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, 2002
|_| 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)
VIRGINIA 54-1712558
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
7900 Sudley Road, Suite 601
Manassas, VA 80109
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number (703) 257-4759
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, NO PAR VALUE
-------------------------------
(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 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 incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
The issuer's revenues for the fiscal year ending December 31, 2002 were
$298,419.
As of May 9, 2003, 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 3,514,074. As of May 9, 2003, the issuer had 287,336,868 outstanding
shares of Common Stock.
Transitional small business format Yes [_] No [X]
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL OVERVIEW
In 2002, Pacel completed an evaluation of its business model and the
potential success in its existing business initiatives. It was determined that
the Company should, as part of that review, evaluate other potential business
markets that could provide the potential for success. In September 2002, Pacel
announced its intention to enter the Professional Employer Organization ("PEO")
industry. In addition, the Company plans to provide Administrative Service
Organization ("ASO") services. The Company will provide human capital management
solutions to small business clients within the United States. Subsequent to
December 31, 2002, the Company successfully completed the acquisition of two PEO
organizations and one ASO organization and is evaluating additional
opportunities with the potential for organic growth in order to secure its
position as an industry leader. The Company sees this initiative in these
industries as an opportunity to tap into the lucrative small business market in
the United States and intends to compliment its activities with information
technology services, business consulting and financial services at a future
time. The focus of the Company in 2003 and early 2004 will be on its PEO/ASO
business unit, integrating is completed and planned acquisitions, developing
leading vendor relationships and establishing itself as an industry leader.
Through its PEO/ASO business unit, the Company will market to its clients,
typically small to medium-sized businesses with between five and one hundred
employees, a broad range of products and services that provide an outsourced
solution for the clients' human resources ("HR") needs. The Company's products
and services will initially include benefits administration, payroll
administration, governmental compliance, risk management, unemployment
administration, and health, welfare and retirement benefits. The Company is
currently working to establish the necessary national vendor relationships in
order to effectively and competitively provide such services to a broad range of
clients.
By allowing the management of these small to medium size business clients
to focus on the "business of business" rather than complicated and time
consuming administrative tasks, the Company, in delivering its services, should
be well positioned to improve the efficiency of its clients' businesses and
enhancing their ability to be profitable in their chosen marketplace.
Additionally, such initiatives as improving the 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.
2
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 ("PEO").
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 option, responsibility for providing 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 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 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, to retain its own policy for the
management of this risk. In those cases, the Company remains heavily involved
with safety and risk management to assist the client in controlling risk and
potentially reducing the costs 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.
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 to 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 the payroll payments, whether a PEO or an ASO client and the method
of delivery of such payments. In a PEO relationship, the component of the
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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 cost of selected
benefit plans, billings to each client also include the wages and other
employment related taxes of each worksite employee. The gross billings are
invoiced at the time of delivery of each periodic payroll delivered to the
client.
Currently, the Company provides workers' compensation insurance coverage
for its worksite employees through a variety of vendor arrangements. It's two
acquired PEO business units have workers' compensation programs in place for the
coverage of their respective worksite employees. The third acquisition is an ASO
and, accordingly, offers no workers' compensation coverage, although it may
assist the client in the management of its existing carrier relationship. The
Company is currently in talks with three carriers in order to secure a national
workers' compensation plan for all of its recent and planned PEO acquisitions.
Once such a program has been developed, the Company will pay the premiums for
this coverage and pass along to its clients some or all of the costs
attributable to the coverage for their respective worksite employees. The
Company does not act as an insurance company. However, as part of a recent
acquisition and in an effort to manage its workers' compensation and benefit
programs in 2003, the Company acquired a wholly owned North Carolina based
insurance company. The Company does assume certain workers' compensation risk as
a result of providing its services.
The Company has an incentive to minimize its workers' compensation and
unemployment tax costs because the Company bears the risk that its actual costs
will exceed those billed to clients, and conversely, the Company profits on
these components of its service offerings in the event that it effectively
manages such costs.
HR Outsourcing Industry
The HR outsourcing 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 to these
burdens. PEOs combined the employees of a large number of clients and leveraged
their purchasing power to obtain discounted workers' compensation and group
health insurance policies.
The Company believes that the key factors driving demand for HR outsourcing
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
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business community in the United States; the increasing complexity of
employment-related governmental regulations and the related costs of compliance;
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 health, welfare and retirement benefits on a
cost-effective and convenient basis.
Another factor affecting the HR outsourcing industry has been the
increasing recognition and acceptance by regulatory authorities of PEOs and the
co-employer relationship created by PEOs, with the development of licensing or
registration requirements at the state level. The National Association of
Professional Employer Organizations ("NAPEO"), 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-two states, including states where the Company recent acquisitions
have operations, have passed laws that have licensing, registration or other
regulatory requirements for PEOs and several 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
coverage. In certain instances, the Company delegates or assigns such rights to
the client. The laws also generally provide for monitoring the fiscal
responsibility of 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 the
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 insurance coverage. The Company views this
continued pressure on the market as providing viable acquisition targets to
further support its business development strategy.
All clients are required to enter into the Company's Professional Services
Agreement. The Professional Services Agreement provides for an initial one-year
term, subject to termination by the Company or the client at any time upon 30
days prior written notice. After the initial 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 Professional Services Agreement.
5
The Company retains the ability to terminate the Professional Services
Agreement as well as its co-employment relationship 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 checks, owner guarantees,
the Company's client selection process and its right to terminate the
Professional Services Agreement and the co-employment relationship with the
worksite employees.
Competition
The HR consulting industry is highly fragmented. The primary competition is
PEOs, insurance agents, and fee-for-service providers, such as payroll
processors and HR consultants. The market for human resource 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 human resource consulting 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 PEO 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.
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,
their 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.
6
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 has begun to offer a 401(k) retirement plan, designed to be a
"multiple employer" plan under the Internal Revenue Code of 1986, as amended
(the "Code") Section 413(c) by way of a recent acquisition. This 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").
Employer Status. 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.
ERISA Requirements. 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.
7
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 that it can assume the withholding
obligations for worksite employees, if the Company fails to meet these
obligations, the client may be held jointly and severally liable.
State Regulation
While many states do not explicitly regulate PEOs, 22 states including four
states where the Company has offices (Florida, Tennessee, South Carolina and
Texas) have passed laws that have licensing, registration or other compliance
requirements for PEOs and several states are considering such regulation. Such
laws 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 four states in which it currently has business. 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
profits generated from the workers' ( composition 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 relating to the collateralization requirements
related to as well as availability and ( 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;
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(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 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-K and in other filings by the Company with the Securities
and Exchange Commission.
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 April 2003, the Company acquired 100% 2,940 shares of the outstanding
stock of Benecorp Business Services Inc. to be accounted for as a purchase. As
consideration the Company will pay $300,000 in cash to and issued 200,000 shares
of Section 144 restricted Pacel common stock. The Company made a deposit of
$96,000 in 2002. In connection with the purchase we signed two one year
employment contracts with the officers for $75,000 each.
10
In April 2003, the Company purchased up to $100,000,000 of customer
contracts from MRG California LLC for 3 times annualized net profit margin on
each contract in either cash or free trading stock. In connection with the
purchase of the contracts we have signed a one year servicing agreement with MRG
to services these contracts until RSG becomes registered as a PEO in the state
of California.
In April 2003, the Company acquired 100% of the stock of Asmara to be
accounted for as a purchase. The Company agreed to acquire all of the debts up
to $2,000,000. In connection with this purchase the Company signed a two year
employment with the officers of Asmara for $150,000. In addition he may be
granted options to purchase up to 1,500,000 shares of the Companies common stock
for .03 per share. These options will be issued upon the Company reaching
certain goals.
Employees
As of May 9, 2003, Pacel Corp. employed 33 persons on a full time basis.
Pacel Corp. supplements full-time 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
The Company maintains its executive offices at 7900 Sudley Road, Suite 601,
Manassas, Virginia 20109. The company has a full service lease that is price
controlled until November 30, 2003. Its telephone number is (703) 257-4759 and
its facsimile number is (703) 361-6706.
ITEM 3. LEGAL PROCEEDINGS
The Securities and Exchange Commission ("SEC") filed an action in the US
federal district court for Norther District of Illinois Case number 03c2182
complaint, alleges inpart ,asserting various violations of securities laws
against us. The complaint alleges that defendant Frank Custable "orchestrated" a
"scheme" to illegally obtain stock from various companies, including the
Company, through
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"scam Commission Form S-8 registration statements, forged stock authorization
form 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. The Company has not yet
been served with the complaint, and no further proceedings are scheduled at this
time.
We are a defendant in various lawsuits, with vendors from whom we owe
monies. We have hired a firm to try and settle our delinquent account payable.
These claims are recorded as liabilities at December 31, 2002.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR THE COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is traded on over-the-counter Electronic Bulletin Board
under the symbol "PACC." On December 31, 2002 there were 186 holders of record
of our common stock. Because many of such shares are held by brokers and other
institutions on behalf of stockholders, we are unable to estimate the total
number of stockholders represented by these record holders. The following table
sets forth the high and low sales price per share of our common stock , for the
periods indicated, all of which are adjusted for all stock splits and reverses.
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, 2001 and December 31,
2002 were as follows:
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Calendar Quarter High Bid Price Low Bid Price
2001
First $3.75 $ .93
Second 2.70 .90
Third .60 .03
Fourth .30 .063
2002
First $16.50 $ 2.70
Second 3.60 .60
Third .87 .15
Fourth .37 .06
On December 31, 2002, there were approximately 186 shareholders of record
of our Common Stock.
The Company has paid no cash dividends since its inception. The Company
presently intends to retain any future earnings for use in its business and does
not presently 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.
RECENT SALES OF UNREGISTERED SECURITIES
In January and March 2003, in connection with the acquisition of Bene
Corp.and MRG California LLC, we issued a total of _43,385,707 unrestricted
shares of our Common Stock, No Par Value per share, 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; and MRG
California LLC. In addition the Company issued 120,000,000 shares of
unrestricted stock to David and F. Kay Calkins in exchange for $600,000 of debts
owed to them. However, because they are "Affiliates" of Pacel, Mr. And Mrs.
Calkins will be able to re-sell their shares only in compliance with Ryles 144
and 145. 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 and Illinois 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.
Option Grants
In April 2002, David Calkins president, director and F. Kay Calkins
director of Pacel were granted a noncash option to purchase 100,000,000 shares
of the company's common stock in exchange for the a loan made to the company in
1999 amounting to $124,000 and securing and loaning to the Company, a personal
line of credit of up to $3,000,000 using the stock as collateral. Our ability to
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draw on this line is based on the volume of the Common Stock multiplied by the
VWAP (volume weighted average price) for the thirty days preceding funding must
be a minimum of $75,000. The maximum amount of collateral at any closing may not
exceed 4.9% of the issued and outstanding shares of the Company. Loan to value
is 35%. The interest rate is prime+2 payable in cash quarterly and financing
expense of 9% of the draws. The Company will pay these expenses directly. The
terms and conditions set fourth in the agreement we may not be able to meet. To
date we have drawn approximately $764,000. Due to the low price of the stock
additional proceeds from this line of credit maybe limited. In August 2002, we
defaulted on the interest payments. The collateral of the 100,000,000 shares of
stock has surrendered.
Issuances of Stock for Services or in Satisfaction of Obligations
We issued 10,7201,000 shares of No Par Value common stock for various
consulting and Legal fees. Included in those share were share issued as payment
for rent and early termination of our lease.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Year Ended December 31, 2002 Compared to Year Ended December 31, 2001
Revenues decreased to $298,419 in 2002 compared to $1,491,203 in 2001. The
decrease is directly attributed to not receiving any NATO contracts and the loss
of our major client, in Advantage systems.
Cost of Goods Sold decreased to $281,339 compared to $783,204 in 2001. The
decrease is directly attributed to the decrease in sales.
Research and Development expenses consist principally of salaries for
software developers, outside consulting, related facilities costs, and expenses
associated with computer equipment used in software development. Research and
development expenses decreased to $9,121 compared to $443,369 in 2001. Our lack
of funding has forced us to cut further research and development on E-Centurion
and as well as development of new products and enhancements. The Company
believes that research and development activities are crucial to maintaining a
competitive edge in markets characterized by rapid rates of technological
advancements. Without adequate financing we may not be able to stay on the
cutting edge of technology.
Sales and marketing expenses include salaries and benefits, sales
commissions, travel expenses, and related facilities costs for our sales,
marketing, customer support, and distribution consultants. Sales and marketing
expenses also include the costs of programs aimed at increasing revenue, such as
advertising, trade shows, public relations, and other market development
programs. Sales and marketing expenses decreased to $218,313 compared to
$261,750 in 2001. The decrease is attributed to the lack of sales, decreasing
commissions. In addition only limited funding was available for use in sales and
marketing.
14
General and administrative expenses consist principally of salaries and
benefits, travel expenses, and related facilities costs for finance and
administration, human resources, legal, information services, and executive
personnel . General and administrative expenses also include outside legal and
accounting fees, and expenses associated with computer equipment and software
used in the administration of the business. General and administrative expenses
increased 81.5% to $4,149,052 in 2002 compared to $2,284,891, in 2001. The
increase in administrative expenses is directly related $3,108,980 charged on
the books for consulting, legal and rent expenses paid in stock instead of cash.
Interest expense decreased to $141,450 in 2002 Compared to $316,220 in
2001. Interest expense at December 31, 2002 and 2001 included a charge of
$50,000 and $232,272 respectively, which resulted from the recognition of debt
discount from a beneficial conversion feature embedded in the convertible notes
issued in 2002 and 2001. Per Emerging Issues Task Force (EITF) Number 98-5,
"Accounting for Convertible Securities with Beneficial Conversion Features or
Contingently Adjustable Conversion Rations", this beneficial conversion feature
was assigned an intrinsic value as calculated under the provisions of the EITF,
this amount was immediately expensed. The remaining interest expense is interest
paid and accrued on the Convertible Notes and Notes payable.
Financing costs were $235,509 in December 31, 2002 compared to $311,417 in
2001. The costs were related to fees related to obtaining various loans through
the year.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used from operating activities for the years ended December 31,
2002 and 2001 was $36,475 and $1,418,591 respectively. The use of cash in
operating activities for the year ended December 31, 2002 resulted primarily
from the shortfall in sales.
Net cash used in investing activities for the years ended December 31, 2002
and 2001 was $25,000 and $10,794 respectively. The cash used in investing
activities was derived from the repayment of a long term receivable off set by
the deposit of an acquisition
Net cash provided by financing activities for the years ended December 31,
2002 and 2001 was $11,815 and $1,458,957, respectively. The cash provided in
financing activities was attributable to repayment of notes payable of $$188,185
offset by convertible notes payable and sale of common stock options.
On December 31, 2002, we had $8,379 in cash and cash equivalents compared
to $65,761 at December 31, 2001. We will continue to have significant capital
requirements due to limited sales projections as well as expected increases in
expenditures for sales and marketing. By December, 2002 we were down to only
essential administrative staff to ensure minimization of our cash usage until
significant sales had occurred and we secured adequate financing.
15
In April 2002, David Calkins president, director and F. Kay Calkins
director of Pacel were granted a noncash option to purchase 100,000,000 shares
of the company's common stock in exchange for the a loan made to the company in
1999 amounting to $124,000 and securing and loaning to the Company, a personal
line of credit of up to $3,000,000 using the stock as collateral. Our ability to
draw on this line is based on the volume of the Common Stock multiplied by the
VWAP (volume weighted average price) for the thirty days preceding funding must
be a minimum of $75,000. The maximum amount of collateral at any closing may not
exceed 4.9% of the issued and outstanding shares of the Company. Loan to value
is 35%. The interest rate is prime+2 payable in cash quarterly and financing
expense of 9% of the draws. The Company will pay these expenses directly. The
terms and conditions set fourth in the agreement we may not be able to meet. To
date we have drawn approximately $764,000. Due to the low price of the stock
additional proceeds from this line of credit maybe limited. In August, 2002 we
defaulted on the interest payments. The collateral of the 100,000,000 shares of
stock was surrendered.
In September 2002, we entered in an Equity line of credit for $10,000,000
from the Honor Hedge Fund and Reisco Hedge Fund through High Desert Capital at a
variable discount rate of 12.5% to 50%. We can draw up to $500,000 per month.
The line will is being used for the acquisition of BeneCorp. , other
acquisitions and working capital. We drew down $465,000 to date and issued
8,885,707 shares of common stock .
In March,2003, we entered into an Equity line of credit for $10,000,000
from Equities First Inc. at a discount rate of up to 50%. We can draw up to
$500,000 per month. The line was being used for the acquisition customer
contracts from MRG California, LLC. , other acquisitions and working capital.
We drew down $172,200 and issued 6,000,000 shares of
common stock.
Our cash requirements for funding our operations continue to greatly
exceeded cash flows from operations. We continue to satisfy our capital needs
through equity financing until we can turn our cash flow around. Our liabilities
consist of over extended accounts payable, payroll taxes, loans from officers
and officer's compensation. We drew down $172,200 and issued 6,000,000 shares of
common stock.
We continually look for strategic relationships that will enhance our
products and services. Currently we have focused our efforts on developing
strategic relationships with other organizations associated with the PEO
business. The loss of equity financing would seriously hinder our ability to
continue as a going concern.
We expect to continue our investing activities, including expenditures for
PEO acquisitions, including sales and marketing, product support, and
administrative support, as funds become available.
In December, 2002 , we formed a wholly owned subsidiary, The Resourcing
Solutions Group, Inc.(TRSG). The company has started a human resource support
company, out of our Manassas, VA offices. In April 2003 we signed an agreement
with MRG to purchase up to $100,000,000 of customer contracts at a cost of
3times the annualized net profit margin. We believe that development of this
business in conjunction with the acquisitions of other PEO companies will
provide us with a direct marketing channel for direct marketing channel for our
IT consulting, System Security, hardware and Web based technologies.
16
In October 2002, signed an agreement to purchase 100% of the assets of
BeneCorp. Business Services Inc. a human resource support company, for $720,000
to be paid over the next six months in equal monthly payments of $180,000.
$96,000 was transferred to BeneCorp in 2002. However, due to delays in funding
in the implementation of the Section 3) a) 10) reorganization we were unable to
make the payments as scheduled. Due to these delays the acquisition contract was
renegotiated as a stock purchase, the final closing was in April, 2003. We will
assume approximately $1,000,000 in debt. In connection with the BeneCorp
acquisition we signed two, employment agreements with the officers of BeneCorp.
for $75,000 per year each. We believe that this acquisition will help expand the
TRSG business.
In December 2002, the company also announced a one time dividend of one
share of The Resourcing Solutions Group, Inc.( a OTC Non- Reporting company
symbol - RESG) for each share shareholder of record of Pacel Corp. stock on
December 10, 2002. Due to delays in filings the stock was not actually
distributed until April, 2003.
In April 2003, the Company acquired 100% of the stock of Asmara to be
accounted for as a purchase. The Company agreed to acquire all of the debts up
to $2,000,000. In connection with this purchase the Company signed a two year
employment agreement with the officers of Asmara for $150,000. In addition he
may be granted options to purchase up to 1,500,000 shares of the Companies
common stock for .03 per share. These options will be issued upon the Company
reaching certain goal
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".
17
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 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, ages, 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 59 Chairman, President and CEO
F. Kay Calkins 44 Director
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, President, Chief Executive Officer and Chairman
David E. Calkins founded PACEL in 1994 and is its acting Chairman,
President and Chief Executive Officer. From 1992 until founding PACEL, Mr.
Calkins was the Regional Manager of three divisions of Pacific Nuclear, now
known as Vectra Technologies, Inc., an engineering and information services
company and a NASDAQ Stock Market listed company. 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-Operations, and Executive Vice President Business Development for PRC
Inc., an information systems development and Services Company. PRC provides
support services to the Federal government and the utility industry. 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 is the spouse of F. Kay Calkins.
18
F. Kay Calkins, Director
F. Kay Calkins is President of EBStor.com, Inc., an Internet and web
development company. In her capacity of president, Ms. Calkins is responsible
for oversight of all operations of the company. Ms. Calkins is experienced in
management of technology companies and has utilized this experience in the
start-up and growth of the company. EBStor offers a wide range of Internet and
web services including design, web site development, database development,
ColdFusion development and hosting.
Prior to her position with EBStor, Ms. Calkins was Vice President/COO 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 15+
years of experience in technology-related companies. Before accepting the
positions with PACEL Ms. Calkins was President of CMC Services, a marketing and
consulting Virginia based corporation.
ITEM 10. MANAGEMENT REMUNERATION AND TRANSACTIONS
Executive Compensation
Annual Annual Annual LT Comp LT All
Comp Comp Comp Rest Comp LTIP Other
Name and Post Year Salary (1) Bonus ($) Other Stock Options Payouts (1)
----------------------- ---- ---------- --------- ------ ------- ------- ------- ------
David E. Calkins, 2001 $175,000* 0 0 0 0 0 0
Chairman, 2002 $175,000* 0 0 0 100,000,000**shares 0
President and CEO 2003 $175,000* 0 0 120,000,000***0 0 0
-----------------------
* = salary accumulated on the books but not paid
** = 100,000,000 stock options provided to pay for prior loans, stock options
used to finance co.
*** = 120,000,000 shares paid to Dave and Kay Calkins to repay loan to company
as part of 3(a)(10) filing
(1) All other compensation includes certain health and life insurance benefits
paid by the Company on behalf of its employees.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
The following table sets forth certain information as of May 9, 2003 with
respect to the beneficial ownership of the common stock by each beneficial owner
of more than 5% of the outstanding shares thereof, by each director, each
nominee to become a director and each executive officer named in the Summary
Compensation Table and by all executive officers, directors and nominees to
become directors of the Company as a group. Under the rules of the Commission, a
person is deemed to be the beneficial owner of a security if such person has or
shares the power to vote or direct the voting of such security or the power to
dispose or direct the disposition of such security. A person is also deemed to
be a beneficial owner of any securities if that person has the right to acquire
19
beneficial ownership within 60 days. Accordingly, more than one person may be
deemed to be a beneficial owner of the same securities. Unless otherwise
indicated by footnote, the named entities or individuals have sole voting and
investment power with respect to the shares of common stock beneficially owned.
There are no arrangements known to the Company including pledges of securities,
which might, at a subsequent date, result in any change of control of the
Company.
Name and Address Title Amount and Nature Percent
of of of of
Beneficial Owner Class Beneficial Owner Class
---------------------------- --------- ------------------- -------
David & Kay Calkins Common 60,000,000 shares ea. 21%ea.
All Executive Officers and
Directors as a Group Common 120,000,000 42%
---------
(1) The address for each of the above is c/o Pacel Corp. 7900 Sudley Rd. Suite
601, Manassas, VA 20109.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On May 31, 2002, the Company completed an agreement to sell E-Bstor an 80%
owned subsidiary to F. Kay Calkins a director. The Company recorded a gain on
the sale of $177,817. Ms. Calkins assumed all of the assets and liabilities on
the books as of May 31, 2002. There is an inter-company receivable of $1,568,815
which we have taken a 100% reserve against, due to our inability to determine
when E-Bstor will have adequate cash flow to repay this loan. The Consolidated
Financial Statements have been restated, where applicable, to reflect the
E-Bstor Discontinued operations. At December 31, 2002 we had a receivable of
$16,499 from E-Bstor for rent from June 1, 2002 through November 30,2002.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report
Financial Statement Description PAGE
Management's Report II
Independent Auditors' Report III
Consolidated Balance Sheets
December 31, 2002 and December 31, 2001 IV
Consolidated Statements of Operations
Years Ended December 31, 2002, and 2001 V
Consolidated Statements of Stockholders' Equity (Deficit)
December 31, 2002, and 2001 VI
Consolidated Statements of Cash Flows
Years Ended December 31, 2002, and 2001 VII
Notes to Consolidated Financial Statements VIII
Item 14 - Controls and Procedures
As required by Rule 13a-15 under the Exchange Act, within the 90 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 the Company's management, including the Company's President
and Chief Executive Officer along with the Company's Chief Financial Officer.
Based upon that evaluation, the Company's President and Chief Executive Officer
along with 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 or in other factors, which could
significantly affect internal controls subsequent to the date the Company
carried out its evaluation.
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
reported, 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.
20
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: May 13, 2003
By: /s/ David Calkins
---------------------------------
David Calkins, CEO and President
By: /s/ F. Kay Calkins
---------------------------------
F. Kay Calkins, Director
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 Calkins
---------------------------------
David Calkins CEO and President May 13, 2003
By: /s/ F. Kay Calkins
---------------------------------
F. Kay Calkins Director May 13, 2003
21
CERTIFICATION
I, David Calkins, CEO and President, certify that:
1. I have reviewed this annual report on Form 10-KSB of Pacel Corp. for the year
ended December 31, 2002;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and c) presented in this quarterly
report our conclusions about the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's Board of Directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
May 13, 2003
/s/David Calkins, CEO and CFO
David Calkins, CEO and CFO
22
INDEPENDENT AUDITORS' REPORT
To The Board of Directors
PACEL Corp.
We have audited the accompanying consolidated balance sheet of Pacel Corp.
and Subsidiaries as of December 31, 2002 and 2001 and the related consolidated
statements of operations, stockholders' equity (deficit), and cash flows for the
years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. 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, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Pacel Corp. and subsidiaries
as of December 31, 2002 and 2001, and results of their operations and their cash
flows for the years then ended in conformity with generally accepted accounting
principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
1(p) to the financial statements, the Company has had minimal revenues since
inception and requires additional 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 also described in
Note 1(p). The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/Peter C. Cosmas Co., CPAs
Peter C. Cosmas Co., CPAs
370 Lexington Ave.
New York, NY 10017
May 2, 2003
II
PACEL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, December 31,
2002 2001
------------------ ----------------
ASSETS
Current assets:
Cash and cash equivalents $ 8,379 $ 65,761
Accounts receivable, net of allowance for doubtful
accounts of $0 and $1,311 respectively - 324,134
Inventory 61,306
Deposit on Benecorp 96,000
Other receivables 16,499 36,684
------------------ ----------------
Total current assets 120,878 487,885
------------------ ----------------
Property and equipment, net of accumulated depreciation
of $128,140 and $73,946 respectively 24,961 81,123
------------------ ----------------
Non-current assets:
Note receivable - 71,000
Goodwill - 407,049
Security deposits 3,991 10,122
------------------ ----------------
Total non-current assets 3,991 488,171
------------------ ----------------
Total assets $ 149,830 $ 1,057,179
================== ================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 1,353,022 $ 1,423,979
Accrued expense 234,602 175,511
Loans payable officers-Stockholders 956,309 143,853
Notes payable 873,750 1,007,500
Notes payable bank 45,565 50,000
Net liabilities of discontinued operations - 236,731
------------------ ----------------
Total current liabilities 3,463,248 3,037,574
------------------ ----------------
Long Term liabilities:
Convertible debentures 409,111 875,479
------------------ ----------------
Total long term liabilities 409,111 875,479
------------------ ----------------
Total liabilities 3,872,359 3,913,053
------------------ ----------------
Minority interest Commitments:
Stockholders' equity (deficit)
Preferred stock, no par value,
no liquidation value, 5,000,000 shares authorized,
issued 1,000,000 shares 1997 class A convertible preferred stock 11,320 11,320
Common stock - no par value,
200,000,000,000 and 650,000,000 shares authorized in 2002 and 2001,
respectively. 21,184,591 and 82,355 shares outstanding in
2002 and 2001, respectively 10,685,520 6,729,122
Cumulative currency translation adjustment (18,720) (11,000)
Deficit (14,400,649) (9,585,316)
------------------ ----------------
Total stockholders' equity (deficit) (3,722,529) (2,855,874)
------------------ ----------------
Total liabilities and stockholders' equity $ 149,830 $ 1,057,179
================== ================
See accompanying notes to consolidated financial statements.
III
PACEL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended
December 31, 2002 December 31, 2001
--------------------- ---------------------
Sales $ 298,419 $ 1,491,203
Direct Cost of Goods Sold 281,339 783,204
--------------------- ---------------------
Gross Profit 17,080 707,999
--------------------- ---------------------
Operating costs and expenses:
Research and development 9,121 443,369
Depreciation & Amortization 55,618 25,531
Interest expense 141,450 316,220
Sales and Marketing 218,313 261,750
Financing Expenses 235,509 311,417
General and Administrative 4,149,052 2,287,436
--------------------- ---------------------
Total operating costs and expenses 4,809,063 3,645,723
--------------------- ---------------------
Other Income - 3,728
Loss before extraordinary items (including discontinued
operations and the effect of an accounting change) (4,791,983) (2,933,996)
Gain on wirte-off of extinguishment of debt 426,150
Discontinued operations (Note 3)
Loss from operations of discontinued E-Bstore business (220,268) (646,550)
Gain on disposal of E-Bstore business 177,817 -
Cumulative effect of accounting change (407,049) -
--------------------- ---------------------
Net (loss) $ (4,815,333)$ (3,580,546)
===================== =====================
Net (loss) per common share
Basic (0.33) (124.18)
Diluted (0.33) (124.18)
Weighted Average shares outstanding
Basic 14,714,561 28,834
Diluted 14,714,561 28,834
See accompanying notes to consolidated financial statements.
IV
PACEL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE TWO YEARS ENDED DECEMBER 31, 2002
Preferred Stock Common Stock Retained Currency Total
Earnings Translation Stockholders
Shares Amount Shares Amount (Deficit) Adjustment Equity
---------------------------------------------------------------------------------------
Balance, December 31, 2000 1,000,000 $ 11,320 13,116 $ 5,155,914 $ (6,004,770) $ (10,833) $ (848,369)
Issuance of common stock, options and
warrants net of expenses 44,776 584,950 584,950
Issuance of restricted common stock for
professional services 4,561 368,738 368,738
Issuance of restricted common stock
Held In Escrow 1,852 -
Issuance of common stock for
professional services 18,050 619,520 619,520
Effect of currency translation (167) (167)
Net loss
(3,580,546) (3,580,546)
---------- -------- ------------ ----------- ------------- ----------- ----------------
Balance, December 31, 2001 1,000,000 11,320 82,355 6,729,122 (9,585,316) (11,000) (2,855,874)
Issuance of common stock, in
connection with convertible notes
payable 4,797,903 541,418 541,418
Issuance of restricted common stock for
professional services 20,000 36,000 36,000
Exercise of stock options 3,333,333 124,000 124,000
Issuance of common stock, options in
connection with S-8 registrations 12,951,000 3,244,980 3,244,980
Effect of currency translation (7,720) (7,720)
Net loss (4,815,333) (4,815,333)
---------- -------- ------------ ----------- ------------- ----------- ----------------
Balance, December 31, 2002 1,000,000 $ 11,320 21,184,591 $10,675,520 $ (14,400,649)$ (18,720)$ (3,732,529)
========== ======== ============ =========== ============= =========== ================
See accompanying notes to consolidated financial statements.
V
PACEL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
2002 2001
-------------- --------------
Cash flows from operating activities:
Net (loss) $ (4,815,333)$ (3,580,546)
Adjustments to reconcile net (loss) to net cash
(used in) provided by operating activities:
Cumulative effect of accounting change 407,049
Depreciation 55,618 25,531
Provision for Bad Debts (1,311) (829)
Other non cash items 3,282,972 1,064,741
Gain on sale of EB-Store (177,817)
Increase (Decrease) in Cash from changes in:
Accounts receivable 324,134 (325,301)
Other receivables 20,185 28,076
Inventory 61,306 (45,816)
Security deposits 6,131 (1,033)
Prepaid expenses 0 2,469
Accounts payable (70,956) 1,104,655
Accrued expense 59,091 112,517
Loans Payable Officers-Stockholders 812,457 196,945
-------------- --------------
Net cash (used in) operating activities (36,475) (1,418,591)
-------------- --------------
Cash flows from investing activities:
Deposit on Acquisition (96,000)
Purchase of property and equipment - (10,794)
Notes Receivable 71,000 -
-------------- --------------
Net cash used in investing activities (25,000) (10,794)
-------------- --------------
Cash flows from financing activities:
Repayment of loans payable (188,185)
Notes payable convertible debenture 777,985
Notes payable 50,000 350,000
Proceeds from sale of common stock options 150,000 330,972
-------------- --------------
Net cash provided by financing activities 11,815 1,458,957
-------------- --------------
Effect of exchange rates on cash (7,720) (167)
-------------- --------------
Net increase (Decrease) in cash and cash equivalents (57,380) 29,405
Cash and cash equivalents at beginning of year 65,761 36,356
-------------- --------------
Cash and cash equivalents at end of period $ 8,379 $ 65,761
============== ==============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid for interest 8,092 2,380
============== ==============
See accompanying notes to consolidated financial statements.
VI
PACEL CORP. AND SUBSIDARIES
NOTES TO CONSOLIDATED FINANCIAL STATMENTS
DECEMBER 31, 2002 AND 2001
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.
The Company will also provide Administrative Services along with its
technology services, and business consulting. In December 2002, the Company
formed a wholly owned subsidiary The Resourcing Solutions Group Inc. to
acquire and run the PEO companies.
The sales in 2002 were derived from computer hardware, software sales and
consulting services.
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. For those consolidated subsidiaries where
Company ownership is less than 100%, the minority stockholders' interest
are shown as a minority interest. Investments in affiliates over which the
Company has significant influence but not a controlling interest are
carried on the equity basis.
c) 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.
d) Inventories
Inventories are stated at the lower of cost or market, which approximates
actual cost, using the first in, first out method.
VII
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
Revenue is recognized when earned. The Company's revenue recognition
policies are in compliance with American Institute of Certified Public
Accountants Statement of Position 97-2. Software Revenue Recognition.
Revenue from products licensed to original equipment manufacturers is
recorded when the manufacturers ship licensed products while revenue from
organization license programs are recorded when the software has been
delivered and the customer is invoiced. Revenue from packaged product sales
to distributors and resellers is recorded when related products are
shipped. Maintenance and subscription revenue is recognized ratably over
the contract period. Revenue attributable to significant support is based
on the price charged or derived value of the undelivered elements and is
recognized ratably on a straight-line basis over the producer's life cycle.
Costs related to insignificant obligations, which include telephone support
for certain products, are accrued. Provisions are recorded for returns and
bad debts.
h) Advertising Costs
The Company expenses all advertising costs as incurred.
i) Research and Development Expenses
Costs incurred in the product development of new software products are
expensed as incurred until technological feasibility has been established.
Software development costs, which are required to be capitalized pursuant
to Statement of Financial Accounting Standards No. 86, "Accounting for the
Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed," have
not been material to date. To date, the establishment of technological
feasibility of the Company's products and general release substantially
coincide. As a result, the Company has not capitalized any software
development costs.
VIII
j) 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.
k) 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.
l) Foreign Currency Translation
The financial statements of the Company's foreign subsidiaries are measured
using the local currency as the functional currency. Assets and liabilities
of these subsidiaries are translated at exchange rates as of the balance
sheet date with the resulting translation adjustments recorded directly to
a separate component of shareholders' equity. Income and expense accounts
are translated at average exchange rates during the year. The resulting
cumulative translation adjustments are included in the consolidated and
combined statements of operations and were not material for any periods
presented herein.
m) Segment Information
SFAS No. 13 1, "Disclosures about Segments of an Enterprise and Related
Information" establishes standards for reporting information about
operating segments in financial statements. Operating segments are defined
as components of an enterprise about which separate financial information
is available that is evaluated regularly by the chief operating decision
maker, or chief decision making group, in deciding how to allocate
resources and in assessing performance. The Company operates in one
segment.
IX
n) 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.
o) Stock Options
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.
p) 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
minimal revenues since inception to December 31, 2002. These factors
indicate that the Company's continuation, as a going concern is dependent
upon its ability to obtain adequate financing
q) Impact of Recently Issued Accounting Standards
The financial Accounting Standards Board (FASB) recently issued SFAS 141,
"Business Combinations," SFAS 142, "Goodwill and Intangible Assets,"
SFAS143, "Accounting for Asset Retirement obligations" and SFAS 144,
"Accounting for the impairment or Disposal of Long -Lived Assets."
SFAS 141 requires companies to account for acquisitions entered into after
June 30,2001 using the purchase method and establishes criteria to be used
in determining whether acquired intangible assets are to be recorded
separately from goodwill. Statement 142 sets forth the accounting for
goodwill and intangible assets after the completion of a business
acquisition and for goodwill and intangible assets already recorded. We are
no longer amortizing good will beginning January 1, 2002. Rather, goodwill
will be tested for impairment by comparing the asset's fair value to its
carrying value. The Company has adopted Statement 142 on January 1, 2002.
X
SFAS 143 requires the fair value of a liability for asset retirement
obligations to be recorded in the period in which it is incurred. The
statement applies to a company's legal or contractual obligation associated
with the retirement of a tangible long-lived asset that resulted from the
acquisition, construction or development through the normal operation of a
long-lived asset. The statement was adopted by the Company on January 1,
2003.
SFAS 144 addresses the accounting and reporting for the impairment or
disposal of long-lived assets. The statement provides a consistent method
to value long-lived assets to be disposed of. New criteria must be met to
classify the asset as a asset held-for-sale. This statement also changes
the rules for reporting the effects of a disposal of a segment of a
business. This statement was adopted January 1, 2002.
2) Business Combinations:
On September 4, 2001 PLRP Acquisitions Corp. a wholly owned subsidiary
acquired all of the outstanding stock, 90,000 shares of Advantage Systems
Inc. a wholly owned subsidiary of Advantage Technologies for $70,000 and
assumption of $739,523 of debt. The acquisition was accounted for as a
purchase under Accounting Principles Board opinion No. 16 (APB no. 16). In
accordance with APB No. 16, the Company allocated the purchase price based
on the fair value of the assets acquired and liabilities assumed. Good will
resulting from the purchase of $401,107 was written off in March 2002. In
September 2002 the Company discontinued the manufacturing and sales of
computer hardware in California.
3) Discontinued Operations
On May 31, 2002, the Company completed an agreement to sell E-Bstor an 80%
owned subsidiary to F. Kay Calkins a director. The Company recorded a gain
on the sale of $177,817. Ms. Calkins assumed all of the assets and
liabilities on the books as of May 31, 2002. There is an inter-company
receivable of $1,568,815 which we have taken a 100% reserve against, due to
our inability to determine when E-Bstor will have adequate cash flow to
repay this loan. The Consolidated Financial Statements have been restated,
where applicable, to reflect the E-Bstor Discontinued operations.
In September 2002, the Company discontinued operations relating to the
manufacturing and sales of computer hardware. The Consolidated Financial
Statements have been restated, where applicable, to reflect this.
XI
4) Property and Equipment:
Property and equipment consist of the following:
December 31,
2002 2001
-------- --------
Computers and office Equipment 153,101 $155,069
Less accumulated depreciation 128,140 73,946
-------- --------
$ 24,961 $ 81,123
-------- --------
5) Notes Receivable
The company extended a long-term note to CTM Automated Systems, Inc. in the
amount of $75,000 at an interest rate of 5.25% payable monthly with a
balloon payment October 2002. 1,000 shares of CTM stock collateralize the
loan. The balance of the loan $71,000 was paid in November 2002.
6) Notes Payable
a) Note payable bank
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, 2002 and 2001 was$45,565 and $50,000 respectively.
b) Notes payable - Other
The Company has issued five short term notes payable amounting to $873,750
that bear an interest rate of 9% and was due 180 days from the approval of
a $5,000,000 SB-2 filing. See subsequent events for details. At December
31, 2002 these notes are in default. We were unable to secure an SB-2
filing to satisfy these notes. We are working with the note holders to
remedy the payment of these loans through working capital of possible
conversion into stock.
c) Convertible Notes payable
The Company had convertible notes of $409,111 and $875,479 at December 31,
2002 and 2001 respectively. The notes bear interest rates of 8%-11%. The
conversion price of the debentures ranges from 70% to 40% of the average of
the 5 trading days prior to conversion.
XII
Under the terms of the warrant agreements, the exercise price of the
warrants and the number of shares purchasable with each warrant are
adjusted when converted. On the conversion date, the exercise price of the
warrant is 70%-40% of the average market price of the stock for the five
days prior to conversion. Per Emerging Issues Task Force (EITF) Number
98-5, "Accounting for Convertible Securities with Beneficial Conversion
Features or Contingently Adjustable Conversion Ratios", this beneficial
conversion feature was assigned an intrinsic value of $50,000 and $232,272
have been recorded as of December 31, 2002 and 2001 respectively , as
calculated under the provisions of the EITF. This amount was immediately
expensed, at the time the Company signed the Agreement.
7) Income Taxes
The Company provides for the tax effects of transactions reported in the
financial statements. The provision if any, consists of taxes currently due
plus deferred taxes related primarily to differences between the basis of
assets and liabilities for financial and income tax reporting. The deferred
tax assets and liabilities, if any, represent the future tax return
consequences of those differences, which will either be taxable or
deductible when the assets and liabilities are recovered or settled. As of
December 31, 2002 and 2001 the Company had no material current tax
liability, deferred tax assets, or liabilities respectively. The Company
has available a net operating loss carry forward of approximately $12
million for tax purposes to offset future taxable income. The net operating
loss carryforwards expire in 2012-2020.
8) 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
4-for-1 stock split, in April of 1998 and a 1-for-4 reverse stock split
that became effective on December 31, 1998 and April 2002 100 to 1 reverse
stock split.
XIII
The weighted average number of shares used to compute basic earnings (loss)
per share was 14,714,561 and 28,834 at December 31, 2002 and 2001
respectively.
9) Commitments and Contingencies:
Operating Leases
Future annual minimum lease payments under all non-cancelable operating
leases as of December 31, 2002 are as follows:
2003 $ 23,947
2004 -0-
2005 -0-
2006 -0-
---------
Total Minimum Lease Payments $ 23,947
Rent expense for December 31, 2002 and 2001was $109,789 and $97,871
respectively
10) Stockholders' Equity:
a) Preferred Stock:
The Company's Amended Certificate of Incorporation authorizes 5,000,000
shares of no par, no 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.
XIV
b) Common Stock:
The authorized common stock of the Company consists of 200 billion and
650,000,000 shares at December 31, 2002 and 2001 respectively without par
value.
On November , 2002 by written consent of the 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 650 million to 200 billion shares
On November 7, 2001, the shareholders of the Company approved an increase
to the authorized number of shares of common stock from 150 million to 650
million shares, on December 5, 2001; the Board of Directors approved the
increase.
On March 2003, the Company effected a one -for-thirty reverse split
restating the number of common shares a of December 31, 2002 from
635,537,735 to 21,184,591. All references to average number of shares
outstanding and prices per share have been restated retroactively to
reflect the split.
On April 5, 2002 the Company effected a one-for-one hundred reverse split
restating the number of common shares as of December 31, 2001 from 247,
064, 347 and December 31, 2000 from 39,348,486 to 393,485. All references
to average number of shares outstanding and prices per share have been
restated retroactively to reflect the split.
On December 10, 2002, the company issued a one time stock dividend of one
share of The Resourcing Solutions Group, Inc.( a OTC Non- Reporting company
symbol - RESG) for each share of record of Pacel Corp. stock on December
10, 2002. We issued 478,037,735 shares of Resourcing Solutions Group common
stock no par value stock representing 24 %. These shares had no value at
December 31, 2002.
11) Related Party Transactions:
a) Officers Loans
The Company recorded a liability to David and F. Kay Calkins in the amount
of $1,080,309 and $259,686 at December 31,2002 and 2001 respectively, for
accrued payroll, loans and unreimbersed business expenses.
b) Employment Agreements
In 2000 the Company entered into a three year employment agreements with
David Calkins. At base salaries of $175,000 per year respectively,
effective January 1, 2001 and are eligible for retroactive increases based
on earnings per share of the Company.
XV
12) Common Stock Options and Warrants
In April 2002, David Calkins president, director and F. Kay Calkins
director of Pacel were granted a noncash option to purchase 100,000,000
shares of the company's common stock in exchange for the a loan made to the
company in 1999 amounting to $124,000 and securing and loaning to the
Company, a personal line of credit of up to $3,000,000 using the stock as
collateral. Our ability to draw on this line is based on the volume of the
Common Stock multiplied by the VWAP (volume weighted average price) for the
thirty days preceding funding must be a minimum of $75,000. The maximum
amount of collateral at any closing may not exceed 4.9% of the issued and
outstanding shares of the Company. Loan to value is 35%. The interest rate
is prime+2 payable in cash quarterly and financing expense of 9% of the
draws. The Company will pay these expenses directly. The terms and
conditions set fourth in the agreement we may not be able to meet. To date
we have drawn approximately $764,000. Due to the low price of the stock
additional proceeds from this line of credit maybe limited. In August 2002,
we defaulted on the interest payments. The collateral of the 100,000,000
shares of stock has surrendered.
13) Business and Credit Concentrations:
The amount reported in the financial statements for cash, trade accounts
receivable and investments approximates fair market value. Because the
difference between cost and the lower of cost or market is immaterial, no
adjustment has been recognized and investments are recorded at cost.
Financial instruments that potentially subject the company to credit risk
consist principally of trade receivables. Collateral is generally not
required
14) Comprehensive Income:
At December 31, 2002 and 2001 net income and comprehensive income were the
same.
15) Subsequent Events
a. On March 17, 2003, the Company effected a one -for-thirty reverse split
restating the number of common shares a of December 31, 2002 from
635,537,735 to 21,184,591. All references to average number of shares
outstanding and prices per share have been restated retroactively to
reflect the split.
b. In January and March 2003, in connection with the acquisition of Bene
Corp.and MRG California LLC, we issued a total of 49,385,707 unrestricted
shares of our Common Stock, No Par Value per share, 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; and MRG California LLC. In addition the Company issued 120,000,000
shares of unrestricted stock to David and F. Kay Calkins in exchange for
XVI
$600,000 of debts owed to them. However, because they are "Affiliates" of
Pacel, Mr. And Mrs. Calkins will be able to re-sell their shares only in
compliance with Rules 144 and 145. 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 and
Illinois 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.
c. In April 2003, the Company acquired 100% 2,940 shares of the outstanding
stock of Benecorp Business Services Inc. to be accounted for as a purchase.
The Company will assume approximately $1,000,000 of debt in connection with
this purchase. As consideration the Company will pay $300,000 in cash to
and issued 200,000 shares of Section 144 restricted Pacel common stock. The
Company made a deposit of $96,0000 in 2002. In connection with the purchase
we signed two one year employment contracts with the officers for $75,000
each.
d. In April 2003, the Company purchased up to $100,000,000 of customer
contracts from MRG California LLC for 3 times annualized net profit margin
on each contract in either cash or free trading stock. We have issued
34,500,000 shares of the Companies free trading stock. In connection with
the purchase of the contracts we have signed a one year servicing agreement
with MRG to services these contracts until RSG becomes registered as a PEO
in the state of California.
e. In April 2003, the Company acquired 100% of the stock of Asmara to be
accounted for as a purchase. The Company agreed to acquire all of the debts
up to $2,000,000. In connection with this purchase the Company signed a two
year employment with the officers of Asmara for $150,000. In addition he
may be granted options to purchase up to 1,500,000 shares of the Companies
common stock for .03 per share. These options will be issued upon the
Company reaching certain goal.
f. The Securities and Exchange Commission ("SEC") filed an action in the US
federal district court for Norther District of Illinois Case number 03c2182
complaint, alleges inpart,asserting various violations of securities laws
against us. The federal district court asserting various violations of
securities laws against us. The complaint alleges that defendant Frank
Custable "orchestrated" a "scheme" to illegally obtain stock from various
companies, including the Company , through "scam Commission Form S-8
registration statements, forged stock authorization form and at least one
bogus attorney opinion letter arranged by Custable." The complaint alleges
that , in connection with this alleged "scheme," the Company and its CEO,
David Calkins violated Section 17(a) of the Securities Act and Section
10(b) and Rule 10b-5 of the Exchange Act. The SEC asks that the Company and
Calkins be permanently enjoined from future violations, ordered to pay
disgorgement and civil penalties and Calkins be barred from continued
service as an office and director. As part of an ex parte proceeding, the
District Court has ordered the Company and Calkins to provide an accounting
of their assets and the transactions that are the subject of the complaint.
The Company has not yet been served with the complaint, and no further
proceedings are scheduled at this time.
XVIII