**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C.20549**

 

**FORM 10-QSB**

 

| **(Mark One)**                                                                                                                                                                                                                                                     |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **ý**** Quarterly report  under Section 13 or 15(d) of the Securities Exchange Act of 1934 for the  quarterly period ended March 31, 2004.**                                                                                                             |
| **o**** Transition  report under Section 13 or 15(d) of the Securities Exchange Act of 1934 for  the transition period from            to             .** |

 

**Commissionfile number: 000-25523**

 

**PRIMARY BUSINESS 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 May 8, 2004 was 86,278,297

 

Transitional Small BusinessDisclosure 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.        |   | Changes in Securities and Use or Proceeds            |   |
| Item  3.       |   | Defaults  Upon Senior Securities                     |   |
| Item  4.       |   | SUBMISSIONS  OF MATTERS TOA VOTE OF SECURITY HOLDERS |   |
| Item 5.        |   | OTHER INFORMATION                                    |   |
| Item  6.       |   | EXHIBITS  AND REPORTS ON FORM 8-K                    |   |
|           |   |                                                 |   |
| SIGNATURES     |   |
|           |   |                                                 |   |
| Certifications |   |

 

----

 

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 March 31, 2004 and statements of operations, and statements ofcash flows for the interim period up to the date of such balance sheet and thecomparable period of the preceding year for the statement of operations areattached hereto as of Pages F-1 through F-9.

 

----

 

Primary Business System, Inc.

 

Financial Statements

 

March 31, 2004

 

F-1

----

 

Primary Business Systems, Inc.

 

Index

 

Unaudited Consolidated Condensed Interim FinancialStatements

For the Period Ended

March 31, 2004

 
| Consolidated Balance Sheets  as of March 31, 2004 (Unaudited)  and December 31, 2003                                            |   |
|---------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                            |   |
| Consolidated  Statements of Operations and Comprehensive Income  for the three months ended March 31, 2004 and 2003 (Unaudited) |   |
|                                                                                                                            |   |
| Statement of Stockholders’  Equity (Deficit)                                                                               |   |
|                                                                                                                            |   |
| Consolidated Statements of Cash  Flows for the three months  ended March 31, 2004 and 2003 (Unaudited)                          |   |
|                                                                                                                            |   |
| Notes  to Consolidated Financial Statements (Unaudited)                                                                         |   |

 

F-2

----

 

PRIMARY BUSINESS SYSTEMS, INC.

And SUBSIDIARIES

ConsolidatedBalance Sheet

As of December 31, 2003 (Audited) and March 31,2004 (Unaudited)

 
|                                  |   | **December  31, 2003** |    | **March 31,  2004** |   |
|---------------------------------------|--------|------------------------|---------|---------------------|--------|
| ASSETS                                |   |                   |    |                |   |
| Current assets                        |   |                   |    |                |   |
| Cash                                  |   | $                      | 19,845  |                | $      | 35,489 |   |
| Notes receivable                      |   | 46,007                 |    | 52,582              |   |
| Client accounts receivable            |   | 70,589                 |    | 38,115              |   |
| Prepaid Expenses                      |   | 73,186                 |    | 45,968              |   |
| Workers Compensation Prepaid Premiums |   | 96,097                 |    | 96,097              |   |
| Employee advances                     |   | 450                    |    |                |   |
| Total Current Assets                  |   | 305,724                |    | 268,701             |   |
|                                  |   |                   |    |                |   |
| Property & Equipment              |   |                   |    |                |   |
| Furniture & Fixtures              |   | 52,244                 |    | 52,244              |   |
| Computer equipment                    |   | 84,300                 |    | 84,3000             |   |
| Payroll software                      |   | 43,724                 |    | 43,724              |   |
|                                  |   |                   |    |                |   |
| Less: accumulated depreciation        |   | 180,269                |    | 180,269             |   |
|                                  |   |                   |    |                |   |
|                                  |   | (119,153               | )       | (126,250            | )      |
| Total Property & Equipment        |   | 61,116                 |    | 54,019              |   |
|                                  |   |                   |    |                |   |
| Other assets                          |   |                   |    |                |   |
| Security Deposits                     |   | 1,054                  |    | 1,054               |   |
| Customer list, net of amortization    |   | 11,400                 |    | 10,800              |   |
| Prepaid marketing                     |   | 0                      |    | 0                   |   |
| Goodwill                              |   | 557,240                |    | 557,240             |   |
| Total Other Assets                    |   | 569,694                |    | 569,094             |   |
| Total Assets                          |   | $                      | 936,534 |                | $      | 891,814 |   |

 

The accompanying notes arean integral part of these financial statements.

 

F-3

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PRIMARY BUSINESS SYSTEMS, INC.

And SUBSIDIARIES

 

Consolidated BalanceSheet Continued

As of December 31, 2003 (audited) and March 31,2004 (unaudited)

 
|                                                                                               |   | **December  31,  2003** |    | **March 31,  2004** |   |
|----------------------------------------------------------------------------------------------------|--------|-------------------------|---------|---------------------|--------|
| LIABILITIES                                                                                        |   |                    |    |                |   |
|                                                                                               |   |                    |    |                |   |
| Current liabilities                                                                                |   |                    |    |                |   |
| Accounts payable                                                                                   |   | $                       | 214,656 |                | $      | 141,352 |   |
| Checks drawn on uncollected payrolls                                                               |   | 69,160                  |    | 167,753             |   |
| Deferred revenue on payrolls                                                                       |   | 0                       |    | 36,076              |   |
| Client Payroll Tax payable                                                                         |   | 20,024                  |    | 50,612              |   |
| Workers Comp payable                                                                               |   | 45,139                  |    | 46,140              |   |
| Client payroll amount withheld                                                                     |   | 16,477                  |    | 1,752               |   |
| Notes Payable                                                                                      |   | 20,973                  |    | 17,973              |   |
| Line of credit from banks                                                                          |   | 44,988                  |    | 58,476              |   |
| Total Current Liabilities                                                                          |   | 431,416                 |    | 520,136             |   |
|                                                                                               |   |                    |    |                |   |
| Other liabilities                                                                                  |   |                    |    |                |   |
| Due to shareholder/officer                                                                         |   | 628,023                 |    | 627,859             |   |
| Total Liabilities                                                                                  |   | 1,059,448               |    | 1,147,995           |   |
| Stockholders’ Equity                                                                          |   |                    |    |                |   |
| Common stock, - $.001 par value authorized  - 750,000,000 shares Issued and outstanding 85,657,747 |   | 85,750                  |    | 85,750              |   |
| Additional paid-in capital                                                                         |   | 976,870                 |    | 976,870             |   |
| accumulated (deficit)                                                                              |   | (1,185,534              | )       | (1,138,801          | )      |
| Total Stockholders’ Equity                                                                    |   | (122,914                | )       | (256,181            | )      |
| Total liabilities and Stockholders’s Equity                                                   |   | $                       | 936,534 |                | $      | 891,814 |   |

 

The accompanying notes arean integral part of theses financial statements.

 

F-4

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PRIMARY BUSINESS SYSTEMS, INC.

And SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS ANDCOMPREHENSIVE INCOME

(Unaudited)

 
|                                                       |   | **For the  three months ending March 31** |     |
|------------------------------------------------------------|--------|-------------------------------------------|----------|
|                                                       |   | **2004**                                  |     | **2003** |   |
| Revenues                                                   |   | $                                         | 548,268  |   | $ | 885,218 |   |
| Cost of revenues                                           |   | 373,022                                   |     | 734,829 |   |
| Gross Profit                                               |   | 175,246                                   |     | 150,389 |   |
| Operating Expenses                                         |   |                                      |     |   |   |
| General and Administrative                                 |   | 183,887                                   |     | 100,799 |   |
| Wages, commissions & salaries                          |   | 126,556                                   |     | 65,703 |   |
| Consulting services for acquisition                        |   | 0                                         |     | 185,000 |   |
| Total Operating Expenses                                   |   | 310,443                                   |     | 351,502 |   |
| (Loss) from Operations                                     |   | (135,197                                  | )        | (201,113 | ) |
| Other Income                                               |   | 1,930                                     |     | 2,670 |   |
| (Loss Before Prevision For Income Tax)                     |   | (133,267                                  | )        | (198,443 | ) |
| Provision for Income Taxes                                 |   | —                                    |     | — |   |
| Net (Loss)                                                 |   | $                                         | (133,267 | ) | $ | (198,443 | ) |
|                                                       |   |                                      |     |   |   |
| Basic & Distributed Net (Loss) Per  Share              |   | $                                         | (0.0016  | ) | $ | (.0023 | ) |
| Basic and Distributed Weighted Average  Shares Outstanding |   | 85,750,747                                |     | 36,811,553 |   |

 

The Accompanying notes arean integral part of these financial statements.

 

F-5

----

 

PRIMARY BUSINESS SYSTEMS, INC. & SUBSIDUARIES

CONSOLIDATED STATEMENTS OF CASH FLOW (Unaudited)

 
|                                                                                                |   | **For the  three months ending March 31** |     |
|-----------------------------------------------------------------------------------------------------|--------|-------------------------------------------|----------|
|                                                                                                |   | **2004**                                  |     | **2003** |   |
| Net Income                                                                                          |   | $                                         | (133,267 | ) | $ | (198,443 | ) |
| Adjustments to reconcile net income (loss)  to net cash provided by (used by) operating activities: |   |                                      |     |   |   |
|                                                                                                |   |                                      |     |   |   |
| Consulting services for acquisition                                                                 |   |                                      |     | 185,000 |   |
| Depreciation and amortization                                                                       |   | 7,697                                     |     | 8,454 |   |
| (Increase) decrease in accounts receivable                                                          |   | 32,474                                    |     | 11,485 |   |
| (Increase) decrease in prepaid expense                                                              |   | 27,218                                    |     | (73,348 | ) |
| (Increase) decrease in other current assets                                                         |   | (7,025                                    | )        | (42,431 | ) |
| Increase (decrease) in accounts payable                                                             |   | (73,304                                   | )        | 151,932 |   |
| Increase (decrease) in client payroll tax  liability                                                |   | 30,588                                    |     | 43,430 |   |
| Deferred revenue on payrolls                                                                        |   | 36,076                                    |     | 0 |   |
| Increase (decrease) in other current  liabilities                                                   |   | (13,721                                   | )        | 0 |   |
| Checks drawn on uncollected payrolls                                                                |   | (98,593                                   | )        | (111,249 | ) |
| Total Adjustments                                                                                   |   | 138,596                                   |     | (25,170 | ) |
| Net cash provided by (used in) operating  activities                                                |   | 5,329                                     |     | (25,170 | ) |
| 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 under line of credit                                                                  |   | 13,488                                    |     | (2,175 | ) |
| Principal payments on short-term debt                                                               |   | (3,000                                    | )        | 0 |   |
| Principal Payments on Long term debt                                                                |   | 0                                         |     | 0 |   |
| Due to shareholders/officers                                                                        |   | (173                                      | )        |   |   |
| Net cash provided by (used in) financing  activities                                                |   | 10,315                                    |     | (2,175 | ) |
| Net increase (decrease) in cash and cash  equivalents                                               |   | 15,644                                    |     | (27,345 | ) |
|                                                                                                |   |                                      |     |   |   |
| Cash and cash equivalents at beginning of  year                                                     |   | 19,845                                    |     | 30,868 |   |
|                                                                                                |   |                                      |     |   |   |
| Cash and Cash equivalents at end of quarter                                                         |   | $                                         | 35,489   |   | $ | 3,523 |   |

 

The accompanying notes are an integral part of these financialstatements

 

F-6

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|                            |   | **For the  Quarter ended March 31,** |   |
|---------------------------------|--------|--------------------------------------|--------|
|                            |   | **2004**                             |   | **2003** |   |
| Supplemental information        |   |                                 |   |   |   |
| Cash Payments for Income Taxes  |   | $                                    | — |   |   |   |
| Non Cash Items                  |   |                                 |   |   |   |
| Stock for goodwill              |   | $                                    | 0      |   | $ | 7,240 |   |
| Stock for prepaid marketing     |   |                                 |   | $ | 0 |   |
| Stock for professional services |   | $                                    | 0      |   | $ | 185,000 |   |

 

The Accompanying notes arean integral part of these financial statements

 

F-7

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**PRIMARYBUSINESS SYSTEMS, INC. and SUBSIDIARIES**

**Notes toUnaudited Consolidated Condensed Interim Financial Statements**

**March31, 2004**

 

NOTE 1 – BASISOF PRESENTATION

 

The condensed interimfinancial statements at March 31, 2004 are unaudited, but include alladjustments which the Company considers necessary for a fair presentation.

 

The accompanying unauditedfinancial statements are for the interim periods and do not include alldisclosures normally provided in annual financial statements, and should beread in conjunction with the Company’s Form 10-KSB for the year ended December31, 2003. The accompanying unaudited interim financial statements for thecurrent quarter and year to date ended March 31, 2004, are not necessarilyindicative of the results which can be expected for the entire year.  The preparation of financial statements inconformity with accounting principles generally accepted in the United Statesof America requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting period.  Actual results coulddiffer from those estimates.

 

NOTE 2 – SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES 

 

The Company has consolidatedthe financial statements of its wholly owned subsidiaries, Primary BusinessSystems, LLC and AHJR Inc., dba/Concord Staffing Services in these financialstatements.  All significantintercompany transactions have been eliminated.

 

All significant accountingpolicies as previously disclosed with the annual financial statements for theyears ended December 31, 2003 and 2002 remain unchanged.

 

NOTE3 – CHANGE IN STOCKHOLDERS’ EQUITY

 

The statement of changes instockholders’ equity is reported in these financial statements and disclosesthe transactions as they were incurred in the three months ended March 31,2004.

 

During 2002 the Companyissued a total of 1,126,355 restricted shares for prepaid consulting servicesvalued at $108,872 to be rendered over a twelve month period.  The consulting expense amortized andreported in the current quarter is $27,218 leaving a current asset of prepaidexpense at $45,968 as of March 31, 2004.

 

NOTE 4 – RELATEDPARTY TRANSACTIONS

 

Notes Receivable reported asa current asset of $52,582 is due from Consumers Insurance Agency, LLC.  The primary member of the LLC is PatrickMatthews who is the majority shareholder in the Company.  The notes receivable are made up ofrevolving cash advances to the LLC and expenses paid on behalf of the LLC bythe Company.

 

These revolving notesreceivable were part of the 2002 acquisition of the present operations of theCompany.  At the time of acquisitionthese revolving notes receivable were for an amount greater than presently reportedin the financial statements as of March 31, 2004.

 

F-8

----

 

**ITEM 2**

 

**MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION 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 ourForm 10-K. Historical results are not necessarily indicative of trends inoperating 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-K as wellas “Critical Accounting Policies” contained therein for a detailed discussionon the application of these and other accounting policies.

 

***Revenue Recognition****.*    Thegross billings that Primary LLC charges its clients under its Customer ServicesAgreement include each worksite employee’s gross wages, a service fee and, tothe extent elected by the clients, health and welfare benefit plan costs.Primary LLC’s service fee, which is computed as a percentage of gross wages, isintended to yield a profit to Primary LLC and cover the cost of certainemployment-related taxes, workers’ compensation insurance coverage, andadministrative and field services provided by Primary to the client, includingpayroll administration, record keeping, and safety, human resources, andregulatory compliance consultation. The component of the service fee related toadministration varies according to the size of the client, the amount andfrequency of payroll payments and the method of delivery of such payments. Thecomponent of the service fee related to workers’ compensation and unemploymentinsurance is based, in part, on the client’s historical claims experience. Allcharges by Primary LLC are invoiced along with each periodic payroll deliveredto 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. TheCompany reports as revenues, on a gross basis, the total amount billed toclients for service fees, health and welfare benefit plan fees, workers’compensation and unemployment insurance fees. Primary reports revenues on agross basis for these fees because Primary Business Systems LLC is the primaryobligor and deemed to be the principal in these transactions under EITF No.99-19. Primary reports revenues on a net basis for the amount billed to clientsfor worksite employee salaries, wages and certain payroll-related taxes lessamounts paid to worksite employees and taxing authorities for these salaries,wages and taxes. Primary accounts for its revenues using the accrual method ofaccounting. Under the accrual method of accounting, Primary recognizes its revenuesin the period in which the worksite employee performs work. Primary accruesrevenues and unbilled receivables for service fees relating to work performedby worksite employees but unpaid at the end of each period. In addition, therelated costs of services are accrued as a liability for the same period.Subsequent to the end of each period, such costs are paid and the related PEOservice fees are billed.

 

**Overview**

 

The business of PrimaryBusiness Systems Inc. is to operate in the Professional Employer Organizationindustry and the Temporary Staffing Services Industry and operate them aswholly owned subsidiaries, then as companies are accumulated in each sector andas economies of scale can be realized combine the

 

F-9

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individual entities in eachsector.  It is important to address theparticular markets of each sector therefore we will discus them individually atthis point.

 

Primary LLC is a regionalProfessional Employer Organization (PEO) committed providing human capitalmanagement solutions.  We offer ourclients, which are typically small to medium-sized business with between fiveand fifty employees, 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, riskmanagement, unemployment administration, and health, welfare and retirementbenefits.

 

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 and Concord to cover the costsof certain employment-related taxes, workers’ compensation insurance coverageand administrative and field services provided to their clients. The servicefee charged is invoiced along with each periodic payroll delivered to theclient. The client’s portion of health plan costs is charged separately and isnot included in the service fee. Service revenues are recognized in the periodin which the worksite employee works. Under this accrual method of accounting,service fees relating to worksite employees with earned but unpaid wages at theend of each period are recognized as unbilled revenues and the related payrollcosts for such wages are accrued as a liability during the period in which theworksite employee earns wages. Subsequent to the end of each period, such wagesare paid and the related service fees are billed.

 

***Costof Services****.*   Cost of services includes alldirect costs associated with revenue generating activities as well as employeebenefit costs, workers’ compensation insurance and state unemployment taxes.

 

Employee benefit costs arecomprised primarily of medical benefit costs, but also include costs of otheremployee benefits such as dental, disability and group life insurance. Benefitclaims incurred by worksite employees under the benefit plans are expensed asincurred according to the terms of each contract.

 

In certain instances,Primary LLC opts to make a contribution toward the cost of the worksiteemployees’ medical benefit costs. In most small group health markets, medicalbenefit plan rates vary based on the medical participants’ demographics. Inorder to offer a competitively priced business solution, Primary LLC may offerreduced medical benefit plan rates to worksite employees with positive riskcharacteristics. The additions of these selected worksite employees’ offsetspotential adverse selection and helps to stabilize the overall medical benefitplan risk to Primary LLC.

 

Primary LLC offers itsmedical benefit plans through partnerships with premier health care companies.These companies have extensive provider networks and strong reputations in themarkets in which Primary LLC operates.

 

All of Primary LLC’s healthcare providers offer preferred provider organization (“PPO”) coverage.

 

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

 

State unemployment tax ratesvary from state to state and are based upon the employer’s claims history.Primary LLC aggressively manages its state unemployment tax exposure bycontesting unwarranted claims.

 

***OperatingExpenses****.*   Operating expenses consistprimarily of salaries, wages and commissions associated with the Primary’sinternal employees, and general and administrative expenses. Sales and

 

F-10

----

 

marketing commissions andclient 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.

 

***IncomeTaxes.***    Primary records income tax expense using theasset and liability method of accounting for deferred income taxes. Primary’seffective 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**

 

The following discussion should be read in conjunctionwith the Company’s Annual Report on Form 10-K for the year ended December 31,2003, including all amendments thereto, as well as the consolidated financialstatements and notes thereto included in this Quarterly Report on Form 10-QSB.

 

The following table presents Primary’s results ofoperations for the quarter ending March 31,2004 and 2003, expressed as apercentage of revenues:

 
|                               |   | **2004** |   | **2003** |   |
|------------------------------------|--------|----------|--------|----------|--------|
| Revenues                           |   | 100.0    | %      | 100.0    | %      |
| Cost of  Services                  |   | 68.04    |   | 83.01    |   |
| Gross Profit                       |   | 31.96    |   | 16.99    |   |
| Operating  Expenses:               |   |     |   |     |   |
| General and  administrative        |   | 33.53    |   | 11.79    |   |
| Salaries,  wages and commissions   |   | 23.08    |   | 7.42     |   |
| Consulting  Services               |   | 0        |   | 20.98    |   |
| Total  operating costs             |   | 56.62    |   | 39.71    |   |
| Operating  (loss) income           |   | (24.3    | )      | (22.42   | )      |
| Other income                       |   | 0.0      |   | 0.0      |   |
| Interest  expense                  |   | 0.0      |   | 0.0      |   |
| Other  non-operating expense       |   | 0.0      |   | 0.0      |   |
| (Loss)  income before income taxes |   | (24.30   | )      | (22.42   | )      |
| Income tax  (benefit) provision    |   | 0        |   | 0        |   |
| Net income  (loss)                 |   | (24.30   | )      | (22.42   | )      |

 

*Quarter ending March 31,2004 compared toMarch 31, 2003*

 

For the quarter ending March 31, 2004, revenuesdecreased $336,950, or 38.06% from 2003, totaling $548,268 in 2004 compared to$885,218, for 2003. Revenue change was due to a number of factors, beginningApril 2003 we fully implemented our new accounting system that more accuratelycategorized gross revenue and cost of revenue. While we are extremely confidentthe line items beginning with gross profit and continuing through net income(loss) are accurate we believe there may have been items recorded in therevenue and cost of services columns resulting in an inflation of both. Thiscontrast is most evident

 

F-11

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when comparing first quarter 2004 to first quarter2003 (the last quarter on the old system). We had an increase in customer count to 99 for March 31, 2004 ascompared to 79 for March 31,2003

 

Cost of services, which includes the cost of PrimaryLLC’s medical benefit plans, workers’ compensation insurance, 410Kadministration cost, state unemployment taxes and other costs were $373,022, or68.04% of revenues for 2004, compared to $734,829, or 83.01% for 2003, representinga decrease of $361,807, or 49.24%.  Asstated above we believe the revenue and cost of services sections for 2003 wereinflated as a consequence of the method of reporting both items under anaccounting software program that was not optimized for our industry.  Basically both the revenue and cost ofservices had what amounts to double entries. In April 2003 we began using our current system which was created specificallyfor the PEO and Staffing industries.

 

Gross profit was $175,246 or 31.96% for 2004, comparedto $150,389, or 16.99% for 2003, representing an increase of $24,857, or16.53%. Gross profit margin increased primarily due to workers’ compensationcost decreases from lower risk business and an increased fee as a result of ouremphasis on HR services.

 

Operating expenses were $310,443 or 56.62% for 2004,compared to $351,502, or 39.71% for 2003, representing a decrease of $41,059,or 11.68%. The decrease in operating expenses was due largely to the decreasesin consulting services.

 

Salaries, wages and commissions were $126,556 or23.08% for 2004, compared to $65,703 or 7.42% for 2002, representing anincrease of $60,853.  Consolidatedpayroll costs increased as Primary LLC expanded staff to facilitate bestservices to our customers, increased its sales staff and due to the acquisitionof Concord and its staff.  In all thetotal staff represented grew from five in the first quarter 2003 to eleven atthe end of first quarter 2004.

 

Other general and administrative expenses were$183,887or 33.53% for 2004, compared to $100,799 or 11.79% in 2003,representing an increase of $83,088. The increase in general and administrativeexpenses was due to the implementation of initiatives in areas related toservices and programs.  This increasealso represents expenses related to the operations of Concord Staffing Servicesacquired in second quarter 2003. Additional increases are attributed to theimplementation of a sells training and tracking program which by design willallow us to acquire larger clients, increase the fee for our services and closedeals quicker. While not fully realized in the first quarter revenue numbersthe program has resulted in the addition of a number of accounts that have moreemployees per location and increases in our average fee.

 

Net loss decreased to $133,267 or ($.0016) per sharefor 2004, compared to a net loss of $198,443 or ($.0023) per share for 2003,representing a decrease in losses of $65,176. As we begin to realize the benefits of our sales training program andfollow through with our expansion plans an increased volume of our operatingcompanies is expected.

 

***Liquidity andCapital Resources***

 

Primary had $ 35,489 in cash and cash equivalents andrestricted certificates of deposit at March 31, 2004. Primary is required tocollateralize its obligations under its workers compensation coverage. TheCompany uses its cash as well as certificates of deposits to collateralizethese obligations as more fully described below.

 

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

 

The Company had no long-term debt as of March 31, 2004other than to its major shareholder, who is a major officer.

 

The charges to clients by Primary LLC derived fromsalaries, wages and payroll taxes is managed from a cash flow perspective sothat a matching exists between the time that the funds are received from aclient to the

 

F-12

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time that the funds are paid to the worksite employeesand to the appropriate tax jurisdictions. As a co-employer, and under the termsof the Client Services Agreement, Primary LLC is obligated to make certainwage, tax and regulatory payments. Because of this, the objective of PrimaryLLC is to minimize the credit risk associated with remitting the payroll andassociated taxes before receiving from the client the service fees charged byPrimary LLC.

 

Primary LLC’s primary short-term capital requirementsrelate to the payment of accrued payroll and payroll taxes of its internal andworksite employees, accounts payable for capital expenditures and the paymentof accrued workers’ compensation expense and health benefit plan premiums..

 

***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 and inthe amounts needed in the near future, our ability to continue as a goingconcern is in substantial doubt.

 

Obtaining future financing may be costly and willlikely 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.

 

**MATERIALCOMMITTEMENTS FOR CAPITAL EXPENDITURES**

 

Neither the Board nor Management has made anycommitments for capital expenditures.

 

***Inflation***

 

Primary believes that inflation in salariesand wages of worksite employees has a positive impact on its results ofoperations as its service fee is proportional to such changes in salaries andwages.

 

**Off-balance Sheet Arrangements**

 

Primary does not currently have anyoff-balance sheet arrangements

 

***ITEM 3******CONTROLS AND PROCEDURES***

 

Our management, under the supervision andwith the participation of our chief executive officer and chief financialofficer, conducted an evaluation of our “disclosure controls and procedures”(as defined in the Securities Exchange Act of 1934 (the “Exchange Act”) Rules13a-14 (c)) within 90 days of the filing date of this Quarterly Report on Form10-Q (the “Evaluation Date”).  Based ontheir evaluation, our chief executive officer and chief financial officer haveconcluded that as of the Evaluation Date, our disclosure controls andprocedures are effective to ensure that all material information required to befiled in this Quarterly Report on Form 10-Q has been made known to them in atimely fashion.

 

F-13

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***CHANGES IN INTERNALCONTROLS***

 

There have been no significant changes(including corrective actions with regard to significant deficiencies ormaterial weaknesses) in our internal controls or in other factors that couldsignificantly affect these controls subsequent to the Evaluation Date set forthabove.

 

# **CAUTIONARYNOTE REGARDING FORWARD-LOOKING STATEMENTS**

# ** **

Thestatements contained in this filing, including under the section titled“Management’s Discussion and Analysis of Financial Condition and Results ofOperations,” and other sections of the filing that are not purely historicalare forward-looking statements within the meaning of Section 27A of theSecurities Act of 1933 and Section 21E of the Securities Exchange Act of 1934,including without limitation, 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 basedon the Company’s current expectations and beliefs concerning futuredevelopments and their potential effects on the Company. There can be noassurance that future developments affecting the Company will be those that theCompany has anticipated. These forward-looking statements involve a number ofrisks, uncertainties (some of which are beyond the Company’s control) or otherassumptions that may cause actual results or performance to be materiallydifferent from those expressed or implied by such forward-looking statements.These risks and uncertainties include, but are not limited to, those factorslisted 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;

•              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 the Companyupon 30 days notice;

•              errorsor omissions by the Company in performing its services;

•                                          the Company’s dependency on key personnel andpotential difficulties and expenses in the recruitment and retention of keyemployees;

•                                          the Company’s inability to attract and retainqualified human resource consultants;

 

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

 

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

 

F-14

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•              fluctuations in interest rates and the associated effect on theCompany’s investments;

 

•              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’sForm 10-K, and in our other filings with the Securities and Exchange Commission(the “SEC”).

 

The Company 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.

 

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 not possiblefor management to predict all of such factors. Further, management cannotassess the impact of each such factor on the business or the extent to whichany factor, or combination of factors, may cause actual results to differmaterially from those contained in any forward-looking statements.

 

**PART II**

** **

**OTHER INFORMATION**

** **

**Item 1.    Legal Proceedings**

** **

**Summary of the litigationinvolving Primary Business Systems, L.L.C, Primary Business Systems, Inc. andSuburban Capital Corporation, Pine Services, Inc. and Frank Custable, Jr. as ofFebruary 12, 2004**

** **

On or about June 12, 2003, the Company was servedwith a suit commenced in the circuit court of Cook County, Illinois by SuburbanCapital Corporation (“Suburban”).  Anattorney who worked with the Company, Ed Wells, is also named as a defendant inthe suit.  The Company removed thelawsuit to the United States District Court for the Northern District ofIllinois, Eastern Division on or about June 20, 2003.  In summary, the suit seeks damages for the Company’s allegedfailure to make full payment to Suburban for consulting work allegedlyperformed by Suburban for the benefit of the Company and for alleged breach ofan Advisory Agreement and a Stock Purchase Agreement pursuant to which PineServices, Inc., a company related to Suburban, sold a controlling interest inthe publicly-held Sharecom, Inc. to Rick Matthews.  The Company contends that Suburban breached the AdvisoryAgreement by not providing the services required by the Agreement.  The Company also alleges that Suburban madematerial misrepresentations to the Company. The Company intends to vigorously defend itself against this lawsuit andto oppose any effort to reinstate it .

 

On or about December 3, 2003, Primary BusinessSystems, L.L.C. (“PBS LLC”), a wholly owned subsidiary of the Company, wasserved with a suit commenced in the United States District Court for theNorthern District of Illinois, Eastern Division by Pine Services, Inc.  In summary, the suit claims that PBS LLCowes Pine Services, Inc. certain amounts for the sale of its majority interestin Sharecom, Inc.  The Company intendsto vigorously defend itself against this lawsuit and pursue any and allremedies it may have against Pine Services, Inc.

 

F-15

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On or about December 23, 2003, the Company filed alawsuit in 285th District Court, Bexar County, Texas against Pine Services,Inc. and Frank Custable, Jr. alleging, among other claims, common law fraud,violation of the Texas Securities Act, violation of the Texas Deceptive Tradesand Practices Act and fraudulent inducement in connection with the AdvisoryAgreement referred to above.  Thedefendants were served with this lawsuit but failed to appear in the case orfile an answer.  On February 6, 2004,upon motion of the Company, the Court entered a default judgment against thedefendants in the amount of approximately $4,700,000.00 in actual and punitivedamages.  The Company intends tocontinue to vigorously prosecute this lawsuit and to seek to enforce thejudgment.

 

Finally, on February 12, 2004, the Company filed alawsuit in the 37th District Court, Bexar County, Texas against SuburbanCapital Corporation alleging, among other claims, common law fraud andviolation of the Texas Deceptive Trades and Practices Act in connection withthe Advisory Agreement.  The Companyintends to vigorously prosecute this lawsuit against Suburban CapitalCorporation.

 

As a commercial enterprise and employer and withrespect to 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 willhave funds 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 and Use or Proceeds**

None

 

**Item 3.    Defaults Upon Senior Securities**

None

 

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

None

 

**Item 5.    OTHER INFORMATION**

** **

None

 

**Item 6.    EXHIBITS AND REPORTS ON FORM 8-K**

** **

Exhibits

 

(a) Exhibits required to be attached by Item 601 ofRegulation S-B are listed in the index to Exhibits on page 11 of this Form10-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   |

 

Reports on form 8-K

 

(b) Reports on Form 8-K. The Company did not file areport on Form 8-K during the quarter for which this report is filed.

 

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SIGNATURES

 

In accordance with the requirements of the ExchangeAct, the registrant caused this report to be singed on its behalf by the undersinged, there unto dully authorized, this 12th day of May 2004.

 
| Primary Business  Systems Inc.                   |         |   |
|--------------------------------------------------|--------------|--------|
|                                             |         |   |
| S/ Patrick D Matthews                            |         |   |   |
| Patrick D. Matthews                              |         |   |
| President, Chief  Executive Officer and Chairman | May 12, 2004 |   |
|                                                  |              |        |  |

 

 

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