** **

**SECURITIESAND EXCHANGE COMMISSION**

WASHINGTON,D.C. 20549

# **FORM 10-KSB**

| **ý**** ** | **ANNUAL  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934  THE FISCAL YEAR ENDED DECEMBER 31, 2005.** |
|----------------------|-------------------------------------------------------------------------------------------------------------------------------------|

**Commission File Number *  *****0-25523**

**PBS Holding, Inc.**

(Name of Small Business Issuer in Its Charter)

 

| **NEVADA**                               |   | **86-0857752**                       |
|------------------------------------------|--------|--------------------------------------|
| (State or Other Jurisdiction of          |   | (I.R.S. Employer Identification No.) |
| Incorporation)                           |   |                                 |
|                                     |   |                                 |
| **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)                 |

 

**Securitiesregistered under Section 12(b) of the Act: NONE**

Securities registered under Section 12(g) of the Act:

**COMMONSTOCK, PAR VALUE $0.001 PER SHARE**

Check whether the issuer (1) filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934, as amended (the“Exchange Act”) during the past 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days. Yes ý No o

Check if there is no disclosure of delinquent filers in response to Item405 of Regulation S-B contained in this form and no disclosure will becontained, to the best of registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of this Form10-KSB or any amendment to this Form 10-KSB. ý

Indicate by check mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Exchange Act). Yes o No ý

The issuer’s revenues for the fiscal year ended December 31, 2005 were$4,919,246.

The number of shares of Common Stock of the issuer outstanding as ofDecember 31, 2005 was 10,784,753.

Theaggregate market value of the registrant’s common stock held by non-affiliates,based upon the average of the bid and asked prices on March 6, 2006 was$583,519 based upon 897,722 shares held by non-affiliates.

**DOCUMENTS INCORPORATED BY REFERENCE: N**one

TransitionalSmall Business Disclosure Format: Yes o No ý

 

 

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**TABLE OF CONTENTS**

 
|     | Cautionary Note Regarding  Forward-Looking Statements                                                             |   |
|----------|-------------------------------------------------------------------------------------------------------------------|--------|
|     |                                                                                                              |   |
|     | Part  I                                                                                                           |   |
|     |                                                                                                              |   |
| Item 1   | Description of Business                                                                                           |   |
| Item 2   | Description of Properties                                                                                         |   |
| 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 of Financial Condition and Results of Operations                       |   |
| Item 7   | Financial  Statements and Supplementary Data                                                                      |   |
| Item 8   | Changes in  and Disagreements with Accountants on Accounting and Financial Disclosure                             |   |
| Item 8a  | Controls and  Procedures                                                                                          |   |
|     |                                                                                                              |   |
|     | Part III                                                                                                          |   |
|     |                                                                                                              |   |
| Item 9   | Directors,  Executive Officers, Promoters and Control Persons; Compliance with Section  16(a) of the Exchange Act |   |
| Item 10  | Executive  Compensation                                                                                           |   |
| Item 11  | Security  Ownership of Certain Beneficial Owners and Management                                                   |   |
| Item 12  | Certain  Relationships and Related Transactions                                                                   |   |
| Item 13  | Exhibits and  Reports on Form 8-K                                                                                 |   |
| Items 14 | Principal  Accounting Fees and Services                                                                           |   |

 

 

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**CAUTIONARY NOTE REGARDINGFORWARD-LOOKING STATEMENTS**

 

In connection with the safeharbor provisions of the Private Securities Litigation Reform Act of 1995 (the “ReformAct”), PBS Holding, Inc. (the “Company”) is hereby providing cautionarystatements identifying important factors that could cause our actual results todiffer materially from those projected in forward-looking statements (as suchterm is defined in the Reform Act) made by or on behalf of the Company herein,in other filings made by the Company with the Securities and ExchangeCommission, in press releases or other writings, or orally, whether inpresentations, in response to questions or otherwise. Any statements thatexpress, or involve discussions as to, expectations, beliefs, plans,objectives, assumptions or future events or performance (often, but not always,through the use of words or phrases such as “will result,” “are expected to,” “anticipate,”“plans,” “intends,” “will continue,” “estimate,” and “projection”) are nothistorical facts and may be forward-looking and, accordingly, suchforward-looking statements involve known and unknown risks, uncertainties andother factors that may cause the actual results or performance of the Companyto be materially different from any future results or performance expressed orimplied by such forward-looking statements. Such known and unknown risks,uncertainties and other factors include, but are not limited to, the following:

 

(i)            volatility of costs of workers’ compensation insurance coverage andprofits generated from the workers’ compensation component of the Company’s andits subsidiaries’ service offering under its loss sensitive workers’compensation programs;

 

(ii)           volatility of stateunemployment taxes;

 

(iii)          the uncertaintiesrelating to the collateralization requirements as well as availability andrenewal of the Company’s and its subsidiaries’ medical benefit plans, generalinsurance and workers’ compensation insurance programs for the worksiteemployees;

 

(iv)          uncertainties as tothe amount the Company will pay to subsidize the costs of medical benefitplans;

 

(v)           possible adverseapplication of certain federal and state laws and the possible enactment ofunfavorable laws or regulation;

 

(vi)          litigation and otherclaims against the Company and its clients including the impact of such claimson the cost, availability and retention of the Company’s and its subsidiaries’insurance coverage programs;

 

(vii)         impact ofcompetition from existing and new businesses offering human resourcesoutsourcing services;

 

(viii)        risks associatedwith expansion into additional markets where the Company does not have apresence or significant market penetration;

 

(ix)           risks associatedwith the Company’s dependence on key vendors and the ability to obtain or renewbenefit contracts and general insurance policies at rates and with retentionamounts acceptable to the Company;

 

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(x)            an unfavorable determination by the Internal Revenue Service orDepartment of Labor regarding the status of the Company’s and its subsidiaries’as an “employer”;

 

(xi)           the possibility ofclient attrition due to the Company’s and it’s subsidiaries’ decision toincrease the price of its services, including medical benefits;

 

(xii)          risks associatedwith geographic market concentration;

 

(xiii)         the financialcondition of clients;

 

(xiv)        the effect ofeconomic conditions in the United States generally on the Company’s and it’ssubsidiaries’ business;

 

(xv)         the failure toproperly manage growth and successfully integrate acquired companies andoperations;

 

(xvi)        risks associatedwith providing new service offerings to clients;

 

(xvii)       the ability tosecure outside financing at rates acceptable to the Company;

 

(xviii)      risks associatedwith third party claims related to the acts, errors or omissions of theworksite employees; and

 

(xix)         other factors whichare described in further detail in this Annual Report on Form 10-KSB and inother filings by the Company with the Securities and Exchange Commission.

 

The Company cautions thatthe factors described above could cause actual results or outcomes to differmaterially from those expressed in any forward-looking statements made by or onbehalf of the Company. Any forward-looking statement speaks only as of the dateon which such statement is made, and the Company undertakes no obligation toupdate any forward-looking statement or statements to reflect events orcircumstances after the date on which such statement is made or to reflect theoccurrence of unanticipated events. New factors emerge from time to time, andit is not possible for management to predict all of such factors. Further,management cannot assess the impact of each such factor on the business or theextent to which any factor, or combination of factors, may cause actual resultsto differ materially from those contained in any forward-looking statement.

 

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Part I

 

**ITEM 1. DESCRIPTION OF BUSINESS**

 

**Development of Business**

 

PBS Holding, Inc. (the “Company”)was organized under the laws of the State of Nevada in November 1996. TheCompany is a holding company with wholly owned subsidiaries operating in theProfessional Employer Organization industry and the Temporary Staffing Servicesindustry.

 

In September 2002, PrimaryBusiness Systems, LLC (“PBS LLC”), a privately held Texas limited liability company,whose members were Patrick D. Matthews, Connie Matthews (wife of Mr. Matthews)and Amanda Sinclair (daughter of Mr. and Mrs. Matthews), entered into anagreement to purchase 58% of the outstanding shares of common stock of theCompany from Pine Services, Inc.

 

In November 2002, theCompany acquired 100% of the members’ interests of PBS LLC, thereby making PBSLLC a wholly owned subsidiary of the Company. As a result of this transaction,the former members of PBS LLC became the majority shareholders of the Companyand replaced the management of the Company.

 

In March 2003, the Companyacquired 100% of the outstanding stock of AHJR, Inc. (“AHJR”), a Texascorporation controlled by Connie Matthews thereby making AHJR a wholly-ownedsubsidiary of the Company. In June 2003, AHJR acquired the assets of atemporary staffing services company and began doing business under thetradename Concord Staffing Services.

 

In June 2004, the Companyestablished Primary HR Services, LLC (“Primary HR”) a Delaware limited liabilitycompany operating in Mississippi, thereby making Primary HR a wholly-ownedsubdidiary of the Company.

 

On or about October 4, 2005,the Company effected a 1 for 8 reverse stock split with respect to itsoutstanding shares of Common Stock and changed its name from Primary BusinessSystems Inc., to PBS Holding, Inc.

 

**Business of Issuer**

 

General

 

The Company is engaged inproviding human resource outsourcing services through its subsidiaries, PBSLLC, Primary HR and AHJR (sometimes hereinafter collectively referred to as the“Subsidiaries”).

 

PBS LLC and Primary HR areregional Professional Employer Organizations (PEO) committed to providing humancapital management solutions. PBS LLC is licensed as a Staff Leasing ServicesCompany in Texas and Primary HR provides similar services in Mississippi. Thetwo PEO subsidiaries focus on serving small to medium-sized businesses withbetween five and fifty employees. As of December 31, 2005, PBS LLC and PrimaryHR served more than 123 clients, and provided over 1930 W-2 forms.

 

AHJR is a regionaltemporary staffing services company helping businesses meet their staffingneeds while minimizing employee acquirement cost. AHJR offers qualified andscreened employees to clients that meet their employment needs on temporarybases. AHJR provides all payroll administration, unemployment administrationand assignment administration of the temporary staff. As of December 31, 2005AHJR had 110 employees on assignment.

 

**Products and Services: PBS LLCand Primary HR**

 

Our PEO subsidiariesprovide a broad range of products and services to their clients. These productsand services are primarily offered to the Company’s clients on a “bundled” orall inclusive basis. Health, welfare and retirement programs may be elected tobe offered to worksite employees at the option of each client. The Company throughthe PEO subsidiaries provides these products and services to its clients

 

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through the following coreactivities:

 

Retain the Best Employees. PBSLLC and Primary HR assist clients in retaining the best employees for theirbusinesses by providing: 

 

•           health benefits (medical, dental, vision)

•           retirement plans (401(k))

•           welfare benefits (voluntary life insurance, AD&D, short-term andlong-term disability)

•           employee assistance programs

•           employee retention best practices

•           employee discounts

•           reward and recognition programs

 

Manage the Paperwork. PBSLLC and Primary HR assist clients in managing employment and related paperworkby providing the following services:

 

•           401(k) plan administration

•           Section 125, FMLA and COBRA administration

•           time and attendance systems

•           payroll processing, employment related tax filings and administration

•           Form W-2 preparation

•           unemployment claims administration

•           benefits annual enrollment administration

•           benefits claims processing (health, disability and workers’compensation)

 

Protect our Clients’Business. PBS LLC and Primary HR assist clients in protecting their businessesby providing:

 

•           HR policies, forms and best practices

•           regulatory compliance and guidance

•           wage and hour guidance

•           employee hiring and termination guidelines

•           employee exit interview guidelines and forms

•           workers’ compensation insurance

•           workplace safety guidance

 

Insuring our Clients’Business. PBS LLC and Primary HR assist clients in insuring their business by bringingin our alliance with insurance providers.

 

•           General Liability Insurance Procurement

•           Commercial Auto Liability Procurement

•           Property & Equipment Insurance Procurement

•           Other Commercial Insurance Needs

•           Assist in audit processes

•           Assist in determining levels of insurance

•           Assist in shopping the market for the best price to coverage

 

**Client Selection and RetentionStrategy**

 

As part of their currentclient selection strategy, PBS LLC and Primary HR offer their services tobusinesses within specific industry classification codes. All prospectiveclients are also evaluated individually on the basis of total predictedprofitability. This analysis takes into account workers’ compensation risk andclaims history, unemployment claims history, payroll adequacy, and creditstatus. With respect to potential clients operating in certain industriesbelieved to present a level of risk exceeding industry norms, more rigorousapproval requirements must be met before agreeing to provide services to theclient. This process may include an on-site inspection and review of workers’compensation and unemployment claims experience for the last three years. Inaddition, under the terms of workers’ compensation agreements, prospectiveclients operating in certain industries or with historically high workers’compensation insurance claims experience must also be approved by the insurancecarrier before

 

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PBS LLC or Primary HRenters into a contract to provide services.

 

PBS LLC and Primary HRmaintain a client review program that includes a detailed profitability andrisk analysis of all their clients. Based on the results of these analyses, wemay modify our pricing, or if necessary, terminate certain clients that webelieve would otherwise be detrimental or not contribute to a long-termprofitability.

 

Our client retention ratefor 2005 was 91.05%. PBS LLC uses the NAPEO standard for measuring clientretention, which is computed by dividing the number of clients at the end ofthe period by the sum of the number of clients at the beginning of the periodplus the number of clients added during the period. The client retention rateis affected by a number of factors including the natural instability of thesmall to medium-sized business market and clients that were terminated by PBSLLC for reasons that include unacceptable risk and low profitability to PBS LLC.Primary HR did not have prior year clients to compare to for retentionpurposes.

 

All clients are required toenter into the Client Services Agreement. The Client Services Agreementprovides for an initial one-year term, subject to termination by PBS LLC orPrimary HR at any time upon 30 days prior written notice. After the initialterm the contract may be renewed, terminated or continued on a month-to-monthbasis. Following the initial term, most contracts are renewed for a one yearterm. Based on the results of a financial review, PBS LLC and Primary HR mayrequire the owners of client companies to personally guarantee the client’sobligations under the Client Services Agreement.

 

PBS LLC and Primary HRretain the ability to terminate the Client Services Agreement as well as theirco-employment relationship with the worksite employees immediately uponnon-payment by a client. PBS LLC and Primary HR manage their credit riskthrough the periodic nature of payroll, client credit checks, owner guarantees,client selection process and their right to terminate the Client ServicesAgreement and the co-employment relationship with the worksite employees.

 

Employment-relatedliabilities are generally allocated between PBS LLC or Primary HR and theclient pursuant to the Client Services Agreement with PBS LLC or Primary HRassuming responsibility for worksite employees, payroll obligations and forcompliance with certain employment-related government regulations. On the otherhand, the client remains responsible for compliance with the employment-relatedgovernment regulations that are more closely associated woth the dailysupervision, direction and control of worksite employees. In some cases,employment-related liabilities are shared between PBS LLC or Primary HR and theclient. The following table summarizes the general division of responsibilitiesfor employment-related regulatory compliance under the Client ServicesAgreement:

 

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| **PBS LLC/Primary HR 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; |       | •              Worksite and employee safety under the Occupational Safety and Health  Act (“OSHA”) and related or similar Federal, state or local regulations;                                                                                                                                                                                                                                                                                                   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|  •             Applicable workers’ compensation laws that cover: (i) procuring  workers’ compensation insurance; (ii) completing and filing all required  reports; (iii) claims processing;                                                                                                                                                                                                    |       |  •             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; |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|  •             COBRA (Consolidated Omnibus Budget Reconciliation Act of 1986)  continuation coverage for employees covered under health plans sponsored by  the Company;                                                                                                                                                                                                                                 |       |  •             Professional licensing and liability;                                                                                                                                                                                                                                                                                                                                                                                                                       |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|  •             Laws governing the garnishment of wages, including Title III of the  Consumer Credit Protection Act;                                                                                                                                                                                                                                                                                      |       |  •             Internal Revenue Code Sections 414(m), (n) and (o) relating to client  maintained benefit plans;                                                                                                                                                                                                                                                                                                                                                            |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|  •             All rules and regulations governing administration, procurement and  payment of all Company sponsored employee benefit plans elected by the client  or worksite employee; and                                                                                                                                                                                                             |       | •              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;                                                                                                                                                                                                                                          |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|  •             Fair Labor Standards Act and the Family and Medical Leave Act of  1993*.                                                                                                                                                                                                                                                                                                                  |       | •              Worker Adjustment and Retraining Notification Act;                                                                                                                                                                                                                                                                                                                                                                                                          |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |       |  •             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;  and                                                                                                                                                                                                                    |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |       | •              Fair Labor Standards Act and the Family and Medical Leave Act of  1993*.                                                                                                                                                                                                                                                                                                                                                                                    |

 

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*    PBS LLC/ Primary HRand the client are each responsible for certain provisions under the terms ofeach Act.

 

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**Sales and Marketing**

 

PBS LLC and Primary HRmarket their services through a direct sales force. In order to exercise morecontrol over the client selection process, we use a direct sales force ratherthan selling through agents. PBS LLC and Primary HR plan to expand theirregional coverage and add sales offices in major metropolitan areas over thenext few years as it accomplishes its expansion program. The sales associatesof PBS LLC and Primary HR are compensated by a combination of salary and commissionwhich, for top producers, will generate total compensation in the moderate sixfigure range.

 

PBS LLC and Primary HRgenerate sales leads from various sources as well as from direct sales effortsand inquiries. Each sales associate visits his or her clients periodically inorder to maintain an ongoing relationship and to seek new business referrals. PBSLLC and Primary HR also generate sales leads from referral relationshippartners and an information database of small businesses.

 

**Clients**

 

Our clients represent across-section of the industrial sector, of which ony three clients currentlyrepresent more than 5% individualy of our total revenues. We attempt tomaintain diversity within our client base in order to decrease our exposure todownturns or volatility in any particular industry, but we cannot assure youthat we will be able to maintain such diversity or decrease our eposure to suchvolatility. All prospective clients fill out a questionnaire to help usevaluate workers’ compensation risk, creditworthiness, unimployment history,and operating stability.

 

**Vendor Relationships**

 

PBS LLC and Primary HRprovide benefits to its worksite employees under arrangements with a number ofvendors. The maintenance of insurance plans including workers’ compensationplans and health benefit plans that cover worksite employees is a significantpart of PBS LLC and Primary HR’s business. If PBS LLC and Primary HR wererequired to obtain replacement contracts, such replacement could cause asignificant disruption to business and possible dissatisfaction with the PBSLLC and Primary HR’s service offering, leading to a decrease in clientretention and an adverse effect on future results of operations or financialcondition.

 

**Workers’ Compensation Plans**

 

Beginning in 2000, TexasMutual Insurance Company (“Texas Mutual”) was the provider of workers’compensation insurance for worksite employees based in Texas. The Texas Mutualprogram is a guaranteed cost insurance arrangement that is up for renewal eachNovember. The agreement with Texas Mutual has been renewed each of thesubsequent years up to and including November 2005 for an additional one-yearterm. The Company has no workers’ compensation liability with respect to claimsby Texas based employees that arose in each of the policy years for amounts inexcess of those paid to Texas Mutual.

 

Primary HR began operationsin 2004 and secured worker’s compensation through the risk pool in Mississippi,the policy is a guaranteed cost policy and poses no liability to Primary HRother than the premiums for coverage.

 

**Information Technology**

 

The Company has investedand is continuing to invest capital resources in the development andenhancement of its information and technology infrastructure, includingcomputer hardware and software and telephony. This investment is intended tobetter serve the client base, achieve a high level of client satisfaction andto allow the subsidiaries to improve efficiencies in its operations.

 

These computer systemsprovide the Subsidiaries with the capability to promptly and accurately deliverpayroll and related services and generate comprehensive management reports. TheSubsidiaries’ information systems manage all data relating to worksite employeeenrollment, payroll processing, benefits administration, management informationand other requirements of the Subsidiaries’ operations. The current systemshave high-volume payroll processing capabilities that allow the Subsidiaries toproduce and deliver payrolls to its clients, each customized to the specificneeds of such client.

 

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The Company is developingand deploying an online client and employee portal. PBS Online HR ManagementSystem (“PBS Online”) allows clients to input their payroll data directly intothe Company’s payroll applications via the Internet. Clients can regularly addor delete employees, view reports, and change payroll information. PBS Onlineprovides real time access to the Subsidiaries’ entire suite of human resourceproducts and services. PBS Online is fully integrated with the Company’s humanresource management systems and payroll engines. This full integration resultsin improved client satisfaction, as well as improved operating margins. Summitsoftware provides the foundation, enabling a robust, client configurableportal, while the Subsidiaries’ custom developed software provides additionalease of use and service capabilities.

 

PBS Online allows theCompany to service its clients 24 hours a day with increased accuracy and efficiency.PBS Online is updated regularly to increase its functionality and is intendedto serve as a human resource information portal for clients providing a varietyof payroll and human resource tools, templates and information.

 

The combination of thesystems, Summit and PBS Online, create a comprehensive solution able to growand adapt to the evolving needs of clients for access and functionality.

 

**Competition**

 

The PEO industry is highlyfragmented. We consider our primary competition to be other PEOs, ASOs(Administrative Services Organizations), insurance agents, and fee-for-serviceproviders, such as payroll processors and human resource consultants. Themarket for human resource consulting services is expected to becomeincreasingly competitive as larger companies, some of which have greaterfinancial resources than PBS LLC and Primary HR and which have nottraditionally operated in this industry, enter the market. There are numerouscompanies operating in the PEO segment which compete with PBS LLC and PrimaryHR, including several larger publicly held entities such as Gevity HR, Inc(NASDAQ;GVHR), ADP (NYSE: ADP) and Administaff, Inc (NYSE;ASI).

 

The key competitive factorsin the human resource consulting industry are breadth and quality of services,price, reputation, financial stability, and choice, quality and cost ofbenefits. PBS LLC seeks to compete through its ability to provide full-servicehuman resource solutions to its clients through its advanced informationtechnology solutions. PBS LLC believes that some smaller PEOs are exiting thePEO industry due to increased collateral required by providers of workers’compensation and health insurance benefits. In addition, an increase in costsand a lack of available workers’ compensation and health insurance benefitprograms is impacting these PEOs providing excellent opportunities forconsolidation in the PEO market place which the Company expects to exploit.

 

**Products and Services: AHJR**

 

Staffing companies likeAHJR provide one or more of three basic services to clients: (i) flexiblestaffing; (ii) placement and search; and (iii) outplacement services. Thetemporary staffing industry consists of a number of sectors focusing onbusiness needs that vary widely in duration of assignment and level oftechnical specialization. We operate primarily within the short-term, lightindustrial and clerical area of the temporary staffing industry.

 

AHJR focuses on meeting ourclients’ flexible staffing needs, targeting opportunities in a fragmentedgrowing market that we believe has been under-served by large, full-servicestaffing companies. Significant benefits to clients include providing theability to outsource the recruiting and many logistical aspects of theirstaffing needs, as well as converting their fixed cost of employees to thevariable cost of outsourced services. A summary of our payroll administrationservices and aggregation of statutory and non-statutory employee benefitsservices is as follows:

 

PAYROLL ADMINISTRATIONSERVICES: We assume responsibility for our employees’ payroll and attendancerecord-keeping, payroll tax deposits, payroll tax reporting, all federal,state, and payroll tax reports (including 941s, 940s, W-2s, W-3s, W-4s andW-5s), state unemployment taxes, employee file maintenance, unemployment claimsand monitoring and responding to changing regulatory requirements.

 

AGGREGATION OF STATUTORYAND NON–STATUTORY EMPLOYEE BENEFITS SERVICES: We provide workers’ compensationand unemployment insurance to our service employees. Workers’ Compensation is astate-mandated comprehensive insurance program that provides medical expenses,lost

 

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wages and other costs thatresult from work related injuries and illnesses, regardless of fault andwithout any co-payment by the employee. Unemployment insurance is an insurancetax imposed by both federal and state governments. Our human resources andclaims administration departments monitor and review workers’ compensation forloss control purposes.

 

The focus of our temporarystaffing service is to provide short and long term employees as well astemp-to-hire employees to financially secured employers. Our servicespecializes in clerical and light industrial staffing. Each applicant isthoroughly interviewed, tested, and screened to meet the requirements of ourcustomers. For long term and temp-to-hire positions, a large percentage of ourcustomers will interview our candidates and then select the individual theybelieve to be best suited for the positon.

 

**Sales and Marketing**

 

AHJR sales staff and staffplacement managers determine the needs of prospective customers and locatequalified individuals for assignment. Currently, referrals from satisfiedcustomers provide new customers for AHJR; however this spring the Companyintends to hire additional direct sales personnel to facilitate growth.

 

**Competition**

 

The Staffing servicesindustry is highly fragmented. We compete with many small providers in addtionto several large public companies, including Kelly Services, Inc., Manpower,Inc., and others. There are limited barriers to entry and new competitorsfrequently enter the market. Although a large percentage of flexible staffingproviders are locally operated, with fewer than five offices, most of thelarger public companies have significantly greater marketing, financial andother resources than we do. We believe that by focusing primarily on customerservice, we enjoy a competitive advantage over many of our competitors thatattempt to provide a broader range of staffing services. We also believe thatby targeting regional and local companies, rather than the national companies,we are generally being pursued by our competitiors and we can gain certaincompetitive advantages.

 

**Industry Regulations**

 

Numerous federal and statelaws and regulations relating to employment matters, benefit plans andemployment taxes affect the operations of Staffing companies. We are subject toassume certain obligations and responsibilities as an employer. Because many federaland state laws were enacted before the development of non-traditionalemployment relationships, such as PEOs, temporary employment and otheremployment-related outsourcing arrangements, many of the laws do notspecifically address the obligations and responsibilities of non-traditionalemployers. In addition, the definition of “employer” under the law is notuniform.

 

Some government agenciesthat regulate employment have developed rules that specifically address issuesraised by the relationship among PEOs, staffing agencies, clients and worksiteemployees. Such regulations are relatively new and, therefore, theirinterpretation and application by administrative agencies and federal and statecourts are limited or non-existent. The development of additional regulationsand interpretation of existing regulations can be expected to evolve over time.In addition, from time to time, states have considered, and if not mayconsider, imposing certain taxes on gross revenues or service fees of theCompany and its competitors.

 

We believe our operationsare currently in compliance in all material respects with applicable federaland state statutes and regulations.

 

**Employee Benefit Plans**

 

Effective June 1, 2001, PBSLLC 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 413C. This plan design enables owners of client companies and highlycompensated worksite employees, as well as highly compensated internal employeesof PBS LLC, to participate. Generally, employee benefit plans are subject toprovisions of both the Code and the Employee Retirement Income Security Act (“ERISA”).In order to qualify for favorable tax treatment under the Code, the plans mustbe established and maintained by an employer for the exclusive benefit of itsemployees. In addition to the employer/employee threshold, pension andprofit-sharing plans, including plans that offer CODAs (a profit-sharing planwith a cash or

 

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deferred arrangement, orCODA, under Code Section 401(k) and matching contributions under Code Section401(m), must satisfy certain other requirements under the Code. These otherrequirements are generally designed to prevent discrimination in favor ofhighly compensated employees to the detriment of non-highly compensatedemployees with respect to both the availability and the benefits, rights andfeatures offered in qualified employee benefit plans.

 

Employee pension and welfarebenefit plans are also governed by ERISA. ERISA defines “employer” as “anyperson acting directly as an employer, or indirectly in the interest of anemployer, in relation to an employee benefit plan.”  ERISA defines the term “employee” as “any individualemployed by an employer.”  A definitivejudicial interpretation of “employer” in the context of a PEO arrangement hasnot been established, although the Internal Revenue Service (“IRS”) releasedRev. Proc. 2002-21 on April 24, 2002, to help clarify the ability of PEOs tomaintain multiple employer 401(k) plans.

 

**IRS Issuance of Rev. Proc.2002-21**

 

In April 2002, the IRSissued Rev. Proc. 2002-21. While Rev. Proc. 2002-21 is intended to describe thesteps that may be taken to ensure the qualified status of defined contributionretirement plans maintained by PEOs for the benefit of worksite employees,there remain uncertainties regarding the operation and interpretation of thatrevenue procedure. Under Rev. Proc. 2002-21, if a PEO operates a multiple employerretirement plan in accordance with Code Section 413C, the IRS will notdisqualify the retirement plan solely on the grounds that the plan violates orhas violated the exclusive benefit rule.

 

**Federal Employment Taxes**

 

Asemployers, PBS LLC and Primary HR assume responsibility and liability for thepayment of federal and state employment taxes with respect to wages andsalaries paid to worksite employees. There are essentially three types offederal employment tax obligations: (i) withholding of income tax governed byCode Section 3401, et seq.; (ii) obligations under the Federal IncomeContributions Act (“FICA”), governed by Code Section 3101, et seq.; and (iii)obligations under the Federal Unemployment Tax Act (“FUTA”), governed by CodeSection 3101, et seq. Under these various Code sections, employers have theobligation to withhold and remit the employer portion and, where applicable,the employee portion of these taxes. Among other employment tax issues relatedto whether PEOs are employers of worksite employees are issues under the Codeprovisions applicable to federal employment taxes. The issue arises as towhether a PEO is responsible for payment of employment taxes on wages andsalaries paid to such worksite employees. Code Section 3401(d)(1), whichapplies 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 have extended thiscommon law employer exception to apply for both FICA and FUTA tax purposes. CodeSection 3401(d)(1) states that if the person for whom services are rendereddoes not have control of the payment of wages, the “employer” for this purposeis the person having control of the payment of wages. The Treasury Regulationsissued under Code Section 3401(d)(1) state that a third party can be deemed tobe the employer of workers under this section for federal 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 hasnot been delineated. Moreover, the IRS has to date relied extensively on thecommon law test of employment in determining liability for failure to complywith Federal income tax withholding requirements. Accordingly, while PBS LLCbelieves that it can assume the withholding obligations for worksite employees,if PBS LLC fails to meet these obligations, the client may be held jointly and severelyliable. While this interpretive issue has not, to PBS LLC’s knowledge,discouraged clients from utilizing PBS LLC’s services, there can be noassurance that a definitive adverse resolution of this issue would not do so inthe future.

 

**State Regulation**

 

While many states do notexplicitly regulate PEOs, 22 states including Texas where PBS LLC has offices,have passed laws that contain licensing, registration or other compliancerequirements for PEOs, and several other states are considering suchregulations. These laws vary from state to state but generally provide formonitoring the fiscal responsibility of PEOs. PBS LLC holds licenses, isregistered and otherwise compliant in the state it provides services. Whetheror not a state has licensing, registration or other compliance requirement, PBSLLC faces a number of other state and local regulations that could

 

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impact its operations.

 

### **Employees**

 

As of December 31, 2005,PBS LLC employed 14 full time employees, four in sales, three in payroll, onein accounting two in loss control, two in customer support and two inmanagement. Primary HR Services has two employees: one in sales and one inmanagement. AHJR has two employees both in customer service. All employees aretrained in customer service and all are responsible for serving our customers. Managementbelieves relations with employees are good. The employees are not representedby any bargaining group. The combined Company’s aslo provided paychecks toapproximately 800 worksite employees. We believe we maintain positive employeerelationships with such employees on client assignments.

 

**Trademarks and Service Marks**

 

We have begun the processof registering the mark “Focus on the Business of Business”.

 

**ITEM 2   DESCRIPTIONOF PROPERTIES**

 

We lease approximately 2780square feet of office space at 433 Kitty Hawk Drive, Suite 226, Universal City,Texas 78148 in a two story masonry office building. The lease began in July2002 and continues through November 2006. The current monthly lease rate is$3,067.00 and includes all utilities. The Company owns all furniture, fixtures,computers, servers and equipment necessary to the operations of the business. Managementbelieves that all property is adequately covered under various insurancepolicies.

 

The space has been builtout to meet the needs of the Company and it is the opinion of management thatit will continue to meet the needs of the Company through the term of the lease.In the future we anticipate that we will need additional facilities in which tocentralize our accounting, training, human resources, risk management andexecutive work activitiies. We anticipate that we will also require largerscale data processing and network communication capabilities, in order tofacilitate the assimilation of acquired companies into our methods of operatingand accounting standards, and to provide customers with state-of-the-artservice and support.

 

**ITEM 3.   LEGAL PROCEEDINGS**

 

While we are not aware ofany outstanding legal proceedings, as a commercial enterprise and employer andwith respect to its employment-related businesses in particular, we may becomeengaged in litigation from time to time during the ordinary course of businessin connection with employment-relations issues, workers’ compensation and othermatters. Generally, we are entitled to indemnification or repayment from ourclients for claims brought by worksite employees related to their employment. However,there can be no assurance that the client employer will have funds or insurancein amounts to cover any damages or awards, and as co-employer, we may besubject to liability.

 

Currently we are notengaged in any litigation, the effect of which would be anticipated to have amaterial adverse impact on our financial conditions or results of operations.

 

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

 

On August 29, 2005, theboard of Directors, with a written consent of the shareholder holding amajority of the outstanding common stock, approved a one for eight reversesplit of the Company’s Common Stock and change of the Company’s name fromPrimary Business Systems Inc., to PBS Holding, Inc. An Information Statementwas mailed on or about September 1, 2005 to the shareholders of record at theclose of business that day. The reverse split was effected on October 3, 2005.

 

Shareholders of recordeffective October 14, 2005 were sent Notice of Meeting of Shareholdersannouncing the Annual Meeting of Shareholder’s to be held in Las Vegas, Nevada,on November 7, 2005. At the meeting the shareholders elected three Directors tohold office until the next annual meeting of sharholders. The Annual Meeting ofShareholders was held November 7, 2005  andat the meeting each director nominated was elected by the shareholders.

 

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PartII

 

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

 

MARKET FOR COMMONEQUITY

 

(a) **MarketInformation.** The Company’s Common Stock has been quoted and tradedon a limited and sporadic basis on the OTC Bulletin Board operated by the NASDunder the trading symbol “PBHG”. The limited and sporadic trading does notconstitute, nor should it be considered an established public trading marketfor the Company’s Common Stock. Furthermore, due to limited and sporadictrading, the market value of the Company’s Common Stock held by non-affiliatescannot be estimated.

 

***PBHG – PBS HOLDING, INC.***

***YEAR ENDING DECEMBER 2005& 2004***

 
| ** **    | ** ** | **BID**  | ** ** |
|---------------|------------|----------|------------|
| **END  DATE** | ** ** | **HIGH** | ** ** | **LOW** | ** ** | **CLOSE** | ** ** |
| **2005**      | * *   | * * | * *   | * * | * * | * * | * * |
| 12/30/2005    |       | $        | 0.85       |   | $ | .011 |   | $ | 0.034 |   |
| 09/30/2005    |       | 0.07     |       | 0.015 |   | 0.03 | * * |
| 06/30/2005    |       | 0.02     |       | 0.012 |   | 0.015 | * * |
| 03/31/2005    |       | 0.03     |       | 0.011 |   | 0.013 | * * |
| **2004**      | * *   | * * | * *   | * * | * * | * * | * * |
| 12/30/2004    |       | 0.045    |       | 0.015 |   | 0.015 | * * |
| 09/30/2004    |       | 0.05     |       | 0.03 |   | 0.04 | * * |
| 06/30/2004    |       | 0.1      |       | 0.03 |   | 0.03 | * * |
| 03/31/2004    |       | 0.31     |       | 0.045 |   | 0.061 | * * |
|               |            |          |            |  |  |  |  |  |  |  |

 

Source: OTC Bulletin Board –quotations reflect inter-dealer prices, without retail mark-up, mark-down orcommission and may not represent actual transactions.

 

Chart reflects the 1 for 8reverse stock split in October 2005.

 

(b) **Holders.**As of March 6, 2006, management believes there to be approximately 187 holdersof record of our Common Stock, holding in the aggregate 10,847,253 sharesof the Company’s Common Stock.

 

(c) **Dividends.**Todate we have not paid any dividends on our Common Stock. We do not currentlyintend to pay dividends in the future.

 

EQUITY COMPENSATIONINFORMATION

 

*Securities authorized forissuance under equity compensation plans.*Although the Company has an Employee Stock Option Plan previouslyapproved by the security holders, no options have been granted under the planto date.

 

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Equity Compensation PlanInformation

 
| **Plan  Category**                                          | ** ** | **Number  of  securities to be  issued upon  exercise of  outstanding options,  warrants and rights.** | ** ** | **Weighted  – average  exercise price of the  oustanding options,  warrants and rights** | ** ** | **Number  of  securities remaining  available for future  issuance under  equity  compensation plans  (excluding  securities reflected  in column (a)** | ** ** |
|-------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                  | ** ** | **(a)**                                                                                                | ** ** | **(b)**                                                                                       | ** ** | **(c)**                                                                                                                                                 | ** ** |
| Equity  compensation plans approved by security holders     |       | 3,000,000                                                                                              |       | n/a                                                                                           |       | 3,000,000                                                                                                                                               |       |
|                                                        |       |                                                                                                   |       |                                                                                          |       |                                                                                                                                                    |       |
| Equity  compensation plans not approved by security holders |       | 315,000                                                                                                |       | $                                                                                             | 0.12       |                                                                                                                                                    | n/a        |   |
|                                                        |       |                                                                                                   |       |                                                                                          |       |                                                                                                                                                    |       |   |
| Total                                                       |       | 3,315,000                                                                                              |       | $                                                                                             | 0.12       |                                                                                                                                                    | 3,000,000  |   |

 

RECENT SALES OFEQUITY SECURITIES

 

This information has been reportedon Form 8-K filed on March 10, 2006.

 

Ourtransfer agent is Registrar and Transfer Corporation located at 10 CommerceDrive, Cranford, New Jersey 07016. The telephone number of Registrar andTransfer is 800-866-1340.

 

**ITEM 6.   MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

Thefinancial information set forth in the following discussion should be read inconjunction with the Company’s Audited Financial Statements and Notes includedherein under Item 7 of Part II.

 

Thestatements contained in this annual report that are not historical facts areforward-looking statements that involve a number of risks and uncertainties. Theactual results of the future events described in such forward-lookingstatements in this annual report could differ materially from those stated insuch forward-looking statements. Among the factors that could cause actualresults to differ materially are the risks and uncertainties discussed in thisItem 6 under “Risk Factors” and the uncertainties set forth from time totime in our other public reports and filings and public statements.

 

Theresults described below are not necessarily indicative of the results to beexpected in any future period.

 

OVERVIEW

 

Throughthe Subsidiaries we provide a broad range of comprehensive services, includingbenefits and payroll administration, health and workers’ compensation insuranceprograms, personnel records management, employer liability management andemployee training and development services.

 

Ourkey objective for 2005 was to continue to accelerate the growth in the numberof paid worksite employees while appropriately pricing our service offering andleveraging our existing infrastructure. Our

 

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growthis reflected in our Net Revenues which increased 47% to $4,919,246 in 2005 over2004 and Gross Profit which increased 37% to $1,766,532 in 2005 over 2004.

 

Wealso endeavored to finalize the long standing legal issues involving theCompany dating back to March 2003. A final outcome was achieved during the fourthquarter of 2005 wherein the control of the Company remained with the majorityshareholder allowing us to focus on the future of the Company and pursue ourplans for strategic acquisitions evidenced by the Letter of Intent in December2005 with Heart Employee Leasing, Inc. (“Heart”), a Texas based PEO. At this pointa definitive agreement has not been finalized between the Company and Heart althoughnegotiations are on going. We anticipate the definitive agreement will be signedin early April with an expected closing date of April 26, 2006. The addition ofHeart will have a significant impact on the Company and substantially increasemarket share in Texas. In order to complete the transaction we will have toraise significant capital and at this time it is not assured we will be able toaccomplish the task.

 

RESULTSOF OPERATIONS

 

Thefollowing table presents consolidated results of PBS’ operations for the yearsended December 31, 2005 and 2004, expressed as a percentage of net revenues.

 
| ** **                                              | ** ** | **Year Ended  December 31, 2005** | ** ** | **Year Ended  December 31, 2004** | ** ** |
|---------------------------------------------------------|------------|-----------------------------------|------------|-----------------------------------|------------|
| Net Revenues                                            |       | %                                 | 100        |                              | %          | 100 |   |
| Cost of  Services                                       |       | 64.1                              |       | 61.62                             |       |
| Gross Profit                                            |       | 35.91                             |       | 38.38                             |       |
|                                                    |       |                              |       |                              |       |
| Operating  Expenses                                     |       |                              |       |                              |       |
| General and  Administrative                             |       | 19.51                             |       | 21.63                             |       |
| Wages,  Compensation & Salaries                     |       | 10.74                             |       | 9.37                              |       |
| Officers  Compensation                                  |       | 5.9                               |       | 6.33                              |       |
| Total Operating  Expenses                               |       | 36.15                             |       | 37.34                             |       |
| Income  (Loss) from Operations                          |       | (0.24                             | )          | 1.05                              |       |
|                                                    |       |                              |       |                              |       |
| Other Income  & Expense                             |       |                              |       |                              |       |
| Other Income                                            |       | 1.02                              |       | 0                                 |       |
| Consulting  Expenses                                    |       | 2.05                              |       | .22                               |       |
| Acquisition  Costs                                      |       | 0.15                              |       | 0                                 |       |
| Employee Services Paid with Cashless Stock Warrants     |       | 0.45                              |       | 0                                 |       |
| Non Employee Services Paid with Cashless Stock Warrants |       | 1.53                              |       | 0                                 |       |
| Litigation  Costs                                       |       | 1.79                              |       | 2.9                               |       |
|                                                    |       |                              |       |                              |       |
| (Loss)  before income taxes                             |       | (4.16                             | )          | (2.07                             | )          |
| Income Tax  (benefit) provisions                        |       | —                            |       | —                            |       |
| (Loss) Net  Income                                      |       | (4.16                             | )          | (2.07                             | )          |
|                                                         |            |                                   |            |                                   |            |  |  |

 

COMPARISONOF CONSOLIDATED OPERATIONS FOR YEAR ENDED DECEMBER 31, 2005 TO YEAR ENDEDDECEMBER 31, 2004.

 

Weaccount for our revenues in accordance with Emerging Issues Task Force (“EITF”)99-19, *Reporting Revenues Gross as a Principal Versus Netas an Agent.*Our gross billings to clients include the payroll costof each worksite employee at the client location and a markup computed as apercentage of each worksite employee’s payroll cost. We invoice the grossbillings concurrently with each periodic payroll of our worksite employees. Revenues,which exclude the payroll cost component of gross billing, and therefore,

 

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consistsolely of the markup, are recognized ratably over the payroll period asworksite employees perform their service at the client worksite. This markupincludes pricing components associated with our estimates of payroll taxes,benefits and workers’ compensation costs, plus a separate component related toour HR services.

 

NetRevenues for the year ended December 31, 2005 increased $1,580,355 to$4,919,246 compared to $3,338,891 for December 31, 2004, a 47% increase,reflecting an increase in business and our aggressive marketing efforts. Thisgrowth is attributable to an increase in sales resulting from the Company’sdevelopment of a strategic sales process implemented in 2004 and leadership ofour experienced management team.

 

Costof Revenues for the year ended December 31, 2005 was $3,152,715 or 64.09% ofNet Revenue compared to $2,057,354 or 61.62% for the year ended December 31,2004. This represents an increase of $1,095,361 or 53.24% which is consistentwith increases in our Net Revenues. Cost of Revenues are primarily affected bythe workers’ compensation costs, state unemployment cost and benefit expenses.

 

Workers’compensation represented the largest increase in our cost of revenues for theyear ended December 31, 2005 increasing to $1,075,971 as compared to $529,930for the year ended December 31, 2004. The increase is due to the larger numberof leased employees covered under the program.

 

Stateunemployment costs for the year ended December 31, 2005 were $118,147 comparedto $88,014 for the year ended December 31, 2005. The increase is consistentwith increases in the number of leased employees.

 

Benefitexpenses for the year ended December 31, 2005 were $119,379 compared to $81,769for the year ended December 31, 2004. The increase is consistent with increasesin the number of leased employees covered by the plans and typical year to yearincreases in insurance programs.

 

OurGross Profit for the year ended December 31, 2005 increased $484,995 or 37% to$1,766,532 as compared to $1,281,537 for the year ended December 31, 2004.

 

TotalOperating expenses for the year ended December 31, 2005 were $1,778,096 or 36.15%of Net Revenues compared to $1,246,576 or 37.34% of Net Revenues for the yearended December 31, 2004.

 

Generaland Administrative Costs were $959,751 or 19.51% of Net Revenues for the yearended December 31, 2005 compared to $722,235 or 21.63% for the year endedDecember 31, 2004. During 2005 the timing and cash requirements of the Companywere such that short term tax payment deficiencies exist resulting in penaltiesincurred by the Company in 2005. The penalties accrued totaled $81,418 and wereincluded in the General and Administrative Costs of the Company. In addition wesettled two lawsuits facing the Company. The suits involved contract disputeswith a service provider and former customer, and were settled at a cost thatmanagement believed would be lower than legal fees accumulated defending ourposition through a drawn out trial process. The total cost associated tosettling the suits included in General and Administrative Costs was $100,000.

 

Wages,commissions, and salaries for the year ended December 31, 2005 were $528.231 or10.74% of Net Revenues compared to $312,976 or 9.37% for the year endedDecember 31, 2004, representing an increase of $240,647. During the year weadded additional sales staff when we opened the Houston market place. Weincreased our payroll staff by one employee during 2005 and added one additionalcustomer service representative, an IT Manager and one risk manager. The totalstaff of the Company increased from eleven to sixteen employees. Commissionsalso increased due to growth as reflected in our Net Revenue. We expect as wegain results in the Houston market we will minimize the impact of theadditional sales staff thereby bringing our cost in line with our expectations.

 

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Officers’compensation for the year ended December 31, 2005 was $290,114 or 5.9% of Net Revenuecompared to $211,365 or 6.33% of net revenue for the year ended December 31,2004.

 

Operationsfor 2005 resulted in a loss of $(11,564) or (0.24) % as compared to income of$34,961 or 1.05% for 2004. This was the accumulative effect of the 2.74%increase in cost of revenues discussed above and increases in wages,commissions and salaries as a result of the investments in our staff andexpansion into additional markets.

 

Otherincome of $50,109 for the period ended December 31, 2005 resulted from aninitial payment for the settlement of the lawsuit with Pine, Inc. and SuburbanCapitol at the beginning of 2005. In the ensuing months Pine, Inc. and SuburbanCapitol defaulted on the settlement agreement thereby surrendering all claimsagainst the Company.

 

Litigationcost for the year ended December 31, 2005 were $87,919 and $96,699 for the yearended December 31, 2004. The sums of both years represent the legal costsassociated with the aforementioned lawsuit.

 

Consultingexpenses for the year ended December 31, 2005 was $50,300 and represents thecosts incurred by the Company for services rendered during that year inassisting the Company to position itself to acquire other businesses in thehuman resources outsourcing industries.

 

OnDecember 16, 2004, the Financial Accounting Standards Board(FASB) issued FASB Statement No. 123 (revised 2004), *Share-Based Payment,* which is a revisionof FASB Statement No. 123, *Accountingfor Stock-Based Compensation.*Statement 123(R) supersedes APBOpinion No. 25, *Accounting for StockIssued to Employees,* and amends FASB Statement No. 95, *Statement of Cash Flows*. Generally, theapproach in Statement 123(R) is similar to the approach described in Statement123. However, Statement 123(R) requires all share-based payments to employees,including grants of employee stock options, to be recognized in the incomestatement based on their fair market values. Pro forma disclosure is no longeran alternative. We adopted SFAS 123(R) as of December 31,2005. Statement 123(R)permits public companies to adopt its requirements using one of two methods:

 

1. A“modified prospective” method in which compensation cost is recognizedbeginning with the effective date: (a) based on the requirements ofStatement 123(R) for all share-based payments granted after the effective date;and (b) based on the requirements of Statement 123 for all awards grantedto employees prior to the effective date of Statement 123(R) that remainunvested on the effective date.

 

2. A“modified retrospective” method which includes the requirements of the modifiedprospective method described above, but also permits entities to restate basedon the amounts previously recognized under Statement 123 for purposes of proforma disclosures either: (a) all prior periods presented; or(b) prior interim periods of the year of adoption.

 

Weadopted Statement 123(R) using the modified prospective method.

 

Weelected during the third quarter 2005 to use cashless warrants as a method topay for services or reward (award) individuals for their service to the Company.The cashless warrant formula is x = y (a – b) / a wherein “x” is the resultantnumber of shares issued, “y” is the number of warrants granted, “a” is themarket price and “b” is the exercise price. It is the opinion of managementthis cashless warrant vehicle provides a method to award performance whileminimizing the impact on the Company’s cash flow and capital structure. It iswidely believed the majority of cashless warrant options will be exercised bysurrendering shares as opposed to paying cash for the total number of sharesoutstanding although this cannot be assured in every case.

 

Todetermine the value of the warrants granted as required in Statement 123R(1) wehave adopted the Black-Scholes-Merton formula which takes into account theinitial stock price, the exercise price, the

 

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continuouslycompounded risk-free interest rate, the expected dividend yield, the expectedvolatility, and the expected term. Our methodology includes assuming the stockprice fair market value at the end of each month a warrant is exercisable thatprice is also applied to the cashless warrant formula as the value for “a”. Managementhas an opinion that the application of the two formulas effectively encompassesthe intent of FAS 123R (1).

 

Employeeservices paid with cashless stock warrants issued during each month of thefourth quarter 2005 totaled 105,000 warrants. These cashless warrants wereissued to an employee in connection with services rendered to the Company andour expansion into the Houston market. These warrants were accounted for asdescribed above and booked as an expense to the Company in the amount of$22,204. There were no such entries for 2004.

 

Non-employeeservices paid with cashless stock warrants issued during each month of fourthquarter 2005 totaled 210,000 warrants. These cashless warrants were issued inconjunction to services performed by a consultant to the Company who isassisting with our acquisition plans. These warrants were accounted for asdescribed above and booked as an expense to the Company in the amount of$75,505. There were no such entries in 2004.

 

Acquisitioncosts are those direct costs associated with the Company’s efforts to purchaseother human resources outsourcing companies. We have included this breakoutbecause we expect to have significant expenses in our pursuit of additionalhuman resources outsourcing companies beginning with our current pursuit ofHeart which is described more fully in Note 14 of the financial statements ofthe Comapany contained in Item 7.

 

Noprovision for income taxes have been reflected or recorded in the financialstatements. We incurred a net loss of $(204,698) for the year ended December31, 2005 as a result of the matters discussed above. This represents a $135,588increase in the net loss from the year ended December 31, 2004. Losses to datecan be used to offset future taxable income, assuming the Company becomesprofitable in the future.

 

Ourfinancial statements have been prepared on a going-concern basis, whichcontemplates the realization of assets and the discharge of liabilities in thenormal course of business. As reflected in the financial statements, wecurrently have a working capital deficiency and a stockholder’s deficiency of$(308,573) and $(250,914), respectively, as of the year ended December 31, 2005and 2004. In addition, we have incurred losses from our operations since ourinception, and have been dependent upon the financial support of shareholders,management, and other related parties.

 

TheCompany had $84,712 in cash and cash equivalents at December 31, 2005. TheCompany is required to collateralize its obligations under its workers’compensation coverage. The Company uses its cash as to collateralize theseobligations.

 

AtNovember 18, 2005, the Company deposited $167,986 as collateral with theCompany’s workers’ compensation carrier for the 2005/2006 policy year. TheCompany’s workers’ compensation plans for the previous years are subject to nofurther collateral adjustments.

 

TheCompany had long term debt as of December 31, 2005 of $117,501 due to PatrickMatthews, the Company’s President and Chief Executive Officer and majorityshareholder, down $ 6,645 from December 31, 2004 or $124,146.

 

Thecharges to clients by the Company derived from salaries, wages, payroll taxesand benefits are managed from the cash flow perspective so that a matchingexists between the time the funds are received from a client and the time thefunds are paid to the worksite employees and appropriate tax jurisdictions.

 

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TheCompany’s primary short-term capital requirements relate to the payment ofaccrued payroll and payroll taxes of its internal and worksite employees,accounts payable for capital expenditures and the payments of accrued workers’compensation expense and health benefit plan premiums.

 

Todate the Company has made significant financial commitments to developing itssales force. We hired a sales consulting firm to help develop and implement oursales practices with the expectation of our sales staff becoming betterequipped to develop relationships with existing and prospective customers. Ourmain goals were to (i) reduce the sales cycle, (ii) increase the size of ouraccounts in terms of employee count and (iii) increase the fee for our services.To date the results sought have been recognized, there is however no guaranteethe results we’ve seen to date will continue into the future.

 

NewAccounting Pronouncements

 

InMay 2005, the FASB issued Statement No. 154, “Accounting Changes andError Corrections — a Replacement of APB Opinion No. 20 and FASB StatementNo. 3” (“SFAS 154”). SFAS 154 requires retrospective application to priorperiod financial statements of changes in accounting principles, unless it isimpracticable to determine either the period-specific effects or the cumulativeeffect of the change. SFAS 154 also redefines “restatement” as the revising ofpreviously issued financial statements to reflect the correction of an error. Thisstatement is effective for accounting changes and corrections of errors made infiscal years beginning after December 15, 2005. The Company discoverederror requiring correction in the foruth quarer of 2005. The corrections weremade as of December 31, 2005 under APB 20 and FASB Statement No. 3. The Companydoes not expect the adoption of SFAS 154 to have a material effect on theCompany’s consolidated financial position or results of operations.

 

During2005 the Company received an inquiry from the Securities and ExchangeCommission regarding goodwill with respect to the Company’s Form 10K-SB for thefiscal year ended December 31, 2004. Specifically the Securities and Exchange Commissionquestioned the correctness of accounting for goodwill regarding thetransactions in 2002 wherein the Members of PBS LLC purchased the controllinginterest in the Company from a third party and the Company exchanged its sharesof Common Stock for the membership interest in PBS LLC. As a result of theinquiry and the ensuing research the Company determined the entries for goodwillwere in error and accordingly, entries relating to goodwill were eliminated inour financial statements. Such changes had no effect on the operational outcomeof the Company. A more complete discussion is contained in Note 12 in the Notesto Financial Statements in Item 7.

 

RISK FACTORS

 

You should carefully consider the risks describedbelow with respect to our operations, businesses and financial condition. Therisks and uncertainties described below are not the only ones facing us. Otherrisks and uncertainties that we have not predicted or assessed may alsoadversely affect us. Some of the information in this filing containsforward-looking statements that involve substantial risks and uncertainties. Youcan identify these statements by forward-looking words such as “may,” “will,” “expect,”“anticipate,” “believe,” “intend,” “estimate,” and “continue” or other similarwords. You should read statements that contain these words carefully for thefollowing reasons:

 

•      the statements may discuss our futureexpectations;

•      the statements may contain projections of ourfuture earnings or of our financial condition; and

•      the statements may state other “forward-looking”information.

 

WE REQUIRE ADDITIONAL CAPITAL TO FUND OUR CURRENTOPERATIONS AND TO MAKE ACQUISITIONS. WE MAY HAVE TO CURTAIL OUR BUSINESS IF WECANNOT FIND ADEQUATE FUNDING.

 

20

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The expansion and development of our business willrequire significant additional capital, which we may be unable to obtain onsuitable terms, or at all. Obtainingfuture financing may be costly and will likely be dilutive to existingstockholders. If we are not able to obtain financing when and in the amountsneeded, and on terms that are acceptable, our operations, financial condition,and prospects could be materially and adversely affected, and we could beforced to curtail our operations or sell part or all of our assets.

 

WE MAY ACQUIRE ADDITIONAL COMPANIES, WHICH MAY RESULTIN ADVERSE EFFECT ON OUR EARNINGS.

 

Wemay at times become involved in discussions with potential acquisitioncandidates. Any acquisition that we may consummate may have an adverse effecton our liquidity and earnings and may be dilutive to our earnings. In the eventthat we consummate an acquisition or obtain additional capital through the saleof debt or equity to finance an acquisition, our shareholders may experiencedilution in their shareholders’ equity. We have historically obtained growththrough acquisitions of other companies and businesses. Under Statements ofFinancial Accounting Standards No. 141, Business Combinations (SFAS No. 141)and No. 142 Goodwill and Other intangible Assets implemented in June 2001, weare required to periodically review goodwill and indefinite life intangibleassets for possible impairment. In the event that we are required to write downthe value of any assets under these pronouncements, it may materially andadversely affect our earnings. See the more detailed discussion appearing aspart of our Management’s Discussion and Analysis.

 

OUR BUSINESS MAY BE ADVERSELY AFFECTED DUE TO ECONOMICCONDITIONS IN SPECIFIC GEOGRAPHIC MARKETS.

 

Allour revenues are derived through our Texas and Mississippi operations. Weattempt to diversify through different industry segments and by obtainingclients in different metropolitan markets. While we believe that our marketdiversification will eventually lessen this risk in addition to generatingsignificant revenue growth, we may not be able to duplicate in other marketsthe revenue growth and operating results necessary to offset economicconditions.

 

UNFAVORABLEINTERPRETATIONS OF GOVERNMENT LAWS MAY HARM OUR PEO OPERATIONS.

 

Our PEO operations are affected by many federal, stateand local laws relating to labor, tax, insurance and employment matters and theprovision of managed care services. Many of the laws related to the employmentrelationship were enacted before the development of alternative employmentarrangements, such as those that we provide, and do not specifically addressthe 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 Code include,but are not limited to, the qualified tax status and favorable tax status ofcertain benefit plans we and other alternative employers provide. In addition,new laws and regulations may be enacted with respect to its activities, whichmay also have a material adverse effect on our business, financial condition,results of operations and liquidity.

 

IFGOVERNMENT REGULATIONS REGARDING PEO’S TEMPORARY AND PERMANENT STAFFING AREIMPLEMENTED, OR IF CURRENT REGULATIONS ARE CHANGED, OUR BUSINESS COULD BEHARMED.

 

Because many of the laws related to the employmentrelationship were enacted prior to the development of PEOs and other staffingbusinesses, many of these laws do not specifically address the obligations andresponsibilities of non-traditional employers. Our operations are affected bynumerous federal, state and local laws 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 Code include, but are not

 

21

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limited to, the qualified tax status and favorable taxstatus of certain benefit plans provided by our Company and other alternativeemployers. The unfavorable resolution of these unsettled issues could have amaterial adverse effect on results of operations and financial condition. Whilemany states do not explicitly regulate PEOs, approximately one-half of thestates have enacted laws that have licensing, registration or certificationrequirements for PEOs. Several additional states are considering such laws. Theselaws vary from state to state but generally provide for the monitoring of thefiscal responsibility of PEOs and specify the employer responsibilities assumedby PEOs. Additionally, many states require licensure or registration ofentities providing temporary health care or nursing services as well as thoseoffering permanent placement services. There can be no assurance that we willbe able to comply with any such regulations, which may be imposed upon us nowor in the future, and our inability to comply with any such regulations couldhave a material adverse effect on our results of operations and financialcondition. In addition, there can be no assurance that existing laws andregulations which are not currently applicable to us will not be interpretedmore broadly in the future to apply to our existing activities or that new lawsand regulations will not be enacted with respect to our activities. Either ofthese changes could have a material adverse effect on our business, financialcondition, results of operations and liquidity.

 

WE MAY NOT BE ABLE TO OBTAIN ALL OF THE LICENSES ANDCERTIFICATIONS THAT WE NEED TO OPERATE.

 

State authorities extensively regulate the PEO,temporary medical staffing and permanent placement industry and some statesrequire us to satisfy operating, licensing or certification requirements. If weare unable to obtain or maintain all of the required licenses or certificationsthat we need, we could experience material adverse effects to our results ofoperations, financial condition and liquidity.

 

HEALTH CARE OR WORKERS’ COMPENSATION REFORM COULDIMPOSE 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. Changesin any of these laws or regulations may adversely impact the demand for ourservices, require that we develop new or modified services to meet the demandsof the marketplace, or require that we modify the fees that we charge for ourservices. Any such changes may adversely impact our competitiveness andfinancial condition.

 

IF WE LOOSE OUR QUALIFIED STATUS FOR CERTAIN TAXPURPOSES, OUR BUSINESS WOULD BE ADVERSELY AFFECTED.

 

The IRS established an Employee Leasing Market SegmentGroup for the purpose of identifying specific compliance issues prevalent incertain segments of the PEO industry. One issue that arose in the course ofthese reviews is whether PEOs should be considered the employers of worksiteemployees under Code provisions applicable to employee benefit plans, whichwould permit PEOs to offer benefit plans that qualify for favorable taxtreatment to worksite employees. If the IRS concludes that PEOs are notemployers of worksite employees for purposes of the Code, we would need torespond to the following adverse implications:

 

•              the tax-qualifiedstatus of our 401(k) plan could be revoked and our Cafeteria Plan may lose itsfavorable tax status;

•              worksite employeeswould not be able to continue to participate in such plans or in other employeebenefit plans;

•              we may no longer beable to assume the client company’s federal employment tax withholdingobligations;

•              if such a conclusionwere applied retroactively, then employees’ vested account balances in the401(k) plan would become taxable immediately, we would lose our tax deductionto the extent contributions were not vested, the plan trust would become ataxable trust and penalties, and additional taxes for prior periods could beassessed.

 

Under such circumstances, we would face the risk ofclient dissatisfaction as well as potential litigation, and our financialcondition, results of operations and liquidity could be materially adverselyaffected.

 

22

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In April 2002, the IRS issued Rev. Proc. 2002-21. WhileRev. 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. UnderRev. Proc. 2002-21, if a PEO operates a multiple employer retirement plan inaccordance with IRS Code Section 413C, the IRS will not disqualify theretirement plan solely on the grounds that the plan violates or has violatedthe exclusive benefit rule. PBS LLC’s current active retirement savings plan isdesigned, and intended to be operated, in accordance with Code Section 413C.

 

WE ARE LIABLE FOR THE COSTS OF WORKSITE EMPLOYEE PAYROLLAND BENEFITS AND BEAR THE RISK IF SUCH COSTS EXCEED THE FEES PAYABLE TO US BYOUR CLIENTS.

 

Under our standard client service agreement, we becomea co-employer of worksite employees and assume the obligations to pay thesalaries, wages and related benefit costs and payroll taxes of such worksiteemployees. We assume these obligations as a principal, not merely as an agent,of the client company. If a client company does not pay us, or if the costs ofbenefits provided to worksite employees exceeds the fees paid by a clientcompany, our ultimate liability for worksite employee payroll and benefitscosts could have a material adverse effect on our financial condition orresults of operations. Our obligations include responsibility for

 

•              payment of thesalaries and wages for work performed by worksite employees, regardless ofwhether the client company makes timely payment to us of the associated servicefee; 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

•              providing benefitsto worksite employees even if the costs we incur to provide those benefitsexceed the fees paid by the client company.

 

WE BEAR THE RISK OF NONPAYMENT FROM OUR CLIENTS ANDTHE POSSIBLE EFFECTS OF BANKRUPTCY FILINGS BY CLIENTS.

 

To the extent that any client experiences financialdifficulty, or is otherwise unable to meet its obligations as they become due,our financial condition and results of operations could be adversely affected. Forwork performed prior to the termination of a client agreement, we may beobligated, as an employer, to pay the gross salaries and wages of the client’sworksite employees and the related employment taxes and workers’ compensationcosts, whether or not our client pays us on a timely basis, or at all. Asignificant increase in our uncollected account receivables may have a materialadverse effect on our earnings and financial condition.

 

To the extent that PBS LLC extends credit to itsclients under its client service agreements, or is liable for employee payrolland related expenses, and the client files for protection under the bankruptcylaws, PBS LLC may be unable to collect the funds owed to it from the client. Asa result, PBS LLC may be required to pay payroll and related expenses withoutreimbursement. In addition, although PBS LLC believes that its client serviceagreements should be terminable by it once a client enters bankruptcy, there isa risk that a bankruptcy court may not agree and would require PBS LLC tocontinue to perform services for such client, thereby increasing the risk thatPBS LLC would be unable to collect funds from the client. Therefore, the filingfor bankruptcy by a significant client, or a number of clients, may have amaterial adverse effect upon PBS LLC’s financial condition.

 

WE MAY BE HELD LIABLE FOR THE ACTIONS OF OUR CLIENTSAND 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

 

23

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such liabilities. In addition, worksite employees maybe deemed to be our agents, which could make us liable for their actions.

 

WE MAY BE LIABLE FOR THE ACTIONS OF PEO WORKSITEEMPLOYEES OR CLIENTS AND OUR INSURANCE POLICIES MAY NOT BE SUFFICIENT TO COVERSUCH LIABILITIES.

 

Our PEO client services agreement establishes acontractual division of responsibilities between our Company and each clientfor various human resource matters, including compliance with, and liabilityunder, various government 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 suchclient agreements generally provide that the client indemnify us for anyliability attributable to the client’s failure to comply with its contractualobligations and to the requirements imposed by law, we may not be able tocollect on such a contractual indemnification claim, and thus may beresponsible for satisfying such liabilities. In addition, worksite employeesmay be deemed to be our agents, subjecting us to liability for the actions ofsuch worksite employees. As an employer, we, from time to time, may be subjectin the ordinary course of our business to a wide variety of employment-relatedclaims such as claims for injuries, wrongful death, harassment, discrimination,wage and hours violations and other matters. Although we carry $1 million ofgeneral liability insurance, with no deductible, and carry $1 million ofemployer liability insurance, with no deductible, there can be no assurancethat any such insurance we carry will be sufficient to cover any judgments,settlements or costs relating to any present or future claims, suits orcomplaints. There also can be no assurance that sufficient insurance will beavailable to us in the future and, if available, on satisfactory terms. If theinsurance we carry is not sufficient to cover any judgments, settlements orcosts relating to any present or future claims, suits or complaints, then ourbusiness and financial condition could be materially adversely affected.

 

OUR CLIENTS MAY BE HELD LIABLE FOR EMPLOYMENT TAXES,WHICH COULD DISCOURAGE SOME COMPANIES FROM TRASACTING BUSINESS WITH US.

 

Pursuant to the PEO client service agreement, weassume responsibility and liability for the payment of federal employment taxesimposed under the Code with respect to wages and salaries paid to our worksiteemployees as well as various state payroll tax obligations. While the clientservice agreement provides that we have the sole legal responsibility formaking these tax contributions, the IRS or applicable state taxing authoritycould conclude that such liability cannot be completely transferred to us.Accordingly, in the event that we fail to meet our tax withholding and paymentobligations, the client company may be held jointly and severally liable. Thereare essentially three types of federal employment tax obligations:

 

•              incometax withholding requirements;

•              obligationsunder the Federal Income Contribution Act; and

•              obligationsunder the Federal and States Unemployment Tax Acts.

 

While this interpretive issue has not, to ourknowledge, discouraged clients from enrolling with us, it is possible that adefinitive adverse resolution of this issue would not do so in the future.

 

WE MAY NOT BE FULLY COVERED BY THE INSURANCE WEPROCURE.

 

Although we carry liability insurance, the insurancewe purchase may not be sufficient to cover any judgments, settlements or costsrelating to any present or future claims, suits or complaints. In addition,sufficient insurance may not be available to us in the future on satisfactoryterms or at all. If the insurance we carry is not sufficient to cover anyjudgments, settlements or costs relating to any present or future claims, suitsor complaints, our business, financial condition, results of operations andliquidity could be materially adversely affected.

 

IF WE WERE NOT ABLE TO RENEW ALL OF THE INSURANCEPLANS, WHICH COVER WORKSITE EMPLOYEES, OUR BUSINESS WOULD BE ADVERSELYIMPACTED.

 

The maintenance of health and workers’ compensationinsurance plans that cover worksite employees is a significant part of ourbusiness. If we were unable to secure such renewal contracts, our businesswould be adversely affected. The current health and workers’ compensationcontracts are provided by vendors with whom we have an established relationshipand on terms that we believe to be favorable. While we believe that renewalcontracts could be secured on competitive terms without causing significantdisruption to our

 

24

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business, there can be no assurance in this regard.

 

OUR BUSINESS WILL SUFFER IF OUR SERVICES ARE NOTCOMPETITIVE.

 

Each of the payroll, temporary employee placement andthe professional employer industries are characterized by vigorous competition.Since we compete with numerous entities that have greater resources than us ineach of our business lines, our business will suffer if we are not competitivewith respect to each of the services we provide. We believe that our majorcompetitors with respect to payroll and tax services are Automatic DataProcessing, Inc., Ceridian Corp. and Paychex, Inc. Our major competitors withrespect to temporary staffing resources are Manpower and TempSource. Our majorcompetitors with respect to professional employer services are ADP TotalSource, Gevity HR and Administaff, Inc. These companies may have greaterfinancial and marketing resources than we. We also compete with manual payrollsystems and computerized payroll services provided by banks, and smallerindependent companies.

 

IF WE CANNOT OBTAIN SUFFICENT LEVELS OF TEMPORARYEMPLOYEES, OUR BUSINESS MAY BE AFFECTED.

 

Our subsidiary AHJR is a temporary employment agency,which depends on a pool of qualified temporary employees willing to acceptassignments for our clients. Its business is materially dependent upon thecontinued 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 provides forsuccessive one-year terms, subject to termination by us or by the client upon30 days’ written notice prior to the expiration of the then-current one-yearterm. A significant number of terminations by clients could have a materialadverse effect on our financial condition, results of operations and liquidity.

 

IF WE ARE UNABLE TO RENEW OR REPLACE CLIENT COMPANIES,OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS WILL BE ADVERSLEY AFFECTED.

 

Our standard PEO client service agreement is subjectto non-renewal on 30 days written 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. Inaddition, our results of operations are dependent in part upon our ability toretain or replace our client companies upon the termination or cancellation ofthe client service agreement. Clients may determine to cancel their relationshipwith us for numerous reasons, including economic factors. It is possible thatthe number of contract cancellations will increase in the future.

 

SINCE WE HAVE NOT PAID DIVIDENDS ON OUR COMMON STOCK,YOU CANNOT EXPECT DIVIDEND INCOME FROM AN INVESTMENT IN OUR COMMON STOCK.

 

We have not paid any dividends on our Common Stocksince our inception and do not contemplate or anticipate paying any dividendson our Common Stock in the foreseeable future. Future potential lenders mayprohibit us from paying dividends without its prior consent. Therefore, holdersof our Common Stock may not receive any dividends on their investment in us.Earnings, if any, will be retained and used to finance the development andexpansion of our business.

 

WE HAVE OUTSTANDING SHARES OF RESTRICTED STOCK, WHICHIF SOLD IN THE OPEN MARKET, MAY ADVERSELY AFFECT OUR STOCK PRICE

 

Of the 10,922,253 shares outstanding as of March 3,2006, the Company has outstanding 10,194,874 shares, which may be deemed “restrictedstock.”  These restricted shares includethe 9,887,030 shares owned by the directors and officers of the Company. Possibleor actual sales of the Company’s Common Stock by shareholders under Rule 144 orregistration statements may have a depressing effect on the price of theCompany’s Common Stock in the open market.

 

25

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THERE ARE RISKS ASSOCIATED WITH OUR STOCK TRADING ONTHE NASD OTC BULLETIN BOARD RATHER THAN A NATIONAL SECURITIES EXCHANGE.

 

There are significant consequences associated with ourstock trading on the NASD OTC Bulletin Board rather than a national exchange.The effects of not being able to list our securities on a national securitiesexchange 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 STOCK RULES,YOU MAY HAVE GREATER DIFFICULTY SELLING YOU SHARES.

 

The Securities Enforcement and Penny Stock Reform Actof 1990 applies to stocks characterized as “penny stocks,” and requiresadditional disclosure relating to the market for penny stocks in connectionwith trades in any stock defined as a penny stock. The Securities and ExchangeCommission has adopted regulations that generally define a penny stock to beany equity security that has a market price of less than $5.00 per share,subject to certain exceptions.

 

The exceptions include exchange-listed equitysecurities and any equity security issued by an issuer that has

 

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

 

•    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 is available, the regulationsrequire the delivery, prior to any transaction involving a penny stock, of adisclosure schedule explaining the penny stock market and the associated risks.

 

If our financial condition does not meet the abovetests, then trading in our Common Stock will be covered by Rules 15g-1 through15g-6 and 15g-9 promulgated under the Securities Exchange Act of 1934 asamended (“Exchange Act”). Under those rules, broker-dealers who recommend suchsecurities to persons other than their established customers and institutionalaccredited investors must make a special written suitability determination forthe purchaser and must have received the purchaser’s written agreement to atransaction prior to sale. These regulations would likely limit the ability ofbroker-dealers to trade in our Common Stock and thus would make it moredifficult for purchasers of common stock to sell their securities in thesecondary market. The market liquidity for the common stock could be severelyaffected.

 

26

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**PBS HOLDING, INC. and SUBSIDIARIES**

**AUDITED FINANCIAL STATEMENTS**

**December 31, 2005 and 2004**

 

----

 

**ITEM 7.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.**

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

 

Boardof Directors & Audit Committee

PBSHolding, Inc. and Subsidiaries

UniversalCity, Texas

 

**REPORT OF INDEPENDENT REGISTEREDPUBLIC ACCOUNTING FIRM**

 

Wehave audited the accompanying consolidated balance sheets of PBS Holding, Inc.****and Subsidiaries as of December 31, 2005 and 2004, and therelated consolidated statements of operations, stockholders’ equity, and cashflows for the years then ended.  Thesefinancial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinionon these financial statements based on our audits.

 

Weconducted our audits in accordance with standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtainreasonable assurance about whether the financial statements are free ofmaterial misstatement.  An audit includesexamining on a test basis, evidence supporting the amounts and disclosures inthe financial statements.  An audit alsoincludes assessing the accounting principles used and significant estimatesmade by management, as well as evaluating the overall financial statementpresentation.  We believe that our auditsprovide a reasonable basis for our opinion.

 

Inour opinion, the consolidated financial statements referred to above presentfairly, in all material respects, the financial position of PBS Holding, Inc.and Subsidiaries as of December 31, 2005 and 2004, and the results of itsconsolidated operations and cash flows for the years then ended in conformitywith accounting principles generally accepted in the United States of America.

 

Theaccompanying financial statements have been prepared assuming that the Companywill continue as a going concern.  Asdisclosed in the notes to the consolidated financial statements, the Companywill need additional working capital for its planned activity and to serviceits debt.  This raises 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 financial statements do not include anyadjustments that might result from the outcome of this uncertainty.

 
| /s/  Madsen & Associates CPA’s, Inc. |   |
|-----------------------------------------------|--------|
|                                          |
| January  17, 2006                             |
|                                          |
| Murray,  Utah                                 |

 

F-1

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**PBS Holding, Inc. and Subsidiaries**

Consolidated Balance Sheet

As of December 31, 2005 and 2004 (Restated)

 
| ** **                           | ** ** | **2005**   | ** ** | **2004**       | ** ** |
|--------------------------------------|------------|------------|------------|----------------|------------|
| ** **                           | ** ** | ** ** | ** ** | **(Restated)** | ** ** |
| ASSETS                               |       |       |       |           |       |
|                                 |       |       |       |           |       |
| Current assets                       |       |       |       |           |       |
|                                 |       |       |       |           |       |
| Cash                                 |       | $          | 84,712     |           | $          | 185,484 |   |
| Notes receivable                     |       | 184,890    |       | 107,949        |       |
| Client accounts receivable           |       | 158,877    |       | 64,435         |       |
| Deposit - pending Heart acquisition  |       | 50,000     |       | —         |       |
| Prepaid Expenses                     |       | 3,014      |       | 1,051          |       |
| Employee advances                    |       | 857        |       | —         |       |
| Worker compensation prepaid premiums |       | 167,986    |       | 96,097         |       |
|                                 |       |       |       |           |       |
| Total Current Assets                 |       | 650,336    |       | 455,016        |       |
|                                 |       |       |       |           |       |
| Property & Equipment             |       |       |       |           |       |
|                                 |       |       |       |           |       |
| Furniture & Fixtures             |       | 55,472     |       | 54,454         |       |
| Computer equipment                   |       | 99,722     |       | 91,322         |       |
| Vehicles                             |       | 15,486     |       | 15,485         |       |
| Payroll software                     |       | 43,724     |       | 43,724         |       |
|                                 |       |       |       |           |       |
|                                 |       | 214,404    |       | 204,986        |       |
| (Less) accumulated depreciation      |       | (158,969   | )          | (149,213       | )          |
|                                 |       |       |       |           |       |
| Net Property & Equipment         |       | 55,435     |       | 55,773         |       |
|                                 |       |       |       |           |       |
| Other assets                         |       |       |       |           |       |
|                                 |       |       |       |           |       |
| Security deposits                    |       | 1,560      |       | 1,054          |       |
| Customer list, net of amortization   |       | 6,600      |       | 9,000          |       |
|                                 |       |       |       |           |       |
| Total Other Assets                   |       | 8,160      |       | 10,054         |       |
|                                 |       |       |       |           |       |
| Total Assets                         |       | $          | 713,932    |           | $          | 520,843 |   |

 

F-2

----

 
| ** **                                                                                                          | ** ** | **2005**   | ** ** | **2004**       | ** ** |
|---------------------------------------------------------------------------------------------------------------------|------------|------------|------------|----------------|------------|
| ** **                                                                                                          | ** ** | ** ** | ** ** | **(Restated)** | ** ** |
| LIABILITIES                                                                                                         |       |       |       |           |       |
|                                                                                                                |       |       |       |           |       |
| Current liabilities                                                                                                 |       |       |       |           |       |
|                                                                                                                |       |       |       |           |       |
| Accounts payable                                                                                                    |       | $          | 101,462    |           | $          | 109,812 |   |
| Checks drawn on uncollected funds                                                                                   |       | 120,027    |       | 177,532        |       |
| Deferred revenue                                                                                                    |       | 7,121      |       | —         |       |
| Client payroll tax payable                                                                                          |       | 503,678    |       | 259,260        |       |
| Workers comp payable                                                                                                |       | 113,676    |       | 60,953         |       |
| Client deposits                                                                                                     |       | 1,000      |       | —         |       |
| Client payroll amount withheld                                                                                      |       | 8,475      |       | 1,532          |       |
| Current maturities of long-term debt                                                                                |       | 25,000     |       | —         |       |
| Line of credit from banks                                                                                           |       | 7,898      |       | 38,522         |       |
| Due to shareholder/officer                                                                                          |       | 117,501    |       | 124,146        |       |
|                                                                                                                |       |       |       |           |       |
| Total Current Liabilities                                                                                           |       | 1,005,838  |       | 771,757        |       |
|                                                                                                                |       |       |       |           |       |
| Long term liabilities                                                                                               |       |       |       |           |       |
|                                                                                                                |       |       |       |           |       |
| Note payable, net of current portion                                                                                |       | 16,667     |       | —         |       |
|                                                                                                                |       |       |       |           |       |
| Total Liabilities                                                                                                   |       | 1,022,505  |       | 771,757        |       |
|                                                                                                                |       |       |       |           |       |
| Stockholders’ Equity (Deficiency)                                                                              |       |       |       |           |       |
|                                                                                                                |       |       |       |           |       |
| Common stock - $.001 par value authorized -  750,000,000, issued and outstanding - 10,922,253 and 10,784,753 shares |       | 10,922     |       | 10,785         |       |
| Additional paid-in capital                                                                                          |       | 1,139,847  |       | 992,945        |       |
| Accumulated (deficit)                                                                                               |       | (1,459,342 | )          | (1,254,644     | )          |
|                                                                                                                |       |       |       |           |       |
| Total Stockholders’ Equity (Deficiency)                                                                        |       | (308,573   | )          | (250,914       | )          |
|                                                                                                                |       |       |       |           |       |
| Total Liabilities and Stockholders’ Equity  (Deficiency)                                                       |       | $          | 713,932    |           | $          | 520,842 |   |

 

F-3

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**PBS Holding, Inc. and Subsidiaries**

Consolidated Statement of Operations

For The Years Ended December 31, 2005 and 2004

 
| ** **                                      | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|-------------------------------------------------|------------|------------|------------|------------|------------|
|                                            |       |       |       |       |       |
| Revenues                                        |       | $          | 4,919,246  |       | $          | 3,338,891 |   |
|                                            |       |       |       |       |       |
| Cost of Revenues                                |       | 3,152,715  |       | 2,057,354  |       |
|                                            |       |       |       |       |       |
| Gross Profit                                    |       | 1,766,532  |       | 1,281,537  |       |
|                                            |       |       |       |       |       |
| Operating Expenses                              |       |       |       |       |       |
| General and Administrative                      |       | 959,751    |       | 722,235    |       |
| Wages, commissions & salaries               |       | 528,231    |       | 312,976    |       |
| Officers compensation                           |       | 290,114    |       | 211,365    |       |
|                                            |       |       |       |       |       |
|                                            |       | 1,778,096  |       | 1,246,576  |       |
|                                            |       |       |       |       |       |
| Income (Loss) from Operations                   |       | (11,564    | )          | 34,961     |       |
|                                            |       |       |       |       |       |
| Other Income & Expense                      |       |       |       |       |       |
| Other income                                    |       | 50,109     |       | 128        |       |
| Consulting expenses                             |       | (50,300    | )          | (7,500     | )          |
| Acquisition costs                               |       | (7,315     | )          | —     |       |
| Employee services paid with stock warrants      |       | (22,204    | )          | —     |       |
| Non employee services paid with stock  warrants |       | (75,505    | )          | —     |       |
| Litigation costs                                |       | (87,919    | )          | (96,699    | )          |
|                                            |       |       |       |       |       |
| Income (Loss) Before Provision For Income  Tax  |       | (204,698   | )          | (69,110    | )          |
|                                            |       |       |       |       |       |
| Provision For Income Taxes                      |       | —     |       | —     |       |
|                                            |       |       |       |       |       |
| Net Income (Loss)                               |       | $          | (204,698   | )          | $          | (69,110 | ) |
|                                            |       |       |       |       |       |
| Basic & Diluted Net (Loss) Per Share        |       | $          | (0.02      | )          | $          | (0.01 | ) |
|                                            |       |       |       |       |       |
| Basic and Diluted Weighted Average              |       |       |       |       |       |
| Shares Outstanding                              |       | 10,839,367 |       | 10,784,753 |       |

 

F-4

----

 

**PBS Holding, Inc. and Subsidiaries**

Consolidated Statements Of Cash Flow

For The Years Ended December 31, 2005 and2004

 
| ** **                                                                                          | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                                                                |       |     |       |     |       |
| Net Income (Loss)                                                                                   |       | $        | (204,698   | )        | $          | (69,110 | ) |
|                                                                                                |       |     |       |     |       |   |   |
| Adjustments to reconcile net income (loss)  to net cash provided by (used by) operating activities: |       |     |       |     |       |
| Depreciation and amortization                                                                       |       | 12,156   |       | 32,460   |       |
| Non cash - non employee services for stock  warrants                                                |       | 75,505   |       | —   |       |
| Non cash - employee services for stock  warrants                                                    |       | 22,204   |       |     |       |
| (Increase) decrease in accounts receivable                                                          |       | (94,442  | )          | 6,154    |       |
| (Increase) decrease in prepaid expense                                                              |       | (1,963   | )          | 72,135   |       |
| (Increase) decrease in worker comp deposit                                                          |       | (71,889  | )          | —   |       |
| (Increase) decrease in other assets                                                                 |       | (1,363   | )          | (61,942  | )          |
| Increase (decrease) in accounts payable                                                             |       | 44,373   |       | (104,844 | )          |
| Increase (decrease) in client payroll tax  liability                                                |       | 244,418  |       | 239,236  |       |
| Increase (decrease) in other current  liabilities                                                   |       | 15,063   |       | 869      |       |
| Deposit - pending Heart acquisition                                                                 |       | (50,000  | )          | —   |       |
| Checks drawn on uncollected payrolls                                                                |       | (57,505  | )          | 108,372  |       |
|                                                                                                |       |     |       |     |       |
| Total Adjustments                                                                                   |       | 136,557  |       | 292,440  |       |
|                                                                                                |       |     |       |     |       |
| Net cash provided by (used in) operating  activities                                                |       | (68,141  | )          | 223,330  |       |
|                                                                                                |       |     |       |     |       |
| Cash flows from investing activities                                                                |       |     |       |     |       |
| Loans to affiliates                                                                                 |       | (76,941  | )          | —   |       |
| Payments for the purchase of property                                                               |       | (9,418   | )          | (24,717  | )          |
|                                                                                                |       |     |       |     |       |
| Net cash provided by (used in) investing  activities                                                |       | (86,359  | )          | (24,717  | )          |
|                                                                                                |       |     |       |     |       |
| Cash flows from financing activities                                                                |       |     |       |     |       |
| Net adjustment for common stock  transactions                                                       |       | 49,330   |       | —   |       |
| Net borrowings under line of credit                                                                 |       | (30,624  | )          | (6,465   | )          |
| Net borrowing on long term debt notes  payable                                                      |       | 41,667   |       | (20,973  | )          |
| Principal payments on short-term debt                                                               |       | —   |       | —   |       |
| Due to shareholders/officers                                                                        |       | (6,645   | )          | (5,536   | )          |
|                                                                                                |       |     |       |     |       |
| Net cash provided by (used in) financing  activities                                                |       | 53,728   |       | (32,974  | )          |
|                                                                                                |       |     |       |     |       |
| Net increase (decrease) in cash and cash  equivalents                                               |       | (100,772 | )          | 165,639  |       |
| Cash and cash equivalents at beginning of  year                                                     |       | 185,484  |       | 19,845   |       |
|                                                                                                |       |     |       |     |       |
| Cash and cash equivalents at end of year                                                            |       | $        | 84,712     |     | $          | 185,484 |   |
|                                                                                                |       |     |       |     |       |
| Supplemental information:                                                                           |       |     |       |     |       |
|                                                                                                |       |     |       |     |       |
| Cash payments                                                                                       |       |     |       |     |       |
|                                                                                                |       |     |       |     |       |
| Interest expense                                                                                    |       | $        | 20,835     |     | $          | — |   |
| Income taxes                                                                                        |       | $        | —     |     | $          | — |   |
|                                                                                                |       |     |       |     |       |
| Non cash items                                                                                      |       |     |       |     |       |
|                                                                                                |       |     |       |     |       |
| Warrants issued for employee services                                                               |       | $        | 22,204     |     | $          | — |   |
| Warrants issued for non employee services                                                           |       | 75,505   |       | —   |       |
|                                                                                                |       |     |       |     |       |
| Total non cash items                                                                                |       | $        | 97,709     |     | $          | — |   |

 

F-5

----

 

**PBS Holding, Inc. and Subsidiaries**

Statement of Stockholders Equity

For the Years Ended December 31, 2005 and 2004

 
| ** **                                                                         | ** ** | **Common Stock** | ** ** | **Additional  Paid-In** | ** ** | **Accumulated** | ** ** | **Net Equity** | ** ** |
|------------------------------------------------------------------------------------|------------|------------------|------------|-------------------------|------------|-----------------|------------|----------------|------------|
| ** **                                                                         | ** ** | **Shares**       | ** ** | **Amount**              | ** ** | **Capital**     | ** ** | **(Deficit)**  | ** ** | **(Deficiency)** | ** ** |
| ** **                                                                         | ** ** | ** **       | ** ** | ** **              | ** ** | ** **      | ** ** | ** **     | ** ** | ** ** | ** ** |
| Balance December 31, 2003                                                          |       | 10,718,809       |       | $                       | 10,719     |            | $          | 993,011        |       | $ | (1,185,534 | ) | $ | (181,804 | ) |
|                                                                               |       |             |       |                    |       |            |       |           |       |   |   |
| Adjustment after change in transfer agent  and recomputation of shares outstanding |       | 65,944           |       | 66                      |       | (66             | )          |           |       | — |   |
|                                                                               |       |             |       |                    |       |            |       |           |       |   |   |
| Net (Loss)                                                                         |       | —           |       | —                  |       | —          |       | (69,110        | )          | (69,110 | ) |
|                                                                               |       |             |       |                    |       |            |       |           |       |   |   |
| Balance December 31, 2004                                                          |       | 10,784,753       |       | 10,785                  |       | 992,945         |       | (1,254,644     | )          | (250,914 | ) |
|                                                                               |       |             |       |                    |       |            |       |           |       |   |   |
| Stock sale                                                                         |       | 62,500           |       | 62                      |       | 19,268          |       |           |       | 19,330 |   |
|                                                                               |       |             |       |                    |       |            |       |           |       |   |   |
| Stock sale                                                                         |       | 75,000           |       | 75                      |       | 29,925          |       |           |       | 30,000 |   |
|                                                                               |       |             |       |                    |       |            |       |           |       |   |   |
| Stock warrants granted:                                                            |       |             |       |                    |       |            |       |           |       |   |   |
|                                                                               |       |             |       |                    |       |            |       |           |       |   |   |
| With stock sales                                                                   |       | —           |       | —                  |       | —          |       |           |       | — |   |
|                                                                               |       |             |       |                    |       |            |       |           |       |   |   |
| For non employee services                                                          |       | —           |       | —                  |       | 75,505          |       |           |       | 75,505 |   |
|                                                                               |       |             |       |                    |       |            |       |           |       |   |   |
| For employee services                                                              |       | —           |       | —                  |       | 22,204          |       |           |       | 22,204 |   |
|                                                                               |       |             |       |                    |       |            |       |           |       |   |   |
| Net (Loss)                                                                         |       | —           |       | —                  |       | —          |       | (204,698       | )          | (204,698 | ) |
|                                                                               |       |             |       |                    |       |            |       |           |       |   |   |
| Balance December 31, 2005                                                          |       | 10,922,253       |       | $                       | 10,922     |            | $          | 1,139,847      |       | $ | (1,459,342 | ) | $ | (308,573 | ) |

 

F-6

----

 

**PBS HOLDING, INC. AND SUBSIDIARIES**

 

Notes to Financial Statements

December 31, 2005

 

**NOTE 1 - Organization and Nature of Business**

 

**History**

 

TheCompany was incorporated in the State of Nevada in 1996 under the name ofAnonymous Data Corporation.  In July 2001the Company name was changed to ShareCom, Inc. The Company then changed its name to Primary Business Systems, Inc. onFebruary 26, 2003.  On September 20,2005, Primary Business Systems Inc. changed its name PBS Holding, Inc.

 

OnMay 28, 2002, the Company filed a Form 8-K with the United States Securitiesand Exchange Commission (“SEC”), which states as follows:

 

“Onor about May 28, 2002, a change of control of the Registrant occurred, as aresult of Pine Services, Ltd (“Purchaser”) purchasing 21,628 shares(432,551,000 old shares) of $.001 par value stock, capital voting stock of theRegistrant (the “Shares”) from Mr. Brad Nordling, the former president of theRegistrant.  The consideration for thepurchase included the payment of $100,000 to the Seller; the release of certainnote obligations aggregating approximately $885,000 and permitting certainassets of the Registrant to be transferred to another entity controlled bySeller.  The source of the cash componentof the consideration for the purchase of the Shares was the working capital ofthe Purchaser.”

 

“Thebasis of the control is Purchaser’s ownership of 21,628 shares (432,551,000 oldshares) representing approximately 59% of the issued and outstandingShares.  The transaction which resultedin the change in control was the closing of a stock purchase agreement.”

 

OnSeptember 27, 2002, the members of Primary Business Systems, LLC (“PBS LLC”), aTexas limited liability company, purchased 22,279 shares (445,577,351 oldshares) of common stock, par value $.001 per share (“Common Stock”) of theCompany from Pine Services Ltd., representing approximately 59% of the thenoutstanding Common Stock of the Company.

 

Subsequently,on November 29, 2002, pursuant to a stock purchase agreement between theCompany and PBS LLC, the Company acquired 100% of the membership interests ofPBS LLC in exchange for 837,032 shares (6,696,256 old shares) of Common Stock.As a result of this transaction, PBS LLC became a wholly owned subsidiary ofthe Company.

 

OnFebruary 28, 2003 the Company purchased all of the outstanding shares of AHJR,Inc. (AHJR), a Texas corporation, in a stock for stock transaction.  Principally Patrick Matthews, the primaryshareholder of the Company and its President and Chief

 

F-7

----

 

ExecutiveOfficer, previously owned AHJR.  In thestock for stock transaction the Company acquired all of the shares of AHJR inexchange for 9,050,000 shares (72,400,000 old shares) of restricted commonstock, par value of $.001 recorded at predecessor cost, or zero.  AHJR is currently operating as a subsidiaryof the Company under the trade name Concord Staffing Services (Concord).

 

Aglobal settlement agreement, related to lawsuits filed against and on behalf ofthe Company in 2002 and 2003 (respectively), was agreed upon by all partieseffective January 31, 2005.  Thesettlement agreement would have, if consummated, resulted in a change ofcontrol of the Company and a distribution of the significant business assets ofthe Company to Patrick Matthews and the Matthews Family.  In effect, the terms and conditions of thesettlement agreement would have “unwound” the transactions entered into by theCompany and the former majority shareholder, Pine Services, Inc., consummatedwith the Matthews Family in 2002.  Priorto the forgoing transactions, the Company had no significant operations.  As a result of the failure by the otherparties to the settlement agreement to adhere to the terms thereof and toperform their obligations hereunder, the Company declared a default andterminated the settlement agreement.

 

Asa result of termination of the settlement agreement, no change in control ofthe Company occurred.  Patrick Matthewshas remained as President and Chief Executive Officer of the Company, and theremaining officers and directors of the Company will remain in theirpositions.  The Company will continuewith its present operations as existing prior to the settlement agreement.

 

Onor about October 4, 2005 the Company affected a 1 for 8 reverse stock splitwith respect to its outstanding shares of Common Stock.

 

**BusinessActivity**

 

Thebusiness of the Company is to operate in the human resources outsourcingindustries with particular emphasis in the professional employer organization(PEO) industry and the temporary staffing services industry. Its wholly ownedsubsidiary, PBS LLC, is a provider of PEO services.  A PEO (Professional Employer Organization) isdefined as an organization that provides an integrated and cost effectiveapproach to the management and administration of the human resources andemployer risks of its clients, by contractually assuming substantial employerrights, responsibilities, and risks and, through the establishment andmaintenance of an employer relationship with the workers assigned to itsclients.

 

Thesecond wholly owned subsidiary, Concord, is a temporary staffing servicescompany and works with temporary employment services.  It began operations on March 1, 2003.

 

Thethird subsidiary of the Company, Primary HR Services, LLC, (a Delaware Limited

 

F-8

----

 

LiabilityCompany) began operating during the fiscal year ended December 31, 2004.  Primary HR Services is an operating entitythat allows the Company to provide PEO services to clients in Mississippi.

 

**NOTE 2 - Summary of Significant Accounting Policies**

 

**(a)****          ****Principles of Consolidation**

 

TheCompany prepares its books and records on the accrual basis for financialreporting and for income taxes.  Thefinancial statements have been prepared in accordance with accountingprinciples generally accepted in the United States of America and promulgatedby the PCAOB.

 

Beforebecoming a subsidiary of the Company PBS LLC and AHJR maintained its books andrecords on the accrual basis of accounting. PBS LLC reported the results of its operations for income tax purposesas a partnership and AHJR reported the results of its operation for incometaxes as a corporation.  These financialstatements have been modified to present them on a consistent ongoing basis foraccounting and tax purposes.

 

Allsignificant Intercompany transactions have been eliminated.

 

**(b)****           Cash Equivalents**

 

Forpurposes of reporting of cash flows, the Company classifies all cash andshort-term investments with maturities of three months or less to be cashequivalents.

 

**(c)****          ****Receivables**

 

Managementhas elected to record bad debts using the direct write-off method.  Accounting principles generally accepted inthe United States require that the allowance method be used to reflect baddebts.  However, the effect of the use ofthe direct write-off method is not significantly different from what theresults would have been had the allowance method been followed.

 

**(d)****          ****Property and Equipment**

 

Propertyand equipment are valued at cost. Depreciation is provided by use of the straight-line method over theestimated 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.

 

F-9

----

 

Depreciationand amortization expense for the years December 31, 2005 and 2004 are $12,156and $32,460 respectively.

 

**(e)****          ****Intangible Assets**

 

TheFinancial Accounting Standards Board has issued SFAC No.142 “Goodwill and OtherIntangible Assets” effective for fiscal years beginning after December 15,2001.  According to SFAS 142, goodwillshould not be amortized.  Instead, itshould be reviewed for impairment at least annually and charged to earningsonly when its recorded value exceeds its fair value.  The Company has elected to follow SFAS 142.

 

TheCompany’s Customer list, an intangible asset, continues to be amortized overfive years, as management considers that it has a definite life

 

**(f)****           ****Impairment of Long-Lived Assets**

 

Itis the policy of the Company to periodically evaluate the economicrecoverability of all of its long-lived assets. In accordance with that policy, when it is determined that an asset hasbeen impaired the loss is recognized in the statement of operations.

 

**(g)****          ****Fair Value of FinancialInstruments**

 

Themethods and assumptions used to estimate the fair value of each class offinancial instruments are as follows:

 

Cashand cash equivalents, receivables, prepaid premiums, employee advances,accounts payable, accrued expense, deferred revenue, notes payable, and allother current assets and liabilities are reflected in the financial statementsat cost, which is considered fair value because of the short maturity of theseinstruments.

 

**(h)****          ****Concentrations**

 

Financialinstruments which potentially subject the Company to concentrations of creditrisk consist principally of cash deposits. The Company will exceed the FDIC insurable limit in an account only whengross payrolls 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.

 

TheCompany provides its services to its clients based upon an evaluation of eachclient’s financial condition.  Exposureto losses on receivables is primarily dependent on each client’s financialcondition.  The Company mitigates suchexposure by requiring customers to immediately pay via electronic fundstransfer the amount of the payroll

 

F-10

----

 

billed,through cash on delivery payment of invoices, through deposits orletters-of-credit or personal guarantees from certain clients.  Exposure to credit losses is monitored by theCompany, and bad debts for anticipated losses are recognized when necessary.

 

**(i)****           ****Revenue Recognition**

 

Primarybills its clients on each payroll date an administrative fee for:  1) the actual gross salaries and wages plusrelated employment taxes and employee benefits of the company’s worksiteemployees; 2) actual costs associated with worksite employees, (e.g. recruitingcosts, drug testing, etc.); 3) workers compensation and unemployment costs, 4)other benefits associated with the worksite employees; 5) other insurancepremiums associated with the client; and 6) payroll processing

 

TheCompany’s administrative fee is computed based upon either a fixed fee perworksite employee or an established percentage of gross salaries and wages,negotiated at the time the client service agreement is executed.  The Company’s administrative fee varies byclient based primarily upon the nature and size of the client’s business andthe Company’s assessment of the costs and risks associated with the employmentof the client’s worksite employees.

 

Accordingly,the Company’s administrative fee income will fluctuate based on the number andgross salaries and wages of worksite employees, and the mix of client feeincome will fluctuate based on the mix of total client fee arrangements andterms.  Although most contracts are forone year and renew automatically, the Company has the ability to terminate therelationship with 30 days notice.

 

**(j)****           ****Income Taxes**

 

TheCompany has adopted the provisions of SFAS No. 109, “Accounting for IncomeTaxes,” which incorporates the use of the asset and liability approach ofaccounting for income taxes.  The assetand liability approach requires the recognition of deferred tax assets andliabilities for the expected future consequences of temporary differencesbetween the financial reporting basis and the income tax basis of assets andliabilities.

 

During2002, the Company underwent an ownership change as defined in Section 382 ofthe Internal Revenue Code.  Consequently,management believes the net operating loss carry forwards were lost at thattime and only losses subsequent to that date can be carried forward.  The Federal net operating losses since theownership change is $1,379,469 and $1,188,829 as of December 31, 2005 and 2004,respectively.  The Company continues tosustain operating losses and there remains an uncertainty as to whether anyincome tax benefit can be used in the future. Therefore, the estimated tax benefit for the Company’s NOL carry forwardof $482,814 and $416,090 respectively has been fully offset by a valuationreserve.

 

F-11

----

 

**(k)****          ****Comprehensive Income**

 

TheCompany has adopted SFAS No. 130 Reporting Comprehensive Income. The Companyhas no reportable differences between net income and comprehensive income;therefore a statement of comprehensive income has not been presented.

 

**(l)****           ****Stock-Based Compensation**

 

SFASNo. 123R, “Share-Based Payment” established accounting and disclosurerequirements using a fair-value based method of accounting for stock-basedemployee compensation plans.  The Companyhas elected to remain on its current method of Accounting as described above,and has adopted the disclosure requirements of SFAS No. 123R.  During the current year the Company issuedstock warrants.  The estimated fair valueof the warrants is disclosed in the note on equity and common stock.

 

**(m)****         ****Net (Loss) Per Share of CommonStock**

 

Thebasic and diluted net income (loss) per common share in the accompanyingstatements of operations are based upon the net income (loss) divided by theweighted average number of shares outstanding during the periodspresented.  Diluted net (loss) per commonshare is the same as basic net (loss) per share because including any potentialcommon shares would be anti-dilutive.

 

**(n)****          ****Advertising Costs**

 

TheCompany’s advertising costs are expensed when incurred.  Total advertising costs of $9,593 and $7,982were incurred for the years ended December 31, 2005 and 2004, respectively.

 

**(o)****          ****Use of 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.

 

**(p)****          ****Reclassifications**

 

Certain amounts in 2004 have been reclassified andrepresented to conform to the current financial statement presentation.

 

F-12

----

 

**(q)****          ****Other Recent AccountingPronouncements**

 

TheCompany does not expect the adoption of other recent accounting pronouncementsto have a material impact on its financial statements.

 

**NOTE 3 - Equity & Common Stock**

 

OnSeptember 27, 2002, the members of PBS LLC, purchased 22,279 shares(445,577,351 old shares) of common stock (“Common Stock”) of the Company fromPine Services Ltd., representing approximately 59% of the then outstandingCommon Stock of the Company.

 

Subsequently,on November 29, 2002, pursuant to a stock purchase agreement between theCompany and PBS LLC, the Company acquired 100% of the membership interests ofPBS LLC in exchange for 837,032 shares (6,696,256 old shares) of Common Stock.As a result of this transaction, PBS LLC became a wholly owned subsidiary ofthe Company.

 

OnFebruary 28, 2003 the Company purchased all of the outstanding shares of AHJR,in a stock for stock transaction.   AHJRwas previously owned principally by Patrick Matthews, the primary shareholderof the Company today and its President and Chief Executive Officer.  In the stock for stock transaction theCompany acquired all of the shares of AHJR in exchange for 9,050,000 shares(72,400,000 old shares) of restricted Common Stock of the Company with no valueassigned to the transaction (refer to Note “Correction of Error”).  AHJR is currently operating as a subsidiaryof the Company under the trade name Concord Staffing Services (Concord).

 

InApril 2002 the Company and former Members of Primary Business Systems LLC wereserved suit by Suburban Capitol and Pine Inc alleging breach of an advisoryagreement and stock purchase agreement by the Members of Primary BusinessSystems LLC.  On or about December 23,2003, the Company filed a lawsuit in 285th District Court, Bexar County, Texasagainst Pine Services, Inc. and Frank Custable, Jr. alleging, among otherclaims, common law fraud, violation of the Texas Securities Act, violation ofthe Texas Deceptive Trades and Practices Act and fraudulent inducement inconnection with the Advisory Agreement referred to above.   A global settlement agreement was agreedupon by all parties effective January 31, 2005. The settlement agreement would have, if consummated, result in a changeof control of the Company and a distribution of the significant business assetsof the Company to Patrick Matthews and the Matthews Family.  In effect, the terms and conditions of thesettlement agreement would have “unwound” the transactions entered into by theCompany and a former majority shareholder, Pine Services, Inc. consummated withthe Matthews Family in 2002.  Prior tothese transactions, the Company had no significant operations.   As a result of the failure by the otherparties to the settlement agreement to adhere to the terms thereof and toperform their obligations there under, the Company and Matthews have declared adefault and terminated the settlement agreement.

 

F-13

----

 

Asa result of termination of the settlement agreement, there will be no change incontrol of the Company.  Patrick Matthewswill remain as Chairman and Chief Executive Officer and Chief Financial Officerof the Company, and the remaining officers and directors of the Company willremain in their positions.  The Companywill continue with its present operations as existing prior to the settlementagreement.

 

Onor about October, 4, 2005 the Company affected a 1 for 8 reverse stock split withrespect to its outstanding shares of Common Stock and changed its name fromPrimary Business Systems Inc. to PBS Holding, Inc.  This reverse stock split has been recognizedin the financial statements retroactively from inception.

 

DuringOctober to December 2005 the Company sold 137,500 shares of Common Stock toprivate investors as part of a stock subscription offer.  The subscriptions were offered at $.40 pershare with warrants attached that allow the holders to exercise an additionalpurchase of 34,375 shares of Common Stock at $.40 per share.  The cost of placing these shares was $5,670and was included in recording the sale of the Common Stock as a reduction ofthe additional paid in capital generated from the sales.   The Company computed the estimated fairvalue of these warrants using the Black-Scholes model and concluded theestimated fair value was insignificant and did not record any fair value forthese warrants.

 

DuringOctober to December 2005 the Company issued 105,000 and 210,000 warrants to anemployee and to a non-employee consultant respectively to purchase a total of315,000 shares of restricted Common Stock at an exercise price of $.12 pershare.  These warrants have the right tobuy restricted Common Stock by turning in the warrants for stock without payingcash based on a computation of the value of the stock at the time ofexercise.  The fair value of thesewarrants was computed using the Black-Scholes model and by applying SFAS 123R(2006 edition). Estimated fair value of the warrants to the employee computesto be $22,205 and is reported as an equity grant using the guidance of SFAS123R section 3.42 and 3.43.  Thesewarrants issued will remain at this computed value until they are exercised.  The estimated fair value of the warrants tothe non-employee computes to be $75,505 and is reported as an equity grantusing the guidance of SFAS 123R.  Thesewarrants issued to the non-employee will remain at this computed value untilthey are exercised.

 

**NOTE 4 - Employee Benefit Plan**

 

A401-K employee benefit plan for the Company’s client worksite employees isincluded in the package of services provided by PBS LLC as a PEO.  The Company’s office and administrativeemployees may also participate in the plan. Less than $100,000 of the plan assets is related to the office andadministrative employees of the Company. The Company has no commitments requiring future payments into the plan.

 

F-14

----

 

**NOTE 5 - Related Party Transactions**

 

Themajority shareholder loans funds to the Company from time to time should theCompany need it.  The amounts due to theshareholder are $117,501 and $124,146 at December 31, 2005 and 2004respectively.   The balance in the due toshareholder account has been corrected as part of the prior period adjustmentin accordance with APB 20.  The notepayable to shareholder should have been eliminated when the Common Stock of theCompany was distributed to the members of PBS LLC.  This increased the additional paid in capitalas the members assumed the liability associated with the Common Stock receivedin a property distribution.  The economiceffect of the transaction is $0 in the equity section.

 

Inthe later part of 2005 the ongoing litigation between the Company and the Matthewsagainst Pine Services and Frank Custable was settled.  The note payable Matthews owed Pine Servicesand the commitment of the Company to issue additional Common Stock to PineServices or Frank Custable ceased and became as if void as part of that settlement.

 

Thenote receivable of $184,890 and $107,949 as of December 31, 2005 and 2004,respectively, is for amounts due from Consumers Insurance Agency LLC(Consumers).  The Company billsConsumers, and Consumers reimburses the Company for use of 500 square feet ofoffice space, office supplies and payroll. These transactions are related party transactions as the majorityshareholder of the company owned 90% of Consumers member interest as ofDecember 31, 2004.  On January 1, 2005Consumers underwent an ownership change whereby Patrick Matthews has 45%,Amanda Sinclair has 10% and an unrelated party has the remaining 45% of themember interest in the LLC.  Thesereimbursements are not recognized as income, but rather they reduce the relatedcosts in the statement of operations.

 

**NOTE 6 - Lease Commitments**

 

TheCompany has no lease commitments except with respect to the facilities itoperates out of at 433 Kitty Hawk, Universal City, Texas as of December 31,2005.  The net rent expense for the yearsended December 31, 2005 and 2004 is $47,212 and $35,841 respectively.  The lease commitment is through November 2006and is for $33,733.  Beginning December1, 2006, the lease is on a month-to-month basis at $3,067 per month.

 

TheCompany has subleased 500 square feet to Consumers Insurance Agency LLC(“Consumers”) since May 2002.

 

F-15

----

 

**NOTE 7 - Line of Credit**

 
| ** **                                                                                                                           | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Lines of Credit are for:                                                                                                             |       |     |       |     |       |
|                                                                                                                                 |       |     |       |     |       |
| Jourdanton State Bank, limit of $50,000 at  8% interest. Collateralized with accounts receivable and right of payment and  equipment |       | $        | 7,898      |     | $          | 33,732 |   |
|                                                                                                                                 |       |     |       |     |       |
| Frost Bank, limit of $10,000 at 5%  interest, unsecured due on May 30, 2003                                                          |       | 0        |       | 4,790    |       |
|                                                                                                                                 |       |     |       |     |       |
|                                                                                                                                 |       | $        | 7,898      |     | $          | 38,522 |   |

 

**NOTE 8 - Notes Payable**

 

TheCompany settled a dispute with AMS, a payroll services provider for$50,000.  This is recognized as a noninterest-bearing note payable reported as a term debt with monthly payments of$2,083 for 24 months through August 2007. Management elected not to record imputed interest on this note becauseof the relative short term of the note and the amount of interest that wouldresult was not material.  The balance onthe note payable as of December 31, 2005 was $41,667 with $25,000 due in thenext twelve months ending December 31, 2006.

 

**NOTE 9 - Workers Compensation**

 

PBSLLC maintains workers compensation insurance for worksite employees as well asits regular and administrative employees. Premium deposits are $167,986 and $96,097 as of December 31, 2005 and2004 respectively. The workers compensation payable premium due as of December31, 2005 and 2004 was $113,676 and $60,953, respectively.

 

**NOTE 10- Checks drawn onuncollected funds and Client payroll tax payable**

 

TheCompany process payroll checks for its worksite employees in advance of thepayments received by its clients resulting in the balance recognized on thebalance sheet of “Checks drawn on uncollected funds”.  The amounts recognized for the years endedDecember 31, 2005 and 2004 was $120,027 and $177,532, respectively.

 

Theamounts reported as “Client payroll tax payable” reflect an amount of taxdeposits required based on the payroll checks issued.  Timing differences between when the clientpays the related invoice and when the tax deposits are due can result inpayroll tax deposit penalties.

 

F-16

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 Duringthe year ended December 31, 2005 there were litigation costs and the cost of arequired deposit associated with a letter of intent to purchase Heart EmployeeLeasing Services, Inc. that contributed to the company incurring additional taxdeposit penalties due to late payment. The amount of penalties for payroll tax deposits during the year endedDecember 31, 2005 and 2004 was $81,419 and $25,856 respectively.  Management perceives this situation asnon-repetitive and is in the process of correcting this situation.

 

**NOTE 11 - Going ConcernIssues**

 

TheCompany continues suffering losses and working capital reflects more currentliabilities than current assets.  Unlesssufficient additional cash flows come into the Company, either through equityfinancing, profits, or a reduction of cash expenses, the Company could be injeopardy of continuing operations. Management has developed a strategy, which it believes will accomplishthis objective through additional long and short-term loans and sale of CommonStock of the Company to related and unrelated parties.

 

**NOTE 12 - Correction of an Error**

 

In 2002 the Company, a “shellcompany” at the time underwent a series of transactions that brought about thepurchase of PBS LLC, which is the bulk of the present operations of theCompany. Later, in 2003, the Company acquired AHJR in a share for shareexchange which brought about the operating activities of the wholly ownedsubsidiary of AHJR as a temporary staffing services company working under thename of Concord.

 

Theoriginal purchase transaction involving Pine Services Inc. was recordedrecognizing $550,000 as goodwill, the accepted value of the transaction by theparties involved.  In the case of AHJR(Concord), $7,240 in goodwill was recognized in the transaction as the value ofAHJR in excess of the other assets and operations of the company acquired.

 

During2005 the underlying documents involving the purchase of PBS LLC were reexaminedand reevaluated as to the proper method to report the correspondingtransactions.  Management determined thatthe $550,000 recognized as goodwill in this acquisition should not have beenrecorded and reported in the financial statements.  The amount should have been a reduction ofthe member equity of the original members of PBS LLC because the stock receivedfrom Pine Services was distributed to the members in a property distribution.  Consequently, this business combination didnot meet the definitions of the SEC as an acquisition, but rather meets thecriteria as a change in equity ownership only. As a result, goodwill should not have been reported in

 

F-17

----

 

thefinancial statements.

 

Theshare for share exchange in acquiring AHJR also relates to a change in equityownership and also does not meet the SEC guidelines where goodwill isrecognized and reported in a business combination.  In accordance with the guidance provided bySFAS 141 and EITF 02-05, management determined that the amount reported asgoodwill for the purchase of the AHJR stock should have been recorded on theparent’s general ledger as an investment in a subsidiary and eliminated in theconsolidated financial statements.

 

Thesetwo transactions involve significant errors in reporting that managementidentified in 2005 that require a change in reporting for 2005 and arestatement of the past financial statements as of December 31, 2002 through tothe present.  The financial statementshereto reflect the correction of an error in accordance with guidance providedby APB 20 that allows the Company to report the correction of errors in thefinancial statement in the period it is first identified without restatingindividually all of the prior periods affected by the correction oferrors.  In the case of the Company,goodwill was recorded in 2002 at $550,000 and in 2003 and 2004 at $557,240 ofwhich $550,000 relates to the 2002 purchase of PBS LLC and the $7,240 relatesto the 2003 purchase of AHJR.

 

Thecorrection of the errors resulted in a reduction in the balances reported forGoodwill, Due to Shareholder and Additional paid in capital.  There is no impact on the statement ofoperations, retained earnings, or cash flows relating to thesecorrections.  Below is the impact of thecorrection on the balance sheet accounts for the prior periods.

 

F-18

----

 

PBSHolding, Inc. and Subsidiaries

Restatementof Prior Years to Recognize the Correction of Errors

SelectedPortions of Financial Statements Only

Asof December 31, 2005

 
| ** **                                                    | ** ** | **As of December 31, 2002** | ** ** |
|---------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                    | ** ** | **As  Reported ***          | ** ** | **Adjustment** | ** ** | **As  Corrected** | ** ** |
|                                                          |       |                        |       |   |   |   |   |
| Other assets                                                  |       |                        |       |   |   |   |   |
| Goodwill                                                      |       | $                           | 550,000    |   | $ | (550,000 | ) | $ | — |   |
| All other                                                     |       | 270,000                     |       | — |   | 270,000 |   |
| Total Other assets                                            |       | $                           | 820,000    |   | $ | (550,000 | ) | $ | 270,000 |   |
|                                                          |       |                        |       |   |   |   |   |
| Total assets                                                  |       | $                           | 1,097,136  |   | $ | (550,000 | ) | $ | 547,136 |   |
|                                                          |       |                        |       |   |   |   |   |
| Current liabilities                                           |       |                        |       |   |   | $ | — |   |
| Due to shareholder/officer                                    |       | 593,294                     |       | (498,350 | ) | $ | 94,944 |   |
| All other                                                     |       | 299,598                     |       | — |   | 299,598 |   |
|                                                          |       |                        |       |   |   | $ | — |   |
| Total current liabilities                                     |       | $                           | 892,892    |   | $ | (498,350 | ) | $ | 394,542 |   |
|                                                          |       |                        |       |   |   |   |   |
| Stockholders’ equity (deficiency)                        |       |                        |       |   |   |   |   |
| Common stock, par $0.001                                      |       | $                           | 1,378      |   | $ | — |   | 1,378 |   |
| Additional paid-in capital                                    |       | 1,079,630                   |       | (51,650 | ) | 1,027,980 |   |
| Accumulated (deficit)                                         |       | (876,764                    | )          | — |   | (876,764 | ) |
| Net Stockholders’ equity (deficiency)                    |       | $                           | 204,244    |   | $ | (51,650 | ) | $ | 152,594 |   |
|                                                          |       |                        |       |   |   |   |   |
| Total liabilities and stockholders’ equity  (deficiency) |       | $                           | 1,097,136  |   | $ | (550,000 | ) | $ | 547,136 |   |
|                                                          |       |                        |       |   |   |   |   |
| Net (loss) for the year (no change)                           |       | $                           | (840,268   | ) | $ | — |   | $ | (840,268 | ) |

 

----

*   After taking into affectthe 1 for 8 reverse stock split as well as after adjusting for certainreclassifications to make this presentation consistent with the reportingpresentation as of December 31, 2005

 

F-19

----

 
| ** **                                                    | ** ** | **As of  December 31, 2003** | ** ** |
|---------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                    | ** ** | **As  Reported ***           | ** ** | **Adjustment** | ** ** | **As  Corrected** | ** ** |
|                                                          |       |                         |       |   |   |   |   |
| Other assets                                                  |       |                         |       |   |   |   |   |
| Goodwill                                                      |       | $                            | 557,240    |   | $ | (557,240 | ) | $ | — |   |
| All other                                                     |       | 12,454                       |       | — |   | 12,454 |   |
|                                                          |       |                         |       |   |   |   |   |
| Total Other assets                                            |       | $                            | 569,694    |   | $ | (557,240 | ) | $ | 12,454 |   |
|                                                          |       |                         |       |   |   |   |   |
| Total assets                                                  |       | $                            | 936,534    |   | $ | (557,240 | ) | $ | 379,294 |   |
|                                                          |       |                         |       |   |   |   |   |
| Current liabilities                                           |       |                         |       |   |   |   |   |
| Due to shareholder/officer                                    |       | $                            | 628,032    |   | $ | (498,350 | ) | $ | 129,682 |   |
| All other                                                     |       | 431,416                      |       | — |   | 431,416 |   |
|                                                          |       |                         |       |   |   | $ | — |   |
| Total current liabilities                                     |       | $                            | 1,059,448  |   | $ | (498,350 | ) | $ | 561,098 |   |
|                                                          |       |                         |       |   |   |   |   |
| Stockholders’ equity (deficiency)                        |       |                         |       |   |   |   |   |
| Common stock, par $0.001                                      |       | $                            | 10,707     |   | $ | — |   | $ | 10,707 |   |
| Additional paid-in capital                                    |       | 1,051,913                    |       | (58,890 | ) | 993,023 |   |
| Accumulated (deficit)                                         |       | (1,185,534                   | )          | — |   | (1,185,534 | ) |
| Net Stockholders’ equity (deficiency)                    |       | $                            | (122,914   | ) | $ | (58,890 | ) | $ | (192,511 | ) |
|                                                          |       |                         |       |   |   |   |   |
| Total liabilities and stockholders’ equity  (deficiency) |       | $                            | 936,534    |   | $ | (557,240 | ) | $ | 379,294 |   |
|                                                          |       |                         |       |   |   |   |   |
| Net (loss) for the year (no change)                           |       | $                            | (308,770   | ) | $ | — |   | $ | (308,770 | ) |

 

F-20

----

 

----

* After taking into affect the 1 for 8reverse stock split as well as after adjusting for certain reclassifications tomake this presentation consistent with the reporting presentation as ofDecember 31, 2005

 
| ** **                                                    | ** ** | **As of  December 31, 2004** | ** ** |
|---------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                    | ** ** | **As  Reported ***           | ** ** | **Adjustment** | ** ** | **As  Corrected** | ** ** |
|                                                          |       |                         |       |   |   |   |   |
| Other assets                                                  |       |                         |       |   |   |   |   |
| Goodwill                                                      |       | $                            | 557,240    |   | $ | (557,240 | ) | $ | — |   |
| All other                                                     |       | 10,054                       |       | — |   | 10,054 |   |
| Total Other assets                                            |       | $                            | 567,294    |   | $ | (557,240 | ) | $ | 10,054 |   |
|                                                          |       |                         |       |   |   |   |   |
| Total assets                                                  |       | $                            | 1,078,083  |   | $ | (557,240 | ) | $ | 520,843 |   |
|                                                          |       |                         |       |   |   |   |   |
| Current liabilities                                           |       |                         |       |   |   |   |   |
| Due to shareholder/officer                                    |       | $                            | 622,496    |   | $ | (498,350 | ) | $ | 124,146 |   |
| All other                                                     |       | 647,611                      |       | — |   | 647,611 |   |
|                                                          |       |                         |       |   |   | $ | — |   |
| Total current liabilities                                     |       | $                            | 1,270,107  |   | $ | (498,350 | ) | $ | 771,757 |   |
|                                                          |       |                         |       |   |   |   |   |
| Stockholders’ equity (deficiency)                        |       |                         |       |   |   |   |   |
| Common stock, par $0.001                                      |       | $                            | 10,785     |   | $ | — |   | $ | 10,785 |   |
| Additional paid-in capital                                    |       | 1,051,835                    |       | (58,890 | ) | 992,945 |   |
| Accumulated (deficit)                                         |       | (1,254,644                   | )          | — |   | (1,254,644 | ) |
| Net Stockholders’ equity (deficiency)                    |       | $                            | (192,024   | ) | $ | (58,890 | ) | $ | (261,699 | ) |
|                                                          |       |                         |       |   |   |   |   |
| Total liabilities and stockholders’ equity  (deficiency) |       | $                            | 1,078,083  |   | $ | (557,240 | ) | $ | 520,843 |   |
|                                                          |       |                         |       |   |   |   |   |
| Net (loss) for the year (no change)                           |       | $                            | (69,110    | ) | $ | — |   | $ | (69,110 | ) |

 

----

* After taking into affect the 1 for 8reverse stock split as well as after adjusting for certain reclassifications tomake this presentation consistent with the reporting presentation as ofDecember 31, 2005

 

F-21

----

 

**Note 13 - Contingencies & Pending Acquisition**

 

**HeartEmployee Leasing, Inc**.

 

OnDecember 21, 2005, the Company entered into a non-binding letter of intent toacquire all of the outstanding capital stock of Heart Employee Leasing, Inc.(Heart), a privately held company also engaged in the human resourcesoutsourcing business. The letter of intent provides for a purchase price of$5,000,000 consisting of $3,500,000 in cash and the issuance of $1,500,000 inshares of a new class of preferred stock of the Company with a guaranteeddividend of 5% per annum. Dividends with respect to such new class of preferredshares shall accrue on a quarterly basis during the first 18 months afterclosing of the transaction and shall be payable provided that the Company is incompliance with the terms and conditions of loan agreements to be executed inconnection with the transaction. Upon the 18-month anniversary after theclosing of the proposed transaction, the former shareholders of Heart will havethe option to (i) receive over the next 18 months quarterly payments in partialredemption of such preferred shares and accrued dividends of 5% per annum, or(ii) convert at any time during such initial 18-month period any or allpreferred shares into shares of common stock of the Company. In the event thata holder of preferred shares elects to convert any or all shares of preferredstock, such conversion will be effected at a rate of two shares of common stockfor each share of preferred stock. In the event that a holder elects to havepreferred shares redeemed, any payments in redemption together with any

 

F-22

----

 

accrueddividends will only be made if at the time of such payment the Company is incompliance with the terms and conditions of certain loan agreements to beexecuted by the Company in connection with the transaction.

 

Inconnection with the transaction, certain employees of Heart will enter intonon-competition and employment agreements with the Company. In addition, theshareholders of Heart will agree not to compete directly or indirectly with thepresent business of the Company for a period of 18 months from the date ofclosing.

 

Theclosing is expected to take place on or about April 26, 2006. The closing ofthe transaction is subject to numerous conditions, including, among others, thenegotiation and execution of a definitive acquisition agreement between theCompany and Heart and the loan documentation with respect to the financing forthe transaction being in form and substance satisfactory to the Company. Therecan be no assurance that the transaction will be completed, or completed uponthe terms described above.

 

Concurrentlywith the execution of the non-binding letter of intent, the Company deposited$50,000 with Heart in connection with the proposed transaction. If the closingof the transaction occurs, the deposited amount will be applied against thepurchase price and distributed to shareholders of Heart. If the closing doesnot occur by April 26, 2006 through no fault of Heart or its shareholders, andno material adverse change has occurred in Heart’s business, assets,liabilities or results of operation, and Heart has furnished its auditedfinancial statements for the two most recent fiscal years, then Heart canterminate the letter of intent and retain such deposit. If the closing fails tooccur for any other reason, the Company can terminate the letter of intent andupon such termination, Heart agrees to promptly reimburse the deposit to theCompany. There can be no assurance that the transaction will be completed, oras completed upon the terms described above.

 

# ***Note 14 - Subsequent Events***

 

On January 1, 2006 theCompany entered into a contract with a non employee consultant to provideservices in which the consultant receives warrants to purchase 70,000 shares ofCommon Stock each month for three months ending March 31, 2006 for a total of210,000 shares of common stock.  Theexercise price of the warrants is $0.43 with a term of two years from the dateof each issuance.  The fair value ofthese warrants will be computed using the Black-Scholes model and will bereported in the March 31, 2006 unaudited financial statements.

 

F-23

----

 

**Note 15 - Subsequent Events (Unaudited)**

 

During February 2006, theCompany sold 100,000 shares of Common Stock to investors at $0.40 per sharewith warrants to purchase an additional 25,000 shares at a purchase price of$0.40.  The warrants are immediatelyexercisable for a two year period at a per share exercise price of $0.40.  The Company received the full $40,000 for theshares of stock sold.

 

OnFebruary 8, 2006 the Company agreed to issue warrants to purchase an aggregateof 450,000 shares of Common Stock in exchange for legal services.  The exercise price of such warrants is $0.60and such warrants are immediately exercisable for a five-year term.  The holder may, at its option, affect acashless exercise by exchanging warrants for shares of Common Stock pursuant tothe formula set forth in the terms of the warrants.

 

OnMarch 7, 2006 the Company agreed to issue 50,000 shares of Common Stock valuedat the closing price of the stock on the same day, which was $0.65.  The stock was obligated pursuant to aplacement agency agreement with a broker-dealer to assist with a privateplacement for financing.

 

OnMarch 8, 2006 the Company agreed to issue warrants to purchase 75,000 shares ofCommon Stock to a company providing public relation services to theCompany.  The exercise price of suchwarrants is $0.40 and such warrants are immediately exercisable for a four-yearterm.  The holder may, at its option,affect a cashless exercise by exchanging warrants for shares of Common Stockpursuant to the formula set forth in the terms of the warrants.

 

Allof these warrants and stock transactions were issued in reliance upon theexemption provided by Section 4(2) of the Securities Act and/or Rule 506 ofRegulation D.  The fair value of thewarrants issued will be computed and reported in the March 31, 2006 quarterlyunaudited financial statements.

 

F-24

----

 

**ITEM 8.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIALDISCLOSURE.**

 

Duringthe two most recent fiscal years ended December 31, 2005 there have been nodisagreements between the Company and Madsen and Associates, CPAs, Inc.

 

**ITEM 8A.CONTROLS AND PROCEDURES.**

 

Our management, including our Chief Executive Officerand Chief Financial Officer, carried out an evaluation of our disclosurecontrols and procedures (as defined in Rule 15d-15(e) under the ExchangeAct as of the end of the period covered by this report. Based on thatevaluation, our Chief Executive Officer and Chief Financial Officer concludedthat we had effective controls and procedures for (i) recording,processing, summarizing and reporting information that is required to bedisclosed in its reports under the Exchange Act, as amended, within the timeperiods specified in the Securities and Exchange Commission’s rules and formsand (ii) ensuring that information required to be disclosed in suchreports is accumulated and communicated to our management, including our ChiefExecutive Officer and Chief Financial Officer, as appropriate to allow timelydecisions regarding disclosure.

 

No change in our internal control over financialreporting (as defined in Rules 13a-15(f) and 15d-15(f) under the ExchangeAct) occurred during the fiscal quarter ended December 31, 2005 that hasmaterially affected, or is reasonably likely to materially affect, our internalcontrol over financial reporting.

 

Our Board of Directors adopted a Code of Ethics and Conductas of March 1, 2004. Our Code of Ethics and Conduct covers all our employeesincluding executive officers.

 

**ITEM 8B. OTHER INFORMATION.**

 

On March 9, 2006, the Company filed a Form 8-K reporting the sales ofcertain unregistered sales of equity securities. Among the reported sales wasan agreement to issue warrants to purchase 75,000 shares of Common Stock to acompany providing public relation services to the Company. The Form 8-K statedthat such warrants were exercisable at a per share price of $0.67 for a periodof four years. That reported exercise price per share was a typographical errorand should correctly be $0.40 per share during such four year period.

 

**PART III**

 

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

 

The following table sets forth the names, ages andpositions of our executive officers and directors as of March 30, 2006. Underour bylaws, each director holds office until the election and qualification ofhis or her successor or until his or her earlier resignation or removal.

 

 

27

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| **Name**            | ** ** | **Age** | ** ** | **Position**                                                              |
|---------------------|------------|---------|------------|---------------------------------------------------------------------------|
|                |       |    |       |                                                                      |
| Patrick D. Matthews |       | 47      |       | Chairman, Chief Executive Officer, Chief Financial  Offiver and President |
|                |       |    |       |                                                                      |
| Amanda Sinclair     |       | 24      |       | Director, Chief Operations Officer, Executive Vice  President, Secretary  |
|                |       |    |       |                                                                      |
| Connie Matthews     |       | 47      |       | Director- Resigned September 2005                                         |
|                |       |    |       |                                                                      |
| Mike Ellis          |       | 54      |       | Director                                                                  |

 

PATRICK D. MATTHEWS has beenChairman, CEO, CFO and President since November 29, 2003.  Mr. Matthews was the founder of PBS., andestablished the company in October 1999. From February 1997 until 1999, Mr. Matthews was a founder, Director,Vice President of Aerostaff Services Inc., a PEO. From March 1992 until 1997,Mr. Matthews was a Director and Regional Vice President of BSI a Texas basedPEO. From June 1990 until 1992, Mr. Matthews was founder and owner of MatthewsPainting Co., a commercial and residential painting company.  From March 1979 until 1989, Mr. Matthews wasVice President with Piccadilly Cafeterias. Mr. Matthews is the husband of Connie Matthews and the father of AmandaSinclair. 

 

AMANDA SINCLAIR has beenDirector, Secretary and Vice President since November 29, 2003. Mrs. Sinclairwas a Member, Director of Operations of Primary Business Systems, LLC sinceJanuary 2000. From 1998 until 2000, Mrs. Sinclair was employed by Lane Bryantas a sales associate. Mrs. Sinclair is currently enrolled in a business degreeprogram at St. Phillips College. Amanda Sinclair is the daughter of Patrick D.Matthews and Connie Matthews.

 

CONNIE MATTHEWS was a foundingmember of PBS. From 1993 to 1997 Mrs. Matthews was President of AHJR, Inc. DBAConnie’s Kids, a state registered day care facility.  Mrs. Matthews obtained an Associates Degreefrom St. Philips College in 1979. Connie Matthews is the wife of Patrick D.Matthews and the mother of Amanda Sinclair. In September 2005, Connie Matthewsresigned as Director of the Company.  

 

MIKE ELLIS was elected by a majorityof votes of the shareholders of the Company at the Annual Meeting ofShareholders in November 2005.  Mr. Ellisis currently employed by Trinity University in San Antonio as the Sr.SystemsAdministrator.  From September 2000 toJune 2001, Mr. Ellis was VP of Clear Blue Media and internet advertisigcompany.  From December 1991, Mr.Elliswas president of Marketbas, Inc.  FromNovember 1984, Mr. Ellis was President of Advanced Theraputic Products.  Mr. Ellis resides in San Antiono, TX.  

 

COMPENSATION OF DIRECTORS

 

Directors attending the Annual Meeting of Shareholdersare compensated $1,000.00.

 

MEETINGS AND COMMITTES OF THE BOARD OF DIRECTORS

 

During the fiscal year ended December 31, 2005, theBoard of Directors held eight meetings and acted by unanimous written consenton eight other occasions. No member of the Board of Directors attended lessthan 100% of the aggregate number of the total number of meetings of the Boardof Directors

 

The Board of Directors has not established anycommittees. All matters relating to audit, compensation, nominations andcorporate governance and considered are acted upon by our Board of Directors.

 

28

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COMPENSATION COMMITTEEINTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION DECISIONS.

 

The Board does not have a compensation committee.There are no interlocks between our Directors and Directors of other companies.

 

AUDIT COMMITTEE FINANCIAL EXPERT

 

We do not currently have at least one member that qualifies as an audit committee financial expert pursuant to Item 401 of Regulation S-B.

 

CERTAIN REPORTS

 

No person who, during the fiscal year ended December31, 2005, was a director, officer or beneficial owner of more than ten percentof our Common Stock (which is the only class of our securities Registered underSection 12 of the Exchange Act of 1934 failed to file on a timely basis, reports required by Section 16 of theExchange Act during the most recent fiscal year or prior years. The foregoingis based solely upon our review of Forms 3 and 4 during the most recent fiscalyear as furnished to us under Rule 16a-3(d) under the 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 revised the Code of Ethics andConduct November 2005 to reflect the name change of the Company. The previousedition of the Code of Ethics and Conduct was adopted March 1, 2004. Our Codeof Ethics and Conduct covers all our employees and Directors, including ourChief Executive Officer and Chief Financial Officer. A copy of our Code ofEthics and Conduct is included as an exhibit to Form 10KSB for the year endedDecember 31, 2003 as previously filed with the Commission.

 

**ITEM 10. EXECUTIVE COMPENSATION.**

 

The following table setsforth executive compensation information as of December 31, 2005 and 2004 withrespect to each executive officer and highly compensated officer of theCompany.

 

SUMMARYCOMPENSATION TABLE

 

Long Term

Compensation

 
| **A**                             | ** ** | **b**      | ** ** | **c**      | ** ** | **d**       | ** ** | **e**                           | ** ** | **f**                         | ** ** | **g**                                            | ** ** | **h**            | ** ** | **i**                   | ** ** |
|-----------------------------------|------------|------------|------------|------------|------------|-------------|------------|---------------------------------|------------|-------------------------------|------------|--------------------------------------------------|------------|------------------|------------|-------------------------|------------|
| **Name and  principal  position** | ** ** | **Year**   | ** ** | **Salary** | ** ** | **Bonuses** | ** ** | **Other  annual  compensation** | ** ** | **Restricted  Stock  awards** | ** ** | **Securities  underlying  options/  SAR’s** | ** ** | **LTIP  Payout** | ** ** | **Other  compensation** | ** ** |
| ** **                        | ** ** | ** ** | ** ** | **($)**    | ** ** | **($)**     | ** ** | **($)**                         | ** ** | **($)**                       | ** ** | **(#)**                                          | ** ** | **($)**          | ** ** | ** **              | ** ** |
| Patrick Matthews,  CEO            |       | 05         |       | 175,943    |       | 1,000       |       | 0                               |       | 0                             |       | 0                                                |       | 0                |       | 0                       |       |
| Patrick Matthews,  CEO            |       | 04         |       | 98,000     |       | 10,000      |       | 0                               |       | 0                             |       | 0                                                |       | 0                |       | 0                       |       |
| Amanda Sinclair,  COO             |       | 05         |       | 65,000     |       | 1,000       |       | 0                               |       | 0                             |       | 0                                                |       | 0                |       | 0                       |       |
| Amanda Sinclair,  COO             |       | 04         |       | 30,389     |       | 0           |       | 0                               |       | 0                             |       | 0                                                |       | 0                |       | 0                       |       |
| Ron Newton, VP  Sales             |       | 05         |       | 180,549    |       | 0           |       | 0                               |       | 0                             |       | 0                                                |       | 0                |       | 0                       |       |
| Ron Newton, VP  Sales             |       | 04         |       | 79,289     |       | 0           |       | 0                               |       | 0                             |       | 0                                                |       | 0                |       | 0                       |       |

 

29

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OPTION/SAR GRANTS IN LAST FISCAL YEAR

 

Therewere no stock option grants or stock appreciation right grants to any executiveofficers granted during the year ended December 31, 2004.

 

AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEARAND FY-END OPTION/SAR VALUES

 
| **Name**   | ** ** | **Share  Acquired  on Exercise** | ** ** | **Value  Realized** | ** ** | **Number of Securities  Underlying Unexercised  Options/SARs at December  31, 2005  Exercisable/Unexercisable** | ** ** | **Value of Unexercised In-  The-Money Options/SARs  At December 31, 2005  Exercisable/Unexercisable** | ** ** |
|------------|------------|----------------------------------|------------|---------------------|------------|-----------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------|------------|
| ** ** | ** ** | ** **                       | ** ** | ** **          | ** ** | ** **                                                                                                      | ** ** | ** **                                                                                            | ** ** |
| none       |       | None                             |       | None                |       | None                                                                                                            |       | None                                                                                                  |       |

 

Insomuch as we have made no grants of stock powers orstock appreciation rights, no excises have occured

 

**ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS ANDMANAGEMENT.**

 

The following table sets forth common stock ownershipinformation as of March 3, 2006 with respect to:

 

•                  Each person known to us to be thebeneficial owner of more than 5% of our Common Stock;

 

•                  Each of our officers and directors; and

 

•                  All directors and officers as agroup.

 

This information as to beneficial ownership wasfurnished to us by or on behalf of the persons named. Unless otherwiseindicated, the business address of each person listed is 433 Kitty Hawk Dr.Suite 226 Universal City, TX 78148. Information with respect to the percent ofclass is based on outstanding shares of Common Stock as of March 3, 2006.Except as otherwise indicated, to our knowledge, each stockholder has solepower to vote and dispose of all the shares of common stock listed opposite hisname.

 

For purposes of this table, each person is deemed tohave beneficial ownership of any shares of our common stock such person has theright to acquire on or within 60 days after March 3, 2006.

 
| **Name of Beneficial Owner**          | ** ** | **Amount of Shares  Beneficially Owned** | ** ** | **Percent of Class** | ** ** |
|---------------------------------------|------------|------------------------------------------|------------|----------------------|------------|
| Patrick D. Matthews                   |       | 8,549,199                                |       | 78.8                 |       |
| Amanda Sinclair                       |       | 802,231                                  |       | 7.4                  |       |
| Connie Matthews                       |       | 535,601                                  |       | 4.9                  |       |
| Mike Ellis                            |       | 0                                        |       | 0                    |       |
| All officers and directors as a group |       | 9,887,031                                |       | 91.1                 |       |

 

30

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**ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.**

 

Patrick Matthews and Amanda Sinclair own a number ofother companies that provide services to and for the benefit of PBS LLC orclients of PBS LLC. The other companies are Consumers Insurance Agency, LLC(CIA LLC) and PBS Premium Funding, LLC. PBS Premium Funding, LLC currently hasno operations. CIA LLC provides insurance services for the customers of PBSLLC, Primary HR and AHJR. Under an agreement between PBS LLC and CIA LLC, PBSLLC pays CIA LLC a 9% management fee for the insurance accounts of PBS LLC’sclients managed by CIA LLC. CIA LLC’s employees are serviced by PBS LLC. PBSLLC bills CIA LLC for normal services provided all PBS LLC customers.

 

**ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K**

 

The exhibits designated with an asterisk (*) are filed herewith. Allother exhibits have been previously filed with the Securities and ExchangeCommission and, pursuant to 17 C.F.R. Section 230.411, are incorporated byreference to the document referenced in brackets following the descriptions ofsuch exhibits.

 

(a)

 

1.                FinancialStatements

 

See the Consolidated Financial Statements and Notes thereto as ofDecember 31, 2005 and 2004, together with the reports thereon of Madsen &Associates CPAs’, Inc., dated January 17, 2006, beginning on page F-1 of thisreport.

 

2.             Allschedules are omitted because they are not required or applicable, or therequired information is shown in the consolidated financial statements ornotes.

 

3.             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 from Form 10-SB filed March 10,  1999).                                                                                                                                                                                                                                                                            |
|             |       |         |       |                                                                                                                                                                                                                                                                                                                                                                  |
| 10.1             |       |         |       | Form  of Employee Stock Option Plan as adopted by shareholders on September 21,  2004 filed as Exhibit B to the Proxy Statement for the Annual Meeting of  Shareholders held on September 21, 2004.                                                                                                                                                                   |
|             |       |         |       |                                                                                                                                                                                                                                                                                                                                                                  |
| 10.2             |       |         |       | Form  of Settlement Agreement dated as of January 4, 2005 by and among Primary  Business Systems, Inc., Rick Matthews, Pine Services, Inc., Frank Custable,  Jr., Primary Business LLC and Suburban Capital Corporation with Form of  Letter modifying execution date to January 31, 2005 (Previously filed as  Exhibit 10.1 to the Form 8-K dated January 31, 2005). |
|             |       |         |       |                                                                                                                                                                                                                                                                                                                                                                  |
| 14               |       |         |       | Code  of Ethics and Conduct (Previously filed as Exhibit A to the Proxy Statement  for the Annual Meeting of Shareholders held on September 21, 2004).                                                                                                                                                                                                                |
|             |       |         |       |                                                                                                                                                                                                                                                                                                                                                                  |
| 21               |       |         |       | List  of Subsidiaries (Previously filed as Exhibit 21 to the Form 10-KSB for the  fiscal year ended December 31, 2004).                                                                                                                                                                                                                                               |
|             |       |         |       |                                                                                                                                                                                                                                                                                                                                                                  |
| 23*              |       | F1           |       | Consent  Letter of Independent Auditors (Included as F-1)                                                                                                                                                                                                                                                                                                             |
|             |       |         |       |                                                                                                                                                                                                                                                                                                                                                                  |
| 31.1*            |       |         |       | Certification  of Chief Executive Officer and Chief Financial Officer pursuant to Rule  13a-14(a) and15d-14(a), adopted pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002.                                                                                                                                                                                   |
|             |       |         |       |                                                                                                                                                                                                                                                                                                                                                                  |
| 32.1*            |       |         |       | Certification  of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C  Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of  2002.                                                                                                                                                                                         |

 

(b)           Reportson Form 8-K

 

The Company filed reports on Form 8-K onFebruary 3, 2005, July 26, 2005 and November 21, 2005.

 

31

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**ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.**

 

The following table presents the total fees paid forprofessional audit and non-audit services rendered by our independent auditorsfor the audit of our annual financial statements for the years ended December31, 2005 and December 31, 2004 and fees billed for other services rendered byour independent auditors during those periods.

 
| ** **             | ** ** | **Year Ended December 31,  2005** | ** ** | **Year Ended December 31,  2004** | ** ** |
|------------------------|------------|-----------------------------------|------------|-----------------------------------|------------|
| Audit Fees (1)         |       | $                                 | 20,990     |                              | $          | 14,680 |   |
| Audit-Related Fees (2) |       | N/A                               |       | N/A                               |       |
| Tax Fees (3)           |       | N/A                               |       | N/A                               |       |
| All other Fees (4)     |       | N/A                               |       | N/A                               |       |
| Total                  |       | $                                 | 20,990     |                              | $          | 14,680 |   |

 

----

(1)           Auditservices consist of audit work performed in the preparation of financialstatements for the fiscal year and for the review of financial statementsincluded in Quarterly Reports on Form 10-Q during the fiscal year, as well aswork that generally only the independent auditor can reasonably be expected toprovide, including consents for registration statement filings and respondingto SEC comment letters on annual and quarterly filings.

 

(2)           Audit-relatedservices consist of assurance and related services that are traditionallyperformed by the independent auditor, including due diligence related tomergers and acquisitions, agreed upon procedures report and accounting andregulatory consultations.

 

(3)           Taxservices consist of all services performed by the independent auditor’s taxpersonnel, except those services specifically related to the audit of thefinancial statements, and includes fees in the areas of tax compliance, taxplanning, and tax advice.

 

(4)           Otherservices consist of those services not captured in the other categories.

 

We have determined that the services provided by ourindependent auditors and the fees paid to them for such services has notcompromised the independence of our independent auditors.

 

Consistent with SEC policies regarding auditorindependence, the Board of Directors 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 independent auditor. Priorto engagement of the independent auditor for the next

 

32

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year’s audit, management will submit a detaileddescription of the audit and permissible non-audit services expected to berendered during that year for each of four categories of services described aboveto the Board for approval. In addition, management will also provide to theBoard for its approval a fee proposal for the services proposed to be renderedby the independent auditor. Prior to the engagement of the independent auditor,the Board will approve both the description of audit and permissible non-auditservices proposed to be rendered by the independent auditor and the budget forall such services. The fees are budgeted and the Board requires the independentauditor and management to report actual fees versus the budget periodicallythroughout the year by category of service.

 

During the year, circumstances may arise when it maybecome necessary to engage the independent auditor for additional services notcontemplated in the original pre-approval. In those instances, the Boardrequires separate pre-approval before engaging the independent auditor. Toensure prompt handling of unexpected matters, the Board may delegatepre-approval authority to one or more of its members. The member to whom suchauthority is delegated must report, for informational purposes only, anypre-approval decisions to the Board at its next scheduled meeting. The fourcategories of services provided by the independent auditor are as defined inthe footnotes to the fee table set forth above.

 

**[THIS SPACE INTENTIONALLY LEFT BLANK]**

 

33

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**SIGNATURES**

 

In accordance with Section 13or 15(d) of the Exchange Act, the registrant has caused this report to besigned on its behalf by the undersigned, hereunto duly authorized.

 
|   | PBS Holding,  Inc.                     |
|--------|----------------------------------------|
|   |                                   |
|   |                                   |
|   | By:                                    | /s/ Patrick  D. Matthews |   |
|   | PATRICK D.  MATTHEWS                   |
|   | PRESIDENT AND  CHIEF EXECUTIVE OFFICER |

 

Date: March 31, 2006

 

In accordance with the ExchangeAct, this report has been signed below by the following persons on behalf ofthe registrant and in the capacities and on the dates indicated.

 
| **Signature**                             | ** ** | **Capacity**                                                                                 | ** ** | **Date**       |
|-------------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|----------------|
|                                      |       |                                                                                         |       |           |
| /s/   Patrick  D. Matthews |       | Chairman of  the Board, President and Chief Executive Officer (Principal Executive  Officer) |       | March 31, 2006 |
| Patrick D.  Matthews                      |       |                                                                                         |       |           |

 

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**INDEX TOEXHIBITS**

 

The exhibits designated with anasterisk (*) are filed herewith.  Allother exhibits have been previously filed with the Commission and, pursuant to17 C.F.R. §230.411, are incorporated by reference to the document referenced inbrackets following the descriptions of 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 from Form 10-SB filed March 10,  1999).                                                                                                                                                                                                                                                                            |
|             |       |         |       |                                                                                                                                                                                                                                                                                                                                                                  |
| 10.1             |       |         |       | Form  of Employee Stock Option Plan as adopted by shareholders on September 21,  2004 filed as Exhibit B to the Proxy Statement for the Annual Meeting of  Shareholders held on September 21, 2004.                                                                                                                                                                   |
|             |       |         |       |                                                                                                                                                                                                                                                                                                                                                                  |
| 10.2             |       |         |       | Form  of Settlement Agreement dated as of January 4, 2005 by and among Primary  Business Systems, Inc., Rick Matthews, Pine Services, Inc., Frank Custable,  Jr., Primary Business LLC and Suburban Capital Corporation with Form of  Letter modifying execution date to January 31, 2005 (Previously filed as  Exhibit 10.1 to the Form 8-K dated January 31, 2005). |
|             |       |         |       |                                                                                                                                                                                                                                                                                                                                                                  |
| 14               |       |         |       | Code  of Ethics and Conduct (Previously filed as Exhibit A to the Proxy Statement  for the Annual Meeting of Shareholders held on September 21, 2004).                                                                                                                                                                                                                |
|             |       |         |       |                                                                                                                                                                                                                                                                                                                                                                  |
| 21               |       |         |       | List  of Subsidiaries (Previously filed as Exhibit 21 to the Form 10-KSB for the  fiscal year ended December 31, 2004).                                                                                                                                                                                                                                               |
|             |       |         |       |                                                                                                                                                                                                                                                                                                                                                                  |
| 23*              |       | F1           |       | Consent  Letter of Independent Auditors (Included as F-1)                                                                                                                                                                                                                                                                                                             |
|             |       |         |       |                                                                                                                                                                                                                                                                                                                                                                  |
| 31.1*            |       |         |       | Certification  of Chief Executive Officer and Chief Financial Officer pursuant to Rule  13a-14(a) and 15d-14(a), adopted pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                                                                  |
|             |       |         |       |                                                                                                                                                                                                                                                                                                                                                                  |
| 32.1*            |       |         |       | Certification  of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C  Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of  2002.                                                                                                                                                                                         |

 

(b)           Reportson Form 8-K

 

The Company filed reports on Form 8-K onFebruary 3, 2005, July 26, 2005 and November 21, 2005.

 

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