Filed Pursuant to Rule 424(b)(3)
Registration No. 333-112283
PROSPECTUS
FTS GROUP, INC.
OFFERING UP TO 15,000,000 SHARES
OF COMMON STOCK
This prospectus relates to the resale of up to 15,000,000 shares of our common
stock by Dutchess Private Equities Fund, L.P., which will become a stockholder
pursuant to a "put right" under an Investment Agreement, also referred to as an
Equity Line of Credit, that we have entered into with Dutchess. That Investment
Agreement permits us to "put" up to $6.0 million in shares of our common stock
to Dutchess. We are not selling any securities in this offering and therefore
will not receive any proceeds from this offering. We will, however, receive
proceeds from the sale of securities pursuant to our exercise of the put right.
All costs associated with this registration will be borne by us.
Our common stock is traded on the Over-The-Counter Bulletin Board under the
trading symbol "FLIP.OB." On January 23, 2004, the last reported sale price for
our common stock on the OTCBB was $0.17 per share.
Dutchess is an "underwriter" within the meaning of the Securities Act of
1933, as amended, in connection with the resale of our common stock under the
Investment Agreement. Dutchess will pay us 93% of the three lowest closing bid
prices of the common stock during the five consecutive trading day period
immediately following the date of our notice to them of our election to put
shares pursuant to the Equity Line of Credit.
INVESTING IN OUR COMMON STOCK INVOLVES RISKS.
SEE "RISK FACTORS" BEGINNING ON PAGE 6
You should rely only on the information provided in this prospectus or any
supplement to this prospectus and information incorporated by reference. We have
not authorized anyone else to provide you with different information. Neither
the delivery of this prospectus nor any distribution of the shares of common
stock pursuant to this prospectus shall, under any circumstances, create any
implication that there has been no change in our affairs since the date of this
prospectus.
Neither the Securities and Exchange Commission nor any state securities
regulator has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this prospectus. It is a criminal offense to make any
representation to the contrary.
The date of this prospectus is February 11, 2004.
3
TABLE OF CONTENTS
PROSPECTUS SUMMARY 5
RISK FACTORS 6
USE OF PROCEEDS 11
DETERMINATION OF OFFERING PRICE 12
DILUTION 12
SELLING SECURITY HOLDERS 14
PLAN OF DISTRIBUTION 15
LEGAL PROCEEDING 16
DIRECTORS & EXECUTIVE OFFICERS 16
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 18
DESCRIPTION OF SECURITIES 19
INTEREST OF NAMED EXPERTS AND COUNSEL 20
DISCLOSURE OF COMMISSION POSITION OF INDEMNIFICATION FOR SECURITIES
ACT LIABILITIES 20
DESCRIPTION OF BUSINESS 21
DESCRIPTION OF PROPERTY 25
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 25
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS 26
EXECUTIVE COMPENSATION 27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF PLAN OF OPERATION 29
FINANCIAL STATEMENTS 34
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE 52
4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements, including the notes thereto, appearing
elsewhere in this prospectus. Because it is a summary, it does not contain all
of the information you should consider before making an investment decision. You
should read the entire prospectus carefully, including the financial statements
and the notes relating to the financial statements.
THE COMPANY
We are engaged in the acquisition and development of a chain of full service
retail wireless stores. Our primary business is the marketing, sale and
activation of cellular and satellite handsets, cellular accessories and other
related wireless products such as Wi-Fi service and related access equipment for
residential or business purposes. Our business plan calls for each retail
wireless location to become a Wi-Fi Hotspot. Wi-Fi Hotspots allow retail and
business wireless customers to connect to the Internet through our Wi-Fi network
by using a wireless device such as PDAs, laptops or a cellular phone located
within approximately 500 feet from each of our wireless locations. To date, two
of our three locations are operating free Wi-Fi Hotspots.
THE OFFERING
This prospectus relates to the resale of up to 15,000,000 shares of our
common stock by Dutchess Private Equities Fund, L.P., which will obtain
our shares of common stock pursuant to a put right under an Investment
Agreement that we have entered into with Dutchess.
For the purpose of determining the number of shares subject to
registration with the Securities and Exchange Commission, we have assumed that
we will issue not more than 15,000,000 shares pursuant to the exercise of our
put right under the Investment Agreement, although the number of shares that we
will actually issue pursuant to that put right may be more than or less than
15,000,000, depending on the trading price of our common stock.
We currently have no intent to exercise the put right in a manner that would
result in our issuance of more than 15,000,000 shares, but if we were to
exercise the put right in that manner, we would be required to file a subsequent
registration statement with the Securities and Exchange Commission and for that
registration statement to be deemed effective prior to the issuance of any such
additional shares.
The Investment Agreement with Dutchess, also referred to as an Equity Line of
Credit, provides that, following notice to Dutchess, we may put to Dutchess up
to $6.0 million in shares of our common stock for a purchase price equal to
93% of the average of the lowest three closing bid price on the
Over-the-Counter Bulletin Board of our common stock during the five day
period following that notice. Dutchess has indicated that it will resell
those shares in the open market, resell our shares to other investors
through negotiated transactions or hold our shares in its portfolio. This
prospectus covers the resale of our stock by Dutchess either in the open market
or to other investors through negotiated transactions.
Common stock offered Up to 15,000,000 shares.
Use of proceeds We will not receive any
proceeds from the sale by the
selling stockholder of our common
stock. However, we will receive
proceeds from the Equity Line of
Credit. See "Use of Proceeds."
Symbol for our common stock Our common stock trades on
The OTCBB Market under the
symbol "FLIP.OB"
HOW TO CONTACT US
Our business address is 1049C Oxford Valley Rd., Levittown, Pennsylvania 19057.
Our telephone number is (215) 943-9979.
5
OUR CAPITAL STRUCTURE AND SHARES ELIGIBLE FOR FUTURE SALE
Shares of common stock outstanding as of January 19, 2004 (1) 17,946,564
Shares of common stock potentially issuable pursuant
to the Equilty Line of Credit 15,000,000
Total 32,946,564
<FN>
(1) Assumes:
- - No exercise of outstanding warrants to purchase an aggregate of 1,036,000
shares of our common stock at an exercise price of $1.50 per share.
- - No exercise of options outstanding to purchase 598,000 shares of our
common stock at exercises prices ranging from $.81 per share to $2.75 per share.
- - No conversion of $409,571 of convertible debentures. The terms of the
debentures provide for payment by February 14, 2007 with the debentures being
convertible into our common stock at any time at the lesser of (i) 80% of the
average of the five lowest closing bid prices during the 15 days prior to
conversion or (ii) 100% of the average of the closing bid prices for the 20
trading days immediately preceding the closing date.
RISK FACTORS
An investment in our common stock involves a high degree of risk. You should
carefully consider the following risk factors, other information included in
this prospectus and information in our periodic reports filed with the SEC. If
any of the following risks actually occur, our business, financial condition or
results of operations could be materially and adversely affected and you may
lose some or all of your investment.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that involve risks and
uncertainties. We generally use words such as "believe," "may," "could," "will,"
"intend," "expect," "anticipate," "plan," and similar expressions to identify
forward-looking statements. You should not place undue reliance on these
forward-looking statements. Our actual results could differ materially from
those anticipated in the forward-looking statements for many reasons, including
the risks described below and elsewhere in this report. Although we believe the
expectations reflected in the forward-looking statements are reasonable, they
relate only to events as of the date on which the statements are made, and our
future results, levels of activity, performance or achievements may not meet
these expectations. We do not intend to update any of the forward-looking
statements after the date of this document to conform these statements to actual
results or to changes in our expectations, except as required by law.
RISKS ABOUT OUR BUSINESS
WE HAD LOSSES SINCE OUR INCEPTION AND EXPECT LOSSES TO CONTINUE IN THE FUTURE.
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 $815,907 for the year ended December 31, 2002. Our future operations may
never become profitable if we are unable to develop our retail wireless
operations. Revenues and profits, if any, will depend upon various factors,
including whether we have sufficient funding to open additional locations,
advertise our products or find additional businesses to operate and/or acquire.
We may not achieve our business objectives and, if we do not achieve our
objectives, we may never become profitable or if we do become profitable, we may
not be able to sustain our profitability.
6
OUR INDEPENDENT AUDITORS HAVE ISSUED A GOING CONCERN OPINION DUE TO OUR
RECURRING LOSSES AND WORKING CAPITAL SHORTAGES, WHICH MEANS WE MAY NOT BE ABLE
TO CONTINUE OPERATIONS UNLESS WE OBTAIN ADDITIONAL FUNDING.
Our audited financial statements for the fiscal year ended December 31, 2002,
reflect a net loss of $815,907. These conditions raised substantial doubt about
our ability to continue as a going concern if we do not acquire sufficient
additional funding or alternative sources of capital to meet our working capital
needs. If we do not obtain additional funding, we may not be able to continue
operations.
WE ONLY RECENTLY ACQUIRED OUR OPERATING UNIT AND HAVE BEEN SELLING WIRELESS
COMMUNICATIONS AND NETWORKING PRODUCTS AND SERVICES FOR A SHORT PERIOD OF TIME
AND WE MAY NOT BE ABLE TO SUCCESSFULLY MANAGE OUR BUSINESS.
We began our retail wireless operations in February 2003 with our acquisition of
selected assets of Simply Cellular, Inc. Since we have just begun operations in
this industry, we may not find commercial acceptance of our products and
services. We have no way of predicting whether our marketing efforts will be
successful in attracting new customers and acquiring market share. We may not be
able to develop products and technologies that will attract customers without
which we cannot operate profitably.
OUR OPERATING RESULTS HAVE FLUCTUATED SIGNIFCANTLY IN THE PAST AND WE BELIEVE
THEY WILL FLUCTUATE SIGNIFICANTLY FOR THE FORESEEABLE FUTURE. INVESTORS MAY
PREFER STABLE AND PREDICTIBLE OPERATING RESULTS AND MAY SELL OUR STOCK IF OUR
OPERATING RESULTS CONTINUE TO FLUCTUATE OR DO NOT MEET THEIR EXPECTATIONS FOR
GROWTH. AS A RESULT YOUR INVESTMENT IN OUR STOCK MAY LOSE VALUE.
Our quarterly results of operations have varied in the past and are likely to
continue to vary significantly from quarter to quarter. Our operating expenses
are based on expected future revenues and are relatively fixed in the short
term. If our revenues are lower than expected, our results of operations could
be lower than expected. Additionally, we are unable to forecast our future
revenues with certainty because our business plan contemplates the acquisition
of new enterprises, which may not occur. Many factors can cause our financial
results to fluctuate, some of which are outside of our control.
Quarter-to-quarter comparisons of our operating results may not be meaningful
and you should not rely upon them as an indication of our future performance. In
addition, during certain future periods our operating results likely will fall
below the expectations of public market analysts and investors. In this event,
the market price of our common stock likely would decline.
WE NEED ADDITIONAL CAPITAL TO GROW OUR BUSINESS AND IF WE DO NOT FIND SUCH
CAPITAL ON ACCEPTABLE TERMS, WE WILL NOT BE ABLE TO FULLY IMPLEMENT OUR BUSINESS
PLAN.
Our independent auditors have issued a going concern opinion that states, in
part, that we must acquire sufficient additional funding or alternative sources
of capital to meet our working capital needs. We believe we must grow our
operations to generate enough revenue to cover our operating and overhead costs.
Therefore, our business plan contemplates the acquisition of new enterprises.
The proceeds from our existing financing arrangement may not be sufficient to
fully implement our business plan. Additionally, we may not be able to generate
sufficient revenues from our existing operations to fund our capital
requirements. Accordingly, we may require additional funds to enable us to
operate profitably. Such financing may not be available on terms acceptable to
us. We currently have no bank borrowings or credit facilities, and we may not be
able to arrange any such debt financing. Additionally, we may not be able to
successfully consummate additional offerings of stock or other securities in
order to meet our future capital requirements. If we cannot raise additional
capital through issuing stock or bank borrowings, we may not be able to sustain
or grow our business.
7
TO BECOME PROFITABLE AND GROW, WE MUST SUCCESSFULLY INTEGRATE NEW BUSINESSES
INTO OUR COMPANY.
Our success depends upon our ability to identify and acquire undervalued
businesses. Although we have identified certain companies available for
potential acquisition that are undervalued and might offer attractive business
opportunities, we may not be able to negotiate profitable acquisitions. If we do
make business acquisitions, we must continue to implement and improve our
operational, financial and management information systems. We must also hire,
train and retain additional qualified personnel, continue to expand and upgrade
core technologies, and effectively manage our relationships with customers,
suppliers and other third parties. If we expand as anticipated, expansion could
place a significant strain on our current services and support operations, sales
and administrative personnel, capital resources, and other company resources. If
we fail to effectively manage our growth, our expenses may increase which could
lower our earnings or prevent us from becoming profitable. Failure to
effectively manage our growth could also result in us failing to generate
sufficient revenues to become profitable.
WE DEPEND ON MR. SCOTT GALLAGHER, OUR CHIEF EXECUTIVE OFFICER, AND IF HE LEAVES
THE COMPANY, WE MAY NOT BE ABLE TO IMPLEMENT OUR BUSINESS PLAN.
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
Mr. Gallagher's services would negatively affect our ability to implement our
business plan, and, as a result, our financial condition, including our cash
position, ability to obtain funding and generate revenues would be harmed.
Although we intend to apply for key-man life insurance, we do not currently
maintain key life insurance policies for Mr. Gallagher.
RISKS ABOUT OUR STOCK AND THIS OFFERING
WE MAY ISSUE ADDITIONAL SHARES OF OUR COMMON STOCK WHICH WOULD REDUCE YOUR
PERCENTAGE OF OWNERSHIP AND MAY DILUTE OUR SHARE VALUE.
Our articles of incorporation authorizes the issuance of 150,000,000 shares of
common stock, par value $.001 per share. As of January 19, 2004 we have
17,946,564 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 no 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 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. 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 lower the
trading price of our common stock.
EXISTING STOCKHOLDERS MAY EXPERIENCE SIGNIFICANT DILUTION FROM THE SALE OF
SECURITIES PURSUANT TO OUR INVESTMENT AGREEMENT WITH DUTCHESS.
The sale of shares pursuant to our Investment Agreement with Dutchess may
have a dilutive impact on our stockholders. As a result, our net income per
share could decrease in future periods, and the market price of our
common stock could decline. In addition, the lower our stock price at
the time we exercise our put option, the more shares we will have to issue
to Dutchess to draw down on the full Equity Line with Dutchess. If
our stock price decreases, then our existing stockholders would experience
greater dilution.
8
DUTCHESS WILL PAY LESS THAN THE THEN-PREVAILING MARKET PRICE OF OUR COMMON
STOCK.
Our common stock to be issued under our agreement with Dutchess will be
purchased at a 7% discount to the average of the three lowest closing bid
prices for the five days immediately following our notice to Dutchess of our
election to exercise our put right. Dutchess has a financial incentive
to sell our common stock immediately upon receiving the shares to realize
the profit between the discounted price and the market price. If Dutchess
sells our shares, the price of our stock could decrease. If our stock price
decreases, Dutchess may have a further incentive to sell the shares of our
common stock that it holds. The discounted sales under our agreement with
Dutchess could cause the price of our common stock to decline.
OUR STOCK PRICE IS VOLATILE AND YOU MAY NOT BE ABLE TO SELL YOUR SHARES AT A
PRICE HIGHER THAN WHAT YOU PAID.
The market for our common stock is highly volatile. Our common stock has
experienced, and is likely to experience in the future, significant price and
volume fluctuations. As a result, the market price of our common stock could
decrease without regard to our operating performance. In addition, we believe
factors such as quarterly fluctuations in our financial results, announcements
of technological innovations or new products by our competitors or us, changes
in prices of our products and services or our competitors' products and
services, changes in our product mix and changes in the overall economy or the
condition of the financial markets could cause the price of our common stock to
fluctuate substantially. If our stock price fluctuates, you may not be able to
sell your shares at a price higher than what you paid.
THE LIMITED TRADING VOLUME OF OUR STOCK MAY DEPRESS THE PRICE OF OUR STOCK OR
CAUSE IT TO 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, you may not be able to sell your common stock in short time periods, or
possibly at all.
WE MUST COMPLY WITH PENNY STOCK REGULATIONS WHICH COULD EFFECT THE LIQUIDITY AND
PRICE OF OUR STOCK.
The SEC has adopted rules that regulate broker-dealer practices in connection
with transactions in "penny stocks." Penny stocks generally are equity
securities with a price of less than $5.00, other than securities registered on
certain national securities exchanges or quoted on NASDAQ, provided that current
price and volume information with respect to transactions in such securities is
provided by the exchange or system. Prior to a transaction in a penny stock, a
broker-dealer is required to:
9
- - Deliver a standardized risk disclosure document prepared by the SEC;
- - Provides the customer with current bid and offers quotations for the penny
stock;
- - Explain the compensation of the broker-dealer and its salesperson in the
transaction;
- - Provide monthly account statements showing the market value of each penny
stock held in the customer's account;
- - Make a special written determination that the penny stock is a suitable
investment for the purchaser and receives the purchaser's; and
- - Provide a written agreement to the transaction.
These requirements may have the effect of reducing the level of trading activity
in the secondary market for our stock. Because our shares are subject to the
penny stock rules, you may find it more difficult to sell your shares.
RISKS RELATED TO OUR CELLULAR PHONE BUSINESS
WE DEPEND ON THIRD PARTY VENDORS AND IF WE ARE NOT ABLE TO SECURE COST-EFFECTIVE
PRODUCTS, WE MAY NOT BECOME OR REMAIN PROFITABLE.
Our performance depends on our ability to purchase products in sufficient
quantities at competitive prices and on our vendors' ability to make and deliver
high quality products in a cost effective, timely manner. Some of our smaller
vendors have limited resources, production capacities and limited operating
histories. We have no long-term purchase contracts or other contracts that
provide continued supply, pricing or access to new products and any vendor or
distributor could discontinue selling to us at any time. We may not be able to
acquire the products that we need in sufficient quantities or on terms that are
acceptable to us in the future. As a result, we may not become or remain
profitable.
WE EARN REVENUES BASED ON AGREEMENTS WITH CELLULAR AND SATELLITE SERVICE
PROVIDERS AND IF THE CONTRACTS ARE CANCELLED OUR REVENUES MAY DECREASE AND WE
MAY NOT BECOME PROFITABLE.
We earn revenues by providing cellular and satellite activations for major
wireless carriers such as T-Mobile, Sprint, Nextel and GlobalStar. These
agreements are partly based on geography and we signed contracts to earn
revenues from activations in Pennslyvania and Florida Our agreements may be
cancelled at any time by either party. If any of our agreements are cancelled,
we will not earn activations through that carrier which will cause our revenues
to decrease. If we do not provide activations for a broad line of carriers, our
stores will not be as competitive. As a result, our revenues may decrease and we
may not become profitable.
WE MAY NOT BE ABLE TO SUCCESSFULLY COMPETE WITH OTHER COMPANIES WHICH WOULD
NEGATIVELY AFFECT OUR EARNINGS AND POSSIBLY CAUSE A DECLINE IN OUR STOCK.
We operate in a highly competitive environment. We principally compete with
other independent retailers, privately held chains that offer a broad range of
products and carrier owned and operated stores with superior name recognition
and brand identity than us. We believe that success in the industry is based on
maintenance of product quality, competitive pricing, delivery efficiency,
customer service and satisfaction levels, maintenance of satisfactory dealer
relationships, and the ability to anticipate technological changes and changes
in customer preferences. Additionally, we believe competition may become more
intense over time due to an increasing percentage of customers that already own
the products we sell. If we can not compete in our markets, we will not sell a
sufficient number of products to generate enough revenues to become profitable.
Additionally, our suppliers, whose products we distribute, or major cellular
phone manufacturers, may acquire, startup, and or expand their own distribution
systems to sell directly to commercial and retail customers which would cause us
to lose revenue which could ultimately cause a decline in the value of our
stock.
10
THE TELECOMMUNICATIONS INDUSRY IS CONSTANTLY EVOLVING AND IF THE INDUSTRY DOES
NOT REMAIN AN ATTRACTIVE INVESTMENT OPPORTUNITY FOR US WE MAY HAVE TO SHIFT OUR
BUSINESS PLAN WHICH COULD RESULT IN LOWER OR NO EARNINGS AND OUR STOCK PRICE
COULD DECLINE.
The technology that our products rely on is constantly changing. The rapid
change in technology may lead to the development of wireless telecommunications
services or alternative services that consumers prefer over traditional
cellular. As a result, we must continue to stay current with new technologies
and offer products and services that meet customer demands. It is difficult to
predict how our product line will evolve over time and what our profitability
margins will be on future products. It is also difficult to predict whether
consumers will purchase new products to take advantage of advancements in
technology. There is uncertainty as to the extent to which airtime charges and
monthly recurring charges may continue to decline. If the technology that our
products rely on changes in a way that reduces customer demand for our products
or reduces the profitability of our products, we may have to adjust our business
plan. If we adjust our business plan, our revenues and earnings may decrease and
our stock price may move lower.
WE SELL PRODUCTS THAT RELY ON THIRD PARTY NETWORKS TO OPERATE. IF ANY NETWORK
DISRUPTION OCCURS, OUR REVENUES AND EARNINGS MAY DECREASE.
The products we sell rely on the efficient and uninterrupted operation of
cellular and satellite networks, which are built and maintained by third parties
such as T-Mobile and Sprint. Any failure of these cellular or satellite systems
could cause our products to work poorly or not at all. A failure by these third
parties to maintain their cellular and satellite systems could result in lower
sales of our products which could reduce our revenues and lower our earnings.
Additionally, our customers may not understand that the failure of a cellular or
satellite system is due to a third party rather than our products and our
reputation could be harmed. If our reputation is harmed, we may have difficulty
selling our products. We may have to increase our advertising costs to repair
our reputation or educate consumers. As a result, a third party failure may
result in us failing to become profitable or, if we become profitable, we may
not be able to sustain profitability.
USE OF PROCEEDS
The 15,000,000 shares of common stock covered by this prospectus are to be sold
by Dutchess Private Equities Fund, L.P. who will receive all of the proceeds
from such sales. We will not receive any proceeds from the sale of our common
shares. However, we will receive proceeds from the sale of our common
shares pursuant to our Investment Agreement with Dutchess.
The proceeds from our exercise of the put right pursuant to the Investment
Agreement will be used for working capital and general corporate expenses,
expansion of our internal operations and potential acquisition costs, although
we do not currently have any agreements or arrangements for pending
acquisitions.
For illustrative purposes, we have set forth below our intended use of proceeds
for the range of net proceeds indicated below to be received under the
Investment Agreement. The Gross Proceeds represent the total dollar amount that
Dutchess is obligated to purchase. The table assumes estimated offering
expenses of $25,000.
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Proceeds Proceeds
If 100% Sold If 50% Sold
------------- ------------
Gross Proceeds $6,000,000 $3,000,000
Estimated Expenses of the Offering $ 25,000 $ 25,000
------------- ------------
Net Proceeds $5,975,000 $2,975,000
============= ===========
Priority Proceeds
------------- ------------
Working capital and general corporate expenses 1st $2,000,000 $1,000,000
Expansion of internal operations 2nd $1,975,000 $ 975,000
Potential acquisition costs 3rd $2,000,000 $1,000,000
------------- ------------
$5,975,000 $2,975,000
============= ============
Proceeds of the offering which are not immediately required for the purposes
described above will be invested in United States government securities,
short-term certificates of deposit, money market funds and other high-grade,
short-term interest-bearing investments.
DETERMINATION OF OFFERING PRICE
The selling stockholders may sell shares from time to time in negotiated
transactions, brokers transactions or a combination of such methods at market
prices prevailing at the time of the sale or at negotiated prices.
DILUTION
Our net tangible book value as of September 30, 2003 was ($401,595), or ($0.023)
per share of common stock. Net tangible book value is determined by dividing our
tangible book value (total tangible assets less total liabilities) by the number
of outstanding shares of our common stock. Since this offering is being made
solely by the selling stockholders and none of the proceeds will be paid to us,
our net tangible book value will be unaffected by this offering. Our net
tangible book value, however, will be impacted by the common stock to be issued
to Dutchess. The amount of dilution will depend on the offering price and number
of shares to be issued. The following example shows the dilution to new
investors at an offering price of $0.175 per share.
If we assume that we were to issue 15,000,000 shares of common stock to Dutchess
at an assumed offering price of $0.175 per share, less $25,000 of offering
expenses, our net tangible book value as of September 30, 2003 would have been
$2,014,655, or $0.062 per share. This represents an immediate increase in net
tangible book value to existing shareholders of $0.085 per share and an
immediate dilution to new shareholders of $0.113 per share.
12
Assumed public offering price per share $0.175
Net tangible book value per share before this offering ($0.023)
Net tangible book value after this offering $2,014,655
Net tangible book value per share after this offering $0.062
Dilution of net tangible book value per share to new
Investors $.0.113
Increase in net tangible book value per share to existing shareholders
$0.084
You should be aware that there is an inverse relationship between our stock
price and the number of shares to be issued under the Investment Agreement
to Dutchess. That is, as our stock price declines, we would be required
to issue a greater number of shares under the Investment Agreement for
a given advance. This inverse relationship is demonstrated by the table
below, which shows the number of shares to be issued under the Investment
Agreement at a price of $0.175 per share per share and 25%, 50% and 75%
discounts to that price.
Offering price: $0.175 75% 50% 25% -
PURCHASE PRICE:(1) $0.044 $0.088 $0.131 $0.175
NO. OF SHARES:(2) 60,000,000 30,000,000 20,000,000 15,000,000
TOTAL OUTSTANDING:(3) . 77,700,240 47,700,240 37,700,240 32,700,240
PERCENT OUTSTANDING:(4) 77.2% 62.9% 53.1% 45.9%
<FN>
(1) Represents market price.
(2) Represents the number of shares of common stock to be issued at the
prices set forth in the table to generate $2.88 million in gross proceeds.
(3) Represents the total number of shares of common stock outstanding
after the issuance of the shares, assuming no issuance of any other shares
of common stock.
(4) Represents the shares of common stock to be issued as a percentage of
the total number shares of common stock outstanding (assuming no exercise or
conversion of any options, warrants or other convertible securities).
13
SELLING SECURITY HOLDERS
Based upon information available to us as of January 12 , 2004, the following
table sets forth the name of the selling stockholder, the number of shares
owned, the number of shares registered by this prospectus and the number and
percent of outstanding shares that the selling stockholder will own after the
sale of the registered shares, assuming all of the shares are sold. The
information provided in the table and discussions below has been obtained from
the selling stockholder. The selling stockholder may have sold, transferred or
otherwise disposed of, or may sell, transfer or otherwise dispose of, at any
time or from time to time since the date on which it provided the information
regarding the shares beneficially owned, all or a portion of the shares of
common stock beneficially owned in transactions exempt from the registration
requirements of the Securities Act of 1933. As used in this prospectus, "selling
stockholder" includes donees, pledgees, transferees or other successors- in
interest selling shares received from the named selling stockholder as a gift,
pledge, distribution or other non-sale related transfer.
Beneficial ownership is determined in accordance with Rule 13d-3(d) promulgated
by the Commission under the Securities Exchange Act of 1934. Unless otherwise
noted, each person or group identified possesses sole voting and investment
power with respect to the shares, subject to community property laws where
applicable.
Ownership Before and After the Offering
---------------------------------------
Number of Shares Number of Number of Shares
Name of Beneficial Beneficially Owned Shares Being Owned After
Owner Prior to Offering Offered Offering
Dutchess Private
Equities Fund L.P.(1) 3,735,160 15,000,000 3,735,160 (2)
<FN>
(1) Includes convertible debentures valued at $409,571 as of January 24, 2004.
The terms of the debentures provide for payment by February 14, 2007 with the
debentures being convertible into our common stock at any time at the lesser of
(i) 80% of the average of the five lowest closing bid prices during the 15 days
prior to conversion or (ii) 100% of the average of the closing bid prices for
the 20 trading days immediately preceding the closing date. If the debentures
converted on January 24, 2004, we would issue 3,735,160 shares. Michael Novielli
and Douglas Leighton are the principals of Dutchess Private Equities Fund, L.P.
(2) This number assumes the selling stockholder has sold all of the shares
offered hereby prior to completion of this offering.
14
PLAN OF DISTRIBUTION
The selling stockholder will act independently of us in making decisions with
respect to the timing, manner and size of each sale. The selling stockholder
may sell the shares from time to time:
- - in transactions on the Over-the-Counter Bulletin Board or on any national
securities exchange or U.S. inter-dealer system of a registered national
securities association on which our common stock may be listed or quoted at
the time of sale; or
- - in private transactions and transactions otherwise than on these exchanges
or systems or in the over-the-counter market; or
- - at prices related to such prevailing market prices, or
- - in negotiated transactions, or
- - in a combination of such methods of sale; or
- - any other method permitted by law.
The selling stockholder may effect such transactions by offering and selling the
shares directly to or through securities broker-dealers, and such broker-dealers
may receive compensation in the form of discounts, concessions or commissions
from the selling stockholder and/or the purchasers of the shares for whom such
broker-dealers may act as agent or to whom the selling stockholder may sell as
principal, or both, which compensation as to a particular broker-dealer might be
in excess of customary commissions.
Dutchess and any broker-dealers who act in connection with the sale of its
shares may be deemed to be "underwriters" within the meaning of the
Securities Act, and any discounts, concessions or commissions received by them
and profit on any resale of the shares as principal may be deemed to be
underwriting discounts, concessions and commissions under the Securities Act.
On or prior to the effectiveness of the registration statement to which this
prospectus is a part, we will advise the selling stockholders that they and any
securities broker-dealers or others who may be deemed to be statutory
underwriters will be governed by the prospectus delivery requirements under the
Securities Act. Under applicable rules and regulations under the Securities
Exchange Act, any person engaged in a distribution of any of the shares may not
simultaneously engage in market activities with respect to the common stock for
the applicable period under Regulation M prior to the commencement of such
distribution. In addition and without limiting the foregoing, the selling
security owners will be governed by the applicable provisions of the Securities
and Exchange Act, and the rules and regulations thereunder, including without
limitation Rules 10b-5 and Regulation M, which provisions may limit the
timing of purchases and sales of any of the shares by the selling stockholders.
All of the foregoing may affect the marketability of our securities.
On or prior to the effectiveness of the registration statement to which this
prospectus is a part, we will advise the selling stockholders that the
anti-manipulation rules under the Securities Exchange Act may apply to sales of
shares in the market and to the activities of the selling security owners and
any of their affiliates. We have informed the selling stockholder that it
may not:
- - engage in any stabilization activity in connection with any of the shares;
- - bid for or purchase any of the shares or any rights to acquire the shares,
- - attempt to induce any person to purchase any of the shares or rights to
acquire the shares other than as permitted under the Securities Exchange
Act; or
- - effect any sale or distribution of the shares until after the prospectus
shall have been appropriately amended or supplemented, if required, to
describe the terms of the sale or distribution.
We have informed the selling stockholder that they must effect all sales of
shares in broker's transactions, through broker-dealers acting as agents, in
transactions directly with market makers, or in privately negotiated
transactions where no broker or other third party, other than the purchaser, is
involved.
15
The selling stockholders may indemnify any broker-dealer that participates in
transactions involving the sale of the shares against certain liabilities,
including liabilities arising under the Securities Act. Any commissions paid or
any discounts or concessions allowed to any broker-dealers, and any profits
received on the resale of shares, may be deemed to be underwriting discounts and
commissions under the Securities Act if the broker-dealers purchase shares as
principal.
In the absence of the registration statement to which this prospectus is a part,
the selling stockholder would be able to sell its shares only pursuant to the
limitations of Rule 144 promulgated under the Securities Act.
We expect to incur approximately $25,000 in expenses related to this
registration statement. Our expenses consist mainly of accounting and legal
fees.
We engaged Charleston Capital Corporation as our placement agent with respect to
the securities to be issued under the Equity Line of Credit. To our knowledge
Charleston Capital Corporation has no affiliation or business relationship with
Dutchess. We agreed to pay Charleston Capital Corporation 1% of the gross
proceeds from each put with an aggregate maximum of $10,000 over the term of our
agreement. The Placement Agent agreement terminates when our Investment
Agreement with Dutchess terminates pursuant to the terms of that Investment
Agreement.
LEGAL PROCEEDINGS
We are not aware of any legal matters that could have a material impact on our
business.
DIRECTORS AND EXECUTIVE OFFICERS
The names and ages of all of our directors and executive officers, along with
their respective positions, term of office and period such position(s) was held,
is as follows:
Name Age Position
- --------------------- ----- -----------
Scott Gallagher 36 Chairman of the Board of
Directors, Chief Executive
Officer and President
Linda Ehlen 53 Interim Chief Financial Officer
David R. Rasmussen 36 Director
James H. Gilligan 31 Director
All of our current directors except Mr. Gallagher have served on the Board since
February 10, 2002; Mr. Gallagher has served since January 11, 2002. 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.
16
BIOGRAPHIES OF OFFICERS AND DIRECTORS
Set forth below is a brief description of the background of our officers and
directors based on information provided by them to us.
SCOTT GALLAGHER has served as our Chairman, President and Chief Executive
Officer since January 11, 2002. Prior to joining us, and since 1999, Mr.
Gallagher had 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 Stock Fund, a private
hedge fund based in New York City. Prior to co-founding Avalon Stock Fund, from
1995 to 1999, 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 has served as our Interim Chief Financial Officer since February 10,
2002. Prior to joining us and 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, Ms. Ehlen 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.
DAVID R. RASMUSSEN has served on our board of directors since February 10, 2002.
He has been in the information technology field since 1992. Since 2000, Mr.
Rasmussen has served as a Project leader for ERC, Inc., a subsidiary of General
Electric. In his current position he provides IT solutions that enable business
to drive core processes and grow profitable relationships. From 1997 through
2000 Mr. Rasmussen worked as a program analyst for National Association of
Insurance Commissions. Mr. Rasmussen received a Bachelor's degree in Computer
Technology from Rockhurst University in Kansas City Missouri. Mr. Rasmussen is a
six sigma certified Green belt.
JAMES H. GILLIGAN has served on our board of directors since February 10, 2002.
Currently Mr. Gilligan is a marine fuels broker/trader for World Fuel Services,
Corp. In September 2001, Mr. Gilligan served as an independent sales consultant
for Digital Descriptor Systems, Inc., a security/biometric company. From 1996 to
2001, Mr. Gilligan worked at Kristensons-Petroleum, Inc. as a broker/trader.
Kristensons-Petroleum services ship owners, marine fuel suppliers and a network
of independent brokers and traders around the world. 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.
17
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, to our knowledge, certain information concerning
the beneficial ownership of our common stock as of January 12, 2004 by each
stockholder known by us to be (i) the beneficial owner of more than 5% of the
outstanding shares of common stock, (ii) each current director, (iii) each of
the executive officers named in the Summary Compensation Table who were serving
as executive officers at the end of the 2002 fiscal year and (iv) all of our
directors and current executive officers as a group:
AMOUNT AND
NATURE OF
BENEFICIAL PERCENTAGE
NAME AND ADDRESS OF BENEFICIAL OWNER(1) OWNERSHIP OF CLASS(2)
James H. Gilligan. . . . . . . . . . . 200,000 1.1%
David R. Rasmussen . . . . . . . . . . 75,000 *
Scott Gallagher . . . . . . . . . . . . 4,302,451 24.0%
Linda Ehlen. . . . . . . . . . . . . . 222,916 1.2%
LeRoy Landhuis . . . . . . . . . . . . 6,793,471 (3) 35.8%
212 N. Wahsatch Avenue,
Suite 301
Colorado Springs, CO 80903
Dutchess Private Equities Fund . . . . 3,735,160 (4) 17.2%
312 Stuart St., 3rd Floor
Boston, MA 02116
All directors and current executive
officers as a group (4 persons). . . . 4,800,367 26.7%
* Less than 1% of outstanding shares of common stock.
<FN>
(1) The address of all individual directors and executive officers is c/o FTS
Group, Inc., 1049C Oxford Valley Rd., Levittown, PA 19057.
(2) The number of shares of common stock issued and outstanding as of January
19, 2004 was 17,946,564 shares. The calculation of percentage ownership for each
listed beneficial owner is based upon the number of shares of common stock
issued and outstanding on as of January 19, 2004, plus shares of common stock
subject to options and warrants held by such person on January 19, 2004 and
exercisable within 60 days thereafter. The persons and entities named in the
table have sole voting and investment power with respect to all shares shown as
beneficially owned by them, except as noted below.
(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.
(4) Includes convertible debentures valued at $409,571 as of January 24, 2004.
The terms of the debentures provide for payment by February 14, 2007 with the
debentures being convertible into our common stock at any time at the lesser of
(i) 80% of the average of the five lowest closing bid prices during the 15 days
prior to conversion or (ii) 100% of the average of the closing bid prices for
the 20 trading days immediately preceding the closing date. If the debentures
converted on January 24, 2004, we would issue 3,735,160 shares of our common
stock. Michael Novielli and Douglas Leighton are the principals of Dutchess
Private Equities Fund, L.P.
18
DESCRIPTION OF SECURITIES
AUTHORIZED CAPITAL
Our total number of our authorized shares of common stock is 150,000,000 with a
par value of $.001 per share. Additionally, we are authorized to issue 5,000,000
shares of Preferred Stock. Of this 5,000,000, we may issue up to 150,000 shares
of our 10% Convertible preferred stock, Series A, $0.01 par value. As of January
19, 2004, we had no Series A shares issued and outstanding and 4,850,000
undesignated preferred shares, par value $.01 per share, of which no shares are
issued or outstanding.
COMMON STOCK
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, subject to
the rights of Preferred stockholders. Please refer to our discussion below under
"Preferred Stock." 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, subject to the rights of Preferred
Stockholders. Please refer to our discussion below under "Preferred Stock."
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.
PREFERRED STOCK
Our 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 Nevada 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 January 19, 2004, a total of 150,000 shares were designated Series A
Preferred Stock, however, none are outstanding. All Series A 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.
19
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.
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.
CONVERTIBLE DEBENTURES
As of January 23, 2004 we have $409,571 outstanding of convertible debentures.
The terms of the debentures provide for payment by February 14, 2007 with the
debentures being convertible into our common stock at any time at the lesser
of (i) 80% of the average of the five lowest closing bid prices during the 15
days prior to conversion or (ii) 100% of the average of the closing bid prices
for the 20 trading days immediately preceding the closing date.
INTEREST OF NAMED EXPERTS AND COUNSEL
No expert or counsel will receive a direct or indirect interest in the small
business issuer or was a promoter, underwriter, voting trustee, director,
officer, or employee of FTS. Nor does any such expert or counsel have any
contingent based agreement with us or any other interest in or connection to us.
DISCLOSURE OF COMMISSION POSITION OF INDEMNIFICATION FOR SECURITIES ACT
LIABILITIES
Our Articles of Incorporation, as amended, provide that the Board of Directors
has the power to:
- - indemnify our directors, officers, employees and agents to the fullest
extent permitted by the General Corporation Law of Nevada;
- - authorize payment of expenses incurred in defending a civil or criminal
action; and
- - purchase and maintain insurance on behalf of any director, officer,
employee or agent.
20
Insofar as indemnification for liabilities arising under the Securities Act of
1933, a amended ("Securities Act") may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing provisions, or
otherwise, we have 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.
DESCRIPTION OF BUSINESS
HISTORY
We organized as Full Tilt Sports, Inc. in 1997 as a Colorado corporation to
develop and market a line of young men's casual apparel. We own several U.S.
trademarks relating to that business. Effective August 23, 2000, we changed our
name to FTS Apparel, Inc. Our attempts to build a profitable apparel business
were unsuccessful and the prior management team was unable to raise the required
funds to continue in the apparel business As a result, we exited the apparel
business. In January 2002, we experienced a change in management. Effective
January 11, 2002, Scott Gallagher became our new Chairman and Chief Executive
Officer and we appointed three new directors. The new Chairman agreed to
purchase 1,861,618 shares of our common stock owned by two of the former
officers and directors and other shareholders. The new management team initially
developed a strategic plan to acquire and develop cash flow positive businesses.
After an analysis of the market, management determined to primarily focus on
building a chain of retail wireless locations that sell cellular and satellite
handsets and activations. FTS Wireless Inc., a wholly owned subsidiary, was
organized as a Florida corporation in February 2003 to become a full service
wireless company operating a chain of retail wireless locations. On January 26,
2004, we changed our name to FTS Group, Inc. to reflect the change in our
operations. Additionally, on that date, we changed our state of incorporation
from Colorado to Nevada.
OUR BUSINESS
We focus on developing, investing in and acquiring cash-flow positive businesses
and viable business projects, primarily those in the wireless industry. Through
our wholly owned subsidiary FTS Wireless, Inc., we are engaged in a targeted,
strategic development strategy to consolidate the highly fragmented cellular
phone and services industry. We currently own four retail wireless locations in
the Florida market and one in the Philadelphia Market:
- - In February 2003, we acquired certain assets of Tampa, Florida based
"Simply Cellular, Inc."
- - In May 2003, we acquired a lease and selected assets from American
Connections of Florida, LLC, giving us a broader presence in the Tampa
market.
- - In July 2003, we opened a third "FTS Wireless" location serving the
Philadelphia Market. This location will also serve as our corporate
headquarters.
- - In November 2003, we acquired a lease and selected assets from Pagers N
Phones, LLC, expanding our presence into the Brandon, Florida market.
- - In December 2003, we acquired a second lease and selected assets from
Pagers N Phones, LLC, expanding our presence into the Saint Petersburg
market.
21
THE MARKET FOR OUR PRODUCTS AND SERVICES
We market and distribute Satellite and Cellular based wireless products and
services in three east-coast markets: Florida' Gulf Coast market, New Jersey and
Pennsylvania's Philadelphia market. In the Florida Gulf Coast market and the
Philadelphia market we sell "post-pay" wireless services and products offered
from 4 of the nation's top 6 wireless carriers AT&T, T-Mobile, Sprint and
Nextel. We purchase wireless handsets and accessories as well as perform
cellular activations through our Master Agents, Malsha Products and American
Connections. We sell these products directly to the end user at any of our
retail locations in Florida and Pennsylvania. We also have marketing rights in
Florida's Gulf coast market to sell and distribute "Pre-Pay" cellular products
and services offered by Air Voice Wireless (an "AT&T Reseller). We derive our
revenues from the sale of wireless products and commission paid to us for each
new customer that signs a cellular or satellite contract. In New Jersey and
Pennsylvania we function as a Master Agent for Air Voice wireless products,
meaning we are able to set up sub dealers and distributors in selected markets
to buy Air Voice wireless products from us.
We derive the majority of our revenue from commissions paid to us for the
activation of new "Post-Pay" cellular customers, those customers who have signed
a one or two year contract for cellular or satellite service. We derive our
"Pre-Pay" revenue primarily from the sale of cellular handsets and the sale of
Air Voice pre-pay cellular airtime cards.
We have converted two of our five retail locations into free Wi-Fi Hotspots. We
convert our stores into Wi-Fi Hotspots by adding Linksys 802.11 routers to our
existing internal network. As a full service wireless company, we offer wireless
business and retail users the ability to access the Internet or make phone calls
using 802.11 or Wi-Fi technology based devices such as PDAs, laptops and cell
phones. Each of our wireless locations also markets and sells 802.11 based
wireless network products from Linksys for home or corporate use. While we do
not charge customers for access to our Wi-Fi Hotspots, we believe offering this
value-added service at each of our retail locations will increase foot traffic
to our stores which may increase our sales of wireless products.
THE WIRELESS INDUSTRY (POST-PAID)
According to market research firm Euromonitor, in a report released in July
2003,in 2003 the cellular/PCS sector totaled US$3.8 billion, and is expected to
reach US$5.1 billion by 2007, a growth of nearly 34% over 2003. In 2002 more
than 50% of the U.S. population owned a cellular phone. Out of all owners of
wireless phones, 56% owned their phone for more than a year, and 42% plan on
changing their phone within the next six months. 85% of current wireless
consumers said they want a mobile phone that can also take and exchange
photographs.
Post-paid customers subscribe to a monthly service plan usually under a one or
two year contract. We believe this segment of the wireless telecommunications
industry is experiencing significant technological change. Upgrading of the
wireless networks capabilities, and the introduction of data in the form of
photos, music, and wireless Internet to the communication network has shifted
the image of wireless devices from a luxury gadget to a business and
entertainment tool. This causes uncertainty about future customer demand for
current products and services and the prices that we will be able to charge for
these services. For example, the demands for wireless data and cellular services
provided by Sprint, Nextel and T-Mobile may be affected by the proliferation of
wireless local area networks, otherwise known as Wi-Fi. To that end we have
begun to carry, sell and market Wi-Fi equipment and products and convert our
chain of retail locations into Wi-Fi Hotspots to attract residential and
business customers to our stores. The rapid change in technology may lead to the
development of wireless telecommunications services or alternative services that
consumers prefer over traditional cellular. There is also uncertainty as to the
extent to which airtime charges and monthly recurring charges may continue to
decline. As a result, the future prospects of the wireless industry and other
competitive services remain uncertain.
22
A key element in the economic success of wireless carriers is the rate of
customer churn. Customer churn is defined as the number of clients who cancel
their contract with the carrier prior to the end of the term. Churn rates have
continued to grow in recent years due to declining cellular plan pricing. In
addition, the implementation of local number portability that took place in
November 2003, is likely to increase churn. Local number portability means
customers can keep their phone number when changing carriers. These developments
may have a positive effect on our cellular operations by presenting customers
with more flexibility when choosing a carrier and increase the rate of new
activations.
THE WIRELESS INDUSTRY (PRE-PAID)
In a report published in February 2003, industry research firm Atlantic-ACM
forecasts that the prepaid wireless segment will grow from $4.4 billion in 2003
to $9.5 billion in 2007. Pre-paid customers typically do not sign a contractual
agreement with a cellular carrier. They typically buy airtime in $20 to $100
denominations at a higher per minute rate than most "Post-Pay" plans. We believe
the pre-paid wireless segment will grow substantially in the next several years
and that we can profit from this trend.
According to Euromonitor, "high penetration rates mean increasing costs for
customer acquisition. One untapped market is 18 to 24 year olds, who have a
higher propensity to buy phones than the population as a whole, as penetration
levels in this segment are comparatively lower." In 2002, 18 to 24 year olds
purchased 16% of all handsets, while in the meantime, the demographic group
accounted for only 10% of the total U.S. population. The 18 to 24 group is also
particular in the way they relate to their phones. They are more likely to buy
on impulse, they spend more on a phone, and they are more likely to base
purchase decisions on product appearance compared with older groups. Based on
these statistics and the growing trend of young adults who now use their
wireless phone as their only form of telecommunication, we feel an above average
opportunity exists for us to target this market.
STRATEGIC PARTNERS AND CONTRACTS
POST-PAID
We activate wireless services through agreements with companies known as "Master
Agents." A Master Agent has the ability to pay us a higher per activation
commission than we could expect to receive if we dealt directly with the major
wireless carriers. Their commission tier is based on the consolidated monthly
activations of all of their dealers. For T-Mobile and Nextel, we have a contract
in place with Fort Lauderdale based master agent American Connections of
Florida, LLC, for Sprint activations we have an agreement in place with New York
based master agent Malsha Products. Our contract with American Connections of
Florida represents approximately two thirds of our revenues and our contract
with Malsha Products represents approximately one third of our revenues. These
companies pay us a commission for each new cellular customer who signs a one or
two year cellular contract with the carrier. However, if that customer
deactivates their cellular service within the 181 day period after signing the
contract the commission paid to us is charged back to our account and not paid.
We have set up a reserve account of 10% of activation revenue for possible
charge-backs.
23
PRE-PAID
We have marketing and distribution rights in three significant east coast
markets, New Jersey, Florida and Pennsylvania, to sell Air Voice Wireless (an
AT&T Reseller) pre-paid products and services. We function as a Master Agent for
Air Voice Wireless products and services in the New Jersey and Philadelphia
markets in addition to selling Air Voice Wireless products at our retail
location in the Philadelphia market. In Florida's Gulf Coast market we function
as a Master Agent in addition to selling Air Voice Wireless products at each of
our retail locations. We generate revenue primarily through the sale of cellular
handsets and airtime.
MARKETING
We depend on advertising and marketing to attract new customers. We currently
advertise in local print publications, including daily newspapers and weekly
publications, advertise on the Internet and in flyers. Additionally, we run in
store product related promotions including a referral program geared at
generating new business through our existing customer base. We currently spend
between $2,000 and $4,000 per month on advertising depending on the placement of
our ads. We plan to increase spending to $5,000 to $7,500 per month as we roll
out additional campaigns possibly including radio and television advertising. To
date, we believe our advertising campaigns have increased foot traffic in our
stores and increase our name recognition. Going forward we will be able to more
accurately track our results with year over year comparisons.
INVESTMENTS
In March 2003, we acquired 30,000 shares of preferred stock in Vidyah, Inc., a
private technology company, for $15,000 in cash. Holders of the Vidyah preferred
stock have the same voting rights as holders of the common stock. The preferred
stock has liquidation rights. The preferred stock is convertible, at the
holder's option, into an equivalent number of shares of common stock subject to
certain adjustements. Vidyah provides comprehensive technology learning
solutions, certification programs, and customized learning for a variety of
Fortune 1000 companies, including, Disney, Sony, Microsoft, IBM, Cisco Systems,
Harvard University, etc. We purchased an interest in Vidya.com because we
believe Vidyah represents an attractive investment that will increase in value
over time.
SEASONALITY
The wireless industry typically generates a higher number of subscriber
additions and handset sales in the fourth quarter of each year compared to the
remaining quarters. This is due to the use of retail distribution, which is
dependent on the holiday shopping season; timing of new products and service
introductions; and aggressive marketing and sales promotions. To date, we have
not experienced any seasonality in our sales although we may in the future as we
expand our retail operations
COMPETITION
The retail wireless market is very fragmented and highly competitive. In the
markets where we operate our retail locations, we experience intense competition
from other independent retailers, privately held chains that offer a broad range
of products and carrier owned and operated stores with superior name recognition
and brand identity than us. There is no one dominant competitor. We believe that
success in the industry is based on maintenance of product quality, competitive
pricing, delivery efficiency, customer service and satisfaction levels,
maintenance of satisfactory dealer relationships, and the ability to anticipate
technological changes and changes in customer preferences. We believe our
competitive advantage lies in our ability to provide superior customer service
while offering a more diverse line of wireless products and services than our
competitors including Wi-Fi networking products,, satellite phones and a large
variety of Pre-Paid cellular products.
24
EMPLOYEES
As of January 19th, 2004, we had three full time employees at the corporate
level, our Chairman and Chief Executive Officer, Scott Gallagher. Additionally,
we employ Linda Ehlen, our Interim Chief Financial Officer and Robert Lewis as
our Chief Operating officer. In connection with our cellular phones and
accessories business, we employ five full-time individuals to run our Florida
stores.
DESCRIPTION OF PROPERTY
We lease facilities located at 1049C Oxford Valley Road, Levittown Pennsylvania
19067 for use as a wireless retail location in addition to serving as our
corporate headquarters. We entered into our lease commencing on July 15, 2003
for a period of one year and currently pay a monthly rental fee of $1,000 to
occupy approximately 1,000 square feet. Our lease agreement provides for a one
year renewal option.
We operate a wireless phone business from leased facilities located at 12014
Anderson Road, Tampa, Florida, 33625. The facilities, leased to Simply Cellular,
Inc., commenced on August 1, 2001, with Life Investor Inc., Co., as landlord and
on February 14, 2003, Simply Cellular, Inc., assigned such leased facilities to
us. The monthly rent for this location is $2,000.
We assumed a lease from American Connections of Florida, LLC for our location at
8802 Rocky Creek Dr, Tampa, Florida at a rate of $985 per month. We renewed this
lease until August 2004.
We assumed a lease from Pagers N Phones, Inc. for our Brandon, Florida location
at 944 Brandon Blvd., Brandon, Fl 33618 at a rate of $1,950.00 per month.
We assumed a lease from Pagers N Phones, Inc. for our St. Petersburg location at
5225 4th St. N, St. Petersburg Fl, 33645 at a rate of $650 per month.
We believe that our leased property for our corporate headquarters is adequate
for our current and immediately foreseeable operating needs. We may acquire
other leases or properties if our business grows according to our strategic
plan.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In August 2002, 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.
On January 5, 2002, we entered into a lease settlement agreement with
Mr.Landhuis, whereby, for forgiving a one-year lease obligation for office
space, Mr. Landhuis received the following, with an aggregated value of $91,901:
(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 in the form of common stock at an assigned value of $0.03 per share.
During 2002, we issued 2,135,540 shares of common stock, valued at $270,064 in
relation to this settlement. The shares were valued at their fair market value
on the date an agreement was reached to issue the shares. We believe the
property lease settlement was at least as favorable to us as we could have
negotiated with a third party.
25
On November 12, 2002 we issued: Scott Gallagher - 833,333 shares of common stock
for services rendered to us valued at $.06 per share; Scott McBride - 125,000
shares of stock for services rendered to us valued at $.06 per share; James
Gilligan - 125,000 shares of common stock for services rendered to us valued at
$.06 per share; and Linda Ehlen 166,666 shares of common stock for services
rendered to us valued at $.06 per share.
On November 26, 2002, we issued Scott Gallagher - 387,500 shares of common stock
for services rendered to us valued at $.08 per share; Scott McBride - 75,000
shares of common stock for services rendered to us valued at $.08 per share;
James Gilligan - 75,000 shares of common stock for services rendered to us
valued at $.08 per share; David Rasmussen - 75,000 shares of common stock for
services rendered to us valued at $.08 per share; and Linda Ehlen - 56,250
shares of common stock for services rendered to us valued at $.08 per share.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock has traded over the counter and has been quoted in the OTCBB
since March 18, 1999. The stock currently trades under the symbol "FLIP.OB." Bid
and ask quotations for our common shares are routinely submitted by registered
broker dealers who are members of the National Association of Securities Dealers
on the NASD Over-the-Counter Electronic Bulletin Board. These quotations reflect
inner-dealer prices, without retail mark-up, mark-down or commission and may not
represent actual transactions. The high and low bid information for our shares
for each quarter for the last two years, so far as information is reported are
as follows:
Year Ended High Low
- ------------------ ------ -----
2002
- ----
March 31 $ .35 $ .06
June 30 $ .20 $ .04
September 30 $ .20 $ .05
December 31 $ .15 $ .06
2003
- ----
March 31 $ .26 $ .09
June 30 $ .28 $ .16
September 30 $ .68 $ .23
December 31 $ .25 $ .15
2004
- ------
March 31* $ .22 $ .15
* Through January 23, 2004.
26
NUMBER OF STOCKHOLDERS
We had approximately 149 record holders of our common stock as of January 12,
2004.
DIVIDENDS
We have never declared dividends on our common shares and we do not anticipate
declaring any dividends in the foreseeable future. There are no existing
restrictions on the authority of the Board of Directors to declare dividends out
of funds legally available for the payment of dividends.
EXECUTIVE COMPENSATION
The following table presents a summary of the compensation paid to our Chief
Executive Officer during the last three fiscal years. Except as listed below,
there are no bonuses, other annual compensation, restricted stock awards or
stock options/SARs.
SUMMARY COMPENSATION TABLE
Annual Compensation
Name And. Year Salary Bonus Other Long Term
Principal Annual Compensation
Position Compensation Awards
Securities All
Underlying Other
Options Compensation
Scott
Gallagher
Chief
Executive
Officer 2002 $ 201,000 (1) $25,000 0 0 0
LeRoy
Landhuis 2002 $19,750 $117,844 (2) 0 0
2001 0 $226,672 (3) 0 0
2000
Mr. Landbuis is no longer our Chairman and Chief Executive Officer. Mr. Gallagher became
our Chairman and Chief Executive Officer in January 2002.
<FN>
(1) In 2002, we did not pay Mr. Gallagher in cash. Instead, we paid him 1,200,000
shares of stock valued at $120,000 pursuant to his employment contract. In addition,
we paid him 1,145,833 shares that were converted into $75,000 and applied to his
salary and 75,000 shares as board compensation valued at $6,000. At the end of
the year Mr. Gallagher had $45,000 in unpaid accrued salary and bonuses.
(2) 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.
(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.
27
COMPENSATION AGREEMENTS
On January 11, 2002, we entered into an executive employment agreement with Mr.
Gallagher 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 our 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 COMPENSATION
We compensate our directors at a quarterly rate of $2,000 payable in stock or
cash at our discretion. Additionally, each director is entitled to be reimbursed
for reasonable and necessary expenses incurred on our behalf.
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 and 2002 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. Compensation
Committee Interlocks and Insider Participation. None of our directors or
executive officer serves as a member of the Board of Directors or Compensation
Committee of any entity that has one or more executive officers serving as a
member of our Board of Directors.
CAPITALIZATION
The table below sets forth our capitalization as of September 30, 2003.
You should read this table in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and our consolidated
financial statements and the related notes included in this prospectus.
28
FTS Apparel, Inc.
September 30, 2003
(unaudited)
DEBT:
Current portion of notes payable, convertible debt
and capital lease obligations. . . . . . . . . . . . $ -
Notes payable, convertible debt and capital
lease obligations, net of current portion. . . . . . 282,500
STOCKHOLDERS' (DEFICIT)
Common stock, $0.001 par value, 25,000,000 shares
authorized, 17,700,240 shares issued and outstanding. 17,770
Additional paid in capital. . . . . . . . . . . . . . . 5,308,472
Common stock subscription . . . . . . . . . . . . . . . 50,000
Deferred compensation . . . . . . . . . . . . . . . . . (146,550)
Accumulated (deficit) . . . . . . . . . . . . . . . . . (5,614,217)
(384,596)
Total Capitalization. . . . . . . . . . . . . . . . . . . $ (102,096)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
The following discussion is intended to provide an analysis of our financial
condition and should be read in conjunction with our financial statements at
September 30, 2003 included in the Form 10-QSB and our financial statements at
December 31, 2002 included in Form 10-KSB, as amended, and the notes thereto.
OVERVIEW
Historically and through the year ended December 31, 2002, we operated
exclusively in the apparel industry. In January 2002, we experienced a
management change after the prior management team was unable to raise the
required funds to continue in the apparel business. Our business now focuses on
developing and acquiring cash-flow positive businesses and viable business
projects. As of January 19th, 2004 we operated a total of 5 retail locations, we
lease two wireless retail locations in Tampa, Florida, one in St. Petersburg,
FL, one in Brandon, Fl and one in Philadelphia, Pennsylvania. Due to continuing
losses from operations, the accountant which audited our financial statements
for the year ended December 31, 2002 assessed that there was substantial doubt
about our ability to continue as a going concern.
29
STRATEGIC PLAN
Going forward we intend to develop a profitable full service wireless company by
acquiring or developing additional retail locations in selected markets on the
East Coast namely Florida's Gulf Coast market and Pennsylvania's Philadelphia
market. Our primary wireless business consist of selling wireless handsets,
accessories, home and business Wi-Fi network equipment and related products to
retail customers. To achieve this goal, we have embarked on a targeted media
marketing campaign focused on building brand identity of our existing retail
business. In addition were actively seeking to expand our business by adding
additional locations in our target markets to grow our critical mass. For the
next twelve months, the principal elements of our strategy for achieving these
goals are:
- - Offer state of the art and hard to find wireless products such as handsets,
accessories, data devices, and Wi-Fi products.
- - Open or acquire additional retail locations. As of January 19th, 2004, we
operated 5 retail locations. We are currently seeking additional locations
however, we currently have no pending agreements to purchase or develop
additional locations.
- - Sign 1,000 Air Voice customers through aggressive selling and marketing to
cellular customers who prefer a "pay as you go" cellular model. As of
January 19th, 2004, we had approximately 267 Air Voice customers.
- - Deliver superior service to all of our customers.
- - Effectively execute a full scale marketing campaign to build brand identity
including mass print advertising in our target markets, radio advertising,
traditional mailers and a mix of Internet marketing programs.
- - Manage and implement sound processes to facilitate our growth including and
inventory monitoring and point of sale software program.
- - Continue to utilize the talent available on our active Board of Directors.
- - Achieve profitability in a reasonable time frame.
We believe our Equity Line of Credit with Dutchess Private Equities Fund, LP and
cash flows generated from operations will allow us to fully execute the basic
components of our 12-month strategic plan outlined above. We continue to search
and evaluate other funding possibilities as we may require additional funds if
we do not achieve profitability within the 12-month time frame. We may not be
able to obtain additional financing on terms that are acceptable to us.
RESULTS OF OPERATIONS
- -----------------------
YEAR ENDED DECEMBER 31, 2002 COMPARED TO THE YEAR ENDED DECEMBER 31, 2001.
During the year ended December 31, 2002, we realized a net loss of $815,907 (or
$0.07 per share) on no revenue, compared to a net loss of $1,168,154 ($.14 per
share) on revenue of $568,953 for the year ended December 31, 2001. Revenue
during 2002 decreased by $568,953 over the prior year due primarily to our
inactivity as we ceased operating activities of our apparel business and
generated no revenue in 2002.
30
The cost of goods sold in 2001, was $645,824. Our cost of goods exceeded our
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 from 2001 to 2002, from $1,101,127
in 2001 to $811,678 in 2002. The administrative expenses in 2002 are comprised
principally of non cash stock compensation of $604,363 and accrued salaries of
$134,500 and legal and accounting of $56,478. The remaining amount of $16,337
includes SEC filing fees, stock transfer fees, insurance, outside consulting,
office supplies, postage and other miscellaneous expenses. The administrative
expenses in 2001 are comprised principally of non cash stock compensation of
$226,672, salaries of $212,372, consulting services of $357,594, office rent of
$108,494, China office of $19,352, insurance of $35,000, accounting fees of
$24,935, legal fees of $27,198, commissions of $34,984 and advertising costs of
$34,619 and other miscellaneous expenses of $19,907. The change to general and
administrative expenses from 2001 to 2002 is primarily attributed to the fact
that in 2001 we operated a business in the apparel industry. In 2002, we were
essentially dormant as management explored strategic alternatives going forward
and ceased operating activities related to its apparel business.
Professional fees remained a significant expense in the amount of $56,478 in
2002 as compared to $49,776 in the prior fiscal year. These expenses were
incurred in connection with our need to file periodic reports with the SEC.
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.
RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDING SEPTEMBER 30, 2003
For the three months ended September 30, 2003, we realized revenue of $26,797
compared to no revenue for the period ending September 30,2002 as we were
essentially dormant. For the nine months ending September 30, 2003 we realized
revenue of $43,111, compared to no revenue for the period ending September 30,
2002 as we were essentially dormant during that period.
For the three months ended September 30, 2003, we realized a net loss of
$132,877 or ($.01) per share, on revenue of $26,797. This compares to a net loss
of $242,590 or ($.02) per share, on no revenues for the three months ended
September 30, 2002, a decrease of ($109,713). The decrease is attributed to the
absence of stock issuances relating to a lease settlement agreement entered into
during the same period for 2002. For the nine months ended September 30, 2003,
we realized a net loss of $544,662 or ($.03) per share, on revenue of $43,111.
This compares to a net loss of $550,959 or ($.05) per share, on no revenues for
the nine months ended September 30, 2002 as we were essentially dormant. The
decrease in our loss is also primarily attributed to the absence of the lease
settlement agreement entered into in 2002.
For the three months ended September 30, 2003 we reported $19,018 for cost of
goods sold compared to $0 cost of goods sold for the three month period ended
September 30, 2002. For the nine months ended September 30, 2003 we reported
$29,185 for cost of goods sold compared to $0 cost of goods sold for the nine
month period ended September 30, 2002. The increase in cost of goods sold was
due to the fact that in the comparable period we were essentially dormant and
our operating business generated revenues in 2003.
31
For the three months ended September 30, 2003 we reported $106,459 of general
and administrative expenses, compared to $68,183 for the three months ended
September 30, 2002, an increase of $38,276 the increase in due to an overall
increase in expense levels relating to our operating business, specifically
increases in staffing, rents and overhead. For the nine months ended September
30, 2003 we reported $303,692 of general and administrative expenses, compared
to $174,318 for the nine months ended September 30, 2002, an increase of
$129,374, the increase is due to the increased operating expenses listed above.
We generate our core revenue from the activation of new wireless service to our
customers. We receive our commission revenue approximately 45 days after the end
of each month, therefore our reported revenue does not reflect the actual
revenue generated during the 3 month period. We report the actual revenue
received on a quarter by quarter basis, for example, new activation revenues
generated in September will not be reported until mid-November.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2003 we had cash available of $2,869, inventory valued at
$18,912 property and equipment valued at $46,242. Investments valued at
$15,000, deposits of $5,775 and current lease rights of $17,000.
Our current liabilities as of September 30, 2003 of $209,585 consist mainly of
accounts payable and accrued expenses, as well as accrued salary of $92,000 and
advances of $42,000 due to our Chairman and Chief Executive Officer Mr.
Gallagher.
We believe that our continued existence is dependent upon our ability to make
our wireless operations profitable and our ability to raise additional capital.
Accordingly, the notes to our unaudited, interim financial statements express
substantial doubt about our ability to continue as a going concern. We
are confident in our ability to raise the necessary capital to execute our
business plan however no assurances can be given.
We are not aware of any material trend, event or capital commitment, which
would potentially adversely affect liquidity.
We believe that if revenue continues at the level reported in the nine months
ended September 30, 2003, we will derive insufficient cash flow to fund
operations and relieve all payables essential to the continuing operation of the
business. Any additional material reduction in revenue could have a material
adverse effect on our operational capabilities. We began operating a wireless
business this year that will require additional funds to fully execute our
business plan, however, we believe that with increased revenue, our cash flow
will improve and will be sufficient to operate the business. Cash flow from
operations is insufficient to fund current operations. At the current rate, we
will need to raise a minimum of $120,000 to fund operations for the next twelve
months. We believe the funds available through operations and our Equity Line
with Dutchess will be sufficient to fund our operations for the next twelve
months.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2002, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards No. 146, " Accounting for Costs
Associated with Exit or Disposal Activities," or FAS 146. FAS 146, which will be
effective for exit or disposal activities initiated after December 31, 2002, is
not expected to have a material impact on our results of operation, financial
position or cash flows.
32
In December 2002, the FASB issued Statement of Financial Accounting Standards
No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure," or
FAS 148, which amends FAS 123, "Accounting for Stock-Based Compensation",
transition requirements when voluntarily changing to the fair value based method
of accounting for stock-based compensation and also amends FAS 123 disclosure
requirements. FAS 148 is not expected to have a material impact on our results
of operations, financial position or cash flow.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
In December, 2001, the SEC issued cautionary advice to elicit more precise
disclosure about accounting policies management believes are most critical in
portraying our financial results and in requiring management's most difficult
subjective or complex judgments. The preparation of financial statements in
conformity with accounting principles generally accepted in the United States of
America requires management to make judgments and estimates.
We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements.
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.
We recognize revenue from advertising and promotion income as the requisite
services are provided. Revenues are recognized.
Operating revenues primarily consist of commissions for wireless service
activation's and revenues generated from handset, accessory and wireless product
sales. Activation commission revenue is realized upon receipt, however we
allocate 10% of activation revenue as deferred revenue for a six-month period
due to possible customer churn.
GOODWILL AND INTANGIBLE ASSET IMPAIRMENT
We periodically review the carrying amount of property, plant and equipment and
our identifiable intangible recognition.
Goodwill and Intangible Asset Impairment: See note 1 impairment of long lived
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 judgment 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.
33
FINANCIAL STATEMENTS
FTS APPAREL, INC.
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, 2002, and the related statements of operations, changes in
stockholders' (deficit), and cash flows for the years ended December 31, 2001
and 2002. 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, 2002, and the results of its operations, and its cash flows for the
years ended December 31, 2001 and 2002, 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,
and has working capital and stockholder deficits. 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.
Stark Winter Schenkein & Co., LLP
Denver, Colorado
March 31, 2003
FTS APPAREL, INC.
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2002
ASSETS
CURRENT ASSETS
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 219
------------
PROPERTY AND EQUIPMENT, NET. . . . . . . . . . . . . . . 3,943
------------
OTHER ASSETS . . . . . . . . . . . . . . . . . . . . . . 900
------------
$ 5,062
============
LIABILITIES AND STOCKHOLDERS' (DEFICIT)
CURRENT LIABILITIES
Accounts payable and accrued expenses . . . . . . . . . . $ 58,219
Accounts payable - related party. . . . . . . . . . . . . 53,926
------------
Total current liabilities . . . . . . . . . . . . . . . . 112,145
------------
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, none issued or outstanding.. . . . . -
Common stock, $0.001 par value, 25,000,000 shares
authorized, 15,530,240 shares issued
and outstanding . . . . . . . . . . . . . . . . . . . . 15,530
Additional paid in capital. . . . . . . . . . . . . . . . 4,956,942
Deferred Compensation. . . . . . . . . . . . . . . . . . (60,000)
Accumulated (deficit) . . . . . . . . . . . . . . . . . . (5,069,555)
------------
(107,083)
------------
$ 5,062
============
The notes to the financial statements are an integral part of these statements
FTS APPAREL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
2001 2002
-------------- --------------
REVENUES
Sales of merchandise . . . . . . . . . . . . . $ 568,953 $ -
Advertising and promotion income . . . . . . . 7,893 -
-------------- --------------
576,846 -
-------------- --------------
COST OF GOODS SOLD . . . . . . . . . . . . . . 645,824 -
-------------- --------------
GROSS PROFIT (LOSS). . . . . . . . . . . . . . (68,978) -
GENERAL AND ADMINISTRATIVE EXPENSES. . . . . . 1,101,127 811,674
-------------- --------------
(LOSS) FROM OPERATIONS . . . . . . . . . . . . (1,170,105) (811,674)
-------------- --------------
OTHER INCOME (EXPENSE)
Interest income . . . . . . . . . . . . . . . . 3,207 -
Interest expense. . . . . . . . . . . . . . . . (1,256) (4,233)
-------------- --------------
1,951 (4,233)
-------------- --------------
NET (LOSS). . . . . . . . . . . . . . . . . . . (1,168,154) (815,907)
PREFERRED DIVIDENDS . . . . . . . . . . . . . . - -
-------------- --------------
NET (LOSS) APPLICABLE TO COMMON STOCK . . . . . $ (1,168,154) $ (815,907)
============== ==============
PER SHARE INFORMATION:
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
(BASIC AND DILUTED) . . . . . . . . . . . . . . 8,598,451 11,132,146
============== ==============
NET (LOSS) PER COMMON SHARE (BASIC AND DILUTED) $ (0.14) $ (0.07)
============== ==============
The notes to the financial statements are an integral part of these statements
FTS APPAREL, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' (DEFICIT)
YEARS ENDED DECEMBER 31, 2001 AND 2002
Number of Number of Additional Total
Preferred Common Preferred Common Paid-in Deferred Accumulated Stockholders'
Shares Shares Stock Stock Capital Compensation (Deficit) (Deficit)
--------- ---------- ----------- ------- ----------- ---------- ------------ ---------------
Balance,
December 31, 2000 . . . . 50,000 7,721,229 $ 50,000 $ 7,721 $4,028,715 $ - $(3,085,494) $ 1,000,942
Subscribed stock issued. . - 105,000 - 105 (105) -
Stock issued for services. - 819,722 - 820 225,852 - 226,672
Net (loss) for the year
ended December 31, 2001 . - - - - - - (1,168,154) (1,168,154)
--------- ---------- ----------- ------- ----------- ---------- ------------ ---------------
Balance,
December 31, 2001 . . . . 50,000 8,645,951 50,000 8,646 4,254,462 - (4,253,648) 59,460
Stock issued pursuant
to employment contract. . - 1,200,000 - 1,200 118,800 (120,000) - -
Stock issued for services - 2,648,749 - 2,649 271,651 - - 274,300
Stock issued for cash . . - 900,000 - 900 44,100 - - 45,000
Stock issued for
settlement of lease. . . - 2,135,540 - 2,135 267,929 - - 270,064
Amortization of
deferred compensation . . - - - - - 60,000 - 60,000
Net (loss) for the year
ended December 31, 2002. - - - - - - (815,907) (815,907)
--------- ---------- ----------- ------- ----------- ---------- ------------ ---------------
Balance,
December 31, 2002 . . . . 50,000 15,530,240 $ 50,000 $15,530 $4,956,942 $ (60,000) $(5,069,555) $ (107,083)
========= ========== =========== ======= =========== ========== ============ ===============
The notes to the financial statements are an integral part of these statements
FTS APPAREL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
2001 2002
-------------- ---------------
OPERATING ACTIVITIES
Net (loss). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (1,168,154) $ (815,907)
Adjustments to reconcile net (loss) to net cash
(used in) operating activities:
Amortization and depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . 32,822 657
Stock issued or subscribed for services,
contracts, and trade agreements. . . . . . . . . . . . . . . . . . . . . . . . . 226,672 604,364
Amortization of non-cash prepaid
expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 304,728 -
Write-down of inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111,979 -
Loss on sale of property and equipment. . . . . . . . . . . . . . . . . . . . . . . (2,662) -
Changes in:
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89,165 -
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 176,718 -
Prepaid expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 19,682
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,782 (900)
Accounts payable and accrued expenses . . . . . . . . . . . . . . . . . . . . . . . (66,799) 56,118
Accounts payable - related party. . . . . . . . . . . . . . . . . . . . . . . . . . 1,971 51,569
-------------- ---------------
Net cash (used in) operating activities . . . . . . . . . . . . . . . . . . . . . . (281,778) (84,417)
-------------- ---------------
INVESTING ACTIVITIES
Acquisition of fixed assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . - (4,600)
-------------- ---------------
Net cash (used in) investing activities . . . . . . . . . . . . . . . . . . . . . . - (4,600)
-------------- ---------------
FINANCING ACTIVITIES
Proceeds from issuance of common stock. . . . . . . . . . . . . . . . . . . . . . . - 45,000
Preferred dividends paid. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,411) -
-------------- ---------------
Net cash provided by (used in) financing activities . . . . . . . . . . . . . . . . (1,411) 45,000
-------------- ---------------
Net (decrease) in cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (283,189) (44,017)
CASH AT BEGINNING OF YEAR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 327,425 44,236
-------------- ---------------
CASH AT END OF YEAR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 44,236 $ 219
============== ===============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for:
Interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,256 $ 4,233
============== ===============
Income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ - $ -
============== ===============
SUPPLEMENTAL DISCLOSURE OF SIGNIFICANT NON-CASH FINANCING AND INVESTING ACTIVITIES
Common stock issued for deferred compensation . . . . . . . . . . . . . . . . . . . $ - $ 120,000
============== ===============
The notes to the financial statements are an integral part of these statements
FTS APPAREL, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2002,
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
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.
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.
FINANCIAL INSTRUMENTS
Fair value estimates discussed herein are based upon certain market assumptions
and pertinent information available to management as of December 31, 2002. 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 judgment 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.
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.
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 equity instruments issued to employees for services
based on the fair value of the equity instruments issued and accounts for equity
instruments issued to other than employees based on the fair value of the
consideration received or the fair value of the equity instruments, whichever is
more reliably measurable.
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 Accounting Principles
Board 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.
DEFERRED OFFERING COSTS
The Company defers costs associated with the raising of capital until such time
as the offering is completed, at which time the costs are charged against the
capital raised. Should the offering be terminated the costs are charged to
operations during the period when the offering is terminated. During the year
ended December 31, 2002 the Company charged an aggregate of $141,000 to
operations related to these costs for charges incurred related to a terminated
offering.
RECENT PRONOUNCEMENTS
In December 2002, the Financial Accounting Standards Board ("FASB") issued SFAS
148 "Accounting for Stock-Based Compensation--Transition and Disclosure-an
amendment of SFAS 123." SFAS 148 provides alternative methods of transition for
a voluntary change to the fair value based method of accounting for stock-based
employee compensation from the intrinsic value-based method of accounting
prescribed by APB 25. As allowed by SFAS 123, the Company has elected to
continue to apply the intrinsic value-based method of accounting, and has
adopted the disclosure requirements of SFAS 123. The Company currently does not
anticipate adopting the provisions of SFAS 148.
In July 2002, the FASB issued SFAS 146, "Accounting for Costs Associated with
Exit or Disposal Activities." SFAS 146 provides new guidance on the recognition
of costs associated with exit or disposal activities. The standard requires
companies to recognize costs associated with exit or disposal activities when
they are incurred rather than at the date of commitment to an exit or disposal
plan. SFAS 146 supercedes previous accounting guidance provided by the EITF
Issue No. 94-3 "Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." EITF Issue No. 94-3 required recognition of costs at the date
of commitment to an exit or disposal plan. SFAS 146 is to be applied
prospectively to exit or disposal activities initiated after December 31, 2002.
Early application is permitted. The adoption of SFAS 146 by the Company is not
expected to have a material impact on the Company's financial position, results
of operations, or cash flows.
In April 2002, the FASB issued SFAS 145, "Rescission of FASB Statements No. 4,
44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
Among other things, this statement rescinds FASB Statement No. 4, "Reporting
Gains and Losses from Extinguishment of Debt" which required all gains and
losses from extinguishment of debt to be aggregated and, if material, classified
as an extraordinary item, net of related income tax effect. As a result, the
criteria in APB Opinion No. 30, "Reporting the Results of Operations --
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions," will now be used to
classify those gains and losses. The provisions of SFAS 145 related to the
classification of debt extinguishment are effective for years beginning after
May 15, 2002. The adoption of SFAS 145 by the Company is not expected to have a
material impact on the Company's financial position, results of operations, or
cash flows.
In November 2001, the EITF of the FASB issued EITF 01-9 "Accounting for
Consideration Given by a Vendor to a Subscriber (Including a Reseller of the
Vendor's Products)." EITF 01-9 provides guidance on when a sales incentive or
other consideration given should be a reduction of revenue or an expense and the
timing of such recognition. The guidance provided in EITF 01-9 is effective for
financial statements for interim or annual periods beginning after December 15,
2001. The adoption of EITF 01-9 by the Company did not have a material impact on
the Company's financial statements.
In August 2001, the FASB issued SFAS 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS 144 provides new guidance on the
recognition of impairment losses on long-lived assets with definite lives to be
held and used or to be disposed of and also issued the definition of what
constitutes a discontinued operation and how the results of a discontinued
operation are to be measured and presented. SFAS 144 is effective for fiscal
years beginning after December 15, 2001. The adoption of SFAS 144 did not have a
material impact on the Company's financial position, results of operations, or
cash flows.
In June 2001, the FASB issued SFAS 143, "Accounting for Asset Retirement
Obligations." SFAS 143 requires the fair value of a liability for an asset
retirement obligation to be recognized in the period that it is incurred if a
reasonable estimate of fair value can be made. The associated asset retirement
costs are capitalized as part of the carrying amount of the long-lived asset.
SFAS 143 is effective for fiscal years beginning after June 15, 2002. The
adoption of SFAS 143 is not expected to have a material impact on the Company's
financial position, results of operations or cash flows.
In June 2001, the FASB issued SFAS 142, "Goodwill and Other Intangible Assets,"
which provides for non-amortization of goodwill and intangible assets that have
indefinite useful lives, annual tests of impairments of those assets and interim
tests of impairment when an event occurs that more likely than not has reduced
the fair value of such assets. The statement also provides specific guidance
about how to determine and measure goodwill impairments, and requires additional
disclosure of information about goodwill and other intangible assets. The
provisions of this statement are required to be applied starting with fiscal
years beginning after December 15, 2001, and applied to all goodwill and other
intangible assets recognized in the financial statements at that date. Goodwill
and intangible assets acquired after June 30, 2001 will be subject to the
non-amortization provisions of the statement. Early application is permitted for
entities with fiscal years beginning after March 15, 2001, provided that the
first interim financial statements had not been issued previously. The Company's
adoption of the provisions of SFAS 142 did not have a material impact on the
Company's financial position, results of operations or cash flows.
In June 2001, the FASB issued SFAS 141, "Business Combinations," which is
effective for all business combinations initiated after June 30, 2001. SFAS 141
requires companies to account for all business combinations using the purchase
method of accounting, recognize intangible assets if certain criteria are met,
as well as provide additional disclosures regarding business combinations and
allocation of purchase price. The adoption of SFAS 141 did not have a material
impact on the Company's financial position, results of operations or cash flows.
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 $815,907 in 2002. In
addition the Company has working capital and stockholders' deficits of $111,926
and $107,083 at December 31, 2002 and has no revenue producing operations.
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 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
Office equipment $ 4,600
Less: accumulated depreciation 657
---------
$ 3,943
During 2002 the Company entered into a lease settlement agreement (See Note 8)
in which all property and equipment held at December 31, 2001, with a net book
value of $19,682 was given to the landlord as partial satisfaction of a lease
obligation.
Depreciation expense for the years ended December 31, 2001 and 2002 was $30,063
and $657.
NOTE 4 - STOCKHOLDERS' (DEFICIT)
The Company has authorized 155,000,000 shares of stock, of which 150,000,000
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.
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 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 (see Note 8). 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.
During January 2002 the Company issued 1,200,000 shares of common stock pursuant
to the terms of an employment contract with its president. These shares were
valued at their fair market value on the date an agreement was reached to issue
the shares of $120,000. The shares have been recorded as deferred compensation
and are being amortized over the term of the employment contract of 2 years.
During 2002 $60,000 was charged to operations.
During August and September 2002 the Company issued 900,000 shares of common
stock for cash aggregating $45,000. Of the shares issued 300,000 shares were
sold to a related party at a discount from fair market value. This discount
aggregating $18,000 has been charged to operations during the year ended
December 31, 2002.
During the year ended December 31, 2002 the Company issued 2,648,749 shares of
common stock valued at $256,300 for services. These shares were valued at their
fair market value on the date an agreement was reached to issue the shares. This
charge to operations includes $126,000 of costs which had been recorded as
deferred offering costs.
During the year ended December 31, 2002 the Company issued 2,135,540 shares of
common stock valued at $270,064 related to a lease settlement (see Note 8).
These shares were valued at their fair market value on the date an agreement was
reached to issue the shares.
During September 2002 the Company filed a Form SB-2 Registration Statement with
the Securities and Exchange Commission to register 11,000,000 shares of common
stock. In conjunction with this registration statement the Company incurred
offering costs including $15,000 paid in cash and $126,000 paid in common stock.
The Company subsequently withdrew the registration statement and charged the
$141,000 in offering costs to operations.
NOTE 5 - 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. The Company did
not grant any stock options during 2001 and 2002.
Changes in options outstanding under the plan are summarized as follows:
Number of Weighted
Shares Average
Exercise Price
--------------- ----------------
Outstanding at December 31, 2000 1,050,000 $ 1.50
Granted
-
Exercised
-
Forfeited 452,000 1.50
------------ ------------
Outstanding at December 31, 2001
and 2002 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:
OUTSTANDING AND
EXERCISABLE
Weighted Weighted
Average Average
Number Contractual Exercise
EXERCISE PRICES OUTSTANDING Life PRICE
- --------------- ----------- ---- -----
$0.81 - $1.38 4,000 6.1 years $1.14
$1.50 - $2.75 594,000 6.7 years $1.50
NOTE 6 - STOCK WARRANTS
The following details the warrants outstanding as of December 31, 2002:
Underlying Exercise
Shares price
Warrant issued during 2000 1,036,000 $1.50
The warrant was issued to the former Chief Executive Officer of the Company. The
Warrant expires on April 19, 2010. At December 31, 2002, the Company had
reserved 1,036,000 shares of common stock for stock warrants.
NOTE 7 - 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 $ 1,496,000
Less valuation allowance (1,496,000)
------------------
Net deferred tax asset $ -
==================
The net operating loss carry forward of approximately $4,400,000 will expire
through 2022.
The net change in valuation allowance for the year ended December 31, 2002 was
$270,000.
NOTE 8 - RELATED PARTY TRANSACTIONS
The Company was the recipient of legal services from a shareholder. The Company
incurred expenses of $24,841 and $28,000 related to these services for the years
ended December 31, 2001 and 2002 including the issuance of 100,000 shares of
common stock valued at its fair market value of $18,000 in 2002.
On April 19, 2000, the Company issued 3,594,256 shares of common stock and a
stock warrant (See Note 6) in exchange for cash, fixed assets, office rent and
consulting services. The agreement also required 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 (see Note 4).
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, with an aggregated
value of $91,901: (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 in the form of common stock at an assigned value
of $0.03 per share. During 2002 the Company issued 2,135,540 shares of common
stock in relation to this settlement (see Note 4). The difference between the
fair market value of the common stock and the assigned value was recorded as a
charge to operations.
During January 2002 the Company entered into an employment agreement with its
president. The agreement is for a period of 2 years and provides for a base
salary of $100,000 per annum plus an annual bonus of at least 25% of the base
salary. In addition, the contract provided for the issuance of 1,200,000 shares
of common stock (see Note 4). During 2002 certain amounts due pursuant to the
employment contract were paid by the issuance of 1,220,833 shares of the
Company's common stock valued its fair market value of $80,000 (see Note 4). At
December 31, 2002 $45,000 of unpaid salary is included in accounts payable -
related party.
NOTE 9 - SUBSEQUENT EVENTS
During February 2003 the Company completed a debenture offering. Pursuant to a
subscription agreement with Dutchess Private Equities Fund, LP ("Dutchess") the
Company received $212,500 from the sale of 6% secured convertible debentures.
The terms of the debentures provide for payment by February 14, 2007 with the
debentures being convertible into the Company's common stock at any time at the
lesser of (i) 80% of the average of the five lowest closing bid prices during
the 15 days prior to conversion or (ii) 100% of the average of the closing bid
prices for the 20 trading days immediately preceding the closing date. The
Company has agreed to register the shares underlying the debentures on a Form
SB-2 Registration Statement. In addition, in exchange for $12,500 in cash
Dutchess agreed to return 250,000 shares of the Company's common stock to the
Company which were purchased by Dutchess in August 2002.
During February 2003 the Company entered into an asset purchase agreement with
Simply Cellular, Inc. whereby it acquired substantially all of the assets of a
cellular service and accessories store for $70,000 in cash.
During February 2003 the Company filed a Form S-8 Registration Statement
registering 1,900,000 shares of its common stock to be used a compensate certain
consultants for services to be provided to the Company.
FTS APPAREL, INC.
BALANCE SHEET
September 30, 2003
(UNAUDITED)
ASSETS
CURRENT ASSETS
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,869
Accounts receivable, net. . . . . . . . . . . . . . . . . 1,691
Inventory . . . . . . . . . . . . . . . . . . . . . . . . 18,912
Lease rights, . . . . . . . . . . . . . . . . . . . . . . 17,000
------------
Total current assets. . . . . . . . . . . . . . . . . 40,472
------------
PROPERTY AND EQUIPMENT, NET . . . . . . . . . . . . . . . . 46,242
------------
OTHER ASSETS
Investment in private entity. . . . . . . . . . . . . . . 15,000
Deposits. . . . . . . . . . . . . . . . . . . . . . . . . 5,775
------------
20,775
------------
$ 107,489
============
LIABILITIES AND STOCKHOLDERS' (DEFICIT)
CURRENT LIABILITIES
Accounts payable and accrued expenses . . . . . . . . . . $ 48,977
Accounts payable and accrued expenses - related parties . 160,607
------------
Total current liabilities . . . . . . . . . . . . . . 209,584
------------
CONVERTIBLE DEBENTURES. . . . . . . . . . . . . . . . . . . 282,500
------------
STOCKHOLDERS' (DEFICIT)
10% Convertible preferred stock, Series A, $0.01 par:
value, 150,000 shares authorized. . . . . . . . . . . .
Preferred stock, $0.01 par value, 4,850,000 undesignated
shares authorized . . . . . . . . . . . . . . . . . . .
Common stock, $0.001 par value, 25,000,000 shares
authorized, 17,700,240 shares issued and outstanding:. . 17,770
Additional paid in capital. . . . . . . . . . . . . . . . 5,308,472
Common stock subscription . . . . . . . . . . . . . . . . 50,000
Deferred compensation . . . . . . . . . . . . . . . . . . (146,550)
Accumulated (deficit) . . . . . . . . . . . . . . . . . . (5,614,217)
------------
(384,595)
------------
$ 107,489
============
See Notes to Financial Statements
FTS APPAREL, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
September 30, September 30, September 30, September 30,
2003 2002 2003 2002
-------------------- ------------------- ------------ -----------
REVENUES
Sales. . . . . . . . . . . . . . . . . . . . . $ 26,797 $ - $ 43,111 $ -
-------------------- ------------------- ------------ ------------
COST OF GOODS SOLD . . . . . . . . . . . . . . . 19,018 - 29,185 -
-------------------- ------------------- ------------ ------------
GROSS PROFIT . . . . . . . . . . . . . . . . . . 7,779 - 13,926 -
-------------------- ------------------- ------------ ------------
GENERAL AND ADMINISTRATIVE EXPENSES
Settlement of lease obligation. . . . . . . . - - - 135,234
Non-cash stock compensation . . . . . . . . . 30,650 174,407 224,650 241,407
Purchased development costs . . . . . . . . . - - 23,500 -
Selling, general and administrative expenses. 106,459 68,183 303,692 174,318
-------------------- ------------------- ------------ ------------
137,109 242,590 551,842 550,959
-------------------- ------------------- ------------ ------------
(LOSS) FROM OPERATIONS . . . . . . . . . . . . . (129,330) (242,590) (537,916) (550,959)
-------------------- ------------------- ------------ ------------
OTHER INCOME (EXPENSE)
Interest expense . . . . . . . . . . . . . . . (3,547) - (6,746) -
-------------------- ------------------- ------------ ------------
(3,547) - (6,746) -
-------------------- ------------------- ------------ ------------
NET (LOSS). . . . . . . . . . . . . . . . . . . . $ (132,877) $ (242,590) $ (544,662) $ (550,959)
==================== =================== ============ ============
PER SHARE INFORMATION:
WEIGHTED AVERAGE SHARES OUTSTANDING
(BASIC AND DILUTED) . . . . . . . . . . . . . . 17,631,910 11,211,267 17,273,721 10,629,127
==================== =================== ============ ============
NET (LOSS) PER COMMON SHARE (BASIC AND DILUTED) . $ (0.01) $ (0.02) $ (0.03) $ (0.05)
==================== =================== ============ ============
See Notes to Financial Statements
FTS APPAREL, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
September 30, 2003 September 30, 2002
----------------- -------------------
OPERATING ACTIVITIES
Net cash (used in) operating activities . $ (271,776) $ (50,140)
----------------- -------------
INVESTING ACTIVITIES
Net cash (used in) investing activities . (18,074) -
----------------- -------------
FINANCING ACTIVITIES
Net cash provided by financing activities 292,500 6,284
----------------- -------------
Net increase (decrease) in cash . . . . . 2,650 (43,856)
CASH AT BEGINNING OF PERIOD . . . . . . . . . 219 44,236
----------------- -------------
CASH AT END OF PERIOD . . . . . . . . . . . . $ 2,869 $ 380
================ =============
See Notes to Financial Statements
FTS APPAREL, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(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, 2002 and for the two years then ended,
including notes thereto, included in the Company's Form 10-KSB/A.
(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) INVENTORY
Inventory is valued at the lower of cost or market on a first in, first out
basis and consists principally of cellular telephone equipment.
(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 nine months ended September 30, 2003 the
Company incurred a net loss of $544,662 and has working capital and
stockholders' deficits of $169,113 and $384,596 respectively, at September 30,
2003.
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.
(5) CONVERTIBLE DEBENTURES
During February 2003 the Company completed a debenture offering. Pursuant to a
subscription agreement with Dutchess Private Equities Fund, LP ("Dutchess") the
Company received $212,500 from the sale of 6% secured convertible debentures.
The terms of the debentures provide for payment by February 14, 2007 with the
debentures being convertible into the Company's common stock at any time at the
lesser of (i) 80% of the average of the five lowest closing bid prices during
the 15 days prior to conversion or (ii) 100% of the average of the closing bid
prices for the 20 trading days immediately preceding the closing date. The
Company has agreed to register the shares underlying the debentures on a Form
SB-2 Registration Statement. In addition, in exchange for $12,500 in cash
Dutchess agreed to return 250,000 shares of the Company's common stock to the
Company, which were purchased by Dutchess in August 2002. As of September 30,
2003 the amount of the debenture was increased to $282,500.
(6) STOCKHOLDERS' (DEFICIT)
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 share
of common stock at the option of the holder. The Series A Convertible Preferred
Stock automatically converts to common stock in April 2003. During August 2003
the holder of the 50,000 outstanding shares of Series A Convertible Preferred
Stock submitted the shares for conversion. The shares are shown as a common
stock subscription at September 30, 2003.
During February 2003 the Company issued 1,900,000 shares of common stock for
services pursuant to a Form S-8 registration statement. The shares were valued
at their fair market value on the date it was agreed that the shares would be
issued. The non-cash stock compensation expense of $209,000 has been charged to
operations during the period.
During April 2003 the Company received $10,000 in cash as payment for a
subscription for 200,000 shares of its common stock.
In July 2003, the Company entered into three service agreements: 250,000 shares
of common stock were issued for S.E.C. related Edgar filing services for a
period of 24 months. 50,000 shares of common stock were issued for web
development and hosting services for a period of 12 months. 20,000 shares of
common stock were issued for marketing of wireless satellite products for a
period of 12 months. All shares were valued at $.46 per share, the fair market
value on the date the shares were issued.
(7) ACQUISITION OF ASSETS
During February 2003 the Company entered into an asset purchase agreement with
Simply Cellular, Inc. whereby it acquired substantially all of the assets of a
cellular service and accessories store for $70,000 in cash. The Company recorded
the fair value of the assets of $46,500 and charged the balance of $23,500 to
operations as purchased development expenses for which feasibility has not been
established and which has no alternative future uses.
In addition, during March 2003 the Company acquired 30,000 shares of preferred
stock in VidYah, Inc., a private entity, for $15,000 in cash.
(8) COMMITMENTS
During May 2003 the Company entered into an agreement to assume certain lease
rights and obligations from a third party. In exchange for the rights the
Company agreed to pay an aggregate of $25,000 and be responsible for all future
lease payments under the lease of $895 per month through August 31, 2003 with
renewal rights through August 31, 2004. In August 2003 the Company renewed the
lease to extend the term through August 31, 2004. The Company has recorded the
$25,000 as lease rights and will amortize this over the term of the lease.
The net lease rights at September 30, 2003 are $17,000.
(9) CORRECTION OF AN ERROR
During August 2003 the Company determined that it had not recorded $17,500 in
amounts due to a third party and $990 in rent expense related to the assumption
of a lease as described in Note 8. In addition, the Company determined that the
50,000 outstanding shares of Series A Convertible Preferred Stock should have
been cancelled and the amount classified as a common stock subscription on the
June 30, 2003 balance sheet. The financial statements have been restated to
reflect these corrections. The adjustments increased the net loss for the nine
and three months ended September 30, 2003 by $(990) or $(.00) per share.
(10) SUBSEQUENT EVENT
On October 27, 2003 the Company acquired the assets of Florida based Pagers N
Phones for $27,000 in cash and agreed to issue 300,000 shares of restricted
stock.
HERE TO FIND MORE INFORMATION ABOUT US
We have filed with the Securities and Exchange Commission a registration
statement on Form SB-2 under the 1933 Act with respect to the shares offered by
this prospectus. This prospectus, filed as a part of the registration statement,
does not contain certain information contained in Part II of the registration
statement or filed as exhibits to the registration statement. We refer you to
the registration statement and exhibits which may be inspected and copied at the
Public Reference Department of the Commission, 450 5th Street, NW, Washington,
D.C. 20549, at prescribed rates. You can contact the Commission's Public
Reference Department at (800) SEC-0330. The registration statement and exhibits
also are available for viewing at and downloading from the EDGAR location within
the SEC's internet website (http://www.sec.gov).
Our common stock is registered with the SEC under section 12(g) of the
Securities Exchange Act of 1934. We file with the SEC periodic reports on Forms
10-KSB, 10-QSB and 8-K, and proxy statements, and our officers and directors
file reports of stock ownership on Forms 3, 4 and 5. These filings may be viewed
and downloaded from the SEC's internet website (http://www.sec.gov) at the EDGAR
location. Also, we will provide copies of these documents and any exhibits to
them, without charge to prospective investors upon request addressed to FTS
Group, Inc., 1049C Oxford Valley Rd., Levittown, PA, 19057. We intend to send
annual reports containing audited financial to the shareholders.
CHANGES IN AND DISAGREMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None of our principal independent accountants have resigned, declined to stand
for re-election or been dismissed in the last two years.