PRIVATE BUSINESS INC - 10-Q Quarterly Report

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.

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.


			Page No.

Part I – Financial Information
	Item 1 –	Financial Statements
		Unaudited Consolidated Balance Sheets As of March 31, 2003 and December 31, 2002		3
		Unaudited Consolidated Statements of Operations for the three months ended March 31, 2003 and 2002		4
		Unaudited Consolidated Statements of Cash Flows for the three months ended March 31, 2003 and 2002		5
		Notes to Unaudited Consolidated Financial Statements		6 -12
	Item 2 –	Management’s Discussion and Analysis of Financial Condition and Results of Operations		13 - 23
	Item 3 –	Quantitative and Qualitative Disclosures About Market Risk		23
	Item 4 –	Disclosure Controls and Procedures		23

Part II – Other Information
	Item 1 –	Legal Proceedings		24 - 25
	Item 6 –	Exhibits and Reports on Form 8-K		26
Signatures				27
Certifications				28 - 31


			March 31,			December 31,
(in thousands, except per share data)			2003			2002

ASSETS
CURRENT ASSETS:
	Cash and cash equivalents		$	971		$	1,146
	Accounts receivable — trade, net of allowance for doubtful accounts of $444 and $632, respectively			6,223			6,726
	Accounts receivable — other			185			420
	Deferred tax assets			1,226			1,009
	Prepaid and other current assets			1,428			1,613

		Total current assets		10,033			10,914

PROPERTY AND EQUIPMENT, NET				5,791			6,468
OTHER ASSETS:
	Software development costs, net			1,425			1,456
	Deferred tax assets			2,133			2,252
	Intangible and other assets, net			12,006			12,211

		Total other assets		15,564			15,919

		Total assets	$	31,388		$	33,301

LIABILITIES AND STOCKHOLDERS’ DEFICIT
CURRENT LIABILITIES:
	Accounts payable		$	2,141		$	2,039
	Accrued liabilities			5,392			5,718
	Dividends payable			615			575
	Deferred revenue			478			470
	Current portion of long-term debt and capital lease obligations			5,576			5,463

		Total current liabilities		14,202			14,265

REVOLVING LINE OF CREDIT				950			950
OTHER NONCURRENT LIABILITIES				436			623
LONG-TERM DEBT, net of current portion				21,815			23,190
CAPITAL LEASE OBLIGATIONS, net of current portion				59			148

		Total liabilities		37,462			39,176

COMMITMENTS AND CONTINGENCIES

PREFERRED STOCK, series B convertible, no par value; 20,000,000 shares authorized, 40,031 shares issued and outstanding				114			114

STOCKHOLDERS’ DEFICIT:
	Common stock, no par value; 33,333,333 shares authorized; shares issued and outstanding, 14,064,008 and 14,047,253, respectively			0			0
	Additional paid-in capital			(7,174	)		(7,195	)
	Retained earnings			986			1,206

		Total stockholders’ deficit		(6,188	)		(5,989	)

		Total liabilities and stockholders’ deficit	$	31,388		$	33,301

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


(in thousands, except per share data)			2003			2002

REVENUES:
	Participation fees		$	7,061		$	9,929
	Software license			76			132
	Retail planning services			2,358			2,745
	Maintenance and other			1,571			1,814

		Total revenues		11,066			14,620

OPERATING EXPENSES:
	General and administrative			5,635			6,178
	Selling and marketing			4,664			5,783
	Research and development			238			251
	Amortization			425			352
	Other operating expense, net			44			(44	)

		Total operating expenses		11,006			12,520

OPERATING INCOME				60			2,100
INTEREST EXPENSE, NET				352			495

INCOME (LOSS) BEFORE INCOME TAXES				(292	)		1,605
Income tax provision (benefit)				(114	)		626

NET INCOME (LOSS)				(178	)		979
Preferred stock dividends				40			40

NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS			$	(218	)	$	939

EARNINGS (LOSS) PER SHARE:
	Basic		$	(0.02	)	$	0.07

	Diluted		$	(0.02	)	$	0.07

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
	Basic			14,064			13,954

	Diluted			14,064			14,267

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


(in thousands)					2003			2002

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)					$	(178	)	$	979
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
		Write-off of debt issuance costs				0			34
		Depreciation and amortization				1,148			1,123
		Deferred taxes				(98	)		1,702
		Non-cash stock based compensation				0			46
		Gain on sale of certain property and equipment, net				0			(183	)
		Changes in assets and liabilities:
			Accounts receivable			738			70
			Prepaid and other current assets			185			(850	)
			Other assets			18			32
			Accounts payable			102			(524	)
			Accrued liabilities			(326	)		(2,319	)
			Deferred revenue			8			54
			Other noncurrent liabilities			(187	)		(183	)

				Net cash provided by (used in) operating activities		1,410			(19	)

CASH FLOWS FROM INVESTING ACTIVITIES:
	Additions to property and equipment					(46	)		(876	)
	Software development costs					(210	)		(170	)
	Proceeds from sale of property and equipment					0			2,201

				Net cash provided by (used in) investing activities		(256	)		1,155

CASH FLOWS FROM FINANCING ACTIVITIES:
	Repayments on long-term debt					(1,244	)		(1,223	)
	Repayments on capitalized lease obligations					(106	)		(96	)
	Early extinguishment of long-term debt					0			(2,188	)
	Proceeds from revolving line of credit, net					0			1,400
	Proceeds from exercise of employee stock options					0			10
	Stock issued through employee stock purchase plan					21			20

				Net cash used in financing activities		(1,329	)		(2,077	)

NET CHANGE IN CASH AND CASH EQUIVALENTS						(175	)		(941	)
CASH AND CASH EQUIVALENTS at beginning of year						1,146			2,648

CASH AND CASH EQUIVALENTS at end of period					$	971		$	1,707

SUPPLEMENTAL CASH FLOW INFORMATION:
	Cash payments for income taxes during period				$	100		$	34

	Cash payments of interest during period				$	352		$	502

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

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.

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.

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.

The following table illustrates the effect on net income (loss) available to common shareholders and earnings (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, 2003 and 2002, respectively.


(in thousands, except per share data)	2003			2002

Net income (loss) available to common shareholders, as reported	$	(218	)	$	939
Add: Stock-based employee compensation expense included in reported net income (loss), net of related tax effects		0			28
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(177	)		(229	)

Pro forma net loss	$	(395	)	$	(738	)

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

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 has completed its initial allocation of purchase price, resulting in identifiable intangible assets of approximately $220,000 and goodwill of approximately $570,000.

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 consolidated statement of operations.

Basic earnings (loss) per share is computed by dividing net income (loss) available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per share is computed by dividing net income (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, 2003 and 2002:


	Three Months Ended March 31,

(in thousands)	2003			2002

Net income (loss) available to common shareholders	$	(218	)	$	939

Weighted average common shares outstanding		14,064			13,954
Plus additional shares from common stock equivalent shares:
Options and convertible preferred stock		0			313

Adjusted weighted average common shares outstanding		14,064			14,267

For the three months ended March 31, 2003 and 2002, approximately 2.1 million and 2.0 million employee stock options and the preferred shares were excluded from diluted earnings (loss) per share calculations, as their effects were anti-dilutive.

Comprehensive income (loss) for the three months ended March 31, 2003 and 2002 was comprised solely of net income (loss).

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 March 31, 2003, the Company was in compliance with all such covenants.

As a result of the merger with Towne, 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.

As previously disclosed, Towne, two of its former officers and a current officer are defendants in a securities class action lawsuit filed in November 1999 in the District Court of Georgia, Atlanta Division. 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 Complaint seeks an unspecified amount of damages. Towne and its officers answered, denying liability. The parties reached a tentative settlement, which is subject to certain conditions including court approval, and which is memorialized in a Memorandum of Understanding signed January 17, 2003. Counsel for plaintiffs agreed to dismiss all claims and release all defendants for a negotiated settlement amount which will be funded by Towne’s directors and officers insurance carrier and Towne. The settlement funds were placed in escrow on February 21, 2003. Counsel for defendants estimate it will take a minimum of six months for the court to approve the class-action settlement. The parties also continue to pursue the question as to whether the carrier will also pay the cost of defense, including the attorney’s fees incurred by Towne, as provided by the underlying insurance policy.

(Towne Services, Inc. as the successor to Banking Solutions, Inc., Bane Leasing.Com, Inc., the successor to BSI Capital Funding, Inc., Moseley & Standerfer, P.C., David R. Frank, Don G. Shafer, and Shannon W. Webb)

This lawsuit was the result of Towne’s acquisition of Banking Solutions, Inc. (“BSI”) through a stock purchase made by its subsidiary, BSI Acquisition Corp. This lawsuit was filed in December 1998 in the District Court of Collin County, Texas. Plaintiff Edward Sullivan, Jr. was employed by BSI. Sullivan alleges, among other things, that he had a buy-out agreement with BSI and certain BSI shareholders under which, in certain circumstances, Sullivan was to receive a commission based on the gross sales price paid by any purchaser of BSI. Sullivan contends that BSI and the other shareholders allegedly fraudulently induced him to release them from the agreement by fraudulently misrepresenting the gross sales price paid by Towne’s subsidiary in the stock purchase. Sullivan contends that Towne is liable to him as the successor to BSI, and also for allegedly tortiously interfering with the agreement. Sullivan also contends Towne conspired with the other defendants to misrepresent the “gross purchase price.” The District Court of Collin County, Texas granted Towne’s Motion for Summary

Judgment on all claims. The Order was entered on July 15, 2002. PBI has sought indemnification from the BSI shareholders for its expenses in defending this action based on the provisions of the BSI stock purchase agreement.

As previously reported, Towne filed an action against six former BSI sales representatives and The Clipper Group, a company founded by one or more of former BSI sales representatives, on April 24, 2001 in the 277th District Court of Williamson County, Texas. Towne contends that the defendants formed a competing company, and are marketing a competing product, to Towne’s bank customers, in violation of the named individuals’ employment contracts, and in particular, in violation of trade secret and confidentiality provisions and non-solicitation of customer and employee provisions contained in those contracts. The parties have reached a settlement agreement in this matter, and executed the final settlement agreement on September 30, 2002. The pending claims were dismissed by agreement of the parties.

The Company is subject to various other legal proceedings, tax matters and other claims which arise in the ordinary course of business. In the opinion of management, the amount of any ultimate liability with respect to these actions will not materially affect the financial position or results of operations of the Company.

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 (loss) 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.

The following table summarizes the financial information concerning the Company’s reportable segments from continuing operations for the three months ended March 31, 2003 and 2002.


Tennessee		62-1453841

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

9020 Overlook Blvd., Brentwood, Tennessee		37027

(Address of principal executive offices)		(Zip Code)


Class		Outstanding as of April 30, 2003

Common Stock, no par value		14,087,397shares


Part 1 Financial Information
	Item 1. Financial Statements
		CONSOLIDATED BALANCE SHEETS — UNAUDITED
		CONSOLIDATED STATEMENTS OF OPERATIONS — UNAUDITED
		CONSOLIDATED STATEMENTS OF CASH FLOWS — UNAUDITED
		Notes to Consolidated Financial Statements — Unaudited
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3. Quantitative and Qualitative Disclosures About Market Risk
	Item 4. Disclosure Controls and Procedures
PART II – Other Information
	Item 1. Legal Proceedings
	Item 6. Exhibits and Reports on Form 8-K
Signatures
CERTIFICATIONS
Ex-10.0 Employment Agreement with Peter S. Scully
Ex-99.1 Section 906 Certification of the CEO
Ex-99.2 Section 906 Certification of the CFO


		2003			2002

Earnings (loss) per share:
	Basic—as reported	$	(0.02	)	$	0 .07

	Basic—pro forma	$	(0.03	)	$	(0.05	)

	Diluted—as reported	$	(0.02	)	$	0.07

	Diluted—pro forma	$	(0.03	)	$	(0.05	)

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