As Filed with the Securities and Exchange Commission on _________, 2002,
Registration No. 333-________
________________________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_____________________________________
FORM SB-2
REGISTRATION STATEMENT
UNDER THE
SECURITIES ACT OF 1933
FTS APPAREL, INC.
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(Exact name of Registrant as Specified in Its Charter)
COLORADO 2253 84-1416864
- --------------------------------- -------------------- --------------------
(State or other jurisdiction (Primary Standard (I.R.S. Employer
of incorporation or organization) Industrial Identification No.)
Classification Code)
301 Oxford Valley Road, Suite 1202
Yardley, Pennsylvania 19067 (215) 369-9979
Facsimile: (215) 369-9957
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
Attention: Scott Gallagher, Chairman
301 Oxford Valley Road, Suite 1202
Yardley, Pennsylvania 19067
(215) 369-9979
(Name, address, including zip code, and telephone number
including area code, of agents for service)
____________________________________
Copies to:
Seth A. Farbman, P.C.
Seth A. Farbman, Esq.
301 Eastwood Road
Woodmere, New York 11598
Ph: 516-569-6089
Facsimile: 516-569-6084
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. |X|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If this Form is post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|
CALCULATION OF REGISTRATION FEE
Proposed
Title of Proposed Maximum Maximum
Each Class of Securities Amount To Be Offering Price Per Aggregate Amount Of
To Be Registered Registered(1) Security (2) Offering Price Registration Fee(3)
- ----------------------- --------------- ------------------ --------------- -----------------
Common Stock, $.001 par 11,000,000 shares $.14 $1,540,000 $ 141.68
value per share(1)
Total 11,000,000 shares $.14 $1,540,000 $ 141.68
- ----------------------
(1) Includes shares of our common stock, par value $0.001 per share, which may
be offered pursuant to this registration statement, which includes (i)
825,000 shares currently outstanding, (ii) up to 10,175,000 shares issuable
in connection with our equity line of credit agreement dated August 23,
2002. In addition to the shares set forth in the table, the amount to be
registered includes an indeterminate number of shares as such
number may be adjusted as a result of stock splits, stock dividends and
similar transactions in accordance with Rule 416.
(2) Estimated solely for purposes of calculating the registration fee. The
registration fee is calculated in accordance with Rule 457(c) based upon
$.14, which is the average of the bid and asked prices of our common
stock reported on the OTC Bulletin Board on September 3, 2002.
(3) The registration fee was previously paid via electronic transfer.
------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
The information in this prospectus is not complete and may be changed. The
selling stockholders may not sell these securities until the registration
statement filed with the Securities and Exchange Commission becomes effective.
This prospectus is not an offer to sell these securities and it is not
soliciting offers to buy these securities in any state where the offer or sale
is not permitted.
PROSPECTUS SUBJECT TO COMPLETION; DATED ______, 2002
We may sell up to 11,000,000 Shares Of Common Stock
Of
FTS Apparel, Inc.
This prospectus relates to the sale of up to 11,000,000 shares of our
common stock by the selling stockholders listed on page 31.
Number of Number of Percentage of registered shares
Number of shares registered shares registered shares for resale to the number of
registered for resale currently issued not currently issued shares currently outstanding
- --------------------- ------------------- -------------------- -------------------------------
11,000,000 825,000 10,175,000 91%
- --------------------- ------------------- -------------------- -------------------------------
With respect to the private equity line of credit agreement we describe in
this prospectus, Dutchess Private Equities Fund, L.P. ("Dutchess") is an
"underwriter" within the meaning of the Securities Act of 1933. None of the
proceeds from the sale of stock by the selling stockholders will be placed in
escrow, trust or any similar account.
Our common stock is traded on the over-the-counter Electronic Bulletin
Board under the symbol "FLIP". The last reported sale price of our common stock
on the OTC Bulletin Board on September 3, 2002 was $0.17 per share.
Our common stock being offered by this prospectus involves a high degree of
risk. You should read the "Risk Factors" section beginning on page 4 before you
decide to purchase any common stock.
Neither the Securities and Exchange Commission nor any state commission has
approved or disapproved of these securities or passed upon the adequacy or
accuracy of this prospectus nor have they made, nor will they make, any
determination as to whether anyone should buy these securities. Any
representation to the contrary is a criminal offense.
The date of this Prospectus is _________ __, 2002
TABLE OF CONTENTS
Prospectus Summary
The Offering 1
Selected Financial Data 2
Risk Factors 5
Forward-Looking Statements 6
Use Of Proceeds 11
Market For Common Equity And Related Stockholders Matters 11
Management's Discussion And Analysis Of Financial Condition And Results Of Operations 12
The Company 18
Directors, Executive Officers, Promoters And Control Persons 22
Executive Compensation 23
Security Ownership Of Certain Beneficial Owners And Management 25
Certain Relationships And Related Transactions 27
Selling Stockholders 28
Plan Of Distribution 29
Description Of Securities 33
Disclosure Of Commission Position On Indemnification For Securities Act Liabilities 35
Where You Can Find Additional Information 36
Legal Matters 36
Experts 36
Financials Statements F-1
PROSPECTUS SUMMARY
This summary highlights certain information contained elsewhere in this
prospectus. You should read the following summary together with the more
detailed information regarding our business and our financial statements and
the related notes appearing elsewhere in this prospectus.
Our Company
Historically we have been in the brick-and-mortar business of designing and
selling designer/casual sportswear and accessories, focusing on athletic and
casual lifestyle clothing. We identify our merchandise with the "Flip The
Switch" and "FTS" trademarks and logos. We market our products with a sports
orientated approach, primarily by endorsements from professional athletes and
sports personalities. Our product line includes shirts, jackets, vests, pants
and caps in various styles and colors that we believe are attractive and
appealing to our target market of young consumers. In connection with the change
in control of our management in January 2002, we decided to explore the
opportunities, if any, of acquiring other operating companies and/or expanding
our business model to include an e-commerce infrastructure.
Our principal executive offices are located at 301 Oxford Valley Road,
Yardley, Pennsylvania 19067 and our telephone number is (215) 369-9979. We
maintain Internet Web sites at http:/www.ftsapparel.com;
http:/www.fliptheswitch.tv and http:/www.flip.tv. Information contained on our
Internet Web sites is for informational purposes only and is not incorporated by
reference into the registration statement of which this prospectus is a part.
-1-
THE OFFERING
This offering relates to the sale of common stock by certain persons who are, or
will become, our stockholders. Of the shares offered in this prospectus:
- - Dutchess, intends to sell (i) up to an aggregate amount of 10,175,000
shares of our common stock to be acquired pursuant to the equity line of
credit; (ii) 600,000 shares of our common stock issued to Dutchess as a
commitment fee pursuant to our equity line of credit; and (iii) 125,000
shares of common stock purchased by Dutchess
- - a selling stockholder, Seth A. Farbman, Esq., who intends to sell up to an
aggregate of 100,000 shares of our common stock.
Pursuant to our equity line of credit, we may, at our discretion,
periodically issue and sell to Dutchess shares of common stock for a total
purchase price of $6 million. Dutchess will purchase the shares of our common
stock for an 8% discount to the prevailing market price of our common stock.
Dutchess intends to sell any shares purchased under our equity line of credit at
the then prevailing market price.
Number of shares of
common stock outstanding prior
to this offering 12,099,284 shares (1)
Common stock offered by
selling stockholders 11,000,000 shares (2)
Use of Proceeds We will not receive any of the proceeds from the sale of the shares of
common stock offered by this prospectus; however, we will receive
estimated gross proceeds of up to $6,000,000 if we decide to put
shares of our common stock to Dutchess after effectiveness of the
registration statement of which this prospectus is a part of.
Plan of Distribution The offering of our shares of common stock is being made by certain of
our stockholders who wish to sell their shares. Sales of
our common stock may be made by the selling stockholders
in the open market or in privately negotiated transactions
and at fixed or negotiated prices.
Risk Factors There are substantial risk factors involved in investing in
our company. For a discussion of certain factors you should
consider before buying shares of our common stock, see
the section entitled "Risk Factors".
OTC Bulletin Board Symbol "FLIP"
______________
-2-
(1) Such figure does not include shares of our common stock to be issued upon
exercise of outstanding options or warrants.
(2) Such figure includes 100,000 shares presently outstanding and held by Seth
Farbman; up to 10,175,000 shares of our common stock issuable as put shares
to Dutchess pursuant to our equity line of credit agreement dated August
23, 2002 and 725,000 shares of our common stock owned by Dutchess.
Our equity line of credit
On August 23, 2002, we entered into an equity line of credit investment
agreement with Dutchess. Pursuant to the equity line of credit, we may, at our
discretion, periodically sell to Dutchess shares of our common stock for a total
purchase price of up to $6.0 million. For each share of common stock purchased
under the equity line of credit, Dutchess will pay 92% of the average of the
three (3) lowest closing bid prices of our common stock during ten (10) trading
day pricing period after a put notice is presented by us to Dutchess. We have
issued 600,000 shares of our common stock to Dutchess as a commitment fee for
entering into the equity line of credit with us. The effectiveness of the sale
of the shares under the equity line of credit is conditioned upon us registering
the shares of common stock with the Securities and Exchange Commission. The
costs associated with this registration will be borne by us.
Pursuant to the equity line of credit, we may periodically sell shares of
common stock to Dutchess to raise capital to fund our working capital needs. The
periodic sale of shares is known as an advance. We may request advances under
the equity line of credit once the underlying shares are registered with the
Securities and Exchange Commission. Thereafter, we may continue to request
advances until Dutchess has advanced an aggregate of $6 million or thirty-six
months after the effective date of the accompanying registration statement,
whichever occurs first. We are limited by each put amount to an amount equal to
two hundred fifty percent (250%) of the average daily volume (United States
market only) of our common stock for the ten (10) trading days prior to the
applicable put notice Date multiplied by the average of the three (3) daily
closing bid prices immediately preceding the put date, but in no event more than
$1,000,000. We cannot predict the actual number of shares of common stock that
will be issued pursuant to the equity line of credit, in part, because the
purchase price of the shares will fluctuate based on prevailing market
conditions and we have not determined the total amount of advances we intend to
draw. Nonetheless, we can estimate the number of shares of our common stock that
will be issued using certain assumptions.
-3-
By way of illustration only, let us assume that the 10-day average trading
volume in our common stock is 20,000 shares during the 10 trading days prior to
our issuing a put notice, and that the average closing bid price for our common
stock is $0.20 during the three trading days prior to our issuing this put
notice. Let us also assume that the aggregate (not average) trading volume is
100,000 shares during the 10 trading days after we issue the put notice, and
that the three lowest closing bid prices for our common stock average $0.15
during this 3-day period. The result would be that our maximum allowable put
notice would be in the amount of $7,500 (2.50 x 20,000 x $.15 = $7,500).
To help investors evaluate the number of shares of common stock we might issue
to Dutchess at various prices, we have prepared the following table. This table
shows the number of shares of our common stock that we would issue at various
prices.
- ----------------------- ----------- -------------- -------------
Purchase Price: $0.10 $0.20 $0.30
- ----------------------- ----------- -------------- -------------
Number of Shares(1): 60,000,000 30,000,000 15,000,000
- ----------------------- ----------- -------------- -------------
Total Outstanding(2): 72,099,284 42,099,284 27,099,284
- ----------------------- ----------- -------------- -------------
Percent Outstanding(3): 83% 71% 55%
- ----------------------- ----------- -------------- -------------
(1) Represents the number of shares of common stock to be issued to Dutchess at
the prices set forth in the table.
(2) Represents the total number of shares of common stock outstanding after the
issuance of the shares to Dutchess at the prices set forth in the table.
(3) Represents the shares of common stock to be issued to Dutchess as a
percentage of the total number of shares outstanding.
We are registering 10,175,000 shares of common stock for the sale under the
equity line of credit. We are not authorized to issue more than 25,000,000
shares of our common stock. You should be aware that there is an inverse
relationship between our stock price and the number of shares to be issued under
the equity line of credit. That is, as our stock price declines, we would be
required to issue a greater number of shares under the equity line of credit for
a given advance. Also, under the terms of our equity line of credit investment
agreement, we are required to remit to Dutchess 8 percent (8%) of the proceeds
from each put that we ask of Dutchess.
Under the terms of our equity line of credit investment agreement we may
put shares to Dutchess only to the extent that the number of shares of
common stock issuable pursuant to such securities, together with the number of
shares of common stock owned by such holder and its affiliates would not exceed
4.9% of the then outstanding common stock as determined in accordance with
Section 13(d) of the Exchange Act.
-4-
Cancellation of Puts. We will have the option of canceling any put notice if the
closing bid price during the pricing period for that put is less than 75% of the
volume weighted average price for our common stock for the 15 trading days
before the date we gave the put notice. If we cancel a put notice, we will still
be required to sell Dutchess the number of shares Dutchess sold during the time
from the day it received the put notice until it received the notice of
cancellation.
Shareholder approval. Under the Investment Agreement, we may sell Dutchess a
number of shares that is more than 20% of our shares outstanding on the date of
this prospectus. If we become listed on The Nasdaq Small Cap Market or Nasdaq
National Market, or if we are listed on the proposed BBX we may be required to
get shareholder approval to issue some or all of the shares to Dutchess. As we
are currently a Bulletin Board company, we do not need shareholder approval.
Registration Rights. We granted Dutchess certain registration rights in
connection with our equity line of credit. The cost of this registration
statement will be borne by us. We agreed to use our best efforts to have the
registration statement filed with the SEC within thirty (30) calendar days after
August 23, 2002. We also agreed to use our best efforts to have the registration
statement declared effective by the SEC within ninety (90) calendar days after
August 23, 2002.
Additional Recent Events
On August 22, 2002 we entered into a stock purchase agreement with Dutchess
whereby we sold 250,000 shares of our restricted common stock to Dutchess for an
aggregate purchase price of $.05 per share. Of such shares sold to Dutchess, we
have agreed to register 125,000 shares of common stock.
SELECTED FINANCIAL DATA
The following information is taken from our audited financial statements as
of December 31, 2001 and our unaudited financials statements for the sixth month
period ended June 30, 2002. The financial information set forth below should be
read in conjunction with the more detailed financial statements and related
notes appearing elsewhere in this prospectus and should be read along with the
section entitled Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Year Ended For the six Month
December 31, Period Ended
2001 June 30, 2002
------------ -------------------
SUMMARY OPERATING DATA
- -----------------------------
Total Revenues. . . . . . . . $ 576,846 --
General and Administrative Expenses 1,101,127 (308,369)
Net Loss. . . . . . . . . . 1,168,154 (308,369)
Net Loss Per Common Share . . (0.14) (0.03)
BALANCE DATA SHEET
- -----------------------------
Cash . . . . . . . . . . . . $ 44,236 380
Total Assets. . . . . . . . . 63,918 380
Total Liabilities . . . . . . 4,458 380
Total liabilities and
stockholders' equity . . . . 63,918 380
-5-
RISK FACTORS
You should carefully consider the following risk factors and all other
information contained in this prospectus before investing in our common stock.
Investing in our common stock involves a high degree of risk. Any of the
following risks could adversely affect our business, financial condition and
results of operations and could result in a complete loss of your investment.
The risks and uncertainties described below are not the only ones we may face.
We Had A Loss For The Year Ended December 31, 2001, For The Six Month Period
Ended June 30, 2002 And Expect Losses To Continue In The Future. There Is A Risk
We May Never Become Profitable.
We had a net loss of $1,168,154 for the year ended December 31, 2001 and a
net loss of 1,328,430 for the year ended December 31, 2000. We also had net
losses of $68,909 for the three months ended June 30, 2002 and had net losses of
$308,369 for the six month period ended June 30, 2002 as compared to $708,900
for the six month period ended June 30, 2001. Our future operations may not be
profitable if we are unable to acquire an operating business or if we are unable
to expand our current limited operations to an e-commerce business model.
Revenues and profits, if any, will depend upon various factors, including
whether we will be able to receive funding to promote our products or find
additional businesses to operate and/or acquire. We may not achieve our business
objectives and the failure to achieve such goals would have an adverse impact on
us.
There Is Substantial Doubt About Our Ability To Continue As A Going Concern Due
To Recurring Losses And Working Capital Shortages, Which Means That We May Not
Be Able To Continue Operations Unless We Obtain Additional Funding.
Our audited financial statements for the fiscal year ended December 31,
2001, reflect a net loss of $1,168,154. These conditions raised substantial
doubt about our ability to continue as a going concern if sufficient additional
funding was not acquired or alternative sources of capital developed to meet our
working capital needs.
Our Current And Potential Competitors in the Apparel Industry, Some Of Whom Have
Greater Resources And Experience Than We Do, May Manufacture or Sell Products
That Cause Greater Demand For Their Products Which May Cause Sales of Our
Products To Decline.
We compete with numerous domestic and foreign designers, brands and
manufacturers of apparel, accessories and other products, some of which are
significantly larger and have greater resources, than we do. Management believes
that our ability to compete effectively depends upon our continued flexibility
in responding to market demand and our ability to offer fashion conscious
consumers a wide variety of high quality apparel at competitive prices.
-6-
Our Business Is Dependent Upon Our Being Able To Accurately Predict Fashion
Trends, Customer Preferences, And Other Fashion-Related Factors.
Customer tastes and fashion trends are volatile and tend to change rapidly.
Our success depends in part on our ability to effectively predict and respond to
quickly changing fashion tastes and consumer demands, and to translate market
trends into appropriate, saleable product offerings. If we are unable to
successfully predict or respond to changing styles or trends and misjudge the
market for our products or any new product lines, our sales, if any, will be
lower and we may be faced with a substantial amount of unsold inventory or
missed sales opportunities. In response, we may be forced to rely on additional
markdowns or promotional sales to dispose of excess, or slow-moving inventory,
which could have a material adverse effect on our business, financial condition,
and results of operations.
The Decline In General Economic Conditions Has Led To Reduced Consumer Demand
For Our Apparel And Accessories And May Continue To Do So In The Future.
Consumer spending habits, including spending for our apparel and
accessories, are affected by, among other things, prevailing economic
conditions, levels of employment, salaries, wage rates, the availability of
consumer credit, consumer confidence, and consumer perception of economic
conditions. The general slowdown in the United States economy and the uncertain
economic outlook have adversely affected consumer spending habits and mall
traffic, which have resulted in, and may continue to result in, lower net sales
by us. A prolonged economic downturn could have a material adverse effect on
our business, financial condition, and results of operations.
The Loss Of Our Key Employees May Adversely Affect Our Growth Objectives.
Our success in achieving our growth objectives depends upon the efforts of
our top management team including the efforts of Mr. Scott Gallagher. The loss
of the services of any of this individual may have a material adverse effect on
our business, financial condition and results of operations. We can give no
assurance that we will be able to maintain and achieve our growth objectives
should we lose Mr. Gallagher's services. Although we intend to apply
for key-man life insurance, we do not currently maintain key life insurance
policies for Mr. Gallagher.
We May Pursue Strategic Acquisitions, Which Could Have An Adverse Impact On Our
Business.
We may from time to time acquire complementary companies or businesses.
Acquisitions may result in difficulties in assimilating acquired companies, and
may result in the diversion of our capital and our management's attention from
other business issues and opportunities. We may not be able to successfully
integrate operations that we acquire, including their personnel, financial
systems, distribution, operations and general store operating procedures. If we
fail to successfully integrate acquisitions, our business could suffer. In
addition, the integration of any acquired business, and their financial results,
into ours may adversely affect our operating results. We currently do not have
any agreements with respect to any such acquisitions.
-7-
We May, In The Future, Issue Additional Shares Of Our Common Stock Which Would
Reduce Investors Percent Of Ownership And May Dilute Our Share Value.
Our articles of incorporation authorizes the issuance of 25,000,000 shares
of common stock, par value $.001 per share. As of August 30, 2002 we have
12,099,284 shares of our common stock issued and outstanding. We are also
authorized to issue 150,000 shares of our Series A 10% convertible preferred
stock of which 50,000 shares are issued and outstanding and 4,850,000
undesignated preferred shares, par value $.01 per share, of which authorized no
shares are issued or outstanding. The future issuance of all or part of our
remaining authorized common stock may result in substantial dilution in the
percentage of our common stock held by our then existing shareholders. We may
value any common stock issued in the future on an arbitrary basis. The issuance
of common stock for future services or acquisitions or other corporate actions
may have the effect of diluting the value of the shares held by our investors,
and might have an adverse effect on any trading market for our common stock.
Shares Of Our Total Outstanding Shares That Are Restricted From Immediate Resale
But May Be Sold Into The Market In The Future Could Cause The Market Price Of
Our Common Stock To Drop Significantly, Even If Our Business Is Doing Well.
As of August 30, 2002, we had 12,099,284 shares of our common stock issued
and outstanding. Of such shares, 7,698,663 shares of common stock were
restricted. As of August 2003 approximately 3,003,333 shares will become
eligible for resale under Rule 144 as such shares may have been then
held for a period of one year. Rule 144 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 a 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 our 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 us. 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
our Common Stock.
Our Common Stock May Be Affected By Limited Trading Volume And May Fluctuate
Significantly
There has been a limited public market for our common stock and there can
be no assurance that an active trading market for our common stock will develop.
As a result, this could adversely affect our shareholders' ability to sell our
common stock in short time periods, or possibly at all. Our common stock has
experienced, and is likely to experience in the future, significant price and
volume fluctuations which could adversely affect the market price of our common
stock without regard to our operating performance. In addition, we believe that
factors such as quarterly fluctuations in our financial results and changes in
the overall economy or the condition of the financial markets could cause the
price of our common stock to fluctuate substantially.
Since We Have Not Paid Any Dividends On Our Common Stock And Do Not Intend To Do
So In The Foreseeable Future, A Purchaser Of Our Common Stock Will Only Realize
An Economic Gain On His Or Her Investment From An Appreciation, If Any, In The
Market Price Of Our Common Stock.
We have never paid, and have no intentions in the foreseeable future to
pay, any cash dividends on our common stock. Therefore an investor in our common
stock, in all likelihood, will only realize a profit on his investment if the
market price of our common stock increases in value.
-8-
Our Common Stock Is Deemed To Be "Penny Stock," Which May Make It More Difficult
For Investors To Resell Their Shares Due To Suitability Requirements
Penny stocks generally are equity securities with a price of less than
$5.00 per share other than securities registered on certain national securities
exchanges or quoted on the NASDAQ Stock Market, provided that current price and
volume information with respect to transactions in such securities is provided
by the exchange or system. Our securities may be subject to "penny stock 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
"penny stock rules" require the delivery, prior to the transaction, of a
disclosure schedule prescribed by the Commission relating to the penny stock
market. The broker-dealer also must disclose the commissions payable to both the
broker-dealer and the registered representative and current quotations for the
securities. Finally, monthly statements must be sent disclosing recent price
information on the limited market in penny stocks. Consequently, the "penny
stock rules" may restrict the ability of broker-dealers to sell our securities
and may have the effect of reducing the level of trading activity of our common
stock in the secondary market. The foregoing required penny stock restrictions
will not apply to our securities if such securities maintain a market price of
$5.00 or greater. We can give no assurance that the price of our securities will
reach or maintain such a level.
-9-
The Significant Downward Pressure On The Price Of Our Stock Caused By The Sale
Of Material Amounts Of Common Stock Under The Accompanying Registration
Statement Could Encourage Short Sales By Third Parties, Which Could Contribute
To The Further Decline Of Our Stock Price
It is conceivable that our stock could be subject to the practice of short
selling. Short selling, or "shorting," occurs when stock is sold which is not
owned directly by the seller; rather, the stock is "loaned" for the sale by a
broker-dealer to someone who "shorts" the stock. In most situations, this is a
short-term strategy by a seller, and based upon volume, may at times drive stock
values down. If such shorting occurs in our common stock, there could be a
negative effect on the trading price of our stock.
We May Not Be Able To Access Sufficient Funds Under The Equity Line Of Credit
When Needed.
Our financing needs, in part, are expected to be provided from our equity
line of credit agreement. No assurances can be given that such financing will be
available in sufficient amounts or at all when needed, in part because the
amount of financing available will fluctuate with the market price and volume of
our common stock. As the market price and volume decline, then the amount of
financing available under the Equity Line of Credit will decline. For
example, we are limited by each put amount to an amount equal to two hundred
fifty percent (250%) of the average daily volume (U.S. market only) of our
common stock for the ten (10) trading days prior to the applicable put notice
Date multiplied by the average of the three (3) daily closing bid prices
immediately preceding the put date,
We have not authorized anyone to provide you with information different from
that contained in this prospectus. This prospectus is not an offer to sell nor
is it seeking an offer to buy these securities in any jurisdiction where this
offer or sale is not permitted. The information contained in this prospectus is
accurate only as of the date of this prospectus, regardless of the time of
delivery of this prospectus or of any sale of the common stock. In this
prospectus, references to the "Company", "we", "us" and "our" refer to
FTS Apparel, Inc., a Colorado corporation.
FORWARD-LOOKING STATEMENTS
Information included or incorporated by reference in this prospectus may contain
forward-looking statements. This information may involve known and unknown
risks, uncertainties and other factors which may cause our actual results,
performance or achievements to be materially different from the future results,
performance or achievements expressed or implied by any forward-looking
statements. Forward-looking statements, which involve assumptions and describe
our future plans, strategies and expectations, are generally identifiable by use
of the words "may," "will," "should," "expect," "anticipate," "estimate,"
"believe," "intend" or "project" or the negative of these words or other
variations on these words or comparable terminology.
-10-
This prospectus contains forward-looking statements, including statements
regarding, among other things, (a) our projected sales and profitability, (b)
our growth strategies, (c) anticipated trends in our industry, (d) our future
financing plans and (e) our anticipated needs for working capital. These
statements may be found under "Management's Discussion and Analysis or Plan of
Operations" and "Business," as well as in this prospectus generally. Actual
events or results may differ materially from those discussed in forward-looking
statements as a result of various factors, including, without limitation, the
risks outlined under "Risk Factors" and matters described in this prospectus
generally. In light of these risks and uncertainties, there can be no assurance
that the forward-looking statements contained in this prospectus will in fact
occur.
USE OF PROCEEDS
We will not receive any of the proceeds from the sale of the shares of
common stock offered by the selling stockholders under this prospectus. We may
receive up to $6 million pursuant to our equity line of credit agreement if we
choose to put shares of our common stock to Dutchess subject to the terms and
conditions of our equity line of credit agreement. We intend to use the proceeds
from puts to Dutchess, if any, for working capital and other general corporate
purposes.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS
Market Information
Our common stock is quoted on the OTC Bulletin Board under the symbol
"FLIP". The following table sets forth the range of high and low bid quotations
of our common stock, as reported on the OTC Bulletin Board, for the periods
indicated. The prices represent inter-dealer quotations, which do not include
retail markups, markdowns or commissions, and may not represent actual
transactions.
-11-
Common Stock
High Low
------ -----
2000
- -----
First Quarter $1.50 $.63
Second Quarter 1.25 .69
Third Quarter .97 .51
Fourth Quarter .53 .19
2001
- ----
First Quarter .31 .07
Second Quarter .26 .07
Third Quarter .25 .02
Fourth Quarter .07 .02
2002
- ----
First Quarter .35 .065
Second Quarter .20 .03
SECURITY HOLDERS
At August 30, 2002 there were 12,099,284 shares our common stock
outstanding which were held by approximately 136 stockholders of record.
DIVIDEND POLICY
We have not paid any dividends on our common stock, and it is not
anticipated that any dividends will be paid in the foreseeable future. Our Board
of Directors intends to follow a policy of using retained earnings, if any, to
finance our growth. The declaration and payment of dividends in the future will
be determined by our Board of Directors in light of conditions then existing,
including our earnings, if any, financial condition, capital requirements and
other factors.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Introduction
The following discussion and analysis covers material changes in our
financial condition since year end December 31, 2001 and a comparison of the
results of operations for the three and six months ended June 30, 2002 to the
same period in 2001. This discussion and analysis should be read in conjunction
with "Management's Discussion and Analysis or Plan of Operation" included in the
Company's Form 10-KSB as of December 31, 2001 and for each of the two years
ended.
-12-
FOR THE YEAR ENDED DECEMBER 31, 2001 AS COMPARED TO THE YEAR ENDED DECEMBER 31,
2000
Results of Operations
- ---------------------
Year ended December 31, 2001. During the year ended December 31, 2001, we
realized a net loss of $1,168,154 (or $0.14 per share) on revenue of $576,846,
compared to a net loss of $1,329,841 ($.20 per share) on revenue of $1,360,284
for the year ended December 31, 2000. Revenue during 2001 decreased 58% from
2000 due to our inability to replace the loss of a major customer from the prior
year. Approximately $1,092,000 of merchandise sold in 2000, representing 82% of
our sales, was to one customer. We attribute the loss of this customer to the
intense competition in the apparel industry.
The cost of goods sold in 2001, including a write-down of inventory of
$111,979, was 113% of revenue. That is, our cost of goods exceeded our revenue.
In 2000, the cost of goods was 77% of revenue. The write down of inventory
during 2001 was necessitated by our decision to liquidate the inventory for
quick sale. Despite our efforts, including manufacturing a portion of our
products overseas, we do not believe that we ever achieved sufficient sales to
reduce our cost of goods to acceptable levels. This fact, coupled with our
general and administrative expenses, caused us to report a net loss for each
year of our existence.
General and administrative expenses decreased 33% from 2000 to 2001, from
$1,643,727 in 2000 to $1,101,127 in 2001. However, these expenses are still
relatively high compared to gross profit. A substantial portion of
administrative expenses relate to non-cash expenses associated with the issuance
of stock to a former officer for services. Non-cash expenses related to stock
based compensation during 2001 was $226,672. We also incurred a non-cash rent
expense of $108,000 through the issuance of shares to our former Chairman for
office space owned by his affiliate. That lease arrangement was terminated
subsequent to the end of the fiscal year in connection with the change in
control discussed elsewhere in this report.
We have reduced our staff significantly over the last two years in an
effort to preserve working capital and improve our operating results. During the
year ended December 31, 2001, we released all but the most critical employees in
an effort to meet these objectives. None-the-less, salaries and payroll were
still a significant portion of our expense, although less than during 2000.
Subsequent to year-end, we reduced our personnel even farther, leaving only a
chief executive officer, a bookkeeper and operating officer, most of who have
agreed to work for non-cash compensation.
-13-
Professional fees remained a significant expense in the amount of $52,133
in 2001 as compared to $82,258 in the prior fiscal year. These expenses were
incurred in connection with our need to file periodic reports with the SEC, as
well as fees incurred in connection with the investigation of acquisition of
other businesses. The high expense in 2000 was due to costs associated with
Commission filing requirements and the reimbursement of legal and financial
consulting fees to an officer in the amount of $45,000.
We anticipate that we will continue to incur losses until such time, if
ever, that we generate revenues from retail sales in an amount adequate to cover
cost of goods and expenses.
Year ended December 31, 2000. Year 2000 was the first year in which we
received significant revenue from operations. Prior to that, we were in the
development stage.
During the year ended December 31, 2000, we realized a net loss of
$1,329,841 (or $0.20 per share) on revenue of $1,360,284, compared to a net loss
of $1,513,241 on revenue of $289,180 for the year ended December 31, 1999.
Revenue increased from the prior fiscal year 370% due to the increased sale of
our products, primarily in large retail outlets. Approximately $1,092,000 of
merchandise in 2000 was sold to one customer, representing 82% of our sales.
In 1999, the cost of goods was 31% of revenues. In 2000, the costs of goods
increased to 77% of revenues. The increased cost of goods is attributed to the
following factors: (i) in 2000, a greater percentage of our products were
manufactured overseas, resulting in increased shipping and customs duties costs;
(ii) some of our overseas orders had to be shipped by air freight, which is
considerably more expensive than ocean shipping; (iii) significant additional
costs were incurred in 2000 due to the delivery of our products to more retail
locations. Our JC Penney orders were shipped directly to each of two hundred
stores instead of to a centralized location. In 2000, our shipping expenses were
$226,185 compared to $2,002 in 1999.
General and administrative expenses decreased slightly from 1999 to 2000,
from $1,712,516 in 1999 to $1,643,727 in 2000. However, these expenses are still
relatively high compared to gross profit. A substantial portion of our net loss
for 2000 resulted from non-cash expenses associated with the issuance of stock
in a private placement and issuance of stock for services. Non-cash expenses
related to stock-based compensation during 2000 were $730,679.
-14-
Shipping costs increased significantly from 1999 to 2000, from $2,002 in
1999 to $226,185 in 2000 as discussed above, to meet demands for increased
sales. Consulting fees of $596,404 were also a significant expense in 2000. Of
that amount, $395,928 was charged as consulting fees in connection with a stock
acquisition. See Item 12. Certain Relationships and Related Transactions.
Salaries increased, as we increased the number of full time employees from six
to nine. Salaries in 2000 were $225,947 as compared to $189,433 for the prior
fiscal year.
Professional fees remained a significant expense in the amount of $82,256
in 2000 as compared to $82,593 in the prior fiscal year. The high expense in
2000 was due to costs associated with Commission filing requirements and the
reimbursement of legal and financial consulting fees to an officer in the amount
of $45,000.
Advertising expenses decreased in 2000 due to our reallocation of
its efforts and available funds to fulfill its larger sales orders. In 2000,
advertising expenses were $138,312 as compared to $416,799 in the prior fiscal
year. Prepaid advertising costs in the form of endorsement contracts reported as
prepaid expenses decreased as well, from $153,733 during 1999 to $36,493 during
2000.
FOR THE THREE MONTHS ENDED JUNE 30, 2002 AS COMPARED TO THE THREE MONTHS
ENDED JUNE 30, 2001
Results of Operations
For the six months ended June 30, 2002, we realized a net loss of $308,369,
or $.03 per share, on no revenue. This compares to a loss of $631,967 on revenue
of $335,605 for the first six months of 2001. Results for the three months ended
June 30, 2002 were a loss of $68,909 on no revenue compared to a loss of
$293,645 on revenue of $214,132 for the second quarter of 2001. Thus, our losses
for the three and six months ended June 30, 2002 were reduced from the
comparable periods of 2001, even though we had no revenue during the current
year.
We were essentially dormant during the first six months of 2002, while we
continue investigation of opportunities to convert our historical apparel
business to an e-commerce model and to supplement our existing business with
operations in other industries. Our revenue and results of operation for the
first six of months of 2001, and in fact all of 2001, were unsatisfactory,
prompting us to refocus our business. We have commenced development of a new web
site to market our apparel products over the Internet, but the site is still
incomplete. We anticipate that it will be completed in the third quarter of the
current fiscal year.
-15-
During the second quarter of 2002, we continued to incur relatively minor
administrative expenses. We had no cost of sales, as we had no revenue. Our
expenses were further reduced from the first quarter of this year, as we
eliminated some special expenses associated with our former operations in
Colorado. As a result of these reductions and our reduced operations, general
and administrative expenses for the second quarter of 2002 were reduced $214,646
from the first quarter of 2001. General and administrative expenses were reduced
a total of $341,066 during the first six months of this year compared to the
comparable period of 2001.
Other than incidental expenses primarily associated with our reporting
obligation as a public company and the compensation to our chief executive
office, our expenses are minimal. Our rent and other overhead are minimal, and
are expected to continue in that fashion until we identify an operating business
to organize or acquire. Our largest expense, $50,000, is the salary accrued
for our chief executive officer.
Liquidity and Capital Resources
Our capital and liquidity position at June 30, 2002 continued to decline
from December 31, 2001. Working capital at June 30, 2002 decreased $198,036, or
333%, from year-end December 31, 2001. At June 30, 2002, we had substantially no
cash, no other current assets and no current source of capital. We also reported
a negative shareholders' equity, which means that our total assets were less
than our total liabilities and our shareholders would receive nothing in the
event of a liquidation. Our current liabilities of $138,956 consist mainly of
accrued salary to our chief executive officer and accounts payable to our
vendors, including service professionals who assist with our reporting
obligations. We believe that our continued existence is dependent on our ability
to raise additional capital and to achieve profitable operations.
Our operations used $50,140 of cash during the first six months of 2002.
This cash was spent primarily on payment of general and administrative expenses,
discussed above. In the process of paying those expenses, we extinguished
substantially all of our cash and relied in part on a short-term advance from
our chief executive officer to fund cash requirements.
On August 23, 2002, we entered into an equity line of credit investment
agreement with Dutchess Private Equities Fund, LP ("Dutchess"). Pursuant to the
equity line of credit, we may, at our discretion, periodically sell to Dutchess
shares of our common stock for a total purchase price of up to $6.0 million. For
each share of common stock purchased under the equity line of credit, Dutchess
will pay 92% of the average of the three (3) lowest closing bid prices of our
common stock during ten (10) trading day pricing period after a put notice is
present by us to Dutchess. We have issued 600,000 shares of our common stock to
Dutchess as a commitment fee for entering into the equity line of credit with
us. The effectiveness of the sale of the shares under the equity line of credit
is conditioned upon us registering the shares of common stock with the
Securities and Exchange Commission. The costs associated with this registration
will be borne by us.
-16-
Pursuant to the equity line of credit, we may periodically sell shares of
common stock to Dutchess to raise capital to fund our working capital needs. The
periodic sale of shares is known as an advance. We may request advances under
the equity line of credit once the underlying shares are registered with the
Securities and Exchange Commission. Thereafter, we may continue to request
advances until Dutchess has advanced an aggregate of $6 million or thirty-six
months after the effective date of the accompanying Registration Statement,
whichever occurs first. We are limited by each put amount to an amount equal to
two hundred fifty percent (250%) of the average daily volume (U.S. market only)
of our common stock for the ten (10) trading days prior to the applicable put
notice Date multiplied by the average of the three (3) daily closing bid prices
immediately preceding the put date, but in no event more than $1,000,000. We
cannot predict the actual number of shares of common stock that will be issued
pursuant to the equity line of credit, in part, because the purchase price of
the shares will fluctuate based on prevailing market conditions and we have not
determined the total amount of advances we intend to draw. Nonetheless, we can
estimate the number of shares of our common stock that will be issued using
certain assumptions.
Management believes that the above-described actions will provide us
with our immediate financial requirements to enable it to continue as a going
concern. In the event that we are unable to raise additional funds, we
could be required to either substantially reduce or terminate our operations.
We are not aware of any material trend, event or capital commitment, which
would potentially adversely affect our liquidity. In the event such a trend
develops, we believe that we will have sufficient funds available to satisfy
working capital needs through lines of credit and the funds expected from equity
sales.
OTHER:
Except for historical information contained herein, the matters set forth above
are forward-looking statements that involve certain risks and uncertainties that
could cause actual results to differ from those in the forward-looking
statements. Potential risks and uncertainties include such factors as the level
of business and consumer spending, the amount of sales of our products, the
competitive environment within the investigative services industry, our ability
to continue to expand its operations, the level of costs incurred in connection
with our expansion efforts, economic conditions and the financial strength of
our customers and suppliers. Investors are directed to consider other risks and
uncertainties discussed in documents filed by us with the Securities and
Exchange Commission.
-17-
THE COMPANY
CHANGES IN CONTROL
Effective January 11, 2002, we experienced a change in our control as the
result of a series of related transactions. Effective that date, we executed an
executive employment agreement with Scott Gallagher pursuant to which he became
our Chairman of the Board and Chief Executive Officer. Simultaneously, the
former Chairman, LeRoy Landhuis, and the other directors of the company
resigned, leaving Mr. Gallagher as the sole remaining director. Also effective
that date, Mr. Gallagher acquired the beneficial ownership of 3,081,618 shares
of our common stock.
Pursuant to the terms of the Mr. Gallagher's employment agreement, Mr.
Gallagher was engaged to serve as our Chairman and CEO for a period of two
years, subject to earlier termination. The Agreement provides him with payment
of an annual salary and the issuance of 1,200,000 shares of our common stock for
services rendered, together with other benefits of a nature consistent with his
position.
Following his appointment to the Board, Mr. Gallagher appointed three
additional individuals to fill the vacancies created by the resignation of the
former directors. The following individuals have been appointed to the Board:
David R. Rasmussen, James H. Gilligan and Scott McBride.
In connection with his appointment as chairman and chief executive officer,
Mr. Gallagher has expressed his intent to review our business and evaluate
opportunities for future expansion and/or acquisitions.
Our Business
Historically we have been in the brick-and-mortar business of designing and
selling designer/casual sportswear and accessories, focusing on athletic and
casual lifestyle clothing. We identify our merchandise with the "Flip The
Switch" and "FTS" trademarks and logos. We market our products with a sports
orientated approach, primarily by endorsements from professional athletes and
sports personalities. Our product line included shirts, jackets, vests, pants
and caps in various styles and colors that we believe are attractive and
appealing to our target market of young consumers. In connection with the change
in control of our management in January 2002, we decided to explore the
opportunities, if any, of acquiring other operating companies and/or expanding
our business model to include an e-commerce infrastructure.
-18-
Our investigation to date has revealed that attractive opportunities are
still available in the technology and distribution industries. Accordingly, we
will evaluate one or more companies of which management is aware in these
industries in an effort to identify a company that offers high profit margin
with little downside risk. To date, we have identified one company that provides
network design and installation and website design services to its clients.
While no agreement has been reached with this entity, our management believes
that this may be one opportunity that presents the type of business that we may
add to our core business.
Another avenue that we are exploring is to adapt our historical business to
an e-commerce business model. In this concept, we would offer the high quality
merchandise that we have sold historically to consumers exclusively on the
Internet through a web site. This would reduce the overhead associated with the
need to maintain a staff of sales, order processing and distribution personnel.
While our thoughts are still in the early stages of exploration, we believe that
this would be an attractive way to use our intellectual property more
effectively than we have in the past.
Production
- ----------
In the past we have contracted with independent overseas and domestic
Manufacturers for production of our merchandise, whose products we have tested
And approved. In the future, should we receive orders, we intend to continue
to outsource these functions. We currently have the ability with outside
consultants, to design and produce all of our products, including style,
color and materials. We believe that we produce only high quality
garments and accessories to appeal to the discriminating consumer. Our current
manufacturers have performed to our standards in terms of quality, cost and time
of manufacturing and delivery, however, we do not maintain written contracts
with our manufacturers. We believe that our current manufacturers, or others who
will be able to provide services of equal quality, will be able to fill our
orders, if any.
The products that we have had produced to date are:
o golf shirts
o t-shirts
o long sleeve shirts
o sweat shirts
o fleece jackets
o pants
o shorts
o caps
We place our larger orders, if any, with overseas manufacturers when we are
able to plan in advance. These manufacturers have more favorable prices but take
longer to fill our orders and deliver our products. For smaller custom orders
that are required on short notice, such as for tournaments and team sales, we
use a local New Jersey manufacturing company that can manufacture the clothing
on short notice.
All of our design work is contracted out as is the manufacturing of all of
our products. We believe this allows us to control and monitor our cost
structure. We intend to sell our products be sold through (i) our Internet web
site located at www.Flip.tv scheduled for launch this fall and (ii) through a
mail order catalog that we intend to produce. We also intend to develop a retail
sales channel by selling our products to local and national retail
establishments; however, we have no agreements to do so as of yet.
Marketing
- ---------
In the past, the focus of our marketing historically has been through the
use of professional athletes and celebrity personalities wearing and promoting
our clothing. We have been successful in signing several of these endorsement
personalities particularly because several members of our former management were
professional baseball players and had contacts with these athletes. We do not
have any signed endorsement contracts with any athletes, but the athletes listed
below have promoted our apparel line because of the personal relationship with
the members of our former management. These athletes include professional
football players, baseball players, boxers and popular former professionals such
as:
Michael Grant, Ed McCaffrey, Rod Smith, Bill Romanowski- Oakland Raiders
Eddie George, Trevor Hoffman, Floyd Mayweather, Reggie Johnson, Tim Dwight,
Chad Brown, Billy Wagner, and Pokie Reese.
These athletes have not endorsed our products since the fiscal year ended
December 31, 2001; however, we believe that they would endorse our products
again if asked to do so.
-19-
We also market our products in the following manner:
o Sponsorship of sporting events
o Sponsorship of team sports
o Radio advertisements
o Newspaper advertisements
o Internet advertisements
Due to the disappointing results of our sales efforts, we believe that our
past methods need refining. Accordingly, we will evaluate other means of
marketing in the future as our new business model evolves.
Distribution and Sales
- --------------------------
The focus of our distribution and sales has been through retail department,
specialty and sporting goods stores. We are dependent on sales in these markets
to achieve the sale volumes we need to be profitable. We have had no
sales since the fiscal year ended December 31, 2001.
Retail Store Sales. Our products have historically been sold primarily
through department stores, specialty stores and sporting goods stores. In 2000,
we were successful in placing our merchandise in JC Penny, a major national
retailer. However, due to the disappointing results of that placement, we were
unable to renew that relationship in 2001. The sales potential for retailers
varies greatly as their locations range from kiosks to department stores. The
retail stores where our products have been sold include:
o Department Stores - JC Penney and Elder Beerman
o Sporting Good Stores - Gart Sports, Copper Rivet, Finish Line
and Shoe Extreme
o Nutrition Stores - Will Power Nutrition and Advanced Nutrition
Our products have not been sold in these stores since the fiscal year ended
December 31, 2001.
Team Sales. We have also been marketing our products to amateur sports
teams, mostly in the Colorado Springs and Colorado Front Range region, where our
headquarters was formerly located and where we had the most local contacts and
exposure. These customers were mostly soccer, hockey, football and baseball
clubs and teams.
Trademark
- ---------
We believe that the distinctiveness of our clothing and accessories lies in
our "Flip The Switch" concept. We have filed Trademark registration applications
with the U.S. Patent and Trademark Office (the "USPTO"). Registration for our
"Flip The Switch" trademark has been approved by the USPTO (Trademark No.
2493173). Registration for a design has been also been approved (Trademark No.
2456035). Registration for a second design Serial # 76-191249 has been "allowed"
as of April 23, 2002 by the USPTO. An opposition has been filed by Propet Usa,
Inc. against the federal registration for our "FTS" trademark, but we do not
believe this opposition has merit and have contacted Propet Usa, Inc to attempt
and resolve this matter.
-20-
Research and Development
- ---------------------------
Historically, we have engaged consultants to work with our staff of
designers to create our apparel merchandise. With the need to reduce our staff
to conserve financial resources, we now rely exclusively on outside
consultants to create our merchandise. These individuals may work as
consultants for many different entities, so their allegiance and availability to
us may be limited.
Employees
As of August 30, 2002, we have one full time employee, our chairman and
chief executive officer, Scott Gallagher. We have never experienced a work
stoppage and we believe that our relationship with Mr. Gallagher is a good one.
Our success depends to a large extent upon the continued services of Mr.
Gallagher. The loss of his services could have a material adverse effect on our
business and our results of operations.
Transfer agent
Our transfer agent is Securities Transfer Corporation located in Dallas,
Texas.
Legal Proceedings
We are not a party to any litigation, and our management has no knowledge
of any threatened or pending litigation against us.
Properties
We lease our facilities located at 301 Oxford Valley Road, Suite 1202,
Yardley, Pennsylvania 19067 for use as our corporate headquarters. We entered
into our lease commencing on August 1, 2002 for a period of one (1) year and
currently pay a monthly rental fee of $900.00 to occupy approximately 700 square
feet. Our lease agreement provides for a one year renewal option. We believe
that our leased properties are adequate for our current and immediately
foreseeable operating needs. We do not have any policies regarding investments
in real estate, securities or other forms of property.
-21-
Property Lease Settlement
On January 5, 2002, we entered into a lease settlement agreement with our
former President whereby, for forgiving a one-year lease obligation for office
space, the former President received the following: (i) all cash on hand as of
January 5, 2002, $44,236 (ii) assignment of all equipment and inventory then
remaining in the office, (iii) assignment of all uncollected accounts receivable
as of January 5, 2002, (iv) issuance of 433,333 shares of our common stock, (v)
accrual of interest on the remaining balance at the rate of 12% per annum, and
(vi) on June 5, 2002 settlement of any remaining balance, estimated at $27,983
as of June 30, 2002, in the form of common stock at an assigned value of $0.03
per share. As of June 30, 2002 no common stock has been issued to settle the
estimated remaining balance of $27,983.
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
DIRECTORS AND EXECUTIVE OFFICERS
The table below sets forth certain information with respect to our
directors and executive officers as of August 30, 2002.
Name Age Positions with the Company
- ------ --- --------------------------
Scott Gallagher 35 Chairman of the Board of Directors,
Chief Executive Officer and President
Linda Ehlen 52 Chief Financial Officer
David R. Rasmussen 35 Director
W. Scott McBride 30 Director
James H. Gilligan 30 Director
All directors hold office until the next annual meeting of stockholders and
until their successors are elected. Officers are elected to serve, subject to
the discretion of the Board of Directors, until their successors are appointed.
SCOTT GALLAGHER. Mr. Gallagher has served on our board of directors since
January 11, 2002. Since 1998, Mr. Gallagher has served as the president of
About-Face Communications, LLC, a privately held business consulting firm
located in Yardley, Pennsylvania. Prior to founding About-Face Communications,
LLC, Mr. Gallagher was the chief investment officer and a general partner with
the Avalon Investment Fund, a private hedge fund based in New York City. Prior
to working for Avalon Investment Fund, Mr. Gallagher was a branch manager and
founder of the Langhorne, Pennsylvania office for Scottsdale Securities, Inc., a
national brokerage firm based in St. Louis, Missouri.
LINDA EHLEN. Since 1995, Ms. Ehlen has served as the Chief Financial
Officer of Casa Comieda, Inc., a company involved in the restaurant business.
From 1981 to 1995, she was a controller for Livingston Oil Corp. Ms. Ehlen
earned her Bachelor's Degree in Accounting from Monmouth University,
Rutgers School of Government and Accounting.
-22-
DAVID R. RASMUSSEN. Mr. Rasmussen has served on our board of directors
since February 10, 2002. Mr. Rasmussen received a Bachelor's degree in Computer
Technology from Rockhurst University in Kansas City Missouri. He has been in the
IT (information Technology Field) since 1992. From 1997 through 2000 he worked
as a program analyst for National Association of Insurance Commissions. Since
2000, Mr. Rasmussen has served as a Project leader for ERC, Inc, a subsidiary of
General Electric (NYSE:GE). In his current position he is charged with providing
IT solutions that enable business to drive core processes and grow profitable
relationships.
W. SCOTT MCBRIDE. Mr. McBride has served on our board of directors since
February 10, 2002. Mr. McBride graduated from Western State College, in Gunnison
Co. in 1995 with a BA in Political and Environmental Science. From 1995 to 1997
Mr. McBride was a partner in a New Jersey real estate development venture. From
1997 to 2000 Mr. McBride attended Monmouth University, in West Long Branch , New
Jersey where he received a Master's Degree in Education. From January of 2000
through December of 2000 Mr. McBride worked with the firm Datek Online Brokerage
Services, as a team technology leader in the customer service area. In January
of 2001 Mr. McBride became a Security Information Technology (SIT) Consultant,
providing a variety of services to companies and law enforcement agencies in the
SIT Industry.
JAMES H. GILLIGAN. Mr. Gilligan has served on our board of directors since
February 10, 2002. From 1996 to 2001, Mr. Gilligan was employed at
Kristensons-Petroleum, Inc. ("KPI") as a broker/trader. KPI services ship
owners, marine fuel suppliers and a network of independent brokers and traders
around the world. In September of 2001, Mr. Gilligan began working as an
independent sales consultant for Digital Descriptor Systems, Inc., a
security/biometric company. Mr. Gilligan earned his BA in Liberal Arts from West
Virginia University in Morgantown, West Virginia and his Associates in Liberal
Arts from Brookdale Community College, in Lincroft, New Jersey.
Involvement In Certain Legal Proceedings
We are not aware of any material legal proceedings that have occurred
within the past five years concerning any director, director nominee, or control
person which involved a criminal conviction, a pending criminal proceeding, a
pending or concluded administrative or civil proceeding limiting one's
participation in the securities or banking industries, or a finding of
securities or commodities law violations.
Executive Compensation
- ----------------------
The following table presents a summary of the compensation paid to our
Chief Executive Officer during the last three fiscal years. No other executive
officer received compensation in excess of $100,000 during 2001. Except as
listed below, there are no bonuses, other annual compensation, restricted stock
awards or stock options/SARs or any other compensation paid to the executive
officers.
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Summary Compensation Table
Long-term
Annual Compensation Compensation
--------------------------- ------------------
Other Annual Securities
Name and Position Year Salary Compensation Underlying Options
- ------------------------------- ---- ------ ------------ ------------------
LeRoy Landhuis, 2000 $19,750 $117,844(1) -0-(2)
Chairman of the Board and 2001 -0- $226,672(3) -0-(2)
Chief Executive Officer(*)
- ----------------------------------------
(*) Mr. Landbuis is no longer our Chairman and Chief Executive Officer.
(1) Represents compensation for services pursuant to a consulting agreement
which was paid in the form of 315,201 shares of common stock valued at $.373869
per share. For additional amounts deemed paid to the officer in the form of
discounted securities.
(2) Excludes warrants to produce 1,036,000 shares of our common stock.
(3) Includes 782,222 shares of common stock valued at $220,000 pursuant to
a consulting agreement with the named executive officer and 142,500 shares of
common stock valued at $6,672 issued pursuant to a registration rights agreement
with the named executive officer.
Compensation Agreements
- -----------------------
Effective January 11, 2002, Mr. Gallagher executed an executive employment
agreement with us pursuant to which he was appointed our Chairman of the Board
and chief executive officer. The agreement provides him a base salary of
$100,000 per year, the opportunity for bonuses based on our financial
performance, 1,200,000 shares of our common stock and the right to participate
in benefit programs maintained for its other employees. The agreement covers the
period through the end of 2004, subject to earlier termination. The Agreement
provides that we may terminate his employment with "cause," as defined therein.
In the event that his employment is terminated without cause, we must pay him
for the balance of the original term.
Directors are not currently compensated, except as noted above for Mr.
Landhuis, although each is entitled to be reimbursed for reasonable and
necessary expenses incurred on our behalf. We reserve the right to enter into
compensation arrangements with the directors in the future.
There were no stock options granted for services to the named executive
officers in fiscal year 2001 and there were no stock options exercised by any of
the named executive officers in fiscal year 2001.
The following table is a summary of the value of the options granted to
named executive officers as of fiscal year end 2001, based upon the latest
average trading price of our stock.
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Fiscal Year End Option Value
Number of Shares
Underlying Unexercised Value of Unexercised
Options at FY-End Options at FY-End
Exercisable Exercisable/Unexercisable
---------------------- -------------------------
Roger K. Burnett 200,000 $0(1)
Joseph F. DeBerry 200,000 $0(1)
- ----------------------------------------
(1) Based upon the last sales price of our common stock on December 31,
2001.
Stock Option Plan
- ------------------
We have adopted a Non-Qualified Stock Option and Stock Grant Plan (the
"Plan") for the benefit of key personnel and others providing significant
services to us. An aggregate of 2,500,000 shares of our common stock have been
reserved for issuance under the Plan, as amended.
The Plan is administered by our Board of Directors, which selects
recipients of any stock options or grants, the number of shares and the terms
and conditions of any options or grants to key persons defined in the Plan. In
determining the value of services rendered to us for purposes of awards under
the Plan, the Board considers, among other things, such person's employment
position and relationship with us, his duties and responsibilities, ability,
productivity, length of service or association, morale, interest in our company,
recommendation by supervisors and the value of comparable services rendered by
others in the community. All options granted pursuant to the Plan are
exercisable at a price not less than the fair market value of the shares of
common stock on the date of grant.
In 2001, no options were granted under the Plan. We have options
outstanding to purchase a total of 598,000 shares of our common stock at
exercise prices ranging from $.81 per share to $2.75 per share.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of the date of this
Report regarding the beneficial ownership of our common stock held by each of
our executive officers and directors, individually and as a group and by each
person who beneficially owns in excess of five percent of the common stock. In
general, beneficial ownership includes those shares that a person has the power
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to vote, sell, or otherwise dispose. Beneficial ownership also includes that
number of shares, which an individual has the right to acquire within 60 days
(such as stock options) of the date this table was prepared. Two or more persons
may be considered the beneficial owner of the same shares. In the registration
statement of which this prospectus is a part, "voting power" is the power to
vote or direct the voting of shares, and "investment power" includes the power
to dispose or direct the disposition of shares. The inclusion in this section of
any shares deemed beneficially owned does not constitute an admission by that
person of beneficial ownership of those shares.
The shareholders listed below have sole voting and investment power. The
address of each of the beneficial owners is 301 Oxford Valley Road,
Yardley, Pennsylvania 19067, unless otherwise indicated. All ownership of
securities is direct ownership unless otherwise indicated.
Number of Percent of
Name Shares Voting Securities
- -------------------------------- ---------- -----------------
Officers and Directors:
Scott Gallagher 4,281,618 34.8%
Linda Ehlan -0- -0-
David R. Rasmussen -0- -0-
W. Scott McBride(2) -0- -0-
James H. Gilligan -0- -0-
All Officers and Directors
as a Group (5 persons) 4,218,618 34.8%
5% Beneficial Owners:
LeRoy Landhuis(3) 6,471,311 49.2%
212 N. Wahsatch Avenue,
Suite 301
Colorado Springs, CO 80903
- ----------------------------
(1) Based upon 12,099,284 shares of our common stock outstanding as of
August 30, 2002.
(2) Such figure does not include 300,000 shares of our common stock which were
sold in August 2002 to Scott McBride, one of our directors, which shares have
not yet been physically delivered by our transfer agent to Mr. McBride. If such
shares were issued, Mr. McBride would own 2.5 percent of our outstanding shares
of common stock.
(3) Includes warrants for 1,036,000 shares of Common Stock, exercisable
immediately for an exercise price of $1.50 per share, and expiring on April 19,
2010.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
To the best of management's knowledge, other than as set forth below, there
were no material transactions, or series of similar transactions, or any
currently proposed transactions, or series of similar transactions, to which
we were or are to be a party, in which the amount involved exceeds
$60,000, and in which any director or executive officer, or any security holder
who is known by us to own of record or beneficially more than 5% of any class of
our common stock, or any member of the immediate family of any of the foregoing
persons, has an interest.
Transactions with LeRoy Landhuis
- --------------------------------
During the year ended December 31, 2001, we issued a total of 924,722
shares of our common stock to LeRoy Landhuis, our former Chairman and Chief
Executive Officer and currently the owner of greater than five percent of our
common stock. Of that amount, 782,222 shares were issued for consulting services
valued at $220,000 and 142,500 shares valued at $6,672 were issued in
satisfaction of our obligation pursuant to a registration rights agreement. We
negotiated the number of shares issued in connection with the consulting
services with Mr. Landhuis prior to his becoming an officer and director, and
the number of shares was based on a discount from the public trading price of
our common stock on December 31, 2001. We negotiated the number of shares in
connection with the registration agreement at the time the shares were issued;
this amount was based on the fair market value of the common stock at the time
of the transaction and the perceived value of the opportunity foregone by Mr.
Landhuis.
During the years ended December 31, 2000 and 2001, we occupied facilities
in space leased from an affiliate of Mr. Landhuis. The rent paid pursuant to
this arrangement for those two years was $193,744, based on the value assigned
to the stock that we issued to Mr. Landhuis in exchange for the rent.
Effective April 19, 2000, we issued 3,594,256 shares of our common stock in
a private placement to Mr. Landhuis. The aggregate proceeds from the private
placement was $1,343,780, based upon the value of the stock as originally
negotiated by the parties ($.37 per share), consisting of $1,000,000 in cash;
payment of rent valued at $193,744 for our office facilities for a two year
term; office equipment and improvements valued at $32,192; and consulting
services valued at $117,844. Mr. Landhuis was a minority shareholder in our
company prior to the transaction. As part of that transaction, we granted a
warrant to Mr. Landhuis to acquire up to 1,036,000 shares of our common stock at
an exercise price of $1.50 per share, effective until April 19, 2010.
-27-
We entered into an agreement with Mr. Landhuis, effective August 18, 2000
whereby we agreed to indemnify Mr. Landhuis for any tax liabilities Mr. Landhuis
incurs for income in excess of amounts agreed upon in his prior agreements with
us. During 2000, Mr. Landhuis made a short term loan to us in the
amount of $65,685 for payroll, accounts payable, merchandise and travel
expenses. The loan was repaid prior to year end with interest in the amount of
$1,585. Also during 2001 and 2000, $5,936 and $16,065 was paid to the Landhuis
Brokerage and Management Co. for consulting services and office support services
provided to us. The Landhuis Brokerage and Management Co. was also reimbursed
$12,621 for travel expenses incurred on our behalf. Finally, during 2000,
$30,000 was reimbursed to Mr. Landhuis for legal fees incurred regarding Mr.
Landhuis's acquisition of our stock and other related transactions.
In August we sold 300,000 shares of our common stock to one of our
directors, W, Scott McBride, at a purchase price of $.05 per share for an
aggregate purchase price of 15,000. The Company believes such issuance was
exempt from registration pursuant to Section 4(2) of the Securities Act of 1933.
SELLING STOCKHOLDERS
We are registering for offer and sale by the holders thereof 11,000,000
shares of our common stock held by certain stockholders which include up to
10,175,000 shares that may be issued to Dutchess pursuant to our Equity Line
Agreement and 825,000 shares of our common stock currently outstanding.
The selling stockholders may offer their shares for sale on a continuous
basis pursuant to Rule 415 under the 1933 Act. None of the following selling
stockholders has held any position or office with us, nor has had any other
material relationship with us in the past three years, other than in connection
with transactions pursuant to which the selling stockholders acquired shares of
our common stock. None of the selling stockholders are or are affiliates of
broker-dealers. All Dutchess' investment decisions are made by Dutchess Capital
Management, LLC of which Michael A. Novielli and Douglas H. Leighton are the
managing members.
Based on information provided to us by the selling stockholders, the
following table sets forth certain ownership and registration information
regarding the shares held by each person who is a selling stockholder.
Number of
Shares Number of
Beneficially Number of shares owned Percent
owned prior shares being after the Beneficially
to the registered offering owned after
Name offering (1) under offering(2) (3) offering(3)
- ----------------------------- ------------- -------------- ------------- ------------
Dutchess Private Equities 11,025,000 10,900,000(4) 125,000 1%
Fund, L.P
312 Stuart St., 3rd Floor
Boston, MA 02116
Seth A. Farbman, Esq.
301 Eastwood Road
Woodmere, NY 11598 100,000 100,000 0 0
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(1) We cannot predict the actual number of shares of common stock that will be
issued pursuant to the equity line of credit, in part, because the purchase
price of the shares under the equity line of credit will fluctuate based on
prevailing market conditions and we have not determined the total amount of
advances under the equity line of credit that we intend to draw. Therefore,
the number of shares of common stock registered in connection with the
equity line of credit is based on our good-faith estimate of the maximum
number of shares that we are authorized to issue together with the current
market prices of our common stock. The number of shares of common stock
available under the equity line of credit may be increased by any unused
shares of common stock available under the equity line of credit.
(2) The actual number of shares of common stock offered in this prospectus, and
included in the registration statement of which this prospectus is a part,
includes such additional number of shares of common stock as may be issued
or issuable by reason of any stock split, stock dividend or similar
transaction involving the common stock, in accordance with Rule 416 under
the Securities Act of 1933.
Under the terms of our equity line of credit investment agreement we may
only put shares to Dutchess only to the extent that the number of shares of
common stock issuable pursuant to such securities, together with the number
of shares of common stock owned by Dutchess and its affiliates would not
exceed 4.9% of the then outstanding common stock as determined in
accordance with Section 13(d) of the Exchange Act.
(3) Such figure assumes the sale of all of the shares offered by the selling
stockholders.
(4) Such figure includes 725,000 shares of our common stock currently held by
the named selling stockholder and up to 10,175,000 shares of our common
stock issuable to Dutchess pursuant to our equity credit line investment
agreement.
PLAN OF DISTRIBUTION
The shares being offered by the selling stockholders or their respective
pledgees, donees, transferees or other successors in interest, will be sold from
time to time in one or more transactions, which may involve block transactions:
- - on the Over-the-Counter Bulletin Board or on such other market on which
the common stock may from time to time be trading;
- - in privately-negotiated transactions;
- - through the writing of options on the shares;
- - any combination thereof.
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The sale price to the public may be:
- - the market price prevailing at the time of sale;
- - a price related to such prevailing market price;
- - at negotiated prices; or
- - such other price as the selling stockholders determine from time to time.
The selling stockholders shall have the sole and absolute discretion not
to accept any purchase offer or make any sale of shares if they deem the
purchase price to be unsatisfactory at any particular time.
The selling stockholders or their respective pledgees, donees, transferees
or other successors in interest, may also sell the shares directly to market
makers acting as principals and/or broker-dealers acting as agents for
themselves or their customers. Such broker-dealers may receive compensation in
the form of discounts, concessions or commissions from the selling stockholders
and/or the purchasers of shares for whom such broker/dealer might be in excess
of customary commissions. Market makers and block purchasers purchasing the
shares will do so for their own account and at their own risk. It is possible
that a selling stockholder will attempt to sell shares of common stock in block
transactions to market makers or other purchasers at a price per share which may
be below the then market price. The selling stockholders cannot assure that all
or any of the shares offered in this prospectus will be issued to, or sold by,
the selling stockholders. The selling stockholders and any brokers, dealers or
agents, upon effecting the sale of any of the shares offered in this prospectus
may be deemed "underwriters" as that term is defined under the Securities Act or
the Exchange Act, or the rules and regulations under such acts.
The selling stockholders, alternatively, may sell all or any part of the
shares offered in this prospectus through an underwriter. No selling stockholder
has entered into any agreement with a prospective underwriter and there is no
assurance that any such agreement will be entered into. If a selling stockholder
enters into such an agreement or agreements, the relevant details will be set
forth in a supplement or revisions to this prospectus.
The selling stockholders and any other persons participating in the sale or
distribution of the shares will be subject to applicable provisions of the
Exchange Act and the rules and regulations under such act, including, without
limitation, Regulation M. The provisions of Regulation M may restrict certain
activities of Dutchess, and limit the timing of purchases and sales of any of
the shares by, the selling stockholders or any other such person. Under
Regulation M, Dutchess or their agents may not bid for, purchase, or attempt to
-30-
induce any person to bid for or purchase, shares of our common stock while
Dutchess is distributing shares covered by this prospectus. Accordingly, except
as noted below, Dutchess is not permitted to cover short sales by purchasing
shares while the distribution is taking place. Dutchess can cover any short
positions only with shares received from us under the Equity Line of Credit. The
selling stockholders are advised that if a particular offer of common stock is
to be made on terms constituting a material change from the information set
forth above with respect to the Plan of Distribution, then to the extent
required, a post-effective amendment to the accompanying registration statement
must be filed with the Securities and Exchange Commission.
We have agreed to indemnify the selling stockholders, or their transferees
or assignees, against certain liabilities, including liabilities under the
Securities Act, or to contribute to payments the selling stockholders or their
respective pledgees, donees, transferees or other successors in interest, may be
required to make in respect of such liabilities.
Dutchess is an underwriter within the meaning of the Securities Act of 1933
in connection with the sale of common stock under our equity line of credit
agreement. Dutchess will purchase stock from us at a purchase price of 92% of
the average of the three (3) lowest closing bid prices of our common stock
during ten (10) trading day pricing period after a put notice is present by us
to Dutchess The 8% percent discount on the purchase of the common stock to be
received by Dutchess will be an underwriting discount.
Amendment and Supplementation Necessitated by Future Sales.
To the extent required, this prospectus may be amended and supplemented
from time to time to describe a specific plan of distribution. In connection
with distributions of such shares or otherwise, the selling stockholders may
enter into hedging transactions with broker-dealer or other financial
institutions. In connection with these transactions, broker-dealer or other
financial institutions may engage in short sales of our common stock in the
course of hedging the positions they assume with the selling stockholders. The
selling stockholders may also sell our common stock short and redeliver the
shares to close out such short positions. The selling stockholders may also
enter into option or other transactions with broker-dealers or other financial
institutions which require the delivery to the broker-dealer or other financial
institution of the shares offered in this prospectus, which shares the
broker-dealer or other financial institution may resell pursuant to this
prospectus (as supplemented or amended to reflect such transaction). The selling
stockholders may also pledge their shares to a broker-dealer or other financial
institution, and, upon a default, the broker-dealer or other financial
institution may effect sales of the pledged shares pursuant to this prospectus
(as supplemented or amended to reflect such transaction). In addition, any
shares that qualify for sale pursuant to Rule 144 may be sold under Rule 144
rather than pursuant to this prospectus.
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In effecting sales, brokers, dealers or agents engaged by the selling
stockholders may arrange for other brokers or dealers to participate. Brokers,
dealers or agents may receive commissions, discounts or concessions from the
selling stockholders in amounts to be negotiated prior to the sale. These
brokers or dealers, the selling stockholders, and any other participating
brokers or dealers may be deemed to be "underwriters" within the meaning of the
Securities Act in connection with such sales, and any such commissions,
discounts or concessions may be deemed to be underwriting discounts or
commissions under the Securities Act. The selling stockholders have advised us
that they have not entered into any agreements, understandings or arrangements
with any underwriters or broker-dealers regarding the sale of their securities,
nor is there an underwriter or coordinating broker acting in connection with the
proposed sale of shares by the selling stockholders.
If a selling stockholder enters into an underwriting agreement, the
relevant details will be set forth in a post-effective amendment to the
registration statement, rather than a prospectus supplement.
OTHER INFORMATION REGARDING FUTURE SALES
In order to comply with the securities laws of some states, if applicable,
the shares being offered in this prospectus must be sold in such jurisdictions
only through registered or licensed brokers or dealers. In addition, in some
states shares may not be sold unless they have been registered or qualified for
sale in the applicable state or a seller complies with an available exemption
from the registration or qualification requirement.
We will make copies of this prospectus available to the selling
stockholders and will inform them of the need for delivery of copies of this
prospectus to purchasers at or prior to the time of any sale of the shares
offered hereby. The selling shareholders may indemnify any broker-dealer that
participates in transactions involving the sale of the shares against some
liabilities, including liabilities arising under the Securities Act.
At the time a particular offer of shares is made, if required, a prospectus
supplement will be filed and distributed that will set forth the number of
shares being offered and the terms of the offering, including the name of any
underwriter, dealer or agent, the purchase price paid by any underwriter, any
discount, commission and other item constituting compensation, any discount
commission or concession allowed or re-allowed or paid to any dealer, and the
proposed selling price to the public. In addition, upon being notified by a
selling stockholder that a donee or pledgee intends to sell more than 500
shares, a prospectus supplement will be filed and distributed.
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PAYMENT OF EXPENSES
We will pay all the expenses related to the registration of the shares
offered by this prospectus, except for any underwriting, brokerage or related
fees, discounts, commissions or the fees or expenses of counsel or advisors to
the selling stockholders.
DESCRIPTION OF SECURITIES
Authorized Capital
The total number of our authorized shares of common stock is twenty five
million (25,000,000) with a par value of $.001 per share. We are authorized to
issue 150,000 shares of our 10% Convertible preferred stock, Series A, $0.01 of
which 50,000 shares are issued and outstanding and 4,850,000 undesignated
preferred shares, par value $.01 per share, of which no shares are issued or
outstanding. The following description of our securities is qualified in its
entirety by reference to our Articles of Incorporation and Articles of Amendment
to the Articles of Incorporation, copies of which are available upon request to
us.
Common Stock
Our Articles of incorporation authorizes the issuance of 25,000,000
shares of common stock, $.001 value per share, of which 12,099,284 shares are
issued and outstanding as of August 30, 2002.
Holders of shares of common stock are entitled to one vote for each share
on all matters to be voted on by the stockholders. Holders of common stock do
not have cumulative voting rights. Holders of common stock are entitled to share
ratably in dividends, if any, as may be declared from time to time by our Board
of Directors in its discretion from funds legally available therefor. In the
event of our liquidation, dissolution or winding up, the holders of common stock
are entitled to share pro rata all assets remaining after payment in full of all
liabilities.
Holders of common stock have no preemptive rights to purchase our common
stock. There are no conversion or redemption rights or sinking fund provisions
with respect to the common stock.
Noncumulative Voting
Each holder of common stock is entitled to one vote per share on all
matters on which such stockholders are entitled to vote. Shares of common stock
do not have cumulative voting rights. The holders of more than 50 percent of the
shares voting for the election of directors can elect all the directors if they
choose to do so and, in such event, the holders of the remaining shares will not
be able to elect any person to the Board of Directors.
-33-
Preferred Stock
Our Articles of Incorporation and Articles of Amendment to the Articles of
Incorporation vest our Board of Directors with authority to divide our preferred
stock into series and to fix and determine the relative rights and preferences
of the shares of any such series so established to the full extent permitted by
the laws of the State of Colorado and the Articles of Incorporation in respect
to, among other things, (i) the number of shares to constitute such series and
the distinctive designations thereof; (ii) the rate and preference of dividends,
if any, the time of payment of dividends, whether dividends are cumulative and
the date from which any dividend shall accrue; (iii) whether preferred stock may
be redeemed and, if so, the redemption price and the terms and conditions of
redemption; (iv) the liquidation preferences payable on Preferred stock in the
event of involuntary or voluntary liquidation; (v) sinking fund or other
provisions, if any, for redemption or purchase of preferred Stock; (vi) the
terms and conditions by which preferred stock may be converted, if the preferred
stock of any series are issued with the privilege of conversion; and (vii)
voting rights, if any.
As of the date of filing this Registration Statement, a total of 150,000
shares were designated Series A Preferred Stock, of which 50,000 are issued and
outstanding. All of those shares have an issue price and preference on
liquidation equal to $1.00 per share. The Series A Preferred Shares accrue
dividends at the rate of 10% per annum during the first two years following
issuance, which dividend is payable in cash and is cumulative. During the third
through fifth year in which the Series A Preferred Shares are outstanding, the
holders are entitled to 3.75% of our net profits, also payable in cash. We may
redeem this preferred stock at any time following notice to the holder for an
amount equal to the issue price, plus any accrued but unpaid dividends.
The Series A Preferred Shares are convertible into shares of our common
stock at the option of the holder on a one for one basis at any time up to
the fifth anniversary of the issuance. On the fifth anniversary, the Series A
Preferred Shares automatically convert into shares of our common stock. The
conversion rate is subject to adjustment in certain events, including stock
splits and dividends. Holders of our preferred stock are entitled to one vote
for each share held of record. Holders of the preferred stock vote with holders
of the common stock as one class.
We also have 4,850,000 undesignated shares of our preferred stock,
$0.01 par value, authorized of which no shares are issued or outstanding.
Stock Options
We have a Non-Qualified Stock Option and Stock Grant Plan (the "Plan"),
which we adopted in July 1997. Under our Plan, our Board of Directors has
reserved 2,500,000 shares of our common stock that may be granted at the Board
of Directors' discretion. No option may be granted after July 27, 2007 and the
maximum term of the options granted under the Plan is ten years. We currently
have options outstanding to purchase 598,000 shares of our common stock at
exercises prices ranging from $.81 per share to $2.75 per share.
Warrants
We currently have warrants outstanding to purchase an aggregate of
1,036,000 shares of our common stock at an exercise price of $1.50 per share.
Such warrants expire on April 19, 2010.
-34-
Penny Stock Regulation
If the market price of the our common stock, if a market for its common
stock develops and is maintained, is or falls below $5.00 per share, then our
common stock may be considered "penny stock". Penny stocks generally are equity
securities with a price of less than $5.00 per share other than securities
registered on certain national securities exchange or quoted on the Nasdaq Stock
Market, provided that current price and volume information with respect to
transactions in such securities is provided by the exchange or system. Our
securities may be subject to "penny stock" 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 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 disclosure scheduled prescribed by the commission related to
the penny stock market. The broker-dealer also must disclose the commissions
payable to both the broker-dealer and the registered representative and current
quotations for the securities. Finally, monthly statements must be sent
disclosing recent price information on the limited market in penny stocks.
Consequently, the "penny stock" rules may restrict the ability of broker-dealers
to sell our securities.
Reports to Stockholders
We will furnish to holders of our common stock annual reports containing
audited financial statements examined and reported upon, and with an opinion
expressed by, an independent certified public accountant. We may issue other
unaudited interim reports to our stockholders as we deem appropriate.
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT
LIABILITIES
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended ("Securities Act") may be permitted to directors,
officers and controlling persons of the registrant pursuant to the foregoing
provisions, or otherwise, the Registrant has been advised that in the opinion of
the Commission such indemnification is against public policy as expressed in the
Securities Act, and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act, and will be governed by the final adjudication of such issue.
-35-
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form SB-2 under the Securities Act
with respect to the securities being offered. This prospectus, filed as a part
of the registration statement, does not contain certain information contained in
or annexed as exhibits to the registration statement. Reference is made to
exhibits to the registration statement for the complete text. For further
information with respect to us and the securities hereby offered, reference is
made to the registration statement and to the exhibits filed as part of it,
which may be inspected and copied at the public reference facilities of the
Commission in Washington D.C. Copies of such material can be obtained from the
Public Reference Section of the Commission, 450 5th Street, NW, Washington, D.C.
20549, at prescribed rates and are available on the World Wide Web at:
http://www.sec.gov.
We are subject to the informational reporting requirements of the
Securities Exchange Act of 1934 and intend to file reports and other information
with the Commission. We will provide without charge to each person who receives
a copy of this prospectus, upon written or oral request, a copy of any of the
information incorporated herein by reference, not including exhibits. Such
requests should be made in writing to FTS Apparel, Inc., Attention: Mr. Scott
Gallagher, 301 Oxford Valley Road, Yardley, Pennsylvania 19067 or call us at
(215) 369-9979.
LEGAL MATTERS
The legality of the shares of common stock offered in this prospectus will
be passed upon for us by the law offices of Seth A. Farbman, P.C., New York. We
issued, as partial payment for legal services, 100,000 shares of our common
stock to Seth A. Farbman.
EXPERTS
The financial statements of FTS Apparel, Inc. at December 31, 2001 and for
each of the two years then ended with notes thereto appearing in this Prospectus
and Registration Statement have been audited by Stark Winter Schenkein & Co.,
LLP, independent auditors, as set forth in their reports thereon appearing
elsewhere herein and in the Registration Statement, and are included in reliance
upon such reports given upon the authority of such firm as experts in accounting
and auditing.
-36-
FTS Apparel, Inc.
Table of Contents
Page
----
Report of Independent Auditors F-1
Balance Sheet F-2
Statements of Operations F-3
Statement of Changes in Stockholders' Equity F-4
Statements of Cash Flows F-5
Notes to Financial Statements F-6 - F-14
STARK WINTER SCHENKEIN & CO., LLP
- --------------------------------------------------------------------------------
Certified Public Accountants
Financial Consultants
REPORT OF INDEPENDENT AUDITORS
Shareholders and Board of Directors
FTS Apparel, Inc.
We have audited the accompanying balance sheet of FTS Apparel, Inc. as of
December 31, 2001, and the related statements of operations, changes in
stockholders' equity, and cash flows for the years ended December 31, 2001 and
2000. 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 auditing standards generally accepted
in the United States of America. 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 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 FTS Apparel, Inc. as of
December 31, 2001, and the results of its operations, and its cash flows for the
years ended December 31, 2001 and 2000, in conformity with accounting principles
generally accepted in the United States of America.
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.
This factor raises substantial doubt about the Company's ability to continue as
a going concern. Management's plans in regard to this matter are also discussed
in Note 2. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
Denver, Colorado
April 22, 2002
/s/ Stark Winter Schenkein & Co., LLP
- -------------------------------------
Stark Winter Schenkein & Co., LLP
7535 East Hampden Avenue, Suite 109 o Denver, Colorado 80231
o (303) 694-6700 Fax (303)694-6761
F-1
FTS APPAREL, INC.
BALANCE SHEET
DECEMBER 31, 2001
ASSETS
CURRENT ASSETS
Cash - restricted $ 44,236
Other current assets 19,682
-----------
Total current assets $ 63,918
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 2,101
Accounts payable - related party 2,357
-----------
Total current liabilities 4,458
-----------
STOCKHOLDERS' EQUITY
10% Convertible preferred stock, Series A, $0.01
par value, 150,000 shares authorized, 50,000
shares issued and outstanding 50,000
Preferred stock, $0.01 par value, 4,850,000 undesignated
shares authorized, none issued or outstanding --
Common stock, $0.001 par value, 25,000,000 shares
authorized, 8,645,951 shares issued
and outstanding 8,646
Additional paid in capital 4,254,462
Accumulated (deficit) (4,253,648)
-----------
59,460
-----------
$ 63,918
===========
The notes to the financial statements are an integral part of these statements
F-2
FTS APPAREL, INC.
STATEMENTS OF OPERATIONS
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
2001 2000
----------- -----------
REVENUES
Sales of merchandise $ 568,953 $ 1,327,464
Advertising and promotion income 7,893 6,860
Trade agreements -- 25,960
----------- -----------
576,846 1,360,284
COST OF GOODS SOLD 645,824 1,043,416
----------- -----------
GROSS PROFIT (LOSS) (68,978) 316,868
GENERAL AND ADMINISTRATIVE EXPENSES 1,101,127 1,643,727
----------- -----------
(LOSS) FROM OPERATIONS (1,170,105) (1,326,859)
----------- -----------
OTHER INCOME (EXPENSE)
Interest income 3,207 11,179
Interest expense (1,256) (12,750)
----------- -----------
1,951 (1,571)
----------- -----------
NET (LOSS) (1,168,154) (1,328,430)
PREFERRED DIVIDENDS -- (1,411)
----------- -----------
NET (LOSS) APPLICABLE TO COMMON STOCK $(1,168,154) $(1,329,841)
=========== ===========
PER SHARE INFORMATION:
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
(BASIC AND DILUTED) 8,598,451 6,807,656
=========== ===========
NET (LOSS) PER COMMON SHARE (BASIC AND DILUTED) $ (0.14) $ (0.20)
=========== ===========
The notes to the financial statements are an integral part of these statements
F-3
FTS APPAREL, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2001 AND 2000
(Table Split - see below - continued)
Number of Number of
Preferred Common Preferred Common
Shares Shares Stock Stock
--------- --------- --------- ------
Balance, December 31, 1999 50,000 3,939,722 $ 50,000 $3,940
Stock issued for services and fixed assets -- 1,106,773 -- 1,106
Stock issued for cash -- 2,674,734 -- 2,675
Preferred dividends declared -- -- -- --
Net (loss) for the year ended December 31, 2000 -- -- -- --
--------- --------- -------- ------
Balance, December 31, 2000 50,000 7,721,229 50,000 7,721
Subscribed stock issued -- 105,000 -- 105
Stock issued for services -- 819,722 -- 820
Net (loss) for the year ended December 31, 2001 -- -- -- --
--------- --------- -------- ------
Balance, December 31, 2001 50,000 8,645,951 $ 50,000 $8,646
========= ========= ======== ======
FTS APPAREL, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2001 AND 2000
(Table Split - continued)
Additional Total
Paid-in Accumulated Stockholders'
Capital Deficit Equity
---------- ----------- -----------
Balance, December 31, 1999 $2,034,632 $(1,755,653) $ 332,919
Stock issued for services and fixed assets 996,758 -- 997,864
Stock issued for cash 997,325 -- 1,000,000
Preferred dividends declared -- (1,411) (1,411)
Net (loss) for the year ended December 31, 2000 -- (1,328,430) (1,328,430)
---------- ----------- -----------
Balance, December 31, 2000 4,028,715 (3,085,494) 1,000,942
Subscribed stock issued (105)
Stock issued for services 225,852 -- 226,672
Net (loss) for the year ended December 31, 2001 -- (1,168,154) (1,168,154)
---------- ----------- -----------
Balance, December 31, 2001 $4,254,462 $(4,253,648) $ 59,460
========== =========== ===========
The notes to the financial statements are an integral part of these statements
F-4
FTS APPAREL, INC.
STATEMENTS OF CASH FLOWS
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
2001 2000
----------- -----------
OPERATING ACTIVITIES
Net (loss) $(1,168,154) $(1,328,430)
Adjustments to reconcile net (loss) to net cash
(used in) operating activities:
Amortization and depreciation 32,822 11,695
Stock issued or subscribed for services,
contracts, and trade agreements 226,672 249,501
Amortization of non-cash prepaid
expenses 304,728 481,178
Write-down of inventory 111,979 --
Loss on sale of property and equipment (2,662) --
Changes in:
Accounts receivable 89,165 (6,716)
Inventory 176,718 (126,917)
Prepaid expenses -- 128,928
Deposits 11,782 (8,665)
Accounts payable and accrued expenses (66,799) 216
Accounts payable - related party 1,971 --
Deferred income - trade agreements -- (21,520)
----------- -----------
Net cash (used in) operating activities (281,778) (620,730)
----------- -----------
INVESTING ACTIVITIES
Acquisition of fixed assets -- (10,532)
----------- -----------
Net cash (used in) investing activities -- (10,532)
----------- -----------
FINANCING ACTIVITIES
Common stock issued, net of offering costs -- 1,000,000
Proceeds from note payable -- 724,558
Proceeds from officer loan -- 65,685
Proceeds from note payable - related party -- --
Payments on note payable -- (724,558)
Payments on officer loan -- (65,685)
Payments on note payable - related party -- (42,000)
Preferred dividends paid (1,411) (5,000)
----------- -----------
Net cash provided by financing activities (1,411) 953,000
----------- -----------
Net increase (decrease) in cash (283,189) 321,738
CASH AT BEGINNING OF YEAR 327,425 5,687
----------- -----------
CASH AT END OF YEAR $ 44,236 $ 327,425
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for:
Interest $ 1,256 $ 12,750
=========== ===========
Income taxes $ -- $ --
=========== ===========
SUPPLEMENTAL DISCLOSURE OF SIGNIFICANT NON-CASH
FINANCING AND INVESTING ACTIVITIES
During the year ended December 31, 2000, the Company
issued 469,597 shares of common stock for the
following assets:
Prepaid rent $ -- $ 193,744
Prepaid consulting -- 522,427
Property and equipment -- 32,192
----------- -----------
$ -- $ 748,363
=========== ===========
The notes to the financial statements are an integral part of these statements
F-5
FTS APPAREL, INC.
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2001
Note 1 - Organization and Summary of Significant Accounting Policies
Organization
FTS Apparel, Inc. (the Company) was incorporated under the laws of the State of
Colorado. The Company's primary purpose has been the development, marketing, and
distribution of clothing apparel bearing the FTS (Flip the Switch) insignia.
Subsequent to December 31, 2001, the Company experienced changes in control and
operations (see Note 8).
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America 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 revenue and expenses during
the reporting period. Actual results could differ significantly from those
estimates.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considered demand
deposits and highly liquid-debt instruments purchased with a maturity of three
months or less to be cash equivalents.
Inventory
Inventories are stated at the lower of cost or market using the average cost
method. The Company's evaluates the net realizable value of inventory on a
quarterly basis. For the year ending December 31, 2001, the Company has recorded
a loss on write-down of inventory of $111,979, which is included in cost of
goods sold.
Property and Equipment
Property and equipment is stated at cost and is being depreciated using the
straight-line method over the asset's estimated economic life, ranging from 3 to
10 years. Subsequent to December 31, 2001, the Company entered into a lease
settlement agreement (See Note 8) in which all assets were given to the landlord
as partial satisfaction of a lease obligation. The net book value of property
and equipment of $19,682 is included in other current assets.
Depreciation expense for the years ended December 31, 2001 and 2000 was $30,063
and $9,851, respectively.
F-6
FTS APPAREL, INC.
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2001
Financial Instruments
Fair value estimates discussed herein are based upon certain market assumptions
and pertinent information available to management as of December 31, 2001. The
respective carrying value of certain on-balance-sheet financial instruments
approximated their fair values. These financial instruments include cash and
accounts payable and accrued expenses. Fair values are assumed to approximate
carrying values for these financial instruments because they are short term in
nature, or are receivable or payable on demand, and their carrying amounts
approximate fair value.
Impairment of Long-Lived Assets
The Company periodically reviews the carrying amount of property, plant and
equipment and its identifiable intangible assets to determine whether current
events or circumstances warrant adjustments to such carrying amounts. If an
impairment adjustment is deemed necessary, such loss is measured by the amount
that the carrying value of such assets exceeds their fair value. Considerable
management judgement is necessary to estimate the fair value of assets;
accordingly, actual results could vary significantly from such estimates. Assets
to be disposed of are carried at the lower of their financial statement carrying
amount or fair value less costs to sell.
Revenue Recognition
Net revenues from wholesale product sales are recognized upon the transfer of
title and risk of ownership to customers. Allowances for estimated returns,
discounts and doubtful accounts are provided when sales are recorded. Shipping
and handling costs are included in cost of sales.
The Company recognizes revenue from advertising and promotion income as the
requisite services are provided.
Advertising Costs
Advertising is expensed as incurred. Advertising costs expensed during the years
ended December 31, 2001 and 2000 were $ - and $138,312, respectively.
Segment information
The Company follows Statement of Financial Accounting Standards (SFAS) 131,
"Disclosure about Segments of an Enterprise and Related Information". Certain
information is disclosed, per SFAS 131, based on the way management organizes
financial information for making operating decisions and assessing performance.
The Company currently operates in one business segment and will evaluate
additional segment disclosure requirements if it expands operations.
F-7
FTS APPAREL, INC.
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2001
Net Loss Per Common Share
The Company follows SFAS 128, "Earnings Per Share". Basic earnings (loss) per
common share calculations are determined by dividing net income (loss) by the
weighted average number of shares of common stock outstanding during the year.
Diluted earnings (loss) per common share calculations are determined by dividing
net income (loss) by the weighted average number of common shares and dilutive
common share equivalents outstanding. During the periods when they are
anti-dilutive, common stock equivalents, if any, are not considered in the
computation.
Stock-Based Compensation
The Company accounts for stock based compensation in accordance with SFAS 123,
"Accounting for Stock-Based Compensation." The provisions of SFAS 123 allow
companies to either expense the estimated fair value of stock options or to
continue to follow the intrinsic value method set forth in APB Opinion 25,
"Accounting for Stock Issued to Employees" (APB 25) but disclose the pro forma
effects on net income (loss) had the fair value of the options been expensed.
The Company has elected to continue to apply APB 25 in accounting for its stock
option incentive plans.
The Company has issued its common stock as compensation to non-employees. The
Company measures the amount of stock-based compensation based on the fair value
of the equity instrument issued or the services or goods provided as of the
earlier of (1) the date at which an agreement is reached with the non-employee
as to the number of shares to be issued for performance, or (2) the date at
which the non-employees' performance is complete.
Recent Pronouncements
In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS 141,
Business Combinations, and SFAS 142, Goodwill and Intangible Assets. SFAS 141 is
effective for all business combinations completed after June 30, 2001. SFAS 142
is effective for the year beginning January 1, 2002; however certain provisions
of that Statement apply to goodwill and other intangible assets acquired between
July 1, 2001, and the effective date of SFAS 142. The Company does not believe
the adoption of these standards will have a material impact on its financial
statements.
F-8
FTS APPAREL, INC.
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2001
In July 2001, the FASB issued SFAS 143, Accounting for Asset Retirement
Obligations. This statement addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. This Statement applies to all entities. It
applies to legal obligations associated with the retirement of long-lived assets
that result from the acquisition, construction, development and (or) the normal
operation of a long-lived asset, except for certain obligations of lessees. This
Statement is effective for financial statements issued for fiscal years
beginning after June 15, 2002. The Company is evaluating the impact of the
adoption of this standard and has not yet determined the effect of adoption on
its financial position and results of operations.
In August 2001, the FASB issued SFAS 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. This statement addresses financial accounting and
reporting for the impairment or disposal of long-lived assets and supersedes
SFAS 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of. The provisions of the statement are effective for
financial statements issued for fiscal years beginning after December 15, 2001.
The Company is evaluating the impact of the adoption of this standard and has
not yet determined the effect of adoption on its financial position and results
of operations.
Note 2 - Going Concern
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles, which contemplates continuation of the
Company as a going concern. However, the Company has sustained substantial
recurring losses, aggregating $1,168,154 in 2001 and $1,328,430 in 2000.
The Company's ability to continue as a going concern is contingent upon its
ability to attain profitable operations and obtain capital. The Company intends
to raise capital through the sale of equity securities and/or the solicitation
of short term financing. However, the Company has no firm commitments for either
the sale of equity securities or debt financing.
The financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or the amounts
and classification of liabilities that may result from the possible inability of
the Company to continue as a going concern.
Note 3 - Stockholders' Equity
The Company has authorized 30,000,000 shares of stock, of which 25,000,000
shares are $.001 par value common stock and 5,000,000 shares are $.01 par value
preferred stock. The Board of Directors is authorized to divide the class of
preferred shares into series and to fix and determine the relative rights and
preferences of those shares.
F-9
FTS APPAREL, INC.
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2001
In April 1998 the Company authorized the issuance of 150,000 shares of Series A
Voting Convertible Cumulative Preferred Stock for $1 per share. The Series A
Convertible Preferred Stock paid senior preferential fixed dividends at the rate
of 10% per annum until April 2000. From May 2000 through April 2003, the
dividend is calculated at 3.75% of the "net profits" of the Company and payable
annually on or before 90 days from the closing of the Company's fiscal year.
Each share of Series A Convertible Preferred Stock is convertible into one
common stock share at the option of the holder. The Series A Convertible
Preferred Stock automatically converts to common stock in April 2003.
During the year ended December 31, 2000, the Company issued 1,106,773 shares of
common stock for services and assets valued at $997,864 ($.25 to $1.38 per
share). The values ascribed to the common stock corresponded with the fair
market value of the common shares on the respective dates the Company agreed to
issue the shares.
During the year ended December 31, 2000, the Company sold 2,674,734 shares of
common stock for cash of $1,000,000. The shares were sold at a discount to the
fair market value as quoted on the OTC Bulletin Board of 30% to account for the
shares being restricted pursuant to Rule 144 of the Securities Act of 1933.
During January 2001, the Company issued 782,222 shares of common stock related
to consulting services to be provided by the Chief Executive Officer. The value
of the consulting services is stipulated to be $220,000. Per the consulting
agreement, the shares were valued at 75% of the average bid and ask price of the
common stock on December 31, 2000, which approximates the discount that would
have been applied due to the shares being restricted per Rule 144 of the
Securities Act of 1933.
During April 2001, the Company issued 142,500 shares of common stock related to
a stock purchase agreement with the Chief Executive Officer in which the Company
agreed to issue 12,500 shares every month until a Registration Statement was
filed. The parties agreed to delay the filing of the Registration Statement and
that the total additional shares issued would be 142,500 shares. Of the 142,500
shares issued during 2001, 105,000 were earned and subscribed as of December 31,
2000. The remaining 37,500 shares were earned during the year ended December 31,
2001.
F-10
FTS APPAREL, INC.
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2001
Note 4 - Stock Options
The Company has a Non-Qualified Stock Option and Stock Grant Plan (the "Plan"),
adopted in July 1997. Under the Company's Plan, the Company's Board of Directors
has reserved 2,500,000 shares that may be granted at the Board of Directors'
discretion. No option may be granted after July 27, 2007 and the maximum term of
the options granted under the Plan is ten years.
The effect of applying SFAS 123 on pro forma net (loss) as stated below is not
necessarily representative of the effects on reported net income (loss) for
future years due to, among other things, the vesting period of the stock options
and the fair value of additional stock options in future years. Had compensation
cost for the Company's stock option plans been determined based upon the fair
value at the grant date for awards under the plans consistent with the
methodology prescribed under SFAS 123, the Company's net (loss) would have been
$1,340,040, or $.19 per share, for 2000. The Company did not grant any stock
options during 2001. The fair values of the options granted during 2000 was
$1.08 on the date of grant using the Black-Scholes option pricing model with the
following assumptions: no dividend yield, volatility of 105%, a risk-free
interest rate of 6.00%, and expected lives of 10 years from date of vesting.
Changes in options outstanding under the plan are summarized as follows:
Number of Weighted
Shares Average
Exercise Price
--------- ---------
Outstanding at December 31, 1999 1,036,000 $ 1.50
Granted 14,000 1.44
Exercised -- --
Forfeited -- --
Outstanding at December 31, 2000 1,050,000 1.50
--------- ---------
Granted -- --
Exercised -- --
Forfeited (452,000) 1.50
--------- ---------
Outstanding at December 31, 2001 598,000 $ 1.50
========= =========
The exercise price for all options is at or above the market value of the common
stock as of the date of grant.
The following table summarizes information about fixed price stock options:
F-11
FTS APPAREL, INC.
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2001
Outstanding and Exercisable
Weighted Weighted
Average Average
Number Contractual Exercise
Exercise Prices Outstanding Life Price
--------------- ----------- --------------- ------------
$0.81 - $1.38 4,000 7.1 years $1.14
$1.50 - $2.75 1,044,000 7.7 years $1.50
Note 5 - Stock Warrants
The following details the warrants outstanding as of December 31, 2001:
Underlying Exercise
Shares Price
--------- -------
Warrant issued during 2000 1,036,000 $1.50
The warrant was issued to the Chief Executive Officer of the Company. The
Warrant expires on April 19, 2010. At December 31, 2001, the Company had
reserved 1,036,000 shares of common stock for stock warrants.
Note 6 - Income Taxes
The Company accounts for income taxes under SFAS 109, "Accounting for Income
Taxes", which requires use of the liability method. SFAS 109 provides that
deferred tax assets and liabilities are recorded based on the differences
between the tax bases of assets and liabilities and their carrying amounts for
financial reporting purposes, referred to as temporary differences. Deferred tax
assets and liabilities at the end of each period are determined using the
currently enacted tax rates applied to taxable income in the periods in which
the deferred tax assets and liabilities are expected to be settled or realized.
Reconciliation of the Federal statutory income tax rate of 34% to the effective
rate is as follows:
Federal statutory income tax rate 34.00 %
State taxes, net of federal benefit 4.95 %
Valuation allowance (38.95)%
----------
-- %
==========
The tax effects of temporary differences and net operating losses that give rise
to significant portions of deferred tax assets and liabilities consisted of the
following:
Reconciling items:
Net operating loss carryforward $ 1,413,000
Less valuation allowance (1,413,000)
-----------
Net deferred tax asset $ --
===========
The net operating loss carry forward of approximately $3,623,000 will expire
through 2021.
F-12
FTS APPAREL, INC.
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2001
The net change in valuation allowance for the year ended December 31, 2001 was
$617,000.
Note 7 - Related Party Transactions
The Company was the recipient of legal services from a shareholder. The Company
incurred expenses of $24,841 and $16,218 related to these services for the years
ended December 31, 2001 and 2000, respectively.
On April 19, 2000, the Company issued 3,594,256 shares of common stock and a
stock warrant (See Note 5) in exchange for cash, fixed assets, office rent and
consulting services. The agreement also requires the Company to file a
Registration Statement for the shares issued and to issue 12,500 shares of
common stock per month until the filing of a Registration Statement. Subsequent
to the year ended December 31, 2000, the parties agreed to delay the filing of
the Registration Statement and that the total additional shares issued would be
142,500 shares.
During 2000, an officer of the Company provided a short-term operating loan for
$65,685. The note was repaid, with interest of $1,585, during 2000.
In prior years, the Company entered into promissory note agreements for $42,000
with two members of the board of directors. The principal, plus interest of
$2,850, was paid during 2000.
Note 8 - Subsequent Events
The Company entered into a lease settlement agreement with a related party
whereby, for forgiving a one-year lease obligation for office space, he would
receive the following: (i) all cash on hand at January 5, 2002, (ii) assignment
of all equipment and inventory remaining in the office, (iii) assignment of all
uncollected accounts receivable as of January 5, 2002, (iv) issuance of 433,333
shares of common stock, (v) accrual of interest on the remaining balance at the
rate of 12%, and (vi) settlement of any remaining balance in the form of common
stock at an assigned value of $0.03 per share. Any difference between the fair
market value of the common stock and the assigned value will be recorded as an
expense. The Company anticipates issuing approximately 935,000 shares of its'
common stock to satisfy the remaining balance.
Effective January 11, 2002, the Company experienced a change in control, in
which the Board of Directors appointed a new Chairman and Chief Executive
Officer. In connection with the change in control, the Company has decided to
explore opportunities outside of the apparel industry. However, the Company does
not anticipate abandoning their traditional business.
During January 2002, the Company agreed to issue 2,070,000 shares of its common
stock related to employment agreements and services to be provided.
F-13
FTS APPAREL, INC.
JUNE 30, 2002
(UNAUDITED)
FTS APPAREL, INC.
BALANCE SHEET
JUNE 30, 2002
(UNAUDITED)
ASSETS
CURRENT ASSETS
Cash $ 380
===========
LIABILITIES AND STOCKHOLDERS' (DEFICIT)
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 9,101
Accounts payable and accrued expenses - related parties 95,588
Operating advances from officer 6,284
Lease settlement payable 27,983
-----------
Total current liabilities 138,956
-----------
STOCKHOLDERS' (DEFICIT)
10% Convertible preferred stock, Series A, $0.01 par value,
150,000 shares authorized, 50,000 shares issued
and outstanding 50,000
Preferred stock, $0.01 par value, 4,850,000 undesignated
shares authorized --
Common stock, $0.001 par value, 25,000,000 shares
authorized, 11,149,284 shares issued and outstanding 11,149
Additional paid in capital 4,522,292
Deferred compensation (160,000)
Accumulated (deficit) (4,562,017)
-----------
(138,576)
-----------
$ 380
===========
The notes to financial statements are an integral part of these statements
1
FTS APPAREL, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------------- -----------------------------
JUNE 30, 2002 JUNE 30, 2001 JUNE 30, 2002 JUNE 30, 2001
------------ ------------ ------------ ------------
REVENUES
Sales of merchandise $ -- $ 212,897 $ -- $ 330,940
Trade agreements -- 1,235 -- 4,665
------------ ------------ ------------ ------------
-- 214,132 -- 335,605
COST OF GOODS SOLD -- 224,222 -- 318,137
------------ ------------ ------------ ------------
GROSS PROFIT -- (10,090) -- 17,468
------------ ------------ ------------ ------------
GENERAL AND ADMINISTRATIVE EXPENSES
Settlement of lease obligation -- -- 135,234 --
Non-cash stock compensation -- -- 52,000 --
Selling, general and administrative expenses 68,909 283,555 121,135 649,435
------------ ------------ ------------ ------------
68,909 283,555 308,369 649,435
------------ ------------ ------------ ------------
(LOSS) FROM OPERATIONS (68,909) (293,645) (308,369) (631,967)
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE)
Interest income -- 957 -- 3,280
Interest expense -- -- -- (213)
Loss on write-down of inventory -- -- -- (80,000)
------------ ------------ ------------ ------------
-- 957 -- (76,933)
------------ ------------ ------------ ------------
NET (LOSS) $ (68,909) $ (292,688) $ (308,369) $ (708,900)
============ ============ ============ ============
PER SHARE INFORMATION:
WEIGHTED AVERAGE SHARES OUTSTANDING
(BASIC AND DILUTED) 11,149,284 8,598,451 10,643,188 8,550,951
============ ============ ============ ============
NET (LOSS) PER COMMON SHARE (BASIC AND DILUTED) $ (0.01) $ (0.03) $ (0.03) $ (0.08)
============ ============ ============ ============
The notes to financial statements are an integral part of these statements
2
FTS APPAREL, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
----------------------
JUNE 30, JUNE 30,
2002 2001
--------- ---------
OPERATING ACTIVITIES
Net cash (used in) operating activities $ (50,140) $(312,190)
--------- ---------
INVESTING ACTIVITIES
Acquisition of fixed assets -- (2,940)
--------- ---------
Net cash (used in) investing activities -- (2,940)
--------- ---------
FINANCING ACTIVITIES
Operating advance from officer 6,284 --
Payment of preferred dividends -- (1,411)
--------- ---------
Net cash provided by (used in) financing activities 6,284 (1,411)
--------- ---------
Net (decrease) in cash (43,856) (316,541)
CASH AT BEGINNING OF PERIOD 44,236 327,425
--------- ---------
CASH AT END OF PERIOD $ 380 $ 10,884
========= =========
The notes to financial statements are an integral part of these statements.
3
FTS APPAREL, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2002
(UNAUDITED)
(1) Basis Of Presentation
The accompanying unaudited financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America
("GAAP") for interim financial information and Item 310(b) of Regulation S-B.
They do not include all of the information and footnotes required by GAAP for
complete financial statements. In the opinion of management, all adjustments
(consisting only of normal recurring adjustments) considered necessary for a
fair presentation have been included.
The results of operations for the periods presented are not necessarily
indicative of the results to be expected for the full year. These financial
statements should be read in conjunction with the audited financial statements
of the Company as of December 31, 2001 and for the two years then ended,
including notes thereto, included in the Company's Form 10-KSB.
(2) Earnings Per Share
The Company calculates net earnings (loss) per share as required by SFAS 128,
"Earnings per Share." Basic earnings (loss) per share is calculated by dividing
net income (loss) by the weighted average number of common shares outstanding
for the period. Diluted earnings (loss) per share is calculated by dividing net
income (loss) by the weighted average number of common shares and dilutive
common stock equivalents outstanding. During the periods presented, common stock
equivalents were not considered as their effect would be anti-dilutive.
(3) Reclassifications
Certain amounts from the six months ended June 30, 2001 financial statements
have been reclassified to conform to the current period presentation.
(4) Going Concern
The Company's financial statements are presented on a going concern basis, which
contemplates the realization of assets and satisfaction of liabilities in the
normal course of business. For the six months ended June 30, 2002 the Company
incurred a net loss of $308,369 and has working capital and stockholders'
deficits of $138,576 at June 30, 2002.
The Company's ability to continue as a going concern is contingent upon its
ability to expand its operations and secure additional financing. The Company is
pursuing financing for its operations and seeking to expand its operations.
Failure to secure such financing or expand its operations may result in the
Company not being able to continue as a going concern.
The financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or the amounts
and classification of liabilities that may result from the possible inability of
the Company to continue as a going concern.
4
FTS APPAREL, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2002
(UNAUDITED)
(5) Stockholders' (Deficit)
On January 5, 2002 the Company issued 433,333 shares of common stock valued at
$43,333 pursuant to the lease settlement agreement (Note 6). These shares were
valued at their fair market value on the date the Company agreed to issue the
shares.
On January 7, 2002 the Company issued 1,200,000 shares of common stock pursuant
to a 2-year employment agreement with its new President and Chief Executive
Officer. These shares were valued at their fair market value on the date the
Company agreed to issue the shares. As of June 30, 2002 the Company had recorded
$90,000 as deferred compensation for services to be received through January 6,
2004.
On January 11, 2002 the Company issued 370,000 shares of common stock valued at
$37,000 to its former President for services rendered during the quarter ended
March 31, 2002. These shares were valued at their fair market value on the date
the Company agreed to issue the shares.
On February 1, 2002 the Company issued 500,000 shares of common stock valued at
$70,000 for services to be performed beginning September 2002. These shares were
valued at their fair market value on the date the Company agreed to issue the
shares and will be adjusted for changes in fair market value at subsequent
measurement dates. As of June 30, 2002 the Company had recorded $70,000 as
deferred compensation for services to be received through September 2003.
(6) Lease Settlement
On January 5, 2002, the Company entered into a lease settlement agreement with
the former President whereby, for forgiving a one-year lease obligation for
office space, the former President received the following: (i) all cash on hand
at January 5, 2002, (ii) assignment of all equipment and inventory remaining in
the office, (iii) assignment of all uncollected accounts receivable as of
January 5, 2002, (iv) issuance of 433,333 shares of common stock, (v) accrual of
interest on the remaining balance at the rate of 12% per annum, and (vi) on June
5, 2002 settlement of any remaining balance, estimated at $27,983 as of June 30,
2002, in the form of common stock at an assigned value of $0.03 per share. Any
difference between the fair market value of the common stock and the assigned
value will be recorded as an expense. As of the date of our June
30, 2002 10QSB, no common stock has been issued to settle the remaining balance.
5
- ------------------------------------------------- --------------------------------------
YOU SHOULD RELY ONLY ON THE INFORMATION
CONTAINED IN THIS DOCUMENT. WE HAVE NOT
AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION THAT IS DIFFERENT. THIS DOCUMENT
MAY ONLY BE USED WHERE IT IS LEGAL TO SELL THESE
SECURITIES. THE INFORMATION IN THIS DOCUMENT
MAY ONLY BE ACCURATE ON THE DATE OF THIS
DOCUMENT.
ADDITIONAL RISKS AND UNCERTAINTIES NOT
PRESENTLY KNOWN OR THAT ARE CURRENTLY DEEMED
IMMATERIAL MAY ALSO IMPAIR OUR BUSINESS
OPERATIONS. THE RISKS AND UNCERTAINTIES
DESCRIBED IN THIS DOCUMENT AND OTHER RISKS AND
UNCERTAINTIES WHICH WE MAY FACE IN THE FUTURE FTS APPAREL, INC.
WILL HAVE A GREATER IMPACT ON THOSE WHO
PURCHASE OUR COMMON STOCK. THESE PURCHASERS
WILL PURCHASE OUR COMMON STOCK AT THE MARKET DISTRIBUTION OF 11,000,000 SHARES OF
PRICE OR AT A PRIVATELY NEGOTIATED PRICE AND COMMON STOCK
WILL RUN THE RISK OF LOSING THEIR ENTIRE
INVESTMENT.
_______________
PROSPECTUS
________________
_____________, 2002
- ------------------------------------------------- ------------------------------------
Dealer Prospectus Delivery Obligation
Until _______ 2002 all dealers that effect transactions in these
securities, whether or not participating in this offering, may be required to
deliver a prospectus. This is in addition to the dealers' obligation to deliver
a prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to directors, officers or persons controlling our Company pursuant
to the foregoing provisions, we have been informed that in the opinion of the
Commission, such indemnification is against public policy as expressed in the
Securities Act and is therefore unenforceable.
As permitted by the Colorado Business Corporation Act, our articles of
incorporation, eliminate, with certain exceptions, the personal liability of
our directors to us and our shareholders for monetary damages as a result of a
breach of fiduciary duty. This provision makes it more difficult to assert a
claim and obtain damages from a director in the event of a breach of fiduciary
duty. The Colorado Business Corporation Act provides that a corporation has the
power to: (i) indemnify directors, officers, employees and agents of the
corporation against judgments, fines and amounts paid in settlement in
connection with suits, actions and proceedings and against certain expenses
incurred by these parties if specified standards of conduct are met and (ii)
purchase and maintain insurance on behalf of any of these persons against
liabilities incurred by them in these capacities. Our articles of incorporation
also provide for indemnification of our officers, directors, agents and
employees against expenses or liability reasonably incurred by them in any
action, suit or proceeding in which they are made parties by reason of being or
having been one of our officers, directors, agents or employees, to the full
extent required or permitted by Colorado law.
Item 25. Other Expenses of Issuance and Distribution
The following table sets forth the costs and expenses payable by the
registrant in connection with the sale of the securities being registered. All
amounts are estimates except the SEC registration fee:
SEC registration fee $ 141.68
Printing and engraving expenses $ 3,000.00
Accounting fees and expenses $10,000.00
Attorneys' fees and expenses $25,000.00
Transfer agent's fees and expenses $ 500.00
Miscellaneous $ 500.00
----------
Total $39,141.68
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
Some of the holders of the shares issued below may have subsequently
transferred or disposed of their shares and the list does not purport to be a
current listing of the Company's stockholders.
During the last three years, we have issued unregistered securities to
the persons, as described below. None of these transactions involved any
underwriters, underwriting discounts or commissions, except as specified below,
or any public offering, and we believe that each transaction was exempt from the
registration requirements of the Securities Act of 1933 by virtue of Section
4(2) thereof, or Regulation D promulgated thereunder. All recipients had
adequate access, through their relationships with us, to information about us.
In February and March, 1999 the Company conducted an offering through a private
placement pursuant to Regulation D, Rule 505 of the 1933 Act. The Company sold
239,518 shares of Common Stock in the offering, with an offering price of $1.50
per share, offered to qualified individuals and entities on a best efforts
basis. Stock was purchased by individuals who were personal or business
acquaintances of the officers and directors, although these individuals were not
affiliated with the Company as an officer, director, employee or otherwise. The
shareholders were personal or business acquaintances of the founding
shareholder, officers and directors, and were not affiliated with the Company as
an officer, director, employee or otherwise.
During the three months ended September 30, 1999, the Company sold 88,421 shares
Of its common stock pursuant to the exercises of outstanding warrants under
the exemption provided by Regulation D, Rule 504 of the 1933 Act. The
warrants were exercised at various times through September 16, 1999 for a
price of $1.50 per share.
During the three month period ended March 31, 2000, the Company issued 133,535
shares of common stock at prices ranging from $.75 to $1.38 per share for
services. The value of the common shares corresponds to the fair market value of
the common stock on the date it was agreed to issue said shares. The Company
also agreed to issue a stock purchase warrant for the purchase of 1,036,000
shares of common stock at $1.50 per share at any time through April 19, 2010.
The Company believes such issuance was exempt from registration pursuant to
Section 4(2) of the Securities Act of 1933.
During April, 2000 the Company issued 3,594,256 shares of its common stock for
cash of $1,000,000, rent for a two year tenancy of office space valued at
$193,744, office equipment valued at $32,192, and consulting services for one
year valued at $766,708 or approximately $0.55 per share. These shares were
valued by the Company at a negotiated discount price from the trading price of
$.75 per share at the date of the transaction, due to the significant financial
investment made, the thinly traded market for the Company's stock, and the fact
that the stock was restricted from resale at the time of purchase. The Company
believes such issuance was exempt from registration pursuant to Section 4(2) of
the Securities Act of 1933.
During the three month period ended June 30, 2000, the Company issued 97,815
shares of common stock at prices ranging from $0.75 to $1.25 per share for
services. The value of the common shares corresponds to the fair market value of
the common stock on the date it was agreed to issue said shares. The Company
believes such issuance was exempt from registration pursuant to Section 4(2) of
the Securities Act of 1933.
During the three month period ended September 30, 2000, the Company issued
50,535 shares of common stock at prices ranging from $0.51 to $0.82 per share
for services. The value of the common shares corresponds to the fair market
value of the common stock on the date it was agreed to issue said shares. The
Company believes such issuance was exempt from registration pursuant to Section
4(2) of the Securities Act of 1933.
During January 2001, the Company issued 782,222 shares of its common stock
related to consulting services to be provided by our Chief Executive Officer.
The value of the consulting services is stipulated to be $220,000. Per the
consulting agreement, the shares were valued at 75% of the average bid and ask
price of the common stock on December 31, 2000. The Company believes such
issuance was exempt from registration pursuant to Section 4(2) of the Securities
Act of 1933.
During April 2001, the Company issued 142,500 shares of common stock related to
a stock purchase agreement with the Chief Executive Officer in which the Company
agreed to issue 12,500 shares every month until a Registration Statement was
filed. The parties agreed to delay the filing of the Registration Statement and
that the total additional shares issued would be 142,500 shares. Of the 142,500
shares issued during 2001, 105,000 were earned and subscribed as of December 31,
2000. The remaining 37,500 shares were earned during the year ended December 31,
2001. The Company believes such issuance was exempt from registration pursuant
to Section 4(2) of the Securities Act of 1933.
On January 5, 2002 the Company issued 433,333 shares of its common stock valued
at $43,333 pursuant to a lease settlement agreement. These shares were valued at
their fair market value on the date the Company agreed to issue the shares. The
Company believes such issuance was exempt from registration pursuant to Section
4(2) of the Securities Act of 1933.
On January 7, 2002 the Company issued 1,200,000 shares of its common stock
pursuant to an employment agreement with its new President and Chief Executive
Officer. These shares were valued at their fair market value on the date the
Company agreed to issue the shares. The Company believes such issuance was
exempt from registration pursuant to Section 4(2) of the Securities Act of 1933.
On January 11, 2002 the Company issued 370,000 shares of its common stock valued
at $37,000 to its former President for services rendered during the quarter
ended March 31, 2002. These shares were valued at their fair market value on the
date the Company agreed to issue the shares. The Company believes such issuance
was exempt from registration pursuant to Section 4(2) of the Securities Act of
1933.
On February 1, 2002 the Company issued 500,000 shares of its common stock valued
at $70,000 for services to be performed beginning September 2002. These shares
were valued at their fair market value on the date the Company agreed to issue
the shares and will be adjusted for changes in fair market value at subsequent
measurement dates. As of June 30, 2002 the Company had recorded $70,000 as
deferred compensation for services to be received through September 2003. The
Company believes such issuance was exempt from registration pursuant to Section
4(2) of the Securities Act of 1933.
In August the company sold 650,000 shares of its restricted common stock to an
aggregate of three people at a purchase price of $.05 per share for aggregate
proceeds to the Company of $32,500. The Company believes such issuance was
exempt from registration pursuant to Section 4(2) of the Securities Act of 1933.
Such issuance of shares, although authorized by the Company, have not yet been
physically delivered from the transfer agent and are not yet included as part of
the Company's total number of shares outstanding calculated at 12,099,284.
In August 2002, the Company issued 100,000 shares of its common stock to one
individual for legal services rendered to the Company. The Company believes
such issuance was exempt from registration pursuant to Section 4(2) of the
Securities Act of 1933.
In August 2002, the Company issues 250,000 shares of its common stock to
Dutchess pursuant to a stock purchase agreement. Such shares were sold at $.05
per share for an aggregate purchase price of $12,500. The Company believes such
issuance was exempt from registration pursuant to Section 4(2) of the
Securities Act of 1933.
In August 2002 the Company issued 600,000 shares of its common stock to Dutchess
Private Equities Fund, LP as a commitment fee in connection with the Company's
equity line of credit Investment Agreement. The Company believes such issuance
was exempt from registration pursuant to Section 4(2) of the Securities
Act of 1933. The Company also authorized the issuance of up to $6,000,000 of
the Company's common stock to Dutchess in connection with its equity line of
credit Investment Agreement.
ITEM 27. EXHIBITS
Exhibit
Number Description
- -------- ---------------------
3.1 Articles of Incorporation of the Company as filed June 30, 1997 with the
Secretary of State of the State of Colorado and included as exhibit 2.1 to
the Company's Form 10-SB dated August 24, 1998, and incorporated herein by
reference
3.2 Articles of Amendment of the Articles of Incorporation of the Company as
filed April, 15, 1998 with the Secretary of State of the State of Colorado
and included as exhibit 2.2 to the Company's Form 10-SB dated August 24,
1998, and incorporated herein by reference.
3.3 Articles of Amendment of the Articles of Incorporation of the Company as
filed August 23, 2000 with the Secretary of State of the State of Colorado
included as exhibit 3.3 to our Annual Report on Form 10-KSB for the fiscal
year ended December 31, 2000, and incorporated herein by this reference.
3.4 Bylaws of the Company included as exhibit 2.3 to the Company's Form 10-SB
dated August 24, 1998, and incorporated herein by reference.
4.1 Form of Certificate for Common Shares, included as exhibit 4.1 to our
Annual Report on Form 10-KSB for the fiscal year ended December 31, 1998,
and incorporated herein by this reference.
5.1* Opinion of Seth A. Farbman, P.C.
10.1 Non-Qualified Stock Option and Stock Grant Plan, dated July 1, 1998
included as exhibit 6.3 to the Company's Form 10-SB dated August 24, 1998,
and incorporated herein by reference.
10.2 Executive Employment Agreement between the Company and Scott Gallagher
dated January 11, 2002 included as exhibit 10.1 to our Current Report on
Form 8-K, dated February 11, 2002, and incorporated herein by this
reference.
10.3 Investment Agreement dated August 23, 2002 between Dutchess and the Company
10.4 Registration Rights Agreement related to the Company's equity line of
credit dated August 23, 2002 between Dutchess and the Company
10.5 Escrow agreement related to the Company's equity line of credit dated
August 23, 2002.
10.6 Stock Purchase Agreement between the Company and Dutchess dated August 22,
2002
10.7 Addendum No. 1 to the Investment Agreement executed August 23, 2002.
23.1 Opinion of Seth A. Farbman, P.C. (see Exhibit 5.1)
23.2 Consent of Stark Winter Schenkein & Co., LLP
- ---------------------------
* To be filed by amendment
ITEM 28. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(a) To include any prospectus required by section 10(a)(3) of
Securities Act.
(b) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of prospectus
filed with the commission pursuant to Rule 424(B) if, in the aggregate, the
changes in volume and price represent no more than 20% change in the maximum
aggregate offering price set forth in the "Calculation of Registration Fee"
table in the effective registration statement; and
(c) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement
(2) That, for the purpose of determining any liability under the Securities
Act, each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial bona fide
offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
(4) That, for purposes of determining any liability under the Securities
Act, each filing of the registrant's annual report pursuant to section 13(a) or
section 15(d) of the Exchange Act that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Yardley, State of
Pennsylvania, on September 4, 2002.
FTS APPAREL, INC.
By: /s/ Scott Gallagher
-----------------------------------------------
Scott Gallagher, Chairman of the Board,
Chief Executive Officer, President and Director
Pursuant to the requirements of the Securities Act, this registration
statement has been signed by the following persons in the capacities and on the
dates indicated.
NAME TITLE DATE
- ---- ------ ----
/s/ Scott Gallagher Chairman of the Board, September 4, 2002
- ----------------------- Chief Executive Officer,
Scott Gallagher President and Director
/s/ Linda Ehlen Chief Financial Officer September 4, 2002
- ----------------------- and Secretary
Linda Ehlen
/s/ James H. Gilligan Director September 4, 2002
- -----------------------
James H. Gilligan
/s/ W. Scott McBride Director September 4, 2002
- -----------------------
W. Scott McBride