Pre-Effective Amendment to Registration of Securities by a Small-Business Issuer — Form SB-2
Filing Table of Contents
Document/Exhibit Description Pages Size
1: SB-2/A Amendment to Registration Statement 117 463K
2: EX-5.1 Opinion of Schneider Weinberger & Beilly, LLP 3 11K
3: EX-23.1 Consent of Russell Atkins, Plc 1 7K
4: EX-23.2 Consent of Plante Moran 1 6K
As filed with the Securities and Exchange Commission on January 14, 2005
Registration No. 333-115250
--------------------------------------------------------------------------------
United States Securities and Exchange Commission
Washington, D.C. 20549
FORM SB-2/A-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
CAPITAL GROWTH SYSTEMS, INC.
(Name of Small Business Issuer in its Charter)
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Florida 7373 65-0953505
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification Number)
incorporation or organization) Classification Code Number)
50 East Commerce Drive, Suite A
Schaumburg, Illinois 60173
(630) 872-5800
(Address and Telephone Number of Principal Executive Offices and Principal
Place of Business)
Skip Behm
Capital Growth Systems, Inc.
50 East Commerce Drive, Suite A
Schaumburg, Illinois 60173
(630) 872-5800
(Name, Address and Telephone Number of Agent for Service)
Copies To:
Mitchell D. Goldsmith, Esq.
Susan W. Wiles, Esq.
Shefsky & Froelich, Ltd.
444 North Michigan Avenue, Ste. 2500
Chicago, Illinois 60611
(312) 527-4000 (312) 527-3194 (Facsimile)
Approximate date of proposed sale to the public: from time to time after the
effective date of this registration statement.
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.[ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
Information contained in this prospectus is not complete and may be changed. The
selling shareholders may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is effective. This
prospectus is not an offer to sell these securities and we are not soliciting an
offer to buy these securities in any state where the offer or sale is not
permitted.
SUBJECT TO COMPLETION, DATED JANUARY ___, 2005
PROSPECTUS
8,104,893 SHARES OF COMMON STOCK
CAPITAL GROWTH SYSTEMS, INC.
This prospectus relates to the offer and sale of up to 8,104,893 shares of
common stock, $0.001 par value of Capital Growth Systems, Inc., all of which may
be sold from time to time by the selling shareholders described in this
prospectus. Of the shares being offered pursuant to this prospectus, 1,301,389
shares relate to the resale of shares which some of the selling shareholders
will receive as a result of the exercise of warrants granted to them by us and
the remaining 6,803,504 shares relate to shares presently owned by some of the
selling shareholders. We have granted registration rights to the holders of the
warrants as well as the holders of the other shares being offered by this
prospectus. Presently, there is no market for either the warrants or the shares.
We will receive proceeds of up to $1,756,875.15 from the issuance of
shares upon exercise of the warrants, all of which will be added to our working
capital. We will not receive any proceeds from the sale of shares by any of the
selling shareholders. Selling shareholders will sell their shares at a stated,
fixed price until their shares are listed for trading on any exchange or
automated quotation system, or in the over-the-counter market. At such time, the
shares will be offered for sale at market prices prevailing at the time of sale
or at negotiated prices and on terms to be determined when the agreement to sell
is made or at the time of sale, as the case may be.
We will pay all expenses of this offering, including the expense of
preparing and duplicating this prospectus and the registration statement of
which it is a part.
PLEASE REVIEW "RISK FACTORS" BEGINNING ON PAGE 4 BEFORE YOU PURCHASE ANY
OF THE SHARES.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this prospectus is January ___, 2005
SUMMARY
This summary may not contain all the information important to your
investment decision. You should read the entire prospectus, including the
consolidated financial statements and related notes, included elsewhere in this
prospectus.
THE COMPANY
We were incorporated on September 29, 1999 under the name Capital Growth
Systems, Inc. Since inception, our activities have been limited. Through
December 31, 2003, we operated as a non-trading, privately held "shell" company
conducting virtually no business operations, other than our efforts to seek a
merger partner or acquisition candidate. Throughout this period we had no full
time employees and owned no real estate. We were created to effect a merger,
exchange of capital stock, asset acquisition or other similar business
combination with an operating or development stage business which desired to
utilize our status as a reporting company under the Securities Exchange Act of
1934.
On January 28, 2004, we completed a merger under which we acquired 100% of
the ownership of Nexvu Technologies, LLC, a Delaware limited liability company,
which we will refer to in this prospectus as "Nexvu." As a result of the merger
we serve as the holding company for Nexvu. Nexvu, which was formed on February
28, 2002, is engaged in the development and sale of application performance
management software to large and mid-sized companies for use in connection with
their computer network systems. Simultaneous with the closing of the merger we
held the initial closing on the sale of common stock pursuant to a private
offering. The private offering was completed before the filing of this
prospectus and resulted in the issuance of 5,633,504 shares of common stock for
$7,605,230 of total consideration. In addition, pursuant to a loan conversion
agreement, we issued an additional 577,500 shares of common stock upon the
conversion of $550,000 of outstanding bridge loans to capital, which were funded
by existing Nexvu members prior to the merger.
On September 14, 2004, we completed a merger under which we acquired 100%
of the stock of Frontrunner Network Systems Corp., a Delaware corporation which
we will refer to in this prospectus as "Frontrunner." Frontrunner began in 1976
as the network integration arm of Frontier Corporation in upstate New York. In
April 1999, Frontrunner was purchased from Frontier Corporation and taken
private in combination with the acquisition of certain assets and certain
liabilities of Telecom Midwest, LLC. Frontrunner is a single - source provider
of business communications equipment and multimedia integration services for
data, voice, video and advanced applications. Frontrunner designs, installs and
services customer-premise voice, data and video networks. It also resells
communication equipment to the small and mid-sized business segment. In 2003,
Frontrunner shifted its business model to concentrate more on services, focusing
on applications and design services in voice, video and data. Frontrunner
launched its network products which leverage the service center on a wholesale
basis to other service providers who provide these services on a retail basis to
end users. This model leverages Frontrunner's centralized resource center which
includes second and third level voice, video and data engineers which enhance
voice and data monitoring. Frontrunner also provides network maintenance and
monitoring services, consulting and outsourcing with regard to networks and
information technology. Frontrunner has expanded its line of offerings to
include larger systems,
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multiple locations, call centers and integrated voice response applications.
Frontrunner is now a voice over Internet protocol (VoIP) certified company. Most
of Frontrunner's customers are located in the northeast United States.
Frontrunner represents NORTEL voice and data, SIEMENS voice, CISCO data and
POLYCOM video.
Our fiscal year-end is December 31. Our current fiscal year will end on
December 31, 2004.
There is currently no trading market for our common stock. We intend to
seek to have our common stock included on the OTC Bulletin Board. However, even
if our stock is included on the OTC Bulletin Board there is no assurance that a
public trading market for our stock will develop.
Our principal executive offices are located at 50 East Commerce Drive,
Suite A, Schaumburg, Illinois 60173 and our telephone number is (630) 872-5800.
Nexvu maintains a website located at www.nexvu.com and Frontrunner maintains a
website located at www.frontrunnernetworks.com. Information contained on these
websites is not a part of this prospectus.
SUMMARY FINANCIAL DATA
The following summary financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition" and the
Consolidated Financial Statements and Notes thereto, included elsewhere in this
prospect us.
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Nine Months Ended
Year Ended December 31 September 30
--------------------------- ---------------------------
STATEMENT OF OPERATIONS DATA 2003 2002 2004 2003
----------- ----------- ----------- -----------
Total Revenue $ 59,027 $ - $ 896,587 $ -
Total Cost of Goods Sold 129,806 - 366,744 78,319
Gross Margin (70,779) - 529,843 (78,319)
Total Operating Expenses 2,420,345 1,126,917 3,915,588 1,735,828
Operating Income/(Loss) (2,491,124) (1,126,917) (3,385,745) (1,814,147)
Net Income/(Loss) (2,637,633) (1,126,917) (3,358,907) (1,930,842)
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BALANCE SHEET DATA December 31, 2003 September 30, 2004
----------------- ------------------
Cash $ 616,880 $ 3,763,554
Total Assets 1,166,328 16,129,732
Total Liabilities 895,971 10,724,046
Total Stockholders' Equity 270,357 5,405,686
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THE OFFERING
We have 16,940,754 shares of common stock outstanding, and 1,301,389
additional shares will be issuable upon the exercise of warrants. All of the
shares being offered for sale by this prospectus will be sold from time to time
by the selling shareholders. We will receive proceeds of up to $1,756,875.15
from the issuance of shares upon exercise of the warrants, all of which will be
added to our working capital. We will not receive any cash proceeds from the
sale of any of the shares by the selling shareholders. The selling shareholders
are offering the shares of common stock described above under Rule 415 of the
Securities Act. The shares of common stock currently held by the selling
shareholders may be sold on a continued or delayed basis. The shares will not be
sold prior to the effective date of this registration statement.
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RISK FACTORS
AN INVESTMENT IN OUR COMMON STOCK IS HIGHLY SPECULATIVE, INVOLVES A HIGH
DEGREE OF RISK AND SHOULD BE CONSIDERED ONLY BY THOSE PERSONS WHO ARE ABLE TO
AFFORD A LOSS OF THEIR ENTIRE INVESTMENT. IN EVALUATING OUR BUSINESS,
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS IN
ADDITION TO THE OTHER INFORMATION INCLUDED IN THIS PROSPECTUS.
WE HAVE HISTORICALLY LOST MONEY AND LOSSES MAY CONTINUE. We have incurred
losses since our inception, and cannot assure you that we will achieve
profitability. We incurred a net loss from operations of $21,362 in the fiscal
year ended May 31, 2003 and $14,929 in the seven-month transition period ended
December 31, 2003. Nexvu, which is considered our predecessor for accounting
purposes, lost $2,637,633 in the year ended December 31, 2003 and $1,126,917 in
the year ended December 31, 2002. Our losses for the nine-month period ended
September 30, 2004 were $3,358,907. To succeed, we must develop new client and
customer relationships and substantially increase our revenues from sales of
products and services. We intend to continue to expend substantial resources to
develop and improve our products and to market our products and services. These
development and marketing expenses often must be incurred well in advance of the
recognition of revenue. There is no certainty that these expenditures will
result in increased revenues. Incurring additional expenses while failing to
increase revenues could have a material adverse effect on our business, results
of operations and financial condition.
WE FACE THE RISK OF PRODUCT OBSOLESCENCE IF WE FAIL TO DEVELOP NEW
PRODUCTS. We expect that the market for our products will be characterized by
rapidly changing technology and new product introductions. Our success will
depend, in part, upon our continued ability to provide products with the
advanced technological qualities desired by our customers, to enhance and expand
our existing product offerings and to develop in a timely manner new products
that achieve market acceptance. Failure to enhance and expand existing product
offerings or failure to develop new products could have a material adverse
effect on our business, results of operations and financial condition.
Competition in the application performance management is very intense, and
it is expected that existing and new competitors will seek to replicate much of
the functionality of our products. Additionally, there can be no assurances that
we will be able to successfully develop the next generation of products
necessary to establish a lead on the market or that if we are able to do so,
that customer acceptance for these products could continue. Replication by
competitors of our existing products, failure to develop new products or failure
to achieve acceptance of products could have a material adverse effect on our
business, results of operations and financial condition.
Given the software intense nature of our business, once a product is
developed, competition has the ability to lower its pricing significantly to
gain market share, due to the minimal incremental cost to product production.
Additionally, certain aspects of the market may be lost to the extent over time
"free" software is developed to address this functionality. These factors could
have a material adverse effect on our business, results of operations and
financial condition.
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In the high technology business, one of the largest barriers to entry for
small and start-up companies is the concern by enterprise customers as to the
survivability of the company. Even if we are profitable, we may experience
significant resistance from prospective customers due to our relatively small
size. This could be exacerbated to the extent we fail to attain break-even
profitability quickly. This resistance could have a material adverse effect on
our business, results of operations and financial condition.
RISK OF DELAYED DEVELOPMENT OF APPLICATION PERFORMANCE MARKET. Our ability
to achieve significant revenues is dependent in large part on companies'
recognizing the need for and allocating portions of their technology budget to
application performance management products. It is possible that the application
performance management market will not grow appreciably, or that it will not
grow fast enough to allow us to recognize significant revenues. We depend on a
relatively rapid acceptance of application performance management products to a
greater extent than companies with greater resources, failure could have a
material adverse effect on our business, results of operations and financial
condition.
DEPENDENCE ON CONTINUED GROWTH IN USE OF THE INTERNET. Rapid growth in use
of and interest in the Internet is a recent phenomenon and there can be no
assurance that acceptance and use of the Internet will continue to develop or
that a sufficient base of users will emerge to support our business. Our future
revenues may, in part, depend on the widespread acceptance and use of the
Internet as a source of multimedia information and entertainment and as a
vehicle for commerce in goods and services.
The Internet could lose its viability as a commercial medium due to delays
in the development or adoption of new standards and protocols required to handle
increased levels of Internet activity, or due to increased government
regulation. Changes in or insufficient availability of telecommunications
services to support the Internet also could result in unacceptable response
times and could reduce Internet usage. If use of the Internet does not continue
to grow or grows more slowly than expected, or if the Internet infrastructure
does not effectively support the growth that may occur, the demand for our
products and our revenue may suffer, which could have a material adverse effect
on our business, results of operations and financial condition.
DEFECTS IN OUR SOFTWARE COULD REDUCE DEMAND FOR OUR PRODUCTS AND EXPOSE US
TO COSTLY LIABILITY THAT WOULD ADVERSELY AFFECT OUR OPERATING RESULTS. The Nexvu
Application Performance Management System product we offer is internally
complex. Complex software may contain errors or defects, particularly when first
introduced or when new versions or enhancements are released. Although we
conduct extensive testing, we may not discover software defects that affect our
current or new products or enhancements until after they are sold. Although we
have not experienced any material software defects to date, any errors or
defects that may be discovered could result in:
- loss of revenue;
- product returns or order cancellations;
- delay in market acceptance of our products;
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- diversion of our development resources;
- distraction of our management;
- damage to our customer relationships and our reputation;
- increased service and warranty costs; and
- costly litigation defense.
In addition, our license and service agreements with our customers
typically contain provisions designed to limit our exposure to potential product
liability claims. It is possible, however, that the limitation of liability
provisions contained in our license and service agreements may not be effective
as a result of existing or future federal, state or local laws, ordinances or
judicial decisions. Although we have not experienced any product liability
claims to date, sale and support of our products entails the risk of such
claims, which could be substantial in light of our customers' use of many of our
products in mission-critical applications. We do not maintain product liability
insurance. If a claimant brings a product liability claim against us, it could
have a material adverse effect on our business, results of operations and
financial condition.
WE FACE UNCERTAINTIES REGARDING OUR PATENTS AND PROTECTING OUR PROPRIETARY
TECHNOLOGY. Although we are exploring the possibility of patenting some of our
technology, there can be no assurances that we can obtain patent protection or
that, if we obtain it, that it will be enforceable or that there are not other
ways to effectively gain the benefits of our proprietary technology. We may lack
the resources to enforce any patents or other intellectual property rights we
may have or a court may subsequently determine that the scope of our
intellectual property protection is not as broad as presently envisioned. In any
event, proprietary rights litigation can be extremely protracted and expensive
and we may lack the resources to enforce our intellectual property.
There can be no assurance that third parties will not allege infringement
by us of their patents and proprietary rights. If infringement is alleged, there
is no assurance that we would prevail in any challenge by these parties, or that
if a challenge is successful, that we will be able to obtain a license to use
such technology on acceptable terms. Failure could have a material adverse
effect on our business, results of operations and financial condition.
WE MAY NEED ADDITIONAL CAPITAL. We may need to obtain additional financing
over time, the amount and timing of which will depend on a number of factors
including the pace of expansion of our markets and customer base, services
offered and development efforts and the cash flow generated by our operations.
We cannot predict the extent to which we will require additional financing, and
cannot assure you that additional financing will be available on favorable terms
or at all times. The rights of the holders of any debt or equity we may issue in
the future could be senior to the rights of shareholders, and any future
issuance of equity could result in the dilution of our owners' proportionate
equity interests in us. Failure to obtain financing could have a material
adverse effect on our business, results of operations and financial condition.
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FRONTRUNNER HAS SIGNIFICANT OUTSTANDING DEBT. Frontrunner is currently
indebted to several entities, including but not limited to Harris Bank and Trust
Company in the amount of $3,920,000, Global Crossing North America in the amount
of $414,000, Nortel Networks Inc., in the amount of $1,394,000 and Review Video
Inc. in the amount of $197,000. Frontrunner is currently in default under its
obligation to Global Crossing North America. Frontrunner's management continues
to devote significant time and resources to managing Frontrunner's outstanding
debt and liabilities, which resources are not being devoted to the growth of
Frontrunner. If Frontrunner defaults on one or more of these loan obligations,
or if Frontrunner's creditors determine not to cooperate with Frontrunner, it
could have a material adverse effect on our business, results of operations and
financial condition.
WE ARE DEPENDENT UPON KEY MEMBERS OF MANAGEMENT. Our success depends to a
significant degree upon the continuing contributions of our key management: Lee
Wiskowski and Douglas Stukel, our co-CEOs; Rory Herriman, our Chief Technology
Officer; and Robert T. Geras, our Chairman. These individuals have the most
familiarity with the products we offer and the markets in which we offer them.
The loss of any of these individuals could have a material adverse effect on our
business, results of operations and financial condition.
WE ARE ABLE TO ISSUE PREFERRED STOCK WHICH COULD PREVENT SOMEONE FROM
TAKING US OVER. Our board of directors has the authority to issue up to
5,000,000 shares of preferred stock in one or more series, and to fix the number
of shares constituting any series, the voting powers, designations, preferences
and relative participating, optional, or other special rights and
qualifications, limitations, or restrictions of any series, including the
dividend rights, terms of redemption, conversion rights, and liquidation
preferences of the shares, without any further vote or action by shareholders.
Our board of directors may, therefore, in the future issue preferred stock with
voting and conversion rights which could adversely affect the voting power of
the holders of common stock. In addition, the issuance of preferred stock could
potentially be used to discourage attempts by others to obtain control of us
through merger, tender offer, proxy contest, or otherwise by making such
attempts more difficult to achieve or more costly. We are currently incorporated
under Florida law but expect to reincorporate shortly under Delaware law. Both
Florida and Delaware have statutory provisions which also could have the effect
of discouraging a takeover.
WE HAVE NOT PAID ANY DIVIDENDS AND DO NOT EXPECT TO PAY DIVIDENDS IN THE
NEAR FUTURE. We have not paid any dividends upon our common stock since our
formation. We do not currently intend to pay any dividends upon the common stock
in the foreseeable future and anticipate that earnings, if any, will be used to
finance the development and expansion of our business. Our ability to pay
dividends on our common stock will be limited by the preferences of any
preferred stock, which may be outstanding from time to time and may be limited
by future indebtedness. Any payment of future dividends and the amounts thereof
will be dependent upon our earnings, financial requirements and other factors
deemed relevant by our board of directors, including our contractual
obligations.
AN ACTIVE TRADING MARKET MAY NOT DEVELOP FOR OUR COMMON STOCK. There is no
established market for our stock, and we do not know whether an active trading
market will develop. We intend to seek to have our shares of common stock
included in the Over the Counter Bulletin Board, but even if they are included
on the bulletin board there is no assurance
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that an active market will develop for our stock. In addition, any market that
develops will be less active and liquid than would be the case if our shares
were listed on an exchange or included in Nasdaq. The lack of an active market
for our shares would make it difficult for investors to sell when they might
deem it advantageous.
OUR COMMON STOCK IS CONSIDERED A "PENNY STOCK," WHICH MAY MAKE IT MORE
DIFFICULT FOR INVESTORS TO SELL THEIR SHARES. Our common stock is considered a
"penny stock" as that term is defined under SEC rules. Broker-dealers dealing in
penny stocks are required to provide potential investors with a document
disclosing the risks of these stocks. Moreover, broker-dealers are required to
determine whether an investment in a penny stock is a suitable investment for a
prospective investor. These requirements may reduce the potential market for our
common stock by reducing the number of potential investors and also make it more
difficult for investors in our common stock to sell or otherwise dispose of
their shares. This could cause our stock price to decline.
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements. The forward-looking
statements are contained principally in the sections entitled "Business" and
"Management's Discussion and Analysis of Financial Condition or Plan of
Operation." These statements involve known and unknown risks, uncertainties and
other factors which may cause our actual results, performance or achievements to
be materially different from any future results, performances or achievements
expressed or implied by the forward-looking statements.
In some cases, you can identify forward-looking statements by terms such
as "may," "should," "could," "would," "expects," "plans," "anticipates,"
"believes," "estimates," "projects," "predicts," "potential" and similar
expressions intended to identify forward-looking statements. These statements
reflect our current views with respect to future events and are based on
assumptions and subject to risks and uncertainties. Given these uncertainties,
you should not place undue reliance on these forward-looking statements. We
discuss many of these risks in this report in greater detail under the heading
"Risk Factors." These forward-looking statements represent our estimates and
assumptions only as of the date of this report, and we do not assume any
obligation to update any of these statements.
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USE OF PROCEEDS
We will receive a maximum of $1,756,875 upon exercise of the warrants. All
proceeds will be used for working capital purposes. We will not receive any
proceeds from the sale of shares by any of the selling shareholders.
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BUSINESS
BACKGROUND
Capital Growth Systems, Inc. was organized as a Florida corporation on
September 29, 1999. We are a developmental stage company and had no revenue
through December 31, 2003. From our inception through December 31, 2003, our
activities were limited to actions related to our organization and the
preparation of the documents necessary for us to be registered with the
Securities and Exchange Commission. During this period, we operated as a "shell"
company conducting virtually no business operations, other than our efforts to
seek a merger partner or acquisition candidate. Throughout this period we had no
full time employees and owned no real estate. We were created to effect a
merger, exchange of capital stock, asset acquisition or other similar business
combination with an operating or development stage business, which we will refer
to as a "target business," which desired to utilize our status as a reporting
company under the Securities Exchange Act of 1934.
On January 28, 2004, we effectuated a business combination by entering
into an Agreement and Plan of Merger whereby we acquired 100% of the ownership
of Nexvu Technologies, LLC, a Delaware limited liability company, which we will
refer to as "Nexvu," by merging it in a reverse triangular merger with our
wholly-owned subsidiary, Nexvu MergerSub, LLC, a Delaware limited liability
company. Nexvu was originally formed on February 28, 2002 under the name of
Siegler Technology & Development, L.L.C. to develop and market software and
hardware products and solutions for communication networks. It changed its name
to "Nexvu, LLC" on January 29, 2003, and to "Nexvu Technologies, LLC" on October
22, 2003.
Craig Siegler organized Siegler Technology & Development and therefore is
considered Nexvu's promoter. Siegler Partners, L.L.C., a company controlled by
Mr. Siegler, acted as the manager of Nexvu from its inception through June 2003.
Mr. Siegler's only current relationship with us is as the beneficial owner of
over 5% of our common stock. From July 2003 through June 2004, Mr. Siegler
provided consulting services to Nexvu, which is now a wholly-owned subsidiary of
ours.
As a result of the above merger, the owners of Nexvu became the majority
owners of our company and Nexvu became the surviving company for financial
statement purposes. We serve as Nexvu's holding company. Accordingly, references
in this prospectus to "we, us or our" are to Capital Growth Systems, Inc. or
Nexvu. We will refer to Nexvu as a separate entity only where necessary, such as
in the discussion of the business combination below. Nexvu is engaged in the
development and sale of application performance management software and software
driven equipment to large and mid-sized companies for use in connection with
their computer network systems and applications.
The consummation of the business combination was simultaneous with our
closing on the proceeds of a private placement of our common stock, thereby
affording Nexvu ready access to in excess of $5,000,000 of capital, while
avoiding what it might deem to be the adverse consequences of undertaking a
public offering itself, such as the time delays and significant expenses
incurred to comply with the various federal and state securities laws governing
initial public offerings.
10
On September 14, 2004, we completed a merger under which we acquired 100%
of the stock of Frontrunner Network Systems Corp., a Delaware corporation, which
we will refer to in this prospectus as "Frontrunner." Frontrunner began in 1976
as the network integration arm of Frontier Corporation in upstate New York. In
April 1999, Frontrunner was purchased from Frontier Corporation and taken
private in combination with the acquisition of certain assets and certain
liabilities of Telecom Midwest, LLC. Frontrunner is a single - source provider
of business communications equipment and multimedia integration services for
data, voice, video and advanced applications. Frontrunner designs, installs and
services customer-premise voice, data and video networks. It also resells
communication equipment to the small and mid-sized business segment. In 2003,
Frontrunner shifted its business model to concentrate more on services, focusing
on applications and design services in voice, video and data. Frontrunner
launched its network products which leverage the service center on a wholesale
basis to other service providers who provide these services on a retail basis to
end users. This model leverages Frontrunner's centralized resource center which
includes second and third level voice, video and data engineers which enhance
voice and data monitoring. Frontrunner also provides network maintenance and
monitoring services, consulting and outsourcing with regard to networks and
information technology. Frontrunner has expanded its line of offerings to
include larger systems, multiple locations, call centers and integrated voice
response applications. Frontrunner is now a voice over Internet protocol
certified company. Most of Frontrunner's customers are located in the northeast
United States. Frontrunner represents NORTEL voice and data, SIEMENS voice,
CISCO data and POLYCOM video.
The addresses of our websites are www.nexvu.com and
www.frontrunnernetworks.com. The information in, or that can be accessed
through, our websites is not part of this prospectus.
BUSINESS COMBINATION
NEXVU
The form of the business combination with Nexvu was a merger in which we
issued 8,558,500 shares of our common stock in exchange for 100% of the
membership interests in Nexvu. In addition, pursuant to a loan conversion
agreement, we issued:
- an additional number of shares of our common stock needed to convert
the amount of new bridge loans funded by Nexvu members from November
15, 2003 through the merger closing into shares of our common stock
at a conversion price of approximately $0.95 per share, for a total
of 577,500 shares; and
- warrants expiring December 31, 2006 to purchase our common stock at
$1.35 per share based upon 50% warrant coverage with respect to all
bridge loans funded, for a total of 288,750 warrants.
The merger agreement also required a simultaneous closing of the issuance
of a private offering for our common stock of not less than $2,000,000, up to a
maximum of $7,000,000, subject to increase in our sole discretion, at $1.35 per
share, and the conversion of bridge loan principal amounts to equity so that we
would own 100% of Nexvu, which would be substantially debt free as of the merger
closing. We subsequently approved an increase in the maximum
11
amount of the private offering and raised a total of approximately $7,700,000
from the sale of our common stock in the offering. The private offering closed
on April 15, 2004.
The merger agreement further provided that, on closing of the merger, at
least three designees of Nexvu, all of whom were Nexvu's principal officers,
would become members of our board of directors. These persons were elected to
the following positions: Scott Allen, CEO and CFO; Rory Herriman, Chief
Technology Officer; and Robert T. Geras, Chairman of the Board. We also entered
into an indemnification agreement at the closing of the merger in which we
agreed to indemnify and hold harmless all five of our directors against certain
liabilities for actions taken in good faith on our behalf or on behalf of Nexvu.
Scott Allen resigned as the CEO, CFO and director on August 30, 2004. Rory
Herriman resigned as a director on August 31, 2004. We added David Beamish and
Philip Kenny to fill the board seats vacated by them.
The consideration for the Nexvu merger was arrived at arms-length
negotiations between Nexvu and us. In connection with the merger we changed our
fiscal year end from May 31 to December 31, which is the fiscal year end of
Nexvu.
FRONTRUNNER
The form of the business combination with Frontrunner was a reverse
triangular merger in which we issued 925,000 shares of our common stock and
$222.18 in exchange for 100% of the ownership of Frontrunner and the
cancellation of indebtedness of Frontrunner in the amount of $2,252,423
(excluding accrued unpaid interest and other claims). The merger was approved by
our board of directors and the boards of directors of Frontrunner and our
subsidiary. The merger was also approved by a majority of the shareholders of
Frontrunner. At the time of the merger, Frontrunner had assets principally in
the form of inventory, fixed assets and receivables in the amount of
approximately $3,800,000.
The merger agreement contained certain conditions precedent including: (i)
requiring certain creditors of Frontrunner to execute creditor waiver
agreements; (ii) James Cuppini entering into an employment agreement with
Frontrunner, (iii) entry by Frontrunner into certain payment agreements calling
for amortization of outstanding past due obligations of Frontrunner plus a
market rate of interest with certain other of its creditors, and (iv)
Frontrunner obtaining from Harris Trust and Savings Bank, a consent to the
merger and a commitment that it would extend and maintain a loan to Frontrunner
with a principal amount of not less than the principal balance outstanding as of
the date of the merger (approximately $3,920,000). We waived all of the
conditions precedent except the entry into certain creditor waiver agreements
and our issuance of common stock to those creditors.
Frontrunner entered into creditor waiver agreements with several of its
identified creditors. All but one of these identified creditors (John Jellinek)
executed the creditor waiver agreements. The following identified creditors
entered into the creditor waiver agreements and we, in turn, issued a total of
925,000 shares of our common stock to Bluestem Capital Partners II, Limited
Partnership, Mesirow Capital Partners VI, The Edgewater Private Equity Fund II,
L.P., 21st Century Communications Partners L.P., 21st Century Communications T-E
Partners, L.P., 21st Century Communications Foreign Partners, L.P., Philip
Kenny, and James Cuppini, and reserved the remaining 75,000 shares, for possible
later issuance to John Jellinek. The
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shares of common stock distributed among the creditors was determined pursuant
to negotiations between the creditors and Frontrunner, rather than allocated
pursuant to a formula. The most recent private placement of our common stock was
made at $1.35 per share, which was assumed to constitute its fair market value.
Bluestem Capital Partners II, Limited Partnership, Mesirow Capital Partners VI,
The Edgewater Private Equity Fund II, L.P., 21st Century Communications Partners
L.P., 21st Century Communications T-E Partners, L.P., 21st Century
Communications Foreign Partners, L.P. and Mr. Cuppini, in addition to being
creditors were also shareholders of Frontrunner. Each of the entities (other
than 21st Century Communications T-E Partners, L.P., 21st Century Communications
Foreign Partners) had one director sitting on Frontrunner's six-member board of
directors. Mr. Kenny, who currently sits on our board of directors, also sat on
the Frontrunner board of directors and received common stock. Bluestem Capital
Partners II, Limited Partnership, Mesirow Capital Partners VI, The Edgewater
Private Equity Fund II, L.P., 21st Century Communications Partners L.P., 21st
Century Communications T-E Partners, L.P., 21st Century Communications Foreign
Partners, L.P. and Mr. Kenny, together were the majority shareholders of each
class of voting stock of Frontrunner that authorized the merger. Mr. Cuppini is
the current and past President of Frontrunner.
Fifteen percent (15%) of the 925,000 shares issued to the participating
creditors, approximately 138,750 shares was deposited in escrow to be held for a
year for the purpose of settling or litigating claims. Mr. Kenny is the owner of
the escrow agent for this account.
Frontrunner has a customer base of over 1,000 companies along with an
installed, fully functional Network Operating Center ("NOC") which will enable
us to extend current Nexvu product offerings with a set of Remote Network and
Application Performance Monitoring Services.
INDUSTRY BACKGROUND
NEXVU
We believe that there has been a shift in the way organizations view, use,
and purchase IT performance management tools that will have a long-term impact
on the overall competitive environment for these markets.
We believe there is an industry trend that will continue to place pressure
on organizations that rely on these technologies for revenue streams, with
increasing demand for products in a new, emerging market - that of application
performance management and monitoring.
The International Standards Organization outlines the primary functions of
network management systems as being focused on the five conceptual areas, also
known as "FCAPS":
1. Fault Management. Fault management encompasses the activities of
detection, isolation and correction of abnormal systems operation. Fault
management provides the means to receive and present fault indication, determine
the cause of a fault, isolate the fault and perform a corrective action if
required.
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2. Configuration Management. Configuration management activities include
the configuration, maintenance and updating of system components. Configuration
management also includes notification to network users of pending and performed
configuration changes.
3. Accounting Management. The ability to track usage to detect inefficient
use and abuse of privileges or usage patterns is included in accounting
management - a key component for capacity planning.
4. Performance Management. Performance management tools are used to
recognize current or impending performance issues that can cause problems for
users. Activities include the monitoring and maintenance of acceptable
performance and the collection and analysis of statistics critical to
performance.
5. Security Management. Security management encompasses the activities of
controlling and monitoring access to the network and associated network
management information. This includes controlling passwords and user
authorization and collecting and analyzing security or access logs. The goal of
a network management system is to provide this functionality in a concise manner
that views the entire network as one homogeneous entity.
A new component of the performance management segment is application
performance management. This market is focused on delivering solutions designed
to resolve performance issues for business applications and systems.
FRONTRUNNER
The market has been trending towards a convergence of voice, data and
video networks. While voice switching networks are still a viable commodity,
increased investment in LAN/WAN upgrades will enable these networks to support
data, voice and video applications over common Internet protocol transport. The
professional services required to build, monitor and maintain these complex
networks will be the differentiator.
OUR PRODUCTS AND SERVICES
NEXVU
We have developed a suite of software application performance management
tools and products which address a chronic problem facing companies today: how
to measure and ensure that a company's business critical software applications
function as effectively and rapidly as intended. Organizations with highly
distributed operational environments, such as banks, retailers, health care
organizations and insurance companies, face the additional challenge of often
having to support these software applications remotely.
We believe we have established a relatively low cost means of
significantly improving the ability to manage remote applications. Our principal
product is a hardware appliance loaded with our proprietary software, which is
installed in the computer equipment closet at a customer's location. The
appliance monitors up to 3,200 different applications over the customer's data
network and sends an "alert" message every time the application is not running
within an acceptable level of performance. This enables the customer to identify
that a problem
14
exists and to pinpoint the cause of the problem, often before the "crash" of the
application occurs.
On June 30, 2003, we introduced our performance management solution, the
Nexvu Application Performance Management System 2.0, also known as the "Nexvu
Manager System." The system has since been renamed the "Nexvu Analyzer System."
We have worked with several companies functioning as beta testers throughout the
design phase of the product. They have been instrumental in providing input as
it relates to business problems, particularly industry-specific challenges that
need to be met today and in the future. In October 2004, we released Version 2.2
of the Nexvu Analyzer and Nexvu Command Center Products.
The Nexvu Analyzer System has two major components - the Nexvu Analyzer
Appliance and the Nexvu Command Center Appliance. The Nexvu Analyzer Appliance
is considered the nerve center of the Nexvu Application Performance Management
System. Residing at the customer's remote location, the Nexvu Analyzer Appliance
collects performance management data by capturing and classifying information in
a passive, non-disruptive manner as it flows across the network. Once this
information is collected, the Nexvu Analyzer Appliance assesses the information
looking for performance trends and providing network operators with information
to avoid a negative impact on the user's business.
The Nexvu Analyzer Appliance is engineered for highly distributed
environments and is designed to be easy to deploy and operate. Our software is
loaded directly into an appliance, which can be mounted onto a rack and
installed by non-technical personnel. Additionally, the Nexvu Manager Appliance
contains a series of restoration-based tools that provide network operators and
field personnel the ability to troubleshoot outages from remote locations and
restore an outage without dispatching technical resources to the site.
Specifically, these tools enable IT service personnel to access and communicate
with our appliance, whether there is a data network connection or not. Once
connected to our appliance, service personnel can utilize trouble-shooting
features included in the appliance to evaluate potential problems and take
action to resolve many problems remotely. The Network Analyzer appliance
includes a modem for remote dial-in and a terminal server for alternate
connection to the network in the event that the network is unavailable. It also
allows "packet capture," which allows IT personnel to understand what network
components and services are working in a troubled environment.
Information is transmitted to users by the Nexvu Command Center Appliance,
which is responsible for managing all Nexvu Analyzer Appliances throughout the
customer's environment. This includes initialization, configuration, upgrading
and monitoring. The customer typically will have one Nexvu Command Center
Appliance for approximately every 500 Nexvu Analyzer Appliances. As a
self-contained appliance which can be mounted onto a rack, the Nexvu Command
Center Appliance can be easily installed in the data center or network
operations center without advanced technical support.
In August of 2003, we received our first purchase order for the Nexvu
Analyzer System from our first paying customer, Bally's Total Fitness. This
initial order of five Nexvu Analyzer Appliances and one Nexvu Command Center
Appliance is the first of a larger rollout that we hope to deploy across Bally's
entire infrastructure of over 400 fitness centers. We have not signed any
agreements to install any of our equipment in these Bally's locations. Since
this first
15
order, the Company has closed sales to several new customers. We do not believe
that our business model will result in our having significant reliance on any
individual customer in the future.
In addition to seeking to make enhancements to the Nexvu Analyzer and
Command Center Appliances, we plan to extend the Nexvu Analyzer product line. We
may seek to develop products that assist information technology organizations in
monitoring Voice over Internet Protocol (VoIP) environments and products that
monitor business activity such as retail sales transactions, supply chain
delivery or call center activity. These products are in the planning stages
only, and there is no assurance that any of them will be developed.
FRONTRUNNER
Frontrunner markets a network solution approach through its field sales
force directly to the small and midsized business segment. Frontrunner is an
authorized distributor of premier vendors such as Nortel, Cisco, Siemens-Rolm
and Polycom. These solutions include Nortel and Siemens voice hardware, Cisco
and 3COM data hardware, and Polycom video units and video network bridges.
Frontrunner has traditionally sold follow-up services into its established base
and more recently has provided advanced professional services including contact
center design and installation, remote network monitoring and management and
network security. Frontrunner also maintains the installed equipment for its
customers.
Frontrunner operates its own service fleet for installation and repair in
its core markets. It also owns and operates a network operations center (NOC) in
Rochester, New York. This network operations center provides round-the-clock
network fault management, service response and repair processes for
Frontrunner's entire customer base.
Frontrunner has recently added advanced retail voice and data network
applications including, virtual private networks, voice over Internet protocol
networks, and several versions of IP Telephony (or phone calls over the
Internet) to its existing product set.
NEXVU PRODUCT FEATURES
The Nexvu Analyzer System is designed to apply the critical functions of
application performance management at the increasingly important remote/branch
locations of a company. We believe that the following features will prove
beneficial to information technology departments:
- Comprehensive collections of data relating to business software
performance, utilization and effectiveness;
- Real-time performance analysis at the site level, ensuring minimal
impact to wide area network bandwidth;
- Support which is "pre-configured," so that no additional programming
is required, for over 900 protocols and over 3200 applications,
including voice/video over Internet Protocol, or "VoIP" and Internet
protocol security, or "IPSEC," and Cisco ISL;
16
- Alerts to management to ensure minimal impact on business
operations;
- Solutions which are easy to deploy and operate, to be readily
installed at remote locations by non-technical personnel, yet
centrally managed;
- Cost-effective solutions designed for deployment at thousands of
remote locations where the risk and cost of downtime is increasingly
high;
- New technology solutions integrating performance and fault
management leveraging the data capture and trend analysis across
each system;
- Architecture that supports the integration of third party tools to
leverage existing technology investment;
- Built-in recovery tools accessible both in-band and out-of-band
through dial-up; and
- System architecture designed for international deployment through
the use of language catalogs.
SALES AND MARKETING
NEXVU
Target Markets. We have generally targeted Fortune 2000 companies with
highly distributed operating environments comprised of hundreds to thousands of
remote locations with thousands of application users. We intend to focus on a
subset of the Fortune 2000 market within the retail, call center, insurance,
banking and health care industries. Future product offerings are expected to
address vertical industry solutions that will more comprehensively meet the
needs of each company, resulting in additional sales and increased penetration
targeted for each segment. We believe that these industry segments offer the
greatest immediate opportunity based on direct feedback from customers and
suppliers relative to the challenges they face, with each location critical to
the business. It is imperative to ensure the application performance,
availability and usability in these locations based on their mission-critical
business activity, which includes the following:
- Customer transactions, such as in retail stores and branch banks,
where customer revenue and customer satisfaction may be affected.
- Transaction processing locations, such as in insurance companies or
call centers, where customer satisfaction and productivity may be
affected.
- Communication transactions, such as for fire and police services,
where safety/lives are affected.
In addition, some of these industries are highly regulated. Regulatory
requirements often drive the need for technology solutions to mitigate business
risk. All of these industries are faced with the challenge of reducing expense,
particularly the high cost of human capital. The value of technology is, in
part, derived from the automation of tasks that are otherwise carried
17
out by technicians. Since companies in these industries have service level
agreements with their customers, failure to reach minimum service levels, due to
performance issues or outages, may result in monetary penalties.
Sales Approach. In early August 2004, our board of directors made an
economic decision in response to the lack of sales results being realized by the
Nexvu executive management team. We decided that the capital investment and
related return on investment for having a national sales team was not prudent
given the sales results at the time. Our board of directors determined we were
better served both strategically and financially with scaled down sales force
with a regionally focused approach. Scott Allen and substantially all of the
sales team are no longer employed by us.
We have determined that a two-tiered approach that focuses on high-end
enterprise businesses in one effort and mid-sized enterprises in another effort
will help allow us to penetrate our target market effectively. We therefore
intend to carry forward with this two-tiered approach in our attempt to increase
both short-term revenues and long-term sources of revenue. We will focus on
selling our product to the high-end enterprise business through a direct sales
force.
We intend to utilize a channel approach to penetrate the mid-sized
businesses. The channel approach will allow value-added resellers, or "VARs" to
market and sell our product to end users. We anticipate that our VARs will be
businesses that focus only on high-end technology products and provide
integrated systems and networking products to mid-size companies and networks
across the nation. We currently have agreements with the following six VARs:
Continental Resources, Gee Communications, Meridian IT Solutions, Hartford
Computer Group, Next Step Technology, and JDM Infrastructure. Under these
agreements, the value-added resellers agree to sell the Nexvu Command Center
Appliance and Analyzer Appliances and our software maintenance support services
to end users of the products or services. The agreements grant the resellers the
right to purchase the Nexvu Command Center Appliance and Nexvu Analyzer
Appliance at a 30% discount to our list price, and an annual maintenance and
support license for each product at a 15% discount. These discounts are based on
a commitment by each reseller to sell $1,500,000 worth of products and services.
If a reseller does not reach this level, we have the right to change the
discount granted to that reseller. If a reseller sells $1,000,000 of our
products and services in a nine-month period, they will be able to purchase the
Command Center and Analyzer appliances at a discount of 35% of the list price.
Under the agreements the resellers have the right to "co-brand" our products,
which means that the products could be sold under a name different from the
Nexvu name which is mutually agreed upon between us and the reseller, followed
by the Nexvu name in a phrase such as "powered by Nexvu." Each agreement has a
term of one-year, and will automatically renew for successive one-year periods
unless terminated by either party on thirty days' written notice.
Our revenues will be generated from three major sources:
1. Sales of licenses for our software and related cost of the hardware
appliance;
2. Maintenance contracts for our software licensing agreements; and
3. Professional services for consulting on related information
technology infrastructure issues.
18
Additionally, we may develop a subscription-based product which may
include revenue from all three of the above sources for an ongoing monthly fee.
Nexvu completed a Technology Alliance partnership with SMARTS(R), an
industry leading provider of business service management and root cause analysis
solutions. As part of this partnership SMARTS(R) will have the ability to
cross-sell the Nexvu product offerings.
SUPPLIERS AND INSTALLATION
We plan to outsource non-strategic elements of our operations to bring our
products to market quickly, maximize return on investment and minimize risks
from exposure to unrelated operations unrelated to our core business. We plan to
focus on developing strong products, selling them into the marketplace and
establishing partnerships with organizations that can help accelerate the
adoption of our solutions.
Suppliers. We have no direct manufacturing requirements. Our software is
designed for installation on any Intel-based server. Although the hardware
server appliance can be any Intel based server, we are presently utilizing
Gateway as our primary appliance supplier and Hartford Computer Group as a
secondary supplier.
Installation. We have designed our products so that they may be installed
by customers ensuring minimal disruption to the customer's business.
Installations can be done by non-technical personnel with minimal assistance.
However, we expect to establish partnerships with industry-leading professional
services firms to accommodate any unique customer requirements.
COMPETITION
The market for our products and services is highly competitive. There are
a number of companies in the application performance management market with
which we compete. There is no assurance that we will be able to effectively
compete in this market. Prospective competitors vary in size and in the scope
and breadth of the products and services offered. Many of our potential
competitors have a number of significant advantages, including a longer
operating history, preferred vendor status with our potential customers, more
extensive name recognition and marketing power and significantly greater
financial, technical, marketing and other resources which would give them the
ability to respond more quickly to new or changing opportunities, technologies
and customer requirements. We may not be able to maintain or expand our revenue
base if competition increases and we are unable to respond effectively.
There are several organizations and companies who have combined many
application performance management functions into products and solutions that
have traditionally operated profitably. Many of the following companies have
combined key elements of network performance management, fault management and/or
accounting management into their products:
- Network General - Apogee Networks
- Netscout - Compuware
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- Concord Communications - Micromuse
- Agilent - Tavve Networks
- Acterna - Niksun
- Wildpackets - Candle Communications
- Network Instrument - Lucent
Many of the application performance management products are developed,
marketed and sold by the following organizations:
- Mercury Interactive - Netiq
- Cisco - Concord Communications
- NetQOS - Compuware
There are many competitors on a national and regional level with
Frontrunner.
SEASONAL TRENDS
Seasonal purchasing trends for technology capital spending may cause our
quarterly operating results to fluctuate. Typically, a disproportionate amount
of technology spending occurs during the fourth quarter of a calendar year, with
a significant drop-off in spending usually occurring in the first quarter of a
calendar year.
RESEARCH AND DEVELOPMENT
During the fiscal years ended May 31, 2003 and May 31, 2002, and the
seven-month period ended December 31, 2003, we did not expend any funds on
research and development activities. During the fiscal years ended December 31,
2003 and December 31, 2002, Nexvu spent $1,900,000 and $1,000,000 respectively,
on research and development activities. Research and development costs include
cost of developers and system engineers, as well as overhead costs during this
developmental stage. These costs are not directly borne by customers, but rather
are inherently built into the pricing to our customers.
PATENTS AND PROPRIETARY TECHNOLOGY
We have proprietary technology and confidential software code. Virtually
all of the software used in our products has been developed by a product
development team of eight individuals as well as by our Chief Technology
Officer, Rory Herriman. None of the individuals involved in the development of
our software has any ownership interest in this technology. Two pieces of
network monitoring software used in one component of our products were developed
by a third party. On August 31, 2002, we entered into software licensing
agreements with this third party for each of the two pieces of software. Each
agreement grants us a non-exclusive
20
license for the worldwide rights to market and distribute the proprietary
software. The license expressly grants us the right to sell or license products
incorporating the third party's software. We have paid a total licensing fee of
$300,000 for the two pieces of software and, in addition, agreed to pay a total
royalty of $50 for each device we sell that includes the software. The
agreements call for minimum royalty payments totaling $500,000, covering both
products, payable on a quarterly basis beginning at the start of the quarter
following our first customer shipment. The quarterly payments range from $12,500
for the first year to $37,500 for the fifth year. We made the first payment for
the quarter ended March 31, 2004. Once we have paid a total of $500,000 in
royalty payments, either in connection with sales of our products or through the
minimum payments, the licenses for both pieces of software will be considered
fully paid. The agreements give us the option to receive upgrades for each piece
of software in consideration for a total annual fee of $15,000, payable for as
long as we desire upgrades. The agreements also call for an annual maintenance
fee of $15,000, also covering both pieces of software. The first payment, which
was mandatory, was made one year after the delivery of the software. We are
obligated to make further annual maintenance payments only if we desire the
maintenance services. We chose to retain maintenance services and paid the
annual maintenance fee. Each license agreement has a term of five years with
provision for annual renewals thereafter, and may be terminated by either party
in the event of a payment default or material breach, except that the licensor
may not terminate the agreement if we have made total royalty payments of
$500,000. We intend to make patent applications with respect to the Nexvu
Analyzer and Command Center Appliances, but have not yet done so. There is not
assurance that, if these patent applications are filed, that they will be
approved.
EMPLOYEES
As of December 31, 2003, we had no full time employees. As of December
31, 2004, we had approximately 100 full-time employees between Nexvu and
Frontrunner, who are employed in the following areas: product development,
quality assurance, product marketing and management, sales and sales support,
administration and customer support. None of our employees are covered by a
collective bargaining agreement. We believe all relations with our employees are
satisfactory.
LEGAL PROCEEDINGS
We are not a party to any legal proceedings.
PROPERTIES
Our principal office is located at 50 East Commerce Drive, Suite A,
Schaumburg, Illinois 60173. A multi-year lease was signed that expires in April
2007, with annual options to renew. Current rent at the Schaumburg location is
$72,000 per year. Another primary office, serving as headquarters for Northeast
operations, is located at 412 Linden Avenue, Rochester, New York 14625. The
Rochester office is leased through April 2006 with annual options to renew. Rent
at this facility is $127,000 per year. A secondary hub located at 40 British
American Boulevard, Albany, New York 12110, services downstate New York and the
New England area. A three year lease was signed that expires in March 2007, with
options to renew. Annual Albany rent is $83,500. Several small satellite offices
housing limited sales and operations are located at: (a)
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415 Lawrence Bell Drive, Buffalo, New York 14221; (b) 129 Brittany Lane,
Pittsford, New York 14534; (c) 6700 Old Collamer Road, Syracuse, New York 13057;
(d) 216 Route #299, Highland, New York 12528; and (e) 7 Kimball Lane, Building
C, Lynnfield, Massachusetts 01940. These five satellite offices all have short
term leases that expire in 2005, each with options to renew. The combined annual
rent obligation for all five satellite offices is currently $70,900 per year. In
addition, we also lease a small office at 2009 Fox Drive Suite 2, Champaign,
Illinois 61820, which houses some of our product development staff. This lease
was entered into in January 2002, having an original one-year term, with annual
options to renew. The current rent for this facility is $38,800 per year.
22
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
No public trading market presently exists for our common stock; however,
we intend to seek to have our common stock quoted on the OTC Bulletin Board
following the declaration of effectiveness of the registration statement of
which this prospectus is a part. There is no assurance that an active market
will develop for our stock even if our stock is quoted on the OTC Bulletin
Board.
We have not paid any cash dividends since our inception, and our board of
directors does not contemplate doing so in the near future. Any decisions as to
future payment of dividends will depend on our earnings and financial position
and such other factors as the board of directors deems relevant.
23
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
BACKGROUND
As of December 31, 2003, we were a development stage company that had
conducted virtually no business operations, other than our efforts to effect a
business combination. On January 28, 2004, we completed a merger under which
Nexvu became a subsidiary of ours. As a result of the merger, the owners of
Nexvu became the majority owners of our company, which resulted in the
transactions being deemed a reverse acquisition for accounting purposes. Under
this treatment, Nexvu became the surviving company for financial statement
purposes. Our net assets were recorded at fair value, with the net assets of
Nexvu reflected at historical costs. In addition, as we were a public shell
company acquiring a privately-held company, no goodwill was reported. In future
periods, the historical financial statements of Nexvu, the operating company,
will be the historical financial statements of the combined company, with our
accumulated deficit eliminated as of the merger date.
During the second quarter, we started experiencing more revenues and we
were no longer a developmental stage company. However, the revenues were not
sufficient to eliminate our operating losses. To address the softness in the
business, we reduced the headcount of Nexvu by an additional 20% during August.
On September 14, 2004, we completed a merger under which we acquired 100%
of the stock of Frontrunner Network Systems Corp., a Delaware corporation.
Frontrunner began in 1976 as the network integration arm of Frontier Corporation
in upstate New York. In April 1999, Frontrunner was purchased from Frontier
Corporation and taken private in combination with the acquisition of certain
assets and certain liabilities of Telecom Midwest, LLC. Frontrunner is a single
- source provider of business communications equipment and multimedia
integration services for data, voice, video and advanced applications.
Frontrunner designs, installs and services customer-premise voice, data and
video networks. It also resells communication equipment to the small and
mid-sized business segment.
The form of the business combination with Frontrunner was a reverse
triangular merger in which we issued 925,000 shares of our common stock and
$222.18 in exchange for 100% of the ownership of Frontrunner and the
cancellation of indebtedness of Frontrunner in the amount of $2,252,423
(excluding accrued unpaid interest and other claims). The merger was approved by
our board of directors and the boards of directors of Frontrunner and our
subsidiary. The merger was also approved by a majority of the shareholders of
Frontrunner.
As of September 30, 2004, we had approximately $1,300,000 of working
capital excluding current debt maturities and $3,800,000 in cash and cash
equivalents. We believe that our working capital levels are sufficient to fund
our operations for the next twelve months.
As a result of the Nexvu and Frontrunner mergers, this Management's
Discussion and Plan of Operation contains information on both us, Nexvu and
Frontrunner.
24
PLAN OF OPERATION - CAPITAL GROWTH SYSTEMS, INC.
Through December 31, 2003, we were a development stage company conducting
virtually no business operations, other than our efforts to effect a business
combination with a target business which we considered to have significant
growth potential. As of December 31, 2003, we had neither engaged in any
operations nor generated any revenue or cash flow. As a result of the merger
with Nexvu, we intend to carry out our plan of business as discussed herein.
We incurred expenses of professional fees of $8,870 during the transition
period ended December 31, 2003 and $21,361 during the fiscal year ended May 31,
2003. As of December 31, 2003, we were not in a position to meet our cash
requirements for the next fiscal year as we did not generate any cash revenue or
receive any type of cash flow through December 31, 2003. After the end of the
transition period, our capital resources increased as the result of our
completion of a private offering in April 2004.
OVERVIEW - NEXVU AND FRONTRUNNER
The following discussion and analysis is based on the financial statements
of Nexvu and Frontrunner, for the entities and as of the dates and for the
periods presented in the financial statements. This discussion and analysis
should be read in conjunction with the financial statements and related notes
for Nexvu and Frontrunner included in this prospectus.
Through December 31, 2003, Nexvu was a development stage company engaged
in the development and sale of application performance management software and
related services to large and mid-sized companies for use in connection with
their computer network systems and applications. Nexvu has been in existence
since February 28, 2002. To date, Nexvu's operations have been focused on
developing its proprietary software so that it can be marketed to the target
audience. From inception through December 31, 2003, total expenses incurred were
$3,823,577, with the majority of the expenses arising from salaries and related
tax benefits, consulting fees and occupancy costs. In late 2003, Nexvu closed
its first product sale in the amount of $59,027. This was the only revenue
generated by the company through December 31, 2003.
RESULTS OF OPERATIONS
Comparison of 12 months ended December 31, 2003 compared to 10 months ended
December 31, 2002
Nexvu's revenues for the twelve months ended December 31, 2003 of $59,027
represent the sale of the company's application performance management tool,
including the software and related appliance that the software runs on, to its
first customer. Nexvu's product was installed at a facility of a customer
utilizing it on a pilot basis. The customer subsequently made the decision to
purchase the product. Cost of goods sold represents the hardware appliance
portion of the product which was sold, as well as costs associated with
purchasing pilot appliances for the sales process. These pilot appliances
comprised the majority of the cost of goods sold and were purchased to
demonstrate the product to potential customers. Nexvu does not expect to require
additional pilot appliances in the future, because the existing appliances can
be re-used and installed at different customer locations.
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The following table sets forth Nexvu's operating expenses for the year
ended December 31, 2003 and ten months ended December 31, 2002. This data should
be read in conjunction with the financial statements included with this
prospectus. The figures for 2002 cannot be directly compared to the 2003 figures
because the 2002 figures represent only a ten month period.
[Download Table]
12 MONTHS 10 MONTHS
ENDED PERCENTAGE ENDED PERCENTAGE
DECEMBER OF TOTAL DECEMBER OF TOTAL
31, 2003 EXPENSES 31, 2002 EXPENSES
OPERATING EXPENSES
Salaries, benefits and payroll taxes $1,752,091 72.4% $ 882,003 78.3%
Marketing and advertising 7,941 0.3% - 0.0%
Occupancy 120,508 5.0% 38,725 3.4%
Professional fees 264,599 10.9% 67,121 6.0%
Depreciation and amortization 84,395 3.5% 39,075 3.5%
Telecommunications 36,438 1.5% 18,421 1.6%
Travel and entertainment 93,047 3.8% 27,294 2.4%
General expenses 61,326 2.5% 54,278 4.8%
---------- ----- ---------- -----
TOTAL EXPENSES $2,420,345 100.0% $1,126,917 100.0%
---------- ----- ---------- -----
The majority of Nexvu's expenses are derived from salaries, benefits and
payroll taxes. Accordingly, the increase in total expenses from the ten months
ended December 31, 2002 to the twelve months ended December 31, 2003 was
primarily due to the increase in the number of Nexvu's full-time employees. The
employees added were sales, marketing, customer support and management
personnel. Professional fees represent programmer consulting fees as well as
legal and accounting fees. The increase in professional expenses from the ten
months ended December 31, 2002 to the twelve months ended December 31, 2003
represents additional contract programmers and higher legal costs associated
with organizational strategies in the company. Occupancy costs rose to support
the corporate headquarters in Schaumburg, IL as well as office space utilized in
Champaign, IL, which houses the programmers. Depreciation and amortization
increased to reflect purchases made during 2003 and the annualized effect of
capital expenditures made in 2002.
Comparison for the 3 and 9 months ended September 30, 2004
Revenues for the three and nine month periods ended September 30, 2004
were heavily influenced by the acquisition of Frontrunner. During the period
September 15 through September 30, 2004, Frontrunner generated approximately
$530,000 of revenue. This revenue represented 90% of the revenues for the third
quarter. These revenues were generated from installation of voice and data
systems as well as through maintenance contracts on installed systems. The
maintenance revenues represented approximately 69% of the total revenues, with
installation and other revenues comprising the remaining revenues. The Nexvu
revenues for the three month period ended September 30, 2004 of $61,500 thousand
are comprised of primary
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sales of our product as well as consulting fees and maintenance. The percentage
of total revenue for Nexvu is 56% for product sales, 39% for consulting services
and approximately 5% maintenance. For the nine month period ended September 30,
2004, the Nexvu revenues were $365,000. The revenues were derived by product
sales of 66%, consulting services of 27% and 7% for maintenance revenues and
other miscellaneous revenues.
Gross margins for Frontrunner were 52% with the installation revenues,
having a 42% gross margin and maintenance revenues having a 59% gross margin.
The Nexvu gross margin rates were 68% and 69% for the three and nine month
periods ended September 30, 2004, respectively. These margins include the costs
of the appliances included in the product sales, amortization of software
licensing fees related to the development of our product, sales commissions and
incidental expenses billable to customers. Total amortization of the software
licensing fees was $25,000 and $50,000 for the three and nine month periods
ended September 30, 2004. No amortization of the licensing fees occurred during
2003.
Total operating expenses were as follows:
[Enlarge/Download Table]
Three months ended, Nine months ended,
------------------------------ ------------------------------
September 30, September 30, September September 30,
2004 2003 30, 2004 2003
------------------------------ ------------------------------
Compensation $ 788,864 $ 528,571 $ 2,381,112 $ 1,277,269
Travel and entertainment 70,932 22,648 210,990 45,142
Occupancy 145,828 29,001 204,645 99,043
Professional services 267,567 47,801 593,036 184,582
Insurance 35,615 1,764 62,195 1,764
Depreciation and amortization 95,167 22,918 147,542 57,923
Other operating expenses 143,693 32,916 316,068 70,105
----------- ---------- ----------- -----------
Total operating expenses $ 1,547,666 $ 685,619 $ 3,915,588 $ 1,735,828
=========== ========== =========== ===========
The majority of our operating expenses consist of compensation expenses
and professional fees. During the third quarter, we took steps to reduce the
overall number of Nexvu employees by over 50%. This was accomplished by a
partial reduction in July and another reduction in August. Annual savings from
this reduction are estimated to be over $1,500,000 due to decreased
compensation, travel and other incidental expenses. Nexvu currently has 11 full
time employees and one part time employee, down from a level during the second
quarter that reached 30. The professional fees are primarily related to legal
fees related to acquisitions and securities work related to filings with the
Securities and Exchange Commission. Our travel and entertainment expenses relate
primarily to cost associated with our sales force. The significant increase in
these expenses in the three and nine months ended September 30, 2004 as compared
with the comparable periods in 2003 is due to the fact that we were still in the
developmental stage of the business in 2003 and are now fully staffed with a
sales force to market our product. Our occupancy expense represents the costs of
our corporate offices in Schaumburg, IL along with offices for Frontrunner in
Rochester, NY, as well as 11 other sales offices. During September, we made the
decision to move our corporate offices to another location in Schaumburg, IL,
sharing space with the Frontrunner division. All future costs
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associated with closing the corporate office were accrued for in September and
represented approximately $100,000. We are currently in the process of finding a
sub-lessor for the space for the remaining life of the lease, which is December
31, 2005.
The current quarter and year to date results reflect interest income on
the investment of the cash raised during the private placement of our stock,
which occurred primarily during the 1st quarter of 2004. With the approximate
$7,500,000 of gross cash raised from this stock offering, all debt was removed
from our balance sheet. Total debt reduction during 2004 was $735,000. The 2003
results include interest expense from debt related to former members of Nexvu.
LIQUIDITY AND CAPITAL RESOURCES -
Comparison of 12 months ended December 31, 2003 Compared to 10 months ended
December 31, 2002
Nexvu has historically met its liquidity needs through loans from
individuals and through member contributions. As of December 31, 2003, total
cash on hand was $616,880 compared to $0 as of December 31, 2002. Total debt as
of December 31, 2003 was $735,000. As a result of the January 28, 2004 merger
between Nexvu and us, Nexvu is now a wholly-owned subsidiary of ours.
Information on our liquidity and capital resources is included under the caption
"Plan of Operation - Capital Growth Systems, Inc." above.
The following table summarizes Nexvu's future contractual obligations as
of December 31, 2003:
[Download Table]
Total 2004 2005 2006 & beyond
----- ---- ---- -------------
Debt: $735,000 $735,000 (1) - -
Operating Leases $154,485 $ 76,265 $ 78,220 -
Minimum Royalty Payments $500,000 $ 50,000 $ 75,000 $375,000
(1) $185,000 of this balance was repaid, and the remaining $550,000 balance
converted to equity, during the 1st quarter of 2004.
Comparison for the 3 and 9 months ended September 30, 2004
As of September 30, 2004, we held $3,800,000 of cash and cash equivalents. The
cash was generated from the private placement of our common stock primarily
during the first quarter of 2004. Total gross proceeds from this offering were
$7,600,000 with net proceeds after advisory, legal and accounting fees bringing
the net total to $6,600,000. Additionally, $185,000 of the capital raised was
utilized to pay down long term debt, with the remaining debt of $550,000 from
December 31, 2003 converted into shares of our common stock subsequent to the
merger.
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As part of the acquisition of Frontrunner, we assumed approximately
$4,700,000 in debt. The majority of debt is a callable demand loan and is
currently classified in current liabilities. We currently have no knowledge that
the noteholder plans to call the debt.
During the nine months ended September 30, 2004, we utilized $3,300,000
cash from operating activities. This use of cash was primarily the result of our
net loss of $3,400,000 realized during the nine months ended September 30, 2004.
We have spent approximately $171,000 on fixed assets during 2004. These
expenditures were primarily for computer equipment utilized in testing our
Application Performance Management product and other computer-related equipment
at Nexvu. We do not expect to require significant capital expenditures in the
near future.
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We have future contractual obligations for leases of our offices and for
minimum future royalty payments related to a software licensing agreement with a
third party. This software is being utilized as a component of our own
proprietary software. The following table summarizes our future contractual
obligations as of September 30, 2004:
[Download Table]
Minimum
Operating Debt Royalty
Leases Obligations Payments
---------- ----------- -----------
2004 $ 122,062 $ 4,384,149 $ 12,500
2005 428,253 195,238 75,000
2006 198,870 31,200 100,000
2007 45,261 - 125,000
2008 - - 150,000
---------- ----------- -----------
Total contractual obligations $ 794,446 $ 4,610,587 $ 462,500
---------- ----------- -----------
Frontrunner has a demand note payable to Harris Bank in the amount of
$3,920,000, which is payable in monthly principal installments of $10,000 plus
interest at 1.50% above the prime rate, which was 4.75% on September 30, 2004,
until the loan is paid in full or demand is made by the bank. This loan is
secured by substantially all of the assets of Frontrunner and a personal
guarantee by a principle. There is also a note payable to Global Crossing North
America in the amount of $425,478, due in monthly installments of $16,667
through May 2006. The note bears interest (imputed at 8%) and is subordinated to
the outstanding bank debt. As of September 30, 2004, Frontrunner was in default
under the terms of the agreement. We have a note payable to a creditor which is
unsecured and payable in monthly installments of $12,500 including interest at
8.25% through December 2005. We have ceased making payments under this
agreement. We also have an installment payment agreement with the New York State
Department of Taxation and Finance, payable in monthly installments of $5,455
through June 2006. This figure includes principle and imputed interest and
penalties at 16.67%. Frontrunner is currently indebted to several entities,
including but not limited to Nortel Networks Inc., in the amount of $1,524,460
and Review Video Inc. in the amount of $297,000. Frontrunner is currently in
default under its obligation to Global Crossing North America.
All debt that is callable or not in compliance is reflected in the 2004
obligations. However, we have no reason to believe that these obligations will
be called by the lender. At the present time we believe that our current cash
and cash equivalent balances will be sufficient to satisfy our anticipated cash
needs for working capital for at least the next 12 months.
From time to time, we may evaluate potential acquisitions of businesses,
products or technologies. A portion of our cash may be used to acquire or invest
in complementary businesses or products or to obtain the right to use third
party technologies. In addition, in making such acquisitions or investments, we
may assume obligations or liabilities that may require us to make payments or
otherwise use additional cash in the future.
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CRITICAL ACCOUNTING POLICIES
Revenue Recognition. We generate revenue from licensing our software,
selling hardware, consulting services, and maintenance agreements. We recognize
revenue in accordance with Generally Accepted Accounting Principles, as set
forth in Statement of Position ("SOP") 97-2, Software Revenue Recognition, and
SOP 98-9, Modification of SOP 97-2, Software Revenue Recognition with respect to
Certain Transactions, the Securities Exchange Commission Staff Accounting
Bulletin No. 104, Revenue Recognition, and other related pronouncements. In
accordance with these statements, we recognize revenue upon meeting each of the
following criteria:
Existence of persuasive evidence of an arrangement, generally consisting of a
purchase order, license agreement or other contract.
Delivery of the product and authorization keys, delivery is generally considered
to have occurred when the customer is provided with our software and hardware
and the authorization keys needed to activate the software.
- Fee is fixed and determinable, which is considered to be the case
when the fee is not subject to subsequent refund or adjustments.
Collection is probable.
We defer maintenance revenue and recognize it ratably over the maintenance
term. Nexvu defers consulting and training billings and recognize them as those
services are performed.
Income Taxes. Nexvu is organized as a limited liability company. Through
December 31, 2003, all losses were the responsibility of the members. Neither
income taxes nor the benefits relating to net losses are reflected in the
accompanying financial statements.
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DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The following information is provided concerning our directors and
executive officers:
[Download Table]
NAME PRINCIPAL OCCUPATION AND BUSINESS EXPERIENCE
-------------------------- --------------------------------------------
Robert Geras Mr. Geras has served as our Chairman of the
Age 66 Board since the completion in January 2004
Director since 2004 of our merger with Nexvu Technologies, LLC,
which is described in "Business -- Merger
with Nexvu Technologies, LLC." Mr. Geras
served as the Chairman of Nexvu Technologies
from June 2003 through the date of the
merger. Mr. Geras' sole occupation for the
last five years has been as a private
investor. Among the companies in which Mr.
Geras has been an early-state investor is
Merge Technologies Inc., a public company
included in the Nasdaq National Market,
which provides eHealth connectivity products
for medical imaging and other clinical
information. Mr. Geras has also served as a
director and/or early stage investor in
VideoHome Tours, a provider of visual
content management and marketing services
for large brokerage firms; ShowTime.com, a
complete Internet scheduling and
productivity tool for real estate agents;
Exadigm, Inc., a company engaged in the
development and sale of electronic payment
processing equipment utilizing wi-fi
technology; and 20/20 Technologies, LLC, a
provider of bandwidth and connectivity to
the high speed data transmission industry.
Philip B. Kenny Mr. Kenny has served as a director of our
Age 51 Company since August 2004. He is an owner
Director since 2004 and Partner in Kenny Industries, which
serves as a holding company for the Kenny
Family. It is in that holding company that
Kenny Construction Company, Seven K
Construction, Northgate Investments, Casino
Queen and Clinton Industries are held. Mr.
Kenny serves as President in two entities of
the holding company, Seven K Construction
and Northgate Investments.
Kenny Construction Company is a seventy-six
year old construction company that is based
in Chicago. It currently is working on
projects in six major cities in the United
States. It has been involved is some of
Chicago's greatest landmarks and projects,
including the recent $600,000,000 renovation
of Soldier Field.
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[Download Table]
NAME PRINCIPAL OCCUPATION AND BUSINESS EXPERIENCE
-------------------------- --------------------------------------------
The company also serves as construction
manager for the $1,000,000,000 expansion at
Midway Airport, the Chicago Transit
Authority's Blue/Orange/and Brown line, and
Millennium Park.
Northgate Investment is the primary
investment vehicle for the companies. It is
involved in ownership, development of
numerous building and real estate projects
in Cook, Lake and Will County. Northgate and
Clinton Industries have various interests in
other companies from manufacturing to some
entertainment properties.
Mr. Kenny recently served as CEO of K-2
Industrial, a $140,000,000 service company,
with over 1,000 corporate clients across the
United States. He currently serves as
Chairman of the company. In addition, he
serves on the Executive Committee of Sports
Publishing, a Champaign Illinois Publisher
that produces and distributes 120 sports
publications on an annual basis.
In addition to serving on the Company's
board, Mr. Kenny also serves on the Boards
of Umbrella Entertainment, the largest
production manager of air shows in the
United States, Fifth Media, a technology
company in Libertyville, Illinois, and
Insight Productions, a designer and importer
of custom products based in Naperville,
Illinois. He serves on the Business Advisory
Board at Miami University in Oxford, Ohio,
the Board at Northern Illinois University
School of Engineering and Technology, and
Loyola Academy, the largest Jesuit High
School in the United States.
Mr. Kenny is a graduate of the Business
School at Arizona State University.
David A. Beamish Mr. Beamish has served as a director of ours
Age 41 since August 2004. He has been in sales and
Director since 2004 marketing for over eighteen years. Mr.
Beamish began his career in the medical
sales area, where he worked for Medline
Industries for five years. He successfully
managed and built a four state territory to
over $35,000,000 in sales. In 1987, he left
Medline Industries to co-found Premier
Medical Industries Inc., which he and a
partner built to $32,000,000 in sales
business over a
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[Download Table]
NAME PRINCIPAL OCCUPATION AND BUSINESS EXPERIENCE
-------------------------- --------------------------------------------
period of eight years. After Premier Medical
Industries, Mr. Beamish successfully formed,
built and sold five local businesses:
Premier Sales Inc. (a linen and textile
distributor), Premier Tax and Accounting LLC
(an accounting and tax firm), Premier
Construction LLC (a small construction
firm), Premier Technologies (a computer
distributor and Internet firm), and Premier
Products LLC (a nursing home supply
company). Today, Mr. Beamish owns and
operates Premier Laundry Technologies LLC
("PLT"), the largest independently owned COG
Healthcare Laundry in the Midwest. PLT has
three plants and employs over 150 people.
Douglas Stukel Mr. Stukel has served as a director of our
Age 35 company since August 2003. Mr. Stukel has
Director since 2003 served as our Co-Chief Executive Officer
since August 30, 2004. Mr. Stukel, together
with Mr. Wiskowski, led the investor group
which purchased the current majority stake
in our company. In addition, Mr. Stukel is a
co-founder of Premier Holdings of Illinois,
LLC, a distributor of medical supplies based
in Joliet, Illinois. Mr. Stukel served as
the president of Cendant Home Funding, a
residential mortgage company based in
Joliet, Illinois, from 1997 until 2001. Mr.
Stukel is also a co-founder of Momentum
Capital, LLC, a privately held firm
providing financial advisory services in
connection with mergers and acquisitions and
analysis as to strategic alternatives. As a
co-founder of Momentum Capital, LLC, Mr.
Stukel's responsibilities are related to the
location of potential clients, the
negotiation of agreements with those clients
and the provision of advisory services
related to the clients.
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[Download Table]
NAME PRINCIPAL OCCUPATION AND BUSINESS EXPERIENCE
-------------------------- --------------------------------------------
Lee Wiskowski Mr. Wiskowski has served as a director of
Age 37 our company since the completion of our
Director since 2003 merger with Nexvu Technologies, LLC. Mr.
Wiskowski has served as our Co-Chief
Executive Officer since August 30, 2004.
From August 2003 through the date of the
merger, Mr. Wiskowski served as our Chief
Executive Officer, Chief Financial Officer,
President and as a director. Since December
2002, Mr. Wiskowski has been engaged in the
advisory and consulting business through
Grander, LLC, both privately held advisory
and consulting firms. As a co-founder of
Grander, LLC and Momentum Capital, LLC, Mr.
Wiskowski's responsibilities are related to
the location of potential clients, the
negotiation of agreements with those clients
and the provision of advisory services
related to the clients. From May 1999 to May
2001, Mr. Wiskowski was associated with
Advanced Equities, Inc., a broker-dealer.
Our board of directors has determined that Mr. Geras is independent within
the meaning of Rule 4200 of the Nasdaq Stock Market.
INFORMATION REGARDING OUR BOARD OF DIRECTORS
BOARD MEETINGS/COMMITTEES
Our board of directors presently has a Compensation Committee, a
Nominating Committee and an Audit Committee. The composition, functions and
responsibilities of each committee are described in the paragraphs that follow.
Compensation Committee. The Compensation Committee is responsible for
reviewing, determining and establishing the salaries, bonuses and other
compensation of our executive officers and administering our 2003 Long-Term
Incentive Plan. Our Compensation Committee is comprised of Messrs. Geras, Stukel
and Wiskowski.
Nominating Committee. The Nominating Committee is responsible for making
recommendations to our board of directors relating to the appropriate size,
functioning and needs of the board of directors, which includes recruitment and
retention of high-quality board members. Our Nominating Committee is comprised
of Messrs. Geras, Stukel and Wiskowski. Mr. Geras is considered independent as
defined in the rules of the Nasdaq stock market.
Audit Committee. The Audit Committee is responsible for selection and
oversight of our independent auditors, reviewing with the independent auditors
the scope and results of the audit engagement, establishing and monitoring our
financial policies and control procedures, reviewing and monitoring the
provision of non-audit services by our independent auditors and reviewing all
potential conflict of interest situations. Our Audit Committee is comprised of
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Messrs. Geras, Stukel and Wiskowski. Mr. Geras is considered independent as
defined in the rules of the Nasdaq stock market. The Audit Committee did not
meet during our 2003 fiscal year. We presently do not have a director who would
qualify as an "audit committee financial expert" as defined in Item 401(e) of
Regulation S-B. Given our present situation, we feel it would be overly costly
and burdensome and unwarranted to retain an independent director who would
qualify as an "audit committee financial expert." We will consider adding an
audit committee financial expert if our business grows and adding such a person
would be less burdensome.
LIMITATION OF DIRECTORS' LIABILITY AND INDEMNIFICATION
As authorized by the Florida Business Corporation Law, our By-Laws provide
that none of our officers or directors will be personally liable to us or our
shareholders for monetary damages for breach of fiduciary duty as an officer or
director, except liability for:
- any breach of the officer's or director's duty of loyalty to us or
our shareholders;
- acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
- in the case of a director, unlawful payments of dividends or
unlawful stock redemptions or repurchases; and
- any transaction from which the officer or director derived an
improper personal benefit.
This provision limits our rights and the rights of our shareholders to recover
monetary damages against an officer or director for breach of the fiduciary duty
of care except in the situations described above. It does not limit our rights
or the rights of any shareholder to seek injunctive relief or rescission if an
officer or director breaches his or her duty of care. This provision will not
alter the liability of officers or directors under federal securities laws. Our
By-Laws further provide for the indemnification of any and all persons who serve
as our director, officer, employee or agent to the fullest extent permitted
under Florida law.
We intend to reincorporate in Delaware in the near future. Our proposed
Delaware Certificate of Incorporation and provisions of the Delaware General
Corporation law will have a similar indemnification effect as the provisions of
our By-Laws and of Florida law described above.
There is no pending litigation or proceeding involving any of our
directors, officers, employees or agents in which we are required or permitted
to provide indemnification. We are also not aware of any threatened litigation
or proceeding that may result in a claim for indemnification.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers or controlling persons under our
By-Laws, we have been informed that, in the opinion of the SEC, indemnification
is against public policy as expressed in the Securities Act and is
unenforceable.
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EXECUTIVE COMPENSATION AND RELATED INFORMATION
CAPITAL GROWTH SYSTEMS, INC.
Through December 31, 2003, none of our directors or officers had received
any salary or other compensation of any kind, other than reimbursement for
out-of-pocket expenses incurred on our behalf, and we did not have any
employment agreements with them.
As a result of the merger with Nexvu, we will compensate our directors and
officers for their services to us. The Agreements we have entered into to date
with our executive officers are discussed below. However, we presently have no
formal agreement or arrangements in place regarding compensation for our
directors or officers, except as described below.
We have entered into employment agreements with each of Scott Allen and
Rory Herriman under which each is entitled to a base salary of $175,000 per
year. Under these agreements, each of Mr. Allen and Mr. Herriman may receive
bonuses in the discretion of the board of directors, with a target bonus of 50%
of base salary. Mr. Allen and Mr. Herriman are each entitled to receive under
their respective employment agreements, options to acquire 430,000 shares of our
common stock under our Long-Term Incentive Plan, vesting over a ten-year period
through January 2, 2007, with acceleration on a change in control. In addition,
each of Mr. Allen and Mr. Herriman is entitled to a bonus in the event of a
successful change in control, such as a merger or sale of our Company, equal to
the lesser of 299% of their base salary as of the date of the change in control,
or one percent of the amount by which the value of the transaction to our
shareholders exceeds the product of the highest prior price at which we sold our
shares, multiplied by the number of our outstanding shares as of the date the
change of control occurs.
Each employment agreement has a term ending at the end of the calendar
year and will automatically renew for additional one-year periods unless
terminated by us or the executive on written notice at least two months before
expiration of the current term. Under the agreements, if employment is
terminated without cause, or the agreement does not automatically renew, he is
entitled to receive severance of one year's pay, payable in regular monthly
increments. The agreements also provide for a lump sum payment of 90 days' pay
in the event of death or disability.
In December 2003, our board of directors adopted the 2003 Long-Term
Incentive Plan for key employees and other persons providing assets or services
of value. The plan provides for the issuance of stock based awards to key
employees as part of their overall compensation. A total of 2,285,000 restricted
shares of our common stock, stock options or other equity based compensation can
be issued under the plan. It is expected that a substantial portion of these
options will be allocated to existing management and other persons assisting us
in our endeavors. Presently, we have issued 1,032,907 restricted shares under
the plan, net of forfeitures.
NEXVU TECHNOLOGIES, LLC
The following table sets forth information with respect to the total
annual compensation paid by Nexvu Technologies, LLC to its Chief Executive
Officer and each of its other executive
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officers whose total cash compensation for the year ended December 31, 2003
exceeded $100,000:
SUMMARY COMPENSATION TABLE
[Enlarge/Download Table]
ANNUAL COMPENSATION LONG-TERM COMPENSATION
------------------- ----------------------
NUMBER OF MANAGING
NAME AND PRINCIPAL POSITION YEAR SALARY MEMBER INTERESTS
------------------------------------ ------- ------------------- ----------------------
Craig Siegler (1) 2003 $ 50,000
Scott Allen
Chief Executive and Chief Financial
Officer (2) 2003 135,000 772,092(3)
Rory Herriman 2003 150,000
Chief Technology Officer (4) 2002(5) 81,250 901,953(6)
(1) Mr. Siegler, who controlled the company that acted as the manager of Nexvu
Technologies from its inception in February 2002 through June 2003, effectively
acted as the company's chief executive officer during this time. Beginning in
July 2003, Mr. Siegler provided consulting services for a one-year period for a
fee of $50,000 per year.
(2) Mr. Allen was employed by Nexvu effective July 2003. Mr. Allen's employment
agreement with Nexvu Technologies called for various options to acquire Class B
interests upon achieving certain targets, which were not met. The employment
agreement was superseded by a new agreement with us entered into on April 26,
2004 (the "Allen Employment Agreement").
(3) Consists of 212,093 managing member interests granted to Mr. Allen in
connection with the signing of his employment agreement, and 559,999 interests
granted to Mr. Allen in October 2003 as part of a discretionary award made by
the manager of Nexvu Technologies to various employees and service providers.
Holders of the managing member interests had no interest in the company other
than the right to share in its profits, if any, after the payment of preferred
returns to other holders. The managing member interests were deemed to have only
nominal value at the time of grant. The 772,092 interests owned by Mr. Allen
were converted into a total of 161,178 shares of our common stock in connection
with the merger between us and Nexvu Technologies which occurred on January 28,
2004.
(4) Mr. Herriman was employed by Nexvu effective May 2002.
(5) Nexvu Technologies, LLC was organized on February 28, 2002.
(6) Consists of managing member interests granted to Mr. Herriman in October
2003 as part of a discretionary award made by the manager of Nexvu Technologies
to various employees and service providers. Holders of the managing member
interests had no interest in the company other than the right to share in its
profits, if any, after the payment of preferred returns to other holders. The
managing member interests were deemed to have only nominal value at the time of
grant. The 901,953 interests owned by Mr. Herriman were converted into a total
of 188,871 shares of our common stock in connection with the merger between us
and Nexvu Technologies which occurred on January 28, 2004.
EMPLOYMENT AGREEMENT
In July, 2003, Nexvu entered into an employment agreement with Scott
Allen, the company's Executive Vice President - Sales, under which Mr. Allen was
entitled to a base salary of $135,000 per year. Under the agreement Mr. Allen
received 212,093 managing member interests in Nexvu, subject to downward
adjustment if an offering of Nexvu' planned at the time was smaller than
anticipated. Half of the managing member interests were to vest on July 1, 2004,
and the remaining half were to vest equally over the subsequent twelve months,
except that all of the interests were to vest in the event of a change in
control. For the first year of the agreement, Mr. Allen was entitled to a bonus
of up to $200,000, based on Nexvu' achieving various sales goals specified in
the agreement. Mr. Allen was also entitled to additional
38
incentive compensation based on: the first purchase order received by Nexvu, if
Mr. Allen was the source of the order; establishment of the company's first
original equipment manufacturer, or "OEM," relationship resulting in $5,000,000
of revenue in the first year of Mr. Allen's employment; or the sale of rights to
any products or technology for $5,000,000 or more, or sale of 51% or more of the
company based on a valuation of the company in excess of $7,500,000. The
incentive based on the purchase order was payable in cash, and the incentives
based on the OEM relationship or sale of products, technology or all or part of
the company were payable in managing member interests.
Mr. Allen's employment agreement had a one-year term, and was to
automatically renew for additional one-year periods unless terminated by Nexvu
or Mr. Allen on written notice at least two months before expiration of the
current term. Under the agreement, if Mr. Allen's employment was terminated
without cause, or the agreement did not automatically renew, he was entitled to
receive severance of 90 days' pay. The agreement also provided for a lump sum
payment of 90 days' pay in the event of death or disability. Mr. Allen's
employment agreement with Nexvu was superseded by an agreement he entered into
with us in April 26, 2004 (the "Allen Employment Agreement"). The Allen
Employment Agreement was terminated August 30, 2004 and as part of the
termination, Mr. Allen entered into a severance agreement with us effective
August 30, 2004 (the "Severance Agreement"), whereby Mr. Allen agreed to provide
consulting services to us until the earlier of his finding alternative
employment or November 23, 2004. We paid Mr. Allen a consulting fee on a pro
rated basis at the rate of $175,000 per year. Mr. Allen holds options to
purchase 107,500 shares of our Common Stock on or before April 25, 2014, at a
price of $1.35 per share.
CHANGE OF CONTROL
The employment agreement of Scott Allen, Nexvu's Executive Vice President
- Sales, provided that managing member interests granted to Mr. Allen, which
otherwise would have vested over a two-year period, vested immediately in the
event of a change of control. "Change of control" was defined in Mr. Allen's
employment agreement to include a sale of all or substantially all of the assets
of Nexvu or a transaction in which over 50% of the company's beneficial
ownership is transferred to a beneficial owner to persons other than the owners
of Nexvu, or holders of its debt, at the time the employment agreement was
signed.
LONG-TERM INCENTIVE PLAN
In December 2003, we adopted the 2003 Long-Term Incentive Plan for key
employees and other persons providing assets or services to us. The plan
provides for the issuance of stock-based awards to key employees as part of
their overall compensation. A total of 2,285,000 restricted shares of common
stock, stock options or other equity-based compensation can be issued under the
plan. It is expected that a substantial portion of these options will be
allocated to existing management and other persons assisting us in our
endeavors. Presently, we have issued 1,032,907 restricted shares under the plan.
39
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
BENEFICIAL OWNERSHIP
The following table sets forth, as of December 31, 2004, the names,
addresses, amount and nature of beneficial ownership and percent of such
ownership of:
- each person known to our to be the beneficial owner of more than
five percent (5%) of our common stock;
- each director; and
- all directors and executive officers, as a group.
Except as otherwise indicated in the footnotes to the table, the persons named
below have sole voting and investment power with respect to the shares
beneficially owned by them. In general, a person is deemed to be a "beneficial
owner" of a security if that person has or shares the power to vote or direct
the voting of the security, or the power to dispose of or to direct the
disposition of the security. A person is also deemed to be a beneficial owner of
any securities of which the person has the right to acquire beneficial ownership
within 60 days. The beneficial ownership percentages are based on 16,940,754
shares outstanding as of December 31, 2004.
[Enlarge/Download Table]
AMOUNT AND NATURE OF
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP(1) PERCENT OF CLASS
------------------------------------ ----------------------- ----------------
Robert T. Geras, Director 2,257,837(2) 13.33%
Carl C. Greer Trust(3) 2,266,282(4) 13.16%
Craig Siegler 1,459,278(5) 8.53%
David Lies 1,304,375(6) 7.65%
Balkin Family Limited Partnership(7) 1,093,186(8) 6.42%
Philip B. Kenny, Director 75,000 .44%
David A. Beamish, Director 400,667 2.37%
Derry L. Behm, CFO(9) 87,500(10) .51%
Douglas Stuke1, Director and Co-CEO(11) 434,482(12) 2.53%
Lee Wiskowski, Director and Co-CEO(11) 325,407(13) 1.89%
All Directors and Executive Officers as a Group
(6 persons) 3,580,893 21.07%
40
(1) Except pursuant to applicable marital property laws or as indicated in the
footnotes to this table, to our knowledge, each stockholder identified in
the table possesses sole voting and investment power with respect to all
common stock shown as beneficially owned by the stockholder.
(2) Includes 111,111 shares issuable upon the exercise of warrants held by Mr.
Geras. Mr. Geras' business address is 55 East Erie Street, Suite 2905,
Chicago, Illinois 60611.
(3) The Carl C. Greer Trust, of which Carl C. Greer is the sole trustee, is an
estate planning trust established by Mr. Greer for the benefit of his
family members. The business address of the trust is c/o Thomas Floyd,
4501 West 127th Street, Suite D, Alsip, Illinois 60803.
(4) Includes 277,778 shares issuable upon the exercise of warrants held by the
Carl C. Greer Trust.
(5) Includes 162,500 shares issuable upon the exercise of warrants held by Mr.
Siegler. Mr. Siegler's business address is 388 Melford Road, Deerfield,
Illinois 60035.
(6) Includes 111,111 shares issuable upon the exercise of warrants held by Mr.
Lies, 97,392 shares owned by Mr. Lies' wife, and 9,259 shares issuable
upon the exercise of warrants held by Mr. Lies' wife. Mr. Lies disclaims
beneficial ownership of shares held by his wife or issuable upon the
exercise of warrants held by his wife. Mr. Lies' address is 1210 Sheridan
Road, Wilmette, Illinois 60091.
(7) The Balkin Family Limited Partnership, of which Michael Balkin is the sole
general partner, is an estate planning partnership established by Mr.
Balkin for the benefit of himself and his immediate family members. The
address of the partnership is 1145 Green Bay Road, Glencoe, Illinois
60022.
(8) Includes 92,593 shares issuable upon the exercise of warrants held by the
Balkin Family Limited Partnership.
(9) The business address of Mr. Behm is 50 East Commerce Drive, Suite A,
Schaumburg, Illinois 60173.
(10) Mr. Behm holds options to purchase 175,000 shares of common stock, which
vest over a period of four years. The first tranche (25% for 43,750
shares) vested immediately and the second tranche (25% for 43,750 shares)
vests in April 2005.
(11) The business address of Mr. Wiskowski and Mr. Stukel is 875 N. Michigan
Avenue, Suite 3335, Chicago, Illinois 60611.
(12) Includes 250,000 shares issuable upon the exercise of a warrant held by
Mr. Stukel.
(13) Includes 72,407 shares owned by Grander, L.L.C., of which Mr. Wiskowski is
the sole member, and 250,000 shares issuable upon the exercise of a
warrant held by Mr. Wiskowski.
41
EQUITY COMPENSATION PLAN INFORMATION
[Enlarge/Download Table]
NUMBER OF SECURITIES
REMAINING AVAILABLE
NUMBER OF SECURITIES FOR FUTURE ISSUANCE
TO BE ISSUED UPON WEIGHTED AVERAGE UNDER EQUITY
EXERCISE OF EXERCISE PRICE OF COMPENSATION PLANS
OUTSTANDING OUTSTANDING (EXCLUDING SECURITIES
OPTIONS, OPTIONS, REFLECTED IN
PLAN CATEGORY WARRANTS AND RIGHTS WARRANTS AND RIGHTS COLUMN (a))
------------------------------ --------------------- ------------------- ---------------------
Equity Compensation
Plans Approved by Security Holders -- -- --
Equity Compensation
Plans Not Approved by Security Holders 0 -- 2,285,000*
Total 0 -- 2,285,000
*Consists of securities issuable under our 2003 Long-Term Incentive Plan for key
employees, which was approved by our board of directors on December 16, 2003.
Currently there is no market for our common stock, nor is any market
likely to develop in the near future. As of May 3, 2004, we had approximately
202 holders of record of our common stock.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Our executive officers, directors and shareholders beneficially owning
more than 10% of our common stock are required under the Securities Exchange Act
of 1934 to file reports of ownership of our common stock with the Securities and
Exchange Commission. Copies of those reports must also be furnished to us. Based
solely upon a review of the copies of reports furnished to us and written
representations that no other reports were required, we believe that during the
preceding year all filing requirements applicable to executive officers,
directors and shareholders beneficially owning more than 10% of our common stock
have been complied with.
42
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On December 1, 2003, we entered into a business and financial advisory agreement
with Grander, L.L.C., of which Lee Wiskowski, one of our directors, is the sole
member. For its services, Grander has been paid a fee of $761,000 for advising
us in connection with the structuring of our acquisition of Nexvu, establishment
of commercial and strategic partnerships and joint ventures, development of our
marketing plan, financial models, financial strategies and structuring of our
private offering.
On March 31, 2004, we entered into advisory services agreements with each
of Mr. Stukel and Mr. Wiskowski. Mr. Stukel and Mr. Wiskowski are both members
of our board of directors. Each agreement has a term extending through September
30, 2005. Under the agreements, Mr. Stukel and Mr. Wiskowski agree to provide
financial advisory services to us in connection with mergers and acquisitions
and analysis of strategic alternatives. Each of Mr. Stukel and Mr. Wiskowski
received, in connection with the agreements, warrants to purchase 250,000 shares
of our common stock at an exercise price of $1.35 per share on or before March
31, 2007. The warrants have a cashless exercise provision. Each of Mr. Stukel
and Mr. Wiskowski has a right of first refusal during the term of his agreement
and for a period of six months thereafter to with respect to merger and
acquisitions.
FRONTRUNNER
On September 14, 2004, we completed a merger under which we acquired 100%
of the stock of Frontrunner. Frontrunner is a single - source provider of
business communications equipment and multimedia integration services for data,
voice, video and advanced applications. Frontrunner designs, installs and
services customer-premise voice, data and video networks. It also resells
communication equipment to the small and mid-sized business segment.
The form of the business combination with Frontrunner was a reverse
triangular merger in which we issued 925,000 shares of our common stock and
$222.18 in exchange for 100% of the ownership of Frontrunner and the
cancellation of indebtedness of Frontrunner in the amount of $2,252,423
(excluding accrued unpaid interest and other claims). The merger was approved by
our board of directors and the boards of directors of Frontrunner and our
subsidiary. The merger was also approved by a majority of the shareholders of
Frontrunner. At the time of the merger, Frontrunner had assets principally in
the form of inventory, fixed assets and receivables in the amount of
approximately $3,800,000.
The merger agreement contained certain conditions precedent including: (i)
requiring certain creditors of Frontrunner to execute creditor waiver
agreements; (ii) James Cuppini entering into an employment agreement with
Frontrunner, (iii) entry by Frontrunner into certain payment agreements calling
for amortization of outstanding past due obligations of Frontrunner plus a
market rate of interest with certain other of its creditors, and (iv)
Frontrunner obtaining from Harris Trust and Savings Bank, a consent to the
merger and a commitment that it would extend and maintain a loan to Frontrunner
with a principal amount of not less than the principal balance outstanding as of
the date of the merger (approximately $3,920,000). We waived all of the
conditions precedent except the entry into certain creditor waiver agreements
and our issuance of common stock to those creditors.
43
Frontrunner entered into creditor waiver agreements with several of its
identified creditors. All but one of these identified creditors (John Jellinek)
executed the creditor waiver agreements. The following identified creditors
entered into the creditor waiver agreements and we, in turn, issued a total of
925,000 shares of our common stock to Bluestem Capital Partners II, Limited
Partnership, Mesirow Capital Partners VI, The Edgewater Private Equity Fund II,
L.P., 21st Century Communications Partners L.P., 21st Century Communications T-E
Partners, L.P., 21st Century Communications Foreign Partners, L.P., Philip
Kenny, and James Cuppini, and reserved the remaining 75,000 shares, for possible
later issuance to John Jellinek. The shares of common stock distributed among
the creditors was determined pursuant to negotiations between the creditors and
Frontrunner, rather than allocated pursuant to a formula. The most recent
private placement of our common stock was made at $1.35 per share, which was
assumed to constitute its fair market value.
The shares were issued in the amounts and to the entities set forth below:
[Download Table]
Number of Shares of Current Estimated
Name of Creditor Debt Holdings Common Stock Market Value
---------------- ------------- ------------------- -----------------
Bluestem $ 215,000 113,438 $ 153,141.30
Mesirow $ 920,109 326,756 $ 441,120.60
Edgewater $ 819,981 273,928 $ 369,802.80
21st Century $ 297,333 35,878 $ 48,435.30
Kenny -0- 75,000 $ 101,250.00
Cuppini -0- 100,000 $ 135,000.00
------------ ------------ ---------------
TOTAL $ 2,252,423 925,000 $ 1,248,750.00
Bluestem Capital Partners II, Limited Partnership, Mesirow Capital
Partners VI, The Edgewater Private Equity Fund II, L.P., 21st Century
Communications Partners L.P., 21st Century Communications T-E Partners, L.P.,
21st Century Communications Foreign Partners, L.P. and Mr. Cuppini, in addition
to being creditors were also shareholders of Frontrunner. Each of the entities
(other than 21st Century Communications T-E Partners, L.P., 21st Century
Communications Foreign Partners) had one director sitting on Frontrunner's
six-member board of directors. Mr. Kenny, who currently sits on our board of
directors, also sat on the Frontrunner board of directors and received common
stock. Bluestem Capital Partners II, Limited Partnership, Mesirow Capital
Partners VI, The Edgewater Private Equity Fund II, L.P., 21st Century
Communications Partners L.P., 21st Century Communications T-E Partners, L.P.,
21st Century Communications Foreign Partners, L.P. and Mr. Kenny, together were
the majority shareholders of each class of voting stock of Frontrunner that
authorized the merger. Mr. Cuppini is the current and past President of
Frontrunner.
Fifteen percent (15%) of the 925,000 shares issued to the participating
creditors, approximately 138,750 shares was deposited in escrow to be held for a
year for the purpose of settling or litigating claims. Mr. Kenny is the owner of
the escrow agent for this account.
The merger agreement further provided that: (i) the officers of
Frontrunner immediately prior to the merger would continue to serve as the
officers of Frontrunner, as the surviving
44
corporation; and (ii) the directors of our subsidiary would become the directors
of Frontrunner, as the surviving corporation.
Craig Siegler organized Siegler Technology & Development and therefore is
considered Nexvu's promoter. Siegler Partners, L.L.C., a company controlled by
Mr. Siegler, acted as the manager of Nexvu from its inception through June 2003.
Mr. Siegler's only current relationship with us is as the beneficial owner of
over 5% of our common stock. From July 2003 through June 2004, Mr. Siegler
provided consulting services to Nexvu, which is now a wholly-owned subsidiary of
ours. On June 27, 2003, Nexvu issued a total of 2,837,950 Class A membership
interests to Craig Siegler, the promoter of Nexvu. The consideration for these
shares was $1,034,907, which had been advanced by Mr. Siegler to Nexvu during
the period from the inception of Nexvu on February 28, 2002 through June 27,
2003. The issuance of the shares eliminated our obligation to repay those
advances.
45
SHARES TO BE ISSUED IN CONNECTION WITH
THE EXERCISE OF WARRANTS
In connection with our merger with Nexvu, we are agreed to issue warrants
to purchase 638,889 shares to persons who had received warrants to purchase
membership interests in Nexvu. In connection with a separate agreement with Mr.
Siegler, we agreed to issue warrants to purchase 162,500 shares of common stock.
In addition, on March 31, 2004, we issued warrants to purchase 250,000 shares of
common stock to each of Mr. Stukel and Mr. Wiskowski in connection with advisory
services agreements with each of these individuals, who are members of our Board
of Directors. All warrants have an exercise price of $1.35 per share and are
exercisable on or before December 31, 2006, except the warrants held by Mr.
Stukel and Mr. Wiskowski, which are exercisable on or before March 31, 2007.
The warrants possess anti-dilution provisions for stock dividends, splits,
mergers or sales of substantially all of our assets. We issued the warrants in
transactions exempt from the registration requirements of the Securities Act of
1933, as amended, as a private offering. As a result, none of the warrants are
freely transferable. There is no market for the warrants.
The holder of a warrant may exercise his or its purchase rights, in whole
or in part, at any time, or from time to time, before the warrant expiration
date. To exercise a warrant, the holder must notify us, in writing, of the
holder's intention to exercise the warrants and the number of shares to be
purchased. The holder must also submit payment for the purchase price of the
shares in the form of cash, certified or cashier's check or wire transfer. If
the holder does not exercise all of the warrants, the holder will receive a new
warrant to purchase a number of shares equal to the difference between the
number of shares subject to the original warrant and the number of shares
purchased through the warrant exercise. In the case of the warrant to purchase
162,500 shares of our common stock referred to above, and the warrants to
purchase a total of 500,000 shares issued to Mr. Stukel and Mr. Wiskowski, the
holder may also take advantage of a "cashless exercise" feature of the warrant.
46
SHARES AVAILABLE FOR FUTURE SALE
Prior to this offering, there has been no market for any of our securities
and we do not know if a significant public market will develop for any of our
securities following completion of this offering. We cannot predict the effect,
if any, that sales of shares of our common stock will have on the price of our
common stock. However, sales of substantial amounts of these shares in the
public market could cause the price of our common stock to decline or impair our
ability to raise money through an offering of our equity securities.
Upon completion of this offering, we will have 16,954,754 shares of common
stock outstanding, and 1,301,389 additional shares will be issuable upon the
exercise of warrants. The 8,104,893 shares of common stock registered in this
offering, including shares issuable upon the exercise of the warrants, will be
freely tradable without restriction or further registration under the Securities
Act, except for any shares purchased by an "affiliate" of ours, which is
generally a person who has a control relationship with us, which will be subject
to the limitations imposed on "affiliates" of ours under Rule 144 promulgated
under the Securities Act of 1933. The remaining 8,849,861 outstanding shares of
common stock are "restricted securities" within the meaning of Rule 144. These
securities were issued in private transactions and are not registered under the
Securities Act and may not be resold except pursuant to an effective
registration statement or pursuant to an exemption under the Securities Act,
including the exemption provided by Rule 144.
In general, under Rule 144, as currently in effect, beginning 90 days
after completion of this offering, a person or persons, including an affiliate,
whose shares are aggregated and who has satisfied a one-year holding period
including the period of any prior owner who is not an affiliate of ours, may
sell within any three-month period a number of shares which does not exceed the
greater of:
- 1% of the then outstanding shares of our common stock; or
- the average weekly trading volume during the four calendar weeks
preceding the sale
In addition, sales under Rule 144 are subject to manner of sale provisions,
notice requirements and to the availability of current public information about
us. Rule 144(k) also permits the sale of shares, without any volume limitation
or manner of sale or public information requirements, by a person who is not an
affiliate of ours and who has not been an affiliate of ours for at least the
three months preceding the sale, and who has satisfied a two-year holding
period. Shares issued to affiliates of the Company prior to the merger with
Nexvu may only be resold through registration under the Securities Act and are
not tradable under Rule 144.
47
SELLING SHAREHOLDERS
The selling shareholders may offer up to 8,104,893 shares pursuant to this
prospectus. We will not receive any of the proceeds from the sale of the shares
by the selling shareholders. However, those shares indicated below which are
underlying warrants, totaling 1,301,389 shares in total, can only be sold to the
extent the warrants are executed at $1.35 per share, subject to cashless
exercise rights for 662,500 of these shares. The following table sets forth
information with respect to the selling shareholders and the shares which they
either presently own or will own after conversion of the exercise of the
warrants.
[Enlarge/Download Table]
SHARES TO BE
BENEFICIALLY
SHARES BENEFICIALLY SHARES OWNED
OWNED PRIOR TO BEING AFTER
REGISTRATION REGISTERED OFFERING(1)
---------------------- ---------- ------------------------
SELLING SHAREHOLDERS Number Percent Number Percent
------ ------- ------ -------
American Physicians Assurance Corporation 150,000 * 150,000 -- --
Guy & Heather Amico 2,000 * 2,000 -- --
Balkin Family Limited Partnership 1,093,186 6.42% 92,593(2) 1,000,593 5.49%
George J. Ballantine 288,333 1.70% 288,333 -- --
George J. Ballantine - IRA 74,000 * 74,000 -- --
George W. Ballantine - Roth IRA 4,440 * 4,440 -- --
George W. & Yolanda F. Ballantine 25,000 * 25,000 -- --
James A. Ballantine 25,000 * 25,000 -- --
James A. Ballantine - Roth IRA 5,500 * 5,500 -- --
Yolanda F. Ballantine - IRA 2,480 * 2,480 -- --
David A. Beamish(4) 400,667 2.37% 400,667 -- --
Wayde Beechy 11,000 * 11,000 -- --
David Bernahl 80,407 * 80,407 -- --
Roger L. Bistry 37,000 * 37,000 -- --
Clayton Blehm Living Trust 1997 297,222 1.75% 297,222 -- --
Eric Blehm 75,000 * 75,000 -- --
Karl W. Brewer 20,000 * 20,000 -- --
Melissa A. Briscoe 10,000 * 10,000 -- --
N. Gene Briscoe 75,556 * 75,556 -- --
Terry & Kathleen Bucciarelli 20,000 * 20,000 -- --
James Caprio 3,500 * 3,500 -- --
Carl Greer Trust 2,266,282 13.16% 277,778(2) 1,988,504 10.90%
Thomas R. Case 37,500 * 37,500 -- --
Cynthia Seinz Clamon 100 * 100 -- --
Jerry Clamon 100 * 100 -- --
Taylor Clamon 100 * 100 -- --
Thomas A. & Desiree Connors 40,000 * 40,000 -- --
Armand D'Andrea 18,519 * 18,519 -- --
Nicholas D'Andrea 50,000 * 50,000 -- --
Rosalie D'Andrea 50,000 * 50,000 -- --
Rowland & Sue Davies 10,000 * 10,000 -- --
Delaware Charter Guarantee & Trust Co. 20,000 * 20,000 -- --
Tom Dempsey 60,000 * 60,000 -- --
Nicole Dunbar - Roth IRA 5,000 * 5,000 -- --
Robert & Nicole Dunbar 25,000 * 25,000 -- --
Robert P. Dunbar 4,700 * 4,700 -- --
Dolores Easthom 100 * 100 -- --
Michael Easthom 100 * 100 -- --
48
[Enlarge/Download Table]
SHARES TO BE
BENEFICIALLY
SHARES BENEFICIALLY SHARES OWNED
OWNED PRIOR TO BEING AFTER
REGISTRATION REGISTERED OFFERING(1)
---------------------- ---------- ------------------------
SELLING SHAREHOLDERS Number Percent Number Percent
------ ------- ------ -------
G. Frederick Edmiston 225,000 1.33% 225,000 -- --
Suzanne Elkin 100 * 100 -- --
Exportadores Unipessoal 16,666 * 16,666 -- --
Jan Ennis Frederick 156,310 * 156,310 -- --
Mark Fuller 40,000 * 40,000 -- --
Robert Geras 2,257,837(3) 13.24% 111,111(2) 2,146,726 11.77%
David Giobbia 14,815 * 14,815 -- --
Donald F. Giobbia 37,037 * 37,037 -- --
Mitchell D. Goldsmith 279,114 1.65% 60,000 219,114 1.20%
Scott Goldstein 2,000 * 2,000 -- --
Dirk Gothe 12,500 * 12,500 -- --
Frank & Dolores Graziadei 10,000 * 10,000 -- --
Michael & Ilene Green 10,000 * 10,000 -- --
Zelda W. Green 100 * 100 -- --
Joseph & Marianne Haake 18,500 * 18,500 -- --
John R. Haley 100,000 * 100,000 -- --
Wilson H. Hartz III 5,000 * 5,000 -- --
Wilson H. Hartz III, M.D. S.C. Profit
Sharing Plan and Trust 5,000 * 5,000 -- --
Krag Maldono Helle 8,198 * 8,198 -- --
Gregory R. Hill 150,000 * 150,000 -- --
Adam Hoeflich 10,000 * 10,000 -- --
Roy Joseph and Linda Huff 4,000 * 4,000 -- --
Karen Jaimovich 426,976 2.51% 37,037(2) 389,939 2.14%
Judith Janicki 10,000 * 10,000 -- --
JI Limited Partnership 20,000 * 20,000 -- --
Bruce W. Johnson 37,037 * 37,037 -- --
Jay Johnson 5,000 * 5,000 -- --
Robert W. Kegley, Sr. 375,000 2.21% 375,000 -- --
Lawrence & Janet Kershner 10,000 * 10,000 -- --
K-Five Construction Corporation 150,000 * 150,000 -- --
David Klein 100 * 100 -- --
Jerry Klein 100 * 100 -- --
Karen Klein 100 * 100 -- --
David Kozlowski 33,333 * 33,333 -- --
David & Sharon Kozlowski 10,300 * 10,300 -- --
Mark A. Krogulski 30,000 * 30,000 -- --
Larry G. Kubinski 60,000 * 60,000 -- --
Richard A. Levy 20,000 * 20,000 -- --
Jerome E. Lewin 30,000 * 30,000 -- --
David J. Lies 1,197,724 7.02% 111,111(2) 1,086,613 5.96%
Linda M. Lies 106,651 * 9,259(2) 97,392 *
Angela Livingston 100 * 100 -- --
Tammy Livingston-Smerdell 100 * 100 -- --
Daniel A. Lombardi 50,000 * 50,000 -- --
Todd C. Lyle 7,500 * 7,500 -- --
Tara Mango 100 * 100 -- --
Alan Mansfield 40,000 * 40,000 -- --
Joseph M. Marconi 125,000 * 125,000 -- --
49
[Enlarge/Download Table]
SHARES TO BE
BENEFICIALLY
SHARES BENEFICIALLY SHARES OWNED
OWNED PRIOR TO BEING AFTER
REGISTRATION REGISTERED OFFERING(1)
---------------------- ---------- ------------------------
SELLING SHAREHOLDERS Number Percent Number Percent
------ ------- ------ -------
William McCabe 75,000 * 75,000 -- --
Mellon Enterprises FLP 215,000 1.27% 215,000 -- --
John Meyer 166,667 1.04% 166,667 -- --
Robert & Marilyn Meyer 25,000 * 25,000 -- --
Ronald M. Mochizuki 20,000 * 20,000 -- --
Krista Monti 20,000 * 20,000 -- --
Thomas E. Morack 22,222 * 22,222 -- --
Richard C. Mutz 10,000 * 10,000 -- --
David Nelson 33,314 * 33,314 -- --
Brian G. Netzky 20,000 * 20,000 -- --
Cristin Obstinik 15,000 * 15,000 -- --
Dr. Randall & Janice Stober-Olivia 18,520 * 18,520 -- --
Richard Patap 10,000 * 10,000 -- --
David L. Pedigo 37,037 * 37,037 -- --
Dr. D. David Pesavento 40,000 * 40,000 -- --
Jerry Pokorny 18,518 * 18,518 -- --
Thomas & Polly Pondell 23,963 * 23,963 -- --
Thomas Pondell 11,111 * 11,111 -- --
Edward Prodehl 55,556 * 55,556 -- --
Edward & Sandra Prodehl 37,037 * 37,037 -- --
Victor & Barbara Proeh 20,000 * 20,000 -- --
Gregory J. Pusinelli 20,000 * 20,000 -- --
Kirk Reeves 11,111 * 11,111 -- --
Michael L. Resnick 20,000 * 20,000 -- --
Stacey Riddell 10,000 * 10,000 -- --
Richard Rizzo 166,667 1.04% 166,667 -- --
Michael A. Russo 11,000 * 11,000 -- --
Safeway Insurance 7,500 * 7,500 -- --
Belle Saltzman 100 * 100 -- --
Nathan Saltzman 100 * 100 -- --
Alice Sassetti 10,000 * 10,000 -- --
Sevila P. Yee Schiml 18,000 * 18,000 -- --
Lindsey Seinz 100 * 100 -- --
Craig Siegler 1,459,258(5) 8.53% 162,500(2) 1,296,758 7.11%
Hannah Smerdell 100 * 100 -- --
Madison Smerdell 100 * 100 -- --
Michael Smerdell 100 * 100 -- --
Dennis Stacy 40,000 * 40,000 -- --
Stateline, L.L.C. 10,000 * 10,000 -- --
Todd W. Stetson 20,000 * 20,000 -- --
George & Irene Stofan 10,000 * 10,000 -- --
George F. Stofan 65,222 * 65,222 -- --
Mark J. Stofan 10,000 * 10,000 -- --
Daniel T. Streitz 37,037 * 37,037 -- --
Allison Strout 100 * 100 -- --
Charles Strout 100 100 -- --
Griffin Strout 100 100 -- --
Douglas Stukel 434,482(6) 2.53% 434,482(4) -- --
Joseph Stukel 29,630 * 29,630 -- --
50
[Enlarge/Download Table]
SHARES TO BE
BENEFICIALLY
SHARES BENEFICIALLY SHARES OWNED
OWNED PRIOR TO BEING AFTER
REGISTRATION REGISTERED OFFERING(1)
---------------------- ---------- ------------------------
SELLING SHAREHOLDERS Number Percent Number Percent
------ ------- ------ -------
Scott Swanson 20,000 * 20,000 -- --
Ken Teague 20,000 * 20,000 -- --
Jeffrey A. Thompson 110,000 * 110,000 -- --
Timothy S. Tomasik 10,000 * 10,000 -- --
Dean A. Tomich 37,037 * 37,037 -- --
Trifinity Partners, Incorporated 10,000 * 10,000 -- --
Glenn L. Udell 20,000 * 20,000 -- --
United Auto Insurance 5,000 * 5,000 -- --
Thomas Valone 170,000 1.00% 170,000 -- --
Edith Vander Hoeven 20,000 * 20,000 -- --
James Virva 14,815 * 14,815 -- --
Jack Wagner 3,500 * 3,500 -- --
Doris Weiser 100 * 100 -- --
Mort Weiser 100 * 100 -- --
Richard Weiser 100 * 100 -- --
Robert & Joyce Wesolowski 40,000 * 40,000 -- --
Janet Wilhelmi 37,037 * 37,037 -- --
Lee Wiskowski 325,407(7) 1.89%(8) 325,407(9) -- --
WJB Chiltern Trust Company Limited 666,667 3.94% 666,667 -- --
Jin Zhang 115,000 * 115,000 -- --
John P. Ziegler 7,408 * 7,408 -- --
*Represents less than 1% of outstanding shares.
(1) Assumes all shares being registered would be sold; actual number to be
sold, if any, is in the sole discretion of the holder in question.
(2) Represents shares purchasable at $1.35 pursuant to exercise of outstanding
warrants, none of which have been exercised as of the date of this
prospectus.
(3) Mr. Geras is a director of ours.
(4) Mr. Beamish is a director of ours.
(5) Mr. Craig Siegler organized Siegler Technology & Development and is
considered Nexvu's promoter. Siegler Partners, L.L.C., a company
controlled by Mr. Siegler acted as the Manager of Nexvu from its inception
through June 2003. From July 2003 through June 2004, Mr. Siegler provided
consulting services to Nexvu.
(6) Mr. Stukel is a director and Co-Chief Executive Officer of ours.
(7) Mr. Wiskowski is a director and Co-Chief Executive Officer of ours.
(8) Mr. Wiskowski also is considered the beneficial owner of the 72,407 shares
owned by Grander, LLC and therefore as of the date of this prospectus
beneficially owns a total of 325,407 shares of our common stock,
representing 2.00% of our outstanding common stock.
(9) Includes 250,000 shares purchasable at $1.35 pursuant to exercise of
outstanding warrants, none of which have been exercised as of the date of
this prospectus.
51
DESCRIPTION OF SECURITIES
GENERAL
Our authorized capital stock consists of: 25,000,000 shares of common
stock, par value $.0001 per share, 16,954,754 of which shares were outstanding
as of the date of this prospectus; and 5,000,000 shares of preferred stock, par
value $.0001 per share, none of which were issued and outstanding as of the date
of this prospectus.
COMMON STOCK
Each share of common stock is entitled to one vote. There are no
preemptive, subscription, conversion or redemption rights pertaining to the
shares of common stock. Shareholders are entitled to receive such dividends as
declared by our Board of Directors out of assets legally available for payment
of dividends and to share ratably in our assets available upon liquidation.
Our Articles of Incorporation do not provide for cumulative voting.
Therefore, shareholders do not have the right to aggregate their votes for the
election of directors and, accordingly, shareholders holding more than fifty
percent of our outstanding common stock can elect all of the directors.
Preferred Stock. We are authorized to issue 5,000,000 shares of preferred
stock without designation, par value $.0001 per share. As of the date of this
prospectus, there were no shares of preferred stock outstanding.
Our Articles of Incorporation grant our Board of Directors the right to
cause us to issue, from time to time, all or part of the shares of preferred
stock remaining undesignated in one or more series, and to fix the number of
shares of preferred stock and determine or alter for each series, the voting
powers, and other designations, preferences, or relative, participating,
optional or other special rights and the qualifications, limitations, or
restrictions on those rights.
Incentive Plan. We have established a long-term incentive plan to provide
incentives to our employees and other persons providing assets or services to
us, calling for the issuance of restricted stock, stock options and/or other
equity-based compensation of up to 2,285,000 shares. It is expected that a
substantial portion of the awards under the plan will be allocated to existing
management and other persons assisting us in our endeavors.
WARRANTS
As of the date of this prospectus, we had outstanding warrants to purchase
1,301,389 shares of our common stock, at an exercise price of $1.35 per share.
The warrants were granted in connection with our issuance of bridge notes to
investors in December 2003. See "Management's Discussion and Analysis or Plan of
Operation - Plan of Operation." Included in the warrants to purchase 1,301,389
shares of our common stock, are warrants to purchase 662,500 shares that may be
exercised on a cashless basis.
52
ANTI-TAKEOVER PROTECTIONS
Various provisions in our Articles of Incorporation, our By-laws and in
the Florida Business Corporation Act could deter and make it more difficult for
a third party to bring about a merger, sale of control, or similar transaction
involving us without approval of our Board of Directors, even if the transaction
would be beneficial to our shareholders. These anti-takeover provisions make it
less likely that a change in control will occur and tend to perpetuate existing
management. Specifically, our Articles of Incorporation authorize our Board of
Directors to issue a series of preferred stock without shareholder action, which
could discourage a third party from attempting to acquire, or make it more
difficult for a third party to acquire us. In addition to the Florida Business
Combination Act, the Florida Control Share Acquisition Act may discourage, delay
or prevent a change in control of our company.
We intend to reincorporate in Delaware in the near future. Our proposed
Delaware Certificate of Incorporation and provisions of the Delaware General
Corporation law will have a similar anti-takeover effect as the provisions of
our Articles of Incorporation and of Florida law described above.
TRANSFER AGENT
Our transfer agent is Continental Stock Transfer & Trust Company, 17
Battery Place, New York, NY 10004
53
PLAN OF DISTRIBUTION
This prospectus, as appropriately amended or supplemented, may be used
from time to time by the selling shareholders, to offer and sell the shares in
transactions in which the selling shareholders and any broker-dealer through
whom any of the shares are sold may be deemed to be underwriters within the
meaning of the Securities Act. We will not receive any of the proceeds from any
of these sales. There presently are no arrangements or understandings, formal or
informal, pertaining to the distribution of the shares.
As of the date of this prospectus, our common stock is not listed for
trading on any exchange or automated quotation system, or in the
over-the-counter market. However, we have initiated the process to have our
shares eligible for quotation on the OTC Bulletin Board. We cannot guarantee
that our common stock will trade in any market. Before the development of a
trading market, selling shareholders are required to sell their shares at a
stated, fixed price. In the event that a trading market for the shares develops,
we anticipate that resales of the shares by the selling shareholders will be
effected from time to time on the open market in ordinary brokerage transactions
in such markets, or in private transactions. The shares will be offered for sale
at market prices prevailing at the time of sale or at negotiated prices and on
terms to be determined when the agreement to sell is made or at the time of
sale, as the case may be. The shares may be offered directly by the selling
shareholders or through brokers or dealers. A member firm of the National
Association of Securities Dealers, Inc. may be engaged to act as one or more of
the selling shareholders' agent in the sale of the shares by the selling
shareholders and/or may acquire shares as principal. Member firms participating
in such transactions as agent may receive commissions from the selling
shareholders and, if they act as agent for the purchaser of such shares, from
the purchaser. Commissions on these transactions are computed, in appropriate
cases, in accordance with the applicable rates of the NASD, and may be
negotiated rates where permissible. Sales of the shares by the member firm may
be made on the Nasdaq SmallCap Market from time to time at prices related to
prices then prevailing.
Participating broker-dealers may agree with the selling shareholders to
sell the specified number of shares at a stipulated price per share and, to the
extent the broker-dealer is unable to do so acting as agent for the selling
shareholders, to purchase as principal any unsold shares at the price required
to fulfill the broker-dealer's commitment to the selling shareholders.
Broker-dealers who acquire shares as principal may thereafter resell the shares
from time to time in transactions in the market in which the common stock is
traded, in negotiated transactions, or otherwise, at market prices prevailing at
the time of sale or at negotiated prices.
Upon the selling shareholders' notifying us that a particular offer to
sell the shares is made and a material arrangement has been entered into with a
broker-dealer for the sale of shares, a supplement to this prospectus will be
delivered together with this prospectus and filed pursuant to Rule 424(b) under
the Securities Act setting forth with respect to such offer or trade the terms
of the offer or trade, including: the number of shares involved; the price at
which the shares were sold; any participating brokers, dealers, agents or member
firm involved; any discounts, commissions and other items paid as compensation
from, and the resulting net proceeds to, the selling shareholders; and other
facts material to the transaction.
54
Shares may be sold directly by the selling shareholders or through agents
designated by the selling shareholders from time to time. Unless otherwise
indicated in the supplement to this prospectus, any such agent will be acting on
a best efforts basis for the period of its appointment.
The selling shareholders and any brokers, dealers, agents, member firm or
others that participate with the selling shareholders in the distribution of the
shares may be deemed to be underwriters within the meaning of the Securities
Act, and any commissions or fees received by these persons and any profit on the
resale of the shares purchased by such person may be deemed to be underwriting
commissions or discounts under the Securities Act.
The selling shareholders and any other person participating in a
distribution of the shares will be subject to applicable provisions of the
Securities Exchange Act of 1934 and the rules and regulations thereunder.
Regulation M of the Securities Exchange Act of 1934 may limit the timing of
purchases and sales of any of the shares by the selling shareholder and any
other person. In addition, Regulation M may restrict the ability of any person
engaged in the distribution of the shares to engage in market-making activities
with respect to the particular securities being distributed for a period of up
to five business days before the distribution. We have informed the selling
shareholders that the anti-manipulative provisions of Regulation M promulgated
under the Securities Exchange Act of 1934 may apply to their sales in the
market.
To our knowledge, there are currently no plans, arrangements or
understandings between the selling shareholders and any underwriter,
broker-dealer or agent regarding the sale of the shares except that some of the
selling shareholders are affiliated with broker-dealers through whom such
selling shareholders expect to sell their shares. Sales through such affiliated
broker-dealers will be done as ordinary broker transactions and not as a result
of an underwriting arrangement. Selling shareholders who are affiliated with
broker-dealers have represented that they have acquired their shares in the
ordinary course of business and, at the time of acquisition of such shares, the
selling shareholders had no agreements or understandings, directly or
indirectly, with any person to distribute their shares.
Under the Securities Exchange Act of 1934, and the regulations thereunder,
any person engaged in a distribution of the shares offered by this prospectus
may not simultaneously engage in market-making activities with respect to the
shares during the applicable "cooling off" period before the commencement of
such distribution. In addition, and without limiting the above, the selling
shareholders will be subject to applicable provisions of the Securities Act and
the Securities Exchange Act and the rules and regulations thereunder, including,
without limitation, Regulation M under the Securities Act, in connection with
transactions in the shares. These provisions may limit the timing of purchases
and sales of shares.
LEGAL MATTERS
Certain legal matters in connection with the offering will be passed on
for us by Shefsky & Froelich Ltd. A shareholder of Shefsky & Froelich Ltd. owns
approximately 2% of our outstanding shares. The legality of the securities
offered by this prospectus will be passed upon for us by Schneider Weinberger
and Beilly, LLP, Boca Raton, Florida, who are acting as special Florida counsel
solely for the purpose of opining as to the validity of the securities.
55
EXPERTS
Our consolidated financial statements for the year ended December 31, 2003
included in this prospectus have been audited by Russell & Atkins, PLC,
Independent Public Accountants, as set forth in its report with respect thereto
and are included herein in reliance upon such report given upon the authority of
such firm as experts in accounting and auditing. The financial statements for
the two year period ended March 31, 2004 for Frontrunner have been audited by
Plante Moran, PLC, Independent Public Accountants, as set forth in its report
with respect thereto and are included herein in reliance upon such report given
upon the authority of such firm as experts in accounting and auditing.
CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
On November 10, 2004, we received written notification that Russell &
Atkins, PLC, hereinafter referred to in this prospectus as "R&A" had withdrawn
from serving as our independent auditors. No action was required or taken by our
board of directors with respect to their withdrawal.
For the period including the prior two fiscal years and the interim period
ending as of the date of withdrawal of R&A, R&A's reports did not contain an
adverse opinion or disclaimer of opinion, nor were they qualified or modified as
to uncertainty, audit scope or accounting principles. During the reporting
period, there were no disagreements between us and R&A on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope of procedure, which would have caused it to make reference to the subject
matter of the disagreement in connection with its reports. We provided R&A with
a copy of this disclosure on November 11, 2004. R&A provided us and the
Securities and Exchange Commission with a letter, which stated that R&A agreed
with these disclosures.
On November 11, 2004, we engaged Russell Bedford Stefanou Mirchandani LLP,
hereinafter referred to in this prospectus as "RBSM" to serve as our independent
auditor.
We did not nor did anyone on our behalf consult with RBSM regarding (i)
either: the application of accounting principles to a specific completed or
contemplated transaction, or the type of audit opinion that might be rendered on
our financial statements; as such, no written or oral advice was provided, and
none was an important factor considered by us in reaching a decision as to the
accounting, auditing or financial reporting issues; or (ii) any matter that was
a subject of a disagreement or event with R&A (as there were none).
We provided RBSM with a copy of this disclosure on November 11, 2004,
providing RBSM with the opportunity to furnish us with a letter addressed to the
Securities and Exchange Commission containing any new information, clarification
of our expression of our views, or the respect in which RBSM did not agree with
our statements. RBSM agreed with our statements and therefore did not provide a
letter.
56
WHERE YOU CAN FIND ADDITIONAL INFORMATION ABOUT US
We have filed with the Securities and Exchange Commission a registration
statement, of which this prospectus is a part, on Form SB-2 under the Securities
Act with respect to the securities offered by this prospectus. This prospectus
does not contain all the information set forth in the registration statement. We
have omitted portions of this information as allowed by the rules and
regulations of the Commission. Statements contained in this prospectus as to the
content of any contract or other document are not necessarily complete. To gain
a complete understanding of any these contracts or other documents, you should
read the copies which are filed as exhibits to the registration statement.
For further information regarding us and the securities we are offering,
you may read the registration statement, including all amendments, and the
exhibits and schedules which may be obtained from the Commission in Room 1024 of
the Commission's main offices at 450 Fifth Street, N.W., Washington, DC 20549.
You can inspect this material for free at the Commission's offices, and you can
make copies of the material if you pay fees established by the Commission. The
Commission's phone number is 1-800-SEC-0330 (1-800-732-0330).
The Commission maintains a website that contains registration statements,
reports, proxy material and other information regarding registrants that file
electronically with the Commission. The address for the website is http:
//www.sec.gov.
We are subject to the reporting requirements of the Securities Exchange
Act of 1934, as amended, and furnish our shareholders annual reports containing
financial statements audited by our independent accountants and make available
quarterly reports containing unaudited financial statements for each of the
first three quarters of each fiscal year.
57
INDEX TO FINANCIAL STATEMENTS
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PAGE
----
CAPITAL GROWTH SYSTEMS, INC. CONSOLIDATED FINANCIAL STATEMENTS
Reports of Independent Certified Public Accountants F-2
Balance Sheet as of December 31, 2003 and May 31, 2003 F-3
Statement of Operations for the transition period of June 1 through December 31,
2003, and, the years ended May 31, 2003 and 2002 and from September 29, 1999
(Inception) to December 31, 2003 F-4
Statement of Changes in Stockholders' Equity from September 29, 1999 (Inception)
to December 31, 2003 F-5
Statement of Cash Flows for the transition period of June 1 through December 31,
2003, and, the years ended May 31, 2003 and 2002 and from September 29, 1999
(Inception) to December 31, 2003 F-6
Notes to Consolidated Financial Statements F-7
[Enlarge/Download Table]
PAGE
----
NEXVU TECHNOLOGIES, LLC CONSOLIDATED FINANCIAL STATEMENTS
Reports of Independent Certified Public Accountants F-13
Balance Sheet as of December 31, 2003 and December 31, 2002 F-14
Statement of Operations for the year ended December 31, 2003, and the period
ended December 31, 2002 and from February 28, 2002 (Inception) to December
31, 2003 F-15
Statement of Cash Flows for the years ended December 31, 2003, and the period
ended December 31, 2002 and from February 28, 2002 (Inception) to
December 31, 2003 F-16
Statement of Members' Equity (Deficit) for the years ended December 31, 2003 and
December 31, 2002, and from February 28, 2002 (Inception) to December 31, 2003 F-17
Notes to Consolidated Financial Statements F-18
FRONTRUNNER NETWORKING SYSTEMS CORP. FINANCIAL STATEMENTS
Reports of Independent Certified Public Accountants F-24
Statements of Financial Condition as of March 31, 2004 and March 31, 2003 F-25
58
[Enlarge/Download Table]
Statements of Operations for the years ended March 31, 2004, and March 31, 2002 F-27
Statements of Preferred Stock and Stockholders' Deficit for the years ended
March 31, 2004 and March 31, 2003 F-28
Statements of Cash Flows for the years ended March 31, 2004 and March 31, 2003 F-29
Notes to Financial Statements F-30
CAPITAL GROWTH SYSTEMS, INC. PRO FORMA FINANCIAL STATEMENTS
Pro Forma Combined Balance Sheet F-39
Pro Forma Combined Statement of Operations for the year ended December 31, 2003 F-40
Pro Forma Combined Statement of Operations for the nine months ended September 30, 2004 F-41
Notes to Pro Forma Combined Financial Statements F-42
59
CAPITAL GROWTH SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
FINANCIAL STATEMENTS
DECEMBER 31, 2003
F-1
INDEPENDENT AUDITORS REPORT
To the Board of Directors of:
Capital Growth Systems, Inc.
We have audited the accompanying balance sheets of Capital Growth Systems,
Inc. (A Development Stage Company) as of December 31, 2003 and May 31, 2003, the
related statements of operations and cash flows for the period then ended
December 31, 2003, the years ended May 31, 2003 and May 31, 2002, and from
inception (September 29, 1999) to December 31, 2003, and the changes in
stockholders' equity from inception (September 29, 1999) to December 31, 2003.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion of these consolidated financial
statements based on our audits.
We conduct our audits in accordance with auditing standards generally
accepted in the United States of America. These standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Capital Growth Systems, Inc.
(A Development Stage Company) as of December 31, 2003 and May 31, 2003 and the
results of its operations and cash flows for the period then ended December 31,
2003, the years ended May 31, 2003 and May 31, 2002, and from inception
(September 29, 1999) to December 31, 2003 in conformity with accounting
principles generally accepted in the United States of America.
/s/ Russell & Atkins, PLC
----------------------------
Russell & Atkins, PLC
April 28, 2004
Oklahoma City, Oklahoma
F-2
CAPITAL GROWTH SYSTEMS, INC.
(A Development Stage Company)
BALANCE SHEET
[Download Table]
DECEMBER 31,
2003 MAY 31, 2003
------------ ------------
ASSETS
Current Assets
Cash $ - $ -
Total Current Assets - -
Other Assets
Incorporation costs - -
Total Other Assets - -
TOTAL ASSETS $ - -
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 13,059 $ 11,361
Advance from shareholder 10,231 10,000
TOTAL CURRENT LIABILITIES 23,290 21,361
Stockholders' Equity
Common stock, authorized 25,000,000 shares, par value 117 93
$ .0001, issued and outstanding - 1,170,000 (May 31,
2003 - 931,500)
Additional paid in capital 19,678 6,702
Deficit accumulated during the development stage (43,085) (28,156)
Total Stockholders' Equity (23,290) (21,361)
---------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ - $ -
========== ===========
The accompanying notes are an integral part of these financial Statements.
F-3
CAPITAL GROWTH SYSTEMS, INC.
(A Development Stage Company)
STATEMENT OF OPERATIONS
[Enlarge/Download Table]
PERIOD YEAR YEAR From Inception
ENDED ENDED ENDED (Sept 29, 1999) to
DECEMBER 31, MAY 31, MAY 31, DECEMBER 31,
2003 2003 2002 2003
---- ---- ---- ----
INCOME $ -- $ -- $ -- $ --
---------- --------- ----------- -----------
OPERATING EXPENSES
Professional Fees 14,929 21,361 2,504 41,860
Amortization Expenses -- -- -- --
Administrative Expenses -- 1 60 1,225
---------- --------- ----------- -----------
Total Operating Expenses 14,929 21,362 2,564 43,085
---------- --------- ----------- -----------
Net Loss from Operations $ (14,929) $ (21,362) $ (2,564) $ (43,085)
========== ========= =========== ===========
Weighted average number of
shares outstanding 1,032,918 931,500 931,500 945,466
========== ========= =========== ===========
Net Loss Per Share $ (.01) $ (.02) $ (.003) $ (.05)
========== ========= =========== ===========
The accompanying notes are an integral part of these financial statements.
F-4
CAPITAL GROWTH SYSTEMS, INC.
(A Development Stage Company)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
From September 29, 1999 (Inception) to December 31, 2003
[Enlarge/Download Table]
Deficit
Accumulated
Common Stock Additional During
-------------------- Paid In Development
Shares Amount Capital Stage Total
--------- ------ ---------- ----------- -----
Issuance of common stock 931,500 $ 93 $ 4,722 $ -- $ 4,815
Net loss for period -- -- -- (1,659) (1,659)
--------- ---- -------- --------- ---------
Balance, May 31, 2000 931,500 93 4,722 (1,659) 3,156
Net loss for year -- -- -- (2,571) (2,571)
--------- ---- -------- --------- ---------
Balance, May 31, 2001 931,500 $ 93 $ 4,722 $ (4,230) $ 585
Additional capital contributed -- -- 1,980 -- 1,980
Net loss for year -- -- -- (2,564) (2,564)
--------- ---- -------- --------- ---------
Balance, May 31, 2002 931,500 $ 93 $ 6,702 $ (6,794) $ 1
Net loss for year -- -- -- (21,362) (21,362)
--------- ---- -------- --------- ---------
Balance, May 31, 2003 931,500 93 6,702 (28,156) (21,361)
Issuance of common stock 238,500 24 12,976 -- 13,000
Net loss - Dec. 31, 2003 -- -- -- (14,929) (14,929)
--------- ---- -------- --------- ---------
Balance - December 31, 2003 1,170,000 $117 $ 19,678 $ (43,085) $ (23,290)
========= ==== ======== ========= =========
The accompanying notes are an integral part of these financial statements.
F-5
CAPITAL GROWTH SYSTEMS, INC.
(A Development Stage Company)
STATEMENT OF CASH FLOWS
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From
Period Inception
Ended Year Ended Year Ended (Sept. 29, 1999)
December 31, May 31, May 31, to December 31,
2003 2003 2002 2003
------------ ---------- ---------- ----------------
Cash Flows From Operating Activities
Net loss $ (14,929) $ (21,362) $ (2,564) $ (43,085)
Adjustments to reconcile net loss to net
cash used operating activities:
Stock issued for services -- -- -- --
Changes in assets and liabilities
Increase (decrease) in Accounts Payable 1,698 11,361 (490) 13,059
------------ ---------- ---------- -----------
1,698 11,361 (490) 13,059
------------ ---------- ---------- -----------
Net Cash Used in Operating Activities (13,231) (10,001) (3,054) (30,026)
------------ ---------- ---------- -----------
Cash Flow From Financing Activities
Issuance of common stock -- -- -- 17,815
Increase in Advance from Shareholder 13,000 10,000 -- 10,231
Contributed capital -- -- 1,980 1,980
------------ ---------- ---------- -----------
Net Cash Provided by Financing Activities 231 10,000 1,980 30,026
------------ ---------- ---------- -----------
Increase (decrease) in Cash -- (1) (1,074) --
Cash and Cash Equivalents -
Beginning of period $ -- $ 1 $ 1,075 $ --
------------ ---------- ---------- -----------
Cash and Cash Equivalents -
End of period $ -- $ -- $ 1 $ --
============ ========== ========== ===========
Supplemental Cash Flow Information
Interest paid $ -- $ -- $ -- $ --
============ ========== ========== ===========
Taxes paid $ -- $ -- $ -- $ --
============ ========== ========== ===========
The accompanying notes are an integral part of these financial statements.
F-6
CAPITAL GROWTH SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
AS AT DECEMBER 31, 2003
1. ORGANIZATION AND BASIS OF PRESENTATION
CAPITAL GROWTH SYSTEMS, INC. (the "Company") was organized in the State of
Florida on September 29, 1999. The Company's intends to serve as a vehicle to
effect an asset acquisition, merger, exchange of capital stock or other business
combination with a domestic or foreign business of an undetermined nature at
this time.
DEVELOPMENT STAGE ENTERPRISE
The Company has no revenues and has just commenced operations. The
Company's activities are accounted for as those of a "Development Stage
Enterprise" as set forth in Financial Accounting Standards Board Statement No. 7
("SFAS 7"). Among the disclosures required by SFAS 7 are that the Company's
financial statements be identified as those of a development stage company, and
that the statements of operations, stockholders' equity(deficit) and cash flows
disclose activity since the date of the Company's inception.
2. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF ACCOUNTING
These financial statements are presented on the accrual method of
accounting in accordance with generally accepted accounting principles.
Significant accounting principles followed by the Company and the methods of
applying those principles, which materially affect the determination of
financial position and cash flows, are summarized below.
USE OF ESTIMATES
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 and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results may differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments and investments,
purchased with an original maturity date of three months or less, to be cash
equivalents.
INCOME TAXES
The Company accounts for income taxes under SFAS No. 109, which requires
the asset and liability approach to accounting for income taxes. Under this
method, deferred assets and
F-7
liabilities are measured based on differences between financial reporting and
tax bases of assets and liabilities measured using enacted tax rates and laws
that are expected to be in effect when differences are expected to reverse.
NET EARNINGS (LOSS) PER SHARE
Basic and diluted net loss per share information is presented under the
requirements of SFAS No. 128, Earnings per Share. Basic net loss per share is
computed by dividing net loss by the weighted average number of shares of common
stock outstanding for the period, less shares subject to repurchase. Diluted net
loss per share reflects the potential dilution of securities by adding other
common stock equivalents, including stock options, shares subject to repurchase,
warrants and convertible preferred stock, in the weighted-average number of
common shares outstanding for a period, if dilutive. All potentially dilutive
securities have been excluded from this computation, as their effect is
anti-dilutive.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash is considered to be representative of its fair
value because of the short-term nature of this financial instrument.
RECENTLY ISSUED ACCOUNTING STANDARDS
On July 20, 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations," and SFAS No. 142, "Goodwill and Intangible Assets." SFAS No. 141
is effective for all business combinations completed after June 30, 2001. SFAS
No. 142 is effective for fiscal years beginning after December 15, 2001;
however, certain provisions of this Statement apply to goodwill and other
intangible assets acquired between July 1, 2001, and the effective date of SFAS
No. 142. The implementation of SFAS No. 141 and SFAS No. 142 will not have a
material effect on the financial position or results of operations of the
Company.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment of Disposal of Long-Lived Assets." SFAS No. 144 is effective for
fiscal years beginning after December 15, 2001, and addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
This statement supersedes SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and the
accounting and reporting provisions of Accounting Principles Board Opinion No.
30, "Reporting the Results of Operations - Reporting the Effects of Disposal of
a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions," for the disposal of a segment of a business.
The Financial Accounting Standards Board has recently issued SFAS No. 133
as amended by SFAS 137 and 138, "Accounting for Derivative Instruments and
Hedging Activities" established accounting and reporting standards for
derivative instruments and related contracts and hedging activities. This
statement is effective for all fiscal quarters and fiscal years beginning after
June 15, 2000. The adoption of this pronouncement did not have a material effect
on the Company's position or results of operations.
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In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities", which addresses accounting for
restructuring and similar costs. SFAS NO. 146 supersedes previous accounting
guidance, principally Emerging Issues Task Force Issue No. 94-3. SFAS No 146
requires that the liability for costs associated with an exit or disposal
activity be recognized when the liability is incurred, SFAS No. 146 also
establishes that the liability should initially be measured and recorded at fair
value. Accordingly, SFAS No. 146 may affect the timing of recognizing future
restructuring costs as well as the amount recognized. SFAS NO. 146 is effective
for exit or disposal activities that are initiated after December 31, 2002.
In November 2002, the FASB Interpretation No. 45 (FIN 45) "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." FIN 45 requires that a liability be
recorded in the guarantor's balance sheet upon issuance of certain guarantees.
FIN 45 also requires disclosure about certain guarantees that an entity has
issued. The Company has implemented the disclosure requirements required by FIN
45, which were effective for fiscal years ending after December 15, 2002. The
Company will apply the recognition provisions of FIN 45 prospectively to
guarantees issued after December 31, 2002.
In December 2002, the FASB issued SFAS No. 148 "Accounting for Stock-Based
Compensation-Transition and Disclosure - an amendment of FASB Statement No. 123"
(FAS 148). The statement amends SFAS 123 "Accounting for Stock Based
Compensation:" (FAS 123) to provide alternative methods of voluntarily
transition to the fair value based method of accounting for stock based employee
compensation. FAS 148 also amends the disclosure requirement of FAS 123 to
require disclosure of the method used to account for stock based employee
compensation and the effect of the method on reported results in both annual and
interim financial statements. The Company has no current intention to change its
policy of accounting for stock-based compensation.
In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46),
"Consolidation of Variable Interest Entities, and Interpretation of ARB No.51."
FIN 46 requires certain variable interest entities to be consolidated by the
primary beneficial of the entity if the equity investors in the entity do not
have characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN 46 is
effective for all new variable interest entities created or acquired after
January 31, 2003. For variable interest entities created or acquired prior to
February 1, 2003, the provisions of FIN 46 must be applied for the first interim
or annual period beginning on or after June 15, 2003.
On April 30, 2003 the FASB issued Statement No. 149, "Amendment of
Statement 133 on Derivative Instruments and Hedging Activities." The Statement
amends and clarifies accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities
under Statement 133. The amendments set forth in Statement 149 improve financial
reporting by requiring that contracts with comparable characteristics be
accounted for similarly. In particular, this Statement clarifies under what
circumstances a contract with an initial net investment meets the characteristic
of a derivative as discussed in Statement 133. In addition, it clarifies when a
derivative contains a financing
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component that warrants special reporting in the statement of cash flows. This
Statement is effective for contracts entered into or modified after June 30,
2003.
On May 15, 2003 the FASB issued Statement No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity". The
Statement improves the accounting for certain financial instruments that, under
previous guidance, issuers could account for as equity. The new Statement
requires that those instruments be classified as liabilities in statements of
financial position. In addition to its requirements for the classification and
measurement of financial instruments in its scope, Statement 150 also requires
disclosures about alternative ways of settling the instruments and the capital
structure of entities, all of whose shares are mandatorily redeemable. Most of
the guidance in Statement 150 is effective for all financial instruments entered
into or modified after May 31, 2003.
The Company believes that none of the recently issued accounting standards
will have a material impact on the financial statements.
3. GOING CONCERN
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. This basis of accounting contemplates
the recovery of the Company's assets and the satisfaction of its liabilities in
the normal course of business. Through December 31, 2003, the Company had
incurred cumulative losses of $43,085. The Company's successful transition from
a development stage company to attaining profitable operations is dependent upon
obtaining financing adequate to achieving a level of revenues adequate to
support the Company's cost structure. Subsequent to the date of these financial
statements the Company completed a merger with Nexvu Technologies, LLC and
raised in excess of $7,500,000 pursuant to a common stock private placement. The
resulting cash balances are expected to be more than sufficient to cover the
cost of operations for the Company for 2004. See Note 5, Subsequent Events.
4. INCOME TAXES
There has been no provision for U.S. federal, state, or foreign income
taxes for any period because the Company has incurred losses in all periods and
for all jurisdictions. Deferred income taxes reflect the net tax effects of
temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.
Significant components of deferred tax assets are as follows:
DEFERRED TAX ASSETS
[Download Table]
Net operating loss carry forwards $ 43,085
Valuation allowance for deferred tax assets (43,085)
--------
Net deferred tax assets $ 0
========
Realization of deferred tax assets is dependent upon future earnings, if
any, the timing and amount of which are uncertain. Accordingly, the net deferred
tax assets have been fully offset by a valuation allowance. As of December 31,
2003 the Company had net operating loss
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carry forwards of approximately $43,085 for federal and state income tax
purposes. These carry forwards, if not utilized to offset taxable income begin
to expire in 2016. Utilization of the net operating loss may be subject to
substantial annual limitation due to the ownership change limitations provided
by the Internal Revenue Code and similar state provisions. The annual limitation
could result in the expiration of the net operating loss before utilization.
5. ISSUANCE OF COMMON STOCK
On October 1, 2003, the Company entered into a Subscription Agreement with
Grander, LLC, whereby Grander agreed to purchase 238,500 shares of our common
stock in consideration for Grander's funding of certain of the Company's
operational requirements. The offering price of the shares purchased was $0.0545
per share. Total proceeds of this issuance were $13,000.
6. SUBSEQUENT EVENTS
On January 28, 2004, the Company merged with Nexvu Technologies, LLC
("Nexvu"), an operating business. The merger was contingent upon the Company
having raised a minimum of $2,000,000 of investor capital pursuant to a common
stock private placement at $1.35 per share. As of April 15, 2004 an aggregate of
$7,605,230 of gross proceeds from the private placement had been raised. In
addition, at the merger closing the $550,000 of bridge loans to Nexvu were
converted into additional common stock of the Company's common stock at
approximately $0.95 per share and one additional $25,000 subscription was
accepted shortly thereafter at such pricing. In connection with the merger, an
aggregate of 8,558,500 shares of common stock of the Company's common stock were
issued to the members of Nexvu and Nexvu became a wholly owned subsidiary
Capital Growth Systems, Inc. The Company's cash balances as of March 1, 2004 are
expected to be more than sufficient to cover the cost of operations of the
Company for 2004.
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NEXVU TECHNOLOGIES, LLC
(A DEVELOPMENT STAGE ENTERPRISE)
FINANCIAL STATEMENTS
DECEMBER 31, 2003
F-12
INDEPENDENT AUDITORS' REPORT
To the Board of Members of
Nexvu Technologies, LLC
We have audited the accompanying balance sheets of Nexvu Technologies,
LLC (a Development Stage Enterprise) as of December 31, 2002 and 2003 and the
related statements of operations and stockholders' equity, and cash flows for
the years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial positions of Nexvu Technologies,
LLC (a Development Stage Enterprise) as of December 31, 2002 and 2003 and the
results of its operations, and its cash flows for the years then ended in
conformity with accounting principles generally accepted in the United States of
America.
/s/ Russell & Atkins, PLC
-------------------------
Russell & Atkins, PLC
May 3, 2004
Oklahoma City, Oklahoma
F-13
FINANCIAL STATEMENTS OF
NEXVU TECHNOLOGIES, LLC
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEETS
DECEMBER 31, 2003 AND 2002
[Enlarge/Download Table]
December 31, December 31,
2003 2002
------------ ------------
ASSETS
CURRENT ASSETS
Cash $ 616,880 $ -
Accounts receivable 61,270 9,590
Prepaid expenses 51,837 -
----------- -----------
Total Current Assets 729,987 9,590
----------- -----------
FIXED ASSETS - NET OF ACCUMULATED DEPRECIATION 136,341 179,777
----------- -----------
OTHER ASSETS
Software licensing fee 300,000 300,000
Organization costs - net of accumulated amortization - 3,371
----------- -----------
Total Other Assets 300,000 303,371
----------- -----------
TOTAL ASSETS $ 1,166,328 $ 492,738
----------- -----------
LIABILITIES AND MEMBERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 120,567 $ 186,869
Accrued expenses 38,449 32,650
Deferred revenue - -
Deferred rent 1,955 -
----------- -----------
Total Current Liabilities 160,971 219,519
----------- -----------
LONG-TERM LIABILITIES
Loans payable 735,000 1,400,136
----------- -----------
Total Liabilities 895,971 1,619,655
----------- -----------
MEMBERS' EQUITY
Class A Member Interest, 2,837,950 and 0 issued and
outstanding as of December 31, 2003 and 2002 respectively 1,034,907 -
----------- -----------
Class B Member Interest, 9,237,329 and 0 issued and
outstanding as of December 31, 2003 and 2002 respectively 3,000,000 -
----------- -----------
Managing Member Interest, 3,320,268 and 0 issued and
outstanding as of December 31, 2003 and 2002 respectively - -
----------- -----------
Members Retained Deficit (3,764,550) (1,126,917)
----------- -----------
MEMBERS' EQUITY (DEFICIT) 270,357 (1,126,917)
----------- -----------
TOTAL LIABILITIES AND MEMBERS' EQUITY $ 1,166,328 $ 492,738
----------- -----------
The accompanying notes are an integral part of these financial statements.
F-14
NEXVU TECHNOLOGIES, LLC
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF OPERATIONS
[Download Table]
FROM
INCEPTION
12 MONTHS 10 MONTHS FEBRUARY, 28,
ENDED ENDED 2002 TO
DECEMBER DECEMBER DECEMBER
31, 2003 31, 2002 31, 2003
------------ ------------ -------------
REVENUE $ 59,027 $ - $ 59,027
----------- ----------- ------------
COST OF GOODS SOLD 129,806 - 129,806
----------- ----------- ------------
GROSS MARGIN (70,779) - (70,779)
OPERATING EXPENSES
Salaries and payroll taxes 1,752,091 882,003 2,634,094
Marketing and advertising 7,941 - 7,941
Occupancy 120,508 38,725 159,233
Professional fees 264,599 67,121 331,720
Depreciation and amortization 84,395 39,075 123,470
Telecommunications 36,438 18,421 54,859
Travel and entertainment 93,047 27,294 120,341
General expenses 61,326 54,278 115,604
----------- ----------- ------------
TOTAL EXPENSES 2,420,345 1,126,917 3,547,262
----------- ----------- ------------
OPERATING INCOME (2,491,124) (1,126,917) (3,618,041)
INTEREST EXPENSE 146,509 - 146,509
----------- ----------- ------------
NET LOSS BEFORE INCOME TAXES (2,637,633) (1,126,917) (3,764,550)
INCOME TAXES - - -
----------- ----------- ------------
NET LOSS $(2,637,633) $(1,126,917) $ (3,764,550)
The accompanying notes are an integral part of these financial statements.
F-15
NEXVU TECHNOLOGIES, LLC
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS
[Enlarge/Download Table]
FROM
INCEPTION
12 MONTHS 10 MONTHS FEBRUARY, 28,
ENDED ENDED 2002 TO
DECEMBER DECEMBER DECEMBER
31, 2003 31, 2002 31, 2003
----------- ----------- -------------
CASH FLOW FROM OPERATING ACTIVITIES:
NET LOSS $(2,637,633) $(1,126,917) $(3,764,550)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation and amortization 84,395 39,075 123,470
Write-off organizational costs 3,371 - 3,371
Changes in assets and liabilities:
Accounts receivable (51,680) (9,590) (61,270)
Prepaid expenses (51,837) - (51,837)
Accounts payable (66,302) 186,869 120,567
Accrued expenses 5,799 32,650 38,449
Deferred revenue - - -
Deferred rent 1,955 - 1,955
----------- ----------- -----------
(74,299) 249,004 174,705
----------- ----------- -----------
Net Cash Used in Operating Activities (2,711,932) (877,913) (3,589,845)
----------- ----------- -----------
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of fixed assets (40,959) (218,852) (259,811)
Purchase of other assets - (303,371) (303,371)
----------- ----------- -----------
Net Cash Used In Investing Activities (40,959) (522,223) (563,182)
----------- ----------- -----------
CASH FLOW FROM FINANCING ACTIVITIES:
Increase in loans payable 2,899,263 1,400,136 4,299,399
Decrease of loans payable (1,354,492) - (1,354,492)
----------- ----------- -----------
Contributions by members - net of repayments 1,825,000 - 1,825,000
----------- ----------- -----------
Net Cash Provided By Financing Activities 3,369,771 1,400,136 4,769,907
----------- ----------- -----------
Increase in Cash 616,880 - 616,880
Cash and Cash Equivalents - Beginning of Period - - -
Cash and Cash Equivalents - End of period $ 616,880 $ - $ 616,880
----------- ----------- -----------
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest $ 108,060 $ - $ 108,060
----------- ----------- -----------
Cash paid for income taxes - - -
----------- ----------- -----------
NONCASH INVESTING AND FINANCING ACTIVITIES:
Contributions by members through conversions of loans $ 2,209,907 $ - $ 2,209,907
----------- ----------- -----------
The accompanying notes are an integral part of these financial statements.
F-16
NEXVU TECHNOLOGIES, LLC
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF MEMBERS' EQUITY (DEFICIT)
DECEMBER 31, 2003 AND 2002
[Enlarge/Download Table]
Members' Interest $ Amount
--------------------------- ------------------------- Retained Total Members'
Class A Class B Class A Class B Deficit Equity
----------- ------------ ----------- ----------- ------------ --------------
BALANCE FEBRUARY 28, 2002 - - $ - $ - $ - $ -
Net Loss (1,126,917) (1,126,917)
----------- ----------- ----------- ----------- ----------- -----------
MEMBERS' EQUITY, END OF PERIOD - - 0 0 (1,126,917) (1,126,917)
----------- ----------- ----------- ----------- ----------- -----------
Issuance of Class A Member Interest,
Loan Conversion 2,837,950 1,034,907 1,034,907
Issuance of Class A Member Interest,
Cash Contributions 5,619,375 1,825,000 1,825,000
Issuance of Class A Member Interest,
Loan Conversion 3,617,954 1,175,000 1,175,000
Net Loss (2,637,633) (2,637,633)
----------- ----------- ----------- ----------- ----------- -----------
MEMBERS' EQUITY, END OF PERIOD 2,837,950 9,237,329 $ 1,034,907 $ 3,000,000 $(3,764,550) $ 270,357
----------- ----------- ----------- ----------- ----------- -----------
The accompanying notes are an integral part of these financial statements
F-17
NEXVU TECHNOLOGIES, LLC
A DEVELOPMENT STAGE ENTERPRISE
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2002 and 2003
NOTE 1 - Organization and Basis of Presentation
Nexvu Technologies, LLC, (the "Company") was organized as a Delaware limited
liability company on February 28, 2002 under the name of Siegler Technology &
Development, L.L.C. The Company was formed to develop and market software and
hardware products and solutions for communication networks. The Company changed
its name to "Nexvu, LLC" on January 29, 2003, and to "Nexvu Technologies, LLC"
on October 22, 2003.
NOTE 2 - Summary of Significant Accounting Policies
Cash and Cash Equivalents
The Company considers those short-term, highly liquid investments with original
maturities of three months or less as cash and cash equivalents.
Property and Equipment
The Company capitalizes property and equipment in excess of $500. All property
and equipment are stated at cost. The cost of ordinary maintenance and repairs
is charged to operations while renewals and replacements are capitalized.
Depreciation is computed over the estimated useful lives of the assets generally
as follows:
Computers, Equipment & Furniture 5 to 7 years
Computer Software 3 years
Software Licensing Fee
The Company accounts for its software license in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 142, effective October 1, 2001. The
Company also reviews its long-lived assets for impairments. Impairment losses on
long-lived assets are recognized when events or changes in circumstances
indicate that the undiscounted cash flows estimated to be generated by such
assets are less than their carrying value and, accordingly, all or a portion of
such carrying value may not be recoverable. Impairment losses are then measured
by comparing the fair value of assets to their carrying amounts. The Company
recognized no impairment loss at December 31, 2002 and 2003.
Fair Value of Financial Instruments
The carrying amount of cash, accounts receivable, prepaid expenses and accounts
payable are considered representative of their respective fair values because of
the short-term nature of these financial instruments.
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Revenue Recognition
We will generate revenue from licensing our software, selling hardware to run
our software and through services. We recognize revenue in accordance with
Generally Accepted Accounting Principles, as set forth in Statement of Position
(SOP) 97-2, Software Revenue Recognition, and SOP 98-9, Modification of SOP
97-2, Software Revenue Recognition with respect to Certain Transactions, and the
Securities Exchange Commission Staff Accounting Bulletin No. 104, Revenue
Recognition, and other related pronouncements. In accordance with these
statements, we recognize revenue upon meeting each of the following criteria:
- Existence of persuasive evidence of an arrangement. Persuasive
evidence generally is a purchase order, license agreement or other
contract.
- Delivery of the product and authorization keys. Delivery has
occurred when the customer is provided our software and hardware and
the authorization keys needed to activate the software.
- Fee is fixed and determinable. A fee is deemed to be fixed or
determinable when it is not subject to subsequent refund or
adjustments.
- Collection is probable.
We defer maintenance revenue and recognize it ratably over the maintenance term.
We defer consulting and training billings and recognize them as those services
are performed.
Income Taxes
The Company is organized as a limited liability company. All profits or losses
or benefits derived are the responsibility of the members. Neither income taxes
nor the benefits relating to net losses are reflected in the accompanying
financial statements.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosures of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from these estimates.
Recently Issued Accounting Pronouncements
SFAS No. 149 "Amendment of Statement 133 on derivative instruments and hedging
activities". This statement amends and clarifies financial accounting and
reporting for derivative instruments embedded in other contracts (collectively
referred to as derivatives) and for hedging activities under SFAS 133,
"Accounting for derivative instruments and hedging activities".
F-19
SFAS No. 150 "Accounting for certain financial instruments with characteristics
of both liabilities and equity". This statement establishes standards for how an
issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity.
The Company believes that the above standards would not have a material impact
on its financial position, results of operations or cash flows.
NOTE 3 - Going Concern
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. This basis of accounting contemplates
the recovery of the Company's assets and the satisfaction of its liabilities in
the normal course of business. Through December 31, 2003, the Company had
incurred cumulative losses of $3,764,550. The Company's successful transition
from a development stage company to attaining profitable operations is dependent
upon obtaining financing adequate to achieving a level of revenues adequate to
support the Company's cost structure. Subsequent to the date of these financial
statements the Company has received a total of $7,605,230 in gross proceeds from
a private placement offering and an additional $550,000 in bridge loans have
been converted into common stock. See Note 9, Subsequent Events.
NOTE 4 - Software License Agreement
On August 31, 2003, the Company entered into a software licensing agreement with
a third party under which the Company acquired a non-exclusive license for the
worldwide rights to market and distribute the third party's proprietary
software. This software is being utilized as a component of the Company's own
proprietary software. The term of the agreement is for five years with provision
for annual renewals thereafter. The cost of the software licensing fee was
$300,000 with annual upgrade and maintenance charges of $30,000. The software
and licensing fees will be amortized over a 36 month period commencing in the
2004 calendar year. The agreement also calls for minimum annual royalty payments
totaling $500,000 over the first five year period following customer shipment,
payable quarterly as follows:
[Download Table]
Year 1 $ 50,000
Year 2 75,000
Year 3 100,000
Year 4 125,000
Year 5 150,000
The minimum annual royalty payments will be expensed quarterly, with any excess
royalties due expensed in the period earned. If in any year the calculation of
the royalty fee is greater than the minimum, this excess will reduce the final
amount due in the fifth year.
F-20
NOTE 5 - Commitments
In July, 2002, the Company entered into a three year operating lease agreement
for office space. Minimum rentals, on an annual basis, are as follows:
[Download Table]
2004 $76,265
2005 78,220
NOTE 6 - Notes Payable
[Download Table]
Notes payable to members, unsecured, interest at 8%,
convertible to equity according to the terms of the Loan
Conversion Agreement $625,000
Note payable to bank, secured by certain personal assets of a
member and all assets of the Company, interest at 9%, interest
only due monthly, principal due March 31, 2004 110,000
--------
Total Notes Payable $735,000
========
Of the $625,000 notes payable to members, $550,000 is convertible into Class B
membership interest at a rate of $0.324 per interest. The remaining $75,000 of
notes payable is convertible into Class B membership interest at a rate of $1.00
per interest.
NOTE 7 - Membership Interest
During the developmental stages of the company, Craig Siegler, the founder of
the company, made advances to the company in the form of loans. These loans
totaled $1,034,907 and were made from the period February 28, 2002 through June
27, 2003. On June 27, 2003, the company issued 2,837,950 of Class A membership
interest to convert these advances to equity.
During the period June through September of 2003, the company issued 5,619,375
of Class B membership interests for total cash consideration of $1,825,000.
During the period September through December of 2003, the company issued
$1,725,000 of promissory notes to accredited investors. These shares were
convertible into Class B membership interest in the company. In December, 2003
the company converted $1,175,000 of these notes into 3,617,954 Class B
membership interest, with the remaining $550,000 of notes outstanding as of
December 31, 2003. The remaining convertible notes are convertible into
1,693,511 of Class B membership interest.
Additionally, there were 3,320,268 of managing membership interest issued during
2003 (the company was a limited liability company at the time). Substantially
all of these interests were issued to employees at a par value of $0.0001 per
interest. The allocation of these interests
F-21
among the employees and others assisting the company was made in the discretion
of senior management. At the time of their issuance, the interests had no value
and represented an opportunity to share in a residual value of the company after
a return of the investment and preferred return to the other interest holders.
Each share of membership interest outstanding has equal voting rights regardless
of class of membership interest. In the event of a distribution of net cash flow
and proceeds from the sale of capital items, the distribution is as follows:
1. To the Class B membership interest equal to two times their
aggregate Capital Contributions and Preferred Cumulative Returns.
2. To the Class A membership interest equal to the aggregate Capital
Contributions and Preferred Cumulative Returns.
3. Any remaining distribution is based on a pro rata share of 60% to
the Class B membership interest, 18.434% to the Class A membership
interest and 21.566% among the managing members' interest.
NOTE 8 - Property and Equipment
Property and equipment at December 31, 2003 consists of the following:
[Download Table]
Furniture and fixtures $ 89,375
Software 19,408
Computer equipment 128,491
Office equipment 3,629
Telephone equipment 18,236
---------
259,139
Less: Accumulated depreciation (122,798)
---------
$ 136,341
=========
NOTE 9 - Related Parties
On December 1, 2003, the Company entered into an agreement for business and
financial advisory services to be provided by an entity controlled by one of the
Company's directors. Fees for these services total $761,000. All of these fees
are related to the raise of future capital and will be paid and accounted for in
2004.
NOTE 10 - Subsequent Events
On January 28, 2004, the Company merged with a wholly owned subsidiary of
Capital Growth Systems, Inc. ("CGSI"), a Florida "shell" corporation formed for
the purpose of acquiring an operating business. The Company has become the sole
operating business of CGSI. The merger was contingent upon CGSI having raised a
minimum of $2,000,000 of investor capital pursuant to a common stock private
placement at $1.35 per share. As of April 15, 2004 an aggregate of
F-22
$7,605,230 of gross proceeds from the private placement had been raised. In
addition, at the merger closing the $550,000 of bridge loans to the Company were
converted into additional common stock of CGSI at approximately $0.95 per share
and one additional $25,000 subscription was accepted shortly thereafter at such
pricing. In connection with the merger, an aggregate of 8,558,500 shares of
common stock of CGSI were issued to the members of the Company and the Company
became a wholly owned subsidiary of CGSI, with CGSI serving as its sole manager.
Following the merger the Company will be treated as a disregarded entity for
state and federal income tax purposes. The cash balances of CGSI as of March 1,
2004 are expected to be more than sufficient to cover the cost of operations of
the Company for 2004.
F-23
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
FRONTRUNNER NETWORK SYSTEMS CORP.
Schaumburg, Illinois
We have audited the accompanying statements of financial condition of
FRONTRUNNER NETWORK SYSTEMS CORP. as of March 31, 2004 and the related
statements of operations, preferred stock and stockholders' deficit, and cash
flows for the year then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit. The financial statements of
FRONTRUNNER NETWORK SYSTEMS CORP as of March 31, 2003 were audited by other
auditors, whose report dated May 23, 2003 expressed an unqualified opinion on
those statements.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of FRONTRUNNER NETWORK SYSTEMS
CORP. as of March 31, 2004 and the results of its operations and its cash flows
for the year then ended, in conformity with accounting principles generally
accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 15 to the
financial statements, the Company's recurring losses from operations, working
capital deficiency, and stockholders' deficit raise substantial doubt about its
ability to continue as a going concern. Management's plans regarding those
matters are also described in Note 15. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
[PLANTE & MORAN, PLLC]
Elgin, Illinois
May 21, 2004
September 15, 2004 for Note 17
F-24
FRONTRUNNER NETWORK SYSTEMS CORP.
STATEMENTS OF FINANCIAL CONDITION
MARCH 31, 2004 AND 2003
[Enlarge/Download Table]
2004 2003
--------------- -------------
ASSETS
CURRENT ASSETS
Cash $ 149,538 $ 37,583
Accounts receivable, net of allowance for doubtful
accounts of $129,110 and $302,580, respectively 1,130,414 1,501,445
Inventories (Note 3) 1,333,239 1,378,532
Other current assets 147,179 86,602
--------------- -------------
TOTAL CURRENT ASSETS 2,760,370 3,004,162
PROPERTY AND EQUIPMENT, NET (NOTE 4) 1 ,039,214 1,259,171
--------------- -------------
TOTAL ASSETS $ 3,799,584 $ 4,263,333
=============== =============
See accompanying notes to financial statements
[PLANTE & MORAN LOGO]
F-25
FRONTRUNNER NETWORK SYSTEMS CORP.
STATEMENTS OF FINANCIAL CONDITION - CONTINUED
MARCH 31, 2004 AND 2003
[Enlarge/Download Table]
2004 2003
-------------- --------------
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Current maturities of long-term debt
and debt due within one year (Note 5) $ 5,971,735 $ 9,524,275
Accounts payable 2,640,133 2,305,163
Accrued expenses 645,747 860,265
Warranty reserve 149,534 144,199
Deferred revenue 1,222,695 1,191,378
Advance billings 542,049 694,107
-------------- --------------
TOTAL CURRENT LIABILITIES 11,171,893 14,719,387
LONG-TERM LIABILITIES
Long-term debt (Note 5) 104,565 239,561
PREFERRED STOCK (NOTE 6)
Junior convertible preferred stock: $100 par value
Authorized 2,500 shares;
Issued and outstanding 2,000 shares 200,000 200,000
Series A junior convertible preferred stock: $100 par value
Authorized 7,000 shares;
Issued and outstanding 4,050 shares 4,050,000 4,050,000
Senior preferred stock: 8% cumulative; $100 par value
Authorized 16,000 shares;
Issued and outstanding 222 shares 22,200 22,200
Junior redeemable preferred stock: $1 par value
Authorized 1,000,000 shares;
Issued and outstanding 830,955 shares 830,955 830,955
-------------- --------------
TOTAL PREFERRED STOCK 5,103,155 5,103,155
STOCKHOLDERS' DEFICIT (NOTE 8)
Common stock: $.001 par value;
Authorized 170,000,000 shares;
Issued and outstanding 87,155,413 shares 87,155 87,155
Additional paid-in capital 38,538,671 38,538,671
Accumulated deficit (51,205,855) (54,424,596)
-------------- --------------
TOTAL STOCKHOLDERS' DEFICIT (12,580,029) (15,798,770)
-------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 3,799,584 $ 4,263,333
============== ==============
See accompanying notes to financial statements
[PLANTE & MORAN LOGO]
F-26
FRONTRUNNER NETWORK SYSTEMS CORP.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MARCH 31, 2004 AND 2003
[Enlarge/Download Table]
2004 2003
-------------- --------------
NET SALES $ 12,330,571 $ 13,591,156
Cost of sales 5,991,340 6,662,654
-------------- --------------
GROSS PROFIT 6,339,231 6,928,502
Selling, general and administrative expense 6,322,497 6,817,471
-------------- --------------
INCOME FROM OPERATIONS 16,734 111,031
Other income (expense)
Miscellaneous income 6,668 ---
Interest expense (342,464) (568,383)
Gain on sale of assets --- 26,512
-------------- --------------
Total other income (expense) (335,796) (541,871)
-------------- --------------
LOSS BEFORE EXTRAORDINARY ITEM AND CUMULATIVE
EFFECT OF ACCOUNTING CHANGE (319,062) (430,840)
Extraordinary item - gain on forgiveness of debt (Note 14) 3,537,803 ---
Cumulative effect of change in accounting principle (Note 10) --- (6,381,918)
-------------- --------------
NET INCOME (LOSS) $ 3,218,741 $ (6,812,758)
============== ==============
EARNINGS PER SHARE:
Net Income (loss) before extraordinary item and cumulative
effect of accounting change $ (0.00) $ (0.01)
Extraordinary gain $ 0.04 $ ---
Cumulative effect of change in accounting principle $ --- $ (0.07)
-------------- --------------
Net Income (loss) $ 0.04 $ (0.08)
============== ==============
See accompanying notes to financial statements
F-27
FRONTRUNNER NETWORK SYSTEMS CORP.
STATEMENTS OF PREFERRED STOCK AND STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED 31, 2004 AND 2003
[Enlarge/Download Table]
STOCKHOLDERS' DEFICIT
---------------------------------------------------------------------------
PREFERRED COMMON STOCK
STOCK ---------------------- ADDITIONAL ACCUMULATED
TOTALS SHARES AMOUNT PAID-IN CAPITAL DEFICIT TOTAL
---------- ---------- -------- --------------- ------------ --------------
BALANCE AT MARCH 31, 2002 $5,103,155 87,155,413 $ 87,155 $ 38,538,671 $(47,611,838) $ (8,986,012)
Net loss --- --- --- --- (6,812,758) (6,812,758)
---------- ---------- -------- ------------ ------------ --------------
BALANCE AT MARCH 31, 2003 5,103,155 87,155,413 87,155 38,538,671 (54,424,596) (15,798,770)
Net income --- --- --- --- 3,218,741 3,218,741
---------- ---------- -------- ------------ ------------ --------------
BALANCE AT MARCH 31, 2004 $5,103,155 87,155,413 $ 87,155 $ 38,538,671 $(51,205,855) $ (12,580,029)
========== ========== ======== ============ ============ ==============
See accompanying notes to financial statements
[PLANTE & MORAN LOGO]
F-28
FRONTRUNNER NETWORK SYSTEMS CORP.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 2004 AND 2003
[Enlarge/Download Table]
2004 2003
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
NET INCOME (LOSS) $ 3,218,741 $ (6,812,758)
Adjustments to reconcile net income (loss) to
net cash flows from operating activities
Cumulative effect of a change in accounting principle --- 6,381,918
Forgiveness of debt (3,537,803) ---
Services provided in exchange for debt (27,368) ---
Depreciation and amortization 322,976 436,318
Gain on sale of assets --- (26,512)
Provision for doubtful accounts (173,470) (147,420)
(Increase) decrease in operating assets
Accounts receivable 544,501 626,294
Inventory 45,293 (376,874)
Other current assets (60,577) 28,341
Increase (decrease) in operating liabilities
Accounts payable 334,970 1,324,242
Accrued expenses (214,518) 86,449
Warranty reserve 5,335 (130,183)
Deferred revenue (199,010) (482,215)
Advance billings (152,058) 118,172
------------- -------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 107,012 1,025,772
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (103,019) (327,972)
Proceeds from sale of assets --- 26,512
------------- -------------
NET CASH USED IN INVESTING ACTIVITIES (103,019) (301,460)
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on long-term debt (1,163,524) (1,356,431)
Principal borrowings on long-term debt 1,271,486 150,000
------------- -------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 107,962 (1,206,431)
------------- -------------
NET INCREASE (DECREASE) IN CASH 111,955 (482,119)
Cash, beginning of year 37,583 519,702
------------- -------------
CASH, END OF YEAR $ 149,538 $ 37,583
============= =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 399,977 $ 566,113
============= =============
Long-term debt exchanged for liability to provide services $ 230,327 $ ---
============= =============
See accompanying notes to financial statements
[PLANTE & MORAN LOGO]
F-29
FRONTRUNNER NETWORK SYSTEMS CORP.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2004 AND 2003
Note 1 - NATURE OF OPERATION
Frontrunner Network Systems Corp. (the "Company") is a single-source provider
of business communications equipment and multimedia integration services for
data, voice, video, and advanced applications. Most of the Company's
customers are located in the northeast United States.
Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of the significant accounting policies applied by
management in the preparation of the accompanying financial statements.
Use of estimates
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 and
disclosure of contingent assets and liabilities at the date of the
financial statements and reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Particularly significant estimates include the calculation of inventory
reserves, revenue recognition, and goodwill impairment.
Concentration of credit risk
Financial instruments that potentially subject the Company to credit risk
consist of cash and accounts receivable. The Company places its cash with
high quality financial institutions. Collateral is not required for
accounts receivable, however, the Company monitors its exposure for credit
losses and maintains allowances for anticipated losses.
Allowance for doubtful accounts
The Company provides an allowance for uncollectible accounts based upon
prior experience and management's assessment of the collectibility of
existing specific accounts.
Inventories
Inventories consist of work in progress and raw materials and are stated
at the lower of cost or market. Cost is determined on a first-in,
first-out basis. Work in process consists of labor, inventory, and
overhead costs relating to ongoing customer projects.
Property, equipment, and depreciation
Property and equipment are stated at cost. Provision for depreciation is
made generally at rates designed to allocate the cost of the property and
equipment over their estimated useful lives of 5 to 15 years. Depreciation
is calculated using the straight-line method. Expenditures for
maintenance, repairs and minor renewals and betterments are charged to
expense as incurred. Replacements of significant items and major renewals
and betterments are capitalized.
Revenue recognition
Contracts are primarily accounted for on the completed contract method.
The Company recognizes revenue and all related costs on these contracts
upon delivery and acceptance by the customer.
[PLANTE & MORAN LOGO]
F-30
FRONTRUNNER NETWORK SYSTEMS CORP.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2004 AND 2003
Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Cash and cash equivalents
Cash and cash equivalents are comprised of demand deposits in commercial
banks.
Earnings per common share
Earnings per common share were computed by dividing net income available
to common stockholders by the weighted average number of common shares
outstanding during the year. For the year ended December 31 2003 and 2004,
diluted and basic earnings per share were the same, as the effect of
dilutive convertible stock outstanding was not significant.
Warranty reserve
The financial statements include product warranty reserves of $149,534 in
2004 and $144,199 in 2003. It is based on estimates of future costs
associated with fulfilling the warranty obligations. The estimates are
derived from historical cost experience. Because of the inherent
uncertainties in estimating costs, it is at least reasonably possible that
the estimates used will change within the near term.
Stock-based compensation
The Company accounts for stock-based compensation in accordance with
Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for
Stock-Based Compensation. As permitted by that standard, the Company has
elected to continue to follow recognition provisions of Accounting
Principles Board Opinion 25, Accounting for Stock Issued to Employees, and
related interpretations in accounting for employee stock-based
compensation. No employee stock-based compensation expense was recorded
for fiscal 2004 and 2003.
Income taxes
Income taxes are provided on the earnings in the financial statements.
Deferred income taxes are provided to reflect the impact of "temporary
differences" between the amounts of assets and liabilities for financial
reporting purposes and such amounts as measured by tax laws and
regulations. The primary temporary differences relate to depreciation,
inventory reserves and the timing of deductions for certain accrued
expense liabilities. Tax credits are recognized as a reduction to income
taxes in the year the credits are earned.
Note 3-INVENTORIES
Inventories at March 31 consist of the following:
[Download Table]
2004 2003
---------- ----------
Raw materials $ 918,340 $ 917,765
Work in process 414,899 460,767
---------- ----------
$1,333,239 $1,378,532
========== ==========
The above amounts are net of the reserve of $1,009,729 and $915,712 at March
31, 2004 and 2003, respectively. The reserve balance is estimated by
management based on previous experience and considers the Company's on-hand
inventory needs based on networks under maintenance service agreements.
[PLANTE & MORAN LOGO]
F-31
FRONTRUNNER NETWORK SYSTEMS CORP.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2004 AND 2003
Note 4-PROPERTY AND EQUIPMENT
Property and equipment at March 31 consists of the following:
[Download Table]
2004 2003
---------- ----------
Furniture and fixtures $ 376,835 $ 376,833
Computer equipment 2,403,049 2,313,299
Leasehold improvements 100,950 90,650
Machinery and equipment 555,589 552,622
Vehicles 240,939 240,939
---------- ----------
3,677,362 3,574,343
Less accumulated depreciation and amortization 2,638,148 2,315,172
---------- ----------
$1,039,214 $1,259,171
========== ==========
Note 5-LONG-TERM DEBT
Long-term debt as of March 31 consists of the following:
[Enlarge/Download Table]
2004 2003
---------- ----------
Demand loan payable to bank, payable in monthly principal payment of
$50,000, plus interest (.50% plus the prime rate; 4.5% at March 31,
2004) until the loan is paid in full or demand is made by the bank.
Secured by substantially all corporate assets. $3,900,000 $4,750,000
At March 31, 2003, a subordinated note payable to ALC
Communications Corporation secured by substantially all
corporate assets. The Company was delinquent on
interest and principal payments. Under terms of a
settlement agreement in connection with a lawsuit filed
to accelerate payment, a portion of the note was forgiven
and a portion was refinanced (see Note 14). -- 4,500,000
Note payable to Global Crossing North America, due in
monthly installments of $16,667 through May 2006. The
note bears no stated interest (imputed interest at 8%) and
is subordinated to the outstanding bank debt. As of
March 31, 2004 the Company was in default under terms
of the note agreement. 504,502 --
Note payable to creditor, unsecured, payable in monthly
installments of $12,500, including interest at 8.25%,
through December 2005. 250,312 363,836
[PLANTE & MORAN LOGO]
F-32
FRONTRUNNER NETWORK SYSTEMS CORP.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2004 AND 2003
Note 5-LONG-TERM DEBT - Continued
[Enlarge/Download Table]
2004 2003
---------- ----------
Various promissory notes to creditor, unsecured, payable in full on demand,
including accrued interest at 10%. The notes may be converted to
participating preferred stock in accordance with the terms of the
convertible promissory note. 215,000 50,000
Various promissory notes to creditor, unsecured, payable
in full between June 10, 2003 and October 1, 2003,
including interest at 7%. 776,486 100,000
Various promissory notes to creditor, unsecured, payable
in full between June 10, 2003 and October 1, 2003,
including interest at 7%. 430,000 --
---------- ----------
Total long-term debt 6,076,300 9,763,836
Less current portion 5,971,735 9,524,275
---------- ----------
Non-current portion - long-term debt $ 104,565 $ 239,561
========== ==========
The aggregate principal payments of long-term debt are as follows:
[Download Table]
2004 $ 5,971,735
2005 104,565
--------------
Total $ 6,076,300
==============
The weighted average interest rate on debt due within one year included above
was 5.3% and 4.6% for 2004 and 2003, respectively.
Note 6-CONVERTIBLE, REDEEMABLE PREFERRED STOCK
Senior Preferred Stock
The holders of the Senior Preferred Stock are entitled to receive, when and
if declared by the Board of Directors, quarterly dividends at the rate per
annum of $80 per share.
On November 1, 2006, the Company shall redeem all of the outstanding shares
of Senior Preferred Stock at a redemption price of $1,000 per share, plus an
amount equal to all accrued and unpaid dividends (whether or not declared) on
such shares up to the date of redemption. Prior to November 1, 2006, the
Company shall have the right to redeem any or all of the outstanding shares
of Senior Preferred Stock at a redemption price of $1,000 per share plus an
amount equal to all accrued and unpaid dividends (whether or not declared) on
such shares up to the date of redemption.
When any event of default, as defined in the Investment Agreement, has
occurred and shall be continuing, and unless the holders of at least a
majority of the shares of Senior Preferred Stock at the time outstanding
shall have waived such event of default in writing, the holders of a majority
of the shares of Senior Preferred Stock then outstanding may require that all
of the shares of Senior Preferred Stock held by the holders requesting
redemption be immediately redeemed by the Company at a redemption price of
$1,000 per share plus an amount equal to all accrued and unpaid dividends
(whether or not declared) on such shares.
[PLANTE & MORAN LOGO]
F-33
FRONTRUNNER NETWORK SYSTEMS CORP.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2004 AND 2003
Note 6 - CONVERTIBLE, REDEEMABLE PREFERRED STOCK - Continued
Junior Convertible Preferred and Series A Junior Preferred Stock
(collectively "Convertible Preferred Stock")
The holders of Convertible Preferred stock shall have no right to receive
dividends.
The Company shall have no right to redeem Convertible Preferred Stock. When
any event of default, as defined in the Investment Agreement, has occurred
and shall be continuing and unless the holders of at least a majority of the
shares of Convertible Preferred Stock at the time outstanding shall have
waived such event of default in writing, the holders of a majority of the
shares of Convertible Preferred Stock then outstanding may require that all
of the shares of Convertible Preferred Stock held by the holders requesting
redemption be immediately redeemed by the Company at a redemption price of
$1,000 per share.
The holder of any share or shares of Convertible Preferred Stock shall have
the right, at its option at any time, to convert any such shares of
Convertible Preferred Stock into such number of fully paid and non-assessable
shares of Common Stock as is determined by a predetermined formula.
The Company has not finalized the terms of the Junior Redeemable Preferred
Stock agreement with the holders. Once finalized, the Company expects that
the Junior Redeemable Preferred Stock will include a redemption feature for
the holders of the Junior Redeemable Preferred Stock.
Note 7 - OPERATING LEASE
The Company leases buildings from several unrelated companies. The Company
also leases certain machinery and equipment from unrelated parties under
operating leases.
Total rent amounted to $391,869 for the year ended March 31, 2004.
At March 31, 2004, the future minimum lease payments under operating leases
were as follows:
[Download Table]
2005 $ 316,302
2006 274,672
2007 145,980
2008 5,209
------------
$ 742,163
============
Note 8 - EMPLOYEE STOCK OPTION PLAN
The Company has a restricted stock option plan for key officers, employees,
and board members. Options are granted at the discretion of the Board of
Directors and may be exercised for up to ten years from the date of grant.
Options granted vest at a rate of 20% per year for five years.
The Company has adopted the disclosures-only provision of SFAS No. 123,
Accounting for Stock-Based Compensation. Accordingly, no compensation cost
has been recognized for the restricted stock option plan as it relates to
employees. Had compensation cost for the Company's restricted stock option
plan been determined based on the fair value at the date of grant for awards
consistent with the provisions of SFAS No. 123, there would have been no
change to the Company's net income.
[PLANTE & MORAN LOGO]
F-34
FRONTRUNNER NETWORK SYSTEMS CORP.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2004 AND 2003
Note 8 - EMPLOYEE STOCK OPTION PLAN - Continued
The fair value of each grant is estimated on the date of grant using the
Black-Scholes option-pricing model using an assumed risk-free interest rate
of 4.79% and an expected life of ten years. As the Company is not considered
to be publicly traded for the purposes of applying SFAS No. 123, the Company
did not include a volatility factor assumption in its fair value model.
A summary of activity under the plan as of March 31 2004, 2003, and 2002
consisted of the following:
[Download Table]
Weighted-
Outstanding Average
Options Exercise Price
----------- --------------
Outstanding shares under option, April 1, 2002 9,218,250 $ .04
Options cancelled (199,500) .18
----------
Outstanding shares under option, March 31, 2003 9,018,750 .04
Options cancelled (151,000) .18
----------
Outstanding shares under option, March 31, 2004 8,867,750 .03
==========
Options exercisable at March 31, 2004 7,094,200 .03
==========
The following table summarizes information concerning outstanding and
exercisable options at March 31, 2004:
[Enlarge/Download Table]
Options Options
Outstanding Exercisable
-------------------------------------------------- -----------------------------------------------------
Weighted
Average
Remaining Weighted Weighted
Range of Number Contractual Average Average
Exercise Price Outstanding Life Exercise Price Number Exercise Price
-------------- ----------- ----------- -------------- --------- --------------
$.001 - $.18 8,867,750 1.0 $ .03 7,094,200 $ .03
Note 9 - EMPLOYEE BENEFIT PLANS
The Company maintains a qualified 401(k) profit sharing plan to provide
retirement benefits to substantially all employees. The Plan provides for
contributions in such amounts as the Board of Directors may determine, but
not in excess of 15% of the eligible participants' compensation for the year
and are matched by 100% by the Company up to 3% of the employees' pre-tax
compensation. The Company's policy is to fund profit sharing costs accrued.
Company contributions to the Plan for the year ended March 31, 2004 and 2003
were approximately $136,037 and $152,853, respectively.
Note 10 - CUMULATIVE CHANGES IN ACCOUNTING PRINCIPLE
Effective April 1, 2002, the Company adopted SFAS No. 142, Goodwill and Other
Intangible Assets, and determined that the goodwill associated with the
acquisition of certain Company assets was fully impaired based on expected
future cash flows. The impairment loss of $6,381,918 to adjust the carrying
value of goodwill is included as a cumulative effect of change in accounting
principle in accordance with SFAS No. 142.
[PLANTE & MORAN LOGO]
F-35
FRONTRUNNER NETWORK SYSTEMS CORP.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2004 AND 2003
Note 11 - INCOME TAXES
The deferred tax assets and liabilities consisted of the following components
as of March 31:
[Download Table]
2004 2003
------------ ------------
Long-term deferred tax assets (liabilities):
Accumulated amortization $ 1,243,710 $ 1,485,190
Accumulated depreciation (153,363) (125,309)
Inventory reserve 108,972 145,639
Net operating loss carryforward 14,328,921 15,400,671
------------ ------------
15,528,240 16,906,192
------------ ------------
Less valuation allowance (15,528,240) (16,906,192)
------------ ------------
Net deferred tax assets (liabilities) $ -- $ --
============ ============
The current year change in the valuation allowance is $1,377,952. The net
operating losses begin to expire in 2015.
Note 12 - RELATED-PARTY TRANSACTIONS
Included in accounts receivable at March 31, 2003 is $11,735 from an entity
owned by a member of the board of directors of the Company for sales of
inventory and services. Sales to the entity were $60,046 for 2003. No
transactions occurred during fiscal year 2004.
Included in accounts payable at March 31, 2003 is $6,450 due to an entity
owned by an officer of the Company for software support. Purchases from the
entity were $223,050 and $320,062, respectively, for the years ended March 31
2004 and 2003.
Note 13 - CONCENTRATIONS
Customers
The Company has one major customer who accounted for 15% of sales for the
years ended March 31, 2004. The amount due from this customer was
approximately 31% of total accounts receivable as of March 31, 2004.
Note 14 - EXTRAORDINARY ITEM
The Company was named in a lawsuit initiated by Global Crossings, the
successor company to ALC Communications, in an attempt to accelerate
repayment of the $4,500,000 note payable, which was subordinated to the bank
and other debt. The Company had significant counter claims against the
creditor. The lawsuit resulted from the Company being delinquent on interest
payments under the terms of the note while it was negotiating with the
creditor's prior management. The lawsuit was settled in May 2003 and approved
by the bankruptcy court on July 30, 2003. The significant terms of the
settlement included the following provisions. The $4,500,000 note payable
plus accrued interest due to ALC Communications was forgiven. In exchange,
the Company agreed to pay $200,000 to Global Crossing, within 30 days of the
approval of the settlement by the Bankruptcy Court and $600,000 in 36 equal
monthly installments with no interest charged on the balance due. The
[PLANTE MORAN LOGO]
F-36
FRONTRUNNER NETWORK SYSTEMS CORP.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2004 AND 2003
Note 14 - EXTRAORDINARY ITEM - Continued
Company also agreed to provide up to $250,000 in approved equipment and
technical installation services to Global Crossing for up to three years
subsequent to the final order approving the settlement.
The terms of the settlement as detailed above resulted in income from the
forgiveness of debt in the amount of $3,537,803. Due to the unusual and
infrequent occurrence of this transaction the income generated by this
settlement appears as an extraordinary item on the statements of operations
for the year ended March 31, 2004.
Note 15 - GOING CONCERN
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. As of March 31, 2004, the
Company had a working capital deficiency of $8,411,523 and a stockholders'
deficit of $12,580,029, due primarily to recurring losses. These factors,
among others, indicate that the Company may be unable to continue as a going
concern for a reasonable period of time.
The financial statements do not include any adjustments relating to the
recoverability of assets and classification of liabilities that might be
necessary should the Company be unable to continue as a going concern. The
Company's ability to continue as a going concern is dependent upon its
ability to generate sufficient cash flow to meet its obligations, to obtain
additional financing, and ultimately, to attain successful operations.
Management of the Company has completed several steps designed to return the
company to profitability and positive cash flow. These steps include a
reduction in workforce resulting in monthly SG&A expense savings of $90,000,
additional service contract revenue with monthly revenue value of $70,000,
forgiveness of debt in the current year of $3,537,803, and a restructuring of
its remaining bank debt to reduce amortization payments by $40,000 per month.
Note 16 - NEW FASB INTERPRETATION TO BE ADOPTED IN THE FUTURE
In May 2003, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity. The Standard
focuses on mandatorily redeemable shares, forward contracts to purchase an
entity's own stock, and freestanding written options that enable the investor
to put shares of stock to the issuer. Prior to this statement mandatorily
redeemable shares were typically presented in the balance sheet between
liabilities and equity, commonly referred to as the "mezzanine" section and
many forward purchase contracts and written put options were presented as
equity, if they could be net-share-settled by the issuer. The Standard will
result in more instruments being classified as liabilities, partially
eliminate the "mezzanine" section of the balance sheet, and require that, for
a limited number of non-public companies, the balance sheet present only
assets and liabilities (no equity). The Interpretation is generally effective
for mandatorily redeemable instruments of non-public entities for fiscal
periods beginning after December 15, 2003.
The Company is currently evaluating the effect that implementation of the
Interpretation will have on its financial position, results of operations,
and cash flows.
[PLANTE & MORAN LOGO]
F-37
FRONTRUNNER NETWORK SYSTEMS CORP.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2004 AND 2003
Note 17 - SUBSEQUENT EVENT
Management states that the actions described in the note above have improved
operating margins significantly. Current performance is meeting or exceeding
budget targets negotiated with the Company's bank and major creditors.
Subsequent to year end, on September 15, 2004, the Company's ownership and
management finalized a merger agreement whereby the Company has become a
wholly-owned subsidiary of a public company. This transaction has directly
resulted in further reduction of both $1,420,000 of existing debt and
$106,000 of accrued interest. The Company also received an immediate infusion
of $250,000 in additional working capital from the parent upon completion of
the merger. The merger provides the Company additional backing from a strong
corporate balance sheet that includes $3,500,000 in cash, and expanded access
to both public equity and debt markets. The merger has also strengthened the
Company with new technology and several additions to its product suite,
positioning the company as a viable competitor in several rapidly growing
Voice Over IP (VOIP) communication market segments.
[PLANTE & MORAN LOGO]
F-38
CAPITAL GROWTH SYSTEMS, INC.
PRO FORMA COMBINED BALANCE SHEET
SEPTEMBER 30, 2004
(UNAUDITED)
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NOTE 2
CAPITAL PRO FORMA
GROWTH PRO FORMA COMBINED
SYSTEM, INC. ADJUSTMENTS NOTES BALANCE
------------- ------------ ------ ------------
ASSETS
CURRENT ASSETS
Cash $ 3,763,554 $ 3,763,554
Accounts receivable 2,371,827 2,371,827
Inventories, net 1,196,273 1,196,273
Other current assets 200,986 200,986
------------ -----------
Total Current Assets 7,532,640 7,532,640
FIXED ASSETS, NET 1,152,315 1,152,315
OTHER ASSETS
Software License Fees 315,800 315,800
Goodwill 7,128,977 Note 4 7,128,977
------------ ----------- ------ -----------
TOTAL ASSETS $ 16,129,732 $ - $16,129,732
============ =========== ===========
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt $ 4,527,739 $ 360,420 Note 5 4,888,159
Accounts payable 2,860,344 (1,591,620) Note 6 1,268,724
Accrued expenses 572,268 572,268
Deferred Revenues 1,575,662 1,575,662
Advance billings 1,007,883 1,007,883
Other current liabilities 97,302 97,302
------------ ----------- ------ -----------
Total Current Liabilities 10,641,198 (1,231,200) 9,409,998
LONG TERM LIABILITIES
Long term notes 82,848 1,231,200 Note 7 1,314,048
------------ ----------- ------ -----------
TOTAL LIABILITIES 10,724,046 - 10,724,046
------------ ----------- -----------
STOCKHOLDERS' EQUITY
COMMON STOCK 1,689 Note 8 1,689
ADDITIONAL PAID IN CAPITAL 12,527,454 Note 8 12,527,454
RETAINED DEFICIT (7,123,457) Note 8 (7,123,457)
------------ ----------- ------ -----------
STOCKHOLDERS' EQUITY 5,405,686 - 5,405,686
------------ ----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 16,129,732 - $16,129,732
============ =========== ===========
SEE ACCOMPANYING NOTES TO COMBINED PRO FORMA FINANCIAL STATEMENTS.
F-39
CAPITAL GROWTH SYSTEMS, INC.
PRO FORMA COMBINED STATEMENT OF OPERATIONS
TWELVE MONTHS ENDED, DECEMBER 31, 2003
(UNAUDITED)
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NOTE 2 NOTE 3
CAPITAL FRONTRUNNER PRO FORMA
GROWTH NETWORK PRO FORMA CONSOLIDATED
SYSTEM, INC. SYSTEMS CORP. ADJUSTMENTS NOTES TOTAL
------------- ------------- ----------- ------ ------------
REVENUES $ 59,027 $ 12,330,571 $ 12,389,598
------------ ------------ ------------
Cost of Sales 129,806 5,991,340 6,121,146
------------ ------------ ---------- ------------
GROSS PROFIT (70,779) 6,339,231 - 6,268,452
Selling, general and administrative expenses 2,420,345 6,322,497 8,742,842
------------ ------------ ---------- ------------
OPERATING INCOME (LOSS) (2,491,124) 16,734 - (2,474,390)
Interest Expense, net 146,509 335,796 (2,995) Note 9 479,310
------------ ------------ ---------- ------ ------------
NET LOSS $(2,637,633) $ (319,062) $ 2,995 $ (2,953,700)
============ ============ ========== ============
Weighted Average Shares Outstanding 1,071,602 925,000 Note 3 1,996,602
NET LOSS PER SHARE $ (2.46) $ (1.48)
SEE ACCOMPANYING NOTES TO COMBINED PRO FORMA FINANCIAL STATEMENTS.
F-40
CAPITAL GROWTH SYSTEMS, INC.
PRO FORMA COMBINED STATEMENT OF OPERATIONS
NINE MONTHS ENDED, SEPTEMBER 30, 2004
(UNAUDITED)
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NOTE 2 NOTE 3
CAPITAL FRONTRUNNER PRO FORMA
GROWTH NETWORK PRO FORMA CONSOLIDATED
SYSTEM, INC. SYSTEMS CORP. ADJUSTMENTS NOTES TOTAL
------------ ------------- ----------- ------ ------------
REVENUES $ 364,993 $ 8,279,255 $ 8,644,248
----------- ------------ -----------
Cost of Sales 112,960 3,824,493 3,937,453
----------- ------------ ---------- -----------
GROSS PROFIT 252,033 4,454,762 - 4,706,795
Selling, general and administrative expenses 3,684,525 4,221,041 7,905,566
----------- ------------ ---------- -----------
OPERATING INCOME (LOSS) (3,432,492) 233,721 - (3,198,771)
Interest Expense (Income), net (39,461) 352,854 (132,629) Note 9 180,764
----------- ------------ ---------- ------ -----------
NET LOSS $(3,393,031) $ (119,133) $ 132,629 $(3,379,535)
=========== ============ ========== ===========
Weighted Average Shares Outstanding 14,553,990 925,000 Note 3 15,478,990
NET LOSS PER SHARE (BASIC AND FULLY DILUTED) $ (0.23) $ (0.22)
SEE ACCOMPANYING NOTES TO COMBINED PRO FORMA FINANCIAL STATEMENTS.
F-41
CAPITAL GROWTH SYSTEMS, INC.
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited pro forma unaudited combined statements of operations
for the twelve and nine month periods ended December 31, 2003 and September 30,
2004, respectively, give effect to the acquisition of Frontrunner Network
Systems Corp. (Frontrunner) by Capital Growth Systems, Inc. (CGSI) on September
15, 2004. The pro forma balance sheet as of September 30, 2004, reflects the
additional adjustments subsequent to the merger that need to be reflected.
The unaudited pro forma combined financial statements of CGSI included herein
have been prepared by management in accordance with the accounting principles
generally accepted in the United States of America. They have been prepared from
information derived from the December 31, 2003 (audited) and September 30, 2004
(unaudited) financial statements of CGSI and the March 31, 2004 (audited) and
the September 30 (unaudited) financial statements of Frontrunner, together with
other information available to the entities. The CGSI financial statements
reflect the effects of the reverse merger between CGSI and Nexvu Technologies,
LLC (Nexvu), which occurred on January 28, 2004. This transaction resulted in
the financial statements of Nexvu being the surviving company for financial
statement purposes. Accordingly, the historical financial statements of Nexvu
are utilized for the CGSI financial statements prior to the merger. In the
opinion of management of CGSI, these unaudited pro forma consolidated financial
statements include all adjustments necessary for the fair presentation of the
merger between CGSI and Frontrunner as described below.
The unaudited pro forma combined financial statements should be read in
conjunction with the historical financial statements and notes thereto of CGSI
and Nexvu, as filed with the Securities and Exchange Commission in their annual
report on form 10KSB, as amended, and third quarter 10QSB and the financial
statements of Frontrunner, included elsewhere in this 8-K. The unaudited pro
forma combined statements of operations for the twelve months and nine months
ended December 31, 2003 and September 30, 2004, respectively, give effect to the
merger as if it had occurred at the start of the fiscal periods beginning on
January 1, 2003 and January 1, 2004. The audited financial statements of
Frontrunner are for the twelve month periods ending March 31. For purposes of
the pro forma statement of operations, these financial statements were utilized
in the combined pro forma financial statements for the twelve months ended
December 31, 2003. The unaudited results of operation for Frontrunner for the
nine month period ended September 30, 2004 were derived from the calendar nine
month period ended September 30, 2004. Accordingly, the results of Frontrunner's
calendar first quarter ended March 31, 2004 are included in the twelve month and
nine month period statement of operations. These unaudited pro forma combined
financial statements are not necessarily indicative of the financial position or
results of operations, which would have resulted if the combination and related
transactions had actually occurred on those dates.
F-42
NOTE 2 - CAPITAL GROWTH SYSTEMS, INC.
Capital Growth Systems, Inc. is the holding company for its wholly owned limited
liability corporation, Nexvu Technologies, LLC (Nexvu). As of the date of this
merger, Nexvu represented essentially all of the operations of CGSI. Nexvu is
engaged in the development and sale of application performance management
software to large and mid-sized companies for use in connection with their
computer network systems. They have been existence since 2002 and have only
recently begun selling their product. As of the date of the merger, Nexvu had 15
full time employees.
NOTE 3 - ACQUISITION OF FRONTRUNNER
On September 15, 2004, CGSI acquired all of the common stock and certain of the
Preferred Stock of Frontrunner. Frontrunner is a converged network systems
provider with its core business in the design, installation, service and
monitoring of customer-premise voice/data/video networks. They currently employ
approximately 85 people serving over 1,000 customers. In addition to their core
business, Frontrunner has begun providing professional services in the area of
contact center design and installation, remote network monitoring and
management, as well as network security.
In consideration of the merger, CGSI issued 925,000 shares of common stock to
certain creditors of Frontrunner in exchange for the cancellation of
indebtedness to Frontrunner by those creditors of $2,252,423. Some of this
cancellation of indebtedness was completed prior to the merger, with the
remaining amount still in discussions. The cancellation of the indebtedness will
be in the form of $1,421,486 of term debt along with $830,937 of debt which had
been earmarked to be converted to Preferred Stock without terms being finalized.
Additionally, CGSI paid $1.00 for each share of 228.184 shares of nonvoting
Eight Percent (8%) Senior Preferred Stock, par value $100.00 per share for a
total of $228.18. The remaining existing debt will remain outstanding. In
addition to the Senior Preferred Stock, there were 2,000 shares of Junior
Convertible Preferred Stock, par value of $100.00 per share and 4,050 shares of
Series A Convertible Preferred Stock, par value of $100.00 per share as well as
87,155,413 shares of common stock. All of these shares, along with all
outstanding stock warrants and options were extinguished and cancelled without
consideration thereof as of the merger date.
In addition to the extinguishment of debt and the cancellation of equity
securities and rights, there were other items that would have impacted the
combined financial statements. As part of the merger agreement, Frontrunner is
in the process of converting some long outstanding Accounts Payable balances
into interest bearing notes. The balances on these accounts were $1,591,620 as
of September 30, 2004, of which $360,420 would be payable within one year and
the remaining balance of $1,231,200 payable in excess of one year. The current
portion of this reclassification is recorded as an increase to current
maturities of long-term debt with the long-term portion classified as long-term
notes. Additionally, interest on this conversion was imputed for the statement
of operations for the twelve and nine month periods ending December 31, 2003
F-43
and September 30, 2004 respectively. Total imputed interest on these notes was
$109,428 and $65,848 for the twelve and nine month periods ended December 31,
2003 and September 30, 2004 respectively.
NOTE 4 - GOODWILL
The goodwill represents fair market value of the 925,000 shares of CGSI common
stock issued at an assumed price of $1.35 per share plus the difference between
the fair market value of the assets acquired less the liabilities assumed of
$7,128,977. The most recent private placement of our common stock was made at
$1.35 per share, which is assumed to constitute its fair market value. CGSI is
in the process of calculating valuations of certain intangible assets, and
obtaining third party verification of the valuations; thus, the allocation of
the purchase price is subject to refinement.
NOTE 5 - CURRENT MATURITIES OF LONG-TERM DEBT
Represents the current portion of the Accounts Payable reclassified to debt as
part of the merger, as explained more fully in Note 3.
NOTE 6 - ACCOUNTS PAYABLE
This represents the reclassification of Accounts Payable into interest-bearing
debt, as explained in Note 3.
NOTE 7 - LONG-TERM NOTES
Represents the long-term portion of the Accounts Payable reclassified into
interest-bearing debt, as explained in Note 3.
NOTE 8 - STOCKHOLDERS' EQUITY
The September 30, 2004 financial statements all ready reflect the elimination of
the Frontrunner equity.
NOTE 9 - INTEREST EXPENSE
This reflects the interest on the Notes Payable that was extinguished as part of
the merger agreement in the amount of $106,432 and $212,955 for the twelve month
and nine month periods ended December 31, 2003 and September 30, 2004
respectively, partially offset by imputed interest on the Accounts Payable
converted to debt in the amount of $109,428 and $80,326 for the twelve month and
nine month periods ended December 31, 2003 and September 30, 2004 respectively,
F-44
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE
NOT AUTHORIZED ANY DEALER, SALESPERSON OR ANY OTHER PERSON TO PROVIDE YOU WITH
DIFFERENT INFORMATION OR REPRESENT ANYTHING THAT IS NOT CONTAINED IN THIS
PROSPECTUS. THE INFORMATION IN THIS PROSPECTUS IS ONLY ACCURATE AS OF THE DATE
OF THE FRONT COVER OF THIS PROSPECTUS. THIS PROSPECTUS IS AN OFFER TO SELL ONLY
THE SHARES OFFERED HEREBY, BUT ONLY UNDER CIRCUMSTANCES AND IN JURISDICTIONS
WHERE IT IS LAWFUL TO DO SO.
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PAGE
Summary....................................................................................... 1
Risk Factors.................................................................................. 4
Forward-Looking Statements.................................................................... 8
Use Of Proceeds............................................................................... 9
Business...................................................................................... 10
Market For Common Equity And Related Stockholder Matters...................................... 23
Management's Discussion And Analysis Or Plan Of Operation..................................... 24
Directors, Executive Officers, Promoters And Control Persons.................................. 32
Information Regarding Our Board Of Directors.................................................. 35
Executive Compensation And Related Information................................................ 37
Security Ownership Of Certain Beneficial Owners And Management................................ 40
Certain Relationships And Related Transactions................................................ 43
Shares To Be Issued In Connection With The Exercise Of Warrants............................... 46
Shares Available For Future Sale.............................................................. 47
Selling Shareholders.......................................................................... 48
Description Of Securities..................................................................... 52
Plan Of Distribution.......................................................................... 54
Legal Matters................................................................................. 55
Experts....................................................................................... 56
Changes In And Disagreements With Accountants On Accounting And Financial Disclosure.......... 56
Where You Can Find Additional Information About Us............................................ 57
Index To Financial Statements................................................................. 58
CAPITAL GROWTH SYSTEMS, INC.
--------------
PROSPECTUS
--------------
JANUARY ____, 2004
PART II - INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 607.0850 of the Florida Business Corporation Act authorizes
indemnification of our directors, officers, employees and agents, allows the
advancement of costs of defending against litigation and permits us to purchase
insurance on behalf of directors, officers, employees and agents against
liabilities whether or not in the circumstances we would have the power to
indemnify against these liabilities under the provisions of the statute.
Our By-Laws provides for indemnification of our officers and directors to
the fullest extent permitted by Section 607.0850 of the Florida Business
Corporation Act. We have obtained directors and officers insurance covering our
executive officers and directors.
We intend to reincorporate in Delaware in the near future. Our proposed
Delaware Certificate of Incorporation and provisions of the Delaware General
Corporation law will have a similar indemnification effect as the provisions of
our By-Laws and of Florida law described above.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following is a schedule of the estimated expenses to be incurred by us
in connection with the issuance and sale of the securities being registered
hereby:
[Download Table]
Registration Fee $ 1,391.12
Blue Sky Fees and Expenses 5,000*
Accounting Fees and Expenses 5,000*
Legal Fees and Expenses 75,000*
Printing Expenses 10,000*
Transfer Agent and Registrar Fees 2,000*
Miscellaneous 5,000*
-----------
Total $103,391.12*
===========
*Estimated
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
The following sets forth securities sold by us in the last three years
without registration under the Securities Act. Unless otherwise noted, in each
case we sold shares of our common stock or warrants to acquire common stock in
private transactions to persons we believed were
"accredited investors" and/or "sophisticated investors" not affiliated with us
unless otherwise noted, and purchasing the shares with an investment intent.
Each of the transactions involved the offering of such securities to a
substantially limited number of persons. Each person took the securities as an
investment for his/her/its own account, and not with a view to distribution. We
relied upon, exemptions contained in Section 4(2) of the Securities Act or
Regulation D promulgated thereunder in each of these instances. In each case,
the company did not engage in general solicitation and advertising and the
shares were purchased by investors with whom we, through our officers and
directors, had preexisting relationships. Each person had access to information
equivalent to that which would be included on a registration statement on the
applicable form under the Securities Act. We did not use underwriters for any of
the transactions described below; therefore, these transactions did not involve
underwriter discounts or commissions.
Allen Borowsky and Jeffrey Klein were considered our promoters. We
initially issued a total of 931,500 shares of our common stock to a total of 41
investors, including 450,000 shares issued to each of Mr. Borowsky and Mr.
Klein, for total consideration of $4,815.
Capital Growth Systems, Inc.
On October 1, 2003, we entered into a Subscription Agreement with Grander,
LLC, d/b/a Capital Strategies Group, an Illinois limited liability company under
which Grander agreed to purchase 238,500 shares of our common stock in
consideration for Grander's funding of certain of our operational requirements.
The offering price of the shares purchased was $13,000, for a purchase price of
$0.054 per share of our common stock. Mr. Lee Wiskowski, a director of ours, is
the sole member of Grander. In connection with the issuance to Grander we relied
upon the exemption from registration available under Section 4(2) of the
Securities Act of 1933, as amended.
On December 1, 2003, we entered into a Business and Financial Advisory
Agreement with Grander, LLC. For its services, Grander and its designees have
been paid a fee of $761,000 for advising us in connection with the structuring
of our acquisition of Nexvu, establishment of commercial and strategic
partnerships and joint ventures, development of our marketing plans, financial
models, financial strategies and structuring of our private offering on April
15, 2004. The designees of Grander are Lee Wiskowski and Douglas Stukel, both of
whom are members of our board of directors and the individuals who help provide
advisory services to us under the agreement.
On March 31, 2004, we entered into Advisory Services Agreements with each
of Lee Wiskowski and Douglas Stukel to provide advisory services on a going
forward basis. Pursuant to the agreements, we may request Mr. Wiskowski and Mr.
Stukel to provide financial advisory services in connection with mergers and
acquisitions and provide analysis as to strategic alternatives. As consideration
for such services, Mr. Wiskowski and Mr. Stukel were each granted a three-year
warrant, exercisable at $1.35 per share, to purchase 250,000 shares of our
common stock on or before March 31, 2007. Nothing contained in the agreement
precludes us from engaging any other person or entity to provide us financial
advisory services, provided that during the term of the agreement and for a
period of six months thereafter, we are required to give Mr. Wiskowski and Mr.
Stukel the right of first refusal to act as our advisor with respect to
II-2
financial advisory services, so long as Mr. Wiskowski or Mr. Stukel, as the case
may be, offers such services on terms no less favorable than we can obtain
elsewhere.
The warrants granted to Mr. Wiskowski and Mr. Stukel under the agreements
contain a cashless exercise provision which essentially provides that upon
exercise of the warrants, they have the right to either pay cash or receive
"credit," as if they had paid cash, for the cancellation of a portion of their
warrants with a value equal to the spread, if any, between the fair-market value
of our common stock at the date of exercise and the exercise price of $1.35 per
share, multiplied by the number of warrants being cancelled.
On January 28, 2004, we issued a total of 8,558,500 shares of our common
stock in connection with a merger between Nexvu Technologies, L.L.C. into our
wholly-owned subsidiary, Nexvu Mergersub, L.L.C. These issuances were made in
reliance upon the exemption from registration available under Section 4(2) of
the Securities Act.
In addition, on January 28, 2004, under a loan conversion agreement, we
issued: 577,500 shares of common stock, the amount necessary for the conversion
of bridge loans funded by Nexvu members and outstanding prior to the merger,
into shares of our common stock at $0.9523809 per share, or approximately
$550,000 in total; and warrants expiring December 31, 2006 to purchase common
stock at $1.35 per share based upon 50% warrant coverage with respect to all
bridge loans funded, for a total of 288,750 warrants. We further sold 26,250
shares to an accredited investor, Robert Gold, at the same price at which the
bridge loans were converted. This individual did not receive warrants to
purchase common stock. These issuances were made in reliance upon the exemption
from registration available under Section 4(2) of the Securities Act.
Between December 2003 and April 2004, we raised a total of $7,605,230 in
an offering of 5,633,504 shares of our common stock. This offering was made in
reliance upon the exemption from registration available under Section 4(2) of
the Securities Act and on Rule 506 of Regulation D. All investors in the
offering were accredited as defined in Regulation D.
On September 14, 2004, we completed a merger under which we acquired 100%
of the stock of Frontrunner Network Systems Corp., a Delaware corporation, which
we will refer to in this prospectus as "Frontrunner." Frontrunner began in 1976
as the network integration arm of Frontier Corporation in upstate New York. In
April 1999, Frontrunner was purchased from Frontier Corporation and taken
private in combination with the acquisition of certain assets and certain
liabilities of Telecom Midwest, LLC.
The form of the business combination with Frontrunner was a reverse
triangular merger in which we issued 925,000 shares of our common stock and
$222.18 in exchange for 100% of the ownership of Frontrunner and the
cancellation of indebtedness of Frontrunner in the amount of $2,252,423
(excluding accrued unpaid interest and other claims). The merger was approved by
our board of directors and the boards of directors of Frontrunner and our
subsidiary. The merger was also approved by a majority of the shareholders of
Frontrunner. At the time of the merger, Frontrunner had assets principally in
the form of inventory, fixed assets and receivables in the amount of
approximately $3,800,000.
II-3
The merger agreement contained certain conditions precedent including: (i)
requiring certain creditors of Frontrunner to execute creditor waiver
agreements; (ii) James Cuppini entering into an employment agreement with
Frontrunner, (iii) entry by Frontrunner into certain payment agreements calling
for amortization of outstanding past due obligations of Frontrunner plus a
market rate of interest with certain other of its creditors, and (iv)
Frontrunner obtaining from Harris Trust and Savings Bank, a consent to the
merger and a commitment that it would extend and maintain a loan to Frontrunner
with a principal amount of not less than the principal balance outstanding as of
the date of the merger (approximately $3,920,000). We waived all of the
conditions precedent except the entry into certain creditor waiver agreements
and our issuance of common stock to those creditors.
Frontrunner entered into creditor waiver agreements with several of its
identified creditors. All but one of these identified creditors (John Jellinek)
executed the creditor waiver agreements. The following identified creditors
entered into the creditor waiver agreements and we, in turn, issued a total of
925,000 shares of our common stock to Bluestem Capital Partners II, Limited
Partnership, Mesirow Capital Partners VI, The Edgewater Private Equity Fund II,
L.P., 21st Century Communications Partners L.P., 21st Century Communications T-E
Partners, L.P., 21st Century Communications Foreign Partners, L.P., Philip
Kenny, and James Cuppini, and reserved the remaining 75,000 shares, for possible
later issuance to John Jellinek. The shares of common stock distributed among
the creditors was determined pursuant to negotiations between the creditors and
Frontrunner, rather than allocated pursuant to a formula. The most recent
private placement of our common stock was made at $1.35 per share, which was
assumed to constitute its fair market value. Bluestem Capital Partners II,
Limited Partnership, Mesirow Capital Partners VI, The Edgewater Private Equity
Fund II, L.P., 21st Century Communications Partners L.P., 21st Century
Communications T-E Partners, L.P., 21st Century Communications Foreign Partners,
L.P. and Mr. Cuppini, in addition to being creditors were also shareholders of
Frontrunner. Each of the entities (other than 21st Century Communications T-E
Partners, L.P., 21st Century Communications Foreign Partners) had one director
sitting on Frontrunner's six-member board of directors. Mr. Kenny, who currently
sits on our board of directors, also sat on the Frontrunner board of directors
and received common stock. Bluestem Capital Partners II, Limited Partnership,
Mesirow Capital Partners VI, The Edgewater Private Equity Fund II, L.P., 21st
Century Communications Partners L.P., 21st Century Communications T-E Partners,
L.P., 21st Century Communications Foreign Partners, L.P. and Mr. Kenny, together
were the majority shareholders of each class of voting stock of Frontrunner that
authorized the merger. Mr. Cuppini is the current and past President of
Frontrunner.
Fifteen percent (15%) of the 925,000 shares issued to the participating
creditors, approximately 138,750 shares was deposited in escrow to be held for a
year for the purpose of settling or litigating claims. Mr. Kenny is the owner of
the escrow agent for this account.
The Company relied upon the exemption from registration available under
Section 4(2) of the Securities Act of 1933, as amended. The Creditors were
accredited investors, small in number, and all of them had access to information
about the Company, Frontrunner and the Merger. No general solicitation or
advertising was employed in connection with any of the above sale of
unregistered securities.
II-4
Nexvu Technologies, LLC
On June 27, 2003, Nexvu issued a total of 2,837,950 Class A membership
interests to Craig Siegler, the promoter of Nexvu. The consideration for these
shares was $1,034,907, which had been advanced by Mr. Siegler to Nexvu during
the period from the inception of Nexvu on February 28, 2002 through June 27,
2003. The issuance of the shares eliminated our obligation to repay those
advances. Between June and September 2003, Nexvu issued a total of 5,619,375 of
Class B member interests for total consideration of $1,825,000. In September and
December 2003, Nexvu issued a total of $1,725,000 in convertible promissory
notes to accredited investors. The notes were convertible into a total of
5,311,465 Class B membership interests in Nexvu. Promissory notes having a
principal value of $1,175,000 were converted into Class B membership interests
on December 31, 2003. The total dollar amount of loans converted to membership
interests was $2,209,907, consisting of this $1,175,000 and the $1,034,907
advanced by Mr. Siegler through June 27, 2003. Promissory notes having a
principal value of $550,000 were converted into shares of our common stock in
the merger. Nexvu also issued warrants to purchase a total of 638,889 membership
interests to the purchasers of the convertible notes.
ITEM 27. EXHIBITS
See Exhibit Index.
ITEM 28. UNDERTAKINGS
(a) The Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Act;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement which,
individually or together, represent a fundamental change in
the information in the registration statement; and
(iii) To include any additional or changed material information with
respect to the plan of distribution;
Provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) above do not apply
if the information required to the included in a post-effective amendment by
those paragraphs is contained in periodic reports filed by the Registrant
pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), that are incorporated by reference in the
registration statement.
(2) That, for the purpose of determining any liability under the Act,
each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
II-5
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the Registrant
pursuant to the foregoing provisions, or otherwise, the Registrant has
been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and
is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
II-6
SIGNATURES
In accordance to the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized this amended
registration statement to be signed on its behalf by the undersigned, in the
City of Schaumburg, State of Illinois, on January 14, 2005.
CAPITAL GROWTH SYSTEMS, INC.
(REGISTRANT)
By: /s/ Lee Wiskowski
-----------------------------------------
Lee Wiskowski, Co-Chief Executive Officer
II-7
POWER OF ATTORNEY
Each person whose signature appears below as a Director and/or officer
of Capital Growth Systems, Inc. hereby constitutes and appoints Lee Wiskowski,
Douglas Stukel and Derry L. Behm their true and lawful attorney-in-fact and
agent, with full power of substitution, for him and in his name, place and
stead, in any and all capacities, to sign any and all subsequent amendments
(including post-effective amendments) to this Registration Statement, and to
file the same with all exhibits thereto, and all documents in connection
therewith, with the Securities and Exchange Commission, granting unto such
attorneys-in-fact and agents, full power and authority to do and perform each
and every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that such attorneys-in fact and
agents, or either of them, or his or their substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities
indicated.
[Download Table]
SIGNATURE TITLE DATE
--------------------------- --------------------------------- ----------------
/s/ Robert T. Geras Director and Chairman of the Board January 14, 2005
--------------------------
Robert T. Geras
/s/ Douglas Stukel Director, Co-Chief Executive Officer January 14, 2005
--------------------------
Douglas Stukel
/s/ Lee Wiskowski Director, Co-Chief Executive Officer January 14, 2005
--------------------------
Lee Wiskowski
/s/ Philip B. Kenny Director January 14, 2005
--------------------------
Philip B. Kenny
/s/ David A. Beamish Director January 14, 2005
--------------------------
David A. Beamish
/s/ Derry L. Behm Chief Financial Officer January 14, 2005
--------------------------
Derry L. Behm
INDEX OF EXHIBITS
EXHIBIT NO.
2.1 Agreement and Plan of Merger Agreement by and among Capital Growth
Systems, Inc., Nexvu MergerSub, LLC, and Nexvu Technologies, L.L.C.
dated January 28, 2004 (Incorporated by reference to Exhibit 10.1 to
our current report on Form 8-K dated February 11, 2004)
2.2 Agreement and Plan of Merger By and Among Capital Growth Systems, Inc.,
a Florida corporation, Frontrunner Acquisition, Inc., a Delaware
corporation and wholly-owned subsidiary of the Company, and Frontrunner
Network Systems Corp., a Delaware corporation (Incorporated by
reference an exhibit to our current report on Form 8-K filed August 13,
2004).
3.1 Articles of Incorporation (Incorporated by reference to Exhibit 3.1 to
our Registration Statement on Form 10-SB filed with the Commission on
June 20, 2000)
3.2 By-Laws (Incorporated by reference to Exhibit 3.2 to our Registration
Statement on Form 10-QSB filed with the Commission on June 20, 2000)
4.1 Registration Rights Agreement by and among Capital Growth Systems, Inc.
and certain shareholders of the Company dated as of December 16, 2003
(Incorporated by reference to Exhibit 4.1 to our current report on Form
8-K dated February 11, 2004)
4.2 Form of Warrant to Purchase common stock of Capital Growth Systems,
Inc. for bridge lenders (Incorporated by reference to Exhibit 4.2 to
our report on Form 10-KSB dated May 5, 2004)
4.3 Form of Warrant to Purchase common stock of Capital Growth Systems,
Inc. issued in connection with Advisory Service Agreements dated March
31, 2004 (Incorporated by reference to Exhibit 4.3 to our report on
Form 10-KSB dated May 5, 2004)
4.4 Form of Warrant to Purchase common stock of Capital Growth Systems,
Inc. for selling shareholder (Incorporated by reference to Exhibit 4.4
to our report on Form 10-KSB dated May 5, 2004)
4.5 2003 Long-Term Incentive Plan (Incorporated by reference to Exhibit 4.5
to our report on Form 10-KSB dated May 5, 2004)
5.1 Opinion of Schneider Weinberger & Beilly, LLP regarding legality
10.1 Loan Conversion Agreement by and among Nexvu Technologies, L.L.C.,
Robert T. Geras, Balkin Family L.P., Carl Greer Trust, David J. Lies,
Linda M. Lies and Karen Jaimovich dated as of December 31, 2003
(Incorporated by reference to Exhibit 10.2 to our current report on
Form 8-K dated February 11, 2004)
II-8
10.2 Indemnification Agreement by and among Capital Growth Systems, Inc.,
Nexvu Technologies, L.L.C., Rory Herriman, Douglas Stukel and Lee
Wiskowski dated as of January 28, 2004 (Incorporated by reference to
Exhibit 10.4 to our current report on Form 8-K dated February 11, 2004)
10.3 Second Amended and Restated Operating Agreement of Nexvu Technologies,
LLC (Incorporated by reference to Exhibit 10.3 to our report on Form
10-KSB dated May 5, 2004)
10.4 Advisory Services Agreement dated March 31, 2004 by and between Capital
Growth Systems, Inc. and Lee Wiskowski (Incorporated by reference to
Exhibit 10.4 to our report on Form 10-KSB dated May 5, 2004)
10.5 Advisory Services Agreement dated March 31, 2004 by and between Capital
Growth Systems, Inc. and Douglas Stukel (Incorporated by reference to
Exhibit 10.5 to our report on Form 10-KSB dated May 5, 2004)
10.6 Employment Agreement dated April 26, 2004 by and between Capital Growth
Systems, Inc. and Scott Allen (Incorporated by reference to Exhibit
10.6 to our report on Form 10-KSB dated May 5, 2004)
10.7 Employment Agreement dated April 26, 2004 by and between Capital Growth
Systems, Inc. and Rory Herriman (Incorporated by reference to Exhibit
10.7 to our report on Form 10-KSB dated May 5, 2004)
10.8 Subscription Agreement dated October 1, 2003, by and between Capital
Growth Systems, Inc. and Grander, LLC d/b/a Capital Strategies Group,
an Illinois limited liability company (Incorporated by reference to
Exhibit 10.8 to our report on Form 10-KSB/A filed August 26, 2004)
10.9 Software License Agreement dated as of August 31, 2002, by and between
Hifn, Inc. and Siegler Technology & Development, L.L.C. for MeterFlow
Software (Incorporated by reference to Exhibit 10.9 to our report on
Form 10-KSB/A filed August 26, 2004)
10.10 Software License Agreement dated as of August 31, 2002, by and between
Hifn, Inc. and Siegler Technology & Development, L.L.C. for MeterWorks
Software (Incorporated by reference to Exhibit 10.9 to our report on
Form 10-KSB/A filed August 26, 2004)
10.11 Form of Agreement between Capital Growth Systems, Inc. and Value-Added
Resellers (Incorporated by reference to Exhibit 10.9 to our report on
Form 10-KSB/A filed August 26, 2004)
10.12 Creditor Waiver and Consent Agreement By and Among Frontrunner Network
Systems Corp., Capital Growth Systems, Inc., a Florida corporation, and
Bluestem Capital Partners II, Limited Partnership, Mesirow Capital
Partners VI, The Edgewater Private Equity Fund II, L.P., Philip Kenny
and James Cuppini (Incorporated by referred to an exhibit to our
current report on Form 8-K filed September 20, 2004)
II-9
10.13 Escrow Agreement By and Among Capital Growth Systems, Inc., a Florida
corporation, Frontrunner Representative, Inc., as the escrow agent, and
Bluestem Capital Partners II, Limited Partnership, Mesirow Capital
Partners VI, The Edgewater Private Equity Fund II, L.P., Philip Kenny
and James Cuppini (Incorporated by referred to an exhibit to our
current report on Form 8-K filed September 20, 2004)
16.1 Letter from Salberg & Co., P.A. dated April 30, 2004 regarding Change
in Auditors (Incorporated by reference to Exhibit 16.1 to our current
report on Form 8-K filed with the commission on May 3, 2004)
16.2 Letter from Salberg & Co., P.A. dated May 12, 2004 regarding Change in
Auditors (Incorporated by reference to Exhibit 16.1 to our current
report on Form 8-K filed with Commission on May 13, 2004)
21.1 List of Subsidiaries (Incorporated by reference to Exhibit 21.1 to our
report on Form 10-KSB dated May 5, 2004)
23.1 Consent of Russell & Atkins, PLC (Replaces Exhibit 23.1 to our
registration statement on Form SB-2 dated May 6, 2004)
23.2 Consent of Plante Moran
23.3 Consent of Schneider Weinberger & Beilly, LLP. (Included in Exhibit No.
5.1 above)
24.1 Power of Attorney (included as part of the signature page of our
registration statement on Form SB-2 dated January 14, 2005)
99.1 Separation and Severance Agreement Between Capital Growth Systems,
Inc., a Florida corporation, and Scott Allen, dated August 30, 2004
(Incorporated by reference as an exhibit to our current report on Form
8-K filed September 3, 2004)
II-10
Dates Referenced Herein and Documents Incorporated by Reference
| Referenced-On Page |
|---|
| This ‘SB-2/A’ Filing | | Date | | First | | Last | | | Other Filings |
|---|
| |  |
| | 4/25/14 | | 41 |
| | 3/31/07 | | 45 | | 108 | | | 10QSB, NT 10-Q |
| | 1/2/07 | | 39 |
| | 12/31/06 | | 13 | | 109 | | | 10KSB, 10KSB/A, NT 10-K |
| | 11/1/06 | | 94 |
| | 12/31/05 | | 30 | | | | | 10KSB, 5, NT 10-K |
| | 9/30/05 | | 45 | | | | | 10QSB |
| Filed on: | | 1/14/05 | | 1 | | 117 | | | 10KSB/A, 10QSB/A |
| | 12/31/04 | | 4 | | 42 | | | 10KSB, NT 10-K |
| | 11/23/04 | | 41 |
| | 11/11/04 | | 58 |
| | 11/10/04 | | 58 |
| | 9/30/04 | | 4 | | 105 | | | 10QSB, 10QSB/A |
| | 9/20/04 | | 116 | | 117 | | | 8-K |
| | 9/15/04 | | 85 | | 104 |
| | 9/14/04 | | 3 | | 109 | | | 8-K, 8-K/A |
| | 9/3/04 | | 117 | | | | | 8-K |
| | 8/31/04 | | 14 | | | | | 3 |
| | 8/30/04 | | 14 | | 117 | | | 3, 8-K |
| | 8/26/04 | | 116 | | | | | 10KSB/A |
| | 8/13/04 | | 115 | | | | | 8-K |
| | 7/1/04 | | 40 |
| | 5/21/04 | | 85 |
| | 5/13/04 | | 117 | | | | | 8-K/A, SB-2/A |
| | 5/12/04 | | 117 |
| | 5/6/04 | | 117 | | | | | 10KSB, SB-2 |
| | 5/5/04 | | 115 | | 117 | | | 8-K/A |
| | 5/3/04 | | 44 | | 117 | | | 8-K |
| | 4/30/04 | | 117 |
| | 4/28/04 | | 63 |
| | 4/26/04 | | 40 | | 116 | | | 4, 8-K, 8-K/A |
| | 4/15/04 | | 14 | | 108 |
| | 3/31/04 | | 23 | | 116 | | | 10QSB, 4, NT 10-Q |
| | 3/1/04 | | 72 | | 84 |
| | 2/11/04 | | 115 | | 116 | | | 8-K |
| | 1/28/04 | | 3 | | 116 | | | 4, 4/A, 8-K, 8-K/A |
| | 1/1/04 | | 103 |
| | 12/31/03 | | 3 | | 115 | | | 10KSB, 10KSB/A |
| | 12/16/03 | | 44 | | 115 | | | 3 |
| | 12/15/03 | | 98 | | | | | 3, 3/A |
| | 12/1/03 | | 45 | | 108 |
| | 11/15/03 | | 13 |
| | 10/22/03 | | 12 | | 79 |
| | 10/1/03 | | 72 | | 116 |
| | 8/31/03 | | 81 | | | | | 10QSB |
| | 7/30/03 | | 97 |
| | 6/30/03 | | 17 | | 71 |
| | 6/27/03 | | 47 | | 111 |
| | 6/15/03 | | 70 |
| | 6/10/03 | | 94 |
| | 5/31/03 | | 6 | | 71 | | | 10KSB |
| | 5/23/03 | | 85 |
| | 5/15/03 | | 71 |
| | 4/30/03 | | 70 |
| | 3/31/03 | | 60 | | 99 |
| | 2/1/03 | | 70 |
| | 1/31/03 | | 70 |
| | 1/29/03 | | 12 | | 79 |
| | 1/1/03 | | 103 |
| | 12/31/02 | | 6 | | 79 |
| | 12/15/02 | | 70 |
| | 8/31/02 | | 22 | | 116 | | | 10QSB |
| | 5/31/02 | | 22 | | 63 | | | 10KSB, 10KSB/A |
| | 4/1/02 | | 96 |
| | 3/31/02 | | 61 | | 89 |
| | 2/28/02 | | 3 | | 111 | | | 10QSB/A |
| | 12/15/01 | | 69 |
| | 10/1/01 | | 79 |
| | 7/20/01 | | 69 |
| | 7/1/01 | | 69 |
| | 6/30/01 | | 69 |
| | 6/20/00 | | 115 | | | | | 10SB12G |
| | 6/15/00 | | 69 |
| | 9/29/99 | | 3 | | 68 |
| List all Filings |
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