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 SEPTEMBER 30, 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
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(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 September 30, 2006 we had 131,737,469 shares of common stock, par value
$0.001, outstanding.
Transitional Small Business Disclosure Format (check one): Yes |_| No |X|
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 19
Item 3. Controls and Procedures 27
PART II. OTHER INFORMATION
- --------------------------
Item 1. Legal Proceedings 28
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 28
Item 3. Defaults Upon Senior Securities 29
Item 4. Submission of Matters to a Vote of Security Holders 29
Item 5. Other Information 29
Item 6. Exhibits and Reports on Form 8-K 29
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) PAGE
BALANCE SHEET - SEPTEMBER 30,2006 AND DECEMBER 31, 2005 2
Statements of Operations - Three and Nine months ended September 30, 2006
and 2005 3
Statements of Cash Flows - Nine months ended September 30, 2006 and 2005 4
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 5
1
FTS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, 2006 and December 31, 2005
Restated
Assets 2006 2005
------ ------------ ------------
Current assets: (Restated)
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
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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.
2
FTS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
(UNAUDITED)
Three Months Ended September 30, Nine Months ended September 30
----------------------------- -----------------------------
2006 2005 2006 2005
------------ ------------ ------------ ------------
REVENUES
Service Revenue-See World Satellites, 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 Revenue-See World Satellites, Inc. 161,206 - 494,669 -
Product Retail Sales-FTS Wireless, Inc. 369,548 216,971 1,092,078 612,356
------------ ------------ ------------ ------------
530,754 216,971 1,586,747 612,356
------------ ------------ ------------ ------------
GROSS PROFIT
Service Revenue-See World Satellites, Inc. 1,072,778 - 3,069,406 -
Product Retail Sales-FTS Wireless, Inc. 41,715 66,534 256,101 321,740
------------ ------------ ------------ ------------
1,114,493 66,534 3,325,507 321,740
------------ ------------ ------------ ------------
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) 242,649 (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 105,736,228 56,982,202 107,614,763 53,952,681
============ ============ ============ ============
Diluted 117,230,110 56,982,202 122,383,360 53,952,681
============ ============ ============ ============
NET LOSS PER COMMON SHARE:
Basic $0.00 ($0.00) $0.00 ($0.02)
============ ============ ============ ============
Diluted $0.00 ($0.00) $0.00 ($0.02)
============ ============ ============ ============
<FN>
See accompanying notes to condensed consolidated financial statements.
3
FTS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
(UNAUDITED)
2006 2005
------------ ------------
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)
------------ ------------
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)
------------ ------------
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 $ 63,400 $ 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
============
<FN>
See accompanying notes to condensed consolidated financial statements.
4
FTS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
(UNAUDITED)
(1) 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.
5
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 stockholders' equity.
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.
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 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. 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 previously 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.
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 of 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.
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's 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 the 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
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 and nine months ended September 30, 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/A 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 , but not limited to, our ability to raise capital, our
ability to continue as a going concern, our ability to effectively manage our
growth, changes in technology, the impact of competition and pricing, and other
risks described in this report, our annual report on Form 10-KSB and other
filings we made from time to time 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.
19
OVERVIEW
We focus on developing, acquiring and investing in cash-flow positive businesses
and viable business projects primarily in the Internet, Wireless and Technology
industries. We operate a diversified wireless business through our two
wholly-owned subsidiaries See World Satellites, Inc. and FTS Wireless, Inc.
We acquired See World Satellites, Inc. on January 3, 2006. See World is a
Regional Service Provider, or RSP, and retail distributor for DISH Network
satellite television service. See World markets, sells and installs satellite
television systems for DISH primarily in the western Pennsylvania market as well
as in Florida and globally over the Internet.
FTS Wireless is an emerging distributor of next generation wireless
communications devices and related products and services. FTS Wireless operates
a chain of nine retail wireless locations in the Gulf Coast market of Florida.
All of the retail locations are leased properties.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include our accounts and those of our
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 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 generally accepted accounting principals 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 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
our annual financial statements and footnotes thereto. For further information,
refer to our audited consolidated financial statements and related footnotes
thereto included in our 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 us 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.
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.
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.
20
INVESTMENT SECURITIES
We account for our investments in accordance with Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." We determine the appropriate classification of our
investments in marketable securities at the time of purchase and reevaluate 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 we do 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.
We determine fair value of our investments based on quoted market prices at each
balance sheet date.
PROPERTY, EQUIPMENT AND DEPRECIATION
We record property and equipment at cost less accumulated depreciation. Upon
retirement or sale, we remove the cost of the assets disposed of and the related
accumulated depreciation from the accounts, and recognize any resultant gain or
loss as a component of other income or expense. We compute depreciation 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. We charge maintenance and repairs 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. We 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
We periodically assess realization of long-lived assets, including goodwill.
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, we compare the
estimated future undiscounted cash flows associated with the asset to the
asset's carrying amount to determine if a write-down to market value is
necessary. We believe that there was no impairment of such assets at September
30, 2006 or December 31, 2005.
21
REVENUE RECOGNITION
Our 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 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.
Our 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.
We recognize revenue from the sale and activation of wireless handsets and
related accessories at the of the sale.
22
INCOME TAXES
We are a taxable entity and recognize 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. We measure deferred tax assets and liabilities 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. We use a valuation allowance to reduce deferred tax assets
to the amount that is more likely than not to be realized.
EARNINGS PER SHARE
We compute the basic net earnings (loss) per common share by dividing the net
earnings (loss) by the weighted average number of shares outstanding during a
period. We compute diluted net earnings (loss) per common share 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, we did not include potential
dilutive securities that had an anti-dilutive effect 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, we 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. We previously
applied APB 25 and related interpretations, as permitted by SFAS 123.
23
FAIR VALUE OF FINANCIAL INSTRUMENTS
We estimate the fair value of our 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, our estimates of fair value are not necessarily
indicative of the amounts that we 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 us on our notes payable approximate market rates. We believe that the
fair value of our financial instruments comprising accounts receivable, notes
receivable, accounts payable, and notes payable approximate our 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. We adopted SFAS No. 154 on January 1, 2006.
Any impact on our 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. We believe the adoption of this statement will
have no impact on our financial statements.
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. We believe the adoption of this statement will
have no impact on our financial statements.
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. We do not believe
the adoption of this statement will have any immediate material impact on us.
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 SEPTMEBER 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.
24
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 $24,820 to $41,714 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 $256,100 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.
25
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.
26
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.
ITEM 3. CONTROLS AND PROCEDURES.
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Our management evaluated, with the participation of our Chief Executive
Officer/Interim Chief Financial Officer, the effectiveness of our disclosure
controls and procedures as of the end of the period covered by this amended
Quarterly Report 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 our 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.
27
<Page>
Despite the restatement, as of September 30, 2006, there were no changes in our
internal control over financial reporting that occurred during the fiscal
quarter ended September 30, 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.
We did not have any issuances of unregistered securities during the three months
ended September 30, 2006
28
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
We have filed a Registration Statement on Form SB-2. The purpose of the
Registration Statement is to register the resale of certain securities we issued
as part of a private placement completed in January 2006.Until the SB-2 is
declared effective by the Securities and Exchange Commission we are accruing
liquidated damages that we anticipate paying either in cash or by issuing shares
of common stock.
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.
None.
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).
29
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).
30
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 Form of Common Stock Purchase Warrant between the Company and Olympus
Securities, (included as exhibit 4.16 to the Form SB-2/A filed July 5, 2006, 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).
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).
31
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).
10.12 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).
10.23 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).
10.25 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).
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).
32
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 18, 2006