SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended September 30, 2005
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)
NEVADA 54-1712558
---------------------------------- --------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification Number)
7621 Little Ave Suite 101
Charlotte, NORTH CAROLINA 28226
---------------------------------------- --------------------------------
(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 November 18, 2005 there were 18,783,825 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 - 2-3
Consolidated Statements of Operations F - 4
Consolidated Statements of Cash Flows F - 5-6
Notes to Consolidated Financial Statements F - 7-10
Item 2. Management's Discussion and Analysis of Financial
Results of Operations 3 - 8
Item 3. Controls and Procedures 9
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 9
Item 6. Exhibits 10
PACEL CORP. AND SUBSIDIARIES
Consolidated Balance Sheets
September 30, December 31,
2005 2004
------------- -------------
(Unaudited) (Audited)
ASSETS
Current assets:
Cash $ 334,794 $ 117,052
Client deposit and advance payments 47,123 826,598
Accounts receivable 8,370 230,469
Accounts receivable-Unbilled 225,530 310,845
Accounts receivable - Allegro 93,964 -0-
Prepaid expenses 98,102 110,408
Workers compensation insurance deposits 92,969 139,089
Restricted cash 178,513 913,009
------------- -------------
Total current assets 1,079,365 2,647,470
------------- -------------
Property and equipment, net of accumulated depreciation of
$100,355 and $70,436, respectively 142,580 147,831
------------- -------------
Other assets:
Goodwill 465,423 1,075,432
Security deposits 18,358 15,182
------------- -------------
Total other assets 483,781 1,090,614
------------- -------------
Total assets $ 1,705,726 $ 3,885,915
============= =============
See accompanying notes to the consolidated financial statements.
F-2
PACEL CORP. AND SUBSIDIARIES
Consolidated Balance Sheets
September 30, December 31,
2005 2004
------------- -------------
(Unaudited) (Audited)
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 381,978 $ 242,210
Payroll and payroll related liabilities 1,943,804 2,511,224
Accrued worksite employee payroll expense 192,228 300,391
Accrued expenses 1,829,318 1,330,456
Assumed Liabilities 493,133 493,133
Deferred Compensation-Director 200,818
Client deposits and advance payments 47,123 826,598
Prepaid Payroll -0- -0-
Short term payables 1,558,525 2,158,251
Current Maturities of long term note 27,127 -0-
------------- -------------
Total current liabilities 6,674,054 7,862,263
------------- -------------
Long-term liabilities:
Notes Payable 225,630 -0-
------------- -------------
Total long term liabilities 225,630 -0-
------------- -------------
Total liabilities 6,899,684 7,862,263
------------- -------------
Stockholders' equity (deficit):
Preferred stock, .001 par value, no liquidation value,
5,000,000 shares authorized, 1,000,000 shares
of 1997 Class A convertible preferred stock issued 1,000 1,000
Common stock, .001 par value, 10,000,000,000 shares
authorized, 4,083,442 and 2
shares issued respectively 4,083 -0-
Additional paid-in capital 24,715,404 22,403,335
Cumulative currency translation adjustment (18,720) (18,720)
Accumulated deficit (29,895,725) (26,361,963)
------------- -------------
Total stockholders' (deficit) (5,193,958) (3,976,348)
------------- -------------
Total liabilities and stockholders' deficit $ 1,705,726 $ 3,885,915
============= =============
See accompanying notes to the consolidated financial statements.
F-3
PACEL CORP. AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
Nine months ended Three months ended
September 30, September 30,
2005 2004 2005 2004
---- ---- ---- ----
Revenue $ 1,880,593 $ 2,438,679 $ 390,082 $ 760,716
Cost of services 1,389,574 1,985,856 211,835 691,678
-------------- -------------- -------------- --------------
Gross profit 491,019 452,823 178,247 69,038
Operating costs and expenses:
General and administrative 2,038,878 1,707,206 538,444 627,588
Sales and marketing 422,870 278,661 72,732 131,063
Depreciation and amortization 45,396 19,244 15,476 5,748
Loss on impairment of goodwill 131,950 -0- -0- -0-
-------------- -------------- -------------- --------------
Total operating expenses 2,639,094 2,005,111 626,652 764,399
-------------- -------------- -------------- --------------
Operating Loss (2,148,075) (1,552,288) (448,405) (695,361)
Other expenses:
Interest expense (305,473 (153,044) (72,763) (46,864)
Financing costs (447,855) (1,718,063) (85,714) (362,349)
-------------- -------------- -------------- --------------
Total other expense (753,328) (1,871,107) (158,477) (409,213)
Net loss before discontinued operations (2,901,403) (3,423,395) (606,882) (1,104,574)
Discontinued operations:
Loss from discontinued operations of Asmara of
Florida and Partners PEO of the Carolinas (31,708) (283,503) -0- (124,197)
Loss from sale of contracts to Allegro, Inc. (600,652) -0- (11,699) -0-
-------------- -------------- -------------- --------------
Total loss on discontinued operations (632,360) (283,503) (11,699) (124,197)
Net loss $ (3,533,763) $ (3,706,898) $ (618,581) $ (1,228,771)
============== ============== ============== ==============
Loss from discontinued operations per common
and common equivalent share:
Basic $ (0.008) $ (141,752) $ (0.00) $ (124,197)
Diluted $ (0.008) $ (141,752) $ (0.00) $ (124,197)
Loss from sale of contracts per common
and common equivalent share:
Basic $ (1.44) $ -0- $ (0.01) $ -0-
Diluted $ (1.44) $ -0- $ (0.01) $ -0-
Net loss per common and common equivalent share:
Basic $ (8.45) $ (1,853,449) $ (0.51) $ (1,228,771)
Diluted $ (8.45) $ (1,853,449) $ (0.51) $ (1,228,771)
Weighted average shares outstanding:
Basic 418,288 1 1,224,719 1
Diluted 418,288 1 1,224,719 1
See accompanying notes to the consolidated financial statements.
F-4
PACEL CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
Nine months ended
September 30,
2005 2004
-------------- --------------
Cash flows from operating activities:
Net loss $ (3,533,763) $ (3,706,898)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation 45,396 19,244
Embedded interest 447,855
Other non-cash items 27,700 1,908,063
Loss on discontinued operations -0- -0-
Loss on sale of contracts 711,009
Loss on impairment of goodwill 131,950 -0-
Changes in operating assets and liabilities:
(Increase) decrease in assets:
Accounts receivable 222,099 61,679
Accounts receivable-Unbilled (85,315) -0-
Other receivables -0- 82,902
Client deposits 779,475
Insurance deposits 14,163 31,835
Prepaid expenses 31,062 (121,251)
Security deposits (1,926) 1,243
Increase (decrease) in liabilities:
Accounts payable 139,768 (205,574)
Accrued expenses 498,862 18,398
Deferred Compensation-Director 200,818 (217,885)
Payroll and payroll related liabilities (573,540) (335,339)
Accrued work site employee payroll cost (108,164) -0-
Client Deposits and advance payments (779,474) -0-
Assumed liabilities -0- (623,248)
Sales and income taxes payable -0- (2,532)
-------------- --------------
Net cash (used in) operating activities (1,832,023) (3,089,363)
Cash flows from investing activities:
Net purchases of property and equipment (15,124) (169,542)
Sale of Contracts 110,356 -0-
Cash CD-Restricted 734,496 (907,727)
-------------- --------------
Net cash (used in) investing activities 829,728 (1,077,269)
Cash flows from financing activities:
Repayments of notes payable (19,242) (95,218)
Issuance of notes payable -0- 90,000
Issuance of convertible notes payable 1,245,000 3,740,898
Repayments of lines of credit (5,721) (7,018)
Repayments of capital lease -0- (13,609)
-------------- --------------
Net cash provided by financing activities 1,220,037 3,715,053
-------------- --------------
Net increase (decrease) in cash and cash equivalents 217,742 (451,579)
Cash and cash equivalents, beginning of period 117,052 682,400
-------------- --------------
Cash and cash equivalents, end of period $ 334,794 $ 230,821
============== ==============
See accompanying notes to the consolidated financial statements.
F-5
PACEL CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
Nine months ended
September 30,
2005 2004
-------------- --------------
Supplemental disclosure of cash flow information: Cash paid during the years
for:
Interest $ 15,091 $ 27,335
Income taxes $ -0- $ -0-
See accompanying notes to the consolidated financial statements.
F-6
PACEL CORP. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
September 30, 2005
Note 1. Basis of Presentation.
The unaudited financial statements of Pacel Corporation and
Subsidiaries (collectively, the Company) 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, 2004. 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.
Note 2. Use of Estimates
Our consolidated financial statements have been prepared in
accordance with generally accepted accounting principles in the
United States (US GAAP). The preparation of these financial
statements requires us to make estimates and judgments that
affect the reported amounts in the financial statements and
accompanying notes. These estimates form the basis for judgments
we make about the carrying values of assets and liabilities that
are not readily apparent from other sources. We base our
estimates and judgments on historical experience and on various
other assumptions that we believe are reasonable under the
circumstances. However, future events are subject to change and
the best estimates and judgments routinely require adjustment.
US GAAP requires us to make estimates and judgments in several
areas, including those related to impairment of goodwill and
equity investments, revenue recognition, recoverability of
inventory and receivables, the useful lives of long lived assets
such as property and equipment, the future realization of
deferred income tax benefits and the recording of various
accruals. The ultimate outcome and actual results could differ
from the estimates and assumptions used.
Note 3. Revenue Recognition.
We account for our revenues in accordance with Emerging Issues
Task Force ("EITF") 99-19, Reporting Revenues Gross as a
Principal Versus Net as an Agent. Our revenues are derived from
our billings, which are based on:
o the payroll cost of our worksite employees; and
o a markup computed as a percentage of the payroll cost.
In determining the pricing of the markup component of the
billings, we consider our estimates of the costs directly
associated with our worksite employees, including payroll taxes
and workers' compensation costs, plus an acceptable gross profit
margin. We invoice the billings concurrently with each periodic
payroll of our worksite employees. Revenues, which exclude the
payroll cost component of billings, are recognized ratably over
the payroll period as worksite employees perform their service at
the client worksite. We include revenues that have been
recognized but not invoiced in unbilled accounts receivable on
our Consolidated Balance Sheets.
F-7
PACEL CORP. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
September 30, 2005
Note 3. Revenue Recognition.
Our revenues are primarily dependent on the number of clients
enrolled, the resulting number of worksite employees paid each
period. Because our markup is computed as a percentage of
payroll cost, revenues are also affected by the payroll cost of
worksite employees, which can fluctuate based on the composition
of the worksite employee base, inflationary effects on wage
levels and differences in the local economies of our markets.
The primary direct costs associated with our revenue generating
activities are:
o employment-related taxes ("payroll taxes");
o workers' compensation claim costs.
Payroll taxes consist of the employer's portion of Social
Security and Medicare taxes under FICA, federal unemployment
taxes and state unemployment taxes. Payroll taxes are generally
paid as a percentage of payroll cost. The federal tax rates are
defined by federal regulations. State unemployment tax rates are
subject to claim histories and vary from state to state.
No allowance for doubtful accounts has been made.
Note 4. Common Stock.
In February, June and October 2005, the Company affected a
one-for-one thousand reverse stock split restating the number of
common shares of the Company at December 31, 2004 from
1,773,000,943 to 2. All references to average number of shares,
shares outstanding and prices per share have been restated
retroactively to reflect the split.
Note 5. Stock Compensation.
The Company issued stock to certain officers, key employees, and
non-employee directors which consisted of Series "B" Preferred
Stock (Series "B" Stock). The maximum number of shares of the
Company's Series "B" Stock available for issuance was 1 million
shares with a par value of $0.001. Each share of the Series "B"
Stock is convertible to 50 shares of Common Stock without the
payment of any additional consideration. Shares issued are
compensation to the recipients.
Effective June 30, the Company authorized and issued 1,000,000
shares of Series "B" Preferred Stock to officers and directors of
the Company.
The Company determined compensation costs based on the fair value
at the grant date for its stock. The value of each share price
was determined to be .0277 representing $27,700 in total
compensation. The Company used the Black-Scholes option-pricing
model.
On June 30, the holders of the Series "B" Stock elected to
convert all of their shares to 50,000,000 shares of Common Stock.
The Black-Scholes option valuation model was developed for
estimating the fair value of traded options that have no vesting
restrictions and are fully transferable. Because option valuation
models require the use of subjective assumptions, changes in
these assumptions can materially affect the fair value of the
options, and the Company's options do not have the
characteristics of traded options, the option valuation models do
not necessarily provide a reliable measure of the fair value of
its options.
F-8
PACEL CORP. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
September 30, 2005
Note 6. Acquisitions.
In January 2005, the Company, through its wholly-owned
subsidiary The Resourcing Solutions Group, Inc., completed the
acquisition of certain assets of Rossar HR LLC, a Pennsylvania
limited liability company, which operated under the name "Your
Staff Solutions". Rossar HR LLC is a Professional Employment
Organization founded in 1987 which specializes in quality human
resource management services for small to medium sized
businesses. Consideration under such agreement did not
contemplate any cash paid to the seller at closing, but calls
for a Promissory Note of $272,000 to be paid in equal monthly
installments over ten years. The Company recorded the
acquisition as a purchase and recorded $52,000 of fees and
$232,950 of goodwill in association with this acquisition. The
Company acquired assets consisting of office equipment and
prepaid expenses of $26,269 and assumed liabilities equal to
$6,100. During the first quarter of 2005, the Company recorded
an impairment of $131,950 reducing the value of goodwill to
$101,000.
Note 7. 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 former 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 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 September 30, 2004. The Company and
Calkins answered the second amended complaint on March 23, 2005.
On April 7, 2005, a federal grand jury in the Northern District
of Illinois returned an indictment charging Custable and ten
other individuals and entities (The Company was not indicted)
with engaging in a fraudulent scheme based on the same
allegations as the SEC's action. On April 21, 2005, the District
Court stayed the SEC's civil action pending resolution of the
criminal action.
On or about September 9, 2005, an action was filed against the
Company in the Supreme Court of New York, County of New York,
Case No. 603823/05, Thomas Kelly; W. David Mc Coy; Richard T.
Garrett Trust vs. Pacel Corp. The action alleges that the
Company is in default in the payment of amounts owing on certain
notes issued by the Company in March 2001 and subsequently
converted to promissory notes. The action seeks compensatory
damages in the amount of $312,000, plus interest and attorneys
fees in an amount yet unspecified. The Company is carrying the
$375,000 obligation as part of short term notes payable. Accrued
interest has been accrued on the note since inception.
Note 8. Client Deposit and advance payments.
The Company had $47,123 in Client Deposits on September 30, 2005
related to amounts prepaid for 2005 services from a single
client. The Company executed a letter agreement in conjunction
with 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. The funds are required
to be held in a separate trust account and at the present time,
the funds are commingled in our operating account which is a
violation of the agreement.
F-9
PACEL CORP. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
September 30, 2005
Note 9. Short-Term Payables consists of:
September 30, December 31
2005 2004
---- ----
Convertible Notes Payable $ 1,075,016 $ 1,669,020
Other Notes Payable 465,000 465,000
Bank Line of Credit 18,509 24,231
--------------- ------------------
Total Short-Term Payables $ 1,558,525 $ 2,158,251
============= ===============
Note 10. Discontinued Operations.
On May 15, 2005, The Resourcing Solutions Group, Inc. a
subsidiary of the Company discontinued the operation of Asmara
of Florida and Partners PEO of the Carolinas. The Company
reported a loss from discontinued operations for the nine months
ended September 30, 2005 and 2004 equal to $31,708 and $283,503
respectively. The consolidated financial statements have been
reclassified, where applicable, to reflect the discontinued
operations.
Note 11. Disposition of Assets.
On May 15, 2005, The Resourcing Solutions Group, Inc., a
subsidiary of the Company, sold all the assets of Asmara of
Florida, Partners PEO of the Carolinas, and Asmara Services II,
Inc. to Allegro, Inc. for $110,356 and reported a loss of
$600,652, of which $711,009 of goodwill was written off. The
Company anticipates receiving $110,356 over the next 12 months
as it's earned.
Note 12. Related Party Transactions.
A. Employment Agreements
In July 2005, The Company entered into a ten year
employment contracts with F. Kay Calkins. Compensation
will include an annual base salary of $240,000 of which
$60,000 is deferred until July 2006. Ms. Calkins is
entitled to an incentive bonus plan based on the EBITDA
(earnings before interest, tax, depreciation and
amortization). The agreement also includes severance
payments upon termination of employment. Ms. Calkins will
hold the title of Chairman of the Board of Directors.
In July 2005, Mr. Calkins resigned as Chairman and Member
of the Board of Directors. In September 2005 the Company
renegotiated Mr. Calkins September 2004 agreement. The
renegotiated contract is for a term of seven years. It
provided that effective July 1, 2005 Mr. Calkins will
remain as an employee in a non-officer, non-director
position. His salary will be reduced to $168,700 per year
and the Company will continue to make payments to his
retirement plan as stipulated in his 2004 agreement. The
Company is currently in violation of this agreement for
not paying his retirement obligation. The Company has
accrued the cost $200,818 as deferred compensation.
Note 13. Recent Accounting Pronouncements.
The Company believes that any new accounting pronouncements
since December 31, 2004, will not have an affect on the
Company's financial statements.
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. Historical results are not necessarily indicative of
trends in operating results for any future period.
In 2005, 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. 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 became fully
operational in January 2005.
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.
In a further effort to bring the Company to profitability it
evaluated its internal operating costs and evaluated each
existing client to determine profitability. The Company
determined that certain clients were not producing sufficient
gross profit. In May 2005, the Company sold 16 contracts to
Allegro, Inc. for $110,356. The Company recorded a receivable
for $110,356 that will be collected over the next 12 months. The
balance of this receivable at the quarter ended September 30,
2005, was $93,964.
Commensurate with the sale of the 16 accounts the Company
reorganized its operations. The Company reduced its internal
staff, and other operating costs to the level necessary to serve
the existing client base. With the new HRIS system becoming
operational the Company will be able to add additional clients
without increasing its operational staff. The reorganization
reduces the Company's heavy industry and "blue collar" client
base allowing it to expand at a greater pace in other economic
sectors. The targeted clients to which the Company is marketing
its services have a greater capability to the more automated
process integral to the new HRIS system. The reorganization also
reduced the Company's reliance on outside equity funding.
3
PACEL CORP. AND SUBSIDIARIES
The sale of the accounts and subsequent re-organization of the
Company caused the gross profit of the Company to increase. The
accounts sold were marginal in profit and the internal direct
cost of sales was significantly higher on these accounts than on
the accounts retained by the Company. The impact of the sale has
caused the Gross Profit of the company to significantly
increase.
Nine Months ended September 30, 2005 compared to the Nine Months ended September
30, 2004
Revenue for the nine months ended September 30, 2005 was
$1,880,593 compared to revenue of $2,438,679 for the nine months
ended September 30, 2004. Revenues generated from the Rossar
acquisition accounted for $427,428 of the increase offset by a
decrease of $985,514 from the Company's existing clients.
The company experienced a decrease in the number of work site
employees it provided PEO services to during the nine months
ended September 30, 2005 compared to the nine months ended
September 30, 2004. The company generates its 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 nine months ended September 30,
2005 and September 30, 2004.
Nine months ended Nine months ended
September 30, September 30,
2005 2004
----------------- -----------------
(Unaudited) (Unaudited)
Reconciliation of billings to revenue recognized:
Gross billings to clients $ 13,750,435 $ 16,075,979
Less - Gross wages billed to clients (11,869,842) (13,637,300)
----------------- -----------------
Total revenue as reported $ 1,880,593 $ 2,438,679
================ ================
Cost of services for the nine months ended September 30, 2005
was $1,389,574 compared to cost of services of $1,985,856 for
the nine months ended September 30, 2004 and is related directly
to the delivery of services to its PEO clients. This decrease is
directly related to the decrease in revenue as well as decreased
unrecoverable costs associated with accounts no longer serviced
by the Company. Additionally, the Company received a rebate of
Worker's Compensation premiums from its existing carrier
reducing Worker's Compensation expenses in the third quarter.
General & administrative expenses, including salaries and wages,
was $2,038,878 for the nine months ended September 30, 2005,
compared to $1,707,206 in the corresponding period of 2004. The
increase was attributed to additional expenditures used to
support the existing operations along with the cost to integrate
the acquired RossarHR operation as well as increased legal
expenses incurred by the Company.
Sales and marketing expense was $422,870 for the nine months
ended September 30, 2005, compared to $278,661 in the
corresponding period of 2004. The increase was attributed to the
company's continued transformation of its sales and marketing
function that began in the second quarter of 2004. Many of the
4
PACEL CORP. AND SUBSIDIARIES
expenses incurred were one-time costs or contracts for specific
periods of time. Sales and marketing expenses decreased in the
third quarter as these costs have been met and the sales and
marketing function shifts to a commission based system.
Depreciation and amortization expense was $45,396 for the nine
months ended September 30, 2005, compared to $19,244 for the
corresponding period of 2004. This increase was from the Human
Resource Information System and various other office equipment
placed in service in the third and fourth quarter of 2004.
Interest expense is interest paid and accrued on the Convertible
Notes, unpaid payroll taxes, notes payable, and bank financing.
Interest expense was $305,473 for the nine months ended
September 30, 2005 compared to $153,044 for the same period of
2004. The increase is primarily attributable to the continued
use of financing for working capital as well as the Company not
being able to convert Convertible Notes to equity in a timely
manner.
Financing costs for the nine months ended September 30, 2005 was
$447,855 compared to finance expense of $1,718,063 for the nine
months ended September 30, 2004. The decrease was the result of
reduced funding. The Company recorded embedded interest in
conjunction with the issuance of convertible debentures during
the period.
Three Months ended September 30, 2005 compared to the Three Months ended
September 30, 2004
Revenue for the quarter ended September 30, 2005 was $390,082
compared to revenue of $760,716 for the quarter ended September
30, 2004. Revenues generated from the Rossar acquisition
accounted for $158,569 of the increase offset by a decrease of
$529,203 from the Company's existing clients.
The company experienced a decrease in the number of work site
employees it provided PEO services to during the quarter ended
September 30, 2005 compared to the quarter ended September 30,
2004. The company generates its 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 September 30, 2005
and September 30, 2004.
Three months ended Three months ended
September 30, September 30,
2005 2004
--------------- ---------------
(Unaudited) (Unaudited)
Reconciliation of billings to revenue recognized:
Gross billings to clients $ 2,775,663 $ 5,231,529
Less - Gross wages billed to clients (2,385,581) 4,470,814
--------------- ---------------
Total revenue as reported $ 390,082 $ 760,716
=============== ===============
5
PACEL CORP. AND SUBSIDIARIES
Cost of services for the three months ended September 30, 2005
was $211,835 compared to cost of services of $691,678 for the
three months ended September 30, 2004 and is related directly to
the delivery of services to its PEO clients. This decrease is
directly related to the decrease in revenue as well as decreased
unrecoverable costs associated with accounts no longer serviced
by the Company. Additionally, the Company received a rebate of
Worker's Compensation premiums from its existing carrier
reducing Worker's Compensation expenses in the third quarter.
General & administrative expenses, including salaries and wages,
was $538,444 for the three months ended September 30, 2005,
compared to $627,588 in the corresponding period of 2004. The
decrease in expenses is related to the re-organization of the
Company and the complete integration of the RossarHr operations
into existing operations.
Sales and marketing expense was $72,732 for the three months
ended September 30, 2005, compared to $131,063 in the
corresponding period of 2004. The decrease was attributed to the
company's continued transformation of its sales and marketing
function that began in the second quarter of 2004. The decrease
in expenses in the third quarter results from the completion of
planned fixed expenses and the expiration of marketing
contracts.
Depreciation and amortization expense was $15,476 for the three
months ended September 30, 2005, compared to $5,748 for the
corresponding period of 2004. This increase was from the Human
Resource Information System and various other office equipment
placed in service in the third and fourth quarter of 2004.
Interest expense is interest paid and accrued on the Convertible
Notes, unpaid payroll taxes, notes payable, and bank financing.
Interest expense was $72,763 for the three months ended
September 30, 2005 compared to $46,864 for the same period of
2004. The increase is primarily attributable to the carrying
costs of unpaid liabilities and Convertible Notes.
Financing cost for the three months ended September 30, 2005 was
$85,714 compared to finance expense of $362,349 for the three
months ended September 30, 2004. The decrease was the result of
reduced funding. The Company recorded embedded interest in
conjunction with the issuance of convertible debentures during
the period.
LIQUIDITY AND CAPITAL RESOURCES:
Cash and cash equivalents at September 30, 2005 was $334,794
compared to $117,052 at December 31, 2004. The Companies use of
cash from operation was $1,832,023 and $3,089,363 for the nine
months ended September 30, 2005 and September 30, 2004,
respectively. The net loss of $3,533,763 was offset by
$1,363,912 of non-cash items, the reductions in accounts
receivable and payroll and payroll related liabilities, and the
increases in accounts payable and accrued expenses.
Net cash provided by investing activities for the nine months
ended September 30, 2005 was $829,728 compared to the net cash
used in investing activities of $1,077,269 for the nine months
ended September 30, 2004. During the nine months ended September
30, 2005, the cash provided by investment activities was from
the redemption of two certificate of Deposits, the sales of
customer contract, offset by the purchase of fixed assets.
6
PACEL CORP. AND SUBSIDIARIES
Net cash provided by financing activities in the nine months
ended September 30, 2005 was $1,220,036 compared to $3,715,053
in the corresponding period ended September 30, 2004. The cash
provided during both periods is primarily related to the
Company's execution and utilization of its equity-based lines of
credit.
In August 2003, the Company entered into an equity line of
credit for $10,000,000 from Compass Capital Inc., Kentan Ltd,
Reef Holding Ltd, The Escrow Corp, and T&B Associates, Inc.
Borrowing from this equity line allows the repayment by issuing
shares of the Company's stock at a discount rate of up to 50%.
The line is being used to fund acquisitions and shortfalls in
working capital. During the nine months ended September 30,
2005, the Company drew down $1,245,000 and issued 4,932,466,322
unrestricted shares of the Company's .001 par common stock,
before adjusting such shares to reflect the effects of reverse
stock splits occurring subsequent to issuance. After giving
effect to the one-for-one thousand reverse split on February 28,
2005 and June 20, 2005, 4,933,434,250 shares were issued in
conjunction with this equity line. The balance remaining on this
equity line of credit at October 31, 2005 was $1,699,102. The
lenders are not obligated to fund the remaining balance on this
equity line of credit and may discontinue funding the Company at
any time without any further obligation.
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 to 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 an interest bearing CD (certificate of deposit)
in the amount of $600,000. In the first quarter of 2005, the
Company reduced the standby letter of credit to $500,000. In the
second quarter of 2005, the Company entered into an agreement
with another financial institution to process its ACH
transaction thus allowing the Company to cancel this standby
letter of credit and the CD.
During the second quarter of 2004, as part of the renewal
process for one of its insurance carriers, the Company was
required to secure the annual policy premiums with an
irrevocable letters of credit in the amount of $178,790. This
irrevocable letters of credit was secured with an interest
bearing CD's (certificate of deposits). During the second
quarter of 2005, the Company elected to terminate this insurance
policy thus allowing the Company to cancel this standby letter
of credit and the CD.
In January 2005, the Company, through its wholly-owned
subsidiary The Resourcing Solutions Group, Inc., completed the
acquisition of certain assets of Rossar HR LLC, a Pennsylvania
limited liability company, which operated under the name "Your
Staff Solutions". Rossar HR LLC is a Professional Employment
Organization founded in the 1987 which specializes in quality
human resource management services for small to medium sized
businesses. Consideration under such agreement did not
contemplate any cash paid to the seller at closing, but call for
a Promissory Note of $272,000 to be paid in equal monthly
installments over ten years. The Company recorded the
acquisition as a purchase and recorded $52,000 of fees and
$232,950 of goodwill in association with this acquisition. The
Company acquired assets consisting of office equipment and cash
on hand totaling $45,170 and assumes liabilities equal to
$6,100. During the first quarter of 2005, the Company recorded
an impairment of $131,950 reducing the value of goodwill to
$101,000.
7
PACEL CORP. AND SUBSIDIARIES
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. 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 successfully negotiated joint marketing programs to
market the company's products and services. 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 became fully operational in
January 2005.
In May 2005, The Resourcing Solutions Group, Inc. a subsidiary
of the Company, sold 16 PEO accounts located primarily in North
Carolina, South Carolina and Florida to Allegro, Inc. for
$122,055 and reported a loss of $485,953. The Company will
receive the $122,055 over the next 12 months. Commensurate with
the sale of the 16 accounts, the Company reorganized its
operations. The Company reduced its internal staff, and other
operating costs to the level necessary to serve the existing
client base. The Company anticipates a future continued
reduction in administrative costs as a as a result of this sale
and the continued focusing of marketing efforts on the
non-"blue-collar" industries. With the new HRIS system becoming
operational the Company will be able to add additional clients
without increasing its operational staff. The reorganization
reduces the Company's heavy industry and "blue collar" client
base allowing it to expand at a greater pace in other economic
sectors which has been a stated goal of the Company. The
targeted clients to which the Company is marketing its services
have a greater capability to the more automated process integral
to the new HRIS system. The reorganization also reduced the
Company's reliance on outside equity funding.
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 September 30, 2005, 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 September 30, 2005. There have been no significant changes in
the Company's internal controls or in other factors that could
significantly affect internal controls subsequent to September
30, 2005.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On or about September 9, 2005, an action was filed against the
Company in the Supreme Court of New York, County of New York,
Case No. 603823/05, Thomas Kelly; W. David Mc Coy; Richard T.
Garrett Trust vs. Pacel Corp. The action alleges that the
Company is in default in the payment of amounts owing on certain
convertible debentures issued by the Company in March 2001 and
subsequently converted to promissory notes. The action seeks
compensatory damages in the amount of $312,000, plus interest
and attorneys fees in an amount yet unspecified.
Reference is made to the Company's previous reports on Form
10-QSB in which the Company disclosed the action filed by the
Securities and Exchange Commission against the Company's former
officers and directors and the April 7, 2005 grand jury
proceedings in the Northern District of Illinois and the
subsequent court stay of the Commission's civil action pending
the resolution of the criminal proceedings arising from the
actions of the grand jury.
Item 3. Defaults upon Senior Securities
The Company is in default in the payment of the principle amount
and accrued interest on certain convertible debentures issued in
March 2001 in the aggregate principle amount of $250,000. The
amounts in default exceed 5% of the Company's total assets as of
the date of this report.
9
PACEL CORP. AND SUBSIDIARIES
Item 6. Exhibits
Exhibit No. Description Page
3(i) Articles of Incorporation *
3(ii) Amendments to Articles of Incorporation *
4 Designation of Series "B" Convertible Preferred Stock *
31.1 Rule 13a-14(a)/15d-14(a) Certification *
32.1 Section 1350 Certification *
* Incorporation by reference from previous reports and filings.
10
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: November 18, 2005