SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended March 31, 2002
OR
[_] TRANSITION REPORT UNDER SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO _______________
Commission File Number 0-29459
PACEL CORP.
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(Exact name of registrant as specified in its charter)
VIRGINIA 54-1712558
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification Number)
8870 RIXLEW LANE, SUITE 201, MANASSAS, VIRGINIA 20109-3795
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(Address of principal executive offices) (ZIP Code)
Registrant's telephone number, including area code: (703) 257-4759
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 day:
Yes [X] No [ ]
Transitional Small Business Disclosure Format (check one)
Yes [ ] No [X]
State the number of Shares outstanding of each of the issuer's classes of common
equity, as of the latest date:
As of March 31, 2002, there were 6,484,626 shares of the Registrant's common
stock outstanding.
PACEL CORP. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION (unaudited)
Item 1. Index to Consolidated Condensed Financial Statements F-1
Condensed Consolidated Balance Sheets F-2
Consolidated Condensed Statements of Income of Operations F-3
Consolidated Statements of Cash Flows F-4
Notes to Consolidated Condensed Financial Statements F-5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 8
PART II. OTHER INFORMATION 11
SIGNATURES 12
F-1
PACEL CORP. AND SUBSIDIARIES
Balance Sheet
(Unaudited)
March 31, December 31,
2002 2001
-------------------- -----------------
Unaudited Audited
ASSETS
Current assets:
Cash and cash equivalents $ 10,527 $ 65,761
Accounts receivable, net of allowance for doubtful accounts of $4,326
and $4,326 respectively 117,265 336,006
Inventory 63,025 63,029
Other receivables 34,414 36,684
-------------------- -----------------
Total current assets 225,231 501,480
-----------------
Property and equipment, net of accumulated depreciation of
$98,128 and $91,726 respectively 122,907 129,309
-------------------- -----------------
Non-current assets:
Note receivable 71,000 71,000
Goodwill - 407,049
Security deposits 25,359 10,122
-------------------- -----------------
Total non-current assets 96,359 488,171
Total assets $ 444,497 $ 1,118,960
==================== =================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 1,744,184 $ 1,596,581
Accrued expense 297,779 185,588
Loans payable officers-Stockholders 279,236 259,686
Notes payable 888,988 1,182,343
Notes payable bank 50,000 50,000
-------------------- -----------------
Total current liabilities 3,260,187 3,274,198
Long Term liabilities:
Convertible debentures 868,629 700,636
-------------------- -----------------
Total long term liabilities 868,629 700,636
Total liabilities 4,128,816 3,974,834
Minority interest Commitments:
Stockholders' equity (deficit)
Preferred stock, no par value, no liquidation value, 5,000,000
shares authorized, issued 1,000,000 shares 1997 class A
convertible preferred stock 11,320 11,320
Common stock - no par value, 650,000,000 and 650,000,000 shares
authorized in 2002 and 2001, respectively. 6,484,626 and 2,470,644
shares outstanding in 2002 and 2001, respectively 7,736,972 6,729,122
Cumulative currency translation adjustment (12,000) (11,000)
Deficit (11,420,611) (9,585,316)
Total stockholders' equity (deficit) (3,684,319) (2,855,874)
-------------------- -----------------
Total liabilities and stockholders' equity $ 444,497 $ 1,118,960
==================== =================
The accompanying notes are an integral part of the financial statements
F-2
PACEL CORP. AND SUBSIDIARIES
Statements of Operations
(Unaudited)
Three months Three months
Ended Ended
March 31, 2002 March 31, 2001
--------------------- ----------------------
Sales 221,168 $ 202,821
Direct Cost of Goods Sold 198,013 176,902
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Gross Profit 23,155 25,919
Operating costs and expenses:
Research and development 103,371 115,275
Depreciation & Amortization 6,402 6,755
Interest expense 35,295 12,830
Sales and Marketing 58,901 50,341
Financing Expenses 3,500 -
General and Administrative 1,243,932 386,040
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Total operating costs and expenses 1,451,401 571,241
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Loss before cumulative effect of accounting
change (1,428,246) (545,322)
Cumulative effect of accounting change (407,049) -
--------------------- ----------------------
Net loss $ (1,835,295) $ (545,322)
===================== ======================
Net (loss) per common share
Basic (0.56) (1.20)
Diluted (0.56) (1.20)
===================== ======================
Weighted Average shares outstanding
Basic 3,260,666 454,480
Diluted 3,260,666 454,480
===================== ======================
The accompanying notes are an integral part of the financial statements
F-3
PACEL CORP. AND SUBSIDIARIES
Statements of Cash Flows
(Unaudited)
2002 2001
----------------- --------------------
Cash flows from operating activities:
Net (loss) $ (1,835,295) $ (545,322)
Adjustments to reconcile net (loss) to net cash
(used in) provided by operating activities:
Cumulative effect of accounting change 407,049 -
Depreciation 6,402 6,755
Provision for Bad Debts 0 861
Other non cash items 832,850 139,922
Increase (Decrease) in Cash from changes in:
Accounts receivable 218,741 (31,707)
Other receivables 2,270 (16,780)
Inventory 4 (3,310)
Security deposits (15,237) 0
Prepaid expenses (4,798)
Accounts payable 147,603 159,590
Accrued expense 112,191 (27,367)
Loans Payable Officers-Stockholders 19,550 (119)
Net cash (used in) operating activities (103,872) (322,275)
----------------- --------------------
Cash flows from investing activities:
Purchase of property and equipment - (1,968)
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Net cash used in investing activities - (1,968)
----------------- --------------------
Cash flows from financing activities:
Repayment of Notes payable
(125,362) -
Notes payable convertible debenture 25,000 259,518
Proceeds from sale of common stock 150,000 54,215
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Net cash provided by financing activities 49,638 313,733
Effect of exchange rates on cash (1,000) 1,523
----------------- --------------------
Net increase (Decrease) in cash and cash equivalents (55,234) (8,987)
Cash and cash equivalents at beginning of year 65,761 36,356
----------------- --------------------
Cash and cash equivalents at end of period $ 10,527 $ 27,369
================= ====================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest 2,775 2,380
----------------- --------------------
The accompanying notes are an integral part of the financial statements
F-4
PACEL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
MARCH 31, 2002
1. Basis of Presentation
The unaudited financial statements included in the Form 10-QSB have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB and Item 310(b)
of Regulation SB. The financial information furnished herein reflects all
adjustments, which in the opinion of management are necessary for a fair
presentation of the Company's financial position, the results of operations and
cash flows for the periods presented.
Certain information and footnote disclosures normally contained in financial
statements prepared in accordance with generally accepted accounting principles
have been omitted, pursuant to such rules and regulations.
These interim statements should be read in conjunction with the audited December
31, 2001 consolidated financial statements and related notes included in the
Company's year ended certified financial statements. The results of operations
for the three months are not necessarily indicative of the operating results for
the year. The Company presumes that users of the interim financial information
herein have read or have access to the audited financial statements for the
preceding fiscal year and that the adequacy of additional disclosure needed for
a fair presentation may be determined in that context. The results of operations
for any interim period are not necessarily indicative of the results for the
full year.
2. Accounting for Business Combinations
In July 2001, the FASB issued Statements of Financial Accounting Standards
("Statement") No. 141, "Business Combinations" and No. 142, "Goodwill and Other
Intangible Assets" ("FAS 142"). These standards change the accounting for
business combinations by, among other things, prohibiting the prospective use of
pooling-of-interests accounting and requiring companies to stop amortizing
goodwill and certain intangible assets with an indefinite useful life. Instead,
goodwill and intangible assets deemed to have an indefinite useful life will be
subject to an annual review for impairment. The new standards generally were
effective for Pacel in the first quarter of 2002 and for purchase business
combinations consummated after June 30, 2001. Upon adoption of FAS 142 in the
first quarter of 2002, Pacel recorded a one-time, noncash charge of $407,049 to
reduce the carrying value of its goodwill. Such charge is nonoperational in
nature and is reflected as cumulative effect of an accounting change in the
accompanying consolidated statement of operations..
3. Subsequent events
a. In April 2002, David Calkins president, director and F. Kay Calkins director
of Pacel were granted a noncash option to purchase 100,000,000 shares of the
company's common stock in exchange for the a loan made to the company in 1999
amounting to $124,000 and securing and loaning to the Company, a personal line
of credit of up to $3,000,000 using the stock as collateral. Our ability to draw
on this line is based on the volume of the Common Stock multiplied by the VWAP
for the thirty days preceding funding must be a minimum of $75,000. The maximum
amount of collateral at any closing may not exceed 4.9% of the issued and
outstanding shares of the Company. Loan to value is 35%. The interest rate is
prime+2 payable in cash quarterly and financing expense of 9% of the draws. The
Company will pay these expenses directly. The terms and conditions set fourth in
the agreement we may not be able to meet.
b. On April 5, 2002 the Company effected a one-for-one hundred reverse split
restating the number of common shares as of March 31, 2002 from 648,462,600 to
6,484,626 and December 31, 2001 from 247,064,400 to 2,470,644. All references to
average number of shares outstanding and prices per share have been restated
retroactively to reflect the split.
F-5
FORWARD-LOOKING STATEMENTS
When used in this document and in our filings with the Securities and
Exchange Commission, in our press releases or other public or shareholder
communications, and in oral statements made with the approval of an authorized
executive officer, the words or phrases "will likely result," "are expected to,"
"will continue," "is anticipated," "estimate," "project" or similar expressions
are intended to identify "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. These statements are subject
to certain risks and uncertainties, which could cause our actual results to
differ materially from our historical results and those we presently anticipate
or project. You should not place undue reliance on any forward-looking
statements, which speak only as of the date made. Various factors could affect
our financial performance and could cause our actual results for future periods
to differ materially from any opinions or statements we express with respect to
future periods in any current statement. These factors include, but are not
limited to, the following: increases in our operating expenses outpacing our
revenues; our inability to expand our sales and distribution channels; the
failure of strategic relationships to implement and promote our software
products; the failure of third parties to develop software components necessary
for the integration of applications using our software; and the use of our
intellectual property by others.
We do not undertake--and we specifically decline any obligation--to
publicly release the result of any revisions which may be made to any
forward-looking statements to reflect events or circumstances after the date of
such statements or to reflect the occurrence of anticipated or unanticipated
events.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
GENERAL BUSINESS
Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Management's discussion and analysis of results of operations and financial
condition, include a discussion of liquidity and capital resources. The
following discussion (presented in hundreds, except per share amounts) should be
read in conjunction with the consolidated financial statements and notes
thereto.
Overview
PACEL's mission is to provide consumers and businesses with a full suite of
products and services that provide secure connectivity to and from the Internet,
including e-commerce transactions and personnel and company data security. To
that end PACEL. and its subsidiaries have been developing products and methods
that meet that need for both families and companies. The ChildWatch software
suite of programs puts the controls for family computer usage, including
internet filtering, access controls and community support for finding missing
and abducted children in the hands of the parents and is readily available at
Zany Brany and Electronic Boutique stores nationally. "e-Centurion" our latest
technology advancement (patent pending) software product will provide complete
file and data security. This new software is designed to guard both the Inner
Door (full protection on your PC from existing and new viruses), i.e., the Love
Bug, and someone trying to penetrate your PC and by-pass your password, and the
Outer Door (full Intruder protection from Internet data collection devices and
programs or hackers). Our current goal is to utilize and extend these
technologies in the production of derivative products to provide secure Internet
connectivity and enhanced desktop security for customers in the home and
business marketplaces.
8
RESULTS OF OPERATIONS
Three Months Ended March 31, 2002 Compared to Three Months Ended March 31, 2001
Revenues increased 9% to $221,168 in 2002 compared to $202,821 in 2001. The
increase in revenues is directly attributed to the sales generated from
Advantage Systems. FCL accounted for 24% of sales, Advantage 69% of sales and
E-Bstore 7% of sales. The majority of our sales came from hardware sales from
Advantage. The sales from FCL fell sharply in the first quarter compared to the
first quarter of 2001. RFP's from Nato were not approved in the fourth quarter
of 2001 in so delaying those sales to the second quarter of 2002. The Company is
focusing it's efforts on expanding it's hardware sales in the United States as
well as through existing NATO contracts. The Company continues to believe that
the Child Watch software has sales potential when we can obtain adequate
financing for the marketing.
Cost of Goods Sold increased 12% to $198,013 in 2002 compared to $176.902
in 2001. The increase is directly attributed to the Advantage division. The sale
of hardware generates a smaller gross profit than our other services.
Research and Development expenses consist principally of salaries for
software developers, outside consulting, related facilities costs, and expenses
associated with computer equipment used in software development. Research and
development expenses decreased 10% to $103,371 in 2002 compared to $115,275
2001. Our lack of funding has forced us to cut further research and development
on E-Centurion and as well as development of new products and enhancements. The
Company believes that research and development activities are crucial to
maintaining a competitive edge in markets characterized by rapid rates of
technological advancements. Without adequate financing we may not be able to
stay on the cutting edge of technology.
Sales and marketing expenses include salaries and benefits, sales
commissions, travel expenses, and related facilities costs for our sales,
marketing, customer support, and distribution consultants. Sales and marketing
expenses also include the costs of programs aimed at increasing revenue, such as
advertising, trade shows, public relations, and other market development
programs. Sales and marketing expenses increased 17% to $58,901 in 2002 compared
to $50,341 in 2001. The increase is attributed to the normal increases in
salaries and commission expenses related to the sales in Advantage.
General and administrative expenses consist principally of salaries and
benefits, travel expenses, and related facilities costs for finance and
administration, human resources, legal, information services, and executive
personnel of E-Business-Stor.Com, Inc. and PACEL. General and administrative
expenses also include outside legal and accounting fees, and expenses associated
with computer equipment and software used in the administration of the business.
General and administrative expenses increased 322% $1,243,932 to in 2002
compared to $386,040, in 2001. The increase in administrative expenses is
directly related to the acquisition of Advantage Systems administrative salaries
and overhead expenses. In addition we issued $826,000 worth of stock for
services instead of cash. The cost of the services would have been reduced if we
had paid for the services in cash in lieu of stock.
Interest expense and financing cost Increased 302% to $38,795 in 2002
Compared to $12,830 in 2001. The increase in interest expense is due the
convertible notes not being converted into common stock because of the low price
of our common stock.
Net (Loss) Before the Cumulative Effect of an Accounting Change
Pacel's net loss before the cumulative effect of an accounting change
increased to $1,428,246 in 2002, compared to $545,322 in 2001. Pacel's net loss
before the cumulative effect of an accounting change increased due to additional
9
overhead expenses related to the acquisition of Advantage in September 2001 and
an increase in interest expense. On several occasions we issued stock in lieu of
cash for various services with deep discounted rates compared to the cash value
of the services.
Three Months Ended March 31, 2002 Compared to Three Months Ended March 31, 2001
Net cash used from operating activities for the three months March 31, 2002
and 2001 was $103,872 and $322,275 respectively. The use of cash in operating
activities for the three months ended March 31, 2002 resulted primarily from the
short fall in sales off set by the reduction in of accounts receivable and the
increase in accounts payable.
Net cash used in investing activities for the three months ended March 31,
2002 and 2001 was $-0- and $1,968 respectively. This decrease was due to lack of
funds available for investing activities.
Net cash provided by financing activities for the three months ended March
31, 2002 and 2001 was $49,638 and $313,733. respectively. The decrease in
financing activities was attributable to repayment of notes payable of $125,362
and our inability to file an SB-2 in 2001.
At March 31, 2002, we had $10,527 in cash and cash equivalents compared to
$27,369 at March 31, 2001. We will continue to have significant capital
requirements due to expected increases in our capital expenditures and sales and
marketing commitments consistent with our anticipated growth in operations,
infrastructure and personnel. We currently anticipate that we will continue to
experience significant growth in our operating expenses for the foreseeable
future and that our operating expenses will be a material use of our cash.
In December 2001, we entered into a $5,000,000 Equity line of Credit
arrangement. Under the terms of the equity line agreement, the Company will have
the right to sell up to $5 million of its common stock. The Company has sole
discretion, subject to certain volume limitations and conditions, to draw down
upon such funds, as its capital needs dictate. We are in the process of filing
an SB-2 to register the stock. There are no guarantees that the $5,000,000 will
be available to us when we need it. The terms and conditions set fourth in the
agreement we may not be able to meet, or the available credit due to those terms
and conditions may not be sufficient to cover our immediate cash flow needs. We
do not expect to have access to these funds until the third quarter of 2002.
In April 2002, David Calkins president, director and F. Kay Calkins
director of Pacel were granted a noncash option to purchase 100,000,000 shares
of the company's common stock in exchange for the a loan made to the company in
1999 amounting to $124,000 and securing and loaning to the Company, a personal
line of credit of up to $3,000,000 using the stock as collateral. Our ability to
draw on this line is based on the volume of the Common Stock multiplied by the
VWAP for the thirty days preceding funding must be a minimum of $75,000. The
maximum amount of collateral at any closing may not exceed 4.9% of the issued
and outstanding shares of the Company. Loan to value is 35%. The interest rate
is prime+2 payable in cash quarterly and financing expense of 9% of the draws.
The Company will pay these expenses directly. The terms and conditions set
fourth in the agreement we may not be able to meet. To date we have drawn
$165,500 net of expenses.
Our cash requirements for funding our operations have greatly exceeded cash
flows from operations. We continually satisfy our capital needs through equity
financing. Our liabilities consist of over extended accounts payable, payroll
taxes, loans from officers and officer's compensation.
10
We continually look for strategic relationships that will enhance our
products and services. Due to the present economic conditions in technology and
our lack of available cash flow it is becoming harder to develop these
relationships. If we do not develop these relationships and find additional
sources of financing will hinder our ability to continue as a going concern.
We expect to continue our investing activities, including expenditures for
computer systems for research and development, sales and marketing, product
support, and administrative staff, as funds become available.
In May 2002, we signed a letter of intent for the acquisition of a human
resource support company, for $7,500,000 in Pacel's common stock equal to 60% of
the issued and outstanding shares. We believe that this acquisition will expand
the type of services we can offer. In addition we will have a direct marketing
channel for our IT consulting, System Security, hardware and Web based
technologies. We are still in the process of performing due diligence.
Part II
Item 1. Legal Proceedings.
The Company knows of no legal proceedings to which it is a party or to
which any of its property is the subject which are pending, threatened or
contemplated or any unsatisfied judgments against the Company.
Item 2. Changes in Securities and Use of Proceeds
None.
Item 3. Defaults in Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information
Subsequent to March 31, 2002, the following directors resigned due to
personal reasons: Keith P. Hicks and Corey M. LaCross.
11
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Pacel, Corporation
(Registrant)
Date: May 20, 2002
/s/ David F. Calkins
-----------------------------------
David F. Calkins, CEO & Chairman
12