UNITED STATES
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, 2003
OR
[_] TRANSITION REPORT UNDER SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO _______________
Commission File Number: 0-29459
PACEL CORP.
-------------------------------------
(Exact name of registrant as specified in its charter)
VIRGINIA 54-1712558
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification Number)
7900 Sudley Road, SUITE 601
MANASSAS, VIRGINIA 20109-3795
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(Address of principal executive offices) (ZIP Code)
Registrant's telephone number, including area code: (703) 257-4759
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 day: Yes [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 28, 2003 there were 411,681,947 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-1
Consolidated Statements of Operations F-3
Consolidated Statements of Cash Flows F-5
Notes to Consolidated Financial Statements F-6
Item 2. Management's Discussion and
Analysis of Financial Results of Operations 12
Item 3. Controls and Procedures 16
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities 17
Item 3. Defaults upon Senior Securities 17
Item 4. Submission of Matters to Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports 18
Signatures 19
PACEL CORP. AND SUBSIDIARIES
Consolidated Balance Sheets
June 30, December 31,
2003 2002
------------- ---------------
(Unaudited) (Audited)
ASSETS
Current assets:
Cash $ 306,674 $ 8,379
Accounts receivable 34,438 -0-
Stock subscription receivable 130,000 -0-
Prepaid expenses 49,948 -0-
Workers compensation insurance deposits 194,776 -0-
Other receivables -0- 112,499
------------- ---------------
Total current assets 715,836 120,878
------------- ---------------
Property and equipment, net of accumulated depreciation of
$139,810 and $128,140, respectively 108,168 24,961
------------- ---------------
Other assets:
Deposit - MRG Contracts Acquisition 600,000 -0-
Other receivables 17,373 -0-
Goodwill 3,230,038 -0-
Security deposits 9,241 3,991
------------- ---------------
Total other assets 3,856,652 3,991
------------- ---------------
Total assets $ 4,680,656 $ 149,830
============= ===============
See accompanying notes to the consolidated financial statements.
F-1
PACEL CORP. AND SUBSIDIARIES
Consolidated Balance Sheets
June 30, December 31,
2003 2002
------------- ---------------
(Unaudited) (Audited)
LIABILITIES AND STOCKHOLDERS' DEFECIT
Current liabilities:
Accounts payable $ 1,058,554 $ 1,353,022
Payroll and payroll related liabilities 1,469,536 -0-
Accrued expenses 355,933 234,602
Accrued expenses - officers 320,286 -0-
Loans payable - officers/stockholders 32,616 956,309
Deferred client revenue 764,562 -0-
Current portion of long-term debt 1,447,681 873,750
Convertible debentures 125,000 -0-
Notes payable - bank 48,847 45,565
Income taxes payable 3,500 -0-
------------- --------------
Total current liabilities 5,626,515 3,463,248
Long-term liabilities:
Notes payable 248,994 -0-
Convertible debentures 651,520 409,111
------------- --------------
Total liabilities 6,527,029 3,872,359
Stockholders' equity (deficit):
Preferred stock, no par value, no liquidation value,
5,000,000 shares authorized, 1,000,000 shares
of 1997 Class A convertible preferred stock 11,320 11,320
Common stock, no par value, 2,000,000,000 and
650,000,000 shares authorized respectively,
327,205,569 and 119,791,243 shares issued
respectively 13,547,205 10,685,520
Cumulative currency translation adjustment (18,720) (18,720)
Accumulated deficit (15,386,178) (14,400,649)
------------- --------------
Total stockholders' (deficit) (1,846,373) (3,722,529)
------------- --------------
Total liabilities and stockholders' deficit $ 4,680,656 $ 149,830
============= ==============
See accompanying notes to the consolidated financial statements.
F-2
PACEL CORP. AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
Six months ended Three months ended
June 30, June 30,
2003 2002 2003 2002
------------ ------------- ------------- ------------
Revenue $ 1,147,420 $ 316,957 $ 1,146,837 $ 138,369
Cost of services 913,702 312,812 913,702 127,502
------------ ------------- ------------- ------------
Gross profit 233,718 4,145 233,135 10,867
Operating costs and expenses:
Research and development -0- 232,826 -0- 129,455
Sales and marketing -0- 206,244 -0- 147,365
General and administrative 1,138,255 1,670,190 833,667 557,446
Depreciation and amortization 8,908 7,477 7,660 3,727
Interest expense 91,723 70,308 63,637 35,013
Financing costs 130,750 35,500 130,750 32,000
------------ ------------- ------------- ------------
Total operating expenses 1,369,636 2,222,545 1,035,714 905,006
------------- --------------- -------------- -------------
Operating loss from continuing operations (1,135,918) (2,218,400) (802,579) (894,139)
Loss from discontinued operations of EBStor -0- (220,268) -0- (116,284)
Gain from disposal of EBStor -0- 177,817 -0- 177,817
------------ ------------- ------------- ------------
Loss before cumulative effect of accounting change (1,135,918) (2,260,851) (802,579) (832,606)
Cumulative effect of accounting change -0- (407,049) -0- -0-
------------ ------------- ------------- ------------
Net Loss $ (1,135,918) $ (2,667,900) $ (802,579) $ (832,606)
------------ ------------- ------------- ------------
Net loss per common and common equivalent share:
Basic $ (0.01) $ (0.10) $ (0.01) $ (0.02)
Diluted $ (0.01) $ (0.10) $ (0.01) $ (0.02)
Weighted average shares outstanding:
Basic 119,890,785 27,740,062 184,288,967 52,219,456
Diluted 119,890,785 27,740,062 184,288,967 52,219,456
See accompanying notes to the consolidated financial statements.
F-3
PACEL CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
Six months ended
June 30,
2003 2002
-------------- --------------
(Unaudited) (Unaudited)
Cash flows from operating activities:
Net loss $ (1,135,917) $ (2,667,900)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Cumulative effect of accounting change 407,049
Depreciation 8,908 7,477
Other non-cash items 492,765 1,153,712
Gain on sale of EBStor -0- (177,877)
Increase (decrease) in cash from changes in:
Accounts receivable (12,001) 232,462
Other receivables 7,590 (71,795)
Inventory -0- 36,423
Insurance deposits (12,485) -0-
Prepaid expenses (7,406) 287,357
Security deposits -0- (15,237)
Accounts payable (573,164) 68,792
Accrued expenses 121,331 636,971
Payroll and payroll related liabilities 582,205 -0-
Deferred revenue (508,764) -0-
Loans payable - officers/stockholders (3,407)
Income taxes payable -0- -0-
-------------- --------------
Net cash (used in) operating activities (1,040,345) (102,566)
Cash flows from investing activities:
Disposals of property and equipment 2,762 -0-
Net cash received in acquisition 160,744 -0-
Cash used for acquisitions (105,000) -0-
-------------- --------------
Net cash (used in) investing activities 58,506 -0-
Cash flows from financing activities:
Repayments of notes payable (22,610) (125,362)
Issuance of convertible notes payable 631,520 25,000
Borrowings from lines of credit 9,049 -0-
Proceeds from sale of common stock 662,175 150,000
-------------- --------------
Net cash provided by financing activities 1,280,134 49,638
Effects of exchange rates on cash -0- (7,720)
-------------- --------------
Net increase (decrease) in cash and cash equivalents 298,295 (60,648)
Cash and cash equivalents, beginning of period 8,379 65,761
-------------- --------------
Cash and cash equivalents, end of period $ 306,674 $ 5,113
============== ==============
See accompanying notes to the consolidated financial statements.
F-4
PACEL CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
June 30,
2003 2002
-------------- --------------
(Unaudited) (Unaudited)
Supplemental disclosure of cash flow information:
Cash paid for interest $ 9,862 $ 5,467
============= ==============
[Balance of this page intentionally left blank.]
See accompanying notes to the consolidated financial statements.
F-5
PACEL CORP. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
June 30, 2003
Note 1. Basis of Presentation.
The unaudited financial statements included in the Form 10-QSB have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-QSB and
Item 310(b) of Regulation SB of the Securities and Exchange Act of 1934.
The financial information furnished herein reflects all adjustments, which
in the opinion of management, are necessary for a fair presentation of the
Company's financial position, the results of operations and cash flows for
the periods presented.
Certain information and footnote disclosures normally contained in
financial statements prepared in accordance with generally accepted
accounting principles have been omitted, pursuant to such rules and
regulations.
These interim statements should be read in conjunction with the audited
consolidated financial statements and related notes thereto as presented in
the Company's certified financial statements for the year ended December
31, 2002. The Company presumes that users of the interim financial
information herein have read or have access to such audited financial
statements and that the adequacy of additional disclosure needed for a fair
presentation may be determined in that context. The results of operations
for any interim period are not necessarily indicative of the results
expected or reported for the full year.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reported period. Actual results could differ from those
estimates.
Note 2. Related Party Transactions.
The company purchased $55,290 and $85,278, respectively, of internet
development and maintenance services from E-B Stor, Inc. for the three
months and six months ended June 30, 2003. E-B Stor, Inc. is owned by F.
Kay Calkins, a director of the Company and wife of David Calkins, CEO and
Chairman of the Board of the Company.
On April 25, 2003, the Company issued 120,000,000 shares of its common
stock, no par value per share, to David and F. Kay Calkins in exchange for
$600,000 of debts owed to them. However, because they are "Affiliates" of
the Company, Mr. and Mrs. Calkins will be able to sell such shares only in
compliance with Rule 144 and 145. The shares were issued pursuant to
Section 3(a)(10) of the Securities Act of 1933, as amended, after a hearing
with notice to, and an opportunity to be heard from, interested parties, as
to the fairness of each transaction, by courts in Nevada and Illinois. Such
courts specifically determined that the transactions were fair to
interested parties and declared that the transactions were exempt under
Section 3(a)(10).
F-6
PACEL CORP. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
June 30, 2003
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. Upon adoption of
these Statements, the Company recorded a one-time, non-cash charge of
$407,049 to reduce the carrying value of its goodwill. Such charge is
non-operational in nature and is reflected as a cumulative effect of
accounting change in the accompanying consolidated statement of operations.
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 result 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.
F-7
PACEL CORP. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
June 30, 2003
Note 5. Common Stock.
On March 17, 2003, the Company effected a one-for-thirty reverse split
restating the number of common shares as of December 31, 2002 from
635,537,735 to 21,184,591. All references to average number of shares
outstanding and prices per share have been restated retroactively to
reflect the split.
Note 6. Contingent Liabilities.
The Securities and Exchange Commission (the "SEC") filed an action in
federal district court asserting various violations of securities laws
against the Company. The complaint alleges that defendant Frank Custable
"orchestrated" a "scheme" to illegally obtain stock from various companies,
including the Company, through "scam Commission Form S-8 registration
statements, forged stock authorization form and least one bogus attorney
opinion letter arranged by Custable." The complain alleges that, in
connection with this alleged "scheme", the Company and its CEO, David
Calkins, violated Section 17(a) of the Securities Act and Section 10(b) and
Rule 10b-5 of the Exchange Act. The SEC asks that the Company and Calkins
be permanently enjoined from future violations, ordered to pay disgorgement
and civil penalties and Calkins be barred from continued service as an
officer and director. As part of an ex parte proceeding, the District Court
has ordered the Company and Calkins to provide an accounting of their
assets and the transactions that are the subject of the complaint. The
Company has been served with the complaint, and no further proceedings are
scheduled at this time.
Note 7. Acquisitions.
In April 2003, the Company completed the acquisition of 100% of the
outstanding stock of BeneCorp. Such acquisition was accounted for as a
purchase. In conjunction with the acquisition, the Company assumed
approximately $1,000,000 of debt. Consideration for the transaction was
$200,000 in cash, of which the Company made an initial deposit of $96,000
in 2002, and the issuance of 200,000 shares of restricted common stock of
the Company. The Company also executed one year employment contracts with
two principal officers of BeneCorp in conjunction with the acquisition. The
Company recorded the acquisition as a purchase and recorded $20,000 of fees
and $1,672,000 of goodwill in association with the acquisition.
In April 2003, TRSG entered into an agreement for the purchase of customer
contracts, with a value of up to $100,000,000, from MRG. Consideration for
such contracts is three times annualized net profit margin on each contract
paid in either cash or freely tradable common stock of the Company. To
date, the Company has issued 34,500,000 shares of unrestricted common stock
in conjunction with the purchase of the contracts and recorded a receivable
of $600,000 in conjunction with that issuance. In addition, the Company
entered into a one-year agreement with MRG to provide continuing
administrative services under such customer contracts.
In April 2003, TRSG acquired substantially all of the assets of Asmara,
Inc. ("Asmara"), a North Carolina corporation, including its ownership of
several subsidiary operations, including Asmara Benefit Services, Inc. and
Asmara Services I, Inc., North Carolina corporations, Woodstock Lumber
Sales, Inc., an Oklahoma Corporation and Asmara of Florida I, Inc., Asmara
of Florida II, Inc., Asmara of Florida III, Inc. and Asmara of Florida IV,
Inc., Florida corporations. The acquisition was accounted for as a
purchase. The Company assumed all debts of the operations of approximately
$1,400,000, issued a note payable to the shareholder of Asmara, Inc. in the
amount of $431,530, payable over a two year period and executed employment
contracts with the principal officer and sole shareholder of Asmara.
Consideration under such agreement consists of cash compensation, bonuses
based on business unit performance and grants of options on the common
stock of the Company. The Company recorded $50,000 of fees and $1,155,000
of goodwill in conjunction with this acquisition.
F-8
PACEL CORP. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
June 30, 2003
On May 15, 2003, the Company acquired, through its wholly-owned subsidiary
Asmara Services I, Inc., the outstanding membership units of NSC, LLC, a
North Carolina limited liability company. Such acquisition was accounted
for as a purchase. Consideration for the transaction was $100,000 in cash
and the issuance of a note payable for $200,000. Such note is payable over
eighteen (18) months and bears no interest. The Company recorded the
acquisition as a purchase and recorded $300,000 of goodwill in association
with the acquisition.
F-9
PACEL CORP. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Management's discussion and analysis of results of operations and financial
condition include a discussion of liquidity and capital resources. The following
discussion should be read in conjunction with the consolidated financial
statements and notes thereto.
In 2002, the Company completed an evaluation of its business model and the
potential success of its existing business initiatives. It was determined that
the Company should, as part of that review, evaluate other potential business
markets that could provide the potential for success. In September 2002, the
Company announced its intention to enter the Professional Employer Organization
("PEO") industry. The Company believes that this market offers an opportunity to
develop and leverage relationships with small and medium businesses. The Company
will provide human capital solutions through the provision of PEO services and
Administrative Service Organization ("ASO") services to such clients. In April
2002, the Company successfully completed the acquisition of two existing PEO
organizations and continues to evaluate other potential acquisition candidates
while also reviewing and implementing opportunities to support organic growth in
order to secure a position as an industry leader. The Company sees this
initiative in the Human Resources Outsourcing ("HRO") industry as an opportunity
to tap into the small business market in the United States and intends to
compliment the provision of PEO and ASO services with information technology
services, business consulting services and financial services at a future time.
Through its PEO/ASO business unit, the Company will market to its clients,
typically small to medium-sized businesses with between five and 1,500
employees, a broad range of products and services that provide an outsourced
solution for the clients' human resources ("HR") needs. The Company's products
initially include payroll services, benefits administration (including health,
welfare and retirement plans), governmental compliance, risk management
(including safety training), unemployment administration and other HR related
services. The Company is currently working to establish the national vendor
relationships in order to effectively and competitively provide such services to
a broad range of clients.
Six Months ended June 30, 2003 compared to the Six Months ended June 30, 2002
Sales for the six months ended June 30, 2003 increased approximately $830,000 to
$1,147,420 when compared to sales of $316,957 for the six months ended June 30,
2002. The Company's revenue in 2003 was derived from the Company's recently
acquired PEO operating units. In 2002, the Company derived revenue from the sale
of retail hardware and software products. In 2003, the Company was not actively
selling such products due to resources being devoted to the acquisition and
development of its PEO business.
Due to the significance of the amounts included in billings to the Company's
clients and its corresponding revenue recognition methods, the Company has
provided the following reconciliation of billings to revenue for the three and
six month periods ended June 30, 2003. The Company had no such revenue in the
corresponding periods of 2002.
Six months ended Three months ended
June 30, June 30,
2003 2003
--------------- ---------------
(Unaudited) (Unaudited)
Reconciliation of billings to revenue recognized:
Gross billings to clients $ 7,253,487 $ 7,253,487
Less - Gross wages billed to clients (6,106,690) (6,106,690)
--------------- ---------------
Revenue from PEO services $ 1,146,797 $ 1,146,797
Other miscellaneous revenue 623 40
--------------- ---------------
Total revenue as reported $ 1,147,420 $ 1,146,837
=============== ===============
11
PACEL CORP. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations. (continued)
Cost of services for the six months ended June 30, 2003 was approximately
$913,000, and is related directly to the delivery of services to its PEO
clients. No such PEO business activity occurred in the period ended June 30,
2002 and the cost of sales reflected for that period are related to the sale of
retail hardware and software products.
Research & Development expenses decreased to $-0- in the six months ended June
30, 2003 as compared to $232,826 in the comparable period ended June 30, 2002.
The decrease in research and development expenses during 2003 reflects the
elimination of the development staff for new software products.
Sales, general & administrative expenses, including salaries and wages,
decreased to approximately $1,138,000 in the six months ended June 30, 2003,
compared to approximately $1,876,000 in the corresponding period of 2002. Since
2002, the Company has significantly reduced its overhead operating requirements.
Such overhead expenses accounted for approximately $715,000 for the six months
ended June 30, 2003 compared to $1,876,000 for the same period of 2002.
Acquisitions completed in the second quarter of 2003 accounted for the remaining
$423,000 of sales, general and administrative expenses, including salaries and
wages. In addition, the Company moved to a new facility for its headquarters,
reducing its rental rates by approximately 66%.
Depreciation expenses increased to approximately $9,000 in the six months ended
June 30, 2003, compared to approximately $7,500 for the corresponding period of
2002. Such increase is related to the Company's acquisition of assets for its
PEO business units.
Interest Expense is interest paid and accrued on the Convertible Notes, Notes
payable and the interest due for the loan from a stockholder. Interest amounted
to approximately $91,000 in the six months ended June 30, 2003 compared to
$70,000 for the same period of 2002. The increase is primarily attributable to
the Company's continued payment of financing costs for such indebtedness as well
as the issuance of new debt during the period.
Finance Expense for the six months ended June 30, 2003 was $130,750 compared to
$35,500 for the six months ended June 30, 2002. The Company recorded imbedded
interest in conjunction with the issuance of convertible debentures during the
period assuming conversion of such debt was available on an immediate basis.
Three Months ended June 30, 2003 compared to the Three Months ended June 30,
2002
Sales for the three months ended June 30, 2003 increased approximately
$1,000,000 to $1,146,837 when compared to sales of $138,369 for the three months
ended June 30, 2002. The Company's revenue in 2003 was derived from the
Company's recently acquired PEO operating units. In 2002, the Company derived
revenue from the sale of retail hardware and software products and was
discontinuing such sales in the second quarter of that year. In 2003, the
Company was not actively selling such products and was devoting its resources to
completing previously announced PEO business unit acquisitions. Such business
accounted for almost all of the revenue generated in the second quarter of 2003.
Cost of services for the three months ended June 30, 2003 was approximately
$913,000, and is related directly to the delivery of services to its PEO
clients. No such PEO business activity occurred in the period ended June 30,
2002 and the cost of sales reflected for that period are related to the sale of
retail hardware and software products. For the three months ended June 30, 2003,
the Company reported a gross profit margin on its PEO operations of $233,000, or
20% of revenue from such operations.
12
PACEL CORP. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations. (continued)
Research & Development expenses decreased to $-0- in the three months ended June
30, 2003 as compared to $129,455 in the comparable period ended June 30, 2002.
The decrease in research and development expenses during 2003 reflects the
elimination of the development staff for new software products as the Company
devoted its resources to the development of its PEO operations.
Sales, general & administrative expenses, including salaries and wages,
increased to approximately $834,000 in the three months ended June 30, 2003,
compared to approximately $705,000 in the corresponding period of 2002. Since
2002, the Company has significantly reduced its corporate overhead operating
requirements. Such overhead expenses accounted for approximately $411,000 for
the three months ended June 30, 2003 compared to $705,000 for the same period of
2002. Acquisitions of PEO business units completed in the second quarter of 2003
accounted for the remaining $423,000 of sales, general and administrative
expenses, including salaries and wages. In addition, the Company moved to a new
facility for its headquarters, reducing its rental rates by approximately 66%.
Depreciation expenses increased to approximately $8,000 in the three months
ended June 30, 2003, compared to approximately $3,700 for the corresponding
period of 2002. Such increase is related to the Company's acquisition of assets
for its PEO business units.
Interest Expense is interest paid and accrued on the Convertible Notes, Notes
payable and the interest due for the loan from a stockholder. Interest amounted
to approximately $64,000 in the three months ended June 30, 2003 compared to
$35,000 for the same period of 2002. The increase is primarily attributable to
the Company's continued payment of financing costs for such indebtedness as well
as the issuance of new debt during the period.
Finance Expense for the three months ended June 30, 2003 was $130,750 compared
to $32,000 for the three months ended June 30, 2002. The Company recorded
imbedded interest in conjunction with the issuance of convertible debentures
during the period assuming conversion of such debt was available on an immediate
basis.
LIQUIDITY AND CAPITAL RESOURCES:
Cash and cash equivalents at June 30, 2003 increased to $306,674 from $8,379 at
December 31, 2002. Net cash used for operating activities was $1,040,345 during
the six months ended June 30, 2003 compared to $102,566 in the corresponding
period ended June 30, 2002. The increase in the cash used in operating
activities is mainly attributable to the increased operating loss for the
quarter, settlement and repayment of outstanding accounts payable and
recognition of revenue previously deferred by the Company's recently acquired
BeneCorp Business Services unit offset by increases in accrued expenses, payroll
related liabilities related to the Company's recently acquired PEO business
units and increased in accounts receivable to PEO clients.
Net cash provided by investing activities for the six months ended June 30, 2003
was $58,506. The Company utilized no cash in the corresponding period of 2002
for investing activities. During the second quarter of 2003, the Company
utilized $105,000 of cash in the acquisition of the Asmara and NSC operating
units and acquired cash of $160,744 in the acquisition of BeneCorp Business
Services.
13
PACEL CORP. AND SUBSIDIARIES
Net cash provided by financing activities in the six months ended June 30, 2003
was $1,280,134 compared to $49,638 in the corresponding period ended June 30,
2002. The cash provided during the first six months of 2003 is directly related
to the Company's execution and utilization of two equity-based lines of credit.
In September 2002, the Company entered in an Equity line of credit for up to
$10,000,000 from the Honor Hedge Fund and Reisco Hedge Fund through High Desert
Capital at a variable discount rate of 12.5% to 50%. The Company can draw up to
$500,000 per month. The line is being used for acquisitions and working capital.
To date, the Company has borrowed $980,000 and issued 41,284,032 shares of
common stock.
In March 2003, the Company entered into an Equity line of credit for up to
$10,000,000 from Equities First Inc. at a discount rate of up to 50%. The
Company can draw up to $500,000 per month. The line is being used to fund
shortfalls in operating capital for the Company's business units, acquisitions
and working capital. . To date, the Company has borrowed $583,200 and issued
44,000,000 shares of common stock.
In April 2003, the Company entered into a two-year, $500,000 Note payable at an
interest of 9% per annum. The balance of such note at June 30, 2003 is
approximately $295,000. In May 2003, the Company entered into a Note payable
related to its acquisition of NSC, LLC totaling $200,000. Such note is for an
eighteen (18) month period and carries no interest. The balance at June 30, 2003
is $189,000. In May and June of 2003, the Company entered into two Note payable
agreements totaling $295,000. Such notes are for a three-year period and carry
interest at a rate of 8% per annum. The balance at June 30, 2003 is
approximately $165,000.
In June 2003, the Company entered into a two-year, $61,500 Note payable with
interest at Prime. The interest rate adjusts monthly and the loan is secured by
5,000,000 shares of the Company's common stock. In June 2003, the Company
entered into two-year, convertible Note Payable for $50,000 at an interest rate
of 10%. The conversion clause allows the holder of such note to convert the Note
into the common stock of the Company at a discount of 30% from the market price
at the date of conversion.
In June 2003, the Company entered into a short term loan agreement for $150,000.
Such note is due to be paid on August 20, 2003. The Company issued approximately
8,823,000 shares of its common stock to serve as collateral for such loan and
recorded a financing fee of $75,000 in association with the loan agreement. In
April 2003, the Company completed the acquisition of 100% of the outstanding
stock of BeneCorp. Such acquisition was accounted for as a purchase. In
conjunction with the acquisition, the Company assumed approximately $1,000,000
of debt. Consideration for the transaction was $200,000 in cash, of which the
Company made an initial deposit of $96,000 in 2002, and the issuance of 200,000
shares of restricted common stock of the Company. The Company also executed one
year employment contracts with two principal officers of BeneCorp in conjunction
with the acquisition. The Company recorded the acquisition as a purchase and
recorded $20,000 of fees and $1,672,000 of goodwill in association with the
acquisition.
In April 2003, TRSG entered into an agreement for the purchase of customer
contracts, with a value of up to $100,000,000, from MRG. Consideration for such
contracts is three times annualized net profit margin on each contract paid in
either cash or freely tradable common stock of the Company. To date, the Company
has issued 34,500,000 shares of unrestricted common stock in conjunction with
the purchase of the contracts and recorded a receivable of $600,000 in
conjunction with that issuance. In addition, the Company entered into a one-year
agreement with MRG to provide continuing administrative services under such
customer contracts.
14
PACEL CORP. AND SUBSIDIARIES
In April 2003, TRSG acquired substantially all of the assets of Asmara, Inc.
("Asmara"), a North Carolina corporation, including its ownership of several
subsidiary operations, including Asmara Benefit Services, Inc. and Asmara
Services I, Inc., North Carolina corporations, Woodstock Lumber Sales, Inc., an
Oklahoma Corporation and Asmara of Florida I, Inc., Asmara of Florida II, Inc.,
Asmara of Florida III, Inc. and Asmara of Florida IV, Inc., Florida
corporations. The acquisition was accounted for as a purchase. The Company
assumed all debts of the operations of approximately $1,400,000, issued a note
payable to the shareholder of Asmara, Inc. in the amount of $431,530, payable
over a two year period and executed employment contracts with the principal
officer and sole shareholder of Asmara. Consideration under such agreement
consists of cash compensation, bonuses based on business unit performance and
grants of options on the common stock of the Company. The Company recorded
$50,000 of fees and $1,155,000 of goodwill in conjunction with this acquisition.
On May 15, 2003, the Company acquired, through its wholly-owned subsidiary
Asmara Services I, Inc., the outstanding membership units of NSC, LLC, a North
Carolina limited liability company. Such acquisition was accounted for as a
purchase. Consideration for the transaction was $100,000 in cash and the
issuance of a note payable for $200,000. Such note is payable over eighteen (18)
months and bears no interest. The Company recorded the acquisition as a purchase
and recorded $300,000 of goodwill in association with the acquisition.
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 short-term loans from David and F. Kay Calkins, Officer and
shareholder, until additional funds can be generated from operations through
acquisitions and organic business growth. The liabilities of the Company consist
of over-extended accounts payable, payroll taxes, loans from officers, accrued
officer's compensation and interest expense.
Currently, the Company has focused its efforts on developing strategic
relationships with other organizations associated with the PEO industry. The
loss of its current equity financing would seriously hinder the Company's
ability to execute its PEO business strategy and impair its ability to continue
as a going concern.
The Company expects to continue its investing activities, including expenditures
for acquisitions, sales and marketing initiatives, product support, and
administrative support based on the availability of funds.
15
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, 2003, an evaluation was performed under the supervision and with
the participation of the Company's management, including the Principal Executive
Officer and the Principal Accounting Officer, of the effectiveness of the design
and operation of the Company's disclosure controls and procedures. Based on that
evaluation, the Company's management, including the Principal Executive Officer
and the Principal Accounting Officer, concluded that the Company's disclosure
controls and procedures were effective as of June 30, 2003. There have been no
significant changes in the Company's internal controls or in other factors that
could significantly affect internal controls subsequent to June 30, 2003.
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The Securities and Exchange Commission ("SEC") filed an action in Federal
District Court asserting various violations of securities laws against the
Company 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 office and director. As part of
an ex parte proceeding, the District Court has ordered the Company and Calkins
to provide an accounting of their assets and the transactions that are the
subject of the complaint. The Company has been served with the complaint, and no
further proceedings are scheduled at this time.
16
PACEL CORP. AND SUBSIDIARIES
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
None
Option Grants
None
Issuances of Stock for Services or in Satisfaction of Obligations
For the six months ended June 30, 2003, the Company issued approximately
10,784,000 shares of its No Par Value common stock as payment for various
consulting and legal fees.
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
Acquisitions
In April 2003, the Company completed the acquisition of 100% of the outstanding
stock of BeneCorp. Such acquisition was accounted for as a purchase. In
conjunction with the acquisition, the Company assumed approximately $1,000,000
of debt. Consideration for the transaction was $200,000 in cash, of which the
Company made an initial deposit of $96,000 in 2002, and the issuance of 200,000
shares of restricted common stock of the Company. The Company also executed one
year employment contracts with two principal officers of BeneCorp in conjunction
with the acquisition. The Company recorded the acquisition as a purchase and
recorded $1,672,000 of goodwill in association with the acquisition.
17
PACEL CORP. AND SUBSIDIARIES
In April 2003, TRSG entered into an agreement for the purchase of customer
contracts, with a value of up to $100,000,000, from MRG. Consideration for such
contracts is three times annualized net profit margin on each contract paid in
either cash or freely tradable common stock of the Company. To date, the Company
has issued 34,500,000 shares of unrestricted common stock in conjunction with
the purchase of the contracts. In addition, the Company entered into a one-year
agreement with MRG to provide continuing administrative services under such
customer contracts.
In April 2003, TRSG acquired substantially all of the assets of Asmara, Inc.
("Asmara"), a North Carolina corporation, including its ownership of several
subsidiary operations, including Asmara Benefit Services, Inc. and Asmara
Services I, Inc., North Carolina corporations, Woodstock Lumber Sales, Inc., an
Oklahoma Corporation and Asmara of Florida I, Inc., Asmara of Florida II, Inc.,
Asmara of Florida III, Inc. and Asmara of Florida IV, Inc., Florida
corporations. The acquisition was accounted for as a purchase. The Company
assumed all debts of the operations of approximately $1,400,000, issued a note
payable to the shareholder of Asmara, Inc. in the amount of $431,530, payable
over a two year period and executed employment contracts with the principal
officer and sole shareholder of Asmara. Consideration under such agreement
consists of cash compensation, bonuses based on business unit performance and
grants of options on the common stock of the Company. The Company recorded
$50,000 of fees and $1,155,000 of goodwill in conjunction with this acquisition.
On May 15, 2003, the Company acquired, through its wholly-owned subsidiary
Asmara Services I, Inc., the outstanding membership units of NSC, LLC, a North
Carolina limited liability company. Such acquisition was accounted for as a
purchase. Consideration for the transaction was $100,000 in cash and the
issuance of a note payable for $200,000. Such note is payable over eighteen (18)
months and bears no interest. The Company recorded the acquisition as a purchase
and recorded $300,000 of goodwill in association with the acquisition.
Item 6. Exhibits and Reports
Number Description
------ -------------------------------------------------
31.1 * 302 Certification by Chief Executive Officer and
Chief Financial Officer
32.1 * Certification by Chief Executive Officer and Chief Financial Officer
pursuant to 18 U.S.C. 1350.
------------------------------------------
* Filed herewith
18
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, registrant has duly caused this report to be signed in its behalf
by the undersigned thereunto duly authorized.
Pacel Corporation
BY: /s/David Calkins
----------------------
DATED: August 29, 2003
In accordance with the Securities Exchange Act, this report has been signed
below by the following persons on behalf of the registrant and in the capacities
and on the date indicated.
Signature Title Date
BY: /s/David Calkins
----------------------
David Calkins CEO/President August 29, 2003
Chairman of the Board
19