**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

** **

** FORM 10-QSB**

**(MarkOne)**

** **

**ý****Quarterly report under Section 13 or 15(d) of theSecurities Exchange Act of 1934 for the quarterly period ended September 30,2003.**

** **

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

 

**Commissionfile number: 000-25523**

 

**PRIMARY BUSINESS SYSTEM INC..**

(Exact name of small business issuer asspecified 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 allreports required to be filed by Section 13 or 15(d) of the Exchange Act duringthe past 12 months (or for such shorter period that the registrant was requiredto file such reports), and (2) has been subject to such filing requirements forthe past 90 days.
| Yes ý |   | No o |
|------------|--------|------|

 

 

 

The number of outstanding shares of theissuer’s common stock, $0.001 par value (the only class of voting stock), as ofSeptember was 85,675,747

 
| 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                   |   |
|               |                                                 |   |
| 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         |                                                 |
|               |                                                 |   |
| INDEX  TO EXHIBITS |                                                 |
|               |                                                 |   |
|               | Certifications                                       |   |

 

----

 

ITEM 1.                                                  FINANCIALSTATEMENTS

 

As used herein, the term “Company” refers toPrimary Business Systems Inc., a Nevada corporation, and its subsidiaries andpredecessors unless otherwise indicated. Unaudited, consolidated condensed interim financial statements includinga balance sheet for the Company as of the quarter ended September 30, 2003 andstatements of operations, and statements of cash flows for the interim periodup to the date of such balance sheet and the comparable period of the precedingyear for the statement of operations are attached hereto as of Pages F-1through F-9.

 

F-1

----

 

Primary Business Systems, Inc.

 

Index

 

Unaudited Consolidated and Condensed InterimFinancial Statements

For the Period Ended

September 30, 2003

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

 

F-2

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**PRIMARYBUSINESS SYSTEMS, INC. and SUBSIDIARIES**

 

Unaudited Consolidated Condensed Interim

Balance Sheet

As of September 30, 2003

 
| ASSETS                                 |   |     |      |
|----------------------------------------|--------|----------|-----------|
|                                   |   |     |      |
| Current assets                         |   |     |      |
|                                   |   |     |      |
| Cash                                   |   | $        | 13,364    |   |
| Notes  receivable – Related Party |   | 121,256  |      |
| Client  accounts receivable            |   | 61,377   |      |
| Prepaid  Expense                       |   | 100,404  |      |
| Workers  Compensation prepaid premiums |   | 80,097   |      |
| Prepaid  Business Promotion            |   | 33,340   |      |
|                                   |   |     |      |
| Total Current  Assets                  |   | 409,837  |      |
|                                   |   |     |      |
| Property &  Equipment              |   |     |      |
|                                   |   |     |      |
| Furniture  & Fixtures              |   | 48,548   |      |
| Computer  equipment                    |   | 84,300   |      |
| Payroll  Software                      |   | 43,724   |      |
|                                   |   |     |      |
|                                   |   | 176,572  |      |
| Less:  accumulated depreciation        |   | (112,738 | )         |
|                                   |   |     |      |
| Total Property  & Equipment        |   | 63,834   |      |
|                                   |   |     |      |
| Other Assets                           |   |     |      |
|                                   |   |     |      |
| Security  deposits                     |   | 1,054    |      |
| Customer List                          |   | 12,000   |      |
| Goodwill                               |   | 557,240  |      |
|                                   |   |     |      |
| Total Other  Assets                    |   | 570,240  |      |
|                                   |   |     |      |
| Total Assets                           |   | $        | 1,043,966 |   |

 

The accompanying notes are an integral partof these financial statements.

 

F-3

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**PRIMARYBUSINESS SYSTEMS, INC. and SUBSIDIARIES**

 

Unaudited Consolidated Condensed Interim

Balance Sheet

As of September 30, 2003

 
| LIABILITIES                                                                                        |   |       |      |
|----------------------------------------------------------------------------------------------------|--------|------------|-----------|
|                                                                                               |   |       |      |
| Current  liabilities                                                                               |   |       |      |
|                                                                                               |   |       |      |
| Accounts  payable                                                                                  |   | $          | 123,905   |   |
| Checks drawn  on uncollected funds                                                                 |   | 128,259    |      |
| Client payroll  tax payable                                                                        |   | 46,450     |      |
| Credit card  payable                                                                               |   | 52,335     |      |
| Client payroll  amount withheld                                                                    |   | 1,398      |      |
| Notes payable                                                                                      |   | 26,973     |      |
| Line of credit  from banks                                                                         |   | 48,921     |      |
|                                                                                               |   |       |      |
| Total Current  Liabilities                                                                         |   | 428,243    |      |
|                                                                                               |   |       |      |
| Other  Liabilities                                                                                 |   |       |      |
|                                                                                               |   |       |      |
| Due to  shareholder/officer for stock yet to issue                                                 |   | 628,032    |      |
|                                                                                               |   |       |      |
| Total  Liabilities                                                                                 |   | 1,056,275  |      |
|                                                                                               |   |       |      |
| Stockholders’  Equity (Deficiency)                                                            |   |       |      |
|                                                                                               |   |       |      |
| Common stock,  -$.001 par value authorized - 750,000,000 shares Issued and outstanding  85,675,747 |   | 85,675     |      |
| Paid in  Capital excess of par value                                                               |   | 954,445    |      |
| Accumulated  (Deficit)                                                                             |   | (1,052,429 | )         |
|                                                                                               |   |       |      |
| Total  Stockholders’ Equity                                                                   |   | (12,309    | )         |
|                                                                                               |   |       |      |
| Total  Liabilities and Stockholders’ Equity                                                   |   | $          | 1,043,966 |   |

 

The accompanying notes are an integral partof these financial statements.

 

F-4

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**PRIMARY BUSINESS SYSTEMS INC and SUBSIDIARIES**

Unaudited Consolidated Condensed Interim

Statement ofOperations

For the Three Months and Nine Months EndedSeptember, 2003 and 2002

 
|                                                            |   | **Three  Months Ended  September 30** |    | **Nine  Months Ended  September 30** |    |
|-----------------------------------------------------------------|--------|---------------------------------------|---------|--------------------------------------|---------|
|                                                            |   | **2003**                              |    | **2002**                             |    | **2003** |   | **2002** |   |
| Revenues                                                        |   | $                                     | 748,326 |                                 | 566,346 |   | $ | 2,087,490 |   | 1,909,492 |   |
| Cost of Revenues                                                |   | 510,436                               |    | 441,697                              |    | 1,486,399 |   | 1,499,201 |   |
| Gross Profit                                                    |   | 237,890                               |    | 124,667                              |    | 601,091 |   | 410,291 |   |
| Operating Expenses                                              |   |                                  |    |                                 |    |   |   |   |   |
| General & Administrative Wages,  Commissions & Salaries |   | 142,873 115,090                       |    | 117,382  38,299                      |    | 379,997 315,934 |   | 244,806 157,677 |   |
| Consulting services for acquisition                             |   | 0                                     |    | 0                                    |    | 75,000 |   | 0 |   |
|                                                            |   | 257,963                               |    | 155,681                              |    | 779,377 |   | 402,483 |   |
| Income (Loss) from Operations                                   |   | (20,073                               | )       | (31,014                              | )       | (178,286 | ) | 7,808 |   |
| Other Income                                                    |   | 184                                   |    | 4,494                                |    | 2,621 |   | 5,052 |   |
| Income (Loss) Before Provision For Income  Tax                  |   | (19,889                               | )       | (26,520                              | )       | (175,665 | ) | 12,860 |   |
| Provision for Income Taxes                                      |   | —                                |    | —                               |    | — |   | — |   |
| Net Income (Loss)                                               |   | $                                     | (19,889 | )                                    | (26,520 | ) | $ | (175,665 | ) | 12,860 |   |
| Basic & Distributed Net Income Per  Share                   |   | $                                     | 0.00    |                                 | —  |   | $ | (0.00 | ) | — |   |
| Basic & distributed Weighted Average  Shares Outstanding    |   | 84,831,787                            |    | —                               |    | 69,424,006 |   | — |   |

 

The accompanying notes are an integral partof these financial statements.

 

F-5

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**PRIMARY BUSINESSSYSTEMS, INC. and SUBSIDIARIES**

Unaudited Consolidated Condensed Interim

Statement of Stockholders’ Equity(Deficiency)

For the Period Ended September 30, 2003

 
|                                               |   |       |   | **Additional  Paid-In  Capital** |   | **Accumulated  (Deficit)** |   | **Total Equity  (Deficiency)** |     |
|----------------------------------------------------|--------|------------|--------|----------------------------------|--------|----------------------------|--------|--------------------------------|----------|
| **Common Stock**                                   |
| **Shares**                                         |   | **Amount** |
| Balance 12/31/02                                   |   |       |   |                             |   |                       |   | $                              | (876,764 | ) | $ | (876, 764 | ) |
|                                               |   |       |   |                             |   |                       |   |                           |     |   |   |
| Net Loss                                           |   |       |   |                             |   |                       |   | (155,776                       | )        | (155,776 | ) |
|                                               |   |       |   |                             |   |                       |   |                           |     |   |   |   |   |
| Balance June 30, 2003                              |   | 84,397,392 |   | $                                | 84,397 |                       | $      | 808,851                        |     | (1,032,540 | ) | (139,292 | ) |
|                                               |   |       |   |                             |   |                       |   |                           |     |   |   |
| Issuance of restricted stockfor prepaid services   |   | 876,355    |   | 876                              |   | 82,996                     |   |                           |     | 83,872 |   |
| Issuance of restricted stockfor purchase of assets |   | 152,000    |   | 152                              |   | 37,848                     |   |                           |     | 38,000 |   |
|                                               |   |       |   |                             |   |                       |   |                           |     |   |   |
| Issuance of restricted stockfor prepaid services   |   | 250,000    |   | 250                              |   | 24,750                     |   |                           |     | 25,000 |   |
|                                               |   |       |   |                             |   |                       |   |                           |     |   |   |
| Net Income (Loss)                                  |   |       |   |                             |   |                       |   | (19,889                        | )        | (19,889 | ) |
|                                               |   |       |   |                             |   |                       |   |                           |     |   |   |
| Balance June 30, 2003                              |   | 85,675,747 |   | $                                | 85,675 |                       | $      | 954,445                        |     | $ | (1,052,429 | ) | $ | (12,309 | ) |

 

The accompanying notes are an integral partof these financial statements

 

F-6

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PRIMARYBUSINESS SYSTEMS, INC. and SUBSIDIARIESUnaudited Consolidated Condensed InterimStatements Of Cash FlowFor the Nine Months Ended September 30, 2003 and 2002

 
|                                                                                                |   | **2003** |     | **2002** |   |
|-----------------------------------------------------------------------------------------------------|--------|----------|----------|----------|--------|
| Net (Loss) Income                                                                                   |   | $        | (175,665 | )        | $      | 12,860 |   |
| Adjustments to reconcile net income (loss)  to net cash provided by (used by) operating activities: |   |     |     |     |   |
| Depreciation and amortization                                                                       |   | 25,362   |     | 35,333   |   |
| (Increase) decrease in accounts receivable                                                          |   | 2,097    |     | (20,190  | )      |
| (Increase) decrease in prepaid expense                                                              |   | (133,744 | )        |     |   |
| (Increase) decrease in other current assets                                                         |   | 67,457   |     | 5,790    |   |
| Increase (decrease) in accounts payable                                                             |   | 33,276   |     | (11,389  | )      |
| Increase (decrease) in client payroll tax  liability                                                |   | 46,450   |     |     |   |
| Increase(decrease) in other current  liabilities                                                    |   | 57,733   |     |     |   |
| Increase (decrease) in other assets                                                                 |   | (1,054   | )        |     |   |
| Adjustment to consulting expense on return  of stock                                                |   | 75,000   |     |     |   |
| Checks drawn on uncollected payrolls                                                                |   | 17,010   |     |     |   |
|                                                                                                |   |     |     |     |   |
| Total Adjustments                                                                                   |   | 185,587  |     | (90,456  | )      |
| Net cash provided by (used in) operating  activities                                                |   | 9,922    |     | (77,596  | )      |
| Cash flows from investing activities                                                                |   |     |     |     |   |
| Payments for the purchase of property                                                               |   | (40,297  | )        | (14,381  | )      |
| Net cash provided by (used in) investing  activities                                                |   | (40,297  | )        | (14,381  | )      |
| Cash flows from financing activities                                                                |   |     |     |     |   |
| Net borrowing under line of credit                                                                  |   | (6,886   | )        | 27,939   |   |
| Net borrowing on notes payable                                                                      |   | 26,973   |     |     |   |
| Principal payments on short-term debt                                                               |   | (41,893  | )        | 3,097    |   |
| Due to shareholders/officers                                                                        |   | 34,677   |     | (41,508  | )      |
| Net cash provided by (used in) financing  activities                                                |   | 12,871   |     | (10,472  | )      |
| Net increase (decrease) in cash and cash  equivalents                                               |   | (17,504  | )        | (102,449 | )      |
| Cash and cash equivalents at beginning of  year                                                     |   | 30,868   |     | 127,889  |   |
| Cash and Cash equivalents at end of quarter                                                         |   | $        | 13,364   |     | $      | 25,440 |   |

 

The accompanying notes are an integral part of these financialstatements

 

F-7

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**PRIMARYBUSINESS SYSTEMS, INC. and SUBSIDIARIES**

** **

UnauditedConsolidated Condensed InterimStatement of Cash Flows (continued)For the Nine Months Ended September 30, 2003 and 2002

 
|                           |   | **2003** |    | **2002** |   |
|--------------------------------|--------|----------|---------|----------|--------|
| Supplemental Information       |   |     |    |     |   |
| Cash Payments for Income Taxes |   | $        |    |     | $      |   |   |
| Non Cash Items                 |   |     |    |     |   |
| Stock for consulting services  |   | $        | 108,872 |     | $      | — |   |

 

 

 

 

 

 

The accompanying notes are anintegral part of these financial statements.

 

F-8

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PRIMARY BUSINESS SYSTEMS INC.,and SUBSIDIARIESNotes to UnauditedConsolidated Condensed Interim Financial StatementsSeptember 30, 2003

 

NOTE1 – BASIS OF PRESENTATION

 

Thecondensed interim financial statements at September 30, 2003 and are unaudited,but include 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 the yearended December 31, 2002. The accompanying unaudited interim financialstatements for the current quarter and year to date ended September 30, 2003,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

 

InFebruary 2003 the Company incurred a prepaid business promotion expense of$80,016 that is amortized over a twelve month period.  Management has elected to record monthly amortization expense of$6,668 to accurately match the expense with the revenues it generates.  The portion of the business promotionexpense for the three months ended September 30, 2003 is $20,004.

 

TheCompany has consolidated the financial statements of its wholly ownedsubsidiaries, Primary Business Systems, LLC and AHJR Inc., (dba/ConcordStaffing Services) in these financial statements.  All significant intercompany transactions have been eliminated.  The Company acquired all of the outstandingcapital stock of  AHJR Inc., in thefirst quarter ended March 31, 2003.

 

In accordance withEmerging Issues Task Force (EITF) Issue No. 99-19, “Reporting Revenue Gross asa Principal versus Net as an Agent,” the Company recognizes amounts billed toclients for administrative fees, health insurance, workers’ compensation andunemployment insurance because revenues as the Company acts as a principal withregard to these matters. Amounts billed for gross payrolls (less employeehealth insurance contributions), employer taxes and 401(k) matchingcontributions are recorded net of corresponding payments as the Company isdeemed to act only as an agent in these transactions. The Company recognizes

inits balance sheet the entire amounts billed to clients for gross payroll andrelated taxes, health insurance, workers’ compensation, unemployment insuranceand administrative fees as unbilled receivables, on an accrual basis, any suchamounts that relate to services performed by worksite employees that have notyet been billed to the client at the end of an accounting period. The relatedgross payroll and related taxes and costs of health insurance, workers’compensation and unemployment insurance are recorded as accrued compensation atthe end of an accounting period.

 

NOTE3 – CHANGE IN STOCKHOLDERS’ EQUITY

 

Thestatement of changes in stockholders’ equity is reported in these financialstatements and discloses the transactions as they were incurred in the threemonths ended September 30, 2003.

 

Inthe current quarter, the Company, through AHJR Inc.,  purchased the assetsof a staff leasing company for a total purchase price of  $50,000 by the issuance of  a promissory note  in the principal amount of $12,000 and the issuance of 152,000 restricted shares of stock of the Company for the remaining$38,000 of the purchase price.  Duringthe current quarter, The Company issued a total of 1,126,355 restricted sharesfor consulting services from third parties valued at $108,872, based upon themarket price of the stock.  These sharesare a prepayment for services to be rendered by the consultants over a twelvemonth period.  The consulting expenseamortized and reported in the current quarter is $8,468, leaving a currentasset of prepaid expense at $100,404.

 

F-9

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NOTE4 – RELATED PARTY TRANSACTIONS

 

TheCompany has reported a Note Receivable as a current asset of $121,256. The note is payable by Consumers Insurance Agency, LLC (CIA).  The primary member of (CIA) is PatrickMatthews who is also the majority shareholder in the Company and the Presidentand Chief Executive Officer and a director. .. The note dated May 2002 was issued by Consumers to Primary BusinessSystems LLC reflect payment by Primary Business Systems LLC of certain expenseson Consumer’s behalf.

 

 

 

F-10

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ITEM 2

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATION

 

General

 

PrimaryBusiness Systems Inc. (the “Company”), a Nevada corporation, is a BusinessProcess Outsourcing (“BPO”) company specializing in human resources.  The Company, through its subsidiary PrimaryBusiness Systems LLC, is a provider of Professional Employer Organization(“PEO”) services in Texas and offers its services to small to medium-sizedbusinesses.  These services includepayroll processing, benefits administration, on-site and online employee andemployer communications and self-service, employment practices and human resourcesrisk management, and workforce compliance administration.  The Company through its subsidiary AHJR Inc(d/b/a/ Concord Staffing Services), is a provider of Temporary Employment Services (Staff Leasing) services inTexas and offers its services to small to medium-sized businesses.  These services include applicant screeningand qualification prior to placement and HR administration of placed employees.

 

TheCompany’s current operations were commenced in November 2003 when the Company(formerly named Sharecom, Inc.), acquired all of the ownership interests ofPrimary Business Systems LLC., a privately owned entity. The transaction  was, for accounting purposes,   accounted for under the purchase method ofaccounting as a reverse acquisition. Primary Business Systems LLC was treatedas the acquiring company for accounting purposes because its shareholdersacquired more  than 50% of thepost-transaction outstanding shares of stock of the Company.  The shareholders of Primary Business SystemsLLC received an approximate aggregate of 3,070,000 shares of the Company in thetransaction, and management of the Company was changed to reflect the newownership.  On or about March 2003 theCompany changed its name from  ShareComInc to Primary Business Systems Inc.

 

Thefollowing discussion examines the Company’s financial condition as a result ofthe operations for the Third quarter ending September 30, 2003 and comparesthose results with comparable periods from last year.

 

Operations

 

Thoughour subsidiary Primary Business Systems LLC (PBS), PEO revenue is recognized asservice is rendered. The PEO revenue consists of charges by the Company for theadministrative service fees, health insurance, workers’ compensation chargesand employer paid unemployment insurance. These charges, along with gross payroll,payroll taxes and retirement benefits are invoiced to the client at the time ofeach periodic payroll. The Company negotiates the pricing for its variousservices on a client-by-client basis based on factors such as marketconditions, client needs and services requested, the client’s workers’compensation experience, credit exposure and the required resources to servicethe account. Because the pricing is negotiated separately with each client andvaries according to circumstances, the Company’s revenue, and therefore itsgross margin, will fluctuate based on the Company’s client mix.  Our objective is to sell PEO services tobusiness with from five (5) to one hundred employees (100).  Becoming the employer of record for ourclients we relieve them of many of the burdens and risks of the business ofemployment (which is our business) and allow them to “focus on the business ofbusiness” (their core competencies).

 

Throughour subsidiary AHJR Inc. DBA Concord Staffing Services (CSS), we operate thetemporary staffing operations.  Ourobjective is to sell temporary staffing services to companies in with in thecounty of our office locations. CSS began by acquiring the assets of atemporary staffing company with three offices, Bexar County, Guadalupe Countyand Comal County during the quarter we closed the Guadalupe and Comal officesand centralized operations out of our Bexar office.   The streamlining of operations has resulted in savings byreducing the overhead of the additional offices.

 

TheCompany believes the following critical accounting policies reflect the moresignificant judgments and estimates used in the preparation of its consolidatedfinancial statements:

 

RevenueRecognition.

 

TheCompany bills its clients on each payroll date for (i) the actual grosssalaries and wages, related employment taxes and employee benefits of theCompany’s worksite employees, (ii) actual advertising costs associated withrecruitment, (iii) workers’ compensation and unemployment service fees and (iv)an administrative fee. The Company’s administrative fee is computed based

 

 

F-11

----

 

 

uponeither a fixed fee per worksite employee or an established percentage of grosssalaries and wages (subject to a guaranteed minimum fee per worksite employee),negotiated at the time the client service agreement is executed. The Company’sadministrative fee varies by client based primarily upon the nature and size ofthe client’s business and the Company’s assessment of the costs and risks associatedwith the employment of the client’s worksite employees. Accordingly, theCompany’s administrative fee income will fluctuate based on the number andgross salaries and wages of worksite employees, and the mix of client feeincome will fluctuate based on the mix of total client fee arrangements andterms. Although most contracts are for one year and renew automatically, theCompany and its clients generally have the ability to terminate therelationship with 30 days’ notice.

 

TheCompany bills its clients for workers’ compensation and unemployment costs atrates that vary by client based upon the client’s claims and rate history.  The amount billed is intended (i) to coverpayments made by the Company for insurance premiums and unemployment taxes, (ii)to cover the Company’s cost of contesting workers’ compensation andunemployment claims, and other related administrative costs and (iii) tocompensate the Company for providing such services. The Company has anincentive to minimize its workers’ compensation and unemployment costs becausethe Company bears the risk that its actual costs will exceed those billed toits clients, and conversely, the Company profits in the event that iteffectively manages such costs. The Company believes that this risk is mitigatedby the fact that its typical standard client agreement provides that theCompany, at its discretion, may adjust the amount billed to the client toreflect changes in the Company’s direct costs, including, without limitation,statutory increases in employment taxes and insurance. Any such adjustment thatrelates to changes in direct costs is effective as of the date of the changes,and all changes require 30 days’ prior notice.

 

Costs of servicesinclude health insurance, workers’ compensation insurance and unemploymentinsurance costs. The Company maintained a workers’ compensation program for allof its employees from November 2000 and intends to renew the program with Texas Mutual Insurance Company on or aboutNovember 18, 2003, which is a fully insured program, under this program, theCompany’s maximum cost is represented by the premiums paid to the insurer.  The Company’s clients are billed at fixedrates determined when the contract is negotiated with the client. The fixedrates include charges for workers’ compensation based upon the Company’sassessment of the costs of providing workers’ compensation to the client. Ifthe Company’s costs for workers’ compensation are greater than the costsincluded in the client’s contractual rate, the Company may be unable to recoverthese excess charges from the clients. The Company reserves the right in itscontracts to increase the workers’ compensation charges on a prospective basisonly.

 

Inaccordance with Emerging Issues Task Force (EITF) Issue No. 99-19, “ReportingRevenue Gross as a Principal versus Net as an Agent,” the Company recognizesamounts billed to clients for administrative fees, health insurance, workers’compensation and unemployment insurance because revenues as the Company acts asa principal with regard to these matters. Amounts billed for gross payrolls(less employee health insurance contributions), employer taxes and 401(k)matching contributions are recorded net of corresponding payments as theCompany is deemed to act only as an agent in these transactions. The Companyrecognizes in its balance sheet the entire amounts billed to clients for grosspayroll and related taxes, health insurance, workers’ compensation,unemployment insurance and administrative fees as unbilled receivables, on anaccrual basis, any such amounts that relate to services performed by worksiteemployees that have not yet been billed to the client at the end of anaccounting period. The related gross payroll and related taxes and costs ofhealth insurance, workers’ compensation and unemployment insurance are recordedas accrued compensation at the end of an accounting period.

 

 

F-12

----

 

 

RESULTSOF OPERATIONS

 

Thefollowing discussion should be read in conjunction with the Company’s AnnualReport on Form 10-K for the year ended December 30, 2002, including allamendments thereto, as well as the consolidated financial statements and notesthereto included in this Quarterly Report on Form 10-Q.

 

THREEMONTHS ENDED JUNE 28, 2003 COMPARED TO THREE MONTHS ENDED JUNE 29, 2002

 

Thefollowing table presents certain information related to the Company’s resultsof operations for the three months ending September 30, 2003 and September 30,2002:

 
|                                                   |   | **September  30, 2003** |    | **September  30, 2002** |   | **%  Change** |   |
|--------------------------------------------------------|--------|-------------------------|---------|-------------------------|--------|---------------|--------|
|                                                   |   | **Unaudited**           |    | **Unaudited**           |   |          |   |
| Revenues                                               |   | $                       | 748,326 |                    | $      | 566,346       |   | 32.13 |   |
| Gross Profit                                           |   | 237,890                 |    | 124,667                 |   | 90.82         |   |
| Operating Expenses                                     |   | 257,963                 |    | 155,681                 |   | 65.70         |   |
| Operating Loss                                         |   | (19,889                 | )       | (26,520                 | )      |          |   |
| Net Loss Attributable to Common Shareholders           |   | —                  |    | —                  |   | —        |   |
| Net Loss Per Share Attributable to Common Shareholders |   | —                  |    | —                  |   | —        |   |
|                                                        |        |                         |         |                         |        |               |        |  |  |

 

NINEMONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,2002

 

Thefollowing table presents certain information related to the Company’s resultsof operations for the nine months ended September 30, 2003 and September 30,2002:

 
|                                                   |   | **September  30, 2003** |      | **September  30, 2002** |   | **%  Change** |   |
|--------------------------------------------------------|--------|-------------------------|-----------|-------------------------|--------|---------------|--------|
|                                                   |   | **Unaudited**           |      | **Unaudited**           |   |          |   |
| Revenues                                               |   | $                       | 2,087,490 |                    | $      | 1,909,492     |   | 9.32 |   |
| Gross Profit                                           |   | 601,091                 |      | 410,291                 |   | 46.50         |   |
| Operating Expenses                                     |   | 779,377                 |      | 402,483                 |   | 93.64         |   |
| Operating Loss                                         |   | (175,665                | )         | 12,860                  |   |          |   |
| Net Loss Attributable to Common Shareholders           |   | —                  |      | —                  |   | —        |   |
| Net Loss Per Share Attributable to Common Shareholders |   | —                  |      | —                  |   | —        |   |
|                                                        |        |                         |           |                         |        |               |        |  |  |

 

 

F-13

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REVENUES

 

Companyconsolidated net revenues were $748,326 compared to $566,346 for the thirdquarter 2003 to 2002 respectively, an increase of $181,980 or 32.13%.  This is the second quarter with revenueincreases in excess of 30%, offsetting our first quarter decreases resulting inour year to date net revenue for nine months of $2,087,490 compared to$1,909,492 an increase of $177,998 or 9.32%.

 

COSTSOF SERVICES/GROSS PROFIT

 

Consolidatedcost of revenue was $510,436 compared to $441,679 for the same period 2003 and2002, an increase in cost of revenue $68,757 or 15.57%. Our nine month cost ofrevenue is $ 1,486,399 compared to $1,499,201 a decrease in cost of$12,808.  Consolidated gross profitswere $ 237,890 compared to $124,667 for the third quarter 2003 to 2002respectively an increase of $113,233 or 90.82%. Our nine month results are$601,091 compared to $410,291 an increase of $190,800 or 46.50%.  Gross profit increased as a result of controllingthe cost of insurance losses, unemployment taxes and increased fees attributedto new lower risk clients.

 

OPERATINGEXPENSES

 

ConsolidatedGeneral  & Administrative expensesfor the quarter were $142,873 compared to $117,382, 2003 to 2002 respectivelythis was an increase of $25,491. For the nine months G & A expenses were$388,443 compared to $244,806 an increase of $143,637.   Cost increases for the nine months arelargely related to increases in legal fees and accounting cost increases over theprevious year.  It is important to notethe G & A expenses have leveled and will become less of a factor as theCompany increases sales.

 

Consolidatedwages, commissions & salaries were $115,090 compared to $38,299 for thequarter 2003 to 2002 respectively, an increase of $76,791. Nine month resultsare $315,934 compared to $157,677 2003 to 2002 respectively an increase of$158,257.  The nine month increase isdue largely to additions of sales salary and commissions, the addition of anaccounting department and accounting for CEO salary.  Payroll cost has leveled off and we expect to operate withexisting personnel through the first quarter of 2004, at that time we expect toadd additional sales personnel for both operating subsidiaries.

 

OPERATINGLOSS

 

Thirdquarter operations resulted in a net loss before taxes of $19,889 in thecurrent  quarter compared to a loss of$26,520 in the same quarter of fiscal 2002, a reduction in loss of $ 6,631 or 25%. Year to date for the nine months ending September are a loss of $175,665compared to a gain of $12,860  for thesame nine months in fiscal 2002  Tosummarize the reduction in profit is contributive to increases in theinfrastructure of the Company for growth, increases in legal and accountingexpenses as a result of being a reporting company and the addition of newoperating subsidiaries.  We expect asincreases in sales continue at the pace of the past two quarters.

 

F-14

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INCOMETAX EXPENSE

 

Forthe three months ended September 30, 2003 and September 30, 2002, respectively,no provision for federal income taxes has been recorded.

 

NETINCOME (LOSS) AND INCOME (LOSS) PER SHARE ATTRIBUTABLE TO COMMON SHAREHOLDERS

 

Thenet income (loss) for the three months ended September 30, 2003 was $ 00compared to a net income (loss) of $00 for the three months ended June 30,2002.

 

Theweighted average number of shares used in the calculation of income (loss)attributable to common shareholders for the three months ended September 30,2003 and June 30, 2002 excludes options, warrants, as their inclusion would beanti-dilutive.

 

CAPITOLRESOURCES AND LIQUIDITY

 

Netcash provided by operating activities was $9,922 for the nine months endedSeptember 30, 2003 compared to net cash used in operating activities of $77,596for the nine months ended September 30, 2002. The increase in cash provided byoperating activities was primarily due to the increase of liabilities timing ofwhich deals with the timing of client payrolls.

 

Netcash used in investing activities was $40,297 for the nine months endedSeptember 30, 2003 compared to $14,381 for the nine months ended September 30,2002. The primary use of cash for investing activities during the nine monthsended September 30, 2003 was $38,000 for the acquisition of customer relationshiprights and property from The Job Market Inc. (TJM).

 

Netcash provided in financing activities during the nine months ended September30, 2003 was $12,871 compared to net cash used by financing activities duringthe nine months ended September 30, 2002 of $10,472.  The Company’s subsidiary Primary Business Systems LLC has a Bankline of credit the principal amount is $60,000.00 as of September 30, 2003 theoutstanding balance was $48,921.00.  Thenote matures December 30, 2003 it carries a 9% APR, payments of $6,886 weremade on the note during the quarter.

 

OnSeptember 30, 2003 Primary Business Systems Inc, had current assets of $409,837and $1,043,966 in total assets compared to $228,238 of current assets and$1,097,136 in total assets at the year ended December 31, 2002..   The Company had net working capital of$13,364 compared to $25,440 for the nine months 2003 to 2002 respectively

 

EFFECTSOF INFLATION

 

TheCompany does not view the effects of inflation to have a material effect uponits business.

 

** **

ITEM3 CONTROLS AND PROCEDURES

 

Ourmanagement, under the supervision and with the participation of our chiefexecutive officer and chief financial officer, conducted an evaluation of our“disclosure controls and procedures” (as defined in the Securities Exchange Actof 1934 (the “Exchange Act”) Rules 13a-14 (c)) within 90 days of the filingdate of this Quarterly Report on Form 10-Q (the “Evaluation Date”).  Based on their evaluation, our chiefexecutive officer and chief financial officer have concluded that as of theEvaluation Date, our disclosure controls and procedures are effective to ensurethat all material

 

 

F-15

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informationrequired to be filed in this Quarterly Report on Form 10-Q has been made knownto them in a timely fashion.

 

CHANGESIN INTERNAL CONTROLS

 

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

 

FORWARDLOOKING STATEMENTS

 

Theinformation herein contains certain forward looking statements within themeaning of Section 27A of the Securities Act of 1933, as amended and Section21E of the Securities Exchange Act of 1934, as amended, which are intended tobe covered by the safe harbors created thereby. Investors are cautioned thatall forward looking statements involve risks and uncertainly including, withoutlimitation, the ability of Primary Business Systems Inc., to continue itsexpansion strategy, changes in the PEO markets, labor and employee benefits,changes in the Insurance markets, changes in government regulations as well asgeneral market conditions, competition, and pricing. Although Primary BusinessSystems Inc., believes that the assumptions underlying the forward lookingstatements contained herein are reasonable, any of the assumptions could beinaccurate, and therefore, there can be no assurance that the forward lookingstatement included in the Form 10-QSB will prove to be accurate. In view of thesignificant uncertainties inherent in the forward looking statements includedherein, the inclusion of such information should not be regarded as a representationby Primary Business Systems Inc., or any other person that the objectives andplans of Primary Business Systems, Inc., will be achieved.

 

 

F-16

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** **

**PART II**OTHER INFORMATION

** **

**Item 1 Legal Proceedings**

** **

Summary of the matter styled Suburban Capital Corporation v. PrimaryBusiness Systems, L.L.C, Primary Business Systems, Inc. and Ed Wells in theUnited States District Court, Northern District of Illinois, Eastern Division,Case No. 03-CV-4194.

** **

On or about June 12, 2003, the Company was served with a suit commencedin the circuit court of Cook County, Illinois by Suburban Capital Corporation(“Suburban”).  An attorney who workedwith the Company, Ed Wells, is also named as a defendant in the suit.  The Company removed the lawsuit to theUnited States District Court for the Northern District of Illinois, EasternDivision on or about June 20, 2003.  Insummary, the suit seeks damages for the Company’s alleged failure to make fullpayment to Suburban for consulting work allegedly performed by Suburban for thebenefit of the Company pursuant to an Advisory Agreement (the“Agreement”).  The suit also seeksdamages pursuant to a Stock Purchase Agreement in which Pine Services, Inc., acompany related to Suburban, sold a controlling interest in the publicly-heldSharecom, Inc. to the Company.  Basedupon its preliminary review of this lawsuit and the discovery produced by allparties to date, the Company and its counsel believe this suit to be withoutmerit.  The Company believes thatSuburban is in breach of the Advisory Agreement by not providing any of theservices required by the Agreement and therefore the Company is not obligatedto pay Suburban under the Agreement. The Company also believes that Suburban made material misrepresentationsto the Company regarding the terms, scope and effect of the Agreement andtherefore may have committed fraud.  TheCompany also believes that the demand for payment pursuant to the StockPurchase

 

 

F-17

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Agreement is untimely and further believes that Suburban made materialmisrepresentations regarding the quality and characteristics of Sharecom, Inc.in order to induce the Company to enter into the Stock Purchase Agreement, andtherefore may have again committed fraud. The Company intends to vigorously defend itself against this lawsuit andpursue any and all remedies it may have against Suburban.

** **

Otherthan as described above the Company is not involved in any legal proceedingswhich may have a material effect upon the Company, its financial condition oroperations.

** **

Item 2.                                    Changesin Securities and Use or Proceeds

** **

During the current quarter, The Company issued 152,000 restrictedshares for the remaining purchase price of $38,000 for the customer lists andphysical assets of The Job Market. During the current quarter, The Company issued a total of 1,126,355restricted shares for consulting services from third parties valued at $108,872,based upon the market price of the stock. These shares are a prepayment for services to be rendered by theconsultants over a twelve month period.

 

With respect to these issuances, the Company relied upon Section 4(2)of the Securities Act of 1933.  All ofsuch issuances were completed with private individuals or entities providingservices to the Company and were not the result of any general solicitation.

** **

** **

Item 3.                                    DefaultsUpon Senior Securities

** **

None

 

Item 4.                                    SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS

 

None

 

Item 5.                                    OTHER INFORMATION

 

The Company previouslyannounced on October 7, 2003 that it had entered into a letter of intent toacquire a privately held professional employer organization located inTexas.  The Company and the proposedtarget did not enter into a final agreement and the letter of intent hasexpired.  The Company and the target arecontinuing discussions, although there can be no assurance that any transactionwill be consummated

 

Item 6.                                    EXHIBITS ANDREPORTS ON FORM 8-K

 

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

 

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

 

 

F-18

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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 13th day ofNovember 2003.

 

 
| Primary Business Systems Inc.                   |              |
|-------------------------------------------------|-------------------|
|                                            |              |
| S/ Patrick D Matthews                           |              |   |
| Patrick D. Matthews                             |              |
| President, Chief Executive Officer and Chairman | November 13, 2003 |
|                                                 |                   |  |

 

 

F-19

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INDEX TOEXHIBITS

 
| **Exhibit  No.** |   | **Description**        |
|------------------|--------|------------------------|
|             |   |                   |
| 31.1             |   | 302  Certification CEO |
| 31.2             |   | 302  Certification CFO |
| 32.1             |   | 902  Certification CEO |
| 32.2             |   | 902  Certification CFO |

 

 

F-20

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