FTS Group, Inc.
7610 West Hillsborough Ave.
Tampa, Florida 33615
Telephone (813) 868-3605
Facsimile (215) 689-2748
Scott Gallagher
Chairman and CEO
FTS Group, Inc.
FTSGroup@aol.com
January 12, 2007
Delivered by electronic submission via EDGAR
United States Securities and Exchange Commission
Division of Corporation Finance
100 F Street, N.E., Mail Stop 7010
Washington, DC 20549
Attn: Mr. Brian V. McAllister
Re: FTS Group, Inc.
Item 4.02 Form 8-K/A
Filed December 15, 2006
File No. 0-24829
Dear Mr. McAllister:
I am the Chairman and Chief Executive Officer of FTS Group, Inc. (the
"Company"). Enclosed please find the Company's response to the comments in your
letter dated January 4, 2007 relating to our amended form 8-K/A filing filed
with the Securities and Exchange Commission on December 15, 2006.
Set forth below is the Company's response to the Staff's comments.
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Comment 1 We note your response to comment 1 in our letter dated December
18, 2006. Please address the following supplemental comments so that we may
better understand why common shares issuable pursuant to warrants and debt
should be treated as conventional convertible debt within the scope of APB 14
rather than EITF 00-19.
Response The Company has complied with the Staff's request. Please see
responses to comments two through five that follow.
Comment 2 Please provide us with Exhibits A1 and A2 to the Subscription
Agreement and any other evidence that will provide the terms and conditions of
the conversion prices of the notes and warrants. Please also provide us with a
complete copy of the final Subscription Agreement or refer us to the filing and
exhibit number that contains the completed document.
Response The final Subscription Agreement and all related documents were filed
with Form 8-K January 25, 2006 (File Number 000-24829/Film Number 06511922). The
specific exhibits contained in this filing requested in the comment are as
follows:
4.1 Class A Common Stock Purchase Warrant-Terms and conditions of A Warrants
4.2 Class B Common Stock Purchase Warrant-Terms and conditions of B Warrants
10.1 Secured Promissory Note-Terms and conditions conversion of Notes
10.2 Subscription Agreement-Combined terms and conditions of all "Securities" as
defined in Subscription Agreement.
Comment 3 Based on your disclosure for selling security holders you have
95,431,100 common shares issuable upon conversion of convertible notes,
46,465,575 issuable upon exercise of class A warrants and 23,232,789 issuable
upon exercise of class B warrants. We refer you to page 8 of Form SB-2/A filed
on December 12, 2006. Please tell us why you view common shares issuable for
the notes and Class A and B warrants to be non-detachable and accounted for as
discussed in paragraph 16 of ABP 14. Please include a reference to the passage
in the Subscription Agreement that explicitly states the non-detachable feature.
Response A clause does not exist in the Subscription Agreement that
explicitly states there is a non-detachable feature. However, paragraph 18 of
APB 14 states that the Board recognizes the impossibility of describing every
possible type of debt with conversion features, debt issued with stock purchase
warrants, or any combination thereof. Therefore, the substance of a particular
transaction, in conjunction with the guidance provide in APB 14, should dictate
the accounting treatment. Following is our basis for viewing the Warrants as
non-detachable from the Notes per provisions of the Subscription Agreement.
Paragraph 1-Closing-states that the Company is selling and each Subscriber is
purchasing a Note in the principal amount designated on the signature page of
each Subscriber's agreement, along with the number of Warrants determined in
paragraph 3. The aggregate principal amount of the notes (including the
warrants) equals the Purchase Price.
Paragraph 4-Subscriber's Representations and Warranties-explains in subparagraph
(f) that the Subscriber will purchase the Notes and Warrants as principal for
its own account for investment only and not with a view toward , or for resale
in connection with, the public sale or any distribution thereof. Subparagraph
(e) confirms that the Subscriber is, and will be at the time of the conversion
of the Notes and exercise of the Warrants, an "accredited investor" as defined
under the 1933 Act. Therefore, he is experienced in investments of this nature
and understands the risks involved, as well as can appropriately interpret the
complex terms involved herewith. Several additional subparagraphs of paragraph 4
go on to explain identical restrictions placed on the shares underlying both the
Notes and the Warrants.
Finally, paragraph 9-Covenants of the Company (and in agreement with the
Subscribers), states in subparagraph(r) that all parties that are part of this
financing arrangement understand that the Company currently has an insufficient
number of shares to convert 100% of all hypothetically exercisable shares under
all agreements. Therefore, a CAP has been put in place. Each Subscriber may
not convert the Note nor exercise any Warrants in excess of each Subscriber's
pro rata portion of 36,000,000 shares of common stock.
In summary of the excerpts from the Subscription Agreement, please note the
following:
A) Notes and Warrants from inception of the Agreement have carried the same
restrictions and are referred to in conjunction with each other throughout the
Agreement.
B) Warrants are not tradable on their own.
C) Due to the Pro Rata stipulations in Paragraph 9 (r) and elsewhere in the
documents, the Note and Warrant shares issuable upon any conversions must be
considered in conjunction with each other. The maximum each subscriber may
convert, either for Note payment or Warrant exercise, is CAPPED. Therefore, one
Subscriber may choose one combination of conversions that differ from that of
another Subscriber. But until a future event occurs, the combined Note and
Warrant shares must be considered on a Subscriber by Subscriber basis, and
therefore, cannot be separated.
Comment 4 Please tell us why you were not in default when issuable shares
exceeded authorized shares. It seems paragraph 7.2 of the Agreement would
provide warrant holders with settlement control to convert into cash, shares or
a combination thereof in the event of default. We also refer you to paragraph
5(m) of the Subscription Agreement.
Response As explained in the response to Comment 2. above, the Subscribers,
as a group of Accredited Investors per Paragraph 4(e), understood at the time of
entering the agreement, that the process for authorizing additional shares was a
necessary part of the viability of this financing vehicle. Therefore, they
agreed to a CAP on conversions relating to both Notes and Warrants on a pro rata
basis applicable to each Subscriber. When all parties to the contract have
agreed to a CAP on conversions pending additional authorization of shares, a
default does not technically exist due to the shortage.
Comment 5 We note you state the warrants are not exercisable until the
pending registration statement is declared effective; however, we note that
paragraph 3 (a) of the Subscription Agreement states "the Class A Warrants shall
be exercisable until the date the Registration Statement has been effective for
the unrestricted public resale of the Warrant Shares for four (4) years." Class
B contains similar provisions. Please explain the contradiction between your
response and the Agreement.
Response Once again, the Company defers to substance over form for this
particular financing arrangement. The Warrant Agreement refers to, and makes
quite clear, the expiration date of said warrants. However, due to the multiple
restrictions contained in the Agreement and highlighted in the above responses,
it is the position of the Company that the spirit of the agreement was
understood by the Accredited Investors that any action towards exercising of
Warrants covered under the terms of this Subscription Agreement would not be
permitted until the pending Registration Statement is declared effective.
This conclusion is supported by the fact that not a single Subscriber attempted
to convert any Warrants or Note Payments into common stock.
In addition, all warrants were understood by the Company and the Subscribers, to
have a finite life. The expiration date of both classes of warrants is
triggered by the effective date of the pending Registration Statement.
Therefore, the start date for their possible bifurcation should be the effective
date of the Registration. Until that time, they are not separable from the Host
contract.
In conclusion, based on the responses above and supported by the language and
spirit of the documents related to this issue, we maintain the view that the
convertible debt, inclusive of the related warrants, is appropriately classified
in the most recent amended Registration Statement.
After conducting an exhaustive research process we appreciate that it appears
this complex issue can be interpreted in many different ways. We believe we have
adequately considered the relevant accounting guidance to deliver an accurate,
compliant and not misleading financial picture to our investors. Other
accounting methods may be, in our opinion, very misleading to investors by
causing fictitious paper gains in the future and causing investors to make
investment decisions based on profits generated from very complex and difficult
to understand accounting methods and not from the underlying business. We
further believe that we have correctly considered the whole of the various
accounting guidance to accurately disclose to our investors the liabilities and
risks associated with our specific financing vehicles in compliance with our
understanding of GAAP.
If you have further questions or comments, please feel free to contact us. We
are happy to cooperate in any way we can.
Regards,
/s/ Scott Gallagher
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Chairman and CEO, FTS Group, Inc.