**UNITED STATES SECURITIES AND EXCHANGE COMMISSION**

Washington, D.C.20549

 

**Form 10-QSB**

 

**QUARTERLY REPORTPURSUANT TO SECTION 13 OR 15(d)**

**OF THE SECURITIESEXCHANGE ACT OF 1934**

 

For the quarterlyperiod ended March 31, 2004

 

OR

 

**TRANSITION REPORTPURSUANT TO SECTION 13 OR 15(d)**

**OF THE SECURITIESEXCHANGE ACT OF 1934**

For the transitionperiod from_________, 20__, to________, 20__.

 

Commission FileNumber: 000-31395

----------------------------------------------

 

**VillageEDOCS**

**--------------------**

 

| California                                                      | 33-0668917                                       |
|-----------------------------------------------------------------|--------------------------------------------------|
| -----------------------------------------------------           | ------------------------------------------------ |
| (State or Other  Jurisdiction of Incorporation or Organization) | I.R.S. Employer  Identification Number           |
|                                                            |                                             |
| 14471 Chambers  Road, Suite 105, Tustin, California             | 92780                                            |
| -----------------------------------------------------           | ----------------------------                     |
| (Address of  principal executive offices)                       | (Zip Code)                                       |

 

 

Registrant's telephone number, including areacode:  (714) 734-1030

 

Indicate by check mark whether the Registrant (1) has filedall reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the Registrant was required to file such reports), and has been subject tosuch filing requirements for the past 90 days.

 

| X  | YES    |   | NO     |
|---------|--------|--------|--------|
| ----    |   | ----   |   |

 

 

There were 35,911,544  shares of the Registrant's commonstock outstanding as of April 30, 2004. 

 

| Transitional Small Business Format (check one) | YES    |   | NO     | X  |
|------------------------------------------------|--------|--------|--------|---------|
|                                           |   | ---    |   | ---     |

Indicate bycheck mark whether the Registrant is an accelerated filer (as defined in Rule12b-2 of the Act

 

|   | YES    |   | NO     | X  |
|--------|--------|--------|--------|---------|
|   |   | ---    |   | ---     |

----

**VillageEDOCS**

# Index

| ** ** | ** **                         | Page No. |
|------------|------------------------------------|----------|
| ** ** | **PART I. FINANCIAL  INFORMATION** |     |   |
|       |                               |     |   |   |   |
|       | Item 1.                            |     | Consolidated Financial Statements |   |   |
|       |                               |     | Consolidated Balance Sheet as of March 31, 2004  (Unaudited) |   | 1 |
|       |                               |     | Consolidated Statements of Operations for the three months  ended March 31, 2004 and 2003 (Unaudited) |   | 2 |
|       |                               |     | Consolidated Statements of Cash Flows for the three months  ended March 31, 2004 and 2003 (Unaudited) |   | 3 |
|       |                               |     | Notes to Unaudited Consolidated Financial Statements |   | 5 |
|       | Item 2.                            |     | Management's Discussion and Analysis of Financial  Condition and  Results of Operations |   | 17 |
|       | Item 3.                            |     | Controls and Procedures |   | 22 |
|       |                               |     |   |   |   |
| ** ** | **PART II. OTHER  INFORMATION**    |     |   |
|       |                               |     |   |   |   |
|       | Item 1.                            |     | Legal Proceedings |   | 23 |
|       | Item 2.                            |     | Changes in Securities and Use of Proceeds |   | 23 |
|       | Item 3.                            |     | Defaults Upon Senior Securities |   | 24
 

Item 4.

 

Submission of Matters to a Vote of Security Holders

 

24

 

Item 5.

 

Other Matters

 

24

 

Item 6.

 

Exhibits and Reports on Form 8-K

 

24

 

 

 

Signatures

 

26
****
**  **
**VillageEDOCS and subsidiary****Consolidated Balance Sheet****(Unaudited)****March 31,****2004**** -------------------------- ****ASSETS**Current assets:     Cash $                    375,302            Accounts receivable, net of allowance for doubtful                accounts of $32,000                       373,394      Inventory                           8,889            Other current assets                         57,234  --------------------------                 Total current assets                       814,819       Property and equipment, net                       374,576       Web site development costs, net                         34,236 Other assets                           6,888 Goodwill                    2,547,077  --------------------------  $                 3,777,596  =============== **LIABILITIES AND STOCKHOLDERS' DEFICIT**      Current liabilities:           Accounts payable $                    219,400            Accrued expenses                       537,297      Current      portion of notes payable to related parties 140,000             Current portion of capital lease obligations                         10,666  --------------------------                 Total current liabilities                       907,363       Capital lease obligations, net of current portion                           5,801 Notes payable                         10,513       Convertible notes and accrued interest           payable to related parties, net of unamortized            debt discount of $413,663                    5,148,702  --------------------------               Total liabilities                    6,072,379  --------------------------       Commitments and contingencies      Stockholders' deficit:      Common stock, no par value:       Authorized -- 90,000,000 shares              Issued and outstanding -- 35,911,544 shares                    7,447,883       Additional paid-in capital                    2,489,806       Accumulated deficit                (12,232,472) --------------------------       Total stockholders' deficit                  (2,294,783) --------------------------  $                 3,777,596  ===============       See accompanying notes to unaudited consolidated financial statements.******VillageEDOCS and subsidiary****Consolidated Statements of Operations****For the Three Months Ended March 31, 2004 and 2003****(Unaudited)****2004****2003**** --------------------------- **** --------------------------- **Net sales $               915,445  $               438,790 Cost of sales                  344,293                   213,198  --------------------- ---------------------                Gross profit                  571,152                   225,592  --------------------- ---------------------            Operating expenses:            Product and technology               development                    91,073                   136,294             Sales and marketing                  167,754                   202,225             General and administrative                  418,807                   266,258             Depreciation and amortization                    41,001                     33,853  --------------------- ---------------------                Total operating expenses                  718,635                   638,630  --------------------- ---------------------                Loss from operations                 (147,483)                 (413,038)Interest expense                 (105,276)                 (294,285) --------------------- ---------------------                Loss before provision for                    income taxes                 (252,759)                 (707,323)      Provision for income taxes                      9,158                          800  ---------------------  ---------------------                 Net loss $              (261,917) $              (708,123) =============  =============       Basic and diluted loss available to         common stockholders per common   share $                    (0.01) $                    (0.02) =============  =============       Weighted average shares outstanding -           basic and diluted             33,543,178              30,498,583  =============  =============       See accompanying notes to unaudited consolidated financial statements.
** **
**VillageEDOCS and subsidiary****Consolidated      Statements of Cash Flows****For the Three Months Ended March 31, 2004 and 2003****(Unaudited)****2004****2003****------------------------****------------------------**      Cash Flows from Operating Activities:   Net loss $              (261,917)       $                 (708,123)         Adjustments to reconcile net loss to net cash            used in operating activities:               Depreciation and amortization                          41,001                               33,853                Estimated fair market value of stock options issued                   to employees and non-employees for services rendered                            5,310                                         -                Common stock issued to employees and                   non-employees for services rendered                                    -                             116,217                Imputed interest expense on convertible debentures                  13,861                             256,964                Provision for doubtful accounts receivable                                    -                                 5,852                Common stock issued for settlement of debt                                    -                               24,000                Changes in operating assets and liabilities, net of acquisition:            Accounts receivable                  130,587                             (46,904)            Inventories                            9,657                                         -             Other assets                         (57,052)                            (42,700)            Accounts payable                           (1,223)                              14,616                   Accrued expenses and other                  108,482                               73,290 ------------------------------------------------                     Net cash used in operating activities                         (11,294)                          (272,935)------------------------------------------------      Cash Flows from Investing Activities:         Purchases of property and equipment                           (4,608)                            (37,580)         Cash paid for acquisition of TBS              (1,500,000)  -          Cash acquired from acquisition of TBS                          70,631   -          Costs incurred for purchase of TBS                 (136,029)  -  ------------------------ ------------------------                     Net cash used in investing activities              (1,570,006)                            (37,580) ------------------------ ------------------------      Cash Flows from Financing Activities:         Proceeds from convertible notes payable to related parties               1,895,000                             317,000          Principal payments under capital leases                           (2,551)                            (20,037)   Payment on notes payable                              (789)                                        -    Proceeds from exercise of      warrants  240  -   ------------------------ ------------------------                     Net cash provided by financing activities               1,891,900                             296,963  ------------------------ ------------------------   Net change in cash                  310,600                             (13,552)   Cash, beginning of period                          64,702                               53,327 ------------------------------------------------   Cash, end of period $               375,302        $                     39,775  ==============  ==============       Supplemental disclosure of cash flow information -         Cash paid during the period for:            Interest $                        1,546        $                          333  ==============  ==============             Income taxes      $                       800       $                          800  ==============  ============== continued.
 
      Supplemental Schedule of Noncash Investing and Financing Activities:         Issuance of common stock as acquisition cost$                          35,200   ============           Issuance of notes payable in acquisition$                     2,100,000   ============     Goodwill generated      in acquisition$                    (2,547,200)  ============           Issuance of common stock in acquisition$                        440,000  ============   Debt assumed in      acquisition$151,302  ============     Debt discount in      issuance of convertible notes payable to related party$427,524    ============                See accompanying notes to unaudited consolidated financial statements. 
 

**VillageEDOCS**

 

**Notes to Unaudited Consolidated Financial Statements -March 31, 2004**

 

 

**NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

** **

**1.          Management'sRepresentation**

 

The management of VillageEDOCS (the "Company") without audithas prepared the financial statements included herein.  The accompanyingunaudited financial statements have been prepared in accordance with accountingprinciples generally accepted in the United States of America for interimfinancial information.  Certain information and note disclosures normallyincluded in the financial statements prepared in accordance with accountingprinciples generally accepted in the United States of America have beenomitted.  In the opinion of the management of the Company, all adjustmentsconsidered necessary for fair presentation of the financial statements havebeen included and were of a normal recurring nature, and the accompanyingfinancial statements present fairly the financial position as of March 31, 2004,and the results of operations and cash flows for the three months ended March31, 2004 and 2003.

 

It is suggested that these unaudited financial statements beread in conjunction with the audited financial statements and notes thereto forthe year ended December 31, 2003, included in the Company's Annual Report onForm 10-KSB filed with the Securities and Exchange Commission on March 29, 2004. The interim results are not necessarily indicative of the results for a fullyear.

 

**2.          Background,Organization and Basis of Presentation**

 

VillageEDOCS was incorporated in 1995 in Delaware andreincorporated in California in 1997. The Company develops and marketsinternet-enabled fax services to organizations throughout the United States andinternationally.  On February 17, 2004, the Company acquired Tailored BusinessSystems, Inc. ("TBS").  TBS provides various programming, processingand printing services to governmental entities, including installing software,hardware, printing and mailing of property tax forms.  The unauditedconsolidated financial statements include the accounts of the Company and TBS, itswholly owned subsidiary, since February 17, 2004.   All significant inter-company transactions andbalances have been eliminated in consolidation.

 

**3.          GoingConcern**

 

The accompanying financial statements have been preparedassuming that the Company will continue as a going concern. The Company has aworking capital deficit and has incurred significant losses from operations ineach year since inception.  The Company's losses are continuing and areexpected to continue until such time as the Company is able to sufficientlyexpand both its internet-enabled fax service business and its governmentbilling and accounting hardware, software and services business. 

 

The Company's success is dependent upon numerous items,certain of which are the successful growth of revenues from its products andservices, its ability to obtain new customers in order to achieve levels ofrevenues adequate to support the Company's current and future cost structure,and its success in obtaining financing for equipment and operations, for whichthere is no assurance. Unanticipated problems, expenses, and delays arefrequently encountered in establishing and maintaining profitable operations. These include, but are not limited to, competition, the need to developcustomer support capabilities and market expertise, setbacks in productdevelopment, technical difficulties, market acceptance and sales andmarketing.  The failure of the Company to meet any of these conditions couldhave a materially adverse effect upon the Company and may force the Company toreduce or curtail operations. Although management strongly believes that itsoperations will begin generating profits during 2004, no assurance can be giventhat the Company can achieve or maintain profitable operations.

 

Until sufficient revenue levels are achieved, the Companywill require additional financing to support its operations. Such sources offinancing could include capital infusions, additional equity financing or debtofferings. Management plans to obtain convertible debt and equity financingfrom existing shareholders and equity financing from new shareholders duringthe remainder of 2004.  Management is actively pursuing both of these financingarrangements.  If the planned financings are obtained, the Company believes itwill have adequate cash to sustain operations until it achieves sustainedprofitability.  There can be no assurance that funding will be available onacceptable terms, if at all, or that such funds, if raised, would enable theCompany to achieve and maintain profitable operations.

 

These factors, among others, raise substantial doubt aboutthe Company's ability to continue as a going concern.  The financial statementsdo not include any adjustments to reflect the possible future effects on therecoverability and classification of assets or the classification of liabilitiesthat might result from the outcome of these uncertainties.

 

**4.         Summaryof Significant Accounting Policies**

 

Segments of an Enterprise andRelated Information 

 

TheCompany has adopted Statement of Financial Accounting Standards ("SFAS") No. 131, "*Disclosures about Segments of anEnterprise and Related Information*". SFAS No. 131 requires the Companyto report information about segments of its business in its annualfinancial statements and requires it to report selected segment informationin its quarterly reports issued to shareholders. SFAS No. 131 also requires entity-widedisclosures about the products and services an entity provides, the materialcountries in which it holds assets and reports revenues and its majorcustomers. The Company's two reportable segments are managed separately basedon fundamental differences in their operations. Since February 17, 2004, theCompany has operated in the following two reportable segments: 

(a) Electronic document delivery services. 

 

(b) Government accounting products and services. 

TheCompany evaluates performance and allocates resources based upon operatingincome. The accounting policies of the reportable segments are the same asthose described in this summary of significant accounting policies (see Note 11).

 

Concentration of Credit Risk

 

TheCompany extends credit to its customers and performs ongoing credit evaluationsof such customers.  The Company does not obtain collateral to secure itsaccounts receivable.  The Company evaluates its accounts receivable on aregular basis for collectibility and provides for an allowance for potentialcredit losses as deemed necessary.  At March 31, 2004, the Company has recordedan allowance for doubtful accounts of approximately $32,000.  No single customeraccounted for more than 10% of accounts receivable at March 31, 2004.  Nosingle customer accounted for more than 10% of total sales for the three monthsended March 31, 2004 and 2003.   

 

Use of Estimates in the Preparation of FinancialStatements

 

The preparation of financialstatements in conformity with accounting principles generally accepted in theUnited States of America requires management to make estimates and assumptionsthat affect the reported amounts of assets and liabilities and disclosure ofcontingent assets and liabilities at the date of the financial statements andthe reported amounts of revenues and expenses during the reporting period.Significant estimates made by management are, among others, the realizabilityof accounts receivable, property and equipment and goodwill, and valuation of deferred tax assets.   Actual results coulddiffer from those estimates.

 

Revenue Recognition

 

The Company's electronic documentdelivery service provides internet-enabled fax services to businesses and chargesfor these services on either a per-page delivered or per-minute used basis.Service revenues are recognized when the services are performed.   Governmentaccounting products and services revenues are recognized at the time theproduct is shipped or the time the service is performed.  Revenue from prepaid annualmaintenance contracts is recognized on a monthly basis throughout the term of eachcontract.

 

Risks andUncertainties

 

The Company operates inhighly competitive industries that are subject to intense competition,government regulation and rapid technological change.  The Company's operationsare subject to significant risks and uncertainties including financial,operational, technological, regulatory and other risks associated with anexpanding business, including the potential risk of business failure.

 

Loss per Share

 

Basic loss per share iscomputed by dividing loss available to common shareholders by the weightedaverage number of common shares assumed to be outstanding during the period ofcomputation. Diluted loss per share is computed similar to basic loss per shareexcept that the denominator is increased to include the number of additionalcommon shares that would have been outstanding if the potential shares had beenissued and if the additional common shares were dilutive.  All potentiallydilutive shares, 20,497,732 and 14,422,334 as of March 31, 2004 and 2003,respectively, have been excluded from diluted loss per share, as their effectwould be anti-dilutive for the periods ended March 31, 2004 and 2003.

 

Goodwill and Other Intangible Assets

 

The Company has adopted SFAS No. 142 "*Goodwill and other Intangible Assets.*" Under SFAS No. 142, goodwill associated with acquisitions consummated after June30, 2001 is not to be amortized, and effective January 1, 2002, goodwill andother intangible assets with indefinite lives are no longer subject to periodicamortization but are instead reviewed annually for impairment, or morefrequently if impairment indicators arise.  As of March 31, 2004, theCompany has not yet determined the valuation date to perform an impairment teston goodwill.

 

Identifiable assets and liabilities acquired in connection with businessacquisitions accounted for under the purchase method are recorded at theirrespective fair values.  Deferred income taxes have been recorded to theextent of differences between the fair value and the tax basis of the assetsacquired and liabilities assumed.

 

Long-Lived Assets

In the event that facts and circumstances indicate that equipment or otherlong-lived assets may be impaired, an evaluation of recoverability would beperformed.  If an evaluation is required, the estimated future discountedcash flows associated with the asset are compared to the asset's carrying amountto determine if an impairment charge is necessary.  The amount oflong-lived asset impairment, if any, is charged to operations in the period inwhich long-lived asset impairment is determined.  At March 31, 2004, thereis no impairment of the long-lived assets.  There can be no assurance,however, that market conditions will not change or demand for the Company'sservices will continue, which could result in impairment of long-lived assets inthe future.

 

Inventory

Inventory consists primarily ofsupplies, forms and envelopes and is stated at the lower of cost (usingfirst-in, first-out method) or market.

 

Comprehensive Income

The Company has no items ofcomprehensive income.

 

Stock-Based Compensation

The Company accounts fornon-employee stock-based compensation under Statement of Financial AccountingStandards ("SFAS") No. 123  "*Accounting For Stock-BasedCompensation*."  SFAS No. 123 defines a fair value based method ofaccounting for stock-based compensation.  However, SFAS No. 123 allows anentity to continue to measure compensation cost related to stock and stockoptions issued to employees using the intrinsic method of accounting prescribedby Accounting Principles Board Opinion No. 25 ("APB 25"), "*Accountingfor Stock Issued to Employees*." Under APB 25, compensation cost, if any, isrecognized over the respective vesting period based on the difference, on thedate of grant, between the fair value of the Company's common stock and thegrant price. Entities electing to remain with the accounting method of APB 25must make pro forma disclosures of net income and earnings per share, as if thefair value method of accounting defined in SFAS No. 123 had been applied.

 

In December 2002, SFAS No. 148, "*Accountingfor Stock-Based Compensation - Transition and Disclosure*", was issued. SFAS No. 148 amends SFAS No. 123 to provide alternative methods of transitionfor a voluntary change to the fair value based method of accounting forstock-based employee compensation.  In addition, SFAS No. 148 amends thedisclosure requirements of SFAS No. 123 to require prominent disclosures inboth annual and interim financial statements about the method of accounting forstock-based employee compensation and the effect of the method used on reportedresults.  The provisions of SFAS No. 148 are effective for financial statementsfor fiscal years ending after December 15, 2002.  The Company adopted thedisclosure provisions of SFAS No. 148 in these financial statements.  TheCompany does not anticipate adopting the fair value based method of accountingfor stock-based compensation.

 

At March 31, 2004, the Company has two stock-basedemployee compensation plans.  The Company accounts for those plans under therecognition and measurement principles of APB 25, and related interpretations(see Note 8).  During the three months ended March 31, 2004 and 2003, nostock-based employee compensation cost is reflected in the accompanyingunaudited statements of operations, as all options granted under those planshad exercise prices equal to or greater than the market value of the underlyingcommon stock on the date of grant.  The following table illustrates the effecton net loss and loss per share if the Company had applied the fair valuerecognition provisions of SFAS No. 123 to stock-based employee compensation:

 

 

 

Three Months  Ended March 31,

 

 

2004

2003

 

 

 

 

 

 

 

Net loss as reported

$ (261,917)

$ (708,123)

 

 

 

 

 

 

 

 

 

Deduct:  Total stock-based employee compensation expense  under APB 25

 

 

 

 

 

 

--   

 

--   

 

 

 

 

 

 

 

 

 

Add:  Total stock-based employee compensation expense  under fair value

based method for all awards, net of related tax effects

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(315,537)

 

 

(279,541)

 

 

 

 

----------------

----------------

 

 

 

 

 

 

 

 

 

Pro forma net loss

  $ (577,454)

$ (987,664)

 

 

 

 

==========

==========

 

 

 

Basic and diluted loss per share - as reported

 

 

 

 

 

$          (0.01)

$          (0.02)

 

 

 

 

==========

==========

 

 

 

Basic and diluted loss per share - pro forma

 

 

 

 

 

$          (0.02)

$          (0.03)

 

 

 

 

==========

==========

 

 

 

 

 

 

 

 

 

 

 

Web Site Development Costs

During the three months ended March31, 2004, the Company did not capitalize any costs related to the web site inaccordance with the Emerging Issues Task Force Issue No. 00-2, "*Accountingfor Web Site Development Costs.*"  During each of the three monthsended March 31, 2004 and 2003, the Company recorded amortization of web sitedevelopment costs of $8,972.

 

Advertising

 

The Company expenses alladvertising costs as incurred.  Advertising costs were $14,641 and $33,220 forthe three months ended March 31, 2004 and 2003, respectively.

 

Warranty costs

Government accounting products andservices offers a one year and a 90-day warranty period for customersafter installation for certain services.  Management has determined thatwarranty claims are not material to the financial statements as of March 31,2004.

 

 

**5.             Acquisitionof TBS**

 

On February 17, 2004, the Companypurchased 100% of the issued and outstanding capital stock of TBS from StephenA. Garner and James L. Campbell.

 

The Company purchased TBS with $1.5million in cash, convertible secured promissory notes totaling $600,000, and 11million restricted shares of the Company's common stock.   Payment of 4,400,000(or 40%) of the shares were made at the closing, and payment of 6,600,000 (or60%) of the shares is contingent upon TBS meeting certain net revenue goals ineach of the first three fiscal years following the closing and, therefore, willtake place over a three-year period.   The Company's common stock was valued at$0.10 per share, the average closing bid price of the Company's common stockfor the thirty-day period ended February 16, 2004.   

 

The acquisition has been accountedfor using the purchase method of accounting. The Company funded the cash portionof the purchase price of TBS with the proceeds of a $1.7 million convertiblesecured promissory note offering subscribed to by Mr. and Mrs. Williams (seeNote 7).

 

The terms of the purchase were theresult of arms-length negotiations.  Neither of the TBS shareholders waspreviously affiliated with VillageEDOCS.

 

The Company, in connection with the acquisition of TBS,has incurred approximately $60,000 in consulting expenses to an unrelated thirdparty (paid during February 2004 in a combination of cash and 220,000 shares ofcommon stock issued in March 2004 valued at $0.10 per share), $76,000 in compensation to an employee(paid, pursuant to his employment agreement and incremental to his base salary,during February 2004 in a combination of cash and 132,000 shares of commonstock issued in March 2004 valued at $0.10 per share) and $53,149 in other acquisition-related costsincluding, but not limited to, expenses incurred for legal, accounting, andtravel.

 

Thepurchase price has been determined as follows:

 

 

Cash

$           1,500,000

 

Convertible  secured promissory notes

           600,000

 

Common stock  (4,400,000 shares)

             440,000

 

Acquisition costs  (including (352,000 shares)

           189,143

 

 

-------------------

 

 

$          2,729,143

 

 

=============

 

 

 

 

The following represents anallocation of the purchase price over the historical net book value of theacquired assets and liabilities of TBS as of February 17, 2004, the acquisitiondate:

 

 

Cash

$          70,631  

 

Accounts receivable

          305,533 

 

Inventories

            18,546  

 

Property and  equipment

           254,287 

 

Accounts payable  and accrued expenses

             (315,629)

 

Notes payable

         (151,302)

 

 

-----------------

 

Net assets

         182,066 

 

 
   
 

Goodwill and other intangible assets

       2,547,077  

 

 

-----------------

 

 

$     2,729,143  

 

 

==========

 

 

 

 

 

This allocation is preliminary andmay be subject to change upon evaluation of the fair value of TBS's acquiredassets and liabilities as of the acquisition date as well as the potentialidentification of certain intangible assets.  The Company is in the process ofanalyzing the components of the intangible assets it acquired and willdetermine the final purchase price allocation during 2004.

 

The unaudited pro forma combined historicalresults, as if TBS had been acquired January 1, 2003, are estimated as follows: 

 

 
 

 

                        For the Three  Months Ended

 
 

 

March 31, 2004

March 31, 2003

 
 

 

-------------------------------

----------------------------

 
Net sales

 

 $                      1,476,731  

 $                     1,365,213 

 
Net loss

 

 $                        (200,162)

 $                      (634,747)

 
Weighted average common

 

 

 

 
shares outstanding:

 

 

 

 
Basic and diluted

 

                        35,892,863

                       35,250,583  

 
Loss per share:

 

 

 

 
Basic and diluted

 

 $                              (0.01)

 $                              (0.02)

 
 

 

 

 

 

Prior to the date of acquisition,TBS's fiscal year ended on October 31.  Accordingly, the unaudited pro formainformation for the 2003 period has been prepared by combining the results ofVillageEDOCS for the three months ended March 31, 2003 and the results of TBSfor the three months ended January 31, 2003.

 

The unaudited pro forma informationhas been prepared for comparative purposes only and does not purport to beindicative of what would have occurred had the acquisition actually been madeat such a date, nor is it necessarily indicative of future operating results.

 

**6.          Notes Payable**

 

Inconnection with the acquisition of TBS, the Company assumed a promissory note inconnection with a vehicle purchase.  This note is payable in monthlyinstallments of $550, including interest, bears interest at 5.4%, iscollateralized by a vehicle, and is due in  November 2005.  Theoutstanding principal balance of this note as of March 31, 2004 was $10,513.

 

 

**7.           NotesPayable and ConvertibleNotes Payable to Related Parties**

 

During the three months ended March 31, 2004, the Companyborrowed $195,000 from C. Alan and Joan P. Williams and issued convertiblepromissory notes bearing interest at 10 percent per annum (the"Notes").   The Notes are secured by a security interest in all ofthe Company's assets.  The notes and accrued interest are due at the earlier ofone of three events: 1) October 31, 2005; 2) acquisition of controllinginterest in the Company by a third party; or 3) the Company achieves equityfinancing of a minimum of $3,000,000.  If the Company is acquired, theprincipal and accrued interest on the Notes, as modified, are convertible intoshares of the Company's common stock at the lower of $2.50 per share or the pricepaid per share by the acquirer.  In addition, the principal and accruedinterest on the Notes, as modified, are convertible into shares of theCompany's common stock at a conversion price equal to the lower of $0.07 pershare or the average of the Company's common stock closing bid price on theOTCBB, NASDAQ or other established securities exchange or market for the ten(10) consecutive trading days prior to the date Mr. Williams delivers writtennotice of his conversion election to the Company.  The beneficial conversionfeature totaling $103,714 and recorded as debt discount will be amortized overthe term of the notes. The Company will immediately record the correspondingunamortized debt discount related to the beneficial conversion feature asinterest expense when the related debenture is converted into shares of theCompany's common stock.   The Company recorded a charge to interest expense in the accompanying statementof operations, related to amortization of debt discount, of $5,766 during the three months ended March 31, 2004.

 

On February 17, 2004, the Company issued a $1,700,000secured convertible promissory note for cash.  The note was issued to a relatedparty, C. Alan and Joan P. Williams, and bears interest at 10 percent perannum.  The note and accrued interest are due at the earlier of one of threeevents: 1) October 31, 2007; 2) acquisition of controlling interest in theCompany by a third party; or 3) the Company achieves equity financing of aminimum of $3,000,000.  If the Company is acquired, the principal and accruedinterest on the note are convertible into shares of the Company's common stockat the lower of $2.50 per share or the price paid per share by the acquirer. In addition, the principal and accrued interest on the note are convertibleinto shares of the Company's common stock at a conversion price equal to eightyfive percent of average of the Company's common stock closing bid price on theOTCBB, NASDAQ or other established securities exchange or market for the ten(10) consecutive trading days prior to the date Mr. and Mrs. Williams deliverwritten notice of their conversion election to the Company.  As aninducement for Mr. and Mrs. Williams to provide the loan, the Company agreed toissue them a warrant to purchase 5,000,000 shares of the Company's restrictedcommon stock at $0.10 per share until February 17, 2009.  There is nobeneficial conversion feature associated with this promissory note.  Inconnection with the issuance of the detachable warrant, the Company recorded adebt discount of $323,810. The Company will amortize the discount using the effective interest methodthrough October 31, 2007.  In the event that the related debenture is convertedto shares of the Company's common stock, the Company will immediately eliminatethe corresponding unamortized debt discount against equity.  During the threemonths ended March 31, 2004, $8,095 of interest expense was recognized on theaccompanying consolidated statements of operations pursuant to amortization ofthe debt discount.

 

In connection with the acquisition of TBS, the Companyissued a $300,000 convertible promissory note to Stephen A. Garner and a$300,000 convertible promissory note to James L. Campbell (the "TBSNotes").  Each of the TBS Notes bears interest at 5 percent per annum and isdue and payable in three equal annual installments of  $100,000, with the firstinstallment due on February 17, 2005 and subsequent installments due onFebruary 17, 2006 and February 17, 2007.  The TBS Notes are secured by a StockPledge Agreement and a Security Agreement.  In addition, Messrs. Garner andCampbell have the right to convert the unpaid principal balance of the TBSNotes into shares of the Company's common stock at the rate of 9.8 shares ofCommon Stock for each $1.00 of principal and interest to be converted.  Sincethe conversion price was based upon the fair market value of the Company'scommon stock on the date of issuance, there is no beneficial conversion featureassociated with the TBS Notes.

 

Inconnection with the acquisition of TBS, the Company assumed promissory notes in theaggregate amount of $140,000 to Stephen A. Garner and James L. Campbell.  The notes bearinterest at 8 percent per annum and are due and payable on December 31, 2004.

 

Total interest expense recognized on all the convertiblenotes payable (including accrued interest based on the stated interest rate)was $105,003 and $292,606 during the three months ended March 31, 2004 and 2003,respectively.  Total interest accrued and not paid on the convertible notespayable to related parties as of March 31, 2004 totaled $677,618 and isincluded in the accompanying consolidated balance sheet.

 

 

**8.           Stockholders'Deficit**

 

a.        Common Stock 

 

On February 17, 2004, the Companyissued 2,200,000 shares of restricted common stock to each of Stephen A. Garnerand James L. Campbell in partial payment of the total purchase price for 100%of the common stock of TBS.  All 4,400,000 shares were valued at $0.10 pershare, the fair market value of the Company's common stock on the date of acquisition.

 

On February 17, 2004 and inconnection with the acquisition of TBS, the Company agreed to issue 132,000shares of its restricted common stock to H. Jay Hill, who is an officer anddirector of the Company, pursuant to Mr. Hill's employment agreement.  Theshares were valued at $0.10 per share, the fair market value on the date of theacquisition.  The shares were issued on March 11, 2004.  

 

On February 17, 2004 and inconnection with the acquisition of TBS, the Company agreed to issue 220,000shares of its restricted common stock to a non-affiliate pursuant to a finder'sfee agreement.  The shares were valued at $0.10 per share, the fair marketvalue on the date of the acquisition.  The shares were issued on March 11,2004.  

 

On March 11, 2004, the Companyissued 24,019 shares of restricted common stock for $240 in cash in connectionwith the exercise of a warrant.

 

b.        Stock Options

 

Effective January 30, 2002, theBoard of Directors of the Company adopted an equity incentive plan (the "2002Plan") that authorized the issuance of options to acquire up to 6,226,258shares of common stock to employees and certain outside consultants.   OnNovember 25, 2002, the Board of Directors of the Company increased the numberof shares reserved for issuance pursuant to the 2002 Plan to 11,634,584shares.  On November 27, 2002, the stockholders of the Company approved the2002 Plan and the number of shares reserved for issuance pursuant to the 2002Plan.  The 2002 Plan allows for the issuance of either non-qualified or,subject to stockholder approval, incentive stock options pursuant to Section422 of the Internal Revenue Code. Options vest at the discretion of the Boardof Directors as determined at the grant date, but not longer than a ten-yearterm.  Under the 2002 Plan, the exercise price of each option shall not be lessthan fair market value on the date the option is granted.  The number ofoptions under the 2002 Plan available for grant at March 31, 2004 was 1,233,830.

 

Options to purchase 200,000 sharesof the Company's common stock under the 2002 Plan at $0.18 per share (above orat the fair market value on the dates of grant), and 25,000 shares of theCompany's common stock under the 2002 Plan at $0.19 per share (above or at thefair market value on the date of grant) were issued to employees during the threemonths ended March 31, 2004, vesting on various dates from the date of grantthrough March 2009.    

 

Options to purchase 50,000 sharesat $0.10 (the fair market value on the date of grant) were granted to anon-employee consultant during 2003.  These options vested on February 28, 2004and $5,310 of consulting expense was recognized in the accompanyingconsolidated statements of operations in connection with the vesting of theseoptions.

 

During the three months ended March31, 2004, no options were cancelled due to their expiration or the terminationof employment.

 

c.        Warrants

During the three months ended March31, 2004, warrants to purchase 24,019 shares of the Company's common stock wereexercised by a non-affiliate for $240 in cash.

 

5,000,000 additional warrants were issued in connection with convertibledebentures payable to related parties (see Note 7).

    

 

**9.           Lossper Share**

              

Basic and dilutedloss per common share is computed as follows:

 

 

 

Three Months  Ended March 31,

 

 

2004

2003

 
 
 

 

 

 

 

 

 

Numerator for basic and    diluted loss per     common share:

 

 

 

 

 

   Net loss available to            common stockholders

 

  $ (261,917)

 

$ (708,123)

 

 

 

 

==========

==========

 

 

 

 

 

 

 

 

 

Denominator for basic   and diluted loss per    common share:

 

 

 

 

 

 

 

 

 

 

  Weighted average      common  shares      outstanding

 

 

35,892,863

 

 

33,573,178

 

 

 

 

==========

==========

 

 

 

Net loss per common     share available to    common stockholders

 

 

$          (0.01)

 

 

$          (0.02)

 

 

 

 

==========

==========

 

 

 

 

 

 

 

 

 

**10.       Commitmentsand Contingencies**

 

Litigation

 

The Company is, from time to time, involved in variouslegal and other proceedings that arise in the ordinary course of operating itsbusiness. In the opinion of management, the amount of ultimate liability, ifany, with respect to these actions will not materially affect the financialposition or results of operations of the Company. 

 

Indemnities and Guarantees

 

During the normal course of business, the Companyhas made certain indemnities and guarantees under which it may be required tomake payments in relation to certain transactions.  The Company indemnifiesits directors, officers, employees and agents to the maximum extent permittedunder the laws of the State of California.  These indemnities includecertain agreements with the Company's officers, under which the Company may berequired to indemnify such person for liabilities arising out of theiremployment relationship.  In connection with its facility leases, theCompany has indemnified its lessor for certain claims arising from the sale ofthe facilities.  The duration of these indemnities and guaranteesvaries and, in certain cases, is indefinite.  The majority of these indemnitiesand guarantees do not provide for any limitation of the maximum potentialfuture payments the Company could be obligated to make.  Historically, theCompany has not been obligated to make significant payments for theseobligations and no liabilities have been recorded for these indemnities andguarantees in the accompanying balance sheet.

 

Authorized Shares

 

After the debt financing and acquisition of TBS (see discussions above), theCompany had insufficient authorized shares available to settle its openstock-based contracts. The number of shares required to settle these contractsat any particular date can vary considerably based on several factors includingthe market price of the Company's common stock, grants, expirations andcancellations of employee incentive compensation, and issuance, conversion, andretirement of convertible debentures.   The Company's management is inthe process of seeking approval to increase the number of shares authorizedbased on preliminary discussions with the Company's majority shareholder.

 

 

**11.       SegmentReporting**

 

The Company's operationsare classified into two principal reportable segments that provide differentproducts or services.  Separate management of each segment is required becauseeach business unit is subject to different marketing, production, andtechnology strategies.  Since February 17, 2004, the Company has operated inthe following two reportable segments: 

(a)  Electronic document delivery services; and

(b)  Government accounting products andservices. 

Segment operating income(loss) is total segment revenue reduced by operating expenses identifiable withthe business segment.  Corporate loss includes general corporate administrativecosts.  Corporate assets include primarily cash.  The Company'sunderlying accounting records are maintained on a legal entity basis forgovernment and public reporting requirements.  Segment disclosures are on aperformance basis consistent with internal management reporting.   The cost ofsome corporate functions and the cost of certain employee benefits are allocatedto segments at cost.  Remaining costs, if any, are not allocated to revenuesegments.  The Company evaluates performance and allocates resources based uponoperating income.  The accounting policies of the reportable segments are thesame as those described in the summary of accounting policies.  There are nointer-segment sales.

 

The following tablesummarizes segment asset and operating balances by reportable segment, has beenprepared in accordance with the internal accounting policies, and may not bepresented in accordance with generally accepted accounting principles:

 

 
 

 

Periods ended

 

 
 
 

 

March 31, 2004

(1)

 
 
 

 

---------------------------

 
 
 
 

 

 

 
 
 
Net revenue from external customers:

 

 

 
 
 
 

 

 

 
 
 
Electronic document delivery services

 

 $                      602,169 

 
 
 
Government accounting products and services

 

                         313,276 

 
 
 
Corporate

 

                                   -   

 
 
 
 

 

----------------------------

 
 
 
Total revenue  from external customers

 

 $                      915,445 

 
 
 
 

 

 ================== 

 
 
 
 

 

 

 
 
 
Operating income (loss):

 

 

 
 
 
 

 

 

 
 
 
Electronic document delivery services

 

 $                        21,650 

 
 
 
Government accounting products and services

 

                           43,703 

 
 
 
Corporate

 

                        (212,836)

 
 
 
 

 

----------------------------

 
 
 
Total operating  loss

 

 $                     (147,483)

 
 
 
 

 

 ================== 

 
 
 
 

 

 

 
 
 
 

 

 

 
 
 

 
 

 

 

 
 
 
Interest expense:

 

 

 
 
 
 

 

 

 
 
 
Electronic document delivery services

 

 $                         76,703 

 
 
 
Government accounting products and services

 

                                481 

 
 
 
Corporate

 

                           28,092 

 
 
 
 

 

----------------------------

 
 
 
Total interest  expense

 

 $                       105,276 

 
 
 
 

 

 ================ 

 
 
 
 

 

 

 
 
 
Net income (loss):

 

 

 
 
 
 

 

 

 
 
 
Electronic document delivery services

 

 $                      (55,053)

 
 
 
Government accounting products and services

 

                           34,064 

 
 
 
Corporate

 

                        (240,928)

 
 
 
 

 

----------------------------

 
 
 
Total net loss

 

 $                     (261,917)

 
 
 
 

 

 ================ 

 
 
 
 

 

 

 
 
 
Identifiable assets:

 

 

 
 
 
 

 

 

 
 
 
Electronic document delivery services

 

 $                      518,301 

 
 
 
Government accounting products and services

 

       3,176,634      

 
 
 
Corporate

 

                       82,661    

 
 
 
 

 

----------------------------

 
 
 
Total  identifiable assets

 

 $                   3,777,596 

 
 
 
 

 

 ================ 

 
 
 
 

 

 

 
 
 
Capital expenditures:

 

 

 
 
 
 

 

 

 
 
 
Electronic document delivery services

 

 $                          4,608 

 
 
 
Government accounting products and services

 

                                   -   

 
 
 
Corporate

 

                                   -   

 
 
 
 

 

----------------------------

 
 
 
Total capital  expenditures

 

 $                          4,608 

 
 
 
 

 

 ================ 

 
 
 
 

 

 

 
 
 
 

 

 

 
 
 
(1)  Results and balances for Electronic document delivery  services and Corporate are reported as of and for the three months ended  March 31, 2004.  Results and balances for Government accounting products and  services are reported as of and for the period from February 17, 2004 (date  of acquisition) through March 31, 2004.

 
 
 
 
 
 
 
 
 

 

**12.           RelatedParty Transactions**

 

The Company has borrowedsignificantly from related parties as described more fully in Note 7.  

 

TBS has a related partyoperating lease with Perimeter Center Partners for the rental of the land andbuilding occupied by TBS.  The lease commenced on February 1, 2004 and has aterm of five years, with monthly payments of $4,000.  The Company has executeda Guaranty with respect to the lease.  Perimeter Center Partners is owned byStephen A. Garner and James L. Campbell, who are affiliates of the Company.

 

On February 17, 2004 and inconnection with the acquisition of TBS, the Company agreed to issue 132,000shares of its restricted common stock to H. Jay Hill, who is an officer anddirector of the Company, pursuant to Mr. Hill's employment agreement.  Theshares were valued at $0.10 per share, the fair market value on the date of theacquisition.  The shares were issued on March 11, 2004.  In addition, inconnection with the acquisition of TBS, we paid Mr. Hill $63,000 in employmentcompensation pursuant to his employment agreement and incremental to his basesalary.

 

 

**13.           SubsequentEvents**

 

Subsequent to March 31,2004, the Company borrowed an additional $40,000 from C. Alan and Joan P.Williams and issued convertible promissory notes with terms identical to thosedescribed in the first paragraph of Note 6 above.  The beneficial conversionfeature contained in this promissory note will result in a charge to interestexpense in the quarter ended June 30, 2004 of $6,318.

****

 

**ITEM 2 - MANAGEMENT'SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

 

**FORWARD-LOOKING INFORMATION**

 

*This QuarterlyReport on Form 10-QSB includes forward-looking statements within the meaning ofSection 21E of the Securities Exchange Act of 1934, as amended. All statementsthat do not directly and exclusively relate to historical facts constituteforward-looking statements within the meaning of the Private SecuritiesLitigation Reform Act of 1995.  These statements are based on our plans,intentions, expectation, and belief and are subject to certain risks anduncertainties that could cause actual results to differ materially from thoseprojected or expressed herein. The words "anticipate,""believe," "expect," "plan," "intend,""seek," "estimate," "project," "will,""could," "may," and similar expressions are intended toidentify forward-looking statements. These statements include, among others,information regarding future operations, future capital expenditures, andfuture net cash flow. Such statements reflect the Company's current views withrespect to future events and financial performance and involves risks anduncertainties, including, without limitation, general economic and businessconditions, changes in foreign, political, social and economic conditions,regulatory initiatives and compliance with governmental regulations, theability to achieve further market penetration and additional customers, andvarious other matters, many of which are beyond the Company's control,including, without limitation, the risks described under the caption"Factors That May Affect Future Results" in Item 6 of the Company'sAnnual Report on Form 10-KSB filed with the Securities and Exchange Commissionon March 29, 2004. Our future results and stockholder values may differmaterially from those expressed in these forward- looking statements. Many ofthe factors that will determine these results and values are beyond our abilityto control or predict. Investors are cautioned not to put undue reliance on anyforward-looking statements. For these statements, we claim the protection ofthe safe harbor for forward-looking statements contained in Section 21E of theExchange Act.*

** **

**WEBSITE ACCESS TO REPORTS**

** **

Our principal executive offices are currently located at14471 Chambers Road, Suite #105, Tustin, CA  92780.  The Company's Internetwebsite address is www.villageedocs.com. The Company's annual reports on Form 10-KSB, quarterly reports on Form 10-QSB,and current reports of Form 8-K, and all amendments thereto, are available freeof charge on the Company's website as soon as reasonably practical after suchreports are electronically filed with, or furnished to, the U.S. Securities andExchange Commission.

 

 

**General Overview**

 

The following discussion and analysis of our financial condition andresults of operations should be read in conjunction with the unauditedconsolidated balance sheet as of March 31, 2004, and the unaudited consolidatedstatements of operations and cash flows for the three months ended March 31,2004 and 2003, and the related notes thereto as well as the audited financialstatements of the Company for the years ended December 31, 2003 and 2002,included in the Company's Annual Report on Form 10-KSB filed with theSecurities and Exchange Commission on March 29, 2004.  This discussion containsforward-looking statements based upon current expectations that involve risksand uncertainties, such as our plans, objectives, expectations and intentions.

 

The Company cautions readers that important facts and factors describedin this Management's Discussion and Analysis of Financial Condition and Resultsof Operations and elsewhere in this document sometimes have affected, and inthe future could affect, the Company's actual results, and could cause theCompany's actual results during 2004 and beyond to differ materially from thoseexpressed in any forward-looking statements made by, or on behalf of, theCompany. 

 

On February 17, 2004, the Company acquired Tailored Business Systems,Inc. ("TBS").  During the fiscal year ended October 31, 2003, TBS's netrevenues were $3,324,059.  During the fiscal year ended December 31, 2003, theCompany's net revenues were $1,882,027.  This acquisition is expected to causethe Company's results of operations during 2004 to vary significantly fromthose reported for 2003 due to the consolidation of TBS during most of 2004. Accordingly, management believes that the following presentation of comparativeresults of operations, while required, may not be meaningful. 

 

As reported in the Independent Auditors' Report on ourDecember 31, 2003 financial statements, the Company has suffered recurringlosses from operations, had negative cash flows from operations, and had a netcapital deficiency that raises substantial doubt about our ability to continueas a going concern. 

 

Management is seeking additional financing by issuingconvertible debt to existing shareholders during 2004. In addition, managementplans to seek equity or a combination of equity and debt financing from newshareholders and/or lenders in the third or fourth quarter of 2004.  Managementis actively pursuing both of these financing arrangements. Between January and April2004, one of our shareholders loaned us $235,000 to fund our operatingshortfalls; however, he has no binding obligation to continue providing funds.If the planned financings are obtained and/or the shareholder continues tocover our operating shortfalls, the Company believes it will have adequate cashto sustain operations until it becomes profitable. There can be no assurancethat funding will be available on acceptable terms, if at all, or that suchfunds, if raised, would enable the Company to achieve and maintain profitableoperations. 

 

**CriticalAccounting Policies**

 

In preparing our financial statements, we make estimates,assumptions and judgments that can have a significant effect on our revenues,income/loss from operations, and net income/net loss, as well as on the valueof certain assets on our balance sheet.  We believe that there are severalaccounting policies that are critical to an understanding of our historical andfuture performance as these policies affect the reported amounts of revenues,expenses, and significant estimates and judgments applied by management.  Whilethere are a number of accounting policies, methods and estimates affecting ourfinancial statements, areas that are particularly significant include revenuerecognition, stock-based compensation, and web site development costs.  Inaddition, please refer to Note 4 to the accompanying financial statements for furtherdiscussion of our significant accounting policies.

 

Revenue Recognition.  The Company's electronicdocument delivery service provides internet-enabled fax services to businessesand charges for these services on either a per-page delivered or per-minuteused basis. Service revenues are recognized when the services are performed.   Governmentaccounting products and services revenues are recognized at the time theproduct is shipped or the time the service is performed.  Revenue from prepaidannual maintenance contracts is recognized on a monthly basis throughout theterm of each contract.

 

Stock-Based Compensation.  The Company accounts fornon-employee stock-based compensation under Statement of Financial AccountingStandards No. 123 ("SFAS 123"), "*Accounting For Stock-BasedCompensation*."  SFAS 123 defines a fair value based method of accountingfor stock-based compensation.  However, SFAS 123 allows an entity to continueto measure compensation cost related to stock and stock options issued to employeesusing the intrinsic method of accounting prescribed by Accounting PrinciplesBoard Opinion No. 25, as amended ("APB 25"), "*Accounting forStock Issued to Employees*." Under APB 25, compensation cost, if any, isrecognized over the respective vesting period based on the difference, on thedate of grant, between the fair value of the Company's common stock and thegrant price. Entities electing to remain with the accounting method of APB 25must make pro forma disclosures of net income and earnings per share, as if thefair value method of accounting defined in SFAS 123 had been applied. TheCompany has elected to account for its stock-based compensation to employeesunder APB 25.

 

Goodwill and OtherIntangible Assets.  The Company has adopted SFAS No. 142 "*Goodwilland Other Intangible Assets*."  Under SFAS No. 142, goodwill associatedwith acquisitions consummated after June 30, 2001 is not to be amortized, andeffective January 1, 2002, goodwill and other intangible assets with indefinitelives are no longer subject to periodic amortization but are instead reviewedannually for impairment, or more frequently if impairment indicators arise. As of March 31, 2004, the Company has not yet determined the valuation date toperform an impairment test on goodwill.

 

Identifiable assetsand liabilities acquired in connection with business acquisitions accounted forunder the purchase method are recorded at their respective fair values. Deferred income taxes have been recorded to the extent of differences betweenthe fair value and the tax basis of the assets acquired and liabilities assumed.

 

Long-Lived Assets. In the event that facts and circumstances indicate that equipment or otherlong-lived assets may be impaired, an evaluation of recoverability would beperformed.  If an evaluation is required, the estimated future discountedcash flows associated with the asset are compared to the asset's carrying amountto determine if an impairment charge is necessary.  The amount oflong-lived asset impairment, if any, is charged to operations in the period inwhich long-lived asset impairment is determined.  At March 31, 2004, thereis no impairment of the long-lived assets.  There can be no assurance,however, that market conditions will not change or demand for the Company'sservices will continue, which could result in impairment of long-lived assets inthe future.

** **

**RESULTS OFOPERATIONS**

 
Three Months Ended March 31, 2004 Compared to Three Months Ended March 31,2003
 

**Net Sales**

Net sales for the three months ended March 31, 2004 were $915,445,a 108% increase over net sales for prior year quarter of $438,790.  Theincrease in the 2004 quarter resulted from an increase of $163,319 in revenuefrom the Company's electronic document delivery services (which resulted fromgrowth in the number of clients) as well as the addition of  $313,276 inrevenue contributed by TBS.

 

**Cost of Sales**

Cost of sales for the three months ended March 31, 2004 were$344,293 as compared to the $213,198 reported for the three months ended March31, 2003.  Total cost of sales during the 2004 quarter represented 38% ofsales.  Cost of sales for the Company's electronic document delivery services duringthe 2004 quarter represented 29% of sales as compared with 49% of sales in the 2003quarter reflecting no significant change in telecommunications and other costs associatedwith providing electronic document delivery services despite an improvement inrevenues from those services.  

 

**Gross Profit**

Gross profit for the three months ended March 31, 2004increased 153% to $571,152 as compared to $225,592 for the prior year quarter. Gross profit margin for the 2004 quarter was 62% as compared with 51% for the2003 quarter.  Of the overall increase of $345,560, $107,876 is attributable tothe increase in sales volume for the Company's internet-enabled fax services,and $237,684 is attributable to TBS.

 

**Operating Expenses**

Operating expenses for the three months ended March 31, 2004increased by 13% to $718,635 from the $638,630 reported in the three monthsended March 31, 2003, an increase of $80,005.  Product and technologydevelopment decreased $45,221 to $91,073 from the $136,294 reported in theprior year quarter because of a reduction in staff.  Sales and marketing decreasedby $34,471 to $167,754 from the $202,225 reported in the prior year quarter dueto a reduction in sales management staff and a small decrease in spending onsales lead generation programs.  General and administrative increased by $192,549to $418,807 from the $226,258 reported in the prior year quarter.   The overallincrease was comprised of a $28,484 increase from the electronic document deliveryservice and a $221,033 increase attributable to TBS.  Depreciation andamortization expense increased $7,148 to $41,001 from the $33,853 reported inthe 2003 quarter.  The overall increase was comprised of a 12% decrease fromelectronic document delivery services (due to disposal of certain capitalizedequipment during the fourth quarter of 2003) and the addition of depreciation fromequipment owned by TBS.  During the three months ended March 31, 2004, expensesrelated to product and technology development, sales and marketing, general andadministrative, and depreciation and amortization represented 10%, 18%, 46%,and 4% of net sales, respectively.  During the three months ended March 31,2003, expenses related to product and technology development, sales andmarketing, general and administrative, and depreciation and amortizationrepresented 31%, 46%, 61%, and 8% of net sales, respectively.

 

**Interest Expense**

Interest expense for the quarter ended March 31, 2004 decreasedby 64% to $105,276 from  $294,285 reported in the prior year quarter becauseof a decrease in the beneficial conversion feature associated with 2004borrowings as compared to 2003 borrowings that resulted from a reduction inborrowings and fluctuations in the market price of the Company's common stock. The beneficial conversion feature resulted in a charge to interest expense of $5,766and $256,961 during the quarters ended March 31, 2004 and 2003, respectively. Inaddition, interest expense incurred in connection with capital leases decreased in the 2004quarter as compared with the 2003 quarter.

 

**Net Loss**

As a result of the foregoing, net loss for the three monthsended March 31, 2004 was $261,917, or $0.01 per share, compared to a net lossof $708,123, or $0.02 per share, for the three months ended March 31, 2003 onweighted average shares of 33,543,178 and 30,498,583, respectively.

 

** **

**LIQUIDITY**

 

During the three months ended March 31, 2004, the Company'snet cash position increased by $310,600 to $375,302. The Company generated $1,891,660from financing activities; however, the Company's operating and investingactivities used net cash of  $11,054 and $1,570,006, respectively.  

 

Net cash used in operating activities for the three monthsended March 31, 2004 was $11,294 a decrease of $261,641 from the $272,935 usedin operating activities for prior year period, mainly due to the decrease innet loss for the 2004 quarter. 

 

The Company's investing activities consisted of the acquisitionof TBS and purchase of computer equipment. Net cash used for investmentactivities increased $1,532,426 to $1,570,006 from the $37,580 reported for 2003due to the acquisition of TBS. 

 

Net cash provided by financing activitiesfor the three months ended March 31, 2004 was $1,891,900, and included proceedsof  $1,895,000 from stockholder loans. Net cash provided by financingactivities for the three months ended March 31, 2003 was $296,963, whichincluded proceeds of  $317,000 from stockholder loans and principal payments oncapital leases of $20,037. 

 

**CAPITAL RESOURCES**

 

The Company does not currently have any material commitmentsfor capital expenditures other than those expenditures incurred in the ordinarycourse of business. 

 

Since our inception, our operating and investing activitieshave used substantially more cash than they have generated. We believe that wehave made considerable progress toward achieving profitable operations byincreasing revenues from electronic document delivery services and through ourrecent acquisition of TBS.  In addition, we are actively seeking opportunitiesto acquire or otherwise combine with businesses that are operating profitably. However, at present and for the foreseeable future, we believe that we willcontinue to need working capital to fund the growth of our businesses and toabsorb the increasing costs associated with operating as a fully reporting companyin the prevailing regulatory environment.    Accordingly, we expect to continueto experience negative operating and investing cash flows through at least thethird quarter of 2004.  We currently anticipate that our available cashresources will be insufficient to meet our anticipated working capital andcapital expenditure requirements beyond June 30, 2004.  We believe we willrequire up to $300,000 in new financing during the remainder of 2004 inaddition to our current revenue streams to support our operations until we beginto operate profitably.  If our current revenue streams or margins be subjectedto even minor decreases, our funding requirements could be greater.

 

While we strongly believe that sustainable profitability isachievable, we have a history of losses, have never been profitable, and maynever achieve profitability.  Should we achieve profitability in any period, wecannot be certain that we will sustain or increase such profitability on aquarterly or annual basis.

 

Between November 2000 and at least April 2004, our operatingshortfalls have been, and are expected to be, funded by one shareholder, anaffiliate, to whom we owe $3,817,000 in principal and $465,289 in interest asof April 30, 2004. Assuming that this shareholder continues to fund any futureoperating shortfalls, we will be able to sustain operations at current levels.However, this shareholder has no obligation to continue to fund our operatingshortfalls and could stop doing so at any time.  We may be required to alterthe terms of the convertible promissory notes held by this shareholder toinduce this shareholder or other such potential lenders to provide additional loans,which could result in this shareholder or other such potential lendersobtaining rights, preferences or privileges senior to those of other creditorsor our stockholders.

 

This estimate is a forward-looking statement that involvesrisks and uncertainties. The actual time period may differ materially from thatindicated as a result of a number of factors so that we cannot assure you thatour cash resources will be sufficient for anticipated or unanticipated workingcapital and capital expenditure requirements for this period. We have advisedthat we will need to raise additional capital in the future to meet ouroperating and investing cash requirements. Such sources of financing couldinclude capital infusions, additional equity financing, or debt offerings.There can be no assurance that additional funding will be available onacceptable terms, if at all, or that such funds if raised, would enable theCompany to achieve and maintain profitable operations. If we are not able toobtain sufficient additional funds from investors, we may be unable to sustain allor part of our operations.  If we raise additional funds through the issuanceof securities, these securities may have rights, preferences or privilegessenior to those of our common stock, and our stockholders may experienceadditional dilution to their equity ownership. 

 

From inception through March 31, 2004,we generated revenue of approximately $6,475,000.  However, we have incurredtotal expenses of approximately $16,925,000 during that same period. We haveincurred net losses each year since our inception. As of March 31, 2004, we hadan accumulated deficit of $12,232,472.  To date, we have funded our capitalrequirements and our business operations primarily with funds provided from thesale of common stock and from shareholder borrowings, supplemented by revenuesfrom sales of our services. From inception to April 30, 2004, the Company hasreceived approximately $10,188,000 from the sale of common stock andconvertible notes, $2,039,245 of which were converted into shares of commonstock on May 15, 2002.

 

The Independent Auditors' Report on our December 31, 2003financial statements includes an explanatory paragraph stating that therecurring losses incurred from operations and a working capital deficiencyraise substantial doubt about our ability to continue as a going concern. Thefinancial statements do not include any adjustments that might result from theoutcome of this uncertainty.

 

**RECENT DEVELOPMENTS**

 

During April 2004, the Company obtained cash of $40,000 inconsideration for a convertible note issued to one stockholder, who is anaffiliate. The note bears interest at 10 percent per annum. The note andaccrued interest are due at the earlier of one of three events: 1) acquisitionof a controlling interest in the Company by a third party; 2) October 31, 2005;or 3) the receipt by the Company of $3,000,000 or more from an equityfinancing. If the Company achieves the equity financing, the stockholders havethe option to convert the note plus accrued interest into common stock at thelower of $2.50 per share or the price per share of common stock issued in theequity financing. If the Company is acquired, the stockholders have the optionto convert the note plus accrued interest into common stock at the lower of$2.50 per share or the price per share paid by the acquirer. The note isconvertible at any time at the option of the holder at a price equal to thelower of $0.07 per share or the average of the Company's common stock closingbid price on the OTCBB, NASDAQ, or other established securities exchange ormarket for the ten (10) consecutive trading days prior to the date the holderdelivers written notice of conversion election to the Company.

 

 

**ITEM 3 - CONTROLS ANDPROCEDURES**

 

As required by Rule 13a-15under the Securities Exchange Act of 1934, within the 90 days prior to thefiling date of this report, the Company carried out an evaluation of theeffectiveness of the design and operation of the Company's disclosure controlsand procedures.  This evaluation was carried out under the supervision and withthe participation of the Company's management, including the Company's ChiefExecutive Officer and the Company's Chief Financial Officer, who concluded thatthe Company's disclosure controls and procedures are effective.  There havebeen no significant changes in the Company's internal control or in otherfactors, which could significantly affect internal controls subsequent to thedate the Company carried out its evaluation.

 

Disclosure controls andprocedures are controls and other procedures that are designed to ensure thatinformation required to be disclosed in the Company reports filed or submittedunder the Exchange Act is recorded, processed, summarized and reported, withinthe time periods specified in the Securities and Exchange Commission's rulesand forms.  Disclosure controls and procedures include, without limitation,controls and procedures designed to ensure that information required to bedisclosed in Company reports filed under the Exchange Act is accumulated andcommunicated to management, including the Company's Chief Executive Officer andChief Financial Officer as appropriate, to allow timely decisions regardingrequired disclosure.

 

 

**PART II**

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**ITEM 1 - LEGAL PROCEEDINGS.**

** **

The Company is not a party in any lawsuits.   There were nonew legal matters to report during the three months ended March 31, 2004.

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**ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS.**

 

On February 17, 2004, the Company issued 2,200,000 shares ofrestricted common stock to each of Stephen A. Garner and James L. Campbell inpartial payment of the total purchase price for 100% of the common stock ofTBS.  All 4,400,000 shares were valued at $0.10 per share, the fair marketvalue of the Company's common stock on the date of acquisition.

 

On February 17, 2004 and in connection with the acquisitionof TBS, the Company agreed to issue 132,000 shares of its restricted commonstock to H. Jay Hill, who is an officer and director of the Company, pursuantto Mr. Hill's employment agreement.  The shares were valued at $0.10 per share,the fair market value on the date of the acquisition.  The shares were issuedon March 11, 2004.  

 

On February 17, 2004 and in connection with the acquisitionof TBS, the Company agreed to issue 220,000 shares of its restricted commonstock to a non-affiliate pursuant to a finder's fee agreement.  The shares werevalued at $0.10 per share, the fair market value on the date of theacquisition.  The shares were issued on March 11, 2004.  

 

On March 11, 2004, the Company issued 24,019 shares ofrestricted common stock for $240 in cash in connection with the exercise of awarrant.

 

During the three months ended March 31, 2004, the Companyborrowed $195,000 from C. Alan and Joan P. Williams and issued convertiblepromissory notes bearing interest at 10 percent per annum (the"Notes").   The Notes are secured by a security interest in all ofthe Company's assets.  The notes and accrued interest are due at the earlier ofone of three events: 1) October 31, 2005; 2) acquisition of controllinginterest in the Company by a third party; or 3) the Company achieves equityfinancing of a minimum of $3,000,000.  If the Company is acquired, theprincipal and accrued interest on the Notes, as modified, are convertible intoshares of the Company's common stock at the lower of $2.50 per share or theprice paid per share by the acquirer.  In addition, the principal and accruedinterest on the Notes, as modified, are convertible into shares of theCompany's common stock at a conversion price equal to the lower of $0.07 pershare or the average of the Company's common stock closing bid price on theOTCBB, NASDAQ or other established securities exchange or market for the ten(10) consecutive trading days prior to the date Mr. Williams delivers writtennotice of his conversion election to the Company.  

 

On February 17, 2004, the Company issued a $1,700,000secured convertible promissory note for cash.  The note was issued to a relatedparty, C. Alan and Joan P. Williams, and bears interest at 10 percent perannum.  The note and accrued interest are due at the earlier of one of threeevents: 1) October 31, 2007; 2) acquisition of controlling interest in theCompany by a third party; or 3) the Company achieves equity financing of aminimum of $3,000,000.  If the Company is acquired, the principal and accruedinterest on the note are convertible into shares of the Company's common stockat the lower of $2.50 per share or the price paid per share by the acquirer. In addition, the principal and accrued interest on the note are convertibleinto shares of the Company's common stock at a conversion price equal to eightyfive percent of average of the Company's common stock closing bid price on theOTCBB, NASDAQ or other established securities exchange or market for the ten(10) consecutive trading days prior to the date Mr. and Mrs. Williams deliverwritten notice of their conversion election to the Company.  As an inducementfor Mr. and Mrs. Williams to provide the loan, the Company agreed to issue thema warrant to purchase 5,000,000 shares of the Company's restricted common stockat $0.10 per share until February 17, 2009.  

 

In connection with the acquisition of TBS, the Companyissued a $300,000 convertible promissory note to Stephen A. Garner and a$300,000 convertible promissory note to James L. Campbell (the "TBSNotes").  Each of the TBS Notes bears interest at 5 percent per annum andis due and payable in three equal annual installments of  $100,000, with thefirst installment due on February 17, 2005 and subsequent installments due onFebruary 17, 2006 and February 17, 2007.  The TBS Notes are secured by a StockPledge Agreement and a Security Agreement.  In addition, Messrs. Garner andCampbell have the right to convert the unpaid principal balance of the TBSNotes into shares of the Company's common stock at the rate of 9.8 shares ofCommon Stock for each $1.00 of principal and interest to be converted.  

 

All offers and sales of our securities described abovewere made pursuant to Section 4(2) of the Securities Act of 1933 and RegulationD promulgated thereunder.

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**ITEM 3 - DEFAULTS UPON SENIOR SECURITIES.**

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None.

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**ITEM 4 - SUBMISSION OF MATTERS TO VOTE OF SECURITYHOLDERS.**

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None. 

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**ITEM 5 - OTHER MATTERS.**

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None.

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**ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K.**

(a)    Exhibits

2.1

Agreement and Plan of Merger dated January 31, 2004 by and  among VillageEDOCS, VillageEDOCS Merger Sub, Inc., Tailored Business Systems,  Inc., Stephen A. Garner, and James L. Campbell.**

4.1

Form of Convertible Secured Promissory Note.  Previously  filed as Exhibit 4.6 to the Registrant's Quarterly Report on Form 10-QSB  filed with the Securities and Exchange Commission on May 15, 2002 and incorporated  herein by reference.

4.2

Form of Stock Option Agreement.  Previously filed as  Exhibit 4.2 to the Registrant's Quarterly Report on Form 10-QSB filed with  the Securities and Exchange Commission on May 15, 2002 and incorporated  herein by reference.

4.3

2002 Equity Incentive Plan dated as of January 30, 2002.   Previously filed as Exhibit 4.1 to the Registrant's Quarterly Report on Form  10-QSB filed with the Securities and Exchange Commission on May 15, 2002 and  incorporated herein by reference.

4.4

Promissory Note to Stephen A. Garner dated February 17,  2004 previously filed as an exhibit to the Company's current  report on Form 8-K filed with the Securities and Exchange Commission on  February 18, 2004 and incorporated herein by reference.

4.5

Promissory Note to James L. Campbell dated February 17,  2004 previously filed as an exhibit to the Company's current report on Form  8-K filed with the Securities and Exchange Commission on February 18, 2004  and incorporated herein by reference.

4.6

Guaranty by Tailored Business Systems, Inc. to Stephen A.  Garner dated February 17, 2004 previously filed as an exhibit to the  Company's current report on Form 8-K filed with the Securities and Exchange Commission  on February 18, 2004 and incorporated herein by reference.

4.7

Guaranty by Tailored Business Systems, Inc. to James L.  Campbell dated February 17, 2004 previously filed as an exhibit to the  Company's current report on Form 8-K filed with the Securities and Exchange Commission  on February 18, 2004 and incorporated herein by reference.

4.8

Form of Security Agreement dated February 17, 2004 by and  between Tailored Business Systems, Inc. and Stephen A. Garner previously  filed as an exhibit to the Company's current report on Form 8-K filed with  the Securities and Exchange Commission on February 18, 2004 and incorporated  herein by reference.

4.9

Form of Security Agreement dated February 17, 2004 by and  between Tailored Business Systems, Inc. and James L. Campbell previously  filed as an exhibit to the Company's current report on Form 8-K filed with  the Securities and Exchange Commission on February 18, 2004 and incorporated  herein by reference.

4.10

Registration Rights Agreement dated February 17, 2004 by  and between VillageEDOCS and Stephen A. Garner previously filed as an exhibit  to the Company's current report on Form 8-K filed with the Securities and  Exchange Commission on February 18, 2004 and incorporated herein by  reference.

4.11

Registration Rights Agreement dated February 17, 2004 by  and between VillageEDOCS. and James L. Campbell previously filed as an exhibit  to the Company's current report on Form 8-K filed with the Securities and  Exchange Commission on February 18, 2004 and incorporated herein by  reference.

4.12

Form of Stock Pledge Agreement dated February 17, 2004 by  and between Tailored Business Systems, Inc. and Stephen A. Garner previously  filed as an exhibit to the Company's current report on Form 8-K filed with  the Securities and Exchange Commission on February 18, 2004 and incorporated  herein by reference.

4.13

Form of Stock Pledge Agreement dated February 17, 2004 by  and between Tailored Business Systems, Inc. and James L. Campbell previously  filed as an exhibit to the Company's current report on Form 8-K filed with  the Securities and Exchange Commission on February 18, 2004 and incorporated herein  by reference.

10.1

Employment Agreement dated February 17, 2004 by and  between Tailored Business Systems, Inc. and Stephen A. Garner previously  filed as an exhibit to the Company's current report on Form 8-K filed with  the Securities and Exchange Commission on February 18, 2004 and incorporated  herein by reference.

10.2

Employment Agreement dated February 17, 2004 by and  between Tailored Business Systems, Inc. and James L. Campbell previously  filed as an exhibit to the Company's current report on Form 8-K filed with  the Securities and Exchange Commission on February 18, 2004 and incorporated  herein by reference.

10.3

General Release and Noncompetition Agreement dated  February 17, 2004 by Stephen A. Garner in favor of Tailored Business Systems,  Inc. previously filed as an exhibit to the Company's current report on Form  8-K filed with the Securities and Exchange Commission on February 18, 2004  and incorporated herein by reference.

10.4

General Release and Noncompetition Agreement dated  February 17, 2004 by James L. Campbell in favor of Tailored Business Systems,  Inc. previously filed as an exhibit to the Company's current report on Form  8-K filed with the Securities and Exchange Commission on February 18, 2004  and incorporated herein by reference.

10.5

Lease Agreement dated February 17, 2004 by and between  Perimeter Center Partners and Tailored Business Systems, Inc. previously  filed as an exhibit to the Company's current report on Form 8-K filed with  the Securities and Exchange Commission on February 18, 2004 and incorporated  herein by reference.

10.6

Executive Employment Agreement effective as of May 26,  2003 by and between the Company and H. Jay Hill.  Previously filed as Exhibit  10.3 to the Registrant's Quarterly Report on Form 10-QSB filed with the  Securities and Exchange Commission on May 15, 2003 and incorporated herein by  reference.

31.1

Certification Under Section 302 of The Sarbanes-Oxley Act  of 2002 signed and dated May 17, 2004 by K. Mason Conner, Chief Executive  Officer.*

31.2

Certification Under Section 302 of The Sarbanes-Oxley Act  of 2002 signed and dated May 17, 2004 by Michael A. Richard, Chief Financial  Officer.*

32.1

Certification Pursuant To 18 U.S.C. §1350, As Adopted  Pursuant To Section 906 of the Sarbanes-Oxley Act of 2002 signed and dated May  17, 2004 by K. Mason Conner, Chief Executive Officer.**

32.2

Certification Pursuant To 18 U.S.C. §1350, As Adopted  Pursuant To Section 906 of the Sarbanes-Oxley Act of 2002 signed and dated May  17, 2004 by Michael A. Richard, Chief Financial Officer.**

*

Filed herewith

**

Furnished herewith

 

(b)     Reportson Form 8-K** **
   
Date

Subject
   
2/18/2004

Acquisition of  Tailored Business Systems, Inc.

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** **
 
**SIGNATURES**

** **

**Pursuant to the requirementsof the Securities and Exchange Act of 1934, the Registrant has caused thisreport to be signed on its behalf by the undersigned, thereto duly authorized,in the capacities and on the dates indicated:**

** **

** **

** **

**VillageEDOCS (Registrant)**

** **

** **

** **

** **

**Dated:  May 17, 2004**

**By:    /s/ K. Mason Conner**

** **

**       K. Mason  Conner**

** **

**       Chief  Executive Officer and Director**

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** **

** **

** **

** **

** **

**Dated:  May 17, 2004**

**By:  /s/ Michael A. Richard**

** **

**      Michael A. Richard**

 

**      Chief Financial  Officer**

** **

**      (Principal  Accounting Officer)**

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