incidental to our
business. 10




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In Re Towne Services, Inc./Securities Litigation As previously disclosed, the Company reached a final settlement regarding the
Towne Services, Inc. (Towne) securities class action lawsuit in 2003. On
January 30, 2004, the Company entered into a settlement agreement requiring
its insurance carrier to fund certain costs of defense incurred in connection
with the Towne securities litigation, which amounts have been paid by its
insurance carrier. Edward H. Sullivan, Jr. and Lisa Sullivan v. Towne Services, Inc. (Towne Services, Inc. as the successor to Banking Solutions, Inc., Bane
Leasing.Com, Inc., the successor to BSI Capital Funding, Inc., Moseley &
Standerfer, P.C., David R. Frank, Don G. Shafer, and Shannon W. Webb) As previously disclosed, the Company is a party to a lawsuit involving
Townes acquisition of Banking Solutions, Inc. (BSI) through a stock
purchase made by its subsidiary, BSI Acquisition Corp. This lawsuit was
filed in December 1998 in the District Court of Collin County, Texas. On
July 15, 2002, the District Court of Collin County, Texas granted Townes
motion for summary judgment on all claims. The Company continues to seek
indemnification, pursuant to the BSI stock purchase agreement, from the BSI
shareholders for its expenses in defending this action. G. Segment Information The Company accounts for segment reporting under SFAS No. 131, Disclosures
about Segments of an Enterprise and Related Information.No corporate overhead
costs or interest have been allocated to income (loss) before taxes of the
retail inventory forecasting segment, but are included in the accounts
receivable financing segment costs. Additionally, $1.5 million of goodwill
associated with the Towne merger has been allocated to the retail inventory
forecasting segment and is therefore included in the segments total assets. The following table summarizes the financial information concerning the
Companys reportable segments from continuing operations for the three months
ended March 31, 2004 and 2003. Three Months Ended
    
    Three Months EndedMarch 31, 2004
    
    March 31, 2003Accounts
    
    Retail
    
    
    
    
    
    Accounts
    
    RetailReceivable
    
    Inventory
    
    
    
    
    
    Receivable
    
    InventoryFinancing
    
    Forecasting
    
    Total
    
    Financing
    
    Forecasting
    
    Total(in thousands)Revenues
    
    $
    7,592
    
    
    $
    2,251
    
    
    $
    9,843
    
    
    $
    8,708
    
    
    $
    2,358
    
    
    $
    11,066Income (loss) before taxes
    
    $
    (1,429
    )
    
    $
    257
    
    
    $
    (1,172
    )
    
    $
    (405
    )
    
    $
    113
    
    
    $
    (292
    )Assets
    
    $
    21,674
    
    
    $
    4,189
    
    
    $
    25,863
    
    
    $
    26,215
    
    
    $
    5,173
    
    
    $
    31,388Total expenditures for
additions to long-lived
assets:
    
    $
    35
    
    
    $
    2
    
    
    $
    37
    
    
    $
    46
    
    
    $
    0
    
    
    $
    46
 H. New Accounting Pronouncements In January 2003, the FASB issued FASB Interpretation No. (FIN) 46,
Consolidation of Variable Interest Entities, to expand upon and strengthen
existing accounting guidance that addresses when a company should include in
its financial statements the assets, liabilities and activities of another
entity. Until now, a company generally has included another entity in its
consolidated financial statements only if it controlled the entity through
voting interests. FIN 46 changes that guidance by requiring a variable interest
entity, as defined, to be 11




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consolidated by a company if that company is subject
to a majority of the risk of loss from the variable interest entitys
activities or is entitled to receive a majority of the entitys residual
returns or both. FIN 46 also requires
disclosure about variable interest entities that the company is not required to
consolidate but in which it has a significant variable interest. The
consolidation requirements of FIN 46 apply immediately to variable interest
entities created after January 31, 2003 and to older entities in the first
fiscal year or interim period ending after March 15, 2004. Certain of the
disclosure requirements apply in all financial statements issued after January
31, 2003, regardless of when the variable interest entity was established. The
Company has adopted the provisions of FIN 46 effective March 31, 2004 which did
not have any impact on the Companys consolidated results of operations and
financial position. 12




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##### Table of Contents



PRIVATE BUSINESS, INC. 
 Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations Three Months Ended March 31, 2004 and 2003 Note Regarding Forward Looking Information This interim report contains several forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995 including,
without limitation, statements containing the words may, would, could,
will, expect, anticipate, believe, intend, plan, and estimate and
words of similar importance. Such statements include statements concerning our
operations, prospects, strategies and financial condition, including our future
economic performance, intent, plans and objectives, and the likelihood of
success in developing and expanding our business. These statements are based
upon a number of assumptions and estimates which are subject to significant
uncertainties, many of which are beyond our control. Actual results may differ
materially from those expressed or implied by such forward-looking statements.
The Company assumes no obligation to update this information. Factors that
could cause actual results to differ materially are discussed in our filings
with the Securities and Exchange Commission, including our Annual Report on
Form 10-K for the year ended December 31, 2003, and include, among other
factors, the timely development and market acceptance of products and
technologies and competitive market conditions. Overview We are a leading provider of solutions that enable community banks to
manage accounts receivable financing provided to their small business
customers. Our solution is called Business Manager, and is based on software,
marketing, and online electronic transaction processing services. One element
of Business Manager is our proprietary software, which enables our network of
client banks to purchase accounts receivable from their small business
customers. The banks then process, bill and track those receivables on an
ongoing basis. As a major component of our program, we work with client banks
to design, implement and manage the sale of Business Manager accounts
receivable financing services to their small business customers. We also give
our client banks the option of outsourcing to us their application hosting and
transaction processing through secure Internet connections, allowing them to
receive accounts receivable information and make funding decisions
electronically. On January 20, 2004, we completed a capital restructuring event consisting
of the sale of 20,000 shares of our Series A preferred stock and a warrant to
purchase up to 16 million shares of our common stock at a price of $1.25 per
share to Lightyear Fund, L.P. for a total purchase price of $20 million, as
well as the execution of a new long-term credit facility with a bank that
allows for total borrowings of up to $11 million. This process was initiated in
April 2003 as a result of the ninth amendment to the then existing credit
facility, which required that a Capital Event, as defined in the amendment, be
pursued and completed by December 31, 2003. As a result, this process consumed
a great deal of executive management resources during 2003, which hindered some
of the core business initiatives outlined early in 2003. The completion of this
Capital Event is a significant milestone in our Companys history as it
improves our capitalization and financial position. While we continue to market new products as part of our overall strategy,
our primary focus in 2004 will be to return our core receivables financing
business to a growth business. We believe that the market for this product is
strong, particularly given the indications that an economic recovery is
underway. The receivables financing market is strongly influenced by the United
States economy, and as the U.S. economy has experienced two years of economic
decline, our core business revenues have been negatively impacted. We believe that
with an improving and growing economy and initiatives underway, that we can
return our core receivables financing business to a growth mode. 13




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In order to achieve this goal, we have undertaken several key initiatives.
First, we intend to invest in our sales force by expanding our bank sales
personnel, as well as our business development managers. During the last three
years, our average number of sales personnel has declined each year. Now that
we have addressed the financial uncertainty related to our high debt service
obligations, which constrained our ability to invest in the sales force in
prior years, we believe that increasing the size of our sales force is a top
priority. Second, we intend to train our entire sales force more effectively in
order to achieve higher productivity levels from all of our sales personnel. We
have redesigned our sales training agenda for new sales personnel so that they
receive more comprehensive training on the products they are expected to sell.
Further, we have completed a process of re-training all of our existing sales
personnel which took place in February and March of 2004. This training was a
four-day session that covered all aspects of the Companys products,
operations, and technologies. We believe that successful execution of the sales force initiatives will
result in growth of the core business. These initiatives, however, will take a
considerable amount of time and effort to implement. We believe these
initiatives will not impact our financial results until late 2004. Critical Accounting Policies Managements Discussion and Analysis of Financial Condition and Results of
Operations are based upon the Companys consolidated financial statements. The
preparation of these consolidated financial statements in accordance with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of contingent assets and
liabilities at the dates of the financial statements, and the reported amounts
of revenues and expenses during the reporting periods. On an on-going basis,
management evaluates its critical accounting policies and estimates. A critical accounting policy is one that is both important to the
understanding of the financial condition and results of operations of the
Company and requires managements most difficult, subjective or complex
judgments, often as a result of the need to make estimates about the effect of
matters that are inherently uncertain. Management believes the following
accounting policies fit this definition: Revenue Recognition.We generate revenue from four main sources:  
    
    participation fees earned on client bank purchases of small business accounts receivable.
    
    software license fees from new client banks.
    
    retail planning services.
    
    maintenance fees and other revenues, comprised primarily of fees
received for insurance brokerage services, paper-based form sales,
software maintenance, medical, and processing services. There are two types of participation fees. The first type is earned upon
the client banks initial purchase of a small business accounts receivable
during the first 30 days in our program. The second type is an ongoing
participation fee earned from subsequent period purchases. Both types of fees
are based on a percentage of the receivables that a client bank purchases from
its small business customers during each month. The second type of fee is a
smaller percentage of the ongoing receivables purchased. Participation fees are
recognized as earned, which is based upon the transaction dates of bank
purchases from its small business customers. Software license fees for Business Manager consist of two components: the
license fee and customer training and support fee. These are one-time fees that
we receive upon the initial licensing of our Business Manager program to a
community bank. Our license agreements are executed with terms ranging from
three to five years, and are renewable for subsequent terms. Some agreements
contain performance or deferred payment terms that must be met in order for us
to receive payment and recognize revenue. We recognize revenues from the
license fee once we have met the terms of the customer agreement. The customer
training and support fee are recognized ratably over the 14




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twelve-month service period subsequent to the activation of the license
agreement. Revenue recognition rules for up front fees are complex and do
require some interpretation and judgment on the part of management. Management
has consistently followed the same revenue recognition practices for this type
of revenue during all years presented. We believe that this practice most
accurately portrays the economic reality of the transactions. Retail planning services revenue is generated from fees charged primarily
for providing inventory merchandising and forecasting information for specialty
retail stores and ancillary services related to these products. RMSA uses
proprietary software to process sales and inventory transactions and provide
the merchandising forecasting information. We recognize revenues as the
transactions occur and merchandising and forecasting services are performed. Maintenance fees and other revenues include several ancillary products and
services we provide to client banks. Annual software maintenance fees are
generated from our client banks starting on the first anniversary date of the
Business Manager license agreement and annually thereafter. These revenues are
recognized ratably over a twelve-month period beginning on the first
anniversary date of the agreement. Additionally, since 1995, we have brokered,
through our Private Business Insurance subsidiary, credit and fraud insurance
products from a national insurance company. We earn fees based on a percentage
of the premium that is paid to the insurance company. These commission revenues
are recognized at the time receivable fundings covered by credit and fraud
insurance policies are purchased by our bank customers. We also provide a
standard set of forms that client banks may purchase and use in the normal
course of administering the Business Manager program. Revenues related to these
forms are recognized in the period that they are shipped to the client bank. We
also have some industry-focused applications for the medical and dental
markets. Monthly transaction processing fees include charges for electronic
processing, statement rendering and mailing, settling payments, recording
account changes and new accounts, leasing and selling point of sale terminals,
telephone and software support services, rental fees and collecting debts. Software Development Costs.Software development costs incurred in the
research and development of new software products and enhancements to existing
software products to be sold or marketed are expensed as incurred until
technological feasibility has been established. After such time, any additional
costs are capitalized in accordance with Statement of Financial Accounting
Standards (SFAS) No. 86, Accounting for the Costs of Computer Software to Be
Sold, Leased, or Otherwise Marketed.Also, the Company capitalizes the cost of
internally used software when application development begins in accordance with
AICPA SOP No. 98-1, Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use. This is generally defined as the point when research
and development has been completed, the project feasibility established, and
management has approved a development plan. Many of the costs capitalized for
internally used software are related to upgrades or enhancements of existing
systems. These costs are only capitalized if the development costs will result
in specific additional functionality of the existing system, and are
capitalized at the point that application development begins. Capitalized
software development costs are amortized on a straight-line basis over their
useful lives, generally three years. The key assumptions and estimates that
must be made relative to this accounting policy center around determining when
technological feasibility has been achieved and whether the project being
undertaken is one that will be marketable or enhance the marketability of an
existing product for externally marketed software and whether the project will
result in additional functionality for internal use software projects.
Management consults monthly with all project managers to ensure that the scope
and expected results of each project are understood in order to make a judgment
on whether it meets the requirements outlined in the authoritative accounting
literature. 15




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##### Table of Contents



Results of Operations The following table sets forth, for the periods indicated, the percentage
relationships of the identified consolidated statements of operations items to
total revenue. First Quarter2004
    
    2003Revenues:Participation fees
    
    
    64.0
    %
    
    
    63.8
    %Software license
    
    
    0.5
    %
    
    
    0.7
    %Retail planning services
    
    
    22.9
    %
    
    
    21.3
    %Maintenance and other
    
    
    12.6
    %
    
    
    14.2
    %100.0
    %
    
    
    100.0
    %Operating Expenses:General and administrative
    
    
    43.8
    %
    
    
    50.9
    %Selling and marketing
    
    
    44.5
    %
    
    
    42.1
    %Research and development
    
    
    1.1
    %
    
    
    2.2
    %Amortization
    
    
    3.3
    %
    
    
    3.8
    %Other operating expense, net
    
    
    17.3
    %
    
    
    0.4
    %110.0
    %
    
    
    99.4
    %Operating Income (Loss)
    
    
    (10.0
    )%
    
    
    0.6
    %Interest expense, net
    
    
    1.9
    %
    
    
    3.2
    %Income (Loss) Before Income Taxes
    
    
    (11.9
    )%
    
    
    (2.6
    )%Income Tax Provision (Benefit)
    
    
    (4.6
    )%
    
    
    (1.0
    )%Net Income (Loss)
    
    
    (7.3
    )%
    
    
    (1.6
    )%Preferred Stock Dividends
    
    
    4.4
    %
    
    
    0.4
    %Net Income (Loss) Available to Common Shareholders
    
    
    (11.7
    )%
    
    
    (2.0
    )%
 Participation fees.Participation fees decreased 10.8% to $6.3 million for
the first three months of 2004 compared to $7.1 million for the comparable
period of 2003. The decreases were primarily due to a reduction in the total
funding through our BusinessManager program to $909 million for the first three
months of 2004, compared to $1.1 billion for the comparable period of 2003.
The decrease in funding is due to a combination of two factors; fewer merchants
funding through our BusinessManager program and lower funding levels at
existing merchants due to the slower economy. As a percentage of total
revenues, participation fees accounted for 64.0% for the three-month period
ended March 31, 2004 compared to 63.8% for the comparable period of 2003. Software license. Software license fees decreased 30.3% to $53,000 for the
first three months of 2004, compared to $76,000 for the comparable period of
2003. The decrease was due to a decrease in the number of new software license
agreements sold during the first quarter of 2004 compared to 2003. This
decline is primarily the result of fewer bank salesmen during the first quarter
of 2004 as compared to 2003. Software license fees accounted for 0.5% of total
revenues for the three months ended March 31, 2004 compared to
0.7% for the comparable period in 2003. Retail planning services. Retail planning services revenues declined 4.5%
to $2.3 million during the three months ended March 31, 2004 as compared to
$2.4 million for the first three months of 2003. The decline is due to fewer
forecasting service clients as a result of the slower retail economy. As a
percentage of total revenues, retail planning services accounted for 22.9% for
the first three months of 2004 compared to 21.3% in the comparable period of
2003. 16




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##### Table of Contents



Maintenance and other. Maintenance and other fees decreased 20.9% to $1.2
million for the three-month period ended March 31, 2004 compared to $1.6
million for the comparable period for 2003. Maintenance and other fees consist
primarily of software maintenance fees, credit and fraud risk insurance
commissions earned from the sale of policies to our BusinessManager banks,
commissions earned through our referrals of certain merchants to alternative
financing companies and account verification services performed for some of our
BusinessManager banks. The first three months of 2003 included $250,000 of
other revenue resulting from a favorable legal settlement received by the
Company. Also contributing to the decline was a decrease in our insurance
revenues. Our insurance revenues decreased 9.5% to $637,000 for the first three
months of 2004 compared to $704,000 for the comparable period in 2003. The
decline in insurance revenues is due to the lower funding levels through the
BusinessManager program as discussed above. Maintenance and other fees
accounted for 12.6% of total revenues for the three month period ended March
31, 2004 compared to 14.2%
for the comparable period in 2003. Total revenues. Total revenues for the first three months of 2004
decreased 11.1% to $9.8 million compared to $11.1 million for the first three
months of 2003. General and administrative. General and administrative expenses decreased
23.5% to $4.3 million for the three-month period ended March 31, 2004 compared
to $5.6 million for the comparable period in 2003. The decrease for the three
months ended March 31, 2004 is primarily due to reductions in salary and
benefits expense as a result of reduced headcount and lower depreciation
expense due to lower capital spending during the last twelve months. General
and administrative expenses include the cost of our executive, finance, human
resources, information and support services, administrative functions and
general operations. As a percentage of total revenue, general and
administrative expenses decreased 7.1% to 43.8% for the three-month period
ended March 31, 2004 compared to the same period in the prior year. Selling and marketing. Selling and marketing expenses decreased 6.2% for
the three-month period ended March 31, 2004 to $4.4 million compared to $4.7
million for the three-month period ended March 31, 2003. The decrease for the
three months ended March 31, 2004 compared to the same period in 2003 was
primarily due to lower commissions expense, as a result of lower revenues, as
well as, fewer sales personnel. This resulted in decreased compensation,
training, and travel expenses. Selling and marketing expenses include the cost
of wages and commissions paid to our dedicated business development and bank
sales force, travel costs of our sales force, recruiting for new sales and
marketing personnel and marketing fees associated with direct and telemarketing
programs. As a percentage of total revenue, selling and marketing expenses
increased 2.3% to 44.4% for the three-month period of 2004 compared to 42.1%
for the comparable period in 2003. Research and development. Research and development expenses decreased
52.5% to $113,000 for the first quarter of 2004 compared to $238,000 for the
year earlier period. These costs include the non-capitalizable direct costs
associated with developing new versions of our system and other projects that
have not yet reached technological feasibility. The decrease in costs for the
first three months of 2004 was primarily due to more capitalized activity
related to new projects meeting the requirements for capitalization, as well
as, fewer total employees working in this area, as compared to the same period
in 2003. As a percentage of total revenues, research and development expenses
decreased to 1.2% for the three months of 2004 compared to 2.2% for the same
period in the prior year. Amortization. Amortization expenses decreased 23.3% to $326,000 for the
first three months of 2004 compared to $425,000 for the comparable period in
2003. These expenses include the cost of amortizing intangible assets including
trademarks, software development costs and debt issuance costs (2003 only). The
decrease was due to amortization of the Fleet debt issuance costs ceasing on
January 20, 2004 as a result of the Capital Event described elsewhere in this
document. Other operating expenses, net. Other operating expenses increased
significantly to $1.7 million for the first quarter of 2004 compared to $44,000
in the same period in the prior year. Other operating expenses include 17




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##### Table of Contents



property tax and other miscellaneous costs associated with providing support
and services to our client banks. As previously disclosed, for the first
quarter of 2004, two unusual charges occurred totaling approximately $1.7
million. As a result of the Capital Event that occurred January 20, 2004 the
Company expensed $780,000 of unamortized debt issuance costs related to the
extinguished Fleet debt facility. In addition, the Company was required to
obtain tail coverage for Directors and Officers liability insurance, which cost
the Company $896,000. In accordance with GAAP, the Company expensed the entire
cost of this premium at the time of purchase. Operating income(loss).As a result of the above factors, we incurred an
operating loss of $982,000 for the first quarter of 2004 compared to operating
income of $60,000 for the first three months of 2003. As a percentage of total
revenue, the operating loss was (10.0)% for the first three months of 2004
compared to operating income of 0.6% for the same period in 2003. Interest expense, net. Interest expense, net decreased 46.0% to $190,000
for the three months ended March 31, 2004 compared to $352,000 for the
comparable period in 2003. The decrease was primarily due to the reduction of
our debt balances in 2004 as a result of the capital event discussed elsewhere
in this document. Income tax provision (benefit).The income tax benefit was approximately
$457,000 for the three months ended March 31, 2004 compared to a tax benefit of
$114,000 for the same period in 2003. As a percentage of income before taxes,
the income tax rate was 39.0% for both 2004 and 2003. Liquidity and Capital Resources Our primary sources of capital have historically been cash provided by
operations, short-term and long-term debt, and investment from stockholders.
During the first three months of 2004 our operating activities provided cash of
approximately $427,000. We used approximately $195,000 in our investing
activities, consisting of capital expenditures of $37,000 and $173,000 of
software development costs, partially offset by a note receivable payment
proceeds of $15,000. We currently estimate that total capital expenditures for
2004 will be approximately $500,000. Cash provided by financing activities totaled $285,000 for the first three
months of 2004, which is the result of the closing of the Capital Event. The Company was the borrower under a credit agreement dated August 7, 1998
between the Company as borrower, and Fleet National Bank as administrative
agent for a syndicate of other lenders (the Fleet Credit Facility). The Fleet
Credit Facility was secured by a pledge of all of our assets and contained
financial and non-financial covenants and contained negative covenants, which,
among other things, limited our ability to sell material assets, redeem capital
stock and pay cash dividends. The Fleet Credit Facility was paid in full on
January 20, 2004 using the net proceeds received from the Lightyear transaction
and the net proceeds from the Bank of America Credit Facility. As such, the
Fleet covenants expired at the time of refinancing. The Company has entered into the Bank of America Credit Facility on
January 19, 2004. The credit facility is secured by a pledge of all of the
Companys assets and contains financial and non-financial covenants. The new
credit agreement includes a term loan in the amount of $5.0 million and a
revolving line of credit of up to $6.0 million for a total facility of up to
$11.0 million. The revolving line of credit includes a $1.0 million letter of
credit sub-limit. As of March 31, 2004, $7.8 million was outstanding under the
Bank of America Credit Facility. The Bank of America Credit Facility expires on January 19, 2007. The
revolving credit commitment reduces by $1.0 million on each of the first two
anniversary dates. 18




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##### Table of Contents



The term loan is repayable in twelve equal quarterly installments of
$416,667, along with interest at the applicable margin. Interest is also due on
the revolving loan quarterly at the applicable margin. The interest rates of
the term loan and revolving loan are based on a pricing grid using the
Companys Funded Debt to Earnings before Interest, Taxes, Depreciation and
Amortization (EBITDA) Ratio, as follows: Funded Debt to EBITDA
    
    Libor
    
    Base RateLess than or equal to 1.0
    
    Libor + 2.25%
    
    
    0Greater than 1.0 but less than or equal to 1.25
    
    Libor + 2.50%
    
    
    0Greater than 1.25 but less than or equal to 1.50
    
    Libor + 2.75%
    
    
    0
 As of March 31, 2004, the rate, calculated as Libor + 2.25%, was 3.36%. The credit agreement includes certain restrictive financial covenants,
measured quarterly, relating to net worth, maximum annual capital expenditures,
funded debt to EBITDA ratio and fixed charges coverage ratio, as defined in the
credit agreement. The credit agreement also contains certain non-financial covenants, including
but not limited to a prohibition on declaring and paying any cash dividends on
any class of stock, except for the Series A and Series B preferred shares
outstanding, provided, that no default, as defined in the credit agreement,
exists as of the date of payment and such payment will not cause a default. As
of March 31, 2004, the Company was, and expects to be throughout 2004, in
compliance with the credit agreement covenants. As of March 31, 2004, we had working capital of approximately $563,000
compared to a working capital deficit of approximately $2.0 million as of
December 31, 2003. The change in working capital resulted primarily from a
decrease in the amount of the current portion of long-term debt by $2.1
million, as well as a decrease in accounts payable and accrued liabilities of
$624,000 and an increase in cash of $517,000 partially offset by a $541,000
decrease in prepaid and other current assets. The decrease in the current
portion of long-term debt is a result closing the Capital Event transaction
discussed above. The decreases in accounts payable and accrued liabilities are
primarily attributable to lower overall operating expenses and continued
payments of assumed liabilities from the Towne merger. We believe that our
line of credit availability along with future operating cash flows will be
sufficient to meet our working capital and capital expenditure requirements for
the next twelve months. The following is a schedule of our obligations and commitments for future
payments, excluding contractual interest payment obligations: (in thousands)
    
    Payments Due by PeriodLess than
    
    1-2
    
    3-4
    
    4 yearsContractual Obligations
    
    Total
    
    1 year
    
    years
    
    years
    
    & afterRevolving Line of Credit
    
    $
    3,250
    
    
    $
    0
    
    
    $
    0
    
    
    $
    3,250
    
    
    $
    0Long-Term Debt
    
    $
    4,584
    
    
    $
    1,667
    
    
    $
    2,917
    
    
    $
    0
    
    
    $
    0Capitalized Lease Obligations
    
    $
    90
    
    
    $
    90
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0Operating Leases
    
    $
    8,518
    
    
    $
    1,504
    
    
    $
    2,632
    
    
    $
    2,388
    
    
    $
    1,994Other Short-Term Borrowings
    
    $
    188
    
    
    $
    188
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0Total Contractual Cash Obligations
    
    $
    16,624
    
    
    $
    3,443
    
    
    $
    5,549
    
    
    $
    5,638
    
    
    $
    1,994Standby Letter of Credit Commitment
    
    $
    539
    
    
    $
    539
    
    
    $
    0
    
    
    $
    0
    
    
    $
    0
 We may, in the future, acquire businesses or products complementary to our
business, although we cannot be certain that any such acquisitions will be
made. The need for cash to finance additional working capital or to make
acquisitions may cause us to seek additional equity or debt financing. We
cannot be certain that such financing will be available, or that our need for
higher levels of working capital will not have a material adverse 19




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effect on our business, financial condition or results of operations. New Accounting Pronouncements In January 2003, the FASB issued FASB Interpretation No. (FIN) 46,
Consolidation of Variable Interest Entities, to expand upon and strengthen
existing accounting guidance that addresses when a company should include in
its financial statements the assets, liabilities and activities of another
entity. Until now, a company generally has included another entity in its
consolidated financial statements only if it controlled the entity through
voting interests. FIN 46 changes that guidance by requiring a variable interest
entity, as defined, to be consolidated by a company if that company is subject
to a majority of the risk of loss from the variable interest entitys
activities or is entitled to receive a majority of the entitys residual
returns or both. FIN 46 also requires disclosure about variable interest
entities that the company is not required to consolidate but in which it has a
significant variable interest. The consolidation requirements of FIN 46 apply
immediately to variable interest entities created after January 31, 2003 and to
older entities in the first fiscal year or interim period ending after March
15, 2004. Certain of the disclosure requirements apply in all financial
statements issued after January 31, 2003, regardless of when the variable
interest entity was established. The Company has adopted the provisions of FIN
46 effective March 31, 2004 which did not have any impact on the Companys
consolidated results of operations and financial position. Inflation We do not believe that inflation has had a material effect on our results
of operation. There can be no assurance, however, that our business will not be
affected by inflation in the future. Risk Factors This section summarizes certain risks, among others, that should be
considered by stockholders and prospective investors in the Company. Many of
these risks are discussed in other sections of this report. If any of the
following risks actually occur, our business, financial condition or results of
operations could be materially adversely affected. In such case, the trading
price of our common stock could decline, and you may lose all or part of your
investment. Primary Dependence on One Product. We currently derive a significant
portion of our revenues from receivables financing; the majority of which flows
through Business Manager. Approximately 1% of our consolidated revenues derived
from license fees from new agreements with client banks and approximately 65%
derive from participation fees based on accounts receivables purchased by our
bank clients from small businesses. We expect to continue to derive significant
revenues from this product and related services. If total revenues derived from
Business Manager decline, our other products or services may not be sufficient
to replace that lost revenue, so any events that adversely impact Business
Manager could adversely impact our business. We cannot be certain that we will
be able to continue to successfully market and sell Business Manager to both
banks and their small business customers or that problems will not develop with
Business Manager that could materially impact our business. Potential Inability to Promote Business Manager to New and Existing Small
Business Customers. Other than the initial contract fee and a small annual
support fee, we do not generate any income from banks contracting to utilize
Business Manager unless small businesses finance their accounts receivable
through our client banks. If we and our client banks cannot retain existing
clients and convince potential small business customers of the benefits of
Business Manager, such businesses will not continue to use or initiate use of
our products and services. Since small business customers of our client banks
are the foundation of our business, their unwillingness to use Business Manager
could have a material adverse effect on our business, operating results and
financial condition. 20




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Dependence on Banking Industry for Clients. Business Manager is used
almost exclusively by banks, primarily community banks. Due to our dependence
upon the banking industry, any events that adversely impact the industry in
general and community banks in particular, such as changed or expanded bank
regulations, could adversely affect the Company and its operations. The banking
industry is subject to supervision by several federal and/or state governmental
regulatory agencies. Regulation of banks, especially with respect to receivable
services such as Business Manager, can indirectly affect our business. The use
of Business Manager by banks is currently in compliance with or is not subject
to banking regulations. These regulatory agencies, however, could change or
impose new regulations on banks, including modifying the banks ability to
offer products and services similar to ours to their small business customers.
These new regulations, if any, could prevent or lessen the use of our services
by banks. Lightyear Owns a Majority of the Companys Stock and Therefore Effectively
Controls the Companys Management and Policies. The Lightyear Fund, L.P., an
affiliate of Lightyear Capital (the Lightyear Fund), through its holdings of
Company Series A Preferred Stock, and warrants convertible into common stock,
beneficially owns, in the aggregate, approximately 53% of the Companys common
stock. As a result of the Lightyear Funds investment in the Company, the
Company has agreed to use its best efforts to cause four Lightyear Fund
nominees to serve on the Companys Board of Directors, which would be composed
of seven directors. Currently, Lightyear has identified three nominees that are
currently serving on the Companys Board and one vacancy remains. In addition,
the Company is required to obtain the approval of holders of the Series A
Preferred Stock prior to taking certain actions. The holders of the Series A
Preferred Stock have certain pre-emptive rights to participate in future equity
financings. In view of its large percentage of ownership and its rights as the
holders of the Series A Preferred Stock, the Lightyear Fund effectively
controls the Companys management and policies, such as the appointment of new
management and the approval of any other action requiring the approval of the
stockholders, including any amendments to the Companys certificate of
incorporation, a sale of all or substantially all of the Companys assets or a
merger. In addition, the Lightyear fund has registration rights with respect to
the shares of the Company common stock that it beneficially owns. These rights
generally become exercisable after July 18, 2004. Any decision by the Lightyear
Fund to exercise such registration rights and to sell a significant amount of
its shares in the public market could have an adverse effect on the price of
the Companys common stock. Potential Inability to Successfully Market our Products and Services to
New Client Banks or to Retain Current Client Banks. Our success depends to a
large degree on our ability to convince prospective client banks to utilize
Business Manager and offer it to small businesses. Failure to maintain market
acceptance, retain clients or successfully expand our offered services could
adversely affect our business, operating results and financial condition. We
have spent, and will continue to spend, considerable resources educating
potential customers about our products and services. However, even with these
educational efforts, we may not be able to maintain market acceptance and
client retention. In addition, as we continue to offer new products and expand
our services, existing and potential client banks or their small business
customers may be unwilling to accept the new products or services. Potential Inability to Attract, Hire, or Retain Enough Qualified Sales and
Marketing Personnel. If we are unable to implement our growth plans and
strategies, our business, operating results and financial condition could be
adversely affected. An important part of our sales strategy is to attract, hire
and retain qualified sales and marketing personnel in order to maintain our
marketing capabilities in our current markets and expand the number of markets
we serve. Since competition for experienced sales and marketing personnel is
intense, we cannot be certain that we will be able to attract and retain enough
qualified sales and marketing personnel or that those we do hire will be able
to generate new business at the rate we currently expect. If the Company is
unable to hire and retain enough qualified sales and marketing personnel or
those we hire are not as productive as we expect, the Company may not be able
to implement its sales plans. Potential Inability to Manage Growth of Business. Our business has the
potential to grow in size and complexity. If our management is unable to manage
growth effectively, our business, operating results and 21




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financial condition could be adversely affected. Any new sustained growth
would be expected to place a significant strain on our management systems and
operational resources. We anticipate that new sustained growth, if any, will
require us to recruit, hire and retain new managerial, finance, sales,
marketing and support personnel. We cannot be certain that we will be
successful in recruiting, hiring or retaining such personnel. Our ability to
compete effectively and to manage our future growth, if any, will depend on our
ability to maintain and improve operational, financial, and management
information systems on a timely basis and to expand, train, motivate and manage
our work force. If we begin to grow, we cannot be certain that our personnel,
systems, procedures, and controls will be adequate to support our operations.
Also, one element of our growth strategy is to actively evaluate and pursue
strategic alliances with businesses that are complementary to the Companys
business. We cannot be certain that we will be able to integrate fully any such
alliances with our existing operations or otherwise implement our growth
strategy. Intended Expansion of Offered Products and Services May Lower Our Overall
Profit Margin and New Products may not be Successful. Part of our business
strategy is to expand our offering of products and services. We believe that we
can provide these services profitably, but such services may generate a lower
profit margin than our current products and services. As a result, by offering
additional products and services, we may lower our overall profit margin.
Although gross revenues would likely increase, the lowering of our profit
margin may be viewed negatively by the stock market, possibly resulting in a
reduction in our stock price. As stated elsewhere in this filing, we are engaged in introducing several
new products to our customer base. Although our research leads us to believe
that markets and customers exist for this expansion, there can be no assurances
that the introduction and sales of these new products will be sufficient for us
to recover our investment in costs. Our Products and Services May Not be as Successful in a Slower Economy.
Since the introduction of Business Manager in 1991, the United States economy
generally has been relatively strong. If the United States economy weakens or
enters into a recession or depression, our client banks and their small
business customers may view the services and benefits provided by Business
Manager differently and may be reluctant to use the products and services we
provide. In addition, in an economic recession or depression, the customers of
small businesses may reduce their purchases of goods and services, thus
reducing accounts receivable eligible for our solution. This development could
have a material adverse effect on our business, operating results and financial
condition. Potential Inability to Compete in the Financial Services Market. The
market for small business financial services is competitive, rapidly evolving,
fragmented and highly sensitive to new product introductions and marketing
efforts by industry participants. Fluctuations in interest rates and increased
competition for services similar to Business Manager could lower our market
share and negatively impact our business and stock price. The Company faces
primary competition from a number of companies that offer to banks products
similar to Business Manager. However, we believe that we are the largest of the
companies offering these services in terms of revenues and number of client
banks under contract. We also compete with banks that use their internal information technology
departments to develop proprietary systems or purchase software from third
parties to offer similar services to small businesses. In addition, we compete
with traditional sources of financial services to small businesses such as
lines of credit, amortizing loans and factoring. Many banks and other
traditional providers of financing are much larger and more established than
Private Business, have significantly greater resources, generate more revenues
and have greater name recognition. We cannot be certain our competitors will
not develop products and services comparable or superior to those that we have
developed or adapt more quickly to new technologies, evolving industry trends
or changing small business requirements. Most providers of traditional sources
of financing have already established relationships with small businesses may
be able to leverage these relationships to discourage these customers from
purchasing the Business Manager solution or persuade them to replace our
products with their products. 22




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We expect that competition will increase as other established and emerging
companies enter the accounts receivable financing market, as new products and
technologies are introduced and as new competitors enter the market. In
addition, as we develop new services, we may begin competing with companies
with whom we have not previously competed. Increased competition may result in
price reductions, lower profit margins and loss of our market share, any of
which could have a material adverse effect on our business, operating results
and financial condition. Dependence on Key Employees. Our future performance will also largely
depend on the efforts and abilities of our executive officers, as well as our
key employees and our ability to retain them. The loss of any of our executive
officers or key employees could have a material adverse effect on our business,
operating results and financial condition. Our Charter, Bylaws and Tennessee Law Contain Provisions that Could
Discourage a Takeover. Our charter, bylaws and Tennessee law contain provisions
that could make it more difficult for a third party to obtain control of the
Company. For example, our charter provides for a staggered board of directors,
restricts the ability of stockholders to call a special meeting and prohibits
stockholder action by written consent. Our bylaws allow the board to expand its
size and fill any vacancies without stockholder approval. In addition, the
Tennessee Business Corporation Act contains provisions such as the Tennessee
Business Combination Act and the Tennessee Greenmail Act, which impose
restrictions on stockholder actions. Potential Inability to Adequately Protect Our Proprietary Technology. Our
success and ability to compete are dependent largely upon our proprietary
technology. Third party claims against our proprietary technology could
negatively affect our business. We cannot be certain that we have taken
adequate steps to deter misappropriation or independent third-party development
of our technology. In addition, we cannot be certain that third parties will
not assert infringement claims in the future or, if infringement claims are
asserted, that such claims will be resolved in our favor. Although we are not
currently subject to any dispute either protecting our proprietary technology
or asserting a third party claim against our proprietary technology, any
infringement claims resolved against us could have a material adverse effect on
the Companys business, operating results and financial condition. Failure of Our Network Infrastructure and Equipment Would Have a Material
Effect on Our Business. Failure of our network infrastructure and equipment,
upon which our business is greatly dependent, as well as the occurrence of
significant human error, a natural disaster or other unanticipated problems
could halt our services, damage network equipment and result in substantial
expense to repair or replace damaged equipment. In addition, the failure of our
telecommunications providers to supply the necessary services could also
interrupt our business, in particular, the application hosting and transaction
processing services we offer to our client banks via secure Internet
connections. The inability to supply these services to our customers could
negatively affect our business, operating results and financial condition and
may also harm our reputation. Private Business Relies on the Technological Infrastructure of its Client
Banks and Their Individual Customers. The success of the products and services
offered by Private Business depends, to a degree, on the technological
infrastructure and equipment of its client banks and their small business
customers. Private Business provides application hosting and transaction
processing services to its client banks that require some level of integration
with the client banks technological infrastructure. In addition, management
services and access to information related to the Private Business products are
offered to each client bank and their customers through the Private Business
portal at BusinessManager.com. Proper technical integration between Private
Business and its client banks, as well as continued accessibility of the
BusinessManager.com portal is critical to the successful provision of services
by Private Business. A failure of a client banks infrastructure or the
inability to access BusinessManager.com for any reason could negatively affect
the business, financial condition and results of Private Businesss operations. 23




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Private Businesss Revenues Declined in 2003 and May Continue to Decline.
Private Businesss revenues declined in 2003 as compared to 2002. Although the
Company has previously shown increased revenue growth, Private Businesss
revenue may not grow in the future. This could cause the financial results of
the company to suffer and have a negative effect on the price of Private
Business common stock. Private Business May Not be Able to Use the Tax Benefit from Townes
Operating Losses. At December 31, 2003, Private Business Inc. had available
federal net operating losses, or NOLs, of approximately $40.5 million that will
expire beginning in 2011 if not used. These NOLs were acquired in connection
with the Companys merger with Towne Services, Inc. The amount of these NOLs
available to Private Business in any given year will be limited by Section 382
of the Internal Revenue Code. This limitation could be material and only permit
Private Business to realize a small portion of the potential tax benefit of
Townes pre-merger NOLs. Private Business estimates it will be able to realize
approximately $6.2 million of these NOLs, which has been recorded as a $2.4
million deferred tax asset at December 31, 2003. To the extent that Private
Business is not permitted to use these NOLs in future years, some NOLs will not
be realized before they expire. Increased Fraud Committed by Small Businesses and Increased Uncollectible
Accounts of Small Businesses May Adversely Affect our Business. Small business
customers from time to time fraudulently submit artificial receivables to our
client banks using our products and services. In addition, customers from time
to time keep cash payments that are mistakenly remitted to the small business
when those payments should actually be remitted directly to the client bank.
Our client banks are also susceptible to uncollectible accounts from small
business customers. Many of the banks purchase insurance through us to insure
against these risks. If the number and amount of fraudulent or bad debt claims
increase, our client banks may decide to reduce or terminate their use of our
products and services, reducing our ability to attract and retain revenue
producing client banks. Further, our insurance carrier providing coverage for
the insurance products may increase rates or cancel coverage, reducing our
ability to produce that revenue and reducing our margins on that business. Errors and Omissions by our Employees at the Private Business Service
Center and any Problems with Systems or Software may Expose Private Business to
Claims and Loss of Business. Private Business currently conducts processing
services for certain client banks and may do so for future client banks. Acting
as processor for client banks may expose Private Business to claims about the
quality of those services. Private Business employees may make errors, or
technical or other events beyond our control may occur. These errors or events
may cause banks to reduce their participation in the program or leave the
program entirely, negatively affecting our revenue. Access to Capital for Growth and New Product Introduction or Acquisitions.
A significant part of our growth plans rest on the development of new products
or the formation of certain strategic alliances. The execution of these plans
may require that we have access to additional capital. Market conditions at the
time we need this capital may preclude access to new capital of any kind. Any
of these developments could significantly hinder our ability to add new
products or services. 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk The Company is subject to market risk from exposure to changes in interest
rates based on our financing and cash management activities. Our exposure
relates primarily to our long-term debt obligations that expire in 2004 and
2006. In the event that interest rates associated with these debt obligations
were to increase 100 basis points, the annual impact on future cash flows would
be approximately $78,000. 
 Item 4. Controls and Procedures In an effort to ensure that the information the Company must disclose in
its filings with the Securities and Exchange Commission is recorded, processed,
summarized, and reported on a timely basis, the Companys 24




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principal executive officer and principal financial officer have evaluated the
effectiveness of the Companys disclosure controls and procedures, as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e), as of
March 31, 2004. Based on such evaluation, such officers have concluded that,
as of March 31, 2004, the Companys disclosure controls and procedures were
effective in timely alerting them to information relating to the Company
required to be disclosed in the Companys periodic reports filed with the SEC.
There has been no change in the Companys internal control over financial
reporting during the quarter ended March 31, 2004 that has materially affected,
or is reasonably likely to materially affect, the Companys internal control
over financial reporting. 25




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PART II  Other Information 
 Item 1. Legal Proceedings As a result of the merger with Towne, we assumed certain outstanding
litigation against Towne. Except for the lawsuits described below, we are not
currently a party to, and none of our material properties is currently subject
to, any material litigation other than routine litigation incidental to our
business. In Re Towne Services, Inc./Securities Litigation As previously disclosed, the Company reached a final settlement regarding the
Towne Services, Inc. (Towne) securities class action lawsuit in 2003. On
January 30, 2004, the Company entered into a settlement agreement requiring
its insurance carrier to fund certain costs of defense incurred in connection
with the Towne securities litigation, which amounts have been paid by its
insurance carrier. Edward H. Sullivan, Jr. and Lisa Sullivan v. Towne Services, Inc. (Towne Services, Inc. as the successor to Banking Solutions, Inc., Bane
Leasing.Com, Inc., the successor to BSI Capital Funding, Inc., Moseley &
Standerfer, P.C., David R. Frank, Don G. Shafer, and Shannon W. Webb) As previously disclosed, the Company is a party to a lawsuit involving
Townes acquisition of Banking Solutions, Inc. (BSI) through a stock
purchase made by its subsidiary, BSI Acquisition Corp. This lawsuit was
filed in December 1998 in the District Court of Collin County, Texas. On
July 15, 2002, the District Court of Collin County, Texas granted Townes
motion for summary judgment on all claims. The Company continues to seek
indemnification, pursuant to the BSI stock purchase agreement, from the BSI
shareholders for its expenses in defending this action. 
 Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities. On January 20, 2004, the Company consummated the sale of 20,000 shares of
its Series A preferred stock and a warrant to purchase up to 16 million shares
of our common stock at an exercise price of $1.25 per share for a total
purchase price of $20 million (the Lightyear Transaction). The Series A
preferred stock and the warrant were sold to Lightyear Fund, L. P., an
affiliate of Lightyear Capital. These securities were not registered pursuant
to the Securities Act of 1933, as amended (the Securities Act), in reliance
upon the exemption from the registration requirements of the Securities Act set
forth in Section 4(2) of the Securities Act, which relates to the sale of
securities by an issuer not involving a public offering. The Series A
preferred stock is non-convertible and carries a cash dividend rate of 10% of
an amount equal to the liquidation preference, payable quarterly in arrears,
when and as declared by the Board of Directors. The Series A preferred stock
has a liquidation preference superior to the common stock and, to the extent
required by the terms of the Companys Series B preferred stock, on parity with
the currently outstanding Series B preferred stock. The liquidation preference
is equal to the original $20 million purchase price, plus all accrued but
unpaid dividends. Each share of Series A preferred stock initially will be
entitled to 800 votes per share, which will be proportionately reduced as any
portion of the common stock warrant is exercised. 26




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Item 4. Submission of Matters to a Vote of Security Holders. A special meeting of shareholders was held on January 19, 2004. At the
meeting, the Companys shareholders were asked to approve the Lightyear
Transaction, which approval was granted. No other matters were voted upon at
the annual meeting. The following table sets forth the voting tabulation for the matter voted upon
at the meeting: Votes
    
    Votes
    
    Votes
    
    
    
    
    
    BrokerFor
    
    Against
    
    Withheld
    
    Abstentions
    
    Non-VotesApproval of the
Lightyear
Transaction
    
    
    6,238,233
    
    
    
    1,993,112
    
    
    
    N/A
    
    
    
    11,296
    
    
    
    N/A
 
 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 3.1
    
    -
    
    Amended and Restated Charter of the Company (incorporated by
reference to Exhibit 3.1 to the Companys Registration Statement
on No. 333-75013 Form S-1)3.1.1
    
    -
    
    Charter Amendment Dated
August 9, 2001 (incorporated by reference to Exhibit 3.3 of
the Companys Quarterly Report on Form 10-Q for the quarter
ended September 30, 2001).3.1.2
    
    -
    
    Charter Amendment Dated
January 16, 2004 (incorporated by reference to Exhibit B of
the Companys Definitive Proxy Statement on Schedule 14A
filed on December 29, 2003).3.2
    
    -
    
    Amended and Restated By-laws of the Company (incorporated by
reference to Exhibit 3.2 to the Companys Registration Statement
on No. 333-75013 Form S-1)3.2.1
    
    -
    
    Bylaw Amendment Dated
January 20, 2004 (incorporated by reference to
Exhibit 3.2.1 to the Companys Annual Report on Form 10-K
for the year ended December 31, 2003).10.1
    
    -
    
    Amended and Restated Securities
Purchase Agreement dated December 24, 2003, between the Company
and Lightyear PBI Holdings, LLC (incorporated by reference to
Exhibit A of the Companys Definitive Proxy Statement on Schedule 14A
filed on December 29, 2003).10.2
    
    -
    
    Warrant Agreement dated
January 20, 2004, by and among the company and Lightyear PBI Holdings, LLC
(incorporated by reference to
Exhibit C of the Companys Definitive Proxy Statement on Schedule 14A
filed on December 29, 2003).10.3
    
    -
    
    Securityholders Agreement dated
January 20, 2004, by and among the Company
and Lightyear PBI Holdings, LLC (incorporated by reference to
Exhibit D of the Companys Definitive Proxy Statement on Schedule 14A
filed on December 29, 2003).10.4
    
    -
    
    Credit Agreement dated
as of January 19, 2004 among the Company, certain Guarantees, and
Bank of America, N.A.31.1
    
    -
    
    Certification pursuant to 18 U.S.C Section 1350 as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 -
Chief Executive Officer31.2
    
    -
    
    Certification pursuant to 18 U.S.C Section 1350 as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 -
Chief Financial Officer32.1
    
    -
    
    Certification pursuant to 18 U.S.C. Section 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 -
Chief Executive Officer32.2
    
    -
    
    Certification pursuant to 18 U.S.C. Section 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 -
Chief Financial Officer
 (b) Reports on Form 8-K  1.
    
    A current report on Form 8-K was filed on January 22, 2004 to announce
the sale of 20,000 shares of Series A preferred stock and a warrant to
acquire 16,000,000 common shares for a total of $20,000,000 to
Lightyear Fund, LP. 27




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Signatures Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. Private Business, Inc.(Registrant)Date: May 12, 2004
    
    By:
    
    /s/ Henry M. BarocoHenry M. BarocoChief Executive OfficerDate: May 12, 2004
    
    By:
    
    /s/ Gerard M. Hayden, Jr.Gerard M. Hayden, Jr.Chief Financial Officer
 28