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, 2005
|_| Transition report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from _____________________ to ___________________.
Commission File Number: 000-29459
Pacel Corporation
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(Name of small business issuer in its charter)
NEVADA 54-1712558
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
7621 Little Ave Suite 101
Charlotte, North Carolina 28226
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(Address of principal executive offices) (Zip Code)
Issuers telephone number: (704) 643-0676
Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange
on which registered
None N/A
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Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK, PAR VALUE .001 PER SHARE
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(Title of Class)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [ X ] No [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporate by reference in Part III f this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]
The issuer's revenue for the fiscal year ended December 31, 2005 was $2,240,843
As of April 13, 2006, 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 $ 9,970,541. As of April 13, 2006, the issuer had 9,970,540,904
outstanding shares of common stock.
Transitional small business format Yes [ _ ] No [ X ]
TABLE OF CONTENT
Part I
Item 1. Description of Business 1-9
Item 2. Description of Property 10
Item 3. Legal Proceedings 10
Item 4. Submission of Matters to a Vote of Security Holders 10
Part II
Item 5. Market for the Common Equity and Related Stockholder Matters
and Small Business Issuer Purchases of Equity Securities 10
Item 6. Management's Discussion and Analysis of Financial Conditions
And Results of Operations 12-17
Item 7. Financial Statements and Supplementary Data 17
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 17
Item 8A. Controls and Procedures 17
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act 18
Item 10. Management Remuneration and Transactions 19
Item 11. Security Ownership of Certain Beneficial Owners and Management 20
Item 12. Certain Relationships and Related Transactions 20
Item 13. Exhibits 21
Item 14. Principal Accountant Fees and Services 22
PART I.
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL OVERVIEW
The Company provides a comprehensive Personnel Management System that
encompasses a broad range of services, including benefits and payroll
administration, health and workers' compensation insurance programs, personnel
records management, employer liability management, employee recruiting and
selection, employee performance management, and employee training and
development services.
In 2005, the Company continued its strategy for penetrating the Human Resources
Outsourcing ("HRO") industry based on its evaluation of its business model and
existing business initiatives completed in 2002. The Company's intention to
enter this business sector was announced in September 2002 and was based on an
evaluation of potential business markets that provide the potential for success.
The HRO market is a component part of the Business Process Outsourcing ("BPO")
industry. The broad category of BPO is a huge area that includes such outsourced
functions as information technology, human resources, logistics, facilities
management and finance/accounting where an external provider assumes
responsibility to own, manage and administer a particular process on the basis
of performance criteria that have been mutually agreed upon. HRO is a large and
complex universe in itself, encompassing the outsourcing of the many different
functions generally considered to be the domain of the Human Resources
department.
The HRO industry began to evolve in the early 1980s, largely in response to the
difficulties faced by small to medium sized businesses in procuring workers'
compensation and group health insurance coverage on a cost-effective basis and
operating in an increasingly complex legal and regulatory environment. While
various service providers, such as payroll processing firms, benefits and safety
consultants and temporary staffing firms were available to assist these
businesses with specific tasks, PEOs began to emerge as providers of a more
comprehensive outsourcing solution. PEOs combined the employees of a large
number of clients and leveraged their purchasing power to obtain workers'
compensation and group health programs. With the subsequent hardening of those
insurance markets for PEOs in the early 2000's, PEOs began investigating
additional market opportunities for further development of their business model.
The Company began its entry into the HRO market through the 2003 acquisition of
two Professional Employer Organizations ("PEO") located in North Carolina and
Texas. The Company is focusing its efforts on the PEO and Administrative
Services Organization ("ASO") sectors of the HRO industry, providing human
capital management solutions to small and medium sized business clients within
the United States. Evaluation of organic growth strategies combined with
continued scrutiny and examination of potential acquisition candidates continues
in order to secure the Company's position as a leader within the industry.
Though the Company remains exclusively focused on the PEO and ASO markets at
this time, it sees its entry into these markets as an opportunity to tap into
the lucrative small business BPO market and intends to compliment its PEO and
ASO activities with additional services such as information technology services,
business consulting and financial services at a still undetermined future time.
In 2005, the Company continues its focus on its PEO and ASO business model,
evaluating, completing and integrating planned acquisitions, developing leading
vendor relationships and establishing itself as an industry leader. To further
improve services by the Company to its clients a major investment in upgrading
technology occurred during 2004. The Company implemented new systems that
integrate Human Resource, payroll, benefits and workers' compensation
administration. The advent of this system permits to Company to effectively
market to larger clients.
1
Through its PEO and ASO business unit, the Company markets to its clients,
typically small to medium sized businesses with between five (5) and one
thousand (1,000) employees, a broad range of products and services that provide
an outsourced solution for the client's Human Resources ("HR") needs. Industry
estimates indicate that this "middle market" opportunity encompasses
approximately 100,000 small to medium-sized businesses employing over 40 million
people. Another benefit of the industry is that the target market is not
restricted as to industry, sector or size. Virtually every company has human
resources needs and almost all can benefit from some level of outsourcing.
Smaller firms appreciate the professional expertise and pooled resources brought
by a PEO or ASO while the potential for economies of scale created by
outsourcing the heavily transaction-intensive HR function make a compelling
economic argument. The Company's service offerings include payroll services,
benefits administration, governmental compliance, risk management, unemployment
administration, and health, welfare and retirement plan benefits. Although the
Company maintains successful relationships with its existing vendors in the
mid-Atlantic area of the United States, it continues negotiations with several
national vendors in these areas in order to effectively and competitively
provide such services to a broad range of clients on a national scale.
By allowing the management of these small to medium sized business clients to
focus on the "business of business" rather than the complicated and time
consuming administrative tasks of managing human capital issues, the Company, in
delivering its services, should be well positioned to improve the efficiency of
its clients' businesses, enhancing their ability to be profitable in their
chosen marketplace. Additionally, such initiatives as improving their ability to
attract and retain talent, improving the planning and management of payroll cash
flows and managing employment risks should enhance the success of the Company's
clients.
In a PEO relationship, the client transfers certain employment-related risks and
liabilities to the Company and retains other risks and liabilities. In this
context, the client and the Company are each viewed as and become a
"co-employer" of the client's worksite employees. In order to enter into a
co-employer relationship, the Company operates as a Professional Employer
Organization.
As a co-employer, employment-related liabilities are contractually allocated
between the Company and the client under a written Professional Services
Agreement. Under the Professional Services Agreement, the Company assumes
responsibility for and manages the risks associated with each client's worksite
employee payroll obligations, including the liability for payment of salaries
and wages (including payroll taxes) to each worksite employee and, at the
client's options, responsibility for planning, providing and administering group
health, welfare and retirement benefits to such individuals. These obligations
of the Company are fixed, whether or not the client makes timely payment of the
associated service fee. In this regard, it is important to understand that,
unlike payroll processing service providers, the Company issues to each of the
client's worksite employees, Company payroll checks drawn on the Company's bank
accounts. The Company also reports and remits all required employment
information and taxes to the Internal Revenue Service ("IRS") and issues a
Federal Form W-2 to each worksite employee under the appropriate Company Federal
Employer Identification Number ("FEIN"). The Company assumes the responsibility
for compliance with those employment-related governmental regulations that can
be effectively managed away from the client's worksite. In many cases, the
Company provides the employee workers' compensation insurance coverage under the
Company's insurance policy. The client may elect, or the workers' compensation
carrier may require, retaining its own policy for the management of this risk.
In all cases, the Company remains heavily involved with safety and risk
management to assist the client in controlling risk and potentially reducing the
cost of such coverage. The client contractually retains the general day-to-day
responsibility to direct, control, hire, terminate and manage each of the
client's worksite employees. The worksite employee services are performed for
the exclusive benefit of the client's business. The client also remains
responsible for compliance with those employment-related governmental
regulations that are more closely related to the day-to-day management of
worksite employees.
2
In an ASO relationship, the client retains all employment-related risks and
liabilities and the Company provides outsourced solutions to meet the
administrative and HR needs of the client.
The Company charges its clients a service fee that is designed to yield a profit
to the Company and cover the cost of certain employment-related taxes, workers'
compensation insurance coverage and administrative and field services provided
by the Company to the client. The component of the service fee related to
administration varies according to the size of the client, the amount and
frequency of payroll payments, whether a PEO or an ASO arrangement and the
method of delivery for such payments. In a PEO relationship, the component of
the service fee related to workers' compensation and unemployment insurance is
based, in part, on the client's historical claims experience. In addition, the
client may choose to offer certain health, welfare and retirement benefits to
its worksite employees. In addition to the service fee and costs of selected
benefit plans, billings to each client also include the wages and other
employment-related taxes of each worksite employee. The billings are invoiced at
the time of each periodic payroll delivered to the client.
Currently, the Company provides workers' compensation insurance coverage for its
worksite employees through several vendor arrangements, depending on the
geographic location of the client's worksite(s). The Company has, to date, been
unsuccessful in obtaining a national program for its current client base and
anticipated growth. The Company is continuing negotiations with several carriers
in order to obtain such national coverage program. The Company pays the premium
for coverage and passes to its clients some or all of the costs attributable to
the coverage for their respective worksite employees in its service fee. The
Company does not act as an insurance company. However, as part of a 2003
acquisition, the Company acquired a fully-licensed, but non-operating, North
Carolina-based insurance company. The Company does assume certain workers'
compensation risk as a result of providing these services.
Human Resources Outsourcing Industry
Human Resources Outsourcing ("HRO") is a subset of the more comprehensive
Business Process Outsourcing ("BPO") sector. Since the 1980's, American industry
has embraced the general concept of outsourcing non-core or non-mission critical
processes, incorporating it into the American way of business. Outsourcing is
perceived as bringing economies of scale, higher levels of expertise and greater
efficiency to those processes.
One of the sectors of the HRO industry began to evolve in the early 1980s,
largely in response to the difficulties faced by small to medium-sized
businesses in procuring workers' compensation and group health insurance
coverage on a cost-effective basis and operating in an increasingly complex
legal and regulatory environment. While various service providers, such as
payroll processing firms, benefits and safety consultants and temporary staffing
firms, were available to assist these businesses with specific tasks,
Professional Employer Organizations ("PEO") began to emerge as providers of a
more comprehensive outsourcing solution for these activities. PEOs combined the
employees of a large number of clients and leveraged their purchasing power to
obtain more cost-effective workers' compensation and group health insurance
programs.
The Company believes that the key factors driving demand for HRO services are
the increasing acceptance in the small to medium-sized business community of
outsourcing certain non-core business functions such as those offered by the
Company; the size and growth of the small to medium-sized business community in
the United States; the increasing complexity of employment-related governmental
regulations and the related costs of compliance with those regulations; the need
of businesses to manage the cash expenditures associated with payroll and
payroll-related expenses, including workers' compensation insurance; and the
need to provide competitive benefit programs, including health, welfare and
retirement, on a cost-effective and convenient basis.
3
The Company further believes that many small to mid-sized businesses recognize
the need to manage employee data and information in a single coordinated basis.
During 2004, the Company invested in a "state-of the art" Human Resource
Information System with an integrated payroll system as a mechanism to address
this need by the business community. Utilization of the Company's systems allow
small to mid-sized businesses to offer capabilities previously associated with
only larger businesses. This system became fully functional in 2005.
Another factor affecting the HRO industry has been the increasing recognition
and acceptance by regulatory authorities of PEOs and the co-employer
relationship that exists when a client contract with a PEO for services
reflected in the development of licensing or registration requirements at the
state level. The National Association of Professional Employer Organizations
("NAPEO"), of which the Company is a member, has worked, along with industry
leaders, with the relevant government entities for the establishment of a
regulatory framework that would clarify the roles and obligations of the PEO and
the client in the co-employer relationship. This framework generally imposes
financial responsibility on the PEO in order to promote the increased acceptance
and further development of the industry.
Twenty-six states, including states where the Company currently has operations,
have passed laws that have licensing, registration or other regulatory
requirements for PEOs and several additional states are considering such
regulation. Such laws vary from state to state, but generally codify the
requirements that the PEO must reserve the right to hire, terminate and
discipline worksite employees and secure workers' compensation insurance. In
certain instances, the Company delegates or assigns such rights to the client.
The laws also generally provide for monitoring the fiscal responsibility of the
PEOs and, in many cases, the licensure of the controlling officers of the PEO.
Since the late 1990's, due to changes in the workers' compensation and group
health insurance markets, many PEOs have encountered significant difficulties in
obtaining workers' compensation and group health benefit insurance policies.
Many PEOs have exited the industry due to the lack of available workers'
compensation and group health benefit insurance programs or due to their
inability to provide the financing security required by insurance companies in
order to obtain such coverage. The Company views this continued pressure on the
market as an opportunity, providing potentially viable acquisition targets to
further support its business development strategy. The Company also views this
continued pressure as an opportunity to expand its Administrative Services.
All of the Company's clients are required to enter into the Company's
Professional Services Agreement (the "PSA"). The PSA provides for an initial
one-year term and is subject to termination by the Company or the client at any
time upon thirty (30) days written notice. The Company has several versions of
its basic PSA and utilizes each depending upon the relationship with the client.
Clients may enter into PEO or Administrative Services Only ("ASO") arrangements,
may bring their own benefit programs, provide their own workers' compensation
coverage, use only payroll services, etc. and the agreement is available to be
modified to suit the individual client's needs and elections. After the initial
one-year term, the contract may be renewed or terminated. Based on the results
of a financial review, the Company may require the owners of client companies to
personally guarantee the client's obligations under the PSA.
In the PEO environment the PSA also establishes the division of responsibilities
between the Company and the client as co-employers. Pursuant to the PSA, we are
responsible for personnel administration and are liable for certain
employment-related government regulations. In addition, we assume liability for
payment of salaries and wages (as well as related payroll taxes) of our worksite
employees and responsibility for providing specified employee benefits to such
persons. These liabilities are not contingent on the prepayment by the client of
the associated comprehensive service fee and, as a result of our employment
relationship with each of our worksite employees, we are liable for payment of
salary and wages to the worksite employees and are responsible for providing
specified employee benefits to such persons, regardless of whether the client
company pays the associated comprehensive service fee. The client retains the
employees' services and remains liable for the purposes of certain government
regulations, compliance
4
with which requires control of the worksite or daily supervisory responsibility
or is otherwise beyond our ability to assume. A third group of responsibilities
and liabilities are shared by the Company and the client where such joint
responsibility is appropriate. The specific division of applicable
responsibilities under the PSA is as follows:
The Company
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o Payment of wages and related tax reporting and remittance (local, state
and federal withholding, FICA, FUTA, state unemployment
o Workers' compensation compliance, procurement, management and
reporting;
o Compliance with COBRA, HIPAA and ERISA (for each employee benefit plan
sponsored by the Company only), as well as monitoring changes in other
governmental regulations governing the employer/employee relationship
and updating the client when necessary; and
o Employee benefits administration of plans.
Client
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o Payment, through the Company, of commissions, bonuses, paid leaves of
absence and severance payments;
o Payment and related tax reporting and remittance of non-qualified
deferred compensation and equity-based compensation;
o Assignment to, and ownership of, all client intellectual property
rights;
o Compliance with OSHA regulations, EPA regulations, FLSA, WARN, USERRA
and state and local equivalents and compliance with government
contracting provisions;
o Compliance with the National Labor Relations Act ("NLRA"), including
all organizing efforts and expenses related to a collective bargaining
agreement and related benefits;
o Professional licensing requirements, fidelity bonding and professional
liability insurance
o Products produced and/or services provided; and
o ERISA compliance for client-sponsored benefit plans.
Joint
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o Implementation of policies and practices relating to the
employee/employer relationship; and
o Compliance with all federal, state and local employment laws,
including, but not limited to Title VII of the Civil Rights Act of
1964, ADEA, Title I of ADA, FMLA, the Consumer Credit Protection Act,
and immigration laws and regulations.
Because we are a co-employer with the client company for some purposes, it is
possible that we could incur liability for violations of such laws, even if we
are not responsible for the conduct giving rise to such liability. The PSA
addresses this issue by providing that the client will indemnify us for
liability incurred to the extent the liability is attributable to conduct by the
client. Notwithstanding this contractual right to indemnification, it is
possible that we could be unable to collect on a claim for indemnification and
may therefore be ultimately responsible for satisfying the liability in
question.
The Company retains the right to terminate the PSA as well as its co-employment
relationship, if applicable, with the worksite employees immediately upon
non-payment by a client. The Company manages its credit risk through the
periodic nature of payroll, client credit and banking checks, owner guarantees,
the Company's client selection process and its right to terminate the PSA and
the co-employment relationship with the worksite employees.
5
In the ASO environment the PSA defines the responsibility of each party. There
is no co-employment relationship in the ASO environment, thus, the Company has
no employer liability. The Company acts as an agent of the client and has a
contractual obligation to perform the functions contracted by the Client. The
PSA in the ASO environment is tailored to the specific needs of the Client.
Typically the Company has a contractual obligation for the following:
o Payment of wages and related tax reporting and remittance (local, state
and federal withholding, FICA, FUTA, state unemployment;
o Compliance with COBRA, and HIPAA, as well as monitoring changes in
other governmental regulations governing the employer/employee
relationship and updating the client when necessary; and
o Employee benefits administration of plans.
The Client is responsible for all other employer responsibilities.
The Company retains the right to terminate the PSA as well as its co-employment
relationship, if applicable, with the worksite employees immediately upon
non-payment by a client. The Company manages its credit risk through the
periodic nature of payroll, client credit and banking checks, owner guarantees,
the Company's client selection process and its right to terminate the PSA and
the co-employment relationship with the worksite employees.
Competition
The PEO sector of the industry is highly fragmented. The primary competition is
other PEOs, insurance agents, and fee-for-service providers, such as payroll
processors and HR consultants. The market for human resources consulting
services is expected to become increasingly competitive as larger companies,
some of which have greater financial resources than the Company, compete in the
market.
The key competitive factors in the HRO industry are breadth and quality of
services, price, reputation, financial stability, and choice, quality and cost
of benefits. The Company will seek to compete through its ability to provide a
full-service HR solution using a variety of delivery methods best suited to the
individual client with an emphasis on leveraging technology.
The Company believes that some smaller PEOs are exiting the industry due to
increased collateral required by providers of workers' compensation and health
benefits insurance. In addition, an increase in costs and a lack of available
workers' compensation and health benefits insurance programs is impacting these
PEOs.
The ASO sector of the industry is equally fragmented. The primary competition is
from small payroll processors and very large companies who are payroll
processors. The Company believes there is a large gap in the middle of this
arena allowing for the possibility of growth.
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,
6
the interpretation and application of these regulations by administrative
agencies and Federal and state courts are limited or non-existent. The
development of additional regulations and interpretation of existing regulations
can be expected to evolve over time. In addition, from time to time, states have
considered, and may in the future consider, imposing certain taxes on gross
revenues or service fees of the Company and its competitors.
The Company believes that its operations are currently in compliance in all
material respects with applicable Federal and state statutes and regulations.
Employee Benefit Plans
The Company currently offers a 401(k) retirement plan, designed to be "multiple
employer" plans under the Internal Revenue Code of 1986, as amended (the "Code")
Section 413(c) by way of recent acquisitions. The plan design enables owners of
clients and highly compensated worksite employees, as well as highly compensated
internal employees of the Company, to participate. Employee benefit plans are
subject to provisions of both the Code and the Employee Retirement Income
Security Act ("ERISA").
In order to qualify for favorable tax treatment under the Code, the plans must
be established and maintained by an employer for the exclusive benefit of its
employees. Generally, an entity is an "employer" of certain workers for federal
employment tax purposes if an employment relationship exists between the entity
and the workers under the common law test of employment. In addition, the
officers of a corporation are deemed to be employees of that corporation for
federal employment tax purposes. The common law test of employment, as applied
by the Internal Revenue Service ("IRS") involves an examination of many factors
to ascertain whether an employment relationship exists between a worker and a
purported employer. Such a test is generally applied to determine whether an
individual is an independent contractor or an employee for federal employment
tax purposes and not to determine whether each of two or more companies is a
"co-employer." Substantial weight is typically given to the question of whether
the purported employer has the right to direct and control the details of an
individual's work. The courts have provided that the common law employer test
applied to determine the existence of an employer-employee relationship for
federal employment tax purposes can be different than the common law test
applied to determine employer status for other federal tax purposes. In
addition, control and supervision have been held to be less important factors
when determining employer status for ERISA purposes.
Employee pension and welfare benefit plans are also governed by ERISA. ERISA
defines "employer" as "any person acting directly as an employer, or indirectly
in the interest of an employer, in relation to an employee benefit plan." ERISA
defines the term "employee" as "any individual employed by an employer." The
courts have held that the common law test of employment must be applied to
determine whether an individual is an employee or an independent contractor
under ERISA. However, in applying that test, control and supervision are less
important for ERISA purposes when determining whether an employer has assumed
responsibility for an individual's benefits status. A definitive judicial
interpretation of "employer" in the context of a PEO or employee leasing
arrangement has not been established.
Federal Employment Taxes
As an employer, the Company assumes responsibility and liability for the payment
of Federal and state employment taxes with respect to wages and salaries paid to
worksite employees. There are essentially three types of Federal employment tax
obligations:(i) withholding of income tax governed by Code Section 3401, et
seq.; (ii) obligations under the Federal Income Contributions Act ("FICA"),
governed by Code Section 3101, et seq.; and (iii) obligations under the Federal
Unemployment Tax Act ("FUTA"), governed by Code Section 3101, et seq. Under
these Code sections, employers have the obligation to withhold and remit the
employer portion and, where applicable, the employee portion of these taxes.
7
Among other employment tax issues related to whether PEOs are employers of
worksite employees are issues under the Code provisions applicable to Federal
employment taxes. The issue arises as to whether the Company is responsible for
payment of employment taxes on wages and salaries paid to such worksite
employees. Code Section 3401(d)(1), which applies to Federal income tax
withholding requirements, contains an exception to the general common law test
applied to determine whether an entity is an "employer" for purposes of Federal
income tax withholding. The courts have extended this common law employer
exception to apply for both FICA and FUTA tax purposes. Code Section 3401(d)(1)
states that if the person for whom services are rendered does not have control
of the payment of wages, the "employer" for this purpose is the person having
control of the payment of wages. The Treasury Regulations issued under Code
Section 3401(d)(1) state that a third party can be deemed to be the employer of
workers under this Section for income tax withholding purposes where the person
for whom services are rendered does not have legal control of the payment of
wages. Although several courts have examined Code section 3401(d)(1) with regard
to PEOs its ultimate scope has not been delineated. Moreover, the IRS has to
date relied extensively on the common law test of employment in determining
liability for failure to comply with Federal income tax withholding
requirements.
Accordingly, while the Company believes it has assumed the withholding
obligations for worksite employees, should the Company fail to meet these
obligations, the client may be held jointly and severally liable.
State Regulation
While many states do not explicitly regulate PEOs, twenty-six states, including
several states where the Company has operations (Texas, Maine, Pennsylvania and
West Virginia) have passed laws that have licensing, registration or other
compliance requirements for PEOs. Several additional states are considering such
regulation. Regulations vary from state to state but generally provide for
monitoring the fiscal responsibility of PEOs. The Company holds licenses, is
registered or otherwise compliant in the states in which it currently has
operations. 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.
In connection with the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995 (the "Reform Act"), the Company is hereby
providing cautionary statements identifying important factors that could cause
the Company's actual results to differ materially from those projected in
forward-looking statements (as such term is defined in the Reform Act) made by
or on behalf of the Company herein, in other filings made by the Company with
the Securities and Exchange Commission, in press releases or other writings, or
orally, whether in presentations, in response to questions or otherwise. Any
statements that express, or involve discussions as to, expectations, beliefs,
plans, objectives, assumptions or future events or performance (often, but not
always, through the use of words or phrases such as "will result," "are expected
to," "anticipated," "plans," "intends," "will continue," "estimated," and
"projection") are not historical facts and may be forward-looking and,
accordingly, such forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause the actual results or performance
of the Company to be materially different from any future results or performance
expressed or implied by such forward-looking statements. Such known and unknown
risks, uncertainties and other factors include, but are not limited to, the
following:
i) volatility of costs of workers' compensation insurance coverage and
excess premium generated from the workers' compensation component of
the Company's service offering under the Company's loss sensitive
workers' compensation programs;
ii) volatility of state unemployment taxes;
iii) the uncertainties of the collateralization required by, as well as the
availability and/or renewal of, the Company's medical benefit plans,
general insurance and workers' compensation insurance programs for the
worksite employees;
iv) uncertainties as to the amount the company will pay to subsidize the
costs of medical benefit plans;
8
v) possible adverse application of certain federal and state laws and the
possible enactment of unfavorable laws or regulations; vi) litigation
and other claims against the Company and its clients, including the
impact of such claims on the cost, availability and retention of the
Company's insurance coverage programs;
vii) impact of competition from existing and new businesses offering human
resources outsourcing services;
viii) risks associated with expansion into additional markets where the
Company does not have a presence or significant market penetration;
ix) risks associated with the Company's dependence on key vendors and the
ability to obtain or renew benefit contracts and general insurance
policies at rates and with retention amounts acceptable to the Company;
x) an unfavorable determination by the Internal Revenue Service or
Department of Labor regarding the status of the Company as an
"employer";
xi) the possibility of client attrition due to price competition or the
Company's decision to increase the price of its services, including
medical benefits;
xii) risks associated with geographic market concentration; xiii) the
financial condition of clients;
xiv) the effect of economic conditions in the United States generally on the
Company's business;
xv) the failure to properly manage growth and successfully integrate
acquired companies and operations;
xvi) risks associated with providing new service offerings to clients;
xvii) the ability to secure outside financing at rates acceptable to the
Company;
xviii) risks associated with third party claims related to the acts, errors or
omissions of the worksite employees; and
xix) other factors which are described in further detail in this Annual
Report on Form 10-KSB and in other filings by the Company with the
Securities and Exchange Commission.
The Company cautions that the factors described above could cause actual results
or outcomes to differ materially from those expressed in any forward-looking
statements made by or on behalf of the Company. Any forward-looking statement
speaks only as of the date on which such statement is made, and the Company
undertakes no obligation to update any forward-looking statement or statements
to reflect events or circumstances after the date on which such statement is
made or to reflect the occurrence of unanticipated events. New factors emerge
from time to time, and it is not possible for management to predict all of such
factors. Further, management cannot assess the impact of each such factor on the
business or the extent to which any factor, or combination of factors, may cause
actual results to differ materially from those contained in any forward-looking
statements.
Acquisitions
In January 2005, the Company, through its wholly-owned subsidiary The Resourcing
Solutions Group, Inc., completed the acquisition of certain assets of Rossar HR
LLC, a Pennsylvania limited liability company, which operated under the name
"Your Staff Solutions". Rossar HR LLC is a Professional Employment Organization
founded in the 1987 which specializes in quality human resource management
services for small to medium sized businesses.
In March 2006, the Company completed the purchase the stock of World Wide
Personnel of Maine, Inc and United Personnel Services, Inc. The effective date
of the purchases was April 1, 2006 and March 7, 2006 respectively. The Company
issues 500,000 share of Series "C" Convertible Preferred shares to the sole
stockholder for United Personnel Services, Inc. and World Wide Personnel
Services of Maine, Inc. Both companies are licensed Professional Employer
Organizations operating in the state of Maine. United Personnel was formed in
1999 and World Wide Personnel of Maine, Inc was formed in 1987. Both companies
offer full service human resource management services for small and mid-sized
businesses. Combined these acquisitions increase the Company's work site
employees by approximately 600.
9
Employees
As of April 11, 2006 Pacel Corp. employed 13 persons on a full time basis. Pacel
Corp. supplements fulltime employees with subcontractors and part-time
individuals, consistent with workload requirements. The Company's continued
success depends heavily upon its ability to retain highly qualified and
competent personnel.
Compliance with Environmental Laws
Company operations do not pollute nor involve discharge of material into the
environment. As a result, no expenditure is budgeted or required for environment
protection or restoration. Pacel is concerned about protecting the environment
and participates in recycling programs.
ITEM 2. DESCRIPTION OF PROPERTY
In February 2005, the Company relocated its executive offices to 7621 Little
Ave, Suite 101, Charlotte, North Carolina, 28226. The Company has a full service
lease until July 31, 2010. The Company's telephone number is (704) 643-0676 and
its facsimile number is (704) 643-0678. The Company is also a party to leases
for four "key-man" office spaces located in Coraopolis, Pennsylvania,
Winchester, VA, Auburn, ME, and Irving, Texas.
ITEM 3. LEGAL PROCEEDINGS
On or about September 9, 2005, an action was filed against the Company in the
Supreme Court of New York, County of New York, Case No. 603823/05, Thomas Kelly;
W. David Mc Coy; Richard T. Garrett Trust vs. Pacel Corp. The action alleges
that the Company is in default in the payment of amounts owing on certain
convertible debentures issued by the Company in March 2001 and subsequently
converted to term notes. The action seeks compensatory damages in the amount of
$312,000, plus interest and attorneys fees in an amount yet unspecified.
The Securities and Exchange Commission ("SEC") filed an action in Federal
District Court asserting various violations of securities laws against the
Company and its principal officer. The complaint alleges that Mr. Frank Custable
"orchestrated" a "scheme" to illegally obtain stock from various companies,
including the Company, through "scam Commission Form S-8 registration
statements, forged stock authorization forms and at least one bogus attorney
opinion letter arranged by Custable." The complaint alleges that, in connection
with this alleged "scheme," the Company and its CEO, David Calkins violated
Section 17(a) of the Securities Act and Section 10(b) and Rule 10b-5 of the
Exchange Act. The SEC asks that the Company and Calkins be permanently enjoined
from future violations, ordered to pay disgorgement and civil penalties and
Calkins be barred from continued service as an officer and director. As part of
an ex parte proceeding, the District Court has ordered the Company and Calkins
to provide an accounting of their assets and the transactions that are the
subject of the complaint. Pursuant to an agreement of the parties, an accounting
of the transactions at issue was provided on June 30, 2004. The Company and
Calkins answered the second amended complaint on March 23, 2005.
On April 7, 2005, grand jury proceedings in the Northern District of Illinois
indicted several individuals, but not the Company. Subsequently, the court
stayed the Commission's civil action pending the resolution of the criminal
proceedings arising from the actions of the grand jury.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the period
covered by this report.
PART II
ITEM 5. MARKET FOR THE COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
10
The common stock of the Company is traded on over-the-counter Electronic
Bulletin Board under the symbol "PCCE." On December 31, 2005 there were 210
holders of record of our common stock. As many such shares are held by brokers
and other institutions on behalf of stockholders, the Company is unable to
estimate the total number of stockholders represented by these record holders.
The following tables set forth the high and low sales price per share of our
common stock, for the periods indicated. The quotations reflect inter-dealer
prices, without retail mark-up, mark-down or commissions and may not represent
actual transactions.
The "high" and "low" bid quotations for the Company's Common Stock for each
quarterly period for the fiscal years ended December 31, 2004 and December 31,
2005 were as follows:
Calendar Quarter High Bid Price Low Bid Price
2004
First 0.4800 0.03100
Second 0.0380 0.00200
Third 0.0240 0.00020
Fourth 0.0050 0.00020
2005
First 0.0200 0.00010
Second 0.3500 0.00010
Third 0.2400 0.00010
Fourth 0.0080 0.00010
The previous table takes into account all reverse splits occurring in fiscal
years ending December 31, 2004 and December 31, 2005.
The Company has paid no cash dividends since its inception. The Company
currently plans to retain any future earnings for use in its business and does
not intend to pay cash dividends in the foreseeable future. Holders of the
Common stock are entitled to share ratably in dividends when and as declared by
the Board of Directors out of funds legally available therefore.
Recent Sales of Unregistered Securities
In the fiscal year ended December 31, 2005, the Company utilized its $10,000,000
equity line of credit from Compass Capital Inc., Kentan Ltd, and Reef Holding
Ltd. Borrowing from this equity line allows the repayment by issuing shares of
the Company's stock at a discount rate of up to 50% off the closing bid stock
price. The equity line is being used to fund acquisitions and shortfalls in
working capital. During the year ended December 31, 2005, the Company drew down
$1,645,000 and issued 18,551,973,987 unrestricted shares of the Company's no par
common stock, before adjusting such shares to reflect the effects of any stock
splits occurring subsequent to issuance. These shares were issued pursuant to
Section 3(a)(10) of the Securities Act of 1933, as amended, after a hearing with
notice to, and an opportunity to be heard from, interested parties, as to the
fairness of each transaction, by a state court in Florida who specifically
determined, prior to declaring that the transactions were exempt under Section
3(a)(10), that the transactions were fair to the interested parties.
From January 1, 2006 until March 31, 2006, in connection the exercise of
conversion rights by the holders of certain of the registrant's convertible
debentures ("Debentures"), the registrant issued an aggregate of 10,770,539,904
shares of its common stock, before adjusting such shares to reflect the effects
of any stock splits occurring subsequent to issuance. After giving effect to the
one-for-one thousand reverse split on January 27, 2006, such shares were be
restated as 9,970,540,904 shares.
11
The Debentures provided that the principal amount and accrued interest were
convertible, at the option of the holders of the Debentures, into the
registrant's common stock at a price per share equal to 30% to 40%, depending on
the terms of a specific Debenture, of the closing bid price of the registrant's
common stock as quoted on the OTC Bulletin Board on the immediately preceding
trading day prior to the notice of conversion.
The common stock was issued pursuant to Section 3(a)(10) of the Securities Act
of 1933, as amended, after a hearing with notice to, and an opportunity to be
heard from, interested parties, as to the fairness of each transaction, by a
state courts in Nevada, Florida and Illinois, who determined, prior to declaring
that the transactions were exempt under Section 3(a)(10), that the transactions
were fair to the interested parties.
As of the date of this report, there 9,970,540,904 shares of the registrant's
common stock issued and outstanding.
Option Grants
There are no option grants outstanding.
Issuances of Stock for Services or in Satisfaction of Obligations
There were no issuances of stock for services or in satisfaction of obligations.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
You should read the following discussion in conjunction with our Consolidated
Financial Statements and related Notes included elsewhere in this annual report.
Historical results are not necessarily indicative of trends in operating results
for any future period.
Year Ended December 31, 2005 Compared to Year Ended December 31, 2004
Revenue for the year ended December 31, 2005 was $2,240,843 compared to revenue
of $3,400,271 for the year ended December 31, 2004. The difference is attributed
to a decision of the Company to sell under performing and unprofitable
contracts. The Company generates it revenue from services relating to work site
employees. During 2005, the Company intentionally decreased the number of work
site employees (WSE) it provided PEO services to. This decrease resulted in a
higher Gross profit in 2005. For the year ending December 31, 2005, the Gross
profit was $551,502compared to $519,195 for the year ending December 31, 2004.
The Company has been heavily marketing its services and Human Resources
Information Systems to national chains, white-collar, and light industrial
clients. The Company anticipates higher gross profit and additional revenue from
services it provides to its clients.
We account for our revenues in accordance with Emerging Issues Task Force
("EITF") 99-19, Reporting Revenues Gross as a Principal Versus Net as an Agent.
Our revenues are derived from our billings, which are based on:
o the payroll cost of our worksite employees; and
o a markup computed as a percentage of the payroll cost.
In determining the pricing of the markup component of the billings, we consider
our estimates of the costs directly associated with our worksite employees,
including payroll taxes and workers' compensation costs, plus an acceptable
gross profit margin. We invoice the billings concurrently with each periodic
payroll of our worksite employees.
12
Revenues, which exclude the payroll cost component of billings, are recognized
ratably over the payroll period as worksite employees perform their service at
the client's worksite. We include revenues that have been recognized but not
invoiced in unbilled accounts receivable on our Consolidated Balance Sheets.
Our revenues are primarily dependent on the number of clients enrolled, the
resulting number of worksite employees paid each period. Because our markup is
computed as a percentage of payroll cost, revenues are also affected by the
payroll cost of worksite employees, which can fluctuate based on the composition
of the worksite employee base, inflationary effects on wage levels and
differences in the local economies of our markets.
The primary direct costs associated with our revenue generating activities are:
o employment-related taxes ("payroll taxes");
o workers' compensation claim and premium costs.
Payroll taxes consist of the employer's portion of Social Security and Medicare
taxes under FICA, federal unemployment taxes, state unemployment taxes and
workers' compensation premiums. Payroll taxes are generally paid as a percentage
of payroll cost. The federal tax rates are defined by federal regulations. State
unemployment tax rates are subject to claim histories and vary from state to
state.
Due to the significance of the amounts included in billings to the Company's
clients and its corresponding revenue recognition methods, the Company has
provided the following reconciliation of billings to revenue for the year ended
December 31, 2005 and December 31, 2004.
Year ended Year ended
December 31, December 31,
2005 2004
----------------- -----------------
Reconciliation of billings to revenue recognized:
Billings to clients $ 17,047,529 $ 26,384,025
Less - Gross wages billed to clients (14,778,592) (22,386,503)
----------------- -----------------
Revenue from PEO services $ 2,268,937 $ 3,997,522
Adjustment for Discontinued operations (28,094) (597,251)
Other miscellaneous revenue -0- -0-
----------------- -----------------
Total revenue as reported $ 2,240,843 $ 3,400,271
================= =================
Employer portion of Social Security
And Medicare taxes $ 986,668 $ 1,862,842
State and Federal Unemployment taxes 247,957 561,200
Workers' Compensation Premiums 424,429 867,786
-
Adjustment for discontinued operations (22,330) (469,029)
Other Misc. Expense 52,617 58,277
----------------- -----------------
Total Cost of Sales 1,689,341 2,881,076
----------------- -----------------
Gross Profit $ 551,502 $ 519,195
================= =================
13
Cost of services for the year ended December 31, 2005 decreased approximately
$1,192,000 to $1,689,343 compared to cost of services of $2,881,076 for the year
ended December 31, 2004 and is related directly to the delivery of services to
its PEO clients. This decrease is the result of eliminating under performing and
unprofitable contracts in May 2005.
General & administrative expenses, including salaries and wages, increased to
$2,523,325 for the year ended December 31, 2005, compared to $2,436,201 in the
corresponding period of 2004. Integration expenses associated with the Rossar
acquisition contributed to higher expenses through May 2005. A company wide
reorganization in May 2005 resulted in a significant reduction in General and
Administrative expenses in the remaining 7 months of 2005.
Sales and Marketing expenses increased to $470,090 for the year ended December
31, 2005, compared to $421,068 in the corresponding period of 2004. During 2004
the Company redesigned its marketing material and Web site as well as engaged
Lincoln Consulting Group to revamp the Company`s sales and marketing. Lincoln
concluded its contract during the second quarter of 2005. During the third and
fourth quarters of 2005 the Company concentrated sales efforts on target markets
identified in the sales and marketing studies. The Company was designated a
preferred provider in a large state association and has begun actively marketing
to its members. Revenue is expected to be generated from this activity during
2006.
Depreciation expenses increased to $62,595 for the year ended December 31, 2005
compared to $53,734 for the corresponding period of 2004. Such increase is
related to the Company's acquisition of its Human Resource Information System
and other technology equipment used for its operations.
Interest expense is interest paid and accrued on the Convertible Notes, unpaid
payroll taxes, Notes payable, bank financing, and capital leases. Interest
expense amounted to $373,287 for the year ended December 31, 2005 compared to
$402,564 for the same period of 2004.
Finance expense for the year ended December 31, 2005 decreased approximately
$1,312,000 to $619,286 compared to finance expense of $1,930,761 for the year
ended December 31, 2004. The decrease was the result of reduced funding
requirements for administrative and operational needs. The Company recorded
embedded interest in conjunction with the issuance of convertible debentures
during the period assuming conversion of such debt was available on an immediate
basis and has incurred fees associated with accessing its lines of credit.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents at December 31, 2005 increased to $251,595 from
$117,052 at December 31, 2004. Net cash used for operating activities was
$2,878,597 during the year ended December 31, 2005 compared to $4,150,530 in the
corresponding period of 2004. The cash used in operating activities is
attributable the net loss of $4,410,043 decreases in accrued worksite employee
costs, offset by a decrease in billed and unbilled accounts receivable,
insurance deposits, and prepaid expenses, payroll related liabilities and
accrued employee costs, an increase in account payable and accrued expense.
Net cash provided by investing activities for the year ended December 31, 2005
was $66,379. The cash provided from investing activities is attributable to
redemption of restricted cash used to secure Letters of Credit for PEO licenses
and tenant build out, offset by the purchase of computer equipment and loss on
the sale of contracts.
Net cash provided by financing activities in the year ended December 31, 2005
was $1,610,675 compared to $4,602,402 in the corresponding period ended December
31, 2004. The cash provided during both periods is directly related to the
Company's execution and utilization of three equity-based lines of credit. We
have decreased our borrowing against our credit lines.
14
In May 2005, The Resourcing Solutions Group, Inc. sold 16 client administrative
service contracts to Allegro, Inc. in Columbia, South Carolina. The Company sold
all of its North Carolina, South Carolina and Florida service contracts. The
Company could no longer service these contracts and make a profit. The company
sold these contracts for $59,358 according to the terms of the contact and
received $16,392. The Company has a receivable of $66,008 which includes the
remaining payment on the sale and reimbursed insurance costs. The Company wrote
off $711,009 of goodwill and recorded a loss on the sale of $651,651.
In connection with the sale of these contract the Company recognized a loss from
discontinued operations of $31,707 and $373,631 at December 31, 2005 and 2004
respectively.
In August 2003, the Company entered into an equity line of credit for
$10,000,000 from Compass Capital Inc., Kentan Ltd, Reef Holding Ltd, and a
$10,000,000.00 line of credit with T&B Associates, Inc. which was transferred to
the Escrow Corporation in May 2005. Borrowing from this equity line allows the
repayment by issuing shares of the Company's stock at a discount rate of up to
50%. The line is being used to fund acquisitions and shortfalls in working
capital. During the year ended December 31, 2005, the Company drew down
$1,645,000 and converted $2,710,673 of old and new convertible debentures in to
4,430,223 unrestricted shares of the Company's no par common stock, after
adjusting for all stock splits occurring subsequent to issuance. The balance
remaining on these equity lines of credit at March 31, 2006 was $949,102. The
lenders are not obligated to fund the remaining balance on this equity line of
credit and may discontinue funding the Company at any time without any further
obligation.
In January 2005, the Company entered into a five year employment contract with
Marcia Sartori. Compensation includes an annual base salary of $85,000 and an
incentive bonus plan based on the EBITDA (earnings before interest, tax,
depreciation and amortization). The agreement also includes severance payments
upon termination of employment. Ms. Sartori will hold the title of Vice
President of Operations.
In July 2005 the Company renegotiated David E. Calkins' September 2004,
employment agreement. The new employment agreement is for five years, has an
annual salary of $138,012 and requires the company to continue to fund the
Variable Flexible Premium Universal Life Policy and to pay legal expenses for
actions which occurred while Mr. Calkins was an officer of the Company. Mr.
Calkins is no longer an Officer or Director of the Company.
In July 2005, the Company entered into a ten year employment contract with F.
Kay Calkins. Compensation will include an annual base salary of $240,000.00, of
which $60,000 is deferred income, an incentive bonus plan based on the EBITDA
(earnings before interest, tax, depreciation and amortization). The agreement
includes severance payments upon termination of employment. In March 2006, the
Company completed the purchase the stock of World Wide Personnel of Maine, Inc
and United Personnel Services, Inc. The effective date of the purchase was April
1, 2006 and March 7, 2006 respectively. The Company issued 500,000 shares of
Series "C" Convertible Preferred shares to the sole stockholder of United
Personnel Services, Inc. and World Wide Personnel Services of Maine, Inc. The
Series "C" Preferred Stock, in the aggregate, shall be convertible, at the
option of the holder, into such number of shares of Common Stock as shall be
equal to $500,000 based on the closing bid price of the Common Stock as quoted
on the OTC Bulletin Board on the date of conversion. No Conversion can occur for
a period of twelve months from the date of issuance of the Series "C" stock.
Both companies are licensed Professional Employer Organizations operating in the
state of Maine. United Personnel was formed in 1999 and World Wide Personnel of
Maine, Inc was formed in 1987. Both companies offer full service human resource
management services for small and mid-sized businesses. Combined these
acquisitions increase the Company's work site employees by approximately 600.
15
The Company's cash requirements for funding its administrative and operating
needs continue to greatly exceed its cash flow generated from operations. Such
shortfalls and other capital needs continue to be satisfied through equity
financing and convertible notes payable, until additional funds can be generated
through acquisitions and organic business growth. The liabilities of the Company
consist of over-extended accounts payable, payroll taxes, and interest expense.
As part of its goal to bring the Company to profitability and less reliant on
equity financing for ongoing operations, the Company has developed an aggressive
marketing strategy as well as an investment to significantly upgrade its HRIS
(Human Resource Information System) capabilities to service its current and
prospective clients. The Company has engaged Thinkware Corporation to implement
its new HRIS system. This system will provide the Company with
"state-of-the-art" human resource data necessary to service the growing needs of
small to mid-size clients as well as automate the Company's internal processes.
The HRIS system was fully operational at January 1, 2005. As part of its efforts
to reduce the need for equity funding, the Company has identified new revenue
sources in the forth quarter of 2005. The Company has developed new
relationships with benefit providers which reduce the Company's administrative
burden while sharing in revenue generated from the sale of these products.
A strategic analysis of the overall Human Resource Outsourcing market occurred
in 2004 with the goal of developing a comprehensive market study that focused
the Company on the areas in which the Company could achieve success in
penetrating. As a result of this study, the Company identified a major segment
of the overall business community that had unique human resource and employer
liability risks. At the request of a national trade association within the
business segment the Company was asked to develop a plan to address three major
areas of concern - workers' compensation insurance, employee retention and
employee benefits. The Company entered into a Memorandum of Understanding with
the trade association in February 2005 that recognized the Company as the
sponsored organization to which association members should engage to address the
areas of concern. As a result of the emphasis placed on the major market segment
identified in the 2004 comprehensive market study, the Company was selected in
November 2005 as a preferred provider for a large state trade association. The
Company created a comprehensive program to address the issues and expanded the
program to the much broader economic sector. The Company believes revenue will
be generated from this program during late second quarter 2006. The Company will
generate revenue from multiple vertical markets.
The market analysis concluded that separating the Company's overall products
into multiple offerings would achieve greater success in penetrating larger and
more diverse prospects. The Company implemented the strategy in the 4th quarter
of 2004 and achieved significant results during 2005. In May 2005, the Company
reorganized and eliminated under performing and unprofitable contracts.
Re-engineered sales and marketing programs became functional in the 4th quarter
of 2005. These efforts have resulted in an increased in sales.
The Company relies on equity financing to fund its ongoing operations and
investing activities. The Company expects to continue its investing activities,
including expenditures for acquisitions, sales and marketing initiatives, HRIS
(Human Resource Information System), and administrative support. The loss of its
current equity financing would seriously hinder the Company's ability to execute
its business strategy and impair its ability to continue as a going concern.
In February, June, October 2005 and January 2006, the Company affected a
one-for-one thousand reverse stock split restating the number of common shares
at December 31, 2004 from 1,773,000,943 to 1. All references to average number
of shares outstanding and prices per share have been restated retroactively to
reflect the split.
16
Forward Looking Statements
The Company is making this statement in order to satisfy the "safe harbor"
provisions contained in the Private Securities Litigation Reform Act of 1995.
This Form 10-KSB includes forward-looking statements relating to the business of
the Company. Forward-looking statements contained herein or in other statements
made by the Company are made based on management's expectations and beliefs
concerning future events impacting the Company and are subject to uncertainties
and factors relating to the Company's operations and business environment, all
of which are difficult to predict and many of which are beyond the control of
the Company, that could cause actual results of the Company to differ materially
from those matters expressed in or implied by forward-looking statements. The
Company believes that the following factors, among others, could affect its
future performance and cause actual results of the Company to differ materially
from those expressed in or implied by forward-looking statements made by or on
behalf of the Company: (a) the effect of technological changes; (b) increases in
or unexpected losses; (c) increased competition; (d) fluctuations in the costs
to operate the business; (e) uninsurable risks; and (f) general economic
conditions.
ITEM 7. FINANCIAL STATEMENTS
The Financial Statements are listed at "Index to Consolidated Financial
Statements".
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no disputes or disagreements of any nature between the Company or its
management and its public auditors with respect to any aspect of accounting or
financial disclosure.
ITEM 8A. CONTROLS AND PROCEDURES
As required by Rule 13a-15 under the Exchange Act, within the ninety days prior
to the filing date of this report, the Company carried out an evaluation of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures. This evaluation was carried out under the supervision and with
the participation of Company's management, including the Company's President and
Chief Executive Officer and the Company's Chief Financial Officer. Based upon
that evaluation, the Company's President and Chief Executive Officer and the
Company's Chief Financial Officer concluded that the Company's disclosure
controls and procedures are effective. There have been no significant changes in
the Company's internal controls subsequent to the date the Company carried out
its evaluation.
Disclosure controls and procedures are controls and other procedures that are
designed to ensure that information required to be disclosed in Company reports
filed or submitted under the Exchange Act is recorded, processed, summarized and
reporting, within the time periods specified in the Securities and Exchange
Commission's rules and7 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.
17
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Directors, Executive Officers, Promoters and Control Persons
a) Set forth below are the names, age, positions, with the Company and business
experiences of the executive officers and directors of the Company.
Name Age Position(s) with Company
--------------------- ---- --------------------------------------------
F. Kay Calkins 47 Chairman of the Board, Secretary, Director
Gary A. Musselman 50 President and Chief Executive Officer, Chief
Financial Officer, 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 upon request 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.
Business Experience
F. Kay Calkins, Chairman, Secretary, Director
F. Kay Calkins currently serves as Chairman, Secretary and Director of the
Company. Prior to the fourth quarter of 2003, she served as President of
EBStor.com, Inc. ("EBStor"), an Internet and web development company, until that
operation ceased activities in the fourth quarter of 2003. In her capacity as
President, Ms. Calkins was responsible for oversight of all operations of the
Company. Ms. Calkins is experienced in the management of technology companies
and utilized that experience in the start-up and growth of EBStor. Prior to her
position with EBStor, Ms. Calkins was Vice President and Chief Operating Officer
of PACEL Corp., where she oversaw the day-to-day operations of the Company and
managed the development and deployment of software systems. Ms. Calkins has over
fifteen years of experience in technology-related companies. Before accepting
the positions with PACEL Ms. Calkins was President of CMC Services, a marketing
and consulting firm based in Virginia. Ms. Calkins resides in Virginia.
Family Relationships:
F. Kay Calkins and David E. Calkins are husband and wife.
Gary A. Musselman
Mr. Musselman was elected as President and Chief Executive Officer and Chief
Financial Officer of the Company in April 2004. Prior to joining Pacel Corp.,
Mr. Musselman served as the Chief Financial Officer of Grace Global, LLC, an
international media company operating within the Untied Stated and three foreign
locations. Mr. Musselman was responsible for due diligence for several companies
being considered for acquisition as well as overseeing the integration of
companies that were acquired. From 2000 to 2002, Mr. Musselman was the managing
Partner for Stratford Financial Resources, LLC, a business development
consulting firm specializing in commercial finance, human resources and mergers
and acquisitions. From 1993 to 2000, Mr. Musselman founded and was the Chief
Executive Officer of ECS Financial Management Services, LLC, a financial
management company specializing in accounts receivable management. Mr. Musselman
resides in North Carolina.
18
Code of Ethics
Effective March 22, 2005, the Board of Directors adopted a Code of Ethics for
Senior Financial Officers. The Code of Ethics was adopted pursuant to the
requirements of the Sarbanes-Oxley Act of 2002 and the rules and regulations of
the Securities and Exchange Commission there under. A copy of the Code of Ethics
will be made available upon request at no charge. Requests should be directed in
writing to the Company at7621 Little Ave. Suite 101, Charlotte, NC 28226.
ITEM 10. MANAGEMENT REMUNERATION AND TRANSACTIONS
Executive Compensation
Annual Annual Annual LT Comp LT
Comp Comp Comp Rest Comp LTIP
Name and Post Year Salary Bonus Other Stock Options Payouts
------------- ---- ------- ------ ------- ------- ------- -------
David E. Calkins, 2003 127,497 [1] 0 120,609 [1],[5] 0 0 0
Former Chairman of the Board 2004 240,049 [1] 0 379,370 [1],[5] 0 0 0
2005 225,628 [1] 8,310 328,715 [5],[9]
F. Kay Calkins 2003 0 0 0 0 0 0
Chairman of the Board 2004 0 0 0 0 0 0
2005 113,077 [2] 28,310 1,357 [5]
Gary A. Musselman, 2003 0 0 0
President and CEO, CFO 2004 118,255 [3] 15,000 40,999 [6] 0 0 0
2005 174,724 [3] 8,310 41,836 [6]
Marcia Sartori 2003 0 0 0
Vice President & COO 2004 0 0 0
2005 85,981 [4] 7,770 8,394 [5]
William R. Bellamy 2003 77,499 [7] 10,840 4,469 [5]
Former President and CEO 2004 54,879 [7] 0 2,384 [5]
2005 0 0 0
Timothy L. Maness 2003 77,499 [8] 10,840 4,469 [5]
Former CFO 2004 54,879 [8] 0 2,384 [5]
2005 0 0 0
[1] - Mr. Calkins is currently compensated at an annual salary of $138,000. In
addition to his regular salary, Mr. Calkins also received other compensation of
$116,667 (2003)and $184,408 (2004) in payment of prior years' salaries that had
been previously accrued on the books of the Company and not paid.
[2] - Mrs. Calkins became the Chairman of the Board on July 1, 2005 and is
currently compensated at an annual salary of $240,000 of which $30,000 was
deferred in 2005.
[3] - Mr. Musselman became an employee of the Company on April 7, 2004 and is
currently compensated at an annual salary of $168,000.
[4] - Mrs. Sartori became an employee of the Company on January 1, 2005 and is
currently compensated at an annual salary of $85,000.
[5] - Other annual compensation includes payments made on behalf on employees
for health, life and dental benefits and a variable flexible premium universal
life policy.
19
[6] - Other annual compensation includes payments made on behalf on employees
for health, life and dental benefits, wages paid to Mr. Musselman's spouse as an
employee of the Company, as well as payments made for services performed by a
company owned by Mrs. Musselman.
[7] - Mr. Bellamy became an employee of the Company on April 26, 2003 in
conjunction with the acquisition of substantially all the assets of Asmara, Inc.
On December 22, 2003, Mr. Bellamy was elected as President & CEO of the
Company. Mr. Bellamy was terminated in April 2004.
[8] - Mr. Maness became an employee of the Company on April 26, 2003 in
conjunction with the acquisition of substantially all assets of Asmara, Inc. On
December 22, 2003, Mr. Manes was elected as Chief Financial Officer of the
Company. Mr. Maness resigned in April 2004.
[9] - Other compensation includes $127,066 paid in legal fees on a matter which
arose while Mr. Calkins was an Officer and Director of the Company
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information concerning the ownership of
the Company's Common Stock as of December 31, 2005, with respect to: (i) each
person known to the Company to be the beneficial owner of more than five percent
of the Company's Common Stock; (ii) all directors; and (iii) directors and
executive officers of the Company as a group. To the knowledge of the Company,
each shareholder listed below possesses sole voting and investment power with
respect to the shares indicated.
TITLE OF NAME AND ADDRESS OF AMOUNT AND NATURE OF PERCENT
CLASS BENEFICIAL OWNER BENEFICIAL OWNERSHIP OF CLASS
------------ ----------------------------------- -------------------------- ---------------
Common Stock Gary Musselman -15- less than 1%
7621 Little Ave Suite 101
Charlotte, NC 28226
Common Stock David Calkins 21 less than 1%
7621 Little Ave Suite 101
Charlotte, NC 28226
Common Stock Marcia Sartori 5 less than 1%
7621 Little Ave Suite 101
Charlotte, NC 28226
F. Kay Calkins 21 less than 1%
Common Stock 7621 Little Ave Suite 101
Charlotte, NC 28226
------------ ------------------------------------ -------------------------- ---------------
Common Stock All Executive Officers and Directors 62 less than 1%
as a Group ( 4 persons)
------------ ------------------------------------ -------------------------- ---------------
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In July 2005, the Company renegotiated the September 2004 employment contract
with David E. Calkins. The new employment agreement is for five years, has an
annual salary of $138,012 and requires the company to continue to fund the
Variable Flexible Premium Universal Life Policy and to pay legal expenses for
actions which occurred while Mr. Calkins was an officer of the Company. Mr.
Calkins is no longer an Officer or Director of the Company. In July 2005, the
Company entered into a ten year employment contract with F. Kay Calkins.
Compensation will include an annual base salary of $240,000 of which $60,000 is
deferred, an incentive bonus plan based on the EBITDA (earnings before interest,
tax, depreciation and amortization). The agreement includes severance payments
upon termination of employment. December 31, 2005 Mrs. Calkins was given a
$20,000 bonus for reducing the Companies need to rely on equity financing.
20
During 2005, the Company paid to Stratford Financial Resources, LLC, a company
owned by Catherine Musselman, wife of Gary Musselman $15,990 for services
rendered to the Company. These services were related to maintaining corporate
licenses for the Company's PEO and insurance business as well as integrating the
sales function with various insurance providers.
In December 2005, the Company entered into a contract with Stratford Financial
Resources, LLC to provide sales services to the Company. Ms. Musselman is a
licensed insurance agent in all states where the Company operates. Ms.
Musselman, through her company, will be selling human resource services of the
Company and selling insurance benefits to clients. Ms. Musselman's company will
be compensated on commission only basis for the sale of the Company's services.
In May 2005, David Calkins engaged the law firm of Hinshaw and Culbert to defend
himself in an action which occurred while Mr. Calkins was an Office and Director
of the Company. The employment contract between Mr. Calkins and the Company
requires the Company to pay such legal bills. Through December 31, 2005 the
Company has paid or incurred $127,066 in fees to Hinshaw and Culbert.
ITEM 13. EXHIBITS
EXHIBIT NO. DESCRIPTION
----------- -----------
* Plan of Reorganization
2.1 * Articles and Agreement of Merger dated January 17, 2005
* Articles of Incorporation and By-Laws
3(i) * Articles of Incorporation dated March 13, 2003
3(ii) * Certificate of Amendment dated January 18,2005
3(iii) * Bylaws
10.1 * Share Exchange and Plan of Reorganization dated March 7,
2006 regarding the aquisition of United Personnel
Services, Inc.
10.2 * Share Exchange and Plan of Reorganization dated March
23, 2006 regarding the aquisition of Worldwide Personnel
Services of Maine, Inc.
21 Subsidiaries
CERTIFICATIONS
31 Rule 15d-14(a) certification of Gary Musselman
32 Section 1350 certification of Gary Musselman
* Incorporated herein by reference from filings previously made by the
Company
21
ITEM 14. Principal Accountant Fees and Services:
The following table sets forth fees billed to us by our auditors during the
fiscal years ended December 31, 2005 and December 31, 2004 for (i) services
rendered for the audit of our annual financial statements and the review of our
quarterly financial statement, (ii) services by our auditor that are reasonably
related to the performance of the audit or review of our financial statements
and are not reported as Audit Fees, (iii) services rendered in connection with
tax compliance, tax advice and tax planning, and (iv) all other fees for
services rendered.
December 31,
2005 2004
-------------- --------------
(i) Audit Fees $ 81,000 $ 87,600
(ii) Audit Related Fees -0- -0-
(iii) Tax Fees 2,500 6,500
(iv) All Other Fees -0- -0-
-------------- --------------
Total Fees $ 83,500 $ 94,100
============== ==============
AUDIT FEES. Consist of Fees billed for professional services rendered for the
audit of Pacel Corp's consolidated financial statements and review of the
interim consolidated financial statements included in quarterly reports and
services that are normally provided by Peter C. Cosmas Co. CPAs in connection
with statutory and regulatory filings or engagements.
AUDIT-RELATED FEES. Consists of fees billed for assurance and related services
that are reasonably related to the performance of the audit or review of Pacel
Corp's consolidated financial statements and are not reported under "Audit
Fees." There were no Audit-Related services provided in fiscal 2005 or 2004.
TAX FEES. Consists of fees billed for professional services for tax compliance,
tax advice, and tax planning.
ALL OTHER FEES. Consists of fees for products and services other than the
services reported above. There were no management consulting services provided
in fiscal 2005 or 2004.
22
INDEX TO FINANCIAL STATEMENTS
-----------------------------
Auditor's Report.............................................................F-2
Balance Sheets as of December 31, 2005 and 2004..............................F-3
Statement of Operations for the years ended December 31, 2005 and 2004.......F-5
Statement of Changes in Stockholder's Equity for the years ended
December 31, 2005 and 2004...................................................F-6
Statement of Cash Flows for the years ended December 31, 2005 and 2004.......F-7
Notes to Financial Statements................................................F-9
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To The Board of Directors and Shareholders of
Pacel Corp.
We have audited the accompanying consolidated balance sheets of Pacel
Corp. and its subsidiaries as of December 31, 2005 and 2004 and the related
consolidated statements of operations, stockholders' equity (deficit), and cash
flows for the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also 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
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Pacel Corp.
and subsidiaries as of December 31, 2005 and 2004, and the results of their
operations and their cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared
assuming that Pacel Corp will continue as a going concern. As discussed in
Note1(c) to the financial statements, the Company has generated significant
losses and requires additional working capital to continue operations. These
conditions raise substantial doubt about its ability to continue as a going
concern. Management's plans in regard to these matters are more fully described
in Note 1(c). The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Peter C. Cosmas Co., CPAs
370 Lexington Ave.
New York, NY 10017
March 29, 2006
F-2
PACEL CORP. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, December 31,
2005 2004
---------------- ----------------
ASSETS
Current assets:
Cash $ 251,595 $ 117,052
Client deposits and advance payments -0- 826,598
Accounts receivable 15,384 230,469
Accounts receivable-Unbilled 169,749 310,845
Prepaid expenses 69,372 110,408
Workers compensation insurance deposits 26,240 139,089
Restricted Cash 179,855 913,009
---------------- ----------------
Total current assets 712,195 2,647,470
---------------- ----------------
Property and equipment, net of accumulated depreciation of
$133,031 and $70,436 respectively 125,380 147,831
---------------- ----------------
Other assets:
Other receivables 65,127 -0-
Retirement Plan - Director 162,230 154,772
Goodwill 368,200 1,075,432
Security deposits 11,152 15,182
---------------- ----------------
Total other assets 606,709 1,245,386
---------------- ----------------
Total assets $ 1,444,284 $ 4,040,687
================ ================
See accompanying notes to the consolidated financial statements.
F-3
PACEL CORP. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, December 31,
2005 2004
---------------- ----------------
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 336,497 $ 242,210
Payroll and payroll related liabilities 1,955,231 2,511,224
Accrued work site employee payroll expenses 163,626 300,391
Accrued expenses 1,857,454 1,330,456
Assumed liabilities 493,133 493,133
Client deposits and advance payments -0- 826,598
Short term payables 1,081,359 2,158,251
Current maturities of long term note 27,127 -0-
---------------- ----------------
Total current liabilities 5,914,427 7,862,263
Long-term liabilities:
Notes payable - Non Current portion 218,926 -0-
Deferred Compensation-Director Payable 335,233 154,772
---------------- ----------------
Total long-term liabilities 554,159 154,772
---------------- ----------------
Total liabilities 6,468,586 8,017,035
Stockholders' equity (deficit):
Preferred stock, .001 par value, no liquidation value,
5,000,000 shares authorized, 1,000,000 shares
of 1997 Class A convertible preferred stock 1,000 1,000
Common stock, .001 par value, 10,000,000,000 shares
authorized, 4,430,273 and 1 shares
issued respectively 4,430 -0-
Additional paid-in capital 25,760,994 22,403,335
Cumulative currency translation adjustment (18,720) (18,720)
Accumulated deficit (30,772,006) (26,361,963)
---------------- ----------------
Total stockholders' (deficit) (5,024,302) (3,976,348)
---------------- ----------------
Total liabilities and stockholders' deficit $ 1,444,284 $ 4,040,687
================ ================
See accompanying notes to the consolidated financial statements.
F-4
PACEL CORP. AND SUBSIDIARIES
Consolidated Statements of Operations
Year ended
December 31,
2005 2004
----------------- -----------------
Revenue $ 2,240,843 $ 3,400,271
Cost of sales 1,689,341 2,881,076
----------------- -----------------
Gross profit 551,502 519,195
Operating costs and expenses:
General and Administrative 2,523,756 2,436,201
Sales and Marketing 470,090 421,068
Depreciation and amortization 62,595 53,734
Loss on impairment of goodwill 229,173 -0-
----------------- -----------------
Total operating expenses 3,285,614 2,911,003
Operating Loss (2,734,112) (2,391,808)
Other Expenses:
Interest expense (373,287) (402,564)
Financing costs (619,286) (1,930,761)
----------------- -----------------
Total other expenses (992,573) (2,333,325)
Discontinued operations:
Loss on discontinued (Sale of Contracts) (31,707) (373,631)
Loss on sale of contracts to Allegro, Inc. (651,651) -0-
----------------- -----------------
Total Loss on discontinued operations (683,358) (373,631)
Net Loss $ (4,410,043) $ (5,098,764)
================= =================
Loss from Discontinued operations per common and common equivalent share:
Basic $ (1.69) $ (373,631)
Diluted $ (1.69) $ (373,631)
Net loss per common and common equivalent share:
Basic $ (10.87) $ (5,098,764)
Diluted $ (10.87) $ (5,098,764)
Weighted average shares outstanding:
Basic 405,553 1
Diluted 405,553 1
See accompanying notes to the consolidated financial statements.
F-5
PACEL CORP. AND SUBSIDIARIES
Consolidated Statements of Stockholders' (Deficit)
For the Two Years Ended December 31, 2004 and 2005
Additional Currency Total
Preferred Stock Common Stock Paid-in-capital Translation Stockholders
Shares Amount Shares Amount Amount (Deficit) Adjustment Equity
----------- -------- ----------- ---------- ------------- --------------- ----------- --------------
Balance, December 31, 2003 1,000,000 $1,000 1 $ 0 $17,385,697 $(21,263,199) $(18,720) $(3,895,222)
=========== ======== =========== ========== ============= =============== =========== ==============
Subscription Receivable 125,000 125,000
Issuance of common stock, in
connection with convertible
notes payable 0 0 90,000 90,000
Issuance of common stock,
in connection with Section
3(a)(10) filings 0 0 2,871,877 2,871,877
Embedded interest in
connection with convertible
debt issued under Section
3(a)(10) filings 0 0 1,930,761 1,930,761
Net loss ($5,098,764) (5,098,764)
----------- -------- ----------- ---------- ------------- --------------- ----------- --------------
Balance, December 31, 2004 1,000,000 $1,000 1 $ 0 $22,403,335 $(26,361,963) $(18,720) $(3,976,348)
=========== ======== =========== ========== ============= =============== =========== ==============
Issuance of common stock, in
to Senior Managers, Officers
and Directors 50 0 27,700 27,700
Issuance of common stock,
in connection with Section
3(a)(10) filings 4,430,222 4,430 2,710,673 2,715,103
Embedded interest in
connection with convertible
debt issued under Section
3(a)(10) filings - - 619,286 619,286
Net loss $ (4,410,043) (4,410,043)
----------- -------- ----------- ---------- ------------- --------------- ----------- --------------
Balance, December 31, 2005 1,000,000 $1,000 4,430,273 $ 4,430 $25,760,994 $(30,772,006) $(18,720) $(5,024,302)
=========== ======== =========== ========== ============= =============== =========== ==============
(1) - Shares are restated to reflect a one-for-one thousand reverse stock split
in February 2005, June 2005, October 2005 and January 2006.
See accompanying notes to the consolidated financial statements.
F-6
PACEL CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Year ended
December 31,
2005 2004
------------------- -------------------
Cash flows from operating activities:
Net loss $ (4,410,043) $ (5,098,764)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation 62,595 53,734
Financing costs (Embedded interest) 619,286 1,930,761
Stock based compensation 27,700 90,000
Loss on impairment of Goodwill 229,173 -0-
Loss on Sale of contracts 651,651 -0-
Accounts receivable 215,085 (160,085)
Accounts receivable-Unbilled 141,096 (310,845)
Other receivables (22,161) 7,901
Insurance deposits 112,849 (6,237)
Prepaid expenses 61,525 (66,082)
Security deposits 5,280 (5,816)
Accounts payable 88,167 (207,216)
Accrued expenses 526,998 279,541
Accrued expenses-Director -0- (251,583)
Payroll and payroll related liabilities (555,993) (80,450)
Accrued work site employee payroll costs (136,765) 300,391
Assumed liabilities -0- (623,248)
Deferred Compensation - Director 173,003 -0-
Income taxes payable -0- (2,532)
------------------- -------------------
Net cash (used in) operating activities (2,210,554) (4,150,530)
Cash flows from investing activities:
Net purchases of property and equipment (15,124) (104,211)
Sale of Contracts 16,392 -0-
Cash CD-Restricted 733,154 (913,009)
------------------- -------------------
Net cash provided (used in) investing activities 734,422 (1,017,220)
Cash flows from financing activities:
Repayments of notes payable (25,947) (123,000)
Issuance of notes payable -0- 90,000
Issuance of convertible notes payable 1,645,000 4,540,898
Receipts of stock subscription receivables -0- 125,000
Repayments from lines of credit (8,378) (9,669)
Repayment of capital leases -0- (20,827)
------------------- -------------------
Net cash provided by financing activities 1,610,675 4,602,402
Net increase (decrease) in cash and cash equivalents 134,543 (565,348)
Cash and cash equivalents, beginning of period 117,052 682,400
------------------- -------------------
Cash and cash equivalents, end of period $ 251,595 $ 117,052
=================== ===================
See accompanying notes to the consolidated financial statements.
F-7
Supplemental disclosure of cash flow information:
Cash paid for interest $ 11,798 $ 46,690
=================== ===================
See accompanying notes to the consolidated financial statements.
F-8
PACEL CORP. AND SUBSIDARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
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. Effective January
25, 2005, by written consent of the shareholders holding a majority of
the voting power of the Company as disclosed in the Company's
Information Statement filed with the Securities and Exchange Commission
approved (a) an amendment to the Company's Articles of Incorporation to
increase the authorized common stock to 10 billion shares; (b) a change
of corporate domicile from Virginia to Nevada; (c) the election of Gary
Musselman to the board of directors. In September 2002, the Company
announced its intention to enter the Professional Employer Organization
(PEO) industry. In December 2002, the Company formed a wholly owned
subsidiary, The Resourcing Solutions Group Inc. (TRSG) for the purpose
of acquiring and running the PEO companies. On December 10, 2002, the
Company issued a one time stock dividend of one share of "TRSG" (an OTC
Non- Reporting company symbol - RSGS) for each share of record of Pacel
Corp. stock on December 10, 2002. The Company issued 493,511,735 shares
of Resourcing Solutions Group no par value common stock representing
approximately 25% of the total shares issued. In October 2004, The
Resourcing Solutions Group, Inc. effected a one-for one thousand
reverse split. After giving effect for the one-for-one thousand reverse
stock split, the Company now owns 1,506,963 shares. The subsidiary
operated at a loss during the years ended December 31, 2005 and 2004.
The minority 25% share of the loss for the years ended December 31,
2005 and 2004 were $151,623 and $76,080 respectively and is reflected
in the statement of operations. See Note 6 Short term borrowing for
possible material dilution of the Company's interest in TRSG. The
Company has no recourse to collect the receivable from these losses.
B. Principles of consolidation. The consolidated financial statements
include the accounts of the Company and all of its subsidiaries in
which a controlling interest is maintained. All significant
inter-company accounts and transactions have been eliminated in
consolidation.
C. Basis of Financial Statement Presentation. The accompanying financial
statements have been prepared on a going concern basis, which
contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. The Company has generated
significant losses; however, it is unable to predict profitability for
the future. These factors indicate that the Company's continuation, as
a going concern is dependent upon its ability to obtain adequate
financing as well as implement its sales and marketing strategy. The
Company plans to address the going concern by obtaining equity
financing and to grow the Company with profitable sales both
organically and through acquisitions. Management believes successfully
executing these tasks will lead to the removal of the going concern
comment from our audited financials.
D. Cash and cash equivalents. Cash equivalents consist of liquid
investments, with a maturity of three months or less at the time of
purchase. Cash equivalents are stated at cost, which approximate market
value.
E. Property and Equipment. Property and equipment are stated at cost less
accumulated depreciation and amortization. Depreciation is determined
using the straight-line method over the estimated useful lives of the
assets. Estimated useful lives of 24 to 36 months are used for computer
equipment and related software, five years for office equipment,
furniture, and
F-9
fixtures. Depreciation and amortization of leasehold improvements is
computed using the shorter of the remaining lease term or five years.
Maintenance and repairs are charged against income and betterments are
capitalized.
F. Reclassification. Certain prior year amounts have been reclassified to
conform to current year's presentation.
G. Revenue recognition. We account for our revenues in accordance with
Emerging Issues Task Force ("EITF") 99-19, Reporting Revenues Gross as
a Principal Versus Net as an Agent. Our revenues are derived from our
billings, which are based on:
o the payroll cost of our worksite employees; and
o a markup computed as a percentage of the payroll cost.
In determining the pricing of the markup component of the billings, we
consider our estimates of the costs directly associated with our
worksite employees, including payroll taxes and workers' compensation
costs, plus an acceptable gross profit margin. We invoice the billings
concurrently with each periodic payroll of our worksite employees.
Revenues, which exclude the payroll cost component of billings, are
recognized ratably over the payroll period as worksite employees
perform their service at the client worksite. We include revenues that
have been recognized but not invoiced in unbilled accounts receivable
on our Consolidated Balance Sheets.
Our revenues are primarily dependent on the number of clients enrolled,
the resulting number of worksite employees paid each period. Because
our markup is computed as a percentage of payroll cost, revenues are
also affected by the payroll cost of worksite employees, which can
fluctuate based on the composition of the worksite employee base,
inflationary effects on wage levels and differences in the local
economies of our markets.
The primary direct costs associated with our revenue generating
activities are:
o employment-related taxes ("payroll taxes");
o workers' compensation claim costs.
Payroll taxes consist of the employer's portion of Social Security and
Medicare taxes under FICA, federal unemployment taxes and state
unemployment taxes. Payroll taxes are generally paid as a percentage of
payroll cost. The federal tax rates are defined by federal regulations.
State unemployment tax rates are subject to claim histories and vary
from state to state.
During 2005, the Company paid $ 424,429 in Workers' Compensation
premiums and paid $1,234,625 in Payroll taxes (Federal, State and
Local). The amount paid in Workers' Compensation premiums and taxes is
included in the Cost of Goods Sold.
H. Advertising Costs. The Company expenses all advertising costs as
incurred.
I. Use of Estimates. The preparation of financial statements and related
disclosures in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the
reported amounts in the Consolidated Financial Statements and
accompanying notes. The actual amounts may differ from the estimated
amounts.
F-10
J. Impairment of long-lived Assets. The Company to reviews the
recoverability of the carrying amounts of its long-lived assets
whenever events or changes in circumstances indicate that the carrying
amount of the asset might not be recoverable. Long-lived assets and
certain identifiable intangible assets to be held and used are reviewed
for impairment whenever events or changes in circumstances indicate
that the carrying amount of such assets may not be recoverable.
Determination of recoverability is based on an estimate of discounted
future cash flows resulting from the use of the asset and its eventual
disposition. Measurement of an impairment loss for long-lived assets
and certain identifiable intangible assets that management expects to
hold and use are based on the fair value of the asset. Long-lived
assets and certain identifiable intangible assets to be disposed of are
reported at the lower of carrying amount or fair value less costs to
sell.
K. Fair Value Disclosures. The carrying amounts reported in the balance
sheets for cash and cash equivalents, accounts receivable, accounts
payable and accrued expenses, approximate fair value because of the
immediate or short-term maturity of these financial instruments.
L. Stock Options In December 2004, the Financial Accounting Standards
Board ("FASB") issued the revised SFAS No. 123, Share-Based,
share-Based payment (SFAS no. 123R). SFAS No. 123R is a revision of
SFAS No. 123 and supersedes APB no. 25. SFAS No. 123R requires an
entity to measure the cost of employee services received in exchange
for an award of equity instruments based on the fair value of the award
on the grant date to be estimated using either using an option-pricing
model, which is consistent with the terms of the award or a market
observed price, if such a price exists. The resulting cost must be
recognized over the period during which an employee is required to
provide service in exchange for the award, which is usually the vesting
period. SFAS 123R must be adopted no later than periods beginning after
December 15, 2005. The Company expects the adoption of SFAS 123R will
not have a material impact on its net income and earnings per share.
2. Acquisitions/Dispositions
On January 1, 2005, The Resourcing Solutions Group, Inc. acquired
substantially all the assets of Rossar HR LLC. The acquisition was
accounted for as a purchase. The Company assumed certain debts and
lease obligations of Rossar HR, LLC and issued a note payable of
$272,000 and executed an employment contract with the former owner of
Rossar HR, LLC. Consideration under the agreement consists of
compensation amounting to $85,000 and bonuses based on business unit
performance. The balance of the note at December 31, 2005 was $246,054.
The Company recorded $232,950 in Goodwill in conjunction with this
acquisition. During the second quarter of 2005, the Company recorded an
impairment of $131,950 reducing the value of Goodwill to $101,000.
In May 2005, The Resourcing Solutions Group, Inc. sold 16 client
administrative service contracts to Allegro, Inc. in Columbia, South
Carolina. The Company sold all of its North Carolina, South Carolina
and Florida service contracts. The Company could no longer service
these contracts and make a profit. The company sold these contracts for
$59,358 according to the terms of the contact and received $16,392. The
Company has a receivable of $66,008 which includes the remaining
payment on the sale and reimbursed insurance costs. The Company wrote
off $711,009 of goodwill and recorded a loss on the sale of $651,651.
In connection with the sale of these contracts the Company recognized a
loss from discontinued operations of $31,707 and $373,631 at December
31, 2005 and 2004 respectively.
F-11
3. Accounts Receivable
The Company's accounts receivable is primarily composed of trade
receivables and unbilled receivables. The Company's trade receivables,
which represent outstanding billings to clients, are reported net of
allowance for doubtful accounts of $0 and $533 as of December 31, 2005
and 2004, respectively. The Company establishes an allowance for
doubtful accounts based on management's assessment of the
collectibility of specific accounts and by making a general provision
for other potentially uncollectible amounts.
The Company makes an accrual at the end of each accounting period for
its obligations associated with the earned but unpaid wages of its
worksite employees and for the unbilled revenue associated with such
wages. These accruals are included in accrued work site employee
payroll expenses and Accounts receivable unbilled, however, these
amounts are presented net in the Consolidated Statements of Operations.
The Company generally requires that clients pay invoices for service
fees no later than one day prior to the applicable payroll date. As
such, the Company generally does not require collateral. Customer
prepayments directly attributable to unbilled accounts receivable have
been netted against such receivables as the billings have been earned
and the payroll cost has been incurred, thus the Company has the legal
right of offset for these amounts. As of December 31, 2005 and 2004,
unbilled accounts receivable consisted of the following:
December 31,
2005 2004
------------ ------------
Accrued worksite employees payroll cost $ 163,626 $ 300,391
Unbilled revenue 6,123 10,454
------------ ------------
Unbilled accounts receivable $ 169,749 $ 310,845
------------ ------------
4. Property and Equipment:
Property and equipment consist of the following:
December 31,
2005 2004
------------ ------------
Computers and office Equipment $ 258,411 $ 218,267
Less accumulated depreciation 133,031 70,436
------------ ------------
$ 125,380 $ 147,831
============ ============
5. Short term Borrowings Consists of:
December 31,
2005 2004
------------ ------------
Note payable bank $ 15,852 $ 24,230
Notes Payable-Other 465,000 465,000
Convertible notes payable 600,507 1,669,021
Capital lease -0- -0-
------------ ------------
Total Short-term borrowings $1,081,359 $2,158,251
============ ============
F-12
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, 2005 and 2004 was $15,852 and $24,230 respectively.
In January 2002, the Company issued three short term notes payable
totaling $375,000 and are included in Notes Payable Other, the notes
bear an interest rate of 9% per annum. At December 31, 2004, the
Company was in default under the terms of these note agreements. The
Company considers these notes as short term borrowings. On or about
September 9, 2005, an action was filed against the Company in the
Supreme Court of New York, County of New York, The action alleges that
the Company is in default in the payment of amounts owing on these
notes issued by the Company in March 2001.. The action seeks
compensatory damages in the amount of $312,000, plus interest and
attorneys fees in an amount yet unspecified.
In January 2004, the Company issued a $90,000 short-term note. This
note is payable upon demand and is included in notes payable other.
In August 2003, the Company entered into an equity line of credit for
$10,000,000 from Compass Capital Inc., Kentan Ltd, Reef Holding Ltd,
and a $10,000,000.00 line of credit with T&B Associates, Inc. which was
transferred to the Escrow Corporation in May 2005. Borrowing from this
equity line allows the repayment by issuing shares of the Company's
stock at a discount rate of up to 50%. The line is being used to fund
acquisitions and shortfalls in working capital. During the year ended
December 31, 2005, the Company drew down $1,645,000 and converted
$2,710,673 of old and new convertible debentures in to 4,430,223
unrestricted shares of the Company's no par common stock, after
adjusting for all stock splits occurring subsequent to issuance. The
balance remaining on these equity lines of credit at March 31, 2006 was
$949,102. The lenders are not obligated to fund the remaining balance
on this equity line of credit and may discontinue funding the Company
at any time without any further obligation.
On November 30, 2004, the Company's subsidiary, The Resourcing
Solutions Group, Inc., issued its 8% Convertible Redeemable Debentures
due November 30, 2005 in the aggregate principal amount of $100,000.
The debentures were purchased by OHHN Holdings, LLC and Hatov Holdings,
LLC. The debentures were issued pursuant to the exemption from
registration under the Securities Act of 1933 provided by Regulation D
Rule 504. This debenture is included in convertible notes payable. As
collateral for the debenture, The Resourcing Solutions Group, Inc.
placed 1,000,000,000 shares in escrow. Based on the price of The
Resourcing Solutions Group, Inc. stock when the debenture was secured,
the collateral was valued at 100 times the amount of the debenture. If
the debenture is converted for stock, the Company's percentage of
ownership in The Resourcing Solutions Group, Inc. will be substantially
reduced. The Company can not determine the dilution since there is an
inverse relationship of the number of shares issued to the value of the
shares necessary to repay the debenture.
The balance of these convertible notes at December 31, 2005 and 2004
was $600,507 and $1,669,021 respectively.
6. Assumed Liabilities
As part of the asset purchase agreement of Asmara Inc. in April 2003,
the Company assumed certain debts attributed to the President and CEO
who was the sole shareholder of Asmara Inc. These debts were previously
classified as Notes Payable to Officers. Upon the dismissal of the
President and CEO, these debts were reclassified as Assumed
Liabilities. The balances at the years ended December 31, 2005 and 2004
was $493,133.
F-13
7. Long Term Liabilities
A. Retirement Plan-Director
During the first quarter of 2004, the Company entered into a Variable
Flexible Premium Universal Life policy naming David E. Calkins, the
Chairman of the Company, as the insured. The Company is the owner of
the policy while David E. Calkins and his spouse are the beneficiaries
of the policy. The insurance policy carries a face value of $3,100,000.
The account value of the insurance policy can be invested in various
investment accounts as directed by the Company. The policy calls for
the Company to make monthly payments of $18,333 for five years. Upon
age 70, David E. Calkins will be eligible to withdraw the assets of the
policy over a 15 year period. During the twelve months ended December
31, 2005, the Company recorded $220,000 in General and Administrative
expense. The Company has recorded the value of the assets $162,230 and
a liabilities of $151,772 and $213,461 totaling $335,223 as deferred
compensation, for the surrender charge on the policy as well as the
unpaid premiums.
8. Income Taxes
At inception, the Company adopted SFAS No. 109, Accounting for income
taxes. Under the provision of SFAS No. 109, the Company elected not to
restate prior years due to immateriality.
At this time, the Company does not believe it can reliably predict
profitability for the long-term. Accordingly, the deferred tax asset
applicable to 2005 and 2004 operation has been reduced in its entirety
by the valuation allowance.
As a result of the operating losses for the years ended December 31,
2005 and 1992-2004, the Company has available to offset future taxable
income a net operating loss of approximately $18 Million expiring in
2006-2019.
The components of this provision (credit) for income taxes from
continuing operations is as follow:
2005 2004
--------------- ---------------
Deferred
Federal $ - $ -
Current
Federal $ - $ -
State $ - $ -
--------------- ---------------
$ - $ -
--------------- ---------------
F-14
Difference between the tax provision computed using the statutory
federal income tax rate ant the effective income tax rate on the
operations is as follow:
2005 2004
------------- --------------
Federal
Statutory rate $(1,288,875) $(1,220,331)
Research tax credits -0- -0-
Tax benefit not provided
Due to valuation allowance $ 1,288,875 $ 1, 220,331
------------- --------------
$ -0- $ -0-
============= ==============
Components of the Company's deferred tax assets and liabilities are as
follow:
December 31,
2005 2004
-------------- --------------
Deferred tax assets:
Tax benefit related to net operating loss carry forward
And research tax credit $ 7,154,601 $ 5,865,744
-------------- --------------
Total deferred tax assets $ 7,154,601 $ 5,865,744
Valuation allowance for
Deferred tax assets $ 7,154,601 $ 5,865,744
-------------- --------------
Net deferred tax assets $ -0- $ -0-
============== ==============
9. Earning (Loss) Per Share:
In February 1997, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standards ("SFAS") No. 128.
"Earnings Per Share" applicable for financial statements issued for
periods ending after December 15, 1997. As required the Company adopted
"SFAS" No. 128 for the year ended December 31, 1997 and restated all
prior period earnings per share figures. The Company has presented
basic earnings per share. Basic earnings per share exclude potential
dilution and are calculated by dividing income available to common
stockholders by the weighted average number of outstanding common
shares. Diluted earnings per share incorporate the potential dilutions
from all potentially dilutive securities that would have reduced
earnings per share. Since the potential issuance of additional shares
would reduce loss per share they are considered anti-dilutive and are
excluded from the calculation.
Basic net income per common share is computed using the
weighted-average number of common shares outstanding during the period.
Diluted net income per common share is computed using the
weighted-average number of common and dilutive common equivalent shares
outstanding during the period. Dilutive common equivalent shares
consist of stock options. Share and per-common share data for all
periods presented reflect the effect of all reverses.
The weighted average number of shares used to compute basic earnings
(loss) per share was 405,552,988 and 233,817 at December 31,2005 and
2004 respectively.
F-15
10. Commitments and Contingencies:
A. Operating Leases
Future annual minimum lease payments under all non-cancelable operating
leases as of December 31, 2005 are as follows:
2006 $ 146,473
2007 141,691
2008 152,902
2009 122,583
2010 & thereafter 116,222
-----------
Total Minimum Lease Payments $ 679,871
===========
Rent expense for December 31, 2005 and 2004 was $129,228 and $117,738
respectively.
B. Legal
The Securities and Exchange Commission ("SEC") filed an action in
Federal District Court asserting various violations of securities laws
against the Company and its principal officer. The complaint alleges
that Mr. Frank Custable "orchestrated" a "scheme" to illegally obtain
stock from various companies, including the Company, through "scam
Commission Form S-8 registration statements, forged stock authorization
forms and at least one bogus attorney opinion letter arranged by
Custable." The complaint alleges that, in connection with this alleged
"scheme," the Company and its CEO, David Calkins violated Section 17(a)
of the Securities Act and Section 10(b) and Rule 10b-5 of the Exchange
Act. The SEC asks that the Company and Calkins be permanently enjoined
from future violations, ordered to pay disgorgement and civil penalties
and Calkins be barred from continued service as an officer and
director. As part of an ex parte proceeding, the District Court has
ordered the Company and Calkins to provide an accounting of their
assets and the transactions that are the subject of the complaint.
Pursuant to an agreement of the parties, an accounting of the
transactions at issue was provided on June 30, 2004. The Company and
Calkins answered the second amended complaint on March 23, 2005.
On April 7, 2005 grand jury proceedings in the Northern District of
Illinois indicted several individuals, but not the Company.
Subsequently, the court stayed the Commission's civil action pending
the resolution of the criminal proceedings arising from the actions of
the grand jury.
On or about September 9, 2005, an action was filed against the Company
in the Supreme Court of New York, County of New York, The action
alleges that the Company is in default in the payment of amounts owing
on certain convertible debentures issued by the Company in March 2001
and subsequently converted to term notes. The action seeks compensatory
damages in the amount of $312,000, plus interest and attorneys fees in
an amount yet unspecified. The Company is carrying these notes in short
term notes payable of $375,000. The Company has recognized the
obligation but, due to limited cash flows are unable pay the
outstanding balance.
11. Goodwill and other Intangible Assets
The Company recorded an impairment of $229,173 related to goodwill in
the Company's PEO
F-16
business. $131,950 was related to the Rossar acquisition in 2005 and
$97,223 is related to the 2003 Benecorp Business acquisition. The fair
value of the PEO business was determined using discounted cash flows
and market value of clients if sold. Current Goodwill is $368,200 of
which $267,200 is attributable to the purchase of Benecorp Business
Services, Inc. and $101,000 is attributable to the purchase of Rossar,
HR, LLC.
12. Stockholders' Equity:
A. Preferred Stock:
The Company's Amended Certificate of Incorporation authorizes 5,000,000
shares of no par, non-liquidating value preferred stock, of which
1,000,000 shares have been designated the 1997 class A Convertible
Preferred Stock. The number of shares of the 1997 Class A shall be
limited to 1,000,000. The Board of Directors of the Company has the
authority to establish and designate any shares of stock in series or
classes and to fix any variations in the designations, relative rights,
preferences and limitations between series as it deems appropriate, by
a majority vote.
The shares of the 1997 Class A Convertible Preferred Stock shall have
no liquidation value, and shall be entitled to receive, out of any
funds of the Company at the time legally available for the declaration
of dividends, a per share participating dividend equivalent to that
declared and or paid with respect to a share of Common Stock.
In January 2005, by written consent of a majority of stockholders, the
Company changed its corporate domicile from Virginia to Nevada. Due to
Nevada requirements, the Company's preferred stock par value changed
from no par value to .001 par value. As a result of this change,
preferred stock for the years ended December 31, 2005 and 2004 was
$11,320 to $1,000.
B. Common Stock:
The authorized common stock of the Company consists of 10,000,000,000
shares of no par value common stock at December 31, 2005 and
2,000,000,000 at December 31, 2004.
In January 2005, by written consent of a majority of stockholders, the
Company adopted an amendment to the Corporations' Certificate of
Incorporation to increase the number of authorized shares of common
stock, from 2,000,000,000 to 10,000,000,000 shares.
In January 2005, by written consent of a majority of stockholders, the
Company changed its corporate domicile from Virginia to Nevada. Due to
Nevada requirements, the Company's common stock par value changed from
no par value to .001 par value. As a result of this change, common
stock for the years ended December 31, 2005 and 2004 were restated from
4,430,272,825 to 4,430,273 and 1,773,000,943 to 1 and from
respectively.
In February 2005, June 2005 and October 2005, the Company affected a
one-for-one thousand reverse stock split, and in January 2006, the
Company affected a one-for-one thousand reverse stock split restating
the number of common shares at December 31, 2004 from 167 to 1.
F-17
13. Related Party Transactions:
A. Employment Agreements
In July 2005 the Company renegotiated David E. Calkins September 2004,
employment contract. The new employment agreement is for five years,
has an annual salary of $138,012 and requires the company to continue
to fund the Variable Flexible Premium Universal Life Policy and to pay
legal expenses for actions which occurred while Mr. Calkins was an
officer of the Company. Mr. Calkins is no longer an Officer or Director
of the Company. In May 2005, David Calkins engaged the law firm of
Hinshaw and Culbert to defend himself in an action which occurred while
Mr. Calkins was an Office and Director of the Company. The employment
contract between Mr. Calkins and the Company requires the Company to
pay such legal bills. Through December 31, 2005 the Company has paid or
incurred $127,066 in fees to Hinshaw and Culbert.
In July 2005, the Company entered into a ten year employment contract
with F. Kay Calkins. Compensation will include an annual base salary of
$240,000.00 of which $60,000 is deferred, an incentive bonus plan based
on the EBITDA (earnings before interest, tax, depreciation and
amortization). The agreement includes severance payments upon
termination of employment.
In January 2005, the Company entered into a five year employment
contract with Marcia Sartori. Compensation will include an annual base
salary of $85,000 and an incentive bonus plan based on the EBITDA
(earnings before interest, tax, depreciation and amortization). The
agreement also includes severance payments upon termination of
employment. Ms. Sartori will hold the title of Vice President of
Operations. In December 2005 the Board of Directors voted a
discretionary bonus of $20,000 and $5,000 to the Chairman of the Board
and the Chief Operating Officer respectively for improving the
financial condition of the company. During 2005, the Company paid to
Stratford Financial Resources, LLC, a company owned by Catherine
Musselman, wife of Gary Musselman $15,990 for services rendered to the
Company. These services were related to maintaining corporate licenses
for the Company's PEO and insurance business as well as integrating the
sales function with various insurance providers.
In December 2005, the Company entered into a contract with Stratford
Financial Resources, LLC to provide sales services to the Company. Ms.
Musselman is a licensed insurance agent in all states where the Company
operates. Ms. Musselman, through her company, will be selling human
resource services of the Company and selling insurance benefits to
clients. Ms. Musselman's company will be compensated on commission only
basis for the sale of the Company's services.
B. Stock Base Compensation
The Company issued stock to certain officers, key employees, and
non-employee directors which consisted of Series "B" Preferred Stock
(Series "B" Stock). The maximum number of shares of the Company's
Series "B" Stock available for issuance was 1 million shares with a par
value of $0.001. Each share of the Series "B" Stock is convertible to
50 shares of Common Stock without the payment of any additional
consideration. Shares issued are compensation to the recipients.
F-18
Effective June 30, the Company authorized and issued 1,000,000 shares
of Series "B" Preferred Stock to officers and directors of the Company.
The Company determined compensation costs based on the fair value at
the grant date for its stock. The value of each share price was
determined to be .0277 representing $27,700 in total compensation.
On June 30, the holders of the Series "B" Stock elected to convert all
of their shares to 50,000,000 shares of Common Stock. As of December
31, 2005, taking into account for all reverses the number of Common
Shares outstanding is 50.
14. Comprehensive Income:
At December 31, 2005 and 2004 net income and comprehensive income were
the same.
15. Client Deposits
The Company had $0 and $826,598 in Deferred Revenue at December 31,
2005 and 2004 related to amounts prepaid for 2005 for services from a
single client. The Company executed a letter agreement in conjunction
with receipt of these funds that provides the funds be held in separate
trust account by the Company.
16. Restricted Cash
During the first quarter of 2005, the Company entered into an lease for
new office space. The landlord required the Company to secure its
tenant build out exposure with a standby letter of credit. The Company
secured this standby letter of credit with an interest bearing CD
(certificate of deposit) in the amount of $100,000. The value of the CD
on December 31, 2005 was $102,612.
During 2004, as part of the renewal process for one of its insurance
carriers and two state PEO (Professional Employer Organization)
licenses, the Company secured irrevocable letters of credit with
interest bearing CD's (certificate of deposits). The value of the CD on
December 31, 2004 was $306,506. During 2005, one state PEO
(Professional Employer Organization) license required the Company to
maintain an irrevocable letter of credit with interest bearing CD's
(certificate of deposits). The value of the CD on December 31, 2005 was
$77,243.
17. Subsequent Event
In January 2006, the Company affected a one-for-one thousand reverse
stock split restating the number of common shares of the Company at
December 31, 2005 from 4,430,273,499 to 4,430,273. All references to
average number of shares, shares outstanding and prices per share have
been restated retroactively to reflect the split.
On March 7, 2006, the Company authorized the issuance of 500,000 shares
of Series "C" Convertible Preferred Stock. Series "C" Convertible may
not be converted to Common Stock one year from its issuance date. The
stock will convert to $1.00 of Common Stock based on the closing bid
price of Common Stock on the day prior to the conversion to Common
Stock.
F-19
In March 2006, the Company completed the purchase the stock of World
Wide Personnel of Maine, Inc and United Personnel Services, Inc. The
effective date of the purchase was April 1, 2006 and March 7, 2006
respectively. The Company issued 500,000 shares of Series "C"
Convertible Preferred shares to the sole stockholder of United
Personnel Services, Inc. and World Wide Personnel Services of Maine,
Inc. The Series "C" Preferred Stock, in the aggregate, shall be
convertible, at the option of the holder, into such number of shares of
Common Stock as shall be equal to $500,000 based on the closing bid
price of the Common Stock as quoted on the OTC Bulletin Board on the
date of conversion. No Conversion can occur for a period of twelve
months from the date of issuance of the Series "C" stock. Both
companies are licensed Professional Employer Organizations operating in
the state of Maine. United Personnel was formed in 1999 and World Wide
Personnel of Maine, Inc was formed in 1987. Both companies offer full
service human resource management services for small and mid-sized
businesses. Combined these acquisitions increase the Company's work
site employees by approximately 600.
F-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.
Date: April 13, 2006
--------------
By: /s/ GARY A. MUSSELMAN
-----------------------------
Gary A. Musselman, President and Chief Executive Officer
Pursuant to the requirements of the Exchange Act, this report has been signed by
the following persons in the capacities and on the dates indicated.
Signature Title Date
By: /s/ F. KAY CALKINS
-----------------------
F. Kay Calkins Director April 13, 2006
--------------
By: /s/ GARY A. MUSSELMAN
-----------------------
Gary A. Musselman President, Chief Executive April 13, 2006
Officer, Director --------------
By: /s/ GARY A. MUSSELMAN
-----------------------
Gary A. Musselman Chief Financial Officer April 13, 2006
--------------