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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 2003

Commission file number 000-25959

Private Business, Inc.

(615) 221-8400
(Registrant’s telephone number, including area code)

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [x] No [  ]

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [  ] No [x]

     Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practical date.

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PRIVATE BUSINESS, INC.

Form 10-Q

For Quarter Ended September 30, 2003

INDEX

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PART I
Financial Information

Item 1. Financial Statements

PRIVATE BUSINESS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS – UNAUDITED

The accompanying notes are an integral part of these consolidated financial statements.

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PRIVATE BUSINESS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS – UNAUDITED

The accompanying notes are an integral part of these consolidated financial statements.

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PRIVATE BUSINESS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS – UNAUDITED

The accompanying notes are an integral part of these consolidated financial statements.

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PRIVATE BUSINESS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS – UNAUDITED

The accompanying notes are an integral part of these consolidated financial statements.

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PRIVATE BUSINESS, INC.
Notes to Consolidated Financial Statements – Unaudited

A. Basis of Presentation

     The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial reporting and in accordance with Rule 10-01 of Regulation S-X.

     In the opinion of management, the unaudited interim financial statements contained in this report reflect all adjustments, consisting of only normal recurring accruals, which are necessary for a fair presentation of the financial position, and the results of operations for the interim periods presented. The results of operations for any interim period are not necessarily indicative of results for the full year.

     These consolidated financial statements, footnote disclosures and other information should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2002.

B. Summary of Significant Accounting Policies

Principles of Consolidation

     The accompanying financial statements include the accounts of Private Business, Inc. and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

     Our significant accounting policies include revenue recognition, self-insurance reserves (2002 only) and software development costs. Please refer to our Annual Report on Form 10-K for the year ended December 31, 2002 for a more detailed description of these accounting policies.

Stock-Based Compensation

     The Company has elected to account for its stock-based compensation plans under the intrinsic value-based method of accounting prescribed by Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and does not utilize the fair value method. However, the Company has adopted the disclosure requirements of SFAS No. 123, and has adopted the additional disclosure requirements as specified in SFAS No. 148, Accounting For Stock-Based Compensation — Transition and Disclosure.

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     The following table illustrates the effect on net income available to common shareholders and earnings per share if the fair value based method had been applied to all outstanding and unvested awards for the three and nine month periods ended September 30, 2003 and 2002, respectively.

C. Reclassifications

     Certain prior period amounts have been reclassified to conform with current period presentation.

D. Sale of Bank Insurance Business

     On June 30, 2003, the Company entered into an agreement to sell certain operating assets of its Bank Insurance business for cash of $325,000 and a note receivable for $175,000. The note is secured by all assets of the business sold, is due in equal quarterly installments of principal and interest through June 2006 and bears interest at 3%. The result of this transaction is a gain on sale of approximately $427,000, which is included in maintenance and other revenues in the accompanying 2003 statement of operations.

E. Stock Option Grants

     On May 30, 2003, the Company’s Board of Directors approved grants of incentive stock options totaling 745,700 to certain employees of the Company. All of the grants have an exercise price equal to the market value of a share of stock as of the date of grant. As such, no compensation expense was recorded in accordance with Accounting Principles Bulletin No. 25.

F. Notes Payable

     During the second quarter of 2003, the Company entered into several short-term notes payable. The notes are for certain insurance policies, as well as various annual software maintenance and support contracts. All of the notes are unsecured and have monthly payments that extend less than twelve months.

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G. Acquisition of Access Retail Management

     On May 28, 2002, the Company entered into an asset purchase agreement to acquire certain operating assets of CAM Commerce’s (“CAM”) retail planning division, known as Access Retail Management, in exchange for cash consideration of $800,000. The acquisition has been recorded in accordance with SFAS No. 141, Business Combinations (“SFAS No. 141”), resulting in the operating results of the CAM division being included with those of the Company subsequent to the date of acquisition. The Company allocated the purchase price of $800,000, resulting in identifiable furnitures and fixtures of $10,000, intangible assets of approximately $210,000 and goodwill of approximately $570,000.

H. Sale of Company Headquarters and Other Properties

     During the quarter ended March 31, 2002, the Company sold its former headquarters building and consolidated its operations into the Technology and Business Center, which is adjacent to the former headquarters building. The net proceeds from the sale were approximately $2.2 million. During the third quarter of 2001, the Company recorded an impairment charge of $4.1 million to write down the headquarters building, land and fixtures to their estimated fair market value of approximately $2.0 million. Therefore the sale in March 2002 resulted in a net gain of approximately $200,000 being recorded in the first quarter of 2002, which is included in other operating expense, net in the accompanying 2002 consolidated statement of operations.

I. Net Income Per Share

     Basic earnings per share is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing net income available to common shareholders by the weighted average number of common and common equivalent shares outstanding during the period, which includes the additional dilution related to conversion of stock options as computed under the treasury stock method and the conversion of the preferred stock under the if-converted method.

     The following table represents information necessary to calculate earnings per share for the three and nine month periods ended September 30, 2003 and 2002:

     For the nine months ended September 30, 2003 and 2002, approximately 2.1 million and 2.4 million employee stock options and the preferred shares were excluded from diluted earnings per share calculations, as their effects were anti-dilutive.

J. Comprehensive Income

     Comprehensive income for the three and nine months ended September 30, 2003 and 2002 was comprised solely of net income.

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K. Bank Covenants

     The Company’s credit facility is secured by a pledge of all Company assets and imposes financial covenants and requirements and contains limitations on the Company’s ability to sell material assets, redeem capital stock and pay dividends, among other actions. As of September 30, 2003, the Company was in compliance with all such covenants.

L. Legal Proceedings

     As a result of the merger with Towne Services, Inc. in August 2001, we assumed certain outstanding litigation against Towne. Except for the lawsuits described below, we are not currently a party to, and none of our material properties is currently subject to, any material litigation other than routine litigation incidental to our business.

In Re Towne Services, Inc./Securities Litigation

As previously disclosed, Towne, two of its former officers and a current officer were defendants in the securities class action lawsuit filed in November 1999. The complaints alleged, among other things, that Towne should have disclosed in the prospectus used for its secondary public offering in June 1999 that it allegedly experienced serious problems with its network infrastructure and processing facilities during the move of its corporate headquarters in June 1999, and that these problems allegedly led to a higher than usual number of customers terminating their contracts during the second quarter. The parties reached a tentative settlement, which was subject to certain conditions including court approval. The settlement funds were placed in escrow on February 21, 2003. On July 23, 2003, the United States District Court, Northern District of Georgia approved the settlement, which is still subject to the distribution of the settlement funds from the escrow account to the plaintiffs and their attorneys. The Company has initiated an arbitration proceeding to require its insurance carrier to pay in the immediate future certain costs of defense incurred in connection with the Towne securities litigation.

Based upon the Company’s review of the documents and proceedings, and after consultation with its outside counsel, the Company believes that the carrier is obligated to reimburse the Company immediately for its legal defense costs. Accordingly, the Company has recorded both a liability owed to the attorneys and a receivable due from the carrier in offsetting amounts in the accompanying consolidated balance sheet as of September 30, 2003.

M. Segment Information

     Prior to August 2001, the Company operated in one business segment, accounts receivable financing. As a result of the Company’s merger with Towne in August 2001, it now operates in a second business segment, retail inventory forecasting. The Company accounts for segment reporting under SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information. No corporate overhead costs or interest have been allocated to income before taxes of the retail inventory forecasting segment, but are included in the accounts receivable financing segment costs. Additionally, $1.5 million of goodwill associated with the Towne merger has been allocated to the retail inventory forecasting segment and is therefore included in the segment’s total assets.

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     The following tables summarize the financial information concerning the Company’s reportable segments for the three and nine months ended September 30, 2003 and 2002.

N. New Accounting Pronouncements

     In August of 2002, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 145, Recission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. This statement rescinds Statement No. 4, which required all material gains and losses from extinguishment of debt to be classified as an extraordinary item, net of related income tax effects. Upon adoption of this statement, extinguishment gains and losses will be classified as ordinary gains and losses in the income statement. The statement is effective for fiscal years beginning after May 15, 2002, resulting in it being effective for the Company on January 1, 2003. The Company early adopted this statement during December 2002, which did not have a material impact on the Company’s financial position or results of operations. However, certain debt extinguishment losses that had previously been reflected as extraordinary items were reclassified to ordinary expenses.

     In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, requiring that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. SFAS No. 146, which applies to all entities, is effective for exit or disposal activities that are initiated after December 31, 2002. The adoption of SFAS No. 146 during fiscal 2003 did not materially impact the Company’s financial position or results of operations.

     In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation —

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Transition and Disclosure, which amends SFAS No. 123. SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value-based method of accounting for stock-based employee compensation and amends the disclosure requirements of SFAS No. 123 to require more prominent and more frequent disclosures in financial statements about the effects of stock-based compensation. SFAS No. 148 is effective for financial statements issued for fiscal years ending after December 15, 2002, and interim disclosure provisions are effective for financial reports containing financial statements for interim periods beginning after December 15, 2002. The Company has included the required interim disclosures elsewhere in this document.

     At the November 21, 2002 Emerging Issues Task Force (“EITF”) meeting, the Task Force reached a consensus in Issue 00-21, Multiple-Deliverable Revenue Arrangements, which addresses how to account for arrangements that may involve the delivery or performance of multiple products, services, or rights to use assets, other than those arrangements accounted for under other more specific literature. The final consensus will be applicable to agreements entered into in fiscal periods beginning after June 15, 2003 with early adoption permitted. Additionally, companies will be permitted to apply the consensus guidance to all existing arrangements as the cumulative effect of a change in accounting principle in accordance with APB Opinion No. 20, Accounting Changes. The Company expects that adoption of this new consensus will not have a material effect on the Company’s financial position or results of operations.

     In May 2003, the FASB issued SFAS No. 150 Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. This statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. Financial instruments that fall within the scope of SFAS No. 150 must be classified by the issuer as liabilities (or assets in some circumstances). Many of those instruments were previously classified as equity. The statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The Company adopted SFAS No. 150 as of July 1, 2003 and, as a result, the issued and outstanding Series B Preferred stock totaling $114,000 has been reclassified to equity for all periods presented in the accompanying consolidated balance sheets.

     In January 2003, the FASB issued FASB Interpretation No. (“FIN”) 46, Consolidation of Variable Interest Entities, to expand upon and strengthen existing accounting guidance that addresses when a company should include in its financial statements the assets, liabilities and activities of another entity. Until now, a company generally has included another entity in its consolidated financial statements only if it controlled the entity through voting interests. FIN 46 changes that guidance by requiring a variable interest entity, as defined, to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity’s activities or is entitled to receive a majority of the entity’s residual returns or both. FIN 46 also requires disclosure about variable interest entities that the company is not required to consolidate but in which it has a significant variable interest. The consolidation requirements of FIN 46 apply immediately to variable interest entities created after January 31, 2003 and to older entities in the first fiscal year or interim period ending after December 15, 2003. Certain portions of the disclosure requirements apply in all financial statements issued after January 31, 2003, regardless of when the variable interest entity was established. The Company is currently evaluating the requirements and impact, if any, of FIN 46 on its consolidated results of operations and financial position.

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PRIVATE BUSINESS, INC.

Overview

     We are a leading provider of solutions that enable community banks to manage accounts receivable financing provided to their small business customers. Our solution is called BusinessManager, and is based on software, marketing, and online electronic transaction processing services. One element of BusinessManager is our proprietary software, which enables our network of client banks to purchase accounts receivable from their small business customers. The banks then process, bill and track those receivables on an ongoing basis. As a major component of our program, we work with client banks to design, implement and manage the sale of BusinessManager accounts receivable financing services to their small business customers. We also give our client banks the option of outsourcing to us their application hosting and transaction processing in our Technology and Business Center. Through our subsidiary, Retail Merchandising Service Automation, (“RMSA”), we also provide merchandising forecasting information and consulting services to customers in the retail industry.

     In previous filings we have discussed that part of our growth strategy is to acquire or develop new products or services. During 2003, marketing and sales activity has begun for three new products; LineManager, Collections Manager and Identification Manager. LineManager allows banks and financial institutions to electronically monitor asset based arrangements in a more timely, cost efficient manner. Collections Manager allows our bank and merchant customers on-line access to collection services, thereby creating efficient, timely follow-up on past due accounts. Identification Manager is an electronic web-based compliance program for banks who must adhere to the requirements of Section 326 of the USA Patriot Act, which is effective October 1, 2003. Section 326 of the Act, among other things, mandates that banks perform background checks on all persons opening accounts at financial institutions. These institutions must then document and retain the results of these background checks. Although the revenue contributions from these new products during 2003 may be insignificant in relation to total consolidated revenues, these products are complimentary to our core business, and we believe will provide significant growth in future years.

Critical Accounting Policies and Estimates

     Management’s Discussion and Analysis of Financial Condition and Results of Operations are based upon the Company’s consolidated financial statements. The preparation of these consolidated financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. On an on-going basis, management evaluates its critical accounting policies and estimates.

     In December 2001, the Securities and Exchange Commission (“SEC”) requested that all registrants list their three to five critical accounting policies in the text of “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The SEC indicated that a “critical accounting policy” is one that is both important to the understanding of the financial condition and results of operations of the Company and requires management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Management believes the following accounting policies fit this definition:

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     Revenue Recognition. We generate revenue from four main sources:

	•		participation fees earned on client bank purchases of small business accounts receivable.
	•		software license fees from new client banks.
	•		retail planning services.
	•		maintenance fees and other revenues, comprised primarily of fees received for insurance brokerage services, paper-based form sales, software maintenance, medical, alternative lending, account verification services and processing services.

     There are two types of participation fees. The first type is earned upon the client bank’s initial purchase of a small business’ accounts receivable during the first 30 days in our program. The second type is an ongoing participation fee earned from subsequent period purchases. Both types of fees are based on a percentage of the receivables that a client bank purchases from its small business customers during each month. The second type of fee is a smaller percentage of the ongoing receivables purchased. Participation fees are recognized as earned.

     Software license fees for BusinessManager consist of two components: the license fee and customer training and support fee. These are one-time fees that we receive upon the initial licensing of our BusinessManager program to a community bank. Our license agreements are executed with terms ranging from three to five years and are renewable for subsequent terms. Some agreements contain performance or deferred payment terms that must be met in order for us to receive payment and recognize revenue. We recognize revenues from the license fee once we have met the terms of the customer agreement. The customer training and support fee are recognized ratably over the twelve-month service period subsequent to the activation of the license agreement.

     Retail planning services revenue is generated from fees charged primarily for providing inventory merchandising and forecasting information for specialty retail stores; and ancillary services related to these products. RMSA uses a proprietary software to process sales and inventory transactions and provide the merchandising forecasting information. During the second quarter of 2002, we completed a strategic acquisition of certain operating assets of CAM Commerce’s retail planning division, known as Access Retail Management, which operates in the same niche market as RMSA. We recognize revenues as the transactions occur and merchandising and forecasting services are performed.

     Maintenance fees and other revenues include several ancillary products and services we provide to client banks. Annual software maintenance fees are generated from our client banks starting on the first anniversary date of the BusinessManager license agreement and annually thereafter. These revenues are recognized ratably over a twelve-month period beginning on the first anniversary date of the agreement. Additionally, since 1995, we have brokered, through our Private Business Insurance subsidiary, credit and fraud insurance products from a national insurance company. We earn fees based on a percentage of the premium that is paid to the insurance company. We also provide a standard set of forms that client banks may purchase and use in the normal course of administering the BusinessManager program. Revenues related to these forms are recognized in the period that they are shipped to the client bank. We also offer processing services to our client banks for an additional fee, based on the volume of transactions processed through the system. We also have some industry-focused applications for the medical and dental markets. Monthly transaction processing fees include charges for electronic processing, statement rendering and mailing, settling payments, recording account changes and new accounts, leasing and selling point of sale terminals, telephone and software support services, rental fees and collecting debts.

     Software Development Costs. Software development costs incurred in the research and development of new software products and enhancements to existing software products are expensed as incurred until

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technological feasibility has been established. After such time, any additional costs are capitalized in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 86, Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed. In addition, any costs incurred for the development or enhancement of software products utilized internally are capitalized in accordance with Statement of Position (“SOP”) 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. Among other provisions, SOP 98-1 requires capitalization of certain internal-use software costs once certain criteria are met. Overhead, general and administrative, and training costs are not capitalized. Capitalized software development costs are amortized on a straight-line basis generally over three years.

     Self-Insurance Reserves. Prior to January 1, 2003, the Company was primarily self-insured for employee medical costs with certain limits of per claim and aggregate stop loss insurance coverage that management considered adequate. The Company maintains an accrual for these costs based on claims filed and an estimate of claims incurred but not reported. The difference between actual settlements and recorded accruals are expensed in the period identified. The Company was self-insured for employee medical claims up to $40,000 per employee per year or an aggregate of approximately $11 million per year. Effective January 1, 2003 the Company ceased being self-insured for medical costs.

Results of Operations

     The following table sets forth, for the periods indicated, the percentage relationships of the identified consolidated statements of operations items to total revenue.