UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB/A
(MARK ONE)
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2006
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934. FOR THE TRANSITION PERIOD FROM
__________ TO __________
COMMISSION FILE NUMBER 000-24829
FTS GROUP, INC.
---------------
(exact name of small business issuer as specified in its charter)
Nevada 84-1416864
------------------------------- -------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
7610 West Hillsborough Ave., Tampa, Florida 33615
-------------------------------------------------
(Address of principal executive offices)
(215) 688-2355
--------------
(issuer's telephone number)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports, and (2)
has been subject to such filing requirements in for the past 90 days. Yes |X| No
|_|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes |_| No |X|
As of March 31, 2006 we had 114,679,131 shares of common stock, par value
$0.001, outstanding.
Transitional Small Business Disclosure Format (check one): Yes |_| No |X|
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FTS GROUP, INC.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE
- -----------------------------
Item 1. Financial Statements 1
Item 2. Management's Discussion and Analysis or
Plan of Operation 15
Item 3. Controls and Procedures 18
PART II. OTHER INFORMATION
- --------------------------
Item 1. Legal Proceedings 19
Item 2. Unregistered Sales of Equity Securities and 19
Use of Proceeds
Item 3. Defaults Upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
Condensed Consolidated Financial Statements (unaudited) PAGE
Balance Sheet - March 31,2006 and December 31, 2005 2
Statements of Operations - Three months ended
March 31, 2006 and 2005 3
Statements of Cash Flows - Three months ended March 31,
2006 and 2005 4
Notes to Condensed Consolidated Financial Statements 5
1
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FTS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 2006 and December 31, 2005
Restatement
ASSETS 2006 2005
---- ----
Current assets:
Cash and cash equivalents $ 124,801 $ 243,079
Restricted cash 500,000 560,000
Accounts receivable 136,713 12,201
Inventories 212,807 33,180
Prepaid expenses and current assets 122,512 474,683
------------ ------------
Total current assets 1,096,833 1,323,143
Property and equipment, net of accumulated depreciation 389,762 208,210
Unamortized discount on convertible debt 351,927 380,690
Unamortized debt issuance costs 118,291 46,313
Excess of cost over the net assets of business acquired 5,177,696 -
Deposits 17,182 16,139
------------ ------------
Total assets $ 7,151,691 $ 1,974,495
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses 236,552 468,185
Current portion of notes payable to related parties 2,397,048 80,850
Convertible debentures 1,462,431 1,002,496
Current installments of long-term debt-equipment loans 13,088 -
------------ ------------
Total current liabilities 4,109,119 1,551,531
Convertible debentures - 430,088
Long-term debt to related parties, less current installments 1,750,000 -
Long-term debt equipment loans, less current installments 2,851
------------ ------------
Total liabilities 5,861,970 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:
500,000 Shares authorized, issued and outstanding at March 31, 2006 1,000,000 -
Common stock, $.001 par value. Authorized 150,000,000 shares:
114,679,131 shares issued and outstanding at March 31, 2006,
102,098,756 shares issued and outstanding at December 31, 2005 114,679 102,099
Additional paid-in capital 10,475,553 10,196,539
Accumulated deficit (10,300,511) (10,305,762)
------------ ------------
Total stockholders' equity (deficit) 1,289,721 (7,124)
------------ ------------
Commitments and contingent liabilities - -
------------ ------------
Total liabilities and stockholders' equity $ 7,151,691 $ 1,974,495
============ ============
See accompanying notes to condensed consolidated financial statements.
2
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FTS GROUP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three and Six Months Ended March 31, 2006 and 2005
2006 2005
-------------- --------------
REVENUES
Service Revenue-See World Satellites, Inc. $ 1,138,036 $ -
Product Retail Sales-FTS Wireless, Inc. 495,578 303,970
-------------- --------------
1,633,614 303,970
-------------- --------------
COST OF GOODS SOLD
Service-See World Satellites, Inc. 209,208 -
Product-FTS Wireless, Inc. 374,274 135,518
-------------- --------------
583,482 135,518
-------------- --------------
GROSS PROFIT
Service-See World Satellites, Inc. 928,828 -
Product-FTS Wireless, Inc. 121,304 168,452
-------------- --------------
1,050,132 168,452
-------------- --------------
GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses 1,008,186 755,327
-------------- --------------
1,008,186 755,327
-------------- --------------
INCOME (LOSS) FROM OPERATIONS 41,946 (586,875)
-------------- --------------
OTHER INCOME (EXPENSE)
Interest (36,695) (184,112)
-------------- --------------
(36,695) (184,112)
-------------- --------------
NET INCOME (LOSS) $ 5,251 $ (770,987)
============== ==============
PER SHARE INFORMATION:
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 107,195,939 52,020,779
============= =============
Diluted 120,862,553 52,020,779
============= =============
NET LOSS PER COMMON SHARE:
Basic $0.00 ($0.01)
============= =============
Diluted
$0.00 ($0.02)
============= =============
See accompanying notes to condensed consolidated financial statements.
3
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FTS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months ended March 31, 2006 and 2005
2006 2005
---------- ----------
Cash flows from operating activities:
Net income (loss) 5,251 (770,987)
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 95,169 8,077
Common shares issued for services 98,400 294,350
Amortization of debt discount - 180,877
(Increase) decrease in operating assets:
Accounts receivable (38,754) (124,334)
Inventories (35,083) (9,136)
Prepaid expenses 423,477 8,158
Other assets (1,043) (1,000)
Increase (decrease) in operating liabilities:
Accounts payable and accrued expenses (338,398) 45,682
---------- ----------
Net cash provided by (used in) operating activities 209,019 (368,313)
---------- ----------
Cash flows from investing activities:
Net assets 100% acquisition of See World Satellites, Inc. (206,100) -
Capital expenditures for property and equipment (74,000) (85,064)
Release of restriction on funding proceeds for investment in acquisition 60,000 -
Payment to See World Satellites, Inc. acquisition (500,000) -
---------- ----------
Net cash used in investing activities (720,100) (85,064)
---------- ----------
Cash flows from financing activities:
Proceeds from issuance of stock 140,109 713,460
Proceeds from convertible debentures 30,000 -
Proceeds from stock issued under equity line - 270,994
Proceeds from note payable to Dutchess Advisors - 500,000
Proceeds from notes payable to individuals 635,002 -
Repayments of note payable Dutchess Advisors - (817,599)
Repayments of notes payable-truck loans (4,708) -
Repayments of notes payable to related parties - (193,815)
Repayments of debenture loan - (26,876)
Repayments of notes payable to individuals (375,000) -
Repayment of loans from related parties (32,600) -
---------- ----------
Net cash provided by financing activities 392,803 446,164
---------- ----------
Net decrease in cash (118,278) (7,213)
Cash at beginning of year 243,079 7,949
---------- ----------
Cash at end of year 124,801 736
========== ==========
<FN>
See accompanying notes to condensed consolidated financial statements.
4
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FTS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 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 three month period ended March 31, 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.
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.
5
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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 March 31, 2006 or December 31, 2005.
6
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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.
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
three months ended March 31, 2006, 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.
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
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.
7
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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.
8
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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:
Consolidated Balance Sheets March 31, 2006
Previously Reported Increase (Decrease) Restated
------------------ ------------------ ------------------
Cash and cash equilavents $ 624,801 $ (500,000) $ 124,801
Restricted cash $ - $ 500,000 $ 500,000
Convertible debenture-current portion $ 1,238,321 $ 224,110 $ 1,462,431
Convertible debentures $ - $ - $ -
Additional paid-in capital $ 10,699,663 $ (224,110) $ 10,475,553
Total Stockholder's equity (deficit) $ 1,513,831 $ (224,110) $ 1,289,721
In addition, the Company has included restatements to reflect certain
clarifications made in response to comments raised in the review of
the Company's registration statement on Form SB-2 as filed on May
2, 2006, on Form SB-2/A as filed on September 29, 2006, on Form
SB-2/A as filed on November 7, 2006 and on Form
SB-2/A as filed on December 12, 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.
The Company has also restated the presentation of its cash flow statement for
the three months ended March 31, 2006. In response to SEC comments as raised in
its review of the Company's registration statement on forms SB-2 and SB-2/A as
noted in the preceeding paragraph, the Company determined the need to correct
the presentation of the cash flow affects of the acquisition of See World
Satellites, Inc. The effect of the restatement on specific amounts provided in
the consolidated financial statements is as follows:
Consolidated Statement of Cash Flows For the three months ended March 31, 2006
Previously Reported Increase (Decrease) Restated
------------------ ------------------ ------------------
Accounts receivable $ (124,512) $ 85,758 $ (38,754)
Inventories $ (179,627) $ 144,544 $ (35,083)
Prepaid expenses $ 352,171 $ 71,306 $ 423,477
Accounts payable and accrued expenses $ (231,633) $ (106,765) $ (338,398)
Net provided by operating activities $ 14,176 $ 194,843 $ 209,019
Net assets 100% acquisition of See World Satellites, Inc. $ - $ (206,100) $ (206,100)
Capital expenditures for property and equipment $ (4,000) $ (70,000) $ (74,000)
Purchase of additional store locations $ (70,000) $ 70,000 $ -
Release of restriction on funding proceeds for investment in acquisition $ - $ 60,000 $ 60,000
Net cash used in investing activities $ (574,000) $ (146,100) $ (720,100)
Proceeds from convertible debentures $ 134,947 $ (104,947) $ 30,000
Proceeds from related party loans $ 518,798 $ 116,204 $ 635,002
Net cash provided by financing activities $ 381,546 $ 11,257 $ 392,803
(3) RESTRICTED CASH
At March 31, 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. 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
Property and equipment are as follows at March 31, 2006 and December 31, 2005:
2006 2005
---------- ----------
Leasehold improvements $ 189,878 $ 180,937
Furniture and fixtures $ 124,208 $ 54,208
Equipment $ 81,942 $ 20,890
Vehicles $ 303,655 $ 11,927
---------- ----------
Total property and equipment $ 699,683 $ 267,962
Less: accumulated depreciation $ (309,921) $ (59,752)
---------- ----------
Net property and equipment $ 389,762 $ 208,210
========== ==========
Depreciation expense for the three months ended March 31, 2006 and 2005 was
$28,902 and $8,077 respectively.
(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. 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.
9
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(6) Convertible Debt
In December 2005 and January 2006 the Company raised a total of $1,858,622 from
the issuance of Secured Convertible Promissory Notes with selected subscribers
before the original issue discount. 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.
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.
(7) Income Taxes
The Company accounts for income taxes under SFAS 109, "Accounting for Income
Taxes", which requires use of the liability method. SFAS 109 provides that
deferred tax assets and liabilities are recorded based on the differences
between the tax bases of assets and liabilities and their carrying amounts for
financial reporting purposes, referred to as temporary differences. Deferred tax
assets and liabilities at the end of each period are determined using the
currently enacted tax rates 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 $ -- $ --
============ ============
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The net operating loss carryforward of $10,300,511 will expire through 2024.
At March 31, 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. Five of the
locations have lease terms ranging from six months to three years while four
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 $108,505
2007 87,705
2008 30,634
--------
$226,844
========
Rent expense was $165,392 and $135,447 for the years ended December 31, 2005 and
2004, 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
their 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. Additionally, these same three vendors are also major
customers of the Company who provide 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
three year employment agreement dated February 1, 2006.
During the three months ending March 31, 2006, the Company issued 2,250,000
restricted shares 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 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 valued at $0.02 to a consultant of the Company to reduce
$18,400 consulting services relating to services rendered during 2005.
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.
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.
During the period ended March 31, 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.
(10) Warrants and Options
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 under the plan is ten years.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 March 31, 2006:
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.
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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
---------- ----------
On September 28, 2005, the Company reduced the exercise price of the A warrants
from $0.12 to $0.10. Additionally, the Company reduced the exercise price of the
B warrants from $0.08 to $0.03.
During the three months ending March 31st, 2006 4,670,313 "B" warrants priced at
$.03 were exercised for gross proceeds of $140,109. Expenses relating to warrant
exercises were $14,048. Additionally, during the three months ended March 31st,
2006 9,499,937 "B" warrants expired.
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.
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 Company's 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.
2005 2005
Underlying Exercise
Shares Price
---------- ----------
Warrants issued in December 2005
A Warrants 36,260,486 $ .02868
B Warrants 18,130,243 $ .0239
---------- ----------
(11) 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 March 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.
(12) Related Party Transactions (See World Satellites Acquisition)
At March 31, 2006, the Company had the following debt obligations and made the
following payments to Mr. Richard Miller a director and President of the
Companies wholly owned subsidiary See World Satellites, Inc. (SWS). The Company
paid Mr. Miller $500,000 on January 3rd, 2006 relating to the acquisition of
SWS. The Company currently has 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 SWS. Additionally, the Company issued 500,000
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 our option or that of the
holder. The Series B stock has no voting rights. Each share is worth $2.00. The
Company also has a $3.5 Million note payable to the President of SWS. 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 $143,798 to
the Company. The Company expects to repay the $143,798 note during 2006.
(13) 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 March 31,
2006, and options to purchase 598,000 shares of the Company have expired:
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)
14
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(14) Subsequent Events
In May 2006, 11,458,338 "B" warrants priced at $0.0239 were exercised. The
Company received total proceeds of $273,854. Simultaneously, the Company issued
11,458,388 new "B" warrants priced at $.04. On April 3, 2006, the Company made a
payment of $250,000 to Mr. Richard Miller relating to the acquisition of See
World Satellites, Inc. The $3.5 Million note was reduced to $3.250 Million on
April 3, 2006.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
The following discussion and analysis contains a comparison of the results of
operations for the three months ended March 31, 2006 and the same period in
2005. This discussion and analysis should be read in conjunction with the
un-audited interim consolidated financial statements and the notes thereto
included in this report, and the audited financial statements in our Annual
Report on Form 10-KSB for the year ended December 31, 2005.
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS
This report on Form 10-QSB contains forward-looking statements that involve
risks and uncertainties. We generally use words such as "believe," "may,"
"could," "will," "intend," "expect," "anticipate," "plan," and similar
expressions to identify forward-looking statements. You should not place undue
reliance on these forward-looking statements. Our actual results could differ
materially from those anticipated in the forward-looking statements for many
reasons, including the risks described in this report and in our annual report
on Form 10-KSB filed with the Securities and Exchange Commission. Although we
believe the expectations reflected in the forward-looking statements are
reasonable, they relate only to events as of the date on which the statements
are made, and our future results, levels of activity, performance or
achievements may not meet these expectations. We do not intend to update any of
the forward-looking statements after the date of this document to conform these
statements to actual results or to changes in our expectations, except as
required by law.
OVERVIEW
We focus on developing, investing in, and acquiring cash-flow positive
businesses and viable business projects primarily in the wireless and technology
industries. Through our-wholly owned subsidiaries See World Satellites, Inc. and
FTS Wireless, Inc. we operate a RSP (Regional Service Provider)and retail
distribution business for DISH Network satellite television systems primarily to
the western Pennsylvania market and nationally through our retail channel. We
also operate a chain of nine retail wireless locations in the Gulf Coast market
of Florida. Currently, we lease a location in Indiana, Pennsylvania for our
satellite RSP business. Additionally, we lease nine retail locations in Florida.
We lease three locations in Tampa, two locations in St. Petersburg, one in
Largo, one in Lutz, one in Seminole and one in Clearwater.
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CRITICAL ACCOUNTING POLICIES AND ESTIMATES
In December 2001, the SEC issued a advice INTENDED to elicit more precise
disclosure about accounting policies management believes are most critical in
portraying our financial results and in requiring management's most difficult
subjective or complex judgments. The preparation of financial statements in
conformity with accounting principles generally accepted in the United States of
America requires management to make judgments and estimates.
We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements.
REVENUE RECOGNITION
Net revenues from product sales are recognized upon the transfer of title and
risk of ownership to customers. Allowances for estimated returns, discounts and
doubtful accounts are provided when sales are recorded. Shipping and handling
costs are included in cost of sales.
We recognize revenue from the sale and activation of wireless handsets and
related accessories.
IMPAIRMENT OF LONG-LIVED ASSETS
We review our long-lived assets including property and equipment and our
identifiable intangible assets subject to amortization whenever current events
or changes in circumstances indicate that the carrying amount of the assets may
not be fully recoverable. To determine recoverability of our long-lived assets,
we evaluate the estimated future undiscounted cash flows that are directly
associated with and that are expected to arise as a direct result of the use and
eventual disposition of that long-lived asset. If the estimated future
undiscounted cash flows demonstrate that recoverability is not probable, an
impairment loss would be recognized. An impairment loss would be calculated
based on the excess carrying amount of the long-lived asset over the long-lived
assets fair value.
THREE MONTHS PERIOD ENDED MARCH 31, 2006 AS COMPARED TO THREE MONTHS ENDED
MARCH 31, 2005
RESULTS OF OPERATIONS
SEGMENT RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 2006
FTS FTS See
Group Wireless World
Inc. Inc. Satellites Total
------------ ------------ ------------ ------------
External Revenues $ - $ 495,578 $ 1,138,036 $ 1,633,614
Internal Revenues 75,000 75,000
------------ ------------ ------------ ------------
Segment Revenues 75,000 495,578 1,138,036 1,708,614
Cost of Goods Sold - 374,274 209,208 583,482
------------ ------------ ------------ ------------
Gross Profit 75,000 121,304 928,828 1,125,132
Selling, General,
and Administrative 144,060 125,460 754,803 1,024,323
------------ ------------ ------------ ------------
EBITDA (69,060) (4,156) 174,025 100,809
Depreciation (3,806) (10,096) (15,000) (28,902)
Amortization (29,573) - - (29,573)
Interest (36,694) - (389) (37,083)
------------ ------------ ------------ ------------
Net Income (Loss) (139,133) (14,252) 158,636 5,251
Intersegment Adjustments (75,000) 75,000 -
------------ ------------ ------------ ------------
$ (214,133) $ (14,252) $ 233,636 $ 5,251
SALES REVENUE
For the three months ended March 31, 2006, overall sales increased $1,329,644 or
537%, to $1,633,614, as compared to $303,970 for the three months ended March
31, 2005. The increase in sales revenue was primarily related to increased
sales, service and installations of DISH satellite television systems resulting
from the acquisition of our wholly owned subsidiary See World Satellites, Inc.,
closed during the quarter. Sales in our retail wireless business also increased
during the first quarter of 2006 primarily due to greater acceptance of Metro
PCS wireless products and services as well as effective marketing and promotion
strategies.
COST OF GOODS SOLD
For the three months ended March 31, 2006, cost of goods sold increased by
$447,694 to $583,482, as compared to $135,518 for the three months ended March
31, 2005. The increase in cost of goods sold was related to increased product
purchases of satellite television systems and wireless handsets and other
related products.
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GROSS PROFITS
Gross Profits increased by $881,680 from $168,452 in 2005 to $1,050,132 in 2006.
The increase in gross profits is attributed to the increase in service and sale
of wireless satellite systems and an increase in sales of wireless handsets
during the period. Gross profits as a percentage of sales increased to 64% in
2006 compared to 23% in 2005. The increase in gross profits as a percentage of
sales is related to the introduction of business related to the sales, service
and installation of satellite television systems for DISH networks and a shift
from post-paid handsets sales to a greater focus on pre-paid handset sales for
Metro PCS.
SELLING,GENERAL AND ADMINISTRATIVE
Selling, General and Administrative Expenses for the three months ended March
31, 2006, increased $252,859 or 33% to $1,008,186, as compared to $755,327 for
the three months ended March 31, 2005. The increase in Selling, General and
Administrative expenses was primarily related to increased operating costs
related to our newly-acquired operations at See World Satellites, Inc. and
related acquisition and financing costs.
OPERATING INCOME
Operating income increased to $41,946 during the three months ended March 31,
2006, compared to an operating loss of ($586,875) for the three months ended
March 31, 2005 for a net improvement of $628,821.
NET INCOME
Net income increased to $5,251 for the three months ended March 31, 2006
compared to a net loss of ($770,987) during the three months ending March 31,
2005. The increase in net income was primarily related to improved operating
conditions for our retail wireless subsidiary due to sales of Metro PCS products
and services and increased sales of DISH satellite television network system
sales, service and installations.
INTEREST EXPENSE
Interest expense decreased $147,417, to $36,695 for the three months ended March
31, 2006, as compared to $184,112 for the three months ended March 31, 2005. The
decrease is related to reduced financing costs and fees incurred on promissory
notes incurred during the first quarter of 2005.
LIQUIDITY AND CAPITAL RESOURCES
Our requirements for capital are to (i) pay down debt,(ii)fund possible
acquisitions, and (iii) provide working capital and funds to expand our current
business. Our primary source of financing during the three months ended March
31, 2006 include cash received from the issuance of common stock and cash
generated from operations.
As of March 31, 2006, our Current Assets were $1,096,833 and Current Liabilities
were $3,885,009. Our Current Liabilities consist mainly of $1,462,431 of
convertible debentures, $2,397,048 of current portion of notes payable to
related parties, $1,750,000 Long-term debt to related parties, less current
installments, accounts payable and accrued expenses of $236,552, current
installments of long term debt equipment loans of $13,088 and long term debt
equipment loans, less current installments of $2,851.
17
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At March 31, 2006, we had cash available of $124,801, accounts receivable of
$136,713, inventory of $212,807, property and equipment net of accumulated
depreciation of $389,762, prepaid expenses and current assets of $122,512,
restricted cash of $500,000, deposits of $17,182, unamortized discount on
convertible debt of $351,927, unamortized debt issuance costs of $118,291 and
excess of cost over net assets of business acquired of $5,177,696 for total
assets of $7,151,691.
During the three month period ended March 31, 2006, we generated cash of
$209,019 in operating activities as compared to the three month period ended
March 31, 2005, where we used $368,313 in cash for operating activities. Net
cash provided by financing activities for the three months ended March 31, 2006
and 2005 of $392,803 and $446,164, respectively. Accumulated deficit decreased
from ($10,305,762) at December 31, 2005 to ($10,300,511) at March 31, 2006.
Stockholders equity improved from ($7,124)1 at December 31, 2005 to stockholders
equity of $1,289,721 at March 31, 2006 for a net improvement of $1,296,845.
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 ended March 31, 2006, 4,670,313 warrants priced at $0.03
were exercised during the quarter ended March 31, 2006 for gross proceeds of
$140,109.
SUBSIDIARIES
As of March 31, 2006, we had two wholly-owned subsidiaries, FTS Wireless, Inc.
and See World Satellites, Inc.
ITEM 3. CONTROLS AND PROCEDURES.
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Our management evaluated, with the participation of our Chief Executive
Officer/InterimChief Financial Officer, the effectiveness of our disclosure
controls and procedures as of the end of the period covered by this Quarterly
Report, as amended on Form 10-QSB. Based on this evaluation, our Chief Executive
Officer/Interim Chief Financial Officer concluded that our disclosure controls
and procedures are effective to ensure that information we are required to
disclose in reports that we file or submit under the Securities Exchange Act of
1934 (i) is recorded, processed, summarized and reported within the time periods
specified in Securities and Exchange Commission rules and forms, and (ii) is
accumulated and communicated to our management, including our Chief Executive
Officer/Interim Chief Financial Officer, as appropriate to allow timely
decisions regarding required disclosure. Our disclosure controls and procedures
are designed to provide reasonable assurance that such information is
accumulated and communicated to our management. Our disclosure controls and
procedures include components of our internal control over financial reporting.
Management's assessment of the effectiveness of our internal control over
financial reporting is expressed at the level of reasonable assurance that the
control system, no matter how well designed and operated, can provide only
reasonable, but not absolute, assurance that the control system's objectives
will be met.
RESTATEMENT
In connection with the restatement and the filing of this Form 10-QSB/A, our
management, with the participation of our Chief Executive Officer/Interim Chief
Financial Officer, re-evaluated the effectiveness of our disclosure controls and
procedures as of the end of the period covered by this report. Based on the
re-evaluation, the Chief Executive Officer/Interim Chief Financial Officer
concluded that the disclosure controls and procedures as of the end of the
period covered by this report were effective. Specifically, our Chief Executive
Officer/Interim Chief Financial Officer evaluated the effects of EITF 00-19 and
FASB Statement 133 on the issuance of certain warrants. Even though the Chief
Executive Officer/Interim Chief Financial Officer believed that the initial
treatment of warrants as a liability was proper, he ultimately determined that,
since we did not have enough authorized shares of common stock to settle the
"Hypothetical" exercise of warrants, it was more appropriate to reclassify the
warrants as a liability.
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Despite the restatement, as of March 31, 2006, there were no changes in our
internal control over financial reporting that occurred during the fiscal
quarter ended March 31, 2006 that materially affected, or is reasonably likely
to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
We are not aware of any litigation or potential litigation that could have a
material impact on our business.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
During the three months ending March 31, 2006, we issued 1,500,000 restricted
shares of our common stock to Mr. David Rasmussen relating to a three year
employment agreement dated February 1, 2006.
During the three months ending March 31, 2006, we issued 2,250,000 restricted
shares valued at $0.02 to a consultant of the Company to reduce an outstanding
debt obligation of $45,000.
During the three months ending March 31, 2006, we issued 2,500,000 restricted
shares valued at $0.02 to an officer of the Company as a success bonus for 2005.
During the three months ending March 31, 2006, we issued 920,000 restricted
shares valued at $0.02 to an officer of the Company to reduce $18,400 consulting
services relating to services rendered during 2005.
Additionally the Company issued 500,000 shares of its Series B Convertible
Preferred stock to Mr. Richard Miller, President of See World Satellites, Inc.
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 our option or
that of the holder. The Series B stock has no voting rights. Each share is worth
$2.00.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
Reports on form 8K
On January 5, 2006, we filed a Form 8-K relating to a financing and a new
material obligation.
On January 9, 2006, we filed a Form 8-K relating to the acquisition of 100% of
the outstanding shares of See World Satellite, Inc.
On January 12, 2006, we filed an 8-K relating to the departure of a director of
the Company.
On March 3, 2006, we filed an amended 8-K with the audited financials statement
of our acquisition. The original Form 8-K relating to the acquisition was filed
on January 9, 2006
On March 13, 2006, we filed a Form 8-K relating to the issuance of Series B
Preferred Convertible stock.
On March 31, 2006, we filed a Form 8-K relating to an amendment to our agreement
with EchoStar Satellite, L.L.C. and DISH Network Service, L.L.C.
On April 5, 2006, we filed a Form 8-K relating to agreements between EchoStar
Satellite, L.L.C., Richard Miller and See World Satellites, Inc. relating to our
acquisition of See World Satellites, Inc.
Number Description of Exhibit
- ------ ----------------------
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).
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).
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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).
4.10A Warrant Form (included as exhibit 4.1 to the Form 8-K filed March 24,
2005, and incorporated herein by reference).
4.11B 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).
10.1 Subscription Agreement Form (included as exhibit 10.1 to the Form 8-K
filed February 24, 2003, and incorporated herein by reference).
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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 Equities
Fund, 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).
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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).
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., dated October 26, 2004 (included as exhibit 99.2 to the Form S-8
filed January 11, 2005, and incorporated herein by reference).
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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 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).
10.28 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).
31.1 Certification of the Chief Executive Officer and Interim Chief Financial
Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Officers pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
FTS GROUP, INC.
/s/ Scott Gallagher
-------------------------
Scott Gallagher
Chief Executive Officer and
Interim Chief Financial Officer
(Principal Accounting Officer)
December 15, 2006
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