**SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-QSB**

 

**(Mark One)**

 

**ý****Quarterly report underSection 13 or 15(d) of the Securities Exchange Act of 1934**

 

**for****the quarterly period ended June 30, 2004.**

 

**o****Transition report underSection 13 or 15(d) of the Securities Exchange Act of 1934**

 

**for****the transition period from****                         to                          .**

 

**Commission file 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 all reports required to be filed bySection 13 or 15(d) of the Exchange Act during the past 12 months (or forsuch shorter period that the registrant was required to file such reports), and(2) has been subject to such filing requirements for the past 90 days.

Yes  ý      No  o

 

The number of outstanding shares of the issuer’s common stock, $0.001par value (the only class of voting stock), as of June 30, 2004 andAugust 9, 2004 was 86,278,297

 

Transitional Small Business DisclosureFormat         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 Purchases of  Securities   |   |
| 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 |                                                 |

 

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ITEM 1.                 FINANCIALSTATEMENTS

 

As used herein, the term “Company” refers to Primary Business SystemsInc., a Nevada corporation, and its subsidiaries and predecessors unlessotherwise indicated.  Unauditedconsolidated condensed interim financial statements including a balance sheetfor the Company as of the quarter ended June 30, 2004 and statements ofoperations, and statements of cash flows for the interim period up to the dateof such balance sheet and the comparable period of the preceding year for thestatement of operations are attached hereto as of Pages F-1 through F-9 and areincorporated herein by this reference.

 

 BASIS OF PRESENTATION

 

The accompanying unaudited consolidated financial statements arepresented in accordance with accounting principles generally accepted in theUnited States of America for interim financial information and the instructionsfor Form 10-QSB and Item 310 under subpart A of Regulation S-B.  Accordingly, they do not include all of theinformation and footnotes required by accounting principles generally acceptedin the United States of America for complete financial statements. Theaccompanying statements should be read in conjunction with the auditedfinancial statements for the years ended December 31, 2003 andDecember 31, 2002. In the opinion of management, all adjustments(consisting only of normal occurring accruals) considered necessary in order tomake the financial statements not misleading have been included. Operatingresults for the three and six months ended June 30, 2004 are notnecessarily indicative of results that may be expected for the year endedDecember 31, 2004. The financial statements are presented on the accrualbasis with significant intercompany transactions and balances eliminated.

 

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Primary Business System, Inc.

 

Financial Statements

 

June 30, 2004

 

F-1

----

 

Primary Business Systems Inc.

& Subsidiaries

 

Index

 

Unaudited Consolidated Condensed InterimFinancial Statements

For the Period Ended

June 30, 2004

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

 

F-2

----

 

PRIMARY BUSINESS SYSTEMS, INC.

And SUBSIDIARIES

Consolidated Balance Sheet

As of December 31, 2003 (Audited) andJune 30, 2004 (Unaudited)

 
|                                  | ** ** | **December 31, 2003** | ** ** | **June 30, 2004** | ** ** |
|---------------------------------------|------------|----------------------------|------------|------------------------|------------|
| ASSETS                                |       |                       |       |                   |       |
| Current assets                        |       |                       |       |                   |       |
| Cash                                  |       | $                          | 19,845     |                   | $          | 34,798 |   |
| Notes receivable                      |       | 46,007                     |       | 61,549                 |       |
| Client accounts receivable            |       | 70,589                     |       | 70,095                 |       |
| Prepaid Expenses                      |       | 73,186                     |       | 30,790                 |       |
| Workers Compensation Prepaid Premiums |       | 96,097                     |       | 96,097                 |       |
|                                  |       |                       |       |                   |       |
| Total Current Assets                  |       | 305,724                    |       | 293,329                |       |
|                                  |       |                       |       |                   |       |
| 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                   | )          | (133,784               | )          |
| Total Property & Equipment        |       | 61,116                     |       | 46,520                 |       |
|                                  |       |                       |       |                   |       |
| Other assets                          |       |                       |       |                   |       |
| Security Deposits                     |       | 1,054                      |       | 1,055                  |       |
| Customer list, net of amortization    |       | 11,400                     |       | 10,200                 |       |
| Prepaid marketing                     |       | 0                          |       | 0                      |       |
| Goodwill                              |       | 557,240                    |       | 557,240                |       |
| Total Other Assets                    |       | 569,694                    |       | 569,094                |       |
| Total Assets                          |       | $                          | 936,534    |                   | $          | 908,344 |   |

 

The accompanying notesare an integral part of these financial statements.

 

F-3

----

 
|                                                                                               | ** ** | **December 31, 2003** | ** ** | **June 30, 2004** | ** ** |
|----------------------------------------------------------------------------------------------------|------------|----------------------------|------------|------------------------|------------|
| LIABILITIES                                                                                        | ** ** | ** **                 | ** ** | ** **             | ** ** |
| Current liabilities                                                                                |       |                       |       |                   |       |
| Accounts payable                                                                                   |       | $                          | 214,656    |                   | $          | 122,402 |   |
| Checks drawn on uncollected payrolls                                                               |       | 69,160                     |       | 60,037                 |       |
| Deferred revenue on payrolls                                                                       |       | 0                          |       | 45,934                 |       |
| Client Payroll Tax payable                                                                         |       | 20,024                     |       | 192,626                |       |
| Workers Comp payable                                                                               |       | 45,139                     |       | 54,647                 |       |
| Client payroll amount withheld                                                                     |       | 16,477                     |       | 1,205                  |       |
| Notes Payable                                                                                      |       | 20,973                     |       | 63,362                 |       |
| Line of credit from banks                                                                          |       | 44,988                     |       | 52,436                 |       |
| Total Current Liabilities                                                                          |       | 431,416                    |       | 592,649                |       |
|                                                                                               |       |                       |       |                   |       |
| Other liabilities                                                                                  |       |                       |       |                   |       |
| Due to shareholder/officer                                                                         |       | 628,023                    |       | 627,859                |       |
| Total Liabilities                                                                                  |       | 1,059,448                  |       | 1,220,508              |       |
| 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                 | )          | (1,347,782             | )          |
| Total Stockholders’ Equity                                                                    |       | (122,914                   | )          | (312,164               | )          |
| Total liabilities and Stockholder’s Equity                                                    |       | $                          | 936,534    |                   | $          | 908,343 |   |

 

The accompanying notes are an integral part of theses financialstatements.

 

F-4

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PRIMARY BUSINESS SYSTEMS, INC.

And SUBSIDIARIES

Unaudited Consolidated Condensed InterimStatement of Operations

For the Three Months and Six Months EndedJune 30, 2004 and 2003

 
| ** **                                                 | ** ** | **Three Months Ended June 30** | ** ** | **Six Months Ended June 30** | ** ** |
|------------------------------------------------------------|------------|-------------------------------------|------------|-----------------------------------|------------|
| ** **                                                 | ** ** | **2004**                            | ** ** | **2003**                          | ** ** | **2004** | ** ** | **2003** | ** ** |
| Revenues                                                   |       | $                                   | 786,631    |                              | $          | 704,233 |   | $ | 1,332,829 |   | $ | 1,338,665 |   |
| Cost of revenues                                           |       | 482,265                             |       | 475,329                           |       | 855,278 |   | 975,963 |   |
| Gross Profit                                               |       | 300,366                             |       | 228,904                           |       | 477,542 |   | 362,702 |   |
| Operating Expenses                                         |       |                                |       |                              |       |   |   |   |   |
| General and Administrative                                 |       | 202,386                             |       | 147,370                           |       | 386,273 |   | 245,932 |   |
| Wages, commissions & salaries                          |       | 153,962                             |       | 140,499                           |       | 280,519 |   | 200,481 |   |
| Consulting services for acquisition                        |       | 0                                   |       | (110,000                          | )          |   |   | 75,000 |   |
| Total Operating Expenses                                   |       | 356,348                             |       | 177,869                           |       | 666,792 |   | 521,413 |   |
| (Loss) from Operations                                     |       | (55,982                             | )          | 51,035                            |       | (189,250 | ) | (158,711 | ) |
| Other Income                                               |       | 0                                   |       | 498                               |       | 0 |   | 2,934 |   |
| (Loss Before Prevision For Income Tax)                     |       | (55,982                             | )          | 51,533                            |       | (189,250 | ) | (155,777 | ) |
| Provision for Income Taxes                                 |       | —                              |       | —                            |       |   |   |   |   |
| Net (Loss)                                                 |       | $                                   | (55,982    | )                                 | $          | 51,533 |   | (189,250 | ) | (155,777 | ) |
|                                                       |       |                                |       |                              |       |   |   |   |   |
| Basic & Distributed Net (Loss) Per  Share              |       | 0.00                                |       | 0.00                              |       | 0.00 |   | 0.00 |   |
| Basic and Distributed Weighted Average  Shares Outstanding |       | 86,278,297                          |       | 62,196,587                        |       | 86,278,297 |   | 62,169,587 |   |
|                                                            |            |                                     |            |                                   |            |  |  |  |  |  |  |  |  |

 

The Accompanying notes are an integral part of these financialstatements.

 

F-5

----

 

PRIMARY BUSINESS SYSTEMS, INC.

& SUBSIDUARIES

 

Unaudited Consolidated Condensed Interim

Statements of Cash Flow

For the Six Months Ended June 30, 2004and 2003

 
| ** **                                                                                          | ** ** | **For the Six Months Ending June 30** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                          | ** ** | **2004**                                   | ** ** | **2003** | ** ** |
| Net Income                                                                                          |       | $                                          | (189,250   | ) | $ | (155,776 | ) |
| Adjustments to reconcile net income (loss)  to net cash provided by (used by) operating activities: |       |                                       |       |   |   |
| Depreciation and amortization                                                                       |       | 15,795                                     |       | 16,908 |   |
| (Increase) decrease in accounts receivable                                                          |       | 494                                        |       | (45,348 | ) |
| (Increase) decrease in prepaid expense                                                              |       | 42,396                                     |       | (53,348 | ) |
| (Increase) decrease in other current assets                                                         |       | (15,542                                    | )          | (31,382 | ) |
| Increase (decrease) in accounts payable                                                             |       | (92,255                                    | )          | 50,259 |   |
| Increase (decrease) in client payroll tax  liability                                                |       | 172,602                                    |       | 30,893 |   |
| Deferred revenue on payrolls                                                                        |       | 40,174                                     |       | 9,641 |   |
| Increase (decrease) in other assets                                                                 |       | (1,955                                     | )          |   |   |
| Adjustments to consulting expense on return  of stock                                               |       | 75,000                                     |       |   |   |
| Checks Drawn on uncollected payrolls                                                                |       | (9,123                                     | )          | 34,336 |   |
| Total Adjustments                                                                                   |       | 154,541                                    |       | 85,004 |   |
| Net cash provided by (used in) operating  activities                                                |       | (34,709                                    | )          | (70,772 | ) |
| 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                                                                  |       | 7,448                                      |       | (3,886 | ) |
| Net borrowing on notes payable                                                                      |       | 0                                          |       | 61,473 |   |
| Principal payments on short-term debt                                                               |       | (20,973                                    | )          | (2,310 | ) |
| Due to shareholders/officers                                                                        |       | (174                                       | )          | (2,995 | ) |
| Net cash provided by (used in) financing  activities                                                |       | 49,662                                     |       | 52,282 |   |
| Net increase (decrease) in cash and cash  equivalents                                               |       | 14,953                                     |       | (18,490 | ) |
| Cash and cash equivalents at beginning of  year                                                     |       | 19,845                                     |       | 30,868 |   |
| Cash and Cash equivalents at end of quarter                                                         |       | $                                          | 34,798     |   | $ | 12,378 |   |

 

The accompanying notes are an integral part of these financialstatements

 

F-6

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| ** **                                                                  | ** ** | **For the Six Months Ending June 30** | ** ** |
|-----------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                  | ** ** | **2004**                                   | ** ** | **2003** | ** ** |
| Supplemental information                                                    |       |                                       |       |   |   |
| Cash Payments for Income Taxes                                              |       | $                                          | —     |   |   |   |
| Non Cash Items                                                              |       |                                       |       |   |   |
| Stock for goodwill                                                          |       | $                                          | 0          |   | $ | 7,240 |   |
| Stock for Consulting Services                                               |       |                                       |       | 235,000 |   |
| Stock returned for non performance of  services regarding prepaid marketing |       |                                       |       | (270,000 | ) |
| Stock returned for nonperformance of  consulting services                   |       | $                                          | 0          |   | $ | (160,000 | ) |

 

The Accompanying notes are an integral part of these financialstatements

 

F-7

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Notes to Unaudited Consolidated CondensedInterim Financial Statements

June 30, 2004

 

NOTE 1 – BASIS OF PRESENTATION

 

The condensed interim financial statements atJune 30, 2004 are unaudited, but include all adjustments which the Companyconsiders necessary for a fair presentation.

 

The accompanying unaudited financial statements arefor the interim periods and do not include all disclosures normally provided inannual financial statements, and should be read in conjunction with theCompany’s Form 10-KSB for the year ended December 31, 2003. Theaccompanying unaudited interim financial statements for the current quarter andyear to date ended June 30, 2004, are not necessarily indicative of theresults 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 – SUMMARY OF SIGNIFICANT ACCOUNTINGPOLICIES

 

The Company has consolidated the financialstatements of its wholly owned subsidiaries, Primary Business Systems, LLC,Primary HR Services LLC and AHJR Inc., dba/Concord Staffing Services in thesefinancial statements.  All significantintercompany transactions have been eliminated.

 

All significant accounting policies as previouslydisclosed with the annual financial statements for the years endedDecember 31, 2003 and 2002 remain unchanged.

 

NOTE 3 – CHANGE IN STOCKHOLDERS’ EQUITY

 

The statement of changes in stockholders’ equity isreported in these financial statements and discloses the transactions as theywere incurred in the three months ended June 30, 2004.

 

During 2003 the Company issued a total of 1,126,355restricted shares for prepaid consulting services valued at $108,872 to berendered over a twelve month period.  Theconsulting expense amortized and reported in the current quarter is $27,218leaving a current asset of prepaid expense at $18,751 as of June 30,2004.  The Company was required to prepaypayroll costs on direct deposit clients during the quarter ended June 30,2004 of $12,039.  The total prepaidexpenses for the quarter ended June 30, 2004 is $30,790.

 

NOTE 4 – RELATED PARTY TRANSACTIONS

 

Notes Receivable reported as a current asset of$61,549 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 of revolvingcash advances to the LLC and expenses paid on behalf of the LLC by the Company.

 

These revolving notes receivable were part of the2002 acquisition of the present operations of the Company and were outstandingprior to the date of acquisition.

 

F-8

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**ITEM 2**

 

**MANAGEMENT’S DISCUSSION 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 including risk factors stated therein. Historical results are notnecessarily indicative of trends in operating results for any future period.

 

**CriticalAccounting Policies and Estimates**

 

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

 

***Revenue Recognition****.*   The gross billings that Primary LLC, Primary HR andConcord Staffing (the Subsidiaries) charges its clients under its CustomerServices Agreement include each worksite employee’s gross wages, a service feeand, to the extent elected by the clients, health and welfare benefit plancosts. The service fees, which are computed as a percentage of gross wages, isintended to yield a profit to Subsidiaries and cover the cost of certain employment-relatedtaxes, workers’ compensation insurance coverage, and administrative and fieldservices provided by the Subsidiaries to the client, including payrolladministration, record keeping, and safety, human resources, and regulatorycompliance 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 the Subsidiaries are invoiced along with each periodic payrolldelivered to the client.

 

Primary reports revenuesfrom service fees in accordance with Emerging Issues Task Force (“EITF”) No.99-19, Reporting Revenue Gross as a Principal versus Net as an Agent. 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 and Primary HRServices LLC is the primary obligor and deemed to be the principal in thesetransactions under EITF No. 99-19. Primary reports revenues on a net basis forthe amount billed to clients for worksite employee salaries, wages and certainpayroll-related taxes less amounts paid to worksite employees and taxingauthorities for these salaries, wages and taxes. Primary accounts for itsrevenues using the accrual method of accounting. Under the accrual method ofaccounting, Primary recognizes its revenues in the period in which the worksiteemployee performs work. Primary accrues revenues and unbilled receivables forservice fees relating to work performed by worksite employees but unpaid at theend of each period. In addition, the related costs of services are accrued as aliability for the same period. Subsequent to the end of each period, such costsare paid and the related PEO service 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

 

----

 

individual entities in each sector.  It is important to address the particularmarkets of each sector therefore we will discus them individually at thispoint.

 

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 five andfifty 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, risk-management, unemployment administration, and health,welfare and retirement benefits.

 

During the second quarterPrimary Business Systems Inc. established a new operating subsidiary inMississippi, Primary HR Services LLC a regional Human Resources Outsourcing(HRO) organization providing professional employer services and human resourceoutsourcing services.  As of the date ofthis 10QSB Primary HR Services has not generated any revenue, although we havemade proposals to three prospective client companies. At Primary Hr Services weoffer our clients, which are typically small to medium-sized business withbetween twenty and one hundred employees, a broad range of product and servicesthat provide a complete solution for the clients’ human resources outsourcingneeds.  Primary LLC’s products andservices include benefits administration, payroll administration, governmentalcompliance, risk management, unemploymentadministration, and health, welfare and retirement benefits

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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PrimaryLLC’s workers’ compensation program from January 1, 2002 throughDecember 31, 2003 was with Texas Mutual Insurance Company.  November 2003 Primary LLC renewed itsworkers’ compensation program which is a guaranteed cost program where thecompany has no liability beyond the premiums of the policy. The current policyterm expires in November 2004.

 

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

 

Stateunemployment tax rates vary from state to state and are based upon theemployer’s claims history. Primary LLC aggressively manages its stateunemployment tax exposure by contesting unwarranted claims.

 

***Operating Expenses****.*      Operating expenses consist primarily of salaries, wages and commissionsassociated with the Primary’s internal employees, and general andadministrative expenses. Sales and marketing commissions and client referralfees are expensed as incurred. Primary expects that future revenue growth willresult in increased operating leverage, as Primary’s fixed operating expensesare leveraged over a larger revenue base.

 

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

 

***Profitability.***   Profitabilityis largely dependent upon Primary’s success in generating revenues for itsservices and managing the costs that are within its control. Revenues and costsof service 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 discussionshould be read in conjunction with the Company’s Annual Report on Form 10-K forthe year ended December 31, 2003, including all amendments thereto, aswell as the consolidated financial statements and notes thereto included in thisQuarterly Report on Form 10-QSB.

 

The following tablepresents Primary’s results of operations for the three months and six monthsended June 30, 2004 and 2003, expressed as a percentage of revenues:

 
| ** **                        | ** ** | **Three months** | ** ** | **Six Months** | ** ** |
|-----------------------------------|------------|------------------|------------|----------------|------------|
| ** **                        | ** ** | **2004**         | ** ** | **2003**       | ** ** | **2004** | ** ** | **2003** | ** ** |
| Revenues                          |       | 100.0            |       | 100.0          | %          | 100 |   | 100 | % |
| Cost of Services                  |       | 61.62            |       | 67.50          |       | 64.17 |   | 72.91 |   |
| Gross Profit                      |       | 38.38            |       | 32.50          |       | 35.83 |   | 27.09 |   |
| Operating Expenses:               |       |             |       |           |       |   |   |   |   |
| General and administrative        |       | 28.14            |       | 20.93          |       | 29.01 |   | 18.37 |   |
| Salaries, wages and commissions   |       | 21.41            |       | 19.95          |       | 22.10 |   | 14.98 |   |
| Consulting Services               |       |             |       | (15.62         | )          |   |   | 5.6 |   |
| Total operating costs             |       | 45.53            |       | 25.26          |       | 50.03 |   | 38.95 |   |
| Operating (loss) income           |       | (7.15            | )          | 7.25           |       | (14.20 | ) | 11.86 |   |
| Other income                      |       | 0.0              |       | 0.0            |       |   |   | .22 |   |
| Interest expense                  |       |             |       | 0.0            |       |   |   | 0.0 |   |
| Other non-operating expense       |       |             |       | 0.0            |       |   |   | 0.0 |   |
| (Loss) income before income taxes |       | (7.15            | )          | 7.32           |       | (14.20 | ) | 11.64 |   |
| Income tax (benefit) provision    |       |             |       | 0              |       |   |   | 0 |   |
| Net income (loss)                 |       | (7.15            | )          | 7.32           |       | (14.20 | ) | 11.64 |   |

 

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*Quarter ending June 30 ,2004 compared toJune 30, 2003*

 

For the three monthsended June 30, 2004, revenues increased $82,398, or 11.17% from 2003,totaling $782,631in 2004 compared to $704,233, for 2003. For the six monthsended June 30, 2004, revenues decreased $5,836, or 0.83% from 2004 to2003.  The three month increase reflectsour focus on sales and the addition of a number of new clients.  Also contributing to the increase is anupturn in temporary staffing employees assigned.  The six month revenue change is reflective ofthe gains made during the second quarter our focus on new business andincreased fees making up for the decrease of fees reported in the firstquarter.

 

Cost of services, whichincludes the cost of Primary LLC’s medical benefit plans, workers’ compensationinsurance, 410K administration cost, state unemployment taxes and other costsfor the three months ended June 30, increased $6,936 or 1.46% from 2003,totaling $482,265, or 61,62% of revenues for 2004, compared to $475,329, or67.50% for 2003.  The six month cost ofservices ended June 30, decreased $120,676 or 12.36% from 2003, totaling$855,287 or 64.17% for 2004, compared to $975,963 or 72.91% for 2003. The threemonth increase in cost is consistent with the addition of new clients andleased employees that are affected by an increase of our state unemploymentrate which is realized through the first $7,000 of employee wages.

 

Gross profit for thethree months ended June 30, increased $71,462 or 31.22% from 2003,totaling $300,366 or 30.11% for 2004, compared to $228,904, or 32.50% for 2003.Gross profit for the six months ended June 30, increased $114,840 or31.66% from 2003, totaling $477,542 or 35.82% for 2004, compared to $362,702,or 27.09% for 2003.  Gross profit marginincreased primarily due to workers’ compensation cost decreases from lower riskbusiness and an increased fee as a result of our emphasis on HR services.

 

Operating expenses forthe three months ended June 30, were $356,348 for 2004, compared to$177,869 which included a credit of $110,000 for consulting services that werenot received for 2003, representing an increase of $178,479.  Operating expenses for the six months periodended June 30 were $666,792 for 2004 compared to $521,413 for 2003, anincrease of $145,379.  Operationexpense increases are attributed mostly to the additional expense of operatingas a reporting company and the ongoing expenses associated with our legalmatters as discussed in the 10KSB and Item III part 1 of this 10QSB.

 

Salaries, wages andcommissions for the three months ended June 30, were $153,962 for 2004,compared to $140,499 for 2003, representing an increase of $13,463. For the sixmonth ended June 30, it was $280,519 for 2004 compared to $200,481 for2003, an increase of $80,038. Consolidated payroll costs increased as Primary LLC expanded staff tofacilitate best services to our customers, increased its sales staff and due tothe acquisition of Concord and its staff and the addition of staff for PrimaryHR Services LLC our Mississippi subsidiary, the company now employees fourteen.

 

Other general andadministrative expenses for the three months ended June 30, were $202,386for 2004, compared to $147,370 in 2003, representing an increase of $55,016.The six month general and administrative expenses ended June 30 were$386,273 for 2004 compared to $245,932 for 2003, an increase of $140,341.  The increase in general and administrativeexpenses was due to the implementation of initiatives in areas related toservices and programs.  Additionalincreases are attributed to the implementation of a sells training and trackingprogram which by design will allow us to acquire larger clients, increase thefee for our services and close deals quicker. Operation expense increases arelargely attributed to the additional expense of operating as a reportingcompany and the ongoing expenses associated with our legal matters as discussedin our previously filed Form10KSB and Item III part 1 of this 10QSB.

 

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Net loss for the threemonths ended June 30 increased to $55,982 or approximately ($.00) pershare for 2004, compared to an income of $51,533 or $0.00 per share for 2003,representing a decrease in income of $107,515. Net loss for the six months ended June 30 increased to $189,250orapproximately ($0.0022) per share for 2004 compared to $155,711 or ($0.003) pershare for 2003.

 

***Liquidity and Capital Resources***

 

Primary had $34,798 incash and cash equivalents and restricted certificates of deposit atJune 30, 2004. Primary is required to collateralize its obligations underits workers compensation coverage. The Company uses its cash as well ascertificates of deposits to collateralize these obligations as more fullydescribed below.

 

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

 

The Company had nolong-term debt as of June 30, 2004 other than to its major shareholder,who is an officer. The principal amount of this outstanding debt atJune 30, 2004 is $628,023.

 

The charges to clients byPrimary LLC derived from salaries, wages and payroll taxes is managed from acash flow perspective so that a matching exists between the time that the fundsare received from a client to the time that the funds are paid to the worksiteemployees and to the appropriate tax jurisdictions. As a co-employer, and underthe terms of the Client Services Agreement, Primary LLC is obligated to makecertain wage, tax and regulatory payments. Because of this, the objective ofPrimary LLC is to minimize the credit risk associated with remitting thepayroll and associated taxes before receiving from the client the service feescharged by Primary LLC.

 

Primary LLC’s primaryshort-term capital requirements relate to the payment of accrued payroll andpayroll taxes of its internal and worksite employees, accounts payable forcapital expenditures and the payment of accrued workers’ compensation expenseand health benefit plan premiums..

 

***Going Concern Issues***

 

We expect to spendsignificant amounts to expand domestic sales and operations through mergers andacquisitions. As a result, we will need to generate significant additionalrevenue to achieve profitability based on such planned expenditures andexpansion. Even if we do achieve profitability, we may not be able to sustainor increase profitability on a quarterly or annual basis. If we do not achieveand maintain profitability, the market price for our common stock may decline.

 

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

 

Obtaining futurefinancing may be costly and will likely be dilutive to existing stockholders.If we are not able to obtain financing when and in the amounts needed, and onterms that are acceptable, our operations, financial condition and prospectscould be materially and adversely affected, and we could be forced to curtailour operations or sell part or all of our assets. Management continually isseeking additional sources of capitol to maintain the ongoing operations of thecompany.

 

**MATERIAL COMMITTEMENTS FOR CAPITALEXPENDITURES**

 

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

 

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***Inflation***

 

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

 

**Off-balance Sheet Arrangements**

 

Primarydoes not currently have any off-balance sheet arrangements

 

***ITEM 3 CONTROLS AND PROCEDURES***

 

Ourmanagement, under the supervision and with the participation of our chiefexecutive officer and chief financial officer, conducted an evaluation of our“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 (who serves as our principalaccounting officer) have concluded that as of the Evaluation Date, ourdisclosure controls and procedures are effective to ensure that all materialinformation required to be filed in this Quarterly Report on Form 10-Q has beenmade known to them in a timely fashion.

 

***CHANGES IN INTERNAL CONTROLS***

 

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

 

# **CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS**

 

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

 

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

•                      exposure to client credit risk as a result of theCompany’s obligation to make certain payments in respect of client employees;

•                      unfavorable determinations under certain laws andregulations regarding the Company’s status as an “employer” of clientemployees;

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

•                      unavailability of insurance coverage for workers’compensation, medical benefits and general liability on financial terms andpremium rates acceptable to the Company;

 

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•                      significant collateral requirements in respect of theCompany’s obligations to its insurance carriers and the potential for thoserequirements to increase in the future;

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

•                      inexperience of a large portion of the Company’s salesstaff;

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

•                      risks associated with geographic marketconcentration;

•                      risks associated with expansion into additionalstates with varying state regulatory requirements;

•                      the impact of competition from existing and newbusinesses offering human resource outsourcing services;  

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

•                      errors or omissions by the Company in performingits 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’s dependency ontechnology services and third party licenses of technology;

•                      the Company’s inability to use the Internet as ameans of delivering human resource services;

•                      fluctuations in interest rates and the associated effecton the Company’s investments;

•                      the Company’s failure to adequately protect itsproprietary rights;

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

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

•                      our need for capital

 

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

 

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

 

**PART II**

 

**OTHER INFORMATION**

 

**Item1.**    Legal Proceedings

 

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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”) as plaintiff. An attorney who worked with the Company, Ed Wells, is also named as adefendant in the suit.  The Company removedthe lawsuit 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 theCompany’s alleged failure to make full payment to Suburban for consulting workallegedly performed by Suburban for the benefit of the Company and for allegedbreach of an Advisory Agreement and a Stock Purchase Agreement pursuant towhich Pine Services, Inc., a company related to Suburban, sold a controllinginterest in the publicly-held Sharecom, Inc. to Rick Matthews.  The Company contends that Suburban breachedthe Advisory Agreement by not providing the services required by theAgreement.  The Company also alleges thatSuburban made material misrepresentations to the Company.  The Company intends to vigorously defenditself against this lawsuit and to 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 LLC owesPine Services, Inc. certain amounts for the sale of its majority interest inSharecom, Inc.  The Company intends tovigorously defend itself against this lawsuit and pursue any and all remediesit may have against Pine Services, Inc.

 

On or about December 23, 2003, the Company fileda lawsuit 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 theTexas Deceptive Trades and Practices Act and fraudulent inducement inconnection with the Advisory Agreement referred to above.  The defendants were served with this lawsuitbut failed to appear in the case or file an answer.  On February 6, 2004, upon motion of theCompany, the Court entered a default judgment against the defendants in theamount of approximately $4,700,000.00 in actual and punitive damages.  The Company intends to continue to vigorouslyprosecute this lawsuit and to seek to enforce the judgment.

 

Finally, on February 12, 2004, the Company fileda lawsuit 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 Capital Corporation.

 

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 will havefunds or insurance in amounts to cover any damages or awards, and asco-employer, we may be subject to liability. No allowance for this contingencyis recognized on the financial statements of the company.

 

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

 

**Item 2.**    Changes in Securities and Purchases of Securities

 

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

 

We have changed our transfer agent for our CommonStock.  Our new registrar and transferagent is Registrar and Transfer Corp.  10Commerce Drive, Cranford, New Jersey 07016. The telephone number of Registrar and Transfer is 800-866-1340

 

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**Item 3.**    Defaults Upon Senior Securities

 

None

 

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

 

No matters were submitted to shareholders in the mostrecent fiscal quarter.

 

Our Board has scheduled our annual meeting ofshareholders for September 21, 2004 to be held in Austin, Texas forshareholders of record as of August 9, 2004.  We expect to mail proxy statements andrelated material to our shareholders on or about August 19, 2004.  As of the date of this filing the onlymatters to be considered by the shareholders will be the election of directorsand approval of an employee stock option plan.

 

**Item5.**    OTHER INFORMATION

 

None

 

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

 

Exhibits

 

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

 

31*                          Certificationpursuant to Rule 13a-14(a)/15d-14(a)

 

32*                          Certificationpursuant to 18 U.S.C. Section 1350

 

Reports on form 8-K

 

None

 

SIGNATURES

 

In accordance with the requirements of the Exchange Act, the registrantcaused this report to be singed on its behalf by the under singed, there untodully authorized, this 13th day of August 2004.

 
| Primary Business Systems Inc.                   |
|-------------------------------------------------|
|                                            |
| /S/ Patrick D Matthews                          |   |
| Patrick D. Matthews                             |   |
| President, Chief Executive Officer and Chairman | August 13, 2004 |
| And Principal Accounting Officer                |   |
|                                                 |  |  |

 

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