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This registration statement has been filed with the Securities and Exchange
Commission but has not yet become effective. Information in this registration
statement is subject to completion or amendment.
As filed with the Securities and Exchange Commission on August __, 2000.
--------------------------------------------------------------------------------
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_____________________________________________
FORM 10-SB
GENERAL FORM FOR REGISTRATION OF SECURITIES
UNDER SECTION 12(B) OR (G) OF THE SECURITIES EXCHANGE ACT OF 1934
_____________________________________________
VillageEDOCS, INC.
_____________________________________________
(Exact Name of Registrant As Specified in Charter)
California 33-0668917
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(State or jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
14471 Chambers Road, Suite 105, Tustin, California 92780
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (714) 734-1030
Securities to be registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which
To be so registered Each class is to be registered
N/A N/A
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Securities to be registered pursuant to Section 12(g) of the Act:
Common Stock (no par value)
(Title of Class)
Total Number of Pages: _____
Index to Exhibits at Page: _____
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TABLE OF CONTENTS
PART I
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PAGE NO.
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ITEM 1. Description of Business 4
Overview 5
Marketing and Customers 7
Current Services 10
Services Development 10
Sales 11
Competition 11
Product Liability Insurance 11
Employees 11
Risk Factors 11
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations 16
Income Statement Data 17
Balance Sheet Data 17
Results of Operations 17
Liquidity 19
Capital Resources 20
ITEM 3. Description of Property 21
ITEM 4. Security Ownership of Certain Beneficial Owners and Management 21
ITEM 5. Directors, Officers, and Control Persons 22
Directors and Executive Officers of the Company 22
Business Experience of Executive Officers and Directors 23
Board of Directors 24
ITEM 6. Executive Compensation 24
Summary Compensation Table 25
Employment and Other Agreements 25
Fiscal Year End Option Values and Exercises 25
Stock Options 25
Board of Director Compensation 26
ITEM 7. Certain Relationships and Related Transactions 26
ITEM 8. Description of Securities 27
Common Stock 27
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PART II
ITEM 1. Market Price of and Dividends on the Registrant's Common
Stock and Other Shareholder Matters
Market Price of Registrant's Common Stock
Dilution and Absence of Dividends
Shareholders
ITEM 2. Legal Proceedings
ITEM 3. Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure
ITEM 4. Recent Sales of Unregistered Securities
ITEM 5. Indemnification of Officers and Directors
PART F/S
Financial Statements and Supplementary Data
PART III
ITEM 1. Index to Exhibits
ITEM 2. Description of Exhibits
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FORWARD-LOOKING INFORMATION
This Registration Statement on Form 10 includes forward-looking statements
within the meaning of Section 21E of the Securities Exchange Act of 1934, as
amended. These statements are based on our beliefs and assumptions, and on
information currently available to us. The words "anticipated," "believe,"
"expect," "plan," "intended," "seek," "estimate," "project," "will," "could,"
"may," and similar expressions are intended to identify forward-looking
statements. These statements include, among others, information regarding future
operations, future capital expenditures, and future net cash flow. Such
statements reflect the Company's current views with respect to future events and
financial performance and involves risks and uncertainties, including, without
limitation, general economic and business conditions, changes in foreign,
political, social and economic conditions, regulatory initiatives and compliance
with governmental regulations, the ability to achieve further market penetration
and additional customers, and various other matters, many of which are beyond
the Company's control, including, without limitation, the risks described under
the caption "BUSINESS- RISK FACTORS." Our future results and stockholder values
may differ materially from those expressed in these forward-looking statements.
Many of the factors that will determine these results and values are beyond our
ability to control or predict. Investors are cautioned not to put undue reliance
on any forward-looking statements. In addition, we do not have any intention or
obligation to update forward-looking statements after the effectiveness of this
registration statement, even if new information, future events or other
circumstances have made them incorrect or misleading. For these statements, we
claim the protection of the safe harbor for forward-looking statements contained
in Section 21E of the Exchange Act.
ITEM 1. DESCRIPTION OF BUSINESS
OVERVIEW
VillageEDOCS, Inc. (the "Company" or "We") is incorporated in the State of
California. The Company was originally incorporated in 1995 in Delaware as
SoftTek Inc. In August 1997, we changed our name to SoftTek Technologies Inc.
and reincorporated in California. In 1999 we changed our name to VillageFax.com,
Inc., and then finally to VillageEDOCS, Inc. in 2000. The Company initially
provided product marketing services and fax server products; however, it no
longer provides these services or products. We now provide Internet-based
business-to-business document delivery and receiving services for enterprises
that desire to outsource their requirements to a service.
We are a cost effective provider of high quality, fast, affordable, worldwide
business-to-business electronic document delivery solutions that integrate with
the enterprises existing business processes. The Company operates a service that
delivers electronically a clients' outbound documents to be printed out as a fax
document on the recipients' fax machine. The client receives inbound documents
electronically via e-mail. The electronic document delivery and receipt services
technology we have developed and implemented has proven to generate improved
speed, quality, reliability, and lower costs for our clients. The Company's
services are designed for a wide range of industries and sizes of business
enterprises. Current client industries include E-commerce providers, application
service providers, manufacturing companies, value added resellers, critical
weather reporting services, letter shops, public relations firms, and direct
marketing organizations. These businesses require fast and reliable delivery of
documents as a key activity in their critical business processes. The Company's
services provide these businesses with an outsourcing resource that generates
significant operational
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savings for them through improved business process efficiencies. We provide our
clients the ability to manage the exploding volume of documents and the
complexities of efficiently and effectively delivering documents. The Company
charges its clients a monthly fee primarily based on the number of document
pages sent and received during the month by the client.
Our business solutions consist of a wide range of Internet document delivery
services that integrate with existing Internet-connected systems within
companies where key documents, such as invoices, statements, purchase orders,
and ticket confirmations, originate.
Our proprietary UNIX-based fax software runs on multiple Sun Microsystems
processors. We employ Cisco technology for inbound faxing and Lucent-Ascend
access technology for out-bound faxing. The different technologies that comprise
the service are interconnected and interoperate in a fault tolerant
configuration using Cisco switches and local-directors. Our service has multiple
tier-one wide-band Internet service provisioning from diverse carriers and
multiple global telephony access through several global telephony providers.
The service operations are co-located with Global Crossing in Anaheim,
California. The Global Crossing facility is served by all major global carriers
and is a physically, environmentally, and utility hardened site with diverse
feeds, multiple redundant emergency power generators, and emergency fuel
reserves. These fully redundant systems and emergency power provisions are
designed to provide non-stop service integrity and no single point of failure.
Management of the service operations is co-located with the corporate
headquarters and service development organization in Tustin California. The
Tustin facility also includes a technology laboratory for development,
operational support, and piloting emerging services.
Clients send electronic documents from their desktop through the Internet to our
service using industry standard MIME compliant e-mail and industry standards
based browser software (i.e. Internet Explorer and Netscape). Clients fax-enable
their internal back office data processing systems and send their electronic
document using our MIME compliant "Email to Fax Tool Kit" or "HTTP Fax Tool
Kit".
MARKETING AND CUSTOMERS
Our marketing and sales focus is on business enterprises that understand the
value of outsourcing their business-to-business document delivery needs. Our
marketing activities target business enterprises that have document delivery
requirements that are not effectively met by traditional fax-services and fax
server solutions.
The Company has historically expended a small amount of its resources in
marketing its services. Our marketing has relied primarily on press releases and
web awareness programs to generate sales leads. This limited approach
nonetheless has attracted several major clients who have provided the Company
with a slight increase in sales beginning in the third quarter of 1999. Recently
the Company initiated a direct marketing approach that has generated a number of
prospective clients and several new clients. This approach targets specific
industries in which the businesses have a need to deliver a large volume of
documents as part of their key business processes. The Company has not
implemented an aggressive marketing strategy due to inadequate financial
resources. The Company plans to obtain additional
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capital in the near future through a private placement or public offering of our
stock. If we are successful in raising additional capital, we will accelerate
and expand our sales and marketing programs. These programs will focus on
raising awareness of the Company's services and obtaining customer loyalty.
Depending upon the amount of capital we are able to obtain, our marketing
activities will include:
Image marketing
Lead generation lists for identifying dealers and end-users
Alliances with vertical market partners
Build the VillageEDOCS Brand by advertising the VillageFax.com,
VillageMessage.com, VillageMessenger.com, and VillageOneBox.com "Brand
Names"
Enhance the Company's ability to provide services that support business
process applications that generate large volumes of documents and messages
Vertical market focused tradeshows
Vertical market focused speaking engagements
Our services are designed for use by a wide range of types and sizes of business
enterprises in virtually any industry. The technology the Company has developed
and implemented to provide its document delivery and receipt services have
proven to generate improved speed, quality, reliability, and lower costs for its
clients. The Company currently has about 40 active clients.
The Company currently has a National Sales Manager, three U.S. regional sales
managers, and three direct sales people. All regional sales managers have been
hired since July 10, 2000. We intend to grow our client base primarily through
indirect sales channels. Throughout the year 2000, regional sales managers will
focus on developing sales channels by driving strategic sales through targeted
qualified dealers under the Company's channel partners program. In alliance with
these dealers, the Company will employ a high intensity end user sales
generation program. This includes using the Company's telesales client care
group to assist in the identification and development of dealers and clients
through strategically focused lead generation and end-user support programs. To
achieve its sales objectives, the Company will engage dealers from the following
sales channel categories:
Value Added Resellers that have historically supported core business process
applications for large and medium sized companies. Examples include various
accounts receivable, Oracle, and SAP systems.
Application Service Providers who provide business process applications that
generate large volumes of business-to-business documents and messages.
Examples include, a service for money managers, letter shops, Customer
Relations Management (CRM), and Enterprise Resource Planning (ERP) systems.
Independent Software Vendors who market applications to end-users that
generate large volumes of documents and messages. Examples include CRM, ERP,
and Call Centers.
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[_] Information Systems Consultants who traditionally provide advice and
development support to enterprises in core business process applications.
Examples include oil and gas industry distribution systems and grassroots
campaign organizers, among others.
Channel partners who sell our services share in the revenue generated from their
clients' use of these services. This revenue sharing encourages these partners
to increase their revenues by initially focusing on their existing key accounts.
This initial focus affords the Company and the dealer the opportunity to quickly
obtain sales growth. The early financial rewards obtained by the dealer from
their existing customer base will enable the Company to further develop its
sales activities. For dealers who derive value out of selling our service under
their own name, the Company can provide a Private Labeled Service Entry Point
(SEP) into the service. This unique SEP capability will enable the Company to
obtain and increase dealer and client loyalty.
Our regional sales managers will focus their activities on capturing accounts
consistent with the Company's "ideal profile" outbound services account. That
is, those accounts delivering an average of 50,000 or more outbound document
pages per month. Strategic sales goals will provide regional managers with the
time necessary to expand the sales channels through the development of key
accounts.
CURRENT SERVICES
The Company is an outsourcing resource that provides services to businesses. We
offer business organizations convenient, reliable, feature-rich, and cost-
beneficial Internet-based messaging and communication outsourcing services for
their business-to-business, document delivery requirements. For outbound
document delivery by fax, our client sends a list of names and fax numbers and
their documents to our communication system via the Internet. Upon receiving
the electronic message or document, and the names and phone numbers, the
Company's system prepares the document for delivery over telephone lines. When
we have completed the delivery by fax, our system sends the client a report of
their delivery status. For inbound messages the fax transmission is received
via the Company's telephone lines then sent over the Internet to the client's
email system.
Our outbound document delivery service enables our clients to send faxes to
individual companies or broadcast lists through the client's preferred desktop
applications such as e-mail, CRM, ERP, and browser. In addition, client
companies can fax- enable a variety of critical applications such as ERP, CRM,
and web- based E-Commerce. The Company focuses on client empowerment, enabling
each client to use their preferred method for faxing and the operational
features that satisfy their existing business processes.
The Company currently provides three primary outbound document delivery
services:
[_] Computer Automated Delivery - Enables an enterprise to automatically
generate documents from their information systems to be delivered to any fax
machine, which serves as a remote printer, worldwide. Examples include
billing systems, call centers, customer relationship management (CRM)
systems, and enterprise resource planning systems.
[_] Broadcast Delivery - Clients electronically send high volumes of the same
messages individually addressed to each unique recipient, which are received
as a fax document.
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[_] Enterprise-Desktop Document Delivery - Users can send documents via their
desktop e-mail, browser, or desktop application such as CRM, which are
printed out as a fax at the recipient's location.
The Company also currently provides two primary inbound document and message
delivery services:
[_] Enterprise-Desktop Reception - Individual users can receive documents and
messages via their e-mail that were sent to them by fax.
[_] Computer Automated Reception - Enterprises such as E-commerce businesses can
receive directly into their information systems bulk documents that were
delivered by fax.
The Company provides inbound fax services to enterprises that desire more cost-
effective means of handling the inbound faxes they receive. Our service enables
enterprises to receive fax documents electronically. Depending upon the desire
of the client, when the Company receives an inbound fax on behalf of a client,
we can send the fax directly to an individual's e-mail, central administrator
for further distribution, or to back office applications for processing. Once
received by the client, these documents may be stored digitally, printed,
forwarded, sent to another fax machine, deleted, or annotated, all with standard
desktop software.
Examples of our services that clients have the ability to integrate into their
business processes that demonstrate the effectiveness of our services are
illustrated as follows:
[_] A manufacturing client re-engineers their accounts receivable system to more
effectively send invoices, statements, and past-due reminders. Their solution
was to use the Company's outbound service to print their invoices, statements,
and reminders at their customers' accounts payable locations. The client
believes this business process change will reduce their outstanding receivables
by five days, at one-tenth the cost of their old mailing-based system. The
Company's solution is one-half the cost of an internal option, which lacks many
required capabilities that only the Company's services provide. The client was
able to use the Company's solution immediately with no investment in capital
resources and minimal time requirements of employees.
[_] Existing Customer Relationship Management (CRM) system implementations do
not address the document delivery needs of business enterprises and Application
Service Providers. For example, using the CRM system a user sends several quotes
and communications daily to its customers. To accomplish delivery, the user
prints and then faxes the documents to its customers. To satisfy the customer's
request, the user may need to send the proposal in different media and methods.
The user has to fax the proposal, e-mail it, print several copies and then send
them via an overnight delivery service. To accomplish this, the user has to
print the documents to be faxed, fax them to a person and notify such person by
pager that the document has been faxed. Additionally, prepare several proposals,
send them via an overnight delivery service, and, finally, notify the recipient
by e-mail that all these actions have occurred and attach the proposal to the e-
mail. The Company's service would enable this user to deliver these documents
through the user's CRM system, and the Company's system would perform the
document delivery tasks without the user having to leave their desk except in
connection with preparation of the overnight delivery package. By using our
services, a user reduces operating costs and the time necessary to accomplish
the task, thereby enabling them to focus on other activities.
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[_] E-Commerce clients take customer orders over the Internet and need to place
fulfillment orders with the product provider and in-turn receive shipping
confirmations to complete their business process. The Company's outbound and
inbound services enable E-Commerce providers to fulfill their document delivery
and receipt requirements. Outsourcing the requirements compared to an internal
solution saved one client $160,000 in capital investment and operational cost
the first year, and will save 50% cost over three years. The Company's solution
was one-half the cost of an internal option, which lacked many required
capabilities that only the Company's service provides. The client was able to
use the Company's solution immediately with no investment in capital resources
and minimal time requirements of employees.
Our services are designed to provide the following key benefits to business
enterprise clients:
[_] Preferred User Interface - Allow easy access via the users' preferred
interfaces such as e-mail, Web browser, and CRM metaphors, and continue to
integrate into other widely accepted business desktop metaphors.
[_] User Empowerment - Service features enable users to control all aspects of
their document delivery and receipt processes. Deliveries are confirmed via
e-mail. To enable our users to keep their records up to date, we also notify
them if a delivery is not successful.
[_] Anytime, Anywhere Accessibility - We have designed our services to allow
easy access by clients seven days a week, 24 hours a day, from any location.
[_] International Services- Allow clients to send and receive documents to and
from 230 countries.
[_] Client Support - The Company offers clients support seven days a week, 24
hours a day.
[_] Security - The Company's electronic services provide a type of security not
available with traditional faxing.
[_] Unified Messaging - A client's e-mail box can function as a single
repository for all outbound and inbound faxes.
Why do businesses prefer to electronically send a fax versus e-mail?
[_] A document that is already printed-out as a fax is immediately usable by and
friendlier to the recipient. A recent Pitney Bowes study reported that 88 %
of all e-mails are printed. (source: Davidson Consulting)
[_] Fax is an e-mail that is already printed-out for the recipient.
[_] Faxing a document is a proactive event that pushes the information to the
recipient. It allows the recipient to immediately view and determine the
content value of the message or document.
[_] E-mail is a passive method of information delivery that relies on the
recipient to commit time and energy to investigate in order to determine the
e-mail content value. An e-mail is like postage due mail to which the
recipient must commit its most valuable resource, time.
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[_] When a business sends an e-mail to deliver a document, it has invited the
other party to participate in its business process. The cost of delivering
the fax is less than the human and operational cost of the recipient
completing the business process, which is printing out the document or
message.
[_] A fax is a permanent document that cannot be altered; an e-mail can be
altered.
SERVICES DEVELOPMENT
We actively and continually engage in development of additional services to
offer to our existing and potential clients. The Company maintains its own
technology development function that currently includes five senior software
engineers.
The Company plans to offer additional services in the future that include
certified delivery of electronic documents, and enabling enterprises to print
documents on printers in geographically separated facilities through its global
print authentication capabilities, among others.
The Company's growth will be enhanced by the introduction of Internet-based
unified messaging services. The Company is working on developing a complete
"unified" messaging service that will provide not only faxing and e-mail, but
also voicemail and other messaging formats. The Company's objective is to
significantly boost revenues and profits by reaching additional device types
with multiple message media types including cell phones, pagers, and handheld
computers. The planned evolution in the Company's services architecture will
give the Company a complete unified messaging service incorporating a variety of
multimedia sending and delivery options. Implementation of this strategy will
position the Company in "One-Box" universal messaging.
The Company expects to achieve a competitive position in unified messaging
because this emerging service is well within the scope of its business-to-
business document and messaging delivery core competencies. Further, unified
messaging is still characterized by a fluid competitive environment. The
Company's strategy is to enable its clients to have the following unified
messaging capabilities:
[_] Receive e-mail, voicemail, and fax messages using a single, common
repository.
[_] Retrieve e-mails and faxes by telephone.
[_] Forward individual message types to any other message type.
[_] Send, receive and control messages using new wireless devices such as
display-enabled cell phones, display-enabled digital pagers and palm top
computers.
[_] Broadcast messages to recipients preferring any mix of devices such as
standard fax machines, PCs, and wireless devices.
SALES
The Company charges its clients a monthly fee primarily based on the number of
document pages sent and received during the month by the client. Sales for the
fiscal year ended December 31, 1999 were $95,887. Sales for the six months
ended June 30, 2000 were $129,701.
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COMPETITION
Our services are differentiated from those of our competitors because we offer
certain capabilities that the competition does not offer. These include user-
empowerment, accessibility anytime/anywhere, access to international services,
client's ability to use their own preferred user-interface, client care support
seven days a week and 24 hours a day, Internet security, emerging document
delivery and unified messaging capabilities.
Xpedite, FaxNet, and Media-Tel are large fax service companies that have
historically focused primarily on a different market segment than the Company's
service. The major market for these companies is the discount broadcast market.
Infrastructure and operational support costs are generally based on historical
telephone technologies and private networks. Their business model requires them
to control all aspects of their clients faxing efforts including specific
hardware and/or software. They focus on competing by being less expensive than
telephone charges rather than improving business processes.
[_] Xpedite is the largest fax service company. They focus on large volume
discount faxing. They have an indirect telephony sales channel that focuses
on volume discount applications. Proprietary software is required and forces
the client to depend on the provider in all aspects of sending the fax.
[_] FaxNet focuses on outsourcing their fax service to a variety of network
service providers such as Regional Bell Operating Companies. Their services
require proprietary software and are aimed at corporate desktop customers of
their reseller.
[_] Media-Tel, a subsidiary of enterprise messaging company AVT, operates a
private network for fax delivery. User empowerment of fax delivery and
management is non-existent for their discount target markets of banking and
mortgage brokers.
PRODUCT LIABILITY INSURANCE
The Company maintains a $2,000,000 product liability insurance policy. No
product or service legal actions have been filed against the Company and it has
not received any customer complaints that could lead to litigation.
EMPLOYEES
As of July 31, 2000, the Company had 20 full-time employees including its three
executive officers. These employees include nine engaged in sales and
marketing, four in technology development, four in operations, and three in
administration.
RISK FACTORS
The risks and uncertainties described below are not the only ones we face.
Additional risks and uncertainties not presently known to us may also adversely
impact our business operations. If any of the following risks actually occur,
our business, financial condition, or operating results could be negatively
affected.
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Unless we can obtain additional financing we will run out of cash by October
2000. Since our inception, our operating and investing activities have used
substantially more cash than they have generated. Because we will continue to
need substantial amounts of working capital to fund the growth of our business,
we expect to continue to experience significant negative operating and investing
cash flows for the foreseeable future. We currently anticipate that our
available cash resources will be sufficient to meet our anticipated working
capital and capital expenditure requirements through October 2000. This
estimate is a forward-looking statement that involves risks and uncertainties.
The actual time period may differ materially from that indicated as a result of
a number of factors so that we cannot assure you that our cash resources will be
sufficient for anticipated or unanticipated working capital and capital
expenditure requirements for this period. We will need to raise additional
capital in the future to meet our operating and investing cash requirements. We
may not be able to find additional financing on favorable terms or at all. If we
raise additional funds through the issuance of securities, these securities may
have rights, preferences or privileges senior to those of our common stock, and
our stockholders may experience additional dilution to their equity ownership.
We have a history of losses and have never been profitable. We have not achieved
profitability, we expect to continue to incur losses for the foreseeable future
and we may never be profitable. If we do achieve profitability in any period, we
cannot be certain that we will sustain or increase such profitability on a
quarterly or annual basis.
We had no revenues from our current services until August 1998. From inception
through December 31, 1999, we generated revenue of only approximately $256,225
and we incurred total expenses of approximately $4,794,933 during that same
period. We have incurred net losses each year since our inception. We incurred a
net loss of $1,046,171 for the six months ended June 30, 2000, $1,920,104 for
1999, and $1,140,650 for 1998. As of June 30, 2000, we had an accumulated
deficit of $5,584,879.
We have received a report from our independent auditors for our fiscal year
ended December 31, 1999 containing an explanatory paragraph that describes the
uncertainty as to our ability to continue as a going concern due to our
historical negative cash flow and because we did not have access to sufficient
committed capital to meet our projected operating needs for fiscal year 2000.
Our limited operating history makes evaluating our business and prospects
difficult. We have a limited operating history on which you can base an
evaluation of our business and future prospects. You should carefully consider
our prospects in light of the risks and difficulties frequently encountered by
early stage companies in new and rapidly evolving markets. Our success will
depend in part upon our ability to implement and execute our business and
marketing strategy in our US equities business and electronic markets business.
There is a risk that we will not be able to accomplish our objectives. Failure
to achieve any of our objectives could negatively affect our business, financial
condition and results of operations.
The market for business-to-business electronic commerce solutions is extremely
competitive. Because the business-to-business market place is highly
competitive and has low barriers to entry, we cannot assure you that we will be
able to compete effectively. We expect competition to intensify as current
competitors expand their product offerings and new competitors like us enter the
market. We cannot assure you that we will be able to compete successfully
against current or future competitors, or that competitive pressures we face
will not harm our business, operating results, or financial condition.
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Many of our competitors will have, and potential competitors may have, more
experience developing software and matching solutions, larger technical staffs,
larger customer bases, greater brand recognition, and greater financial and
other resources than we have. In addition, competitors may be able to develop
products and services that are superior to our products and services, that
achieve greater customer acceptance or that have significantly improved
functionality as compared to our existing and future products and services.
There is a risk that the business-to-business electronic commerce solutions
offered by our competitors now or in the future will be perceived as superior to
ours.
The Internet could become subject to regulations that affect our business. Our
business segments, both directly and indirectly, rely on the Internet and other
electronic communications gateways. We intend to expand our use of these
gateways. To date, the use of the Internet has been relatively free from
regulatory restraints. However, legislation, regulations, or interpretations may
be adopted in the future that constrain our own and our customers' abilities to
transact business through the Internet or other electronic communications
gateways. There is a risk that any additional regulation of the use of such
gateways could have a material adverse effect on our business, financial
condition, and operating results.
We depend on key personnel and will need to recruit new personnel. As we
attempt to expand our customer base, we will need to add additional key
personnel as we continue to grow. If we cannot attract and retain enough
qualified and skilled staff, the growth of our business may be limited. Our
ability to provide services to clients and expand our business depends, in part,
on our ability to attract and retain staff with professional experiences that
are relevant to technology development and other functions we perform.
Competition for personnel with these skills is intense. Some technical job
categories are under conditions of severe shortage in the United States. In
addition, restrictive immigration quotas could prevent us from recruiting
skilled staff from outside the United States. We may not be able to recruit or
retain the caliber of staff required to carry out essential functions at the
pace necessary to sustain or expand our business.
We believe our future success will depend in part on the following:
- the continued employment and performance of our senior management,
- our ability to retain and motivate our officers and key employees, and
- our ability to identify, attract, hire, train, retain, and motivate other
highly skilled technical, managerial, marketing, and customer service
personnel.
Effective trademark protection may not be available to us. We have not yet
registered "VillageEDOCS" for trademark protection in the United States. There
is a risk that we will not be able to obtain a trademark or, if we are
successful in obtaining a trademark, we may not be able to secure significant
protection for and successfully enforce the trademark. Our competitors or
others may adopt product or service names similar to "VillageEDOCS", thereby
impeding our ability to build brand identity and possibly leading to customer
confusion. Our inability to adequately protect the name "VillageEDOCS" would
harm our business.
We may not be able to protect our proprietary technology. Despite any
precautions we may take, a third party may be able to copy or otherwise obtain
and use our software or other proprietary information without authorization or
develop similar software independently. We cannot assure you that
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the steps we have taken or will take will prevent misappropriation of our
technology. Litigation may be necessary in the future to determine the validity
and scope of the proprietary rights of others, or defend against claims of
infringement or invalidity. This litigation, whether successful or unsuccessful,
could result in substantial costs and diversions of resources, either of which
could harm our business.
We may infringe intellectual property rights of third parties. Litigation
regarding intellectual property rights is common in the software and technology
industries. We have in the past received letters alleging that we are infringing
the intellectual property rights of AudioFax. We do not believe the proprietary
nature of the AudioFax software is critical to our current or future market
competiveness. Several providers of fax service software have patent license
agreements with AudioFax, and it is our understanding that our use of these
other fax software platforms would indemnify us from any infringement of
AudioFax patents. We currently plan to migrate to a fax software platform that
is compatible with our current technology, has existing license agreements with
AudioFax, and will indemnify us from infringement of AudioFax patents. This
migration is subject to the Company's ability to obtain the additional capital
needed for the license fees for the other fax software platforms. We may in the
future be the subjects of claims for infringement, invalidity, or
indemnification claims based on such claims of other parties' proprietary
rights. These claims, with or without merit, could be time consuming and costly
to defend or litigate, divert our attention and resources, or require us to
enter into royalty or licensing agreements. There is a risk that such licenses
would not be available on reasonable terms, or at all. Although we believe we
have the ability to use our intellectual property to operate, market, and
license our existing products without incurring liability to third parties,
there is a risk that our products and services infringe the intellectual
property rights of third parties.
Our products and technology depend on the continued availability of licensed
technology from third parties. We license and will continue to license certain
technology and software from third parties. These licenses are integral to our
business. If any of these relationships were terminated or if any of these
third parties were to cease doing business, we would be forced to spend
significant time and money to replace the licensed software. We cannot assure
you that we would be able to replace these licenses. This could have a material
adverse effect on our business, financial condition, and operating results.
Officers and directors may be able to influence stockholder actions. Executive
officers and directors, in the aggregate, beneficially own approximately 30% of
our outstanding voting stock. These stockholders acting together may be able to
significantly influence matters requiring approval by our stockholders,
including the election of directors, and the approval of mergers or other
business combination transactions in a manner that could conflict with our other
stockholders.
Our Certificate of Incorporation limits director liability. As permitted by
California law, the Company's Certificate of Incorporation limits the liability
of directors to the Company or its stockholders for monetary damages for breach
of a director's fiduciary duty except for liability in certain instances. As a
result of the Company's charter provision and California law, stockholders may
have limited rights to recover against directors for breach of fiduciary duty.
There is no assurance that there will be an active trading market for our stock.
There has been no public market for our common stock and there can be no
assurance that an active trading market in the Company's securities will develop
or be maintained. In addition, the stock market in recent years has
14
<PAGE>
experienced extreme price and volume fluctuations that have particularly
affected the market prices of many smaller companies. The trading price of the
common stock is expected to be subject to significant fluctuations in response
to variations in quarterly operating results, changes in analysts' earnings
estimates, and announcements of technological innovations by the Company or its
competitors, general conditions in our industry and other factors. These
fluctuation, as well as general economic and market conditions, may have a
material or adverse effect on the market price of the Company's common stock.
Penny stock regulations may impose certain restrictions on marketability of our
stock. The Securities and Exchange Commission (the "Commission") has adopted
regulations which generally define a "penny stock" to be any equity security
that has a market price (as defined) of less than $5.00 per share or an exercise
price of less than $5.00 per share, subject to certain exceptions. As a result,
our Common Stock is subject to rules that impose additional sales practice
requirements on broker-dealers who sell such securities to persons other than
established customers and accredited investors (generally those with assets in
excess of $1,000,000 or annual income exceeding $200,000, or $300,000 together
with their spouse). For transactions covered by these rules, the broker-dealer
must make a special suitability determination for the purchase of such
securities and have received the purchaser's written consent to the transaction
prior to the purchase. Additionally, for any transaction involving a penny
stock, unless exempt, the rules require the delivery, prior to the transaction,
of a risk disclosure document mandated by the Commission relating to the penny
stock market. The broker-dealer must also disclose the commission payable to
both the broker-dealer and the registered representative, current quotations for
the securities and, if the broker-dealer is the sole market maker, the broker-
dealer must disclose this fact and the broker-dealer's presumed control over the
market. Finally, monthly statements must be sent disclosing recent price
information for the penny stock held in the account and information on the
limited market in penny stocks. Consequently, the "penny stock" rules may
restrict the ability of broker-dealers to sell the Company's securities and may
affect the ability of purchasers in this Offering to sell the Company's
securities in the secondary market and the price at which such purchasers can
sell any such securities.
We have never paid dividends on our common stock and do not expect to pay any in
the foreseeable future. The Company has not paid any dividends on its Common
Stock since its inception and does not intend to pay dividends on its Common
Stock in the foreseeable future. Any earnings that the Company may realize in
the foreseeable future will be retained to finance the growth of the Company.
The number of shares eligible for future sale may adversely affect the market.
As of July 31, 2000, the Company has 13,603,459 shares of its Common Stock
issued and outstanding, all of which are "restricted securities". Rule 144 of
the Commission provides, in essence, that a person holding "restricted
securities" for a period of one year may sell only an amount every three months
equal to the greater of (a) one percent of the Company's issued and outstanding
shares, or (b) the average weekly volume of sales during the four calendar weeks
preceding the sale. The amount of "restricted securities" which a person who is
not an affiliate of the Company may sell is not so limited, since non-affiliates
may sell without volume limitation their shares held for two years if there is
adequate current public information available concerning the Company. In such
an event, "restricted securities" would be eligible for sale to the public at an
earlier date. The sale in the public market of such shares of Common Stock may
adversely affect prevailing market prices of the Common Stock.
15
<PAGE>
Outstanding options could affect the market. As of July 31, 2000, there were
outstanding stock options to purchase an aggregate of 1,068,793 shares of Common
Stock at an exercise price of $0.20 per Share; 1,015,000 shares of Common Stock
at an exercise price of $0.25 per share; 252,837 shares of Common Stock at an
exercise price of $0.50 per share; 50,000 shares of Common Stock at an exercise
price of $1.00 per share; and 1,075,090 shares of Common Stock at an exercise
price of $2.50 per share. None of such options are available for public resale
and such shares would be subject to Rule 144 of the Act upon issuance thereof.
The exercise of such outstanding options will dilute the percentage ownership of
the Company's stockholders, and any sales in the public market of shares of
Common Stock underlying such securities may adversely affect prevailing market
prices for the Common Stock. Moreover, the terms upon which the Company will be
able to obtain additional equity capital may be adversely affected since the
holders of such outstanding securities can be expected to exercise their
respective rights therein at a time when the Company would, in all likelihood,
be able to obtain any needed capital on terms more favorable to the Company than
those provided in such securities.
The forward-looking information in this Registration Statement may prove
inaccurate. This Form 10-SB contains forward-looking statements and information
that are based on management's beliefs as well as assumptions made by, and
information currently available to, management. When used in this Form 10-SB
(including Exhibits), words such as "anticipate," "believe," "estimate,"
"expect," and, depending on the context, "will" and similar expressions, are
intended to identify forward-looking statements. Such statements reflect the
Company's current views with respect to future events and are subject to certain
risks, uncertainties and assumptions, including the specific risk factors
described above. Should one or more of these risks or uncertainties materialize,
or should underlying assumptions prove incorrect, actual results may vary
materially from those anticipated, believed, estimated or expected. The Company
does not intend to update these forward-looking statements and information.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Company cautions readers that important facts and factors described in this
Management Discussion and Analysis of Financial Condition and results of
Operations and elsewhere in this document sometimes have affected, and in the
future could affect, the Company's actual results, and could cause the Company's
actual results during 2000 and beyond to differ materially from those expressed
in any forward-looking statements made by, or on behalf of, the Company.
The following income statement and balance sheet data as of and for the six
months ended June 30, 2000, and the six months ended June 30, 1999 is unaudited.
16
<PAGE>
INCOME STATEMENT DATA
<TABLE>
<CAPTION>
(unaudited)
Six Months Ended Year Ended
June 30, December 31,
------------------------------------------------------------
2000 1999 1999 1998
------------------------------------------------------------
<S> <C> <C> <C> <C>
Total revenue $ 129,701 $ 22,864 $ 95,887 $ 13,956
Net income (loss) $(1,046,171) $(1,254,243) $(1,920,104) $(1,140,650)
Earnings (loss) per common share - basic and diluted $ (0.08) $ (0.11) $ (0.16) $ (0.11)
Shares used in per share computation 13,475,466 11,484,605 12,192,766 10,143,627
</TABLE>
BALANCE SHEET DATA
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
(unaudited)
------------------------------------
<S> <C> <C>
Total assets $ 646,440 $1,523,636
Working capital $ (16,327) $ 992,901
Long-term debt $ 648,595 $ 617,898
Stockholders' $(374,272) $ 590,280
(deficit)equity
</TABLE>
RESULTS OF OPERATIONS
Net Sales
Net sales for the six months ended June 30, 2000 were $129,701, a 467% increase
over net sales for the six months ended June 30, 1999 of $22,864. The increase
in 2000 was due to the Company beginning to sell its current services in the
second half of 1999, and initiating its direct sales program in the second
quarter of the year 2000.
Net sales for the year ended December 31, 1999 were $95,887, a 587% increase
over the $13,956 net sales for the year ended December 31, 1998. The increase
was due to the fact that the Company did not begin to sell its current services
until 1999.
Cost of Sales
Cost of sales for the six months ended June 30, 2000 were $327,671, a 234%
increase over the cost of sales of $98,065 for the six months ended June 30,
1999. The increase was because the Company's operations infrastructure was
significantly further developed beginning in late 1999, and increased
telecommunications costs were incurred as a result of a higher volume of
business. The network operations infrastructure costs primarily include
operations personnel, computer equipment operating leases, software, and co-
location costs.
Cost of sales for the year ended December 31, 1999 were $213,534, a 309%
increase over the $52,243 cost of sales for the year ended December 31, 1998.
Cost of sales increased because the network
17
<PAGE>
operations infrastructure was implemented in 1999. The network operations
infrastructure costs primarily include operations personnel, computer equipment
operating leases, software, and co-location costs.
Gross margin
The increased cost of sales in the six months ended June 30, 2000 resulted in a
gross margin loss of $197,970 compared to a gross margin loss of $75,201 for the
six months ended June 30, 1999.
The increased cost of sales in the year ended December 31, 1999 resulted in a
gross margin loss of $117,647 compared to a gross margin loss of $38,287 in the
year ended December 31, 1998.
Operating Expenses
Operating expenses for the six months ended June 30, 2000 were $824,082 compared
to $1,140,610 for the six months ended June 30, 1999. The operating expenses
for the six months ended June 30, 1999 were higher because they included
$735,731 in non-cash stock option expense due to issuance of certain stock
options with exercise prices less than their fair value at grant date. These
stock option expenses were not incurred in the six months ended June 30, 2000.
Excluding stock option expense, operating expenses were $404,879 for the six
months ended June 30, 1999, and the increase of $419,203 for the six months
ended June 30, 2000 is due to additional personnel in all functions.
Operating expenses for the year ended December 31, 1999 were $1,773,102, an
$882,536 (99%) increase over operating expenses of $890,566 for the year ended
December 31, 1998. The biggest increase was stock option expense of $753,856
resulting from the issuance of stock options with exercise prices less than fair
value at grant date in the year ended December 31, 1999, compared to no stock
option expense in the year ended December 31, 1998. The remaining increase was
due to additional full time employees in 1999 in product and technology
development, sales and marketing, and general and administrative functions.
Interest income and expense
Net interest expense of $23,319 for the six months ended June 30, 2000 is
$15,113 less than net interest expense of $38,432 for the six months ended June
30, 1999, primarily because approximately June 30, 1999, $450,292 of notes
payable were converted to equity and $40,000 of notes payable were paid.
Net interest expense for the year ended December 31, 1999 was $28,555 compared
to net interest expense of $210,997 for the year ended December 31, 1998. The
primary difference was debt discount in the amount of $168,560 that was fully
amortized as interest expense in the year ended December 31, 1998 and was
related to convertible notes payable that were issued in April 1998 and
converted to equity in June 1999.
Income Taxes
As the Company has incurred operating losses through December 31, 1999 and June
30, 2000, the provision for income taxes consists only of minimum state taxes of
$800 per year. At December 31,
18
<PAGE>
1999 the Company had approximately $4,233,234 of federal and state net operating
loss carryforwards for tax reporting purposes available to offset future taxable
income. Deferred tax assets consist primarily of the tax aspects of net
operating loss carryforwards. The Company has provided a full valuation
allowance on the deferred tax assets because of the uncertainty regarding
realizability of the net operating loss carryforwards.
Net Loss
Net loss for the six months ended June 30, 2000 was $1,046,171 compared to a net
loss of $1,254,243 for the six months ended June 30, 1999. The improvement in
2000 is due to the $735,731 stock option expense incurred in 1999 discussed
above, which was partially offset by higher cost of sales and operating expenses
in the six months ended June 30, 2000.
Net loss for the year ended December 31, 1999 was $1,920,104 compared to a net
loss of $1,140,650 for the year ended December 31, 1998. The increased net loss
of $779,454 was primarily due to the increased operating expenses discussed
above.
Loss Per Share
Basic and diluted net loss per share for six months ended June 30, 2000 was
$(0.08) compared to basic and diluted net loss per share of $(0.11) for the six
months ended June 30, 1999. This difference is due to the reduced net loss in
2000 discussed above, and 1,990,861 additional average common shares outstanding
in 2000.
Basic and diluted net loss per share for the year ended December 31, 1999 was
$(0.16) compared to basic and diluted net loss per share of $(0.11) for the year
ended December 31, 1998. This difference is due to the increased net loss in
1999 discussed above, and 2,049,139 additional average common shares outstanding
in 1999.
LIQUIDITY
Operating Activities
Net cash used in operating activities for the six months ended June 30, 2000 was
$928,355, an increase of $436,677 over the $491,678 cash used in operating
activities for the six months ended June 30, 1999. The increase was primarily
because the net loss, excluding non-cash expenses for issuance of stock options
with exercise prices less than fair value at grant date was $1,038,671 for the
six months ended June 30, 2000 compared to $518,512 for the six months ended
June 30, 1999, and accounts payable and accrued expenses increased by $25,980 in
2000 compared to a $63,975 decrease in 1999.
Net cash used in operating activities for the year ended December 31, 1999 was
$1,193,934, an increase of $436,718 over the $757,216 cash used in operating
activities for the year ended December 31, 1998. The increase in 1999 was
primarily due to changes in accrued expenses and increased net loss.
19
<PAGE>
Investment Activities
The Company's investment activities consisted of the purchase of equipment. Net
cash used for investment activities was $11,026 and $8,514 for the six months
ended June 30, 2000 and 1999, respectively, and $25,934 and $10,436 for the
years ended December 31, 1999 and 1998, respectively.
Financing Activities
The Company's financing activities include proceeds from the sale of common
stock, issuance of convertible notes payable and stockholder loans, and
principal payments on notes payable and capitalized leases.
Net cash used in financing activities for the six months ended June 30, 2000 was
$30,455, all of which was principal payments on capitalized leases. Net cash
provided by financing activities in the six months ended June 30, 1999 was
$2,446,713, and included net proceeds of $2,254,213 and $230,000 from the sale
of common stock and stockholder loans, respectively, and principal payments of
$37,500 on notes payable.
Net cash provided by financing activities for the years ended December 31, 1999
and December 31, 1998 was $2,437,253 and $802,292, respectively. The Company
received net proceeds from the sale of common stock in the amount of $2,254,213
and $102,000 in the years ended December 31, 1999 and December 31, 1998,
respectively. The Company received net proceeds from loans of $230,000 and
$700,292 in the years ended December 31, 1999 and December 31, 1998,
respectively. The net proceeds from loans in 1998 include $450,292 of
convertible notes payable, all of which were converted to equity in 1999.
CAPITAL RESOURCES
The Company does not currently have any material commitments for capital
expenditures other than those expenditures incurred in the ordinary course of
business.
To date, we have funded our capital requirements and our business operations
primarily with funds provided from the sale of common stock and from borrowings,
supplemented by revenues from sales of our services. As of July 31, 2000, the
Company has received $3,741,505 from the sale of common stock and convertible
notes subsequently converted into common stock. We will require additional
financing to support our operations until we become profitable. Such sources of
financing could include capital infusions, additional equity financing, or debt
offerings. Our management personnel are actively pursuing various financings
alternatives. In our opinion, together with our current revenue stream, we have
sufficient cash to operate at current staffing levels through October 2000. If
additional financing of approximately $5 million is obtained, our management
believes that we will have adequate cash to sustain operations until we become
profitable. There can be no assurance that additional funding will be available
on acceptable terms, if at all, or that such funds if raised, would enable the
Company to achieve and maintain profitable operations.
20
<PAGE>
ITEM 3. DESCRIPTION OF PROPERTY
The Company leases approximately 4,600 square feet of air-conditioned space.
The Company occupies approximately 3,600 square feet of this space for office
and product development uses, and 1,000 square feet is subleased. The space is
located at 14471 Chambers Road, Suite 105, Tustin, California 92780. The lease
expires May 2004, and the sublease expires January 2001. The cost of the
occupied space is approximately $4,600 per month. Additionally, The Company co-
locates its operating systems equipment at a hardened facility in Anaheim,
California that is hosted by Global Center, Inc. The co-location cost is
approximately $2,800 per month.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information with respect to the
beneficial ownership of shares of the Company's Common Stock owned as of July
31, 2000 beneficially by (i) each person who beneficially owns more than 5% of
the outstanding Common Stock, (ii) each director of the Company, (iii) the
President and Chief Executive Officer of the Company (the only executive officer
of the Company whose cash and non-cash compensation for services rendered to the
Company for the year ended December 31, 1999 exceeded $100,000), and (iv)
directors and executive officers as a group:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------
Name of Beneficial Owner (1) Amount and Nature of Percent of Class (3) (4)
Beneficial Ownership (2)
-------------------------------------------------------------------------------------------
<S> <C> <C>
Tim Dales (5) 2,500,000 16.7
-------------------------------------------------------------------------------------------
James Townsend (6) 3,460,488 23.1
-------------------------------------------------------------------------------------------
C. Alan Williams (7) 2,773,282 18.5
-------------------------------------------------------------------------------------------
J. Thomas Zender (8) 406,138 2.7
-------------------------------------------------------------------------------------------
H. Jay Hill (9) 231,138 1.5
-------------------------------------------------------------------------------------------
K. Mason Conner (10) 631,138 4.2
-------------------------------------------------------------------------------------------
All directors and executive 4,453,357 29.8
officers as a group (6 persons)
-------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------
</TABLE>
(1) The address of each individual is in care of the Company.
(2) Represents sole voting and investment power unless otherwise indicated.
(3) Based on approximately 13,603,765 shares of the Company's Common Stock
outstanding at July 31, 2000 plus, as to each person listed, that portion
of Company Common Stock subject to outstanding options, warrants, and
convertible debt which may be exercised or converted by such person, and as
to all directors and executive officers as a group, unissued shares of
Company Common Stock as to which the members of such group have the right
to acquire beneficial
21
<PAGE>
ownership upon the exercise of stock options or warrants, or conversion of
convertible debt within the next 60 days.
(4) Excludes 3,317,430 shares reserved for issuance under outstanding options
and warrants.
(5) May be deemed to be a "founder" of the Company for the purpose of the
Securities Act.
(6) Includes warrants to acquire 49,256 shares of Common Stock at $2.50 per
share, debt convertible to 135,409 shares of Common Stock at $2.50 per
share, and options to acquire 31,138 shares of Common Stock at $2.50 per
share.
(7) Includes debt convertible to 108,282 shares of Common Stock at $2.50 per
share.
(8) Includes options to acquire 135,000 shares of Common Stock at $0.20 per
share, and 31,138 shares at $2.50 per share.
(9) Includes options to acquire 200,000 shares of Common Stock at $0.20 per
share, and 31,138 shares at $2.50 per share.
(10) Includes options to acquire 600,000 shares of Common Stock at $0.25 per
share, and 31,138 shares at $2.50 per share.
ITEM 5. DIRECTORS, OFFICERS, AND CONTROL PERSONS
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth certain information with respect to each person
who is a director or an executive officer of the Company as of July 31, 2000.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------
NAME AGE POSITION
------------------------------------------------------------------------------------------
<S> <C> <C>
James Townsend 54 Chairman of the Board of Directors
------------------------------------------------------------------------------------------
K. Mason Conner 43 President, Chief Executive Officer, Director
------------------------------------------------------------------------------------------
Robert L. Daniels 62 Vice President Operations
------------------------------------------------------------------------------------------
Fred J. Barnes 60 Chief Financial Officer
------------------------------------------------------------------------------------------
J. Thomas Zender 60 Director, Corporate Secretary
------------------------------------------------------------------------------------------
H. Jay Hill 60 Director
------------------------------------------------------------------------------------------
</TABLE>
Executive officers are elected by the Board of Directors and serve until their
successors are duly elected and qualify, subject to earlier removal by the Board
of Directors. Directors are elected at the annual meeting of shareholders to
serve for their term and until their successors are duly elected and qualify, or
until their earlier resignation, removal from office, or death. The remaining
directors may fill any vacancy in the Board of Directors for an unexpired term.
See "Board of Directors" for information regarding the Directors' terms.
22
<PAGE>
BUSINESS EXPERIENCE OF EXECUTIVE OFFICERS AND DIRECTORS
James Townsend has been a director since 1996 and has been Chairman of the Board
since 1998. He has 35 years of technical and financial management expertise
including Development Manager of data protocols at Rockwell, Business Unit
Manager at Control Data Corp., co-founder of The Protocol Team (that developed
the X.25 Protocol for Amdahl Computers), and as co-founder and CFO of Newport
Systems, which was acquired by Cisco Systems.
K. Mason Conner has been President, a Board Member, and Acting Vice-President of
Sales since 1998 and Chief Executive Officer since 1999. He has 24 years in
sales and business management experience, including 18 years of direct and
channel sales experience in the voice and data communications products and
services industry. In the early 1980's he was involved in the application of
Internet Protocol technologies with the military. In the late 1980s and early
1990s he was a principal strategist for an international initiative to transform
K-12 education through the use of the Internet. He was a lead consultant with
LTS for the electronic vulnerability threat assessment of the Los Angeles
Airport Department after the "UniBomer" threat. He has held senior sales
management positions with Banyon Systems, Doelz Networks, and Timeplex. During
the five years prior to joining the Company, Mr. Conner was Director of Sales at
Telecom Multimedia Systems, Vice President of Sales at Lo Tiro-Sapere, and Vice
President of Sales at Digital Network Architectures.
Robert L. Daniels has been Vice President of Operations since 1999 and Chairman
of our Advisory Board since 1997. In the late 1960s he began his involvement in
the application of Internet Protocol technologies within the military.
Throughout the late 1980s and early 1990s he was involved in an international
initiative to transform K-12 education through the use of the Internet. He was
the consultant with LTS for the electronic vulnerability threat assessment of
the Los Angeles Airport Department after the "UniBomber" threat. Mr. Daniels
has 38 years of management and technical-services operations experience,
including 25 years of experience in Internet Protocol technologies. He has held
senior technical management positions at Pacific Bell, Pacific Telesis, Doelz
Networks, and MIDACS. He has a Ph.D. in Information Systems Management, MBA, and
is Lt. Col. (Ret.) USMC.
Fred Barnes has been Vice President of Finance and Chief Financial Officer since
1999. He has extensive financial and operations experience in both public and
private corporations, including managing four public offerings and obtaining
capital from a wide range of other sources. Mr. Barnes is a CPA who has served
in CFO and COO positions in a broad range of industries and companies, including
Arthur Andersen, Smith International, Coldwell Banker Residential, WorldTel
Services, and Lau Capital Funding. Barnes earned a B.S. in Finance from UCLA.
Thomas Zender has been a director since 1996. He is an information technology
industry consultant specializing in strategic business development with 35 years
of management and marketing experience. He has held senior marketing and
corporate development positions for GENRAD, Calcomp, MAI Systems, Encore
Computer, General Electric, Honeywell Information Systems, MTI Technology, and
was CEO of Strategic Business Development Corp. He has been an officer in three
publicly held corporations, one NYSE listed company and two NASDAQ traded
companies. He is a board member of Forum for Corporate Directors, an Internet
ASP, and a member of Tech Coast Venture Network.
23
<PAGE>
Jay Hill has been a director since 1997. He has served on 14 Boards of
Directors. For the last 17 years, he has primarily been a senior executive in
turnaround situations in information technology and telecommunication companies.
Mr. Hill has been President of Unitron Medical Communications, Inc. (d/b/a Moon
Communications), SunCoast Environmental Controls and Amnet (Netlink), and has
held senior sales and marketing management positions with Harris Corporation,
Paradyne/AT&T, Inforex, and IBM. Mr. Hill currently serves on the board of an
Internet ASP in the financial market. During 1999 Moon Communications, which was
then a subsidiary of Sabratek Corp., filed for protection under Chapter 11 of
the U.S. Bankruptcy Code in connection with the reorganization of Sabratek.
BOARD OF DIRECTORS
The Company's Bylaws fix the size of the Board of Directors at no fewer than
three and no more than five members, to be elected annually by a plurality of
the votes cast by the holders of Common Stock, and to serve until the next
annual meeting of stockholders and until their successors have been elected or
until their earlier resignation or removal. Currently there are four directors,
all of whom were elected on June 24, 1999.
ITEM 6. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table shows the compensation paid or accrued by the Company for
the fiscal years ended December 31, 1998 and 1999 to or for the account of the
President and Chief Executive Officer. No other executive officer or director
of the Company received benefits or annual salary and bonus of $100,000 or more
during the stated period. Accordingly, the summary compensation table does not
include compensation of other executive officers.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
----------------------------------------------------------------------------------------------
NAME& PRINCIPAL SALARY BONUS OTHER STOCK OPTIONS LTIP OTHER ($)
POSITION ($) ($) ($) (#) PAYOUTS ($)
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Fiscal 1998
Mason Conner - - - -
President,CEO $50,000 -
Fiscal 1999
Mason Conner - 120,000 - -
President,CEO $81,667 $42,708
----------------------------------------------------------------------------------------------
</TABLE>
24
<PAGE>
EMPLOYMENT AND OTHER AGREEMENTS
The Company has a written employment agreement with Mason Conner dated
September 3, 1999, which sets forth the terms and provisions of his employment
as our President and Chief Executive Officer. Under the agreement, Mr. Conner
is to be paid a base salary of $105,000 per year effective July 1, 1999, and has
options to purchase 480,000 shares of the Company's common stock at $0.25 per
share which vest over five years from his start date of September 15, 1997 and
expire September 15, 2007, and options to purchase 120,000 shares of our common
stock at $0.25 per share which vested May 31, 1999 and expire May 31, 2009.
FISCAL YEAR END OPTION VALUES AND EXERCISES
The following table provides information with respect to the year-end value of
unexercised stock options for each of the executive officers named in the
summary executive compensation table. The dollar values of unexercised options
are calculated by determining the difference between the fair market value at
fiscal year end of the common stock underlying the options and the exercise
price of the options. The fair market value is $2.50 per share, the per share
price of the common stock offering which closed in May 1999. No stock options
were exercised during the fiscal years ended December 31, 1998 and 1999, nor
during the six months ended June 30, 2000.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------
Name Number of Unexercised Options Value of Unexercised In-the
at FYE Exercisable on or after Money Options at FYE
January 1, 1998 or January 1, Exercisable on or after January
1999 1, 1998 or 1999
--------------------------------------------------------------------------------------------------
<S> <C> <C>
Fiscal 1998:
--------------------------------------------------------------------------------------------------
Mason Conner 480,000 $1,080,000
--------------------------------------------------------------------------------------------------
Fiscal 1999:
--------------------------------------------------------------------------------------------------
Mason Conner 600,000 $1,350,000
--------------------------------------------------------------------------------------------------
</TABLE>
STOCK OPTIONS
In 1997 the Company adopted a stock option plan (the "Plan") authorizing the
issuance of options to acquire up to 5,000,000 shares of common stock to
employees and certain outside consultants. The Plan allows for the issuance of
either non-qualified or incentive stock options pursuant to Section 422 of the
Internal Revenue Code. As of July 31, 2000, options to purchase approximately
3,038,883 shares at prices ranging from $0.20 to $2.50 per share and non-
employee consultants and were outstanding under the Plan. In addition to
options granted under the Plan, as of July 31, 2000 options to purchase
approximately 252,837 shares at $0.50 per share by non-employee consultants, and
options to purchase approximately 170,000 shares at $0.25 to $1.00 per share by
employees were outstanding. The Plan provides that (a) no option shall be
exercisable after the expiration of ten years from the date it was granted,
unless a shareholder owns 10% or more of the total combined voting power of all
classes of stock of the Company, whereupon the expiration date is five years
after the grant date, (b) the exercise price of each incentive stock option
shall be not less than 100% of the fair market value of the stock
25
<PAGE>
subject to the option on the date the option is granted, unless a shareholder
owns 10% or more of the total combined voting power of all classes of stock of
the Company, whereupon the exercise price shall be at least 110% of the fair
market value of the shares of the stock subject to option on the date the option
is granted, (c) the exercise price of each non-qualified stock option shall not
be less than 85% of the fair market value of the stock subject to the option on
the date the option is granted, (d) in the event an optionee's continuous status
as an employee, director, or consultant terminates, the optionee may exercise
their option up to the earlier of 90 days after the termination or the
expiration of the term of the option, unless employment is terminated because of
disability, whereupon the optionee may exercise their option up to the earlier
of six months following the termination or the expiration of the term of the
option, and (e) if the Company is not the surviving entity in any merger or
other reorganization, or sells or exchanges substantially all of its assets, or
is dissolved and liquidated, or any person or entity acquires more than 50% of
the outstanding shares of the Company's voting stock, then all options granted,
including those not otherwise vested, shall become exercisable in full.
BOARD OF DIRECTOR COMPENSATION
Members of our board of directors receive no cash compensation for services as a
director or for attendance at or participation in meetings. Directors receive
options to purchase common stock as compensation for services as a director.
Each current director was granted options to purchase 31,138 shares of our
common stock at $2.50 per share as compensation for their current term, which
began on June 24, 1999 and expires at the date of the next shareholders'
meeting. Directors are reimbursed for out-of-pocket expenses incurred by them in
connection with attending meetings. All directors have options to purchase
shares of the Company's Common Stock as set forth in the table in Item 4 of this
Registration Statement. The Company has no other arrangements regarding
compensation for services as a director.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In 1998 the Company issued convertible notes payable in the amount of $450,292,
including $123,000 to Jim Townsend, Chairman of the Board, bearing interest at
10 % per annum and an original maturity of September 1998. Upon issuance, the
noteholders received three shares of the Company's common stock for every dollar
loaned, totaling 1,350,876 shares, including 369,000 shares to Mr. Townsend.
The notes were convertible into shares of the Company's common stock for every
dollar at a price of $0.30 per share. The maturity date of the notes was
extended to June 1999 and the Company offered noteholders the option to either:
1) convert the principal and accrued interest on the notes to shares of the
Company's common stock at $0.30 per share; or 2) convert the principal and
accrued interest to common stock at $2.50 per share and receive 7.334 warrants
to purchase common stock at $0.01 per share, for each share converted. Notes
totaling $450,292 plus accrued interest of $52,606 were converted to common
stock in June 1999, including Mr. Townsend's note for $123,000 plus accrued
interest of $12,205. The number of shares of common stock and warrants that
were issued in connection with the conversion was 1,017,501 shares, including
450,685 shares to Mr. Townsend, and 658,877 warrants, none of which were to Mr.
Townsend. The warrants expire June 30, and July 31, 2002.
In 1997, the Company borrowed $50,000 from Mr. Townsend. In June 1999, the note
plus accrued interest were exchanged for a convertible note in the amount of
$61,570, bearing interest at 10% per annum. Mr. Townsend has the option to
convert the note plus accrued interest into the Company's
26
<PAGE>
common stock at $2.50 per share. As an incentive to extend the terms of the
note, the Company granted the holder warrants to purchase 49,256 shares of the
Company's common stock at $2.50 per share. These warrants expire June 30, 2004.
The note and accrued interest are due upon the first to occur of: 1) acquisition
of controlling interest in the Company by a third party; 2) on June 30, 2002; or
3) receipt by the Company of equity financing of at least $6,000,000.
Beginning in September 1998, the Company borrowed funds from Mr. Townsend. In
June 1999, the related notes, which totaled $235,000, plus accrued interest,
were exchanged for a convertible note in the amount of $246,177 bearing interest
at 10% per annum. The note is convertible into the Company's common stock at
$2.50 per share. The note and accrued interest are due upon the first to occur
of: 1) acquisition of controlling interest in the Company by a third party; 2)
June 30, 2002; or 3) receipt by the Company of equity financing of at least
$6,000,000.
Total interest expense recognized on these original and convertible notes
payable to Mr. Townsend was $15,387 for the six months ended June 30, 2000, and
$33,706 and $6,880 for the years ended December 31, 1999 and 1998, respectively.
ITEM 8. DESCRIPTION OF SECURITIES
COMMON STOCK
The Company's authorized capital stock consists of 40,000,000 shares of common
stock, no par value, of which 13,603,765 shares were outstanding at July 31,
2000. As of July 31, 2000, 4,057,279 shares of common stock have been reserved
for issuance under outstanding options and warrants.
Holders of the Company's common stock are entitled to one vote per share on all
matters to be voted on by the shareholders. Holders of the Company's common
stock have cumulative voting rights with respect to the election of directors of
the Company, whereby any stockholder may multiply the number of shares he is
entitled to vote by the number of directors to be elected and allocate his votes
among the candidates in any manner he chooses. Holders of the common stock are
entitled to receive dividends when and as declared by the Company's Board of
Directors out of legally available funds. The Company has not paid any
dividends since its inception and expects that no dividends on the common stock
will be declared in the foreseeable future. There can be no assurance that any
dividends on the common stock will be paid in the future. Shares of common
stock have no pre-emptive rights. Upon a dissolution and liquidation of the
Company, each share of common stock is entitled to share ratably in the assets
available for distribution to holders of the equity securities after
satisfaction of all liabilities.
The transfer agent for our common stock is U.S. Stock Transfer Corporation.
27
<PAGE>
PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON STOCK AND
OTHER SHAREHOLDER MATTERS
MARKET PRICE OF THE REGISTRANT'S COMMON STOCK
The Company's common stock is not listed on any exchange or over-the-counter
market and there is no public market for our common stock.
DILUTION AND ABSENCE OF DIVIDENDS
We have not paid any cash dividends on our common stock and we do not anticipate
paying any such cash dividends in the foreseeable future. Earnings, if any,
will be retained to finance future growth. The Company may issue shares of its
common stock in private or public offerings to obtain equity financing or to
acquire other businesses that can improve the performance and growth of the
Company.
SHAREHOLDERS
As of July 31, 2000 there were approximately 440 beneficial owners of the
Company's common stock with 13,603,765 shares issued and outstanding.
ITEM 2. LEGAL PROCEEDINGS
The Company is not a party in any lawsuits.
The Company is involved in a dispute with a prior law firm regarding legal fees.
The law firm is demanding $63,600 for nonpayment of services it claims were
rendered on behalf of the Company. We are contesting this claim. The parties
are in the process of going to arbitration on this matter. The Company has
recorded this amount as a liability and expense in its financial statements.
A marketing company has threatened legal action related to its claim that the
Company owes it $48,000 for services rendered. The Company agrees that it owes
$24,000 for such services, which amount is recorded as a liability in the
Company's financial statements. The Company believes the claim for the
additional $24,000 is without merit, and that the outcome of any legal action
will not have a material adverse effect on the Company.
The Company has received communications from a company asserting the ownership
of certain United States and Canadian patents and making a licensing proposal
for these patents on unspecified terms. The Company has not accepted the
licensing proposal. If these claims prove accurate and the Company
28
<PAGE>
is not able to enter into a licensing agreement on acceptable terms, it would
have a material adverse effect on the Company.
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Corbin & Wertz, a regional Certified Public Accounting firm, audited our
financial statements for the years ended December 31, 1996, 1997, and 1998.
Arthur Andersen LLP, a national Certified Public Accounting firm, audited the
financial statements for the year ended December 31, 1999. The change in
accountants was made because our Board of Directors preferred to have our audits
performed by a national recognized firm of independent certified public
accountants. There were no disagreements with Corbin & Wertz on any matters of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure, which, if not resolved to the satisfaction of Corbin & Wertz
would have caused it to make reference to the subject matter of the disagreement
in connection with its report.
ITEM 4. RECENT ISSUANCES OF UNREGISTERED SECURITIES
All the Company's issued and outstanding common stock is unregistered. The
purpose of filing this Form 10-SB is to enable the Company's common stock to be
registered.
Set forth below is information regarding the issuance and sales of securities of
the Company without registration for the past three (3) years.
During the year ended December 31, 1997, the Company issued 10,638,542 shares of
its common stock including 5,100,000 shares at no cost to its founder, Tim
Dales; 2,300,000 shares subscribed for in 1996 at $0.20 per share for cash of
$426,000, net of commissions; 713,542 shares for services rendered by
consultants in 1996 for fund raising activities; and 2,525,000 shares sold to
individuals at $0.20 to $0.25 per share for cash of $508,500, net of
commissions. Of the 5,100,000 shares issued to Mr. Dales, 2,525,000 shares were
contributed back to the Company; 2,165,511 shares in 1997, and 359,489 shares in
1998.
During the year ended December 31, 1998, the Company issued 3,136,970 shares of
its common stock, including 1,276,094 shares commited in 1997 for services
rendered by consultants; 510,000 shares were sold at $0.20 per share for cash of
$102,000; and 1,350,876 shares were issued to convertible noteholders at the
rate of three shares per $1.00 loaned to the Company.
During the year ended December 31, 1999, the Company issued 2,030,952 shares of
its common stock including 1,017,501 shares at $0.30 and $2.50 per share to
noteholders upon conversion of their notes to equity; 994,437 shares were sold
to approximately 355 investors at $2.50 per share in an offering made pursuant
to Regulation A of the Securities Act of 1933, as amended, for cash of
$2,254,213, net of offering costs; 18,014 shares for consulting services; and
1,000 shares at $2.50 per share as payment on a note payable.
29
<PAGE>
During the six months ended June 30, 2000 the Company issued 319,129 shares of
its common stock, including 290,644 shares at $0.31 per share in connection with
the exercise of warrants, and 28,485 shares for consulting services.
In the year 1999, the Company sold 994,437 shares of common stock pursuant to an
Offering Statement filed with the Securities and Exchange Commission on Form-1A
under Regulation A of the Rules and Regulations under the Securities Act of
1933, as amended. All other sales of its common stock, and sale of its
convertible notes, were made in private transactions that did not involve a
public offering. Accordingly, the Company relied on the exemption from
registration described in Section 4(2) of the Securities Act of 1933, as
amended, in connection with these sales.
ITEM 5. INDEMNIFICATION OF OFFICERS AND DIRECTORS
In accordance with Section 317 of the California General Corporations Law, our
Articles of Incorporation eliminate the liability of each of our directors for
monetary damages to the fullest extent permissible under California law.
Section 317 of the California General Corporations Law authorizes a court to
award, or a corporation's board of directors to grant, indemnity to directors
and officers who are parties or are threatened to be made parties to any
proceeding (with certain exceptions) by reason of the fact that the person is or
was an agent of the corporation, against expenses, judgments, fines, settlements
and other amounts actually and reasonably incurred in connection with the
proceeding if that person acted in good faith and in a manner the person
reasonably believed to be in the best interests of the corporation. Section 204
of the law provides that this limitation on liability has no effect on a
director's liability (a) for acts or omissions that involve intentional
misconduct or a knowing and culpable violation of law, (b) for acts or omissions
that a director believes to be contrary to the best interests of the corporation
or its shareholders or that involve the absence of good faith on the part of the
director, (c) for any transaction from which a director derived an improper
personal benefit, (d) for acts or omissions that show a reckless disregard for
the director's duty to the corporation or its shareholders in circumstances in
which the director was aware, or should have been aware, in the ordinary course
of performing a director's duties, of a risk of a serious injury to the
corporation or its shareholders, (e) for acts or omissions that constitute an
unexcused pattern of inattention that amounts to an abdication of the director's
duty to the corporation or its shareholders, (f) under Section 310 of the law
(concerning contracts or transactions between the corporation and a director),
or (g) under Section 316 of the law (directors' liability for improper
dividends, loans and guarantees). Section 317 does not extend to acts or
omissions of a director in his capacity as an officer. Further, Section 317 has
no effect on claims arising under federal or state securities laws and does not
affect the availability of injunctions and other equitable remedies available to
our shareholders for any violation of a director's fiduciary duty to us or our
shareholders.
Insofar as indemnification for liabilities may be invoked to disclaim liability
for damages arising under the Securities Act of 1933, as amended, or the
Securities Act of 1934, (collectively, the "Acts") as amended, it is the
position of the Securities and Exchange Commission that such indemnification is
against public policy as expressed in the Acts and are therefore, unenforceable.
30
<PAGE>
PART F/S
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Part III for listing of financial statements and exhibits herein, which
include:
1. Audited financial statements consisting of the Company's statements of
operations, stockholders' equity, and cash flows for the year ended
December 31, 1998, and related Report of Independent Public Accountants by
Corbin & Wertz. Audited financial statements consisting of the Company's
balance sheet as of December 31, 1999, and its statements of operations,
stockholders' equity (deficit), and cash flows for the year ended December
31, 1999, and related Report of Independent Public Accountants by Arthur
Andersen LLP.
2. Unaudited financial statements consisting of a balance sheet as of June 30,
2000, the last day of the Company's most recent fiscal quarter, and its
statements of operations, stockholders' equity (deficit), and cash flow for
the six months ended June 30, 2000 and 1999.
31
<PAGE>
PART III
EXHIBITS
A. Financial Statements:
The following is a list of each financial statement filed under Part F/S of
this Registration Statement:
1. Audited financial statements consisting of the Company's balance sheet as
of December 31, 1999, and its statements of operations, stockholders'
equity (deficit), and cash flows for the years ended December 31, 1998 and
1999, and related Reports of Independent Public Accountants by Arthur
Andersen LLP and Corbin & Wertz.
2. Unaudited financial statements consisting of a balance sheet as of June 30,
2000, the last day of the Company's most recent fiscal quarter, and its
statements of operations, stockholders' equity (deficit), and cash flow for
the six months ended June 30, 2000 and 1999.
B. Index of Exhibits:
EXHIBITS
Exhibit Number Description
-------------- -----------
3.1 Articles of Incorporation, as amended
3.2 By-laws
10.1 Technology Transfer Agreement dated March 17, 1999 between
the Company and John Uhley, dba XpressWare
10.2 Settlement Agreement and Mutual Release dated May 20, 1999
between the Company and John Uhley, dba XpressWare
10.3 Office Building Lease dated May 13, 1999 between the Company
(as tenant) and SLO Newport Inc. (as landlord)
10.4 Sublease dated June 1, 2000 between the Company (as
sublessor) and SLO Newport Inc. (as sublessee)
10.5 Equipment Lease dated June 29, 1999 between the Company (as
lessee) and Ascend Credit Corporation (as lessor)
10.6 Equipment Lease dated March 29, 2000 between the Company (as
lessee) and Ascend Credit Corporation (as lessor)
2
<PAGE>
10.7 Equipment Lease dated May 15, 2000 between the Company (as
lessee) and Dimension Funding (as lessor)
10.8 Equipment Lease dated November 11, 1999 between the Company
(as lessee) and Dimension Funding (as lessor)
10.9 1997 Stock Option Plan
10.10 Form of Incentive Stock Option Agreement under 1997 Stock
Option Plan
10.11 Form of Stock Option Agreement
10.12 Form of Nonstatutory Stock Option Agreement
10.13 Form of Warrant Agreement
10.14 Executive Employment Agreement dated September 3, 1999
between the Company and Mason Conner
10.15 Employment letter dated November 15, 1999 between the
Company and Robert L. Daniels
10.16 Select Account Network Services Agreement dated May 3, 2000
between the Company and Global Crossing Telecommunications,
Inc.
3
<PAGE>
FINANCIAL STATEMENTS
VillageEDOCS, Inc. (formerly VillageFax.com, Inc.)
June 30, 2000 and 1999 (Unaudited)
and December 31, 1999 and 1998
2
<PAGE>
VillageEDOCS, Inc.
Financial Statements
June 30, 2000 and 1999 (Unaudited)
and December 31, 1999 and 1998
CONTENTS
Report of Independent Public Accountants on Financial Statements for the Year
Ended December 31, 1999
Independent Auditors Report on Financial Statements for the Year Ended December
31, 1998
Financial Statements:
Balance Sheets
Statements of Operations
Statements of Changes in Stockholders' Equity (Deficit)
Statements of Cash Flows
Notes to Financial Statements
3
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors
of VillageFax.com, Inc.:
We have audited the accompanying balance sheet of VillageFax.com, Inc. (formerly
known as SoftTek Technologies, Inc.), a California corporation, as of December
31, 1999, and the related statements of operations, stockholders' equity
(deficit) and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit. The financial
statements of VillageFax.com, Inc. as of December 31, 1998, were audited by
other auditors whose report dated August 25, 1999, expressed an unqualified
opinion on those statements.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of VillageFax.com, Inc. as of
December 31, 1999, and the results of its operations and its cash flows for the
year then ended in conformity with accounting principles generally accepted in
the United States.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has suffered recurring losses from operations
and has a net capital deficiency that raises substantial doubt about its ability
to continue as a going concern. Management's plans in regard to these matters
are also described in Note 2. The financial statements do not include any
adjustments relating to the recoverability and classification of asset carrying
amounts or the amount and classification of liabilities that might result should
the Company be unable to continue as a going concern.
ARTHUR ANDERSEN LLP
Orange County, California
January 28, 2000
4
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
VillageFax.com
We have audited the accompanying balance sheets of VillageFax.com (formerly
known as SoftTek Technologies, Inc.) (the "Company") as of December 31, 1998 and
1997, and the related statements of operations, stockholders' equity (deficit)
and cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company as of December 31,
1998 and 1997, and the results of its operations and its cash flows for the
years then ended, in conformity with generally accepted accounting principles.
CORBIN & WERTZ
Irvine, California
August 25, 1999
VillageEDOCS, Inc.
5
<PAGE>
Balance Sheets
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
----------------------------------
<S> <C> <C>
ASSETS (unaudited)
Current Assets:
Cash $ 289,270 $ 1,259,106
Accounts receivable 60,136 46,666
Other current assets 6,384 2,587
----------------------------------
Total current assets 355,790 1,308,359
----------------------------------
Property and Equipment, net 272,254 201,973
Other assets 18,396 13,304
----------------------------------
Total assets $ 646,440 $ 1,523,636
==================================
LIABILITIES and STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of capital lease obligations $ 89,727 $ 59,048
Accounts payable 160,412 188,551
Accrued expenses 121,978 67,859
----------------------------------
Total current liabilities 372,117 315,458
Capital lease obligations, net of current portion 110,065 82,733
Convertible notes payable, net of discount 538,530 535,165
----------------------------------
Total liabilities 1,020,712 933,356
Stockholders' Equity (Deficit):
Common stock 4,228,666 4,067,354
Warrants 219,272 306,465
Additional paid-in capital 762,669 755,169
Accumulated deficit (5,584,879) (4,538,708)
----------------------------------
Total stockholders' equity (deficit) (374,272) 590,280
----------------------------------
Total liabilities and stockholders' equity $ 646,440 $ 1,523,636
==================================
</TABLE>
The accompanying notes to financial statements are an integral part of these
balance sheets.
6
<PAGE>
VillageEDOCS, Inc.
Statements of Operations
<TABLE>
<CAPTION>
(unaudited)
Six Months Ended Year Ended
June 30, December 31,
2000 1999 1999 1998
--------------------------------------------------------
<S> <C> <C> <C> <C>
Net Sales $ 129,701 $ 22,864 $ 95,887 $ 13,956
Cost of Sales 327,671 98,065 213,534 52,243
--------------------------------------------------------
Gross Margin (197,970) (75,201) (117,647) (38,287)
--------------------------------------------------------
Operating Expenses:
Product and technology development 183,861 152,992 352,555 246,168
Sales and marketing 292,437 105,980 292,486 178,348
General and administrative expenses 318,573 858,723 1,086,221 426,717
Depreciation 29,211 22,915 41,840 39,333
--------------------------------------------------------
Total operating expenses 824,082 1,140,610 1,773,102 890,566
Loss from operations (1,022,052) (1,215,811) (1,890,749) (928,853)
Interest expense, net 23,319 38,432 28,555 210,997
--------------------------------------------------------
Income before provision for income taxes (1,045,371) (1,254,243) (1,919,304) (1,139,850)
Provision for income taxes 800 - 800 800
--------------------------------------------------------
Net loss $(1,046,171) $(1,254,243) $(1,920,104) $(1,140,650)
========================================================
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
7
<PAGE>
VillageEDOCS, Inc.
Statements of Changes in Stockholders' Equity (Deficit)
For the Periods Ended December 31,1999 and 1998
And June 30, 2000 (unaudited)
<TABLE>
<CAPTION>
Common Stock
-----------------------------------------------
Issued Subscribed Additional Accumulated
Paid-in
Shares Amount Shares Amount Warrants Capital Deficit Total
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1997 8,473,031 $ 934,500 1,276,094 $ 255,219 - $ 1,313 $(1,477,954) $ (286,922)
Founders shares surrendered (359,489) -
Issuance of common stock
at $0.20 per share in -
connection with previously
committed shares 1,276,094 255,219 (1,276,094) (255,219) -
Issuance of common stock at
$0.20 per share for cash 510,000 102,000 102,000
Issuance of common stock at
$0.125 per share to -
convertible noteholders 1,350,876 168,560 168,560
Net loss (1,140,650) (1,140,650)
--------------------------------------------------------------------------------------------------
Balance, December 31, 1998 11,250,512 1,460,279 - - - 1,313 (2,618,604) (1,157,012)
Issuance of common stock (at
$0.30 and $2.50 per share)
and warrants (at $0.01 per
share) to holders upon
conversion of notes payable
to equity 1,017,501 305,327 197,571 502,898
Shares sold in Direct Public
Offering at $2.50 per share,
net of offering costs
of $231,880 994,437 2,254,213 2,254,213
Issuance of common stock
at $2.50 per share for
consulting services 18,014 45,035 45,035
Issuance of common stock
at $2.50 per share in lieu
of note payable 1,000 2,500 2,500
Compensation expense related to
stock options issued to
non-employees with an exercise
price of $0.50 per share 510,731 510,731
Compensation expense related to
stock options issued to
employees with exercise prices
of $0.25, $1.00 and $2.125 per
share 243,125 243,125
Issuance of warrants to
employees as compensation 88,702 88,702
Issuance of warrants in
connection with convertible
notes 20,192 20,192
Net loss (1,920,104) (1,920,104)
-------------------------------------------------------------------------------------------------
Balance, December 31, 1999 13,281,464 4,067,354 - - 306,465 755,169 (4,538,708) 590,280
Issuance of common stock at
$0.31 per share in connection
with exercise of warrant
(unaudited) 290,644 90,099 (87,193) 2,906
Issuance of common stock at
$2.50 per share for consulting
services (unaudited) 28,485 71,213 71,213
Compensation expense related to
stock options issued to
employees with exercise price
of $1.00 (unaudited) 7,500 7,500
Net loss (unaudited) (1,046,171) (1,046,171)
--------------------------------------------------------------------------------------------------
Balance, June 30.
2000 (unaudited) 13,600,593 $4,228,666 - - $219,272 $762,669 $(5,584,879) $ (374,272)
</TABLE>
8
<PAGE>
VillageEDOCS, Inc.
Statements of Cash Flows
<TABLE>
<CAPTION>
(unaudited)
Six Months Ended Year Ended
June 30, December 31,
2000 1999 1999 1998
--------------------------------------------------------
<S> <C> <C> <C> <C>
Cash Flows from Operating Activities:
Net loss $(1,046,171) $(1,254,243) $(1,920,104) $(1,140,650)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 29,211 22,915 41,840 39,333
Amortization of discount on convertible notes payable 3,365 - 3,365 168,560
Provision for loss on doubtful accounts receivable - - - (1,008)
Issuance of common stock as payment for services 71,213 5,000 45,035 -
Issuance of stock options with exercise prices less
than fair value at grant date 7,500 741,981 753,856 -
Stock warrants issued as compensation 88,702 88,702 -
Exercise of warrants 2,906
Changes in operating assets and liabilities:
Accounts receivable, net (13,470) (16,506) (45,249) 3,679
Other assets (8,889) (15,552) (10,174) (1,223)
Accounts payable (28,139) 18,684 (15,004) (24,764)
Accrued expenses 54,119 (82,659) (136,201) 198,857
----------- ----------- ----------- -----------
Net cash used in operating activities (928,355) (491,678) (1,193,934) (757,216)
Cash Flows from Investing Activities:
Purchases of property and equipment (11,026) (8,514) (25,934) (10,436)
Cash Flows from Financing Activities:
Proceeds from notes payable - 10,000
Principal payments on notes payable (37,500) (37,500) -
Proceeds from stockholder loans 230,000 230,000 240,000
Proceeds from convertible notes payable - 450,292
Proceeds from sale of common stock, net of offering costs 2,254,213 2,254,213 102,000
Principal payments on capital leases (30,455) - (9,460) -
----------- ----------- ----------- -----------
Net cash provided by financing activities (30,455) 2,446,713 2,437,253 802,292
----------- ----------- ----------- -----------
Net increase/(decrease) in cash (969,836) 1,946,521 1,217,385 34,640
Cash, beginning of period $ 1,259,106 $ 41,721 41,721 7,081
----------- ----------- ----------- -----------
Cash, end of period $ 289,270 $ 1,988,242 $ 1,259,106 $ 41,721
=========== =========== =========== ===========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for -
Interest $ 11,216 $ 2,011 $ 10,504 $ 31,835
</TABLE>
9
<PAGE>
Supplemental Disclosure of Noncash Financing Activities:
During the six months ended June 30, 2000, the Company issued 290,644 shares
of common stock at $0.30 per share in connection with the exercise of
warrants.
Issued 28,485 shares of common stock at $2.50 per share as payment for
consulting services.
Borrowed $88,465 under capital lease obligations.
During 1999, the Company issued 1,017,501 shares of common stock at $0.30 per
share and at $2.50 per share plus warrants to purchase 658,877 shares of
common stock at $0.01 per share, in connection with the conversion of
$450,292 convertible notes payable plus $52,606 accrued interest to equity.
The warrants were valued at $197,571 (see Note 6).
Issued 1,000 shares of common stock at $2.50 per share as payment on a note
payable.
Issued 47,809 shares of common stock at $2.50 per share as payment for
services rendered in connection with the Direct Public Offering. The cost of
the services provided was $119,523.
Converted $520,000 in notes payable plus $31,992 accrued interest to $551,992
in convertible notes payable (see Note 6).
Issued warrants to purchase 49,256 shares of common stock at $2.50 per share
in connection with the conversion of a note payable to convertible note
payable. The warrants were valued at $20,192 (see Note 6).
Issued 18,014 shares of common stock to a consultant for services provided
(see Note 7.a.).
Borrowed $151,241 under capital lease obligations.
During 1998, the Company issued 1,276,094 shares of common stock in
connection with previously committed shares.
Issued 1,350,876 shares of common stock to convertible note holders (see Note
6).
The accompanying notes to financial statements are an integral part of these
statements
10
<PAGE>
VillageEDOCS, Inc.
(formerly known as VillageFax.com and SoftTek Technologies, Inc.)
Notes to Financial Statements
December 31, 1999 and 1998
(Data as of and for six months ended June 30, 2000 and 1999 is unaudited)
1. Background and Organization
---------------------------
VillageEDOCS,.Inc. (the "Company"), formerly known as VillageFax.com,Inc. and
SoftTek Technologies, Inc., was incorporated in 1995 in Delaware and
reincorporated in California in 1997. The Company develops and markets Internet-
enabled fax services to organizations throughout the United States and
internationally.
2. Going Concern
-------------
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company has a working capital
deficit and has incurred significant losses from operations in each year since
inception (1995). The Company's losses are continuing and are expected to
continue until such time as the Company is able to successfully establish,
operate and sufficiently expand its internet-enabled fax services. There can be
no assurance that the Company will achieve and maintain profitable operations.
These factors, among others, raise substantial doubt about the Company's ability
to continue as a going concern.
The Company's success is dependent upon numerous items, certain of which are the
successful implementation and marketing of its internet-enabled fax services,
its ability to obtain new customers in order to achieve levels of revenues
adequate to support the Company's current and future cost structure, and its
success in obtaining financing for equipment and operations, for which there is
no assurance. Unanticipated problems, expenses, and delays are frequently
encountered in establishing a new business. These include, but are not limited
to, competition, the need to develop customer support capabilities and market
expertise, setbacks in product development, technical difficulties, market
acceptance and sales and marketing. The failure of the Company to meet any of
these conditions could have a materially adverse effect upon the Company and may
force the Company to reduce or curtail operations. No assurance can be given
that the Company can or will ever operate profitably.
The financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or the
classification of liabilities that might result from the outcome of these
uncertainties.
Until sufficient revenue levels are achieved, the Company will require
additional financing to support its operations. Such sources of financing could
include capital infusions, additional equity financing or debt offerings.
Management plans to obtain equity financing from existing shareholders and
equity financing from new shareholders during the year 2000. Management is
actively pursuing both of these financings. If the planned financings are
obtained, the Company will have adequate cash to sustain operations until it
becomes profitable. There can be no assurance that funding will be available on
acceptable terms, if at all, or that such funds, if raised, would enable the
Company to achieve and maintain profitable operations.
3. Summary of Significant Accounting Policies
------------------------------------------
a. Concentration of Credit Risk
----------------------------
The Company extends credit to its customers and performs ongoing credit
evaluations of such customers. The Company does not obtain collateral to
secure its accounts receivable. The Company evaluates its accounts
receivable on a regular basis for collectibility and provides for an
allowance for potential credit losses as deemed necessary.
b. Use of Estimates in the Preparation of Financial Statements
-----------------------------------------------------------
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to
make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
11
<PAGE>
c. Property and Equipment
----------------------
Property and equipment, consisting primarily of computer equipment,
software, and furniture, are stated at cost and are depreciated or
amortized using the straight-line method over the estimated useful lives of
the assets, ranging from three to seven years. Major betterments and
renewals are capitalized, while routine repairs and maintenance are charged
to expense when incurred. The Company leases certain of its computer
equipment and software under capitalized and operating lease arrangements.
The Company assesses the recoverability of property and equipment by
determining whether the depreciation and amortization amounts can be
recovered through projected undiscounted cash flows. The amount of
impairment, if any, is measured based on fair value and is charged to
operations in the period in which impairment is determined by management.
At December 31, 1999, management has determined that there is no impairment
of property and equipment.
d. Revenue Recognition
-------------------
The Company provides internet-enabled fax services to businesses and
charges for these services on a per page faxed basis. Service revenues are
recognized when the services are performed.
e. Product and Technology Development
----------------------------------
Product and technology development expense includes personnel costs
relating to developing the features, content and functionality of the
Company's internet-enabled fax services and Web site. Product and
technology costs are expensed as incurred.
f. Advertising
-----------
The Company expenses all advertising costs as incurred. There were no
advertising costs incurred during the year ended December 31, 1999. The
amount incurred for advertising during the year ended December 31, 1998 was
$10,770. There were no advertising costs incurred during the six months
ended June 30, 2000.
g. Income Taxes
------------
The Company accounts for income taxes in accordance with the liability
method for financial accounting and reporting purposes. Under this method,
deferred tax assets and liabilities are determined based on differences
between the financial reporting and the tax basis of assets and liabilities
and are measured using the enacted tax rates and laws that will be in
effect when the differences are expected to reverse. A valuation allowance
is provided for certain deferred tax assets if it is more likely than not
that the Company will not realize tax assets through future operations.
h. Stock Based Compensation
------------------------
The Company has elected to follow the intrinsic method of recognizing
employee stock-based compensation. Under this method, compensation expense
is recorded only to the extent that the exercise price of stock options
granted exceeds the fair market value (FMV) of the Company's stock at the
date of grant.
i. Reclassifications
-----------------
Certain reclassifications have been made to the 1998 financial statements
to conform to the 1999 presentation.
12
<PAGE>
j. Unaudited interim financial statements
--------------------------------------
The accompanying financial information as of and for the six months ended
June 30, 2000 and 1999 is unaudited. In the opinion of management, the
balance sheet as of June 30, 2000, the statements of operations and cash
flows for the six months ended June 30, 2000 and 1999, and the statement of
stockholders' equity (deficit) for the six months ended June 30, 2000
present fairly the financial position of VillageEDOCS as of June 30, 2000,
and the results of its operations and cash flows for the six month periods
ended June 30, 2000 and 1999. All adjustments consisting only of normal
recurring adjustments have been made.
4. Property and Equipment
----------------------
Property and equipment consist of the following as of:
<TABLE>
<CAPTION>
June 30 December 31
2000 1999
----------- ------------
(unaudited)
<S> <C> <C>
Computer equipment $ 134,951 $ 127,145
Furniture and equipment 48,072 44,762
Equipment and software under capital leases 239,706 151,241
--------- ---------
422,729 323,148
Less--accumulated depreciation (150,475) (121,175)
--------- ---------
$ 272,254 $ 201,973
========= =========
</TABLE>
Depreciation expense for the six months ended June 30, 2000 and the year ended
December 31, 1999 were $29,211 and $41,840, respectively.
5. Convertible Notes Payable
-------------------------
In 1997, the Company borrowed $50,000 from a stockholder, bearing interest at 10
percent per annum. The Company did not make any payments on this loan. In June
1999, the note plus accrued interest were exchanged for a convertible note in
the amount of $61,570, bearing interest at 10 percent per annum. The note and
accrued interest are due at the earlier of one of three events: 1) acquisition
of controlling interest in the Company by a third party; 2) June 30, 2002; or 3)
the Company achieves equity financing of a minimum of $6,000,000. The
stockholder has the option to convert the note plus accrued interest into common
stock at $2.50 per share. As an incentive to extend the terms of the note, the
Company granted warrants to purchase 49,256 shares of the Company's common stock
at $2.50 per share. The Company allocated $20,192 to the value of the warrants
using a pro-rata allocation calculation based on fair values and recorded the
offsetting amount as a discount on notes payable, which will be amortized over
three years.
Beginning in September 1998, the Company borrowed operating funds from two
stockholders, bearing interest at 10 percent per annum. In May and June 1999,
the related notes, which totaled $470,000 plus accrued interest, were exchanged
for two convertible notes in the amounts of $244,245 and $246,177, bearing
interest at 10 percent per annum. The notes and accrued interest are due at the
earlier of one of three events: 1) May 31, 2002 and June 30, 2002, respectively;
2) acquisition of controlling interest in the Company by a third party; or 3)
the Company achieves equity financing of a minimum of $6,000,000.
Total interest expense recognized on all the original and convertible notes was
$27,600 for the six months ended June 30, 2000 and $51,300 for the year ended
December 31, 1999. All interest on the convertible notes is accrued as of June
30,2000 and December 31, 1999 and is included in accrued liabilities on the
accompanying balance sheet.
In April 1998, the Company issued convertible notes payable in the amount of
$450,292, bearing interest at 10 percent per annum and an original maturity date
of September 1998. Upon issuance, the noteholders received three shares of
common stock for every dollar loaned (totaling 1,350,876 shares). The Company
allocated $168,560 to the value of the shares using a pro-rata allocation
computation based on fair values, with the offsetting amount being recorded as a
debt discount and amortized in full as additional interest expense through the
original maturity date of September 30, 1998. In addition, the notes were
convertible into shares of common stock for every dollar at an exercise price of
$0.30 per share. The maturity date of the notes was extended to June 1999 and
the Company offered noteholders certain choices including: 1) convert the
principal and accrued interest to shares of common stock at $0.30 per share; or
2) convert the principal and accrued interest to common stock at $2.50 per share
and receive 7.334 warrants to purchase common stock at $.01 per share, for each
share converted. Notes totaling $450,292 plus accrued interest of $52,606 were
converted to common stock in June 1999. As a result of the conversion, the
notes and accrued interest are not reported as part of liabilities as of
December 31, 1999. The number of shares of common stock that were issued was
1,017,501, and the number of warrants that were issued was 658,877. The Company
allocated $305,327 to common stock and $197,571 to warrants.
13
<PAGE>
6. Stockholders' Equity (Deficit)
------------------------------
a. Common Stock Issuances
----------------------
In 1995, the Company committed to issue 5,100,000 shares of its common
stock to its founder, which was issued in 1997. The Company's founder
agreed to contribute back to the Company 2,525,000 shares and subsequently
contributed back to the Company 2,165,511 shares in 1997 and 359,489 shares
in 1998.
During the year ended December 31, 1997, the Company subscribed 1,276,094
shares of its common stock for services rendered. These shares were issued
during the year ended December 31, 1998.
During the year ended December 31, 1998, the Company issued 510,000 shares
of its common stock for $102,000 in cash. In addition, the Company issued
1,350,876 shares of its common stock in connection with convertible notes.
During the year ended December 31, 1999, these notes were converted to
common stock, and 1,017,501 shares were issued upon the conversion (see
Note 6).
During the year ended December 31, 1999, the Company completed the sale of
946,628 shares of its common stock at $2.50 per share. Net cash proceeds
were $2,254,213 after cash offering costs of $112,357. Additional costs of
services related to the offering were paid with the issuance of 47,809
shares of common stock valued at $119,523.
During the year ended December 31, 1999, the Company issued 18,014 shares
of stock valued at $45,035 as payment for consulting services, and 1,000
shares valued at $2,500 as payment on a note payable.
In June 1999, the shareholders approved an increase in the number of
authorized common shares of the Company to 40,000,000.
During the six months ended June 30, 2000 (unaudited), the Company issued
290,644 shares of common stock in connection with the exercise of warrants.
During the six months ended June 30, 2000 (unaudited), the Company issued
28,485 shares of common stock valued at $ 71,213 as payment for consulting
services.
b Stock Options
-------------
During 1997, the Board of Directors of the Company adopted a stock option
plan (the "Plan") that authorizes the issuance of options to acquire up to
5,000,000 shares of common stock to employees and certain outside
consultants. The Plan allows for the issuance of either non-qualified or
incentive stock options pursuant to Section 422 of the Internal Revenue
Code. Options vest at the discretion of the Board of Directors as
determined at the grant date, but not longer than a ten-year term.
14
<PAGE>
Stock option activity for the six months ended June 30, 2000 (unaudited)
and the years ended December 31, 1999 and 1998, is as follows:
<TABLE>
<CAPTION>
Number Price per
of Options Share
---------- --------------
<S> <C> <C>
Outstanding at December 31, 1997 1,274,063 $0.20 - 0.25
Granted 899,730 0.20 - 0.25
Canceled (60,000) (0.25)
Exercised - -
--------- ------------
Outstanding at December 31, 1998 2,113,793 0.20 - 0.25
Granted 1,218,318 0.25 - 2.50
Canceled (120,000) (0.25)
Exercised - -
--------- ------------
Outstanding at December 31, 1999 3,212,111 0.20 - 2.50
Granted 469,609 2.50
Canceled (370,000) 2.25 - 2.50
Exercised - -
--------- ------------
Outstanding at June 30, 2000 (unaudited) 3,311,720 $0.20 - 2.50
========= ============
Exercisable at December 31, 1999 1,460,274 $0.20 - 0.25
========= ============
Exercisable at June 30, 2000 (unaudited) 1,747,978 $0.20 - 2.50
========= ============
</TABLE>
Under the Plan, the exercise price of each option shall not be less than 85
percent of FMV on the date the option is granted. During the year ended
December 31, 1999, stock options to purchase 252,837 shares at $0.50 were
granted to non-employee consultants. These options vest one year from the
date granted. Compensation expense equal to the fair value of the services
provided of $510,731 was recorded in the year ended December 31, 1999, and
is included in General and administrative expenses in the accompanying
statements of operations.
Stock options to purchase 50,000 shares at $1.00, 100,000 shares at $2.125,
and 100,000 shares at $0.25 were issued to employees during the year ended
December 31, 1999. The difference between the fair value of the Company's
stock at date of grant and the exercise price is expensed ratably over the
vesting period. Compensation expense of $243,125 was recorded for the year
ended December 31, 1999 and is included in Operating expenses in the
accompanying statements of operations.
The options for the 252,837 shares to non-employees were granted outside
the 1997 Plan. The options issued to employees for 50,000 shares at $1.00
and 100,000 shares at $0.25 were also granted outside the 1997 Plan.
All other stock options that were granted in 1999 and all that were granted
in six months ended June 30, 2000 were at or above FMV of the underlying
common stock at the date of grant and vest over a five-year period. At
June 30, 2000 and December 31, 1999, the weighted average remaining
contractual life of outstanding stock options is approximately nine years.
Of the options granted during the year ended December 31, 1998, 689,730
were issued to non-employee consultants. The Company did not record any
compensation charge as a result of these option grants because the FMV of
these options was deemed to be immaterial.
During 1999, warrants to purchase 162,070 shares of common stock and stock
options to purchase 35,481 shares of common stock were issued to employees
in lieu of $88,702 in deferred compensation. The warrants and stock options
vested immediately and have exercise prices of $0.01 and $2.50,
respectively.
15
<PAGE>
c. Pro Forma Information
---------------------
The following table presents pro forma disclosure of net income as if the
estimated fair value of stock options granted is recorded as compensation
expense on a straight-line basis over the vesting period. Adjustments are
made for options forfeited prior to vesting.
<TABLE>
<CAPTION>
June 30, 2000 1999 1998
------------- ------------ ------------
<S> <C> <C> <C>
(unaudited)
As reported $(1,046,171) $(1,920,104) $(1,140,650)
Pro forma $(1,046,171) $(1,945,490) $(1,172,492)
</TABLE>
The fair values of options granted in 1999 and 1998 were estimated at the
date of grant using the Black Scholes option pricing model with the
following weighted average assumptions:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Risk free interest rate 5.5% 6.2%
Dividend yield 0.0% 0.0%
Volatility factor 0.0% 0.0%
Expected life 5 years 3 years
</TABLE>
The minimum value method was used to calculate the fair value of the
options with an exercise price equal to the FMV at grant date.
The Black Scholes option valuation method was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because the Company's employee stock
options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of the
fair value of its employee stock options.
7. Income Taxes
------------
As the Company incurred net operating losses through June 30, 2000, the
provision for income taxes for the periods presented consists of minimum state
taxes only. At December 31, 1999 and 1998, the Company had approximately
$4,233,234 and $2,637,000, respectively, of federal and state net operating loss
carryforwards for tax reporting purposes available to offset future taxable
income; federal and state carryforwards expire in 2019 and 2007, respectively.
Under the Tax Reform Act of 1986, the amounts of and benefits from net operating
losses carried forward may be impaired or limited in certain circumstances.
Events which may cause limitations in the amount of net operating losses that
the Company may utilize in any one year include, but are not limited to, a
cumulative ownership change of more than 50 percent over a three year period.
At December 31, 1999, the effect of such limitation, if imposed, has not been
determined.
Deferred tax assets, consist primarily of the tax effect of net operating loss
carryforwards. The Company has provided a full valuation allowance on the
deferred tax assets because of the uncertainty regarding realizability.
The tax effects that generated the deferred tax assets at December 31, 1999 and
1998 and June 30, 2000 (unaudited) are presented below:
<TABLE>
<CAPTION>
(unaudited)
June 30, 2000 1999 1998
------------- ------------ -----------
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 2,244.094 $ 1,821,094 $ 1,044,000
Less valuation allowance (2,244.094) (1,821,094) (1,044,000)
--------------------------------------
$ - $ - $ -
=========== =========== ===========
</TABLE>
8. Loss per Share
--------------
Basic loss per share was computed by dividing net loss by the weighted average
number of shares of common stock outstanding during the period. The weighted
average number of shares used in the loss per share computation was 12,192,766
and 10,143,627 in the years ended December 31,1999 and 1998, respectively. The
weighted average number of shares for the six months ended June 30, 2000 and
1999 were 13,475,466 and 11,484,605, respectively. Potential common shares for
the six months ended June 30, 2000 and for the years ended December 31, 1999 and
1998 amounted to 3,967,279, 4,070,181 and 2,113,793, respectively, but have not
been included in the net loss per share calculations as they are antidilutive.
16
<PAGE>
9. Commitments and Contingencies
-----------------------------
a. Leases
------
The Company leases computer equipment, related software and its corporate
headquarters under various operating and capital leases. Future minimum
scheduled lease payments under these noncancellable leases at December 31,
1999 are as follows:
<TABLE>
<CAPTION>
Capital Operating
-------- ---------
<S> <C> <C>
2000 $ 75,586 $ 93,362
2001 71,345 75,272
2002 22,549 77,567
2003 - 79,861
2004 - 27,551
-------- --------
Total minimum lease payments 169,480 $353,613
========
Less: amounts representing interest 27,699
--------
Present value of lease obligations 141,781
Less: current portion (59,048)
--------
$ 82,733
========
</TABLE>
Future minimum scheduled lease payments under these noncancellable leases
at June 30, 2000 (unaudited) are as follows:
<TABLE>
<CAPTION>
Capital Operating
--------- ---------
<S> <C> <C>
2001 (12 months end 6/30/01) $118,817 $ 89,059
2002 88,831 78,444
2003 39,716 73,995
2004 - -
2005 (12 months end 6/30/05) - -
-------- --------
Total minimum lease payments $247,364 $241,498
========
Less: amounts representing interest 47,572
Present value of lease obligations 199,792
Less: current portion (89,727)
--------
$110,065
========
</TABLE>
17
<PAGE>
The Company occupies its only facility under a lease agreement, which
expires in May 2004. Total rent expense for the years ended December 31,
1999 and 1998 was $44,585 and $29,162, respectively.
Rent expense for the six months ended June 30,2000 and 1999 was $27,770 and
$17,113, respectively.
b. License Agreements
------------------
The Company had a software development and license agreement with Client
Service Technologies, Inc. ("CSTI"), whereby CSTI developed software to
inter-operate specifically with the Company's software and granted the
Company a license to market the enhanced software. Under the terms of the
agreement, the Company paid CSTI $0 and $4,400 in cash for the years ended
December 31, 1999 and 1998, respectively. In July 1999, the Company
terminated this agreement.
The Company also had a software development and license agreement with
Xpress Ware, Inc. ("XW"), whereby XW developed software to inter-operate
specifically with the Company's software and granted the Company a license
to market the enhanced software. In March 1999, pursuant to a Technology
Agreement, the Company acquired for $40,000 XW software and related
technology, of which $30,000 was paid in June 1999 and the remaining
$10,000 is due in July 2000. The Technology Agreement supercedes and
cancels the previous agreement between XW and the Company.
c. Litigation
----------
The Company is, from time to time, involved in various legal and other
proceedings which arise in the ordinary course of operating its business.
In the opinion of management, the amount of ultimate liability, if any,
with respect to these actions will not materially affect the financial
position or results of operations of the Company.
d. Consulting and Employee Agreements
----------------------------------
The Company has entered into a variety of consulting and employee
agreements for services to be provided to the Company in the ordinary
course of business. These agreements call for minimum salary levels and/or
option grants and/or common share issuances and various payments upon
termination of the agreements (except for cause).
18
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the registrant has duly caused this registration statement to be signed
on its behalf by the undersigned, thereunto duly authorized.
VillageEDOCs, INC.
Dated: August 28, 2000 By: /s/ K. Mason Conner
----------------------------
K. Mason Conner
Chief Executive Officer
Dated: August 28, 2000 By: /s/ Fred J. Barnes
----------------------------
Fred J. Barnes
Chief Financial Officer, Principal
Accounting Officer
19
