| PRIVATE BUSINESS INC Item 1A Risk Factors This section summarizes certain risks, among others, that shareholders and prospective investors should consider |
| If any of the following risks actually occurs, 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 |
| Additional risks of which we are presently unaware or that we currently consider immaterial may also impair our business operations and hinder our financial performance |
| Risks Related to Our Operations We have a limited operating history as a combined company under a new CEO Our Chief Executive Officer, Mr |
| Lynn Boggs, joined us in December 2005 when we merged with Captiva |
| Our previous Chief Executive Officer, Henry Baroco, became our President and Chief Operating Officer |
| We acquired Goldleaf and PTC in January 2006 |
| Our new management and our substantially expanded range of products and services make it extremely difficult to project our future performance |
| Therefore, investors will be unable to make historic comparisons regarding our prior operations |
| Furthermore, given this insufficient combined operating history, there can be no assurance that we will achieve any of our objectives |
| 11 If we are unable to integrate the business operations of Captiva, PTC and Goldleaf into our business operations, we will not realize the anticipated potential benefits from the acquisitions and our business could be adversely affected |
| The acquisitions of Captiva, PTC and Goldleaf involve the integration of companies that have previously operated independently |
| Successful integration of the acquired 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 acquisitions 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 the acquired entities’ ongoing businesses and possible inconsistencies in standards, controls, procedures and policies |
| Our integration of the acquired entities, including the integration and testing of internal controls and procedures that may be required with respect to these entities to comply with certain SEC rules and regulations as they become effective, 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 |
| If the combined company experiences losses, we could experience difficulty meeting our business plan and our stock price could be negatively affected |
| We may not be able to achieve profitability as we implement our business plan for the combined entity |
| Any failure to achieve or maintain profitability could negatively affect the market price of our common stock |
| Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis |
| If our revenues grow more slowly than we anticipate, or if our operating expenses exceed our expectations and cannot be adjusted accordingly, our business operations and financial results will suffer |
| We anticipate that the combined company will incur significant product development, administrative, and sales and marketing expenses |
| Any failure to increase revenues significantly would also harm our ability to achieve and maintain profitability |
| As a result of our recent acquisitions, our debt to equity ratio has increased and exposes us to greater risks |
| To finance the cash portion of the acquisition consideration, our debt has increased by approximately dlra13dtta9 million since September 30, 2005 |
| This additional leverage may: • increase our vulnerability to general adverse economic and industry conditions; • limit our flexibility 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 covenants in our indebtedness, our ability to borrow additional funds |
| Competition, restrictions under our credit facility, market conditions and other factors may impede our ability to acquire other businesses and may inhibit our growth |
| We anticipate that we may derive a portion of our future growth through acquisitions |
| The success of this strategy depends on our ability to identify suitable acquisition candidates, reach agreements to acquire these companies, obtain necessary financing on acceptable terms and successfully integrate the operations of these businesses |
| In pursuing acquisition and investment opportunities, we may compete with other companies that have similar growth strategies |
| Many of these competitors are larger and have greater financial and other resources than we have |
| This competition may render us unable to acquire businesses that could improve our growth or expand our operations |
| Our acquisitions could result in integration difficulties, unexpected expenses, diversion of management’s attention and other negative consequences |
| Our growth strategy is partly based on making acquisitions |
| We plan to continue to acquire complementary businesses, products and services |
| We must integrate the technology, products and services, operations, systems and personnel of acquired businesses with our own and attempt to grow the acquired businesses as part of our company |
| The integration of other businesses is a complex process and places significant demands on our management, financial, technical and other resources |
| The successful integration of businesses we have recently acquired and may acquire in the future is critical to our future success, and if we are unsuccessful in integrating these businesses, our financial and operating performance could suffer |
| The risks and challenges associated with the acquisition and integration of acquired businesses include: 12 • we may be unable to centralize and consolidate our financial, operational and administrative functions with those of the businesses we acquire; • our management’s attention may be diverted from other business concerns; • we may be unable to retain and motivate key employees of an acquired company; • we may enter markets in which we have little or no prior direct experience; • litigation, indemnification claims and other unforeseen claims and liabilities may arise from the acquisition or operation of acquired businesses; • the costs necessary to complete integration may exceed our expectations or outweigh some of the intended benefits of the transactions we close; • we may be unable to maintain the customers or goodwill of an acquired business; and • the costs necessary to improve or replace the operating systems, products and services of acquired businesses may exceed our expectations |
| We may be unable to integrate our acquisitions with our operations on schedule or at all |
| We cannot assure you that we will not incur large accounting charges or other expenses in connection with acquisitions or that our acquisitions will result in cost savings or sufficient revenues or earnings to justify our investment in, or our expenses related to, these acquisitions |
| As a result of the recent acquisitions, some of the acquired entities’ current clients may choose to discontinue their business relationship with us |
| Although we anticipate that the acquired entities’ existing customers will view the acquisitions as a benefit, some of the acquired entities’ existing customers may decide to discontinue their business relationship with us because of the acquisitions |
| We may be unable to manage growth of our business |
| We intend to grow our business 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 will 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 |
| In addition, one element of our growth strategy is to actively evaluate and pursue strategic alliances with businesses that are complementary to our 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 |
| We generate a substantial portion of our revenues from receivables financing |
| We currently derive a significant portion of our revenues from receivables financing; the majority of which flows through BusinessManager |
| Historically, approximately 1prca of our consolidated revenues derived from license fees from new agreements with client financial institutions and approximately 64prca derive from participation fees based on accounts receivables purchased by our financial institution clients from small businesses |
| We expect to continue to derive significant revenues from this product and related services |
| If the total revenues we derive from BusinessManager decline, our other products or services may not be sufficient to replace that lost revenue, so any events that adversely affect BusinessManager could adversely affect our business |
| We cannot be certain that we will be able to continue to successfully market and sell BusinessManager to both financial institutions and their small business customers or that problems will not develop with BusinessManager that could materially affect our business |
| 13 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 financial institutions contracting to use BusinessManager unless small businesses finance their accounts receivable through our client financial institutions |
| If we and our client financial institutions 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 financial institutions are the foundation of our business, their unwillingness to use BusinessManager could have a material adverse effect on our business, operating results and financial condition |
| We may be unable to market our products and services successfully to new client financial institutions or to retain current client financial institutions |
| Our success depends to a large degree on our ability to convince prospective client financial institutions to use our products |
| 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 financial institutions or their small business customers may be unwilling to accept the new products or services |
| The loss of our chief executive officer or other key employees could have a material adverse effect on our business |
| G Lynn Boggs, our chief executive officer, has substantial experience with our operations and our industry |
| Although we maintain key man life insurance on Mr |
| Boggs and we have an employment agreement with him, our customer and marketing relationships would likely be impaired and our business would likely suffer if we lost the services of Mr |
| Boggs, or of any other executive officer or key employee, for any reason |
| 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 to maintain and expand our marketing capabilities |
| Because 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 we are unable to hire and retain enough qualified sales and marketing personnel, or those we hire are not as productive as we expect, we may not be able to implement our sales plans |
| The failure to execute our growth plans may affect 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 we face the risk that our strategy will not ultimately be successful |
| In such event, it is possible that the continued costs associated with being a public traded company will outweigh the anticipated organic growth of our current business, which could result in our being delisted from the Nasdaq Smallcap Market or engaging in a going private transaction |
| Our plans to expand the number of products and services offered may not be successful and may lower our overall profit margin |
| 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 report, we have acquired several new products to offer to our customer base |
| Although we believe that markets and customers exist for this expansion, there can be no assurances that we can successfully sell these products at a rate sufficient for us to recover our investment |
| We may be unable to compete in the financial services market |
| The market for community-minded financial institutions and small business financial services is highly competitive |
| We face primary competition from a number of companies that offer to financial institutions products similar to our own, and many of these competitors are much larger and have many more resources than we do |
| 14 We also compete with financial institutions that use their internal information technology departments to develop proprietary systems or purchase software from third parties to offer similar services |
| In addition, we compete with traditional sources of financial services to small businesses such as lines of credit, amortizing loans and factoring |
| Many financial institutions and other traditional providers of financing are much larger and more established than we are, 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 |
| In addition, as we expand our service offerings, 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 may be unable to protect our proprietary technology adequately |
| 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 development of our technology by others |
| 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 our 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, on which our business depends, 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 financial institutions 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 |
| We rely on the technological infrastructure of our client financial institutions and their individual customers |
| The success of the products and services we offer depends, to a degree, on the technological infrastructure and equipment of our client financial institutions and their small business customers |
| We provide application hosting and transaction processing services to our clients that require some level of integration with the client’s technological infrastructure |
| Proper technical integration between our clients and us is critical to our being able to provide the services we have agreed to provide |
| A failure of a client’s infrastructure for any reason could negatively affect our business, financial condition and results |
| 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 |
| 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 clients 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 clients |
| Our clients are also susceptible to uncollectible accounts from small business customers |
| If the number and amount of fraudulent or bad debt claims increase, our clients may decide to reduce or terminate their use of our products and services, reducing our ability to attract and retain revenue producing clients |
| 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 |
| 15 Errors and omissions by our employees at our service center and any problems with systems or software may expose us to claims and loss of business |
| We currently conduct core processing services for some of our financial institution clients and expect to grow this part of our business in the future |
| Acting as a processor for clients may expose us to claims about the quality of those services |
| Our employees may make errors, or technical or other events beyond our control may occur |
| These errors or events may adversely affect our business and financial results |
| 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 strategic alliances for our primary products |
| To execute the plans as we intend, we will need 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 |
| We are subject to government and private regulation, and an increase in regulatory requirements or tax burdens could adversely affect our business |
| Various federal and state regulatory agencies examine our data processing operations from time to time |
| These agencies can make findings or recommendations regarding various aspects of our operations, and we generally must follow those recommendations to continue our data processing operations |
| If we fail to comply with these regulations, our operations and processing revenues could be negatively affected |
| In addition, our business is subject to review by these regulatory agencies |
| If we do not conduct our business in compliance with applicable regulatory standards, our business and operations could be adversely affected |
| If our processing center or communications network suffers a systems failure or interruption, we may face customer service issues and be liable for damage suffered by our customers |
| Our operations depend on our ability to protect our processing center, network infrastructure and equipment |
| Damage to our systems or equipment, or those of third parties that we use, may be caused by natural disasters, human error, power and telecommunications failures, intentional acts of vandalism and similar events |
| Although we do have an off-site back-up server, we have only one processing center |
| Interruption in our processing or communications services could delay transfers of our customers’ data, or damage or destroy the data |
| Any of these occurrences could result in lawsuits or loss of customers and may also harm our reputation |
| If our products and services contain errors, we may lose customers and revenues and be subject to claims for damages |
| Our new products and services, and enhancements to our existing products and services, may have undetected errors or failures, or could fail to achieve market acceptance, despite testing by our current and potential customers and by us |
| If we discover errors after we have introduced a new or updated product to the marketplace, we could experience, among other things: • delayed or lost revenues while we correct the errors; • a loss of customers or delay in market acceptance; and • additional and unexpected expenses to fund further product development |
| Our agreements with our customers generally contain provisions designed to limit our exposure to potential product liability claims, such as disclaimers of warranties and limitations on liability for special, consequential and incidental damages |
| These provisions may not be effective because of existing or future federal, state or local laws or ordinances, or unfavorable judicial decisions |
| If our products and services fail to function properly, we could be subject to product liability claims, which could result in increased litigation expense, damage awards and harm to our business reputation |
| 16 Technological changes may reduce the demand for our products and services or render them obsolete |
| The introduction of new technologies and financial products and services can render existing technology products and services obsolete |
| We expect other vendors to introduce new products and services, as well as enhancements to their existing products and services, that will compete with our current products and services |
| To be successful, we must anticipate evolving industry trends, continue to apply advances in technology, enhance our existing products and services and develop or acquire new products and services to meet the demands of our customers |
| We may not be successful in developing, acquiring or marketing new or enhanced products or services that respond to technological change or evolving customer needs |
| We may also incur substantial costs in developing and employing new technologies |
| If we fail to adapt to changes in technologies, we could lose customers and revenues, and fail to attract new customers or otherwise realize the benefits of costs we incur |
| Risks Related to Our Industry We are not diversified and depend on a single industry |
| Our financial institution products and services are used almost exclusively by financial institutions, primarily community financial institutions |
| As a result, we are subject to the risks of providing services for a single industry |
| Due to our dependence upon the banking industry, any events that adversely affect the industry in general and community financial institutions in particular, such as changed or expanded financial institution regulations, could adversely affect us and our operations |
| A downturn in this industry would have a substantial negative impact on our business and operations |
| Financial institutions are subject to industry consolidation, and we may lose customers with little notice |
| The financial institution 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 customers and then convert them to competing products and services |
| Most of our contracts provide for a charge to the customer for early termination of the contract without cause, but these charges are insufficient to replace the recurring revenues that we would have received if the financial institution had continued as a customer |
| The banking industry is highly regulated, and changes in banking regulations could negatively affect our business |
| Our financial institution customers are subject to the supervision of several state and federal government regulatory agencies |
| Regulation of financial institutions, especially with respect to receivable services such as BusinessManager, can indirectly affect our business |
| The use of our products by financial institutions is currently in compliance with or is not subject to banking regulations |
| These regulatory agencies, however, could change or impose new regulations on financial institutions, including modifying the financial institutions’ 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 financial institutions |
| 17 Risks of Owning Our Stock Lightyear owns a majority of the company’s stock and therefore effectively controls the company’s management and policies |
| Lightyear, through its holdings of our Series A and Series C Preferred Stock, and warrants convertible into common stock, beneficially owns, in the aggregate, approximately 50prca of the our common stock |
| As a result of Lightyear’s investment in us, we have agreed to use our best efforts to cause four Lightyear nominees to serve on our board of directors, which is composed of seven directors |
| Four Lightyear nominees are currently serving on our board |
| In addition, we are required to obtain the approval of holders of the Series A Preferred Stock before taking certain actions |
| The holder of the Series A Preferred Stock has certain pre-emptive rights to participate in future equity financings |
| In view of its large percentage of ownership and its rights as the holder of the Series A Preferred Stock, Lightyear effectively controls our management and policies, such as the appointment of new management and the approval of any other action requiring the approval of the shareholders, including any amendments to our charter, a sale of all or substantially all of our assets or a merger |
| In addition, Lightyear has registration rights with respect to the shares of our 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 our common stock |
| We may not be able to use the tax benefit from our operating losses |
| At December 31, 2005, we had available federal net operating losses, or NOLs, of approximately dlra40dtta8 million that will expire beginning in 2011 if not used |
| We acquired approximately dlra37dtta6 million of these NOLs in connection with our 2001 merger with Towne Services, Inc |
| Section 382 of the Internal Revenue Code limits the amount of NOLs available to us in any given year |
| This limitation permits us to realize only a small portion of the potential tax benefit of the NOLs each year |
| We estimate that we will be able to realize approximately dlra5dtta2 million of the Towne Services NOLs, which we recorded as a dlra1dtta9 million deferred tax asset at December 31, 2005 |
| 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 us |
| For example, our charter provides for a staggered board of directors, restricts the ability of shareholders to call a special meeting and prohibits shareholder action by written consent |
| Our bylaws allow the board to expand its size and fill any vacancies without shareholder approval |
| In addition, the Tennessee Business Corporation Act contains the Tennessee Business Combination Act and the Tennessee Greenmail Act, which impose restrictions on shareholder actions |
| Future sales of shares of our common stock will dilute the ownership of our current investors and may negatively affect our stock price |
| To carry out our growth strategies, we plan to acquire other businesses and products using a combination of our stock and cash, and we may also sell additional shares of our stock to raise money for expanding our operations |
| The issuance of shares of our common stock in either case could dilute the ownership interest of current investors |
| If our shareholders sell substantial amounts of our common stock, the market price of our common stock could fall |
| These sales also might make it more difficult for us to sell equity securities in the future at a time and price that we deem appropriate |
| As of March 10, 2006, 15cmam808cmam652 shares of common stock are outstanding, 19cmam787cmam879 shares of common stock are issuable to Lightyear under the warrants it holds, 6cmam893cmam119 shares of common stock can be acquired on the exercise of outstanding options, 821cmam574 shares of common stock are reserved for future issuance under stock option plans and up to 1cmam212cmam121 common shares could be issued as contingent consideration related to the Captiva merger |
| Our issuance of additional shares of common stock on the exercise of warrants or options would also dilute the ownership interest of current investors |