As Filed with the Securities and Exchange Commission on December 12, 2006
Registration No. 333-133749
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 4 TO THE
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
FTS Group, Inc.
(Name of small business issuer in its charter)
Nevada 2253 84-1416864
(State or jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or or Classification Code Number) Identification Number)
organization)
7610 West Hillsborough Ave., Tampa, Florida 33615
Telephone: (813) 868-3600
(Address and telephone number of principal executive offices)
7610 West Hillsborough Ave., Tampa, Florida 33615
Telephone: (813) 868-3600
(Address of principal place of business or intended principal place of business)
Scott Gallagher
Chief Executive Officer
FTS Group, Inc.
7610 West Hillsborough Ave., Tampa, Florida 33615
Telephone: (813) 868-3600
(Name, address and telephone number of agent for service)
COPY TO:
Amy M.Trombly, Esq.
1320 Centre Street, Suite 202
Newton, MA 02459
phone (617) 243-0060
fax (617) 243-0066
Approximate date of proposed sale to the public: As soon as practicable after
this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. |X|
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434, check
the following box. |_|
Proposed maximum Proposed maximum
Title of each class of Amount to be offering price Aggregate Amount of
securities to be registered registered (1) per security (2) offering price registration fee
- --------------------------- -------------- ---------------- -------------- ----------------
Common stock par value
$0.001 per share 212,848,288 $0.07 $14,899,380.16 $ 1,594.23
- --------------------------- -------------- ---------------- -------------- ----------------
<FN>
(1) Pursuant to Rule 416(a) of the Securities Act of 1933, as amended (the
"Act"), this registration statement shall be deemed to cover additional
securities that may be offered or issued to prevent dilution resulting from
stock splits, stock dividends or similar transactions.
(2) The price of $0.07 per share, which was the average of the high and low
prices of the Registrant's common stock, as reported on the Over-The-Counter
Bulletin Board on April 21, 2006 is set forth solely for purposes of calculating
the registration fee pursuant to Rule 457(c) of the Securities Act of 1933, as
amended.
(3) Of the shares being registered, 92,931,100 are being registered for
potential conversions related to the outstanding note. The conversion price of
the note is $0.04 or eighty-five percent (85%) of the weighted average volume
price of the Common Stock using the AQR function as reported by Bloomberg, L.P.
for the Principal Market ("VWAP") for the five (5) trading days preceding such
Repayment Date and 84,396,684 shares are being registered underlying outstanding
warrants priced at $0.0239, $0.02868 and $0.04.
1
Pursuant to Rule 416(a) of the Securities Act of 1933, as amended (the "Act"),
this registration statement shall be deemed to cover additional securities that
may be offered or issued to prevent dilution resulting from stock splits, stock
dividends or similar transactions.
The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
The information contained in this prospectus is not complete and may be changed.
We may not sell these securities until the registration statement filed with the
Securities and Exchange Commission is declared effective. This prospectus is not
an offer to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
PROSPECTUS
FTS GROUP, INC.
OFFERING UP TO 212,848,288 SHARES
OF COMMON STOCK
This prospectus relates to the resale of up to 212,848,288 shares of our common
stock by selling shareholders. We are not selling any securities in this
offering and therefore will not receive any proceeds from this offering. We may,
however, receive proceeds from the exercise of warrants. 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 December 8, 2006, the last reported sale price for
our common stock on the OTCBB was $0.05 per share.
INVESTING IN OUR COMMON STOCK INVOLVES RISKS.
SEE "RISK FACTORS" BEGINNING ON PAGE 4
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.
2
Subject to Completion, The date of this prospectus is December 12, 2006.
TABLE OF CONTENTS
PROSPECTUS SUMMARY 3
RISK FACTORS 4
USE OF PROCEEDS 8
DETERMINATION OF OFFERING PRICE 8
DILUTION 8
SELLING SECURITY HOLDERS 8
PLAN OF DISTRIBUTION 11
LEGAL PROCEEDINGS 12
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS 12
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 13
DESCRIPTION OF SECURITIES 14
INTEREST OF NAMED EXPERTS AND COUNSEL 15
DISCLOSURE OF COMMISSION POSITION OF INDEMNIFICATION FOR SECURITIES
ACT LIABILITIES 15
ORGANIZATION WITHIN LAST FIVE YEARS 16
DESCRIPTION OF BUSINESS 16
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION 19
DESCRIPTION OF PROPERTY 24
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 24
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS 25
EXECUTIVE COMPENSATION 25
FINANCIAL STATEMENTS F-1
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE 27
INDEMNIFICATION OF DIRECTORS AND OFFICERS 27
OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION 27
RECENT SALES OF UNREGISTERED SECURITIES 28
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 in the Florida Gulf Coast region and the Philadelphia
suburban market. 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. We also market and sell products worldwide through our web
sites. On October 5, 2005, we announced a proposal to spin off our subsidiary
FTS Wireless following the acquisition of a profitable company. We acquired See
World in January 2006. We are still evaluating the feasibility, appropriateness
and timing of a potential spin-off.
THE OFFERING
This prospectus relates to the resale of up to 212,848,288 shares of our common
stock by several selling shareholders who obtained shares of our common stock
and warrants in a private placement transaction. This prospectus covers the
resale of our stock by the selling shareholders either in the open market or to
other investors through negotiated transactions.
Common stock offered 212,848,288 shares
Use of proceeds We will not receive any proceeds
from the sale by the selling
stockholder of our common
stock. However, we may receive
proceeds from the exercise of
warrants. 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 7610 West Hillsborough Ave., Tampa, Florida, 33615. Our
telephone number is (813) 868-3600.
OUR CAPITAL STRUCTURE AND SHARES ELIGIBLE FOR FUTURE SALE
Shares of common stock outstanding as of May 1, 2006 (1) 129,208,394
Shares of common stock potentially issuable pursuant to
warrants registered in this prospectus 84,396,864
Shares of common stock potentially issuable pursuant to
convertible notes registered in this prospectus 92,931,100
Total 306,536,538
(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. The warrants
expire in 2010.
- - No exercise of options outstanding to purchase 598,000 shares of our common
stock at exercises prices ranging from $0.81 per share to $2.75 per share. The
options expire on July 27, 2007.
- - No exercise of warrants outstanding to purchase 3,000,000 shares of our common
stock at an exercise price of $0.25 per share. The warrants expire August 7,
2007.
- -No conversion of the 1,000,000 shares of Series B Preferred Stock. The shares
can be converted the option of either the Company or the holder at any time
after January 3, 2008. The 1,000,000 shares of Series B Preferred Stock convert
into 25,000,000 shares of common stock.
3
RISK FACTORS
An investment in our common stock involves a high degree of risk. You should
carefully consider the following risk factors 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.
WE HAD A LOSS FOR THE YEAR ENDED DECEMBER 31, 2005 THERE IS A RISK WE MAY NEVER
BECOME PROFITABLE.
We had a net loss of $2,328,353 for the year ended December 31, 2004 and a net
loss of $1,997,236 for the year ended December 31, 2005. Our future operations
may not be profitable if we are unable to develop and expand our wireless
business and our Internet operations. Revenues and profits, if any, will depend
upon various factors, including whether we will be able to receive funding to
advertise our products or find additional businesses to operate and/or acquire.
We may not achieve our business objectives and the failure to achieve such goals
would have an adverse impact on us.
THERE IS SUBSTANTIAL DOUBT ABOUT OUR ABILITY TO CONTINUE AS A GOING CONCERN DUE
TO RECURRING LOSSES AND WORKING CAPITAL SHORTAGES, WHICH MEANS THAT WE MAY NOT
BE ABLE TO CONTINUE OPERATIONS UNLESS WE OBTAIN ADDITIONAL FUNDING.
Our audited financial statements for the fiscal year ended December 31, 2005,
reflect a net loss of $1,997,236 and stockholders' deficit of ($7,124) as of
December 31, 2005. These conditions raise substantial doubt about our ability to
continue as a going concern if sufficient additional funding is not acquired or
alternative sources of capital are not developed to meet our working capital
needs. If we can not obtain additional funding as needed, our business may fail.
4
WE MAY, IN THE FUTURE, ISSUE ADDITIONAL SHARES OF OUR COMMON STOCK WHICH WOULD
REDUCE INVESTORS PERCENT OF OWNERSHIP AND MAY DILUTE OUR SHARE VALUE.
Our articles of incorporation authorize the issuance of 855,000,000 shares of
common stock. As of April 28, 2006 we have 114,589,131 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 or
outstanding and 4,850,000 undesignated preferred shares 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. We may value any common
stock issued in the future on an arbitrary basis. The issuance of common stock
for future services or acquisitions or other corporate actions will have the
effect of diluting the value of the shares held by our investors, and might have
an adverse effect on any trading market for our common stock.
WE ONLY RECENTLY ACQUIRED OUR OPERATING UNITS AND HAVE BEEN SELLING WIRELESS
COMMUNICATIONS AND SATELLITE TELEVISION 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 acquire products and technologies that will attract customers without
which we cannot operate profitably. As of the period ending June 30, 2006 our
wholly owned subsidiary FTS Wireless generated approximately 28.7% of total
revenue. The remaining 71.3% came from our wholly owned subsidiary See World
Satellites, Inc. acquired on January 3rd, 2006.
OUR OPERATING RESULTS HAVE FLUCTUATED SIGNIFICANTLY IN THE PAST AND WE BELIEVE
THEY WILL FLUCTUATE SIGNIFICANTLY FOR THE FORESEEABLE FUTURE. INVESTORS MAY
PREFER STABLE AND PREDICTABLE 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.
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 financial
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.
5
TO BECOME PROFITABLE AND GROW, WE MUST SUCCESSFULLY INTEGRATE NEW BUSINESSES.
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
US, 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.
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. During the past six months our share price has moved
between $0.04 and $0.07, and the average daily trading volume has varied between
1,500 shares per day and 5,589,500 shares per day. 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 an active
trading market for our common stock may not 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 Securities and Exchange Commission 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: Deliver a
standardized risk disclosure document prepared by the SEC; Provide 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.
6
WE DEPEND IN THIRD PARTY VENDORS FOR 100% OF OUR BUSINESS AS WE DO NOT OWN ANY
WIRELESS NETWORKS OR MANUFACTURING CAPABILITIES. IF WE ARE NOT ABLE TO SECURE
COST-EFFECTIVE PRODUCTS WE MAY NOT BE ABLE TO REMAIN PROFITABLE OR SUSTAIN OUR
REVENUES AND MAY LOSE MONEY.
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 profitable.
WE EARN REVENUE BASED ON AGREEMENTS WITH CELLULAR AND SATELLITE SERVICE
PROVIDERS AND, IF THE CONTRACTS ARE CANCELED WE WOULD LOSE 100% OF THE REVENUE
GENERATED FROM THESE ACTIVITIES.
We earn revenues by providing cellular and satellite activations for major
wireless carriers such as Metro PCS, Cingular, Sprint/Nextel, and GlobalStar.
These agreements are partly based on geography and we signed contracts to earn
revenues from activations in 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 more 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.
THE TELECOMMUNICATIONS INDUSTRY 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.
7
WE SELL PRODUCTS THAT RELY ON THIRD PARTY NETWORKS TO OPERATE; IF A NETWORK
DISRUPTION OCCURS WE WOULD NO LONGER BE ABLE TO SELL THESE PRODUCTS AND WOULD
LOSE 100% OF THE RELATED REVENUE GENERATED FROM THE SALE OF WIRELESS HANDSETS
WHILE THE NETWORK WAS DOWN.
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 Cingular 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 212,848,288 shares of common stock covered by this prospectus are to be sold
by certain selling shareholders 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 may receive proceeds from the exercise of warrants. We can not
predict when, or if, we will receive proceeds from the exercise of the warrants.
It is possible the warrants will expire and will never be exercised. The
proceeds from our exercise of warrants, if any, 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. If all of the warrants from this offering
are exercised, we will receive a total of $1,950,396.20. $1,332,632.60 if all of
the Class A Warrants are exercised, $555,263.65 if all of the Class B Warrants
are exercised and $62,500 if all of the warrants issued to Olympus Securities
are exercised.
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, broker transactions or a combination of such methods at market
prices prevailing at the time of the sale or at negotiated prices.
SELLING SECURITY HOLDERS
Based upon information available to us as of April 21, 2006, the following table
sets forth the name of the selling stockholders, the number of shares owned, the
number of shares registered by this prospectus and the number of outstanding
shares that the selling stockholders 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 stockholders. The
selling stockholders 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.
8
Selling Stockholder Number of shares Number of Shares that may be Number of Shares
beneficially owned offered pursuant to Beneficially Owned
before offering this prospectus After Offering (1)
Alpha Capital Aktiengesellschaft (2) 54,119,663 54,119,663 0
Pradafant 7
9490 Furstentums
Vaduz, Lichtenstein
Bristol Investment Fund, Ltd. (3) 30,220,792 30,220,792 0
Caledonian House, Jennett Street
George Town, Grand Cayman
Cayman Islands
Whalehaven Capital Fund Limited (4) 45,331,100 45,331,100 0
3rd Floor, 14 Par-Laville Road
Hamilton, Bermuda HM08
Ellis International Ltd. (5) 27,059,825 27,059,825 0
53rd Street Urbanizacion Obarrio
Swiss Tower, 16th Floor, Panama
Republic of Panama
Omega Capital Small Cap Fund (6) 13,529,938 13,529,938 0
1403 44th Street, Suite 214
Brooklyn, NY 11219
CMS Capital (7) 11,332,825 11,332,825 0
9612 Ventura Blvd., Suite 108
Panorama City, CA 91402
Iroquois Master Fund (8) 22,665,552 22,665,552 0
641 Lexington Avenue, 26th Floor
New York, NY 10022
Asher Brand (9) 2,029,531 2,029,531 0
30 Olympia Lane
Monsey, NY 10952
Momona Capital Corp. (10) 4,059,062 4,059,062 0
3 Martha Road
Monsey, NY 10952
Olympus Securities (11) 2,500,000 2,500,000 0
170 Changebridge Road, Suite B-1
Montville, NJ 07045
<FN>
(1) Assumes all shares are sold pursuant to this Prospectus.
(2) Alpha Capital Aktiengesellschaft owns 9,866,800 shares of common stock,
25,287,350 shares that may issue upon conversion of a convertible note,
12,643,675 shares upon exercise of class A warrants, and 6,321,838 shares upon
exercise of class B warrants. The convertible note is convertible at a fixed
price of $0.04 subject to adjustment. The exercise price of the class A warrants
is $0.02868. The class A warrants shall be exercisable until the date that this
registration statement has been effective for the unrestricted public resale of
the warrant shares for 4 years. The exercise price of the class B warrants is
$0.0239. The class B warrants are exercisable until the later of four months
after the actual effective date of this registration statement, or ninety days
after the actual effective date of a further registration statement. Konrad
Ackerman and Rainer Posch, as directors, have voting and investment control over
the securities held by Alpha Capital Aktiengesellschaft. Mr. Ackerman and Mr.
Posch disclaim beneficial ownership of these securities.
(3) Bristol Investment Fund, Ltd. owns 8,094,287 shares of common stock,
12,643,700 shares that may issue upon conversion of a convertible note,
6,321,850 shares upon exercise of class A warrants, and 3,160,925 shares upon
exercise of class B warrants. The convertible note is convertible at a fixed
price of $0.04 subject to adjustment. The exercise price of the class A warrants
is $0.02868. The class A warrants shall be exercisable until the date that this
registration statement has been effective for the unrestricted public resale of
the warrant shares for 4 years. The exercise price of the class B warrants is
$0.0239. The class B warrants are exercisable until the later of four months
after the actual effective date of this registration statement, or ninety days
after the actual effective date of a further registration statement. Bristol
Capital Advisors, LLC is the investment manager to Bristol Investment Fund, Ltd.
Paul Kessler is the manager of Bristol Advisors, LLC, and as such has voting and
investment control over the securities held by Bristol Investment Fund, Ltd. Mr.
Kessler disclaims beneficial ownership of these securities. Under the
subscription agreement dated December 25, 2005, the conversion of the note and
exercise of the warrants limits the number of shares that can be beneficially
owned by Bristol Investment Fund, Ltd. to 4.9%.
(4) Whalehaven Capital Fund, Limited owns 12,141,475 shares of common stock,
18,965,500 shares that may issue upon conversion of a convertible note,
9,482,750 shares upon exercise of class A warrants, and 4,741,375 shares upon
exercise of class B warrants. The convertible note is convertible at a fixed
price of $0.04 subject to adjustment. The exercise price of the class A warrants
is $0.02868. The class A warrants shall be exercisable until the date that this
registration statement has been effective for the unrestricted public resale of
the warrant shares for 4 years. The exercise price of the class B warrants is
$0.0239. The class B warrants are exercisable until the later of four months
after the actual effective date of this registration statement, or ninety days
after the actual effective date of a further registration statement. Arthur
Jones, Jennifer Kelly, and Derek Wood, as directors, have voting and investment
control over the securities held by Whalehaven Capital Fund. Mr. Jones, Ms.
Kelly, and Mr. Wood disclaim beneficial ownership of these securities. Under the
subscription agreement dated December 25, 2005, the conversion of the note and
exercise of the warrants limits the number of shares that can be beneficially
owned by Whalehaven Capital Fund, Ltd. to 4.9%.
9
(5) Ellis International Ltd. owns 4,933,400 shares of common stock, 12,643,650
shares that may issue upon conversion of a convertible note, 6,321,850 shares
upon exercise of class A warrants, and 3,160,925 shares upon exercise of class B
warrants. The convertible note is convertible at a fixed price of $0.04 subject
to adjustment. The exercise price of the class A warrants is $0.02868. The class
A warrants shall be exercisable until the date that this registration statement
has been effective for the unrestricted public resale of the warrant shares for
4 years. The exercise price of the class B warrants is $0.0239. The class B
warrants are exercisable until the later of four months after the actual
effective date of this registration statement, or ninety days after the actual
effective date of a further registration statement. Wilhelm Unger, as director
of Ellis International Ltd., has voting and investment control over the
securities held by Ellis International Ltd. Mr. Unger disclaims beneficial
ownership of these securities. Under the subscription agreement dated December
25, 2005, the conversion of the note and exercise of the warrants limits the
number of shares that can be beneficially owned by Ellis International Ltd to
4.9%.
(6) Omega Capital Small Cap Fund owns 2,466,700 shares of common stock,
6,321,850 shares that may issue upon conversion of a convertible note, 3,160,925
shares upon exercise of class A warrants, and 1,580,463 shares upon exercise of
class B warrants. The convertible note is convertible at a fixed price of $0.04
subject to adjustment. The exercise price of the class A warrants is $0.02868.
The class A warrants shall be exercisable until the date that this registration
statement has been effective for the unrestricted public resale of the warrant
shares for 4 years. The exercise price of the class B warrants is $0.0239. The
class B warrants are exercisable until the later of four months after the actual
effective date of this registration statement, or ninety days after the actual
effective date of a further registration statement. Herman Segal has voting and
investment control over the securities held by Omega Capital Small Cap Fund. Mr.
Segal disclaims beneficial ownership of these securities. Under the subscription
agreement dated December 25, 2005, the conversion of the note and exercise of
the warrants limits the number of shares that can be beneficially owned by Omega
Capital Small Cap Fund to 4.9%.
(7) CMS Capital owns 3,035,375 shares of common stock, 4,741,400 shares that may
issue upon conversion of a convertible note, 2,370,700 shares upon exercise of
class A warrants, and 1,185,350 shares upon exercise of class B warrants. The
convertible note is convertible at a fixed price of $0.04 subject to adjustment.
The exercise price of the class A warrants is $0.02868. The class A warrants
shall be exercisable until the date that this registration statement has been
effective for the unrestricted public resale of the warrant shares for 4 years.
The exercise price of the class B warrants is $0.0239. The class B warrants are
exercisable until the later of four months after the actual effective date of
this registration statement, or ninety days after the actual effective date of a
further registration statement. Menachem Lipskier, as manager, has voting and
investment control over the securities held by CMS Capital. Mr. Lipskier
disclaims beneficial ownership of these securities. Under the subscription
agreement dated December 25, 2005, the conversion of the note and exercise of
the warrants limits the number of shares that can be beneficially owned by CMS
Capital to 4.9%.
(8) Iroquois Master Fund owns 6,070,739 shares of common stock, 9,482,750 shares
that may issue upon conversion of a convertible note, 4,741,375 shares upon
exercise of class A warrants, and 2,370,688 shares upon exercise of class B
warrants. The convertible note is convertible at a fixed price of $0.04 subject
to adjustment. The exercise price of the class A warrants is $0.02868. The class
A warrants shall be exercisable until the date that this registration statement
has been effective for the unrestricted public resale of the warrant shares for
4 years. The exercise price of the class B warrants is $0.0239. The class B
warrants are exercisable until the later of four months after the actual
effective date of this registration statement, or ninety days after the actual
effective date of a further registration statement. Joshua Silverman has voting
and investment control over the shares held by Iroquois Master Fund Ltd. Mr.
Silverman disclaims beneficial ownership of these shares. Under the subscription
agreement dated December 25, 2005, the conversion of the note and exercise of
the warrants limits the number of shares that can be beneficially owned by
Iroquois Master Fund to 4.9%.
(9) Mr. Asher Brand owns 370,006 shares of common stock, 948,300 shares that may
issue upon conversion of a convertible note, 474,150 shares upon exercise of
class A warrants, and 237,075 shares upon exercise of class B warrants. The
convertible note is convertible at a fixed price of $0.04 subject to adjustment.
The exercise price of the class A warrants is $0.02868. The class A warrants
shall be exercisable until the date that this registration statement has been
effective for the unrestricted public resale of the warrant shares for 4 years.
The exercise price of the class B warrants is $0.0239. The class B warrants are
exercisable until the later of four months after the actual effective date of
this registration statement, or ninety days after the actual effective date of a
further registration statement. Mr. Brand has sole voting and dispositive power
of these shares. Under the subscription agreement dated December 25, 2005, the
conversion of the note and exercise of the warrants limits the number of shares
that can be beneficially owned by Mr. Asher Brand to 4.9%.
(10) Momona Capital Corp. owns 740,012 shares of common stock, 1,896,600 shares
that may issue upon conversion of a convertible note, 948,300 shares upon
exercise of class A warrants, and 474,150 shares upon exercise of class B
warrants. The convertible note is convertible at a fixed price of $0.04 subject
to adjustment. The exercise price of the class A warrants is $0.02868. The class
A warrants shall be exercisable until the date that this registration statement
has been effective for the unrestricted public resale of the warrant shares for
4 years. The exercise price of the class B warrants is $0.0239. The class B
warrants are exercisable until the later of four months after the actual
effective date of this registration statement, or ninety days after the actual
effective date of a further registration statement. Arie Rabinowitz, as manager,
has voting and investment control over the securities held by Momona Capital
Corporation. Under the subscription agreement dated December 25, 2005, the
conversion of the note and exercise of the warrants limits the number of shares
that can be beneficially owned by Momona Capital Corp. to 4.9%.
(11) Olympus Securities owns 2,500,000 shares of common stock upon exercise of
warrants. The warrants shall be exercisable until the close of business on
December 31, 2006. The exercise price of the warrants is $0.025. Olympus
Securities is a broker dealer and an underwriter. James Carrazza has voting and
investment control over the securities held by Olympus Securities. Mr. Carrazza
disclaims beneficial ownership of these securities. The shares were acquired as
a finders fee to a financing transaction. Olympus Securities received the shares
in the ordinary course of business. At the time Olympus received the securities
it had no agreements or understandings, directly or indirectly, with any person
to distribute them.
10
PLAN OF DISTRIBUTION
The selling stockholders will act independently of us in making decisions with
respect to the timing, manner and size of each sale. The selling stockholders
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 stockholders 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 stockholders and/or the purchasers of the shares
for whom such broker-dealers may act as agent or to whom the selling
stockholders may sell as principal, or both, which compensation as to a
particular broker-dealer might be in excess of customary commissions.
The selling shareholders, Olympus Securities and any broker-dealers who act in
connection with the sale of their 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 stockholders that they 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 stockholders that they must affect 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.
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, certain of the selling stockholders would be able to sell their
shares only pursuant to the limitations of Rule 144 promulgated under the
Securities Act.
11
LEGAL PROCEEDINGS
We are not aware of any litigation or potential litigation that could have a
material impact on our business.
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The following individuals presently serve as officers and directors of the
Company.
Name Age Position
- ------------------ --- --------
Scott Gallagher 39 Chairman of the Board of Directors,
Chief Executive Officer and President
David R. Rasmussen 39 Director, Chief Operating Officer
All directors hold office until the next annual meeting of stockholders and
until their successors are elected. Officers are elected to serve, subject to
the discretion of the Board of Directors, until their successors are appointed.
SCOTT GALLAGHER. Mr. Gallagher has been Chairman of the Board of Directors and
our Chief Executive Office since January of 2002. Prior to joining us, Mr.
Gallagher was the founder and President of About-Face Communications, LLC, a
privately-held business consulting firm located in Yardley, Pennsylvania. Prior
to founding About-Face Communications, LLC, Mr. Gallagher was the Chief
Investment Officer and a general partner with the Avalon Investment Fund, a
private hedge fund based in New York City and Philadelphia.
DAVID R. RASMUSSEN. Mr. Rasmussen has served on our board of directors since
February 10, 2002. On February 1, 2006, Mr. Rasmussen became our Chief Operation
Officer and the Chief Executive Officer of our wholly-owned subsidiary, See
World Satellites, Inc. Prior to joining us, Mr. Rasmussen was employed with
ERC, Inc., a subsidiary of General Electric as an IT project Manager. In that
position, he was charged with providing IT solutions that enable business to
drive core processes and grow profitable relationships. Mr. Rasmussen received a
Bachelor's degree in Computer Technology from Rockhurst University in Kansas
City Missouri. He was in the United Sates Air Force and Reserves for eight years
as a communications specialist.
12
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 April 28, 2006 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 2005 fiscal year and (iv) all of our
directors and current executive officers as a group:
The shareholders listed below have sole voting and investment power. The address
of each of the beneficial owners is 7610 West Hillsborough Ave. Tampa, Fl.
33615, unless otherwise indicated.
AMOUNT AND
NATURE OF
BENEFICIAL PERCENTAGE
NAME AND ADDRESS OF BENEFICIAL OWNER(1) OWNERSHIP OF CLASS(2)
Scott Gallagher (3) 11,581,451 10.1%
David R. Rasmussen (4) 1,637,500 1.4%
Alpha Capital Aktiengesellschaft (5) 4,850,866 9.9%
Pradafant 7, Furstentums 9490
Vaduz, Liechtenstein
All directors and current executive
officers as a group (5 persons) 13,218,951 11.5%
(1) The address of all individual directors and executive officers is c/o FTS
Group, Inc., 7610 West Hillsborough Ave., Tampa, Florida 33615.
(2) The number of shares of common stock issued and outstanding as of April 28,
2006 was 114,589,131 shares. The calculation of percentage ownership for each
listed beneficial owner is based upon the number of shares of common stock
issued and outstanding as of April 28, 2006, plus shares of common stock subject
to options and warrants held by such person on April 28, 2006 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) Scott Gallagher is Chairman of the Board of Directors, Chief Executive
Officer and President of FTS Group, Inc. He directly owns all of his shares, and
as such has voting and investment power over them.
(4) David R. Rasmussen is Chief Operating Officer of FTS Group, Inc. he directly
owns all of his shares, and as such has voting and investment power over them.
(5) Based on a Schedule 13G filed by Alpha Capital Aktiengesellschaft on
February 7, 2006. Alpha Capital Aktiengesellschaft owns 9,866,800 shares of
common stock, 25,287,350 shares that may issue upon conversion of a convertible
note, 12,643,675 shares upon exercise of class A warrants, and 6,321,838 shares
upon exercise of class B warrants. The number of shares listed in the table
above represents the maximum amount of shares that Alpha Capital
Aktiengesellschaft can beneficially control under a contractually stipulated
9.9% ownership restriction. The full exercise of Alpha Capital's warrants would
cause Alpha Capital to exceed this restriction. Konrad Ackerman and Rainer
Posch, as directors, have voting and investment control over the securities held
by Alpha Capital Aktiengesellschaft. Mr. Ackerman and Mr. Posch disclaim
beneficial ownership of these securities.
13
DESCRIPTION OF SECURITIES
AUTHORIZED CAPITAL
Our total number of our Authorized shares of common stock is 855,000,000 with a
par value of $0.001 per share. Additionally, we are authorized to issue
5,000,000 shares of Preferred Stock. Of this 5,000,000, we have authorized up to
150,000 shares of our 10% Convertible preferred stock, Series A, $0.01 par value
and 1,000,000 shares as Series B Convertible Preferred Stock. As of April 28,
2006, we had no Series A shares issued and outstanding, 1,000,000 shares of
Series B stock outstanding and 3,850,000 undesignated shares of preferred stock,
par value $0.01 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 therefore, 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.
14
PREFERRED STOCK
Our Articles of Incorporation, as amended, 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.
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.
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.
In April 2006, a total of 1,000,000 shares were designated Series B Preferred
Stock and all 1,000,000 shares are outstanding. Upon liquidation (voluntary or
otherwise), dissolution or winding up of the Company, holders of Series B
Convertible Preferred Stock will receive their prorate share of the total value
of the assets and funds of the Company to be distributed, assuming the
conversion of Series B Convertible Preferred Stock to Common Stock. The holders
of shares of Series B Convertible Preferred Stock shall not be entitled to
receive dividends and shall have no voting rights. After June 1, 2006, the
shares of Series B Convertible Preferred Stock shall be redeemable at $2.00 per
share solely at the Company's option.
Any shares of Series B Convertible Preferred Stock may, at any time after
January 3, 2008, at the option of the holder or the Corporation, be converted
into fully paid and nonassessable shares of Common Stock. The number of shares
of Common Stock to which a holder of Series B Convertible Preferred Stock shall
be entitled upon a conversion shall be the product obtained by multiplying the
number the number of shares of Series B Convertible Preferred Stock being
converted by 25.
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 Group, Inc. 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.
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.
15
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 diversified wireless business. FTS Wireless Inc., a wholly owned
subsidiary, was organized as a Florida corporation in February 2003 to acquire
and develop a chain of retail wireless locations in the Gulf Coast market of
Florida. 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. In January 2006, we acquired
Pennsylvania based See World Satellites, Inc., a regional service provider and
retail distributor for Dish Networks, Inc., as a wholly owned subsidiary.
Based on the 2005 proforma results of See World Satellites, Inc. and FTS
Wireless, Inc. reported in our previous SEC filings reflecting top line sales of
$6,349,407, we expect FTS to generate profitable 2006 sales in the range of $6.3
to $7.5 Million. In addition were exploring several cross marketing and
expansion opportunities between our two wholly owned subsidiaries designed at
increasing sales and improving operating efficiencies of both Companies for 2006
and beyond.
BUSINESS
Our goal is to develop, invest in and acquire cash-flow positive businesses and
viable business projects, primarily in the Wireless, Internet and Technology
Industries for the benefit of our Company and our stockholders. Since changing
our business model in 2002 from a pure apparel Company we have purchased a
business with significant cash-flow relative to our size in See World
Satellites, Inc. Additionally we have developed several retail wireless
locations in the Gulf Coast market of Florida for our wholly owned subsidiary
FTS Wireless, IncWe are continuously evaluating attractive investment
opportunities that have the potential to benefit our Company and our
stockholders. Through our wholly-owned subsidiaries See World Satellites, Inc.
and FTS Wireless, Inc., we are creating a diversified wireless distribution
business. Our subsidiary FTS Wireless, Inc. distributes wireless communications
products such as cell phones, PDAs and related communication devices and
accessories through retail locations to customers in the Gulf Coast region of
Florida. Our subsidiary See World Satellites, Inc. is an RSP (Regional Service
Provider) and retail distributor of satellite television systems and services
for DISH Networks. On the RSP side of our business we install satellite
television systems sold by DISH networks and are paid a commission for each
installation completed. On the retail side of our business we sell and install
satellite systems for DISH Networks through our retail location in Indiana, Pa.
We operate our business as a "Bricks and Clicks" model. On the "Bricks" side of
our business through our subsidiaries FTS Wireless, Inc. we operate a chain of
nine retail wireless locations in the Gulf Coast market of Florida. We derive
our revenue primarily from the "Bricks" side of our business model through the
sale of wireless handsets and accessories. We distribute wireless phones and
related products and rate plans from some of the nation's largest wireless
carriers including, Cingular and Sprint/Nextel, in the Gulf Coast market of
Florida. We can also market Cingular and Sprint products in selected markets
around the country. In addition we sell cellular phones and activate rate plans
for Dallas-based Metro PCS in the Tampa/St. Petersburg market. Since launching
into the Tampa market in October of 2005, Metro PCS has become one of the
leading local wireless carriers in the Tampa market. We expect Metro PCS to
continue to capture additional market share when it launches its network into
the Orlando, Florida market sometime in Late 2006 or early 2007. Metro PCS
wireless handsets are currently the number one product sold through our retail
stores. We are not paid any commissions from Metro PCS and make our profit on
the sale of cellular phones and related accessories. Metro PCS is a leading
regional wireless carrier offering unlimited rate plans and unlimited text
messaging plans from $35 dollars a month to customers without the need of a
credit check or signing of an annual contract. Metro customers pay their
wireless bill at any Metro PCS approved location for a service charge. As of
March 1, 2006 six of our nine retail locations were approved to sell Metro PCS
products and services. We also offer our customer wireless handsets and
accessories for some of the national MVNO's (Mobile Virtual Network Operators)
such as AMP'D Mobile, Virgin Mobile, and Disney Mobile. The MVNO products do not
constitute a significant part of our revenue mix and generate less then 3% of
total sales. Through our wholly owned subsidiary See World satellites, Inc. we
operate a leading RSP (Regional Service Provider) for DISH Networks. The
business is based in Indiana, Pa. And provides installations and activation
fulfillment business for DISH. We operate a fleet of trucks that cover the
Pittsburgh market or generally operate within a 2-hour driving radius from our
offices in Indiana, Pa. We acquire the business on January 3, 2006. On the
"Clicks" side of our business model we own and operate a web site that allows
customers to create custom ring tones utilizing a software download from the
site. To date we have not generated any revenue from the site
www.CellChannel.com. Currently we drive traffic to the site and promote customer
loyalty by offering free access to our retail customers after they make an in
store wireless handset purchase. Using our site allows our customers to create
an unlimited numbers of custom ringtones versus paying $1 to 3 per ring tone
from the carriers We've created an opt-in e-mail list by offering free access to
CellChannel.com allowing us to market new wireless products and services to new
and existing customers without incurring additional cost. The site also helps us
promote customer loyalty by providing extra value for our customers. In the
future we plan to expand the site with new cellular and wireless products such
as cell phones, airtime cards, games and accessories and change the ring tone
download to a pay model.
We constantly re-evaluate our product portfolio to stay current with industry
trends and meet the needs of our customers. We also continuously evaluate how
new technologies such as Wi-Fi and Voice over Internet, or VoIP, will affect our
business. We believe these new communication technologies will provide us and
distributors like us with new opportunities as the technologies become more
widely adopted and next generation products and services are developed and
increase in demand.
THE MARKET FOR OUR PRODUCTS AND SERVICES
According to the semi-annual wireless industry survey released in June 2005 by
the Cellular Telecommunications & Internet Association, or CTIA, 2005 was the
highest growth year to date, with subscriber growth up 25 million to 194.5
million subscribers. According to a trends study from Deloitte Research, by the
close of 2005, wireless subscriptions should hit nearly 2 billion on a world
wide basis, with cellular mobile dominating the wireless technology field.
Another key industry indicator is Minutes of Usages, or MOU, which rose 30.1%
year over year in 2005. According to the CTIA, wireless penetration rates in the
U.S. were over 65 percent.
16
We believe the increase in wireless subscribers and the substantial increase in
MOU validates our business model and represents a significant opportunity for us
to continue to gain market share and increase our retail and Internet
distribution channels within the markets in which we operate. We have targeted
our marketing and product mix towards certain niche sectors of the industry
particularly the Hispanic market. In the third quarter of 2005, a new wireless
carrier called Metro PCS entered our key market of Tampa/St. Petersburg. As of
March 1, 2006, we had six retail locations that are approved to market and
distribute Metro PCS products and services. Metro PCS offers customers unlimited
service plans starting at $35 per month. The key differentiator is that
customers do not have to enter into an annual contract or go through a credit
check of any kind. The business model has been very well received in our market
and Metro currently has more than 2 million subscribers. Our expansion plans for
2006 include opening additional Metro PCS approved locations as they roll out
new markets during the second half of 2006. According to the CTIA semi annual
wireless industry survey, from June 2004 to June 2005 wireless subscribers grew
by 25.2 million to 65% penetration, the highest growth rate in the U.S. wireless
market to date. FTS does not have subscribers or customer turnover. We sell
handsets to our customers who activate the phone service of the desired carrier
then they become a subscriber of that wireless carrier. A general increase in
wireless subscribers is positive for our business. We do not have the ability to
predict market share of the retail wireless business. However, we are the third
largest distributor for Metro PCS in the Tampa market according to Metro PCS'
published rankings for the specific time frames.
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 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. 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
180-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 for possible
activation charge-backs.
For Cingular Wireless we have an agreement in place with Philadelphia-based
Master Agent Digital Communications Warehouse to market and sell Cingular
products and services in approximately 19 markets around the country. For Sprint
PCS we have an agreement in place with Colorado-based Master Agent Wireless
Channels, Inc. to market and sell Sprint/NEXTEL products and services anywhere
in the United States.
We activate and rent satellite phones through an agreement with GlobalStar.
GlobalStar is one of the largest satellite communications providers in the
world.
PRE-PAID
We have marketing and distribution rights from a number of national pre-paid
wireless carriers known as Mobile Virtual Network Operators, or MVNOs. MVNOs
resell airtime from the national carriers. We resell products and services from
a number of other MVNOs such as Air Voice Wireless, Virgin Mobile, STI-Mobile
and Boost Mobile through agreements with our third parties service providers. We
are generally able to market and sell products and services from the MVNO in any
market the MVNO operates. We derive revenue from the sale of wireless handsets
and the sale of prepaid wireless airtime.
METRO PCS
Metro PCS is a regional wireless carrier based in Dallas, Texas with more than 2
million subscribers in various markets around the U.S. including Miami, Tampa,
Atlanta and Sacramento. We distribute Metro PCS wireless handsets and service
plans at six of our Metro PCS approved retail wireless locations in the Tampa/
St. Petersburg market. Metro PCS owns its own network and is therefore not
considered an MVNO. Since Metro PCS owns its network it has the ability to offer
its customers superior rate plans in its local market. Metro markets unlimited
anytime minute plans, unlimited long distance and unlimited text messaging plans
beginning at $35 per month with no credit check or service contract required.
COMPETITION
We operate in a highly competitive environment. The principal market for our FTS
Wireless retail locations is the Tampa/St. Petersburg market on the gulf coast
of Florida. Our stores are located generally within one hour drive time of
Tampa, Florida. We compete with both large and small retailers as described in
detail below. We believe we can effectively compete in our market by offering
superior customer service to our customers and added value items such as free
custom ring tones at our web site CellChannel.com. We also target the Hispanic
community, the fastest growing sector of the Tampa/St. Petersburg market. Most
of our customer service reps are bi lingual. We also have an agreement with
Tampa Bay Devil Rays shortstop Julio Lugo to serve as our Company spokesman in
Radio and print advertisements in both English and Spanish. In addition we
believe that larger retailer's such as Best Buy or Office Max do not focus
exclusively on wireless products and devices. Due to this belief their service
reps may not be as familiar with new wireless products and devices as FTS
service reps. We further believe that our physical retail locations provide us
with a competitive advantage over our smaller competitors due to the fact that
wireless carriers usually will not allow another wireless retailer to open a
competing location within a 1 to 5 mile radius of our locations.
17
In regards to See World Satellites, Inc. we operate in the Western Pennsylvania
market as an RSP (regional service provider) for DISH networks. We are one of 21
RSP's operating in the US and the only RSP operating in the Western, Pa. market.
We expect to remain the only RSP in our market for the foreseeable future.
Basically as an RSP DISH provides use with satellite system installation
business in our market generated from their advertising programs and the
advertising programs of other mass marketers. Since there are no other RSP's in
our market we do not see any material competition to our RSP related business.
CARRIERS CORPORATE OWNED STORES
We compete against stores owned by service carriers including:
- - Sprint/NEXTEL;
- - Cingular;
- - T-Mobile;
- - Verizon Wireless and
- - Metro PCS.
The carrier-owned corporate stores generally sell only their own wireless
products and services. We believe our product offerings are superior to
corporate stores because we offer customers service from multiple carriers and
provide the best solution for each customer's individual needs. In addition, we
offer wireless content, accessories, Wi-Fi access, Satellite phones and service.
LARGE NATIONAL RETAILERS
We compete against large national retailers including:
- - Radio Shack;
- - Best Buy;
- - Staples; and
- - Office Depot.
These retailers promote wireless-boxed products with limited customer support.
We believe we offer a higher level of customer service and product knowledge to
our customers as compared to large national retailers. We also believe our
customer service is superior because we focus only on wireless products and
services, which are only a part of the business of the above-mentioned
retailers. However, due to scale of purchasing power, number of locations and
advertising budgets, large national retailers can sometimes offer discounts
superior to ours.
LOCAL WIRELESS RETAILERS
We compete with a variety of smaller independent retailers. Our main competitors
are:
- - Beepers N Phones, which operates approximately 25 stores in the state of
Florida and promotes several brands of wireless products.
- - The Mobile Zone, which operates approximately 15 stores in the state of
Florida and promotes several brands of wireless products and services.
- - GCS Wireless which operates approximately 10 stores in Florida and primarily
promotes products and services from only one wireless carrier.
We also compete with a variety of smaller, independent retailers operating less
than three stores. We compete against these retailers by offering a broad
product range and superior customer service.
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, Radio 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 $3,000 and $5,000 per month on advertising depending on the placement of
our ads. During times of increased advertising, we spend approximately $5,000 to
$7,500 or more per month on new product roll-outs and marketing campaigns
including print, Internet and television media advertising. We believe our
advertising campaigns have increased foot traffic in our stores and increased
our overall name recognition.
18
SUPPLIERS
We buy wireless handsets from our Master Agents and other designated
distributors. We purchase all of our Metro PCS handsets from Bright Point, one
of the largest handset distributors in the world. For Sprint/Nextel we purchase
our handsets from our Master agent, Wireless Channels. For Cingular we purchase
our handsets from DCW.
We purchase accessories from various dealers depending on price and product
availability.
We purchase satellite supplies directly from Echostar Satellite, LLC for the
regional service provider side of our business and from All Systems, Inc. a
national master agent for the retail side of our business.
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 and is convertible, at the holder's option, into an
equivalent number of shares of common stock, subject to certain adjustments.
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 Vidyah.com because we believe Vidyah represents an
attractive investment that will increase in value over time. In November 2005,
we acquired a 40% stake in Bucharest, Romania-based mobile game developer Maxim
Software SRL for $5,000 in cash. Maxim creates, develops and markets mobile
games in the Asian and European markets. As part of the agreement, we acquired
exclusive U.S. distribution rights to Maxim's portfolio of mobile games. Maxim
will also develop a proprietary wireless content software product for us to be
implemented on CellChannel.com.
SEASONALITY
The wireless industry typically generates a higher number of subscriber
additions and handset sales in the fourth quarter of each year, as 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.
EMPLOYEES
As of September 30, 2006, we had approximately 53 full time employees. Ten
employees are employed by FTS Wireless, Inc., in connection with our retail
wireless business. Two of our employees are employed by FTS Group, Inc. at the
corporate level, our Chairman and Chief Executive Officer and Interim CFO Scott
Gallagher and our Chief Operating Officer and Director, Dave Rasmussen.
Approximately forty one employees are employed by See World Satellites, Inc. in
connection with our satellite television business.
We expect to hire additional employees over the next twelve months as our
business grows. From time-to-time, we engage the services of outside consultants
to assist in our business, including attorneys, accountants, and marketing and
advertising personnel. We may engage the services of additional individuals in
the future as our business needs dictate and our financial resources permit.
19
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
OVERVIEW
Historically, and through the year ended December 31, 2001, 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, primarily those in the wireless and technology industries. As of March
15, 2006, we operated a total of nine retail locations. Due to continuing losses
from operations, the independent registered public accountant that audited our
financial statements for the year ended December 31, 2005 assessed that there
was substantial doubt about our ability to continue as a going concern.
RESULTS OF OPERATIONS FOR THE YEAR ENDING DECEMBER 31, 2005
Sales revenues for the year ended December 31, 2005 increased $598,449, or
84%, to $1,310,731, as compared to $712,282 for the year ended December 31,
2004. The increase in sales revenues was primarily related to the acquisition
and development of new stores and opening of new retail outlets.
Cost of Goods Sold for the year ended December 31, 2005, increased $588,985 to
$1,110,645, as compared to $521,660 for the year ended December 31, 2004. The
increase in Cost of Goods Sold is primarily related to the overall growth of our
business and increased buying levels of wireless handsets, airtime, devices, and
accessories.
Selling, General and Administrative expense for the year ended December 31, 2005
decreased $424,274 to $1,767,563 as compared to $2,191,837 for the year December
31, 2004. The decrease in Selling, General and Administrative expenses were
primarily related to more efficient operating cost as well as reduced investor
relations and public relations services and reduced cost's incurred in the area
of capital raising.
Interest expense increased to $422,259 for the year ended December 31, 2005
from $212,638 for the year ended December 31, 2004. The increase was due mainly
to the accrual of interest on promissory notes as part of the capital raised
during the year ended December 31, 2005.
We had a net loss of $1,997,236 for the fiscal year ended December 31, 2005, as
compared to net loss of $2,328,353 for the fiscal year ended December 31, 2004.
The decrease in net loss was primarily due to lowered consulting fees,
financing-related expenses, new store openings and increased operating expenses.
As of December 31, 2005, we had an accumulated deficit of $10,305,762.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2005, total current assets increased to $1,323,143 versus
$175,862 as of December 31, 2004. Current assets consisted of $243,079 of
unrestricted cash, $560,000 of restricted of cash, $12,201 of accounts
receivable, $33,180 of inventories and $474,683 of prepaid expenses and current
assets.
As of December 31, 2005, total current liabilities increased to $1,551,531 from
$648,724 as of December 31, 2004. Current liabilities consisted of $468,185 of
accounts payable and accrued expenses, notes payable to related parties of
$80,850, and current portion of convertible debentures of $1,002,496.
We will require additional capital to support strategic acquisitions and our
current expansion plans. We raised funds from institutional investors during
2005 through the sale convertible promissory notes, equity securities and the
issuance of warrants. During 2005 we had an equity line of credit with Dutchess
Private Equities Fund. This facility provides us with access to a maximum of $6
million in financing subject to certain terms and conditions. Additionally, we
raise funds through private placements of our equity that may involve dilution
to our existing shareholders.
Our currently anticipated levels of revenues and cash flow are subject to many
uncertainties. Until we generate cash flow from operations that will be
sufficient to satisfy our cash requirements, we will continue to seek
alternative means for financing our operations and capital expenditures and/or
postpone or eliminate certain investments or expenditures. Potential alternative
means for financing may include accessing our Equity Line of Credit with
Dutchess Private Equities Fund or obtaining additional debt or equity financing.
When needed, additional financing may not be available, or available on
acceptable terms. The inability to obtain additional financing or generate
sufficient cash from operations could require us to reduce or eliminate
expenditures for acquiring or developing new retail locations or marketing our
products, or otherwise curtail or discontinue our operations, which could have a
material adverse effect on our business, financial condition and results of
operations. Furthermore, if we raise funds through the sale of additional equity
securities, the common stock currently outstanding will be diluted.
FINANCINGS
On December 29, 2005, we entered into a transaction in which we agreed to issue
up to $1,896,551 of secured, convertible promissory notes with an original
discount of 21%. We actually raised $1,820,690 in the transaction. The Notes can
convert into shares of our common stock, subject to certain conditions, at a per
share conversion price set forth in the Notes. On December 29, 2005, we received
proceeds of $1,000,000 after the 21% discount but before expenses. On January 4,
2005 we received an additional $440,000 after the 21% discount but before
expenses.
We also agreed to issue warrants to purchase shares of our common stock. We
agreed to issue 100 Class A Warrants for each 100 shares which would be issued
on the closing date assuming the complete conversion of the Notes on the closing
date at the conversion price then in effect. The exercise price of the Class A
Warrant is $0.02868. The Class A Warrants shall be exercisable until the date
that the Registration Statement (as defined in the Subscription Agreement) has
been effective for the unrestricted public resale of the Warrant Shares for 4
years.
We agreed to issue 50 Class B Warrants for each 100 shares which would be issued
on the closing date assuming the complete conversion of the Notes on the closing
date at the conversion price then in effect. The exercise price of the Class B
Warrants is $0.0239. The Class B Warrants are exercisable until the later of
four months after the actual effective date of Registration Statement (as
defined in the Subscription Agreement), or ninety days after the actual
effective date of a Second Registration Statement (as defined in the
Subscription Agreement).
We also agreed to issue 35,520,424 shares of our common stock to be distributed
pro rata among the purchasers of the Notes.
20
SUBSEQUENT EVENTS
On January 3, 2006, we acquired See World Satellites, Inc., a Pennsylvania
corporation. See World has material contracts with EchoStar and All Systems. We
paid $500,000 at the closing of the transaction on January 3, 2006. We agreed to
pay an additional $500,000 into an escrow account to be held until all material
contracts held by See World have been executed, amended or modified to
acknowledge our acquisition of See World and/or to make us a party to each
agreement such that we have full benefit of the agreements.
At the closing, we also issued to See World a two year secured promissory note
in the sum of $3,500,000. The Note does not pay interest. Pursuant to the terms
of the Note, we agreed to pay to See World seven equal cash installments of
$250,000. The initial installment is payable 90 days after closing and the
remaining installments are payable every three months thereafter. We also agreed
to make additional payments of $1,000,000 on January 3, 2007 and $750,000 on
April 3, 2008. The Note is secured against the assets of See World.
As part of the acquisition we issued 1,000,000 shares of our Series B
Convertible Preferred Stock to Richard Miller. Mr. Miller is the former owner of
See World Satellites, Inc. He continues to serve as an employee of the Company.
These shares were worth $1,000,000 when issued.
See World Satellites, Inc. has been profitable for over five years. We believe
this acquisition will provide us with a predictable stream of positive cash flow
for years to come from which we can use to pay debt and further grow our
business over time. The acquisition also allowed us to expand our management
team and operating capabilities due to economies of scale.
21
NEW ACCOUNTING PRONOUNCEMENTS
In December 2004, the FASB issued Statement of Financial Accounting Standards,
or SFAS, No. 123R "Share-Based Payment." SFAS No. 123R establishes standards for
the accounting for transactions in which an entity exchanges its equity
instruments for goods or services. This Statement focuses primarily on
accounting for transactions in which an entity obtains employee services in
share-based payment transactions. SFAS No. 123R requires that the fair value of
such equity instruments be recognized as an expense in the historical financial
statements as services are performed. SFAS 123R, replaces SFAS 123, Accounting
for Stock Based Compensation and Supercedes APB opinion No.25, Accounting for
Stock Issued to Employees. This guidance is effective as of the first interim or
annual reporting period after December 15, 2005 for Small Business Filers. The
adoption of SFAS 123 (R) is not expected to have a material effect on our
financial position or operations.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets, an Amendment of APB Opinion No. 29." The guidance in Accounting
Principles Board, APB, ("APB") Opinion No. 29, "Accounting for Nonmonetary
Transactions," is based on the principle that exchanges of nonmonetary assets
should be measured based on the fair value of the assets exchanged. The guidance
in APB Opinion No. 29, however, included certain exceptions to that principle.
SFAS No. 153 amends APB Opinion No. 29 to eliminate the exception for
nonmonetary exchanges of similar productive assets and replaces it with a
general exception for exchanges of nonmonetary assets that do not have
commercial substance. A nonmonetary exchange has commercial substance if the
future cash flows of the entity are expected to change significantly as a result
of the exchange. The provisions of SFAS No. 153 will be applied prospectively to
nonmonetary asset exchange transactions in fiscal year 2006. The adoption of
SFAS No. 153 is not expected to have a significant effect on our consolidated
financial statements.
In January 2003, the FASB issued Interpretation No. 46 "Consolidation of
Variable Interest Entities", and interpretation of Accounting Research Bulletin
No. 51 "Consolidated Financial Statements." FIN No. 46 prescribes how to
identify variable interest entities and how an enterprise assesses its interests
in a variable interest entity to decide whether to consolidate that entity.
This interpretation requires existing unconsolidated variable interest entities
to be consolidated by their primary beneficiaries if the entities do not
effectively disperse risks among parties involved. FIN 46 was scheduled to be
effective for variable interest entities created after January 31, 2003. On
December 24, 2003, the FASB published FIN No. 46(R), a revision to FIN No. 46.
FIN No. 46(R) clarifies certain provisions of FIN No. 46 and exempts certain
entities from its requirements. For interests in variable interest entities
acquired prior to January 31, 2003, the provisions of FIN No. 46(R) have been
applied on March 31, 2004. We determined the adoption of FIN 46(R) did not have
a material effect on our financial position or results of operations.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
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
We recognize net revenues from wholesale product sales 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 the cost of sales. We also recognize revenue
from the sale and activation of wireless handsets and related accessories.
ACCOUNTS RECEIVABLE
Accounts receivable consist primarily of trade receivables, net of a valuation
allowance for doubtful accounts.
CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, we consider all short-term debt
securities with maturity of three months or less to be cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Maintenance and repairs are charged
to expense when incurred; major renewals and betterment are capitalized. When
property or equipment is sold or retired, the related cost and accumulated
depreciation is removed from the accounts and any gain or loss is included in
the results of operations. Depreciation is calculated using the straight line
method over the estimated useful lives of the respective assets.
22
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 revenues and expenses
during the reporting period. Actual results could vary from those estimates.
GOODWILL AND INTANGIBLE ASSET IMPAIRMENT
We periodically review the carrying amount of property and equipment. We
determine whether current events or circumstances warrant adjustments to
carrying amounts of long lived assets. If an impairment adjustment is deemed
necessary, such loss is measured by the amount that the carrying value of such
assets exceeds their fair market value. Considerable judgment is necessary for
estimating 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.
INVENTORIES
Inventories are stated at the lower of cost (determined on a first in first out
method) or market value.
THREE MONTH PERIOD ENDED SEPTEMBER 30, 2006 AS COMPARED TO THREE MONTHS
ENDED SEPTEMBER 30, 2005 RESULTS OF OPERATIONS
SEGMENT RESULTS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2006
Three Months Ended September 30, 2006
------------------------------------------------------
FTS FTS See
Group Wireless World
Inc. Inc. Satellites Total
------------ ------------ ------------ ------------
External Revenues $ - $ 411,263 $ 1,233,984 $ 1,645,247
Internal Revenues 75,000 75,000
------------ ------------ ------------ ------------
Segment Revenues 75,000 411,263 1,233,984 1,720,247
Cost of Goods Sold - 369,548 161,206 530,754
------------ ------------ ------------ ------------
Gross Profit 75,000 41,715 1,072,778 1,189,493
Selling, General,
and Administrative 142,479 103,752 776,368 1,022,599
------------ ------------ ------------ ------------
EBITDA (67,479) (62,037) 296,410 166,894
Depreciation (5,556) (10,302) (15,000) (30,858)
Amortization (29,573) - - (29,573)
Interest (36,696) - (216) (36,912)
------------ ------------ ------------ ------------
Net Income (Loss) (139,304) (72,339) 281,194 69,551
Intersegment Adjustments (75,000) 75,000 -
------------ ------------ ------------ ------------
$ (214,304) $ (72,339) $ 356,194 $ 69,551
============ ============ ============ ============
Nine Months Ended September 30,2006
------------------------------------------------------
FTS FTS See
Group Wireless World
Inc. Inc. Satellites Total
------------ ------------ ------------ ------------
External Revenues $ - $ 1,348,178 $ 3,564,075 $ 4,912,253
Internal Revenues 225,000 225,000
------------ ------------ ------------ ------------
Segment Revenues 225,000 1,348,178 3,564,075 5,137,253
Cost of Goods Sold - 1,092,078 494,669 1,586,747
------------ ------------ ------------ ------------
Gross Profit 225,000 256,100 3,069,406 3,550,506
Selling, General,
and Administrative 495,308 359,637 2,271,957 3,126,902
------------ ------------ ------------ ------------
EBITDA (270,308) (103,537) 797,449 423,604
Depreciation (16,669) (30,568) (45,000) (92,237)
Amortization (88,718) - - (88,718)
Interest (110,087) - (893) (110,980)
------------ ------------ ------------ ------------
Net Income (Loss) (485,782) (134,105) 751,556 131,669
Intersegment Adjustments (225,000) - 225,000 -
------------ ------------ ------------ ------------
$ (710,782) $ (134,105) $ 976,556 $ 131,669
SALES REVENUE
CONSOLIDATED
For the three months ended September 30, 2006, consolidated sales increased
$1,361,742 or 480%, to $1,645,247, as compared to $283,505 for the three months
ended September 30, 2005. For the nine months ended September 30, 2006
consolidated sales increased to $4,912,254 from $934,096 during the same period
in 2005. The increase in year to date consolidated sales is related to the
inclusion of results of See World Satellites not included in the prior years
results as well as a year to date increase in sales at FTS Wireless of 44%.
FTS WIRELESS
For the three months ended September 30, 2006, FTS Wireless sales increased by
$127,758 to $411,263 when compared to sales of $283,505 for the three months
ended September 30, 2005. For the nine months ended September 30, 2006 FTS
Wireless, revenue increased $414,083 or 44.0% to $1,348,179 compared to revenue
of $934,096 for the nine months ended September 30, 2005. FTS Wireless generated
25.0% of our total sales or $411,263 for the three months ended September 30,
2006, compared to revenue of $283,505 for the three months ended September 30,
2005 for an increase of 45%. Our sales revenue for FTS Wireless is primarily
generated from the sale of wireless handsets, wireless accessories and related
products. The increase in sales revenue at FTS Wireless is related to the
introduction of Metro PCS handsets and rate plans into our core market. During
the three and nine months ended September 30, 2005 Metro PCS did not operate in
the Tampa, Florida market.
SEE WORLD SATELLITES
For the three months ended September 30, 2006, See World generated sales of
$1,233,984. See World generated approximately 75.0% of our consolidated sales
for the three months ended September 30, 2006. For the nine months ended
September 30, 2006 See World generated sales of $3,564,075which accounted for
approximately 73% of our consolidated sales for the period. Our sales revenue
for See World Satellites, Inc. is primarily generated from the sale, service and
installations of DISH Network satellite television systems. Since See World was
acquired in January 2006 we do not have year over year comparisons.
COST OF GOODS SOLD
CONSOLIDATED
For the three months ended September 30, 2006, consolidated cost of goods sold
increased by $313,783 to $530,754, as compared to $216,971 for the three months
ended September 30, 2005. For the nine months ended September 30,2006 cost of
goods sold increase by $974,391 to $1,586,747 as compared to $612,356 for the
nine months ending September 30, 2005.
FTS WIRELESS
For the three months ended September 30, 2006, FTS Wireless reported an increase
in cost of goods sold of $152,577 to $369,548 when compared to cost of goods
sold of $216,971 for the three months ended September 30, 2005.FTS Wireless
reported an increase in cost of goods sold for the nine months ended September
30,2006 of $479,722 to $1,092,078 when compared to $612,356 for the three months
ended September 30, 2005. The increase in cost of goods sold for both periods is
primarily related to increased pricing and purchases of wireless handsets and
related products.
SEE WORLD SATELLITES
For the three months ended September 30, 2006 See World Satellites reported cost
of goods sold of $161,206. For the nine months ended September 30, 2006 See
World reported cost of goods sold of $464,669. Since the business was acquired
in January 2006 we do not have year over year comparisons for cost of goods sold
at See World.
GROSS PROFITS
CONSOLIDATED
For the three months ended September 30, 2006, gross profits increased by
$1,047,959 from $66,534 in 2005 to $1,114,493 in 2006. For the nine months ended
September 30, 2006, gross profits increased by $3,003,767 to $3,325,507 as
compared to $321,740 for the nine months ending September 30, 2005. The increase
in gross profits is attributed to the increase in sales revenue of DISH
satellite systems relating to our wholly-owned subsidiary See World Satellites
not offered during the comparable period and a 45% increase in year over year
sales revenue at our wholly-owned subsidiary FTS Wireless. For the nine months
ended September 30, 2006, gross profits as a percentage of sales increased to
67% in 2006 compared to 34% in 2005.
FTS WIRELESS
For the three months ended September 30, 2006, FTS Wireless' gross profit
decreased by $24,819 to $41,715 when compared to gross profit of $66,534 for the
three months ended September 30, 2005. For the nine months ended September 30,
2006, FTS Wireless' gross profit decreased by $65,640 to $256,101 when compared
to gross profits of $321,740 for the nine months ended September 30, 2005. The
decrease in gross profits is primarily related to reduced margins on sales on
Metro PCS handsets when compared to the higher margin post-pay products.
However, with Metro PCS we do not have any ongoing charge back exposure.
SEE WORLD SATELLITES
For the three months ended September 30, 2006, See World reported gross profits
of $1,072,778. For the three months ended September 30, 2006 we reported gross
profits of $3,069,406. Since See World was acquired in January of 2006, we do
not have year over year comparisons in gross profits for See World
SELLING, GENERAL AND ADMINISTRATIVE
Selling, General and Administrative Expenses for the three months ended
September 30, 2006, increased $762,642 or 311% to $1,008,030 as compared to
$245,388 for the three months ended September 30, 2005. For the nine months
ended September 30, 2006, Selling, General and Administrative Expenses increased
to $3,082,858 or 63% of total sales compared to $1,271,665 for the nine months
ended September 30, 2006. The increase for the three and nine months ended
September 30, 2006 in Selling, General and Administrative expenses was primarily
related to increased operating costs related to our acquisition of See World
Satellites, Inc. on January 3, 2006. The year over year comparisons include
operations of See World Satellites, Inc. not included in the three and nine
months ended September 30, 2005.
OPERATING INCOME
Operating income increased to $106,463 during the three months ended September
30, 2006, compared to an operating loss of ($178,854) for the three months ended
September 30, 2005 for a net improvement of $285,317. Operating income increased
to $242,649 during the nine months ended September 30, 2006, compared to an
operating loss of ($949,925) for the nine months ended September 30, 2005, for a
net improvement of $1,192,574. The year over year comparisons include operations
of See World Satellites, Inc. not included in the three and nine months ended
September 30, 2005.
NET INCOME
Net income increased by $248,896 to $69,551 for the three months ended September
30, 2006 compared to a net loss of ($179,345) during the three months ending
September 30, 2005. The increase in net income was primarily related to an
increase in revenue of $1,233,984 from our new wholly-owned subsidiary See World
Satellites, inc. not included in the prior years results. Net income for the
nine month ended September 30, 2006 increased to $131,669 compared to a net loss
of ($1,140,163) for a net improvement of $1,271,832. The increase in net income
was primarily related to an increase in revenue of $3,564,075 from our
wholly-owned subsidiary See World Satellites, Inc. not included in the prior
years results.
INTEREST EXPENSE
Interest expense increased $36,421 to $36,912 for the three months ended
September 30, 2006, as compared to $491 for the three months ended September 30,
2005. The year over year increase in interest expenses is related to an increase
in interest expenses from a private placement closed on December 29, 2005.
LIQUIDITY AND CAPITAL RESOURCES
Our requirements for capital are to:
o pay down debt,
o fund possible acquisitions, and
o provide working capital and funds to expand our current business.
Our primary source of financing during the three months ended September 30, 2006
includes cash received from the issuance of common stock and cash generated from
operations.
As of September 30, 2006, our Current Assets were $765,096 consisting of $25,356
in cash, $369,876 in inventories, $170,150 of accounts receivables and $199,714
of prepaid expenses and current assets. Current Liabilities were $3,446,428,
consisting of $1,462,431 of convertible debentures, $1,830,895 of notes payable
to related parties, $145,483 in accounts payable and accrued expenses and $7,619
of long term debt-equipment loans.
At September 30, 2006, we had total assets of $6,638,258 consisting of, in
addition to the assets described above, excess of cost over the net assets of
business acquired $5,177,696, property and equipment, net of accumulated
depreciation of $340,604, unamortized discount of convertible debt of $278,535,
unamortized debt issuance costs $59,145 and deposits of $17,182.
23
GOING CONCERN OPINION
We believe that our continued existence is dependent upon our ability to grow
the profits of our satellite television operations and make our retail wireless
operations profitable, and our ability to raise additional capital to reduce
debt. Accordingly, the notes to our un-audited, interim financial statements
express substantial doubt about our ability to continue as a going concern.
FINANCING ACTIVITIES
During the three months ending September 30, 2006, 5,600,000 "A" warrants priced
at $0.045 were exercised for gross proceeds of $252,000. At September 30, 2006,
we had not issued 1,185,350 restricted shares that we owed to one of the
investors.
SUBSIDIARIES
As of September 30, 2006, we had two wholly-owned subsidiaries, FTS Wireless,
Inc. and See World Satellites, Inc.
DESCRIPTION OF PROPERTY
As of September 30, 2006, we have nine leases for our retail stores and our
corporate facilities in Tampa, Florida. Our retail stores are located in the
counties of Hillsborough and Pinellas, generally within 30 miles of Tampa,
Florida. The retail stores vary in size from 500 to 2,000 square feet. Our
principal office is located in approximately 1,500 square feet of the leased
facilities in Tampa, Florida. The minimum aggregate monthly rental commitment
for the retail stores is $9,429. The terms of the leases vary from month to
month to three years with a three-year option. We also have a three year lease
with See World Satellites, Inc. at a rate of $2,500 per month for approximately
5,000 square feet of mixed use space.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During June 2004, we entered into a note agreement with our then Chief Financial
Officer, Linda Ehlen. Ms. Ehlen extended us a loan for $61,200 bearing interest
of 8% per annum and a face amount premium of 20%, or $12,240. The note also
included a stipulation that this related party would receive 307,000 shares of
common stock as an inducement for providing the financing. The proceeds of
$61,200 were allocated $43,200 to notes payable and $18,000 to the value of the
common stock to be issued, based on their relative fair values. The difference
between the amount to be repaid of $73,440 and the $43,200 represents a debt
discount in the amount of $30,240 which was recorded by the company. This amount
was amortized over the life of the loan. For the year ended December 31, 2004,
the Company had amortized $13,829 leaving an unamortized debt discount of
$16,411 at December 31, 2004. Unpaid principal remained at December 31, 2004 in
the amount of $63,440 for a net balance due of $47,029. This loan was paid in
full and the debt discount fully amortized during 2005.
During September 2004, we entered into a note agreement with our Chief Executive
Officer, Scott Gallagher. Mr. Gallagher extended us a loan for $125,000 bearing
interest of 8% per annum and a face amount premium of 20%, or $25,000. The note
also included a stipulation that this related party would receive 625,000 shares
of common stock as an inducement for providing the financing. The proceeds of
$125,000 were allocated $88,235 to notes payable and $36,765 to the value of the
common stock to be issued, based on their relative fair values. The difference
their relative fair values. The difference between the amount to be repaid of
$150,000 and the $88,235 represents a debt discount in the amount of $61,765
which was recorded by the company. This amount was amortized over the life of
the loan. For the year ended December 31, 2004, the Company had amortized
$28,245 leaving an unamortized debt discount of $33,520 at December 31, 2004.
Unpaid principal remained at December 31, 2004 in the amount of $98,242 for a
net balance due of $64,722. This loan was paid in full and the debt discount
fully amortized during 2005. Additional funds of $8,800 were advanced by and
repaid to Scott Gallagher during the course of the year in 2004.
During the quarter ended September 30, 2005, our Chief Executive Officer
advanced additional funds totaling $70,661 to us. During the fourth quarter,
these advances were converted to a note with an interest rate of 20% per annum.
The note must be repaid by August 2007. Mr. Gallagher was issued 1,000,000
shares of restricted stock as inducement for providing this financing.
24
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock has traded over the counter and has been quoted in the OTC
Bulletin Board since March 18, 1999. The stock currently trades under the symbol
"FLIP." The following table sets forth the range of high and low bid quotations
as reported by the National Association of Securities Dealers for the common
stock of the Company for the last two fiscal years. Quotations represent prices
between dealers, do not include retail markups, markdowns or commissions and do
not necessarily represent prices at which actual transactions were effected.
Year Ended ..... High Low
- ---------------- --------- ---------
2004
- ---------
March 31 ....... $ 0.40 $ 0.15
June 30 ........ $ 0.27 $ 0.15
September 30 ... $ 0.17 $ 0.09
December 31 .... $ 0.18 $ 0.09
2005
- ---------
March 31 ....... $ 0.23 $ 0.10
June 30 ........ $ 0.13 $ 0.075
September 30 ... $ 0.095 $ 0.046
December 31 .... $ 0.05 $ 0.021
2006
- ---------
March 31 ....... $ 0.138 $ 0.029
We had approximately 2,557 stock holders as of December 5, 2006.
DIVIDEND POLICY
Holders of common stock are entitled to receive such dividends as may be
declared by the Board of Directors. In July 2004, our Board of Directors
approved a 10% warrant dividend to stockholders of record on August 28, 2004.
The warrant allows stockholders of record to purchase one new share of common
stock at $0.25 for each ten common shares owned. The warrant expires in three
years. No cash dividends on the common stock have been paid or declared by the
Board to date. We do not anticipate any cash dividends being paid out in the
near future.
TRANSFER AGENT
Our transfer agent is Securities Transfer Corporation, located at 2591 Dallas
Parkway Suite 102, Frisco, Texas 75034. Their phone number is (469) 633-0101.
EXECUTIVE COMPENSATION
The following table presents a summary of the compensation paid to our Chief
Executive Officer during the last three fiscal years. No other executive officer
received compensation in excess of $100,000 during 2005. Except as listed below,
there are no bonuses, other annual compensation, restricted stock awards or
stock options/SARs or any other compensation paid to the executive officers.
25
SUMMARY COMPENSATION TABLE
Annual Compensation
----------------------------
Other Annual
Name and Position Year Salary Compensation
- -------------------------- ---- ------ ------------
Scott Gallagher 2005 $100,000(3) $ 50,000
Chairman and CEO 2004 $100,000(2) $ 25,000
2003 $100,000(1) $ 25,000
(1)In 2003, Mr. Gallagher was issued 1,000,000 common shares in lieu of cash.
Mr. Gallagher's contract includes an annual bonus of at least $25,000.
(2)In 2004, Mr. Gallagher was issued 625,000 restricted common shares in lieu of
cash. Mr. Gallagher's annual bonus for 2004 was $25,000.
(3) In 2005 Mr. Gallagher was granted an annual bonus of $50,000. At December
31, 2005 the bonus remained unpaid.
COMPENSATION AGREEMENTS
We have three-year employment agreements with our Chief Executive Officer and
our Chief Operating Officer as follows:
Beginning November 15, 2005, we entered into a new three year employment
agreement with Scott Gallagher, our Chairman and Chief Executive Officer. The
employment agreement has a base annual rate of $200,000. Mr. Gallagher is also
entitled to bonuses based on performance.
On February 1, 2006, we entered into a three year employment agreement with Mr.
David R. Rasmussen whereby Mr. Rasmussen became our Chief Operating Officer and
Chief Executive Officer of our wholly-owned subsidiary, See World Satellites,
Inc. The employment agreement carries a base annual rate of $150,000 plus a
performance based bonus.
We do not currently have any outside directors. In 2005, we paid our directors,
who are also our employees, $2,000 per quarter. In February 2006, we eliminated
board compensation for 2006.
We did not grant stock options in 2004 or 2005. Additionally, no stock options
were exercised by any of the named executive officers in 2004 or 2005.
STOCK OPTION PLAN
We have adopted a Non-Qualified Stock Option and Stock Grant 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.
We have not granted any options from 2001 to the present. As of December 31,
2005 we had options outstanding to purchase a total of 598,000 shares of our
common stock at exercise prices ranging from $0.81 per share to $2.75 per share.
In accordance with SFAS 123R, we reviewed the provisions of the plan and its
related outstanding options to comply with the required fair value analysis
component to SFAS 123R that took effect January 1, 2006. During this analysis we
determined that the 598,000 options previously issued have expired and are no
longer outstanding as of January 1, 2006 per plan provisions.
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.
26
FINANCIAL STATEMENTS
FTS GROUP, INC. AND SUBSIDIARY
Index to Consolidated Financial Statements
Page
Consolidated financials Statements
Report of Independent Registered Public Accounting Firm F-2
Consolidated Balance Sheets as of December 31,2005 and 2004 F-3
Consolidated Statements of Operations for the years ended
December 31, 2005 and 2004 F-4
Consolidated Statements of Cash Flows for the years ended
December 31,2005 and 2004 F-5
Consolidated Statements of Stockholders' Equity
(Deficiency)for the Years ended December 31,2005 and 2004 F-6
Notes to the Consolidated Financial Statements F-7
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS, FTS GROUP, INC.
We have audited the accompanying consolidated balance sheet of FTS Group, Inc.
and subsidiary as of December 31, 2004, and the related consolidated statements
of operations, stockholders' deficiency and cash flows for the year then ended.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of FTS
Group, Inc. and subsidiary as of December 31, 2004, and the consolidated results
of their operations and their cash flows for the year then ended in conformity
with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As more fully described in
Note 3 to the consolidated financial statements, the Company has a working
capital deficit of $472,862 and a stockholders' deficit of $421,811 as of
December 31,2004. These conditions raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 3. The consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
/s/ Withum Smith & Brown, P.C.
- ----------------------------------------
Princeton, New Jersey March 7,
2005, except for note 15 which
is dated March 31, 2005
R. E. BASSIE & CO. CERTIFIED PUBLIC ACCOUNTANTS
6671 Southwest Freeway, Suite 550 Houston, Texas 77074-2220 Tel: (713) 272-8500
E-Mail: Rebassie@aol.com
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS FTS GROUP, INC.:
We have audited the accompanying consolidated balance sheet of FTS Group, Inc.
and subsidiary as of December 31, 2005, and the related consolidated statements
of operations, stockholders' equity and cash flows for the year ended December
31, 2005. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of FTS Group, Inc. and
subsidiary as of December 31, 2005, and the results of their operations and
their cash flows for the year ended December 31, 2005, in conformity with
accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 13 to
the financial statements, the Company has suffered recurring losses from
operations. These factors raise 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 13. The consolidated financial statements do not include
any adjustments that might result from the outcome of these uncertainties.
/s/ R. E. Bassie & Co.
Houston, Texas
April 10, 2006
F-2
FTS GROUP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2005 AND 2004
Assets 2005 2004
Current assets: ------------ ------------
Cash and cash equivalents $ 243,079 $ 7,949
Restricted cash 560,000
Accounts receivable 12,201 87,485
Inventories 33,180 44,998
Prepaid expenses and current assets 474,683 35,430
------------ ------------
Total current assets 1,323,143 175,862
Property and equipment, net of accumulated depreciation 208,210 124,555
Unamortized discount on convertible debt 380,690 -
Unamortized debt issuance costs 46,313 -
Investment in private entity - 7,500
Deposits 16,139 19,489
------------ ------------
Total assets $ 1,974,495 $ 327,406
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses 468,185 259,723
Current portion of notes payable to related parties
Convertible debentures-current portion 1,002,496 -
Notes payable to individuals - 37,250
Notes payable to related parties, net of discount 80,850 111,751
Note payable - Dutchess Advisors - 240,000
------------ ------------
Total current liabilities 1,551,531 648,724
------------ ------------
Convertible debentures, net of current portion 430,088 100,493
------------ ------------
Stockholders' equity:
10% Convertible preferred stock, Series A, $0.01 par value:
150,000 shares authorized; 0 shares issued and outstanding - -
Preferred stock, $0.01 par value, 4,850,000 undesignated
shares authorized, none issued - -
Common stock, $.001 par value. Authorized 150,000,000 shares:
102,098,756 shares issued and outstanding at December 31, 2005,
37,882,183 shares issued and outstanding at December 31, 2004 102,099 37,882
Additional paid-in capital 10,196,539 7,848,833
Accumulated deficit (10,305,762) (8,308,526)
------------ ------------
Total stockholders' equity (deficit) (7,124) (421,811)
------------ ------------
Commitments and contingent liabilities
------------ ------------
Total liabilities and stockholders' equity $ 1,974,495 $ 327,406
============ ============
<FN>
See accompanying notes to consolidated financial statements.
F-3
FTS GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
DECEMBER 31, 2005 AND 2004
2005 2004
------------ ------------
Revenues $ 1,310,731 $ 712,282
------------ ------------
Costs and expenses:
Cost of sales 1,110,645 521,660
Selling, general and administrative 1,767,563 2,191,837
Impairment loss - 107,000
------------ ------------
Total costs and expenses 2,878,208 2,820,497
------------ ------------
Operating loss (1,567,477) (2,108,215)
------------ ------------
Other income (expenses):
Unrealized loss on investments (7,500) (7,500)
Interest expense (422,259) (212,638)
Total other income (expenses) (429,759) (220,138)
------------ ------------
Net loss from operations before taxes (1,997,236) (2,328,353)
------------ ------------
Provision for income taxes - -
------------ ------------
Net loss applicable to common shareholders $(1,997,236) $(2,328,353)
============ ============
Net loss applicable to common shareholders:
Basic and diluted $ (0.04) $ (0.08)
============ ============
Weighted average common shares:
Basic and diluted 55,986,790 27,459,250
============ ============
<FN>
See accompanying notes to consolidated financial statements.
F-4
FTS GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2005 AND 2004
2005 2004
------------ ------------
Cash flows from operating activities:
Net loss $(1,997,236) $(2,328,353)
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 35,974 15,851
Impairment of long-lived assets - 107,000
Common shares issued for services 630,850 1,220,201
Unrealized loss on investment in private entity 7,500 7,500
Decrease in deferred compensation - 146,550
Amortization of debt discount 180,893 98,107
(Increase) decrease in operating assets:
Accounts receivable 75,284 (83,580)
Inventories 11,818 (37,239)
Prepaid expenses 747 (33,918)
Other assets 10,850 (1,839)
Increase (decrease) in operating liabilities:
Accounts payable and accrued expenses 322,011 (24,954)
------------ ------------
Net cash used in operating activities (721,309) (914,674)
------------ ------------
Cash flows from investing activities:
Capital expenditures for property and equipment (119,629) (194,729)
Funding restricted for investment in acquisition (560,000) -
------------ ------------
Net cash used in investing activities (679,629) (194,729)
------------ ------------
Cash flows from financing activities:
Proceeds from issuance of stock 882,298 417,341
Proceeds for stock to be issued - 54,765
Proceeds from convertible debentures 1,263,000 -
Proceeds from stock issued under equity line - 376,833
Proceeds from note payable to Dutchess Advisors 560,000 450,500
Proceeds from notes payable to individuals - 98,250
Repayments of note payable to Dutchess Advisors (921,022) (266,485)
Repayments of debenture loan (26,876) -
Repayments of notes payable to individuals (37,250) (61,000)
Increase in amounts due to related parties 84,000 140,235
Repayment of loans from related parties (168,082) (99,974)
------------ ------------
Net cash provided by financing activities 1,636,068 1,110,465
------------ ------------
Net increase in cash 235,130 1,062
Cash at beginning of year 7,949 6,887
------------ ------------
Cash at end of year $ 243,079 $ 7,949
============ ============
Supplemental schedule of cash flow information:
Interest paid $ 93,133 $ 188,344
============ ============
Supplemental disclosure of non-cash investing and financing activities:
Stock issued in exchange for convertible debentures $ 51,016 $ 350,091
============ ============
Stock issued in exchange for acquisition of assets $ - $ 2,100
============ ============
<FN>
See accompanying notes to consolidated financial statements.
F-5
FTS GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2005 AND 2004
Additional Total
Preferred Stock Common Stock paid-in Accumulated Deferred stock-
-------------- -------------------- holders'
shares amount shares amount capital deficit compensation equity
------ ------- ----------- -------- ----------- ------------- ---------- --------
Balance, December 31, 2003 - $ - 18,141,564 $ 18,142 $ 5,465,030 $(5,943,196) $(146,550)$(606,574)
Issuance of common shares for cash - - 6,000,000 6,000 411,341 - - 417,341
Issuance of common shares for services - - 7,994,720 7,994 1,212,207 - -1,220,201
Conversion of debentures in shares of common
stock - - 3,570,030 3,570 346,521 - - 350,091
Issuance of common shares for acquisition
of assets - - 30,000 30 2,070 - - 2,100
Issuance of common shares for through equity line - - 2,145,869 2,146 374,687 - - 376,833
Amortization of deferred compensation - - - - - - 146,550 146,550
Issuance of stock warrants as dividends on
common shares - - - - 36,977 (36,977) - -
Net loss - - - - - (2,328,353) - (2,328,353)
------ ------- ----------- -------- ----------- ------------- ---------- --------
Balance, December 31, 2004 - - 37,882,183 37,882 7,848,833 (8,308,526) - (421,811)
Issuance of common shares for cash - - 13,461,300 13,461 868,837 - - 882,298
Issuance of common shares for services - - 6,572,500 6,573 624,277 - - 630,850
Conversion of debentures in shares of
common stock - - 522,086 522 50,494 - - 51,016
Issuance of common shares through equity line - - 8,140,263 8,140 451,513 - - 459,653
Issuance of common shares on convertible debt - - 35,520,424 35,521 352,585 - - 388,106
Net loss - - - - - (1,997,236) -(1,997,236)
------ ------- ----------- -------- ----------- ------------- -------- --------
Balance, December 31, 2005 - $ - 102,098,756 $102,099 $10,196,539 $(10,305,762) $ - $(7,124)
<FN>
See accompanying notes to consolidated financial statements.
F-6
FTS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
(1) BASIS OF PRESENTATION
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION, OWNERSHIP AND BUSINESS
FTS Group, Inc. (the "Company"), was incorporated under the laws of the State of
Nevada. The Company is engaged in the acquisition and development of a chain of
full service retail wireless stores. The Company's primary business is the
marketing, sale and activation of cellular and satellite handsets, satellite
television activations and installations, cellular accessories and other related
wireless products such as Wi-Fi service and related access equipment for
residential or business purposes.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiary: FTS Wireless, Inc. All significant intercompany
transactions and balances have been eliminated in consolidation.
ACCOUNTS RECEIVABLE
Accounts receivable consist primarily of trade receivables, net of a valuation
allowance for doubtful accounts.
INVENTORIES
Inventories are valued at the lower-of-cost or market on a first-in, first-out
basis.
INVESTMENT SECURITIES
The Company accounts for its investments in accordance with Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." Management determines the appropriate
classification of its investments in marketable securities at the time of
purchase and reevaluates such determination at each balance sheet date.
Securities that are bought and held principally for the purpose of selling them
in the near term are classified as trading securities. Debt securities for which
the Company does not have the intent or ability to hold to maturity and equity
securities not classified as trading securities are classified as
available-for-sale. The cost of investments sold is determined on the specific
identification or the first-in, first-out method. Trading securities are
reported at fair value with unrealized gains and losses recognized in earnings,
and available-for-sale securities are also reported at fair value but unrealized
gains and losses are shown in the caption "unrealized gains (losses) on shares
available-for-sale" included in stockholders' equity. Management determines fair
value of its investments based on quoted market prices at each balance sheet
date.
PROPERTY, EQUIPMENT AND DEPRECIATION
Property and equipment are recorded at cost less accumulated depreciation. Upon
retirement or sale, the cost of the assets disposed of and the related
accumulated depreciation are removed from the accounts, with any resultant gain
or loss being recognized as a component of other income or expense. Depreciation
is computed over the estimated useful lives of the assets (3-20 years) using the
straight-line method for financial reporting purposes and accelerated methods
for income tax purposes. Maintenance and repairs are charged to operations as
incurred.
INTANGIBLE ASSETS
SFAS No. 142 eliminates the amortization of goodwill, and requires annual
impairment testing of goodwill and introduces the concept of indefinite life
intangible assets. The Company adopted SFAS No. 142 effective January 1, 2002.
Goodwill and indefinite lived intangible asset impairment is always assessed
based upon a comparison of carrying value with fair value.
IMPAIRMENT OF LONG-LIVED ASSETS
Realization of long-lived assets, including goodwill, is periodically assessed
by the management of the Company. Accordingly, in the event that facts and
circumstances indicate that property and equipment, and intangible or other
assets may be impaired, an evaluation of recoverability would be performed. If
an evaluation is required, the estimated future undiscounted cash flows
associated with the asset are compared to the asset's carrying amount to
determine if a write-down to market value is necessary. In management's opinion,
there was no impairment of such assets at December 31, 2005. When the Company
completed its impairment testing for the year ended December 31, 2004, it
determined that the value of assets acquired related to certain store locations
were impaired in the amount of $107,000.
REVENUE RECOGNITION
We recognize revenue from the activation of new wireless customers and the sale
of wireless handsets, airtime and accessories at the time of activation or sale.
Net revenues from wireless activations are recognized during the month the
activation is performed. Allowances for charge backs, returns, discounts and
doubtful accounts are provided when sales are recorded. Shipping and handling
costs are included in cost of sales.
Although our post-paid activations are subject to possible charge-back of
commissions if a customer deactivates service within the allowable 180-day
period after signing the contract, we still recognize the activation in the
period of the activation. We have set up a reserve for possible activation
charge-backs. Based on SFAS No. 48, this is permitted if reliable estimates of
the expected refunds can be made on a timely basis, the refunds are being made
for a large pool of homogeneous items, there is sufficient company-specific
historical basis upon which to estimate the refunds, and the amount of the
commission specified in the agreement at the outset of the arrangement is fixed,
other than the customer's right to request a refund.
INCOME TAXES
The Company is a taxable entity and recognizes deferred tax assets and
liabilities for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax basis. Deferred tax assets and liabilities are measured
using enacted tax rates expected to be in effect when the temporary differences
reverse. The effect on the deferred tax assets and liabilities of a change in
tax rates is recognized in income in the year that includes the enactment date
of the rate change. A valuation allowance is used to reduce deferred tax assets
to the amount that is more likely than not to be realized.
RESTRICTED CASH
Restricted cash of $560,000 represents funds held in escrow by Grushko & Mittman
to be utilized at the closing of the acquisition of See World Satellites in
January, 2006. The source of the funds was from the December 2005 issuance of
promissory notes designed for the purpose of raising funds for this acquisition.
The funds are contractually restricted and to be remitted directly towards
settlement of the acquisition.
EARNINGS PER SHARE
The basic net earnings (loss) per common share is computed by dividing the net
earnings (loss) by the weighted average number of shares outstanding during a
period. Diluted net earnings (loss) per common share is computed by dividing the
net earnings, adjusted on an as if converted basis, by the weighted average
number of common shares outstanding plus potential dilutive securities. For the
years ended December 31, 2005 and 2004, potential dilutive securities that had
an anti-dilutive effect were not included in the calculation of diluted net
earnings (loss) per common share. These securities include options to purchase
shares of common stock.
ADVERTISING COSTS
Advertising costs are expensed as incurred. Advertising expense was $23,631 and
$17,792 for the years ended December 31, 2005 and 2004 respectively.
MANAGEMENT'S ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, disclosure of contingent
assets and liabilities at the date of the financial statements, and the reported
amounts of revenues and expenses. Actual results could differ from these
estimates.
STOCK-BASED COMPENSATION
The Company has chosen to continue to account for stock-based compensation using
the intrinsic value method prescribed in Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees", and related Interpretations and
to elect the disclosure option of SFAS No. 123, "Accounting for Stock-Based
Compensation". Accordingly, compensation cost for stock options issued to
employees is measured as the excess, if any, of the quoted market price of the
Company's stock at the date of the grant over the amount an employee must pay to
acquire the stock.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company estimates the fair value of its financial instruments using
available market information and appropriate valuation methodologies. However,
considerable judgment is required in interpreting market data to develop the
estimates of fair value. Accordingly, the Company estimates of fair value are
not necessarily indicative of the amounts that the Company could realize in a
current market exchange. The use of different market assumption and/or
estimation methodologies may have a material effect on the estimated fair value
amounts. The interest rates payable by the Company on its notes payable
approximate market rates. The Company believes that the fair value of its
financial instruments comprising accounts receivable, notes receivable, accounts
payable, and notes payable approximate their carrying amounts.
NEW ACCOUNTING STANDARDS
In May 2005, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standard ("SFAS") No. 154, Accounting Changes and Error
Corrections. SFAS No. 154 replaces Accounting Principles Board Opinion No. 20,
Accounting Changes, and SFAS No. 3, Reporting Accounting Changes in Internal
Financial Statements, and changes the requirements for the accounting for and
reporting of a change in accounting principle. SFAS No. 154 requires
retrospective application of changes in accounting principle to prior periods'
financial statements, unless it is impracticable to determine either the
period-specific effects or the cumulative effect of the change. SFAS No. 154 is
effective for accounting changes and corrections of errors made in fiscal years
beginning after December 15, 2005. We will adopt SFAS No. 154 on January 1,
2006. Any impact on the Company's consolidated results of operations and
earnings per share will be dependent on the amount of any accounting changes or
corrections of errors whenever recognized.
In December 2004, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 153. This statement addresses the measurement
of exchanges of nonmonetary assets. The guidance in APB Opinion No. 29,
"Accounting for Nonmonetary Transactions," is based on the principle that
exchanges of nonmonetary assets should be measured based on the fair value of
the assets exchanged.
The guidance in that opinion; however, included certain exceptions to that
principle. This statement amends Opinion 29 to eliminate the exception for
nonmonetary exchanges of similar productive assets and replaces it with a
general exception for exchanges of nonmonetary assets that do not have
commercial substance. A nonmonetary exchange has commercial substance if the
future cash flows of the entity are expected to change significantly as a result
of the exchange. This statement is effective for financial statements for fiscal
years beginning after June 15, 2005. Earlier application is permitted for
nonmonetary asset exchanges incurred during fiscal years beginning after the
date of this statement is issued. Management believes the adoption of this
statement will have no impact on the financial statements of the Company.
In December 2004, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 152, which amends FASB statement No. 66,
"Accounting for Sales of Real Estate," to reference the financial accounting and
reporting guidance for real estate time-sharing transactions that is provided in
AICPA Statement of Position (SOP) 04-2, "Accounting for Real Estate Time-Sharing
Transactions." This statement also amends FASB Statement No. 67, "Accounting for
Costs and Initial Rental Operations of Real Estate Projects," to state that the
guidance for (a) incidental operations and (b) costs incurred to sell real
estate projects does not apply to real estate time-sharing transactions. The
accounting for those operations and costs is subject to the guidance in SOP
04-2. This statement is effective for financial statements for fiscal years
beginning after June 15, 2005. Management believes the adoption of this
statement will have no impact on the financial statements of the Company.
In November 2004, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 151, "Inventory Costs- an
amendment of ARB No. 43, Chapter 4." This statement amends the guidance in ARB
No. 43, Chapter 4, "Inventory Pricing," to clarify the accounting for abnormal
amounts of idle facility expense, freight, handling costs, and wasted material
(spoilage). Paragraph 5 of ARB 43, Chapter 4, previously stated that "under some
circumstances, items such as idle facility expense, excessive spoilage, double
freight, and rehandling costs may be so abnormal as to require treatment as
current period charges." This statement requires that those
items be recognized as current-period charges regardless of whether they meet
the criterion of "so abnormal." In addition, this statement requires that
allocation of fixed production overheads to the costs of conversion be based on
the normal capacity of the production facilities. This statement is effective
for inventory costs incurred during fiscal years beginning after June 15, 2005 .
Management does not believe the adoption of this statement will have any
immediate material impact on the Company .
RECLASSIFICATIONS
Certain 2004 amounts have been reclassified to conform to the 2005 presentation.
(2) Restatement
The company has restated its financial statements for the year ended December
31, 2005 to amend and restate the accounting for warrants issued in connection
with a financing closed December 29, 2005. These security components were
originally treated as equity transactions associated with the issuance of
secured, convertible promissory notes. However, at the time of the issuance, the
Company had an insufficient number of authorized shares to settle the contract
after considering all other commitments that may require the issuance of stock
during the maximum period the contract could remain outstanding. Based on this
shortage, EITF-0019 requires initial balance sheet classification of the
warrants as a liability until such time that an increase in authorized shares
sufficient to cover the shortage, is approved by the shareholders. If the
classification required under this Issue changes as a result of events during
the period, the contract should be reclassified as of the date of the event that
caused the reclassification. Additional shares sufficient to cover the shortage
were approved in October, 2006. Therefore, from December 2005 through the end of
the third quarter 2006, liability classification is required for the warrants.
During the fourth quarter 2006, a reclassification back to equity will be
appropriate. Also being restated in relation to this financing is the split
between the current and long term components of the associated liabilities per
closer review of the contract terms.
The restatement will also reclassify the restricted portion of cash to a
separate line item on the Balance Sheet with a corresponding correction to the
Statement of Cash Flows to reflect the restriction.
There is no impact to earnings or cash associated with these restatements other
than earmarking the restricted portion of cash, details of which were already
disclosed elsewhere in the statements.
There were also related adjustments to the Company's consolidated statement of
cash flows and consolidated statement of stockholder's equity.
The effect of the restatement on specific amounts provided in the consolidated
financial statements is as follows:
As of December 31,2005
Consolidated Balance Sheet Previously Reported Increase (Decrease) Restated
------------ ------------- -------------
Cash,$560,000 restricted at 12/31/05 $ 803,079 $ (560,000) $ 243,079
Restricted Cash $ - $ 560,000 $ 560,000
Convertible debentures-current portion $ - $ 1,002,496 $ 1,002,496
Convertible debentures $ 1,213,049 $ (782,961) $ 430,088
Additional paid in capital $ 10,416,074 $ (219,535) $ 10,196,593
Total stockholder's equity (deficit) $ 212,411 $ (219,535) $ (7,124)
In addition, the Company has included restatements to reflect certain
clarifications made in response to the SEC's comments as raised in its review of
the Company's registration statement on Form SB-2 as filed with the SEC on May
2, 2006, on Form SB-2/A as filed with the SEC on September 29, 2006 and on Form
SB-2/A as filed with the SEC on November 7, 2006. These restatements include
expanded clarification on business operations in general as well as expanded
clarification on revenue recognition policies, liquidity considerations,
critical accounting policies, and changes to the Notes to Consolidated Financial
Statements.
(3) PROPERTY AND EQUIPMENT
Major classes of property and equipment together with their estimated useful
lives, consisted of the following:
December 31
Years 2005 2004
----- - -------- --------
Leasehold improvements 5 $180,937 $ -
Furniture and fixtures 5 54,208 19,460
Equipment 3-5 20,890 5,273
Vehicles 3 11,927 2,100
Construction in progress 5 - 121,500
- ---------------------------------------------- -------- --------
Total property and equipment 267,962 148,333
- ----------------------------------------------
Less accumulated depreciation and amortization 59,752 23,778
- ---------------------------------------------- -------- --------
Net property and equipment $208,210 $124,555
- ---------------------------------------------- -------- --------
Depreciation expense for the years ended December 31, 2005 and 2004 was $35,974
and $15,851 respectively.
F-11
(4) CONVERTIBLE DEBT
During 2005 the Company raised a total of $1,820,690 from the issuance of
$1,896,551 Secured Convertible Promissory Notes with selected subscribers. The
Notes were issued at an original discount of 21%. On December 29, 2005, the
Company received $1,000,000 of the proceeds and a further $470,000 in January,
2006. Both amounts were after discount, but before expenses. The Company agreed
to issue 100 class A, and 50 class B warrants for each 100 shares on the closing
date of the issuance of the Notes, assuming complete conversion. The Company
also agreed to issue 35,520,424 shares of common stock to be distributed pro
rata to purchasers of the Notes (the common stock was issued effective December
29, 2005 and is included in the number of shares issued and outstanding at
December 31, 2005). The Conversion prices of the Notes, class A warrants, and
class B warrants as stated on the Notes are $0.04, $0.02868 and $0.0239
respectively.
We accounted for the issuance of stocks and warrants under the convertible notes
in line with the provisions of EITR 00-27 which states that when a debt
instrument includes detachable instruments such as warrants, the proceeds of the
issuance should be allocated to the convertible instrument and the detachable
instruments in proportion to their relative fair market values. Accordingly,
the Company calculated fair value of the stock based on current market price and
fair value of the warrants using the Black-Scholes pricing model. Total
proceeds from the funding were then allocated among debt and equity based on
their relative fair values.
As discussed in footnote #2, a restatement was necessary as the $219,535
allocated to warrants was initially classified as equity. Due to an
insufficient number of authorized and unissued shares available at the date of
the issue to cover complete conversion, the warrant portion if the allocation is
being reclassified to liability until the fourth quarter, 2006 at which time the
shareholders approved an increase in authorized shares sufficient to cover the
shortage.
(5) CONVERTIBLE DEBENTURES
During February 2003 the Company completed an additional 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 registered the underlying shares on
Form SB-2. As of December 31, 2005 and 2004 the amount of debentures outstanding
was $0 and $100,493 respectively. During 2004 Dutchess converted $350,093 worth
of debentures into 3,570,030 shares of stock.
During the year ended December 31, 2004 the Company issued approximately
3,570,030 shares to Dutchess Private Equities Fund, LP to reduce its balance by
$350,091. At December 31, 2004 the outstanding unconverted debenture totaled
$100,493, which has since been converted into approximately 1,004,930 shares of
stock of Dutchess.
(6) EQUITY LINE OF CREDIT
The Company entered into an investment agreement in 2004 for an equity line of
credit with Dutchess Private Equities Fund. The agreement provides for a maximum
of $6,000,000 with 15,000,000 shares of common stock registered and available to
repay credit line advances. Shares are convertible based on 93% of the three-day
average of the lowest three out of five days subsequent to a put for funds. At
December 31, 2004, 12,854,131 shares were available under the terms of the
equity line agreement. During 2004, the Company raised $376,833 from the equity
line of credit.
(7) NOTES PAYABLE TO RELATED PARTIES
During June 2004, we entered into a note agreement with our then Chief Financial
Officer, Linda Ehlen. Ms. Ehlen extended us a loan for $61,200 bearing interest
of 8% per annum and a face amount premium of 20%, or $12,240. The note also
included a stipulation that this related party would receive 307,000 shares of
common stock as an inducement for providing the financing. The proceeds of
$61,200 were allocated $43,200 to notes payable and $18,000 to the value of the
common stock to be issued, based on their relative fair values. The difference
between the amount to be repaid of $73,440 and the $43,200 represents a debt
discount in the amount of $30,240 which was recorded by the company. This amount
was amortized over the life of the loan. For the year ended December 31, 2004,
the Company had amortized $13,829 leaving an unamortized debt discount of
$16,411 at December 31, 2004. Unpaid principal remained at December 31, 2004 in
the amount of $63,440 for a net balance due of $47,029. This loan was paid in
full and the debt discount fully amortized during 2005.
During September 2004, we entered into a note agreement with our Chief Executor
Officer, Scott Gallagher. Mr. Gallagher extended us a loan for $125,000 bearing
interest of 8% per annum and a face amount premium of 20%, or $25,000. The note
also included a stipulation that this related party would receive 625,000 shares
of common stock as an inducement for providing the financing. The proceeds of
$125,000 were allocated $88,235 to notes payable and $36,765 to the value of the
common stock to be issued, based on their relative fair values. The difference
between the amount to be repaid of $150,000 and the $88,235 represents a debt
discount in the amount of $61,765 which was recorded by the company. This amount
was amortized over the life of the loan. For the year ended December 31, 2004,
the Company had amortized $28,245 leaving an unamortized debt discount of
$33,520 at December 31, 2004. Unpaid principal remained at December 31, 2004 in
the amount of $98,242 for a net balance due of $64,722. This loan was paid in
full and the debt discount fully amortized during 2005. Additional funds of
$8,800 were advanced by and repaid to Scott Gallagher during the course of the
year in 2004.
During the quarter ended September 30, 2005, our Chief Executive Officer
advanced additional funds totaling $70,661 to us. During the fourth quarter,
these advances were converted to a note with an interest rate of 20% per annum.
The note must be repaid by August 2007. Mr. Gallagher was issued 1,000,000
shares of restricted stock as inducement for providing this financing.
F-12
(8) NOTE PAYABLE - DUTCHESS EQUITIES FUND
- --- ------------------------------------------
The Company signed a short-term Note payable to Dutchess Equities Fund, II L.P.
in the amount of $500,000 which was due in May of 2005. The loan bears interest
at a rate of 12% per annum, it includes a 20% premium. The premium in the amount
of $100,000 has been charged to the interest expense for 2005. The loan was paid
back timely. 750,000 shares of common stock were issued to Dutchess as
inducement for entering into the financing.
During the year ended December 31, 2005, the Company also borrowed, under short
term loan agreements, $60,000 from Dutchess Private Equities Fund bearing an
interest rate of 12% per annum, it includes a 20% premium. The entire balance
was repaid during 2005.
(9) 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 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:
December 31
--------------------------
2005 2004
--------- ---------
Federal statutory income tax rate (659,000) (792,000)
- ---------------------------------
659,000 792,000
--------- ---------
- -
--------- ---------
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:
December 31
Reconciling items: 2005 2004
- -------------------------------- ------------ ------------
Net operating loss carryforward: $ 3,244,000 $ 2,585,000
- --------------------------------
Less valuation allowance (3,244,000) (2,585,000)
- -------------------------------- ------------ ------------
Net deferred tax asset $ - $ -
The net operating loss carryforward of approximately $10,000,000 will expire
through 2024.
At December 31, 2005, the Company provided a 100% valuation allowance for the
deferred tax asset because given the volatility of the current economic climate,
it could not be determined whether it was more likely than not that the deferred
tax asset/(liability) would be realized.
F-13
(10) OPERATING LEASES
- ---- -----------------
The Company leases real property for its seven retail locations. Five of the
locations have lease terms ranging from six months to three years while two
locations are on a month-to-month basis.
Future minimum payments due on the non-cancelable leases are as follows:
Year Annual
Ending Payments
2006 $ 95,439
2007 53,807
2008 633
$ 149,879
---------
Rent expense was $165,392 and $135,447 for the years ended December 31, 2005 and
2004, respectively.
(11) CONCENTRATION OF CREDIT RISK
- ---- -------------------------------
The Company's concentrations of credit risk consist principally of Accounts
Receivable and Accounts Payable. The Company purchases approximately 90% of
their telephone supplies from two vendors. Additionally, these same two vendors
are also major customers of the Company who provide over 60% of revenue.
(12) STOCK
During July 2003, the Company filed Form SB-2 Registration Statement with the
Securities and Exchange Commission to register 5,600,000 shares of common stock.
In conjunction with this registration statement the Company incurred legal and
accounting costs of approximately $35,000. The SB-2 Registration statement was
declared effective by the Securities and Exchange Commission in October of 2003.
During January of 2004, the Company filed Form SB-2 Registration Statement with
the Securities and Exchange Commission to register 15,000,000 shares of common
stock. In conjunction with this registration statement the Company incurred
legal and accounting costs of approximately $25,000. The SB-2 Registration
statement was declared effective by the Securities and Exchange Commission in
February of 2004.
During June of 2005, the Company filed Form SB-2 Registration Statement with the
Securities and Exchange Commission to register 47,501,563 shares of common
stock. In conjunction with this registration statement the Company incurred
legal and accounting costs of approximately $25,000. The SB-2 Registration
statement was declared effective by the Securities and Exchange Commission in
August of 2005.
F-14
On January 17th 2005 the Company closed a private placement and agreed to issue
12,200,050 shares of common stock to a group of accredited investors in private
placements at an average price of $0.08 per share for gross proceeds of $769,460
after 10% commission and 3% expense fee. In accordance with the subscription
agreement, the investors will receive two classes of warrants, called Series A
and Series B warrants, for each share of common stock purchased. The A warrants
have an exercise price of $0.08 and B warrants have an exercise price of $0.12.
The Company filed the terms and conditions of the financing and registration
rights in March of 2005 on Form 8-K. The funds raised in the private placement
were primarily used for working capital, costs related to the opening of new
locations and to reduce outstanding liabilities.
During the three months ended March 31, 2005, $51,017 worth of debentures was
converted into 1,004,930 shares of stock relating to the Company's convertible
debenture with Dutchess Private Equities Fund. The convertible debenture was
fully extinguished during the period.
During the three months ended March 31, 2005, 2,085,426 shares of stock were
issued relating to the Company's equity line of credit for proceeds of $270,994.
Funds were used to repay outstanding notes.
The Company signed a short-term note payable to Dutchess Equities Fund, II L.P.
in the amount of $500,000 plus a $100,000 premium. The note, dated January 10th,
2005 matures on August 10, 2005. The note bears interest at 12% per annum. The
note carries certain restrictions relating to additional financing and
registration rights to certain shares issued to Dutchess. As of May 5th, 2005,
the note and interest have been paid in full.
The note contained a stipulation that the Company would deliver 500,000 shares
of common stock with "Piggy-Back" registration rights. In addition, the Company
issued 250,000 shares of restricted common stock in March 2005 relating to loan
inducements for a loan in 2004.
During January 2005, the Company issued 2,030,000 shares of common stock for
services pursuant to a Form S-8 registration. The shares were valued at fair
market on the date it was agreed that the shares would be issued. The non-stock
compensation expense of $294,350 has been charged to operations during the
period and reported under Selling, General and Administrative Expenses.
On June 15th, 2004 the Company borrowed $61,200 from its CFO Linda Ehlen. On
September 25, 2004 the Company borrowed $133,800 from its Chairman and CEO Scott
Gallagher. The loans bear an interest rate of 8% per annum and due in June and
September of 2005. Two of the notes carried a 20% premium in the aggregate
amount of $37,240. The funds were primarily used to fund acquisitions and to
repay loans from Dutchess Private Equities Fund II, LP.
The two notes received from related parties, Mr. Gallagher and Mrs. Ehlen
required the Company to issue 932,000 (625,000 restricted common shares to Mr.
Gallagher and 307,000 restricted shares to Mrs. Ehlen) of common stock as an
inducement to provide the financing. On March 3, 2005 we issued 932,000
restricted common shares. Proceeds in the amount of $186,200 borrowed from two
of its officers have been allocated $131,435 to notes payable and $54,765 to the
value of the common stock to be issued to the individuals based on their
relative fair values. The difference between the amount to be repaid aggregating
$223,440 and the $131,435 represents a debt discount in the amount of $92,005
which was recorded by the Company. This amount is being amortized over the life
of the loans. For the year ended December 31, 2004, the Company has amortized
$42,073 leaving an unamortized debt discount of $49,931 at December 31, 2004.
F-15
On January 15th, 2006 the Company issued 1,500,000 restricted common shares to
Scott Gallagher relating to a two year employment agreement entered into on
November 15, 2005.
During the quarter ended December 31, 2005 warrants were exercised at $0.03 per
share by eight accredited investors for the purchase of 762,500 shares of common
stock.
During the quarter ended December 31, 2005 the Company issued 5,474,880 shares
to Dutchess Private Equities Fund II, LP, under our equity line of credit for
proceeds of $134,575 after fees.
During the quarter ended December 31, 2005, the Company issued 35,520,424 shares
of common stock to a group of ten accredited investors relating to a financing
closed on December 29, 2005. An 8-K detailing this issuance was filed with the
Securities and Exchange Commission on January 5, 2006.
(13) WARRANTS AND OPTIONS
(13) A-OPTIONS
The Company has a Non-Qualified Stock Option and Stock Grant Plan (the "Plan"),
adopted in July 1997. For the year ended December 31, 2005 the Company has not
granted any options. 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 a pro forma basis was $0 for the year ended December 31, 2005 and 2004
because all of the options were granted and fully vested prior to 2003. Changes
in options outstanding under the plan are summarized as follows:
Weighted
Average
Number of Exercise
shares Price
--------- ---------
Options Outstanding at December 31, 2005 598,000 $ 1.50
--
Granted - -
Exercised - -
Forfeited - -
Options Outstanding at December 31, 2005 598,000 $ 1.50
The exercise price for all options is at or above the market value of the common
stock as of the date of grant.
The following table summarizes information about fixed price stock options:
F-16
OPTIONS OUTSTANDING AND EXERCISABLE
Weighted Weighted Weighted Weighted
Average Average Average Average
Exercise Number Contractual Exercise
Price 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
(13) B- WARRANTS
The following details warrants outstanding as of December 31, 2005:
The Company had 3,000,000 warrants outstanding relating to a dividend declared
to stockholders of record on August 27, 2004. The warrants have an exercise
price of $0.25 and expire on August 7, 2007. The Company does not expect these
warrants to be exercised in the near future because the exercise price exceeds
the current stock price.
In accordance with the subscription agreement relating to the private placement
the Company closed during the period ending March 31, 2005. The Company issued
the following warrants. Investors received two classes of warrants, Series A and
Series B warrants, for each share of common stock purchased. The B warrants have
an exercise price of $0.08 and A warrants have an exercise price of $0.12. The
Company filed the terms and conditions of the financing and registration rights
in March of 2005 on Form 8-K. The funds raised in the private placement were
primarily used for working capital, costs related to the opening of new
locations and to reduce outstanding liabilities.
2005 2005
Underlying Exercise
Shares Price
Warrants issued during 2000 1,036,000 $1.50
Warrants issued during 2004
(10% Warrant Div) 3,000,000 $0.25
Warrants issued during 2004 and 2005
A Warrants 15,431,250 $ .10
B Warrants 14,170,250 $ .03
On September 28, 2005, our Board of Directors reduced the exercise price of the
A warrants from $0.12 to $0.10. Additionally, our Board of Directors reduced the
exercise price of the B warrants from $0.08 to $0.03.
In accordance with the subscription agreement relating to the private placement
closed on December 29, 2005 the Company issued the following warrants. Investors
received two classes of warrants, called Series A and Series B warrants, for
each share of common stock purchased. The A warrants have an exercise price of
$0.02868 and the B warrants have an exercise price of $.0239. The Company filed
the terms and conditions of the financing and registration rights in January of
2006 on Form 8-K. The funds raised in the private placement were primarily used
for the acquisition of the Companies wholly owned subsidiary See World
Satellites, Inc.
As discussed in footnote #2, a restatement was necessary as the $219,535
allocated to warrants was initially classified as equity. Due to an
insufficient number of authorized and unissued shares available at the date of
the issue to cover complete conversion, the warrant portion if the allocation is
being reclassified to liability until the fourth quarter, 2006 at which time the
shareholders approved an increase in authorized shares sufficient to cover the
shortage.
As discussed in footnote #4, the warrants associated with this Issue, along with
the related stock, were allocated based on their relative fair values, with the
fair value of the warrant component determined using the Black-Scholes pricing
model considering market factors at December 29,2005. The fair value
calculation for this grouping of warrants was performed independently of any
other issue. Therefore, the reduction to the exercise prices for Series A and B
warrants on September 28,2005 and July 7, 2006 did not impact the fair value
measurement of the warrants associated with the December 29, 2005 financing.
The warrants below, associated with the financing, are not exercisable until
such time as the Company's pending SB-2 becomes effective.
F-17
2005 2005
---- ----
Underlying Exercise
Shares Price
Warrants issued in December 2005
A Warrants 35,520,424 $ .02868
B Warrants 17,760,212 $ .0239
F-18
(14) 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. The Company's ability to continue as a going concern
is contingent upon its ability to expand its operations and secure additional
financing. Failure to secure financing or expand 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 of 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.
(15) SUBSEQUENT EVENTS
On January 3, 2006, the Company acquired See World Satellites, Inc., a
Pennsylvania corporation. The Company paid $500,000 at the closing of the
transaction on January 3, 2006. The Company agreed to pay an additional $500,000
into an escrow account to be held until all material contracts held by See World
have been executed, amended or modified to acknowledge our acquisition of See
World and/or to make us a party to each agreement such that we have full benefit
of the agreements.
At the closing, the Company also issued to See World a two year secured
promissory note in the sum of $3,500,000. The Note does not pay interest.
Pursuant to the terms of the Note, the Company agreed to pay to See World seven
equal cash installments of $250,000. The initial installment is payable 90 days
after closing and the remaining installments are payable every three months
thereafter. The Company also agreed to make additional payments of $1,000,000 on
January 3, 2007 and $750,000 on April 3, 2008. The Note is secured against the
assets of See World.
The Company also agreed to issue to Richard Miller $1,000,000 worth of our
convertible preferred stock within three days of the completion of the 2005
audit. The value of the shares will be based on the closing price of our stock
on January 3, 2006.
F-18
FINANCIAL INFORMATION
FINANCIAL STATEMENTS
Consolidated Financial Statements (unaudited) PAGE
Balance Sheet - September 30,2006 and December 31, 2005 F-20
Statements of Operations - Three months ended
September 30, 2006 and 2005 F-21
Statements of Cash Flows - Three months ended September 30,
2006 and 2005 F-22
Notes to Consolidated Financial Statements F-23
F-19
FTS GROUP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
September 30, 2006 and December 31, 2005
Assets 2006 2005
------------ ------------
Current assets:
Cash and cash equivalents $ 25,356 $ 243,079
Restricted cash - 560,000
Accounts receivable 170,150 12,201
Inventories 369,876 33,180
Prepaid expenses and current assets 199,714 474,683
------------ ------------
Total current assets 765,096 1,323,143
Property and equipment, net of accumulated depreciation 340,604 208,210
Unamortized discount on convertible debt 278,535 380,690
Unamortized debt issuance costs 59,145 46,313
Excess of cost over the net assets of business acquired 5,177,696 -
Deposits 17,182 16,139
------------ ------------
Total assets $ 6,638,258 $ 1,974,495
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 145,483 $ 468,185
Current portion of notes payable to related parties 1,830,895 80,850
Convertible debentures 1,462,431 1,002,496
Current installments of long-term debt-equipment loans 7,619 -
------------ ------------
Total current liabilities 3,446,428 1,551,531
Convertible debentures - 430,088
Long-term debt to related parties, less current installments 1,250,000 -
Long-term debt equipment loans, less current installments 620 -
------------ ------------
Total liabilities 4,697,048 1,981,619
------------ ------------
Stockholders' equity:
10% Convertible preferred stock, Series A, $0.01 par value:
150,000 shares authorized; 0 shares issued and outstanding - -
Preferred stock, $0.01 par value, 4,850,000 undesignated
shares authorized, none issued - -
Convertible preferred stock, Series B, $0.01 par value:
1,000,000 Shares authorized, issued and outstanding at September 30,2006 10,000 -
Common stock, $.001 par value. Authorized 150,000,000 shares:
131,737,469 shares issued and outstanding at September 30, 2006,
102,098,756 shares issued and outstanding at December 31, 2005. 131,737 102,099
Additional paid-in capital 11,973,568 10,196,539
Accumulated deficit (10,174,095) (10,305,762)
------------ ------------
Total stockholders' equity 1,941,210 (7,124)
------------ ------------
Commitments and contingent liabilities - -
------------ ------------
Total liabilities and stockholders' equity $ 6,638,258 $ 1,974,495
============ ============
<FN>
See accompanying notes to consolidated financial statements.
F-20
FTS GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Nine Months
Ended September 30, Ended September 30,
-------------------------- --------------------------
2006 2005 2006 2005
------------ ------------ ------------ ------------
REVENUES
Service Revenue-See World Satelltites, Inc. $ 1,233,984 $ - $ 3,564,075 $ -
Product Retail Sales-FTS Wireless, Inc. 411,263 283,505 1,348,179 934,096
------------ ------------ ------------ ------------
1,645,247 283,505 4,912,254 934,096
------------ ------------ ------------ ------------
COST OF GOODS SOLD
Service-See World Satelltites, Inc. 161,206 - 464,669 -
Product-FTS Wireless, Inc. 369,548 216,971 1,092,078 612,356
------------ ------------ ------------ ------------
530,754 216,971 1,556,747 612,356
------------ ------------ ------------ ------------
GROSS PROFIT
Service-See World Satelltites, Inc. 1,072,778 - 3,099,406 -
Product-FTS Wireless, Inc. 41,715 66,534 256,101 321,740
------------ ------------ ------------ ------------
1,114,493 66,534 3,355,507 321,740
------------ ------------ ------------ ------------
GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses 1,008,030 245,388 3,082,858 1,271,665
------------ ------------ ------------ ------------
1,008,030 245,388 3,082,858 1,271,665
------------ ------------ ------------ ------------
INCOME (LOSS) FROM OPERATIONS 106,463 (178,854) 272,649 (949,925)
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE)
Interest (36,912) (491) (110,980) (190,238)
------------ ------------ ------------ ------------
(36,912) (491) (110,980) (190,238)
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ 69,551 $ (179,345) $ 131,669 $(1,140,163)
============ ============ ============ ============
PER SHARE INFORMATION:
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 114,977,066 56,982,202 112,767,697 53,952,681
============ ============ ============ ============
Diluted 56,982,202 53,952,681
============ ============ ============ ============
NET LOSS PER COMMON SHARE:
Basic $ 0.00 ($0.00) $ 0.00 ($0.02)
============ ============ ============ ============
Diluted ($0.00) ($0.02)
============ ============ ============ ============
<FN>
See accompanying notes to consolidated financial statements.
F-21
FTS GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Nine Months Ended September, 2006 and 2005
2006 2005
------------ ------------
Cash flows from operating activities:
Net income (loss) $ 131,669 $(1,140,163)
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 291,042 26,980
Common shares issued for services 98,400 294,350
Amortization of debt discount - 188,393
(Increase) decrease in operating assets:
Accounts receivable (72,191) (77,561)
Inventories (192,152) (23,688)
Prepaid expenses 286,275 30,030
Other assets (1,043) (1,000)
Increase (decrease) in operating liabilities:
Accounts payable and accrued expenses (430,248) 160,028
------------ ------------
Net cash used in operating activities 111,752 (542,631)
------------ ------------
Cash flows from investing activities:
Net assets 100% acquisition of See World Satellites, Inc. (206,100) -
Capital expenditures for property and equipment (88,177) (119,629)
Proceeds from funding restricted for investment in acquisition (440,000) -
Release of restriction on funding proceeds for investment in acquisition 1,060,000 -
Payment to See World Satellites, Inc. acquisition from escrowed amounts (1,000,000) -
------------ ------------
Net cash used in investing activities (674,277) (119,629)
------------ ------------
Cash flows from financing activities:
Proceeds from issuance of stock 665,964 844,460
Proceeds from convertible debentures 30,000
Proceeds from stock issued under equity line - 325,078
Proceeds from note payable to Dutchess Advisors - 500,000
Proceeds from notes payable related parties 635,002 70,661
Repayments of notes payable-truck loans (12,411) -
Repayments of note payable to Dutchess Advisors - (861,022)
Repayments of debenture loan - (26,876)
Repayments of notes payable to individuals - (34,000)
Repayment of loans from related parties (973,753) (161,682)
------------ ------------
Net cash provided by financing activities 344,802 656,619
------------ ------------
Net decrease in cash (217,723) (5,641)
Cash at beginning of year 243,079 7,949
------------ ------------
Cash at end of year $ 25,356 $ 2,308
============ ============
Supplemental schedule of cash flow information:
Interest paid $ 4,524 $ 44,566
============ ============
Supplemental disclosure of non-cash investing and financing activities:
Stock issued in exchange for convertible debentures $ 8,085 $ 73,617
============ ============
Stock issued as loan inducements $ - $ 38,462
============ ============
Stock issued in payment of accounts payable and accrued expenses $ - $ 77,365
Acquisition of See World Satellites, Inc.
Final negotiated purchase price of 100% of See World Satellites,
Inc. stock $ 5,500,000
Amount financed through formal promissory note to Richard Miller (3,500,000)
Paid in preferred stock of FTS Group, Inc. (1,000,000)
------------
Cash down payment for See World Satellites, Inc. $ 1,000,000
============
F-22
FTS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
(UNAUDITED)
(1) BASIS OF PRESENTATION
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION, OWNERSHIP AND BUSINESS
FTS Group, Inc. (the "Company"), is a holding company incorporated under the
laws of the State of Nevada. The Company is focused on developing, acquiring and
investing-in cash-flow positive businesses and viable business ventures
primarily those in the Internet, Wireless and Technology industries. Through its
two wholly-owned subsidiaries See World Satellites, Inc. and FTS Wireless, Inc.,
the Company has acquired and developed a diversified wireless business engaged
in the distribution of next generation wireless communications and entertainment
products and services for businesses and consumers alike. The Company's
wholly-owned subsidiary See World Satellites, Inc. is a leading distributor of
satellite television systems and relating products and services for DISH
Networks in the western Pennsylvania marketplace. The Company's wholly-owned
subsidiary FTS Wireless, Inc. is an emerging retail wireless distributor
operating in the gulf coast market of Florida.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries: FTS Wireless, Inc and See World Satellites, Inc.
All significant intercompany transactions and balances have been eliminated in
consolidation.
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with U.S. generally accepted accounting principles
("GAAP") for interim financial information and with the instructions to Form
10-QSB. Accordingly, 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 of normal recurring adjustments)
considered necessary for a fair presentation have been included. Operating
results for the nine months period ended September 30, 2006 are not indicative
of the results that may be expected for the year ending December 31, 2006.
As contemplated by the Securities and Exchange Commission (SEC) under Rules of
Regulation S-B, the accompanying financial statements and related footnotes have
been condensed and do not contain certain information that will be included in
the Company's annual financial statements and footnotes thereto. For further
information, refer to the Company's audited consolidated financial statements
and related footnotes thereto included in the Company's annual report on Form
10-KSB for the year ended December 31, 2005.
MANAGEMENT'S ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, disclosure of contingent
assets and liabilities at the date of the financial statements, and the reported
amounts of revenues and expenses. Actual results could differ from these
estimates.
CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company considers all
short-term debt securities with maturity of three months or less to be cash
equivalents.
ACCOUNTS RECEIVABLE
Accounts receivable consist primarily of trade receivables, net of a valuation
allowance for doubtful accounts.
INVENTORIES
Inventories are valued at the lower-of-cost or market on a first-in, first-out
basis.
INVESTMENT SECURITIES
The Company accounts for its investments in accordance with Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." Management determines the appropriate
classification of its investments in marketable securities at the time of
purchase and reevaluates such determination at each balance sheet date.
Securities that are bought and held principally for the purpose of selling them
in the near term are classified as trading securities. Debt securities for which
the Company does not have the intent or ability to hold to maturity and equity
securities not classified as trading securities are classified as
available-for-sale. The cost of investments sold is determined on the specific
identification or the first-in, first-out method. Trading securities are
reported at fair value with unrealized gains and losses recognized in earnings,
and available-for-sale securities are also reported at fair value but unrealized
gains and losses are shown in the caption "unrealized gains (losses) on shares
available-for-sale" included in stockholders' equity. Management determines fair
value of its investments based on quoted market prices at each balance sheet
date.
PROPERTY, EQUIPMENT AND DEPRECIATION
Property and equipment are recorded at cost less accumulated depreciation. Upon
retirement or sale, the cost of the assets disposed of and the related
accumulated depreciation are removed from the accounts, with any resultant gain
or loss being recognized as a component of other income or expense. Depreciation
is computed over the estimated useful lives of the assets (3-20 years) using the
straight-line method for financial reporting purposes and accelerated methods
for income tax purposes. Maintenance and repairs are charged to operations as
incurred.
INTANGIBLE ASSETS
SFAS No. 142 eliminates the amortization of goodwill, and requires annual
impairment testing of goodwill and introduces the concept of indefinite life
intangible assets. The Company adopted SFAS No. 142 effective January 1, 2002.
Goodwill and indefinite-lived intangible asset impairment is always assessed
based upon a comparison of carrying value with fair value.
6
IMPAIRMENT OF LONG-LIVED ASSETS
Realization of long-lived assets, including goodwill, is periodically assessed
by the management of the Company. Accordingly, in the event that facts and
circumstances indicate that property and equipment, and intangible or other
assets may be impaired, an evaluation of recoverability would be performed. If
an evaluation is required, the estimated future undiscounted cash flows
associated with the asset are compared to the asset's carrying amount to
determine if a write-down to market value is necessary. In management's opinion,
there was no impairment of such assets at September 30, 2006 or December 31,
2005.
REVENUE RECOGNITION
The Company's wholly-owned subsidiary, FTS Wireless, recognizes revenue from the
activation of new wireless customers and the sale of wireless handsets, airtime
and accessories at the time of activation or sale. Net revenues from wireless
activations are recognized during the month the activation is performed.
Allowances for charge-backs, returns, discounts and doubtful accounts are
provided when sales are recorded. Shipping and handling costs are included in
cost of sales.
Although the Company's post-paid activations are subject to possible charge-back
of commissions if a customer deactivates service within the allowable 180-day
period after signing the contract, they still recognize the activation in the
period of the activation. The Company has set up a reserve for possible
activation charge-backs. Based on SFAS No. 48, this is permitted if reliable
estimates of the expected refunds can be made on a timely basis, the refunds are
being made for a large pool of homogeneous items, there is sufficient
company-specific historical basis upon which to estimate the refunds, and the
amount of the commission specified in the agreement at the outset of the
arrangement is fixed, other than the customer's right to request a refund. The
Company's wholly-owned subsidiary, See World Satellites, Inc. recognizes revenue
when it makes a sale within the store, completes a retail satellite receiver
installation at the customer's home and the customer signs a contract, or
completes a retail service provider satellite receiver installation at the
customer's home and signs a contract.
7
INCOME TAXES
The Company is a taxable entity and recognizes deferred tax assets and
liabilities for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax basis. Deferred tax assets and liabilities are measured
using enacted tax rates expected to be in effect when the temporary differences
reverse. The effect on the deferred tax assets and liabilities of a change in
tax rates is recognized in income in the year that includes the enactment date
of the rate change. A valuation allowance is used to reduce deferred tax assets
to the amount that is more likely than not to be realized.
EARNINGS PER SHARE
The basic net earnings (loss) per common share is computed by dividing the net
earnings (loss) by the weighted average number of shares outstanding during a
period. Diluted net earnings (loss) per common share is computed by dividing the
net earnings, adjusted on an as if converted basis, by the weighted average
number of common shares outstanding plus potential dilutive securities. For the
nine months ended September 30, 2006 and 2005, potential dilutive securities
that had an anti-dilutive effect were not included in the calculation of diluted
net earnings (loss) per common share. These securities include options to
purchase shares of common stock.
ADVERTISING COSTS
The cost of advertising is expensed as incurred. Advertising expense was
$107,796 and $12,771 for the nine months ended September 30, 2006 and 2005
respectively.
STOCK-BASED COMPENSATION
Effective the first quarter of fiscal 2006, the Company adopted SFAS 123(R)
which establishes accounting for stock-based awards exchanged for employee
services. Accordingly, stock-based compensation cost is measured at grant date,
based on the fair value of the award, over the requisite service period. The
Company previously applied APB 25 and related interpretations, as permitted by
SFAS 123.
8
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company estimates the fair value of its financial instruments using
available market information and appropriate valuation methodologies. However,
considerable judgment is required in interpreting market data to develop the
estimates of fair value. Accordingly, the Company's estimates of fair value are
not necessarily indicative of the amounts that the Company could realize in a
current market exchange. The use of different market assumption and/or
estimation methodologies may have a material effect on the estimated fair value
amounts. The interest rates payable by the Company on its notes payable
approximate market rates. The Company believes that the fair value of its
financial instruments comprising accounts receivable, notes receivable, accounts
payable, and notes payable approximate their carrying amounts.
NEW ACCOUNTING STANDARDS
In May 2005, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 154, Accounting Changes and Error
Corrections. SFAS No. 154 replaces Accounting Principles Board Opinion No. 20,
Accounting Changes, and SFAS No. 3, Reporting Accounting Changes in Internal
Financial Statements, and changes the requirements for the accounting for and
reporting of a change in accounting principle. SFAS No. 154 requires
retrospective application of changes in accounting principle to prior periods'
financial statements, unless it is impracticable to determine either the
period-specific effects or the cumulative effect of the change. SFAS No. 154 is
effective for accounting changes and corrections of errors made in fiscal years
beginning after December 15, 2005. The Company adopted SFAS No. 154 on January
1, 2006. Any impact on the Company's consolidated results of operations and
earnings per share will be dependent on the amount of any accounting changes or
corrections of errors whenever recognized.
In December 2004, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 153. This statement addresses the measurement
of exchanges of nonmonetary assets. The guidance in APB Opinion No. 29,
"Accounting for Nonmonetary Transactions," is based on the principle that
exchanges of nonmonetary assets should be measured based on the fair value of
the assets exchanged.
The guidance in that opinion; however, included certain exceptions to that
principle. This statement amends Opinion 29 to eliminate the exception for
nonmonetary exchanges of similar productive assets and replaces it with a
general exception for exchanges of nonmonetary assets that do not have
commercial substance. A nonmonetary exchange has commercial substance if the
future cash flows of the entity are expected to change significantly as a result
of the exchange. This statement is effective for financial statements for fiscal
years beginning after June 15, 2005. Earlier application is permitted for
nonmonetary asset exchanges incurred during fiscal years beginning after the
date this statement was issued. Management believes the adoption of this
statement will have no impact on the financial statements of the Company.
9
In December 2004, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 152, which amends FASB statement No. 66,
"Accounting for Sales of Real Estate," to reference the financial accounting and
reporting guidance for real estate time-sharing transactions that is provided in
AICPA Statement of Position (SOP) 04-2, "Accounting for Real Estate Time-Sharing
Transactions." This statement also amends FASB Statement No. 67, "Accounting for
Costs and Initial Rental Operations of Real Estate Projects," to state that the
guidance for (a) incidental operations and (b) costs incurred to sell real
estate projects does not apply to real estate time-sharing transactions. The
accounting for those operations and costs is subject to the guidance in SOP
04-2. This statement is effective for financial statements for fiscal years
beginning after June 15, 2005. Management believes the adoption of this
statement will have no impact on the financial statements of the Company.
In November 2004, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 151, "Inventory Costs--an
amendment of ARB No. 43, Chapter 4." This statement amends the guidance in ARB
No. 43, Chapter 4, "Inventory Pricing," to clarify the accounting for abnormal
amounts of idle facility expense, freight, handling costs, and wasted material
(spoilage). Paragraph 5 of ARB 43, Chapter 4, previously stated that "under some
circumstances, items such as idle facility expense, excessive spoilage, double
freight, and rehandling costs may be so abnormal as to require treatment as
current period charges." This statement requires that those items be recognized
as current-period charges regardless of whether they meet the criterion of "so
abnormal." In addition, this statement requires that allocation of fixed
production overheads to the costs of conversion be based on the normal capacity
of the production facilities. This statement is effective for inventory costs
incurred during fiscal years beginning after June 15, 2005. Management does not
believe the adoption of this statement will have any immediate material impact
on the Company.
(2) Restatement
The company has restated its financial statements for the year ended December
31, 2005 to amend and restate the accounting for warrants issued in connection
with a financing closed December 29, 2005. These security components were
originally treated as equity transactions associated with the issuance of
secured, convertible promissory notes. However, at the time of the issuance, the
Company had an insufficient number of authorized shares to settle the contract
after considering all other commitments that may require the issuance of stock
during the maximum period the contract could remain outstanding. Based on this
shortage, EITF-0019 requires initial balance sheet classification of the
warrants as a liability until such time that an increase in authorized shares
sufficient to cover the shortage, is approved by the shareholders. If the
classification required under this Issue changes as a result of events during
the period, the contract should be reclassified as of the date of the event that
caused the reclassification. Additional shares sufficient to cover the shortage
were approved in October, 2006. Therefore, from December 2005 through the end of
the third quarter 2006, liability classification is required for the warrants.
During the fourth quarter 2006, a reclassification back to equity will be
appropriate. Also being restated in relation to this financing is the split
between the current and long term components of the associated liabilities per
closer review of the contract terms.
The restatement will also reclassify the restricted portion of cash to a
separate line item on the Balance Sheet with a corresponding correction to the
Statement of Cash Flows to reflect the restriction.
There is no impact to earnings or cash associated with these restatements other
than earmarking the restricted portion of cash, details of which were already
disclosed elsewhere in the statements.
There were also related adjustments to the Company's consolidated statement of
cash flows and consolidated statement of stockholder's equity.
The effect of the restatement on specific amounts provided in the consolidated
financial statements is as follows:
As of December 31,2005
Consolidated Balance Sheet Previously Reported Increase (Decrease) Restated
------------ ------------- -------------
Cash,$560,000 restricted at 12/31/05 $ 803,079 $ (560,000) $ 243,079
Restricted Cash $ - $ 560,000 $ 560,000
Convertible debentures-current portion $ - $ 1,002,496 $ 1,002,496
Convertible debentures $ 1,213,049 $ (782,961) $ 430,088
Additional paid in capital $ 10,416,074 $ (219,535) $ 10,196,593
Total stockholder's equity (deficit) $ 212,411 $ (219,535) $ (7,124)
In addition, the Company has included restatements to reflect certain
clarifications made in response to the SEC's comments as raised in its review of
the Company's registration statement on Form SB-2 as filed with the SEC on May
2, 2006, on Form SB-2/A as filed with the SEC on September 29, 2006 and on Form
SB-2/A as filed with the SEC on November 7, 2006. These restatements include
expanded clarification on business operations in general as well as expanded
clarification on revenue recognition policies, liquidity considerations,
critical accounting policies, and changes to the Notes to Consolidated Financial
Statements.
(3) RESTRICTED CASH
At June 30, 2006 Restricted Cash of $500,000 represented a short term note
obligation due Richard Miller as part of the financing of the acquisition of See
World Satellites, Inc. ("See World"). Per the purchase agreement, Mr. Miller is
to receive $500,000 within 30 days of the ratification of new five year renewal
contracts with Echo Star Satellites, LLC and DISH Network Services, LLC, both of
which were signed in June 2006. The $500,000 payment was made to Mr. Miller
during the third quarter 2006. Therefore, restricted cash is zero at September
30, 2006.
10
At December 31, 2005 Restricted Cash of $560,000 represents funds held in escrow
by Grushko & Mittman to be utilized at the closing of acquisition of See World
in January 2006. The source of the funds was from the December 2005 issuance of
promissory notes designed for the purpose of raising funds for this acquisition.
The funds were contractually restricted to be remitted directly towards
settlement of the acquisition January 3, 2006.
(4) PROPERTY AND EQUIPMENT
Major classes of property and equipment together with their estimated useful
lives, consisted of the following at September 30, 2006 and December 31, 2005:
Years 2006 2005
----- --------- ---------
Leasehold improvements 5 $ 189,878 $ 180,937
Furniture & fixtures 5 128,535 54,208
Equipment 3-5 81,942 20,890
Vehicles 3 313,505 11,927
--------- ---------
Total property and equipment 713,860 267,962
Less: accumulated depreciation 373,256 (59,752)
--------- ---------
Net property and equipment $ 340,604 $ 208,210
========= =========
Depreciation expense for the nine months ended September 30, 2006 and September
30, 2005 was $92,237 and $26,980
There was a significant increase in the Vehicles component of Property and
Equipment in 2006 from that reported for the comparable period in 2005. This
increase resulted from acquiring a fleet of trucks in the acquisition of See
World Satellites, Inc. The trucks are utilized for delivery of equipment and
service related activities consistent with that of the Company's established
business purpose.
(5) 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. 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 has warrants outstanding that if exercised will provide
for additional operating capital, however there is no guarantee that the
warrants will be exercised. The Company is pursuing additional financing options
in order to raise funds required to reduce outstanding debt obligations and
execute its operating and expansion plans. Failure to secure financing or expand
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 of 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.
11
(6) CONVERTIBLE DEBT
In December 2005 and January 2006 the Company raised a total of $1,470,000 from
the issuance of $1,858,622 Secured Convertible Promissory Notes with selected
subscribers. The Notes were issued at an original discount of 21%. On December
29, 2005, the Company received $1,000,000 of the proceeds and a further $470,000
in January 2006. Both amounts were after discount, but before expenses. The
Company agreed to issue 100 class A, and 50 class B warrants for each 100 shares
on the closing date of the issuance of the Notes, assuming complete conversion.
The Company also agreed to issue 36,260,486 shares of common stock to be
distributed pro rata to purchasers of the Notes (the common stock was issued
effective December 29, 2005 and is included in the number of shares issued and
outstanding at December 31, 2005). The conversion prices of the Notes, Class A
Warrants, and Class B Warrants as stated on the Notes are $0.04, $0.02868 and
$0.0239 respectively.
(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 basis 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, 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:
December 31
-----------
2005 2004
-------- --------
Federal statutory income tax rate (659,000) (792,000)
659,000 792,000
-------- --------
-- --
======== ========
12
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:
December 31
-----------------------------
Reconciling items: 2005 2004
----------- -----------
Net operating loss carry forward: $ 3,244,000 $ 2,585,000
Less valuation allowance (3,244,000) (2,585,000)
Net deferred tax asset $ -- $ --
=========== ===========
The net operating loss carry forward of $10,174,095 will expire through 2024. At
September 30, 2006, the Company provided a 100% valuation allowance for the
deferred tax asset because given the volatility of the current economic climate,
it could not be determined whether it was more likely than not that the deferred
tax asset/(liability) would be realized.
(8) OPERATING LEASES
The Company leases real property for its nine retail locations. Four of the
locations have lease terms ranging from three months to three years while five
locations are on a month-to-month basis.
Future minimum payments due on the non-cancelable leases are as follows:
Year Annual
Ending Payments
- ------- --------
2006 $ 25,380
2007 72,026
2008 30.678
--------
$128,084
========
13
Rent expense was $135,297 and $132,754 for the nine months ended September 30,
2006 and 2005, respectively.
(9) CONCENTRATION OF CREDIT RISK
The Company's concentrations of credit risk consist principally of Accounts
Receivable and Accounts Payable. The Company purchases approximately 95% of its
satellite system supplies from Echostar Satellite, L.L.C. and DISH Network
Service, L.L.C. The Company further purchases approximately 80% of its telephone
supplies from one vendor, Metro PCS. Additionally, these three vendors are major
customers of the Company who provide products that generate over 90% of revenue.
(10) STOCK
During the three months ending March 31, 2006, the Company issued 1,500,000
restricted shares of common stock to an officer of the Company relating to a two
year employment agreement dated February 1, 2006.
During the three months ending March 31, 2006, the Company issued 2,250,000
restricted shares of common stock valued at $0.02 to an officer of the Company
to reduce an outstanding debt obligation of $45,000.
During the three months ending March 31, 2006, the Company issued 2,500,000
restricted shares of common stock valued at $0.02 to an officer of the Company
as a success bonus for 2005.
During the three months ending March 31, 2006, the Company issued 920,000
restricted shares of common stock valued at $0.02 to a consultant of the Company
to reduce the $18,400 owed for consulting services relating to services rendered
during 2005.
During the three months ended June 30, 2006, the Company agreed to issue
11,458,338 restricted common shares relating to warrants priced at $0.0239 that
were exercised by four accredited investors for total proceeds of $273,854.28.
At September 30, 2006, 1,185,350 restricted shares due to one of the investors
remained unissued. 11,458,338 new warrants were issued to the investors under
the same terms other than the strike price which was increased to $0.04.
During the three months ended September 30, 2006, relating to the exercise of
warrants, the Company issued 5,600,000 shares at $0.045 for proceeds of
$252,000. Additionally, the Company issued 1,000,000 shares of its Series B
Convertible Preferred stock to Mr. Richard Miller, President of See World during
the three months ended March 31, 2006. The conversion rate for the Series B
stock is 25 shares of common stock for each share of Series B Convertible
Preferred Stock. The shares of Series B Convertible Preferred Stock may be
converted into common stock at any time after January 3, 2008, at the option of
the Company or that of the holder. The Series B stock has no voting rights. Each
share is worth $1.00. The following is a discussion of the rights and privileges
of our outstanding classes of common stock and preferred stock:
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 the Company's
Board of Directors in its discretion from funds legally available therefore,
subject to the rights of Preferred stockholders. Please refer to the Company's
discussion below under "Preferred Stock." In the event of the Company's
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 the 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. 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.
14
PREFERRED STOCK
The Company's Articles of Incorporation, as amended, vest its 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.
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 the Company's net profits, also payable in
cash. The Company may redeem this preferred stock at any time following notice
to the holder for an amount equal to the issue price, plus any accrued but
unpaid dividends.
The Series A Preferred Shares are convertible into shares of the Company's
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 the Company's 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.
In April 2006, a total of 1,000,000 shares were designated Series B Preferred
Stock and all 1,000,000 shares are outstanding. Upon liquidation (voluntary or
otherwise), dissolution or winding up of the Company, holders of Series B
Convertible Preferred Stock will receive their prorate share of the total value
of the assets and funds of the Company to be distributed, assuming the
conversion of Series B Convertible Preferred Stock to Common Stock. The holders
of shares of Series B Convertible Preferred Stock shall not be entitled to
receive dividends and shall have no voting rights. After June 1, 2006, the
shares of Series B Convertible Preferred Stock shall be redeemable at $2.00 per
share solely at the Company's option.
Any shares of Series B Convertible Preferred Stock may, at any time after
January 3, 2008, at the option of the holder or the Corporation, be converted
into fully paid and nonassessable shares of common stock. The number of shares
of common stock to which a holder of Series B Convertible Preferred Stock shall
be entitled upon a conversion shall be the product obtained by multiplying the
number the number of shares of Series B Convertible Preferred Stock being
converted by 25.
15
(11) OPTIONS AND WARRANTS
OPTIONS
The Company has a Non-Qualified Stock Option and Stock Grant Plan (the Plan)
adopted in July 1997. For the year ended December 31, 2005 the Company has not
granted any options. In accordance with SFAS 123R, the Company reviewed the
provisions of the plan and its related outstanding options to comply with the
required fair value analysis component to SFAS 123R that took effect January 1,
2006. During this analysis the Company determined that the 598,000 options
previous issued have expired and are no longer outstanding as of January 1, 2006
per plan provisions.
WARRANTS
The following details warrants outstanding as of December 31, 2005:
The Company had 3,000,000 warrants outstanding relating to a dividend declared
to stockholders of record on August 27, 2004. The warrants have an exercise
price of $0.25 and expire on August 7, 2007. The Company does not expect these
warrants to be exercised in the near future because the exercise price exceeds
the current stock price.
In accordance with the subscription agreement relating to the private placement
the Company closed during the period ending March 31, 2005, the Company issued
the following warrants. Investors received two classes of warrants, Series A and
Series B warrants, for each share of common stock purchased. The B warrants had
an initial exercise price of $0.08 and A warrants had an initial exercise price
of $0.12. The Company filed the terms and conditions of the financing and
registration rights in March 2005 on Form 8-K. The funds raised in the private
placement were primarily used for working capital, costs related to the opening
of new locations and to reduce outstanding liabilities.
2005 2005
Underlying Exercise
Shares Price
--------- -----------
Warrants issued during 2000 1,036,000 $ 1.50
--------- -----------
Warrants issued during 2004
(10% Warrant Div) 3,000,000 $ 0.25
Warrants issued during 2004 and 2005
A Warrants 15,431,250 $ 0.045
--------- -----------
On September 28, 2005, the Company reduced the exercise price of the A warrants
from $0.12 to $0.10. Additionally, he Company reduced the exercise price of the
B warrants from $0.08 to $0.03. On July 17, 2006 the Company lowered the
exercise price on the "A" Warrants from $0.10 to $0.045.
During the three months ending March 31, 2006, 4,670,313 "B" warrants priced at
$0.03 were exercised for gross proceeds of $140,109. Expenses relating to
warrant exercises were $14,048. Additionally, during the three months ended
March 31, 2006, 9,499,937 "B" warrants expired.
During the three months ending September 30, 2006, 5,600,000 "A" warrants priced
at $0.045 were exercised for gross proceeds of $252,000.
In accordance with the subscription agreement relating to the private placement
closed on December 29, 2005, the Company issued the following warrants.
Investors received two classes of warrants, called Series A and Series B
warrants, for each share of common stock purchased. The A warrants have an
exercise price of $0.02868 and the B warrants have an exercise price of $0.0239.
16
The Company filed the terms and conditions of the financing and registration
rights in January 2006 on Form 8-K. The funds raised in the private placement
were primarily used for the acquisition of the Company's wholly-owned subsidiary
See World Satellites, Inc. The table below summarizes the A and B warrants
outstanding as of September 30, 2006 relating to the financing closed on
December 29, 2005.
2005 2005
Underlying Exercise
Shares Price
---------- ----------
Warrants issued in December 2005
A Warrants 36,260,486 $ 0.02868
B Warrants 6,671,905 $ 0.0239
New B Warrants 11,458,338 $ 0.04
---------- ----------
During the three months ended June 30, 2006, the Company agreed to issue
11,458,338 restricted common shares relating to warrants priced at $0.0239 that
were exercised by four accredited investors for total proceeds of $273,854.28.
At September 30, 2006, 1,185,350 restricted shares due to one of the investors
remained unissued. New warrants totaling 11,458,338 were issued to the investors
under the same terms other than the strike price which was increased to $0.04.
17
(12) SEE WORLD SATELLITES, INC. ACQUISITION
Effective January 3, 2006, the Company acquired 100% of the capital stock of See
World Satellites, Inc. ("See World"), for consideration, providing for (i)
$1,000,000 in cash to the shareholder of See World, (ii) a promissory note in
the amount of $3,500,000, and (iii) $1,000,000 in convertible preferred stock of
the Company.
As required by SFAS No. 141, the Company has recorded the acquisition using the
purchase method of accounting with the purchase price allocated to the acquired
assets and liabilities based on their respective estimated fair values at the
acquisition date. The purchase price of $5,500,000 had been allocated at
follows:
Current assets $185,850
Property and equipment, net 136,454
Goodwill 5,177,696
--------------
$5,500,000
==============
Goodwill recorded as a result of the acquisition is assignable to the See World
Satellites, Inc. segment and is tax deductible over a period of fifteen years.
Revenues and expenses are included in the Company's statement of operations from
January 3, 2006 through September 30, 2006.
Unaudited pro forma data (included in the Company 8-K/A filing on March 3, 2006)
summarizes the results of operations of the Company for the years ended December
31, 2005 and 2004 as if the acquisition had been completed on January 1, 2004.
The pro forma data gives effect to the actual operating results prior to
acquisition. The pro forma results do not purport to be indicative of the
results that would have actually been achieved if the acquisition had occurred
on January 1, 2004 or may be achieved in the future.
SFAS 141 also requires in the year of the acquisition, proforma information
displaying the results of operations for the current period as if the
combination had been completed at the beginning of the period, unless the
acquisition was at or near the beginning of the period. Since See World
Satellites, Inc. was acquired on January 3, 2006, the first business day of the
year, and the Company determined that transactions between Jaunary 1, 2006
through January 2, 2006 to be immaterial, proforma presentation is deemed
unnecessary.
(13) RELATED PARTY TRANSACTIONS (SEE WORLD ACQUISITION)
At September 30, 2006, the Company had the following debt obligations and made
the following payments to Mr. Richard Miller a director and President of the
Company's wholly-owned subsidiary See World. The Company paid Mr. Miller
$500,000 on January 3, 2006 relating to the acquisition of See World. The
Company carried a short term note obligation in the amount of $500,000 due to
Mr. Miller. This note is due within 30 days of the effective date of a new five
year contract between Echo Star Satellites, L.L.C., DISH Network Services,
L.L.C. and See World. During the three months ended September 30, 2006 the
Company paid this note in full. Additionally, the Company issued 1,000,000
shares of its Series B Convertible Preferred stock to Mr. Miller during the
three months ended March 31, 2006. The conversion rate for the Series B stock is
25 shares of common stock for each share of Series B Convertible Preferred
Stock. The shares of Series B Convertible Preferred Stock may be converted into
common stock at any time after January 3, 2008, at the Company's option or that
of the holder. The Series B stock has no voting rights. Each share is worth
$1.00. On April 3, 2006, the Company made a $250,000 payment to Mr. Miller
reducing the outstanding note amount to $3.25 million as of June 30, 2006. On
July 5, 2006, the Company made a $250,000 payment to Mr. Miller reducing the
outstanding note amount to $3 million. In October of 2006 the Company made a
$250,000 payment to Mr. Miller reducing the outstanding note amount due to
$2.750 million as of November 15, 2006. The Company filed an 8-K with the terms
and conditions of this note on January 5, 2006. Mr. Miller also extended a
short-term note in the amount of $551,073 to the Company, of which $375,000 was
paid back January 13, 2006. During the three months ended September 30, 2006 the
Company repaid $58,691 of the outstanding note leaving an unpaid balance of
$117,382 at September 30, 2006. Subsequent to the end of the September 30, 2006
period the Company paid an additional $117,382 to Mr. Miller to extinguish an
existing note due January 3, 2007.
(14) STOCK-BASED COMPENSATION
The disclosures required by paragraph 84 of SFAS 123 ( R ) are stated below,
although the Company had not granted any options since 2001 to September 30,
2006, and options to purchase 598,000 shares of the Company have not been
exercised:
2005 2004
--------------------------
Net Income /(Loss) as reported $(1,997,236) $(2,328,353)
Basic and diluted earnings per share as reported $(.04) $(.08)
Share-based employee compensation cost net of related tax effects included
in net income as reported - -
Share-based employee compensation cost, net of related tax effects that
would have been included in net income if the fair-value based method had
been applied to all awards - -
Pro-forma net income as if the fair-value method had been applied to all
awards $(1,997,236) $(2,328,353)
Pro-forma basic and diluted earrings per share as if the fair-value based
method had been applied to all awards $(.04) $(.08)
18
(15) SUBSEQUENT EVENTS
In October and November 2006 the Company paid $117,382 relating to an
outstanding note with Mr. Richard Miller. These payments extinguished the
outstanding note that was due January 3, 2007. In October the Company issued
4,875,000 shares to investors relating to warrant exercises. The warrants were
exercised at $0.045 for proceeds of 219,375. On October 3, 2006 the Company
announced that it had acquired a 25% stake in Elysium Internet. Elysium is a
start-up venture generating minimal revenue at this point. In addition on
October 20, 2006 the Company held its 2006 annual meeting. At the meeting two
proposals were passed by the shareholders of the Company. The shareholders
re-elected the Company's two directors Scott Gallagher and David Rasmussen. The
shareholders also approved an increase in the amount of authorized shares from
150,000,000 to 855,000,000. The results were as follows:
1. Election of Directors:
FOR AGAINST ABSTAIN
SCOTT GALLAGHER 76,600,556 0 140,000
DAVID R. RASMUSSEN 76,565,556 0 175,000
2. Proposal to increase the Company's authorized shares of common stock from 150
million shares to 855 million shares.
FOR 74,815,571
AGAINST 1,918,985
ABSTAIN 6,200
F-35
WHERE 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, 100 F Street, NE, 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., 7610 West Hillsborough Ave., Tampa, Florida 33615. We intend to
send annual reports containing audited financial to the shareholders.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
Changes in accountants were previously reported on Form 8-K. We had no
disagreements with our accountants in 2004 or 2005.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article VII in our Articles of Incorporation provides that we shall indemnify to
the fullest extent not prohibited by law any person who was or is a party or is
threatened to be made a party to any legal proceeding against all expenses
(including attorney's fees), judgments, fines, and amounts paid in settlement
actually and reasonably incurred by the person in connection with such
proceeding. Any repeal or modification of this Article by the stockholders of
the corporation shall be prospective only and shall not adversely affect any
limitation on the personal liability of a director or officer of the corporation
for acts of omissions prior to such repeal or modification.
Article 7.1 of our By-Laws provides that we shall indemnify to the fullest
extent not prohibited by law any person who was or is a party or is threatened
to be made a party to any proceeding (as hereinafter defined) against all
expenses (including attorney's fees), judgments, fines, and amounts paid in
settlement actually and reasonably incurred by the person in connection with
such proceeding. Under the foregoing provisions of our Articles of Incorporation
and By-Laws, each person who is or was a director or officer shall be
indemnified by us to the full extent permitted or authorized by the General
Corporation Law of Nevada. Under such law, to the extent that such person is
successful on the merits of defense of a suit or proceeding brought against such
person by reason of the fact that such person is a director or officer of FTS
Group, such person shall be indemnified against expenses, including attorneys'
fees, reasonably incurred in connection with such action. If unsuccessful in
defense of a third-party civil suit or a criminal suit or if such a suit is
settled, such a person shall be indemnified under such law against both (1)
expenses (including attorneys' fees) and (2) judgments, fines and amounts paid
in settlement if such person acted in good faith and in a manner such person
reasonably believed to be in, or not opposed to, our best interests, and with
respect to any criminal action, had no reasonable cause to believe such person's
conduct was unlawful.
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to directors, officers and controlling persons of the Registrant
pursuant to the foregoing provisions, or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable.
OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth our expenses in connection with this registration
statement. All of these expenses are estimates, other than the fees and expenses
of legal counsel and filing fees payable to the Securities and Exchange
Commission.
Filing Fee--Securities and Exchange Commission $ 1,594
Legal Expenses $14,850
Accounting Expenses $ 7,000
Blue Sky Fees and Expenses $ 1,000
Printing Expenses $ 1,000
Miscellaneous expenses $ 1,000
-------
Total: $26,444
27
RECENT SALES OF UNREGISTERED SECURITIES
During February 2003, pursuant to a subscription agreement with Dutchess Private
Equities Fund, LP ("Dutchess") we 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 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. We registered the underlying shares on Form SB-2. As of December 31, 2004
and 2003 the amount of debentures outstanding was $100,493 and $450,586,
respectively. During 2004 Dutchess converted $350,093 worth of debentures into
3,570,030 shares of stock.
In April and May, 2003, we sold convertible debentures to Dutchess Private
Equities Fund, LP worth $35,000. In October 2003, we sold Dutchess $130,000 of
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.
On March 3, 2005, 250,000 restricted shares of common stock were issued to
Dutchess Private Equities Fund, LP valued at $.10 per share relating to a
$200,000 note agreement.
During the quarter ended March 31, 2004, we issued approximately 1,485,000
shares of our common stock related to our equity line of credit with Dutchess
Private Equities Fund, LP to fund operations, acquisitions and working capital.
On June 15th, 2004, we entered into a note agreement with our then Chief
Financial Officer, Linda Ehlen. Ms. Ehlen extended a loan to us in the amount of
$61,200 bearing an interest amount of 8% per annum and a face amount premium of
20%. On March 3, 2005, Ms. Ehlen was issued 307,000 shares of restricted stock
relating to the loan agreement. On September 17th, 2004, our Chief Executive
Officer, Scott Gallagher, entered into a note agreement. Mr. Gallagher extended
us loans in the amount of $133,800 one note bears an interest rate of 8% per
annum and a face amount premium of 20%. On March 3, 2005, Mr. Gallagher was
issued 625,000 restricted shares relating to the $125,000 loan agreement. These
shares were issued to Ms. Ehlen and Mr. Gallagher in March of 2005.
On August 26, 2004, we made the following issuances of shares of restricted
common stock: 625,000 shares to our Chief Executive Officer as compensation,
250,000 shares to Linda Ehlen, our Chief Financial Officer, as compensation,
250,000 to our former Chief Operating Officer, Robert Lewis as compensation,
1,000,000 shares to SLP Management for consulting services and 153,500 shares to
Pentony Enterprises for consulting services.
On November 13, 2004 933,973 shares of restricted common stock were issued for
consulting services. 625,000 Shares were issued to Scott Gallagher and 308,973
were issued to Linda Ehlen.
On January 20, 2005, we issued 500,000 restricted shares of common stock to
Dutchess Private Equities Fund, LP valued at $.10 per share relating to a
$500,000 note agreement entered into during 2005.
On January 26, 2005, we issued 100,000 restricted shares of common stock to
Dutchess Private Equities Fund, LP relating to a convertible debenture.
On February 11, 2005, we issued 100,000 restricted shares of common stock to
Dutchess Private Equities Fund, LP relating to a convertible debenture.
On February 28, 2005, we issued 262,423 restricted shares of common stock to
Dutchess Private Equities Fund, LP relating to a convertible debenture.
On March 3, 2005, we issued 59,663 restricted shares of common stock to Dutchess
Private Equities Fund, LP relating to a convertible debenture.
On January 11, 2005, we issued 56,024 shares of restricted common stock to
Dutchess Private Equities Fund, II, LP relating to our equity line of credit.
On January 12, 2005, we issued 764,049 shares of restricted common stock to
Dutchess Private Equities Fund, II, LP relating to our equity line of credit.
On February 1, 2005, we issued 164,552 shares of restricted common stock to
Dutchess Private Equities Fund, II, LP relating to our equity line of credit.
On February 9, 2005, we issued 244,500 shares of restricted common stock to
Dutchess Private Equities Fund, II, LP relating to our equity line of credit.
On February 18, 2005, we issued 75,300 shares of restricted common stock to
Dutchess Private Equities Fund, II, LP relating to our equity line of credit.
28
On March 11, 2005, we issued 777,001 shares of restricted common stock to
Dutchess Private Equities Fund, II, LP relating to our equity line of credit.
On March 28, 2005, we issued 4,000 shares of restricted common stock to Dutchess
Private Equities Fund, II, LP relating to our equity line of credit.
On April 1, 2005, we issued 297,957 shares of restricted common stock to
Dutchess Private Equities Fund, II, LP relating to our equity line of credit.
On April 29, 2005, we issued 282,000 shares of restricted common stock to
Dutchess Private Equities Fund, II, LP relating to our equity line of credit.
On November 10, 2005, we issued 110,000 shares of restricted common stock to
Dutchess Private Equities Fund, II, LP relating to our equity line of credit.
On November 17, 2005, we issued 555,000 shares of restricted common stock to
Dutchess Private Equities Fund, II, LP relating to our equity line of credit.
On November 28, 2005, we issued 1,046,000 shares of restricted common stock to
Dutchess Private Equities Fund, II, LP relating to our equity line of credit.
On December 5, 2005, we issued 2,310,780 shares of restricted common stock to
Dutchess Private Equities Fund, II, LP relating to our equity line of credit.
On December 12, 2005, we issued 1,453,100 shares of restricted common stock to
Dutchess Private Equities Fund, II, LP relating to our equity line of credit.
On March 4, 2005, we closed a private placement with 18 accredited investors in
which we issued 14,493,750 shares of common stock and associated warrants for
gross proceeds of $1,159,500. We agreed to file a Registration Statement with
the SEC to register the resale of the shares of our common stock and the shares
that may be issued if the investors exercise the warrants. The A warrants allow
investors to purchase 14,493,750 shares of our common stock at an exercise price
of $0.12, subject to adjustment, and the A warrants expire in March 2008. The B
warrants allow investors to purchase 14,493,750 shares of our common stock at an
exercise price of $0.08, subject to adjustment, and the B warrants expire 180
days after a Registration Statement is declared effective by the Securities and
Exchange Commission.
On April 25, 2005, we sold 625,000 restricted shares to Iroquois Master Fund
valued at $0.08 with "piggy-back" Registration rights for total proceeds of
$50,000. In accordance with the private placements, the investor will receive
two classes, A and B warrants, for each share purchased. The warrants are priced
at $.12 and $.08. We filed the terms and conditions of the financing, including
registration rights in March of 2005 on Form 8-K. The funds will be used for
general working capital purposes.
29
On June 15, 2005, we sold 312,500 shares to Omicron Investment Fund valued at
$0.08 with "piggy-back" Registration rights for total proceeds of $25,000. In
accordance with the private placements, the investor will receive two classes, A
and B warrants, for each share purchased. The warrants are priced at $.12 and
$.08. We filed the terms and conditions of the financing, including registration
rights in March of 2005 on Form 8K. The funds will be used for general working
capital purposes.
On December 29, 2005, we entered into a transaction with 10 accredited investors
in which we agreed to issue up to $1,896,551 of secured, convertible promissory
notes with an original discount of 21%. We actually raised $1,820,690 in the
transaction. The Notes can convert into shares of our common stock, subject to
certain conditions, at a per share conversion price set forth in the Notes. On
December 29, 2005, we received proceeds of $1,000,000 after the 21% discount but
before expenses. On January 4, 2005 we received an additional $440,000 after the
21% discount but before expenses.
We also agreed to issue warrants to purchase shares of our common stock. We
agreed to issue 100 Class A Warrants for each 100 shares which would be issued
on the closing date assuming the complete conversion of the Notes on the closing
date at the conversion price then in effect. The exercise price of the Class A
Warrants is $0.02868. The Class A Warrants shall be exercisable until the date
that the Registration Statement (as defined in the Subscription Agreement filed
as Exhibit 10.2 to the Form 8-K dated January 5, 2006) has been effective for
the unrestricted public resale of the Warrant Shares for 4 years.
We agreed to issue 50 Class B Warrants for each 100 shares which would be issued
on the closing date assuming the complete conversion of the Notes on the closing
date at the conversion price then in effect. The exercise price of the Class B
Warrants is $0.0239. The Class B Warrants are exercisable until the later of
four months after the actual effective date of Registration Statement (as
defined in the Subscription Agreement filed as Exhibit 10.2 to the Form 8-K
dated January 5, 2006), or ninety days after the actual effective date of a
Second Registration Statement (as defined in the Subscription Agreement filed as
Exhibit 10.2 to the Form 8-K dated January 5, 2006).
We also agreed to issue the 10 accredited investors 35,520,424 shares of our
common stock to be distributed pro rata among the purchasers of the Notes.
As part of our acquisition of See World Satellites, Inc., we issued to Richard
Miller 1,000,000 shares of our Series B Convertible Preferred Stock.
On April 28, 2006, we issued warrants to purchase 14,619,263 shares of our
common stock to 5 accredited investors. The exercise price of the warrants is
$0.04 and they are exercisable until the later of four months after the actual
effective date of Registration Statement (as defined in the Subscription
Agreement filed as Exhibit 10.2 to the Form 8-K dated January 5, 2006), or
ninety days after the actual effective date of a Second Registration Statement
(as defined in the Subscription Agreement filed as Exhibit 10.2 to the Form 8-K
dated January 5, 2006).
On June 10, 2006 we issued warrants to purchase 2,500,000 shares of our common
stock to Olympus Securities as payment for a finders fee relating to the
financing closed on December 29, 2006.
We believe such issuances were exempt from registration pursuant to Section 4(2)
of the Securities Act and any regulations promulgated thereunder, relating to
sales by an issuer not involving any public offering.
With respect to the sales of our common stock described above, we relied on the
Section 4(2) and/or 4(6) exemptions from securities registration under the
federal securities laws for transactions not involving any public offering. No
advertising or general solicitation was employed in offering the shares. The
shares were sold to sophisticated and/or accredited investors. The securities
were offered for investment purposes only and not for the purpose of resale or
distribution, and the transfer thereof was appropriately restricted by us.
The securities issued in the foregoing transactions were made in reliance upon
an exemption from registration under Rule 701 promulgated under Section 3(b) of
the Securities Act. Alternatively, these issuances of securities were undertaken
under Rule 506 of Regulation D under the Securities Act of 1933, as amended, by
the fact that:
- - the sale was made to a sophisticated or accredited investor, as defined in
Rule 502;
- - we gave the purchaser the opportunity to ask questions and receive answers
concerning the terms and conditions of the offering and to obtain any additional
information which we possessed or could acquire without unreasonable effort or
expense that is necessary to verify the accuracy of information furnished;
- - at a reasonable time prior to the sale of securities, we advised the purchaser
of the limitations on resale in the manner contained in Rule 502(d)2;
- - neither we nor any person acting on our behalf sold the securities by any form
of general solicitation or general advertising; and
- - we exercised reasonable care to assure that the purchaser of the securities is
not an underwriter within the meaning of Section 2(11) of the Securities Act of
1933 in compliance with Rule 502(d).
30
EXHIBITS
NUMBER DESCRIPTION
2.1 Agreement and Plan of Merger between the Company and FTS Apparel, Inc.,
dated December 23, 2003 (included as Attachment A to the Definitive Proxy
on Form DEF 14A filed January 9, 2004, and incorporated herein by
reference).
3.1 Articles of Incorporation dated December 23, 2003 (included as Attachment B
to the Definitive Proxy on Form DEF 14A filed January 9, 2004, and
incorporated herein by reference).
3.2 Bylaws (included as Attachment C to the Definitive Proxy on Form DEF 14A
filed January 9, 2004, and incorporated herein by reference).
3.3 Amendment to the Articles of Incorporation (included as Exhibit 10.1 to the
Form 8-K filed March 13, 2006, and incorporated herein by reference).
3.4 Certificate of Designation for Series B Convertible Preferred Stock dated
March 8, 2006 (included as Exhibit 10.1 to the Form 8-K filed March 13,
2006 and incorporated herein by reference).
4.1 Form of Certificate for Common Shares (included as exhibit 4.1 to the
Registrant's Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1998 and incorporated herein by this reference).
4.2 Subscription Agreement Form (included as exhibit 10.1 to the Form 8-K filed
February 24, 2003, and incorporated herein by reference).
4.3 Debenture Agreement between the Company and Dutchess Private Equities Fund,
L.P., dated February 14, 2003 (included as exhibit 10.2 to the Form 8-K
filed February 24, 2003, and incorporated herein by reference).
4.4 Registration Rights Agreement between the Company and Dutchess Private
Equities Fund, L.P., dated February 14, 2003 (included as exhibit 10.3 to
the Form 8-K filed February 24, 2003, and incorporated herein by
reference).
4.5 Debenture Exchange Agreement between the Company and Dutchess Private
Equities Fund, L.P., dated February 14, 2003 (included as exhibit 10.5 to
the Form 8-K filed February 24, 2003, and incorporated herein by
reference).
4.6 Addendum to the Subscription Agreement, dated July 21, 2003 (included as
Exhibit 10.1 to the Form 8-K filed July 22, 2003, and incorporated herein
by reference).
4.7 Amended Debenture between the Company and Dutchess Private Equities Fund,
L.P., dated February 14, 2003 (included as Exhibit 10.2 to the Form 8-K
filed July 22, 2003, and incorporated herein by reference).
4.8 Registration Rights Agreement between the Company and Dutchess Private
Equities Fund, L.P., dated January 9, 2004 (filed as Exhibit 10.16 to the
Form SB-2 filed January 28, 2004, and incorporated herein by reference).
4.9 Subscription Agreement Form (included as exhibit 10.1 to the Form 8-K filed
March 24, 2005, and incorporated herein by reference).
4.10 A Warrant Form (included as exhibit 4.1 to the Form 8-K filed March 24,
2005, and incorporated herein by reference).
4.11 B Warrant Form (included as exhibit 4.2 to the Form 8-K filed March 24,
2005, and incorporated herein by reference).
4.12 Promissory Note between the Company and Dutchess Private Equities Fund, II,
L.P., dated October 27, 2004 (included as exhibit 4.11 to the Form SB-2
filed June 17, 2005, and incorporated herein by reference).
4.13 Promissory Note between the Company and Dutchess Private Equities Fund, II,
L.P., dated January 10, 2005 (included as exhibit 4.12 to the Form SB-2
filed June 17, 2005, and incorporated herein by reference).
4.14 A Warrant Form (included as Exhibit 4.1 to the Form 8-K filed January 5,
2006, and incorporated herein by reference).
4.15 B Warrant Form (included as Exhibit 4.2 to the Form 8-K filed January 5,
2006, and incorporated herein by reference).
31
4.16 Form of Common Stock Purchase Warrant (included as exhibit 4.16 to the Form
SB-2/A filed July 5, 2006 and incorporated herein by reference).
5.1* Opinion re: legality of Amy M. Trombly, Esq.
10.1 Subscription Agreement Form (included as exhibit 10.1 to the Form 8-K filed
February 24, 2003, and incorporated herein by reference).
10.2 Debenture Agreement between the Company and Dutchess Private Equities Fund,
LP, dated February 14, 2003 (included as exhibit 10.2 to the Form 8-K filed
February 24, 2003, and incorporated herein by reference).
10.3 Registration Rights Agreement between the Company and Dutchess Private
Equities Fund, LP, dated February 14, 2003 (included as exhibit 10.3 to the
Form 8-K filed February 24, 2003, and incorporated herein by reference).
10.4 Escrow Agreement between the Company and Dutchess Private Equities Fund,
LP, dated February 14, 2003 (included as exhibit 10.4 to the Form 8-K filed
February 24, 2003, and incorporated herein by reference).
10.5 Debenture Exchange Agreement between the Company and Dutchess Private
Equities Fund, LP, dated February 14, 2003 (included as exhibit 10.5 to the
Form 8-K filed February 24, 2003, and incorporated herein by reference).
10.6 Addendum to the Subscription Agreement, dated July 21, 2003 (included as
Exhibit 10.1 to the Form 8-K filed July 22, 2003, and incorporated herein
by reference).
10.7 Amended Debenture between the Company and Dutchess Private EquitiesFund,
LP, dated February 14, 2003 (included as Exhibit 10.2 to the Form 8-K filed
July 22, 2003, and incorporated herein by reference).
10.8 Memorandum of Understanding between the Company and Malsha Imports, Inc.,
dated February 28, 2003 (included as Exhibit 10.11 to the Form SB-2/A filed
September 15, 2003, and incorporated herein by reference).
10.9 Confidentiality and No Conflict Agreement between the Company and American
Connections, LLC, dated February 28, 2003 (included as Exhibit 10.12 to the
Form SB-2/A filed September 15, 2003, and incorporated herein by
reference).
10.10 Authorized Subcontractor Agreement between the Company and American
Connections, LLC, dated February 28, 2003 (included as Exhibit 10.13 to the
Form SB-2/A filed September 15, 2003, and incorporated herein by
reference).
10.11 Lease Agreement between the Company and American Connections Florida, LLC,
dated May 22, 2003 (included as Exhibit 10.14 to the Form SB-2/A filed
September 15, 2003, and incorporated herein by reference).
10.12 Investment Agreement between the Company and Dutchess Private Equities
Fund, LP, dated January 9, 2004 (included as exhibit 10.15 to the Form SB-2
filed January 28, 2004, and incorporated herein by reference).
10.13 Registration Rights Agreement between the Company and Dutchess Private
Equities Fund, LP, dated January 9, 2004 (included as Exhibit 10.16 to the
Form SB-2 filed January 28, 2004, and incorporated herein by reference).
10.14 Placement Agent Agreement between the Company, Dutchess Private Equities
Fund, LP, and Charleston Capital Securities, dated January 9, 2004
(included as Exhibit 10.17 to the Form SB-2 filed January 28, 2004, and
incorporated herein by reference).
10.15 Consulting Agreement between the Company and W. Scott McBride, dated
January 15, 2004 (included as exhibit 99.1 to the Form S-8 filed February
3, 2004, and incorporated herein by reference).
10.16 Corporate Consulting Agreement between the Company and Theodore J. Smith,
Jr., dated January 28, 2004 (included as exhibit 99.2 to the Form S-8 filed
February 3, 2004, and incorporated herein by reference).
10.17 Consulting Agreement between the Company and Mike DeGirolamo, dated
January 5, 2004 (included as exhibit 99.3 to the Form S-8 filed February 3,
2004, and incorporated herein by reference).
10.18 Consulting Agreement between the Company and Jeff Teischer, dated January
5, 2004 (included as exhibit 99.4 to the Form S-8 filed February 3, 2004,
and incorporated herein by reference).
32
10.19 Consulting Agreement between the Company and David Taylor, dated December
12, 2003 (included as exhibit 99.5 to the Form S-8 filed February 3, 2004,
and incorporated herein by reference).
10.20 Consulting Agreement between the Company and Pablo Oliva, dated November
12, 2003 (included as exhibit 99.6 to the Form S-8 filed February 3, 2004,
and incorporated herein by reference).
10.21 Consulting Agreement between the Company and Tommy Hollman, dated January
27, 2004 (included as exhibit 99.7 to the Form S-8 filed February 3, 2004,
and incorporated herein by reference).
10.22 Compensation Agreement between the Company, W. Scott McBride, David
Rasmussen, James H. Gilligan, and Scott Gallagher, dated January 29, 2004
(included as exhibit 99.8 to the Form S-8 filed February 3, 2004, and
incorporated herein by reference).
10.23 Lease Agreement between the Company and Investments Limited, dated August
25, 2004 (included as exhibit 10.1 to the Form 8-K filed September 9, 2004,
and incorporated herein by reference).
10.24 Consulting Agreement between the Company and Pablo Oliva, dated October
26, 2004 (included as exhibit 99.1 to the Form S-8 filed January 11, 2005,
and incorporated herein by reference).
10.25 Corporate Consulting Agreement between the Company and Theodore J. Smith,
Jr., October 26, 2004 (included as exhibit 99.2 to the Form S-8 filed
January 11, 2005, and incorporated herein by reference).
10.26 Subscription Agreement Form (included as exhibit 10.1 to the Form 8-K
filed March 24, 2005, and incorporated herein by reference).
10.27 Promissory Note between the Company and Alpha Capital Aktiengesellschaft
(included as Exhibit 10.1 to the Form 8-K filed January 5, 2006, and
incorporated herein by reference).
10.28 Subscription Agreement between the Company and certain subscribers, dated
December 29, 2005 (included as Exhibit 10.2 to the Form 8-K filed January
5, 2006, and incorporated herein by reference).
10.29 Guaranty Agreement between the Company and certain lenders, dated December
29, 2005 (included as Exhibit 10.3 to the Form 8-K filed January 5, 2006,
and incorporated herein by reference).
10.30 Security Agreement between the Company and certain lenders, dated December
29, 2005 (included as Exhibit 10.4 to the Form 8-K filed January 5, 2006,
and incorporated herein by reference).
10.31 Security and Pledge Agreement between the Company and certain lenders,
dated December 29, 2005 (included as Exhibit 10.5 to the Form 8-K filed
January 5, 2006, and incorporated herein by reference).
10.32 Collateral Agent Agreement between the Company and certain lenders
(included as Exhibit 10.6 to the Form 8-K filed January 5, 2006, and
incorporated herein by reference).
10.33 Promissory Note between the Company and Richard E. Miller, dated January
3, 2006 (included as Exhibit 10.1 to the Form 8-K filed January 9, 2006,
and incorporated herein by reference).
10.34 Stock Purchase Agreement between the Company and Richard E. Miller, dated
January 3, 2006 (included as Exhibit 10.2 to the Form 8-K filed January 9,
2006, and incorporated herein by reference).
10.35 Stock Escrow Agreement between the Company, Richard E. Miller, and
Lambert& Martineau, attorneys at law, dated January 3, 2006 (included as
Exhibit 10.3 to the Form 8-K filed January 9, 2006, and incorporated herein
by reference).
10.36 Amendment Number 1 to the Retailer Agreement between the Company and
EchoStar Satellite LLC, dated March 31, 2006 (included as Exhibit 10.1 to
the Form 8-K filed March 31, 2006, and incorporated herein by reference).
10.37 Amendment to extend Authorized Regional Service Provider Agreement between
the Company and Dish Network Service LLC dated March 31, 2006 (included as
Exhibit 10.2 to the Form 8-K filed March 31, 2006, and incorporated herein
by reference).
10.38 Letter Agreement between the Company and EchoStar Satellite LLC, dated
March 27 2006 (included as exhibit 10.1 to the Form 8-K filed April 5, 2006
and incorporated herein by reference).
33
10.39 Employment Agreement between the Company and Scott Gallagher dated
November 15, 2005 (included as exhibit 10.27 to the Form 10-QSB filed May
15, 2006 and incorporated herein by reference).
10.40 Employment Agreement between the Company and David Rasmussen dated
February 1, 2006 (included as exhibit 10.28 to the Form 10-QSB filed May
15, 2006 and incorporated herein by reference).
14.1 Corporate Code of Conduct and Ethics (included as exhibit 14.1 to the Form
10-KSB filed April 14, 2004, and incorporated herein by reference).
21.1 Subsidiaries of the Registrant (included as exhibit 21.1 to the Form 10-QSB
filed November 14, 2005, and incorporated herein by reference).
23.1 Consent of R.E. Bassie & Co.
23.2* Consent of Withum, Smith & Brown, P.C.
23.3* Consent of Counsel (contained in Exhibit 5.1) * To be filed by amendment
UNDERTAKINGS
(a) The undersigned registrant hereby undertakes to:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the Securities
Act:
(ii) Reflect in the prospectus any facts or events which, individually or
together, represent a fundamental change in the information in the registration
statement. Notwithstanding the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of securities offered would not
exceed that which was registered) and any deviation from the low or high end of
the estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b)(ss.230.424(b) of this chapter)
if, in the aggregate, the changes in volume and price represent no more than a
20% change in the maximum aggregate offering price set forth in the "Calculation
of Registration Fee" table in the effective registration statement; and
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
(4) For determining liability of the undersigned small business issuer under the
Securities Act to any purchaser in the initial distribution of the securities,
the undersigned small business issuer undertakes that in a primary offering of
securities of the undersigned small business issuer pursuant to this
registration statement, regardless of the underwriting method used to sell the
securities to the purchaser, if the securities are offered or sold to such
purchaser by means of any t of the following communication, the undersigned
small business issuer will be a seller to the purchaser and will be considered
to offer or sell such securities to such purchaser:
(i) Any preliminary prospectus or prospectus of the undersigned small business
issuer relating to the offering required to be filed pursuant to Rule 424
(ss.230.424 of this chapter)
(ii) Any free writing prospectus relating to the offering prepared by or on
behalf of the undersigned small business issuer or used or referred to by the
undersigned small business issuer;
(iii) The portion of any other free writing prospectus relating to the offering
containing material information about the undersigned small business issuer or
its securities provided by or on behalf of the undersigned small business
issuer; and
(iv) Any other communication that is an offer in the offering made by the
undersigned small business issuer to the purchaser.
(e) Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the small business issuer pursuant to the foregoing provisions, or
otherwise, the small business issuer has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
and as expressed in the Act and is, therefore, unenforceable.
34
In the event that a claim for indemnification against such liabilities (other
than the payment by the small business issuer of expenses incurred or paid by a
director, officer or controlling person of the small business issuer in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the small business issuer will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
(g) That for the purpose of determining any liability under the Securities Act
to any purchaser:
(1) If the small business issuer is relying on Rule 430B (ss.230.430B of this
chapter):
(i) Each prospectus filed by the undersigned small business issuer pursuant to
Rule 424(b)(3)(ss.230.424(b)(3) of this chapter) shall be deemed to be part of
the registration statement as of the date the filed prospectus was deemed part
of and included in the registration statement; and
(ii) Each prospectus required to be filed pursuant to Rule 424(b)(2), (b)(5), or
(b)(7) (ss.230.424(b)(2), (b)(5), or (b)(7) of this chapter) as part of a
registration statement in reliance on Rule 430B relating to an offering made
pursuant to Rule 415(a)(1)(i), (vii), or (x)(ss.230.415(a)(1)(i), (vii), or (x)
of this chapter) for the purpose of providing the information required by
section 10(a) of the Securities Act shall be deemed to be part of and included
in the registration statement as of the earlier of the date such form of
prospectus is first used after effectiveness or the date of the first contract
of sale of securities in the offering described in the prospectus. As provided
in Rule 430B, for liability purposes of the issuer and any person that is at
that date an underwriter, such date shall be deemed to be a new effective date
of the registration statement relating to the securities in the registration
statement to which that prospectus relates, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
Provided, however, that no statement made in a registration statement or
prospectus that is part of the registration statement will, as to a purchaser
with a time of contract of sale prior to such effective date, supersede or
modify any statement that was made in the registration statement or prospectus
that was part of the registration statement or made in any such document
immediately prior to such effective date; or
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized this Registration
Statement to be signed on its behalf by the undersigned, in the State of
Florida, on December 12, 2006.
FTS GROUP, INC.
By: /s/ Scott Gallagher
--------------------------------
Scott Gallagher
Chief Executive Officer and
Interim Chief Financial Officer
Signature Date
/s/ Scott Gallagher December 12, 2006
- ------------------------- ------------------
Scott Gallagher
Chief Executive Officer,
Interim Chief Financial Officer, Director and Chief Accounting Officer
/s/ David R. Rasmussen December 12, 2006
- -------------------------- ------------------
David R. Rasmussen
Chief Operating Officer and Director
35