**SECURITIES AND EXCHANGECOMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-QSB**

** **

**(Mark One)**

**ý****Quarterly report under Section 13or 15(d) of the Securities Exchange Act of 1934 for the quarterly periodended June 30, 2005.**

 

**o****Transition report under Section 13or 15(d) of the Securities Exchange Act of 1934****for thetransition period from             to            .**

 

**Commission file number: 000-25523**

 

**PRIMARY BUSINESS SYSTEM INC.**

(Exact name of small businessissuer as specified in its charter)

 
| **NEVADA**                                                       | ** ** | **86-0857752**                         |
|------------------------------------------------------------------|------------|----------------------------------------|
| (State or  other jurisdiction of  incorporation or organization) |       | (I.R.S.  Employer  Identification No.) |

 

**433 KittyHawk Drive # 226, Universal City, Texas 73148**

(Address of principal executiveoffice) (Zip Code)

 

**(210) 658-4675**

 (Issuer’s telephone number)

 

Check whether the issuer: (1) filed all reports required to befiled by Section 13 or 15(d) of the Exchange Act during the past 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.

Yes ý                                                                                                                                                             Noo

 

The number of outstanding shares of the issuer’s common stock, $0.001par value (the only class of voting stock), as of June 30, 2005 was86,278,297

 

Transitional Small Business Disclosure Format              Yes o    No ý

 

 

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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.    | Unregistered Sales of Equity Securities and Use of proceeds |   |
|       |                                                        |   |
| Item 3.    | Defaults Upon Senior Securities                             |   |
|       |                                                        |   |
| Item 4.    | SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS        |   |
|       |                                                        |   |
| Item  5.   | OTHER  INFORMATION                                          |   |
|       |                                                        |   |
| Item 6.    | EXHIBITS                                                    |   |
|       |                                                        |   |
| SIGNATURES |                                                        |

 

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ITEM 1.                                                  FINANCIALSTATEMENTS

 

As used herein, the term “Company” refers to Primary Business SystemsInc., a Nevada corporation, and its subsidiaries and predecessors unlessotherwise indicated.  Unauditedconsolidated condensed interim financial statements including a balance sheetfor the Company as of the quarter ended June 30, 2005 and statements ofoperations, and statements of cash flows for the interim period up to the dateof such balance sheet and the comparable period of the preceding year for thestatement of operations are attached hereto as of Pages F-1 through F-9and are incorporated herein by this reference.

 

BASIS OF PRESENTATION

 

The accompanying unaudited consolidated financial statements arepresented in accordance with accounting principles generally accepted in theUnited States of America for interim financial information and the instructionsfor Form 10-QSB and Item 310 under subpart A of Regulation S-B.  Accordingly, they do not include all of theinformation and footnotes required by accounting principles generally acceptedin the United States of America for complete financial statements. Theaccompanying statements should be read in conjunction with the auditedfinancial statements for the years ended December 31, 2004 and December 31,2003. In the opinion of management, all adjustments (consisting only of normaloccurring accruals) considered necessary in order to make the financialstatements not misleading have been included. Operating results for the sixmonths ended June 30, 2005 are not necessarily indicative of results thatmay be expected for the year ended December 31, 2005. The financialstatements are presented on the accrual basis with significant intercompanytransactions and balances eliminated.

 

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Primary Business Systems Inc.

 & Subsidiaries

 

Index

 

Unaudited Consolidated Condensed InterimFinancial Statements

For the Period Ended

June 30, 2005

 

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

 

F-2

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PRIMARY BUSINESS SYSTEMS, INC.

& SUBSIDIARIES

Consolidated Balance Sheet

As of June 30, 2005 (Unaudited) and December 31,2004 (Audited)

 
| ** **                            | ** ** | **June 30, 2005** | ** ** | **December 31, 2004** | ** ** |
|---------------------------------------|------------|------------------------|------------|----------------------------|------------|
| ASSETS                                |       |                   |       |                       |       |
| Current assets                        |       |                   |       |                       |       |
| Cash                                  |       | $                      | 76,350     |                       | $          | 185,484 |   |
| Notes receivable                      |       | 123,820                |       | 107,949                    |       |
| Client accounts receivable            |       | 67,821                 |       | 64,435                     |       |
| Prepaid Expenses                      |       | 42,803                 |       | 1,051                      |       |
| Workers Compensation Prepaid Premiums |       | 96,097                 |       | 96,097                     |       |
|                                  |       |                   |       |                       |       |
| Total Current Assets                  |       | 406,892                |       | 455,016                    |       |
|                                  |       |                   |       |                       |       |
| Property & Equipment         |       |                   |       |                       |       |
| Furniture & Fixtures         |       | 54,454                 |       | 54,454                     |       |
| Computer equipment                    |       | 91,322                 |       | 91,322                     |       |
| Vehicles                              |       | 15,485                 |       | 15,485                     |       |
| Payroll software                      |       | 43,724                 |       | 43,724                     |       |
|                                  |       |                   |       |                       |       |
| Total Property and Equipment          |       | 204,986                |       | 204,986                    |       |
|                                  |       |                   |       |                       |       |
| Less: accumulated depreciation        |       | (158,853               | )          | (149,213                   | )          |
| Net Property & Equipment     |       | 55,773                 |       | 55,773                     |       |
|                                  |       |                   |       |                       |       |
| Other assets                          |       |                   |       |                       |       |
| Security Deposits                     |       | 1,055                  |       | 1,054                      |       |
| Customer list, net of amortization    |       | 7,800                  |       | 9,000                      |       |
| Goodwill                              |       | 557,240                |       | 557,240                    |       |
| Total Other Assets                    |       | 566,095                |       | 567,294                    |       |
| Total Assets                          |       | $                      | 1,019,120  |                       | $          | 1,078,083 |   |

 

The accompanying notes arean integral part of these financial statements.

 

F3

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PRIMARY BUSINESS SYSTEMS, INC.

And SUBSIDIARIES

 

Consolidated Balance Sheet Continued

As of June 30, 2005(unaudited) and December 31, 2004 (audited)

 
| ** **                                                                                                | ** ** | **June 30, 2005** | ** ** | **December 31, 2004** | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|------------------------|------------|----------------------------|------------|
| LIABILITIES                                                                                               |       |                   |       |                       |       |
| Current liabilities                                                                                       |       |                   |       |                       |       |
| Accounts payable                                                                                          |       | $                      | 136,883    |                       | $          | 109,812 |   |
| Checks drawn on uncollected payrolls                                                                      |       | 0                      |       | 177,532                    |       |
| Deferred revenue on payrolls                                                                              |       | 86,450                 |       | 0                          |       |
| Client Payroll Tax payable                                                                                |       | 293,164                |       | 259,260                    |       |
| Workers Comp payable                                                                                      |       | 45,777                 |       | 60,953                     |       |
| Client payroll amount withheld                                                                            |       | 5,306                  |       | 1,532                      |       |
| Line of credit from banks                                                                                 |       | 21,345                 |       | 38,522                     |       |
| Total Current Liabilities                                                                                 |       | 588,925                |       | 647,611                    |       |
|                                                                                                      |       |                   |       |                       |       |
| Other liabilities                                                                                         |       |                   |       |                       |       |
| Due to shareholder/officer                                                                                |       | 622,451                |       | 622,496                    |       |
| Total Liabilities                                                                                         |       | 1,211,376              |       | 1,270,107                  |       |
|                                                                                                      |       |                   |       |                       |       |
| Stockholders’ Equity (Deficiency)                                                                    |       |                   |       |                       |       |
| Common stock, - $.001 par value authorized -  750,000,000 shares Issued and outstanding 86,278,297 shares |       | 86,278                 |       | 86,278                     |       |
| Additional paid-in capital                                                                                |       | 976,342                |       | 976,342                    |       |
| accumulated (deficit)                                                                                     |       | (1,254,876             | )          | (1,254,644                 | )          |
| Total Stockholders’ Equity (Deficiency)                                                              |       | (192,256               | )          | (192,024                   | )          |
| Total liabilities and Stockholders’s Equity  (Deficiency)                                            |       | $                      | 1,019,120  |                       | $          | 1,078,083 |   |

 

Theaccompanying notes are an integral part of theses financial statements.

 

F4

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PRIMARY BUSINESS SYSTEMS, INC.

And SUBSIDIARIES

CONSOLIDATEDSTATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME(Unaudited)

For the Three Months and Six Months Ended June 30,2005 and 2004

 
| ** **                                                 | ** ** | **Three months ending June 30** | ** ** | **Six months ending June 30** | ** ** |
|------------------------------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                                                 | ** ** | **2005**                             | ** ** | **2004**                           | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                       |       |                                 |       |                               |       |   |   |   |   |
| Revenues                                                   |       | $                                    | 1,228,236  |                               | $          | 782,631 |   | $ | 2,266,000 |   | $ | 1,332,829 |   |
| Cost of revenues                                           |       | 688,047                              |       | 482,265                            |       | 1,438,500 |   | 855,287 |   |
| Gross Profit                                               |       | 540,191                              |       | 300,366                            |       | 827,500 |   | 477,542 |   |
| Operating Expenses                                         |       |                                 |       |                               |       |   |   |   |   |
| General and Administrative                                 |       | 165,613                              |       | 202,386                            |       | 352,519 |   | 386,273 |   |
| Wages, commissions & salaries                     |       | 289,207                              |       | 153,986                            |       | 457,213 |   | 280,519 |   |
| Total Operating Expenses                                   |       | 454,820                              |       | 356,348                            |       | 827,732 |   | 666,792 |   |
| (Loss) from Operations                                     |       | 85,371                               |       | (55,982                            | )          | (232 | ) | (189,250 | ) |
| Other Income                                               |       | 0                                    |       | 0                                  |       | 0 |   | 0 |   |
| (Loss) Before Prevision For Income Tax                     |       | 85,371                               |       | (55,982                            | )          | (232 | ) | (189,250 | ) |
| Provision for Income Taxes                                 |       | —                               |       | —                             |       | — |   | — |   |
| Net Income (Loss)                                          |       | $                                    | 85,371     |                               | $          | (55,982 | ) | $ | (232 | ) | $ | (189,250 | ) |
|                                                       |       |                                 |       |                               |       |   |   |   |   |
| Basic & Distributed Net Income  (Loss) Per Share  |       | $                                    | 0.0        |                               | $          | (.000 | ) | $ | (0.0 | ) | $ | (.000 | ) |
| Basic and Distributed Weighted Average  Shares Outstanding |       | 86,278,297                           |       | 85,750,747                         |       | 86,278,297 |   | 85,750,747 |   |

 

The Accompanying notes arean integral part of these financial statements.

 

F5

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PRIMARY BUSINES SYSTEMS, INC. and SUBSIDIARY

Unaudited Consolidated Condensed Interim

Statementof Stockholder’s Equity (Deficiency)

For the Period Ended June 30, 2005

 
| ** **                     | ** ** | **Common Stock** | ** ** | **Paid-in** | ** ** | **Additional  accumulated** | ** ** | **Total**   | ** ** |
|--------------------------------|------------|------------------|------------|-------------|------------|-----------------------------|------------|-------------|------------|
| ** **                     | ** ** | **Shares**       | ** ** | **Amount**  | ** ** | **capitol**                 | ** ** | **Deficit** | ** ** | **Equity (Deficiency)** | ** ** |
| Balance December 31, 2004 |       | 86,278,297       |       | $           | 86,278     |                        | 976,342    |        | $          | (1,254,644 | ) | $ | (192,024 | ) |
| Net Income (Loss)              |       |             |       |        |       |                        |       | (232        | )          | (232 | ) |
| Balance June 30, 2004     |       | 86,278,297       |       | $           | 86,297     |                        | 976,342    |        | $          | (1,254,876 | ) | $ | (192,256 | ) |

 

Theaccompanying notes are an integral part of these financial statements.

 

F6

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PRIMARY BUSINESS SYSTEMS, INC.  &SUBSIDUARIES

CONSOLIDATEDSTATEMENTS OF CASH FLOW (Unaudited)

For the Six Months Ended June 30, 2005and 2004

 
| ** **                                                                                          | ** ** | **For the Six months ending June 30** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                          | ** ** | **2005**                                   | ** ** | **2004** | ** ** |
| Net Income                                                                                          |       | $                                          | (232       | ) | $ | (189,250 | ) |
| Adjustments to reconcile net income (loss)  to net cash provided by (used by) operating activities: |       |                                       |       |   |   |
| Depreciation and amortization                                                                       |       | 10,834                                     |       | 15,795 |   |
| (Increase) decrease in accounts receivable                                                          |       | (3,386                                     | )          | 494 |   |
| (Increase) decrease in prepaid expense                                                              |       | (41,752                                    | )          | 42,396 |   |
| (Increase) decrease in other current assets                                                         |       | (15,871                                    | )          | (15,542 | ) |
| Increase (decrease) in accounts payable                                                             |       | 27,278                                     |       | (92,255 | ) |
| Increase (decrease) in client payroll tax  liability                                                |       | 33,904                                     |       | 172,602 |   |
| Increase (decrease) in deferred revenue                                                             |       | 86,450                                     |       | 0 |   |
| Increase (decrease) in other current  liabilities                                                   |       | (11,405                                    | )          | 40,174 |   |
| Checks drawn on uncollected payrolls                                                                |       | (177,532                                   | )          | (9,123 | ) |
| Total Adjustments                                                                                   |       | (91,860                                    | )          | 154,541 |   |
| Net cash provided by (used in) operating  activities                                                |       | (91,912                                    | )          | (34,709 | ) |
| Cash flows from investing activities                                                                |       |                                       |       |   |   |
| Payments for the purchase of property                                                               |       | 0                                          |       | 0 |   |
| Net cash provided by (used in) investing  activities                                                |       | 0                                          |       | 0 |   |
| Cash flows from financing activities                                                                |       |                                       |       |   |   |
| Net borrowing (paybacks) under line of  credit                                                      |       | (17,177                                    | )          | 7,448 |   |
| Net borrowing on notes payable                                                                      |       | 0                                          |       | 63,361 |   |
| Principal (payments) on short-term debt                                                             |       | 0                                          |       | (20,973 | ) |
| Due to shareholders/officers                                                                        |       | (45                                        | )          | (174 | ) |
| Net cash provided by (used in) financing  activities                                                |       | (17,222                                    | )          | 49,662 |   |
| Net increase (decrease) in cash and cash  equivalents                                               |       | (109,134                                   | )          | 14,953 |   |
|                                                                                                |       |                                       |       |   |   |
| Cash and cash equivalents at beginning of  year                                                     |       | 185,484                                    |       | 19,845 |   |
|                                                                                                |       |                                       |       |   |   |
| Cash and Cash equivalents at end of period                                                          |       | $                                          | 76,350     |   | $ | 34,798 |   |

 

The accompanying notes are an integral part of these financialstatements

 

F7

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PRIMARY BUSINESS SYSTEMS, INC.  &SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASHFLOWS (Unaudited)

 
| ** **                         | ** ** | **For Six Months Ended June 30** | ** ** |
|------------------------------------|------------|---------------------------------------|------------|
| ** **                         | ** ** | **2005**                              | ** ** | **2004** | ** ** |
| Supplemental information:          |       |                                  |       |   |   |
| Cash payments for interest expense |       | $                                     | 0          |   | 0 |   |
| Cash payments for income taxes     |       | $                                     | —     |   | $ | — |   |
|                               |       |                                  |       |   |   |
| Non Cash Items (None)              |       |                                  |       |   |   |
|                                    |            |                                       |            |  |  |  |  |

 

The Accompanying notes arean integral part of these financial statements

 

 

(THIS SPACE HAS BEEN LEFT BLANK INTENTIONALLY)

 

F8

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PRIMARY BUSINESS SYSTEMS, INC. andSUBSIDIARIES

Notesto Unaudited Consolidated Condensed Interim Financial Statements

June 30, 2005

 

NOTE1 – BASIS OF PRESENTATION

 

Thecondensed interim financial statements at June 30, 2005 are unaudited, butinclude all adjustments which 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 theyear ended December 31, 2004. The accompanying unaudited interim financialstatements for the current quarter and year to date ended June 30, 2005,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, 2004 and 2003 remainunchanged.

 

NOTE 3 – 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 June 30, 2005.

 

NOTE 4 – RELATED PARTY TRANSACTIONS

 

NotesReceivable reported as a current asset of $123,820 is due from Consumers InsuranceAgency, LLC.  The primary member of theLLC is Patrick Matthews who is also the majority shareholder in theCompany.  The notes receivable make uprevolving cash advances to the LLC and expenses paid on behalf of the LLC bythe Company.

 

Theserevolving notes receivable were part of the 2002 acquisition of the presentoperations of the Company.  At the timeof acquisition, these revolving notes receivable were for an amount less thanwhat is presently reported in the financial statements as of June 30,2005.

 

F9

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NOTE5 – ACCOUNTS RECEIVABLE FACTORED

 

Concord,the Company’s subsidiary, factors its accounts receivable.  As of June 30, 2005 it had $21,569.00accounts receivable factored, all with recourse, none of which have everreturned to the Company for lack of payment.  The Company has made no provision for loss onreceivables factored as it believes the risk exposure is minimal.

 

NOTE 6 Termination of a Material Definitive Agreement

 

PrimaryBusiness Systems, Inc., a Nevada corporation (“Primary Business” or the “Company”),had previously announced, on Form 8-k dated January 31, 2005, that ithad entered into a Settlement Agreement , dated as of January 31, 2005with several parties to resolve outstanding claims, judgements and existinglitigation.  The Company also previouslyfiled with the Securities and Exchange Commission and distributed to itsshareholders of record as of April 22, 2005 an Information Statementregarding the proposed transaction.

 

Asa result of the failure by the other parties to the Settlement Agreement toadhere to the terms thereof and to perform their obligations thereunder, theCompany has declared a default and terminated the Settlement Agreement.  The Company has been unable to reach any ofthe other parties to the Settlement Agreement despite delivering several demandand notice of default letters.

 

TheSettlement Agreement would have, if consummated, resulted in a change ofcontrol of the Company and a distribution of the significant business assets ofthe Company to Patrick Matthews and his family (the “Mathews Family”).  In effect, the terms and conditions of theSettlement Agreement would have “unwound” the transactions entered into by theCompany and a former majority shareholder, Pine Services, Inc. consummatedwith the Matthews Family in November 2002. Prior to these transactions, the Company had no significant operations.

 

Asa result of termination of the Settlement Agreement, there will be no change incontrol of the Company, Patrick Matthews will remain as Chairman and ChiefExecutive Officer of the Company, and the remaining officers and directors ofthe Company will remain in their positions. The Company will continue with itspresent operations as existing prior to the Settlement Agreement.

 

NOTE 7 – CONTINGENTLIABILITIES & LITIGATION

 

TheCompany presently has two separate lawsuits filed against it pendingresolution.  Limited discovery hasoccurred in both cases.  The Companyintends to vigorously defend itself against both of these lawsuits and topursue what remedies it may have against the plaintiffs.  Management believes the contingent liabilityof these lawsuits is minimal, and therefore, it has concluded to accrue nocontingency in the financial statements for them. .

 

OnAugust 2, 2004, AMS Staff Leasing, LTD. filed a lawsuit in the 298thJudicial District Court, Dallas County, Texas (Cause No. 04-07448-M)against Patrick Dey Matthews CEO of the Company, the Company, and PrimaryBusiness Systems LLC (the “Defendants”). It alleges, among other claims, breach of fiduciary duty, breach ofcontract and conversion.  On September 13,2004, the Defendants filed a motion to transfer venue and answer.any update?

 

F10

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Onor about September 13, 2004, Primary Business Systems L.L.C. (“PBS LLC”),a wholly owned subsidiary of the Company, was served with a suit filed in the341st Judicial District Court, Webb County, Texas, by Laredo Cal-Tex, Inc.(Cause No. 2004- CV F 001296 D3), alleging breach of contract.  On September 30, 2004, PBS LLC filed amotion to transfer venue and answer.  Anyupdate?

 

**ITEM 2**

 

**MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS**

 

**ForwardLooking and Cautionary Statements**

 

The following discussioncontains forward-looking statements. The Company’s actual results could differmaterially from those discussed in such forward-looking statements. Factorsthat could cause or contribute to such differences include those discussedbelow and elsewhere in this Form 10-Q. See “Cautionary Note RegardingForward-Looking Statements”. The following discussion should be read inconjunction with the Company’s condensed consolidated financial statements andnotes thereto included elsewhere in this filing and in conjunction with our Form 10-Kincluding risk factors stated therein. Historical results are not necessarilyindicative of trends in operating results for any future period.

** **

**CriticalAccounting Policies and Estimates**

 

Primary believes itssignificant critical accounting policies have not changed since fiscal year endDecember 31, 2003. See Note 2 of Primary’s annual report on Form 10-Kas well as “Critical Accounting Policies” contained therein for a detaileddiscussion on the application of these and other accounting policies.

 

***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 revenuesfrom service fees in accordance with Emerging Issues Task Force (“EITF”) No. 99-19,Reporting Revenue Gross as a Principal versus Net as an Agent. The Companyreports as revenues, on a gross basis, the total amount billed to clients forservice fees, health and welfare benefit plan fees, workers’ compensation andunemployment insurance fees. Primary reports revenues on a gross basis forthese fees because Primary Business Systems LLC and Primary HR Services LLC arethe primary obligor and deemed to be the principal in these transactions underEITF No. 99-19. Primary reports revenues on a net basis for the amountbilled to clients for worksite employee salaries, wages and certainpayroll-related

 

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taxes less amounts paid toworksite employees and taxing authorities for these salaries, wages and taxes.Primary accounts for its revenues using the accrual method of accounting. Underthe accrual method of accounting, Primary recognizes its revenues in the periodin which the worksite employee performs work. Primary accrues revenues andunbilled receivables for service fees relating to work performed by worksiteemployees but unpaid at the end of each period. In addition, the related costsof services are accrued as a liability for the same period. Subsequent to theend of each period, such costs are paid and the related PEO service fees arebilled.

 

**Overview**

 

The business of PrimaryBusiness Systems Inc. is to operate in the Professional Employer Organizationindustry and the Temporary Staffing Services Industry and operates through itssubsidiaries Primary Buisness Systems LLC, Primary HR Services LLC and ConcordStaffing Services (Subsidiaries) and as economies of scale can be realizedcombine the individual entities in each sector.

 

Primary LLC and Primary HRServices LLC are regional Professional Employer Organizations (PEO) committedproviding human capital management solutions. We offer our clients, which are typically small to medium-sized businesswith between five and fifty employees, a broad range of product and services thatprovide a complete solution for the clients’ human resources outsourcingneeds.  Primary LLC’s products andservices include benefits administration, payroll administration, governmentalcompliance, risk- management, unemployment administration, and health, welfareand retirement benefits.

 

Concord Staffing Service isa regional temporary staffing services company helping business meet theirstaffing needs while minimizing there employee acquirement cost.  We offer qualified screened employees to ourclients that meet their employment needs on temporary biases. Concord providesall payroll administration, unemployment administration and assignmentadministration of the temporary staff.

 

***Revenues.***    Revenuesconsist of service fees charged by Primary LLC, Primary HR Services LLC andConcord (Subsidiaries) to cover the costs of certain employment-related taxes,workers’ compensation insurance coverage and administrative and field servicesprovided to their clients. The service fee charged is invoiced along with eachperiodic payroll delivered to the client. The client’s portion of health plancosts is charged separately and is not included in the service fee. Servicerevenues are recognized in the period in which the worksite employee works.Under this accrual method of accounting, service fees relating to worksiteemployees with earned but unpaid wages at the end of each period are recognizedas unbilled revenues and the related payroll costs for such wages are accruedas a liability 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****.*    Costof services includes all direct costs associated with revenue generatingactivities as well as employee benefit costs, workers’ compensation insuranceand state unemployment taxes.

 

Employee benefit costs are comprised primarily ofmedical benefit costs, but also include costs of other employee benefits suchas dental, disability and group life insurance. Benefit claims incurred byworksite employees under the benefit plans are expensed as incurred accordingto the terms of each contract.

 

In certain instances, Primary LLC opts to make acontribution toward the cost of the worksite employees’ medical benefit costs.In most small group health markets, medical benefit plan rates vary based onthe medical participants’ demographics. In order to offer a competitivelypriced business solution, Primary LLC may offer reduced medical benefit planrates to worksite employees with positive risk characteristics. The additionsof these selected worksite employees’ offsets potential adverse selection andhelps to stabilize the overall medical benefit plan risk to Primary LLC.

 

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Primary LLC offers its medical benefit plans throughpartnerships with premier health care companies. These companies have extensiveprovider networks and strong reputations in the markets in which Primary LLCoperates.

 

All of Primary LLC’s health care providers offerpreferred 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.

 

State unemployment tax rates vary from state tostate and are based upon the employer’s claims history. Primary LLCaggressively manages its state unemployment tax exposure by contestingunwarranted claims.

 

***Operating Expenses****.*    Operatingexpenses consist primarily of salaries, wages and commissions associated withthe Subsidiaries internal employees, and general and administrative expenses.Sales and marketing commissions and client referral fees are expensed asincurred. Primary expects that future revenue growth will result in increasedoperating leverage, as the Subsidiaries fixed operating expenses are leveragedover 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 the Subsidiaries success in generating revenues fortheir services and managing the costs that are within its control. Revenues andcosts of service primarily relate to workers’ compensation coverage, healthbenefit plans and state unemployment taxes. Subsidiaries seek to manage thesecosts through the use of: (i) workers’ compensation arrangements withcarriers who efficiently manage claims administration, internal risk assessmentand client risk management programs; (ii) appropriately designed healthbenefit plans that encourage worksite employee participation, and, (iii) aggressivemanagement of its state unemployment tax exposure.

 

**RESULTS OF OPERATIONS**

 

The following discussion should be read inconjunction with the Company’s Annual Report on Form 10-K for the yearended December 31, 2004, including all amendments thereto, as well as theconsolidated financial statements and notes thereto included in this QuarterlyReport on Form 10-QSB.

 

The following table presents Primary’s results of operations for thethree and six months ending June 30, 2005 and 2004, expressed as apercentage of revenues:

 

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| ** **                         | ** ** | **Three Months Ended  June 30** | ** ** | **Six Months Ended  June 30** | ** ** |
|------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                         | ** ** | **2005**                             | ** ** | **2004**                           | ** ** | **2005** | ** ** | **2004** | ** ** |
| Revenues                           |       | 100.0                                |       | 100.00                             |       | 100.00 |   | 100.0 | % |
| Cost of  Services                  |       | 56.02                                |       | 61.62                              |       | 63.48 |   | 64.17 |   |
| Gross Profit                       |       | 43.92                                |       | 38.38                              |       | 36.52 |   | 35.83 |   |
| Operating  Expenses:               |       |                                 |       |                               |       |   |   |   |   |
| General and  administrative        |       | 13.48                                |       | 25.86                              |       | 15.56 |   | 28.98 |   |
| Salaries,  wages and commissions   |       | 23.55                                |       | 19.67                              |       | 20.97 |   | 21.05 |   |
| Consulting  Services               |       | 0                                    |       |                               |       |   |   | 0 |   |
| Total  operating costs             |       | 37.03                                |       | 45.53                              |       | 36.53 |   | 50.03 |   |
| Operating  (loss) income           |       | 6.95                                 |       | (7.15                              | )          | (00.01 | ) | (14.20 | ) |
| Other income                       |       | 0.0                                  |       | 0.0                                |       | 0.0 |   | 0.0 |   |
| Interest  expense                  |       | 0.0                                  |       | 0.0                                |       | 0.0 |   | 0.0 |   |
| Other  non-operating expense       |       | 0.0                                  |       | 0.0                                |       | 0.0 |   | 0.0 |   |
| (Loss)  income before income taxes |       | 6.95                                 |       | (7.15                              | )          | (00.01 | ) | (14.20 | ) |
| Income tax  (benefit) provision    |       | 0.0                                  |       | 0.0                                |       | 0.0 |   | 0.0 |   |
| Net income  (loss)                 |       | 6.95                                 |       | (7.15                              | )          | (00.01 | ) | (14.20 | ) |

 

*Quarter ending June 30, 2005 compared toJune 30, 2004*

 

For the quarter ended June 30, 2005, revenues increased$445,607, or 56.9% from 2004, totaling $1,228,238 in 2005 compared to $782,631,for 2004.  The three month increasereflects our focus on sales and the addition of a number of new clients.  The change is reflective of the gains madeduring the period with our focus on new business and increased fees.

 

Cost of services, which includes the cost of medicalbenefit plans, workers’ compensation insurance, 410K administration cost, stateunemployment taxes and other costs for the Quarter ended June 30, 2005,  totaled $688,047 or 56.02% of revenues for2005, compared to $483,265 or 61.62% for 2004. The increase in cost is consistent with the addition of new clients andleased employees that are affected by an increase of our state unemploymentrate which is realized through the first $7,000 of employee wages.

 

Gross profit for the quarter ended June 30,2005 was 540,191 or 43.92% of revenue compared to $300,366 or 38.38% for2004.  Gross profit dollars increased forthe quarter $239,852 or 79.84% over the same quarter 2004.

 

Operatingexpenses for the quarter ended June 30, 2005, was $454,820 for 2005, or37.03 % of revenues compared to $356,348, or 45.53% of revenues for 2004.

 

Salaries, wages and commissions for the Quarterended June 30, 2005, were $289,207 for 2005, or 23.55% of revenuescompared to $153,962 or 19.67% for 2004. Payroll costs increased as Primary LLC expanded staff to facilitate bestservices to our customers, increased its sales staff, and increased itscommission expense and the addition of staff for Primary HR Services LLC ourMississippi subsidiary.  At the end of

 

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June 2004 the combinedSubsidiaries employed eleven, for the same period ending June 2005 thecombined subsidiaries employed fifteen.

 

Other general and administrative expenses for thequarter ended June 30, 2005, was $165,613, or 13.48% of revenue for 2005,compared to $202,386, or 25.86 % of revenue in 2004, representing a decrease of$36,773 in general and administrative expenses. ..

 

We experienced a net gain for the quarter ended June 30,2005 of $85,371, or 6.95% of revenue as compared to a net loss of ($55,982), or7.15% of revenue for 2004.  The decreasein operating losses is attributed to our increased in sales, focus on limitingexpenses and a reduction in legal fees for the Corporation.

 

*Six Months ending June 30, 2005 comparedto June 30, 2004*

 

For the six months ended June 30, 2005,revenues increased $933,171, or 70.01% from 2004, totaling $2,266,000 in 2005compared to $1,332,829, for the same period in 2004.  The Six month increase reflects our focus onsales and the addition of a number of new clients.  The change is reflective of the gains madeduring the period with our focus on new business and increased fees.

 

Costof services, which includes the cost of medical benefit plans, workers’compensation insurance, 410K administration cost, state unemployment taxes andother costs for the six months ended June 30, 2005,  totaled $1,438,500 or 63.48% of revenues for2005, compared to $855,287 or 64,17% for 2004. The increase in cost is consistent with the addition of new clients andleased employees that are affected by an increase of our state unemploymentrate which is realized through the first $7,000 of employee wages.

 

Grossprofit for the six months ended June 30, 2005 was $827,500 or 36.52% ofrevenue compared to $477,542 or 35.83% for 2004.  Gross profit dollars increased for the sixmonths $349,958 or 73.28% over the same quarter 2004.

 

Operatingexpenses for six months ended June 30, 2005, was $827,732 for 2005, or36.53 % of revenues compared to $666,792, or 50.03% of revenues for 2004.

 

Salaries,wages and commissions for six months ended June 30, 2005, were $475,213for 2005, or 20.97% of revenues compared to $280,519 or 21.05% for 2004.  Payroll costs increased as Primary LLCexpanded staff to facilitate best services to our customers, increased itssales staff, and increased its commission expense and the addition of staff forPrimary HR Services LLC our Mississippi subsidiary.  At the end of June 2004 the combinedSubsidiaries employed eleven, for the same period ending June 2005 thecombined subsidiaries employed fifteen.

 

Othergeneral and administrative expenses for the six months ended June 30,2005, was $352,519, or 15.56% of revenue for 2005, compared to $386,273, or28.98 % of revenue in 2004, representing a decrease of $33,754 in general andadministrative expenses.  .

 

Weexperienced a net loss for the six months ended June 30, 2005 of $232, or00.01% of revenue as compared to a net loss of ($189,250), or 14.20% of revenuefor 2004.  The decrease in operatinglosses is attributed to our increased in sales, focus on limiting expenses anda reduction in legal fees for the Corporation.

 

Liquidity and Capital Resources

 

Primaryhad $ 76,350 in cash and cash equivalents and restricted certificates ofdeposit at June 30, 2005. 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.

 

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AtNovember 18, 2003, Primary LLC had deposited $96,097, as collateral withthe Company’s workers’ compensation plans upon renewal of its plan for2003/2004 which was then carried forward for the 2004/2005 policy year. PrimaryLLC’s workers’ compensation programs for the 2001 through November 2004program years are subject to no further collateral adjustments.

 

The Company had no long-term debt as of June 30,2005 other than to its major shareholder, who is an officer and director. Theprincipal amount of this outstanding debt at June 30, 2005 is $622,451. [WHATIS GOING TO HAPPEN WITH THIS?] DOES IT BEAR INTEREST?

 

The charges to clients by Primary LLC, Primary HRand Concord derived from salaries, wages and payroll taxes is managed from acash flow perspective so that a matching exists between the time that the fundsare received from a client to the time that the funds are paid to the worksiteemployees and to the appropriate tax jurisdictions. As a co-employer, and underthe terms of the Client Services Agreement, Primary LLC, Primary HR and Concordis 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.

 

Primary LLC’s primary short-term capitalrequirements relate to the payment of accrued payroll and payroll taxes of itsinternal and worksite employees, accounts payable for capital expenditures andthe payment of accrued workers’ compensation expense and health benefit planpremiums..

 

***Going Concern Issues***

 

We expect to spend significant amounts to expanddomestic sales and operations through mergers and acquisitions. As a result, wewill need to generate significant additional revenue to achieve profitabilitybased on such planned expenditures and expansion. Even if we do achieveprofitability, we may not be able to sustain or increase profitability on aquarterly or annual basis. If we do not achieve and maintain profitability, themarket price for our common stock may decline.

 

If we do not receive additional capital when andin the amounts needed in the near future, our ability to continue as a goingconcern is in substantial doubt. We have limited revenue and limited cashassets, and will require additional equity or capital investments.

 

Obtaining future financing may be costly andwill likely be dilutive to existing stockholders. If we are not able to obtainfinancing when and in the amounts needed, and on terms that are acceptable, ouroperations, financial condition and prospects could be materially and adverselyaffected, and we could be forced to curtail our operations or sell part or allof our assets. Management continually is seeking additional sources of capitolto maintain the ongoing operations 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.

 

**Off-balance Sheet Arrangements**

 

Primarydoes not currently have any off-balance sheet arrangements

 

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**Purchase of Registrant’s Securities**

 

**Primary did not purchase any of its securitiesduring the quarter ended June 30, 2005.**

 

***ITEM 3 CONTROLS AND PROCEDURES***

 

Ourmanagement, under the supervision and with the participation of our ChiefExecutive Officer and Controller, conducted an evaluation of our “disclosurecontrols and procedures” (as defined in the Securities Exchange Act of 1934 Rules 13a-14(c))as of the end of the period covered by this Report on Form 10-QSB (“EvaluationDate”).  Based on their evaluation, ourchief executive officer and chief financial officer (who is also our controllerand principal accounting officer) have concluded that as of the date of the endof the period covered by this Report on Form 10-QSB, our disclosurecontrols and procedures are effective to ensure that all  information required to be filed in thisReport on Form 10-QSB the Exchange Act is recorded, processed, summarizedand reported, within the time periods specified in the Securities and ExchangeCommission’s rules and forms.

 

***CHANGES IN INTERNAL CONTROLS***

 

Therehave been no changes (including corrective actions with regard to significantdeficiencies or material weaknesses) in our internal controls or in otherfactors that could significantly or materially, or have materially or arereasonably likely to materially effect these controls over financial reporting

 

# **CAUTIONARYNOTE REGARDING FORWARD-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 1933and Section 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. Theseforward-looking statements are based on the Company’s current expectations andbeliefs concerning future developments and their potential effects on theCompany. There can be no assurance that future developments affecting theCompany will be those that the Company has anticipated. These forward-lookingstatements involve a number of risks, uncertainties (some of which are beyondthe Company’s control) or other assumptions that may cause actual results orperformance to be materially different from those expressed or implied by suchforward-looking statements. These risks and uncertainties include, but are notlimited to, those factors listed below:

 

**•**              potentialliability as a co-employer as a result of acts or omissions by the Company’sclients or client employees;

**•**              exposureto client credit risk as a result of the Company’s obligation to make certainpayments in respect of client employees;

**•**              unfavorable determinations under certain laws and regulations regardingthe Company’s status as an “employer” of client employees;

**•**              inadequacy of the Company’s insurance-related loss reserves to coverits ultimate liability for losses;

**•**              unavailability of insurance coverage for workers’ compensation, medicalbenefits and general liability on financial terms and premium rates acceptableto the Company;

 

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**•**              significantcollateral requirements in respect of the Company’s obligations to itsinsurance carriers and the potential for those requirements to increase in thefuture;

**•**              the Company’s failure to comply with applicable laws and regulations ina complex regulatory environment; 

**•**              inexperienceof a large portion of the Company’s sales staff;

**•**              theCompany’s failure to properly manage its growth and to successfully integrateacquired companies, including risks of client attrition and the risksassociated with assumed employee benefit plans; 

**•**              risks associated with geographic market concentration;

**•**              risksassociated with expansion into additional states with varying state regulatoryrequirements;

**•**              theimpact of competition from existing and new businesses offering human resourceoutsourcing services; 

**•**              theability of the Company’s clients to terminate their relationship with theCompany upon 30 days notice;

**•**              errorsor omissions by the Company in performing its services;

**•**              theCompany’s dependency on key personnel and potential difficulties and expensesin the recruitment and retention of key employees;

 

**•**              theCompany’s inability to attract and retain qualified human resource consultants;

 

**•**              risksassociated with the Company’s dependency on technology services and third partylicenses of technology;

 

**•**              theCompany’s inability to use the Internet as a means of delivering human resourceservices;

 

**•**              fluctuations in interest rates and the associated effect on the Company’sinvestments;

 

**•**              the Company’s failure to adequately protect its proprietary rights;

 

**•**              theCompany’s reliance on one financial institution to transfer its payroll funds;and

 

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

 

**•**              ourneed for capital

 

The Company undertakes noobligation to publicly update or revise any forward-looking statements, whetheras a result of new information, future events or otherwise except as may berequired under applicable securities laws.

 

Primary cautions that the factors described abovecould cause actual results or outcomes to differ materially from thoseexpressed in any forward-looking statements made by or on behalf of Primary.Any forward-looking statement speaks only as of the date on which suchstatement is made, and Primary undertakes no obligation to update anyforward-looking statement or statements to reflect events or circumstancesafter the date on which such statement is made or to reflect the occurrence ofunanticipated events. New factors emerge from time to time, and it is notpossible for management to predict all of such factors. Further, managementcannot assess the impact of each such factor on the business or the extent towhich any factor, or combination of factors, may cause actual results to differmaterially from those contained in any forward-looking statements.

 

9

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PART II

 

OTHER INFORMATION

 

**Item 1.               Legal Proceedings**

 

Termination of a Material Definitive Agreement

 

Primary Business Systems, Inc., a Nevada corporation (“PrimaryBusiness” or the “Company”), had previously announced, on Form 8-k dated January 31,2005, that it had entered into a Settlement Agreement , dated as of January 31,2005 with several parties to resolve outstanding claims, judgements andexisting litigation.  The Company alsopreviously filed with the Securities and Exchange Commission and distributed toits shareholders of record as of April 22, 2005 an Information Statementregarding the proposed transaction.

 

As a result of the failure by the other parties to the SettlementAgreement to adhere to the terms thereof and to perform their obligationsthereunder, the Company has declared a default and terminated the SettlementAgreement.  The Company has been unableto reach any of the other parties to the Settlement Agreement despitedelivering several demand and notice of default letters.

 

The Settlement Agreement would have, if consummated, result in a changeof control of the Company and a distribution of the significant business assetsof the Company to Patrick Matthews and his family (the “Mathews Family”).  In effect, the terms and conditions of theSettlement Agreement would have “unwound” the transactions entered into by theCompany and a former majority shareholder, Pine Services, Inc. consummatedwith the Matthews Family in November 2002. Prior to these transaction, the Company had no significant operations.

 

As a result of termination of the Settlement Agreement, there will beno change in control of the Company, Patrick Matthews will remain as Chairmanand Chief Executive Officer of the Company, and the remaining officers anddirectors of the Company will remain in their positions. The Company willcontinue with its present operations as existing prior to the SettlementAgreement.

 

See the Description in Item4 and in Note 6 to the Financial Statements above.

 

As a commercial enterprise and employer and with respectto its employment-related businesses in particular, we are engaged inlitigation from time to time during the ordinary course of business inconnection with employment-relations issues, workers’ compensation and othermatters.  Generally, we are entitled toindemnification or repayment from our PEO clients for claims brought byworksite employees related to their employment. However, there can be no assurance that the client employer will havefunds or insurance in amounts to cover any damages or awards, and asco-employer, we may be subject to liability. No allowance for this contingencyis recognized on the financial statements of the company.

 

We are engaged in no other litigation, the effect ofwhich would be anticipated to have a material adverse impact on our financialconditions or results of operations.

 

**Item 2.               Changes in Securities andPurchases of Securities**

 

We have not undertaken any stock purchases of oursecurities in the last fiscal quarter or the current fiscal quarter as of thedate of this Report. Additionally, we have not issued any securities in themost recent fiscal quarter or in the current fiscal quarter.

 

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Our registrar and transfer agent is Registrar andTransfer Corp.  10 Commerce Drive,Cranford, New Jersey 07016.  The telephonenumber of Registrar and Transfer is 800-866-1340

 

**Item 3.    Defaults Upon Senior Securities**

 

None

 

**Item 4.               SUBMISSION OF MATTERS TO A VOTEOF SECURITY HOLDERS**

 

 None

 

**Item 5.               OTHER INFORMATION**

 

None

 

**Item 6.               EXHIBITS**

 

Exhibits

 

(a) Exhibits required to be attached byItem 601 of Regulation S-B are listed in the index to Exhibits on page 11of this Form 10-QSB, and are incorporated herein by this reference.

 

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

 

SIGNATURES

 

In accordance with the requirements of theExchange Act, the registrant caused this report to be singed on its behalf bythe under singed, there unto dully authorized, this 12th day ofAugust, 2005..

 
| Primary Business Systems Inc.                    |                 |
|--------------------------------------------------|----------------------|
|                                             |                 |
| S/ Patrick D Matthews                            |                 |   |
| Patrick D. Matthews                              |                 |
| President, Chief Executive Officer and  Chairman | August 12, 2005 |
| And Principal Accounting Officer                 |                 |
|                                                  |                      |  |

 

 

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