U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB
(Mark One)
| X | Annual report under Section 13 or 13(d) of the Securities Exchange Act of
1934
For the fiscal year ended: December 31, 2004
| _ | Transition report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the transition period from _____________________ to ___________________.
Commission File Number: 000-29459
Pacel Corporation
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(Name of small business issuer in its charter)
NEVADA 54-1712558
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
7621 Little Ave Suite 101
Charlotte, North Carolina 28226
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(Address of principal executive offices) (Zip Code)
Issuers telephone number: (704) 643-0676
Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange
on which registered
None N/A
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Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK, PAR VALUE .001 PER SHARE
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(Title of Class)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [ X ] No [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or
information statements incorporate by reference in Part III f this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
The issuer's revenue for the fiscal year ended December 31, 2004 was $3,997,522.
As of April 12, 2005, the aggregate market value of the voting and non-voting
common stock of the registrant held by non-affiliates of the registrant computed
by reference to the average bid and asked price of such common equity on that
date was $93,070. As of April 12, 2005, the issuer had 930,698,300 outstanding
shares of common stock.
Transitional small business format Yes [ _ ] No [ X ]
TABLE OF CONTENTS
Part I
Item 1. Description of Business 1-11
Item 2. Description of Property 11
Item 3. Legal Proceedings 11
Item 4. Submission of Matters to a Vote of Security Holders 11
Part II
Item 5. Market for the Common Equity and Related Stockholder Matters 12-14
Item 6. Management's Discussion and Analysis of Financial Conditions
And Results of Operations 14-19
Item 7. Financial Statements and Supplementary Data 19
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 19
Item 8A. Controls and Procedures 19-20
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act 20-21
Item 10. Management Remuneration and Transactions 22
Item 11. Security Ownership of Certain Beneficial Owners and Management 23
Item 12. Certain Relationships and Related Transactions 23
Item 13. Exhibits and Reports on Form 8-K 24
Item 14. Principal Accountant Fees and Services 25
PART I.
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL OVERVIEW
The Company provides a comprehensive Personnel Management System that
encompasses a broad range of services, including benefits and payroll
administration, health and workers' compensation insurance programs, personnel
records management, employer liability management, employee recruiting and
selection, employee performance management, and employee training and
development services.
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 HRO market is a component part of the Business Process Outsourcing ("BPO")
industry. The broad category of BPO is a huge area that includes such outsourced
functions as information technology, human resources, logistics, facilities
management and finance/accounting where an external provider assumes
responsibility to own, manage and administer a particular process on the basis
of performance criteria that have been mutually agreed upon. HRO is a large and
complex universe in itself, encompassing the outsourcing of the many different
functions generally considered to be the domain of the Human Resources
department.
The HRO industry began to evolve in the early 1980s, largely in response to the
difficulties faced by small to medium sized businesses in procuring workers'
compensation and group health insurance coverage on a cost-effective basis and
operating in an increasingly complex legal and regulatory environment. While
various service providers, such as payroll processing firms, benefits and safety
consultants and temporary staffing firms were available to assist these
businesses with specific tasks, PEOs began to emerge as providers of a more
comprehensive outsourcing solution. PEOs combined the employees of a large
number of clients and leveraged their purchasing power to obtain workers'
compensation and group health programs. With the subsequent hardening of those
insurance markets for PEOs in the early 2000's, PEOs began investigating
additional market opportunities for further development of their business model.
The Company's began its entry into the HRO market through the 2003 acquisition
of two Professional Employer Organizations ("PEO") located in North Carolina and
Texas. The Company's is focusing its efforts on the PEO and Administrative
Services Organization ("ASO") sectors of the HRO industry, providing human
capital management solutions to small and medium sized business clients within
the United States. Evaluation of organic growth strategies combined with
continued scrutiny and examination of potential acquisition candidates continues
in order to secure the Company's position as a leader within the industry.
Though the Company remains exclusively focused on the PEO and ASO markets at
this time, it sees its entry into these markets as an opportunity to tap into
the lucrative small business BPO market and intends to compliment its PEO and
ASO activities with additional services such as information technology services,
business consulting and financial services at a still undetermined future time.
In 2004, the Company continues its focus on its PEO and ASO business model,
evaluating, completing and integrating planned acquisitions, developing leading
vendor relationships and establishing itself as an industry leader. To further
improve services by the Company to its clients a major investment in upgrading
technology occurred during 2004. The Company implemented new systems that
integrate Human Resource, payroll, benefits and workers' compensation
administration. The advent of this system permits to Company to effectively
market to larger clients.
1
Through its PEO and ASO business unit, the Company markets to its clients,
typically small to medium sized businesses with between five (5) and one
thousand (1,000) employees, a broad range of products and services that provide
an outsourced solution for the client's Human Resources ("HR") needs. Industry
estimates indicate that this "middle market" opportunity encompasses
approximately 100,000 small to medium-sized businesses employing over 40 million
people. Another benefit of the industry is that the target market is not
restricted as to industry, sector or size. Virtually every company has human
resources needs and almost all can benefit from some level of outsourcing.
Smaller firms appreciate the professional expertise and pooled resources brought
by a PEO or ASO while the potential for economies of scale created by
outsourcing the heavily transaction-intensive HR function make a compelling
economic argument. The Company's service offerings include payroll services,
benefits administration, governmental compliance, risk management, unemployment
administration, and health, welfare and retirement plan benefits. Although the
Company maintains successful relationships with its existing vendors in the
Southeastern United States, it continues negotiations with several national
vendors in these areas in order to effectively and competitively provide such
services to a broad range of clients on a national scale.
By allowing the management of these small to medium sized business clients to
focus on the "business of business" rather than the complicated and time
consuming administrative tasks of managing human capital issues, the Company, in
delivering its services, should be well positions to improve the efficiency of
its clients' businesses, enhancing their ability to be profitable in their
chosen marketplace. Additionally, such initiatives as improving their ability to
attract and retain talent, improving the planning and management of payroll cash
flows and managing employment risks should enhance the success of the Company's
clients.
In a PEO relationship, the client transfers certain employment-related risks and
liabilities to the Company and retains other risks and liabilities. In this
context, the client and the Company are each viewed as and become a
"co-employer" of the client's worksite employees. In order to enter into a
co-employer relationship, the Company operates as a Professional Employer
Organization.
As a co-employer, employment-related liabilities are contractually allocated
between the Company and the client under a written Professional Services
Agreement. Under the Professional Services Agreement, the Company assumes
responsibility for and manages the risks associated with each client's worksite
employee payroll obligations, including the liability for payment of salaries
and wages (including payroll taxes) to each worksite employee and, at the
client's options, responsibility for planning, providing and administering group
health, welfare and retirement benefits to such individuals. These obligations
of the Company are fixed, whether or not the client makes timely payment of the
associated service fee. In this regard, it is important to understand that,
unlike payroll processing service providers, the Company issues to each of the
client's worksite employees, Company payroll checks drawn on the Company's bank
accounts. The Company also reports and remits all required employment
information and taxes to the Internal Revenue Service ("IRS") and issues a
Federal Form W-2 to each worksite employee under the appropriate Company Federal
Employer Identification Number ("FEIN"). The Company assumes the responsibility
for compliance with those employment-related governmental regulations that can
be effectively managed away from the client's worksite. In many cases, the
Company provides the employee workers' compensation insurance coverage under the
Company's insurance policy. The client may elect, or the workers' compensation
carrier may require, retaining its own policy for the management of this risk.
In all cases, the Company remains heavily involved with safety and risk
management to assist the client in controlling risk and potentially reducing the
cost of such coverage. The client contractually retains the general day-to-day
responsibility to direct, control, hire, terminate and manage each of the
client's worksite employees. The worksite employee services are performed for
the exclusive benefit of the client's business. The client also remains
responsible for compliance with those employment-related governmental
regulations that are more closely related to the day-to-day management of
worksite employees.
2
In an ASO relationship, the client retains all employment-related risks and
liabilities and the Company provides outsourced solutions to meet the
administrative and HR needs of the client.
The Company charges its clients a service fee that is designed to yield a profit
to the Company and cover the cost of certain employment-related taxes, workers'
compensation insurance coverage and administrative and field services provided
by the Company to the client. The component of the service fee related to
administration varies according to the size of the client, the amount and
frequency of payroll payments, whether a PEO or an ASO arrangement and the
method of delivery for such payments. In a PEO relationship, the component of
the service fee related to workers' compensation and unemployment insurance is
based, in part, on the client's historical claims experience. In addition, the
client may choose to offer certain health, welfare and retirement benefits to
its worksite employees. In addition to the service fee and costs of selected
benefit plans, billings to each client also include the wages and other
employment-related taxes of each worksite employee. The billings are invoiced at
the time of deliver of each periodic payroll delivered to the client.
Currently, the Company provides workers' compensation insurance coverage for its
worksite employees through several vendor arrangements, depending on the
geographic location of the client's worksite(s). The Company has, to date, been
unsuccessful in obtaining a national program for its current client base and
anticipated growth. The Company is continuing negotiations with several carriers
in order to obtain such national coverage program. The Company pays the premium
for coverage and passes to its clients some or all of the costs attributable to
the coverage for their respective worksite employees in its service fee. The
Company does not act as an insurance company. However, as part of a 2003
acquisition, the Company acquired a fully-licensed, but non-operating, North
Carolina-based insurance company. The Company does assume certain workers'
compensation risk as a result of providing these services.
Human Resources Outsourcing Industry
Human Resources Outsourcing ("HRO") is a subset of the more comprehensive
Business Process Outsourcing ("BPO") sector. Since the 1980's, American industry
has embraced the general concept of outsourcing non-core or non-mission critical
processes, incorporating it into the American way of business. Outsourcing is
perceived as bringing economies of scale, higher levels of expertise and greater
efficiency to those processes.
One of the sectors of the HRO industry began to evolve in the early 1980s,
largely in response to the difficulties faced by small to medium-sized
businesses in procuring workers' compensation and group health insurance
coverage on a cost-effective basis and operating in an increasingly complex
legal and regulatory environment. While various service providers, such as
payroll processing firms, benefits and safety consultants and temporary staffing
firms, were available to assist these businesses with specific tasks,
Professional Employer Organizations ("PEO") began to emerge as providers of a
more comprehensive outsourcing solution for these activities. PEOs combined the
employees of a large number of clients and leveraged their purchasing power to
obtain more cost-effective workers' compensation and group health insurance
programs.
The Company believes that the key factors driving demand for HRO services are
the increasing acceptance in the small to medium-sized business community of
outsourcing certain non-core business functions such as those offered by the
Company; the size and growth of the small to medium-sized business community in
the United States; the increasing complexity of employment-related governmental
regulations and the related costs of compliance with those regulations; the need
of businesses to manage the cash expenditures associated with payroll and
payroll-related expenses, including workers' compensation insurance; and the
need to provide competitive benefit programs, including health, welfare and
retirement, on a cost-effective and convenient basis.
3
The Company further believes that many small to mid-sized businesses recognize
the need to manage employee data and information in a single coordinated basis.
During 2004, the Company invested in a "state-of the art" Human Resource
Information System with an integrated payroll system as a mechanism to address
this need by the business community. Utilization of the Company's systems allow
small to mid-sized businesses to offer capabilities previously associated with
only larger businesses.
Another factor affecting the HRO industry has been the increasing recognition
and acceptance by regulatory authorities of PEOs and the co-employer
relationship that exists when a client contract with a PEO for services
reflected in the development of licensing or registration requirements at the
state level. The National Associated of Professional Employer Organizations
("NAPEO"), of which the Company is a member, has worked, along with industry
leaders, with the relevant government entities for the establishment of a
regulatory framework that would clarify the roles and obligations of the PEO and
the client in the co-employer relationship. This framework generally imposes
financial responsibility on the PEO in order to promote the increased acceptance
and further development of the industry.
Twenty-six states, including states where the Company currently has operations,
have passed laws that have licensing, registration or other regulatory
requirements for PEOs and several additional states are considering such
regulation. Such laws vary from state to state, but generally codify the
requirements that the PEO must reserve the right to hire, terminate and
discipline worksite employees and secure workers' compensation insurance. In
certain instances, the Company delegates or assigns such rights to the client.
The laws also generally provide for monitoring the fiscal responsibility of the
PEOs and, in many cases, the licensure of the controlling officers of the PEO.
Since the late 1990's, due to changes in the workers' compensation and group
health insurance markets, many PEOs have encountered significant difficulties in
obtaining workers' compensation and group health benefit insurance policies.
Many PEOs have exited the industry due to the lack of available workers'
compensation and group health benefit insurance programs or due to their
inability to provide the financing security required by insurance companies in
order to obtain such coverage. The Company views this continued pressure on the
market as an opportunity, providing potentially viable acquisition targets to
further support its business development strategy.
All of the Company's clients are required to enter into the Company's
Professional Services Agreement (the "PSA"). The PSA provides for an initial
one-year term and is subject to termination by the Company or the client at any
time upon thirty (30) days written notice. The Company has several versions of
its basic PSA and utilizes each depending upon the relationship with the client.
Clients may enter into PEO or Administrative Services Only ("ASO") arrangements,
may bring their own benefit programs, provide their own workers' compensation
coverage, use only payroll services, etc. and the agreement is available to be
modified to suit the individual client's needs and elections. After the initial
one-year term, the contract may be renewed or terminated. Based on the results
of a financial review, the Company may require the owners of client companies to
personally guarantee the client's obligations under the PSA.
4
In the PEO environment the PSA also establishes the division of responsibilities
between the Company and the client as co-employers. Pursuant to the PSA, we are
responsible for personnel administration and are liable for certain
employment-related government regulations. In addition, we assume liability for
payment of salaries and wages (as well as related payroll taxes) of our worksite
employees and responsibility for providing specified employee benefits to such
persons. These liabilities are not contingent on the prepayment by the client of
the associated comprehensive service fee and, as a result of our employment
relationship with each of our worksite employees, we are liable for payment of
salary and wages to the worksite employees and are responsible for providing
specified employee benefits to such persons, regardless of whether the client
company pays the associated comprehensive service fee. The client retains the
employees' services and remains liable for the purposes of certain government
regulations, compliance with which requires control of the worksite or daily
supervisory responsibility or is otherwise beyond our ability to assume. A third
group of responsibilities and liabilities are shared by the Company and the
client where such joint responsibility is appropriate. The specific division of
applicable responsibilities under the PSA is as follows:
The Company
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o Payment of wages and related tax reporting and remittance (local, state
and federal withholding, FICA, FUTA, state unemployment
o Workers' compensation compliance, procurement, management and
reporting;
o Compliance with COBRA, HIPAA and ERISA (for each employee benefit plan
sponsored by the Company only), as well as monitoring changes in other
governmental regulations governing the employer/employee relationship
and updating the client when necessary; and
o Employee benefits administration of plans.
Client
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o Payment, through the Company, of commissions, bonuses, paid leaves of
absence and severance payments;
o Payment and related tax reporting and remittance of non-qualified
deferred compensation and equity-based compensation;
o Assignment to, and ownership of, all client intellectual property
rights;
o Compliance with OSHA regulations, EPA regulations, FLSA, WARN, USERRA
and state and local equivalents and compliance with government
contracting provisions;
o Compliance with the National Labor Relations Act ("NLRA"), including
all organizing efforts and expenses related to a collective bargaining
agreement and related benefits;
o Professional licensing requirements, fidelity bonding and professional
liability insurance
o Products produced and/or services provided; and
o ERISA compliance for client-sponsored benefit plans.
Joint
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o Implementation of policies and practices relating to the
employee/employer relationship; and
o Compliance with all federal, state and local employment laws,
including, but not limited to Title VII of the Civil Rights Act of
1964, ADEA, Title I of ADA, FMLA, the Consumer Credit Protection Act,
and immigration laws and regulations.
5
Because we are a co-employer with the client company for some purposes, it is
possible that we could incur liability for violations of such laws, even if we
are not responsible for the conduct giving rise to such liability. The PSA
addresses this issue by providing that the client will indemnify us for
liability incurred to the extent the liability is attributable to conduct by the
client. Notwithstanding this contractual right to indemnification, it is
possible that we could be unable to collect on a claim for indemnification and
may therefore be ultimately responsible for satisfying the liability in
question.
The Company retains the right to terminate the PSA as well as its co-employment
relationship, if applicable, with the worksite employees immediately upon
non-payment by a client. The Company manages its credit risk through the
periodic nature of payroll, client credit and banking checks, owner guarantees,
the Company's client selection process and its right to terminate the PSA and
the co-employment relationship with the worksite employees.
In the ASO environment the PSA defines the responsibility of each party. There
is no co-employment relationship in the ASO environment, thus, the Company has
no employer liability. The Company acts as an agent of the client and has a
contractual obligation to perform the functions contracted by the Client. The
PSA in the ASO environment is tailored to the specific needs of the Client.
Typically the Company has a contractual obligation for the following:
o Payment of wages and related tax reporting and remittance (local, state
and federal withholding, FICA, FUTA, state unemployment;
o Compliance with COBRA, and HIPAA, as well as monitoring changes in
other governmental regulations governing the employer/employee
relationship and updating the client when necessary; and
o Employee benefits administration of plans.
The Client is responsible for all other employer responsibilities.
The Company retains the right to terminate the PSA as well as its co-employment
relationship, if applicable, with the worksite employees immediately upon
non-payment by a client. The Company manages its credit risk through the
periodic nature of payroll, client credit and banking checks, owner guarantees,
the Company's client selection process and its right to terminate the PSA and
the co-employment relationship with the worksite employees.
Competition
The PEO sector of the industry is highly fragmented. The primary competition is
other PEOs, insurance agents, and fee-for-service providers, such as payroll
processors and HR consultants. The market for human resources consulting
services is expected to become increasingly competitive as larger companies,
some of which have greater financial resources than the Company, compete in the
market.
The key competitive factors in the HRO industry are breadth and quality of
services, price, reputation, financial stability, and choice, quality and cost
of benefits. The Company will seek to compete through its ability to provide a
full-service HR solution using a variety of delivery methods best suited to the
individual client with an emphasis on leveraging technology.
The Company believes that some smaller PEOs are exiting the industry due to
increased collateral required by providers of workers' compensation and health
benefits insurance. In addition, an increase in costs and a lack of available
workers' compensation and health benefits insurance programs is impacting these
PEOs.
6
Industry Regulation
Numerous federal and state laws and regulations relating to employment matters,
benefit plans and employment taxes affect the operations of the Company. By
entering into a co-employer relationship with its clients, the Company assumes
certain obligations and responsibilities as an employer under these laws.
Because many of these federal and state laws were enacted before the development
of non-traditional employment relationships, such as PEOs, temporary employment
and other employment-related outsourcing arrangements, many of these laws do not
specifically address the obligations and responsibilities of non-traditional
employers. In addition, the definition of "employer" under these laws is not
uniform.
Some governmental agencies that regulate employment have developed rules that
specifically address issues raised by the relationship among PEOs, clients and
worksite employees. Such regulations are relatively new and, therefore, the
interpretation and application of these regulations by administrative agencies
and Federal and state courts are limited or non-existent. The development of
additional regulations and interpretation of existing regulations can be
expected to evolve over time. In addition, from time to time, states have
considered, and may in the future consider, imposing certain taxes on gross
revenues or service fees of the Company and its competitors.
The Company believes that its operations are currently in compliance in all
material respects with applicable Federal and state statutes and regulations.
Employee Benefit Plans
The Company currently offers a 401(k) retirement plan, designed to be "multiple
employer" plans under the Internal Revenue Code of 1986, as amended (the "Code")
Section 413(c) by way of recent acquisitions. The plan design enables owners of
clients and highly compensated worksite employees, as well as highly compensated
internal employees of the Company, to participate. Employee benefit plans are
subject to provisions of both the Code and the Employee Retirement Income
Security Act ("ERISA").
In order to qualify for favorable tax treatment under the Code, the plans must
be established and maintained by an employer for the exclusive benefit of its
employees. Generally, an entity is an "employer" of certain workers for federal
employment tax purposes if an employment relationship exists between the entity
and the workers under the common law test of employment. In addition, the
officers of a corporation are deemed to be employees of that corporation for
federal employment tax purposes. The common law test of employment, as applied
by the Internal Revenue Service ("IRS") involves an examination of many factors
to ascertain whether an employment relationship exists between a worker and a
purported employer. Such a test is generally applied to determine whether an
individual is an independent contractor or an employee for federal employment
tax purposes and not to determine whether each of two or more companies is a
"co-employer." Substantial weight is typically given to the question of whether
the purported employer has the right to direct and control the details of an
individual's work. The courts have provided that the common law employer test
applied to determine the existence of an employer-employee relationship for
federal employment tax purposes can be different than the common law test
applied to determine employer status for other federal tax purposes. In
addition, control and supervision have been held to be less important factors
when determining employer status for ERISA purposes.
7
Employee pension and welfare benefit plans are also governed by ERISA. ERISA
defines "employer" as "any person acting directly as an employer, or indirectly
in the interest of an employer, in relation to an employee benefit plan." ERISA
defines the term "employee" as "any individual employed by an employer." The
courts have held that the common law test of employment must be applied to
determine whether an individual is an employee or an independent contractor
under ERISA. However, in applying that test, control and supervision are less
important for ERISA purposes when determining whether an employer has assumed
responsibility for an individual's benefits status. A definitive judicial
interpretation of "employer" in the context of a PEO or employee leasing
arrangement has not been established.
Federal Employment Taxes
As an employer, the Company assumes responsibility and liability for the payment
of Federal and state employment taxes with respect to wages and salaries paid to
worksite employees. There are essentially three types of Federal employment tax
obligations:(i) withholding of income tax governed by Code Section 3401, et
seq.; (ii) obligations under the Federal Income Contributions Act ("FICA"),
governed by Code Section 3101, et seq.; and (iii) obligations under the Federal
Unemployment Tax Act ("FUTA"), governed by Code Section 3101, et seq. Under
these Code sections, employers have the obligation to withhold and remit the
employer portion and, where applicable, the employee portion of these taxes.
Among other employment tax issues related to whether PEOs are employers of
worksite employees are issues under the Code provisions applicable to Federal
employment taxes. The issue arises as to whether the Company is responsible for
payment of employment taxes on wages and salaries paid to such worksite
employees. Code Section 3401(d)(1), which applies to Federal income tax
withholding requirements, contains an exception to the general common law test
applied to determine whether an entity is an "employer" for purposes of Federal
income tax withholding. The courts have extended this common law employer
exception to apply for both FICA and FUTA tax purposes. Code Section 3401(d)(1)
states that if the person for whom services are rendered does not have control
of the payment of wages, the "employer" for this purpose is the person having
control of the payment of wages. The Treasury Regulations issued under Code
Section 3401(d)(1) state that a third party can be deemed to be the employer of
workers under this Section for income tax withholding purposes where the person
for whom services are rendered does not have legal control of the payment of
wages. Although several courts have examined Code section 3401(d)(1) with regard
to PEOs its ultimate scope has not been delineated. Moreover, the IRS has to
date relied extensively on the common law test of employment in determining
liability for failure to comply with Federal income tax withholding
requirements.
Accordingly, while the Company believes it has assumed the withholding
obligations for worksite employees, should the Company fail to meet these
obligations, the client may be held jointly and severally liable.
State Regulation
While many states do not explicitly regulate PEOs, twenty-six states, including
several states where the Company has operations (North Carolina, Florida,
Oklahoma, South Carolina, Texas, West Virginia, and Virginia) have passed laws
that have licensing, registration or other compliance requirements for PEOs.
Several additional states are considering such regulation. Regulations vary from
state to state but generally provide for monitoring the fiscal responsibility of
PEOs. The Company holds licenses, is registered or otherwise compliant in the
states in which it currently has operations. The Company plans to seek such
registration and licensing in the remaining states in the near future. Whether
or not a state has licensing, registration or other compliance requirements, the
Company faces a number of other state and local regulations that could impact
its operations.
8
In connection with the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995 (the "Reform Act"), the Company is hereby
providing cautionary statements identifying important factors that could cause
the Company's actual results to differ materially from those projected in
forward-looking statements (as such term is defined in the Reform Act) made by
or on behalf of the Company herein, in other filings made by the Company with
the Securities and Exchange Commission, in press releases or other writings, or
orally, whether in presentations, in response to questions or otherwise. Any
statements that express, or involve discussions as to, expectations, beliefs,
plans, objectives, assumptions or future events or performance (often, but not
always, through the use of words or phrases such as "will result," "are expected
to," "anticipated," "plans," "intends," "will continue," "estimated," and
"projection") are not historical facts and may be forward-looking and,
accordingly, such forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause the actual results or performance
of the Company to be materially different from any future results or performance
expressed or implied by such forward-looking statements. Such known and unknown
risks, uncertainties and other factors include, but are not limited to, the
following:
i) volatility of costs of workers' compensation insurance coverage and
excess premium generated from the workers' compensation component of
the Company's service offering under the Company's loss sensitive
workers' compensation programs;
ii) volatility of state unemployment taxes;
iii) the uncertainties of the collateralization required by, as well as the
availability and/or renewal of, the Company's medical benefit plans,
general insurance and workers' compensation insurance programs for the
worksite employees;
iv) uncertainties as to the amount the company will pay to subsidize the
costs of medical benefit plans;
v) possible adverse application of certain federal and state laws and the
possible enactment of unfavorable laws or regulation; vi) litigation
and other claims against the Company and its clients, including the
impact of such claims on the cost, availability and retention of the
Company's insurance coverage programs;
vii) impact of competition from existing and new businesses offering human
resources outsourcing services;
viii) risks associated with expansion into additional markets where the
Company does not have a presence or significant market penetration;
ix) risks associated with the Company's dependence on key vendors and the
ability to obtain or renew benefit contracts and general insurance
policies at rates and with retention amounts acceptable to the Company;
x) an unfavorable determination by the Internal Revenue Service or
Department of Labor regarding the status of the Company as an
"employer";
xi) the possibility of client attrition due to price competition or the
Company's decision to increase the price of its services, including
medical benefits;
xii) risks associated with geographic market concentration;
xiii) the financial condition of clients;
xiv) the effect of economic conditions in the United States generally on the
Company's business; xv) the failure to properly manage growth and
successfully integrate acquired companies and operations;
xvi) risks associated with providing new service offerings to clients; xvii)
the ability to secure outside financing at rates acceptable to the
Company;
xviii) risks associated with third party claims related to the acts, errors or
omissions of the worksite employees; and
xix) other factors which are described in further detail in this Annual
Report on Form 10-KSB and in other filings by the Company with the
Securities and Exchange Commission.
9
The Company cautions that the factors described above could cause actual results
or outcomes to differ materially from those expressed in any forward-looking
statements made by or on behalf of the Company. Any forward-looking statement
speaks only as of the date on which such statement is made, and the Company
undertakes no obligation to update any forward-looking statement or statements
to reflect events or circumstances after the date on which such statement is
made or to reflect the occurrence of unanticipated events. New factors emerge
from time to time, and it is not possible for management to predict all of such
factors. Further, management cannot assess the impact of each such factor on the
business or the extent to which any factor, or combination of factors, may cause
actual results to differ materially from those contained in any forward-looking
statements.
Acquisitions
In 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.
In October 2004, the Company acquired PiedmontHR, Inc., a Virginia corporation,
from Kaye Calkins, Secretary and Director of the Company, and wife of David
Calkins. This company was acquired in anticipation of the Company re-organizing
its subsidiary operations into a more streamlined management. PiedmiontHR is the
operating entity which all Human Resource, risk and safety consulting will be
provided. The acquisition of PiedmontHR permits the Company to segregate Human
Resource, Risk and Safety consulting from its PEO/HRO operations.
Plan of Internal Reorganization
Management of the Company has undertaken an evaluation of the organizational
structure of the Company and its subsidiaries and has concluded that a
restructuring would be in the Company's best interests operationally and
financially. With that in mind, management has recommended that all of the
Company's Professional Employee Organization ("PEO") activities will be
conducted through The Resourcing Solutions Group, Inc., ("TRSG") the Company's
subsidiary. All other non-PEO activities will be conducted through the Company.
Under the current corporate structure, all PEO businesses, except Benecorp
Business Services ("BBS"), transact business under the TRSG subsidiary of the
Company. This structure causes the Company to have multiple filings with various
states for PEO licensing. TRSG is required to file various state mandate
documents and post indemnity bonds, up to $100,000 per state, in order to secure
its PEO license. In order for BBS to secure its PEO license, it must file
essentially duplicate documents and post similar indemnity bonds. Furthermore,
in reviewing the market potential in the human resources outsourcing industry,
management of the Company believes that significant future revenue can be
generated by offering insurance products and services. In order to capitalize on
this revenue potential and to ensure compliance with the Federal Employee
Retirement Income Security Act of 1974, management believes that it is necessary
to segregate the insurance and risk management services from the PEO services.
The proposed reorganization will also streamline management reporting. This will
permit the Company to leverage its resources in its various business operations.
The proposed reorganization will not have a direct impact on shareholders of the
Company.
10
Effective January 25, 2005, by written consent of the shareholders holding a
majority of the voting power of the Company as disclosed in the Company's
Information Statement filed with the Securities and Exchange Commission approved
(a) an amendment to the Company's Articles of Incorporation to increase the
authorized common stock to 10 billion shares; (b) a change of corporate domicile
from Virginia to Nevada; (c) the election of Gary Musselman, Joseph Amato and
Thorn Auchter to the board of directors. These new directors have delayed
acceptance of their election until such time as the Company has obtained
directors and officers liability insurance.
Employees
As of March 31, 2005, Pacel Corp. employed 17 persons on a full time basis.
Pacel Corp. supplements fulltime employees with subcontractors and part-time
individuals, consistent with workload requirements. The Company's continued
success depends heavily upon its ability to retain highly qualified and
competent personnel.
Compliance with Environmental Laws
Company operations do not pollute nor involve discharge of material into the
environment. As a result, no expenditure is budgeted or required for environment
protection or restoration. Pacel is concerned about protecting the environment
and participates in recycling programs.
ITEM 2. DESCRIPTION OF PROPERTY
In February 2005, the Company relocated its executive offices to 7621 Little
Ave, Suite 101, Charlotte, North Carolina, 28226. The Company has a full service
lease until July 31, 2010. The Company's telephone number is (704) 643-0676 and
its facsimile number is (704) 643-0678. The Company is also a party to leases
for three "key-man" office spaces located in Coraopolis, Pennsylvania, Plano,
Texas, and Washington, Virginia.
ITEM 3. LEGAL PROCEEDINGS
The Securities and Exchange Commission ("SEC") filed an action in Federal
District Court asserting various violations of securities laws against the
Company and its principal officer. The complaint alleges that Mr. Frank Custable
"orchestrated" a "scheme" to illegally obtain stock from various companies,
including the Company, through "scam Commission Form S-8 registration
statements, forged stock authorization forms and at least one bogus attorney
opinion letter arranged by Custable." The complaint alleges that, in connection
with this alleged "scheme," the Company and its CEO, David Calkins violated
Section 17(a) of the Securities Act and Section 10(b) and Rule 10b-5 of the
Exchange Act. The SEC asks that the Company and Calkins be permanently enjoined
from future violations, ordered to pay disgorgement and civil penalties and
Calkins be barred from continued service as an officer and director. As part of
an ex parte proceeding, the District Court has ordered the Company and Calkins
to provide an accounting of their assets and the transactions that are the
subject of the complaint. Pursuant to an agreement of the parties, an accounting
of the transactions at issue was provided on June 30, 2004. The Company and
Calkins answered the second amended complaint on March 23, 2005. Under the
current scheduling order fact discovery must be completed by June 21, 2005.
Final dispositive pre-trial motion deadlines will be set by the trial judge. A
trial date has not yet been set.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
11
PART II
ITEM 5. MARKET FOR THE COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The common stock of the Company is traded on over-the-counter Electronic
Bulletin Board under the symbol "PCLL." On December 31, 2004 there were 199
holders of record of our common stock. As many such shares are held by brokers
and other institutions on behalf of stockholders, the Company is unable to
estimate the total number of stockholders represented by these record holders.
The following tables set forth the high and low sales price per share of our
common stock, for the periods indicated. The quotations reflect inter-dealer
prices, without retail mark-up, mark-down or commissions and may not represent
actual transactions.
The "high" and "low" bid quotations for the Company's Common Stock for each
quarterly period for the fiscal years ended December 31, 2003 and December 31,
2004 were as follows:
Calendar Quarter High Bid Price Low Bid Price
2003
First $ 0.0057 $ 0.00023
Second 0.0021 0.00017
Third 0.0008 0.00003
Fourth 0.0002 0.00003
2004
First 0.3700 0.03600
Second 0.0300 0.00200
Third 0.0300 0.00020
Fourth 0.0050 0.00020
The "high" and "low" bid quotations for the Company's Common Stock for each
quarterly period for the fiscal years ended December 31, 2003 and December 31,
2004, all of which are adjusted for all stock splits and reverses were as
follows:
Calendar Quarter High Bid Price Low Bid Price
2003
First $ 1,700,000.00 $ 70,000.00
Second 630,000.00 50,000.00
Third 240,000.00 10,000.00
Fourth 70,000.00 10,000.00
2004
First 3,700,000.00 3,600.00
Second 3000.00 200.00
Third 400.00 5.00
Fourth 5.00 0.20
The Company has paid no cash dividends since its inception. The Company
currently plans to retain any future earnings for use in its business and does
not intend to pay cash dividends in the foreseeable future. Holders of the
Common stock are entitled to share ratably in dividends when and as declared by
the Board of Directors out of funds legally available therefore.
12
Recent Sales of Unregistered Securities
In the fiscal year ended December 31, 2004, the Company utilized its $10,000,000
equity line of credit from Compass Capital Inc., Kentan Ltd, Reef Holding Ltd,
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% off the
closing bid stock price. The equity line is being used to fund acquisitions and
shortfalls in working capital. During the year ended December 31, 2004, the
Company drew down $4,440,898 and issued 4,177,281,829 unrestricted shares of the
Company's no par common stock, before adjusting such shares to reflect the
effects of any stock splits occurring subsequent to issuance. These shares were
issued pursuant to Section 3(a)(10) of the Securities Act of 1933, as amended,
after a hearing with notice to, and an opportunity to be heard from, interested
parties, as to the fairness of each transaction, by a state court in Florida who
specifically determined, prior to declaring that the transactions were exempt
under Section 3(a)(10), that the transactions were fair to the interested
parties.
In 2003, in connection with the acquisition of BeneCorp Business Services, Inc.,
the acquisition of contracts from Management Resource Group California, LLC and
other working capital purposes, the Company issued a total of 1,576,834,553
unrestricted shares of the Company's no par value common stock, before adjusting
such shares to reflect the effects of any stock splits occurring subsequent to
issuance. After giving effect to the one-for-thirty reverse split on March 17,
2003 the one-for-one hundred reverse split on February 24, 2004, the one-for-one
hundred reverse split on September 13, 2004, and the one-for-one thousand
reverse split on February 28, 2005, such shares would be restated as 124 shares.
Such shares were issued to The Honor Hedge Fund, LLC, a Nevada limited liability
company; Reisco Consulting, Inc., a Nevada Corporation; Equities First, LLC a
Delaware Limited Liability Company; MRG California LLC, a California Limited
Liability Company; Compass Capital, Inc., a New York Corporation; and T&B
Associates, Inc., a Florida Corporation. These shares were issued pursuant to
Section 3(a)(10) of the Securities Act of 1933, as amended, after a hearing with
notice to, and an opportunity to be heard from, interested parties, as to the
fairness of each transaction, by courts in Nevada, Illinois and Florida who
specifically determined, prior to declaring that the transactions were exempt
under Section 3(a)(10), that the transactions were fair to the interested
parties.
On April 25, 2003, the Company issued 120,000,000 shares of its common stock, no
par value per share, to David and F. Kay Calkins in exchange for $600,000 of
debts owed to them. Subsequent to the one-for-one hundred split in February
2004, the one-for-one hundred reverse split on September 13, 2004, and the
one-for-one thousand reverse split on February 28, 2005,such shares were
replaced with 12 shares of the common stock of the Company. However, because
they are "Affiliates" of the Company, Mr. and Mrs. Calkins will be able to sell
such shares only in compliance with Rule 144 and 145. The shares were issued
pursuant to Section 3(a)(10) of the Securities Act of 1933, as amended, after a
hearing with notice to, and an opportunity to be heard from, interested parties,
as to the fairness of each transaction, by courts in Nevada and Illinois.
13
From January 1, 2005 until March 31, 2005, in connection with the funding of
working capital shortfalls, the Company issued a total of 6,170,700,000 shares
of its common stock with the conversion value of $478,246, before adjusting such
shares to reflect the effects of any stock splits occurring subsequent to
issuance. After giving effect to the one-for-one thousand reverse split on
February 28, 2005, such shares would be restated as 925,950,000 shares. Such
shares were issued to Compass Capital, Inc., a New York Corporation; Kentan
Limited, a Turks & Cacos Islands Corporation, and Reef Holdings Limited, a Turks
& Cacos Islands Corporation. These shares were issued pursuant to Section
3(a)(10) of the Securities Act of 1933, as amended, after a hearing with notice
to, and an opportunity to be heard from, interested parties, as to the fairness
of each transaction, by a state court in Florida who specifically determined,
prior to declaring that the transactions were exempt under Section 3(a)(10),
that the transactions were fair to the interested parties. The Company received
$600,000 of additional funding From January 1, 2005 until March 31, 2005 through
the issuance of convertible notes.
On November 30, 2004, the Company's subsidiary, The Resourcing Solutions Group,
Inc., issued its 8% Convertible Redeemable Debentures due November 30, 2005 in
the aggregate principal amount of $100,000. The debentures were purchased by
OHHN Holdings, LLC and Hatov Holdings, LLC. The debentures were issued pursuant
to the exemption from registration under the Securities Act of 1933 provided by
Regulation D Rule 504. As collateral for the debenture, The Resourcing Solutions
Group, Inc. placed 1,000,000,000 shares in escrow. If the debenture is converted
for stock, the price value of the Resourcing Solutions Group, Inc. stock will be
diluted by the amount of shares necessary to repay the $100,000.00 principle
plus any outstanding interest.
Option Grants
None.
Issuances of Stock for Services or in Satisfaction of Obligations
None
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
You should read the following discussion in conjunction with our Consolidated
Financial Statements and related Notes included elsewhere in this annual report.
Historical results are not necessarily indicative of trends in operating results
for any future period.
Year Ended December 31, 2004 Compared to Year Ended December 31, 2003
Revenue for the year ended December 31, 2004 was $3,997,522 compared to revenue
of $3,840,586 for the year ended December 31, 2003. The difference is attributed
to the comparison of twelve months of PEO revenue for the year ended December
31, 2004 to nine months of the PEO revenue recorded from the Benecorp Business
Services acquisition and eight months of the PEO revenue recorded from the
Asmara acquisition during the year ended December 31, 2003. The Company
generates it revenue from services relating to work site employees. During 2004,
the Company experienced a decrease in the number of work site employees (WSE) it
provided PEO services to. The average monthly WSE for the year ended December
31, 2004 decreased from 988 to 742 when compared to the average WSE from the
year ended December 31, 2003. These losses were primarily in blue-collar
industries. The Company has been heavily marketing its services and Human
Resources Information Systems to national chains, white-collar, and light
industrial clients. The Company expects white-collar and national chain clients
to replace its expected loss in blue-collar clients.
14
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.
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 and premium 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.
Due to the significance of the amounts included in billings to the Company's
clients and its corresponding revenue recognition methods, the Company has
provided the following reconciliation of billings to revenue for the year ended
December 31, 2004 and December 31, 2003.
Year ended Year ended
December 31, December 31,
2004 2003
Reconciliation of billings to revenue recognized:
Billings to clients $ 26,384,025 $ 25,437,118
Less - Gross wages billed to clients (22,386,503) (21,597,214)
------------- -------------
Revenue from PEO services $ 3,997,522 $ 3,839,904
Other miscellaneous revenue -0- 682
------------- -------------
Total revenue as reported $ 3,997,522 $ 3,840,586
============= =============
15
Cost of services for the year ended December 31, 2004 increased approximately
$364,600 to $3,350,105 compared to cost of services of $2,985,530 for the year
ended December 31, 2003 and is related directly to the delivery of services to
its PEO clients. This increase is the result of having twelve months of PEO cost
of services in the year ended December 31, 2004 when compared to nine months of
PEO cost of services from the Benecorp acquisition and eight months of PEO cost
of services from the Asmara acquisition in 2003. Also, the Company recorded
$154,300 in cost of services during the fourth quarter of 2004 for unpaid client
payroll taxes from years prior to and relating to the Benecorp acquisition.
General & administrative expenses, including salaries and wages, increased to
$2,864,097 for the year ended December 31, 2004, compared to $2,625,343 in the
corresponding period of 2003. Acquisitions completed in the second quarter of
2003, in conjunction with the Company's entry into the HRO market, accounted for
the majority of the increase in 2004.
Sales and Marketing expenses increased to $495,025 for the year ended December
31, 2004, compared to $440,075 in the corresponding period of 2003. The sales
approach in prior years was to employ salespeople to actively find potential PEO
clients primarily in blue-collar industries. During the second and third quarter
of 2004, the Company redesigned all marketing literature and hired a new sales
force. During the fourth quarter of 2004, the Company updated its website and
implemented a new Human Resource Information System to target white-collar and
light industrial clients where the Company believes it can be successful. This
complete restructuring of the Company's sales and marketing function completed
in the fourth quarter of 2004 is expected to realize an increase in work site
employees beginning in the second quarter of 2005.
Depreciation expenses increased to $53,734 for the year ended December 31, 2004,
compared to $25,438 for the corresponding period of 2003. Such increase is
related to the Company's acquisition of its Human Resource Information System
and other technology equipment used for its operations.
Loss on write-down of loan receivables was -0- for the year ended December 31,
2004 compared to $717,500 for the year ended December 31, 2003. The loss in
December 31, 2003 consisted of $575,000 from the MRG acquisition and various
other receivables deemed uncollectible.
Interest expense is interest paid and accrued on the Convertible Notes, unpaid
payroll taxes, Notes payable, bank financing, and capital leases. Interest
expense amounted to $402,565 for the year ended December 31, 2004 compared to
$410,718 for the same period of 2003.
Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Finance expense for the year ended December 31, 2004 increased approximately
$1,345,000 to $1,930,761 compared to finance expense of $585,905 for the year
ended December 31, 2003. The increase was the result of additional funding
requirements for administrative and operational needs. The Company recorded
imbedded interest in conjunction with the issuance of convertible debentures
during the period assuming conversion of such debt was available on an immediate
basis and has incurred fees associated with accessing its lines of credit.
16
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents at December 31, 2004 decreased to $117,052 from
$682,400 at December 31, 2003. Net cash used for operating activities was
$4,150,530 during the year ended December 31, 2004 compared to $3,592,727 in the
corresponding period of 2003. The increase in the cash used in operating
activities is mainly attributable to billed and unbilled accounts receivable,
deposits, prepaid expenses, settlement and repayment of outstanding accounts
payable, accrued expenses-director, payroll related liabilities, recognition of
revenue previously deferred, assumed liabilities, offset by decreases in
operating loss for the year ended December 31, 2004, embedded interest, other
receivables, client deposits, accrued expenses, and accrued work site employee
costs.
Net cash used for investing activities for the year ended December 31, 2004 was
$1,017,220. The cash used in investing activities is attributable to computer
equipment and software purchased for the Company's business information system
implementation as well as an investment in four CD's (certificate of deposits).
These CD's were used to secure Letters of Credit for its payroll ACH (automated
clearing house) exposure, one of the Company's workers compensation insurance
policy, and two state PEO licenses. This compares to net cash provided by
investing activities for the year ended December 31, 2003 of $38,052. During the
second quarter of 2003, the Company utilized $105,000 of cash in the acquisition
of the Asmara and NCS operating units and acquired $160,744 in the acquisition
of Benecorp Business Services.
Net cash provided by financing activities in the year ended December 31, 2004
was $4,602,402 compared to $4,228,696 in the corresponding period ended
September 30, 2003. The cash provided during both periods is directly related to
the Company's execution and utilization of three equity-based lines of credit.
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, 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 year
ended December 31, 2004, the Company drew down $4,440,898 and issued
4,177,281,829 unrestricted shares of the Company's no par common stock, before
adjusting such shares to reflect the effects of any stock splits occurring
subsequent to issuance. After giving effect to the one-for-one hundred reverse
split on February 24, 2004, the one-for-one hundred reverse split on September
13, 2004, and the one-for-one thousand reverse split on February 28, 2005,
1,994,500 shares were issued in conjunction with this equity line. The balance
remaining on this equity line of credit at April 12, 2005 was $2,584,100. 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.
On November 30, 2004, the Company's subsidiary, The Resourcing Solutions Group,
Inc., issued its 8% Convertible Redeemable Debentures due November 30, 2005 in
the aggregate principal amount of $100,000. The debentures were purchased by
OHHN Holdings, LLC and Hatov Holdings, LLC. The debentures were issued pursuant
to the exemption from registration under the Securities Act of 1933 provided by
Regulation D Rule 504. This debenture is included in convertible notes payable.
As collateral for the debenture, The Resourcing Solutions Group, Inc. placed
1,000,000,000 shares in escrow. Based on the price of The Resourcing Solutions
Group, Inc. stock when the debenture was secured, the collateral was valued at
100 times the amount of the debenture. If the debenture is converted for stock,
the Company's percentage of ownership in The Resourcing Solutions Group, Inc.
will be substantially reduced. The Company can not determine the dilution since
there is an inverse relationship of the number of shares issued to the value of
the shares necessary to repay the debenture.
17
In September 2004, The Company entered into a ten year employment contract with
Gary A. Musselman. Compensation will include an annual base salary of $168,000
and 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. Mr. Musselman will hold the title of President
and Chief Executive Officer.
In September 2004, The Company entered into a ten year employment contract with
David E. Calkins. Compensation will include an annual base salary of $300,000,
an incentive bonus plan based on the EBITDA (earnings before interest, tax,
depreciation and amortization), and the funding of a Variable Flexible Premium
Universal Life Policy. The agreement also includes severance payments upon
termination of employment. Mr. Calkins will hold the title of Chairman of the
Board of Directors.
The Company's cash requirements for funding its administrative and operating
needs continue to greatly exceed its cash flows generated from operations. Such
shortfalls and other capital needs continue to be satisfied through equity
financing and convertible notes payable, until additional funds can be generated
through acquisitions and organic business growth. The liabilities of the Company
consist of over-extended accounts payable, payroll taxes, and interest expense.
As part of its goal to bring the Company to profitability and less reliant on
equity financing for ongoing operations, the Company has developed an aggressive
marketing strategy as well as an investment to significantly upgrade its HRIS
(Human Resource Information System) capabilities to service its current and
prospective clients. The Company has engaged Lincoln Consulting, LLC, a
strategic marketing firm, to develop and launch an aggressive and innovative
marketing and sales plan. This plan includes hiring and training the sales team
as well as marketing the Company's services through networks of national
associations and chains. The Company has also engaged Thinkware Corporation to
implement its new HRIS system. This system will provide the Company with
"state-of-the-art" human resource data necessary to service the growing needs of
small to mid-size clients as well as automate the Company's internal processes.
The HRIS system was fully operational at January 1, 2005.
A strategic analysis of the overall Human Resource Outsourcing market occurred
in 2004 with the goal of developing a comprehensive market study that focused
the Company on the areas in which the Company could achieve success in
penetrating. As a result of this study, the Company identified a major segment
of the overall business community that had unique human resource and employer
liability risks. At the request of a national trade association within the
business segment the Company was asked to develop a plan to address three major
areas of concern - workers' compensation insurance, employee retention and
employee benefits. The Company entered into a Memorandum of Understanding with
the trade association in November 2004 and February 2005 that recognized the
Company as the sponsored organization to which association members should engage
to address the areas of concern. The Company created a comprehensive program to
address the issues and expanded the program to the much broader economic sector.
The Company believes revenue will be generated from this program during late
second quarter 2005. The Company will generate revenue from multiple vertical
markets.
The market analysis concluded that separating the Company's overall products
into multiple offerings would achieve greater success in penetrating larger and
more diverse prospects. The Company implemented the strategy in the 4th quarter
of 2004 and expects significant results during 2005. As of March 2005, the
Company efforts have resulted in a significant increase in customer prospects.
The Company believes these revised and aggressive sales efforts will bring the
Company profitable on a monthly basis during 2005.
18
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.
In February and September 2004, the Company effected a one-for-one hundred
reverse stock split and in February 2005, the Company effected a one-for-one
thousand reverse stock split restating the number of common shares at December
31, 2003 from 1,675,736,763 to 167. All references to average number of shares
outstanding and prices per share have been restated retroactively to reflect the
split.
Forward Looking Statements
The Company is making this statement in order to satisfy the "safe harbor"
provisions contained in the Private Securities Litigation Reform Act of 1995.
This Form 10-KSB includes forward-looking statements relating to the business of
the Company. Forward-looking statements contained herein or in other statements
made by the Company are made based on management's expectations and beliefs
concerning future events impacting the Company and are subject to uncertainties
and factors relating to the Company's operations and business environment, all
of which are difficult to predict and many of which are beyond the control of
the Company, that could cause actual results of the Company to differ materially
from those matters expressed in or implied by forward-looking statements. The
Company believes that the following factors, among others, could affect its
future performance and cause actual results of the Company to differ materially
from those expressed in or implied by forward-looking statements made by or on
behalf of the Company: (a) the effect of technological changes; (b) increases in
or unexpected losses; (c) increased competition; (d) fluctuations in the costs
to operate the business; (e) uninsurable risks; and (f) general economic
conditions.
ITEM 7. FINANCIAL STATEMENTS
The Financial Statements are listed at "Index to Consolidated Financial
Statements".
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no disputes or disagreements of any nature between the Company or its
management and its public auditors with respect to any aspect of accounting or
financial disclosure.
ITEM 8A. CONTROLS AND PROCEDURES
As required by Rule 13a-15 under the Exchange Act, within the ninety days prior
to the filing date of this report, the Company carried out an evaluation of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures. This evaluation was carried out under the supervision and with
the participation of Company's management, including the Company's President and
Chief Executive Officer and the Company's Chief Financial Officer. Based upon
that evaluation, the Company's President and Chief Executive Officer and the
Company's Chief Financial Officer concluded that the Company's disclosure
controls and procedures are effective. There have been no significant changes in
the Company's internal controls subsequent to the date the Company carried out
its evaluation.
19
Disclosure controls and procedures are controls and other procedures that are
designed to ensure that information required to be disclosed in Company reports
filed or submitted under the Exchange Act is recorded, processed, summarized and
reporting, within the time periods specified in the Securities and Exchange
Commission's rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed in Company reports filed under the Exchange Act is
accumulated and communicated to management, including the Company's Chief
Executive Officer and Chief Financial Officer, as appropriate, to allow timely
decisions regarding required disclosure.
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Directors, Executive Officers, Promoters and Control Persons
a) Set forth below are the names, age, positions, with the Company and business
experiences of the executive officers and directors of the Company.
Name Age Position(s) with Company
----------------- ---- ----------------------------------
David E. Calkins 61 Chairman of the Board, Director
F. Kay Calkins 46 Secretary, Director
Gary A. Musselman 49 President and Chief Executive Officer, Chief Financial
Officer
All directors hold office until the next annual meeting of the Company's
shareholders and until their successors have been elected and qualify. Officers
serve at the pleasure of the Board of Directors. The officers and directors will
devote such time and effort to the business and affairs of the Company as may be
necessary to perform their responsibilities as executive officers and/or
directors of the Company.
Family Relationships
David E. Calkins and F. Kay Calkins are husband and wife.
Business Experience
David E. Calkins, Chairman, Director
David E. Calkins founded PACEL in 1994 and is a member and Chairman of the Board
of Directors. Mr. Calkins also served as President, Chief Executive Officer and
Chief Financial Officer of the Company until December 2003. From 1992 until
founding PACEL, Mr. Calkins was the Regional Manager of three divisions of
Pacific Nuclear Corporation ("PRC"), now known as Vectra Technologies, Inc., an
engineering and information services company, listed and traded on NASDAQ Stock
Market. Vectra Technologies provides power plant modifications, maintenance
support and nuclear fuel handling to utility companies and the United States
Department of Energy. From 1987 to 1993, Mr. Calkins served as Project Manager,
Program Director, Vice President of Operations, and Executive Vice President for
Business Development for PRC. Mr. Calkins served from 1981 to 1986 as Manager of
Engineering and Construction for the Zack Company, a Chicago, Illinois
mechanical contractor to the utility industry. Mr. Calkins was also a Manager of
Quality Engineering and Startup Engineer for Westinghouse. From 1972 to 1981,
Mr. Calkins served as an Executive Engineer and Consultant for NUS Corporation,
a consulting firm for domestic and international utilities, The United States
Nuclear Regulatory Commission and Department of Energy. Mr. Calkins resides in
Virginia and is the spouse of F. Kay Calkins.
20
F. Kay Calkins, Secretary, Director
F. Kay Calkins currently serves as Secretary and Director of the Company. Prior
to the fourth quarter of 2003, she served as President of EBStor.com, Inc.
("EBStor"), an Internet and web development company, until that operation ceased
activities in the fourth quarter of 2003. In her capacity as President, Ms.
Calkins was responsible for oversight of all operations of the Company. Ms.
Calkins is experienced in the management of technology companies and utilized
that experience in the start-up and growth of EBStor. Prior to her position with
EBStor, Ms. Calkins was Vice President and Chief Operating Officer of PACEL
Corp., where she oversaw the day-to-day operations of the Company and managed
the development and deployment of software systems. Ms. Calkins has over fifteen
years of experience in technology-related companies. Before accepting the
positions with PACEL Ms. Calkins was President of CMC Services, a marketing and
consulting firm based in Virginia. Ms. Calkins resides in Virginia.
Gary A. Musselman
Mr. Musselman was elected as President and Chief Executive Officer and Chief
Financial Officer of the Company in April 2004. Prior to joining Pacel Corp.,
Mr. Musselman served as the Chief Financial Officer of Grace Global, LLC, an
international media company operating within the Untied Stated and three foreign
locations. Mr. Musselman was responsible for due diligence for several companies
being considered for acquisition as well as overseeing the integration of
companies that were acquired. From 2000 to 2002, Mr. Musselman was the managing
Partner for Stratford Financial Resources, LLC, business development consulting
firm specializing in commercial finance, human resources and mergers and
acquisitions. From 1993 to 2000, Mr. Musselman founded and was the Chief
Executive Officer of ECS Financial Management Services, LLC, a financial
management company specializing in account receivable management. Mr. Musselman
resides in North Carolina.
Section 16(a) Beneficial Ownership Reporting Compliance
The Company's President and Chief Executive Officer, Gary Musselman, failed to
file a report on Form 3 upon his appointment in April 2004 disclosing his
initial beneficial ownership of the Company's securities. Mr. Musselman will
file an appropriate Form 5. Upon Mr. Musselman's appointment in April 2004, and
at this time, Mr. Musselman does not hold any of the Company's securities.
Code of Ethics
Effective March 22, 2005, the Board of Directors adopted a Code of Ethics for
Senior Financial Officers. The Code of Ethics was adopted pursuant to the
requirements of the Sarbanes-Oxley Act of 2002 and the rules and regulations of
the Securities and Exchange Commission thereunder. A copy of the Code of Ethics
will be made available upon request at no charge. Requests should be directed in
writing to the Company at7621 Little Ave. Suite 101, Charlotte, NC 28226.
21
ITEM 10. MANAGEMENT REMUNERATION AND TRANSACTIONS
Executive Compensation
Annual Annual Annual LT Comp LT
Comp Comp Comp Rest Comp LTIP
Name and Post Year Salary Bonus Other Stock Options Payouts
David E. Calkins, 2002 175,000 [1] 0 0 12 [2] 0 0
Chairman of the Board 2003 127,497 [3] 0 120,609 [3],[5] 0 0 0
2004 240,049 [3] 0 379,370 [3],[5] 0 0 0
Gary A. Musselman, 2002 0 0 0
President and CEO, CFO 2003 0 0 0
2004 118,255 [4] 0 40,999 [6] 0 0 0
William R. Bellamy 2002 0 0 0
Former President & CEO 2003 98,077 [7] 49,545 6,423 [5]
2004 57,115 [7] 17,308 3,609 [5]
Timothy L. Maness 2002 0 0 0
Former CFO 2003 77,499 [8] 10,840 4,469 [5]
2004 54,879 [8] 0 2,384 [5]
[1] - Annual salary accrued on books, but not paid to Mr. Calkins.
[2] - Pursuant to a 3 (a) (10) filing, the Company issued 120,000,000 shares of
the common stock of the Company to David E. and F. Kay Calkins to repay a
loan made to the Company. The issuance has been restated for the February
2004, one-for-one hundred reverse split, the September 2004, one-for-one
hundred reverse split, and February 2005 one-for-one thousand reverse
split.
[3] - Mr. Calkins is currently compensated at an annual salary of $300,000. In
addition to his regular salary, Mr. Calkins also received other
compensation of $116,667 (2003)and $184,408 (2004) in payment of prior
years' salaries that had been previously accrued on the books of the
Company.
[4] - Mr. Musselman became an employee of the Company on April 7, 2004 and is
currently compensated at an annual salary of $168,000.
[5] - Other annual compensation includes payments made on behalf on employees
for health, life and dental benefits and a variable flexible premium
universal life policy (183,333).
[6] - Other annual compensation includes payments made on behalf
on employees for health, life and dental benefits, wages paid to Mr.
Musselman's spouse as an employee of the Company, as well as payments made
for services performed by a company owned by Mrs. Musselman.
[7] - Mr. Bellamy became an employee of the Company on April 26, 2003 in
conjunction with the acquisition of substantially all the assets of
Asmara, Inc. On December 22, 2003, Mr. Bellamy was elected as President &
CEO of the Company. Mr. Bellamy was terminated in April 2004.
[8] - Mr. Maness became an employee of the Company on April 26, 2003 in
conjunction with the acquisition of substantially all assets of Asmara,
Inc. On December 22, 2003, Mr. Bellamy was elected as Chief Financial
Officer of the Company. Mr. Maness resigned in April 2004.
22
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information concerning the ownership of
the Company's Common Stock as of December 31, 2004, with respect to: (i) each
person known to the Company to be the beneficial owner of more than five percent
of the Company's Common Stock; (ii) all directors; and (iii) directors and
executive officers of the Company as a group. To the knowledge of the Company,
each shareholder listed below possesses sole voting and investment power with
respect to the shares indicated.
TITLE OF NAME AND ADDRESS OF AMOUNT AND NATURE OF PERCENT
CLASS BENEFICIAL OWNER BENEFICIAL OWNERSHIP OF CLASS
------------ ----------------------------------- -------------------------- ---------------
Common Stock Gary Musselman -0- -0-
7621 Little Ave Suite 101
Charlotte, NC 28226
Common Stock David Calkins 6 less than 1%
7621 Little Ave Suite 101
Charlotte, NC 28226
F. Kay Calkins 6 less than 1%
Common Stock 7621 Little Ave Suite 101
Charlotte, NC 28226
------------ ------------------------------------ -------------------------- ---------------
Common Stock All Executive Officers and Directors 12 less than 1%
as a Group ( 3 persons)
------------ ----------------------------------- -------------------------- ---------------
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In May 2004, Kaye Calkins, Director, and wife of David Calkins formed Piedmont
HR Inc. The purpose of Piedmont HR Inc is to provide Human Resources and Risk
Management consulting services. In September 2004, the Company acquired Piedmont
HR for the sum of the set-up costs of approximately $20,000.
In September 2004, the Company entered into a ten year employment contract with
Gary A. Musselman. Compensation will include an annual base salary of $168,000
and 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. Mr. Musselman holds the title of President and
Chief Executive Officer and Chief Financial Officer.
In September 2004, the Company entered into a ten year employment contract with
David E. Calkins. Compensation will include an annual base salary of $300,000,
an incentive bonus plan based on the EBITDA (earnings before interest, tax,
depreciation and amortization), and the funding of a Variable Flexible Premium
Universal Life Policy which is a vehicle to fund a deferred compensation plan.
The agreement also includes severance payments upon termination of employment.
Mr. Calkins holds the title of Chairman of the Board of Directors.
23
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBIT No. DESCRIPTION
----------- -----------------------
PLAN OF REORGANIZATION
2.1 * Articles and Agreement of Merger dated January 17, 2005
ARTICLES OF INCORPORATION AND BY-LAWS
3(i) * Articles of Incorporation dated March 13, 2003
3(ii) * Certificate of Amendment dated January 18,2005
3(iii) Bylaws
21 Subsidiaries
Certifications
31 Rule 15d-14(a) certification of Gary Musselman
32 Section 1350 certification of Gary Musselman
* Incorporated herein by reference from filings previously made by the Company
24
ITEM 14. Principal Accountant Fees and Services:
The following table sets forth fees billed to us by our auditors during the
fiscal years ended December 31, 2004 and December 31, 2003 for (i) services
rendered for the audit of our annual financial statements and the review of our
quarterly financial statement, (ii) services by our auditor that are reasonably
related to the performance of the audit or review of our financial statements
and are not reported as Audit Fees, (iii) services rendered in connection with
tax compliance, tax advice and tax planning, and (iv) all other fees for
services rendered.
December 31,
2004 2003
---------- ----------
(i) Audit Fees $ 87,600 $ 70,875
(ii) Audit Related Fees -0- -0-
(iii) Tax Fees 6,500 6,500
(iv) All Other Fees -0- -0-
---------- ----------
Total Fees $ 94,100 $ 77,375
========== ==========
AUDIT FEES. Consist of Fees billed for professional services rendered for the
audit of Pacel Corp's consolidated financial statements and review of the
interim consolidated financial statements included in quarterly reports and
services that are normally provided by Peter C. Cosmas Co. CPAs in connection
with statutory and regulatory filings or engagements.
AUDIT-RELATED FEES. Consists of fees billed for assurance and related services
that are reasonably related to the performance of the audit or review of Pacel
Corp's consolidated financial statements and are not reported under "Audit
Fees." There were no Audit-Related services provided in fiscal 2004 or 2003.
TAX FEES. Consists of fees billed for professional services for tax compliance,
tax advice, and tax planning.
ALL OTHER FEES. Consists of fees for products and services other than the
services reported above. There were no management consulting services provided
in fiscal 2004 or 2003.
25
INDEX TO FINANCIAL STATEMENTS
Auditor's Report...........................................................F-2
Balance Sheets as of December 31, 2004 and 2003............................F-3
Statement of Operations for the years ended December 31, 2004 and 2003.....F-5
Statement of Changes in Stockholder's Equity for the years ended
December 31, 2004 and 2003.........................................F-6
Statement of Cash Flows for the years ended December 31, 2004 and 2003.....F-7
Notes to Financial Statements..............................................F-9
Report of Independent Registered Public Accounting Firm
To The Board of Directors and Shareholders of
Pacel Corp.
We have audited the accompanying consolidated balance sheets of Pacel
Corp. and its subsidiaries as of December 31, 2004 and 2003 and the related
consolidated statements of operations, stockholders' equity (deficit), and
cash flows for the years then ended. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audits to obtain reasonable assurance about
whether the financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform, an audit of
its internal control over financial reporting. Our audit included
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Company's
internal control over financial reporting. Accordingly, we express no such
opinion. An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, and as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Pacel
Corp. and subsidiaries as of December 31, 2004 and 2003, and the results of
their operations and their cash flows for the years then ended in conformity
with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared
assuming that Pacel Corp will continue as a going concern. As discussed in
Note1(c) to the financial statements, the Company has generated significant
losses and requires additional working capital to continue operations. These
conditions raise substantial doubt about its ability to continue as a going
concern. Management's plans in regard to these matters are more fully
described in Note 1(c). The consolidated financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
Peter C. Cosmas Co., CPAs
370 Lexington Ave.
New York, NY 10017
March 18, 2005
(March 31, 2005 as to Note 10B)
F-2
PACEL CORP. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, December 31,
2004 2003
---- ----
ASSETS
Current assets:
Cash $ 117,052 $ 682,400
Client deposits and advance payments 826,598 1,100,000
Accounts receivable 230,469 70,384
Accounts receivable-Unbilled 310,845 -0-
Prepaid expenses 110,408 44,326
Workers compensation insurance deposits 139,089 132,851
Restricted Cash 913,009 -0-
------------- -------------
Total current assets 2,647,470 2,029,961
------------- -------------
Property and equipment, net of accumulated depreciation of
$70,436 and $153,578 respectively 147,831 97,355
------------- -------------
Other assets:
Other receivables -0- 7,902
Retirement Plan-Director 154,772 -0-
Goodwill 1,075,432 1,075,432
Security deposits 15,182 9,366
------------- -------------
Total other assets 1,245,386 1,092,700
------------- -------------
Total assets $ 4,040,687 $ 3,220,016
============= =============
See accompanying notes to the consolidlidated statements.
F-3
PACEL CORP. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, December 31,
2004 2003
---- ----
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 242,210 $ 449,426
Payroll and payroll related liabilities 2,511,224 2,591,675
Accrued work site employee payroll expenses 300,391 -0-
Accrued expenses 1,330,456 1,050,915
Accrued expenses - officers -0- 251,583
Assumed liabilities 493,133 1,116,381
Client deposits and advance payments 826,598 1,100,000
Short term payables 2,158,251 552,726
Income taxes payable -0- 2,532
------------- -------------
Total current liabilities 7,862,263 7,115,238
Long-term liabilities:
Deferred compensation-Director payable 154,772 -0-
------------- -------------
Total liabilities 8,017,035 7,115,238
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 1,000 1,000
Common stock, .001 par value, 10,000,000,000 shares
authorized, 1,773,001 and 167 shares
issued respectively 1,773 1
Additional paid-in capital 22,401,562 17,510,696
Less: Stock subscription receivable -0- (125,000)
Cumulative currency translation adjustment (18,720) (18,720)
Accumulated deficit (26,361,963) (21,263,199)
------------- -------------
Total stockholders' (deficit) (3,976,348) (3,895,222)
------------- -------------
Total liabilities and stockholders' deficit $ 4,040,687 $ 3,220,016
============= =============
See accompanying notes to the consolidated financial statements.
F-4
PACEL CORP. AND SUBSIDIARIES
Consolidated Statements of Operations
Year ended
December 31,
2004 2003
Revenue $ 3,997,522 $ 3,840,586
Cost of sales 3,350,105 2,985,530
------------- -------------
Gross profit 647,417 855,056
Operating costs and expenses:
General and Administrative 2,864,097 2,625,343
Sales and Marketing 495,025 440,075
Depreciation and amortization 53,734 25,438
Loss on impairment of goodwill -0- 2,912,627
------------- -------------
Total operating expenses 3,412,856 6,003,483
------------- -------------
Net operating loss before other expenses (2,765,439) (5,148,427)
------------- -------------
Other Expenses:
Interest expense 402,564 410,718
Financing costs 1,930,761 585,905
Loss on write-down of loan receivables -0- 717,500
------------- -------------
Total other expenses 2,333,325 1,714,123
------------- -------------
Net Loss $ (5,098,764) $ (6,862,550)
============= =============
Net loss per common and common equivalent share:
Basic $ (21.81) $(163,394.05)
Diluted $ (21.81) $(163,394.05)
Weighted average shares outstanding:
Basic 233,817 42
Diluted 233,817 42
See accompanying notes to the consolidated financial statements.
F-5
PACEL CORP. AND SUBSIDIARIES
Consolidated Statements of Stockholders' (Deficit)
For the Two Years Ended December 31, 2004 and 2003
Additional Currency Total
Preferred Stock Common Stock Paid-in capital Translation Stockholders
Shares Amount Shares[1] Amount Amount (Deficit) Adjustment Deficit
--------- ------ --------- ------- ----------- ------------- --------- ------------
Balance, December 31, 2002 1,000,000 $1,000 2 $ 1 $10,695,839 $(14,400,649) $(18,720) $(3,722,529)
Issuance of common stock,
in connection with convertible
notes payable 26 0 964,934 964,934
Issuance of common stock,
for professional services 3 0 53,575 53,575
Issuance of common stock,
In connection with section
3(a)(10) filings 120 0 4,035,548 4,035,548
Embedded interest in
connection with convertible
debt issued under section
3(a)(10) filings 0 360,800 360,800
Issuance of common stock, in
connection with repayment
of loans from officers 12 0 600,000 600,000
Issuance of common stock, in
connection with acquisitions 4 0 800,000 800,000
Less subscription receivables (125,000) (125,000)
Net loss (6,862,550) (6,862,550)
--------- ------ --------- ------- ----------- ------------- --------- ------------
Balance, December 31, 2003 1,000,000 1,000 167 1 17,385,696 (21,263,199) (18,720) (3,895,222)
Subscription receivable 125,000 125,000
Issuance of common stock, in
connection with payment of
Interest 7 0 90,000 90,000
Issuance of common stock,
in connection with Section
3(a)(10) filings 1,772,827 1,772 2,870,105 2,871,877
Embedded interest in
connection with convertible
debt issued under Section
3(a)(10) filings - 0 1,930,761 1,930,761
Net loss (5,098,764) (5,098,764)
--------- ------ --------- ------- ----------- ------------- --------- ------------
Balance, December 31, 2004 1,000,000 $1,000 1,773,001 $ 1,773 $22,401,562 $(26,361,963) $(18,720) $(3,976,348)
========= ====== ========= ======= =========== ============= ========= ============
[1] - Shares are restated to reflect a one-for-thirty reverse stock split in
March 2003, a one-for-one hundred reverse stock split in February 2004, a
one-for-one hundred reverse stock split in September 2004 and a one-for-one
thousand reverse split in February 2005.
See accompanying notes to the consolidated financial statements.
F-6
PACEL CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Year ended
December 31,
2004 2003
---- ----
Cash flows from operating activities:
Net loss $ (5,098,764) $ (6,862,550)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation 53,734 25,438
Provision for bad debts -0- 625,000
Embedded interest 1,930,761 585,905
Other non-cash items 90,000 (180,892)
Loss on impairment of asset -0- 2,912,627
(Increase)/decrease in cash from changes in assets:
Accounts receivable (160,085) (47,947)
Accounts receivable-Unbilled (310,845) -0-
Other receivables 7,901 (20,995)
Client Deposits 273,402 (1,100,000)
Insurance deposits (6,237) 49,440
Prepaid expenses (66,082) (5,160)
Security deposits (5,816) (125)
Increase (decrease) in cash from changes in liabilities:
Accounts payable (207,216) (417,593)
Accrued expenses 279,541 396,013
Accrued expenses-Director (251,583) -0-
Payroll and payroll related liabilities (80,450) 617,054
Accrued work site employee payroll costs 300,391 -0-
Deferred revenue (273,402) (162,970)
Assumed liabilities (623,248) (5,003)
Income taxes payable (2,532) (969)
------------- -------------
Net cash (used in) operating activities (4,150,530) (3,592,727)
Cash flows from investing activities:
Net purchases of property and equipment (104,211) (17,692)
Cash CD-Restricted (913,009) -0-
Net cash received in acquisition -0- 160,744
Cash used for acquisitions -0- (105,000)
------------- -------------
Net cash (used in) investing activities (1,017,220) 38,052
Cash flows from financing activities:
Repayments of notes payable (123,000) 945,457
Issuance of notes payable 90,000 -0-
Issuance of convertible notes payable 4,540,898 3,285,929
Receipts of stock subscription receivables 125,000 -0-
Repayments from lines of credit (9,669) (2,690)
Repayment of capital leases (20,827) -0-
------------- -------------
Net cash provided by financing activities 4,602,402 4,228,696
Net increase (decrease) in cash and cash equivalents (565,348) 674,021
Cash and cash equivalents, beginning of period 682,400 8,379
------------- -------------
Cash and cash equivalents, end of period $ 117,052 $ 682,400
============= =============
See accompanying notes to the consolidated financial statements.
F-7
PACEL CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Year ended
December 31,
2004 2003
---- ----
Supplemental disclosure of cash flow information:
Cash paid for interest $ 46,690 $ 24,980
============= =============
See accompanying notes to the consolidated financial statements.
F-8
PACEL CORP. AND SUBSIDARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
1. Summary of Significant Accounting Policies:
A. Nature of the business. PACEL Corp. (the "Company") was incorporated on
May 3, 1994 under the laws of the State of Virginia. In September 2002,
the Company announced its intention to enter the Professional Employer
Organization (PEO) industry. In December 2002, the Company formed a
wholly owned subsidiary, The Resourcing Solutions Group Inc. (TRSG) for
the purpose of acquiring and running the PEO companies. On December 10,
2002, the Company issued a one time stock dividend of one share of
"TRSG" (an OTC Non- Reporting company symbol - RSGS) for each share of
record of Pacel Corp. stock on December 10, 2002. The Company issued
493,511,735 shares of Resourcing Solutions Group no par value common
stock representing approximately 25% of the total shares issued. In
October 2004, The Resourcing Solutions Group, Inc. effected a one-for
one thousand reverse split. After giving effect for the one-for-one
thousand reverse stock split, the Company now owns 1,506,488 shares.
Management of the Company evaluated the organizational structure of the
Company and its subsidiaries and concluded that a restructuring would
be in the Company's best interests operationally and financially. With
that in mind, management recommended that all of the Company's
Professional Employee Organization ("PEO") activities will be conducted
through The Resourcing Solutions Group, Inc., ("TRSG") the Company's
subsidiary. All other non-PEO activities will be conducted through the
Company. Under the current corporate structure, all PEO businesses,
except Benecorp Business Services ("BBS"), transact business under the
TRSG subsidiary of the Company. This structure causes the Company to
have multiple filings with various states for PEO licensing. TRSG is
required to file various state mandate documents and post indemnity
bonds, up to $100,000 per state, in order to secure its PEO license. In
order for BBS to secure its PEO license, it must file essentially
duplicate documents and post similar indemnity bonds. Furthermore, in
reviewing the market potential in the human resources outsourcing
industry, management of the Company believes that significant future
revenue can be generated by offering insurance products and services.
In order to capitalize on this revenue potential and to ensure
compliance with federal Employee Retirement Income Security Act of
1974, management believes that it is necessary to segregate the
insurance and risk management services from the PEO services. The
reorganization will also streamline management reporting. This will
permit the Company to leverage its resources in its various business
operations. The reorganization will not have a direct impact on
shareholders of the Company. As consideration for payment to the
Company, The Resourcing Solutions Group, Inc. will issue 1,000,000
shares of its common stock to the Company in April 2005. The issuance
of these shares will change the Company's ownership percentage of The
Resourcing Solutions Group, Inc from 75% to 84%. The subsidiary
operated at a loss during the years ended December 31, 2004 and 2003.
The minority 25% share of the loss for the years ended December 31,
2004 and 2003 were $76,080 and $157,136 respectively and is reflected
in the statement of operations. See Note 6 Short term borrowing for
possible material dilution of the Company's interest in TRSG. The
Company has no recourse to collect the receivable from these losses.
F-9
Effective January 25, 2005, by written consent of the shareholders
holding a majority of the voting power of the Company as disclosed in
the Company's Information Statement filed with the Securities and
Exchange Commission approved (a) an amendment to the Company's Articles
of Incorporation to increase the authorized common stock to 10 billion
shares; (b) a change of corporate domicile from Virginia to Nevada; (c)
the election of Gary Musselman, Joseph Amato and Thorn Auchter to the
board of directors. These new directors have delayed acceptance of
their election until such time as the Company has obtained directors
and officers liability insurance.
B. Principles of consolidation. The consolidated financial statements
include the accounts of the Company and all of its subsidiaries in
which a controlling interest is maintained. All significant
inter-company accounts and transactions have been eliminated in
consolidation.
C. Basis of Financial Statement Presentation. The accompanying financial
statements have been prepared on a going concern basis, which
contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. The Company has generated
significant losses; however, is unable to predict profitability for the
future. These factors indicate that the Company's continuation, as a
going concern is dependent upon its ability to obtain adequate
financing as well as implement its sales and marketing strategy. The
Company plans to address the going concern by increasing equity and
continuing to grow the Company with profitable sales both organically
and through acquisitions. Management believes successfully executing
these tasks will inevitably lead to the removal of the going concern
comment from our audited financials.
D. Cash and cash equivalents. Cash equivalents consist of liquid
investments, with a maturity of three months or less at the time of
purchase. Cash equivalents are stated at cost, which approximate market
value.
E. Property and Equipment. Property and equipment are stated at cost less
accumulated depreciation and amortization. Depreciation is determined
using the straight-line method over the estimated useful lives of the
assets. Estimated useful lives of 24 to 36 months are used on computer
equipment and related software, five years for office equipment,
furniture, and fixtures. Depreciation and amortization of leasehold
improvements is computed using the shorter of the remaining lease term
or five years. Maintenance and repairs are charged against income and
betterments are capitalized.
F. Reclassification. Certain prior year amounts have been reclassified to
conform to current year's presentation.
G. 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.
F-10
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.
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.
H. Advertising Costs. The Company expenses all advertising costs as
incurred.
I. Use of Estimates. The preparation of financial statements and related
disclosures in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the
reported amounts in the Consolidated Financial Statements and
accompanying notes. The actual amounts may differ from the estimated
amounts.
J. Impairment of long-lived Assets. Effective January 1, 1996, the Company
adopted SFAS NO. 121, "Accounting for the Impairment of long-lived
Assets and for long-lived Assets to be disposed of." SFAS 121 required
the Company to review the recoverability of the carrying amounts of its
long-lived assets whenever events or changes in circumstances indicate
that the carrying amount of the asset might not be recoverable.
Long-lived assets and certain identifiable intangible assets to be held
and used are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of such assets may not
be recoverable. Determination of recoverability is based on an estimate
of discounted future cash flows resulting from the use of the asset and
its eventual disposition. Measurement of an impairment loss for
long-lived assets and certain identifiable intangible assets that
management expects to hold and use are based on the fair value of the
asset. Long-lived assets and certain identifiable intangible assets to
be disposed of are reported at the lower of carrying amount or fair
value less costs to sell.
K. Fair Value Disclosures. The carrying amounts reported in the balance
sheets for cash and cash equivalents, accounts receivable, inventories,
accounts payable and accrued expenses, approximate fair value because
of the immediate or short-term maturity of these financial instruments.
F-11
L. Stock Options. The Company has adopted the disclosure provisions of
SFAS No. 148. The Company accounts for its stock options in accordance
with the provisions of Accounting Principles Board (APB) Opinion No.
25, Accounting for Stock Issued to Employees, and related
interpretations. As such, compensation expense would be recorded on the
date of grant only if the current market price of the underlying stock
exceeded the exercise price. On January 1, 1996, the Company adopted
the disclosure requirements of Statement of Financial Accounting
Standards (SFAS) No. 123, Accounting for Stock-based Compensation. Had
the Company determined compensation cost based on fair value at the
grant date for stock options under SFAS No. 123 the effect would have
been immaterial. In December 2002, the Financial Accounting Standard
Board ("FASB") issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure", SFAS No. 148 amends
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," to provide alternate methods of transition
for companies electing to voluntarily change to the fair value method
of accounting for stock-based compensation and also amends the
disclosure provisions of SFAS No. 123. The provisions of SFAS No. 148
are effective for fiscal years ending December 15, 2002. The Company
has not issued any stock options.
2. Acquisitions
In April 2003, the Company completed the acquisition of 100% of the
outstanding stock of BeneCorp. Such acquisition was accounted for as a
purchase. In conjunction with the acquisition, the Company assumed
approximately $1,000,000 of debt. Consideration for the transaction was
$200,000 in cash, of which the Company made an initial deposit of $96,000 in
2002, and the issuance of 200,000 shares of restricted common stock of the
Company. After giving effect to the one-for-one hundred reverse split on
February 24, 2004, the one-for-one hundred reverse split on September 13,
2004, and the one-for-one thousand reverse split on February 28, 2005, 1
share was issued in conjunction with this acquisition. The Company also
executed one year employment contracts with two principal officers of
BeneCorp in conjunction with the acquisition. The Company recorded the
acquisition as a purchase and recorded $17,500 of fees and $1,685,120 of
goodwill in association with the acquisition. During the fourth quarter of
2003, the Company recorded an impairment of $1,320,697 reducing the value of
goodwill to $364,423.
In April 2003, The Resourcing Solutions Group, Inc. ("TRSG") entered into an
agreement for the purchase of customer contracts, with a value of up to
$100,000,000, from Management Resource Group California, LLC ("MRG").
Consideration for such contracts was to be three times annualized net profit
margin on each contract paid in either cash or freely tradable common stock
of the Company. Initially, the Company issued 34,500,000 shares of
unrestricted common stock in conjunction with the purchase of the contracts
and recorded a receivable of $600,000 in conjunction with that issuance.
After giving effect to the one-for-one hundred reverse split on February 24,
2004, the one-for-one hundred reverse split on September 13, 2004, and the
one-for-one thousand reverse split on February 28, 2005, 3 shares were issued
in conjunction with this acquisition. In addition, the Company entered into a
one-year agreement with MRG to provide continuing administrative services
under such customer contracts. On August 27, 2003, the Company terminated its
agreements with MRG as delivery of the promised contracts was no longer
viable based on restrictions in the California insurance market. In
conjunction with the termination of this agreement, the Company entered into
a settlement agreement for repayment of the $600,000 receivable. The
repayment required MRG to make monthly recurring payment of $20,000 over a
period of thirty (30) months. MRG has failed to meet its obligations under
this agreement and the Company is currently reviewing its settlement and
litigation options. As of December 31, 2003, there was $575,000 remaining as
due to the Company from MRG. The Company has fully reserved this amount as
uncollectible in the years ended December 31, 2004 and 2003.
F-12
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
balance of the note at December 31, 2004 and 2003 was $0 and $303,030
respectively. The Company recorded $70,000 of fees and $2,002,938 of goodwill
in conjunction with this acquisition. During the fourth quarter of 2003, the
Company recorded an impairment of $1,591,929 reducing the value of goodwill
to $411,009.
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 balance of the note at December 31,
2004 and 2003 was $0 and $123,000 respectively. The Company recorded the
acquisition as a purchase and recorded $300,000 of goodwill in connection
with the acquisition.
3. Accounts Receivable
The Company's accounts receivable is primarily composed of trade receivables
and unbilled receivables. The Company's trade receivables, which represent
outstanding billings to clients, are reported net of allowance for doubtful
accounts of $533 and $-0- as of December 31, 2004 and 2003, respectively. The
Company establishes an allowance for doubtful accounts based on management's
assessment of the collectibility of specific accounts and by making a general
provision for other potentially uncollectible amounts.
The Company makes an accrual at the end of each accounting period for its
obligations associated with the earned but unpaid wages of its worksite
employees and for the accrued billings associated with such wages. These
accruals are included in accrued worksite employee payroll cost and unbilled
accounts receivable; however, these amounts are presented net in the
Consolidated Statements of Operations. The Company generally requires that
clients pay invoices for service fees no later than one day prior to the
applicable payroll date. As such, the Company generally does not require
collateral. Customer prepayments directly attributable to unbilled accounts
receivable have been netted against such receivables as the billings have
been earned and the payroll cost has been incurred, thus the Company has the
legal right of offset for these amounts. As of December 31, 2004 and 2003,
unbilled accounts receivable consisted of the following:
December 31,
2004 2003
---- ----
Accrued worksite employees payroll cost $ 300,391 $ -0-
Unbilled revenue 10,454 -0-
---------- -----------
Unbilled accounts receivable $ 310,845 $ -0-
F-13
4. Property and Equipment:
Property and equipment consist of the following:
December 31,
2004 2003
---- ----
Computers and office Equipment $ 218,267 $ 250,933
Less accumulated depreciation 70,436 153,578
---------- ----------
$ 147,831 $ 97,355
========== ==========
5. Short term Borrowings Consists of:
December 31,
2004 2003
---- ----
Note payable bank $ 24,230 $ 33,900
Notes Payable-Other 465,000 498,000
Convertible notes payable 1,669,021 -0-
Capital lease -0- 20,826
------------ -----------
Total Short-term borrowings $ 2,158,251 $ 552,726
============ ===========
The Company borrowed $50,000 from the bank in the form of 5 year term
note due February 20, 2007 at an interest rate of 8.5%. The balance at
December 31, 2004 and 2003 was $24,230 and $33,900 respectively.
In January 2002, the Company issued three short term notes payable
totaling $375,000, the notes bear an interest rate of 9% per annum. At
December 31, 2004, the Company was in default under the terms of these
note agreements. The Company considers these notes as short term
borrowings. The Company is working with the note holders to remedy the
payment of these loans through working capital or possible conversion
into stock.
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. Consideration for the transaction
was $100,000 in cash and the issuance of a note payable for $200,000.
Such note was payable over eighteen (18) months. The balance of the
note at December 31, 2004 and 2003 was $0 and $123,000 respectively.
In January 2004, the Company issued a $90,000 short-term note. This
note is payable upon demand and is included in notes payable other.
F-14
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,
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 year ended December 31, 2004,
the Company drew down $4,440,898 and issued 4,177,281,829 unrestricted
shares of the Company's no par common stock, before adjusting such
shares to reflect the effects of any stock splits occurring subsequent
to issuance. After giving effect to the one-for-one hundred reverse
split on February 24, 2004, the one-for-one hundred reverse split on
September 13, 2004, and the one-for-one thousand reverse split on
February 28, 2005, 1,994,500 shares were issued in conjunction with
this equity line. The balance remaining on this equity line of credit
at April 12, 2005 was $2,584,100. During the years ended December 31,
2004 and 2003, the Company incurred embedded interest relating to this
equity line in the amount of $1,930,761 and $585,905 respectively. 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.
On November 30, 2004, the Company's subsidiary, The Resourcing
Solutions Group, Inc., issued its 8% Convertible Redeemable Debentures
due November 30, 2005 in the aggregate principal amount of $100,000.
The debentures were purchased by OHHN Holdings, LLC and Hatov Holdings,
LLC. The debentures were issued pursuant to the exemption from
registration under the Securities Act of 1933 provided by Regulation D
Rule 504. This debenture is included in convertible notes payable. As
collateral for the debenture, The Resourcing Solutions Group, Inc.
placed 1,000,000,000 shares in escrow. Based on the price of The
Resourcing Solutions Group, Inc. stock when the debenture was secured,
the collateral was valued at 100 times the amount of the debenture. If
the debenture is converted for stock, the Company's percentage of
ownership in The Resourcing Solutions Group, Inc. will be substantially
reduced. The Company can not determine the dilution since there is an
inverse relationship of the number of shares issued to the value of the
shares necessary to repay the debenture.
The balance of these convertible notes at December 31, 2004 and 2003
was $1,665,021 and $-0- respectively.
6. Assumed Liabilities
As part of the asset purchase agreement of Asmara Inc. in April 2003, the
Company assumed certain debts attributed to the President and CEO who was the
sole shareholder of Asmara Inc. These debts were previously classified as
Notes Payable to Officers. Upon the dismissal of the President and CEO, these
debts were reclassified as Assumed Liabilities. The balances at the years
ended December 31, 2004 and 2003 was $493,133 and $1,116,381 respectively.
F-15
7. Long Term Liabilities
A. Retirement Plan-Director
During the first quarter of 2004, the Company entered into a Variable
Flexible Premium Universal Life policy naming David E. Calkins, the Chairman
of the Company, as the insured. The Company is the owner of the policy while
David E. Calkins and his spouse are the beneficiaries of the policy. The
insurance policy carries a face value of $3,100,000. The account value of the
insurance policy can be invested in various investment accounts as directed
by the Company. The policy calls for the Company to make monthly payments of
$18,333 for five years. Upon age 70, David E. Calkins will be eligible to
withdraw the assets of the policy over a 15 year period. During the twelve
months ended December 31, 2004, the Company recorded $183,333 in General and
Administrative expense. The Company also recorded the value of the assets and
deferred compensation equal to $154,772 related to the issuance of this
policy.
8. Income Taxes
At inception, the Company adopted SFAS No. 109, Accounting for income taxes.
Under the provision of SFAS No. 109, the Company elected not to restate prior
years due to immateriality.
At this time, the Company does not believe it can reliably predict
profitability for the long-term. Accordingly, the deferred tax asset
applicable to 2004 and 2003 operation has been reduced in its entirety by the
valuation allowance.
As a result of the operating losses for the years ended December 31, 2004 and
1992-2003, the Company has available to offset future taxable income a net
operating loss of approximately $18 Million expiring in 2005-2018. In addition,
research credits expiring 2005-2018 are available to offset future taxes.
The components of this provision (credit) for income taxes from continuing
operations is as follow:
2004 2003
---- ----
Deferred
Federal $ - $ -
Current
Federal $ - $ -
State $ - $ -
----------- -----------
$ - $ -
=========== ===========
F-16
Difference between the tax provision computed using the statutory federal income
tax rate ant the effective income tax rate on the operations is as follow:
2004 2003
---- ----
Federal
Statutory rate $(1,220,331) $(1,177,406)
Research tax credits -0- -0-
Tax benefit not provided
Due to valuation allowance $ 1,220,331 $ 1,177,406
----------- -----------
$ -0- $ -0-
=========== ===========
Components of the Company's deferred tax assets and liabilities are as follow:
December 31,
2004 2003
---- ----
Deferred tax assets:
Tax benefit related to net operating loss
carry forward and research tax credit $ 5,865,744 $ 4,645,414
----------- -----------
Total deferred tax assets $ 5,865,744 $ 4,645,414
Valuation allowance for
Deferred tax assets $ 5,865,744 $ 4,645,414
----------- -----------
Net deferred tax assets $ -0- $ -0-
=========== ===========
9. Earning (Loss) Per Share:
In February 1997, the Financial Accounting Standards Board issued Statements
of Financial Accounting Standards ("SFAS") No. 128. "Earnings Per Share"
applicable for financial statements issued for periods ending after December
15, 1997. As required the Company adopted "SFAS" No. 128 for the year ended
December 31, 1997 and restated all prior period earnings per share figures.
The Company has presented basic earnings per share. Basic earnings per share
exclude potential dilution and are calculated by dividing income available to
common stockholders by the weighted average number of outstanding common
shares. Diluted earnings per share incorporate the potential dilutions from
all potentially dilutive securities that would have reduced earnings per
share. Since the potential issuance of additional shares would reduce loss
per share they are considered anti-dilutive and are excluded from the
calculation.
Basic net income per common share is computed using the weighted-average
number of common shares outstanding during the period. Diluted net income per
common share is computed using the weighted-average number of common and
dilutive common equivalent shares outstanding during the period. Dilutive
common equivalent shares consist of stock options. Share and per-common share
data for all periods presented reflect the effect of a one-for-thirty reverse
stock split in March 2003, a one-for-one hundred reverse stock split in
February 2004, a one-for-one hundred reverse stock split in September 2004
and a one-for-one thousand reverse stock split in February 2005.
The weighted average number of shares used to compute basic earnings (loss)
per share was 233,817 and 42 at December 31, 2004 and 2003 respectively.
F-17
10. Commitments and Contingencies:
A. Operating Leases
Future annual minimum lease payments under all non-cancelable operating
leases as of December 31, 2004 are as follows:
2005 $ 78,554
2006 112,608
2007 115,204
2008 & thereafter 292,164
---------
Total Minimum Lease Payments $ 598,530
=========
Rent expense for December 31, 2004 and 2003 was $117,738 and $126,931
respectively.
Legal
B. The Securities and Exchange Commission ("SEC") filed an action in
Federal District Court asserting various violations of securities laws
against the Company and its principal officer. The complaint alleges
that Mr. Frank Custable "orchestrated" a "scheme" to illegally obtain
stock from various companies, including the Company, through "scam
Commission Form S-8 registration statements, forged stock authorization
forms and at least one bogus attorney opinion letter arranged by
Custable." The complaint alleges that, in connection with this alleged
"scheme," the Company and its CEO, David Calkins violated Section 17(a)
of the Securities Act and Section 10(b) and Rule 10b-5 of the Exchange
Act. The SEC asks that the Company and Calkins be permanently enjoined
from future violations, ordered to pay disgorgement and civil penalties
and Calkins be barred from continued service as an officer and
director. As part of an ex parte proceeding, the District Court has
ordered the Company and Calkins to provide an accounting of their
assets and the transactions that are the subject of the complaint.
Pursuant to an agreement of the parties, an accounting of the
transactions at issue was provided on June 30, 2004. The Company and
Calkins answered the second amended complaint on March 23, 2005. Under
the current scheduling order fact discovery must be completed by June
21, 2005. Final dispositive pre-trial motion deadlines will be set by
the trial judge. A trial date has not yet been set.
C. During 2003, the Company began experiencing difficulties in processing
unemployment claims for its North Carolina worksite employees. Upon
research of the difficulties, the Company learned that its North
Carolina Employment Security Commission ("ESC") account was being
actively reviewed by that agency. Through discussions with the ESC, the
Company learned that these difficulties were the result of underpayment
for unemployment taxes. The underpayments resulted from the operations
of a non-acquired companies, owned by the former President & CEO of the
Company, whose experience was imputed to the Company. The Company and
the ESC reached an agreement of an amount and a payment schedule for
these unpaid taxes. The Company had previously recorded a liability for
$291,900 as assumed liabilities. The Company agreed to pay this amount
in installments during the third and fourth quarters of 2004. Due to
cash flow difficulties, the Company was unable to make the fourth
quarter payments of $245,599. The Company is working with the ESC on a
new payment plan.
F-18
D. The Internal Revenue Service claims principal, interest and penalties
owed by the Company and two of its inactive PEO companies, Benecorp and
Asmara Services I, as of December 31, 2004 of approximately $201,000,
$276,000 and $1,542,000 respectively. On March 10, 2005, Benecorp and
Asmara Services I submitted Offers in Compromise with respect to the
amounts allegedly owed by them. In the offers, the companies asserted
doubt about collectibility as the basis for compromise, and proposed to
pay the principal (without penalties or interest) claimed to be due. To
date, the companies have not received a response from the Internal
Revenue Service with respect to these offers.
11. Goodwill and other Intangible Assets
During 2003, as a result of adoption SFAS No. 142, Goodwill and Other
Intangible Assets, the Company recorded an impairment of $2,912,627 related
to goodwill in the Company's PEO business. The fair value of the PEO business
was determined using discounted cash flows. This impairment was reported as a
cumulative effect of a change in accounting principle.
12. Stockholders' Equity:
A. Preferred Stock:
The Company's Amended Certificate of Incorporation authorizes 5,000,000
shares of no par, non-liquidating value preferred stock, of which
1,000,000 shares have been designated the 1997 class A Convertible
Preferred Stock. The number of shares of the 1997 Class A shall be
limited to 1,000,000. The Board of Directors of the Company has the
authority to establish and designate any shares of stock in series or
classes and to fix any variations in the designations, relative rights,
preferences and limitations between series as it deems appropriate, by
a majority vote.
The shares of the 1997 Class A Convertible Preferred Stock shall have
no liquidation value, and shall be entitled to receive, out of any
funds of the Company at the time legally available for the declaration
of dividends, a per share participating dividend equivalent to that
declared and or paid with respect to a share of Common Stock.
At any time after June 30, 2000, the Company, at the option of the
Board of Directors, may redeem the whole of or part of, the 1997, Class
A Convertible Preferred Stock by paying in cash $ .001 per share and in
addition an amount equal to all unpaid dividends.
In January 2005, by written consent of a majority of stockholders, the
Company changed its corporate domicile from Virginia to Nevada. Due to
Nevada requirements, the Company's preferred stock par value changed
from no par value to .001 par value. As a result of this change,
preferred stock for the years ended December 31, 2004 and 2003 were
restated from $11,320 to $1,000.
B. Common Stock:
The authorized common stock of the Company consists of 2,000,000,000
shares of no par value common stock at December 31, 2004 and 2003.
F-19
In January 2005, by written consent of a majority of stockholders, the
Company adopted an amendment to the Corporations' Certificate of
Incorporation to increase the number of authorized shares of common
stock, from 2,000,000,000 to 10,000,000,000 shares.
In January 2005, by written consent of a majority of stockholders, the
Company changed its corporate domicile from Virginia to Nevada. Due to
Nevada requirements, the Company's common stock par value changed from
no par value to .001 par value. As a result of this change, common
stock for the years ended December 31, 2004 and 2003 were restated from
$22,443,015 to $1,773 and from $17,385,696 to $1 respectively.
In February 2004 and September 2004, the Company effected a one-for-one
hundred reverse stock split, and in February 2005, the Company effected
a one-for-one thousand reverse stock split restating the number of
common shares at December 31, 2003 from 1,675,736,763 to 167.
13. Related Party Transactions:
A. Employment Agreements
In September 2004, The Company entered into a ten year employment
contracts with Gary A. Musselman. Compensation will include an annual
base salary of $168,000 and 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. Mr. Musselman will hold the title of President and Chief
Executive Officer.
In September 2004, The Company entered into a ten year employment
contracts with David E. Calkins. Compensation will include an annual
base salary of $300,000, an incentive bonus plan based on the EBITDA
(earnings before interest, tax, depreciation and amortization), and the
funding of a Variable Flexible Premium Universal Life Policy which is a
vehicle to fund a deferred compensation plan. The agreement also
includes severance payments upon termination of employment. Mr. Calkins
will hold the title of Chairman of the Board of Directors.
B. Related Party Acquisitions
In September 2004, the Company acquired PiedmontHR, Inc., a Virginia
corporation, from Kaye Calkins, Secretary and Director of the Company,
and wife of David Calkins for the sum of the set-up costs of
approximately $20,000. This company was acquired in anticipation of the
Company re-organizing its subsidiary operations into a more streamlined
management. PiedmiontHR is the operating entity which all Human
Resource, risk and safety consulting will be provided. The acquisition
of PiedmontHR permits the Company to segregate Human Resource, Risk and
Safety consulting from its PEO/HRO operations.
F-20
14. Common Stock Options and Warrants
On April 25, 2003, the Company issued 120,000,000 shares of its common stock,
no par value per share, to David and F. Kay Calkins in exchange for $600,000
of debts owed to them. Subsequent to the one-for-one hundred reverse split in
February 2004, the one-for-one hundred reverse split in September 2004, and
the one-for-one thousand reverse split in January 2005, such shares were
replaced with 12 shares of the common stock of the Company. However, because
they are "Affiliates" of the Company, Mr. and Mrs. Calkins will be able to
sell such shares only in compliance with Rule 144 and 145. The shares were
issued pursuant to Section 3(a)(10) of the Securities Act of 1933, as
amended, after a hearing with notice to, and an opportunity to be heard from,
interested parties, as to the fairness of each transaction, by courts in
Nevada and Illinois. Such courts specifically determined that the
transactions were fair to interested parties and declared that the
transactions were exempt under Section 3(a)(10).
15. Comprehensive Income:
At December 31, 2004 and 2003 net income and comprehensive income were the
same.
16. Client Deposits
The Company had $826,598 and $1,100,000 in Deferred Revenue at December 31,
2004 and 2003 related to amounts prepaid for 2004 and 2005 respectively for
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
Company is currently in violation of this agreement.
17. Restricted Cash
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. The value of the CD on
December 31, 2004 was $606,503.
During the second and third quarter of 2004, as part of the renewal process
for one of its insurance carriers and two state PEO (Professional Employer
Organization) licenses, the Company secured irrevocable letters of credit
with interest bearing CD's (certificate of deposits). The value of the CD on
December 31, 2004 was $306,506.
F-21
18. Subsequent Event
In February 2005, the Company effected 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 1,773,001. All references to average number of
shares, shares outstanding and prices per share have been restated
retroactively to reflect the split.
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.
Effective January 25, 2005, by written consent of the shareholders holding a
majority of the voting power of the Company as disclosed in the Company's
Information Statement filed with the Securities and Exchange Commission there
was approved (a) an amendment to the Company's Articles of Incorporation to
increase the authorized common stock to 10 billion shares; (b) a change of
corporate domicile from Virginia to Nevada; (c) the election of Gary
Musselman, Joseph Amato and Thorn Auchter to the board of directors. These
new directors have delayed accepted their election until such time as the
Company has obtained directors and officers liability insurance.
F-22
SIGNATURES
In accordance with Section 13 and 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Pacel Corp.
(Registrant)
Date: April 14, 2005
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By: /s/ DAVID E. CALKINS
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David E. Calkins, Director and Chairman of the Board
By: /s/ F. KAY CALKINS
-------------------
F. Kay Calkins, Secretary, Director
By: /s/ GARY A. MUSSELMAN
---------------------
Gary A. Musselman, President and Chief Executive Officer
By: /s/ GARY A. MUSSELMAN
---------------------
Gary A. Musselman, Chief Financial Officer
Pursuant to the requirements of the Exchange Act, this report has been signed by
the following persons in the capacities and on the dates indicated.
Signature Title Date
By: /s/ DAVID E. CALKINS
--------------------
David E. Calkins Director, Chairman April 14, 2005
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By: /s/ F. KAY CALKINS
------------------
F. Kay Calkins Director April 14, 2005
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By: /s/ GARY A. MUSSELMAN
---------------------
Gary A. Musselman President and CEO April 14, 2005
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By: /s/ GARY A. MUSSELMAN
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Gary A. Musselman CFO April 14, 2005
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