Goldleaf Financial Solutions 10-Q 2005 Q3 Quarterly report

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 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 by check mark whether the registrant is a shell company (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 October 31, 2005
Common Stock, no par value	14,815,377 shares

PRIVATE BUSINESS, INC.

Form 10-Q

For Quarter Ended September 30, 2005

INDEX

				Page No.
Part I – Financial Information
	Item 1 –	Financial Statements
			Unaudited Consolidated Balance Sheets as of September 30, 2005 and December 31, 2004	3
			Unaudited Consolidated Statements of Income for the Three Months ended September 30, 2005 and 2004	4
			Unaudited Consolidated Statements of Income for the Nine Months ended September 30, 2005 and 2004	5
			Unaudited Consolidated Statements of Cash Flows for the Nine Months ended September 30, 2005 and 2004	6
			Notes to Unaudited Consolidated Financial Statements	7 –14
	Item 2 –	Management’s Discussion and Analysis of Financial Condition and Results of Operations		15 – 30
	Item 3 –	Quantitative and Qualitative Disclosures About Market Risk		30
	Item 4 –	Controls and Procedures		30
Part II – Other Information
	Item 1 –	Legal Proceedings		30
	Item 2 –	Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities		30 - 31
	Item 6 –	Exhibits		32
Signatures				33

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Part 1
Financial Information

Item 1.   Financial Statements

PRIVATE BUSINESS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)	September 30 2005		December 31 2004
		(Unaudited)		(Audited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	144	$	7
Accounts receivable — trade, net of allowance for doubtful accounts of $370 and $241, respectively		4,897		4,506
Accounts receivable — other		30		104
Deferred tax assets		0		70
Investment in direct financing leases		2,670		0
Prepaid and other current assets		1,165		1,245
Total current assets		8,906		5,932
PROPERTY AND EQUIPMENT, NET		2,001		2,327
OPERATING LEASE EQUIPMENT, NET		191		0
OTHER ASSETS:
Software development costs, net		1,436		1,138
Deferred tax assets		2,078		2,704
Investment in direct financing leases, net of current portion		5,903		0
Intangible and other assets, net		9,535		9,235
Total other assets		18,952		13,077
Total assets	$	30,050	$	21,336
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable	$	1,927	$	1,861
Accrued liabilities		1,358		1,976
Dividends payable		540		0
Deferred tax liabilities		44		0
Deferred revenue		444		586
Current portion of non-recourse lease notes payable		2,772		0
Current portion of long-term debt		1,667		1,667
Total current liabilities		8,752		6,090
REVOLVING LINE OF CREDIT		1,600		110
NON-RECOURSE LEASE NOTES PAYABLE, net of current portion		5,255		0
OTHER NONCURRENT LIABILITIES		83		74
LONG-TERM DEBT, net of current portion		417		1,666
Total liabilities		16,107		7,940
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ EQUITY:
Common stock, no par value; 100,000,000 shares authorized; shares issued and outstanding, 14,802,347 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		4,162		3,716
Retained earnings		3,458		3,357
Total stockholders’ equity		13,943		13,396
Total liabilities and stockholders’ equity	$	30,050	$	21,336

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

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PRIVATE BUSINESS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME – UNAUDITED
For the Three Months Ended September, 2005 and 2004

(in thousands, except per share data)	2005			2004
REVENUES:
Participation fees	$	5,776		$	6,394
Software license		56			50
Retail planning services		2,176			2,272
Maintenance and other		1,484			1,282
Total revenues		9,492			9,998
OPERATING EXPENSES:
General and administrative		3,510			3,884
Selling and marketing		4,508			4,558
Research and development		49			58
Amortization		247			263
Other operating (income) expense, net		(11	)		19
Total operating expenses		8,303			8,782
OPERATING INCOME		1,189			1,216
INTEREST EXPENSE, NET		79			93
INCOME BEFORE INCOME TAXES		1,110			1,123
Income tax provision (benefit)		433			(531	)
NET INCOME		677			1,654
Preferred stock dividends		540			540
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS	$	137		$	1,114
EARNINGS PER SHARE:
Basic	$	0.01		$	0.08
Diluted	$	0.01		$	0.07
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic		14,756			14,303
Diluted		15,011			14,795

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

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PRIVATE BUSINESS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME – UNAUDITED
For the Nine Months Ended September 30, 2005 and 2004

(in thousands, except per share data)	2005		2004
REVENUES:
Participation fees	$	17,257	$	19,232
Software license		292		163
Retail planning services		6,571		6,736
Maintenance and other		4,072		3,866
Total revenues		28,192		29,997
OPERATING EXPENSES:
General and administrative		10,866		12,290
Selling and marketing		13,454		13,387
Research and development		167		292
Amortization		657		879
Other operating expense, net		8		1,740
Total operating expenses		25,152		28,588
OPERATING INCOME		3,040		1,409
INTEREST EXPENSE, NET		219		382
OTHER INCOME		0		(265	)
INCOME BEFORE INCOME TAXES		2,821		1,292
Income tax provision (benefit)		1,100		(462	)
NET INCOME		1,721		1,754
Preferred stock dividends		1,620		1,523
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS	$	101	$	231
EARNINGS PER SHARE:
Basic	$	0.01	$	0.02
Diluted	$	0.01	$	0.01
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic		14,664		14,193
Diluted		14,996		14,675

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

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PRIVATE BUSINESS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS – UNAUDITED
For the Nine Months Ended September 30, 2005 and 2004

(in thousands)	2005			2004
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	1,721		$	1,754
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		1,558			2,296
Depreciation on fixed assets under operating leases		18			—
Deferred taxes		740			614
Write-off of debt issuance costs		—			780
Deferred gain on land sale		(11	)		(11	)
Loss on asset disposal		16			—
Changes in assets and liabilities:
Accounts receivable, net		(148	)		240
Prepaid and other current assets		82			413
Accounts payable		(298	)		(86	)
Accrued liabilities		(981	)		(1,617	)
Deferred revenue		(142	)		—
Net cash provided by operating activities		2,555			4,383
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of leasing business, net of cash acquired		(508	)		—
Investment in direct financing leases		(201	)		—
Additions to property and equipment		(424	)		(315	)
Additions to intangibles and other assets		(96	)		—
Software development costs		(711	)		(569	)
Payments received on notes receivable		44			29
Net cash used in investing activities		(1,896	)		(855	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments on long-term debt		(1,249	)		(1,250	)
Repayments on capitalized lease obligations		—			(201	)
Repayments of other short-term borrowings		—			(414	)
Extinguishment of long-term debt facility with Fleet		—			(23,875	)
Proceeds from new debt facility with Bank of America, net of issuance cost of $286		—			7,214
Proceeds from revolving line of credit, net		1,490			750
Repayments of non-recourse lease financing notes payable		(293	)		—
Proceeds from non-recourse lease financing notes payable		364			—
Proceeds from exercise of employee stock options		369			321
Stock issued through employee stock purchase plan		27			23
Net proceeds from sale of Series A preferred shares and common stock warrant		—			16,894
Payments of declared preferred dividends		(1,080	)		(2,258	)
Repurchase of common stock		(150	)		—
Net cash used in financing activities		(522	)		(2,796	)
NET CHANGE IN CASH AND CASH EQUIVALENTS		137			732
CASH AND CASH EQUIVALENTS at beginning of year		7			1,586
CASH AND CASH EQUIVALENTS at end of period	$	144		$	2,318
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash payments for income taxes during period	$	694		$	254
Cash payments of interest during period	$	115		$	291
NONCASH INVESTING ACTIVITIES:
Issuance of 115,607 common shares as purchase consideration in the KVI leasing business acquisition	$	200		$	0

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

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

A.      Basis of Presentation

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

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

          These consolidated financial statements, footnote disclosures and other information should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 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, software development costs and income taxes. Please refer to our critical accounting policies as described in Management’s Discussion and Analysis of Financial Condition and Results of Operations in this Quarterly Report on Form 10-Q and in 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.

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          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 and nine month periods ended September 30, 2005 and 2004, respectively.

	Three Months Ended September  30,						Nine Months Ended September 30,
(in thousands, except per share data)	2005			2004			2005		2004
Net income available to common shareholders, as reported	$	137		$	1,114		$	101	$	231
Add (Deduct): Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(14	)		(77	)		229		(253	)
Pro forma net income (loss)		123			1,037			330		(22	)
Earnings (loss) per share:
Basic—as reported	$	0.01		$	0.08		$	0.01	$	0.02
Basic—pro forma	$	0.01		$	0.07		$	0.02	$	(0.00	)
Diluted—as reported	$	0.01		$	0.07		$	0.01	$	0.01
Diluted—pro forma	$	0.01		$	0.07		$	0.02	$	(0.00	)

Lease Accounting

          As a result of the KVI Capital, Inc. (“KVI”) acquisition, the Company is an equipment lessor. As such, the Company accounts for its leasing business in accordance with SFAS No. 13, Accounting for Leases. SFAS No. 13 requires lessors to evaluate each lease transaction and determine whether it qualifies as a sales-type, direct financing, leveraged, or operating lease. KVI’s leases fall into two of those catagories: direct financing and operating leases.

          For direct financing leases, the investment in direct financing leases caption consists of the sum of the minimum lease payments due during the remaining term of the lease and unguaranteed residual value of the leased asset. The difference between the total above and the cost of the leased asset is then recorded as unearned income. Unearned income is amortized to income over the lease term as to produce a constant periodic rate of return on the net investment in the lease.

          For leases classified as operating leases, the leased asset is recorded at cost and depreciated by the Company. Lease payments are recorded as rent income during the period earned.

C.      Reclassifications

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

D.      Acquisition of Leasing Business

          Effective August 1, 2005, the Company executed a stock purchase agreement to acquire 100% of the outstanding stock of KVI in exchange for cash consideration of $699,000 and common stock consideration of $200,000 (115,607 shares). In addition to the consideration at closing, the selling shareholder will be entitled to 20% of the operating income (as defined in the stock purchase agreement) of KVI for each of the three years

8

ending December 31, 2008. Simultaneous to the execution of the stock purchase agreement, the Company entered into a three year employment agreement with the principal selling shareholder of KVI. The operating results of KVI were included with those of the Company beginning August 1, 2005. The transaction was accounted for in accordance with SFAS No. 141, Business Combinations. The preliminary purchase price allocation is as follows:

Purchase Price:
Cash	$	699,000
Common shares (115,607 shares valued at $1.73 per share)		200,000
Total purchase price	$	899,000
Value assigned to assets and liabilities:
Assets:
Cash and cash equivalents	$	191,000
Accounts receivable, net of allowance of $145,000		238,000
Other current assets		2,000
Property and equipment		44,000
Operating lease equipment		209,000
Investment in direct financing leases		8,279,000
Goodwill/Identified intangibles		603,000
Liabilities:
Accounts payable		(312,000	)
Accrued liabilities		(418,000	)
Other noncurrent liabilities		(26,000	)
Non-recourse operating lease notes payable		(171,000	)
Non-recourse direct financing lease notes payable		(7,740,000	)
Total net assets	$	899,000

          The Company is continuing to evaluate and value any identifiable intangible assets of KVI and expects to complete this analysis by December 31, 2005. The above preliminary purchase price allocation may be adjusted based on the results of this analysis.

E.      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 PBI Holdings, LLC (together with its affiliates, “Lightyear”).  The Series A preferred shares carry a cash dividend rate of 10% per annum 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 it chooses to exercise its equity purchase right, to pay the same price per share as the employee stock options being exercised.

9

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 among the preferred stock, the common stock warrant and the additional common stock equity right based upon the estimated fair value of each instrument, resulting in $6.2 million allocated to the preferred shares and $10.7 million 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 derived 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% 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 a new credit facility (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.

          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 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 (The Company has the option of choosing the Libor or Base Rate):

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 Facility includes certain restrictive financial covenants relating to minimum net worth, maximum annual capital expenditures, funded debt to EBITDA ratio and fixed charge coverage ratio.

          The Bank of America Credit Facility 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 Facility, exists as of the date of the dividend payment and such dividend payment will not cause a default.

          The total net proceeds of both the Lightyear Transaction and the Bank of America Credit Facility were used to extinguish the Company’s 1998 credit facility.

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          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 one-time charges totaling approximately $1.7 million.

F.      Net Income Per Share

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

          The following table represents information necessary to calculate earnings per share for the three and nine month periods ended September 30, 2005 and 2004:

	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2005		2004		2005		2004
Net income available to common shareholders	$	137	$	1,114	$	101	$	231
Weighted average common shares outstanding		14,756		14,303		14,664		14,193
Plus additional shares from common stock equivalent shares:
Options and convertible preferred stock		255		492		332		482
Diluted weighted average common shares outstanding		15,011		14,795		14,996		14,675

          For the nine months ended September 30, 2005 and 2004, approximately 17.4 million and 17.1 million employee stock options, warrants and the Series B preferred shares were excluded from diluted earnings per share calculations, as their effects were anti-dilutive.

G.      Bank Covenants

          The Company’s Bank of America Credit Facility is secured by a pledge of all Company assets and imposes financial covenants and requirements and contains limitations on the Company’s ability to sell material assets, redeem capital stock and pay dividends, among other actions. As of September 30, 2005, the Company was in compliance with all such covenants.

H.      Legal Proceedings

          Except for the lawsuit 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.

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          Citizens Bank & Trust v. Private Business, Inc.

          This cause of action was filed against Private Business Inc. (PBI) in the District Court of Louisiana, in the Parish of Iberville on November 25, 2002.  Citizens Bank & Trust (Bank) alleges that PBI made factual misrepresentations regarding the viability of a merchant placed on the BusinessManager Program at Citizens Bank & Trust in 1999. The merchant subsequently defaulted on the receivables purchased by the Bank, and efforts to collect the receivables from the merchant by the Bank have been unsuccessful to date. The Bank is seeking damages from the Company in the amount of $500,000. This matter is set for trial on January 26, 2006, and PBI anticipates vigorously defending the alleged claims.  PBI believes based upon all available information that the outcome of this cause of action would not have a material affect on the Company’s financial position or operations.

I.        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 not been allocated to income 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 lease operations have been included in the accounts receivable financing segment.

          The following tables summarize the financial information concerning the Company’s reportable segments as of and for the three and nine months ended September 30, 2005 and 2004.

	Three Months Ended September 30, 2005						Three Months Ended September 30, 2004
(in thousands)	Accounts Receivable Financing		Retail Inventory Forecasting		Total		Accounts Receivable Financing		Retail Inventory Forecasting		Total
Revenues	$	7,316	$	2,176	$	9,492	$	7,726	$	2,272	$	9,998
Income before taxes	$	644	$	466	$	1,110	$	661	$	462	$	1,123
Assets	$	26,188	$	3,862	$	30,050	$	20,334	$	4,242	$	24,576
Total expenditures for additions to long-lived assets:	$	607	$	6	$	613	$	313	$	117	$	430

	Nine Months Ended September 30, 2005						Nine Months Ended September 30, 2004
(in thousands)	Accounts Receivable Financing		Retail Inventory Forecasting		Total		Accounts Receivable Financing		Retail Inventory Forecasting		Total
Revenues	$	21,621	$	6,571	$	28,192	$	23,261	$	6,736	$	29,997
Income before taxes	$	1,653	$	1,168	$	2,821	$	178	$	1,114	$	1,292
Assets	$	26,188	$	3,862	$	30,050	$	20,334	$	4,242	$	24,576
Total expenditures for additions to long-lived assets:	$	1,216	$	15	$	1,231	$	757	$	127	$	884

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J.        New Accounting Pronouncements

          On December 16, 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123R (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.

K.      Subsequent Event

          On October 21, 2005, the Company announced that a definitive merger agreement had been executed with privately-held Captiva Solutions, LLC (“Captiva”).  Captiva is a provider of technology products and services, which include core data processing and item processing, for community banks and small financial institutions.  The terms of the merger will result in a purchase price equal to $7.0 million ($6.0 in cash and $1.0 million in common shares consisting of 757,576 shares at closing), as well as, contingent consideration worth up to $1.6 million ( in common shares at $1.32 per share) based on results achieved in 2006. The transaction requires simple majority shareholder approval and as such, the Company has filed a proxy statement and scheduled a shareholder meeting for November 30, 2005. 

          In conjunction with the merger, the Board of Directors of the Company has approved the creation of the 2005 Long-Term Equity Incentive Plan which reserves approximately 5.0 million common shares for issuance under the plan. The Company’s shareholders must also approve this new plan at the November 30, 2005 shareholders meeting. At closing, a total of approximately 3.3 million common stock options were granted on October 20, 2005 and are contingent upon the closing of the merger at a strike price of $1.32 per share.

          Lightyear PBI Holdings, LLC which owns shares of Series A preferred stock and warrants giving it the right to cast approximately 52% of the votes entitled to be cast at the meeting, signed a voting agreement with Captiva in which it agreed, subject to the terms and conditions of the voting agreement, to vote all of its shares in favor of each of the proposals above at the shareholder meeting.

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          The merger transaction will be accounted for in accordance with SFAS No. 141. The operating results of Captiva will be included with those of the Company following the consummation of the acquisition upon approval at the Company’s shareholder meeting, which is scheduled for November 30, 2005.

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PRIVATE BUSINESS, INC.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Three and Nine Months Ended September 30, 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 those identified in the “Risk Factors” section and elsewhere in this Quarterly Report on Form 10-Q and in 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 provider of financial technology to community financial institutions and middle market businesses.  We offer two principal services directed at middle market businesses and middle market financial institutions. 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 approximately 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.

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          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 August 2005, we have added, through the acquisition of KVI Capital, leasing as a product offering for our community financial institutions. Our leasing product essentially provides our financial institution partners with a turn-key leasing solution, whereby we provide the leasing expertise from both a structuring and pricing perspective. We believe that a large number of community financial institutions can benefit from having a leasing solution.

Recent Developments

          On October 21, 2005, the Company announced that a definitive merger agreement had been executed with privately-held Captiva Solutions, LLC.  Captiva is a provider of technology products and services, which include core data processing and item processing, for community banks and small financial institutions.  The terms of the merger will result in a purchase price equal to $7.0 million ($6.0 in cash and $1.0 million in common shares consisting of 757,576 shares at closing), as well as, contingent consideration worth up to $1.6 million ( in common shares at $1.32 per share) based on results achieved in 2006. The transaction requires simple majority shareholder approval and as such, the Company has filed a proxy statement and scheduled a shareholder meeting for November 30, 2005. 

          In conjunction with the merger, the Board of Directors of the Company has approved the creation of the 2005 Long-Term Equity Incentive Plan which reserves approximately 5.0 million common shares for issuance under the plan. The Company’s shareholders must also approve this new plan at the November 30, 2005 shareholders meeting. At closing, a total of approximately 3.3 million common stock options were granted on October 20, 2005 and are contingent upon the closing of the merger at a strike price of $1.32 per share.

          Lightyear PBI Holdings, LLC which owns shares of Series A preferred stock and warrants giving it the right to cast approximately 52% of the votes entitled to be cast at the meeting, signed a voting agreement with Captiva in which it agreed, subject to the terms and conditions of the voting agreement, to vote all of its shares in favor of each of the proposals above at the shareholder meeting.

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          The merger transaction will be accounted for in accordance with SFAS No. 141. The operating results of Captiva will be included with those of the Company following the consummation of the acquisition upon approval at the Company’s shareholder meeting, which is scheduled for November 30, 2005.

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 and the disclosure of contingent assets and liabilities at the dates of the financial statements, and the reported amounts of revenues and expenses during the reporting periods.  On an on-going basis, management evaluates its critical accounting policies and estimates.

          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 agreements 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.   

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The initial software maintenance fee is included with the license fee and customer training and support fee.  Future annual software maintenance fees generated from our client banks start on the first anniversary date of the Business Manager license agreement and annually thereafter.  The annual software maintenance fee 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. 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 Business Manager 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.

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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.

	Third Quarter						Year to Date
	2005			2004			2005			2004
Revenues:
Participation fees		60.9	%		63.9	%		61.2	%		64.1	%
Software license		0.6	%		0.5	%		1.0	%		0.5	%
Retail planning services		22.9	%		22.7	%		23.3	%		22.5	%
Maintenance and other		15.6	%		12.9	%		14.5	%		12.9	%
		100.0	%		100.0	%		100.0	%		100.0	%
Operating Expenses:
General and administrative		37.0	%		38.9	%		38.5	%		41.0	%
Selling and marketing		47.5	%		45.6	%		47.7	%		44.6	%
Research and development		0.5	%		0.6	%		0.6	%		1.0	%
Amortization		2.6	%		2.6	%		2.3	%		2.9	%
Other operating expense (income), net		(0.1	)%		0.2	%		0.0	%		5.8	%
		87.5	%		87.9	%		89.2	%		95.3	%
Operating Income		12.5	%		12.1	%		10.8	%		4.7	%
Interest expense, net		0.8	%		0.9	%		0.8	%		1.3	%
Other income		0.0	%		0.0	%		0.0	%		0.9	%
Income Before Income Taxes		11.7	%		11.2	%		10.0	%		4.3	%
Income Tax Provision (Benefit)		4.6	%		(5.3	)%		3.9	%		(1.6	)%
Net Income		7.1	%		16.5	%		6.1	%		5.9	%
Preferred Stock Dividends		5.7	%		5.4	%		5.8	%		5.1	%
Net Income Available to Common Shareholders		1.4	%		11.1	%		0.3	%		0.8	%

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          Participation Fees. Participation fees decreased 9.7% and 10.3% to $5.8 million and $17.3 million for the third quarter and first nine months of 2005 compared to $6.4 million and $19.2 million for the comparable periods of 2004. The decreases are primarily due to a reduction in the total funding through our BusinessManager program to $977.4 million and $2.88 billion for the third quarter and first nine months of 2005, compared to $1.04 billion and $3.02 billion for the comparable periods of 2004.  The decrease in funding is due to a combination of two factors: fewer merchants funding through our BusinessManager program partially offset by higher funding levels at existing merchants. A portion of the decline is also attributable to a reduction in average participation rates. Overall, our effective participation rate was .59% and .60% for the third quarter and nine months of 2005, compared to .61% and .63% for the comparable periods of 2004. As a percentage of total revenues, participation fees accounted for 60.9% and 61.2% for the third quarter and nine month period ended Sesptember 30, 2005 compared to 63.9% and 64.1% for the comparable periods of 2004.

          Software license. Software license fees increased 12.0% to $56,000 and increased 79.1% to $292,000 for the third quarter and first nine months of 2005, compared to $50,000 and $163,000 for the comparable periods of 2004. The increase during the third quarter and nine months of 2005 is due to the change in our service period estimate to a four-month service period.  Software license fees accounted for 0.6% and 1.0% of total revenues for the third quarter and nine months ended September 30, 2005 compared to 0.5% for the comparable periods in 2004.

          Retail planning services. Retail planning services revenues declined 4.2% and 2.4% to $2.2 and $6.6 million during the third quarter and nine months ended September 30, 2005 as compared to $2.3 and $6.7 million for the comparable periods of 2004. The declines are due to fewer point-of-sale support customers and a decline in billing services provided by RMSA to its customers. As a percentage of total revenues, retail planning services accounted for 22.9% and 23.3% for the third quarter and first nine months of 2005 compared to 22.7% and 22.5% in the comparable periods of 2004.

          Maintenance and other. Maintenance and other fees increased 15.8% and 5.3% to $1.5 million and $4.1 million for the third quarter and nine months ended September 30, 2005 compared to $1.3 million and $3.9 million for the comparable periods 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, identification services to verify new clients and new accounts provided to our BusinessManager banks, and leasing. The increase of approximately $200,000 for the third quarter is attributable to our new leasing business acquired in August 2005 and our new MarketingManager and Free Checking products. Our referral fees increased 1.6% and 6.6% to $262,000 and $774,000 for the third quarter and first nine months of 2005 compared to $258,000 and $726,000 for the comparable periods in 2004.  Maintenance and other fees accounted for 15.6% and 14.5% of total revenues for the third quarter and nine month period ended September 30, 2005 compared to 12.9% for the comparable periods in 2004.

          Total revenues. Total revenues for the third quarter and first nine months of 2005 decreased 5.1% and 6.0% to $9.5 and $28.2 million compared to $10.0 and $30.0 million for the comparable periods of 2004.

          General and administrative. General and administrative expenses decreased 9.6% and 11.6% to $3.5 and $10.9 million for the third quarter and nine month period ended September 30, 2005 compared to $3.9 and $12.3 million for the comparable periods in 2004. The decreases for the third quarter and nine month period ended September 30, 2005, respectively, are primarily due to reductions in salary and benefits expense of approximately $400,000 and $890,000 as a result of reduced headcount and a shift in job responsibilities of certain individuals from general and administrative during 2004 to selling and marketing during 2005, as well as reduced depreciation expense of approximately $190,000 and $530,000 due to continued lower capital spending. 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 to 37.0% and 38.5% for the third quarter and nine month period ended September 30, 2005 compared to 38.9% and 41.0% for the same periods in the prior year.

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          Selling and marketing. Selling and marketing expenses were relatively constant for the third quarter and nine month period ended September 30, 2005 at $4.5 and $13.5 million compared to $4.6 and $13.4 million for the comparable periods of 2004. 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. Although selling and marketing expenses in total remained unchanged quarter to quarter and year to year, there were several significant fluctuations within this category.  Salaries and benefits expense increased by approximately $500,000 for the nine months ended September 30, 2005 as compared to the same period in 2004.  This is due to the shift in responsibilities as described above.  Marketing materials and fees increased $109,000 for the nine months ended September 30, 2005 as compared to the same period in 2004.  These increases are offset by decreases in commissions expense of $350,000 and recruiting expense of $207,000.  Commissions expense decreased due to lower than expected sales performance and recruiting expense decreased due to lower headcount with our Business Development Managers.  As a percentage of total revenue, selling and marketing expenses increased 4.2% and 6.9% to 47.5% and 47.7% for the third quarter and nine month period of 2005 compared to 45.6% and 44.6% for the comparable periods in 2004.

          Research and development. Research and development expenses decreased 15.5% and 42.8% to $50,000 and $166,000 for the third quarter and nine month period ended September 30, 2005 compared to $58,000 and $292,000 for the year earlier periods. These costs include the non-capitalizable direct costs associated with developing new versions of our products and other projects that have not yet reached technological feasibility. The decrease in costs for the third quarter and first nine months of 2005 was primarily due to more capitalized activity as a result of several projects reaching technological feasibility in early 2005.  As a percentage of total revenues, research and development expenses decreased to 0.5% and 0.6% for the third quarter and first nine months of 2005 compared to 0.6% and 1.0% for the same periods in the prior year.

          Amortization. Amortization expense decreased 6.1% and 25.3% to $247,000 and $658,000 for the third quarter and first nine months of 2005 compared to $263,000 and $879,000 for the comparable periods 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 for the first nine months of 2005 is due to amortization of the Fleet debt issuance costs ceasing on January 20, 2004 as a result of the Capital Event described in Note E of Notes to Consolidated Financial Statements.  The decrease for the third quarter of 2005 when compared to the same period in 2004 is the result of lower amortization expense for software development costs.  Amortization for software development costs begins when the project is released for general use to our customers.  During the third quarter of 2005, no projects were released.  As a result, amortization expense for the third quarter of 2005 related only to those projects released prior to the quarter.  

          Other operating expenses (income), net. Other operating expenses (income) for the three months ended September 30, 2005 were flat as compared to the same period in 2004. For the nine months ended September 30, 2005 other operating expenses decreased $1.7 million to $8,000 compared to $1.7 million for the same period of 2004.  As previously disclosed, for the first quarter of 2004, two one-time 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 Offiers liability insurance, which cost approximately $900,000.  In accordance with generally accepted accounting principles, the Company expensed the entire cost of this premium at the time of purchase.  

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          Operating income. As a result of the above factors, our operating income totaled $1.2 million and $3.0 million for the three and nine months period ended September 30, 2005, compared to operating income of $1.2 million and $1.4 million for the third quarter and nine months of 2004. As a percentage of total revenue, operating income was 12.5% and 10.8% for the third quarter and nine months of 2005 compared to 12.1% and 4.7% for the same periods in 2004.

          Interest expense, net. Interest expense, net decreased 15.1% and 42.7% to $79,000 and $219,000 for the third quarter and nine months ended September 30, 2005 compared to $93,000 and $382,000 for the comparable periods in 2004. The decrease for the first nine months of 2005 is primarily due to the reduction of our debt balances in 2004 as a result of the Capital Event discussed in Note E of Notes to Consolidated Financial Statements.  For the third quarter and nine months ended September 30, 2005, interest expense includes approximately $24,000 and $72,000 of debt issuance cost amortization.

          Other income. During the nine months ended September 30, 2004, the Company received proceeds totaling $266,000 relating to notes receivable from former officers of one of the Company’s subsidiaries.  These notes had previously been written-off as uncollectible; therefore, the collection resulted in this gain.

          Income tax provision. The income tax provision was approximately $433,000 and $1.1 million for the third quarter and nine months ended September 30, 2005 compared to a benefit of $531,000 and a benefit of $462,000 for the same periods in 2004. During September of 2004, the Company recorded a tax benefit of $972,000 relating to an income tax contingent liability for which the statue of limitations expired in September 2004. As a result, the effective tax rate for the quarter ended September 30, 2004 was (47.2%). The Company expects its effective tax rate to be approximately 39.0% in all future periods. As a percentage of income before taxes, the income tax rate was approximately 39.0% for the nine months of 2005.

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 nine months of 2005 our operating activities provided cash of approximately $2.6 million. We used approximately $1.9 million in our investing activities, consisting primarily of capital expenditures of $424,000 and $711,000 of software development costs, as well as $508,000 for the acquisition of the KVI leasing business. We currently estimate that total capital expenditures for 2005 will be approximately $500,000 (excluding expenditures for software development costs).

          Cash used in financing activities totaled $522,000 for the first nine months of 2005, which is the result of net proceeds of $1.5 million from draws against our line of credit as well as $396,000 of proceeds received from employee stock option exercises and stock purchases and $71,000 net proceeds from lease financing.  Offsetting these financing receipts were repayments of long-term debt totaling $1.2 million, dividend payments of $1.1 million, and repurchase of common stock of $150,000.

          The Company was the borrower under a credit agreement dated August 7, 1998 between the Company as borrower, Fleet National Bank as administrative agent and a syndicate of other lenders (the “1998 Credit Facility”). The 1998 Credit Facility was paid in full on January 20, 2004 using the net proceeds received from the Lightyear transaction and the net proceeds from the Bank of America Credit Facility. 

          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 September 30, 2005, $3.7 million was outstanding under the Bank of America Credit Facility.

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          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 (The Company has the option of choosing Libor or Base Rate):

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 September 30, 2005, the Company’s applicable borrowing rate, calculated as Libor + 2.25%, was 5.76%.

          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.  The credit agreement also 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, as defined in the credit agreement, exists as of the date of payment and such payment will not cause a default.  As of September 30, 2005, the Company was, and expects to be throughout 2005, in compliance with the credit agreement covenants.

          As of September 30, 2005, we had working capital of approximately $154,000 compared to a working capital deficit of approximately $158,000 as of December 31, 2004. The change in working capital resulted primarily from decreases in accrued liabilities, partially offset by an increase in accounts receivable.  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

          On December 16, 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123(R) (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.

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          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.

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 1% 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.

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          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.  Lightyear PBI Holdings, LLC, an affiliate of Lightyear Capital (“Lightyear”), through its holdings of Company Series A Preferred Stock, and warrants convertible into common stock, beneficially owns, in the aggregate, approximately 52% of the Company’s common stock.  As a result of Lightyear’s investment in the Company, the Company has agreed to use its best efforts to cause four Lightyear 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, Lightyear 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, Lightyear has registration rights with respect to the shares of the Company common stock that it beneficially owns. Any decision by Lightyear 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.

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          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 publicly 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.

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          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.

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          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 the first nine months of 2005 and may continue to decline. Private Business’s revenues declined during the first nine months of 2005 as compared to 2004.  Although the Company has previously shown 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.

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          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.

          If we are unable to complete the merger with Captiva Solutions, LLC, our business may be adversely affected.  If we do not complete the merger as we intend, our business and the market price of our stock price may be adversely affected, and we may be unable to find another way to grow our business. We must pay the costs related to the merger, such as legal, accounting and financial advisor fees, even if the merger does not close.

          The merger will result in dilution to our current shareholders.  The issuance of shares of our capital stock options to purchase common stock and warrants to purchase our capital stock in the merger and in connection with the related financing will dilute the voting power, book value, and ownership percentage of our existing shareholders.

          We may not realize the anticipated benefits from the merger.  We may not achieve the benefits we are seeking in the merger. There is no assurance that we can successfully integrate Captiva’s technology into our operations, that Captiva’s technology will provide an adequate platform to grow our combined business or that we will otherwise succeed in growing the business, or that the financial results of the combined company will meet or exceed the financial results that we would have achieved without the merger. As a result, our operations and financial results may suffer and the market price of our common stock may decline.

          If we are unable to successfully integrate the business operations of Captiva into our business operations after the merger, we will not realize the anticipated potential benefits from the merger and our business could be adversely affected.  The merger involves the integration of companies that have previously operated independently. Successful integration of Captiva’s operations with ours will depend on our ability to consolidate operations, systems and procedures, eliminate redundancies and reduce costs. If we are unable to do so, we will not realize the anticipated potential benefits of the merger, and our business and results of operations could be adversely affected. Difficulties could include the loss of key employees and customers, the disruption of our and Captiva’s ongoing businesses and possible inconsistencies in standards, controls, procedures and policies. Our integration of Captiva may be complex and time-consuming. Additionally, a number of factors beyond our control could prevent us from realizing any efficiencies and cost savings we expect.

          The debt we will incur to pay the cash portion of the merger consideration will increase our debt to equity ratio and expose us to greater risks.  To finance the cash portion of the merger consideration, our debt will increase by approximately $6.0 million. This additional leverage may:

• increase our vulnerability to general adverse economic and industry conditions;

• limit our flexibiilty in planning for, or reacting to, changes in our business and the financial technology industry, which may place us at a competitive disadvantage compared to our competitors that have less debt, and

• limit, along with the possible financial and other restrictive convenants in our indebtedness, our ability to borrow additional funds.

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We may borrow more than the $6.0 million needed to finance the cash portion of the merger consideration to pay for transaction costs and other working capital needs, which would further increase our risk. Any of the foregoing could have a material adverse effect on us and our operations and financial results.

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 long-term debt obligations that expire in 2007. 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 $37,000.

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 September 30, 2005.  Based on such evaluation, such officers have concluded that, as of September 30, 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 September 30, 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

          Except for the lawsuit 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.

     Citizens Bank & Trust v. Private Business, Inc.

          This cause of action was filed against Private Business Inc. (“PBI”) in the District Court of Louisiana, in the Parish of Iberville on November 25, 2002.  Citizens Bank & Trust (“Bank”) alleges that PBI made factual misrepresentations regarding the viability of a merchant placed on the BusinessManager Program at Citizens Bank & Trust in 1999. The merchant subsequently defaulted on the receivables purchased by the Bank, and efforts to collect the receivables from the merchant by the Bank have been unsuccessful to date. The Bank is seeking damages from the Company in the amount of $500,000. This matter is set for trial on January 26, 2006, and PBI anticipates vigorously defending the alleged claims.  PBI believes based upon all available information that the outcome of this cause of action would not have a material affect on the Company’s financial position or operations.

Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities

          During July 2005, the Company purchased a total of 40,800 shares of the Company’s common shares on the open market for $61,000. These repurchases are in accordance with the Company’s share repurchase plan initiated and announced in December 2004. The repurchase plan approved by the Board of Directors of the Company allows for the purchase of up to $500,000 of the Company’s common stock. As such, as of September 30, 2005, the Company has cumulatively purchased $150,000 of common shares, and therefore can purchase up to an additional $350,000 of common shares.  The share repurchase plan was originally scheduled to expire on December 1, 2005.  The Company’s Board of Directors has elected to extend the expiration date of the share repurchase plan to December 1, 2006.  All other terms and conditions of the share repurchase program remain unchanged.

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          On August 1, 2005, the Company sold 57,803 shares of its common stock (the “Stock”) to Donald V. Kincaid. The consideration for the Stock was the Company’s acquisition of all the issued and outstanding stock of KVI Capital, Inc., a Florida corporation (“KVI”) partially owned by Mr. Kincaid. The aggregate consideration paid to Mr. Kincaid for the acquisition was (i) the Stock, (ii) an additional 57,804 shares of the Company’s common stock paid into escrow, which Mr. Kincaid will receive on August 1, 2006 unless certain conditions occur, and (iii) 20% of the operating income of KVI for each of the fiscal years ending December 31, 2006, 2007, and 2008 (the “Earnout”). The Earnout will be payable 70% in cash and 30% in shares of the Company’s common stock unless the Company elects to pay the entire amount in cash. The Stock will not be registered under the Securities Act of 1933, as amended (the “Securities Act”) in reliance on private offering exemption under Section 4(2) of the Securities Act.

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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

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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:     November 14, 2005	By:	/s/ Henry M. Baroco
		Henry M. Baroco
		Chief Executive Officer
Date:     November 14, 2005	By:	/s/ J. Scott Craighead.
		J. Scott Craighead
		Chief Financial Officer

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