U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB
(Mark One)
[X] Annual report under Section 13 or 13(d) of the Securities Exchange Act of
1934
For the fiscal year ended: December 31, 2003
[_] Transition report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the transition period from _____________________ to ___________________.
Commission File Number: 000-29459
Pacel Corporation
---------------------------------------------
(Name of small business issuer in its charter)
VIRGINIA 54-1712558
----------------------------------------- ----------------------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
10108 Industrial Drive
Pineville, North Carolina 28134
----------------------------------------- ----------------------------------
(Address of principal executive offices) (Zip Code)
Issuers telephone number: (704) 643-0676
Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange
on which registered
None N/A
-------------------------- ----------------------------------
Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK, NO PAR VALUE
----------------------------------------------------------
(Title of Class)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 [_]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporate by reference in Part III f this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
The issuer's revenue for the fiscal year ended December 31, 2003 was $3,840,586.
As of March 25, 2004, the aggregate market value of the voting and non-voting
common stock of the registrant held by non-affiliates of the registrant computed
by reference to the average bid and asked price of such common equity on that
date was $1,134,880. As of March 25, 2004, the issuer had 27,903,051 outstanding
shares of common stock.
Transitional small business format Yes [_] No [X]
PART I.
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL OVERVIEW
In 2003, the Company continued its strategy for penetrating the Human Resources
Outsourcing ("HRO") industry based on its evaluation of its business model and
existing business initiatives completed in 2002. The Company's intention to
enter this business sector was announced in September 2002 and was based on an
evaluation of potential business markets that provide the potential for success.
The HRO market is a component part of the Business Process Outsourcing ("BPO")
industry. The broad category of BPO is a huge area that includes such outsourced
functions as information technology, human resources, logistics, facilities
management and finance/accounting where an external provider assumes
responsibility to own, manage and administer a particular process on the basis
of performance criteria that have been mutually agreed upon. HRO is a large and
complex universe in itself, encompassing the outsourcing of the many different
functions generally considered to be the domain of the Human Resources
department.
The HRO industry began to evolve in the early 1980s, largely in response to the
difficulties faced by small to medium sized businesses in procuring workers'
compensation and group health insurance coverage on a cost- effective basis and
operating in an increasingly complex legal and regulatory environment. While
various service providers, such as payroll processing firms, benefits and safety
consultants and temporary staffing firms were available to assist these
businesses with specific tasks, PEOs began to emerge as providers of a more
comprehensive outsourcing solution. PEOs combined the employees of a large
number of clients and leveraged their purchasing power to obtain workers'
compensation and group health programs. With the subsequent hardening of those
insurance markets for PEOs in the early 2000's, PEOs began investigating
additional market opportunities for further development of their business model.
The Company's began its entry into the HRO market through the 2003 acquisition
of two Professional Employer Organizations ("PEO") located in North Carolina and
Texas. The Company's is focusing its efforts on the PEO and Administrative
Services Organization ("ASO") sectors of the HRO industry, providing human
capital management solutions to small and medium sized business clients within
the United States. Evaluation of organic growth strategies combined with
continued scrutiny and examination of potential acquisition candidates continues
in order to secure the Company's position as a leader within the industry.
Though the Company remains exclusively focused on the PEO and ASO markets at
this time, it sees its entry into these markets as an opportunity to tap into
the lucrative small business BPO market and intends to compliment its PEO and
ASO activities with additional services such as information technology services,
business consulting and financial services at a still undetermined future time.
In 2004, the Company continues its focus on its PEO and ASO business model,
evaluating, completing and integrating planned acquisitions, developing leading
vendor relationships and establishing itself as an industry leader.
Through its PEO and ASO business unit, the Company markets to its clients,
typically small to medium sized businesses with between five (5) and one
thousand (1,000) employees, a broad range of products and services that provide
an outsourced solution for the client's Human Resources ("HR") needs. Industry
estimates indicate that this "middle market" opportunity encompasses
approximately 100,000 small to medium-sized businesses employing over 40 million
people. Another benefit of the industry is that the target market is not
restricted as to industry, sector or size. Virtually every company has human
resources needs and almost all can benefit from some level of outsourcing.
Smaller firms appreciate the professional expertise and pooled resources brought
by a PEO or ASO while the potential for economies of scale created by
outsourcing the heavily transaction- intensive HR function make a compelling
economic argument. The Company's service offerings include payroll services,
benefits administration, governmental compliance, risk management, unemployment
administration, and health, welfare and retirement plan benefits. Although the
Company maintains successful relationships with its existing vendors in the
Southeastern United States, it continues negotiations with several national
vendors in these areas in order to effectively and competitively provide such
services to a broad range of clients on a national scale.
3
By allowing the management of these small to medium sized business clients to
focus on the "business of business" rather than the complicated and time
consuming administrative tasks of managing human capital issues, the Company, in
delivering its services, should be well positions to improve the efficiency of
its clients' businesses, enhancing their ability to be profitable in their
chosen marketplace. Additionally, such initiatives as improving their ability to
attract and retain talent, improving the planning and management of payroll cash
flows and managing employment risks should enhance the success of the Company's
clients.
In a PEO relationship, the client transfers certain employment-related risks and
liabilities to the Company and retains other risks and liabilities. In this
context, the client and the Company are each viewed as and become a
"co-employer" of the client's worksite employees. In order to enter into a
co-employer relationship, the Company operates as a Professional Employer
Organization.
As a co-employer, employment-related liabilities are contractually allocated
between the Company and the client under a written Professional Services
Agreement. Under the Professional Services Agreement, the Company assumes
responsibility for and manages the risks associated with each client's worksite
employee payroll obligations, including the liability for payment of salaries
and wages (including payroll taxes) to each worksite employee and, at the
client's options, responsibility for planning, providing and administering group
health, welfare and retirement benefits to such individuals. These obligations
of the Company are fixed, whether or not the client makes timely payment of the
associated service fee. In this regard, it is important to understand that,
unlike payroll processing service providers, the Company issues to each of the
client's worksite employees, Company payroll checks drawn on the Company's bank
accounts. The Company also reports and remits all required employment
information and taxes to the Internal Revenue Service ("IRS") and issues a
Federal Form W-2 to each worksite employee under the appropriate Company Federal
Employer Identification Number ("FEIN"). The Company assumes the responsibility
for compliance with those employment-related governmental regulations that can
be effectively managed away from the client's worksite. In many cases, the
Company provides the employee workers' compensation insurance coverage under the
Company's insurance policy. The client may elect, or the workers' compensation
carrier may require, retaining its own policy for the management of this risk.
In all cases, the Company remains heavily involved with safety and risk
management to assist the client in controlling risk and potentially reducing the
cost of such coverage. The client contractually retains the general day-to-day
responsibility to direct, control, hire, terminate and manage each of the
client's worksite employees. The worksite employee services are performed for
the exclusive benefit of the client's business. The client also remains
responsible for compliance with those employment-related governmental
regulations that are more closely related to the day-to-day management of
worksite employees.
In an ASO relationship, the client retains all employment-related risks and
liabilities and the Company provides outsourced solutions to meet the
administrative and HR needs of the client.
The Company charges its clients a service fee that is designed to yield a profit
to the Company and cover the cost of certain employment-related taxes, workers'
compensation insurance coverage and administrative and field services provided
by the Company to the client. The component of the service fee related to
administration varies according to the size of the client, the amount and
frequency of payroll payments, whether a PEO or an ASO arrangement and the
method of delivery for such payments. In a PEO relationship, the component of
the service fee related to workers' compensation and unemployment insurance is
based, in part, on the client's historical claims experience. In addition, the
client may choose to offer certain health, welfare and retirement benefits to
its worksite employees. In addition to the service fee and costs of selected
benefit plans, billings to each client also include the wages and other
employment-related taxes of each worksite employee. The gross billings are
invoiced at the time of deliver of each periodic payroll delivered to the
client.
4
Currently, the Company provides workers' compensation insurance coverage for its
worksite employees through several vendor arrangements, depending on the
geographic location of the client's worksite(s). The Company has, to date, been
unsuccessful in obtaining a national program for its current client base and
anticipated growth. The Company is continuing negotiations with several carriers
in order to obtain such national coverage program. The Company pays the premium
for coverage and passes to its clients some or all of the costs attributable to
the coverage for their respective worksite employees in its service fee. The
Company does not act as an insurance company. However, as part of a 2003
acquisition, the Company acquired a fully-licensed, but non-operating, North
Carolina-based insurance company. The Company does assume certain workers'
compensation risk as a result of providing these services.
Human Resources Outsourcing Industry
Human Resources Outsourcing ("HRO") is a subset of the more comprehensive
Business Process Outsourcing ("BPO") sector. Since the 1980's, American industry
has embraced the general concept of outsourcing non-core or non-mission critical
processes, incorporating it into the American way of business. Outsourcing is
perceived as bringing economies of scale, higher levels of expertise and greater
efficiency to those processes.
One of the sectors of the HRO industry began to evolve in the early 1980s,
largely in response to the difficulties faced by small to medium-sized
businesses in procuring workers' compensation and group health insurance
coverage on a cost-effective basis and operating in an increasingly complex
legal and regulatory environment. While various service providers, such as
payroll processing firms, benefits and safety consultants and temporary staffing
firms, were available to assist these businesses with specific tasks,
Professional Employer Organizations ("PEO") began to emerge as providers of a
more comprehensive outsourcing solution for these activities. PEOs combined the
employees of a large number of clients and leveraged their purchasing power to
obtain more cost- effective workers' compensation and group health insurance
programs.
The Company believes that the key factors driving demand for HRO services are
the increasing acceptance in the small to medium-sized business community of
outsourcing certain non-core business functions such as those offered by the
Company; the size and growth of the small to medium-sized business community in
the United States; the increasing complexity of employment-related governmental
regulations and the related costs of compliance with those regulations; the need
of businesses to manage the cash expenditures associated with payroll and
payroll-related expenses, including workers' compensation insurance; and the
need to provide competitive benefit programs, including health, welfare and
retirement, on a cost-effective and convenient basis.
Another factor affecting the HRO industry has been the increasing recognition
and acceptance by regulatory authorities of PEOs and the co-employer
relationship that exists when a client contract with a PEO for services
reflected in the development of licensing or registration requirements at the
state level. The National Associated of Professional Employer Organizations
("NAPEO"), of which the Company is a member, has worked, along with industry
leaders, with the relevant government entities for the establishment of a
regulatory framework that would clarify the roles and obligations of the PEO and
the client in the co-employer relationship. This framework generally imposes
financial responsibility on the PEO in order to promote the increased acceptance
and further development of the industry.
Twenty-five states, including states where the Company currently has operations,
have passed laws that have licensing, registration or other regulatory
requirements for PEOs and several additional states are considering such
regulation. Such laws vary from state to state, but generally codify the
requirements that the PEO must reserve the right to hire, terminate and
discipline worksite employees and secure workers' compensation insurance. In
certain instances, the Company delegates or assigns such rights to the client.
The laws also generally provide for monitoring the fiscal responsibility of the
PEOs and, in many cases, the licensure of the controlling officers of the PEO.
5
Since the late 1990's, due to changes in the workers' compensation and group
health insurance markets, many PEOs have encountered significant difficulties in
obtaining workers' compensation and group health benefit insurance policies.
Many PEOs have exited the industry due to the lack of available workers'
compensation and group health benefit insurance programs or due to their
inability to provide the financing security required by insurance companies in
order to obtain such coverage. The Company views this continued pressure on the
market as an opportunity, providing potentially viable acquisition targets to
further support its business development strategy.
All of the Company's clients are required to enter into the Company's
Professional Services Agreement (the "PSA"). The PSA provides for an initial
one-year term and is subject to termination by the Company or the client at any
time upon thirty (30) days written notice. The Company has several versions of
its basic PSA and utilizes each depending upon the relationship with the client.
Clients may enter into PEO or Administrative Services Only ("ASO") arrangements,
may bring their own benefit programs, provide their own workers' compensation
coverage, use only payroll services, etc. and the agreement is available to be
modified to suit the individual client's needs and elections. After the initial
one-year term, the contract may be renewed or terminated. Based on the results
of a financial review, the Company may require the owners of client companies to
personally guarantee the client's obligations under the PSA.
The Company retains the right to terminate the PSA as well as its co-employment
relationship, if applicable, with the worksite employees immediately upon
non-payment by a client. The Company manages its credit risk through the
periodic nature of payroll, client credit and banking checks, owner guarantees,
the Company's client selection process and its right to terminate the PSA and
the co-employment relationship with the worksite employees.
Competition
The PEO sector of the industry is highly fragmented. The primary competition is
other PEOs, insurance agents, and fee-for-service providers, such as payroll
processors and HR consultants. The market for human resources consulting
services is expected to become increasingly competitive as larger companies,
some of which have greater financial resources than the Company, compete in the
market.
The key competitive factors in the HRO industry are breadth and quality of
services, price, reputation, financial stability, and choice, quality and cost
of benefits. The Company will seek to compete through its ability to provide a
full-service HR solution using a variety of delivery methods best suited to the
individual client with an emphasis on leveraging technology.
The Company believes that some smaller PEOs are exiting the industry due to
increased collateral required by providers of workers' compensation and health
benefits insurance. In addition, an increase in costs and a lack of available
workers' compensation and health benefits insurance programs is impacting these
PEOs.
Industry Regulation
Numerous federal and state laws and regulations relating to employment matters,
benefit plans and employment taxes affect the operations of the Company. By
entering into a co-employer relationship with its clients, the Company assumes
certain obligations and responsibilities as an employer under these laws.
Because many of these federal and state laws were enacted before the development
of non-traditional employment relationships, such as PEOs, temporary employment
and other employment-related outsourcing arrangements, many of these laws do not
specifically address the obligations and responsibilities of non- traditional
employers. In addition, the definition of "employer" under these laws is not
uniform.
6
Some governmental agencies that regulate employment have developed rules that
specifically address issues raised by the relationship among PEOs, clients and
worksite employees. Such regulations are relatively new and, therefore, the
interpretation and application of these regulations by administrative agencies
and Federal and state courts are limited or non-existent. The development of
additional regulations and interpretation of existing regulations can be
expected to evolve over time. In addition, from time to time, states have
considered, and may in the future consider, imposing certain taxes on gross
revenues or service fees of the Company and its competitors.
The Company believes that its operations are currently in compliance in all
material respects with applicable Federal and state statutes and regulations.
Employee Benefit Plans
The Company currently offers two 401(k) retirement plans, designed to be
"multiple employer" plans under the Internal Revenue Code of 1986, as amended
(the "Code") Section 413(c) by way of recent acquisitions. The plan design
enables owners of clients and highly compensated worksite employees, as well as
highly compensated internal employees of the Company, to participate. Employee
benefit plans are subject to provisions of both the Code and the Employee
Retirement Income Security Act ("ERISA").
In order to qualify for favorable tax treatment under the Code, the plans must
be established and maintained by an employer for the exclusive benefit of its
employees. Generally, an entity is an "employer" of certain workers for federal
employment tax purposes if an employment relationship exists between the entity
and the workers under the common law test of employment. In addition, the
officers of a corporation are deemed to be employees of that corporation for
federal employment tax purposes. The common law test of employment, as applied
by the Internal Revenue Service ("IRS") involves an examination of many factors
to ascertain whether an employment relationship exists between a worker and a
purported employer. Such a test is generally applied to determine whether an
individual is an independent contractor or an employee for federal employment
tax purposes and not to determine whether each of two or more companies is a
"co-employer." Substantial weight is typically given to the question of whether
the purported employer has the right to direct and control the details of an
individual's work. The courts have provided that the common law employer test
applied to determine the existence of an employer-employee relationship for
federal employment tax purposes can be different than the common law test
applied to determine employer status for other federal tax purposes. In
addition, control and supervision have been held to be less important factors
when determining employer status for ERISA purposes.
Employee pension and welfare benefit plans are also governed by ERISA. ERISA
defines "employer" as "any person acting directly as an employer, or indirectly
in the interest of an employer, in relation to an employee benefit plan." ERISA
defines the term "employee" as "any individual employed by an employer." The
courts have held that the common law test of employment must be applied to
determine whether an individual is an employee or an independent contractor
under ERISA. However, in applying that test, control and supervision are less
important for ERISA purposes when determining whether an employer has assumed
responsibility for an individual's benefits status. A definitive judicial
interpretation of "employer" in the context of a PEO or employee leasing
arrangement has not been established.
Federal Employment Taxes
As an employer, the Company assumes responsibility and liability for the payment
of Federal and state employment taxes with respect to wages and salaries paid to
worksite employees. There are essentially three types of Federal employment tax
obligations:(i) withholding of income tax governed by Code Section 3401, et
seq.; (ii) obligations under the Federal Income Contributions Act ("FICA"),
governed by Code Section 3101, et seq.; and (iii) obligations under the Federal
Unemployment Tax Act ("FUTA"), governed by Code Section 3101, et seq. Under
these Code sections, employers have the obligation to withhold and remit the
employer portion and, where applicable, the employee portion of these taxes.
Among other employment tax issues related to whether PEOs are employers of
worksite employees are issues under the Code provisions applicable to Federal
employment taxes. The issue arises as to whether the Company is responsible for
payment of employment taxes on wages and salaries paid to such worksite
employees. Code Section 3401(d)(1), which applies to Federal income tax
withholding requirements, contains an exception to the general common law test
7
applied to determine whether an entity is an "employer" for purposes of Federal
income tax withholding. The courts have extended this common law employer
exception to apply for both FICA and FUTA tax purposes. Code Section 3401(d)(1)
states that if the person for whom services are rendered does not have control
of the payment of wages, the "employer" for this purpose is the person having
control of the payment of wages. The Treasury Regulations issued under Code
Section 3401(d)(1) state that a third party can be deemed to be the employer of
workers under this Section for income tax withholding purposes where the person
for whom services are rendered does not have legal control of the payment of
wages. Although several courts have examined Code section 3401(d)(1) with regard
to PEOs its ultimate scope has not been delineated. Moreover, the IRS has to
date relied extensively on the common law test of employment in determining
liability for failure to comply with Federal income tax withholding
requirements.
Accordingly, while the Company believes it has assumed the withholding
obligations for worksite employees, should the Company fail to meet these
obligations, the client may be held jointly and severally liable.
State Regulation
While many states do not explicitly regulate PEOs, twenty-five states, including
several states where the Company has operations (North Carolina, Florida, South
Carolina and Texas) have passed laws that have licensing, registration or other
compliance requirements for PEOs. Several additional states are considering such
regulation. Regulations vary from state to state but generally provide for
monitoring the fiscal responsibility of PEOs. The Company holds licenses, is
registered or otherwise compliant in the states in which it currently has
operations. The Company plans to seek such registration and licensing in the
remaining states in the near future. Whether or not a state has licensing,
registration or other compliance requirements, the Company faces a number of
other state and local regulations that could impact its operations.
In connection with the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995 (the "Reform Act"), the Company is hereby
providing cautionary statements identifying important factors that could cause
the Company's actual results to differ materially from those projected in
forward-looking statements (as such term is defined in the Reform Act) made by
or on behalf of the Company herein, in other filings made by the Company with
the Securities and Exchange Commission, in press releases or other writings, or
orally, whether in presentations, in response to questions or otherwise. Any
statements that express, or involve discussions as to, expectations, beliefs,
plans, objectives, assumptions or future events or performance (often, but not
always, through the use of words or phrases such as "will result," "are expected
to," "anticipated," "plans," "intends," "will continue," "estimated," and
"projection") are not historical facts and may be forward-looking and,
accordingly, such forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause the actual results or performance
of the Company to be materially different from any future results or performance
expressed or implied by such forward-looking statements. Such known and unknown
risks, uncertainties and other factors include, but are not limited to, the
following:
i) volatility of costs of workers' compensation insuranc coverage and excess
premium generated from the workers' compensation component of the Company's
service offering under the Company's loss sensitive workers' compensation
programs;
ii) volatility of state unemployment taxes;
iii) the uncertainties of the collateralization required by, as well as the
availability and/or renewal of, the Company's medical benefit plans,
general insurance and workers' compensation insurance programs for the
worksite employees;
iv) uncertainties as to the amount the company wil pay to subsidize the costs
of medical benefit plans;
v) possible adverse application of certain federal and state laws and the
possible enactment of unfavorable laws or regulation;
8
vi) litigation and other claims against the Company and its clients, including
the impact of such claims on the cost, availability and retention of the
Company's insurance coverage programs;
vii) impact of competition from existing and new businesses offering human
resources outsourcing services;
viii)risks associated with expansion into additional markets where the Company
does not have a presence or significant market penetration;
ix) risks associated with the Company's dependence on key vendors and the
ability to obtain or renew benefit contracts and general insurance policies
at rates and with retention amounts acceptable to the Company;
x) an unfavorable determination by the Internal Revenue Service or Department
of Labor regarding the status of the Company as an "employer";
xi) the possibility of client attrition due to pric competition or the
Company's decision to increase the price of its services, including medical
benefits;
xii) risks associated with geographic market concentration;
xiii) the financial condition of clients;
xiv) the effect of economic conditions in the Unite States generally on the
Company's business;
xv) the failure to properly manage growth and successfully integrate acquired
companies and operations;
xvi) risks associated with providing new service offerings to clients;
xvii) the ability to secure outside financing at rate acceptable to the Company;
xviii) risks associated with third party claims relate to the acts, errors or
omissions of the worksite employees; and
xix) other factors which are described in further detail in this Annual Report
on Form 10-KSB and in other filings by the Company with the Securities and
Exchange Commission.
The Company cautions that the factors described above could cause actual results
or outcomes to differ materially from those expressed in any forward-looking
statements made by or on behalf of the Company. Any forward-looking statement
speaks only as of the date on which such statement is made, and the Company
undertakes no obligation to update any forward-looking statement or statements
to reflect events or circumstances after the date on which such statement is
made or to reflect the occurrence of unanticipated events. New factors emerge
from time to time, and it is not possible for management to predict all of such
factors. Further, management cannot assess the impact of each such factor on the
business or the extent to which any factor, or combination of factors, may cause
actual results to differ materially from those contained in any forward-looking
statements.
Acquisitions
In April 2003, the Company completed the acquisition of 100% of the outstanding
stock of BeneCorp Business Services, Inc. ("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 October, 2003,
the Company terminated the employment agreements with the two former officers of
BeneCorp.
In April 2003, The Resourcing Solutions Group, Inc. ("TRSG") entered into an
agreement for the purchase of customer contracts, with a value of up to
$100,000,000, from Management Resource Group California, LLC ("MRG").
Consideration for such contracts was to be three times annualized net profit
margin on each contract paid in either cash or freely tradable common stock of
the Company. Initially, the Company issued 34,500,000 shares of unrestricted
common stock in conjunction with the purchase of the contracts and recorded a
receivable of $600,000 in conjunction with that issuance. In addition, the
Company entered into a one-year agreement with MRG to provide continuing
administrative services under such customer contracts. 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.
9
In conjunction with the termination of this agreement, the Company entered into
a settlement agreement for repayment of the $600,000 receivable. The repayment
requires MRG to make monthly recurring payment of $20,000 over a period of
thirty (30) months. MRG has failed to meet its obligations under this agreement
and the Company is currently reviewing its settlement and litigation options. As
of December 31, 2003, there was $575,000 remaining as due to the Company from
MRG. The Company has fully reserved this amount as uncollectible.
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. 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.
Employees
As of March 31, 2004, Pacel Corp. employed 16 persons on a full time basis.
Pacel Corp. supplements fulltime employees with subcontractors and part-time
individuals, consistent with workload requirements. The Company's continued
success depends heavily upon its ability to retain highly qualified and
competent personnel.
COMPLIANCE WITH ENVIRONMENTAL LAWS
Company operations do not pollute nor involve discharge of material into the
environment. As a result, no expenditure is budgeted or required for environment
protection or restoration. Pacel is concerned about protecting the environment
and participates in recycling programs.
ITEM 2. DESCRIPTION OF PROPERTY
The Company maintains its executive offices at 10108 Industrial Drive,
Pineville, North Carolina 28134. The company has a full service lease until
December 31, 2004. The Company's telephone number is (704) 643-0676 and its
facsimile number is (704) 643-0678. The Company is also a party to leases for
three "key-man" office spaces located in Plano, Texas; Jacksonville, Florida;
and Washington, Virginia.
ITEM 3. LEGAL PROCEEDINGS
The Securities and Exchange Commission (the "SEC") filed an action in federal
district court asserting various violations of securities laws against the
Company. The complaint alleges that defendant 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 form and least one bogus attorney opinion letter arranged by
Custable." The complain alleges that, in connection with this alleged "scheme",
the Company and its Chairman and former CEO, David Calkins, violated Section
10
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.
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
hired a law firm to handle such 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR THE COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The common stock of the Company is traded on over-the-counter Electronic
Bulletin Board under the symbol "PCCL." On December 31, 2003 there were 195
holders of record of our common stock. As many such shares are held by brokers
and other institutions on behalf of stockholders, the Company is unable to
estimate the total number of stockholders represented by these record holders.
The following table sets forth the high and low sales price per share of our
common stock, for the periods indicated, all of which are adjusted for all stock
splits and reverses. The quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commissions and may not represent actual transactions.
The "high" and "low" bid quotations for the Company's Common Stock for each
quarterly period for the fiscal years ended December 31, 2002 and December 31,
2003 were as follows:
Calendar Quarter High Bid Price Low Bid Price
2002
First $ 1,650.00 $ 270.00
Second 360.00 60.00
Third 87.00 15.00
Fourth 37.00 6.00
2003
First 17.00 0.70
Second 6.30 0.50
Third 2.40 0.10
Fourth 0.70 0.10
On December 31, 2003, there were approximately 195 shareholders of record of the
Company's Common Stock.
The Company has paid no cash dividends since its inception. The Company
currently plans to retain any future earnings for use in its business and does
not intend to pay cash dividends in the foreseeable future. Holders of the
Common stock are entitled to share ratably in dividends when and as declared by
the Board of Directors out of funds legally available therefore.
RECENT SALES OF UNREGISTERED SECURITIES
In 2003, in connection with the acquisition of BeneCorp Business Services, Inc.,
the acquisition of contracts from Management Resource Group California, LLC and
other working capital purposes, the Company issued a total of 1,576,834,553
unrestricted shares of the Company's no par value common stock, before adjusting
such shares to reflect the effects of any stock splits occurring subsequent to
issuance. After giving effect to the one- for-thirty reverse split on March 17,
2003 and the one-for-one hundred reverse split on February 24, 2004, such shares
11
would be restated as 12,448,550 shares. Such shares were issued to The Honor
Hedge Fund, LLC, a Nevada limited liability company; Reisco Consulting, Inc., a
Nevada Corporation; Equities First, LLC a Delaware Limited Liability Company;
MRG California LLC, a California Limited Liability Company; Compass Capital,
Inc., a New York Corporation; and T&B Associates, Inc., a Florida Corporation.
These 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, Illinois and Florida who specifically determined, prior to declaring
that the transactions were exempt under Section 3(a)(10), that the transactions
were fair to the interested parties.
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. Subsequent to the one-for-one hundred split in February
2004, such shares were replaced with 1,200,000 shares of the common stock of the
Company. 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
From January 1, 2004 until March 25, 2004, in connection with the funding of
working capital shortfalls and expenses associated with the review of potential
acquisition candidates, the Company issued a total of 332,166,221 unrestricted
shares of the Company's no par value common stock, before adjusting such shares
to reflect the effects of any stock splits occurring subsequent to issuance.
After giving effect to the one-for-one hundred reverse split on February 24,
2004, such shares would be restated as 11,145,615 shares. Such shares were
issued to Honor Hedge Fund, LLC, a Nevada limited liability company; Reisco
Consulting, Inc., a Nevada corporation; Compass Capital, Inc., a New York
Corporation; and T&B Associates, Inc., a Florida Corporation. These 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, Illinois
and Florida who specifically determined, prior to declaring that the
transactions were exempt under Section 3(a)(10), that the transactions were fair
to the interested parties.
Option Grants
None.
Issuances of Stock for Services or in Satisfaction of Obligations
The Company issued 41,623,496 shares of its no par value common stock for
various consulting, financing and legal fees for the year ended December 31,
2003. After giving effect to the one-for-thirty reverse split on March 17, 2003
and the one-for-one hundred reverse split on February 24, 2004, such shares
would be restated as 319,567 shares.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Year Ended December 31, 2003 Compared to Year Ended December 31, 2002
Revenue for the year ended December 31, 2003 to $3,840,586. All of the Company's
revenue in 2003 was derived from its recently acquired PEO operating units. In
2002, the Company derived revenue from the sale of retail hardware and software
products, but all such operations have been classified as discontinued
operations for presentation purposes. In 2003, the Company was not actively
selling such products due to all resources being devoted to the acquisition and
development of its PEO business.
12
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 year ended
December 31, 2003. The Company had no such revenue in the corresponding periods
of 2002.
Year ended
December 31, 2003
Reconciliation of billings to revenue recognized:
Gross billings to clients $ 25,437,118
Less - Gross wages billed to clients (21,597,214)
---------------
Revenue from PEO services $ 3,839,904
Other miscellaneous revenue 682
---------------
Total revenue as reported $ 3,840,586
===============
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Cost of services for the year ended December 31, 2003 was $2,985,530, and is
related directly to the delivery of services to its PEO clients. No such PEO
business activity occurred in the year ended December 31, 2002. During 2003, the
Company began experiencing difficulties in processing unemployment claims for
its North Carolina worksite employees. Upon research of the difficulties, the
Company learned that its North Carolina Employment Security Commission account
was being actively reviewed by that agency. Although the Company has received no
notices in writing from the agency, it has engaged counsel to bring this matter
to a close as quickly as possible. There is a possibility that liability for the
Company may be the result of this review, but management is currently unable to
provide a reasonable estimate of the amount.
Gross profit contributed by the PEO operations of the Company totaled $855,056
for 2003. This amount is equivalent of 3.42% of billings or 22.6% of revenue.
Sales, general & administrative expenses, including salaries and wages,
decreased to$3,065,418 for the year ended December 31, 2003, compared to
$4,367,365 in the corresponding period of 2002. During 2002, the Company began
to decrease its level of spending for general and administrative expenses as it
had discontinued the operations of its retail hardware and software business.
Depreciation expenses decreased to $25,438 for the year ended December 31, 2003,
compared to $55,618 for 2002. The majority of the 2003 depreciation expense is
related to the Company's acquisition of assets for its PEO business units. The
decrease is due to the disposal of assets related to the Company's relocation
and downsizing of its operating activities in 2002.
Interest Expense is interest paid and accrued on convertible notes, notes
payable, taxes and loans from officers or stockholders. Interest for the year
ended December 31, 2003 was $410,718 compared to $141,450 for the same period of
2002. The increase is primarily attributable to the Company's continued need to
borrow for working capital needs.
Finance Expense for 2003 was $585,905 compared to $235,509 for 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. The Company anticipates that such costs will continue at the 2003 levels
until an alternative source of financing can be implemented.
13
LIQUIDITY AND CAPITAL RESOURCES
Net cash used for operating activities for the years ended December 31, 2003 and
2002 was $3,592,727 and $36,475 respectively. The use of cash in operating
activities for the year ended December 31, 2003 is mainly attributable to the
increased operating loss for the year, 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 year ended December 31, 2003
was $38,052. The Company utilized $25,000 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 for the year ended December 31, 2003
was $4,228,696 compared to $11,815 in the corresponding period ended December
31, 2002. The cash provided during the 2003 fiscal year is directly related to
the Company's execution and utilization of three equity-based lines of credit.
On December 31, 2003, the Company had $682,400 in cash and cash equivalents
compared to $8,379 at December 31, 2002. In addition, the Company maintains a
trust account that, at December 31, 2003 had a balance of $1,100,000 related to
funds prepaid for 2004 services by a client of the Company. Such funds are
segregated and are unavailable for general operating purposes. The Company
anticipates that it will continue to have significant capital requirements as
operations continue to use cash in excess of billings. The Company views this
investment in building its infrastructure as necessary to the execution of its
business plan. The Company consolidated all operations except sales and risk
management at its corporate headquarters in Charlotte, North Carolina by the end
of 2003 in order to reduce operating expenses.
In September 2002, the Company entered into an equity line of credit for
$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 to fund acquisitions and shortfalls
in working capital. During 2003, the Company drew down $1,385,000 and issued
407,123,834 shares, before the effect of any splits subsequent to the issuance
of those shares, of common stock in conjunction with this equity line. After
giving effect to the one-for-thirty reverse split in March 2003 and the
one-for-one hundred reverse split in February 2004, the total shares issued
would be restated as 1,534,844 shares.
In March 2003, the Company entered into an equity line of credit for $10,000,000
from Equities First Inc. at a discount rate of up to 50%. Pursuant to an
Assignment and Assumption Agreement dated February 10, 2004, Gala Enterprises
Ltd. Was substituted for Equities First Inc. Access to the funds is limited to
$500,000 per month. The line is being used to fund acquisitions and shortfalls
in working capital. The Company drew down $377,675 and issued 119,000,000
shares, before the effect of any splits subsequent to the issuance of those
shares, of common stock in 2003. After giving effect to the one-for-thirty
reverse split in March 2003 and the one-for-one hundred reverse split in
February 2004, the total shares issued would be restated as 320,000 shares.
14
Subsequent to the end of 2003 and the substitution of Gala Enterprise Ltd., no
funding under this line has occurred.
In August 2003, the Company entered into an equity line of credit for
$10,000,000 from Compass Capital Inc. and T&B Associates, 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 acquisitions and shortfalls in working capital. During 2003,
the Company drew down $2,275,000 and issued 1,017,210,718 share of common stock
in conjunction with this equity line. After giving effect to the one-for-one
hundred reverse split in February 2004, the total shares issued would be
restated as 10,172,106 shares.
The cash requirements of the Company needed to fund corporate and operating
expenditures continue to exceed cash flows generated from operations. The
Company continues to satisfy its capital needs through equity financing until
sufficient cash flows can be generated from PEO revenues through organic growth
initiatives for the existing operations and the acquisition of additional
business units. Liabilities of the Company consist of over extended accounts
payable, payroll taxes, loans from officers and accrued officer's compensation.
The loss of equity financing would seriously hinder the Company's ability to
continue as a going concern.
The Company is continually seeking strategic relationships to enhance its
products and services. Currently, the Company has focused its efforts on
developing strategic relationships with other organizations associated with the
PEO business. The Company expects to continue its investing activities,
including expenditures for PEO acquisitions, sales and marketing, product
support, and administrative support, as funds are available.
In March 2003, the Company effected a one-for-thirty reverse stock 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.
In February 2004, the Company effected a one-for-one hundred reverse stock split
restating the number of common shares outstanding as of December 31, 2002 from
21,184,591 to 211,846 and the number of common shares outstanding as of December
31, 2003 from 1,675,736,763 to 16,757,368. All references to average number of
shares outstanding and prices per share have been restated retroactively to
reflect the split.
In April 2003, the Company issued a one time dividend of one share of The
Resourcing Solutions Group, Inc. ("TRSG") (an Over-the-Counter, non-reporting
company, Symbol: RESG) for each share of the Company held by shareholders of
record on December 10, 2002.
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-KSB 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
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.
15
ITEM 7. FINANCIAL STATEMENTS
The Financial Statements are listed at "Index to Consolidated Financial
Statements".
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no disputes or disagreements of any nature between the Company or its
management and its public auditors with respect to any aspect of accounting or
financial disclosure.
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT
Directors, Executive Officers, Promoters and Control Persons
a) Set forth below are the names, ages, positions, with the Company and
business experiences of the executive officers and directors of the Company.
Name Age Position(s) with Company
------------------ ---- ----------------------------------
David E. Calkins 60 Chairman of the Board, Director
F. Kay Calkins 45 Director
W. Revel Bellamy 54 President and Chief Executive Officer
Timothy L. Maness 43 Chief Financial Officer
All directors hold office until the next annual meeting of the Company's
shareholders and until their successors have been elected and qualify. Officers
serve at the pleasure of the Board of Directors. The officers and directors will
devote such time and effort to the business and affairs of the Company as may be
necessary to perform their responsibilities as executive officers and/or
directors of the Company.
Family Relationships
David E. Calkins and F. Kay Calkins are husband and wife.
Business Experience
David E. Calkins, Chairman of the Board and Director
David E. Calkins founded PACEL in 1994 and is a member and Chairman of the Board
of Directors. Mr. Calkins also served as President, Chief Executive Officer and
Chief Financial Officer of the Company until December 2003. From 1992 until
founding PACEL, Mr. Calkins was the Regional Manager of three divisions of
Pacific Nuclear Corporation ("PRC"), now known as Vectra Technologies, Inc., an
engineering and information services company, listed and traded on NASDAQ Stock
Market. Vectra Technologies provides power plant modifications, maintenance
support and nuclear fuel handling to utility companies and the United States
Department of Energy. From 1987 to 1993, Mr. Calkins served as Project Manager,
Program Director, Vice President of Operations, and Executive Vice President for
Business Development for PRC. Mr. Calkins
16
served from 1981 to 1986 as Manager of Engineering and Construction for the Zack
Company, a Chicago, Illinois mechanical contractor to the utility industry. Mr.
Calkins was also a Manager of Quality Engineering and Startup Engineer for
Westinghouse. From 1972 to 1981, Mr. Calkins served as an Executive Engineer and
Consultant for NUS Corporation, a consulting firm for domestic and international
utilities, The United States Nuclear Regulatory Commission and Department of
Energy. Mr. Calkins resides in Virginia and is the spouse of F. Kay Calkins.
F. Kay Calkins, Director
F. Kay Calkins current serves as a Director of the Company. Prior to the fourth
quarter of 2003, she served as President of EBStor.com, Inc. ("EBStor"), an
Internet and web development company, until that operation ceased activities in
the fourth quarter of 2003. In her capacity as President, Ms. Calkins was
responsible for oversight of all operations of the company. Ms. Calkins is
experienced in the management of technology companies and utilized that
experience in the start-up and growth of EBStor. Prior to her position with
EBStor, Ms. Calkins was Vice President and Chief Operating Officer of PACEL
Corp., where she oversaw the day-to- day operations of the Company and managed
the development and deployment of software systems. Ms. Calkins has over fifteen
years of experience in technology-related companies. Before accepting the
positions with PACEL Ms. Calkins was President of CMC Services, a marketing and
consulting firm based in Virginia. Ms. Calkins resides in Virginia.
W. Revel Bellamy
Mr. Bellamy was elected as President and Chief Executive officer of the Company
in December 2003. Mr. Bellamy founded Asmara, the North Carolina-based PEO that
was acquired by the Company in April 2003. Prior to the acquisition of Asmara by
the Company, Mr. Bellamy served as President and Chief Executive Officer of
Asmara and its affiliated companies. Prior to founding Asmara, Mr. Bellamy had
accumulated over twenty years of experience building and operating a large
commercial construction company. Mr. Bellamy currently resides in North
Carolina.
Timothy L. Maness
Mr. Maness was elected as Chief Financial Officer of the Company in December
2003. He had served as Chief Financial Officer of Asmara from May 2002 until its
acquisition by the Company in April 2003, after spending three years with an
early-stage internet brokerage firm as Chief Financial Officer. Before that, Mr.
Maness spent five years, in several senior capacities, with Broadway & Seymour,
Inc., a publicly traded software concern focused on the financial services
industry. He is a senior financial executive with over twenty years of
experience in managing and directing the financial activities of business
organizations. He received his Bachelor of Science in Accounting from the
University of North Carolina at Charlotte and is licensed as a Certified Public
Accountant in North Carolina. Mr. Maness resides in North Carolina.
17
ITEM 10. MANAGEMENT REMUNERATION AND TRANSACTIONS
Executive Compensation
Annual Annual Annual LT Comp LT
Comp Comp Comp Rest Comp LTIP
Name and Post Year Salary Bonus Other Stock Options Payouts
-------------
David E. Calkins, 2001 175,000 [1] 0 0 0 33,333 [2] 0
Chairman of the Board 2002 175,000 [1] 0 0 1,200,000 [3] 0 0
2003 127,497 [4] 0 120,609 [4], [6] 0 0 0
William R. Bellamy, 2001 0 0 0 0 0 0
President and CEO 2002 0 0 0 0 0 0
2003 98,077 [5] 49,545 6,423 [6] 0 0 0
Timothy L. Maness, 2001 0 0 0 0 0 0
CFO 2002 0 0 0 0 0 0
2003 77,499 [7] 10,840 4,469 [6] 0 0 0
[1] - Annual salary accrued on books, but not paid to Mr. Calkins.
[2] - The Company issued 100,000,000 options for the purchase of common stock
of the Company to repay Mr. Calkins for prior loans used to finance the
Company. The issuance has been restated for the March 2003, one-for-thirty
reverse split and the February 2004, one-for-one hundred reverse split.
[3] - Pursuant to a 3 (a) (10) filing, the Company issued 120,000,000 shares of
the common stock of the Company to David E. and F. Kay Calkins to repay a
loan made to the Company. The issuance has been restated for the February
2004, one-for-one hundred reverse split.
[4] - Mr. Calkins began receiving compensation payments from the Company in May
2003. He is currently compensated at an annual salary of $240,000. In
addition to his regular salary, Mr. Calkins also received other
compensation of $116,667 in payment of prior years' salaries that had been
previously accrued on the books of the Company.
[5] - Mr. Bellamy became an employee of the Company on April 26, 2003 in
conjunction with the acquisition of substanitally all of the assets of
Asmara, Inc. On December 22, 2003, Mr. Bellamy was elected as President and
CEO of the Company. Mr. Bellamy is currently compensated at an annual
salary of $216,000.
[6] - Other annual compensation includes payments made on behalf on employees
for health, life and dental benefits and employer matching contributions
for retirement plans.
[7] - Mr. Maness became an employee of the Company on April 26, 2003 in
conjunction with the acquisition of substantially all of the assets of
Asmara, Inc. On December 22, 2003, Mr. Maness was elected as Chief
Financial Officer of the Company. Mr. Maness is currently compensated at an
annual salary of $135,000.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of March 31, 2004 with
respect to the beneficial ownership of the common stock by each beneficial owner
of more than 5% of the outstanding shares thereof, by each director, each
nominee to become a director and each executive officer named in the Summary
Compensation Table and by all executive officers, directors and nominees to
become directors of the Company as a group. Under the rules of the Commission, a
person is deemed to be the beneficial owner of a security if such person has or
shares the power to vote or direct the voting of such security or the power to
dispose or direct the disposition of such security. A person is also deemed to
be a beneficial owner of any securities if that person
18
has the right to acquire beneficial ownership within 60 days. Accordingly, more
than one person may be deemed to be a beneficial owner of the same securities.
Unless otherwise indicated by footnote, the named entities or individuals have
sole voting and investment power with respect to the shares of common stock
beneficially owned. There are no arrangements known to the Company including
pledges of securities that may, at a subsequent date, result in any change of
control of the Company.
Name and Address Title of Amount and Nature Percent
of Beneficial Owner [1] Class of Beneficial Owner of Class
----------------------------- ---------- ------------------- ----------
David E. Calkins Common 600,010 3.60%
F. Kay Calkins Common 600,005 3.60%
All Directors and Executive
Officers as a Group Common 1,200,015 7.20%
[1] - The address for each of the above is c/o Pacel Corp., 311 Gay Street,
Suite 3E, Washington, Virginia 22747.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In April 2003, in connection with its acquisition of Asmara, the Company entered
into a two year employment agreement with W. Revel Bellamy. The agreement
stipulated a base salary of $150,000 per year.
In April 2003, in connection with its acquisition of Asmara, the Company became
party to a real estate lease for office space located in Charlotte, North
Carolina. The lessor for this property is W. Revel Bellamy, the President and
CEO of the Company. The lease expires on December 31, 2004 and requires monthly
lease payments of $5,000.
In August 2003, the Company entered into a one year employment agreement with
Timothy L. Maness. The agreement stipulates a base salary of $135,000 per year.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit No. Description
---------- -----------
31.1 * Section 302 Certification by the CEO
31.2 * Section 302 Certification by the CFO
32.1 * CEO Certification Pursuant to the Sarbanes-Oxley Act
32.2 * CFO Certification Pursuant to the Sarbanes-Oxley Act
* Filed herewith
(b) Reports on Form 8-KSB: 8-K/A filed with the Securities and Exchange
Commission on December 16, 2003
19
ITEM 14. CONTROLS AND PROCEDURES
As required by Rule 13a-15 under the Exchange Act, within the ninety days prior
to the filing date of this report, the Company carried out an evaluation of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures. This evaluation was carried out under the supervision and with
the participation of Company's management, including the Company's President and
Chief Executive Officer and the Company's Chief Financial Officer. Based upon
that evaluation, the Company's President and Chief Executive Officer and the
Company's Chief Financial Officer concluded that the Company's disclosure
controls and procedures are effective. There have been no significant changes in
the Company's internal controls subsequent to the date the Company carried out
its evaluation.
Disclosure controls and procedures are controls and other procedures that are
designed to ensure that information required to be disclosed in Company reports
filed or submitted under the Exchange Act is recorded, processed, summarized and
reporting, within the time periods specified in the Securities and Exchange
Commission's rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed in Company reports filed under the Exchange Act is
accumulated and communicated to management, including the Company's Chief
Executive Officer and Chief Financial Officer, as appropriate, to allow timely
decisions regarding required disclosure.
20
SIGNATURES
In accordance with Section 13 and 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Pacel Corp.
-------------------------------
(Registrant)
Date: March 29, 2004
By: /s/ David E. Calkins
------------------------------------------------------
David E. Calkins, Director and Chairman of the Board
By: /s/ F. Kay Calkins
------------------------------------------------------
F. Kay Calkins, Director
By: /s/ W. Revel Bellamy
------------------------------------------------------
W. Revel Bellamy, President and Chief Executive Officer
By: /s/ Timothy L. Maness
------------------------------------------------------
Timothy L. Maness, Chief Financial Officer
Pursuant to the requirements of the Exchange Act, this report has been signed by
the following persons in the capacities and on the dates indicated.
Signature Title Date
By: /s/ David E. Calkins
------------------------
David E. Calkins Director, Chairman March 29, 2004
By: /s/ F. Kay Calkins
------------------------
F. Kay Calkins Director March 29, 2004
By: /s/ W. Revel Bellamy
------------------------
W. Revel Bellamy President and CEO March 29, 2004
By: /s/ Timothy L. Maness
------------------------
Timothy L. Maness CFO March 29, 2004
21
Financial Statement Table of Contents Page
Independent Auditors' Report F-2
Consolidated Balance Sheets
December 31, 2003 and December 31, 2002 F-3
Consolidated Statement of Operations
For the years ended December 31, 2003 and December 31, 2002 F-5
Consolidated Statement of Stockholders' Deficit
December 31, 2003 and December 31, 2002 F-6
Consolidated Statement of Cash Flows
For the years ended December 31, 2003 and December 31, 2002 F-7
Notes to Consolidated Financial Statements F-9
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The Board of Directors
Pacel Corp.
We have audited the accompanying consolidated balance sheet of Pacel
Corp.and Subsidiaries as of December 31, 2003 and 2002 and the related
consolidated statements of operations, stockholders' equity (deficit), and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Pacel Corp. and subsidiaries
as of December 31, 2003 and 2002, and results of their operations and their cash
flows for the years then ended in conformity with generally accepted accounting
principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
1(l) to the financial statements, the Company has sustained significant losses
from operations since inception and requires additional capital to continue
operations. These conditions raise substantial doubt about its ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 1(l). The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ Peter C. Cosmas Co., CPAs
Peter C. Cosmas Co., CPAs
370 Lexington Ave.
New York, NY 10017
March 24, 2004
F-2
PACEL CORP. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, December 31,
2003 2002
---------------- ---------------
ASSETS
Current assets:
Cash $ 682,400 $ 8,379
Trust account - client deposits and advance payments 1,100,000 -0-
Accounts receivable 70,384 -0-
Stock subscription receivable 125,000 -0-
Prepaid expenses 44,326 -0-
Workers compensation insurance deposits 132,851 -0-
Other receivables -0- 112,499
---------------- ---------------
Total current assets 2,154,961 120,878
---------------- ---------------
Property and equipment, net of accumulated depreciation of
$153,578 and $128,140, respectively 97,355 24,961
---------------- ---------------
Other assets:
Other receivables 7,902 -0-
Goodwill 1,075,432 -0-
Security deposits 9,366 3,991
---------------- ---------------
Total other assets 1,092,700 3,991
---------------- ---------------
Total assets $ 3,345,016 $ 149,830
================ ===============
See accompanying notes to the consolidated financial statements.
F-3
PACEL CORP. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, December 31,
2003 2002
---------------- ---------------
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 1,119,543 $ 1,353,022
Payroll and payroll related liabilities 2,413,244 -0-
Accrued expenses 559,229 234,602
Accrued expenses - officers 251,583 316,533
Loans payable - officers/stockholders 1,063,131 639,776
Client deposits and advance payments 1,100,000 -0-
Notes payable 505,218 873,750
Notes payable - bank 33,900 45,565
Capital Leases 13,608 -0-
Income taxes payable 2,532 -0-
---------------- ---------------
Total current liabilities 7,061,988 3,463,248
Long-term liabilities:
Loans payable-officers/stockholders 53,250 -0-
Convertible debentures -0- 409,111
---------------- ---------------
Total liabilities 7,115,238 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 shares
authorized, 16,757,368 and 211,846 shares
issued respectively 17,500,377 10,685,520
Cumulative currency translation adjustment (18,720) (18,720)
Accumulated deficit (21,263,199) (14,400,649)
---------------- ---------------
Total stockholders' (deficit) (3,770,222) (3,722,529)
---------------- ---------------
Total liabilities and stockholders' deficit $ 3,345,016 $ 149,830
================ ===============
See accompanying notes to the consolidated financial statements.
F-4
PACEL CORP. AND SUBSIDIARIES
Consolidated Statements of Operations
Year ended
December 31,
2003 2002
---------------- ----------------
Revenue $ 3,840,586 $ -0-
Cost of sales 2,985,530 -0-
---------------- ----------------
Gross profit 855,056 -0-
Operating costs and expenses:
Sales, General and administrative 3,065,418 4,367,365
Depreciation and amortization 25,438 55,618
Interest expense 410,718 141,450
Financing costs 585,905 235,509
---------------- ----------------
Total operating expenses 4,087,479 4,799,942
---------------- ----------------
Operating loss from continuing operations
before extraordinary items (3,232,423) (4,799,942)
Loss on write-down of loan receivables (717,500) -0-
Gain on extinguishment of debt -0- 426,150
Discontinued operations (Note 3):
Income from discontinued operations of FCL -0- 7,959
Loss from discontinued operations of EBStor -0- (220,268)
Gain from disposal of EBStor -0- 177,817
---------------- ----------------
Loss before cumulative effect of accounting change (3,949,923) (4,408,284)
Cumulative effect of accounting change (2,912,627) (407,049)
---------------- ----------------
Net Loss $ (6,862,550) $ (4,815,333)
================ ================
Net loss per common and common equivalent share:
Basic $ (1.63) $ (32.72)
Diluted $ (1.63) $ (32.72)
Weighted average shares outstanding:
Basic 4,207,603 147,146
Diluted 4,207,603 147,146
See accompanying notes to the consolidated financial statements.
F-5
PACEL CORP. AND SUBSIDIARIES
Consolidated Statements of Stockholders'
Currency Total
Preferred Stock Common Stock Translation Stockholders
Shares Amount Shares[1] Amount (Deficit) Adjustment Deficit
---------- ----------- ----------- ------------- -------------- ---------- ------------
Balance, December 31, 2001 1,000,000 $ 11,320 824 $ 6,729,122 $ (9,585,316) $ (11,000) $ (2,855,874)
Issuance of common stock, in
connection with convertible
notes payable 47,979 541,418 541,418
Issuance of common stock,
for professional services 200 36,000 36,000
Exercise of stock options 33,333 124,000 124,000
Issuance of common stock,
options in connection with
S-8 registrations 129,510 3,254,980 3,254,980
Effect of currency translation (7,720) (7,720)
Net loss (4,815,333) (4,815,333)
---------- ----------- ----------- ------------- -------------- ---------- ------------
Balance, December 31, 2002 1,000,000 11,320 211,846 10,685,520 (14,400,649) (18,720) (3,722,529)
Issuance of common stock, in
connection with convertible
notes payable 2,577,405 964,934 964,934
Issuance of common stock,
for professional services 384,567 53,575 53,575
Issuance of common stock,
in connection with Section
3(a)(10) filings 12,026,950 4,035,548 4,035,548
Embedded interest in
connection with convertible
debt issued under Section
3(a)(10) filings - 360,800 360,800
Issuance of common stock, in
in connection with repayment
of loans from officers 1,200,000 600,000 600,000
Issuance of common stock, in
connection with acquisitions 356,600 800,000 800,000
Net loss (6,862,550) (6,862,550)
---------- ----------- ----------- ------------- -------------- ---------- ------------
Balance, December 31, 2003 1,000,000 $ 11,320 16,757,368 $17,500,377 $ (21,263,199) $ (18,720) $ (3,770,222)
========== =========== =========== ============= ============== ========== ============
[1] - Shares are restated to reflect a one-for-thirty reverse stock sp on
March 17, 2003 and a one-for-one hundred reverse stock split on February
24, 2003.
See accompanying notes to the consolidated financial statements.
F-6
PACEL CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Year ended
December 31,
2003 2002
---------------- ----------------
Cash flows from operating activities:
Net loss $ (6,862,550) $ (4,815,333)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Cumulative effect of accounting change -0- 407,049
Depreciation 25,438 55,618
Provision for bad debts 625,000 (1,311)
Other non-cash items 405,013 3,282,972
Loss on impairment of asset 2,912,627 -0-
Gain on sale of EBStor -0- (177,817)
Increase (decrease) in cash from changes in:
Accounts receivable (47,947) 324,134
Other receivables (20,995) 20,185
Client Deposits (1,100,000) -0-
Inventory -0- 61,306
Insurance deposits 49,440 -0-
Prepaid expenses (5,160) -0-
Security deposits (125) 6,131
Accounts payable (417,593) (70,957)
Accrued expenses 396,013 59,091
Payroll and payroll related liabilities 617,054 -0-
Deferred revenue (162,970) -0-
Loans payable - officers/stockholders (5,003) 812,457
Income taxes payable (969) -0-
--------------- ---------------
Net cash (used in) operating activities (3,592,727) (36,475)
Cash flows from investing activities:
(Purchases) disposals of property and equipment (17,692) -0-
Deposits on Acquisitions -0- (96,000)
Notes receivable -0- 71,000
Net cash received in acquisition 160,744 -0-
Cash used for acquisitions (105,000) -0-
--------------- ---------------
Net cash (used in) investing activities 38,052 (25,000)
Cash flows from financing activities:
Repayments of notes payable 945,457 50,000
Repayment of Loans Payable -0- (188,185)
Issuance of convertible notes payable (37,250) -0-
Repayments from lines of credit (2,690) -0-
Proceeds from sale of common stock 3,323,179 150,000
-------------- ---------------
Net cash provided by financing activities 4,228,696 11,815
Effects of exchange rates on cash -0- (7,720)
------------- ---------------
Net increase (decrease) in cash and cash equivalents 674,021 (57,380)
Cash and cash equivalents, beginning of period 8,379 65,761
-------------- ---------------
Cash and cash equivalents, end of period $ 682,400 $ 8,381
============== ===============
See accompanying notes to the consolidated financial statements.
F-7
PACEL CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Year ended
December 31,
2003 2002
---------------- ----------------
Supplemental disclosure of cash flow information:
Cash paid for interest $ 24,980 $ 8,092
=============== ===============
[BALANCE OF THIS PAGE INTENTIONALLY LEFT BLANK]
See accompanying notes to the consolidated financial statements.
F-8
PACEL CORP. AND SUBSIDARIES
NOTES TO CONSOLIDATED FINANCIAL STATMENTS
DECEMBER 31, 2003 AND 2002
1. Summary of Significant Accounting Policies:
a. Nature of the business. PACEL Corp. (the "Company") was incorporated on May
3, 1994 under the laws of the State of Virginia. In September 2002, the Company
announced its intention to enter the Professional Employer Organization (PEO)
industry. The Company will also provide Administrative Services along with its
technology services, and business consulting. In December 2002, the Company
formed a wholly owned subsidiary, The Resourcing Solutions Group Inc. to acquire
and run the PEO companies.
b. Principles of consolidation. The consolidated financial statements include
the accounts of the Company and all of its subsidiaries in which a controlling
interest is maintained. All significant inter-company accounts and transactions
have been eliminated in consolidation. For those consolidated subsidiaries where
Company ownership is less than 100%, the minority stockholders' interest is
shown as a minority interest. Investments in affiliates over which the Company
has significant influence but not a controlling interest are carried on the
equity basis.
c. Cash and cash equivalents. Cash equivalents consist of liquid investments,
with a maturity of three months or less at the time of purchase. Cash
equivalents are stated at cost, which approximate market value.
d. Property and Equipment. Property and equipment are stated at cost less
accumulated depreciation and amortization. Depreciation is determined using the
straight-line method over the estimated useful lives of the assets. Estimated
useful lives of 24 to 36 months are used on computer equipment and related
software, five years for office equipment, furniture, and fixtures. Depreciation
and amortization of leasehold improvements is computed using the shorter of the
remaining lease term or five years. Maintenance and repairs are charged against
income and betterments are capitalized.
e. Reclassification. Certain prior year amounts have been reclassified to
conform to current year's presentation.
f. 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
F-9
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.
g. Advertising Costs. The Company expenses all advertising costs as incurred.
h. Use of Estimates. The preparation o financial statements and related
disclosures in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts in
the Consolidated Financial Statements and accompanying notes.
i. Impairment of long-lived Assets. Effective January 1, 1996, the Company
adopted SFAS NO. 121, "Accounting for the Impairment of long-lived Assets and
for long-lived Assets to be disposed of." SFAS 121 required the Company to
review the recoverability of the carrying amounts of its long-lived assets
whenever events or changes in circumstances indicate that the carrying amount of
the asset might not be recoverable. Long-lived assets and certain identifiable
intangible assets to be held and used are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of such
assets may not be recoverable. Determination of recoverability is based on an
estimate of discounted future cash flows resulting from the use of the asset and
its eventual disposition. Measurement of an impairment loss for long-lived
assets and certain identifiable intangible assets that management expects to
hold and use are based on the fair value of the asset. Long-lived assets and
certain identifiable intangible assets to be disposed of are reported at the
lower of carrying amount or fair value less costs to sell.
j. Fair Value Disclosures. The carrying amounts reported in the balance sheets
for cash and cash equivalents, accounts receivable, inventories, accounts
payable and accrued expenses, approximate fair value because of the immediate or
short-term maturity of these financial instruments.
k. Stock Options. The Company has adopte the disclosure provisions of SFAS No.
148. The Company accounts for its stock options in accordance with the
provisions of Accounting Principles Board (APB) Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations. As such, compensation
expense would be recorded on the date of grant only if the current market price
of the underlying stock exceeded the exercise price. On January 1, 1996, the
Company adopted the disclosure requirements of Statement of Financial Accounting
Standards (SFAS) No. 123, Accounting for Stock-based Compensation. Had the
Company determined compensation cost based on fair value at the grant date for
stock options under SFAS No. 123 the effect would have been immaterial. In
December 2002, the Financial Accounting Standard Board ("FASB") issued SFAS No.
148, "Accounting for Stock-Based Compensation - Transition and Disclosure", SFAS
No. 148 amends Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation," to provide alternate methods of transition for
companies electing to voluntarily change to the fair value method of accounting
for stock- based compensation and also amends the disclosure provisions of SFAS
No. 123. The provisions of SFAS No. 148 are effective for fiscal years ending
December 15, 2002.
l. Basis of Financial Statement Presentation. The accompanying financial
statements have been prepared on a going concern basis, which contemplates the
realization of assets and the satisfaction of liabilities in the normal course
of business. The Company has sustained significant and continuing losses from
operations. These factors indicate that the Company's continuation as a going
concern is dependent upon its ability to obtain adequate financing and becoming
profitable through growth in the PEO market.
F-10
2. 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") entered into an
agreement for the purchase of customer contracts, with a value of up to
$100,000,000, from Management Resource Group California, LLC ("MRG").
Consideration for such contracts was to be three times annualized net profit
margin on each contract paid in either cash or freely tradable common stock of
the Company. Initially, the Company issued 34,500,000 shares of unrestricted
common stock in conjunction with the purchase of the contracts and recorded a
receivable of $600,000 in conjunction with that issuance. In addition, the
Company entered into a one-year agreement with MRG to provide continuing
administrative services under such customer contracts. On August 27, 2003, the
Company terminated its agreements 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. The repayment
required MRG to make monthly recurring payment of $20,000 over a period of
thirty (30) months. MRG has failed to meet its obligations under this agreement
and the Company is currently reviewing its settlement and litigation options. As
of December 31, 2003, there was $575,000 remaining as due to the Company from
MRG. The Company has fully reserved this amount as uncollectible.
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. 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.
On September 4, 2001 PLRP Acquisitions Corp. a wholly owned subsidiary acquired
all of the outstanding stock, 90,000 shares of Advantage Systems Inc. a wholly
owned subsidiary of Advantage
F-11
Technologies for $70,000 and assumption of $739,523 of debt. The acquisition was
accounted for as a purchase under Accounting Principles Board opinion No. 16
(APB no. 16). In accordance with APB No. 16, the Company allocated the purchase
price based on the fair value of the assets acquired and liabilities assumed.
Goodwill resulting from the purchase of $401,107 was written off in March 2002.
In September 2002 the Company discontinued the manufacturing and sales of
computer hardware in California.
3. Discontinued Operations
On May 31, 2002, the Company completed an agreement to sell E-Bstor an 80% owned
subsidiary to F. Kay Calkins a director. The Company recorded a gain on the sale
of $177,817. Ms. Calkins assumed all of the assets and liabilities on the books
as of May 31, 2002. There is an inter-company receivable of $1,568,815 which we
have taken a 100% reserve against, due to our inability to determine when
E-Bstor will have adequate cash flow to repay this loan. The Consolidated
Financial Statements have been restated, where applicable, to reflect the
E-Bstor Discontinued operations.
In September 2002, the Company discontinued operations relating to the
manufacturing and sales of computer hardware and software. The Consolidated
Financial Statements have been restated, where applicable, to reflect the
discontinuance of these operations.
4. Property and Equipment:
Property and equipment consist of the following:
December 31,
2003 2002
---- ----
Computers and office Equipment $ 250,933 $ 153,101
Less accumulated depreciation 153,578 128,140
--------- ---------
$ 97,355 $ 24,961
========= =========
5. Notes Receivable
The company extended a long-term note to CTM Automated Systems, Inc. in the
amount of $75,000 at an interest rate of 5.25% payable monthly with a balloon
payment October 2002. 1,000 shares of CTM stock collateralize the loan. The
balance of the loan $71,000 was paid in November 2002.
In August 2003, in conjunction with the termination of its agreements with MRG,
the Company entered into a settlement agreement for repayment of a $600,000
receivable. The repayment required MRG to make monthly recurring payment of
$20,000 over a period of thirty (30) months. MRG has failed to meet its
obligations under this agreement and the Company is currently reviewing its
settlement and litigation options. As of December 31, 2003, there was $575,000
remaining as due to the Company from MRG. The Company has fully reserved this
amount as uncollectible.
F-12
6. Long and Short term Borrowings
a. Short-term borrowings
December 31,
2003 2002
---- ----
Note payable bank $ 33,900 $ 45,565
Notes payable - Other 505,218 873,750
Capital lease 13,608 -0-
Total Short-term borrowings $ 552,851 $ 919,315
========== ==========
b. Note payable bank.
The Company borrowed $50,000 from the bank in the form of 5 year term note
due February 20, 2007 at an interest rate of 8.5%. The balance at December
31, 2003 and 2002 was $33,900 and $45,565 respectively.
c. Notes payable - Other.
1) The Company has issued three short term notes payable totaling
$375,000, the notes bear an interest rate of 9% per annum. At December 31,
2003, the Company was in default under the terms of these note agreements.
The Company is working with the note holders to remedy the payment of these
loans through working capital or possible conversion into stock.
2) In connection with the acquisition of NSC, LLC the Company issued a
note for $200,000. Such note is payable over eighteen (18) months and bears
no interest. The balance at December 31, 2003 was $130,218.
d. Convertible Notes payable
The Company had convertible notes of $-0- and $409,111 at December 31, 2003
and 2002 respectively. The notes outstanding at December 31, 2002 bore
interest of 8%-11% per annum. The conversion price of the debentures ranged
from 70% to 40% of the average of the 5 trading days prior to conversion.
Under the terms of the warrant agreements, the exercise price of the
warrants and the number of shares purchasable with each warrant are
adjusted when converted. On the conversion date, the exercise price of the
warrant is 70%-40% of the average market price of the stock for the five
days prior to conversion. Per Emerging Issues Task Force (EITF) Number
98-5, "Accounting for Convertible Securities with Beneficial Conversion
Features or Contingently Adjustable Conversion Ratios", this beneficial
conversion feature was assigned an intrinsic value of $50,000 and recorded
as of December 31, 2002, as calculated under the provisions of the EITF.
This amount was immediately expensed, at the time the Company signed the
Agreement.
F-13
7. Income Taxes
The Company provides for the tax effects of transactions reported in the
financial statements. The provision if any, consists of taxes currently due
plus deferred taxes related primarily to differences between the basis of
assets and liabilities for financial and income tax reporting. The deferred
tax assets and liabilities, if any, represent the future tax return
consequences of those differences, which will either be taxable or
deductible when the assets and liabilities are recovered or settled. As of
December 31, 2003 and 2002 the Company had no material current tax
liability, deferred tax assets, or liabilities respectively. The Company
has available a net operating loss carry forward of approximately $15
million for tax purposes to offset future taxable income. The net operating
loss carryforwards expire in 2012-2023.
8. Earning (Loss) Per Share:
In February 1997, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards ("SFAS") No. 128. "Earnings Per Share" applicable
for financial statements issued for periods ending after December 15, 1997. As
required the Company adopted "SFAS" No. 128 for the year ended December 31, 1997
and restated all prior period earnings per share figures. The Company has
presented basic earnings per share. Basic earnings per share exclude potential
dilution and are calculated by dividing income available to common stockholders
by the weighted average number of outstanding common shares. Diluted earnings
per share incorporate the potential dilutions from all potentially dilutive
securities that would have reduced earnings per share. Since the potential
issuance of additional shares would reduce loss per share they are considered
anti-dilutive and are excluded from the calculation.
Basic net income per common share is computed using the weighted-average number
of common shares outstanding during the period. Diluted net income per common
share is computed using the weighted- average number of common and dilutive
common equivalent shares outstanding during the period. Dilutive common
equivalent shares consist of stock options. Share and per-common share data for
all periods presented reflect the effect of a one-for-one hundred reverse stock
split in April 2002, a one-for- thirty reverse stock split in March 2003 and a
one-for-one hundred reverse stock split in February 2004.
The weighted average number of shares used to compute basic earnings (loss) per
share was 4,207,603 and 147,146 at December 31, 2003 and 2002 respectively.
9. Commitments and Contingencies:
Operating Leases
Future annual minimum lease payments under all non-cancelable operating leases
as of December 31, 2003 are as follows:
2004 $ 99,268
2005 24,292
2006 14,426
2007 5,910
---------
Total Minimum Lease Payments $ 143,896
=========
Rent expense for December 31, 2003 and 2002 was $126,931 and $109,789
respectively.
F-14
Legal
The Securities and Exchange Commission (the "SEC") filed an action in federal
district court asserting various violations of securities laws against the
Company. The complaint alleges that defendant 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 form and least one bogus attorney opinion letter arranged by
Custable." The complain 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.
During 2003, the Company began experiencing difficulties in processing
unemployment claims for its North Carolina worksite employees. In 2004, upon
research of those difficulties, the Company learned that its North Carolina
Employment Security Commission account was being actively reviewed by that
agency. Although the Company has received no notices in writing from the agency,
it has engaged counsel to bring this matter to a close as quickly as possible.
There is a possibility that liability for the Company may be the result of this
review, but management is currently unable to provide a reasonable estimate of
the amount.
10. Goodwilll and other Intangible Assets
During 2003, as a result of adoption SFAS No. 142, Goodwill and Other Intangible
Assets, the Company recorded an impairment of $2,912,627 related to goodwill in
the Company's PEO business. The fair value of the PEO business was determined
using discounted cash flows. This impairment was reported as a cumulative effect
of a change in accounting principle.
In March 2002, the Company recorded a charge for the impairment of the goodwill
that resulted from its September 4, 2001 purchase of Advantage Systems Inc. of
$401,107. This impairment was reported as a cumulative effect of a change in
accounting principle.
11. Stockholders' Equity:
a. Preferred Stock: The Company's Amended Certificate of Incorporation
authorizes 5,000,000 shares of no par, non- liquidating value preferred stock,
of which 1,000,000 shares have been designated the 1997 class A Convertible
Preferred Stock. The number of shares of the 1997 Class A shall be limited to
1,000,000. The Board of Directors of the Company has the authority to establish
and designate any shares of stock in series or classes and to fix any variations
in the designations, relative rights, preferences and limitations between series
as it deems appropriate, by a majority vote.
The shares of the 1997 Class A Convertible Preferred Stock shall have no
liquidation value, and shall be entitled to receive, out of any funds of the
Company at the time legally available for the declaration of dividends, a per
share participating dividend equivalent to that declared and or paid with
respect to a share of Common Stock.
F-15
At any time after June 30, 2000, the Company, at the option of the Board of
Directors, may redeem the whole of or part of, the 1997, Class A Convertible
Preferred Stock by paying in cash $ .001 per share and in addition an amount
equal to all unpaid dividends.
b. Common Stock: The authorized common stock of the Company consists of
2,000,000,000 shares of no par value common stock at December 31, 2003 and 2002.
In November 2002, by written consent of a majority of stockholders, the Company
adopted an amendment to the Corporations' Certificate of Incorporation to
increase the number of authorized shares of common stock, from 650,000,000 to
2,000,000,000 shares.
In February 2004 the Company effected a one-for-one hundred reverse stock split
restating the number of common shares at December 31, 2003 from 1,675,736,763 to
16,757,368. All references to average number of shares outstanding and prices
per share have been restated retroactively to reflect the split.
In March 2003 the Company effected a one-for-thirty reverse stock 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.
On December 10, 2002, the company issued a one time stock dividend of one share
of The Resourcing Solutions Group, Inc.( a OTC Non- Reporting company symbol -
RESG) for each share of record of Pacel Corp. stock on December 10, 2002. The
Company issued 478,037,735 shares of Resourcing Solutions Group no par value
common stock representing 24% of the total shares authorized. These shares had
no value at December 31, 2003.
12. Related Party Transactions:
a. Officers Loans The Company recorded a liability to David and F. Kay Calkins
in the amount of $251,583 and $1,080,309 at December 31, 2003 and 2002
respectively, for accrued payroll, loans and unreimbursed business expenses.
In conjunction with its acquisition of Asmara, the Company issued a non-interest
bearing 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
W. Revel Bellamy, the principal officer and sole shareholder of Asmara and
President and CEO of the Company. The balance of the note at December 31, 2003
was $266,250. In addition, the Company provided a letter agreement to Mr.
Bellamy to provide payment for certain personal liabilities retained by Mr.
Bellamy in conjunction with the acquisition. At December 31, 2003, the Company
had recorded $850,131 as a note payable to Mr. Bellamy. The Company accrues
interest on this note at a rate of 9% per annum. The Company has recorded a
total of $1,116,381 at December 31, 2003 payable to Mr. Bellamy, classified as
$1,063,131 in short-term notes payable and $53,250 as long-term notes payable.
F-16
b. Employment Agreements In April 2003, in connection with its acquisition of
Asmara, the Company entered into a two year employment agreement with W. Revel
Bellamy. The agreement stipulates a base salary of $150,000 per year.
In August 2003, the Company entered into a one year employment agreement with
Timothy L. Maness. The agreement stipulates a base salary of $135,000 per year.
13. Common Stock Options and Warrants
In April 2002, David Calkins, Chairman and F. Kay Calkins, Director of Pacel
were granted a non-cash option to purchase 1,000,000 shares of the company's
common stock in exchange for the a loan made to the company in 1999 amounting to
$124,000 and securing and loaning to the Company, a personal line of credit of
up to $3,000,000 using the stock as collateral. The Company's ability to draw on
this line was based on the volume of the Common Stock multiplied by the VWAP
(volume weighted average price) for the thirty days preceding funding. The
agreement requires minimum funding of $75,000. The maximum amount of collateral
at any closing may not exceed 4.9% of the issued and outstanding shares of the
Company. The loan to value ratio is 35%. The interest rate is prime + 200 basis
points, payable quarterly and financing expense of 9% of the draws. The Company
may be unable to meet the terms and conditions set forth in the agreement. Until
August 2002, the Company drew approximately $764,000. In August 2002, the
Company defaulted on the interest payments and the collateral of the 1,000,000
shares of stock was surrendered.
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. Subsequent to the one-for- one hundred split in February
2004, such shares were replaced with 1,200,000 shares of the common stock of the
Company. 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).
14. Business and Credit Concentrations:
The amount reported in the financial statements for cash, trade accounts
receivable and investments approximates fair market value. Because the
difference between cost and the lower of cost or market is immaterial, no
adjustment has been recognized and investments are recorded at cost. Financial
instruments that potentially subject the company to credit risk consist
principally of trade receivables. Collateral is generally not required.
15. Comprehensive Income:
At December 31, 2003 and 2003 net income and comprehensive income were the same.
16. Customer Deposit
The Company had $1,100,000 in Deferred Revenue at December 31, 2003 related to
amounts prepaid for 2004 services from a single client. The Company executed a
letter agreement in conjunction with
F-17
receipt of these funds that provides the funds be held in separate trust account
by the Company and not commingled with any other general use funds of the
Company. The Company draws down the pre- payment account as needed to fund the
payment of payroll, deposit taxes, benefits, fees and other costs for this
single client pursuant to the agreement.
17. Subsequent Event
In February 2004, the Company effected a one-for-one hundred reverse stock split
restating the number of common shares of the Company at December 31, 2003 from
1,675,736,763 to 16,757,368. All references to average number of shares, shares
outstanding and prices per share have been restated retroactively to reflect the
split.
F-18