**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

** **

**FORM 10-KSB**

 

**ý****  ANNUALREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934THE FISCAL YEAR ENDED DECEMBER 31, 2003**

 

**000-25523**

**Commission File Number**

 

**PRIMARY BUSINESS SYSTEMS INC**

(Name of Small Business Issuer in Its Charter)

 

| **NEVADA**                                                     |   | **86-0857752**                                         |
|----------------------------------------------------------------|--------|--------------------------------------------------------|
| (State or Other Jurisdiction of  Incorporation)                |   | (I.R.S. Employer Identification No.)                   |
|                                                           |   |                                                   |
| **433 Kitty Hawk Dr. Suite 226  Universal City, TX 78148**     |   | **(210) 658-4675**                                     |
| (Address of Principal Executive Offices)                       |   | (Issuer’s Telephone Number,  Including Area Code) |
|                                                           |   |                                                   |
| Securities registered under Section 12(b) of the Act: **NONE** |
|                                                           |   |                                                   |
| Securities registered under Section 12(g) of the Act:          |
|                                                           |   |                                                   |
| **COMMON STOCK, PAR VALUE $0.001 PER SHARE**                   |

 

Check whether the issuer (1)filed all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934, as amended (the “Exchange Act”) during the past 12 months(or for such 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  Noo

 

Check if there is no disclosureof delinquent filers in response to Item 405 of Regulation S-B contained inthis form and no disclosure will be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB.o

 

The issuer’s revenues for thefiscal year ended December 31, 2003 were $2,684,396.

 

The number of shares of CommonStock of the issuer outstanding as of December 31, 2003 and March 25, 2004 was85,568,747.

 

The aggregate market value ofthe registrant’s common stock held by non-affiliates, based upon the average ofthe bid and asked prices ($.065) on March 26, 2004,  was $446,832.80, based upon 7,182,043 shares held by nonaffiliates.

 

DOCUMENTS INCORPORATED BY REFERENCE:

 

**None**

 

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Table of Contents

 
|     | Forward-Looking Statements                                                             |   |
|----------|----------------------------------------------------------------------------------------|--------|
|     |                                                                                   |   |
|     | Part I                                                                                 |   |
|     |                                                                                   |   |
| Item 1   | Description of Business                                                                |   |
| Item 2   | Description of Property                                                                |   |
| Item 3   | Legal Proceedings                                                                      |   |
| Item 4   | Submission of Matters to a Vote of Security  Holders                                   |   |
|     |                                                                                   |   |
|     | Part II                                                                                |   |
|     |                                                                                   |   |
| Item 5   | Market for Registrant’s Common Equity and  Related Stockholder Matters            |   |
| Item 6   | Management’s Discussion and Analysis or  Plan of Operation                        |   |
| Item 7   | Financial Statements                                                                   |   |
| Item 8   | Changes in and Disagreements with  Accountants on Accounting and Financial Disclosures |   |
| Item 8a  | Controls and Procedures                                                                |   |
|     |                                                                                   |   |
|     | Part III                                                                               |   |
|     |                                                                                   |   |
| Item 9   | Directors, Executive Officers, of the  Registrant:                                     |   |
| Item 10  | Executive Compensation                                                                 |   |
| Item 11  | Security Ownership of Certain Beneficial  Owners and Management                        |   |
| Item 12  | Certain Relationships and Related  Transaction                                         |   |
| Item 13  | Exhibits and Reports on Form 8-K                                                       |   |
| Items 14 | Principal Accounting Fees and Services                                                 |   |
|     |                                                                                   |   |
|     | Part IV                                                                                |   |
|     |                                                                                   |   |
| Item 14  | Exhibits,  Financial Statement Schedules and Reports on Form 8-K                       |   |

 

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**Cautionary Note Regarding Forward-LookingStatements**

 

In connectionwith the safe harbor provisions of the Private Securities Litigation Reform Actof 1995 (the “Reform Act”), Primary Business Systems, Inc. (“Primary”) ishereby providing cautionary statements identifying important factors that couldcause our actual results to differ materially from those projected inforward-looking statements (as such term is defined in the Reform Act) made byor on behalf of Primary herein, in other filings made by Primary with theSecurities and Exchange Commission, in press releases or other writings, ororally, whether in presentations, in response to questions or otherwise. Anystatements that express, or involve discussions as to, expectations, beliefs,plans, objectives, assumptions or future events or performance (often, but notalways, through the use of words or phrases such as “will result,” “areexpected to,” “anticipated,” “plans,” “intends,” “will continue,” “estimated,”and “projection”) are not historical facts and may be forward-looking and,accordingly, such forward-looking statements involve known and unknown risks,uncertainties and other factors that may cause the actual results orperformance of Primary to be materially different from any future results orperformance expressed or implied by such forward-looking statements. Such knownand unknown risks, uncertainties and other factors include, but are not limitedto, the following:

 

(i)                                     volatilityof costs of workers’ compensation insurance coverage and profits generated fromthe workers’ composition component of Primary’s service offering under its losssensitive workers’ compensation programs;

 

(ii)                                  volatilityof state unemployment taxes;

 

(iii)                               theuncertainties relating to the collateralization requirements related to as wellas availability and renewal of Primary’s medical benefit plans, generalinsurance and workers’ compensation insurance programs for the worksiteemployees;

 

(iv)                              uncertaintiesas to the amount the company will pay to subsidize the costs of medical benefitplans;

 

(v)                                 possibleadverse application of certain federal and state laws and the possibleenactment of unfavorable laws or regulation;

 

(vi)                              litigationand other claims against the Company and its clients including the impact ofsuch claims on the cost, availability and retention of Primary’s insurance coverageprograms;

 

(vii)                           impactof competition from existing and new businesses offering human resourcesoutsourcing services;

 

(viii)                        risksassociated with expansion into additional markets where Primary does not have apresence or significant market penetration;

 

(ix)                                risksassociated with Primary’s dependence on key vendors and the ability to obtainor renew benefit contracts and general insurance policies at rates and withretention amounts acceptable to Primary;

 

(x)                                   anunfavorable determination by the Internal Revenue Service or Department ofLabor regarding the status of Primary as an “employer”;

 

(xi)                                thepossibility of client attrition due to Primary’s decision to increase the priceof its services, including medical benefits;

 

(xii)                             risksassociated with geographic market concentration;

 

(xiii)                          thefinancial condition of clients;

 

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(xiv)                         theeffect of economic conditions in the United States generally on Primary’sbusiness;

 

(xv)                            thefailure to properly manage growth and successfully integrate acquired companiesand operations;

 

(xvi)                         risksassociated with providing new service offerings to clients;

 

(xvii)                      theability to secure outside financing at rates acceptable to Primary;

 

(xviii)                   risksassociated with third party claims related to the acts, errors or omissions ofthe worksite employees; and

 

(xix)                           otherfactors which are described in further detail in this Annual Report on Form10-KSB and in other filings by Primary with the Securities and ExchangeCommission.

 

Primary cautions that thefactors described above could cause actual results or outcomes to differmaterially from those expressed in any forward-looking statements made by or onbehalf of Primary. Any forward-looking statement speaks only as of the date onwhich such statement is made, and Primary undertakes no obligation to updateany forward-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

 

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**Part 1**

 

**Item1. Description of Business**

 

Primary Business Systems Inc.(“Primary”) is a holding company engaged in two lines of business, namely,  the Professional Employer Organization (PEO)industry through our principal operating subsidiary, Primary Business SystemsLLC (“Primary LLC”)) and the Temporary Staffing Services industry through ouroperating subsidiary AHJR Inc., d/b/a/ Concord Staffing Services (“Concord”).

 

*Our History:*

 

We were incorporated in thestate of Nevada in November 1996 under the name Anonymous Data Inc.  In July 2001,  Anonymous Data Inc. completed a reverse merger with ShareCom,Inc. and the name was changed to ShareCom Inc. In May 2002 ShareCom, Inc. sold all sold all of its assets, selectedliabilities and business operations to USAlert, Inc., an Illinois corporationand became a “shell corporation”.  PineServices Inc.,  purchased 58% of theoutstanding shares of ShareCom Inc., from its former president Brad Nordling.

 

In September 2002, the membersof Primary Business Systems LLC (a privately held Texas Limited LiabilityCompany) entered into an agreement to purchase the 58% holdings of ShareComfrom Pine Services Inc.

 

In November 2002, ShareComInc., acquired 100% of the members’ interests of Primary Business Systems LLC,thereby making Primary Business Systems LLC a wholly owned subsidiary ofShareCom Inc.  As a result of thistransaction, the former members of Primary Business Systems LLC became themajority shareholders of ShareCom and replaced the management of ShareCom.

 

In March 2003 ShareCom Inc.,changed its name to Primary Business Systems Inc.  In addition, in March 2003, Primary acquired 100% of theoutstanding stock of AHJR Inc., thereby making AHJR Inc. a wholly ownedsubsidiary of Primary.  In June 2003, AHJRInc. acquired the assets of a temporary staffing services company and begandoing business under the tradename Concord Staffing Services.

 

*Our Business Lines.*

 

The business of PrimaryBusiness Systems Inc.  is to operate inthe PEO industry and the temporary staffing services industry.We expect that wewill operate primarily through our existing subsidiaries and through futureacquired entities.

 

The PEO Sector: Our existingPEO subsidiary, Primary Business Systems LLC is a regional ProfessionalEmployer Organization, providing human capital management solutions.  We offer our clients, which are typicallysmall to medium-sized business with between five and fifty employees, a broadrange of product and services that provide a complete solution for the clients’human resources outsourcing needs.  Asof December 31, 2003, we served more than 80 clients, with approximately 900active worksite employees.  PrimaryLLC’s products and services include benefits administration, payrolladministration, governmental compliance, risk management, unemploymentadministration, and health, welfare and retirement benefits.

 

**Products and Services**

 

Primary LLC provides a broadrange of products and services to its clients. These products and services areprimarily offered to the company’s clients on a “bundled” or all inclusivebasis. Health, welfare and retirement programs may be elected to be offered toworksite employees at the option of each client. Primary provides theseproducts and services to its clients through the following core activities:

 

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*Retain the Best Employees.   *PrimaryLLC assists its clients in retaining the best employees for their businesses byproviding:

 

•                                       healthbenefits (medical, dental and vision)

•                                       retirementplans – 401(k)s

•                                       welfarebenefits (voluntary life insurance, AD&D, short-term and long-termdisability)

•                                       employeeassistance programs

•                                       employeeretention best practices

•                                       employeediscounts

•                                       rewardand recognition programs

 

*Manage the Paperwork.   *PrimaryLLC assists its clients in managing employment related paperwork by providing thefollowing services:

 

•                                       401(k)plan administration

•                                       Section125, FMLA and COBRA administration

•                                       timeand attendance systems

•                                       payrollprocessing, employment related tax filings and administration

•                                       FormW-2 preparation

**•**                                       unemploymentclaims administration

•                                       benefitsannual enrollment administration

•                                       benefitsclaims processing (health, disability and workers’ compensation)

 

*Protect our clients’business.   *Primary LLC assists itsclients in protecting their businesses by providing:

 

•                                       HRpolicies forms and best practices

•                                       regulatorycompliance and guidance

•                                       wageand hour guidance

•                                       employeehiring and termination guidelines

•                                       employeeexit interview guidelines and forms

•                                       workers’compensation insurance

•                                       workplacesafety guidance

 

*Insuring our clients business*.  PrimaryLLC assists its clients in insuring their business by bringing in our alliancewith insurance providers.

 

•                                       GeneralLiability Insurance Procurement

•                                       CommercialAuto Liability Procurement

•                                       Property& Equipment Procurement

•                                       OtherCommercial insurance needs

•                                       Assistin audit processes

•                                       Assistin determining levels of insurance

•                                       Assistin shopping the market for the best price to coverage

 

*Client Selection and Retention Strategy*.

 

As part of its current clientselection strategy, Primary LLC offers its services to businesses withinspecific industry classification [ put the actual name not acronym]codes. Allprospective clients are also evaluated individually on the basis of totalpredicted profitability. This analysis takes into account workers’ compensationrisk and claims history, unemployment claims history, payroll adequacy, andcredit status. With respect to potential clients operating in certainindustries believed by Primary LLC to present a level of risk exceedingindustry norms, more rigorous approval requirements must be met before PrimaryLLC agrees to provide services to the client. This process may include anon-site inspection and review of workers’ compensation and unemployment claimsexperience for the last three years. In addition, under the terms of PrimaryLLC’s workers’ compensation agreement, prospective clients operating in certainindustries or with historically high workers’ compensation insurance claimsexperience must also be approved by the insurance carrier before Primary LLCenters into a contract to provide services.

 

Primary LLC maintains a clientreview program that includes a detailed profitability and risk analysis of allits clients. Based on the results of these analyses, Primary LLC may modify itspricing, or if necessary, terminate certain clients that Primary LLC believeswould otherwise be detrimental or not contribute to its long-termprofitability.

 

Primary LLC’s client retentionrate for 2003 was 82.05% Primary LLC uses the NAPEO standard for measuringclient retention, which is computed by dividing the number of clients at theend of the period by the sum of the number of clients at the beginning of theperiod plus the number of clients added during the period. The client retentionrate is affected by a number of factors including the natural instability ofthe

 

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small to medium-sized business market and clients that were terminatedby Primary LLC for reasons that include unacceptable risk and low profitabilityto Primary LLC.

 

*Client Services Agreement*.    Allclients are required to enter into the Primary LLC Client Services Agreement.The Client Services Agreement provides for an initial one-year term, subject totermination by Primary LLC or the client at any time upon 30 days prior writtennotice. After the initial term the contract may be renewed, terminated orcontinued on a month-to-month basis. Following the initial term, most contractsare renewed for new one year term. Based on the results of a financial review,Primary LLC may require the owners of client companies to personally guaranteethe client’s obligations under the Client Services Agreement.

 

Primary LLC retains the abilityto terminate the Client Services Agreement as well as its co-employmentrelationship with the worksite employees immediately upon non-payment by aclient. Primary LLC manages its credit risk through the periodic nature ofpayroll, client credit checks, owner guarantees, Primary LLC’s client selectionprocess and its right to terminate the Client Services Agreement and theco-employment relationship with the worksite employees.

 

Employment-related liabilitiesare generally allocated between Primary LLC and the client pursuant to theClient Services Agreement, with Primary LLC assuming responsibility forworksite employee payroll obligations and for compliance with certainemployment-related governmental regulations. On the other hand, the clientremains responsible for compliance with the employment-related governmentalregulations that are more closely related to the daily supervision, directionand control of worksite employees. In some cases, employment-relatedliabilities are shared between Primary LLC and the client. The following tablesummarizes the general division of responsibilities for employment relatedregulatory compliance under the Client Services Agreement:

 
| **Primary  LLC Responsibilities**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   | **Client Responsibilities**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •              All  rules and regulations governing the reporting, collection and payment of  federal and state payroll taxes on wages, including: (i) federal income tax  withholding provisions of the Internal Revenue Code; (ii) state and/or local  income tax withholding provisions; (iii) FICA; (iv) FUTA; and (v) applicable  state unemployment tax provisions, including managing claims

 

•           Applicable  workers’ compensation laws that cover: (i) procuring workers’ compensation  insurance; (ii) completing and filing all required reports; (iii) claims  processing 

 

•              COBRA  (Consolidated Omnibus Budget Reconciliation Act of 1986) continuation  coverage for employees covered under health plans sponsored by the Company 

 

•              Laws  governing the garnishment of wages, including Title III of the Consumer  Credit Protection Act 

 

•              All  rules and regulations governing administration, procurement and payment of  all Company sponsored employee benefit plans elected by the client or  worksite employee 

 

•              Fair  Labor Standards Act and the Family and Medical Leave Act of 1993* |   | •              Worksite  and employee safety under the Occupational Safety and Health Act (“OSHA”) and  related or similar Federal, state or local regulations 

 

•              Government  contracting requirements as regulated by, including, but not limited to: (i)  Executive Order 11246; (ii) Vocational Rehabilitation Act of 1973; (iii)  Vietnam Era Veteran’s Readjustment Assistance Act of 1974; (iv) Walsh-Healy  Public Contracts Act; (v) Davis-Bacon Act; (vi) the Service Contract Act of  1965; and (vii) any and all similar, related or like Federal, state or local  laws, regulations, ordinances and statutes 

 

•              Professional  licensing and liability  

 

•              Internal  Revenue Code Sections 414(m), (n) and (o) relating to client maintained  benefit plans  

 

•              Laws  affecting the assignment and ownership of intellectual property rights  including, but not limited to, inventions, whether patentable or not, any  patents resulting therefrom, copyrights and trade secrets 

 

•              Worker  Adjustment and Retraining Notification Act  |

 

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|   |   | •              Laws  affecting the maintenance, storage and disposal of hazardous materials

 

•              Title  VII (Civil Rights Act of 1964, as amended), Immigration Reform and Control  Act, the Americans with Disabilities Act, the Age Discrimination in  Employment Act, Older Workers Benefit Protection Act (including provisions  hereunder relating to client’s premises)

 

•              All  other federal, state, county or local laws, regulations, ordinances and  statutes which regulate employees’ wage and hour matters, prohibit  discrimination in the workplace or govern the employer/employee relationship

 

•              Fair  Labor Standards Act and the Family and Medical Leave Act of 1993* |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

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*  Primary LLC and the client are each responsible forcertain provisions under the terms of each Act.

 

**Sales and Marketing**

 

Primary LLC markets itsservices through a direct sales force. In order to exercise more control over the client selection process,Primary LLC uses a direct sales force rather than selling through agents.Primary LLC plans to expand its regional coverage and add sales offices inmajor metropolitan areas over the next few years as it accomplishes itsexpansion program. Primary LLC’s sales associates are compensated by acombination of salary and commission which, for top producers, will generatetotal compensation in the moderate six figure range.

 

Primary LLC generates salesleads from various sources as well as from direct sales efforts and inquiries.Each sales associate visits his or her clients periodically in order tomaintain an ongoing relationship and to seek new business referrals. PrimaryLLC also generates sales leads from referral relationship partners and aninformation database of small businesses.

 

**Vendor Relationships**

 

Primary LLC provides benefitsto its worksite employees under arrangements with a number of vendors. Themaintenance of insurance plans including workers’ compensation plans and healthbenefit plans that cover worksite employees is a significant part of PrimaryLLC’s business. If Primary LLC were required to obtain replacement contracts,such replacement could cause a significant disruption to the Primary LLC’sbusiness and possible dissatisfaction with the Primary LLC’s service offeringleading to a decrease in client retention and an adverse effect on the PrimaryLLC’s future results of operations or financial condition.

 

**Workers’ Compensation Plans**

 

Beginning in 2000, Texas MutualInsurance Company (Texas Mutual) was the provider of workers’ compensationinsurance for worksite employees based in Texas. The Texas Mutual program was aguaranteed cost insurance arrangement that expired on November 17, 2001. Theagreement with Texas Mutual was renewed in November 2001, again in November2002 and again in November 2003 for an additional one-year term. The Companyhas no workers’ compensation liability with respect to claims by Texas basedemployees that arose in 2001 2002 or 2003 for amounts in excess of those paidto Texas Mutual.

 

**Information Technology**

 

Primary Business Systems LLChas invested and is continuing to invest capital resources in the

 

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development and enhancement ofits information and technology infrastructure, including computer hardware andsoftware and telephony. This investment is intended to better serve PrimaryLLC’s client base, achieve a high level of client satisfaction and to allowPrimary LLC to improve efficiencies in its operations.

 

These computer systems providePrimary LLC with the capability to promptly and accurately deliver payroll andrelated services and generate comprehensive management reports. Primary LLC’sinformation systems manage all data relating to worksite employee enrollment,payroll processing, benefits administration, management information and otherrequirements of the Primary LLC’s operations. The current systems have high-volumepayroll processing capabilities that allow the Primary LLC to produce anddeliver weekly payrolls to its clients, each customized to the needs of suchclients.

 

Primary LLC processes payrollfor all of its worksite employees using Summit Financial payroll processingapplication. The Summit system enables the Primary LLC to effectively manageits existing operations and maintain appropriate controls.

 

Primary LLC is developing anddeploying PBS HR Central, an online client and employee portal. PBS HR Centralallows clients to input their payroll data directly into the Company’s payrollapplications via the Internet. Clients can regularly add or delete employees,view reports, and change payroll information. PBS HR Central provides real timeaccess to Primary LLC’s entire suite of human resource products and services.PBS HR Central is fully integrated with the company’s human resource managementsystems and payroll engines. This full integration results in improved clientsatisfaction, as well as improved operating margins. Summits software providesthe foundation, enabling a robust, client configurable portal, while PrimaryLLC’s custom developed software provides additional ease of use and servicecapabilities.

 

PBS HR Central allows theCompany to service its clients 24 hours a day with increased accuracy andefficiency. PBS HR Central is updated regularly to increase its functionality.PBS HR Central is intended to serve as a human resource information portal forclients providing a variety of payroll and human resource tools, templates andinformation.

 

The combination of the Summitsystems for access and functionality and the PBS HR Central online capabilitiescreates a comprehensive solution capable of growing and adapting to theevolving needs of clients.

 

**Competition**

 

The PEO industry is highlyfragmented.  We consider our primarycompetition to be PEOs, insurance agents, and fee-for-service providers, suchas payroll processors and human resource consultants. The market for humanresource consulting services is expected to become increasingly competitive aslarger companies, some of which have greater financial resources than PrimaryLLC and which have not traditionally operated in this industry, enter themarket. There are numerous companies operating in the PEO segment which competewith Primary LLC, including several larger publicly held entities such asGevity HR, Inc., ADP, ADP and and Administaff Inc.

 

The key competitive factors inthe human resource consulting industry are breadth and quality of services,price, reputation, financial stability, and choice, quality and cost ofbenefits. Primary LLC seeks to compete through its ability to provide afull-service human resource solutions to its clients through its advancedinformation technology solutions. The PEO industry consists of approximately800 companies, most of which serve a single market or region. Primary LLCbelieves that there are several PEOs with annual revenues that exceed $500million, four of which are publicly traded companies.  Management believes, based on industrysources, that the largest PEO, in terms of revenue, is Administaff, Inc., withrevenue in excess of $4 billion. Primary LLC considers its competition to be all of these large nationaland regional PEO providers, as well as the traditional form of employment ofemployees.

 

Primary LLC believes that somesmaller PEOs are exiting the PEO industry due to increased collateral requiredby providers of workers’ compensation and health benefits insurance. Inaddition, an increase in costs and a lack of available workers’ compensationand health benefits insurance programs is impacting

 

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these PEOs providing excellentopportunities for consolidations in the PEO market place Primary expects toexploit.

 

**Industry Regulation**

 

Numerous federal and state lawsand regulations relating to employment matters benefit plans and employmenttaxes affect the operations of Primary LLC. By entering into a co-employerrelationship with its clients, the Primary LLC assumes certain obligations andresponsibilities as an employer under these laws. Because many of these federaland state laws were enacted before the development of non-traditionalemployment relationships, such as PEOs, temporary employment and otheremployment-related outsourcing arrangements, many of these laws do notspecifically address the obligations and responsibilities of non-traditionalemployers. In addition, the definition of “employer” under these laws is notuniform.

 

Some governmental agencies thatregulate employment have developed rules that specifically address issuesraised by the relationship among PEOs, clients and worksite employees. Suchregulations are relatively new and, therefore, their interpretation and applicationof these regulations by administrative agencies and Federal and state courtsare limited or non-existent. The development of additional regulations andinterpretation of existing regulations can be expected to evolve over time. Inaddition, from time to time, states have considered, and may in the futureconsider, imposing certain taxes on gross revenues or service fees of theCompany and its competitors.

 

Primary LLC believes that itsoperations are currently in compliance in all material respects with applicableFederal and state statutes and regulations.

 

**Employee Benefit Plans**

 

Effective June 1, 2001 thePrimary LLC began to offer a 401(k) retirement plan, designed to be a “multipleemployer” plan under the Internal Revenue Code of 1986, as amended (the “Code”)Section 413(c). This plan design enables owners of clients and highlycompensated worksite employees, as well as highly compensated internalemployees of PBS, to participate. Generally, employee benefit plans are subjectto provisions of both the Code and the Employee Retirement Income Security Act(“ERISA”).  In order to qualify forfavorable tax treatment under the Code, the plans must be established andmaintained by an employer for the exclusive benefit of its employees.  In addition to the employer/employeethreshold, pension and profit-sharing plans, including plans that offer CODAs(a profit-sharing plan with a cash or deferred arrangement, or CODA, under CodeSection 401(k) under Code Section 401(k) and matching contributions under CodeSection 401(m), must satisfy certain other requirements under the Code.  These other requirements are generallydesigned to prevent discrimination in favor of highly compensated employees tothe detriment of non-highly compensated employees with respect to both theavailability of, and the benefits, rights and features offered in qualifiedemployee benefit plans.

 

Employee pension and welfarebenefit plans are also governed by ERISA. ERISA defines “employer” as “any person acting directly as an employer,or indirectly in the interest of an employer, in relation to an employeebenefit plan.”  ERISA defines the term“employee” as “any individual employed by an employer.”  A definitive judicial interpretation of“employer” in the context of a PEO arrangement has not been established,although the Internal Revenue Service released Rev. Proc. 2002-21 on April 24,2002, to help clarify the ability of PEOs to maintain multiple employer 401(k)plans.

 

**IRSIssuance of Rev. Proc. 2002-21**

 

In April 2002, the IRS issuedRev. Proc. 2002-21.  While Rev. Proc.2002-21 is intended to describe the steps that may be taken to ensure thequalified status of defined contribution retirement plans maintained by PEOsfor the benefit of worksite employees, there remain uncertainties regarding theoperation and interpretation of that revenue procedure.  Under Rev. Proc. 2002-21, if a PEO operatesa multiple employer retirement plan in accordance with IRS Code Section 413(c),the IRS will not disqualify the retirement plan solely on the grounds that theplan violates or has violated the exclusive benefit rule.

 

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**Federal Employment Taxes**

 

As an employer, Primary LLCassumes responsibility and liability for the payment of Federal and stateemployment taxes with respect to wages and salaries paid to worksite employees.There are essentially three types of Federal employment tax obligations:(i)withholding of income tax governed by Code Section 3401, et seq.; (ii)obligations under the Federal Income Contributions Act (“FICA”), governed byCode Section 3101, et seq.; and (iii) obligations under the FederalUnemployment Tax Act (“FUTA”), governed by Code Section 3101, et seq. Underthese Code sections, employers have the obligation to withhold and remit theemployer portion and, where applicable, the employee portion of these taxes.

 

Among other employment taxissues related to whether PEOs are employers of worksite employees are issuesunder the Code provisions applicable to Federal employment taxes. The issuearises as to whether a PEO is responsible for payment of employment taxes onwages and salaries paid to such worksite employees. Code Section 3401(d)(1),which applies to Federal income tax withholding requirements, contains an exceptionto the general common law test applied to determine whether an entity is an“employer” for purposes of Federal income tax withholding. The courts haveextended this common law employer exception to apply for both FICA and FUTA taxpurposes. Code Section 3401(d)(1) states that if the person for whom servicesare rendered does not have control of the payment of wages, the “employer” forthis purpose is the person having control of the payment of wages. The TreasuryRegulations issued under Code Section 3401(d)(1) state that a third party canbe deemed to be the employer of workers under this Section for income taxwithholding purposes where the person for whom services are rendered does nothave legal control of the payment of wages. Although several courts haveexamined Code section 3401(d)(1) with regard to PEOs its ultimate scope has notbeen delineated. Moreover, the IRS has to date relied extensively on the commonlaw test of employment in determining liability for failure to comply withFederal income tax withholding requirements. Accordingly, while Primary LLC believes that it can assume thewithholding obligations for worksite employees, if Primary LLC fails to meetthese obligations, the client may be held jointly and severally liable. Whilethis interpretive issue has not, to Primary LLC’s knowledge, discouragedclients from utilizing Primary LLC’s services, there can be no assurance that adefinitive adverse resolution of this issue would not do so in the future.

 

**State Regulation**

 

While many states do notexplicitly regulate PEOs, 22 states including the state where Primary LLC hasoffices (Texas) have passed laws that have licensing, registration or othercompliance requirements for PEOs and several states are considering suchregulation. Such laws vary from state to state but generally provide formonitoring the fiscal responsibility of PEOs. Primary LLC holds licenses, isregistered or otherwise compliant in the state it provides services. Whether ornot a state has licensing, registration or other compliance requirement,Primary LLC faces a number of other state and local regulations that couldimpact its operations.

 

**The Temporary Staffing Services (Staffing)sector**: In March 2003 Primary Business Systems Incacquired 100% of the shares of AHJR Inc., a Texas corporation established in1992.  The purpose of this purchase wasto provide a platform for the temorary staffing operations for the Company. InMarch we acquired, through AHJR, the customers and certain assets of atemporary staffing services company located in Texas.  AHJR operates under the tradename Concord Staffing Services.

 

**Products and Services**

 

Concord Staffing Servicesserves businesses in Texas by providing qualified temporary employees that meetthe needs of the customer. Customer’s needs vary some need seasonal staff,others short term employees to finish a project an others use the services ofConcord to determine the compatibility of employees before making the finaldecision to place them on staff permanently.               Whilethese aren’t all the reasons a company will use the services of Concord it isclear that Concord provides a valuable service to businesses in itsmarket.  Concord screens and qualifiesapplicants prior to scheduling them for assignment.

 

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**Sales and Marketing**:

 

Concord sales staff and staffplacement managers determine the needs of prospective customers and locatequalified individuals for assignment. Currently referrals from satisfied customers provide new customers forCSS; however this spring the company expects to hire additional direct salespersonnel to facilitate growth.

 

**Competition:**

 

The temporary staffing servicesindustry is highly fragmented and competitors range from household names ofpublic companies to niche market suppliers like Concord.  The focus in the business over the last 12months has been on establishing a platform in the temporary staffing servicesindustry that will provide opportunities to acquire other regional serviceproviders.  We have sought to establishbest practices and secure funding that will allow the company to grow, at thetime of this writing funding has not been secured however we are in discussionswith sources that have indicated a desire to provide funding and hope to have thisissue resolved by the end of the first quarter.  Failure to secure funding will have a negative effect on thegrowth of Concord and ultimately Primary.

 

Concord’s customer base is madeup of mostly large corporations (over 500 employees) who need temporary helpusualy with seasonal adjustmnets in their business.  In addition to the larger coprorations we also seak to servicesmall and medium size business (from 10 to 500) with expansion and seasonalneeds.

 

Concord management believesConcord is in compliance with the various state and federal regulations thatgovern employmnet and temporary staffing service providers.

 

Primary currently has ten fulltime employees.  We have two in sales,two in payroll, one in accounting two in loss controll and two in management.  All employees are trained in customerservice and all are responsible for serving our customers.  Management believes relations with emploeesare good. The employees are not represented by any barganing group.  Management expects to add up to three newemployees in sales durring fiscal year 2004.

 

**ITEM2.  PROPERTIES**

 

We lease space for our twooffices.  Our corporate office and PEOoperations are at 43 Kitty Hawk Dr. Suite 226, Universal City, TX 78148.  We lease approximately 1780 sq ft of thesecond floor in a two story masonry office building. The lease began in July2002 and continues through January 2005, the cost of the lease is $51,400 paidin monthly installments of $1,715.  Thelease includes all utilities.  The spacehas been built out to meet the needs of the company and it is the opinion ofmanagement that it will continue to meet the needs of the company through theterm of the lease.

 

Concord Staffing Services’operations are housed in approximately 1,014 sq. ft., leased space at 830 N.E.Loop 410, San Antonio, TX.

The term of the lease beganJune 2003 and continues through May 2006. Monthly lease payments from June 2003through May 2004 are $1,003.86, totalling $12,046.32for the period. From June2004 through May 2005, monthly lease payments will be $1,054.56 and totaling$12,654.72 for the period.  From June2005 through May 2006, monthly lease payments will be $1,105.26, totaling$13,263.12 for such period.  The leasecovers all utilities.  However, there isa provision for operations and maintenance pursuant to which the landlordassesses a prorata share of 2.50% of all increases in operations andmaintenance of the property.  For 2003,we were billed $587.99 to satisfy this provision.

 

Each entity owns all furniture,fixtures, computers, servers and equipment necessary to the operations of thebusiness.  Management believes that allproperty is adequately covered under various insurance policies.

 

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**Employees**

 

As of December 31, 2003, weemployed 11 corporate (non worksite) employees, both full-time and part-time,including executive officers.  We alsoemploy approximately 603 worksite employees and approximately 15 temporaryemployees on client assignments.  Webelieve our relationship with its employees is satisfactory. None of Primary’scorporate employees is covered by a collective bargaining agreement.

 

**ITEM3.  LEGAL PROCEEDINGS**

 

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

 

On or about June 12, 2003, theCompany was served with a suit commenced in the circuit court of Cook County,Illinois by Suburban Capital Corporation (“Suburban”).  An attorney who worked with the Company, EdWells, is also named as a defendant in the suit.  The Company removed the lawsuit to the United States DistrictCourt for the Northern District of Illinois, Eastern Division on or about June20, 2003.  In summary, the suit seeksdamages for the Company’s alleged failure to make full payment to Suburban forconsulting work allegedly performed by Suburban for the benefit of the Companyand for alleged breach of an Advisory Agreement and a Stock Purchase Agreementpursuant to which Pine Services, Inc., a company related to Suburban, sold acontrolling interest 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 allegesthat Suburban 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, PrimaryBusiness Systems, L.L.C. (“PBS LLC”), a wholly owned subsidiary of the Company,was served with a suit commenced in the United States District Court for theNorthern District of Illinois, Eastern Division by Pine Services, Inc.  In summary, the suit claims that PBS LLCowes Pine Services, Inc. certain amounts for the sale of its majority interestin Sharecom, Inc.  The Company intendsto vigorously defend itself against this lawsuit and pursue any and allremedies it may have against Pine Services, Inc.

 

On or about December 23, 2003, the Companyfiled a lawsuit in 285th District Court, Bexar County, Texas againstPine Services, Inc. and Frank Custable, Jr. alleging, among other claims,common law fraud, violation of the Texas Securities Act, violation of the TexasDeceptive Trades and Practices Act and fraudulent inducement in connection withthe Advisory Agreement referred to above. The defendants were served with this lawsuit but failed to appear in thecase or file an answer.  On February 6,2004, upon motion of the Company, the Court entered a default judgment againstthe defendants in the amount of approximately $4,700,000.00 in actual andpunitive damages.  The Company intendsto continue to vigorously prosecute this lawsuit and to seek to enforce thejudgment.

 

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

 

As a commercial enterprise andemployer and with respect to its employment-related businesses in particular,we are engaged in litigation from time to time during the ordinary course ofbusiness in connection with employment-relations issues, workers’ compensationand other matters.  Generally, we areentitled to indemnification or repayment from our PEO clients for claimsbrought by worksite employees related to their employment.  However, there can be no assurance that theclient employer will have funds or insurance in amounts to cover any damages orawards, and as co-employer, we may be subject to liability.

 

We are engaged in no otherlitigation, the effect of which would be anticipated to have a material adverse

 

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impact on our financialconditions or results of operations.

 

**ITEM 4.  SUBMISSIONOF MATTERS TO A VOTE OF SECURITY-HOLDERS**

 

None

 

**PartII**

 

**ITEM 5.  MARKETFOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS**

 

*Market Information.   *Ourcommon stock, par value $0.001 per share, is traded on the OTC Bulletin Boardof the National Association of Securities Dealers, Inc. under the symbol “PYBS.OB”

 
| **Fiscal Year Ended December 31,  2004** |   | **High** |   | **Low** |   |
|------------------------------------------|--------|----------|--------|---------|--------|
| First Quarter                            |   | $        | .34    |    | $      | .05 |   |
| Second Quarter                           |   | $        |   |    | $      |   |   |
| Third Quarter                            |   | $        |   |    | $      |   |   |
| Fourth Quarter                           |   | $        |   |    | $      |   |   |

 
| **Fiscal Year Ended December 31,  2003** |   | **High** |   | **Low** |   |
|------------------------------------------|--------|----------|--------|---------|--------|
| First Quarter                            |   | $        | 1.01   |    | $      | 0.05 |   |
| Second Quarter                           |   | $        | 1.01   |    | $      | 0.10 |   |
| Third Quarter                            |   | $        | 0.30   |    | $      | 0.10 |   |
| Fourth Quarter                           |   | $        | 0.15   |    | $      | .010 |   |

 
| **Fiscal Year Ended December 31,  2002** |   | **High** |   | **Low** |   |
|------------------------------------------|--------|----------|--------|---------|--------|
| First Quarter                            |   | $        | 0.01   |    | $      | 0.01 |   |
| Second Quarter                           |   | $        | 0.02   |    | $      | 0.01 |   |
| Third Quarter                            |   | $        | 0.00   |    | $      | 0.00 |   |
| Fourth Quarter                           |   | $        | *2.50  |    | $      | 0.31 |   |

 

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* Close priceadjusted for dividends and splits.

 

*Dividends.   *TheCompany did not pay any cash dividends during the fiscal year ended December31, 2003 and does not expect to pay dividends in the foreseeable future.

 

We are authorized to issue750,000,000 shares of common stock, of which 85,568,747 shares were issued andoutstanding as of March 26, 2004. The number of stockholders of record for theCommon Stock as of March 23, 2004 is 179. This number does not include beneficial owners of the common stock whoseshares are held in the names of various dealers, clearing agencies, banks,brokers and other fiduciaries.

 

Our transfer agent is StandardRegistrar & Transfer Company, Inc. of Draper, Utah. We expect to change ourtransfer agent within the next 60 days.

 

**RISKFACTORS**

 

You should carefully considerthe risks described below with respect to our operations, businesses andfinancial condition.  The risks anduncertainties described below are not the only ones facing us.  Other risks and uncertainties that we havenot predicted or assessed may also adversely affect us.  Some of the information in this filingcontains forward-looking statements that involve substantial risks and

 

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 uncertainties.  You canidentify these statements by forward-looking words such as “may,” “will,”“expect,” “anticipate,” “believe,” “intend,” “estimate,” and “continue” orother similar words.  You should readstatements that contain these words carefully for the following reasons:

 

•              thestatements may discuss our future expectations;

 

•              thestatements may contain projections of our future earnings or of our financialcondition; and

 

•              thestatements may state other “forward-looking” information.

 

**We Will Need To Raise Additional Funds. TheseFunds May Not Be Available When We Need Them**.

 

Based on our current plans andthe funding noted above, we believe that our cash on hand and cash generatedfrom our operations will be sufficient to fund our operations for at least thenext 12 months. However, Primary may look to raise additional capital tooperate the business, support expansion plans, develop new or enhanced servicesand products, respond to competitive pressures, acquire complementarybusinesses or technologies or respond to unanticipated events. We can provideno assurances that additional financing will be available when needed onfavorable terms, or at all. If these funds are not available when we need them,we may need to change our business strategy or reduce our operations orinvestment activities. In addition, any issuance of additional equitysecurities will dilute the ownership interest of our existing stockholders andthe issuance of additional debt securities may increase the perceived risk ofinvesting in us. Primary periodically evaluates its liquidity requirements,capital needs and availability of capital resources in view of its plans forexpansion, anticipated levels of health benefit plan subsidies,collateralization requirements for insurance coverages, and other operatingcash needs. Primary believes that its current cash balances and cash flow fromoperations will be sufficient to meet its requirements through 2004.

 

**We may acquire additional companies, whichmay result in adverse effects on our earnings.**

 

We may at times become involved indiscussions with potential acquisition candidates. Any acquisition that we mayconsummate may have an adverse effect on our liquidity and earnings and may bedilutive to our earnings. In the event that we consummate an acquisition orobtain additional capital through the sale of debt or equity to finance anacquisition, our shareholders may experience dilution in their shareholders’equity.  We have historically obtainedgrowth through acquisitions of other companies and businesses.  Under Statements of Financial AccountingStandards No.141, Business Combinations (SFAS No.141) and No. 142 Goodwill andOther intangible Assets implemented in June 2001, we are required toperiodically review goodwill and indefinite life intangible assets for possibleimpairment.  In the event that we arerequired to write down the value of any assets under these pronouncements, it maymaterially and adversely affect our earnings. See the more detailed discussionappearing as part of our Management Discussion and Analysis.

 

**Our financial condition may be affected byincreases in health care and workers’ compensation insurance costs.**

 

Health care insurance premiums and workers’compensation insurance coverage comprise a significant part of our PEOoperating expenses. Accordingly, we use managed care procedures in an attemptto control these costs. Changes in health care and workers’ compensation lawsor regulations may result in an increase in our costs and we may not be able toimmediately incorporate such increases into the fees charged to clients becauseof our existing contractual arrangements with clients. As a result, any such increasesin these costs could have a material adverse effect on our financial condition,results of operations and liquidity.

 

**Our financial condition may be affected byrisks associated with the health and workers’ compensation claims experience ofour clients.**

 

Although we utilize only fully insured plansof health care and incur no direct risk of loss under

 

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those plans, the premiums thatwe pay for health care and workers’ compensation insurance are directlyaffected by the claims experience of our clients. If the experience of theclients is unfavorable, the premiums that are payable by us will increase orcoverage may become unavailable altogether. We may not be able to pass suchincreases onto our clients, which may reduce our profit margin. Increasinghealth care and workers’ compensation premiums could also place us at adisadvantage in competing for new clients. In addition, periodic reassessmentsof workers’ compensation claims of prior periods may require an increase ordecrease to our reserves, and therefore may also affect our present and futurefinancial condition.

 

**Our financial condition may be affected byincreases in health insurance premiums, unemployment taxes and workers’compensation rates.**

 

Health insurance premiums state unemploymenttaxes and workers’ compensation rates are in part determined by our claimsexperience and comprise a significant portion of our direct costs.  If we experience a large increase in claimactivity, our unemployment taxes, health insurance premiums or workers’compensation insurance rates could increase. Although we employ internal and external risk management procedures inan attempt to manage our claims incidence, estimate claims expenses andstructure our benefits contracts to provide as much cost stability as possible,we may not be able to prevent increases in claim activity, accurately estimateour claims expenses or pass the cost of such increases on to our clients.  Since our ability to incorporate such increasesinto service fees to our clients is constrained by contractual arrangementswith clients, a delay could result before such increases could be reflected inservice fees. As a result, such increases could have a material adverse effecton our financial condition or results of operations.

 

**Significant growth through acquisitions mayadversely affect our management and operating systems.**

 

Our growth is making significant demands onour management, operations and resources, including working capital. If we arenot able to effectively manage our growth, our business and operations will bematerially harmed. To manage growth effectively, we will be required tocontinue to improve our operational, financial and managerial systems,procedures and controls, and hire and train new employees while managing ourcurrent operations and employees. Historically, our cash flow from operationshas been insufficient to expand operations. Sufficient capital may not be available in the future.

 

**Our business may be adversely affected due toeconomic conditions in specific geographic markets.**

 

All our revenues are derived through ourTexas operations. We attempt to diversify through different industry segmentsand by obtaining clients in different metropolitan markets. While we believethat our market diversification will eventually lessen this risk in addition togenerating significant revenue growth, we may not be able to duplicate in othermarkets the revenue growth and operating results necessary to offset economicconditions.

 

**Unfavorable interpretations of governmentlaws may harm our PEO operations.**

 

Our PEO operations are affected by manyfederal, state and local laws relating to labor, tax, insurance and employmentmatters and the provision of managed care services. Many of the laws related tothe employment relationship were enacted before the development of alternativeemployment arrangements, such as those that we provide, and do not specificallyaddress the obligations and responsibilities of non-traditional employers. Theunfavorable resolution of unsettled interpretive issues concerning ourrelationship could have a material adverse effect on our results of operations,financial condition and liquidity. Uncertainties arising under the InternalRevenue Code of 1986 include, but are not limited to, the qualified tax statusand favorable tax status of certain benefit plans we and other alternativeemployers provide. In addition, new laws and regulations may be enacted withrespect to its activities, which may also have a material adverse effect on ourbusiness, financial condition, results of operations and liquidity.

 

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**If government regulations regarding PEOs,temporary and permanent staffing are implemented, or if current regulations arechanged, our business could be harmed.**

 

Because many of the laws related to theemployment relationship were enacted prior to the development of professionalemployer organizations and other staffing businesses, many of these laws do notspecifically address the obligations and responsibilities of non-traditionalemployers. Our operations are affected by numerous federal, state and locallaws and regulations relating to labor, tax, insurance and employment matters.  By entering into an employment relationshipwith employees who work at client locations, we assume obligations andresponsibilities of an employer under these laws. Uncertainties arising underthe Internal Revenue Code of 1986, include, but are not limited to, the qualifiedtax status and favorable tax status of certain benefit plans provided by ourcompany and other alternative employers. The unfavorable resolution of theseunsettled issues could have a material adverse effect on results of operationsand financial condition. While many states do not explicitly regulate PEOs,approximately one-half of the states have enacted laws that have licensing;registration or certification requirements for PEOs, and several additionalstates are considering such laws. Such laws vary from state to state butgenerally provide for the monitoring of the fiscal responsibility of PEOs andspecify the employer responsibilities assumed by PEOs. Additionally, manystates require licensure or registration of entities providing temporary healthcare or nursing services as well as those offering permanent placementservices. There can be no assurance that we will be able to comply with anysuch regulations, which may be imposed upon us now or in the future, and ourinability to comply with any such regulations could have a material adverseeffect on our results of operations and financial condition. In addition, therecan be no assurance that existing laws and regulations which are not currentlyapplicable to us will not be interpreted more broadly in the future to apply toour existing activities or that new laws and regulations will not be enactedwith respect to our activities. Either of these changes could have a materialadverse effect on our business, financial condition, results of operations andliquidity.

 

**We may not be able to obtain all of thelicenses and certifications that we need to operate.**

 

State authorities extensively regulate thePEO, temporary medical staffing and permanent placement industry and somestates require us to satisfy operating, licensing or certificationrequirements.  If we are unable toobtain or maintain all of the required licenses or certifications that we need,we could experience material adverse effects to our results of operations,financial condition and liquidity.

 

**Health care or workers’ compensation reformcould impose unexpected burdens on our ability to conduct our business.**

 

Regulation in the health care and workers’compensation fields continues to evolve, and we cannot predict what additionalgovernment regulations affecting our business may be adopted in the future.Changes in any of these laws or regulations may adversely impact the demand forour services, require that we develop new or modified services to meet thedemands of the marketplace, or require that we modify the fees that we chargefor our services. Any such changes may adversely impact our competitiveness andfinancial condition.

 

**If we lose our qualified status for certaintax purposes, our business would be adversely affected.**

 

The Internal Revenue Service established anEmployee Leasing Market Segment Group for the purpose of identifying specificcompliance issues prevalent in certain segments of the PEO industry. One issuethat arose in the course of these reviews is whether PEOs should be consideredthe employers of worksite employees under Internal Revenue Code provisionsapplicable to employee benefit plans, which would permit PEOs to offer benefitplans that qualify for favorable tax treatment to worksite employees. If theIRS concludes that PEOs are not employers of worksite employees for purposes ofthe Internal Revenue Code, we would need to respond to the following adverseimplications:

 

•              thetax-qualified status of our 401(k) plan could be revoked and our Cafeteria Planmay lose its favorable tax status;

 

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•              worksiteemployees would not be able to continue to participate in such plans or inother employee benefit plans;

 

•              wemay no longer be able to assume the client company’s federal employment taxwithholding obligations;

 

•                                          ifsuch a conclusion were applied retroactively, then employees’ vested accountbalances in the 401(k) plan would become taxable immediately, we would lose ourtax deduction to the extent contributions were not vested, the plan trust wouldbecome a taxable trust and penalties, and additional taxes for prior periodscould be assessed.

 

In such a circumstance, we would face therisk of client dissatisfaction as well as potential litigation, and ourfinancial condition; results of operations and liquidity could be materiallyadversely affected.

 

In April 2002, IRS issued Rev. Proc. 2002-21.While Rev. Proc. 2002-21 is intended to describe the steps that may be taken toinsure the qualified status of defined contribution retirement plans maintainedby PEOs for the benefit of worksite employees, there remain uncertaintiesregarding the operation and interpretation of that revenue procedure.  Under Rev. Proc. 2002-21, if a PEO operatesa multiple employer retirement plan in accordance with IRS Code Section 413(c),the IRS will not disqualify the retirement plan solely on the grounds that theplan violates or has violated the exclusive benefit rule.  Primary LLC’s current active retirementsavings plan is designed, and intended to be operated, in accordance with IRSCode Section 413(c).

 

**We are liable for the costs of worksiteemployee payroll and benefits and bear the risk if such costs exceed the feespayable to us by our clients.**

 

Under our standard client service agreement,we become a co-employer of worksite employees and assume the obligations to paythe salaries, wages and related benefit costs and payroll taxes of suchworksite employees. We assume these obligations as a principal, not merely asan agent, of the client company.  If aclient company does not pay us, or if the costs of benefits provided toworksite employees exceeds the fees paid by a client company, our ultimateliability for worksite employee payroll and benefits costs could have amaterial adverse effect on our financial condition or results ofoperations.  Our obligations includeresponsibility for

 

•                                          paymentof the salaries and wages for work performed by worksite employees, regardlessof whether the client company makes timely payment to us of the associatedservice fee; and

 

•                                          periodicreassessments of workers’ compensation claims of prior periods may require anincrease or decrease to our reserves, and therefore may also affect our presentand future financial conditions; and

 

•                                          providingbenefits to worksite employees even if the costs we incur to provide thosebenefits exceed the fees paid by the client company.

 

**We bear the risk of nonpayment from ourclients and the possible effects of bankruptcy filings by clients.**

 

To the extent that any client experiencesfinancial difficulty, or is otherwise unable to meet its obligations as theybecome due, our financial condition and results of operations could beadversely affected. For work performed prior to the termination of a clientagreement, we may be obligated, as an employer, to pay the gross salaries andwages of the client’s worksite employees and the related employment taxes andworkers’ compensation costs, whether or not our client pays us on a timelybasis, or at all. A significant increase in our uncollected account receivablesmay have a material adverse effect on our earnings and financial condition.

 

To the extent that Primary LLC extends creditto its clients under its client service agreements, or

 

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is liable for employee payroll and related expenses, and the clientfiles for protection under the bankruptcy laws, Primary LLC may be unable tocollect the funds owed to it from the client. As a result, Primary LLC may be required to pay payroll and relatedexpenses without reimbursement. In addition, although Primary LLC believes thatits client service agreements should be terminable by it once a client entersbankruptcy, there is a risk that a bankruptcy court may not agree and wouldrequire Primary LLC to continue to perform services for such client, therebyincreasing the risk that Primary LLC would be unable to collect funds from theclient.  Therefore, the filing forbankruptcy by a significant client, or a number of clients, may have a materialadverse effect upon Primary LLC’s financial condition.

 

**We may be held liable for the actions of ourclients and employees and therefore incur unforeseen liabilities.**

 

A number of legal issues with respect to theco-employment arrangements among PEOs and temporary staffing firms, theirclients and worksite employees remain unresolved. These issues include whobears the ultimate liability for violations of employment and discriminationlaws. As a result of our status as a co-employer, we may be liable forviolations of these or other laws despite contractual protections. While ourclient service agreements generally provide that the client is to indemnify usfor any liability caused by the client’s failure to comply with its contractualobligations and the requirements imposed by law, we may not be able to collecton such a contractual indemnification claim and may then be responsible forsatisfying such liabilities. In addition, worksite employees may be deemed tobe our agents, which could make us liable for their actions.

 

**We may be liable for the actions of PEOworksite employees or clients and our insurance policies may not be sufficientto cover such liabilities.**

 

Our PEO client services agreement establishesa contractual division of responsibilities between our company and each clientfor various human resource matters, including compliance with and liabilityunder various governmental laws and regulations. However, we may be subject toliability for violations of these or other laws despite these contractualprovisions, even if we do not participate in such violations.  Although such client agreements generallyprovide that the client indemnify us for any liability attributable to theclient’s failure to comply with its contractual obligations and to therequirements imposed by law, we may not be able to collect on such acontractual indemnification claim, and thus may be responsible for satisfyingsuch liabilities. In addition, worksite employees may be deemed to be ouragents, subjecting us to liability for the actions of such worksite employees.As an employer, we, from time to time, may be subject in the ordinary course ofour business to a wide variety of employment-related claims such as claims forinjuries, wrongful death, harassment, discrimination, wage and hours violationsand other matters. Although we carry $1 million of general liability insurance,with no deductible, and carry $1 million of employer liability insurance, withno deductible, there can be no assurance that any such insurance we carry willbe sufficient to cover any judgments, settlements or costs relating to anypresent or future claims, suits or complaints. There also can be no assurancethat sufficient insurance will be available to us in the future and, if available,on satisfactory terms. If the insurance we carry is not sufficient to cover anyjudgments, settlements or costs relating to any present or future claims, suitsor complaints, then our business and financial condition could be materiallyadversely affected.

 

**Our clients may be held liable for employmenttaxes, which could discourage some companies from transacting business with us.**

 

Pursuant tothe PEO client service agreement, we assume responsibility and liability forthe payment of federal employment taxes imposed under the Internal Revenue Codewith respect to wages and salaries paid to our worksite employees as well asvarious state payroll tax obligations. While the client service agreement provides that we have the sole legalresponsibility for making these tax contributions, the Internal Revenue Serviceor applicable state taxing authority could conclude that such liability cannotbe completely transferred to us. Accordingly, in the event that we fail to meetour tax withholding and payment obligations, the client company may be heldjointly and severally liable.  There areessentially three types of federal employment tax obligations:

 

•              incometax withholding requirements;

 

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•              obligationsunder the Federal Income Contribution Act; and

 

•              obligationsunder the Federal and States Unemployment Tax Acts.

 

While this interpretive issuehas not, to our knowledge, discouraged clients from enrolling with us, it ispossible that a definitive adverse resolution of this issue would not do so inthe future.

 

**We may not be fully covered by the insurancewe procure.**

 

Although we carry liability insurance, theinsurance we purchase may not be sufficient to cover any judgments, settlementsor costs relating to any present or future claims, suits or complaints. Inaddition, sufficient insurance may not be available to us in the future onsatisfactory terms or at all. If the insurance we carry is not sufficient tocover any judgments, settlements or costs relating to any present or futureclaims, suits or complaints, our business, financial condition, results ofoperations and liquidity could be materially adversely affected.

 

**If we were not able to renew all of theinsurance plans, which cover worksite employees, our business would beadversely impacted.**

 

The maintenance of health and workers’compensation insurance plans that cover worksite employees is a significantpart of our business.  If we were unableto secure such renewal contracts, our business would be adverselyaffected.  The current health andworkers’ compensation contracts are provided by vendors with whom we have anestablished relationship and on terms that we believe to be favorable.  While we believe that renewal contractscould be secured on competitive terms without causing significant disruption toour business, there can be no assurance in this regard.

 

**Our business will suffer if our services arenot competitive.**

 

Each of the payroll, temporary employeeplacement and the professional employer industries are characterized byvigorous competition. Since we compete with numerous entities that have greaterresources than us in each of our business lines, our business will suffer if weare not competitive with respect to each of the services we provide. We believethat our major competitors with respect to payroll and tax services areAutomatic Data Processing, Inc., Ceridian Corp. and Paychex, Inc. Our majorcompetitors with respect to temporary staffing resources are Manpower andTempSource.  Our major competitors withrespect to professional employer services are ADP Total Source, Gevity HR andAdministaff, Inc. These companies may have greater financial and marketingresources than we. We also compete with manual payroll systems and computerizedpayroll services provided by banks, and smaller independent companies.

 

**If we cannot obtain sufficient levels oftemporary employees, our business may be affected.**

 

Our subsiairy AHJR is a temporary employmentagency, which depends on a pool of qualified temporary employees willing toaccept assignments for our clients. Its business is materially dependent uponthe continued availability of such qualified medical temporary personnel. Ourinability to secure temporary medical personnel would have a material adverseeffect on our business.

 

**Our client agreements are terminable and if asignificant number of clients do not renew their contracts, our business maysuffer.**

 

Our standard PEO client agreement providesfor successive one-year terms, subject to termination by us or by the clientupon 30 days’ written notice prior to the expiration of the then-currentone-year term. A significant number of terminations by clients could have amaterial adverse effect on our financial condition, results of operations andliquidity.

 

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**If we are unable to renew or replace clientcompanies, our financial condition and results of operations will be adverselyaffected.**

 

Our standard PEO client service agreement issubject to non-renewal on 30 days notice by either us or the client.Accordingly, the nature of the client service agreement makes us vulnerable topotential cancellations by existing clients, which could materially andadversely affect our financial condition and results of operations.  In addition, our results of operations aredependent in part upon our ability to retain or replace our client companiesupon the termination or cancellation of the client service agreement.  Clients may determine to cancel their relationshipwith us for numerous reasons, including economic factors.  It is possible that the number of contractcancellations will increase in the future.

 

**Since we have not paid dividends on ourcommon stock, you cannot expect dividend income from an investment in ourcommon stock.**

 

We have not paid any dividends on our commonstock since our inception and do not contemplate or anticipate paying anydividends on our common stock in the foreseeable future. Future potentiallenders may prohibit us from paying dividends without its prior consent.Therefore, holders of our common stock may not receive any dividends on theirinvestment in us. Earnings, if any, will be retained and used to finance thedevelopment and expansion of our business.

 

**We have outstanding shares of restrictedstock, which if sold in the open market, may adversely affect its stock price.**

 

Of the 86,278,297 shares outstanding as ofMarch 1, 2004, the Company has outstanding 80,998,153 shares, which may bedeemed “restricted stock.”  These restrictedshares include the 79,096,254 shares owned by management.  Possible or actual sales of the Company’scommon stock by its present shareholders under Rule 144 or registrationstatements may have a depressing effect on the price of the Primary’s commonstock in the open market.

 

**There Are Risks Associated With Our StockTrading On The NASD OTC Bulletin Board Rather Than A National Exchange.**

 

There are significantconsequences associated with our stock trading on the NASD OTC Bulletin Boardrather than a national exchange. The effects of not being able to list oursecurities on a national exchange include:

 

• Limitedrelease of the market prices of our securities;

• Limitednews coverage of us;

• Limitedinterest by investors in our securities;

• Volatilityof our stock price due to low trading volume;

• Increaseddifficulty in selling our securities in certain states due to “blue sky”restrictions; and

• Limitedability to issue additional securities or to secure additional financing.

 

**If Our Common Stock Is Subject To Penny StockRules, You May Have Greater**

**Difficulty Selling Your Shares.**

 

The Securities Enforcement andPenny Stock Reform Act of 1990 applies to stocks characterized as “pennystocks,” and requires additional disclosure relating to the market for pennystocks in connection with trades in any stock defined as a penny stock. TheSecurities and Exchange Commission has adopted regulations that generallydefine a penny stock to be any equity security that has a market price of lessthan $5.00 per share, subject to certain exceptions.

 

The exceptions includeexchange-listed equity securities and any equity security issued by an issuerthat has

• nettangible assets of at least $2,000,000, if the issuer has been in     continuous operation for at least three years;

 

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• nettangible assets of at least $5,000,000, if the issuer has been in continuousoperation for less than three years; or

• averageannual revenue of at least $6,000,000 for the last three years.

 

Unless an exception isavailable, the regulations require the delivery, prior to any transactioninvolving a penny stock, of a disclosure schedule explaining the penny stockmarket and the associated risks.

 

If our financial condition doesnot meet the above tests, then trading in the common stock will be covered byRules 15g-1 through 15g-6 and 15g-9 promulgated under the Securities ExchangeAct. Under those rules, broker-dealers who recommend such securities to personsother than their established customers and institutional accredited investorsmust make a special written suitability determination for the purchaser andmust have received the purchaser’s written agreement to a transaction prior tosale. These regulations would likely limit the ability of broker-dealers totrade in our common stock and thus would make it more difficult for purchasersof common stock to sell their securities in the secondary market. The marketliquidity for the common stock could be severely affected.

 

**ITEM6.**

 

**MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

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-K. See “Cautionary Note RegardingForward-Looking Statements” beginning on page 1. The following discussionshould be read in conjunction with the Company’s Consolidated FinancialStatements and Notes thereto included elsewhere in this filing. Historicalresults are not necessarily indicative of trends in operating results for anyfuture period.

 

**Overview**

 

The business of PrimaryBusiness Systems Inc. is to operate in in the Professional EmployerOrganization industry and the Temporary Staffing Services Industry and operatethem as wholly owned subsidiaries, then as companies are accumulated in eachsector and as economies of scale can be realized combine the individualentities in each sector.  It isimportant to address the particular markets of each sector therefore we willdiscus them individually at this point.

 

Primary LLC is a regionalProfessional Employer Organization (PEO) committed providing human capitolmanagement solutions.  We offer ourclients, which are typically small to medium-sized business with between fiveand fifty employees, a broad range of product and services that provide a completesolution for the clients’ human resources outsourcing needs.  Primary LLC’s products and services includebenefits administration, payroll administration, governmental compliance, riskmanagement, unemployment administration, and health, welfare and retirementbenefits.

 

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

 

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

 

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Subsequent to the end of each period, such wages are paid and therelated service fees are billed.

 

***Cost of Services****.   *Costof services includes all direct costs associated with revenue generatingactivities as well as employee benefit costs, workers’ compensation insuranceand state unemployment taxes.

 

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

 

In certain instances, PrimaryLLC opts to make a contribution toward the cost of the worksite employees’medical benefit costs. In most small group health markets, medical benefit planrates vary based on the medical participants’ demographics. In order to offer acompetitively priced business solution, Primary LLC may offer reduced medicalbenefit plan rates to worksite employees with positive risk characteristics.The addition of these selected worksite employees offsets potential adverseselection and helps to stabilize the overall medical benefit plan risk toPrimary LLC.

 

Primary LLC offers its medicalbenefit plans through partnerships with premier health care companies. Thesecompanies have extensive provider networks and strong reputations in themarkets in which Primary LLC operates.

 

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

 

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

 

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

 

***Operating Expenses****.   *Operatingexpenses consist primarily of salaries, wages and commissions associated withthe Primary’s internal employees, and general and administrative expenses.Sales and marketing commissions and client referral fees are expensed asincurred. Primary expects that future revenue growth will result in increasedoperating leverage, as Primary’s fixed operating expenses are leveraged over alarger revenue base.

 

***Income Taxes.***     Primary records income tax expense usingthe asset and liability method of accounting for deferred income taxes.Primary’s effective tax rate for 2003 was 0%.

 

***Profitability.***        Profitability is largely dependent uponPrimary’s success in generating revenues for its services and managing thecosts that are within its control. Revenues and costs of service primarilyrelate to workers’ compensation coverage, health benefit plans and stateunemployment taxes. Primary seeks to manage these costs through the use of: (i)workers’ compensation arrangements with carriers who efficiently manage claimsadministration, internal risk assessment and client risk management programs;(ii) appropriately designed health benefit plans that encourage worksiteemployee participation, and, (iii) aggressive management of its state unemploymenttax exposure.

 

**Off-balance Sheet Arrangements**

 

Primary does not currently haveany off-balance sheet arrangements.

 

**Critical Accounting Policies**

 

The accounting policiesdescribed below are those that Primary considers critical in preparing its financial

 

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statements. These policiesinclude significant estimates made by management using information available atthe time the estimates are made. However, as described below, these estimatescould change materially if different information or assumptions were used. Thedescriptions below are summarized and have been simplified for clarity. A moredetailed description of the significant accounting policies used by Primary inpreparing its financial statements is included in Note 1 of Notes to theConsolidated Financial Statements and in Item 1 of this Form 10-K.

 

***Revenue Recognition****.   *Thegross billings that Primary LLC charges its clients under its Customer ServicesAgreement include each worksite employee’s gross wages, a service fee and, tothe extent elected by the clients, health and welfare benefit plan costs.Primary LLC’s service fee, which is computed as a percentage of gross wages, isintended to yield a profit to Primary LLC and cover the cost of certainemployment-related taxes, workers’ compensation insurance coverage, andadministrative and field services provided by Primary to the client, includingpayroll administration, record keeping, and safety, human resources, andregulatory compliance consultation. The component of the service fee related toadministration varies according to the size of the client, the amount andfrequency of payroll payments and the method of delivery of such payments. Thecomponent of the service fee related to workers’ compensation and unemploymentinsurance is based, in part, on the client’s historical claims experience. Allcharges by Primary LLC are invoiced along with each periodic payroll deliveredto the client.

 

Primary reports revenues fromservice fees in accordance with Emerging Issues Task Force (“EITF”) No. 99-19, *ReportingRevenue Gross as a Principal versus Net as an Agent*. The Companyreports as revenues, on a gross basis, the total amount billed to clients forservice fees, health and welfare benefit plan fees, workers’ compensation andunemployment insurance fees. Primary reports revenues on a gross basis forthese fees because Primary Business Systems LLC is the primary obligor anddeemed to be the principal in these transactions under EITF No. 99-19. Primarynow reports revenues on a net basis for the amount billed to clients forworksite employee salaries, wages and certain payroll-related taxes lessamounts paid to worksite employees and taxing authorities for these salaries,wages and taxes. Primary accounts for its revenues using the accrual method ofaccounting. Under the accrual method of accounting, Primary recognizes itsrevenues in the period in which the worksite employee performs work. Primaryaccrues revenues and unbilled receivables for service fees relating to workperformed by worksite employees but unpaid at the end of each period. Inaddition, the related costs of services are accrued as a liability for the sameperiod. Subsequent to the end of each period, such costs are paid and therelated PEO service fees are billed.

 

**Results of Operations**

 

The following table presentsPrimary’s results of operations for the years ended December 31, 2002 and 2003,expressed as a percentage of revenues:

 
|                               |   | **2002** |   | **2003** |   |
|------------------------------------|--------|----------|--------|----------|--------|
| Revenues                           |   | 100.0    | %      | 100.0    | %      |
| Cost of  Services                  |   | 82.8     |   | 71.01    |   |
|                               |   |     |   |     |   |
| Gross Profit                       |   | 17.2     |   | 28.98    |   |
| Operating  Expenses:               |   |     |   |     |   |
| General and  administrative        |   | 11.4     |   | 22.65    |   |
| Salaries,  wages and commissions   |   | 8.5      |   | 15.75    |   |
| Consulting  Services               |   | 23       |   | .03      |   |
|                               |   |     |   |     |   |
| Total  operating costs             |   | 43.96    |   | 41.19    |   |
|                               |   |     |   |     |   |
| Operating  (loss) income           |   | (25.77   | )      | (12.21   | )      |
| Other income                       |   | 0.0      |   | 0.0      |   |
| Interest  expense                  |   | 0.0      |   | 0.0      |   |
| Other  non-operating expense       |   | 0.0      |   | 0.0      |   |
|                               |   |     |   |     |   |
| (Loss)  income before income taxes |   | (25.43   | )      | (11.50   | )      |
| Income tax  (benefit) provision    |   | 0        |   | 0        |   |
|                               |   |     |   |     |   |
| Net income  (loss)                 |   | (25.43   | )      | (11.50   | )      |

 

*Year Ended December31, 2003 Compared to Year Ended December 31, 2002*

 

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For the year ended December 31, 2003, revenues decreased $619,522, or18.75% from 2002, totaling $2,684,396 n 2003 compared to $3,303,918, for 2002.Revenue change was primarily due to Primary LLC’s marketing strategy andability to provide complete human resource services to our clients and lowerrisk associated with those clients.

 

Cost of services which includes the cost of Primary LLC’s medicalbenefit plans, workers’ compensation insurance, state unemployment taxes andother costs were $1,906,307, or 71.01% of revenues for 2003, compared to$2,735,940, or 82.8% for 2002, representing a decrease of $829,633, or 30.32%.

 

Decreases in the number of covered worksite employees are largelyresponsible for decreases in benefit expenses. 

Benefit expenses were $105,699 for 2003, compared to $156,700 or 4.7%for 2002.

 

Workers’ compensation costs were $391,328 for 2002, as compared to$382,147 for 2001, representing an increase of $9,181. Net change in Workers’compensation costs was due to the addition of worksite employees in lower riskcategories and the elimination of some high risk business.

 

State unemployment taxes were $50,652 for 2003, compared to $12,114 for2002. This increase was the result of an increase of the number of coveredemployees.

 

Gross profit was $778,089 or 28.98% for 2003, compared to $567,978, or17.2% for 2002, representing an increase of $210,111, or 36.99%. Gross profitmargin increased primarily due to workers’ compensation cost decreases fromlower risk business and an increased fee as a result of our emphasis on HRservices.

 

Operating expenses were $1,105,829 or% for 2003, compared to $1,419,30543.96% for 2003, representing a decrease of $313,476. The decrease in operatingexpenses was due largely to the decreases in consulting services.  (See ITEM 12. CERTAIN RELATIONSHIPS ANDRELATED TRANSACTIONS.)

 

Salaries, wages and commissions were $422,807 or 15.75% for 2003,compared to $281,788 or 8.5% for 2002, representing an increase of$141,019.  Consolidated payroll costsincreased primarily due to the acquisition of CSS and additional sells staff.

 

Other general and administrative expenses were $608,022or 22.65% for2003, compared to $378,159 or 11.4% in 2002, representing an increase of$229,863. The increase in general and administrative expenses was due to theimplementation of initiatives in areas related to services and programs.  This increase also represents expensesrelated to the acquisition of Concord Staffing Services and legal andaccounting fees.

 

Net loss was $308,770 for 2003, compared to a net loss of $840,268 for2002, representing a decrease in losses of $531,498.  As the volume of our operating companies increase we expect tocontinue this trend.

 

***Liquidityand Capital Resources***

 

Primary had $20,899 in cash and cash equivalents and restrictedcertificates of deposit at December 31, 2003. Primary is required tocollateralize its obligations under its workers compensation coverage. TheCompany uses its cash as well as certificates of deposits to collateralizethese obligations as more fully described below.

 

At November 18, 2003, Primary had deposited $96,097, as collateral withthe Company’s workers’ compensation plans upon renewal of its plan for2003/2004. Primary’s workers’ compensation programs for the 2001 throughNovember 2003 program years are subject to no further collateral adjustments.  The Company had no long-term debt as ofDecember 31, 2003.

 

The charges to clients by Primary LLC derived from salaries, wages andpayroll taxes is managed from a cash flow perspective so that a matching existsbetween the time that the funds are received from a client to the time that thefunds are paid to the worksite employees and to the appropriate taxjurisdictions. As a co-employer,

 

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and under the terms of the Client Services Agreement, Primary LLC isobligated to make certain wage, tax and regulatory payments. Because of this,the objective of Primary LLC is to minimize the credit risk associated withremitting the payroll and associated taxes before receiving from the client theservice fees charged by Primary LLC.

 

Primary LLC’s primary short-term capital requirements relate to thepayment of accrued payroll and payroll taxes of its internal and worksiteemployees, accounts payable for capital expenditures and the payment of accruedworkers’ compensation expense and health benefit plan premiums.

 

We expect to spend significant amounts to expand domestic sales andoperations through mergers and acquisitions. As a result, we will need togenerate significant additional revenue to achieve profitability based on suchplanned expenditures and expansion. Even if we do achieve profitability, we maynot be able to sustain or increase profitability on a quarterly or annualbasis. If we do not achieve and maintain profitability, the market price forour common stock may further decline.

 

If we do not receive additional capital when and in the amounts neededin the near future, our ability to continue as a going concern is insubstantial doubt.

 

Obtaining future financing may be costly and will likely be dilutive toexisting stockholders. If we are not able to obtain financing when and in theamounts needed, and on terms that are acceptable, our operations, financialcondition and prospects could be materially and adversely affected, and wecould be forced to curtail our operations or sell part or all of our assets.

 

**MATERIAL COMMITTEMENTS FOR CAPITALEXPENDITURES**

 

Neither the Board nor Management have made any committments for capitalexpenditures other than office lease obligations described under Item 2.

 

***Inflation***

 

Primary believes that inflation in salaries and wages of worksiteemployees has a positive impact on its results of operations as its service feeis proportional to such changes in salaries and wages.

 

**ITEM 7.  FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA**

 

The information required by this Item 8 is contained below AT PAGESF25-42. See “Index to Consolidated Financial Statements and Financial StatementSchedule” beginning on Page 26.

 

**ITEM 8. CHANGESIN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING****ANDFINANCIAL DISCLOSURE**

 

On February19,2004, we dismissed Sellers & Andersen, LLC from its position as ourindependent accountants.  Sellers &Andersen served as the independent auditors for the fiscal years ended December31, 2002 and 2001.

 

The audit reports of Sellers & Andersen,LLC for the fiscal years ended December 31, 2002 and 2001 did not not containan adverse opinion, disclaimer of opinion or modification of the opinion;however, the reports for each year did include an opinion regarding PBS’sability to continue as a going concern.

 

Our Board of Directors participated in andapproved the decision to change independent accountants.           The new accountants, as disclosed below, have beenretained to audit ourf inancial statements for the fiscal year ended December31, 2003.

 

During the two most recent fiscal years endedDecember 31, 2003 and through the date of dismissal (February 19, 2004), therehave been no disagreements between us and Sellers & Andersen, LLC on anymatter of accounting principles or practices, financial statement disclosure,or auditing scope or

 

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procedure, which disagreements if not resolved to the satisfaction ofSellers & Andersen, LLC would have caused them to make reference thereto intheir report on the financial statements.

 

During the two most recent fiscal years endedDecember 31, 2003 and through the date of dismissal (February 19, 2004), therehave been no reportable events (as defined in Regulation S-B Item 304 (a)(1)(iv)).

 

We requested that Sellers & Andersenfurnish us with a letter addressed to the SEC stating whether or not it agreeswith the above statements.  A copy ofsuch letter was filed as an Exhibit to our Current Report on Form 8-K/A, datedthe 26th

day ofFebruary 2004.

 

New independent accountants

 

On February 19, 2004, we engaged Madsen &Associates, Inc., CPA’s, to audit our financial statements for the period endedDecember 31, 2003.  During the two mostrecent fiscal years as well as during the period to its appointment on February19, 2004 we had not consulted with Madsen & Associates, CPA, Inc. regarding(i) the application of accounting principles to a specified transaction, eithercompleted or proposed, or the type of audit opinion that might be rendered onour financial statements, and no written report or oral advice was provided tous concluding there was an important factor to be considered by usPrimary inreaching a decision as to an accounting, auditing or financial reporting issue;or (ii) any matter that was either the subject of a disagreement, as that termis defined in Item 304(a)(1)(iv) of Regulation S-B and the related instructionsto Item 304 of Regulation S-B, or a reportable event, as that term is definedin Item 304(a)(1)(iv) of Regulation S-B.

 

**ITEM 8A.              CONTROLSAND PROCEDURES**

 

Our management, including our Chief ExecutiveOfficer and Chief Financial Officer, carried out an evaluation of ourdisclosure controls and procedures (as defined in Rule 15d-15(e) under theSecurities Exchange Act of 1934, as amended) as of the end of the periodcovered by this report. Based on that evaluation, our Chief Executive Officerand Chief Financial Officer concluded that we had effective controls andprocedures for (i) recording, processing, summarizing and reportinginformation that is required to be disclosed in its reports under theSecurities Exchange Act of 1934, as amended, within the time periods specifiedin the Securities and Exchange Commission’s rules and forms and (ii) ensuringthat information required to be disclosed in such reports is accumulated andcommunicated to our management, including our Chief Executive Officer and ChiefFinancial Officer, as appropriate to allow timely decisions regardingdisclosure.

 

No change inour internal control over financial reporting (as defined inRules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during thefiscal quarter ended December 31, 2004 that has materially affected, or isreasonably likely to materially affect, our internal control over financialreporting.

 

Our Board of Directors adopted a Code of Ethics as of March 1, 2004.Our Code of Ethics and Conduct covers all our employees including exicutiveofficers.

 

**PART III.**

 

**ITEM 9.****DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS ANDCONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.**

 

The following table sets forth the names, ages and positions of ourexecutive officers and directors as of March 26, 2004. Under our bylaws, eachdirector holds office until the election and qualification of his successor oruntil his earlier resignation or removal.

 
| **Name**             |   | **Age** |   | **Position**                                     |
|----------------------|--------|---------|--------|--------------------------------------------------|
|                 |   |    |   |                                             |
| Patrick D.  Matthews |   | 45      |   | Chairman,  Chief Executive Officer and President |
|                 |   |    |   |                                             |
| Amanda  Sinclair     |   | 22      |   | Director,  Executive Vice President, Secretary   |
|                 |   |    |   |                                             |
| Connie  Matthews     |   | 45      |   | Director                                         |

 

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PATRICK D. MATTHEWS has beenChairman, CEO, CFO and President since November 29, 2003.  Mr. Matthews was the founder of PrimaryBusiness Systems LLC., and established the company in October 1999.  From February 1997, Mr. Matthews was aFounder, Director, Vice President of Aerostaff Services Inc., a PEO. From March1992 Mr. Matthews was a Director and Regional Vice President of BSI a Texasbased PEO.  From June 1990 Mr. Matthewswas founder and Owner of Matthews Painting Co., a commercial and residentialpainting company.  From March 1979 Mr.Matthews was Vice President with Piccadilly Cafeterias. Mr. Matthews is thehusband of Connie Matthews and the father of Amanda Sinclair.

 

AMANDA SINCLAIR has beenDirector, Secretary and Vice President since November 29, 2003.  Mrs. Sinclair was a Member, director ofoperations of Primary Business Systems LLC since January 2000. From 1998 Mrs.Matthews was employed by Lane Bryant as a sales associate.  Mrs. Sinclair is currently enrolled in abusiness degree program at St. Phillips College.  Amanda Sinclair is the daughter of Patrick D. Matthews and ConnieMatthews.

 

CONNIE MATTHEWS was a foundingMember of Primary Business Systems LLC. From 1993 to 1997 Mrs. Matthews wasPresident of AHJR Inc. DBA Connie’s Kids, a state registered day carefacility.  Mrs. Matthews obtained anAssociates Degree from St. Philips College in 1979. Connie Matthews is the wifeof Patrick D. Matthews and the mother of Amanda Sinclair.

 

**Compensationof Directors**

 

As all of our directorsare also employees of our company, we do not pay an additional retainer to thepersons currently serving on our Board of Directors.

 

**Meetings and Committees of the Board of Directors.**

 

During the fiscal year ended December 31,2003, the Board of Directors met on eight occasions and acted by unanimouswritten consent on eight occasions.****No member of the Board of Directorsattended less than 75% of the aggregate number of the total number of meetingsof the Board of Directors

 

The Board of Directors has not establishedany committees.  All matters relating toaudit, compensation, nominations and corporate governance and considered andacted upon by our Board of Directors.

 

**Compensation Committee Interlocks and InsiderParticipation in Compensation Decisions**

 

The Board does not have a compensationcommittee. There are no interlocks between our Directors and Directors of othercompanies.

 

**Audit Committee Financial Expert**

 

Our Board of Directors has determined that wedo not have at least one member that qualifies as an audit committee financialexpert pursuant to Item 401 of Regulation S-B.

 

**CertainReports; Section 16 Compliance**

 

No person who, during thefiscal year ended December 31, 2003, was a Director, officer or beneficialowner of more than ten percent of our common stock (which is the only class ofour securities registered under Section 12 of the Securities Exchange Act of1934 failed to file on a timely basis, reports

 

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required by Section 16 ofthe Securities Exchange Act during the most recent fiscal year or prioryears.  The foregoing is based solelyupon our review of Forms 3 and 4 during the most recent fiscal year asfurnished us under Rule 16a-3(d) under the Securities Exchange Act, and Forms 5and amendments thereto furnished to us with respect to its most recent fiscalyear, and any representation received by us from any reporting person that noForm 5 is required.

 

**Code of Ethics.**

 

Our Board of Directors adopted a Code ofEthics as of March 1, 2004.  Our Code ofEthics and Conduct covers all our employees and Directors, including our ChiefExecutive Officer and Chief Financial Officer. A copy of our Code of Ethics andConduct is included as an exhibit to this Form 10KSB.

 

**ITEM 10.               EXECUTIVECOMPENSATION**

 

The following table sets forthexecutive compensation information as of December 31, 2003 with respect to eachexecutive officer whose total annual salary and bonus exceeded $100,000 ormore:

 
|                               |   |       |   |            |   |             |   |                                 |   | **Long Term  Compensation**          |   |                                           |   |
|------------------------------------|--------|------------|--------|-----------------|--------|------------------|--------|--------------------------------------|--------|--------------------------------------|--------|------------------------------------------------|--------|
| **Annual  Compensation**           |   | **Awards** |   | **Payouts**     |   | **Other**        |   |
| **(a)**                            |   | **(b)**    |   | **(c)**         |   | **(d)**          |   | **(e)**                              |   | **(f)**                              |   | **(g)**                                        |   | **(h)** |   | **(i)** |   |
| **Name  and  Principal  Position** |   | **Year**   |   | **Salary  ($)** |   | **Bonuses  ($)** |   | **Other  Annual  Compensation  ($)** |   | **Restricted  Stock  Award(s)  ($)** |   | **Securities  Underlying  Options/  SARs (#)** |   | **LTIP  Payouts  ($)** |   | **All other  Compensation  ($)** |   |
| Patrick Matthews CEO               |   | 2003       |   | 107,500         |   | 0                |   | 0                                    |   | 0                                    |   | 0                                              |   | 0 |   | 0 |   |
| Patrick Matthews CEO               |   | 2002       |   | 0               |   | 0                |   | 0                                    |   | 0                                    |   | 0                                              |   | 0 |   | 0 |   |

 

Mr. Matthews joined the company in November 2002.  Prior managemnet including the former CEOprior to Mr. Matthews are no longer with the company.

 

**OPTION/SARGRANTS IN LAST FISCAL YEAR**

 

There were no stock option grants to any executive officers grantedduring the year ended December 31, 2003.

 

**AGGREGATED OPTION/SAR EXERCISES IN LASTFISCAL YEARAND FY-END OPTION/SAR VALUES**

 
| **Name** |   | **Share  Acquired on  Exercise** |   | **Value  Realized** |   | **Number of  Securities  Underlying Unexercised  Options/SARs at December  31, 2003  Exercisable/Unexercisable** |   | **Value of  Unexercised In-  The-Money Options/SARs  At December 31, 2003  Exercisable/Unexercisable** |   |
|----------|--------|----------------------------------|--------|---------------------|--------|------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------------------------------------|--------|
| none     |   | None                             |   | None                |   | None                                                                                                             |   | None                                                                                                   |   |

 

**Equity CompensationPlan Information**

 

Primarycurrently does not have an equity compensation plan and did not have a plan during2003.

 

**Employment Agreements**

 

All our employees are employed “at will”there are no formal employment agreements in place.

 

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Mr. Matthews our CEO/CFO is paid a salary of $120,000 per year he doesnot receive any other compensation of a material nature.  Primary expects to formalize an employmentagreement with the CEO this year.

 

**ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT**.

 

The followingtable sets forth common stock ownership information as of March 26, 2004 withrespect to:

 

•         Eachperson known to us to be the beneficial owner of more than 5% of our commonstock;

 

•         Eachof our officers and directors;

 

•         andAll directors and officers as a group.

 

This information as tobeneficial ownership was furnished to us by or on behalf of the persons named.Unless otherwise indicated, the business address of each person listed is 433Kitty Hawk Dr. Suite 226 Universal City, TX 78148. Information with respect tothe percent of class is based on outstanding shares of common stock as of March26, 2004. Except as otherwise indicated, to our knowledge, each stockholder hassole power to vote and dispose of all the shares of common stock listedopposite his name.

 

For purposes of this table,each person is deemed to have beneficial ownership of any shares of our commonstock such person has the right to acquire on or within 60 days after March 26,2004.

 
| **Name of Beneficial Owner**          |   | **Amount of  Shares  Beneficially Owned** |   | **Percent of  Class** |   |
|---------------------------------------|--------|-------------------------------------------|--------|-----------------------|--------|
| Patrick D Matthews                    |   | 68,393,591                                |   | 78.5                  |   |
| Amanda Sinclair                       |   | 6,417,850                                 |   | 7.4                   |   |
| Connie Matthews                       |   | 4,284,813                                 |   | 4.9                   |   |
| All officers and directors as a group |   | 79,096,254                                |   | 90.8                  |   |

 

**ITEM 12. CERTAIN RELATIONSHIPS AND RELATEDTRANSACTIONS.**

 

As a group, the Directors ofPrimary own a number of other companies that provide services to and for thebenefit of Primary or clients of Primary; the other companies are ConsumersInsurance Agency LLC and PBS Premium Funding LLC.  PBS Premium Funding LLC currently has no operations.  Consumers Insurance Agency LLC (Consumers)provides insurance services for the customers of Primary LLC.  Under the agreement between Primary LLC andConsumers, Primary pays Consumers 9% managment fee for the insurance accountsof Primary’s clients managed by Consumers. Consumers sole employee is serviced by Primary LLC.  Primary LLC bills Consumers for normalservices provided all Primary LLC customers.

 

During the first quarter of2002, as disclosed in our Quarterly Report on Form 10-QSB for the quarter endedMarch 31, 2002 10-QSB, Mr. Brad Nordling, ShareCom, Inc.’s., former Presidentand principal shareholder entered into an agreement to sell all of his sharesof common stock in ShareCom, Inc., to Pine Services, Inc.  Mr. Nordling held approximately 432,551,000shares representing approximately 59% of the issued and outstanding shares ofShareCom, Inc.  This transaction tookplace on or about May 28, 2002 and resulted in a change of control of ShareCom,Inc.  As also disclosed in our QuarterlyReport on Form 10-QSB for the quarter ended March 31, 2002 10-QSB, ShareCom,Inc., expected to enter into an asset purchase agreement with USALert, Inc., anIllinois corporation , which provided for USALert to purchase substantially allof the assets and business of SharCom, Inc. The transaction occurred on orabout May 28, 2002 as a result of which ShareCom, Inc. Disposed of its currentbusiness operations.

 

On November 29, 2002, asdisclosed in our Current Report on Form 8-K filed December 19, 2002, the Membersof Primary Business Systems LLC entered in to a Stock Acquisition Agreementwith Pine Services Inc., to acquire from Pine Services Inc., 2,696,256 sharesrepresenting approximately 90% of the issued and outstanding shares of ShareComInc. from Pines Services Inc., resulting in a transfer of control

 

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of ShareCom Inc to the Membersof Primary Business Systems LLC.

 

In March 2003, ShareCom Inc.,changed its name to Primary Business Systems, Inc.  In addition, during March 2003, Primary Business Systems, Inc.purchased from Patrick Matthews and Connine Matthews the stock of AHJR Inc., aTexas corporation, for the purposes of operating this subsidiary as a temporarystaffing services company.

 

**ITEM 13. Exhibits and reports on for 8-K**

 

(a)           1.             Financial Statements

 

See the Consolidated Financial Statements andNotes thereto, together with the reports thereon of Matsen & Associates,LLP dated March 25, 2004 beginning on page F-1 of this report.

 

2.             All schedules are omitted because they arenot required or applicable, or the required information is shown in theconsolidated financial statements or notes.

 

3.             Exhibits

 

Incorporated by referenceto the Exhibit Index at the end of this report.

 

(b)           Reports on Form 8-K

 

During the last quarter of the period coveredby this Report, there were no Current Reports on Form 8-K filed by us.

 

**ITEM 14. 4 Principal Accountant Fees andServices.**

 

Our Audit Committee hasselected Matsen & Associates, Inc., Certified Public Accountants, as itsindependent accountants for the current fiscal year.  For the fiscal years ended December 31, 2002 and 2001, Seller& Andersen, LLC served as our independent accountants.  The audit services provided by Matsen &Associates, Inc. and Sellers & Andersen, LLC, consist of examination offinancial statements, services relative to filings with the Securities andExchange Commission, and consultation in regard to various accountingmatters.  The followingtable presents the total fees paid for professional audit and non-auditservices rendered by our independent auditors for the audit of our annualfinancial statements for the years ended December 31, 2003 and December 31,2002 and fees billed for other services rendered by our independent auditors duringthose periods.

 
|                       |   | **Fiscal  Year Ended  December 31, 2003** |   | **Fiscal  Year Ended  December 31, 2002** |   |
|----------------------------|--------|-------------------------------------------|--------|-------------------------------------------|--------|
| **Audit Fees (1)**         |   | $                                         | 14,680 |                                      | $      | 14,680 |   |
| **Audit-Related Fees (2)** |   | N/A                                       |   | N/A                                       |   |
| **Tax Fees (3)**           |   | $                                         | 15,000 |                                      | $      | 13,000 |   |
| **All Other Fees (4)**     |   | N/A                                       |   | N/A                                       |   |
| **Total**                  |   | $                                         | 29,680 |                                      | $      | 27,680 |   |

 

----

(1)           Audit services consist of audit work performed in thepreparation of financial statements for the fiscal year and for the review offinancial statements included in Quarterly Reports on Form 10-Q during thefiscal year, as well as work that generally only the independent auditor canreasonably be expected to provide, including consents for registrationstatement flings and responding to SEC comment letters on annual and quarterlyfilings.

(2)           Audit-related services consist of assurance and relatedservices that are traditionally performed by

 

31

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the independent auditor,including due diligence related to mergers and acquisitions, agreed uponprocedures report and accounting and regulatory consultations.

(3)           Tax services consist of all services performed by theindependent auditor’s tax personnel, except those services specifically relatedto the audit of the financial statements, and includes fees in the areas of taxcompliance, tax planning, and tax advice.

(4)           Other services consist of those service not captured inthe other categories.

 

Our Board has determined that the servicesprovided by our independent auditors and the fees paid to them for suchservices has not compromised the independence of our independent auditors.

 

Consistent with SEC policies regardingauditor independence, the Board has responsibility for appointing, settingcompensation and overseeing the work of the independent auditor. In recognitionof this responsibility, the Board has established a policy to pre-approve allaudit and permissible non-audit services provided by the independentauditor.  Prior to engagement of theindependent auditor for the next year’s audit, management will submit adetailed description of the audit and permissible non-audit services expectedto be rendered during that year for each of four categories of servicesdescribed below to the Board for approval. In addition, management will alsoprovide to the Board for its approval a fee proposal for the services proposedto be rendered by the independent auditor. Prior to the engagement of the independent auditor, the Board willapprove both the description of audit and permissible non-audit services proposedto be rendered by the independent auditor and the budget for all suchservices.  The fees are budgeted and theBoard requires the independent auditor and management to report actual feesversus the budget periodically throughout the year by category of service.

 

During the year, circumstances may arise whenit may become necessary to engage the independent auditor for additionalservices not contemplated in the original pre-approval. In those instances, theBoard requires separate pre-approval before engaging the independent auditor.  To ensure prompt handling of unexpectedmatters, the Board may delegate pre-approval authority to one or more of itsmembers. The member to whom such authority is delegated must report, forinformational purposes only, any pre-approval decisions to the Board at itsnext scheduled meeting.  The fourcategories of services provided by the independent auditor are as defined inthe footnotes to the fee table set forth above.

 

**[THIS SPACEINTENTIONALLY LEFT BLANK]**

 

32

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**PRIMARYBUSINESS SYSTEMS, INC. & SUBSIDIARY**

 

 

**AuditedConsolidated Financial Statements**

 

**December31, 2003 and 2002**

 

33

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**PRIMARYBUSINESS SYSTEMS, INC. & SUBSIDIARIES**

 

**TABLEOF CONTENTS**

 

**December31, 2002 and 2001**

 

 
| **INDEPENDENT AUDITORS’ REPORT**          |                                        |
|------------------------------------------------|---------------------------------------------|
|                                           |                                        |
| **CONSOLIDATED  FINANCIAL STATEMENTS:**        |                                        |
|                                           |                                        |   |
|                                           | **Balance Sheets**                          |   |
|                                           |                                        |   |
|                                           | **Statements of Operations**                |   |
|                                           |                                        |   |
|                                           | **Statements of Stockholders’ Equity** |   |
|                                           |                                        |   |
|                                           | **Statements of Cash Flows**                |   |
|                                           |                                        |   |
| **NOTES TO CONSOLIDATED FINANCIAL STATEMENTS** |                                        |

 

F-1

----

 

| **MADSEN  & ASSOCIATES CPA’s. INC.**              |   | 684  East Vine St #3    |
|------------------------------------------------------------|--------|-------------------------|
| **Certified  Public Accountants and Business Consultants** |   | Murray,  Utah 84107     |
|                                                       |   | Telephone  801-268-2632 |
|                                                       |   | Fax  801-262-3978       |

 

Board of Directors & Audit Committee

Primary Business Systems, Inc.

Universal City, Texas

 

**REPORT OF INDEPENDENT CERTIFIED PUBLICACCOUNTANTS**

 

 

We have audited the accompanying consolidated balance sheet of PrimaryBusiness Systems, Inc.****andSubsidiaries as of December 31, 2003 and the related consolidated statements ofoperations, stockholders’ equity, and cash flows for the year then ended.  These consolidated financial statements arethe responsibility of the Company’s Management.  Our responsibility is to express an opinion on these financial statementsbased on our audit.

 

We conducted our audit in accordance with auditing standards generallyaccepted in the United States of America. Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the consolidated financial statements arefree of material misstatement.  An auditincludes examining on a test basis, evidence supporting the amounts anddisclosures in the financial statements. An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overall financialstatement presentation.  We believe thatour audit provides a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to abovepresent fairly, in all material respects, the financial position of PrimaryBusiness System, Inc. and Subsidiaries as of December 31, 2003 and the resultsof its operations and its cash flows for the year then ended in conformity withaccounting principles generally accepted in the United States of America.

 

The accompanying consolidated financial statements have been preparedassuming that the Company will continue as a going concern.  As disclosed in the consolidated  financial statements and notes to theconsolidated financial statements, the Company has suffered significant losses.  These conditions raise substantial doubtabout the Company’s ability to continue as a going concern.  Management’s plans regarding these mattersare described in the notes to the consolidated financial statements.  The consolidated financial statements do notinclude any adjustments that might result from the outcome of this uncertainty.

 

                                                      /s/ Madsen& Associates CPA’s, Inc.

March 22, 2004

Murray, Utah

 

F-2

----

 

| **SELLERS  & ANDERSEN, LLC**                           |   | 684  East Vine Street # 3 |
|------------------------------------------------------------|--------|---------------------------|
| **Certified  Public Accountants and Business Consultants** |   | Murray,  Utah 84107       |
|                                                       |   | Telephone  801-268-2632   |
|                                                       |   | Fax  801-262-3978         |

 

 

Board of Directors & Audit Committee

Primary Business Systems, Inc.

Universal City, Texas

 

 

**REPORTOF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS**

 

 

We have audited the accompanying consolidated balance sheet of PrimaryBusiness Systems, Inc.****andSubsidiary as of December 31, 2002 and the related consolidated statements ofoperations, stockholders’ equity, and cash flows for the year ended December31, 2002.  These consolidated financialstatements are the responsibility of the Company’s Management.  Our responsibility is to express an opinionon these consolidated financial statements based on our audit.

 

We conducted our audit in accordance with auditing standards generallyaccepted in the United States of America. Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the consolidated financial statements arefree of material misstatement.  An auditincludes examining on a test basis, evidence supporting the amounts anddisclosures in the financial statements. An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation.  Webelieve that our audits provides a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to abovepresent fairly, in all material respects, the financial position of PrimaryBusiness System, Inc. and Subsidiary as of December 31, 2002 and the results ofits operations and its cash flows for the year ended December 31, 2002 inconformity with accounting principles generally accepted in the United Statesof America.

 

The accompanying consolidated financial statements have been preparedassuming that the Company will continue as a going concern.  As disclosed in the consolidated financialstatements and notes to the consolidated financial statements, the Company hassuffered significant losses.  Theseconditions raise substantial doubt about the Company’s ability to continue as agoing concern.  Management’s plansregarding these matters are described in the notes to the consolidatedfinancial statements.  The consolidatedfinancial statements do not include any adjustments that might result from theoutcome of this uncertainty.

 

                                                           /s/Sellers & Andersen, LLC

March 22, 2004

Murray, Utah

 

F-3

----

 

**PRIMARYBUSINESS SYSTEMS, INC.**

**AndSUBSIDIARIES**

 

Consolidated Balance Sheet

As of December 31, 2003 and 2002

 
|                                  |   | **2003** |    | **2002** |   |
|---------------------------------------|--------|----------|---------|----------|--------|
| ASSETS                                |   |     |    |     |   |
| Current assets                        |   |     |    |     |   |
| Cash                                  |   | $        | 19,845  |     | $      | 30,868 |   |
| Notes receivable                      |   | 46,007   |    | 53,799   |   |
| Client accounts receivable            |   | 70,589   |    | 63,474   |   |
| Prepaid Expenses                      |   | 73,186   |    |     |   |
| Workers Compensation Prepaid Premiums |   | 96,097   |    | 80,097   |   |
| Total Current Assets                  |   | 305,724  |    | 228,238  |   |
|                                  |   |     |    |     |   |
| Property & Equipment              |   |     |    |     |   |
| Furniture & Fixtures              |   | 52,244   |    | 10,548   |   |
| Computer equipment                    |   | 84,301   |    | 82,003   |   |
| Payroll software                      |   | 43,724   |    | 43,724   |   |
|                                  |   |     |    |     |   |
| Less: accumulated depreciation        |   | 180,269  |    | 136,275  |   |
|                                  |   | (119,153 | )       | (87,377  | )      |
| Total Property & Equipment        |   | 61,116   |    | 48,898   |   |
|                                  |   |     |    |     |   |
| Other assets                          |   |     |    |     |   |
| Security Deposits                     |   | 1,054    |    | 0        |   |
| Customer list, net of amortization    |   | 11,400   |    | 0        |   |
| Prepaid marketing                     |   |     |    | 270,000  |   |
| Goodwill                              |   | 557,240  |    | 550,000  |   |
| Total Other Assets                    |   | 569,694  |    | 820,000  |   |
| Total Assets                          |   | $        | 936,534 |     | $      | 1,097,136 |   |

 

The accompanying notes are an integral part of these financialstatements.

 

F-4

----

 

**PRIMARYBUSINESS SYSTEMS, INC.**

**AndSUBSIDIARIES**

 

ConsolidatedBalance Sheet

As of December 31, 2003 and 2002

 

 
|                                                             |   | **2003**   |    | **2002**  |   |
|------------------------------------------------------------------|--------|------------|---------|-----------|--------|
| LIABILITIES                                                      |   |       |    |      |   |
| Current liabilities                                              |   |       |    |      |   |
| Accounts payable                                                 |   | $          | 214,656 |      | $      | 90,649 |   |
| Checks drawn on uncollected payrolls                             |   | 69,160     |    | 111,249   |   |
| Credit card payable                                              |   | 0          |    | 41,893    |   |
| Client Payroll Tax payable                                       |   | 20,023     |    | 0         |   |
| Workers Comp payable                                             |   | 45,139     |    | 0         |   |
| Client payroll amount withheld                                   |   | 16,477     |    | 0         |   |
| Notes Payable                                                    |   | 20,973     |    | 0         |   |
| Line of credit from banks                                        |   | 44,988     |    | 55,807    |   |
| Total Current Liabilities                                        |   | 431,416    |    | 299,598   |   |
|                                                             |   |       |    |      |   |
| Other liabilities                                                |   |       |    |      |   |
| Due to shareholder/officer                                       |   | 628,023    |    | 593,294   |   |
| Total Liabilities                                                |   | 1,059,448  |    | 892,892   |   |
| Stockholders’ Equity (Deficiency)                           |   |       |    |      |   |
| Common stock, - $.001 par value authorized  - 750,000,000 shares |   |       |    |      |   |
| Issued and outstanding 85,657,747                                |   | 85,569     |    | 11,021    |   |
| Additional paid-in capital                                       |   | 977,051    |    | 1,069,987 |   |
| accumulated (deficit)                                            |   | (1,185,534 | )       | (876,764  | )      |
| Total Stockholders’ Equity (Deficiency)                     |   | (122,914   | )       | 204,244   |   |
| Total liabilities and Stockholders’s Equity                 |   | $          | 936,534 |      | $      | 1,097,136 |   |

 

The accompanying notes are an integral part of theses financialstatements.

 

F-5

----

 

**PRIMARYBUSINESS SYSTEMS, INC.**

**AndSUBSIDIARIES**

 

Consolidated Statement of Operations

As of December 31, 2003 and 2002

 
|                                                       |   | **2003**   |      | **2002**  |     |
|------------------------------------------------------------|--------|------------|-----------|-----------|----------|
| Revenues                                                   |   | $          | 2,684,396 |      | $        | 3,303,918 |   |
| Cost of revenues                                           |   | 1,906,307  |      | 2,735,940 |     |
| Gross Profit                                               |   | 778,089    |      | 567,978   |     |
| Operating Expenses                                         |   |       |      |      |     |
| General and Administrative                                 |   | 608,022    |      | 378,159   |     |
| Wages, commissions & salaries                          |   | 422,807    |      | 281,788   |     |
| Consulting services for acquisition                        |   | 75,000     |      | 759,358   |     |
| Total Operating Expenses                                   |   | 1,105,829  |      | 1,419,305 |     |
| (Loss) from Operations                                     |   | (327,740   | )         | (851,268  | )        |
| Other Income                                               |   | 18,970     |      | 11,059    |     |
| (Loss Before Prevision For Income Tax)                     |   | (308,770   | )         | (840,268  | )        |
| Provision for Income Taxes                                 |   | —     |      | —    |     |
| Net (Loss)                                                 |   | (308,770   | )         | $         | (840,268 | ) |
|                                                       |   |       |      |      |     |
| Basic & Distributed Net (Loss) Per  Share              |   | $          | (0.00     | )         | $        | (.084 | ) |
| Basic and Distributed Weighted Average  Shares Outstanding |   | 85,253,767 |      | 996,389   |     |

 

The Accompanying notes are an integral part of these financialstatements.

 

F-6

----

 

**PRIMARYBUSINESS SYSTEMS, INC. & SUBSIDIARIES**

Consolidated Statements of Stockholders’ Equity

For the Years Ended December 31, 2003 and2002

 

 
|                                                         |   |              |   | **Additional  Paid-in-  Capitol** |                     |      |              |     |   |
|--------------------------------------------------------------|--------|-------------------|--------|-----------------------------------|--------------------------|-----------|-------------------|----------|--------|
|                                                         |   | **Common  Stock** |   |                              | **Accumulated  Deficit** |      | **Total  Equity** |     |
| **Shares**                                                   |   | **Amount**        |
| Balance  12/31/2001                                          |   | —            |   | $                                 | —                   |      | $                 | —   |   | $ | (36,496 | ) | $ | (36,496 | ) |
| Issuance of  Unrestricted stock to SharCom, Inc Stockholders |   | 126,104           |   | 126                               |                     | (7,626    | )                 | —   |   | (7500 | ) |
| Issuaned of  restricted stock for acqusition                 |   | 6,696,254         |   | 6,696                             |                     | 44,954    |              | —   |   | 51,650 |   |
| Issuance of  unrestricted stock for services                 |   | 1,1790,000        |   | 1,790                             |                     | 1,018,210 |              | —   |   | 1,020,000 |   |
| Issusance of  restricted stock for services                  |   | 2,408,306         |   | 2,409                             |                     | 14,449    |              | —   |   | 16,858 |   |
| Net (Loss)                                                   |   | —            |   | —                            |                     | —    |              | (840,268 | )      |   |   |
| Balance  12/31/2002                                          |   | —            |   | $                                 | —                   |      | $                 | —   |   | $ | (876,764 | ) | $ | (876,764 | ) |
| Balance  December 31, 2002                                   |   | 11,202,664        |   | 11,202                            |                     | 1,069,806 |              | (876,764 | )      | 204,244 |   |

 

The Accompanying notes are an integral part of these financialstatements.

 

F-7

----

 

**PRIMARYBUSINESS SYSTEMS, INC. & SUBSIDIARIES**

Consolidated Statements of Stockholders’Equity

For the Years Ended December 31, 2003 and2002

 
|                                                                                                      |   |              |   | **Additional  Paid-in-  Capitol** |                     |      |             |     |   |
|-----------------------------------------------------------------------------------------------------------|--------|-------------------|--------|-----------------------------------|--------------------------|-----------|------------------|----------|--------|
|                                                                                                      |   | **Common  Stock** |   |                              | **Accumulated  Deficit** |      | **Total Equity** |     |
| **Shares**                                                                                                |   | **Amount**        |
| Balance  December 31, 2002                                                                                |   | 11,020,664        |   | 11,021                            |                     | 1,069,987 |             | (876,764 | )      | 204,244 |   |
| Issuance of  Restricted Stock for acquisition of AHJR, INC stock                                          |   | 72,400,000        |   | 72,400                            |                     | (65,160   | )                |     |   | 7,240 |   |
| Issuance of  unrestricted stock for services                                                              |   | 3,700,000         |   | 3,700                             |                     | 181,300   |             |     |   | 185,000 |   |
| Issuance of  restricted stock for services                                                                |   | 100,000           |   | 100                               |                     | 4,900     |             |     |   | 5,000 |   |
| Return of  unrestricted stock for non performance of services                                             |   | (3,000,000        | )      | 3,000                             | )                        | (147,000  | )                |     |   | (150,000 | ) |
| Return of  restricted stock for non performance of services – of originally issued  1,790,000 shares |   | (500,000          | )      | (500                              | )                        | (279,500  | )                |     |   | (280,000 | ) |
| Issuance of  restricted stock for services                                                                |   | 494,728           |   | 495                               |                     | 44,505    |             |     |   | 45,000 |   |
| Issuance of  stock for prepaid services                                                                   |   | 876,355           |   | 876                               |                     | 82,966    |             |     |   | 83,872 |   |
| Issuance of  restricted stock for purchases of assets                                                     |   | 152,000           |   | 152                               |                     | 37,848    |             |     |   | 38,000 |   |
| Issuance of  restricted stock for services                                                                |   | 75,000            |   | 75                                |                     | 22,425    |             |     |   | 22,500 |   |
| Issuance of  restricted stock for prepaid services                                                        |   | 250,000           |   | 250                               |                     | 24,750    |             |     |   | 25,000 |   |
| Net (Loss)                                                                                                |   | —            |   | —                            |                     | _         |             |     |   | (308,770 | ) |
| Balance  December 31, 2003                                                                                |   | 85,568,747        |   | $                                 | 85,569                   |      | $                | 977,051  |   | $ | (1,185,543 | ) | $ | (122,914 | ) |
|                                                                                                           |        |                   |        |                                   |                          |           |                  |          |        |  |  |  |  |  |  |

 

The Accompanying notes are an integral part of these financialstatements.

 

F-8

----

 

**PRIMARYBUSINESS SYSTEMS, INC.  &SUBSIDUARIES**

Consolidated Statements Of Cash Flow

For the Years Ended December 31, 2003 and2002

 
|                                                                                               |   | **2003** |     | **2002** |   |
|----------------------------------------------------------------------------------------------------|--------|----------|----------|----------|--------|
| Net Income                                                                                         |   | $        | (308,770 | )        | $      | (840,268 | ) |
| Adjustments to reconcile net income (loss)  to net cashprovided by (used by) operating activities: |   |     |     |     |   |
| Depreciation and amortization                                                                      |   | 31,776   |     | 35,398   |   |
| (Increase) decrease in accounts receivable                                                         |   | (7,116   | )        | 7,758    |   |
| (Increase) decrease in prepaid expense                                                             |   | (73,186  | )        | (47,767  | )      |
| (Increase) decrease in workers comp deposit                                                        |   | (16,000  | )        |     |   |
| (Increase) decrease in other current assets                                                        |   | 7,792    |     | (53,799  | )      |
| Increase (decrease) in accounts payable                                                            |   | (14,507  | )        | (152,073 | )      |
| Increase (decrease) in client payroll tax  liability                                               |   | 36,501   |     |     |   |
| Increase (decrease) in other current  liabilities                                                  |   | 183,653  |     |     |   |
| (Increase) decrease in other assets                                                                |   | 262,306  |     |     |   |
| Consulting Services for Acquisition                                                                |   |     |     | 759,358  |   |
| Checks drawn on uncollected payrolls                                                               |   | (42,089  | )        | 111,249  |   |
| Total Adjustments                                                                                  |   | 369,131  |     | 660,124  |   |
| Net cash provided by (used in) operating  activities                                               |   | 60,360   |     | (180,144 | )      |
| Cash flows from investing activities                                                               |   |     |     |     |   |
| Payments for the purchase of property                                                              |   | (55,994  | )        | (15,675  | )      |
| Net cash provided by (used in) investing  activities                                               |   | (55,994  | )        | (15,675  | )      |
| Cash flows from financing activities                                                               |   |     |     |     |   |
| Net adjustment for common stock transaction                                                        |   | (18,388  | )        |     |   |
| Net borrowing under line of credit                                                                 |   | (10,819  | )        | 56,491   |   |
| Net borrowing on notes payable                                                                     |   | 20,973   |     |     |   |
| Principal payments on short-term debt                                                              |   | (41,893  | )        | —   |   |
| Due to shareholders/officers                                                                       |   | 34,738   |     | 42,307   |   |
| Net cash provided by (used in) financing  activities                                               |   | (15,389  | )        | 98,798   |   |
| Net increase (decrease) in cash and cash  equivalents                                              |   | (11,023  | )        | (97,021  | )      |
| Cash and cash equivalents at beginning of  year                                                    |   | 30,086   |     | 127,889  |   |
| Cash and Cash equivalents at end of year                                                           |   | $        | 19,845   |     | $      | 30,868 |   |

 

The accompanying notes are an integral part of these financialstatements

 

F-9

----

 

**PRIMARYBUSINESS SYSTEMS, INC.  &SUBSIDIARIES**

 

Consolidated Statements of Cash Flow(continued)

For the Years Ended December 31, 2003 and2002

 
|                                                           |   | **2003** |     | **2002** |    |
|----------------------------------------------------------------|--------|----------|----------|----------|---------|
| Supplemental information                                       |   |     |     |     |    |
| Cash Payments for Income Taxes                                 |   | $        | —   |     |    |   |
| Non Cash Items                                                 |   |     |     |     |    |
| Stock for goodwill                                             |   | $        | 7,240    |     | $       | 51,650 |   |
| Stock yet to issue for goodwill                                |   |     |     | $        | 498,350 |   |
| Stock for prepaid marketing                                    |   |     |     | $        | 270,000 |   |
| Stock for professional services                                |   | $        | 343,872  |     | $       | 759,358 |   |
| Stock (returned) for non performance of  services              |   | $        | (270,000 | )        |    |   |
| Stock (returned) for non performance of  professional services |   | $        | (160,000 | )        |    |   |
| Stock issued for purchase of assets                            |   | $        | 38,000   |     |    |   |

 

The Accompanying notes are an integral part of these financialstatements

 

F-10

----

 

**PRIMARY BUSINESS SYSTEMS, INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**DECEMBER 31, 2003**

 

**NOTE 1 - Organizationand Nature of Business**

 

**History**

 

Primary Business Systems, Inc. (the “Company”), was incorporated in theState of Nevada in 1996 under the name of Anonymous Data Corporation.  In July 2001 the Company was name changed toShareCom, Inc..  The Company thenchanged its name to Primary Business Systems, Inc. on February 26, 2003.

 

On May 28, 2002 the Company filed a Form 8-K with the United StatesSecurities and Exchange Commission (“SEC”). It states:

 

 “On or about May 28, 2002, achange of control of the Registrant occurred, as a result of Pine Services, Ltd(“Purchaser”) purchasing 432,551,000 shares of $.001 par value, capital votingstock of the Registrant (the “Shares”) from Mr. Brad Nordling, the formerpresident of the Registrant.  Theconsideration for the purchase included the payment of $100,000 to the Seller;the release of certain note obligations aggregating approximately $885,000 andpermitting certain assets of the Registrant to be transferred to another entitycontrolled by Seller.  The source of thecash component of the consideration for the purchase of the Shares was theworking capital of the Purchaser.

 

“The basis of the control is Purchaser’s ownership of 432,551,000shares representing approximately 59% of the issued and outstandingShares.  The transaction which resultedin the change in control was the closing of a stock purchase agreement.”

 

From  about May 28, 2002 toaround November 29, 2002 the Company did transactions, including a 2500 for 1reverse stock split of common stock. The Company at that juncture was a“publically held shell company” of which prior management confirms itpersonally assumed all debt, leaving the Company without any assets and withoutany liabilities.

 

On or about November 29, 2002 Pine Services, Inc. (Pine) sold itsequity interest in ShareCom, Inc, of approximately 90% controlling interest inShareCom, Inc., to the owners of Primary Business Systems, LLC (Primary LLC).  This agreement left the existingstockholders of ShareCom, Inc., a total of 126,104 shares of common stock.

 

In March 2002 the company changed its name to Primary Business SystemsInc. (Primary)

 

 

On February 28, 2003 the Company purchased all of the outstandingshares of AHJR, Inc. (a State of Texas corporation), an inactive corporation,in a stock for stock transaction.   AHJRInc., was previously owned principally by Patrick Matthews, the primaryshareholder of the Company.  In thestock for stock transaction all of the shares of AHJR, Inc., were passed toPrimary in exchange for 72,400,000 shares of restricted stock of Primary valuedat $.0001 per share , or $7,240.  The$7,240 is recorded as

 

F-11

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goodwill on the balance sheet. AHJR Inc., is currently operating under the trade name Concord StaffingServices (Concord).

 

 

**BusinessActivity**

 

The business of Primary Business Systems Inc.  is to operate in the PEO industry and the temporary staffingservices industry. Its wholly owned subsidiary, Primary LLC, is a provider ofProfessional Employment Organization (“PEO”) services.   PEO is defined as an organization thatprovides an integrated and cost effective approach to the management andadministration of the human resources and employer risk of its clients, bycontractually assuming substantial employer rights, responsibilities, and risksand, through the establishment and maintenance of an employer relationship withthe workers assigned to its clients. Its other wholly owned subsidiary, Concord is a temporary staffingservices company and works with temporary employment services.  It began operations March 1, 2003.

 

 

**NOTE 2 - Summaryof Significant Accounting Policies**

 

**Principlesof Consolidation**

 

The consolidated financial statements shown in this report excludes thehistorical operating information of the parent before December 31, 2002, andinstead includes the operating information of the wholly owned subsidiary,Primary Business Systems, LLC. (Primary LLC) from January 1, 2001 to December31, 2003.  It also includes theoperations of its wholly owned subsidiary Concord Staffing Services (Concord)since it began operations March 1, 2003.

 

Primary  prepares its books andrecords on the accrual basis for financial reporting and for income taxes...  The financial statements have beenprepared in accordance with accounting principles generally accepted in theUnited States of America.

.

Primary LLC before becoming a subsidiary of the Company maintained itsbooks and records on an accrual basis of accounting and it reported the resultsof its operations for income tax purposes as an “S” corporation.  These financial statements have beenmodified to present them on an ongoing basis of accounting and tax reporting,including but not limited to accruing compensation to officers (members) aspart of the wages, commissions & salaries on the statement of operations.

 

 

All significant intercompany transactions have been eliminated.

 

F-12

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**CashEquivalents**

 

For purposes of reporting of cash flows, Primary classifies all cashand short-term investments with maturities of three months or less to be cashequivalents.

 

**Receivables**

 

Management has elected to record bad debts using the direct write-offmethod.  Accounting principles generallyaccepted in the United States require that the allowance method be used toreflect bad debts.  However, the effectof the use of the direct write-off method is not materially different from theresults that would have been obtained had the allowance method been followed.

 

**Propertyand Equipment**

 

Property and equipment are valued at cost.  Depreciation is provided by use of the straight-line method overthe estimated useful lives of the assets. Useful lives of the respective assets are generally from three to sevenyears.  Purchase of property andequipment greater than $500 and major repairs of existing equipment thatextends the useful life of the asset are capitalized

 

Depreciation and amortization expense for theyears December 31, 2003 and 2002 are $31,776_and $35,398 respectively.

 

**Intangible Assets**

 

The Financial Accounting Standards Board has issued FASB 142  “Goodwill and Other Intangible Assets”effective for fiscal years beginning after December 15, 2001.  According to this FASB, goodwill should notbe amortized.  Instead, it should bereviewed for impairment at least annually and charged to earnings only when itsrecorded value exceeds its fair value. Primary has elected to follow FASB 142.

 

**Impairment of Long-Lived Assets**

 

It is Primary’s policy to periodically evaluate the economic recoverability of all of its long-lived assets. In accordance with that policy, when Primary determines that an assethas been impaired, it recognizes the loss in its statement of operations.

 

 

**Fair Value of Financial Instruments**

 

The methods and assumptions used to estimate the fair value of eachclass of financial instruments are as follows:

Cash and cash equivalents, receivables, prepaid premiums, accountspayable, notes payable are reflected in the financial statements at fair valuebecause of the short maturity

 

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of these instruments.

 

Amounts due to shareholder/officer for stock yet to issue arecontingent on the future value of the stock yet to issue from time totime.  So, the amount reflected in thefinancial statements is not measurable; however, management believes itapproximates fair value.  Refer to theNote discussing equity and stock commitments for further information.

 

**Concentrationof Credit Risk**

 

Financial instruments which potentially subject Primary toconcentrations of credit risk consist principally of cash deposits.  Primary will exceed the FDIC insurable limit in an account only when grosspayrolls billed and collected post to the payroll bank account before thepayroll checks and tax deposits are posted. The timeliness of the deposits and withdrawals are such that no materialcredit risk is estimated by management.

 

Primary provided its services to its clients based upon an evaluationof each client’s financial condition. Exposure to losses on receivables is primarily dependent on eachclient’s financial condition.  Primarymitigates such exposure by requiring customers to immediately pay via electronicfunds transfer the amount of the payroll billed, through COD payment ofinvoices, through deposits or letters-of-credit or personal guarantees fromcertain clients.  Exposure to creditlosses is monitored by Primary, and allowances for anticipated losses areestablished when necessary.

 

 

**RevenueRecognition**

 

Primary bills its clients on each payroll date an administrative feefor: 1) the actual gross salaries and wages plus related employment taxes andemployee benefits of the company’s worksite employees, 2) actual costsassociated with worksite employees, (e.g. recruiting costs, drug testing,etc.), 3) workers compensation and unemployment costs, 4) other benefitsassociated with the worksite employees, 5) other insurance premiums associatedwith the client, and 6) payroll processing

 

Primary’s  administrative fee iscomputed based upon either a fixed fee per worksite employee or an establishedpercentage of gross salaries and wages, negotiated at the timethe clientservice agreement is executed.  Primary’sadministrativefee varies by client based primarily upon the nature and size of the client’sbusiness and Primary’s assessment of the costs and risks associated with theemployment of the client’s worksite employees.

 

Accordingly, Primary’s administrative fee income will fluctuate basedon the number and gross salaries and wages of worksite employees, and the mixof client fee income will fluctuate based on the mix of total client feearrangements and terms.  Although mostcontracts are for one year and renew automatically, Primary and its clientsgenerally have

 

F-14

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the ability to terminate the relationship with 30 days notice.

 

**IncomeTaxes**

 

Primary has adopted the provisions of statements of FinancialAccounting Standards No. 109, “Accounting for Income Taxes,” which incorporatesthe use of the asset and liability approach of accounting for incometaxes.  The asset and liability approachrequires the recognition of deferred tax assets and liabilities for theexpected future consequences of temporary differences between the financialreporting basis and the income tax basis of assets and liabilities.

 

During 2002, Primary underwent an ownership change as defined inSection 382 of the Internal Revenue Code. Consequently, management believes the net operating loss carry forwardsare lost.  The Federal net operatinglosses since the ownership change is $1,149,038.  Primary continues to suffer operating losses and there remains anuncertainty as to whether any income tax benefit can be used in thefuture.  Therefore, no recognition ofany net operating loss carry forwards or benefits are recognized in thesefinancial statements.

 

**ComprehensiveIncome**

 

Primary has adopted SFAS No. 130 Reporting Comprehensive Income.  Primary has no reportable differencesbetween net income and comprehensive income, therefore a statement ofcomprehensive income has not been presented.

 

**Stock-BasedCompensation**

 

SFAS No. 123, “Accounting for Stock-Based Compensation” establishedaccounting and disclosure requirements using a fair-value based method ofaccounting for stock-based employee compensation plans.  Primary has elected to remain on its currentmethod of Accounting as described above, and has adopted the disclosure requirementsof SFAS No. 123.

 

**Net(Loss) Per Share of Common Stock**

 

The basic and diluted net income (loss) per common share in theaccompanying statements of operations are based upon the net income (loss)divided by the weighted average number of shares outstanding during the periodspresented.  Diluted net (loss) percommon share is the same as basic net (loss) per share because including anypending shares to issued for goodwill or otherwise would be anti-dilutive.

 

**AdvertisingCosts**

 

Primary’s advertising costs are expensed when incurred.  Total advertising costs of $17,093 and$5,874 were incurred for the years ended December 31, 2003 and 2002,respectively.

 

F-15

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**Reclassifications**

 

Certain amounts in 2002 have been reclassified and represented toconform to the current financial statement presentation.

 

**Useof Accounting Estimates**

 

Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenues and expensesduring the reporting period.  Actualresults could differ from those estimates.

 

 

**OtherRecent Accounting Pronouncements**

 

Primary does not expect that the adoption of other recent accountingpronouncements to have any material impact on its financial statements.

 

**NOTE 3 - Equity& Common Stock**

 

 

On November 29, 2002 Pine Services, Inc. (“Pine”) sold its equityinterest in Primary, of approximately 90% controlling interest in the Company,to the owners of Primary Business Systems, LLC. (Primary LLC).   This agreement left the existingstockholders of Primary before the acquisition, which is a reverse merger, atotal of 126,104 free trading shares of common stock valued at a negative of$7,500.  Primary was a publically held“shell” company.

 

The new controlling owners of Primary, who were the prior owners of the LLC received 2,696,254restricted shares of common stock.  Thenew owners of Primary agreed to pay Pine $550,000 for its controlling interestin Primary.  The new major shareholderof Primary pledged up to 60% of his stock in Primaryas security to Pine that itwill be paid in full the $550,000 due it. He has three years to pay it off (approximately the end of 2005).   Primary issued an additional 4,000,000restricted shares of common stock to the new major shareholder forservices.  The new owners received as agroup a total of 6,696,254 restricted shares of common stock valued at a totalof $51,650.

 

During the first half of 2002 Primary issued 1,790,000 free tradingshares of common stock to consultants for marketing and consulting services, for a total of $1,020,000.  In 2003 500,000 of these shares werecancelled for non performance of services for a value

 

F-16

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assigned of $280,000.  (Also, referto the Note on Contingent Liabilities.)

 

During 2002 Primary issued 2,408,306 restricted shares of stock forservices valued at $16,858.

 

On February 28, 2003 Primary purchased all of the outstanding shares ofConcord Staffing, Inc.(“Concord”), in a stock for stock transaction.  All of the shares of Concord were exchangedfor 72,400,000 shares of restricted stock of Primary valued at $.0001 pershare, or $7,240.

 

During 2003 Primary issued 3,700,000 unrestricted shares of stock forservices of which 3,000,000 were cancelled for non performance for a net valueof $35,000.  (Refer to Note onContingent Liabilities.)

 

An Additional 1,453,355 shares of restricted common stock were issuedfor services and asset purchase for a total value of $174,372.

 

During 2003 an additional 494,728 shares of unrestricted common stockwas issued for services with a value assigned of $45,000.

 

** **

**NOTE 4 - Goodwill**

 

 

Goodwill is the amount paid by Primary to acquire its Subsidiaries inexcess of the assets received less liabilities assumed.  Goodwill is valued at cost, which is$557,240.  Management has evaluatedgoodwill for impairment and has determined the value of goodwill exceeds itscost.  Therefore, goodwill has noimpairment as of December 31, 2003 nor at December 31, 2002.  Also, refer to the Note discussingStock-Based Compensation and the Note on Contingent Liabilities for a more indepth explanation of what makes up the LLC portion of goodwill, which is$550,000.

 

 

**NOTE 5 - EmployeeBenefit Plan**

 

 

During 2001 Primary LLC established a 401-K employee benefit plan forits office and administrative employees and worksite employees.  Under $40,000 of the plan pertains toPrimary LLC per se as most of it relates to its clients and the worksiteemployees associated with them..

 

F-17

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**NOTE 6 - PrepaidMarketing**

 

In December 2002, Primary entered into an agreement with a consultantto receive a marketing campaign in 2003 to enhance the business and itsgrowth.  The consultant received 900,000shares of common stock in advance to do the work for a value assigned of$270,000.  During 2003 managementconcluded there was no value left in this prepaid marketing, so it was writtenoff to the Statement of Operations.

 

**NOTE 7 - PrepaidExpenses**

 

During 2003 Primary paid in stock $108,872 in prepaid consultingservices to three unrelated companies. These services are to be received over one year and are amortized at$9,073 per month with the final consulting services and corresponding amortizationof prepaid expenses in September 2004.

 

**NOTE 8 - RelatedParty Transactions**

 

The majority shareholder advances Primary funds from time to timeshould it need it.  The funds advanced,including for stock yet to issue, is $628,032 and $593,294 at December 31, 2003and 2002 respectively.

 

The note receivable of $46,007 and $53,799 as of December 31, 2003 and2002 respectively is for amounts due from Consumers Insurance Agency LLC(Consumers).  Primary bills Consumersand Consumers  reimburses Primary foruse of 500 square feet of office space, office supplies and payroll.  These transactions are related partytransactions as Consumers is owned by the CEO of Primary.   These reimbursements are not recognized asincome, but rather reduce the related costs in the statement of operations.

 

**NOTE 9 - LeaseCommitments**

 

Primary has no lease except the facilities it operates out of as ofDecember 31, 2003.

 

The net rent expense for the years ended December 31, 2003 and 2002 is$36,687 and  $20,676 respectively.  The rent was paid to Office BuildingPartnership.  Primary negotiated a newlease agreement as of July 2002 to the space currently occupied for $1,715 permonth; previously, it was $1,809 per month. The lease ends in January 2005 with an option to continue the lease on amonth-to-month basis for the following 6 months.  Total lease commitment is $20,580 for 2004 and $1,715 for2005.  The Company sub rents 500 squarefeet to Consumers Insurance Agency LLC (“Consumers”) starting in May 2002.  Rent received in 2003 is $4,490 and 2002 is$4,000.  The net rent the Company paidfor the years ended December 31, 2003 and 2002 is $$32,197 and $16,676respectively.

 

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**NOTE 10 - Line ofCredit**

 

Lines of Credit are for:
|                                                                                                                                       |   | **2003** |   | **2002** |   |
|--------------------------------------------------------------------------------------------------------------------------------------------|--------|----------|--------|----------|--------|
|                                                                                                                                       |   |     |   |     |   |
| Jourdanton State Bank, limit of $50,000 at  8% interest.  Collateralized with  accounts receivable and right of payment and equipment |   | $        | 44,988 |     | $      | 49,845 |   |
|                                                                                                                                       |   |     |   |     |   |
| Frost Bank, limit of $10,000 at 5%  interest, unsecured due on May 30, 2003                                                                |   | —   |   | 5,962    |   |
|                                                                                                                                       |   | $        | 44,988 |     | $      | 55,807 |   |

 

 

**NOTE 11 - CreditCard Payable**

 

The Company regularly uses two credit cards held under the majorityshareholder’s individual name, but are used exclusively for the Company.  Interest paid on these accounts are chargedto interest expense.  Balances owed are:

 
|                                |   | **2003** |   | **2002** |   |
|-------------------------------------|--------|----------|--------|----------|--------|
|                                |   |     |   |     |   |
| Delta Sky American Express          |   | $        | — |     | $      | 16,893 |   |
|                                |   |     |   |     |   |
| American Centurion American Express |   | —   |   | $        | 25,000 |   |
|                                |   |     |   |     |   |
|                                |   | $        | 0      |     | $      | 42,893 |   |

 

 

**NOTE 12 - NotesPayable**

 

Primary has two notes payable to non financial institutions, both duebefore December 31, 2004 for a total amount of $20,973.  The notes bear interest at approximately 9%per annum.  Primary is current on theobligations.

 

 

 **NOTE 13 - Workers Compensation**

 

Primary LLC maintains workers compensation insurance for worksiteemployees and well its regular and administrative employees.  Gross payroll to employees is over$13,000,000 for both December 31, 2003 and 2002. The insurance carrier auditsthe premiums yearly and based on their findings assess in the renewal processthe amount to pay up front in premiums the next year.  Premium deposits are $80,097 and $26,540 as of

 

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December 31, 2002 and 2001 respectively.

 

 

**NOTE14- Contingent Liabilities & Litigation**

 

Primary is in litigation with Suburban Capital, et al (“Advisor”).  The Advisor claims the Company owes themsignificant amounts of unrestricted stock in Primary for services provided andhas impeded them from receiving additional significant amounts of stock ofPrimary.  Primary on the other hand hasrefused to issue additional stock, and even cancelled some previously issued inan effort to reduce its loss for the non performance of the Advisor.  Legal counsel indicates the outcome of thislitigation is unknown.

 

Management has determined to not accrue or recognize any potentialobligation or exposure that may or may not arise from this matter.  Below is a brief synopsis of what theagreement is about that brought on the present litigation. 

 

On November 29, 2002 Pine Services, Inc. sold its equity interest inPrimary to the owners of Primary Business Systems, LLC (“Primary LLC”), leavingthe owners of the Primary LLC with approximately 90% ownership of Primary.  This agreement left the existingstockholders of Primary before the acquisition a total of 126,104 shares whilethe members of the Primary LLC received 2,696,256 shares of the Companystock.  The members of the Primary LLCagreed to pay $550,000 for Primary, which was a publically held “shell”corporation.  The major shareholderpledged 60% of his Primary stock to pay off the $550,000 due to Pine Services,Inc.  He has three years to pay it off(approximately the end of 2005).

 

Primary  also set up an agreementwith a consultant (“Suburban Capital, et al) (“Advisor”) to provide consultingservices to Primary, the value of which is not to exceed $2,000,000.  It is computed based on the stock issued tothe Advisor and what the sale proceeds the Advisor receives.  The Advisor owns up to 9.9% total ownershipin the Primary at any one time.  TheAdvisor’s stock is registered with the SEC on Form S-8 and is unrestricted(free trading) stock.  Up to every 60days the Advisor can receive newly issued stock computing up to 9.9% of thetotal issued and outstanding shares of Primary and sell it and keep theproceeds.  Once the Advisor has received$2,000,000 in proceeds from stock sales, or on or about December 15, 2003,which ever comes first, then Primary has no further obligation to issue theAdvisor additional stock..

 

In conjunction with the purchase agreement, the majority owner, who isthe CEO of Primary, has the rights to maintain 90% ownership in Primary throughout the time the Advisor continues to receive stock.  His stock, however,  isSection 144 restricted stock he must hold for at least 1 year from the date ofissue.  Payments to him for restrictedstock received is recognized as a function of the goodwill paid for theacquisition of the Subsidiary.

 

So, every time the Advisorreceives up to 9.9% new unrestricted S-8 stock of Primary to sell,

 

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the controlling owner receives over 9 times that much more additionalrestricted Section 144 stock..  Becauserestricted stock issued cannot be sold immediately, its value

 

**NOTE14- Contingent Liabilities & Litigation Continued**

 

is less than the market value of the stock when issued.  Management is unable to determine the valueof the restricted stock as to number to receive or the value to receive.  Management estimates goodwill is worth aminimum of $550,000, so that is the value assigned to these restricted stockissues to recognize as goodwill.  Out ofthe $550,000, $51,650 was received as of December 31, 2002.  Additional amounts were received in 2003.The estimated amount due to the shareholder/officer is recognized on thebalance sheet as an other payable for $593,294 as of December 31, 2002 less thevalue of stock received in 2003 relating to this agreement, the amount of whichwas not a significant amount.

 

 

**NOTE15 - Going Concern Issues**

 

Primary continues suffering significant losses and working capitalreflects more current liabilities than current assets.  Unless sufficient additional cash flows comeinto Primary, either through equity financing, profits, or a reduction of cashexpenses, Primary could be in jeopardy of continuing operations.  Management has developed a strategy, whichit believes will accomplish this objective through additional long and shortterm loans and sale of common stock of Primary to related and unrelatedparties.

** [THIS SPACE INTENTIONALLY LEFT BLANK]**

 

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**PRIMARY BUSINESS SYSTEMS, INC.NOTES TO FINANCIAL STATEMENTSDECEMBER 31, 2003**

 

**SIGNATURES**

 

In accordance with Section 13 or 15(d) of theExchange Act, the registrant has caused this report to be signed on its behalfby the undersigned, hereunto duly authorized.

 
|                  | Primary  Business Systems Inc.                                 |
|-----------------------|----------------------------------------------------------------|
|                  |                                                           |
|                  |                                                           |
|                  | By:                                                            | /s/ Patrick  D Matthews |   |
|                  | PATRICK D.  MATTHEWS,                                          |
|                  | CHIEF  EXECUTIVE OFFICER CHIEF FINANCIAL OFFICER AND PRESIDENT |
|                  |
| Date: March  29, 2004 |

 

 

In accordance with the Exchange Act, thisreport has been signed below by the following persons on behalf of theregistrant and in the capacities and on the dates indicated.

 

 
| **Signature**                            |   | **Capacity**                                 |                                                                     | **Date** |
|------------------------------------------|--------|----------------------------------------------|--------------------------------------------------------------------------|----------|
|                                     |   |                                         |                                                                     |     |
| /s/    Patrick D Matthews |   |                                         | Chairman of  the Board, Chief Executive Officer  Chief Financial Officer |     | March 29,  2004 |
| Patrick D  Matthews                      |   | and  President (Principal Executive Officer) |                                                                     |     |
|                                     |   |                                         |                                                                     |     |
|                                     |   |                                         |                                                                     |     |
| /s/    Amanda Sinclair    |   |                                         | Director,  Executive Vice President, Secretary                           |     | March 29,  2004 |
| Amanda  Sinclair                         |   |                                         |                                                                     |     |
|                                     |   |                                         |                                                                     |     |
|                                     |   |                                         |                                                                     |     |
| /s/  Connie Matthews                |   |                                         | Director                                                                 |     | March 29,  2004 |
| Connie  Matthews                         |   |                                         |                                                                     |     |

 

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**INDEX TO EXHIBITS**

 

The exhibits designated with an asterisk (*) are filed herewith.  All other exhibits have been previouslyfiled with the Commission and, pursuant to 17 C.F.R. §230.411, are incorporatedby reference to the document referenced in brackets following the descriptionsof such exhibits.

 

 
| **Exhibit  No.**    |   | **Page No.** |   | **Description**                                                                                                                          |
|---------------------|--------|--------------|--------|------------------------------------------------------------------------------------------------------------------------------------------|
|                |   |         |   |                                                                                                                                     |
| 3(i)                |   |         |   | Articles of Incorporation of the Company dated May 7, 1997  (Incorporated by reference from Form 10-SB filed March 10, 1999).            |
|                |   |         |   |                                                                                                                                     |
| 3(ii)               |   |         |   | Amended Articles of Incorporation of the Company dated April 26, 1999  (Incorporated by reference from Form 10-SB filed March 10, 1999). |
|                |   |         |   |                                                                                                                                     |
| 3(iv)               |   |         |   | By-laws of the Company (Incorporated by reference form Form 10-SB  filed March 10, 1999).                                                |
|                |   |         |   |                                                                                                                                     |
| MATERIAL CONTRACTS? |   |         |
|                |   |         |   |                                                                                                                                     |
| 14*                 |   |         |   | Code of Ethics                                                                                                                           |
|                |   |         |   |                                                                                                                                     |
| 21*                 |   |         |   | List of Subsidiaries                                                                                                                     |
|                |   |         |   |                                                                                                                                     |
| 31*                 |   |         |   | Certification pursuant to Rule 13a-14(a)/15d-14(a)                                                                                       |
|                |   |         |   |                                                                                                                                     |
| 32*                 |   |         |   | Certification pursuant to 18 U.S.C. Section 1350                                                                                         |

 

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