UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934
Date of Report: September 14, 2004
(Date of earliest event reported)
CAPITAL GROWTH SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Florida 0-30831 65-0953505
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File No.) Identification No.)
1100 East Woodfield Road
Schaumburg, Illinois 60173
(Address of Principal Executive Offices)
(630) 872-5800
Registrant's telephone number including area code)
NOT APPLICABLE
(Former name or former address, if changed since last report)
--------------------------
Check the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation of the registrant under any of the
following provisions (see General Instruction A.2. below):
/ / Written communications pursuant to Rule 425 under the Securities Act (17
CFR 230.425)
/ / Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17
CFR 240.14a-12)
/ / Pre-commencement communications pursuant to Rule 14d-2(b) under the
Exchange Act (17 CFR 240.14d-2(b))
/ / Pre-commencement communications pursuant to Rule 13e-4(c) under the
Exchange Act (17 CFR 240.13e-4(c))
ITEM 1.01 ENTRY INTO A MATERIAL DEFINITIVE AGREEMENT.
The information set forth in Item 2.01 and Item 3.02 of this Current
Report on Form 8-K is incorporated by reference herein.
ITEM 2.01 COMPLETION OF ACQUISITION OR DISPOSITION OF ASSETS.
On August 9, 2004, Capital Growth Systems, Inc. (the "Company")
executed an Agreement and Plan of Merger (the "Merger Agreement") by and among
the Company, Frontrunner Network Systems, Corp., a Delaware corporation
("Frontrunner") and Frontrunner Acquisition, Inc., a Delaware corporation and
wholly-owned subsidiary of the Company ("Mergeco"). A copy of the Merger
Agreement was previously filed by the Company as an exhibit to its Current
Report on Form 8-K, filed August 13, 2004 (SEC File No. 000-30831), and is
incorporated herein by reference.
The transaction was a reverse triangular merger, whereby Mergeco merged
with and into Frontrunner, with Frontrunner being the surviving corporation (the
"Merger"). The Merger and Merger Agreement were approved by the Board of
Directors of the Company, Frontrunner and Mergeco, and by a majority of the
shareholders of Frontrunner. The Company filed the certificate of merger
relating to the Merger with the Secretary of State of the State of Delaware on
September 15, 2004, at which time the Merger became effective (the "Effective
Time"). 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) "Creditors" (as that term is defined herein), executing a "Creditor Waiver
Agreement" (as that term is defined herein), (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
to 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 Agreement. Frontrunner satisfied
certain of the conditions precedent and the Company waived the rest. Frontrunner
entered into a Creditor Waiver Agreement with five (5) Creditors as described
more fully herein. Execution of the Creditor Waiver Agreement by two of the
Creditors and the remaining conditions precedent were waived by the Company.
Prior to the entry into the Merger Agreement, Frontrunner had
outstanding the following shares of capital stock: (i) 222.184 shares of
nonvoting Eight Percent (8%) Senior Preferred Stock, par value $100.00 per share
(the "Senior Preferred Stock"); (ii) 2,000 shares of Junior Convertible
Preferred Stock, par value $100.00 per share (the "Junior Preferred Stock");
(iii) 4,050 shares of Series A Convertible Preferred Stock, par value $100.00
per share (the "Convertible Preferred Stock"); and (iv) 87,155,413 shares of
common stock, par value $0.001 per share (the "Frontrunner Common Stock"). No
shares of capital stock were issued by Frontrunner since entry into the Merger
Agreement.
In consideration for Frontrunner shares, the Company will pay out of
its operating capital $222.18 in the aggregate in exchange for all of the Senior
Preferred Stock, upon their surrender.
2
All of the shares of the Junior Preferred Stock, the Convertible Preferred Stock
and the Frontrunner Common Stock, and all outstanding unexpired and unexercised
options and warrants to acquire Frontrunner Common Stock were cancelled without
consideration therefore. The Senior Preferred Stock was entitled to a
liquidation preference of $1,000 per share and accordingly, all other shares of
stock of the Company were subordinate to such preference.
Each share of Senior Preferred Stock outstanding immediately prior to
the Effective Time was cancelled and extinguished and converted automatically
into the right to receive $1.00 per share, upon their surrender. Each share of
Junior Preferred Stock, Convertible Preferred Stock and Frontrunner Common Stock
and any outstanding options, warrants, convertible notes, or other convertible
securities or other rights to acquire shares of the Company was extinguished and
cancelled without conversion or exercise, and those holders are not entitled to
any payment of any kind. Each share of stock owned by the Company or any direct
or indirect wholly-owned subsidiary of the Company immediately prior to the
Effective Time was cancelled and extinguished without any conversion thereof.
As additional consideration given by the Company in connection with the
Merger Agreement (but not as part of the Merger consideration), and for the
benefit of Frontrunner, prior to the Effective Time, the Company reserved for
issuance up to 1,000,000 shares of its common stock, $.0001 par value to be
issued to certain "Creditors" (as that term is defined herein) of Frontrunner in
exchange for the cancellation of indebtedness to Frontrunner by those Creditors
in the approximate amount of $2,252,423 (excluding accrued unpaid interest and
other claims), pursuant to Creditor Waiver and Consent Agreement ("Creditor
Waiver Agreement"), a counterpart executed copy of which is attached as exhibit
10.1 to this Current Report on Form 8-K, and incorporated by reference herein.
The "Creditors" consist of: Bluestem Capital Partners II, Limited Partnership
("Bluestem"); Mesirow Capital Partners VI ("Mesirow"); The Edgewater Private
Equity Fund II, L.P. ("Edgewater"); 21st Century Communications Partners L.P.,
21st Century Communications T-E Partners, L.P., 21st Century Communications
Foreign Partners, L.P., (collectively, "21st Century"); Philip Kenny ("Kenny");
John Jellinek ("Jellinek"); and James Cuppini ("Cuppini").
The 1,000,000 shares of common stock were distributed among the
Creditors pursuant to negotiations between the Creditors and Frontrunner, rather
than allocated pursuant to a formula. Based on these negotiations, the 1,000,000
shares of common stock were to be issued in the amounts and to the entities as
set forth below:
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
Jellinek -0- 75,000 $ 101,250.00
Cuppini -0- 100,000 $ 135,000.00
---------- --------- --------------
TOTAL $2,252,423 1,000,000 $ 1,350,000.00
3
All but two of the Creditors (21st Century and Jellinek) executed the
Creditor Waiver Agreement. On September 14, 2004 (and prior to the Effective
Time), the Company issued a total of 889,122 shares of common stock to Bluestem,
Mesirow, Edgewater, Kenny and Cuppini (together, the "Participating Creditors"),
and reserved the remaining 110,878 shares, for possible later issuances to the
non-participating Creditors. The most recent private placement of the Company
common stock was made at $1.35 per share, which is assumed to constitute its
fair market value. The shares were issued in the amounts and to the entities set
forth below:
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
Kenny -0- 75,000 $ 101,250.00
Cuppini -0- 100,000 $ 135,000.00
---------- ------- --------------
TOTAL $1,955,090 889,122 $ 1,200,314.70
Fifteen percent (15%) of the 889,122 shares issued to the Participating
Creditors, approximately 133,368 shares (the "Collateral"), was deposited in
escrow pursuant to the Escrow Agreement, dated September 14, 2004, by and among
the Company, Frontrunner Representative, Inc., as the escrow agent
("Representative"), and the Participating Creditors, a copy of the Escrow
Agreement is attached as exhibit 10.2 to this Current Report on Form 8-K, and
incorporated by reference herein. The Escrow Agreement will terminate on the
first anniversary of the date of the Escrow Agreement (the "Escrow Termination
Date"). During such time as the Collateral is held by the Representative, the
Participating Creditors retain all legal and beneficial ownership rights. Upon
the Company delivering to Representative a Claim Notice, as that term is defined
in the Creditor Waiver Agreement, prior to the Escrow Termination Date,
Representative shall determine whether to settle or litigate the Claim Notice.
Upon settlement or upon delivery of a certified copy of final judgment or
decree, the Representative shall deliver to the Company that portion of the
Collateral equal in value to the Indemnifiable Damages, as that term is defined
in the Escrow Agreement.
Bluestem, Mesirow, Edgewater, 21st Century and Mr. Cuppini, in addition
to being creditors were also shareholders of Frontrunner. Each of the entities
(other than 21st Century) had one Director sitting on Frontrunner's six-member
Board of Directors. Mr. Kenny also sat on the Board of Directors and received
common stock. The Merger and Merger Agreement were approved by the unanimous
written consent of the Board of Directors of Frontrunner and the written consent
of a majority of the shareholders of Frontrunner. Bluestem, Mesirow, Edgewater,
21st Century and Mr. Kenny, together were the majority shareholders of each
class of voting stock of Frontrunner, and authorized the Merger and Merger
Agreement, by shareholder written consent pursuant to ss. 228 of the DGCL. Mr.
Kenny is the sole shareholder of the Representative.
Each share of $0.00001 par value common stock of Mergeco issued to the
Company immediately prior to the Effective Time, was by virtue of the Merger,
converted into one share of common stock of Frontrunner.
4
The Merger Agreement further provided that: (i) the officers of
Frontrunner immediately prior to the Effective Time would continue to serve as
the officers of Frontrunner, as the surviving corporation; and (ii) the
directors of Mergeco would become the directors of Frontrunner, as the surviving
corporation.
The Company has registered with the Securities and Exchange Commission
under the Securities and Exchange Act of 1934 and has filed a registration
statement under Form SB-2 to register for resale the shares of common stock
issued per its most recent private placement as well as certain other common
stock either issued or underlying certain outstanding warrants. There is
presently no public market for the common stock, and it is not expected that the
registration statement will be declared effective until some time following the
closing of the Merger.
The descriptions of the Merger, Merger Agreement, Creditor Waiver
Agreement, and Escrow Agreement included in this Current Report on Form 8-K are
not complete, and are qualified in their entirety by reference to the Merger
Agreement, Creditor Waiver Agreement, and Escrow Agreement.
ITEM 3.02 UNREGISTERED SALES OF EQUITY SECURITIES.
On September 14, 2004, the Company issued 889,122 shares of the
Company's common stock. The issuance was pursuant to the Merger and Merger
Agreement and the Creditor Waiver Agreements discussed in Section 2.01 above and
fully incorporated herein. In connection with the issuance pursuant to the
Merger, 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.
ITEM 9.01 FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial statements of businesses acquired.
The Company will file the financial statements required by Item 9.01(a)
of Current Report on Form 8-K within the time period specified in Item
9.01(a)(4) of Current Report on Form 8-K.
(b) Pro forma financial information.
The Company will file the pro forma financial information required by
Item 9.01(b) of Current Report on Form 8-K within the time period specified in
Item 9.01(b)(2) of Current Report on Form 8-K.
(c) Exhibits.
Exhibit 2.1-- 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 Capital Growth Systems, Inc., and
Frontrunner Network Systems, Corp., a Delaware corporation, was previously filed
by the Company as an exhibit to its Current Report
5
on Form 8-K, filed August 13, 2004 (SEC File No. 000-30831), and is incorporated
herein by reference.
Exhibit 10.1-- 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.
Exhibit 10.2-- 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.
6
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Dated: September 20, 2004
CAPITAL GROWTH SYSTEMS, INC.
By: /s/ D. Skip Behm
--------------------------------
Its: D. Skip Behm, CFO
7
EXHIBIT INDEX
Exhibit 2.1-- 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 Capital Growth Systems, Inc., and
Frontrunner Network Systems, Corp., a Delaware corporation, was previously filed
by the Company as an exhibit to its Current Report on Form 8-K, filed August 13,
2004 (SEC File No. 000-30831), and is incorporated herein by reference.
Exhibit 10.1-- 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.
Exhibit 10.2-- 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.