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 March 31, 2004
OR
[_] TRANSITION REPORT UNDER SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO _______________
Commission File Number: 0-29459
PACEL CORP.
---------------------------------------
(Exact name of registrant as specified in its charter)
VIRGINIA 54-1712558
---------------------------------- --------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification Number)
10108 Industrial Drive
CHARLOTTE, NORTH CAROLINA 28134-6516
---------------------------------------- --------------------------------
(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 May 19, 2004 there were 121,341,006 shares of the Registrant's common
stock outstanding.
PACEL CORP. AND SUBSIDIARIES
Part I. FINANCIAL INFORMATION (unaudited)
Item 1. Index to Consolidated Financial Statements
Consolidated Balance Sheets F-2
Consolidated Statements of Operations F-4
Consolidated Statements of Cash Flows F-5
Notes to Consolidated Financial Statements F-7
Item 2. Management's Discussion and Analysis of
Financial Results of Operations 13
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 17
Signatures 18
PACEL CORP. AND SUBSIDIARIES
Consolidated Balance Sheets
March 31, December 31,
2004 2003
(Unaudited) (Audited)
------------ ------------
ASSETS
Current assets:
Cash $ 77,254 $ 682,400
Trust account - client deposits and advance payments 600,012 1,100,000
Accounts receivable 15,787 70,384
Stock subscription receivable -0- 125,000
Prepaid expenses 112,582 44,326
Workers compensation insurance deposits 132,851 132,851
------------ ------------
Total current assets 938,486 2,154,961
------------ ------------
Property and equipment, net of accumulated depreciation of
$160,078 and $153,578, respectively 141,116 97,355
------------ ------------
Other assets:
Other receivables 100 7,902
Goodwill 1,075,432 1,075,432
Security deposits 10,241 9,366
------------ ------------
Total other assets 1,085,773 1,092,700
------------ ------------
Total assets $ 2,165,375 $ 3,345,016
============ ============
See accompanying notes to the consolidated financial statements.
F-2
PACEL CORP. AND SUBSIDIARIES
Consolidated Balance Sheets
March 31, December 31,
2004 2003
(Unaudited) (Audited)
------------ -------------
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 989,793 $ 1,119,543
Payroll and payroll related liabilities 1,971,575 2,413,244
Accrued expenses 487,787 559,229
Accrued expenses - officers 199,141 251,583
Loans payable - officers/stockholders 927,191 1,063,131
Client deposits and advance payments 600,012 1,100,000
Notes payable 562,219 505,218
Convertible Notes Payable 68,920 -0-
Notes payable - bank 32,168 33,900
Capital leases 6,779 13,608
Income taxes payable -0- 2,532
------------ -------------
Total current liabilities 5,845,585 7,061,988
Long-term liabilities:
Loans payable - officers/stockholders -0- 53,250
------------ -------------
Total liabilities 5,845,585 7,115,238
Stockholders' equity (deficit):
Preferred stock, no par value, no liquidation value,
5,000,000 shares authorized, 1,000,000 shares
of 1997 Class A convertible preferred stock 11,320 11,320
Common stock, no par value, 2,000,000,000 shares
authorized, 101,341,006 and 16,757,368
shares issued respectively 18,572,355 17,500,377
Cumulative currency translation adjustment (18,720) (18,720)
Accumulated deficit (22,245,165) (21,263,199)
------------ -------------
Total stockholders' (deficit) (3,680,210) (3,770,222)
------------ -------------
Total liabilities and stockholders' deficit $ 2,165,375 $ 3,345,016
============ =============
See accompanying notes to the consolidated financial statements.
F-3
PACEL CORP. AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
Three months ended
March 31,
2004 2003
--------------- -------------
Revenue $ 948,921 $ -0-
Cost of sales 853,845 -0-
Gross profit 95,076 -0-
--------------- -------------
Operating costs and expenses:
Sales, General and administrative 684,386 310,629
Depreciation and amortization 6,500 1,248
Interest expense 41,157 27,556
Financing costs 245,000 -0-
--------------- -------------
Total operating expenses 977,043 339,433
--------------- -------------
Operating loss from continuing operations
before extraordinary items (881,967) (339,433)
Loss on write-down of stock subscriptions receivable (100,000) -0-
Gain from the discontinued operation of Pacel Corp -0- 583
--------------- -------------
Net Loss $ (981,967) $ (338,850)
=============== =============
Net loss per common and common equivalent share:
Basic $ (0.05) $ (1.24)
=============== =============
Diluted $ (0.05) $ (1.24)
=============== =============
Weighted average shares outstanding:
Basic 20,647,888 272,961
=============== =============
Diluted 20,647,888 272,961
=============== =============
See accompanying notes to the consolidated financial statements.
F-4
PACEL CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
Three months ended
March 31,
2004 2003
--------------- -------------
Cash flows from operating activities:
Net loss $ (981,967) $ (338,850)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation 6,500 1,248
Write-down of Stock Subscription Receivable 100,000 -0-
Other non-cash items 385,000 66,332
Increase (decrease) in cash from changes in:
Client Deposits 499,988 -0-
Accounts receivable 54,598 -0-
Other receivables 32,802 (29,665)
Prepaid expenses (68,255) -0-
Security deposits (875) -0-
Accounts payable (129,750) (53,505)
Accrued expenses (71,441) 24,779
Accrued Expenses-Officers (52,442) -0-
Payroll and payroll related liabilities (441,669) -0-
Deferred revenue (499,988) -0-
Loans payable - officers/stockholders (189,190) 50,530
Income taxes payable (2,532) -0-
--------------- -------------
Net cash (used in) operating activities (1,359,221) (279,131)
Cash flows from investing activities:
(Purchases) disposals of property and equipment (50,262) -0-
--------------- -------------
Net cash (used in) investing activities (50,262) -0-
Cash flows from financing activities:
Repayments of notes payable (33,000) (10,128)
Issuance of notes payable 90,000 -0-
Issuance of convertible notes payable 68,920 -0-
Repayments from lines of credit (1,732) -0-
Repayments of capital lease (6,829) -0-
Common stock proceeds from convertible notes 686,978 492,425
--------------- -------------
Net cash provided by financing activities 804,337 482,297
Net increase (decrease) in cash and cash equivalents (605,146) 203,166
Cash and cash equivalents, beginning of period 682,400 8,379
--------------- -------------
Cash and cash equivalents, end of period $ 77,254 $ 211,545
=============== =============
See accompanying notes to the consolidated financial statements.
F-5
PACEL CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
Three months ended
March 31,
2004 2003
--------------- -------------
Supplemental disclosure of cash flow information:
Cash paid for interest $ 22,598 $ 2,777
=============== =============
See accompanying notes to the consolidated financial statements.
F-6
PACEL CORP. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
March 31, 2004
Note 1. Basis of Presentation.
The unaudited financial statements included in the Form 10-QSB have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB and Item 310(b)
of Regulation SB of the Securities and Exchange Act of 1934. The financial
information furnished herein reflects all adjustments, which in the opinion of
management, are necessary for a fair presentation of the Company's financial
position, the results of operations and cash flows for the periods presented.
Certain information and footnote disclosures normally contained in financial
statements prepared in accordance with generally accepted accounting principles
have been omitted, pursuant to such rules and regulations.
These interim statements should be read in conjunction with the audited
consolidated financial statements and related notes thereto as presented in the
Company's certified financial statements for the year ended December 31, 2003.
The Company presumes that users of the interim financial information herein have
read or have access to such audited financial statements and that the adequacy
of additional disclosure needed for a fair presentation may be determined in
that context. The results of operations for any interim period are not
necessarily indicative of the results expected or reported for the full year.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reported period. Actual
results could differ from those estimates.
Note 2. Related Party Transactions.
a) Lease Commitments. In April 2003, in connection with its acquisition of
Asmara, the Company became party to a real estate lease for office space
located in Charlotte, North Carolina. The lessor for this property is W.
Revel Bellamy, the former President and CEO of the Company. The lease
expires on December 31, 2004 and requires monthly lease payments of $5,000.
The Company made payments totaling $10,000 during the quarter ended March
31, 2004.
b) The Company recorded a liability to David Calkins in the amount of
$199,141 and $251,583 at March 31, 2004 and December 31, 2003 respectively,
for accrued payroll and loans.
c) Officer Loans. In conjunction with its acquisition of Asmara, the
Company issued a non-interest bearing note payable to the shareholder of
Asmara, Inc. in the amount of $431,530, payable over a two year period and
executed employment contracts with W. Revel Bellamy, the principal officer
and sole shareholder of Asmara and former President and CEO of the Company.
The balance of the note at March 31, 2004 was $113,840. In addition, the
Company provided a letter agreement to Mr. Bellamy to provide payment for
certain personal liabilities retained by Mr. Bellamy in conjunction with
the acquisition. In 2003, the Company recorded $813,351 as a note payable
to Mr. Bellamy. The balance of the notes at March 31, 2004 was $927,191.
F-7
PACEL CORP. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
March 31, 2004
Note 2. Related Party Transactions. (continued)
d) Due to existing credit issues and the SEC lawsuit, Pacel Corp. found
that it was becoming extremely difficult to obtain funds for acquisitions.
Therefore, the Officers and Board of Directors began exploring alternative
means by which to secure adequate financing for acquisitions. The Board of
Directors decided, and the officers of the company agreed, that David
Calkins and/or Kay Calkins would form a new company independent of Pacel,
and at the same time, resign as an Officer and Director of Pacel in 2004
(referred to as "Newco"). The purpose of forming Newco was to acquire
businesses in the HRO industry in markets where Pacel did not do business,
and to benefit Pacel shareholders through administrative services and
management contracts and leases of Pacel technology, operations, and
processes to operate the companies acquired. Newco will only pursue
acquisition candidates that Pacel has been provided an opportunity to
review, but has rejected. . Newco will fund all of its acquisition costs.
In the event that Newco successfully acquires a company or its
assets/operations, Newco will execute a service agreement with Pacel to
perform all or the majority of the administrative, management and
operational services necessary to operate the acquired business. In May
2004 F. Kay Calkins director and wife of David Calkins formed Newco and its
corporate name is Piedmont HR Inc. To date, Piedmont HR has not completed
any acquisitions or hired any employees.
Note 3. Accounting for Business Combinations.
In July 2001, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards No. 141, Business Combinations and
Statement of Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets (collectively, the "Statements"). These Statements change the
accounting for business combinations by, among other things, prohibiting the
prospective use of pooling-of-interests accounting and requiring companies to
discontinue amortizing goodwill and certain intangible assets deemed to have an
indefinite useful life. Alternatively, goodwill and intangible assets deemed to
have an indefinite useful life will be subject to an annual review for
impairment. These Statements were adopted by the Company in the first quarter of
2002 and for all business purchase combinations consummated after June 30, 2001.
Note 4. Revenue Recognition.
The gross billings that the Company charges its clients under its Professional
Services Agreement include each worksite employee's gross wages and a service
fee. The Company's service fee, which is computed as a percentage of gross
wages, is intended to yield a profit to the Company and cover the cost of
employment- related taxes, workers' compensation insurance coverage, and
administration and field services provided by the Company to the client,
including payroll administration and record keeping, as well as safety, human
resources and regulatory compliance consulting services. The component of the
service fee related to administration varies according to the size of the
client, the amount and frequency of payroll payments and the method of delivery
of such payments. The component of the service fee related to workers'
compensation and employer taxes, including unemployment insurance, is based, in
part, on the clients historical claims experience. All charges by the Company
are invoiced along with each periodic payroll delivered to the client.
F-8
PACEL CORP. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
March 31, 2004
Note 4. Revenue Recognition. (continued)
The Company reports revenue from service fees in accordance with Emerging Issues
Task Force ("EITF") No. 99-19, Reporting Revenue Gross as a Principal versus Net
as an Agent. The Company reports as revenue, on a gross basis, the total amount
billed to clients for service fees, workers' compensation and employer taxes.
The Company reports revenue on a gross basis for these fees because the Company
is the primary obligor and deemed to be the principal in these transactions
under EITF 99-19. The Company typically bills its clients for wages paid to
worksite employees in an amount equal to the amounts paid to these employees for
these wages. Accordingly, such billings result in no profit to the Company and
when presented on a net basis results in no revenue being recorded. The Company
accounts for its revenue under the accrual method of accounting. Under the
accrual method of accounting, the Company recognizes its revenues in the period
in which the worksite employee performs the work.
Note 5. Common Stock.
In February 2004 the Company effected a one-for-one hundred reverse stock split
restating the number of common shares at December 31, 2003 from 1,675,736,763 to
16,757,368. All references to average number of shares outstanding and prices
per share have been restated retroactively to reflect the split.
Note 6. Contingent Liabilities.
The Securities and Exchange Commission ("SEC") filed an action in Federal
District Court asserting various violations of securities laws against the
Company and its principal officer. The complaint alleges that Mr. Frank Custable
"orchestrated" a "scheme" to illegally obtain stock from various companies,
including the Company, through "scam Commission Form S-8 registration
statements, forged stock authorization forms and at least one bogus attorney
opinion letter arranged by Custable." The complaint alleges that, in connection
with this alleged "scheme," the Company and its CEO, David Calkins violated
Section 17(a) of the Securities Act and Section 10(b) and Rule 10b-5 of the
Exchange Act. The SEC asks that the Company and Calkins be permanently enjoined
from future violations, ordered to pay disgorgement and civil penalties and
Calkins be barred from continued service as an officer and director. As part of
an ex parte proceeding, the District Court has ordered the Company and Calkins
to provide an accounting of their assets and the transactions that are the
subject of the complaint. Pursuant to an agreement of the parties, that
accounting is due on June 30, 2004. The Company has been served with the
complaint and a scheduling order has been put into place. A response to the
complaint is currently due on July 30, 2004. Under the scheduling order fact
discovery must be completed by December 23, 2004 and expert discovery must be
completed by March 29, 2005. Final dispositive pre-trial motions must be filed
by May 13, 2005. A trial date has not yet been set.
F-9
PACEL CORP. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
March 31, 2004
Note 6. Contingent Liabilities. (continued)
During 2003, the Company began experiencing difficulties in processing
unemployment claims for its North Carolina worksite employees. Upon research of
the difficulties, the Company learned that its North Carolina Employment
Security Commission ("ESC") account was being actively reviewed by that agency.
Although the Company has received no notices in writing from the agency, it has
engaged counsel to bring this matter to a close as quickly as possible. Based on
discussions held to date between counsel and the ESC, the Company estimates that
the liability resulting from this investigation will be approximately $95,000.
The Company recorded such liability in the first quarter of 2004 and expects
final resolution of this matter by the end of June 2004.
The Company, as a member of the Phoenix Fund of North Carolina through its
Asmara Services I, Inc. subsidiary, is party to an indemnity agreement providing
joint and several liability for the Company to secure any outstanding
liabilities should the fund become insolvent. The Phoenix Fund is a recognized
insurance facility, regulated by the North Carolina Department of Insurance
("NCDOI"), through which the Company provides workers' compensation coverage to
its clients located within the State of North Carolina. The Company is party to
such agreement in conjunction with the other 1,200 members of the fund. The
Fund, by policy, establishes reserves for all losses on a full developed basis
and is subject to quarterly and annual reporting of the status of its
capitalization and operations to the NCDOI. The fund was required by the NCDOI
and has issued a surety bond that would act as the primary vehicle for funding
such liabilities should the fund become insolvent. The NCDOI, through provisions
in the law, can waive any such assessments on behalf of the fund should the
State determine that such assessment was not likely to be successful. Management
believes the likelihood of any assessment is minimal due to the continued
oversight of the fund by the NCDOI and the fund's establishment of sufficient
reserves to cover fully developed losses.
Note 7. Customer Deposit
The Company had $600,012 in Deferred Revenue at March 31, 2004 related to
$1,100,000 paid, in advance, in December 2003 for 2004 services from a single
client. In December 2003, 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.
Note 8. Officer's Retirement Plan
During the first quarter of 2004, the Company entered into a Variable Flexible
Premium Universal Life policy naming David E. Calkins, the Chairman of the
Company, as the insured. The Company is the owner of the policy while David E.
Calkins and his spouse are the beneficiaries of the policy. The insurance policy
carries a face value of $3,100,000. The account value of the insurance policy
can be invested in various investment accounts as directed by the Company. The
policy calls for the company to make monthly payments of $18, 333 for five
years. Upon age 70, David E. Calkins will be eligible to withdraw the assets of
the policy over a 15 year period. During the three months ended March 31, 2004,
the Company recorded $10,850 of expense related to the issuance of this policy.
F-10
PACEL CORP. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Management's discussion and analysis of results of operations and financial
condition include a discussion of liquidity and capital resources. The following
discussion should be read in conjunction with the consolidated financial
statements and notes thereto.
In 2004, the Company continued its strategy for penetrating the Human Resources
Outsourcing ("HRO") industry based on its evaluation of its business model and
existing business initiatives completed in 2002. The Company's intention to
enter this business sector was announced in September 2002 and was based on an
evaluation of potential business markets that provide the potential for success.
The Company provides human capital solutions through the provision of PEO
services and Administrative Service Organization ("ASO") services to such
clients. In 2003, the Company successfully completed the acquisition of two
existing PEO organizations and continues to evaluate other potential acquisition
candidates while also reviewing and implementing opportunities to support
organic growth in order to secure a position as an industry leader. The Company
sees this initiative in the Human Resources Outsourcing ("HRO") industry as an
opportunity to tap into the small business market in the United States and
intends to compliment the provision of PEO and ASO services with information
technology services, business consulting services and financial services at a
future time.
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.
Three Months ended March 31, 2004
compared to the Three Months ended March 31, 2003
Revenue for the three months ended March 31, 2004 was $948,921. All of the
Company's revenue in the first quarter of 2004 was derived from PEO operating
units acquired during 2003. Before those acquisitions were completed in the
second quarter of 2003, the Company had derived revenue from the sale of retail
hardware and software products. Such operations have ceased and are classified
as discontinued operations for presentation purposes. In 2003 and 2004, the
Company was not actively selling such products due to all 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 quarter
ended March 31, 2004.
Three months ended
March 31, 2004
------------------
(Unaudited)
Reconciliation of billings to revenue recognized:
Gross billings to clients $ 6,178,509
Less - Gross wages billed to clients (5,229,588)
---------------
Revenue from PEO services 948,921
Other miscellaneous revenue -0-
---------------
Total revenue as reported $ 948,921
===============
13
PACEL CORP. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations. (continued)
Cost of services for the three months ended March 31, 2004 was $853,845, and is
related directly to the delivery of services to its PEO clients. No such PEO
business activity occurred in the corresponding period of 2003
Sales, general & administrative expenses, including salaries and wages,
increased to $684,386 for the three months ended March 31, 2004, compared to
$310,629 in the corresponding period of 2003. In 2003, the Company had
discontinued its sale of retail hardware and software products, experiencing
related declines in its level of spending for general and administrative
expenses. Acquisitions completed in the second quarter of 2003, in conjunction
with the Company's entry into the HRO market, accounted for the majority of the
increase in 2004.
Depreciation expenses increased to $6,500 for the three months ended March 31,
2004, compared to $1,248 for the corresponding period of 2003. Such increase is
related to the Company's acquisition of assets for its PEO business units.
Interest Expense is interest paid and accrued on the Convertible Notes, Notes
payable and the interest due for the loan from a stockholder. Interest amounted
to $41,157 for the three months ended March 31, 2004 compared to $27,556 for the
same period of 2003. The increase is primarily attributable to the Company's
continued payment of financing costs for such indebtedness.
Finance Expense for the three months ended March 31, 2004 was $245,000. The
Company recorded imbedded interest in conjunction with the issuance of
convertible debentures during the period assuming conversion of such debt was
available on an immediate basis and has incurred fees associated with accessing
its lines of credit. The Company incurred no such expense for the three months
ended March 31, 2003.
LIQUIDITY AND CAPITAL RESOURCES:
Cash and cash equivalents at March 31, 2004 decreased to $77,254 from $682,400
at December 31, 2003. Net cash used for operating activities was $1,359,221
during the three months ended March 31, 2004 compared to $279,131 in the
corresponding period of 2003. The increase in the cash used in operating
activities is mainly attributable to the increased operating loss for the
quarter, settlement and repayment of outstanding accounts payable and
recognition of revenue previously deferred, offset by increases in accrued
expenses, payroll related liabilities related to the Company's recently acquired
PEO business units and decrease in accounts receivable to PEO clients.
Net cash provided by investing activities for the three months ended March 31,
2004 was $50,262. The increase in the cash used in investing activities is
attributable to computer equipment and software purchased for the company's
business information system implementation. The Company reported no investing
activities for the corresponding period of 2003.
Net cash provided by financing activities in the three months ended March 31,
2004 was $804,337 compared to $482,297 in the corresponding period ended March
31, 2003. The cash provided during both periods is directly related to the
Company's execution and utilization of three equity-based lines of credit.
14
PACEL CORP. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations. (continued)
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%. Pursuant
to an Assignment and Assumption Agreement dated February 10, 2004, Gala
Enterprises Ltd. was substituted for Equities First Inc. Access to the funds is
limited to $500,000 per month. The line is being used to fund acquisitions and
shortfalls in working capital. In 2004 no funding under this line has occurred.
In August 2003, the Company entered into an equity line of credit for
$10,000,000 from Compass Capital Inc. and T&B Associates, Inc. at a discount
rate of up to 50%. The Company can draw up to $500,000 per month. The line is
being used to fund acquisitions and shortfalls in working capital. During the
three months ended March 31, 2004, the Company drew down $755,898 and issued
12,729,132 shares of common stock in conjunction with this equity line. All of
the funds received in 2004 were drawn from the Company's agreement with Compass
Capital, Inc. However, at December 31, 2003, the Company had recorded a
receivable from T&B Associates, Inc. of $50,000 in exchange for 440,000 shares
of common stock. At March 31, 2004, the Company had not received these funds.
Due to uncertainties regarding the collection of these funds, the Company fully
reserved the receivable from T&B Associates, Inc. as uncollectible but is under
discussion with the lender to reach a resolution.
In the first quarter of 2004, the company utilized its 3A10 filing to issue
13,745,615 shares of its common stock. Proceeds from this issuance resulted in
$776,978 in cash of which $90,000 was used to pay accrued interest.
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, 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 March 31, 2004, an evaluation was performed under the supervision and with
the participation of the Company's management, including the Principal Executive
Officer, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures. Based on that evaluation, the Company's
management, including the Principal Executive Officer and the Principal
Accounting Officer, concluded that the Company's disclosure controls and
procedures were effective as of March 31, 2004. There have been no significant
changes in the Company's internal controls or in other factors that could
significantly affect internal controls subsequent to March 31, 2004.
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The Securities and Exchange Commission ("SEC") filed an action in Federal
District Court asserting various violations of securities laws against the
Company and its principal officer. The complaint alleges that Mr. Frank Custable
"orchestrated" a "scheme" to illegally obtain stock from various companies,
including the Company, through "scam Commission Form S-8 registration
statements, forged stock authorization forms and at least one bogus attorney
opinion letter arranged by Custable." The complaint alleges that, in connection
with this alleged "scheme," the Company and its CEO, David Calkins violated
Section 17(a) of the Securities Act and Section 10(b) and Rule 10b-5 of the
Exchange Act. The SEC asks that the Company and Calkins be permanently enjoined
from future violations, ordered to pay disgorgement and civil penalties and
Calkins be barred from continued service as an officer and director. As part of
an ex parte proceeding, the District Court has ordered the Company and Calkins
to provide an accounting of their assets and the transactions that are the
subject of the complaint. Pursuant to an agreement of the parties, that
accounting is due on June 30, 2004. The Company has been served with the
complaint and a scheduling order has been put into place. A response to the
complaint is currently due on July 30, 2004. Under the scheduling order fact
discovery must be completed by December 23, 2004 and expert discovery must be
completed by March 29, 2005. Final dispositive pre-trial motions must be filed
by May 13, 2005. A trial date has not yet been set.
16
PACEL CORP. AND SUBSIDIARIES
Item 1. LEGAL PROCEEDINGS (continued)
The Board of Directors dismissed the President and CEO for cause, the grounds of
which included, but are not limited to, unauthorized prepayments and charges
from corporate funds directed by him against acquisition debt held by him. The
Board of Directors is evaluating possible remedies, if any, against the decision
makers for the unauthorized prepayments.
The Company is a defendant in various lawsuits, mainly with previous vendors of
the Company still owed monies. The Company continues to settle such claims and
hired a law firm to handle such negotiations. All claims are recorded as
liabilities on the balance sheet of the Company and the Company believes such
recorded reserves to be adequate for the settlement of the claims.
Item 2. Changes in Securities
In February 2004 the Company effected a one-for-one hundred reverse stock split
restating the number of common shares at December 31, 2003 from 1,675,736,763 to
16,757,368. All references to average number of shares outstanding and prices
per share have been restated retroactively to reflect the split.
Option Grants
None
Issuances of Stock for Services or in Satisfaction of Obligations
None.
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None
Item 6. Exhibits and Reports
Number Description
------ -------------------------------------------------
31.1 * 302 Certification by President, Chief Executive Officer and Chief
Financial Officer.
32.1 * Certification by President, Chief Executive Officer and Chief
Financial Officer pursuant to 18 U.S.C. 1350.
------------------------------------------
* Filed herewith
17
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.
Dated: May 20, 2004
By: /s/ Gary Musselman
----------------------------------
Gary Musselman, President, Chief Executive Officer
and Chief Financial Officer.
18