SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended June 30, 2004
OR
[_] TRANSITION REPORT UNDER SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO _______________
Commission File Number: 0-29459
PACEL CORP.
-------------------------------------
(Exact name of registrant as specified in its charter)
VIRGINIA 54-1712558
---------------------------------- --------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification Number)
10108 Industrial Drive
Pineville, NORTH CAROLINA 28134-6516
---------------------------------------- --------------------------------
(Address of principal executive offices) (ZIP Code)
Registrant's telephone number, including area code: (704) 643-0676
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 day:
Yes [X] No [ ]
Transitional Small Business Disclosure Format (check one)
Yes [ ] No [X]
State the number of Shares outstanding of each of the issuer's classes of common
equity, as of the latest date:
As of August 19, 2004 there were 1,391,744,739 shares of the Registrant's common
stock outstanding.
PACEL CORP. AND SUBSIDIARIES
Part I. FINANCIAL INFORMATION (unaudited)
Item 1. Index to Consolidated Financial Statements
Consolidated Balance Sheets F - 2
Consolidated Statements of Operations F - 4
Consolidated Statements of Cash Flows F - 5
Notes to Consolidated Financial Statements F - 7
Item 2. Management's Discussion and Analysis
of Financial Results of Operations 3
Item 3. Controls and Procedures 9
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 10
Item 2. Changes in Securities 10
Item 3. Defaults upon Senior Securities 10
Item 4. Submission of Matters to Vote of Security Holders 10
Item 5. Other Information 11
Item 6. Exhibits and Reports 11
Item 7. Signatures 12
PACEL CORP. AND SUBSIDIARIES
Consolidated Balance Sheets
June 30, December 31,
2004 2003
------------- ------------
(Unaudited) (Audited)
ASSETS
Current assets:
Cash $ 243,520 $ 682,400
Cash CD-Restricted 600,000 -0-
Trust account - client deposits and advance payments 145,942 1,100,000
Accounts receivable 9,318 70,384
Stock subscription receivable -0- 125,000
Prepaid expenses 122,407 44,326
Workers compensation insurance deposits 304,300 132,851
------------- ------------
Total current assets 1,425,487 2,154,961
------------- ------------
Property and equipment, net of accumulated depreciation of
$167,074 and $153,578, respectively 187,995 97,355
------------- ------------
Other assets:
Other receivables -0- 7,902
Retirement Plan-Director 58,175 -0-
Goodwill 1,075,432 1,075,432
Security deposits 12,905 9,366
------------- ------------
Total other assets 1,146,512 1,092,700
------------- ------------
Total assets $ 2,759,994 $ 3,345,016
============= ============
See accompanying notes to the consolidated financial statements.
F-2
PACEL CORP. AND SUBSIDIARIES
Consolidated Balance Sheets
June 30, December 31,
2004 2003
------------- ------------
(Unaudited) (Audited)
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 931,794 $ 1,119,543
Payroll and payroll related liabilities 1,980,689 2,413,244
Accrued expenses 548,067 559,229
Accrued expenses - officers 47,578 251,583
Assumed Liabilities 550,759 1,116,381
Client deposits and advance payments 145,942 1,100,000
Notes payable 533,000 505,218
Convertible Notes Payable 908,595 -0-
Notes payable - bank 29,538 33,900
Capital leases 6,187 13,608
Income taxes payable -0- 2,532
------------- ------------
Total current liabilities 5,682,149 7,115,238
Long-term liabilities:
Deferred Compensation-Director Payable 58,175 -0-
------------- ------------
Total liabilities 5,740,324 7,115,238
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, 386,887,751 and 16,757,368
shares issued respectively 20,768,394 17,500,377
Cumulative currency translation adjustment (18,720) (18,720)
Accumulated deficit (23,741,324) (21,263,199)
------------- ------------
Total stockholders' (deficit) (2,980,330) (3,770,222)
------------- ------------
Total liabilities and stockholders' deficit $ 2,759,994 $ 3,345,016
============= ============
See accompanying notes to the consolidated financial statements.
F-3
PACEL CORP. AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
Six months ended Three months ended
June 30, June 30,
2004 2003 2004 2003
-------------- -------------- ------------- -------------
Revenue $ 1,971,154 $ 1,147,420 $ 1,022,233 $ 1,146,837
Cost of services 1,537,680 913,702 778,790 913,702
-------------- -------------- ------------- -------------
Gross profit 433,474 233,718 243,443 233,135
Operating costs and expenses:
General and administrative 1,436,210 1,138,255 651,824 833,667
Depreciation and amortization 13,496 8,908 6,996 7,660
Interest expense 106,181 91,723 65,024 63,637
Financing costs 1,355,714 130,750 1,110,714 130,750
-------------- -------------- ------------- -------------
Total operating expenses 2,911,601 1,369,636 1,834,558 1,035,714
-------------- -------------- ------------- -------------
Net loss from Continuing operations $ (2,478,127) $ (1,135,918) $ (1,591,115) $ (802,579)
============== ============== ============= =============
Net loss per common and common equivalent share:
Basic $ (0.03) $ (0.95) $ (0.01) $ (0.44)
Diluted $ (0.03) $ (0.95) $ (0.01) $ (0.44)
Weighted average shares outstanding:
Basic 74,490,264 1,198,908 127,269,277 1,842,890
Diluted 74,490,264 1,198,908 127,269,277 1,842,890
See accompanying notes to the consolidated financial statements.
F-4
PACEL CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
Six months ended
June 30,
2004 2003
--------------- ---------------
Cash flows from operating activities:
Net loss $ (2,478,127) $ (1,135,918)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation 13,496 8,908
Other non-cash items 1,545,714 492,765
Increase (decrease) in cash from changes in:
Accounts receivable 61,071 (12,000)
Other receivables 82,901 7,590
Insurance deposits (171,450) (12,485)
Prepaid expenses (78,080) (7,406)
Security deposits (3,540) -0-
Accounts payable (187,749) (573,164)
Accrued expenses (11,161) 121,331
Accrued expenses-Officers (204,005) -0-
Payroll and payroll related liabilities (432,555) 582,205
Assumed liabilities (565,622) (3,407)
Income taxes payable (2,532) -0-
--------------- ---------------
Net cash (used in) operating activities (2,431,639) (1,040,345)
Cash flows from investing activities:
(Purchases)/disposals of property and equipment (104,137) 2,762
Cash CD-Restricted (600,000) -0-
Investment in Benecorp -0- 160,744
Cash used for acquisitions -0- (105,000)
--------------- ---------------
Net cash (used in) investing activities (704,137) 58,506
Cash flows from financing activities:
Repayments of notes payable (62,218) (22,610)
Issuance of notes payable 90,000 -0-
Issuance of convertible notes payable 2,680,898 1,293,695
Borrowings/(repayments) from lines of credit (4,362) 9,049
Repayments of capital lease (7,422) -0-
--------------- ---------------
Net cash provided by financing activities 2,696,896 1,280,134
Net increase (decrease) in cash and cash equivalents (438,880) 298,295
Cash and cash equivalents, beginning of period 682,400 8,379
--------------- ---------------
Cash and cash equivalents, end of period $ 243,520 $ 306,674
=============== ===============
See accompanying notes to the consolidated financial statements.
F-5
PACEL CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
Six months ended
June 30,
2004 2003
--------------- ---------------
Supplemental disclosure of cash flow information:
Cash paid for interest $ 27,335 $ 9,862
=============== ===============
[Balance of this page intentionally left blank]
See accompanying notes to the consolidated financial statements.
F-6
PACEL CORP. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
June 30, 2004
Note 1. Basis of Presentation.
The unaudited financial statements included in the Form 10-QSB have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB and Item 310(b)
of Regulation SB of the Securities and Exchange Act of 1934. The financial
information furnished herein reflects all adjustments, which in the opinion of
management, are necessary for a fair presentation of the Company's financial
position, the results of operations and cash flows for the periods presented.
Certain information and footnote disclosures normally contained in financial
statements prepared in accordance with generally accepted accounting principles
have been omitted, pursuant to such rules and regulations.
These interim statements should be read in conjunction with the audited
consolidated financial statements and related notes thereto as presented in the
Company's certified financial statements for the year ended December 31, 2003.
The Company presumes that users of the interim financial information herein have
read or have access to such audited financial statements and that the adequacy
of additional disclosure needed for a fair presentation may be determined in
that context. The results of operations for any interim period are not
necessarily indicative of the results expected or reported for the full year.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reported period. Actual
results could differ from those estimates.
Note 2. Related Party Transactions.
a) The Company made payments to David Calkins for accrued payroll and loans.
The balance due to Mr. Calkins was $47,578 and $251,583 at June 30, 2004
and December 31, 2003 respectively.
b) Due to existing credit issues and the SEC lawsuit, Pacel Corp. found that
it was becoming extremely difficult to obtain funds for acquisitions.
Therefore, the Officers and Board of Directors began exploring alternative
means by which to secure adequate financing for acquisitions. The Board of
Directors decided, and the officers of the company agreed, that Kay Calkins
would form a new company independent of Pacel in 2004 (referred to as
"Newco"). In May 2004 Newco was formed and its corporate name is Piedmont
HR Inc. The purpose of forming Piedmont HR was to acquire businesses in the
HRO industry in markets where Pacel did not do business, and to benefit
Pacel shareholders through administrative services and management contracts
and leases of Pacel technology, operations, and processes to operate the
companies acquired. In the event that Piedmont HR successfully acquired a
company or its assets/operations, Piedmont HR would have executed a service
agreement with Pacel to perform all or the majority of the administrative,
management and operational services necessary to operate the acquired
business. To date, Piedmont HR has not completed any acquisitions or hired
any employees nor does Piedmont HR anticipate acquiring any companies. The
Board of Directors and Officers have determined that Piedmont HR will not
offer the growth potential equal to the growth potential from Pacel
aggressive marketing strategy. Piedmont HR no longer fits Pacel's strategic
business model and is being dissolved.
F-7
PACEL CORP. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
June 30, 2004
Note 3. Accounting for Business Combinations.
In July 2001, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards No. 141, Business Combinations and
Statement of Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets (collectively, the "Statements"). These Statements change the
accounting for business combinations by, among other things, prohibiting the
prospective use of pooling-of-interests accounting and requiring companies to
discontinue amortizing goodwill and certain intangible assets deemed to have an
indefinite useful life. Alternatively, goodwill and intangible assets deemed to
have an indefinite useful life will be subject to an annual review for
impairment. These Statements were adopted by the Company in the first quarter of
2002 and for all business purchase combinations consummated after June 30, 2001.
Note 4. Revenue Recognition.
The gross billings that the Company charges its clients under its Professional
Services Agreement include each worksite employee's gross wages and a service
fee. The Company's service fee, which is computed as a percentage of gross
wages, is intended to yield a profit to the Company and cover the cost of
employment-related taxes, workers' compensation insurance coverage, and
administration and field services provided by the Company to the client,
including payroll administration and record keeping, as well as safety, human
resources and regulatory compliance consulting services. The component of the
service fee related to administration varies according to the size of the
client, the amount and frequency of payroll payments and the method of delivery
of such payments. The component of the service fee related to workers'
compensation and employer taxes, including unemployment insurance, is based, in
part, on the clients historical claims experience. All charges by the Company
are invoiced along with each periodic payroll delivered to the client.
The Company reports revenue from service fees in accordance with Emerging Issues
Task Force ("EITF") No. 99-19, Reporting Revenue Gross as a Principal versus Net
as an Agent. The Company reports as revenue, on a gross basis, the total amount
billed to clients for service fees, workers' compensation and employer taxes.
The Company reports revenue on a gross basis for these fees because the Company
is the primary obligor and deemed to be the principal in these transactions
under EITF 99-19. The Company typically bills its clients for wages paid to
worksite employees in an amount equal to the amounts paid to these employees for
these wages. Accordingly, such billings result in no profit to the Company and
when presented on a net basis results in no revenue being recorded. The Company
accounts for its revenue under the accrual method of accounting. Under the
accrual method of accounting, the Company recognizes its revenues in the period
in which the worksite employee performs the work.
Note 5. Common Stock.
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.
F-8
PACEL CORP. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
June 30, 2004
Note 6. Contingent Liabilities.
The Securities and Exchange Commission ("SEC") filed an action in Federal
District Court asserting various violations of securities laws against the
Company and its principal officer. The complaint alleges that Mr. Frank Custable
"orchestrated" a "scheme" to illegally obtain stock from various companies,
including the Company, through "scam Commission Form S-8 registration
statements, forged stock authorization forms and at least one bogus attorney
opinion letter arranged by Custable." The complaint alleges that, in connection
with this alleged "scheme," the Company and its CEO, David Calkins violated
Section 17(a) of the Securities Act and Section 10(b) and Rule 10b-5 of the
Exchange Act. The SEC asks that the Company and Calkins be permanently enjoined
from future violations, ordered to pay disgorgement and civil penalties and
Calkins be barred from continued service as an 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. Pursuant to an agreement of the parties, an accounting
of the transactions at issue was provided on June 30, 2004. The Company has been
served with the complaint and a scheduling order has been put into place. A
response to the complaint is currently due on September 3, 2004, pursuant to an
agreement of the parties. Under the scheduling order fact discovery must be
completed by December 23, 2004 and expert discovery must be completed by March
29, 2005. Final dispositive pre-trial motions must be filed by May 13, 2005. A
trial date has not yet been set.
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 ("ESC") account was being actively reviewed by that agency.
Through discussions with the ESC, the company learned that these difficulties
were the result of underpayment for unemployment taxes. The underpayments
resulted from the operations of a non-acquired company, owned by the former
President & CEO of the company, whose experience was imputed to the company. The
company and the ESC reached an agreement of an amount and a payment schedule for
these unpaid taxes. The company had previously recorded a liability for $291,900
as assumed liabilities. The company agreed to pay this amount in installments
during the third and fourth quarters of 2004.
The Company, as a member of the Phoenix Fund of North Carolina through its
Asmara Services I, Inc. subsidiary, is party to an indemnity agreement providing
joint and several liability for the Company to secure any outstanding
liabilities should the fund become insolvent. The Phoenix Fund is a recognized
insurance facility, regulated by the North Carolina Department of Insurance
("NCDOI"), through which the Company provides workers' compensation coverage to
its clients located within the State of North Carolina. The Company is party to
such agreement in conjunction with the other 1,200 members of the fund. The
Fund, by policy, establishes reserves for all losses on a fully developed basis
and is subject to quarterly and annual reporting of the status of its
capitalization and operations to the NCDOI. The fund was required by the NCDOI
and has issued a surety bond that would act as the primary vehicle for funding
such liabilities should the fund become insolvent. The NCDOI, through provisions
in the law, can waive any such assessments on behalf of the fund should the
State determine that such assessment was not likely to be successful. Management
believes the likelihood of any assessment is minimal due to the continued
oversight of the fund by the NCDOI and the fund's establishment of sufficient
reserves to cover fully developed losses.
F-9
PACEL CORP. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
June 30, 2004
Note 7. Customer Deposit
The Company had $145,942 in Deferred Revenue at June 30, 2004 related to
$1,100,000 paid, in advance, in December 2003 for 2004 services from two
clients. In December 2003, the Company executed a letter agreement in
conjunction with receipt of these funds that provides the funds be held in a
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.
Note 8. Cash CD-Restricted
During the second quarter of 2004, the company entered into an agreement with a
national bank to develop a program that eliminates the need for multiple banks.
During the credit review process, the bank required the company to secure its
ACH (automated clearing house) exposure with a standby letter of credit. ACH
transactions are used collect funds due from the company's clients for PEO
services along with depositing funds into employee bank accounts that have
elected direct deposit as a means of wage payment. The company secured this
standby letter of credit with a CD (certificate of deposit) in the amount of
$600,000.
Note 9. Retirement Plan-Director
During the first quarter of 2004, the Company entered into a Variable Flexible
Premium Universal Life policy naming David E. Calkins, the Chairman of the
Company, as the insured. The Company is the owner of the policy while David E.
Calkins and his spouse are the beneficiaries of the policy. The insurance policy
carries a face value of $3,100,000. The account value of the insurance policy
can be invested in various investment accounts as directed by the Company. The
policy calls for the company to make monthly payments of $18, 333 for five
years. Upon age 70, David E. Calkins will be eligible to withdraw the assets of
the policy over a 15 year period. During the six months ended June 30, 2004, the
Company recorded $73,333 of expense along with the value of the assets and
deferred compensation equal to $58,175 related to the issuance of this policy.
Note 10. Assumed Liabilities
As part of the asset purchase agreement of Asmara Inc. in April 2003, the
Company assumed certain debts attributed to the President and CEO who was the
sole shareholder of Asmara Inc. These debts were previously classified as Notes
Payable to Officers. Upon the dismissal of the President and CEO, these debts
were reclassified as Assumed Liabilities. During the six months ended June 30,
2004, the company made certain payments and reclassification and reduced the
balance due on the assumed liabilities to $550,759.
F-10
PACEL CORP. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Management's discussion and analysis of results of operations and financial
condition include a discussion of liquidity and capital resources. The following
discussion should be read in conjunction with the consolidated financial
statements and notes thereto.
In 2004, 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 Company provides human capital solutions through the provision of PEO
services and Administrative Service Organization ("ASO") services to such
clients. In 2003, the Company successfully completed the acquisition of two
existing PEO organizations and continues to evaluate other potential acquisition
candidates while also reviewing and implementing opportunities to support
organic growth in order to secure a position as an industry leader. The Company
sees this initiative in the Human Resources Outsourcing ("HRO") industry as an
opportunity to tap into the small business market in the United States and
intends to compliment the provision of PEO and ASO services with information
technology services, business consulting services and financial services at a
future time.
As part of its goal to bring the company to profitability and less reliant on
equity financing for ongoing operations, the company has developed an aggressive
marketing strategy as well as an investment to significantly upgrade its HRIS
(Human Resource Information System) capabilities to service its current and
prospective clients. The company has engaged Lincoln Consulting, LLC, a
strategic marketing firm, to develop and launch an aggressive and innovative
marketing and sales plan. This plan includes hiring and training the sales team
as well as marketing the company's services through networks of national
associations and chains. The company has also engaged Thinkware Corporation to
implement its new HRIS system. This system will provide the company with
"state-of-the-art" human resource data necessary to service the growing needs of
small to mid-size clients as well as automate the company's internal processes.
The HRIS system is targeted to be fully operational in the fourth quarter of
2004.
Through its PEO/ASO business unit, the Company markets to current and
prospective clients, typically small to medium-sized businesses with between
five and 1,500 employees, a broad range of products and services that provide an
outsourced solution for the clients' human resources ("HR") needs. The Company's
products include payroll services, benefits administration (including health,
welfare and retirement plans), governmental compliance, risk management
(including safety training), unemployment administration and other HR related
services. The Company is currently working to establish the national vendor
relationships it believes are necessary to effectively and competitively provide
such services to a broad range of clients.
Six Months ended June 30, 2004 compared to the Six Months ended June 30, 2003
Revenue for the six months ended June 30, 2004 was $1,971,154 when compared to
revenue of $1,147,420 for the six months ended June 30, 2003. All of the
Company's revenue in the six months ended June 30, 2004 was derived from PEO
operating units acquired during 2003. The difference is attributed to the
comparison of six months of PEO revenue for the six months ended June 30, 2004
to three months of the PEO revenue recorded from the Benecorp Business Services
acquisition and two months of the PEO revenue recorded from the Asmara
acquisition during the six months ended June 30, 2003.
3
PACEL CORP. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
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 six months
ended June 30, 2004 and June 30, 2003.
Six months ended Six months ended
June 30, June 30,
2004 2003
(Unaudited) (Unaudited)
Reconciliation of billings
to revenue recognized:
Gross billings to clients $ 12,819,990 $ 7,253,487
Less - Gross wages billed to clients (10,848,836) (6,106,690)
------------- -------------
Revenue from PEO services 1,971,154 1,146,797
Other miscellaneous revenue -0- 623
-------------- -------------
Total revenue as reported $ 1,971,154 $ 1,147,420
============= =============
Cost of services for the six months ended June 30, 2004 increased approximately
$624,000 to $1,537,680 when compared to cost of services of $913,702 for the six
months ended June 30, 2003 and is related directly to the delivery of services
to its PEO clients. This increase is the result of having six months of PEO cost
of services in the six months ended June 30, 2004 when compared to three months
of PEO cost of services from the Benecorp acquisition and two months of PEO cost
of services from the Asmara acquisition in 2003.
Sales, general & administrative expenses, including salaries and wages,
increased to $1,436,210 for the six months ended June 30, 2004, compared to
$1,138,255 in the corresponding period of 2003. Acquisitions completed in the
second quarter of 2003, in conjunction with the Company's entry into the HRO
market, accounted for the majority of the increase in 2004.
Depreciation expenses increased to $13,496 for the six months ended June 30,
2004, compared to $8,908 for the corresponding period of 2003. Such increase is
related to the Company's acquisition of assets for its PEO business units.
Interest expense is interest paid and accrued on the Convertible Notes, unpaid
payroll taxes, Notes payable, bank financing, and capital leases. Interest
amounted to $106,181 for the six months ended June 30, 2004 compared to $91,723
for the same period of 2003. The increase is primarily attributable to the
continued use of financing for working capital.
Finance expense for the six months ended June 30, 2004 increased approximately
$1,225,000 to $1,355,714 when compared to finance expense of $130,750 for the
six months ended June 30, 2003. The increase was the result of additional
funding requirements for administrative and operational needs. 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.
4
PACEL CORP. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Three Months ended June 30, 2004 compared to the Three Months ended June 30,
2003
Revenue for the quarter ended June 30, 2004 decreased approximately $124,600 to
$1,022,233 when compared to revenue of $1,146,837 for the quarter ended June 30,
2003. All of the Company's revenue in the quarter ended June 30, 2004 and the
quarter ended June 30, 2003 was derived from PEO operating units acquired during
2003.
Even though the company experienced an increase in the number of clients it
provided PEO services to during the quarter ended June 30, 2004 when compared to
the quarter ended June 30, 2003, the company experienced a net loss in the total
of work site employees. The company generates it revenue from services relating
to work site employees. This decrease in work site employees was primarily from
large construction and heavy industrial clients that terminated PEO services
with the company for reasons ranging from plant and company closings to clients
bringing the services typically offered in a PEO relationship in-house. The PEO
industry as a whole has found it more difficult to provide the PEO services to
construction and heavy industrial clients because of its inability to obtain
workers compensation insurance. The company has focused its sales and marketing
effort to white collar and light industrial clients where workers compensation
insurance is readily and economically accessible.
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 quarters
ended June 30, 2004 and June 30, 2003.
Three months ended Three months ended
June 30, June 30,
2004 2003
(Unaudited) (Unaudited)
Reconciliation of billings
to revenue recognized:
Gross billings to clients $ 6,641,480 $ 7,253,487
Less - Gross wages billed to clients (5,619,247) (6,106,690)
---------------- ----------------
Revenue from PEO services 1,022,233 1,146,797
Other miscellaneous revenue -0- 40
---------------- ----------------
Total revenue as reported $ 1,022,233 $ 1,146,837
================ ===============
5
PACEL CORP. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Cost of services for the three months ended June 30, 2004 was $778,790 when
compared to cost of services of $913,702 for the three months ended June 30,
2003 and is related directly to the delivery of services to its PEO clients.
This decrease was directly related to the decrease in revenue.
Sales, general & administrative expenses, including salaries and wages,
decreased to $651,824 for the three months ended June 30, 2004, compared to
$833,667 in the corresponding period of 2003. The decrease was attributed to the
consolidation of the back office operations from the acquisitions completed in
the second quarter of 2003.
Depreciation expenses decreased to $6,996 for the three months ended June 30,
2004, compared to $7,660 for the corresponding period of 2003. This decrease was
the result of asset in service becoming fully depreciated.
Interest expense is interest paid and accrued on the Convertible Notes, unpaid
payroll taxes, Notes payable, bank financing, and capital leases. Interest
amounted to $65,024 for the three months ended June 30, 2004 compared to $63,637
for the same period of 2003. The increase is primarily attributable to the
continued use of financing for working capital.
Finance expense for the three months ended June 30, 2004 increased approximately
$980,000 to $1,110,714 when compared to finance expense of $130,750 for the six
months ended June 30, 2003. The increase was the result of additional funding
requirements for administrative and operational needs. 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.
6
PACEL CORP. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
LIQUIDITY AND CAPITAL RESOURCES:
Cash and cash equivalents at June 30, 2004 decreased to $243,520 from $682,400
at December 31, 2003. Net cash used for operating activities was $2,431,639
during the six months ended June 30, 2004 compared to $1,040,345 in the
corresponding period of 2003. The increase in the cash used in operating
activities is mainly attributable to the increased operating loss for the six
months ended June 30, 2004, settlement and repayment of outstanding accounts
payable, accrued expenses, assumed liabilities, embedded interest, insurance
deposits, and recognition of revenue previously deferred, offset by decreases in
other receivables and accounts receivable to PEO clients.
Net cash used for investing activities for the six months ended June 30, 2004
was $704,137. The cash used in investing activities is attributable to computer
equipment and software purchased for the company's business information system
implementation as well as an investment in a CD (certificate of deposit) to
secure its payroll ACH (automated clearing house) exposure. This compares to net
cash provided by investing activities for the six months ended June 30, 2003 of
$58,506. During the second quarter of 2003, the company utilized $105,000 of
cash in the acquisition of the Asmara and NCS operating units and acquired
$160,744 in the acquisition of Benecorp Business Services.
Net cash provided by financing activities in the six months ended June 30, 2004
was $2,696,896 compared to $1,280,134 in the corresponding period ended June 30,
2003. The cash provided during both periods is directly related to the Company's
execution and utilization of three equity-based lines of credit.
7
PACEL CORP. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
In August 2003, the Company entered into an equity line of credit for
$10,000,000 from Compass Capital Inc., Kentan Ltd, 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 the six months ended June 30, 2004, the Company drew down $2,680,898 and
issued 319,113,632 shares of common stock in conjunction with this equity line.
All of the funds received in 2004 were drawn from the Company's agreement with
Compass Capital, Inc and T&B Associates, Inc.
In the six months ended June 30, 2004, the company utilized its 3A10 filing to
issue 320,131,115 shares of its common stock. Proceeds from this issuance
resulted in $2,770,898 in cash of which $90,000 was used to pay accrued
interest.
In April 2004, Pacel entered into a Letter of Intent to Purchase RossarHR, LLC.
The purchase will add in excess of $2 million in revenue to the Company on an
annualized basis. The purchase does not contemplate any cash paid to the seller
at closing. The Company will assume approximately $300,000 in debt of the
acquired company with the majority being a term note at 6% interest payable in
monthly installment of approximately $2,400 over 9.25 years. It is anticipated
the purchase will be finalized by the end of September 2004.
The Company's cash requirements for funding its administrative and operating
needs continue to greatly exceed its cash flows generated from operations. Such
shortfalls and other capital needs continue to be satisfied through equity
financing and convertible notes payable, until additional funds can be generated
through acquisitions and organic business growth. The liabilities of the Company
consist of over-extended accounts payable, payroll taxes, and interest expense.
As part of its goal to bring the Company to profitability and less reliant on
equity financing for ongoing operations, the Company has developed an aggressive
marketing strategy as well as an investment to significantly upgrade its HRIS
(Human Resource Information System) capabilities to service its current and
prospective clients. The Company has engaged Lincoln Consulting, LLC, a
strategic marketing firm, to develop and launch an aggressive and innovative
marketing and sales plan. This plan includes hiring and training the sales team
as well as marketing the Company's services through networks of national
associations and chains. The Company has also engaged Thinkware Corporation to
implement its new HRIS system. This system will provide the company with
"state-of-the-art" human resource data necessary to service the growing needs of
small to mid-size clients as well as automate the Company's internal processes.
The HRIS system is targeted to be fully operational in the fourth quarter of
2004. The Company relies on equity financing to fund its ongoing operations and
investing activities. The Company expects to continue its investing activities,
including expenditures for acquisitions, sales and marketing initiatives, HRIS
(Human Resource Information System), and administrative support. The loss of its
current equity financing would seriously hinder the Company's ability to execute
its business strategy and impair its ability to continue as a going concern.
8
PACEL CORP. AND SUBSIDIARIES
Forward Looking Statements
The Company is making this statement in order to satisfy the "safe harbor"
provisions contained in the Private Securities Litigation Reform Act of 1995.
This Form 10-QSB includes forward-looking statements relating to the business of
the Company. Forward-looking statements contained herein or in other statements
made by the Company are made based on management's expectations and beliefs
concerning future events impacting the Company and are subject to uncertainties
and factors relating to the Company's operations and business environment, all
of which are difficult to predict and many of which are beyond the control of
the Company, that could cause actual results of the Company to differ materially
from those matters expressed in or implied by forward-looking statements. The
Company believes that the following factors, among others, could affect its
future performance and cause actual results of the Company to differ materially
from those expressed in or implied by forward-looking statements made by or on
behalf of the Company: (a) the effect of technological changes; (b) increases in
or unexpected losses; (c) increased competition; (d) fluctuations in the costs
to operate the business; (e) uninsurable risks; and (f) general economic
conditions.
Item 3. CONTROLS AND PROCEDURES.
As of June 30, 2004, an evaluation was performed under the supervision and with
the participation of the Company's management, including the Principal Executive
Officer, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures. Based on that evaluation, the Company's
management, including the Principal Executive Officer and the Principal
Accounting Officer, concluded that the Company's disclosure controls and
procedures were effective as of June 30, 2004. There have been no significant
changes in the Company's internal controls or in other factors that could
significantly affect internal controls subsequent to June 30, 2004.
9
PACEL CORP. AND SUBSIDIARIES
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The Securities and Exchange Commission ("SEC") filed an action in Federal
District Court asserting various violations of securities laws against the
Company and its principal officer. The complaint alleges that Mr. Frank Custable
"orchestrated" a "scheme" to illegally obtain stock from various companies,
including the Company, through "scam Commission Form S-8 registration
statements, forged stock authorization forms and at least one bogus attorney
opinion letter arranged by Custable." The complaint alleges that, in connection
with this alleged "scheme," the Company and its CEO, David Calkins violated
Section 17(a) of the Securities Act and Section 10(b) and Rule 10b-5 of the
Exchange Act. The SEC asks that the Company and Calkins be permanently enjoined
from future violations, ordered to pay disgorgement and civil penalties and
Calkins be barred from continued service as an 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. Pursuant to an agreement of the parties, an accounting
of the transactions at issue was provided on June 30, 2004. The Company has been
served with the complaint and a scheduling order has been put into place. A
response to the complaint is currently due on September 3, 2004, pursuant to an
agreement of the parties. Under the scheduling order fact discovery must be
completed by December 23, 2004 and expert discovery must be completed by March
29, 2005. Final dispositive pre-trial motions must be filed by May 13, 2005. A
trial date has not yet been set.
The Board of Directors dismissed the President and CEO for cause, the grounds of
which included, but are not limited to, unauthorized prepayments and charges
from corporate funds directed by him against acquisition debt held by him. The
Board of Directors is evaluating possible remedies, if any, against the decision
makers for the unauthorized prepayments.
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 2. Changes in Securities
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.
Option Grants
None
Issuances of Stock for Services or in Satisfaction of Obligations
None.
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None.
10
PACEL CORP. AND SUBSIDIARIES
Item 5. Other Information
None
Item 6. Exhibits and Reports
None
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11
Item 7. Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, registrant has duly caused this report to be signed in its behalf
by the undersigned thereunto duly authorized.
Pacel Corp.
BY: /s/ Gary Musselman
--------------------------
Gary Musselman, President, Chief Executive Officer, and Chief Financial Officer
DATED: August 19, 2004
12