SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended September 30, 2003
OR
[_] TRANSITION REPORT UNDER SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO _______________
Commission File Number: 0-29459
PACEL CORP.
-------------------------------------
(Exact name of registrant as specified in its charter)
VIRGINIA 54-1712558
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification Number)
7900 Sudley Road, SUITE 601
MANASSAS, VIRGINIA 20109-3795
---------------------------------------- --------------------------------
(Address of principal executive offices) (ZIP Code)
Registrant's telephone number, including area code: (703) 257-4759
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 day: Yes [_] No [X]
Transitional Small Business Disclosure Format (check one) Yes [_] No [X]
State the number of Shares outstanding of each of the issuer's classes of common
equity, as of the latest date:
As of November 12, 2003 there were 909,877,945 shares of the Registrant's common
stock outstanding.
PACEL CORP. AND SUBSIDIARIES
Part I. FINANCIAL INFORMATION (unaudited)
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets F-1
Consolidated Statements of Operations F-3
Consolidated Statements of Cash Flows F-4
Notes to Consolidated Financial Statements F-6
Item 2. Management's Discussion and
Analysis of Financial Results of Operations 12
Item 3. Controls and Procedures 19
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 2. Changes in Securities 19
Item 3. Defaults upon Senior Securities 20
Item 4. Submission of Matters to Vote of Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits and Reports 21
Item 7. Signatures 22
PACEL CORP. AND SUBSIDIARIES
Consolidated Balance Sheets
September 30, December 31,
2003 2002
-------------- --------------
(Unaudited) (Audited)
ASSETS
Current assets:
Cash $ 180,995 $ 8,379
Accounts receivable 17,795 -0-
Stock subscription receivable 275,000 -0-
Prepaid expenses 35,409 -0-
Workers compensation insurance deposits 154,285 -0-
Other receivables -0- 112,499
-------------- --------------
Total current assets 663,484 120,878
-------------- --------------
Property and equipment, net of accumulated depreciation
of $139,810 and $128,140, respectively 113,059 24,961
-------------- --------------
Other assets:
Note receivable 600,000 -0-
Receivable - officers/stockholders 65,103 -0-
Other receivables 15,255 -0-
Goodwill 3,937,438 -0-
Security deposits 9,841 3,991
-------------- --------------
Total other assets 4,627,637 3,991
-------------- --------------
Total assets $ 5,404,180 $ 149,830
============== ==============
See accompanying notes to the consolidated financial statements.
F-1
PACEL CORP. AND SUBSIDIARIES
Consolidated Balance Sheets
(continued)
September 30, December 31,
2003 2002
-------------- --------------
(Unaudited) (Audited)
LIABILITIES AND STOCKHOLDERS' DEFECIT
Current liabilities:
Accounts payable $ 1,254,725 $ 1,353,022
Payroll and payroll related liabilities 2,312,898 -0-
Accrued expenses 326,486 234,602
Accrued expenses - officers 291,120 316,533
Loans payable - officers/stockholders -0- 639,776
Deferred client revenue 391,389 -0-
Current portion of long-term debt 990,958 873,750
Convertible debentures 70,000 -0-
Notes payable - bank 37,108 45,565
Income taxes payable 3,500 -0-
-------------- --------------
Total current liabilities 5,678,184 3,463,248
Long-term liabilities:
Notes payable 190,780 -0-
Convertible debentures 590,270 409,111
-------------- --------------
Total liabilities 6,459,234 3,872,359
Stockholders' equity (deficit):
Preferred stock, no par value, no liquidation value,
5,000,000 shares authorized, 1,000,000 shares
of 1997 Class A convertible preferred stock 11,320 11,320
Common stock, no par value, 2,000,000,000 and
650,000,000 shares authorized respectively,
568,875,083 and 21,184,591 shares issued
respectively 15,301,430 10,685,520
Cumulative currency translation adjustment (18,720) (18,720)
Accumulated deficit (16,349,084) (14,400,649)
-------------- --------------
Total stockholders' (deficit) (1,055,054) (3,722,529)
-------------- --------------
Total liabilities and stockholders' deficit $ 5,404,180 $ 149,830
============== ==============
See accompanying notes to the consolidated financial statements.
F-2
PACEL CORP. AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
Nine months ended Three months ended
September 30, September 30,
2003 2002 2003 2002
-------------- ------------- ------------- ------------
Revenue $ 2,507,291 $ 435,218 $ 1,369,370 $ 118,261
Cost of sales 1,898,953 403,702 984,874 90,890
-------------- ------------- ------------- ------------
Gross profit 608,338 31,516 384,496 27,371
Operating costs and expenses:
Research and development -0- 254,656 -0- 21,830
Sales, general and administrative 2,163,543 2,271,668 1,024,777 395,234
Depreciation and amortization 15,722 11,246 6,814 3,769
Interest expense 125,015 122,808 32,852 52,500
Financing costs 393,818 50,397 262,978 14,897
-------------- ------------- ------------- ------------
Total operating expenses 2,698,098 2,710,775 1,327,421 488,230
-------------- ------------- ------------- ------------
Other Income -0- -0- -0- 2,796
Operating loss from continuing operations
before extraordinary items and
discontinued operations (2,089,760) (2,679,259) (942,925) (458,063)
Write-off of loan receivable -0- (71,000) -0- (71,000)
Gain on write-off of extinguishment of debt -0- 426,150 -0- 426,150
Discontinued operations (Note 3):
Loss from discontinued operations of EBStor -0- (220,268) -0- -0-
Gain from disposal of EBStor -0- 177,817 -0- -0-
-------------- ------------- ------------- ------------
Loss before cumulative effect of accounting change (2,089,760) (2,366,560) (942,925) (102,913)
Cumulative effect of accounting change -0- (407,049) -0- -0-
-------------- ------------- ------------- ------------
Net Loss $ (2,089,760) $ (2,773,609) $ (942,925) $ (102,913)
============== ============= ============= ============
Net loss per common and common equivalent share:
Basic $ (0.01) $ (1.22) $ (0.00) $ (0.02)
Diluted $ (0.01) $ (1.22) $ (0.00) $ (0.02)
Weighted average shares outstanding:
Basic 193,620,431 2,274,786 400,935,214 4,938,504
Diluted 193,620,431 2,274,786 400,935,214 4,938,504
See accompanying notes to the consolidated financial statements.
F-3
PACEL CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
Nine months ended
September 30,
2003 2002
----------------- ----------------
(Unaudited) (Unaudited)
Cash flows from operating activities:
Net loss $ (2,089,760) $ (2,773,609)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Cumulative effect of accounting change -0- 407,049
Depreciation 15,722 11,246
Provision for bad debts -0- (1,311)
Other non-cash items 800,694 1,309,112
Gain on sale of EBStor -0- (177,817)
Increase (decrease) in cash from changes in:
Accounts receivable 4,643 324,819
Other receivables (55,395) 36,579
Inventory -0- 61,306
Insurance deposits 28,006 -0-
Prepaid expenses 7,133 -0-
Security deposits (600) (15,237)
Accounts payable (376,992) 34,185
Accrued expenses 62,717 8,751
Payroll and payroll related liabilities 611,785 -0-
Deferred revenue (881,937) -0-
Loans payable - officers/stockholders (36,023) 752,358
Income taxes payable -0- -0-
----------------- ----------------
Net cash (used in) operating activities (1,910,007) (22,569)
Cash flows from investing activities:
(Purchases) disposals of property and equipment (8,942) -0-
Notes receivable 50,000 (71,000)
Net cash received in acquisition 160,744 -0-
Cash used for acquisitions (105,000) -0-
----------------- ----------------
Net cash provided by (used in) investing activities 96,802 (71,000)
Cash flows from financing activities:
Repayments of notes payable (130,434) (125,362)
Issuance of convertible notes payable 1,106,770 25,000
Repayments from lines of credit (2,690) -0-
Proceeds from sale of common stock 1,012,275 150,000
----------------- ----------------
Net cash provided by financing activities 1,985,821 49,638
Effects of exchange rates on cash -0- (7,720)
----------------- ----------------
Net increase (decrease) in cash and cash equivalents 172,616 (51,651)
Cash and cash equivalents, beginning of period 8,379 65,761
----------------- ----------------
Cash and cash equivalents, end of period $ 180,995 $ 14,110
================= ================
See accompanying notes to the consolidated financial statements.
F-4
PACEL CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
(continued)
Nine months ended
September 30,
2003 2002
----------------- ----------------
(Unaudited) (Unaudited)
Supplemental disclosure of cash flow information:
Cash paid for interest $ 14,126 $ 6,298
================= ================
[BALANCE OF THIS PAGE INTENTIONALLY LEFT BLANK]
See accompanying notes to the consolidated financial statements.
F-5
PACEL CORP. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
September 30, 2003
Note 1. Basis of Presentation.
The unaudited financial statements included in the Form 10-QSB have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-QSB and
Item 310(b) of Regulation SB of the Securities and Exchange Act of 1934.
The financial information furnished herein reflects all adjustments, which
in the opinion of management, are necessary for a fair presentation of the
Company's financial position, the results of operations and cash flows for
the periods presented.
Certain information and footnote disclosures normally contained in
financial statements prepared in accordance with generally accepted
accounting principles have been omitted, pursuant to such rules and
regulations.
These interim statements should be read in conjunction with the audited
consolidated financial statements and related notes thereto as presented in
the Company's certified financial statements for the year ended December
31, 2002. The Company presumes that users of the interim financial
information herein have read or have access to such audited financial
statements and that the adequacy of additional disclosure needed for a fair
presentation may be determined in that context. The results of operations
for any interim period are not necessarily indicative of the results
expected or reported for the full year.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reported period. Actual results could differ from those
estimates.
Note 2. Related Party Transactions.
The company purchased $138,520 and $223,798, respectively, of internet
development and maintenance services from E-B Stor, Inc. for the three
months and nine months ended September 30, 2003. E-B Stor, Inc. is owned by
F. Kay Calkins, a director of the Company and wife of David Calkins, CEO
and Chairman of the Board of the Company. Subsequent to the end of the
third quarter of 2003, E-B Stor, Inc. ceased all operations.
On April 25, 2003, the Company issued 120,000,000 shares of its common
stock, no par value per share, to David and F. Kay Calkins in exchange for
$600,000 of debts owed to them. However, because they are "Affiliates" of
the Company, Mr. and Mrs. Calkins will be able to sell such shares only in
compliance with Rule 144 and 145. The shares were issued pursuant to
Section 3(a)(10) of the Securities Act of 1933, as amended, after a hearing
with notice to, and an opportunity to be heard from, interested parties, as
to the fairness of each transaction, by courts in Nevada and Illinois. Such
courts specifically determined that the transactions were fair to
interested parties and declared that the transactions were exempt under
Section 3(a)(10).
F-6
PACEL CORP. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
September 30, 2003
Note 3. Revenue Recognition.
The gross billings that the Company charges its clients under its
Professional Services Agreement include each worksite employee's gross
wages and a service fee. The Company's service fee, which is computed as a
percentage of gross wages, is intended to yield a profit to the Company and
cover the cost of employment-related taxes, workers' compensation insurance
coverage, and administration and field services provided by the Company to
the client, including payroll administration and record keeping, as well as
safety, human resources and regulatory compliance consulting services. The
component of the service fee related to administration varies according to
the size of the client, the amount and frequency of payroll payments and
the method of delivery of such payments. The component of the service fee
related to workers' compensation and employer taxes, including unemployment
insurance, is based, in part, on the clients historical claims experience.
All charges by the Company are invoiced along with each periodic payroll
delivered to the client.
The Company reports revenue from service fees in accordance with Emerging
Issues Task Force ("EITF") No. 99-19, Reporting Revenue Gross as a
Principal versus Net as an Agent. The Company reports as revenue, on a
gross basis, the total amount billed to clients for service fees, workers'
compensation and employer taxes. The Company reports revenue on a gross
basis for these fees because the Company is the primary obligor and deemed
to be the principal in these transactions under EITF 99-19. The Company
typically bills its clients for wages paid to worksite employees in an
amount equal to the amounts paid to these employees for these wages.
Accordingly, such billings result in no profit to the Company and when
presented on a net basis results in no revenue being recorded. The Company
accounts for its revenue under the accrual method of accounting. Under the
accrual method of accounting, the Company recognizes its revenues in the
period in which the worksite employee performs the work.
Note 5. Common Stock.
On March 17, 2003, the Company effected a one-for-thirty reverse split
restating the number of common shares as of December 31, 2002 from
635,537,735 to 21,184,591. All references to average number of shares
outstanding and prices per share have been restated retroactively to
reflect the split.
Note 6. Contingent Liabilities.
The Securities and Exchange Commission (the "SEC") filed an action in
federal district court asserting various violations of securities laws
against the Company; David F. Calkins (the Company's current Chairman of
the Board) and others. The complaint alleges that defendant Frank Custable
"orchestrated" a "scheme" to illegally obtain stock from various companies,
F-7
PACEL CORP. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
September 30, 2003
Note 6. Contingent Liabilities. (continued)
including the Company, through "scam Commission Form S-8 registration
statements, forged stock authorization form and at least one bogus attorney
opinion letter arranged by Custable." The complaint alleges that, in
connection with this alleged "scheme", the Company and its CEO, David
Calkins, violated Section 17(a) of the Securities Act and Section 10(b) and
Rule 10b-5 of the Exchange Act. The SEC asks that the Company and Calkins
be permanently enjoined from future violations, ordered to pay disgorgement
and civil penalties and Calkins be barred from continued service as an
officer and director. As part of an ex parte proceeding, the District Court
has ordered the Company and Calkins to provide an accounting of their
assets and the transactions that are the subject of the complaint. The
Company has been served with the complaint, and no further proceedings are
scheduled at this time.
Note 7. Acquisitions.
In April 2003, the Company completed the acquisition of 100% of the
outstanding stock of BeneCorp. Such acquisition was accounted for as a
purchase. In conjunction with the acquisition, the Company assumed
approximately $1,000,000 of debt. Consideration for the transaction was
$200,000 in cash, of which the Company made an initial deposit of $96,000
in 2002, and the issuance of 200,000 shares of restricted common stock of
the Company. The Company also executed one year employment contracts with
two principal officers of BeneCorp in conjunction with the acquisition. The
Company recorded the acquisition as a purchase and recorded $17,500 of fees
and $1,669,500 of goodwill in association with the acquisition.
In April 2003, The Resourcing Solutions Group, Inc. ("TRSG"), a Nevada
corporation and a majority-owned subsidiary of the Company, entered into an
agreement for the purchase of customer contracts, with a value of up to
$100,000,000, from MRG, LLC, a California limited liability company
("MRG"). In conjunction with the agreement, the Company issued 34,500,000
shares of unrestricted common stock and recorded a non-interest bearing
receivable of $600,000. On August 27, 2003, the Company terminated its
agreement with MRG as delivery of the promised contracts was no longer
viable based on restrictions in the California insurance market. In
conjunction with the termination of this agreement, the Company entered
into a settlement agreement for repayment of the $600,000 receivable as the
stock previously issued by the Company had been divested by MRG and was
unable to be returned to the Company for cancellation. Such receivable is
now secured by assets of MRG, consisting of publicly held securities, with
an approximate value of $250,000. Such assets are assigned to Pacel in the
event of default on the repayment by MRG. The repayment requires MRG to
F-8
PACEL CORP. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
September 30, 2003
Note 7. Acquisitions. (continued)
make monthly recurring payment of $20,000 over a period of thirty (30)
months. MRG is currently in compliance with this settlement agreement and
is making the required payments to the Company.
In April 2003, TRSG acquired substantially all of the assets of Asmara,
Inc. ("Asmara"), a North Carolina corporation, including its ownership of
several subsidiary operations, including Asmara Benefit Services, Inc. and
Asmara Services I, Inc., North Carolina corporations, Woodstock Lumber
Sales, Inc., an Oklahoma Corporation and Asmara of Florida I, Inc., Asmara
of Florida II, Inc., Asmara of Florida III, Inc. and Asmara of Florida IV,
Inc., Florida corporations. The acquisition was accounted for as a
purchase. The Company assumed all debts of the operations of approximately
$1,400,000, issued a note payable to the shareholder of Asmara, Inc. in the
amount of $431,530, payable over a two year period and executed employment
contracts with the principal officer and sole shareholder of Asmara.
Consideration under such agreement consists of cash compensation, bonuses
based on business unit performance and grants of options on the common
stock of the Company. The Company recorded $70,000 of fees and $1,859,858
of goodwill in conjunction with this acquisition.
On May 15, 2003, the Company acquired, through its wholly-owned subsidiary
Asmara Services I, Inc., the outstanding membership units of NSC, LLC, a
North Carolina limited liability company as a vehicle for entering into a
workers' compensation product with a North Carolina carrier. Such
acquisition was accounted for as a purchase. Consideration for the
transaction was $100,000 in cash and the issuance of a note payable for
$200,000. Such note is payable over eighteen (18) months and bears no
interest. The Company recorded the acquisition as a purchase and recorded
$300,000 of goodwill in association with the acquisition.
F-9
PACEL CORP. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Management's discussion and analysis of results of operations and financial
condition include a discussion of liquidity and capital resources. The following
discussion should be read in conjunction with the consolidated financial
statements and notes thereto.
In 2002, the Company completed an evaluation of its business model and the
potential success of its existing business initiatives. It was determined that
the Company should, as part of that review, evaluate other potential business
markets that could provide the potential for success. In September 2002, the
Company announced its intention to enter the Professional Employer Organization
("PEO") industry. The Company believed that this market offered an opportunity
to develop and leverage relationships with small and medium businesses. The
Company now provides human capital solutions through the provision of PEO
services and Administrative Service Organization ("ASO") services to such
clients. In April 2002, the Company successfully completed the acquisition of
two existing PEO organizations and continues to evaluate other potential
acquisition candidates while also reviewing and implementing opportunities to
support organic growth in order to secure a position as an industry leader. The
Company sees this initiative in the Human Resources Outsourcing ("HRO") industry
as an opportunity to tap into the small business market in the United States and
intends to compliment the provision of PEO and ASO services with information
technology services, business consulting services and financial services at a
future time.
Through its PEO/ASO business unit, the Company markets to its clients, typically
small to medium-sized businesses with between five and 1,500 employees, a broad
range of products and services that provide an outsourced solution for the
clients' human resources ("HR") needs. The Company's products include payroll
services, benefits administration (including health, welfare and retirement
plans), governmental compliance, risk management (including safety training),
unemployment administration and other HR related services. The Company is
currently working to establish the national vendor relationships in order to
effectively and competitively provide such services to a broad range of clients.
Nine Months ended September 30, 2003 compared to the Nine Months ended September
30, 2002
Sales for the nine months ended September 30, 2003 increased approximately
$2,072,000 to $2,507,291 when compared to sales of $435,218 for the nine months
ended September 30, 2002. The Company's revenue in 2003 was derived from the
Company's recently acquired PEO operating units. In 2002, the Company derived
revenue from the sale of retail hardware and software products. In 2003, the
Company was not actively selling such products due to resources being devoted to
the acquisition and development of its PEO business.
12
PACEL CORP. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations. (continued)
Due to the significance of the amounts included in billings to the Company's
clients and its corresponding revenue recognition methods, the Company has
provided the following reconciliation of billings to revenue for the three and
nine month periods ended September 30, 2003. The Company had no such revenue in
the corresponding periods of 2002.
Nine months ended Three months ended
September 30, September 30,
2003 2003
--------------- ----------------
(Unaudited) (Unaudited)
Reconciliation of billings
to revenue recognized:
Gross billings to clients $ 16,098,762 $ 8,654,774
Less - Gross wages billed to clients (13,592,194) (7,285,504)
--------------- ----------------
Revenue from PEO services $ 2,506,568 $ 1,369,270
Other miscellaneous revenue 723 100
--------------- ----------------
Total revenue as reported $ 2,507,291 $ 1,369,370
=============== ================
Cost of services for the nine months ended September 30, 2003 was approximately
$1,899,000, and is related directly to the delivery of services to its PEO
clients. No such PEO business activity occurred in the period ended September
30, 2002 and the cost of sales reflected for that period are related to the sale
of retail hardware and software products.
Research & Development expenses decreased to $-0- in the nine months ended
September 30, 2003 as compared to $254,656 in the comparable period ended
September 30, 2002. The decrease in research and development expenses during
2003 reflects the elimination of the development staff for new software
products.
Sales, general & administrative expenses, including salaries and wages,
decreased to approximately $2,163,000 in the nine months ended September 30,
2003, compared to approximately $2,272,000 in the corresponding period of 2002.
During the second half of 2002, the Company was experiencing declines in its
level of spending for general and administrative expenses as it began to wind
down the operations of its retail hardware and software business. Such overhead
expenses accounted for approximately $1,321,000 for the nine months ended
September 30, 2003 compared to $2,272,000 for the same period of 2002.
Acquisitions completed in the second quarter of 2003 accounted for the remaining
$842,000 of sales, general and administrative expenses, including salaries and
wages.
Depreciation expenses increased to approximately $16,000 in the nine months
ended September 30, 2003, compared to approximately $11,000 for the
corresponding period of 2002. Such increase is related to the Company's
acquisition of assets for its PEO business units.
13
PACEL CORP. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations. (continued)
Interest Expense is interest accrued on the Convertible Notes, Notes payable and
the interest due for the loan from a stockholder. Interest amounted to
approximately $125,000 in the nine months ended September 30, 2003 compared to
$123,000 for the same period of 2002. The increase is primarily attributable to
the Company's continued payment of financing costs for such indebtedness.
Finance Expense for the nine months ended September 30, 2003 was $393,818
compared to $50,397 for the nine months ended September 30, 2002. The Company
recorded imbedded interest in conjunction with the issuance of convertible
debentures during the period assuming conversion of such debt was available on
an immediate basis and has incurred fees associated with accessing its lines of
credit.
Three Months ended September 30, 2003 compared to the Three Months ended
September 30, 2002
Sales for the three months ended September 30, 2003 increased approximately
$1,250,000 to $1,369,370 when compared to sales of $118,261 for the three months
ended September 30, 2002. The Company's revenue in 2003 was derived from the
Company's recently acquired PEO operating units. In 2002, the Company derived
revenue from the sale of retail hardware and software products and was
discontinuing such sales in the second quarter of that year. In 2003, the
Company was not actively selling such products and was devoting its resources to
completing previously announced PEO business unit acquisitions. Such business
accounted for almost all of the revenue generated in the second quarter of 2003.
Cost of services for the three months ended September 30, 2003 was approximately
$985,000, and is related directly to the delivery of services to its PEO
clients. No such PEO business activity occurred in the period ended September
30, 2002 and the cost of sales reflected for that period are related to the sale
of retail hardware and software products. For the three months ended September
30, 2003, the Company reported a gross profit margin on its PEO operations of
$384,000, or 28% of revenue from such operations.
Research & Development expenses decreased to $-0- in the three months ended
September 30, 2003 as compared to $21,830 in the comparable period ended
September 30, 2002. The decrease in research and development expenses during
2003 reflects the elimination of the development staff for new software products
as the Company devoted its resources to the development of its PEO operations.
Sales, general & administrative expenses, including salaries and wages,
increased to approximately $1,025,000 in the three months ended September 30,
2003, compared to approximately $395,000 in the corresponding period of 2002.
Acquisitions of PEO business units completed in the second quarter of 2003
contributed to the increase for the period.
14
PACEL CORP. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations. (continued)
Depreciation expenses increased to approximately $7,000 in the three months
ended September 30, 2003, compared to approximately $3,700 for the corresponding
period of 2002. Such increase is related to the Company's acquisition of assets
for its PEO business units.
Interest Expense is interest accrued on the Convertible Notes, Notes payable and
the interest due for the loan from a stockholder. Interest amounted to
approximately $33,000 in the three months ended September 30, 2003 compared to
$52,000 for the same period of 2002. The decrease is primarily attributable to
the Company's repayment and settlement of outstanding obligations during the
period.
Finance Expense for the three months ended September 30, 2003 was $262,978
compared to $15,000 for the three months ended September 30, 2002. The Company
recorded imbedded interest in conjunction with the issuance of convertible
debentures during the period assuming conversion of such debt was available on
an immediate basis and has incurred fees associated with accessing its lines of
credit.
LIQUIDITY AND CAPITAL RESOURCES:
Cash and cash equivalents at September 30, 2003 increased to $180,995 from
$8,379 at December 31, 2002. Net cash used for operating activities was
$1,910,007 during the nine months ended September 30, 2003 compared to $22,569
in the corresponding period ended September 30, 2002. The increase in the cash
used in operating activities is mainly attributable to the increased operating
loss for the quarter, settlement and repayment of outstanding accounts payable
and recognition of revenue previously deferred by the Company's recently
acquired BeneCorp Business Services unit offset by increases in accrued
expenses, payroll related liabilities related to the Company's recently acquired
PEO business units.
Net cash provided by investing activities for the nine months ended September
30, 2003 was $96,802. The Company utilized $71,000 in the corresponding period
of 2002 for investing activities. During the second quarter of 2003, the Company
utilized $105,000 of cash in the acquisition of the Asmara and NSC operating
units and acquired cash of $160,744 in the acquisition of BeneCorp Business
Services.
Net cash provided by financing activities in the nine months ended September 30,
2003 was $1,985,821 compared to $49,638 in the corresponding period ended
September 30, 2002. The cash provided during the first nine months of 2003 is
directly related to the Company's execution and utilization of two equity-based
lines of credit.
In September 2002, the Company entered in an Equity line of credit for up to
$10,000,000 from the Honor Hedge Fund and Reisco Hedge Fund through High Desert
Capital at a variable discount rate of 12.5% to 50%. The Company can draw up to
$500,000 per month. The line is being used for acquisitions and working capital.
To date, the Company has borrowed $1,305,000 and issued 78,359,480 shares of
common stock. Subsequent to the end of the third quarter, the principal
individual involved in effecting the draw down of funds under this line of
credit was unable to fulfill the most recent commitments under the agreement.
15
PACEL CORP. AND SUBSIDIARIES
During the third quarter of 2003 the Company issued 37,075,448 shares of its
common stock in exchange for $325,000 of funding. As of September 30, 2003, the
Company had not received $175,000 of funds for which shares had been issued. The
Company has recorded a receivable for that amount and is in negotiation with the
lender to reach a resolution.
In March 2003, the Company entered into an Equity line of credit for up to
$10,000,000 from Equities First Inc. at a discount rate of up to 50%. The
Company can draw up to $500,000 per month. The line is being used to fund
shortfalls in operating capital for the Company's business units, acquisitions
and working capital. To date, the Company has borrowed $583,200 and issued
44,000,000 shares of common stock.
In April 2003, the Company entered into a convertible note payable in the amount
of $200,000. The note is for a three-year period and carries interest at a rate
of 8% per annum. As of September 30, 2003, the holder of the note had converted
the entire balance of the note into 33,675,386 shares of the common stock of the
Company in accordance with the terms of the original agreement. At September 30,
2003, the Company had no remaining obligation under this debt instrument.
In April 2003, the Company entered into a two-year, $500,000 Note payable at an
interest of 9% per annum. The balance of such note at September 30, 2003 is
approximately $370,270. In June 2003, the Company entered into a convertible
note payable in the amount of $95,000. The note is for a three-year period and
carries interest at a rate of 8% per annum. As of September 30, 2003, the holder
of the note had converted the entire balance of the note into 17,071,428 shares
of the common stock of the Company in accordance with the terms of the original
agreement. At September 30, 2003, the Company had no remaining obligation under
this debt instrument.
In June 2003, the Company entered into two-year, convertible Note Payable for
$50,000 at an interest rate of 10%. The conversion clause allows the holder of
such note to convert the Note into the common stock of the Company at a discount
of 30% from the market price at the date of conversion.
In June 2003, the Company entered into a short term loan agreement for $150,000.
Such note is due to be paid on August 20, 2003. The Company issued approximately
8,823,000 shares of its common stock to serve as collateral for such loan and
recorded a financing fee of $75,000 in association with the loan agreement. On
August 19, 2003, the Company settled this obligation in total with the issuance
of 19,623,590 shares of its common stock and has no remaining obligation.
In September 2003, the Company entered into a convertible note payable in the
amount of $150,000. The note is for a three-year period and carries interest at
a rate of 8% per annum. As of September 30, 2003, the holder of the note had
converted the entire balance of the note into 35,304,638 shares of the common
stock of the Company in accordance with the terms of the original agreement. At
September 30, 2003, the Company had no remaining obligation under this debt
instrument.
16
PACEL CORP. AND SUBSIDIARIES
In September 2003, the Company entered into a convertible note payable in the
amount of $150,000. The note is for a three-year period and carries interest at
a rate of 8% per annum. The conversion clause allows the holder of such note to
convert the Note into the common stock of the Company at a discount of 30% from
the market price at the date of conversion. At September 30, 2003, the balance
of the note was $150,000.
In September 2003, the Company entered into a convertible note payable in the
amount of $20,000. The note is for a three-year period and carries interest at a
rate of 8% per annum. The conversion clause allows the holder of such note to
convert the Note into the common stock of the Company at a discount of 30% from
the market price at the date of conversion. At September 30, 2003, the balance
of the note was $20,000.
In April 2003, the Company completed the acquisition of 100% of the outstanding
stock of BeneCorp. Such acquisition was accounted for as a purchase. In
conjunction with the acquisition, the Company assumed approximately $1,000,000
of debt. Consideration for the transaction was $200,000 in cash, of which the
Company made an initial deposit of $96,000 in 2002, and the issuance of 200,000
shares of restricted common stock of the Company. The Company also executed one
year employment contracts with two principal officers of BeneCorp in conjunction
with the acquisition. In October 2003, the Company terminated the employment
agreements with the two former officers of BeneCorp and incurred approximately
$3,000 in expenses in association with their termination. The Company recorded
the acquisition as a purchase and recorded $17,500 of fees and $1,669,500 of
goodwill in association with the acquisition.
In April 2003, TRSG entered into an agreement for the purchase of customer
contracts, with a value of up to $100,000,000, from MRG. In conjunction with the
agreement, the Company issued 34,500,000 shares of unrestricted common stock and
recorded a non-interest bearing receivable of $600,000. On August 27, 2003, the
Company terminated its agreement with MRG as delivery of the promised contracts
was no longer viable based on restrictions in the California insurance market.
In conjunction with the termination of this agreement, the Company entered into
a settlement agreement for repayment of the $600,000 receivable as the stock
previously issued by the Company had been divested by MRG and was unable to be
returned to the Company for cancellation. Such receivable is now secured by
assets of MRG, consisting of publicly held securities, with an approximate value
of $250,000. Such assets are assigned to Pacel in the event of default on the
repayment by MRG. The repayment requires MRG to make monthly recurring payment
of $20,000 over a period of thirty (30) months. MRG is currently in compliance
with this settlement agreement and is making the required payments to the
Company.
In April 2003, TRSG acquired substantially all of the assets of Asmara, Inc.
("Asmara"), a North Carolina corporation, including its ownership of several
subsidiary operations, including Asmara Benefit Services, Inc. and Asmara
Services I, Inc., North Carolina corporations, Woodstock Lumber Sales, Inc., an
Oklahoma Corporation and Asmara of Florida I, Inc., Asmara of Florida II, Inc.,
Asmara of Florida III, Inc. and Asmara of Florida IV, Inc., Florida
17
PACEL CORP. AND SUBSIDIARIES
corporations. The acquisition was accounted for as a purchase. The Company
assumed all debts of the operations of approximately $1,400,000, issued a note
payable to the shareholder of Asmara, Inc. in the amount of $431,530, payable
over a two year period and executed employment contracts with the principal
officer and sole shareholder of Asmara. The balance of the note at September 30,
2003 was $378,780. Consideration under such agreement consists of cash
compensation, bonuses based on business unit performance and grants of options
on the common stock of the Company. The Company recorded $70,000 of fees and
$1,859,858 of goodwill in conjunction with this acquisition.
On May 15, 2003, the Company acquired, through its wholly-owned subsidiary
Asmara Services I, Inc., the outstanding membership units of NSC, LLC, a North
Carolina limited liability company as a vehicle for entering into a workers'
compensation product with a North Carolina carrier. Such acquisition was
accounted for as a purchase. Consideration for the transaction was $100,000 in
cash and the issuance of a note payable for $200,000. Such note is payable over
eighteen (18) months and bears no interest. The balance of the note at September
30, 2003 was $156,000. The Company recorded the acquisition as a purchase and
recorded $300,000 of goodwill in association with the acquisition. The Company's
cash requirements for funding its administrative and operating needs continue to
greatly exceed its cash flows generated from operations. Such shortfalls and
other capital needs continue to be satisfied through equity financing and the
issuance of convertible notes payable until additional funds can be generated
from operations through acquisitions and organic business growth. The
liabilities of the Company consist of over-extended accounts payable, payroll
related liabilities and taxes, accrued officer's compensation and deferred
revenue. Currently, the Company has focused its efforts on developing strategic
relationships with other organizations associated with the HRO industry. The
loss of its current equity financing would seriously hinder the Company's
ability to execute its HRO business strategy and impair its ability to continue
as a going concern. The Company expects to continue its investing activities,
including expenditures for acquisitions, sales and marketing initiatives,
product support, and administrative support based on the availability of funds.
Forward Looking Statements
The Company is making this statement in order to satisfy the "safe harbor"
provisions contained in the Private Securities Litigation Reform Act of 1995.
This Form 10-QSB includes forward-looking statements relating to the business of
the Company. Forward-looking statements contained herein or in other statements
made by the Company are made based on management's expectations and beliefs
concerning future events impacting the Company and are subject to uncertainties
and factors relating to the Company's operations and business environment, all
of which are difficult to predict and many of which are beyond the control of
the Company, that could cause actual results of the Company to differ materially
from those matters expressed in or implied by forward-looking statements. The
Company believes that the following factors, among others, could affect its
18
PACEL CORP. AND SUBSIDIARIES
future performance and cause actual results of the Company to differ materially
from those expressed in or implied by forward-looking statements made by or on
behalf of the Company: (a) the effect of technological changes; (b) increases in
or unexpected losses; (c) increased competition; (d) fluctuations in the costs
to operate the business; (e) uninsurable risks; and (f) general economic
conditions.
Item 3. CONTROLS AND PROCEDURES.
As of September 30, 2003, an evaluation was performed under the supervision and
with the participation of the Company's management, including the Principal
Executive Officer and the Principal Accounting Officer, of the effectiveness of
the design and operation of the Company's disclosure controls and procedures.
Based on that evaluation, the Company's management, including the Principal
Executive Officer and the Principal Accounting Officer, concluded that the
Company's disclosure controls and procedures were effective as of June 30, 2003.
There have been no significant changes in the Company's internal controls or in
other factors that could significantly affect internal controls subsequent to
September 30, 2003.
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The Securities and Exchange Commission ("SEC") filed an action in Federal
District Court asserting various violations of securities laws against the
Company; David F. Calkins (the Company's current Chairman of the Board) and
others. The complaint alleges that Mr. Frank Custable "orchestrated" a "scheme"
to illegally obtain stock from various companies, including the Company, through
"scam Commission Form S-8 registration statements, forged stock authorization
forms and at least one bogus attorney opinion letter arranged by Custable." The
complaint alleges that, in connection with this alleged "scheme," the Company
and its CEO, David Calkins violated Section 17(a) of the Securities Act and
Section 10(b) and Rule 10b-5 of the Exchange Act. The SEC asks that the Company
and Calkins be permanently enjoined from future violations, ordered to pay
disgorgement and civil penalties and Calkins be barred from continued service as
an office and director. As part of an ex parte proceeding, the District Court
has ordered the Company and Calkins to provide an accounting of their assets and
the transactions that are the subject of the complaint. The Company has been
served with the complaint, and no further proceedings are scheduled at this
time.
The Company is a defendant in various lawsuits, mainly with previous vendors of
the Company still owed monies. The Company continues to settle such claims and
has hired a firm to handle certain of those negotiations. All claims are
recorded as liabilities on the balance sheet of the Company and the Company
believes such recorded reserves to be adequate for the settlement of the claims.
19
PACEL CORP. AND SUBSIDIARIES
Item 2. Changes in Securities
None
Option Grants
None
Issuances of Stock for Services or in Satisfaction of Obligations
For the nine months ended September 30, 2003, the Company issued approximately
10,784,000 shares of its No Par Value common stock as payment for various
consulting and legal fees.
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
Acquisitions
In April 2003, the Company completed the acquisition of 100% of the outstanding
stock of BeneCorp. Such acquisition was accounted for as a purchase. In
conjunction with the acquisition, the Company assumed approximately $1,000,000
of debt. Consideration for the transaction was $200,000 in cash, of which the
Company made an initial deposit of $96,000 in 2002, and the issuance of 200,000
shares of restricted common stock of the Company. The Company also executed one
year employment contracts with two principal officers of BeneCorp in conjunction
with the acquisition. The Company recorded the acquisition as a purchase and
recorded $1,669,500 of goodwill in association with the acquisition.
In April 2003, TRSG entered into an agreement for the purchase of customer
contracts, with a value of up to $100,000,000, from MRG. In conjunction with the
agreement, the Company issued 34,500,000 shares of unrestricted common stock and
recorded a non-interest bearing receivable of $600,000. On August 27, 2003, the
Company terminated its agreement with MRG as delivery of the promised contracts
was no longer viable based on restrictions in the California insurance market.
In conjunction with the termination of this agreement, the Company entered into
a settlement agreement for repayment of the $600,000 receivable as the stock
previously issued by the Company had been divested by MRG and was unable to be
returned to the Company for cancellation. Such receivable is now secured by
assets of MRG, consisting of publicly held securities, with an approximate value
of $250,000. Such assets are assigned to Pacel in the event of default on the
repayment by MRG. The repayment requires MRG to make monthly recurring payment
of $20,000 over a period of thirty (30) months. MRG is currently in compliance
with this settlement agreement and is making the required payments to the
Company.
20
PACEL CORP. AND SUBSIDIARIES
In April 2003, TRSG acquired substantially all of the assets of Asmara, Inc.
("Asmara"), a North Carolina corporation, including its ownership of several
subsidiary operations, including Asmara Benefit Services, Inc. and Asmara
Services I, Inc., North Carolina corporations, Woodstock Lumber Sales, Inc., an
Oklahoma Corporation and Asmara of Florida I, Inc., Asmara of Florida II, Inc.,
Asmara of Florida III, Inc. and Asmara of Florida IV, Inc., Florida
corporations. The acquisition was accounted for as a purchase. The Company
assumed all debts of the operations of approximately $1,400,000, issued a note
payable to the shareholder of Asmara, Inc. in the amount of $431,530, payable
over a two year period and executed employment contracts with the principal
officer and sole shareholder of Asmara. Consideration under such agreement
consists of cash compensation, bonuses based on business unit performance and
grants of options on the common stock of the Company. The Company recorded
$70,000 of fees and $1,859,858 of goodwill in conjunction with this acquisition.
On May 15, 2003, the Company acquired, through its wholly-owned subsidiary
Asmara Services I, Inc., the outstanding membership units of NSC, LLC, a North
Carolina limited liability company as a vehicle for entering into a workers'
compensation product with a North Carolina carrier. Such acquisition was
accounted for as a purchase. Consideration for the transaction was $100,000 in
cash and the issuance of a note payable for $200,000. Such note is payable over
eighteen (18) months and bears no interest. The Company recorded the acquisition
as a purchase and recorded $300,000 of goodwill in association with the
acquisition.
Item 6. Exhibits and Reports
Item 6. Exhibits and Reports
Number Description
------ -------------------------------------------------
31.1 * 302 Certification by Chief Executive Officer and
Chief Financial Officer
32.1 * Certification by Chief Executive Officer and Chief Financial Officer
pursuant to 18 U.S.C. 1350.
------------------------------------------
* Filed herewith
21
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, registrant has duly caused this report to be signed in its behalf
by the undersigned thereunto duly authorized.
Pacel Corporation
(Registrant)
BY: /s/David Calkins
----------------------
CEO/President
Chairman of the Board
DATED: November 12, 2003
22