Trombly Business Law
1320 Centre Street, Suite 202
Newton, MA 02429
Telephone (617) 243-0060
Facsimile (309) 406-1426
Amy M. Trombly, Esq.
amy@tromblybusinesslaw.com
December 15, 2006
Delivered by electronic submission via EDGAR
United States Securities and Exchange Commission
Division of Corporation Finance
100 F Street, N.E., Mail Stop 7010
Washington, DC 20549
Attn: Mr. Brian V. McAlllister
Re: FTS Group, Inc.
Item 4.02 Form 8-K
Filed December 7, 2006
File No. 0-24829
Dear Mr. McAllister:
I am securities counsel for FTS Group, Inc. (the "Company"). I enclose for
filing under the Securities Act of 1933, as amended, an amended Form 8-K, File
No. 0-24829, together with certain exhibits thereto (the "Form 8-K").
The Amendment to the Form 8-K contains revisions that have been made in response
to comments received from the staff of the Securities and Exchange Commission
(the "Staff") in their letter dated December 11, 2006.
Set forth below are the Company's responses to the Staff's comments. The
numbering of the responses corresponds to the numbering of comments in the
letter from the Staff.
Form 8-K filed December 7, 2006
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Comment 1. Please provide us with a preliminary summary that supports your
basis for stating the measurement of warrants classified as liabilities to fair
value will not have any impact on earnings in any of the amended financial
statements. Please include a detailed discussion of the facts and circumstances
as well as the applicable authoritative accounting guidance that supports your
conclusion.
Response 1. The Company reviewed numerous authoritative accounting guidance in
determining proper measurement and classification issues surrounding the
warrants from the December 29, 2005 financing. We concluded that the
reclassification of the warrants from equity to liability would not impact
earnings in the subsequent quarters for two main reasons.
Firstly, EITF-0019 referred us to SFAS No. 133 to determine if the warrants were
derivative in nature. Based on a thorough review of the subscription agreements
and the specific criteria in paragraph six of the SFAS 133 we concluded that the
warrants were not derivatives.
Secondly, we reviewed EITF 98-5 Accounting for Convertible Securities with
Beneficial Conversion Features or Contingently Adjustable Conversion Ratios.
Paragraph 13 of this abstract states "The Task Force also discussed the
accounting for (a) a security that becomes convertible only upon the occurrence
of a future event outside the control of the holder and (b) a security that is
convertible from inception but contains conversion terms that change upon the
occurrence of a future event. The Task Force reached a consensus that any
contingent beneficial conversion feature should be measured at the commitment
date but not recognized in earnings until the contingency is resolved.
The Company concluded that the pending authorization of an increase in
authorized shares sufficient to cover all possible future conversions, is a
contingency that fits the paragraph 13 (a). In addition, the Subscription
agreement that governs this Issue precludes exercise of warrants in excess of
authorized shares. Per paragraph 9 (r) of the Agreement, subscribers are
permitted to exercise warrants only up to their pro-rata portion not exceeding
available authorized shares. The entire paragraph is replicated below.
(r) Shareholder Approval. The Company and Subscribers agree that until the
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Company obtains shareholder approval of an increase in the authorized Common
Stock of the Company to not less than _________ Shares of Common Stock, files an
amendment to the Company's Articles of Incorporation and reserves ____% of the
amount of shares of Common Stock necessary to allow the conversion of the entire
Note principal and interest that may accrue thereon and 100% of the Common Stock
issuable upon exercise of all of the Warrants issued in connection with this
Agreement (collectively such shares of Common Stock being the "RESERVE AMOUNT"
and the shareholder approval, amendment and reservation being the
"RESERVATION"), each Subscriber may not convert the Note nor exercise any
Warrants in excess of each Subscriber's pro rata portion of __________ shares of
Common Stock. Each Subscriber's pro rata portion is equal to the Note principal
purchased by such Subscriber divided by the aggregate Note principal sold in the
Offering. The Company undertakes to file a preliminary proxy statement with the
Commission for a meeting of the Company's shareholders relating to the
Reservation not later than ten (10) days after the Closing Date ("PROXY FILING
DATE"). The Company covenants to use its best efforts to obtain the
Reservation not later than fifty (50) days after the Closing
Conclusion: The liability will remain at its original measurement amount until
future events occur.
Comment 2. Please amend to delete the phrase "the SEC has taken the position
that we still need to reclassify the treatment of the warrants" from the press
release in your Item 4.02 Form 8-K. The decision to include the restatements in
the 2005 Form 10-KSB and Form 10-QSB for the three months ended March 31, 2006,
June 30, 206 and September 30, 2006, is management's decision.
Response 2. The Company has complied with the Staff's comment.
Comment 3. When you amend your periodic reports to file your restated
financial statements, describe the effect of the restatement on the officers'
conclusions regarding the effectiveness of the company's disclosure controls and
procedures. See Item 307 of Regulation S-B. If the officers conclude that the
disclosure controls and procedures were effective, despite the restatement,
describe the basis for the officers' conclusions, as applicable.
Response 3. The Company has complied with the Staff's comment.
If you have further questions or comments, please feel free to contact us. We
are happy to cooperate in any way we can.
Regards,
/s/ Amy M. Trombly
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Amy M. Trombly
Counsel for FTS Group, Inc.
cc: FTS Group, Inc.