**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM10-QSB**

 

**(Mark One)**

 

**ý****Quarterly report under Section 13 or 15(d) of the Securities ExchangeAct of 1934**

 

**for thequarterly period ended September 30, 2004.**

 

**o****Transition report under Section 13 or 15(d) of the Securities ExchangeAct of 1934**

 

**for thetransition period from                   to                  .**

 

**Commissionfile number: 000-25523**

 

**PRIMARYBUSINESS SYSTEM INC.**

(Exact name of small business issuer as specified in its charter)

 
| **NEVADA**                                                      |   | **86-0857752**                        |
|-----------------------------------------------------------------|--------|---------------------------------------|
| (State or other jurisdiction of  incorporation or organization) |   | (I.R.S. Employer  Identification No.) |
|                                                            |   |                                  |
| **433 Kitty Hawk Drive # 226, Universal City,  Texas 73148**    |
| (Address of principal executive office) (Zip Code)              |
|                                                            |   |                                  |
| **(210) 658-4675**                                              |
| (Issuer’s telephone number)                                |

 

Check whether the issuer: (1)filed all reports required to be filed by Section 13 or 15(d) of the ExchangeAct during the past 12 months (or for such shorter period that the registrantwas required to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

Yes ý                                              No o

 

The number of outstandingshares of the issuer’s common stock, $0.001 par value (the only class of votingstock), as of September 30, 2004 and November 15, 2004 was 86,278,297

Transitional Small BusinessDisclosure Format                                 Yes o                     Noý

 

 

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Table of Contents

 
| Part I                                                              |                                |
|---------------------------------------------------------------------|-------------------------------------|
|                                                                |                                |   |
| Item 1.                                                             | FINANCIAL STATEMENTS                |   |
|                                                                |                                |   |
| Item 2.                                                             | MANAGEMENT  DISCUSSION AND ANALYSIS |   |
|                                                                |                                |   |
| Item 3.                                                             | Controls and Procedures             |   |
|                                                                |                                |   |
| Part II                                                             |                                |
|                                                                |                                |   |
| Item 1                                                              | LEGAL  PRECEEDINGS                  |   |
| Item 2.  Changes in Securities and Purchases of Securities          |                                |
| Item 3.  Defaults Upon Senior Securities                       |                                |
| Item 4.  SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY  HOLDERS |                                |
| Item 5.                                                             | OTHER  INFORMATION                  |   |
| Item 6.                                                             | EXHIBITS  AND REPORTS ON FORM 8-K   |   |
|                                                                |                                |   |
| SIGNATURES                                                          |                                |

 

2

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ITEM 1.          FINANCIALSTATEMENTS

 

As used herein, the term “Company”refers to Primary Business Systems Inc., a Nevada corporation, and itssubsidiaries and predecessors unless otherwise indicated.  Unaudited consolidated condensed interimfinancial statements including a balance sheet for the Company as of thequarter ended September 30, 2004 and statements of operations, and statementsof cash flows for the interim period up to the date of such balance sheet andthe comparable period of the preceding year for the statement of operations areattached hereto as of Pages F-1 through F-9 and are incorporated herein by thisreference.

 

BASIS OF PRESENTATION

 

The accompanying unauditedconsolidated financial statements are presented in accordance with accountingprinciples generally accepted in the United States of America for interimfinancial information and the instructions for Form 10-QSB and Item 310 undersubpart A of Regulation S-B. Accordingly, they do not include all of the information and footnotesrequired by accounting principles generally accepted in the United States ofAmerica for complete financial statements. The accompanying statements shouldbe read in conjunction with the audited financial statements for the yearsended December 31, 2003 and December 31, 2002. In the opinion of management,all adjustments (consisting only of normal occurring accruals) considerednecessary in order to make the financial statements not misleading have beenincluded. Operating results for the three and nine months ended September 30, 2004are not necessarily indicative of results that may be expected for the yearended December 31, 2004. The financial statements are presented on the accrualbasis with significant intercompany transactions and balances eliminated.

 

3

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PrimaryBusiness System, Inc.

 

FinancialStatements

 

September30, 2004

 

F-1

----

 

PrimaryBusiness Systems Inc.

&Subsidiaries

 

Index

 

UnauditedConsolidated Condensed Interim Financial Statements

Forthe Period Ended

September30, 2004

 
| Balance Sheet                                         |   |
|-------------------------------------------------------|--------|
|                                                  |   |
| Statement  of Operations-Three Months and Nine Months |   |
|                                                  |   |
| Statement of Stockholders’  Equity (Deficit)     |   |
|                                                  |   |
| Statement  of Cash Flows- Nine Months                 |   |
|                                                  |   |
| Notes  to the Unaudited Financial Statements          |   |

 

F-2

----

 

PRIMARYBUSINESS SYSTEMS, INC.

&SUBSIDIARIES

Consolidated Balance Sheet

Asof December 31, 2003 (Audited) and September 30, 2004 (Unaudited)

 
| ** **                            | ** ** | **December 31, 2003** | ** ** | **September 30, 2004** | ** ** |
|---------------------------------------|------------|-----------------------|------------|------------------------|------------|
| ASSETS                                |       |                  |       |                   |       |
| Current assets                        |       |                  |       |                   |       |
| Cash                                  |       | $                     | 19,845     |                   | $          | 119,886 |   |
| Notes receivable                      |       | 46,007                |       | 67,769                 |       |
| Client accounts receivable            |       | 70,589                |       | 62,843                 |       |
| Prepaid Expenses                      |       | 73,186                |       | 4,508                  |       |
| Workers Compensation Prepaid Premiums |       | 96,097                |       | 96,097                 |       |
|                                  |       |                  |       |                   |       |
| Total Current Assets                  |       | 305,724               |       | 351,104                |       |
|                                  |       |                  |       |                   |       |
| Property & Equipment              |       |                  |       |                   |       |
| Furniture & Fixtures              |       | 52,244                |       | 52,244                 |       |
| Computer equipment                    |       | 84,300                |       | 86,246                 |       |
| Payroll software                      |       | 43,724                |       | 43,724                 |       |
|                                  |       |                  |       |                   |       |
| Less: accumulated depreciation        |       | 180,269               |       | 184,215                |       |
|                                  |       |                  |       |                   |       |
|                                  |       | (119,153              | )          | (139,638               | )          |
| Total Property & Equipment        |       | 61,116                |       | 44,577                 |       |
|                                  |       |                  |       |                   |       |
| Other assets                          |       |                  |       |                   |       |
| Security Deposits                     |       | 1,054                 |       | 1,055                  |       |
| Customer list, net of amortization    |       | 11,400                |       | 9,000                  |       |
| Prepaid marketing                     |       | 0                     |       | 0                      |       |
| Goodwill                              |       | 557,240               |       | 557,240                |       |
| Total Other Assets                    |       | 569,694               |       | 567,295                |       |
| Total Assets                          |       | $                     | 936,534    |                   | $          | 908,976 |   |

 

The accompanying notes are anintegral part of these financial statements.

 

F3

----

 
| ** **                                                       | ** ** | **December 31,  2003** | ** ** | **September 30, 2004** | ** ** |
|------------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| LIABILITIES                                                      |       |                   |       |                   |       |
|                                                             |       |                   |       |                   |       |
| Current liabilities                                              |       |                   |       |                   |       |
| Accounts payable                                                 |       | $                      | 214,656    |                   | $          | 109,393 |   |
| Checks drawn on uncollected payrolls                             |       | 69,160                 |       | 109,703                |       |
| Deferred revenue on payrolls                                     |       | 0                      |       | 51,152                 |       |
| Client Payroll Tax payable                                       |       | 20,024                 |       | 216,753                |       |
| Workers Comp payable                                             |       | 45,139                 |       | 44,731                 |       |
| Client payroll amount withheld                                   |       | 16,477                 |       | 2,740                  |       |
| Notes Payable                                                    |       | 20,973                 |       | 0                      |       |
| Line of credit from banks                                        |       | 44,988                 |       | 46,082                 |       |
| Total Current Liabilities                                        |       | 431,416                |       | 578,554                |       |
|                                                             |       |                   |       |                   |       |
| Other liabilities                                                |       |                   |       |                   |       |
| Due to shareholder/officer                                       |       | 628,023                |       | 627,859                |       |
| Total Liabilities                                                |       | 1,059,448              |       | 1,206,412              |       |
| Stockholders’ Equity                                        |       |                   |       |                   |       |
| Common stock, - $.001 par value authorized -  750,000,000 shares |       |                   |       |                   |       |
| Issued and outstanding 86,278,297                                |       | 86,278                 |       | 85,278                 |       |
| Additional paid-in capital                                       |       | 976,342                |       | 976,342                |       |
| accumulated (deficit)                                            |       | (1,185,534             | )          | (1,306,056             | )          |
| Total Stockholders’ Equity                                  |       | (122,914               | )          | (243,436               | )          |
| Total liabilities and Stockholder’s Equity                  |       | $                      | 936,534    |                   | $          | 962,976 |   |

 

The accompanying notes arean integral part of theses financial statements.

 

F4

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PRIMARYBUSINESS SYSTEMS, INC.

AndSUBSIDIARIES

UnauditedConsolidated Condensed Interim Statement of Operations

Forthe Three Months and Nine Months Ended September 30, 2004 and 2003

 
| ** **                                                 | ** ** | **Three Months Ended  September 30** | ** ** | **Nine Months Ended September  30** | ** ** |
|------------------------------------------------------------|------------|--------------------------------------|------------|-------------------------------------|------------|
| ** **                                                 | ** ** | **2004**                             | ** ** | **2003**                            | ** ** | **2004** | ** ** | **2003** | ** ** |
| Revenues                                                   |       | $                                    | 95-,246    |                                | $          | 748,326 |   | $ | 2,283,076 |   | $ | 2,087,490 |   |
| Cost of revenues                                           |       | 580,911                              |       | 510,436                             |       | 1,436,098 |   | 1,486,399 |   |
| Gross Profit                                               |       | 369,436                              |       | 237,890                             |       | 846,078 |   | 601,091 |   |
| Operating Expenses                                         |       |                                 |       |                                |       |   |   |   |   |
| General and Administrative                                 |       | 136,239                              |       | 142,873                             |       | 522,512 |   | 388,443 |   |
| Wages, commissions & salaries                          |       | 164,469                              |       | 115,090                             |       | 444,988 |   | 315,934 |   |
| Consulting services for acquisition                        |       | 0                                    |       | 0                                   |       | 0 |   | 75,000 |   |
| Total Operating Expenses                                   |       | 300,709                              |       | 257,063                             |       | 967,500 |   | 779,377 |   |
| Income (Loss) from Operations                              |       | 68,727                               |       | (20,073                             | )          | (120,522 | ) | (178,286 | ) |
| Other Income                                               |       | 0                                    |       | 184                                 |       | 0 |   | 2,621 |   |
| Income (Loss) Before Prevision For Income  Tax             |       | 68,727                               |       | (19,889                             | )          | (120,522 | ) | (175,665 | ) |
| Provision for Income Taxes                                 |       | —                               |       | —                              |       |   |   |   |   |
| Net Income (Loss)                                          |       | $                                    | 68,727     |                                | $          | (19,889 | ) | (120,522 | ) | (175,665 | ) |
|                                                       |       |                                 |       |                                |       |   |   |   |   |
| Basic & Distributed Net (Loss) Per  Share              |       | 0.00                                 |       | 0.00                                |       | 0.00 |   | 0.00 |   |
| Basic and Distributed Weighted Average Shares  Outstanding |       | 86,278,297                           |       | 84,831,787                          |       | 86,278,297 |   | 69,424,006 |   |
|                                                            |            |                                      |            |                                     |            |  |  |  |  |  |  |  |  |

 

The Accompanying notes arean integral part of these financial statements.

 

F5

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PRIMARYBUSINESS SYSTEMS, INC.

&SUBSIDUARIES

 

UnauditedConsolidated Condensed Interim

Statements of Cash Flow

Forthe Nine Months Ended September 30, 2004 and 2003

 
| ** **                                                                                          | ** ** | **For the Nine Months Ending September 30** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                          | ** ** | **2004**                                    | ** ** | **2003** | ** ** |
| Net Income                                                                                          |       | $                                           | (120,522   | ) | $ | (175,665 | ) |
| Adjustments to reconcile net income (loss)  to net cash provided by (used by) operating activities: |       |                                        |       |   |   |
|                                                                                                |       |                                        |       |   |   |
| Depreciation and amortization                                                                       |       | 22,885                                      |       | 25,362 |   |
| (Increase) decrease in accounts receivable                                                          |       | 7,746                                       |       | 2,097 |   |
| (Increase) decrease in prepaid expense                                                              |       | 68,677                                      |       | (133,744 | ) |
| (Increase) decrease in other current assets                                                         |       | (21,762                                     | )          | 67,457 |   |
| Increase (decrease) in accounts payable                                                             |       | (105,263                                    | )          | 33,276 |   |
| Increase (decrease) in client payroll tax  liability                                                |       | 196,730                                     |       | 46,450 |   |
| Increase (decrease) in other current  liabilities                                                   |       | 35,004                                      |       | 53,733 |   |
| Increase (decrease) in other assets                                                                 |       | 0                                           |       | (1,054 | ) |
| Adjustments to consulting expense on return of stock                                                |       | 0                                           |       | 75,000 |   |
| Checks Drawn on uncollected payrolls                                                                |       | 40,544                                      |       | 17,010 |   |
| Total Adjustments                                                                                   |       | 244,561                                     |       | 185,587 |   |
| Net cash provided by (used in) operating activities                                                 |       | 124,039                                     |       | 9,922 |   |
| Cash flows from investing activities                                                                |       |                                        |       |   |   |
|                                                                                                |       |                                        |       |   |   |
| Payments for the purchase of property                                                               |       | (3,947                                      | )          | (40,297 | ) |
| Net cash provided by (used in) investing  activities                                                |       | (3,947                                      | )          | (40,297 | ) |
| Cash flows from financing activities                                                                |       |                                        |       |   |   |
| Net borrowing under line of credit                                                                  |       | 1,095                                       |       | (6,886 | ) |
| Net borrowing on notes payable                                                                      |       | (20,973                                     | )          | 26,973 |   |
| Principal payments on short-term debt                                                               |       | (41,893                                     | )          |   |   |
| Due to shareholders/officers                                                                        |       | (173                                        | )          | 34,677 |   |
| Net cash provided by (used in) financing  activities                                                |       | (20,051                                     | )          | 12,871 |   |
| Net increase (decrease) in cash and cash equivalents                                                |       | 100,041                                     |       | (17,504 | ) |
|                                                                                                |       |                                        |       |   |   |
| Cash and cash equivalents at beginning of year                                                      |       | 19,845                                      |       | 30,868 |   |
|                                                                                                |       |                                        |       |   |   |
| Cash and Cash equivalents at end of quarter                                                         |       | $                                           | 119,886    |   | $ | 13,364 |   |

 

The accompanying notes are an integral part of these financialstatements

 

F6

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| ** **                                                                  | ** ** | **2004** | ** ** | **2003** | ** ** |
|-----------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Supplemental information                                                    |       |     |       |     |       |
| Cash Payments for Income Taxes                                              |       | $        | —     |     |       |   |
| Non Cash Items                                                              |       |     |       |     |       |
| Stock for goodwill                                                          |       | $        | 0          |     | $          | 7,240 |   |
| Stock for Consulting Services                                               |       |     |       | 235,000  |       |
| Stock returned for non performance of  services regarding prepaid marketing |       |     |       | (270,000 | )     |
| Stock returned for nonperformance of  consulting services                   |       | $        | 0          |     | $          | (160,000 | ) |

 

The Accompanying notes arean integral part of these financial statements

 

F7

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Primary Business Systems, Inc and Subsidiaries

Notesto Unaudited Consolidated Condensed Interim Financial Statements

September 30, 2004

 

NOTE1 – BASIS OF PRESENTATION

 

Thecondensed interim financial statements at September 30, 2004 are unaudited, butinclude all adjustments that the Company considers necessary for a fairpresentation.

 

Theaccompanying unaudited financial statements are for the interim periods and donot include all disclosures normally provided in annual financial statements,and should be read in conjunction with the Company’s Form 10-KSB for the yearended December 31, 2003. The accompanying unaudited interim financialstatements for the current quarter and year to date ended September 30, 2004,are not necessarily indicative of the results, which can be expected for theentire year.  The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States of America requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities atthe date of the financial statements and the reported amounts of revenues andexpenses during the reporting period. Actual results could differ from those estimates.

 

NOTE2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 

 

TheCompany has consolidated the financial statements of its wholly ownedsubsidiaries, Primary Business Systems, LLC, Primary HR Services LLC and AHJRInc., dba/Concord Staffing Services in these financial statements.  All significant intercompany transactionshave been eliminated.

 

Allsignificant accounting policies as previously disclosed with the annualfinancial statements for the years ended December 31, 2003 and 2002 remainunchanged.

 

NOTE3 – CHANGE IN STOCKHOLDERS’ EQUITY

 

Thestatement of changes in stockholders’ equity is reported in these financialstatements and discloses the transactions as they were incurred in the threemonths ended September 30, 2004.

 

During2003 the Company issued a total of 1,126,355 restricted shares for prepaidconsulting services valued at $108,872 to be rendered over a twelve-monthperiod.  The consulting expense amortizedand reported in the current quarter is $18,751 leaving a current asset ofprepaid expense at $0 as of September 30, 2004. The total prepaid expenses for the quarter ended September 30, 2004 is$4,508.

 

NOTE4 – RELATED PARTY TRANSACTIONS

 

NotesReceivable reported as a current asset of $67,769 is due from ConsumersInsurance Agency, LLC.  The primarymember of the LLC is Patrick Matthews who is the majority shareholder in theCompany.  The notes receivable are madeup of revolving cash advances to the LLC and expenses paid on behalf of the LLCby PRIMARY BUSINESS SYSTEMS LLC WHICH IS A SUBSIDAIRY OF the Company.

 

Theserevolving notes receivable were part of the 2002 acquisition of the presentoperations of the Company and were outstanding prior to the date ofacquisition.   At the time of acquisitionthese revolving notes receivable were for an amount greater than presentlyreported in the financial statements as of September 30, 2004.

 

F-8

----

 

**ITEM2**

 

**MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS**

** **

**Forward Looking and Cautionary Statements**

The following discussion contains forward-looking statements. TheCompany’s actual results could differ materially from those discussed in suchforward-looking statements. Factors that could cause or contribute to suchdifferences include those discussed below and elsewhere in this Form 10-Q. See “CautionaryNote Regarding Forward-Looking Statements”. The following discussion should beread in conjunction with the Company’s condensed consolidated financialstatements and notes thereto included elsewhere in this filing and inconjunction with our Form 10-K including risk factors stated therein.Historical results are not necessarily indicative of trends in operatingresults for any future period.

 

**Critical Accounting Policies and Estimates**

Primary believes its significant critical accounting policies have notchanged since fiscal year end December 31, 2003. See Note 2 of Primary’s annualreport on Form 10-K as well as “Critical Accounting Policies” contained thereinfor a detailed discussion on the application of these and other accountingpolicies.

 

***Revenue Recognition****.*    Thegross billings that Primary LLC, Primary HR and Concord Staffing (theSubsidiaries) charges its clients under its Customer Services Agreement includeeach worksite employee’s gross wages, a service fee and, to the extent electedby the clients, health and welfare benefit plan costs. The service fees, whichare computed as a percentage of gross wages, is intended to yield a profit toSubsidiaries and cover the cost of certain employment-related taxes, workers’compensation insurance coverage, and administrative and field services providedby the Subsidiaries to the client, including payroll administration, recordkeeping, and safety, human resources, and regulatory compliance consultation.The component of the service fee related to administration varies according tothe size of the client, the amount and frequency of payroll payments and themethod of delivery of such payments. The component of the service fee relatedto workers’ compensation and unemployment insurance is based, in part, on theclient’s historical claims experience. All charges by the Subsidiaries areinvoiced along with each periodic payroll delivered to the client.

 

Primary reports revenues from service fees in accordance with EmergingIssues Task Force (“EITF”) No. 99-19, Reporting Revenue Gross as a Principalversus Net as an Agent. The Company reports as revenues, on a gross basis, thetotal amount billed to clients for service fees, health and welfare benefitplan fees, workers’ compensation and unemployment insurance fees. Primary reportsrevenues on a gross basis for these fees because Primary Business Systems LLCand Primary HR Services LLC are the primary obligor and deemed to be theprincipal in these transactions under EITF No. 99-19. Primary reports revenueson a net basis for the amount billed to clients for worksite employee salaries,wages and certain payroll-related taxes less amounts paid to worksite employeesand taxing authorities for these salaries, wages and taxes. Primary accountsfor its revenues using the accrual method of accounting. Under the accrualmethod of accounting, Primary recognizes its revenues in the period in whichthe worksite employee performs work. Primary accrues revenues and unbilledreceivables for service fees relating to work performed by worksite employeesbut unpaid at the end of each period. In addition, the related costs ofservices are accrued as a liability for the same period. Subsequent to the endof each period, such costs are paid and the related PEO service fees arebilled.

 

12

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**Overview**

The business of Primary Business Systems Inc. is to operate in theProfessional Employer Organization industry and the Temporary Staffing ServicesIndustry and operates THROUGH ITS SUBSIDAIRIES, PRIMARY BUSINESS SYTEMS LLC,CONCORD STAFFING SERVICES AND PRIMARY HR SERVICES LLC and as economies of scalecan be realized combine the individual entities in each sector.

 

Primary LLC and Primary HR Services LLC are regional ProfessionalEmployer Organizations (PEO) committed providing human capital managementsolutions.  We offer our clients, whichare typically small to medium-sized business with between five and fiftyemployees, a broad range of product and services that provide a completesolution for the clients’ human resources outsourcing needs.  Primary LLC’s products and services includebenefits administration, payroll administration, governmental compliance, risk-management, unemployment administration, and health, welfare and retirementbenefits.

 

Concord Staffing Service is a regional temporary staffing servicescompany helping business meet their staffing needs while minimizing thereemployee acquirement cost.  We offerqualified screened employees to our clients that meet their employment needs ontemporary biases. Concord provides all payroll administration, unemploymentadministration and assignment administration of the temporary staff.

 

***Revenues.***    Revenuesconsist of service fees charged by Primary LLC, Primary HR Services LLC andConcord to cover the costs of certain employment-related taxes, workers’compensation insurance coverage and administrative and field services providedto their clients. The service fee charged is invoiced along with each periodicpayroll delivered to the client. The client’s portion of health plan costs ischarged separately and is not included in the service fee. Service revenues arerecognized in the period in which the worksite employee works. Under thisaccrual method of accounting, service fees relating to worksite employees withearned but unpaid wages at the end of each period are recognized as unbilledrevenues and the related payroll costs for such wages are accrued as aliability during the period in which the worksite employee earns wages.Subsequent to the end of each period, such wages are paid and the relatedservice fees are billed.

 

***Cost of Services****.*    Cost of services includes all direct costsassociated with revenue generating activities as well as employee benefitcosts, workers’ compensation insurance and state unemployment taxes.

 

Employeebenefit costs are comprised primarily of medical benefit costs, but alsoinclude costs of other employee benefits such as dental, disability and grouplife insurance. Benefit claims incurred by worksite employees under the benefitplans are expensed as incurred according to the terms of each contract.

 

Incertain instances, Primary LLC opts to make a contribution toward the cost ofthe worksite employees’ medical benefit costs. In most small group healthmarkets, medical benefit plan rates vary based on the medical participants’demographics. In order to offer a competitively priced business solution,Primary LLC may offer reduced medical benefit plan rates to worksite employeeswith positive risk characteristics. The additions of these selected worksiteemployees’ offsets potential adverse selection and helps to stabilize theoverall medical benefit plan risk to Primary LLC.

 

PrimaryLLC offers its medical benefit plans through partnerships with premier healthcare companies. These companies have extensive provider networks and strongreputations in the markets in which Primary LLC operates.

 

Allof Primary LLC’s health care providers offer preferred provider organization (“PPO”)coverage.

 

PrimaryLLC’s workers’ compensation program from January 1, 2002 through December 31,2003 was with Texas Mutual Insurance Company. November 2003 Primary LLC renewed its workers’ compensation programwhich is a guaranteed cost program where the company has no liability beyondthe premiums of the policy. The current policy term expires in November 2004.

 

PrimaryHR obtained worker’s compensation from the AMFED Companies LLC effective July,2004 through July 2005; the program is a guaranteed cost program where thecompany has no liability beyond the premiums of the policy.

 

13

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Stateunemployment tax rates vary from state to state and are based upon the employer’sclaims history. Primary LLC aggressively manages its state unemployment taxexposure by contesting unwarranted claims.

 

***Operating Expenses****.*    Operating expenses consist primarily ofsalaries, wages and commissions associated with the Primary’s internalemployees, and general and administrative expenses. Sales and marketing commissionsand client referral fees are expensed as incurred. Primary expects that futurerevenue growth will result in increased operating leverage, as Primary’s fixedoperating expenses are leveraged over a larger revenue base.

 

***Income Taxes.***    Primaryrecords income tax expense using the asset and liability method of accountingfor deferred income taxes. Primary’s effective tax rate for 2003 was 0%.

 

***Profitability.***    Profitabilityis largely dependent upon Primary’s success in generating revenues for its servicesand managing the costs that are within its control. Revenues and costs ofservice primarily relate to workers’ compensation coverage, health benefitplans and state unemployment taxes. Primary seeks to manage these costs throughthe use of: (i) workers’ compensation arrangements with carriers whoefficiently manage claims administration, internal risk assessment and clientrisk management programs; (ii) appropriately designed health benefit plans thatencourage worksite employee participation, and, (iii) aggressive management ofits state unemployment tax exposure.

 

**RESULTS OF OPERATIONS**

 

Thefollowing discussion should be read in conjunction with the Company’s AnnualReport on Form 10-K for the year ended December 31, 2003, including allamendments thereto, as well as the consolidated financial statements and notesthereto included in this Quarterly Report on Form 10-QSB.

 

Thefollowing table presents Primary’s results of operations for the three monthsand nine months ended September 30, 2004 and 2003, expressed as a percentage ofrevenues:

 
| ** **                         | ** ** | **Three months** | ** ** | **Nine Months** | ** ** |
|------------------------------------|------------|------------------|------------|-----------------|------------|
| ** **                         | ** ** | **2004**         | ** ** | **2003**        | ** ** | **2004** | ** ** | **2003** | ** ** |
| Revenues                           |       | 100.0            |       | 100.0           | %          | 100 |   | 100 | % |
| Cost of  Services                  |       | 61.12            |       | 68.21           |       | 62.90 |   | 71.21 |   |
| Gross Profit                       |       | 38.38            |       | 31.79           |       | 37.10 |   | 28.79 |   |
| Operating  Expenses:               |       |             |       |            |       |   |   |   |   |
| General and  administrative        |       | 14.34            |       | 19.09           |       | 22.89 |   | 18.61 |   |
| Salaries,  wages and commissions   |       | 17.31            |       | 15.38           |       | 19.49 |   | 15.14 |   |
| Consulting  Services               |       |             |       |            |       |   |   | 3.59 |   |
| Total  operating costs             |       | 31.65            |       | 34.47           |       | 42.38 |   | 37.34 |   |
| Operating  (loss) income           |       | 7.23             |       | (2.68           | )          | (5.29 | ) | (8.54 | ) |
| Other income                       |       | 0.0              |       | 0.0             |       |   |   | .13 |   |
| Interest  expense                  |       |             |       | 0.0             |       |   |   | 0.0 |   |
| Other  non-operating expense       |       |             |       | 0.0             |       |   |   | 0.0 |   |
| Income  (Loss) before income taxes |       | 7.23             |       | (2.66           | )          | (5.29 | ) | (8.41 | ) |
| Income tax  (benefit) provision    |       |             |       | 0               |       |   |   | 0 |   |
| Net income  (loss)                 |       | 7.23             |       | (2.66           | )          | (5.29 | ) | (8.41 | ) |

 

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*Quarter ending September 30, 2004 compared to September 30, 2003*

 

Forthe three months ended September 30, 2004, revenues increased $201,920, or26.98% from 2003, totaling $950,246 in 2004 compared to $748,326, for 2003. Forthe nine months ended September 30, 2004, revenues increased $195,586, or 9.37%from 2004 to 2003.  The three monthincrease reflects our focus on sales and the addition of a number of newclients.  Also contributing to theincrease is an upturn in temporary staffing employees assigned.  The nine month revenue change is reflectiveof the gains made during the third quarter our focus on new business andincreased fees making up for the decrease of fees reported in the firstquarter.

 

Costof services, which includes the cost of Primary LLC’s medical benefit plans,workers’ compensation insurance, 410K administration cost, state unemploymenttaxes and other costs for the three months ended September 30, increased$70,375 or 13.78% from 2003, totaling $580,811, or 61.12% of revenues for 2004,compared to $510,436, or 68.21% for 2003. The nine month cost of services ended September 30, decreased $50,301 or3.38% from 2003, totaling $1,436,098 or 62.90% for 2004, compared to $1,486,399or 71.21% for 2003. The three month increase in cost is consistent with theaddition of new clients and leased employees that are affected by an increaseof our state unemployment rate which is realized through the first $7,000 ofemployee wages.

 

Grossprofit for the three months ended September 30, increased $131,546 or 52.30%from 2003, totaling $369,436 or 38.38% for 2004, compared to $237,890, or31.79% for 2003. Gross profit for the nine months ended September 30, increased$245,887 or 40.91% from 2003, totaling $846,978 or 37.10% for 2004, compared to$601,091, or 28.97% for 2003.  Grossprofit margin increased primarily due to workers’ compensation cost decreasesfrom lower risk business and an increased client count and fee as a result ofour emphasis on HR services.

 

Operatingexpenses for the three months ended September 30, were $300,709 for 2004,compared to $257,963, resenting an increase of $42,746.  Operating expenses for the nine months periodended September 30 were $967,500 for 2004 compared to $779,377 for 2003, anincrease of $188,123.   Operation expenseincreases are attributed mostly to the additional expense of operating as areporting company and the ongoing expenses associated with our legal matters asdiscussed in the 10KSB and Item III part 1 of this 10QSB.

 

Salaries,wages and commissions for the three months ended September 30, were $164,469for 2004, compared to $115,090 for 2003, representing an increase of $49,379.For the nine month ended September 30, it was $444,988 for 2004 compared to$315,934 for 2003, an increase of $129,054. Consolidated payroll costs increased as Primary LLC expanded staff tofacilitate best services to our customers, increased its sales staff and due tothe acquisition of Concord and its staff and the addition of staff for PrimaryHR Services LLC our Mississippi subsidiary, the company now employees fifteen.

 

Othergeneral and administrative expenses for the three months ended September 30,were $136,239 for 2004, compared to $142,873 in 2003, representing a decreaseof $6,634. The nine month general and administrative expenses ended September30 were $522,512 for 2004 compared to $388,443 for 2003, an increase of$134,069.  Year to date increases ingeneral and administrative expenses was due to the implementation ofinitiatives in areas related to services and programs.  Additional increases are attributed to theimplementation of a sells training and tracking program which by design will allowus to acquire larger clients, increase the fee for our services and close dealsquicker. Operation expense increases are largely attributed to the additionalexpense of operating as a reporting company and the ongoing expenses associatedwith our legal matters as discussed in our previously filed Form10KSB and ItemIII part 1 of this 10QSB.

 

Netprofit for the three months ended September 30 increased to $68,727 orapproximately ($.00) per share for 2004, compared to a net loss of $19,889 or$0.00 per share for 2003.  Net loss forthe nine months ended September 30 was $120,522 or approximately ($0.0014) pershare for 2004 compared to $175,665 or ($0.0025) per share for 2003.

 

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***Liquidity and Capital Resources***

 

Primaryhad $ 119,886 in cash and cash equivalents and restricted certificates ofdeposit at September 30, 2004. Primary is required to collateralize itsobligations under its workers compensation coverage. The Company uses its cashas well as certificates of deposits to collateralize these obligations as morefully described below.

 

AtNovember 18, 2003, Primary had deposited $96,097, as collateral with theCompany’s workers’ compensation plans upon renewal of its plan for 2003/2004.Primary’s workers’ compensation programs for the 2001 through November 2003program years are subject to no further collateral adjustments.

 

TheCompany had no long-term debt as of June 30, 2004 other than to its majorshareholder, who is an officer. The principal amount of this outstanding debtat June 30, 2004 is $627,859.

 

Thecharges to clients by Primary LLC derived from salaries, wages and payrolltaxes is managed from a cash flow perspective so that a matching exists betweenthe time that the funds are received from a client to the time that the fundsare paid to the worksite employees and to the appropriate tax jurisdictions. Asa co-employer, and under the terms of the Client Services Agreement, PrimaryLLC is obligated to make certain wage, tax and regulatory payments. Because ofthis, the objective of Primary LLC is to minimize the credit risk associatedwith remitting the payroll and associated taxes before receiving from theclient the service fees charged by Primary LLC.

 

PrimaryLLC’s primary short-term capital requirements relate to the payment of accruedpayroll and payroll taxes of its internal and worksite employees, accountspayable for capital expenditures and the payment of accrued workers’compensation expense and health benefit plan premiums..

 

***Going Concern Issues***

 

Weexpect to spend significant amounts to expand domestic sales and operationsthrough mergers and acquisitions. As a result, we will need to generatesignificant additional revenue to achieve profitability based on such plannedexpenditures and expansion. Even if we do achieve profitability, we may not beable to sustain or increase profitability on a quarterly or annual basis. If wedo not achieve and maintain profitability, the market price for our commonstock may decline.

 

Ifwe do not receive additional capital when and in the amounts needed in the nearfuture, our ability to continue as a going concern is in substantial doubt. Wehave limited revenue and limited cash assets, and will require additionalequity or capital investments.

 

Obtainingfuture financing may be costly and will likely be dilutive to existingstockholders. If we are not able to obtain financing when and in the amountsneeded, and on terms that are acceptable, our operations, financial conditionand prospects could be materially and adversely affected, and we could beforced to curtail our operations or sell part or all of our assets. Managementcontinually is seeking additional sources of capitol to maintain the ongoingoperations of the company.

 

**MATERIAL COMMITTEMENTS FOR CAPITALEXPENDITURES**

 

Neitherthe Board nor Management has made any commitments for capital expenditures.

 

***Inflation***

 

Primarybelieves that inflation in salaries and wages of worksite employees has apositive impact on its results of operations as its service fee is proportionalto such changes in salaries and wages.

 

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**Off-balance Sheet Arrangements**

 

Primarydoes not currently have any off-balance sheet arrangements

 

***ITEM 3 CONTROLS AND PROCEDURES***

 

Ourmanagement, under the supervision and with the participation of our chiefexecutive officer and chief financial officer, conducted an evaluation of our “disclosurecontrols and procedures” (as defined in the Securities Exchange Act of 1934(the “Exchange Act”) Rules 13a-14 (c)) within 90 days of the filing date ofthis Quarterly Report on Form 10-Q (the “Evaluation Date”).  Based on their evaluation, our chiefexecutive officer and chief financial officer (who serves as our principalaccounting officer) have concluded that as of the Evaluation Date, ourdisclosure controls and procedures are effective to ensure that all materialinformation required to be filed in this Quarterly Report on Form 10-Q has beenmade known to them in a timely fashion. Disclosure controls and procedures are designed to ensure thatinformation required to be disclosed in our reports filed or submitted underthe Securities Exchange Act is recorded, processed, summarized and reported,within the time periods specified in the Securities and Exchange Commission’srules and forms. Disclosure controls and procedures include, withoutlimitation, controls and procedures designed to ensure that informationrequired to be disclosed in our reports filed under the Exchange Act isaccumulated and communicated to management, including our Chief ExecutiveOfficer and Chief FinancialOfficer, to allow timely decisions regarding required disclosure.

 

***CHANGES IN INTERNAL CONTROLS***

 

Therehave been no significant changes (including corrective actions with regard tosignificant deficiencies or material weaknesses) in our internal controls or inother factors that could significantly affect these controls subsequent to theEvaluation Date set forth above.

 

# **CAUTIONARY NOTE REGARDINGFORWARD-LOOKING STATEMENTS**

# ** **

Thestatements contained in this filing, including under the section titled “Management’sDiscussion and Analysis of Financial Condition and Results of Operations,” andother sections of the filing that are not purely historical are forward-lookingstatements within the meaning of Section 27A of the Securities Act of 1933 andSection 21E of the Securities Exchange Act of 1934, including withoutlimitation, statements regarding the Company’s expectations, hopes, beliefs,intentions or strategies regarding the future. Words such as “may”, “will”, “should”,“could”, “would”, “predicts”, “potential”, “continue”, “expects”, “anticipates”,“future”, “intends”, “plans”, “believes”, “estimates”, and similar expressions,as well as statements in future tense, identify forward-looking statements.These forward-looking statements are based on the Company’s currentexpectations and beliefs concerning future developments and their potentialeffects on the Company. There can be no assurance that future developmentsaffecting the Company will be those that the Company has anticipated. Theseforward-looking statements involve a number of risks, uncertainties (some ofwhich are beyond the Company’s control) or other assumptions that may causeactual results or performance to be materially different from those expressedor implied by such forward-looking statements. These risks and uncertaintiesinclude, but are not limited to, those factors listed below:

 

•        potential liability as a co-employer asa result of acts or omissions by the Company’s clients or client employees;

•        exposure to client credit risk as aresult of the Company’s obligation to make certain payments in respect ofclient employees;

•        unfavorabledeterminations under certain laws and regulations regarding the Company’sstatus as 

 

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an “employer” of client employees;

•        inadequacy of the Company’s insurance-relatedloss reserves to cover its ultimate liability for losses;

•        unavailability of insurance coverage forworkers’ compensation, medical benefits and general liability on financialterms and premium rates acceptable to the Company;

•        significant collateral requirements inrespect of the Company’s obligations to its insurance carriers and thepotential for those requirements to increase in the future;

•        the Company’s failure to comply withapplicable laws and regulations in a complex regulatory environment;

•        inexperience of a large portion of theCompany’s sales staff;

•        the Company’s failure to properly manageits growth and to successfully integrate acquired companies, including risks ofclient attrition and the risks associated with assumed employee benefit plans;

•        risks associated with geographic marketconcentration;

•        risks associated with expansion intoadditional states with varying state regulatory requirements;

•        the impact of competition from existingand new businesses offering human resource outsourcing services;

•        the ability of the Company’s clients toterminate their relationship with the Company upon 30 days notice;

•        errors or omissions by the Company inperforming its services;

•        the Company’s dependency on keypersonnel and potential difficulties and expenses in the recruitment andretention of key employees;

•        the Company’s inability to attract andretain qualified human resource consultants;

 

•        risks associated with the Company’sdependency on technology services and third party licenses of technology;

 

•        the Company’s inability to use theInternet as a means of delivering human resource services;

 

•        fluctuations in interest rates and theassociated effect on the Company’s investments;

 

•        the Company’s failure to adequately protectits proprietary rights;

 

•        the Company’s reliance on one financialinstitution to transfer its payroll funds; and

 

•        other factors which are described in furtherdetail in the Company’s Form 10-K, and in our other filings with the Securitiesand Exchange Commission (the “SEC”).

 

•        our need for capital

 

TheCompany undertakes no obligation to publicly update or revise anyforward-looking statements, whether as a result of new information, futureevents or otherwise except as may be required under applicable securities laws.

 

Primarycautions that the factors described above could cause actual results or outcomesto differ materially from those expressed in any forward-looking statementsmade by or on behalf of Primary. Any forward-looking statement speaks only asof the date on which such statement is made, and Primary undertakes noobligation to update any forward-looking statement or statements to reflectevents or circumstances after the date on which such statement is made or toreflect the occurrence of unanticipated events. New factors emerge from time totime, and it is not possible for management to predict all of such factors.Further, management cannot assess the impact of each such factor on thebusiness or the extent to which any factor, or combination of factors, maycause actual results to differ materially from those contained in anyforward-looking statements.

 

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**PART II**

**OTHERINFORMATION**

** **

**Item1**.            Legal Proceedings

** **

Onor about June 12, 2003, the Company was served with a suit commenced in thecircuit court of Cook County, Illinois by Suburban Capital Corporation (“Suburban”)as plaintiff in a suit entitled Suburban Capitol Corporation v Primary BusinessSystems, LLC Primary Business Systems, Inc., f/k/a Sharecom, Inc and Ed Wellsas Escrow Agent.  An attorney who workedwith the Company, Ed Wells, is also named as a defendant in the suit.  The Company removed the lawsuit to the UnitedStates District Court for the Northern District of Illinois, Eastern Divisionon or about June 20, 2003.  In summary,the suit seeks damages for the Company’s alleged failure to make full paymentto Suburban for consulting work allegedly performed by Suburban for the benefitof the Company and for alleged breach of an Advisory Agreement and a StockPurchase Agreement pursuant to which Pine Services, Inc., a company related toSuburban, sold a controlling interest in the Company (then named Sharecom) toPrimary Business Systems LLC, .  TheCompany contends that Suburban breached the Advisory Agreement by not providingthe services required by the Agreement. The Company also alleges that Suburban made material misrepresentationsto the Company.  The Company isvigorously defending itself against this lawsuit and to oppose any effort toreinstate it.

 

Onor about December 3, 2003, Primary Business Systems, L.L.C. (“PBS LLC”), awholly owned subsidiary of the Company, was served with a suit commenced in theUnited States District Court for the Northern District of Illinois, EasternDivision by Pine Services, Inc. in a suit entitled Pine Service, Inc., a CostaRican corporation v Primary Business Systems LLC, a Texas limited PartnershipIn summary, the suit claims that PBS LLC owes Pine Services, Inc. approximately$5550,000 for the sale of Pine’s majority interest in Sharecom, Inc. which wascompleted in September 2002. At the time the suit was commenced the amountclaimed was not due under the terms of the note issued by PBS LLC to Pine forthe amount claimed.  The Company isdefending itself against this lawsuit and pursue any and all remedies it mayhave against Pine Services, Inc.

 

Onor about December 23, 2003, the Company filed a lawsuit in 285th DistrictCourt, Bexar County, Texas against Pine Services, Inc. and Frank Custable, Jr.alleging, among other claims, common law fraud, violation of the TexasSecurities Act, violation of the Texas Deceptive Trades and Practices Act andfraudulent inducement in connection with the Advisory Agreement referred toabove.  The defendants were served withthis lawsuit but failed to appear in the case or file an answer.  On February 6, 2004, upon motion of theCompany, the Court entered a default judgment against the defendants in theamount of approximately $4,700,000.00 in actual and punitive damages.  The Company intends to continue to vigorouslyprosecute this lawsuit and to seek to enforce the judgment.

 

Finally,on February 12, 2004, the Company filed a lawsuit in the 37th District Court,Bexar County, Texas against Suburban Capital Corporation alleging, among otherclaims, common law fraud and violation of the Texas Deceptive Trades andPractices Act in connection with the Advisory Agreement. The Company i isvigorously prosecuting this lawsuit against Suburban Capital Corporation.

 

Wehave been discussing global settlements of these lawsuits discussed abovebecause it is the Company’s position that the other parties to these lawsuitsare inter-related. There can be no assurance that a settlement will becompleted on terms favorable to us.

 

Asa commercial enterprise and employer and with respect to its employment-relatedbusinesses in particular, we are engaged in litigation from time to time duringthe ordinary course of business in connection with employment-relations issues,workers’ compensation and other matters. Generally, we are entitled to indemnification or repayment from our PEOclients for claims brought by worksite employees related to theiremployment.  However, there can be noassurance that the client employer will have funds or insurance in

 

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amountsto cover any damages or awards, and as co-employer, we may be subject toliability. No allowance for this contingency is recognized on the financialstatements of the company.

 

Weare engaged in no other litigation, the effect of which would be anticipated tohave a material adverse impact on our financial conditions or results ofoperations.

 

**Item2.**            Changes in Securities and Purchasesof Securities

** **

Wehave not undertaken any stock purchases of our securities in the last fiscalquarter or the current fiscal quarter as of the date of this Report.Additionally, we have not issued any securities in the most recent fiscalquarter or in the current fiscal quarter.

 

Ourregistrar and transfer agent is Registrar and Transfer Corp.  10 Commerce Drive, Cranford, New Jersey07016.  The telephone number of Registrarand Transfer is 800-866-1340

 

**Item 3**.            DefaultsUpon Senior Securities

** **

None

 

**Item 4**.            SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS

** **

TheCompany held our Annual Meeting of shareholders on September 21, 2004 and washeld in San Antonio, Texas shareholders of record as of August 9, 2004.  Proxy statements and related material wasmailed to our shareholders on or about August 19, 2004.  The only matters considered by theshareholders were the election of directors and approval of an employee stockoption plan.  At the meeting, Patrick DMatthews, Connie Matthews and Amanda Sinclair, the only persons slated fornomination, were elected as directors. In addition, the employee stock option plan was approved by the stockholders. Present in person or by proxy were in excess of 82, 563,626 shares

 

Thevoting was as follows:

 
| ** **           | ** ** | **For**    | ** ** | **Against** | ** ** | **Abstain** | ** ** |
|----------------------|------------|------------|------------|-------------|------------|-------------|------------|
|                 |       |       |       |        |       |        |       |
| Patrick Matthews     |       | 82,653,371 |       |        |       | 10,255      |       |
|                 |       |       |       |        |       |        |       |
| Connie Matthews      |       | 82,643,373 |       |        |       | 20,253      |       |
|                 |       |       |       |        |       |        |       |
| Amanda Sinclair      |       | 82,653,371 |       |        |       | 30,255      |       |
|                 |       |       |       |        |       |        |       |
| Employee Option Plan |       | 79,377,466 |       | 36,817      |       | 3,087       |       |

 

**Item 5**.            OTHERINFORMATION

** **

None

 

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**Item 6**.            EXHIBITSAND REPORTS ON FORM 8-K

** **

Exhibits

(a)Exhibits required to be attached by Item 601 of Regulation S-B are listed inthe index to Exhibits on page 11 of this Form 10-QSB, and are incorporatedherein by this reference.

 

 
| 31*    |   | Certification  pursuant to Rule 13a-14(a)/15d-14(a) |
|--------|--------|-----------------------------------------------------|
|   |   |                                                |
| 32*    |   | Certification  pursuant to 18 U.S.C. Section 1350   |

 

Reportson form 8-K

 

None

 

SIGNATURES

 

Inaccordance with the requirements of the Exchange Act, the registrant causedthis report to be singed on its behalf by the under singed, there unto dullyauthorized, this 13th day of August 2004.

 

PrimaryBusiness Systems Inc.

 
| S/  Patrick D Matthews                           |                |   |
|--------------------------------------------------|---------------------|--------|
| Patrick  D. Matthews                             |                |
| President,  Chief Executive Officer and Chairman | November  18 , 2004 |
| And  Principal Accounting Officer                |                |

 

 

(THIS SPACEHAS BEEN LEFT BLANK INTENTIONALLY)

 

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