PRIVATE BUSINESS INC - 10-Q Quarterly Report

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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 March 31, 2005

Commission file number 000-25959

Private Business, Inc.

(Exact name of registrant as specified in its charter)

Tennessee		62-1453841

(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

9020 Overlook Blvd., Brentwood, Tennessee		37027

(Address of principal executive offices)		(Zip Code)

(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 o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes o

No x

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

Class		Outstanding as of April 30, 2005

Common Stock, no par value		14,661,923 shares

PRIVATE BUSINESS, INC.

Form 10-Q

For Quarter Ended March 31, 2005

INDEX

			Page No.

Part I – Financial Information
	Item 1 –	Financial Statements
		Unaudited Consolidated Balance Sheets As of March 31, 2005 and December 31, 2004	3
		Unaudited Consolidated Statements of Operations for the three months ended March 31, 2005 and 2004	4
		Unaudited Consolidated Statements of Cash Flows for the three months ended March 31, 2005 and 2004	5
		Notes to Unaudited Consolidated Financial Statements	6 –11
	Item 2 –	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12 – 25
	Item 3 –	Quantitative and Qualitative Disclosures About Market Risk	25
	Item 4 –	Disclosure Controls and Procedures	25

Part II – Other Information
	Item 1 –	Legal Proceedings	26
	Item 6 –	Exhibits	26
Signatures			27

Part 1
Financial Information

Item 1. Financial Statements

PRIVATE BUSINESS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

(in thousands, except per share data)	March 31, 2005		December 31, 2004

	(Unaudited)		(Audited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	7	$	7
Accounts receivable — trade, net of allowance for doubtful accounts of $265 and $242, respectively		4,526		4,506
Accounts receivable — other		84		104
Deferred tax assets		151		70
Prepaid and other current assets		1,105		1,245

Total current assets		5,873		5,932

PROPERTY AND EQUIPMENT, NET		2,087		2,327
OTHER ASSETS:
Software development costs, net		1,165		1,138
Deferred tax assets		2,421		2,704
Intangible and other assets, net		9,112		9,235

Total other assets		12,698		13,077

Total assets	$	20,658	$	21,336

LIABILITIES AND STOCKHOLDERS’ EQUITY CURRENT LIABILITIES:
Accounts payable	$	1,421	$	1,861
Accrued liabilities		1,652		1,976
Deferred revenue		486		586
Current portion of long-term debt and capital lease obligations		1,667		1,667

Total current liabilities		5,226		6,090

REVOLVING LINE OF CREDIT		510		110
OTHER NONCURRENT LIABILITIES		64		74
LONG-TERM DEBT, net of current portion		1,250		1,666

Total liabilities		7,050		7,940

COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ EQUITY:
Common stock, no par value; 100,000,000 shares authorized; shares issued and outstanding, 14,655,927 and 14,388,744, respectively		0		0
Preferred Stock, 20,000,000 shares authorized:
Series A, non-convertible, no par value; 20,000 shares issued and outstanding		6,209		6,209
Series B, convertible, no par value; 40,031 shares issued and outstanding		114		114
Additional paid-in capital		4,089		3,716
Retained earnings		3,196		3,357

Total stockholders’ equity		13,608		13,396

Total liabilities and stockholders’ equity	$	20,658	$	21,336

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

PRIVATE BUSINESS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS – UNAUDITED
For the Three Months Ended March 31, 2005 and 2004

(in thousands, except per share data)	2005			2004

REVENUES:
Participation fees	$	5,590		$	6,297
Software license		194			53
Retail planning services		2,202			2,251
Maintenance and other		1,213			1,242

Total revenues		9,199			9,843

OPERATING EXPENSES:
General and administrative		3,817			4,309
Selling and marketing		4,390			4,376
Research and development		91			113
Amortization		208			326
Other operating expense, net		0			1,701

Total operating expenses		8,506			10,825

OPERATING INCOME (LOSS)		693			(982	)
INTEREST EXPENSE, NET		70			190

INCOME (LOSS) BEFORE INCOME TAXES		623			(1,172	)
Income tax expense (benefit)		244			(457	)

NET INCOME (LOSS)		379			(715	)
Preferred stock dividends		540			438

NET LOSS AVAILABLE TO COMMON SHAREHOLDERS	$	(161	)	$	(1,153	)

LOSS PER SHARE:
Basic	$	(0.01	)	$	(0.08	)

Diluted	$	(0.01	)	$	(0.08	)

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic		14,575			14,079

Diluted		14,575			14,079

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

PRIVATE BUSINESS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS – UNAUDITED
For the Three Months Ended March 31, 2005 and 2004

(in thousands)	2005			2004

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	379		$	(715	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization		549			803
Deferred taxes		202			(143	)
Write-off of debt issuance cost from Fleet debt facility		0			780
Stock compensation		6			0
Deferred gain on land sale		(4	)		(4	)
Changes in assets and liabilities:
Accounts receivable		(15	)		197
Prepaid and other current assets		140			140
Other assets		0			24
Accounts payable		(440	)		(311	)
Accrued liabilities		(309	)		(312	)
Deferred revenue		(100	)		(32	)

Net cash provided by operating activities		408			427

CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment		(66	)		(37	)
Software development costs		(153	)		(173	)
Payment received on note receivable		0			15

Net cash used in investing activities		(219	)		(195	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments on long-term debt		(416	)		(417	)
Repayments on capitalized lease obligations		0			(111	)
Repayments of other short-term borrowings		0			(201	)
Extinguishment of long-term debt facility with Fleet		0			(23,875	)
Proceeds from revolving line of credit		400			750
Proceeds from exercise of employee stock options		358			23
Stock issued through employee stock purchase plan		9			7
Net proceeds from sale of Series A preferred shares and comon stock warrant		0			17,295
Net proceeds from new debt facility with Bank of America		0			7,214
Payments of declared preferred dividends		(540	)		(400	)

Net cash provided by (used in) financing activities		(189	)		285

NET CHANGE IN CASH AND CASH EQUIVALENTS		0			517
CASH AND CASH EQUIVALENTS at beginning of year		7			1,586

CASH AND CASH EQUIVALENTS at end of period	$	7		$	2,103

SUPPLEMENTAL CASH FLOW INFORMATION:
Cash payments for income taxes during period	$	119		$	158

Cash payments of interest during period	$	45		$	154

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

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, 2004.

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 and software development costs. Please refer to our critical accounting policies as described in Management’s Discussion and Analysis of Financial Condition and Results of Operations and our Annual Report on Form 10-K for the year ended December 31, 2004 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.

The following table illustrates the effect on net loss available to common shareholders and loss per share if the fair value based method had been applied to all outstanding and unvested awards for the three-month periods ended March 31, 2005 and 2004, respectively.

(in thousands, except per share data)	2005			2004

Net loss available to common shareholders, as reported	$	(161	)	$	(1,153	)
Add: Stock-based employee compensation expense included in reported net loss, net of related tax effects		4			0
Add (Deduct): Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		15			(92	)

Pro forma net loss	$	(142	)	$	(1,245	)

	2005			2004

Loss per share:
Basic—as reported	$	(0.01	)	$	(0.08	)

Basic—pro forma	$	(0.01	)	$	(0.09	)

Diluted—as reported	$	(0.01	)	$	(0.08	)

Diluted—pro forma	$	(0.01	)	$	(0.09	)

C. Capital Event

On January 20, 2004, the Company completed the sale of 20,000 shares of Series A non-convertible preferred stock and a warrant to purchase 16,000,000 shares of our common stock ($1.25 per share exercise price) for a total of $20 million (the “Lightyear Transaction”) to Lightyear Fund, L.P. (together with its affiliates, “Lightyear”). The preferred shares carry a cash dividend rate of 10% of an amount equal to the liquidation preference, payable quarterly in arrears, when and as declared by the Board of Directors. The Series A preferred stock has a liquidation preference superior to the common stock and to the extent required by the terms of the Series B preferred stock, in parity with the currently outstanding Series B preferred stock. The liquidation preference is equal to the original $20 million purchase price, plus all accrued but unpaid dividends. In addition, the Securityholders agreement between the Company and Lightyear PBI Holdings, LLC, executed in conjunction with the sale of the preferred stock and warrant, entitles Lightyear to an additional equity purchase right. The equity purchase right allows Lightyear, so long as Lightyear continues to hold any shares of Series A Preferred Stock, all or any portion of its rights under the warrant or any shares of common stock issued pursuant to an exercise of the warrant, the right to purchase its pro rata portion of all or any part of any new securities which the Company may, from time to time, propose to sell or issue. However, in the case of new security issuances resulting from the exercise of employee stock options which have an exercise price less than $1.25 per share, Lightyear must still pay $1.25 per share under this equity purchase right. To the extent that new security issuances resulting from the exercise of employee stock options occur which have an exercise price in excess of $1.25 per share, then Lightyear will be required, if they choose to exercise their equity purchase right, to pay the same price per share as the employee stock options being exercised.

The net proceeds from the Lightyear Transaction are shown below (in thousands):

Cash Received from Lightyear	$	20,000
Less:
Broker fees		1,255
Legal and accounting fees		383
Transaction structuring fees		1,200
Other		268

Net Proceeds Received	$	16,894

The net proceeds above were allocated between the preferred stock, the common stock warrant and the additional common stock equity right based upon the estimated fair values of each instrument, resulting in $6.2 million being allocated to the preferred shares and $10.7 million being allocated to the common stock warrant and additional common stock equity right. The estimated fair value of the preferred stock was determined based on valuing the expected preferred stock dividend stream using expected yields ranging from 20.2% to 30.2%. These yield ranges were arrived at by comparison to other similar preferred issuances at companies with similar equity ratings. The estimated fair value of the common stock warrant and additional common stock equity right were determined by using the Black-Scholes model. The assumptions used in this valuation for the warrant included the exercise price of $1.25, the expected life of the warrant of ten years, an interest rate of 4.41% and volatility factors of between 51.9% and 64.3% determined based on selected comparable companies. The assumptions used in this valuation for the additional common stock equity right included exercise prices ranging from $1.25 to $42.64, expected lives between two and seven years, an interest rate of 4.0% and a volatility factor of 75%.

Simultaneous with the closing of the Lightyear Transaction, the Company entered into the Bank of America Credit Facility. The Bank of America Credit Facility is an $11.0 million facility that includes a term loan in the amount of $5.0 million and a revolving line of credit of up to $6.0 million. The revolving line of credit includes a $1.0 million letter of credit sub-limit. As of March 31, 2005, $3.4 million is outstanding under the Bank of America Credit Facility.

The Bank of America Credit Agreement expires on January 19, 2007. The revolving credit commitment reduces by $1.0 million on each of the first two anniversary dates of the credit facility.

The term loan is repayable in twelve equal quarterly installments of $416,667, along with interest at the applicable margin. Interest is also due on the outstanding revolving line of credit quarterly at the applicable margin. The interest rates of the term loan and revolving loan are based on a pricing grid using the Company’s Funded Debt to EBITDA Ratio, as follows:

Funded Debt to EBITDA	Libor		Base Rate

Less than or equal to 1.0		Libor + 2.25%		0
Greater than 1.0 but less than or equal to 1.25		Libor + 2.50%		0
Greater than 1.25 but less than or equal to 1.50		Libor + 2.75%		0

The Bank of America Credit Agreement includes certain restrictive financial covenants relating to net worth, maximum annual capital expenditures, funded debt to EBITDA ratio and fixed charge coverage ratio.

The Bank of America Credit Agreement prohibits the Company from declaring and paying any cash dividends on any class of stock except for the Series A and Series B preferred shares outstanding, provided, that no default, as defined in the Bank of America Credit Agreement, exists as of the date of payment and such payment will not cause a default.

The total net proceeds of both the Lightyear Transaction and the new credit agreement were used to extinguish the Company’s 1998 credit facility.

As a result of the 1998 credit facility extinguishment, the Company recorded a charge of $780,000 to write-off the unamortized portion of debt issuance costs as of January 20, 2004. Also, the Lightyear Transaction required that the Company obtain directors and officers tail insurance coverage for periods prior to January 20, 2004. The premium for the tail directors and officers liability insurance coverage totaled approximately $900,000. The Company expensed the entire premium in January 2004. Therefore, first quarter 2004 other operating expense includes two unusual expense items totaling approximately $1.7 million.

D. Net Loss Per Share

Basic loss per share is computed by dividing net loss available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted loss per share is computed by dividing net loss 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-month periods ended March 31, 2005 and 2004:

	Three Months Ended March 31,

(in thousands)	2005			2004

Net loss available to common shareholders	$	(161	)	$	(1,153	)

Weighted average common shares outstanding		14,575			14,079
Plus additional shares from common stock equivalent shares:
Options, warrant and convertible preferred stock		0			0

Adjusted weighted average common shares outstanding		14,575			14,079

For the three months ended March 31, 2005 and 2004, respectively, approximately 18.1 million and 14.9 million employee stock options, convertible preferred shares and stock warrant were excluded from diluted loss per share calculations, as their effects were anti-dilutive.

E. Bank Covenants

The Company’s credit facility with Bank of America 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 March 31, 2005, the Company was in compliance with all such covenants.

F. Legal Proceedings

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.

G. Segment Information

The Company accounts for segment reporting under SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information. Corporate overhead costs and interest have been allocated to income (loss) before taxes of the retail inventory forecasting segment. 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.

The following table summarizes the financial information concerning the Company’s reportable segments from continuing operations for the three months ended March 31, 2005 and 2004.

	Three Months Ended March 31, 2005						Three Months Ended March 31, 2004

(in thousands)	Accounts Receivable Financing		Retail Inventory Forecasting		Total		Accounts Receivable Financing			Retail Inventory Forecasting		Total

Revenues	$	6,997	$	2,202	$	9,199	$	7,592		$	2,251	$	9,843

Income (loss) before taxes	$	346	$	277	$	623	$	(1,429	)	$	257	$	(1,172	)

Assets	$	16,646	$	4,012	$	20,658	$	21,674		$	4,189	$	25,863

Total expenditures for additions to long-lived assets:	$	219	$	0	$	219	$	208		$	2	$	210

H. New Accounting Pronouncements

On December 16, 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123 (revised 2004), Share-Based Payment, which is a revision of SFAS Statement No. 123, Accounting for Stock-Based Compensation. SFAS No.123(R) supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and amends SFAS No. 95, Statement of Cash Flows. Generally, the approach in SFAS No. 123(R) is similar to the approach described in SFAS No. 123. However, SFAS No. 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative.

The Company must adopt SFAS No. 123(R) no later than January 1, 2006. Early adoption will be permitted in periods in which financial statements have not yet been issued. We expect to adopt SFAS No. 123(R) on January 1, 2006.

As permitted by SFAS No. 123, the Company currently accounts for share-based payments to employees using APB Opinion No. 25’s intrinsic value method and, as such, generally recognizes no compensation cost for employee stock options. Accordingly, the adoption of SFAS No 123(R)’s fair value method will have a significant impact on our result of operations, although it will have no impact on our overall financial position. The impact of adoption of SFAS No. 123(R) cannot be predicted at this time because it will depend on levels of share-based payments granted in the future. However, had we adopted SFAS No. 123(R) in prior periods, the impact of that standard would have approximated the impact of SFAS No. 123 as described in the disclosure of pro forma net income and earnings per share in Note 1 to our consolidated financial statements. SFAS No. 123(R) also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption. While the Company cannot estimate what those amounts will be in the future (because they depend on, among other things, when employees exercise stock options), the amount of operating cash flows recognized in prior periods for such excess tax deductions were not material to the Company’s consolidated financial position or results of operations.

PRIVATE BUSINESS, INC.

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations Three Months Ended March 31, 2005 and 2004

Note Regarding Forward Looking Information

This interim report contains several “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 including, without limitation, statements containing the words “may,” “would,” “could,” “will,” “expect,” “anticipate,” “believe,” “intend,” “plan,” and “estimate” and words of similar importance. Such statements include statements concerning our operations, prospects, strategies and financial condition, including our future economic performance, intent, plans and objectives, and the likelihood of success in developing and expanding our business. These statements are based upon a number of assumptions and estimates which are subject to significant uncertainties, many of which are beyond our control. Actual results may differ materially from those expressed or implied by such forward-looking statements. The Company assumes no obligation to update this information. Factors that could cause actual results to differ materially are discussed in our filings with the Securities and Exchange Commission, including our Annual Report on Form 10-K for the year ended December 31, 2004, and include, among other factors, the timely development and market acceptance of products and technologies and competitive market conditions.

Overview

Private Business was incorporated in Tennessee in 1990. We are a leading supplier of financial technology to community banks and small businesses. We offer two principal services directed at small businesses. The first is a solution that helps banks market and manage accounts receivable financing. The second is a forecast and tracking service that allows retail chains to better manage their inventories. Our accounts receivable financing solution, BusinessManager^®, is offered through a nationwide network of client banks, and helps these banks provide cash flow and financing to thousands of small businesses across the United States. BusinessManager provides targeted marketing, software and transaction processing services, linking Private Business to our client banks and small business customers. Our retail division, RMSA, offers retail inventory management and forecasting services to smaller retail stores and regional chains throughout the United States and Canada.

The BusinessManager solution enables our network of over 600 client banks to purchase accounts receivable from their small business customers. The banks then process, bill and track those receivables on an ongoing basis. A major component of our solution is sales and marketing support for our client banks, and we work with these institutions to design, implement and manage the sale of BusinessManager accounts receivable financing services to their small business customers. We help these banks reach customers they might not otherwise access because of cost or system constraints. Some banks will perform the basic administrative and detail transaction processing within their own organizations. Others rely on us for this infrastructure and support, which we provide through our product, Private Business Processing (“PBP”). In addition to maintaining the BusinessManager software and databases related to the accounts receivable financing service, the PBP product also provides staffing for transaction support and more efficient banking services such as lockboxes with automated clearing house transactions, accelerating funds flow and account credits.

A number of other products, including credit and fraud insurance, account verification services, marketing services, line of credit monitoring and identity verification services, are offered in conjunction with the BusinessManager solution or as stand-alone products geared towards the community bank market.

As a complement to BusinessManager, we advise and train our client banks concerning risk management procedures and offer insurance products that mitigate their exposure to fraud and non-payment. We assume none of the payment risk in the banks’ purchase of receivables. All such risk falls upon the client banks and their small business customers.

The BusinessManager solution benefits both our client banks and their small business customers. The solution introduces our client banks to a new type of high-margin fee generating service in a financing sector they otherwise might be unable to cost-effectively market and serve. BusinessManager also provides small business customers with access to a new type of bank financing that may better fit their business needs and capital position.

Since 1994 the American Bankers Association, through its subsidiary, the Corporation for American Banking, has endorsed BusinessManager. The American Bankers Association employs a due diligence process in endorsing products, including conducting interviews with banks and customers regarding the product. Only 26 companies have the American Bankers Association’s endorsement, and BusinessManager is the only product of its type that has received the endorsement.

RMSA serves small business retail establishments. One of the critical success factors for retail establishments is the proper ordering and turnover of inventory. RMSA, which employs a sales force of experienced consultants that use our proprietary software and databases, works closely with retailers in helping them manage their purchasing, turnover and disposition of stock items. We normally receive a monthly fee from RMSA customers based on the number of inventory items, or classifications, to be tracked. RMSA usually delivers a report on a monthly basis to its retail customers, which forecasts inventory needs based on historical trends. Approximately 80% of RMSA’s forecasting revenue is recurring in nature.

During 2005, we intend to continue to invest in our sales force as we did in 2004. We believe that the market for our current suite of products is strong. Our focus is to build a robust and dynamic sales and marketing organization that can effectively sell a wide variety of products and servies to our customer base. We believe we have made significant strides in this area over the course of 2004 and the first quarter of 2005, however the results of these efforts may not be evident in our financial statements in the near term.

Critical Accounting Policies

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 accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, 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.

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:

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, 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, which is based upon the transaction dates of bank purchases from its small business customers.

Software license fees for BusinessManager consist of three components: the license fee, customer training and support fee, and software maintenance fee. The license fee and customer training and support fee 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. Revenue recognition rules for up front fees are complex and require interpretation and judgment on the part of management. Effective January 1, 2005, we began to recognize revenue from the license fee and customer training and support fee ratably over a four-month service period subsequent to the activation of the license agreement. Management feels this four-month service period is a better estimate of the period in which customer implementation, training, and marketing and sales support are performed. Previously, we recognized revenue from the license fee once we had met the terms of the customer agreements. We also recognized the customer training and support fee ratably over an estimated twelve-month service period. The software maintenance fee is an annual fee and continues to be recognized ratably over a twelve-month service period. While the effects of these changes are immaterial to the financial statements, we believe that this revenue recognition practice most accurately portrays the economic reality of the transactions.

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 proprietary software to process sales and inventory transactions and provide the merchandising forecasting information. 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. These commission revenues are recognized at the time receivable fundings covered by credit and fraud insurance policies are purchased by our bank customers. 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 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 to be sold or marketed are expensed as incurred until 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. Also, the Company capitalizes the cost of internally used software when application development begins in accordance with AICPA SOP No. 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. This is generally defined as the point when research and development has been completed, the project feasibility established, and management has approved a development plan. Many of the costs capitalized for internally used software are related to upgrades or enhancements of existing systems. These costs are only capitalized if the development costs will result in specific additional functionality of the existing system, and are capitalized at the point that application development begins. Capitalized software development costs are amortized on a straight-line basis over their useful lives, generally three years. The key assumptions and estimates that must be made relative to this accounting policy center around determining when technological feasibility has been achieved, and whether the project being undertaken is one that will be marketable or enhance the marketability of an existing product for externally marketed software, and whether the project will result in additional functionality for internal use software projects. Management consults monthly with all project managers to ensure that the scope and expected results of each project are understood in order to make a judgment on whether it meets the requirements outlined in the authoritative accounting literature.

Income Taxes. Income taxes are accounted for in accordance with SFAS No. 109, Accounting for Income Taxes. SFAS No. 109 requires the asset and liability method, meaning that deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the fiscal years in which those temporary differences are expected to be recovered or settled. The Company evaluates its ability to realize the deferred tax assets based on an assessment of the likelihood that the Company will have sufficient taxable income in future years to realize the recorded deferred tax assets. Deferred taxes for the Company primarily relate to net operating loss carryforwards (“NOLs”), which require considerable judgment as to the ultimate realizability. For Private Business, this judgment relies largely on the fact that we expect to have sufficient taxable income in future years that will allow for full utilization of the NOLs recorded by the Company. The other key assumption impacting the amount of NOLs recorded by the Company as a deferred tax asset is the estimated restrictions in usage due to Section 382 of the Internal Revenue Service tax code. Section 382 is very complex requiring significant expertise and professional judgment in order to properly evaluate its impact to the Company’s usable NOLs. The Company utilizes an independent public accounting firm to assist with this evaluation and believes that the limitations required by Section 382 have been appropriately considered in arriving at the Company’s deferred tax asset for NOLs.

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.

	First Quarter

	2005			2004

Revenues:
Participation fees		60.8	%		64.0	%
Software license		2.1	%		0.5	%
Retail planning services		23.9	%		22.9	%
Maintenance and other		13.2	%		12.6	%

		100.0	%		100.0	%
Operating Expenses:
General and administrative		41.5	%		43.8	%
Selling and marketing		47.7	%		44.5	%
Research and development		1.0	%		1.1	%
Amortization		2.3	%		3.3	%
Other operating expense, net		0.0	%		17.3	%

		92.5	%		110.0	%

Operating Income (Loss)		7.5	%		(10.0	)%
Interest expense, net		0.8	%		1.9	%

Income (Loss) Before Income Taxes		6.7	%		(11.9	)%
Income Tax Provision (Benefit)		2.7	%		(4.6	)%

Net Income (Loss)		4.0	%		(7.3	)%
Preferred Stock Dividends		5.9	%		4.4	%

Net Loss Available to Common Shareholders		(1.9	)%		(11.7	)%

Participation fees. Participation fees decreased 11.2% to $5.6 million for the first three months of 2005 compared to $6.3 million for the comparable period of 2004. The decreases were primarily due to a reduction in the total funding through our BusinessManager program to $929 million for the first three months of 2005, compared to $957 million for the comparable period of 2004. The decrease in funding is due to fewer merchants funding through our BusinessManager program. As a percentage of total revenues, participation fees accounted for 60.8% for the three-month period ended March 31, 2005 compared to 64.0% for the comparable period of 2004.

Software license. Software license fees increased 266.0% to $194,000 for the first three months of 2005, compared to $53,000 for the comparable period of 2004. The increase was due to an increase in the number of new software license agreements sold during the first quarter of 2005 compared to 2004, as well as, the Company’s change in estimate regarding the period over which up-front license fees are recognized, as discussed in the Company’s critical accounting policy section of this document. This increase is also the result of additional product offerings with software licenses during the first quarter of 2005 as compared to 2004. Software license fees accounted for 2.1% of total revenues for the three months ended March 31, 2005 compared to 0.5% for the comparable period in 2004.

Retail planning services. Retail planning services revenues declined 2.2% to $2.2 million during the three months ended March 31, 2005 as compared to $2.3 million for the first three months of 2004. The decline is due to lower point of sale system support and billing services provided to customers. As a percentage of total revenues, retail planning services accounted for 23.9% for the first three months of 2005 compared to 22.9% in the comparable period of 2004.

Maintenance and other. Maintenance and other fees declined 2.3% for the three-month period ended March 31, 2005 compared to the comparable period for 2004. Maintenance and other fees consist primarily of software maintenance fees, credit and fraud risk insurance commissions earned from the sale of policies to our BusinessManager banks, commissions earned through our referrals of certain merchants to alternative financing companies and account verification services performed for some of our BusinessManager banks. A decrease in our insurance revenues primarily contributed to the decline. Our insurance revenues decreased 7.9% to $586,000 for the first three months of 2005 compared to $637,000 for the comparable period in 2004. The decline in insurance revenues is due to the lower funding levels through the BusinessManager program as discussed above. Maintenance and other fees accounted for 13.2% of total revenues for the three month period ended March 31, 2005 compared to 12.6% for the comparable period in 2004.

Total revenues. Total revenues for the first three months of 2005 decreased 6.5% to $9.2 million compared to $9.8 million for the first three months of 2004.

General and administrative. General and administrative expenses decreased 11.4% to $3.8 million for the three-month period ended March 31, 2005 compared to $4.3 million for the comparable period in 2004. The decrease for the three months ended March 31, 2005 is primarily due to reductions in salary and benefits expense as a result of reduced headcount and lower depreciation expense due to lower capital spending during the last two years. General and administrative expenses include the cost of our executive, finance, human resources, information and support services, administrative functions and general operations. As a percentage of total revenue, general and administrative expenses decreased 2.3% to 41.5% for the three-month period ended March 31, 2005 compared to the same period in the prior year.

Selling and marketing. Selling and marketing expenses were unchanged at $4.4 million for the first quarter of 2005 and 2004, respectively. Selling and marketing expenses include the cost of wages and commissions paid to our dedicated business development and bank sales force, travel costs of our sales force, recruiting for new sales and marketing personnel and marketing fees associated with direct and telemarketing programs. As a percentage of total revenue, selling and marketing expenses increased 3.2% to 47.7% for the three-month period of 2005 compared to 44.5% for the comparable period in 2004.

Research and development. Research and development expenses decreased 19.5% to $91,000 for the first quarter of 2005 compared to $113,000 for the year earlier period. These costs include the non-capitalizable direct costs associated with developing new versions of our system and other projects that have not yet reached technological feasibility. The decrease in costs for the first three months of 2005 was primarily due to fewer total employees working in this area as compared to the same period in 2004. As a percentage of total revenues, research and development expenses decreased to 1.0% for the three months of 2005 compared to 1.1% for the same period in the prior year.

Amortization. Amortization expense decreased 36.2% to $208,000 for the first three months of 2005 compared to $326,000 for the comparable period in 2004. These expenses include the cost of amortizing intangible assets including trademarks, software development costs and debt issuance costs (January 2004 only). The decrease is due to amortization of the Fleet debt issuance costs ceasing on January 20, 2004 as a result of the Capital Event described elsewhere in this document.

Other operating expenses, net. There were no other operating expenses incurred in the first quarter of 2005 compared to $1.7 million in the same period in the prior year. As previously disclosed, for the first quarter of 2004, two unusual charges occurred totaling approximately $1.7 million. As a result of the Capital Event that occurred January 20, 2004, the Company expensed $780,000 of unamortized debt issuance costs related to the extinguished Fleet debt facility. In addition, the Company was required to obtain tail coverage for Directors and Officers liability insurance, which cost the Company $896,000. In accordance with generally acceptable accounting principles, the Company expensed the entire cost of this premium at the time of purchase.

Operating income (loss). As a result of the above factors, we incurred operating income of $693,000 for the first quarter of 2005 compared to an operating loss of $982,000 for the first three months of 2004. As a percentage of total revenue, operating income was 7.5% for the first three months of 2005 compared to the operating loss of 10.0% for the same period in 2004.

Interest expense, net. Interest expense, net decreased 63.2% to $70,000 for the three months ended March 31, 2005 compared to $190,000 for the comparable period in 2004. The decrease was primarily due to the reduction of our debt balances in 2004 as a result of the capital event discussed elsewhere in this document.

Income tax provision (benefit). The income tax provision was approximately $244,000 for the three months ended March 31, 2005 compared to a tax benefit of $457,000 for the same period in 2004. As a percentage of income before taxes, the income tax rate was approximately 39% for both 2005 and 2004.

Liquidity and Capital Resources

Our primary sources of capital have historically been cash provided by operations, short-term and long-term debt, and investment from stockholders. During the first three months of 2005, our operating activities provided cash of approximately $408,000. We used approximately $219,000 in our investing activities, consisting of capital expenditures of $66,000 and $153,000 of software development costs. We currently estimate that total capital expenditures and software development costs for 2005 will be approximately $1.0 million.

Cash used by financing activities totaled $189,000 for the first three months of 2005, which is the result of draws against the revolving line of credit and proceeds from the exercise of employee stock options, offset by payments of preferred dividends of $540,000 and term debt of $416,000.

The Company entered into the Bank of America Credit Facility on January 19, 2004. The credit facility is secured by a pledge of all of the Company’s assets and contains financial and non-financial covenants. The new credit agreement includes a term loan in the amount of $5.0 million and a revolving line of credit of up to $6.0 million for a total facility of up to $11.0 million. The revolving line of credit includes a $1.0 million letter of credit sub-limit. As of March 31, 2005, $3.4 million was outstanding under the Bank of America Credit Facility.

The Bank of America Credit Facility expires on January 19, 2007. The revolving credit commitment reduces by $1.0 million on each of the first two anniversary dates.

The term loan is repayable in twelve equal quarterly installments of $416,667, along with interest at the applicable margin. Interest is also due on the revolving loan quarterly at the applicable margin. The interest rates of the term loan and revolving loan are based on a pricing grid using the Company’s Funded Debt to Earnings before Interest, Taxes, Depreciation and Amortization (“EBITDA”) Ratio, as follows:

Funded Debt to EBITDA	Libor		Base Rate

Less than or equal to 1.0		Libor + 2.25%		0
Greater than 1.0 but less than or equal to 1.25		Libor + 2.50%		0
Greater than 1.25 but less than or equal to 1.50		Libor + 2.75%		0

As of March 31, 2005, the rate, calculated as Libor + 2.25%, was 4.81%.

The credit agreement includes certain restrictive financial covenants, measured quarterly, relating to net worth, maximum annual capital expenditures, funded debt to EBITDA ratio and fixed charges coverage ratio, as defined in the credit agreement. As of March 31, 2005, the Company was in compliance with all such covenants.

The credit agreement contains certain non-financial covenants, including but not limited to a prohibition on declaring and paying any cash dividends on any class of stock, except for the Series A and Series B preferred shares outstanding, provided that no default under the credit agreement exists as of the date of payment and such payment will not cause such a default. As of March 31, 2005, the Company was, and expects to be throughout 2005, in compliance with such non-financial covenants.

As of March 31, 2005, we had working capital of approximately $647,000 compared to a working capital deficit of approximately $158,000 as of December 31, 2004. The change in working capital resulted primarily from a decreases in accounts payable and accrued liabilities of $764,000 and deferred revenue of $100,000 offset by a decrease in deferred tax assets of $202,000 and a $140,000 decrease in prepaid and other current assets. The decreases in accounts payable and accrued liabilities are primarily attributable to lower overall operating expenses. We believe that our line of credit availability along with future operating cash flows will be sufficient to meet our working capital and capital expenditure requirements for the next twelve months.

We may, in the future, acquire businesses or products complementary to our business, although we cannot be certain that any such acquisitions will be made. The need for cash to finance additional working capital or to make acquisitions may cause us to seek additional equity or debt financing. We cannot be certain that such financing will be available, or that our need for higher levels of working capital will not have a material adverse effect on our business, financial condition or results of operations.

New Accounting Pronouncements

also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption. While the Company cannot estimate what those amounts will be in the future (because they depend on, among other things, when employees exercise stock options), the amount of operating cash flows recognized in prior periods for such excess tax deductions were not material to the Company’s consolidated financial position or results of operations.

Inflation

We do not believe that inflation has had a material effect on our results of operation. There can be no assurance, however, that our business will not be affected by inflation in the future.

Risk Factors

This section summarizes certain risks, among others, that should be considered by stockholders and prospective investors in the Company. Many of these risks are discussed in other sections of this report. If any of the following risks actually occur, our business, financial condition or results of operations could be materially adversely affected. In such case, the trading price of our common stock could decline, and you may lose all or part of your investment.

We primarily depend on our product. We currently derive a significant portion of our revenues from receivables financing; the majority of which flows through BusinessManager. Approximately 2% of our consolidated revenues derived from license fees from new agreements with client banks and approximately 61% derive from participation fees based on accounts receivables purchased by our bank clients from small businesses. We expect to continue to derive significant revenues from this product and related services. If total revenues derived from BusinessManager decline, our other products or services may not be sufficient to replace that lost revenue, so any events that adversely impact BusinessManager could adversely impact our business. We cannot be certain that we will be able to continue to successfully market and sell BusinessManager to both banks and their small business customers or that problems will not develop with BusinessManager that could materially impact our business.

We may be unable to promote BusinessManager to new and existing small business customers. Other than the initial contract fee and a small annual support fee, we do not generate any income from banks contracting to utilize BusinessManager unless small businesses finance their accounts receivable through our client banks. If we and our client banks cannot retain existing clients and convince potential small business customers of the benefits of BusinessManager, such businesses will not continue to use or initiate use of our products and services. Since small business customers of our client banks are the foundation of our business, their unwillingness to use BusinessManager could have a material adverse effect on our business, operating results and financial condition.

We depend on the banking industry for clients. BusinessManager is used almost exclusively by banks, primarily community banks. Due to our dependence upon the banking industry, any events that adversely impact the industry in general and community banks in particular, such as changed or expanded bank regulations, could adversely affect the Company and its operations. The banking industry is subject to supervision by several federal and/or state governmental regulatory agencies. Regulation of banks, especially with respect to receivable services such as BusinessManager, can indirectly affect our business. The use of BusinessManager by banks is currently in compliance with or is not subject to banking regulations. These regulatory agencies, however, could change or impose new regulations on banks, including modifying the banks’ ability to offer products and services similar to ours to their small business customers. These new regulations, if any, could prevent or lessen the use of our services by banks.

The banking industry is subject to industry consolidation, and we may lose customers with little notice. The banking industry is prone to consolidations that result from mergers and acquisitions. Other financial institutions that do not use our products and services may acquire our existing customer banks, which may result in our customer banks adopting competing products and services.

Lightyear owns a majority of the company’s stock and therefore effectively controls the company’s management and policies. The Lightyear Fund, L.P., an affiliate of Lightyear Capital (the “Lightyear Fund”), through its holdings of Company Series A Preferred Stock, and warrants convertible into common stock, beneficially owns, in the aggregate, approximately 53% of the Company’s common stock. As a result of the Lightyear Fund’s investment in the Company, the Company has agreed to use its best efforts to cause four Lightyear Fund nominees to serve on the Company’s Board of Directors, which is composed of seven directors. Four Lightyear nominees are currently serving on the Company’s Board. In addition, the Company is required to obtain the approval of holders of the Series A Preferred Stock prior to taking certain actions. The holders of the Series A Preferred Stock have certain pre-emptive rights to participate in future equity financings. In view of its large percentage of ownership and its rights as the holders of the Series A Preferred Stock, the Lightyear Fund effectively controls the Company’s management and policies, such as the appointment of new management and the approval of any other action requiring the approval of the stockholders, including any amendments to the Company’s certificate of incorporation, a sale of all or substantially all of the Company’s assets or a merger. In addition, the Lightyear fund has registration rights with respect to the shares of the Company common stock that it beneficially owns. These rights generally became exercisable after July 18, 2004. Any decision by the Lightyear Fund to exercise such registration rights and to sell a significant amount of its shares in the public market could have an adverse effect on the price of the Company’s common stock.

We may be unable to successfully market our products and services to new client banks or to retain current client banks. Our success depends to a large degree on our ability to convince prospective client banks to utilize BusinessManager and offer it to small businesses. Failure to maintain market acceptance, retain clients or successfully expand our offered services could adversely affect our business, operating results and financial condition. We have spent, and will continue to spend, considerable resources educating potential customers about our products and services. Even with these educational efforts, however, we may not be able to maintain market acceptance and client retention. In addition, as we continue to offer new products and expand our services, existing and potential client banks or their small business customers may be unwilling to accept the new products or services.

We may be unable to attract, hire, or retain enough qualified sales and marketing personnel. If we are unable to implement our growth plans and strategies, our business, operating results and financial condition could be adversely affected. An important part of our sales strategy is to attract, hire and retain qualified sales and marketing personnel in order to maintain our marketing capabilities in our current markets and expand the number of markets we serve. Since competition for experienced sales and marketing personnel is intense, we cannot be certain that we will be able to attract and retain enough qualified sales and marketing personnel or that those we do hire will be able to generate new business at the rate we currently expect. If the Company is unable to hire and retain enough qualified sales and marketing personnel or those we hire are not as productive as we expect, the Company may not be able to implement its sales plans.

We may be unable to manage growth of our business. Our business has the potential to grow in size and complexity. If our management is unable to manage growth effectively, our business, operating results and financial condition could be adversely affected. Any new sustained growth would be expected to place a significant strain on our management systems and operational resources. We anticipate that new sustained growth, if any, will require us to recruit, hire and retain new managerial, finance, sales, marketing and support personnel. We cannot be certain that we will be successful in recruiting, hiring or retaining such personnel. Our ability to compete effectively and to manage our future growth, if any, will depend on our ability to maintain and improve operational, financial, and management information systems on a timely basis and to expand, train, motivate and manage our work force. If we begin to grow, we cannot be certain that our personnel, systems, procedures, and controls will be adequate to support our operations. Also, one element of our growth strategy is to actively evaluate and pursue strategic alliances with businesses that are complementary to the Company’s business. We cannot be certain that we will be able to integrate fully any such alliances with our existing operations or otherwise implement our growth strategy.

The failure to execute our growth plans may impact our ability to remain a publicly traded company. Part of our business strategy involves growth either through the development of new products or the formation of strategic alliances. These growth plans will require a substantial expenditure of time, money and other valuable resources. Not only does this take resources away from our current business, but there is the chance that our strategy will not ultimately be successful. In such event, it is possible that the continued costs associated with being a public traded company will outweigh the anticipated organic growth of our current business, which could result in our being delisted from the Nasdaq Smallcap Market or engaging in a going private transaction.

Our plans to expand the number of products and services offered may not be successful and may lower our overall profit margin. Part of our business strategy is to expand our offering of products and services. We believe that we can provide these services profitably, but such services may generate a lower profit margin than our current products and services. As a result, by offering additional products and services we may lower our overall profit margin. Although gross revenues would likely increase, the lowering of our profit margin may be viewed negatively by the stock market, possibly resulting in a reduction in our stock price.

As stated elsewhere in this filing, we are engaged in introducing several new products to our customer base. Although our research leads us to believe that markets and customers exist for this expansion, there can be no assurances that the introduction and sales of these new products will be sufficient for us to recover our investment in costs.

Our products and services may not be as successful in a slower economy. Since the introduction of BusinessManager in 1991, the United States economy generally has been relatively strong. If the United States economy weakens or enters into a recession or depression, our client banks and their small business customers may view the services and benefits provided by BusinessManager differently and may be reluctant to use the products and services we provide. In addition, in an economic recession or depression, the customers of small businesses may reduce their purchases of goods and services, thus reducing accounts receivable eligible for our solution. This development could have a material adverse effect on our business, operating results and financial condition.

We may be unable to compete in the financial services market. The market for small business financial services is competitive, rapidly evolving, fragmented and highly sensitive to new product introductions and marketing efforts by industry participants. Fluctuations in interest rates and increased competition for services similar to BusinessManager could lower our market share and negatively impact our business and stock price. The Company faces primary competition from a number of companies that offer to banks products similar to BusinessManager. However, we believe that we are the largest of the companies offering these services in terms of revenues and number of client banks under contract.

We also compete with banks that use their internal information technology departments to develop proprietary systems or purchase software from third parties to offer similar services to small businesses. In addition, we compete with traditional sources of financial services to small businesses such as lines of credit, amortizing loans and factoring. Many banks and other traditional providers of financing are much larger and more established than Private Business, have significantly greater resources, generate more revenues and have greater name recognition. We cannot be certain our competitors will not develop products and services comparable or superior to those that we have developed or adapt more quickly to new technologies, evolving industry trends or changing small business requirements. Most providers of traditional sources of financing have already established relationships with small businesses may be able to leverage these relationships to discourage these customers from purchasing the BusinessManager solution or persuade them to replace our products with their products.

We expect that competition will increase as other established and emerging companies enter the accounts receivable financing market, as new products and technologies are introduced and as new competitors enter the market. In addition, as we develop new services, we may begin competing with companies with whom we have not previously competed. Increased competition may result in price reductions, lower profit margins and loss of our market share, any of which could have a material adverse effect on our business, operating results and financial condition.

We are dependent upon our key employees. Our future performance will also largely depend on the efforts and abilities of our executive officers, as well as our key employees and our ability to retain them. The loss of any of our executive officers or key employees could have a material adverse effect on our business, operating results and financial condition.

Our charter, bylaws and Tennessee law contain provisions that could discourage a takeover. Our charter, bylaws and Tennessee law contain provisions that could make it more difficult for a third party to obtain control of the Company. For example, our charter provides for a staggered board of directors, restricts the ability of stockholders to call a special meeting and prohibits stockholder action by written consent. Our bylaws allow the board to expand its size and fill any vacancies without stockholder approval. In addition, the Tennessee Business Corporation Act contains provisions, such as the Tennessee Business Combination Act and the Tennessee Greenmail Act, that impose restrictions on stockholder actions intended to gain or exercise control over the Company.

We may be unable to adequately protect our proprietary technology. Our success and ability to compete are dependent largely upon our proprietary technology. Third party claims against our proprietary technology could negatively affect our business. We cannot be certain that we have taken adequate steps to deter misappropriation or independent third-party development of our technology. In addition, we cannot be certain that third parties will not assert infringement claims in the future or, if infringement claims are asserted, that such claims will be resolved in our favor. Although we are not currently subject to any dispute either protecting our proprietary technology or asserting a third party claim against our proprietary technology, any infringement claims resolved against us could have a material adverse effect on the Company’s business, operating results and financial condition.

The failure of our network infrastructure and equipment would have a material effect on our business. Failure of our network infrastructure and equipment, upon which our business is greatly dependent, as well as the occurrence of significant human error, a natural disaster or other unanticipated problems could halt our services, damage network equipment and result in substantial expense to repair or replace damaged equipment. In addition, the failure of our telecommunications providers to supply the necessary services could also interrupt our business, in particular, the application hosting and transaction processing services we offer to our client banks via secure Internet connections. The inability to supply these services to our customers could negatively affect our business, operating results and financial condition, and may also harm our reputation.

Private Business relies on the technological infrastructure of its client banks and their individual customers. The success of the products and services offered by Private Business depends, to a degree, on the technological infrastructure and equipment of its client banks and their small business customers. Private Business provides application hosting and transaction processing services to its client banks that require some level of integration with the client banks’ technological infrastructure. In addition, management services and access to information related to the Private Business products are offered to each client bank and their customers through the Private Business portal at BusinessManager.com. Proper technical integration between Private Business and its client banks, as well as continued accessibility of the BusinessManager.com portal is critical to the successful provision of services by Private Business. A failure of a client bank’s infrastructure or the inability to access BusinessManager.com for any reason could negatively affect the business, financial condition and results of Private Business’s operations.

Because our business involves the electronic storage and transmission of data, security breaches and computer viruses could adversely affect us. Our online transaction processing systems electronically store and transmit sensitive business information of our customers. The difficulty of securely storing confidential information electronically has been a significant issue in conducting electronic transactions. We may be required to spend significant capital and other resources to protect against the threat of security breaches and computer viruses, or to alleviate problems caused by breaches or viruses. To the extent that our activities or the activities of our customers involve the storage and transmission of confidential information, security breaches and viruses could expose us to claims, litigation and other possible liabilities. Any inability to prevent security breaches or computer viruses could also cause existing customers to lose confidence in our systems and could inhibit our ability to attract new customers.

Private Business’s revenues declined in 2004 and in the first quarter of 2005 and may continue to decline. Private Business’s revenues declined in 2004 as compared to 2003 and in the first quarter of 2005 compared to the first quarter of 2004. Although the Company has previously shown increased revenue growth, Private Business’s revenue may not grow in the future. This could cause the financial results of the company to suffer and have a negative effect on the price of the Private Business common stock.

Private Business may not be able to use the tax benefit from its operating losses. At December 31, 2004, Private Business Inc. had available federal net operating losses, or NOLs, of approximately $44.2 million that will expire beginning in 2011 if not used. Approximately $38.7 million of these NOL’s were acquired in connection with the Company’s merger with Towne Services, Inc. The amount of NOLs available to Private Business in any given year will be limited by Section 382 of the Internal Revenue Code. This limitation could be material and only permit Private Business to realize a small portion of the potential tax benefit of the NOLs. Private Business estimates it will be able to realize approximately $9.6 million of these NOLs, which have been recorded as a $3.7 million deferred tax asset at December 31, 2004. To the extent that Private Business is not permitted to use these NOLs in future years, some NOLs will not be realized before they expire.

Increased fraud committed by small businesses and increased uncollectible accounts of small businesses may adversely affect our business. Small business customers from time to time fraudulently submit artificial receivables to our client banks using our products and services. In addition, customers from time to time keep cash payments that are mistakenly remitted to the small business when those payments should actually be remitted directly to the client bank. Our client banks are also susceptible to uncollectible accounts from small business customers. Many of the banks purchase insurance through us to insure against these risks. If the number and amount of fraudulent or bad debt claims increase, our client banks may decide to reduce or terminate their use of our products and services, reducing our ability to attract and retain revenue producing client banks. Further, our insurance carrier providing coverage for the insurance products may increase rates or cancel coverage, reducing our ability to produce that revenue and reducing our margins on that business.

Errors and omissions by our employees at the Private Business service center and any problems with systems or software may expose Private Business to claims and loss of business. Private Business currently conducts processing services for certain client banks and may do so for future client banks. Acting as processor for client banks may expose Private Business to claims about the quality of those services. Private Business employees may make errors, or technical or other events beyond our control may occur. These errors or events may cause banks to reduce their participation in the program or leave the program entirely, negatively affecting our revenue.

Access to capital for growth and new product introduction or acquisitions may not be available. A significant part of our growth plans rest on the development of new products, strategic acquisitions, and the formation of certain strategic alliances for both of our primary products. The execution of these plans may require that we have access to additional capital. Market conditions at the time we need this capital may preclude access to new capital of any kind or to capital on terms acceptable to us. Any of these developments could significantly hinder our ability to add new products or services.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

The Company is subject to market risk from exposure to changes in interest rates based on our financing and cash management activities. Our exposure relates primarily to our variable rate borrowings under the Bank of America Credit Facility, which totaled approxiately $3.4 million at March 31, 2005 and December 31, 2004. In the event that interest rates associated with these debt obligations were to increase 100 basis points, the annual impact on future cash flows would be approximately $34,000, representing the impact of increased interest expense on our existing variable rate borrowings.

Item 4.

Controls and Procedures

In an effort to ensure that the information the Company must disclose in its filings with the Securities and Exchange Commission is recorded, processed, summarized, and reported on a timely basis, the Company’s principal executive officer and principal financial officer have evaluated the effectiveness of the Company’s disclosure controls and procedures, as defined in Exchange Act Rules 13a-15(e) and 15d-15(e), as of March 31, 2005. Based on such evaluation, such officers have concluded that, as of March 31, 2005, the Company’s disclosure controls and procedures were effective in timely alerting them to information relating to the Company required to be disclosed in the Company’s periodic reports filed with the SEC. There has been no change in the Company’s internal control over financial reporting during the quarter ended March 31, 2005 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II – Other Information

Item 1.

Legal Proceedings

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.

Item 6.

Exhibits

3.1 –	Amended and Restated Charter of the Company (incorporated by reference to Exhibit 3.1 to the Company’s Registration Statement on No. 333-75013 Form S-1)

3.2 –	Amended and Restated By-laws of the Company (incorporated by reference to Exhibit 3.2 to the Company’s Registration Statement on No. 333-75013 Form S-1)

31.1 –	Certification pursuant to Rule 13a – 14(a)/15d – 14(a) – Chief Executive Officer

31.2 –	Certification pursuant to Rule 13a – 14(a)/15d – 14(a) – Chief Financial Officer

32.1 –	Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 – Chief Executive Officer

32.2 –	Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 – Chief Financial Officer

Signatures

Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	PRIVATE BUSINESS, INC.
		(Registrant)

Date: May 12, 2005	By:	/s/ HENRY M. BAROCO

		Henry M. Baroco Chief Executive Officer

Date: May 12, 2005	By:	/s/ J. SCOTT CRAIGHEAD

		J. Scott Craighead Chief Financial Officer