UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
Exhibit
99.3
UNAUDITED
PRO FORMA COMBINED FINANCIAL STATEMENTS
On
September 8, 2006, Capital Growth Systems, Inc., a Florida corporation (the
“Company” or “CGSI”), entered into an Agreement and Plan of Merger (the “20/20
Merger Agreement”) by and among the Company, 20/20 Merger Sub, Inc., a Delaware
corporation and a wholly owned subsidiary of the Company (“20/20 Mergeco”), and
20/20 Technologies, Inc., a Delaware corporation (“20/20”). Also party to the
Agreement for the specific purposes called for therein was 20/20 Representative,
Inc. (“20/20 Representative”). The transactions contemplated pursuant to the
20/20 Merger Agreement (the “20/20 Acquisition”) were consummated on September
8, 2006 (the “Closing Date”).
Pursuant
to the terms of the 20/20 Merger Agreement, the Company agreed to acquire all
of
the capital stock of 20/20 in exchange for certain cash, stock consideration
and
the assumption of certain indebtedness. The Company and 20/20 effected the
transaction through a reverse triangular merger whereby 20/20 Mergeco was
merged with 20/20, and 20/20 was the surviving corporation (the
“Merger”).
The
aggregate consideration paid to 20/20 in connection with the Merger was
$8,727,050, comprised of debt refinanced in the amount of $3,559,416 and stock
valued at $5,167,634 and comprised of 3,899,315 shares of the Company's common
stock, par value of $0.0001 (“Common Stock”) and 2,516.10 shares of the
Company's Series B preferred stock, par value $.0001 (the “Series B Preferred
Stock”, and collectively with the shares of Common Stock, the “Transaction
Shares”). The value of the Transaction Shares was based on the average closing
price of the Company's Common Stock for the ten trading days immediately
preceding the Closing Date and was equal to $0.68 per share. The Series B
Preferred Stock, by its terms will automatically convert into an additional
3,700,147 shares of common stock upon the filing of articles of amendment to
the
Company's articles of incorporation authorizing the issuance of not less than
50,000,000 shares of common stock, and it enjoys a liquidation preference prior
to conversion equal to $0.68 per share, subject to adjustment based upon a
true
up of the outstanding assets and liabilities of 20/20 as of the Closing Date.
The
aggregate consideration to be paid is subject to a net asset adjustment with
respect to 20/20 which was originally anticipated to be completed by October
8,
2006 (and which was completed as of February 28, 2007). This adjustment is
based
upon a true up of the outstanding indebtedness of 20/20 as of the Closing Date
and the outstanding cash and receivables as of the Closing Date (with an
adjustment in the share issuance up or down to the extent the net indebtedness
of 20/20 was greater or less than the amounts specified above). A portion of
the
Transaction Shares have been held back as security in connection with certain
indemnification obligations of 20/20 and its stockholders. As a result of the
ultimate adjustment, the number of shares of CGSI Series B Preferred Stock
was
reduced to 2,516.10 shares, representing 3,700,147 shares of CGSI Common Stock
on an as converted to Common Stock basis.
The
following unaudited pro forma combined financial statements are presented to
illustrate the estimated effects of Company’s acquisition of 20/20 on September
8, 2006 (the “Transaction”) on the Company’s historical financial position and
its results of operations. The Company has derived its historical financial
data
for the year ended December 31, 2005 from its audited financial statements
included in the Annual Report on Form 10-KSB for the year ended
December 31, 2005. The Company has derived its historical financial data as
of and for the six months ended June 30, 2006 from its unaudited financial
statements included in the Form 10-QSB for the quarter ended June 30, 2006.
The
Company has derived 20/20’s historical financial data for the year ended
December 31, 2005 from the audited statement of operations included in this
Form
8-K/A. The Company has compiled 20/20’s historical six month period ended
June 30, 2006 statement of operations from the Company’s books and
records.
The
unaudited pro forma combined statements of operations for the year ended
December 31, 2005 and for the six months ended June 30, 2006 assume that
the Transaction took place on January 1, 2005. The unaudited pro forma
combined balance sheet as of June 30, 2006 assumes that the Transaction
took place on that date.
The
information presented in the unaudited pro forma combined financial statements
does not purport to represent what the Company’s financial position or results
of operations would have been had the Transaction occurred as of the dates
indicated, nor is it indicative of its future financial position or results
of
operations for any period. In addition, the Company and 20/20 may have performed
differently had they always been combined. You should not rely on this
information as being indicative of the historical results that would have been
achieved had the companies always been combined or the future results that
the
combined company will experience after the acquisition.
The
pro
forma adjustments are based upon available information and certain assumptions
that the Company believes are reasonable under the circumstances and which
are
expected to have a continuing effect on the combined results. A final
determination of fair values relating to the 20/20 acquisition may differ
materially from the preliminary estimates and will include management’s final
valuation of the fair value of assets acquired and liabilities assumed. This
final valuation will be based on the actual net tangible assets of 20/20 that
exist as of the date of the completion of the Transaction. The final valuation
may change the allocations of the purchase price, which could affect the fair
value assigned to the assets and liabilities and could result in a change to
the
unaudited pro forma combined financial statements data.
These
unaudited pro forma combined financial statements should be read in conjunction
with the accompanying notes and assumptions and the historical financial
statements and related notes contained in the annual, quarterly and other
reports filed by the Company with the SEC.
UNAUDITED
PRO FORMA COMBINED STATEMENT OF OPERATIONS
OF
CAPITAL GROWTH SYSTEMS, INC. (CGSI) & 20/20 TECHNOLOGIES, INC.
(20/20)
For
the year ended December 31, 2005
Historical
|
Pro Forma
|
||||||||||||
|
CGSI
|
20/20
|
Adjustments
|
Combined
|
|||||||||
Revenues:
|
|
|
|
|
|||||||||
Total
revenues
|
$
|
15,656,226
|
1,914,231
|
—
|
17,570,457
|
||||||||
|
|||||||||||||
Total
cost of revenues
|
8,520,909
|
—
|
—
|
8,520,909
|
|||||||||
|
|||||||||||||
Gross
margin
|
7,135,317
|
1,914,231
|
—
|
9,049,548
|
|||||||||
|
|||||||||||||
Operating
Expenses:
|
|||||||||||||
Compensation
|
5,446,071
|
2,707,808
|
—
|
8,153,879
|
|||||||||
Travel
and entertainment
|
248,279
|
497,923
|
—
|
746,202
|
|||||||||
Occupancy
|
490,099
|
348,138
|
—
|
838,237
|
|||||||||
Professional
fees
|
639,965
|
867,621
|
—
|
1,507,586
|
|||||||||
Insurance
|
319,533
|
—
|
—
|
319,533
|
|||||||||
Depreciation
and amortization
|
852,000
|
140,369
|
500,000
|
(7) |
1,492,369
|
||||||||
Other
operating expenses
|
1,023,619
|
333,721
|
—
|
1,357,340
|
|||||||||
Merger
& acquisition costs
|
—
|
2,295,956
|
—
|
2,295,956
|
|||||||||
|
|||||||||||||
Total
operating expenses
|
9,019,566
|
7,191,536
|
500,000
|
(7) |
16,711,102
|
||||||||
|
|||||||||||||
Loss
from Operations
|
(1,884,249
|
)
|
(5,277,305
|
)
|
(500,000
|
) |
(7,661,554
|
) | |||||
|
|||||||||||||
Interest
expense, net
|
347,191
|
776,512
|
459,000
|
(1)
|
1,582,703
|
||||||||
|
|||||||||||||
Net
loss before income taxes
|
$
|
(2,231,440
|
)
|
$
|
(6,053,817
|
)
|
$
|
(959,000
|
)
|
$
|
(9,244,257
|
)
|
|
Income
taxes
|
61,448
|
—
|
—
|
61,448
|
|||||||||
Net
loss
|
$
|
(2,292,888
|
)
|
$
|
(6,053,817
|
)
|
$
|
(959,000
|
)
|
$
|
(9,305,705
|
)
|
|
|
|||||||||||||
Loss
per share
|
$
|
(.13
|
)
|
$
|
(.45
|
)
|
|||||||
Weighted
average shares outstanding:
|
16,984,606
|
3,899,315
|
(3 )
|
20,883,921
|
See
notes
to unaudited pro forma combined consolidated financial statements
2
UNAUDITED
PRO FORMA COMBINED BALANCE SHEET
OF
CAPITAL GROWTH SYSTEM, INC. (CGSI) & 20/20 TECHNOLOGIES, INC.
(20/20)
June
30, 2006
Historical
|
Pro
Forma
|
||||||||||||
|
CGSI
|
20/20
|
Adjustments
|
Combined
|
|||||||||
ASSETS
|
|
|
|
|
|||||||||
Current
assets:
|
|
|
|
|
|||||||||
Cash
|
$
|
5,221
|
$
|
15,429
|
$
|
—
|
$
|
20,650
|
|||||
Accounts
receivable, net
|
1,757,809
|
236,965
|
—
|
1,994,774
|
|||||||||
Inventories,
net
|
1,481,639
|
—
|
—
|
1,481,639
|
|||||||||
Prepaid
expenses
|
138,780
|
20,159
|
—
|
158,939
|
|||||||||
Other
current assets
|
14,583
|
—
|
—
|
14,583
|
|||||||||
|
|||||||||||||
Total
current assets
|
3,398,032
|
272,553
|
—
|
3,670,585
|
|||||||||
|
|||||||||||||
Fixed
Assets, net accumulated depreciation
|
906,028
|
17,817
|
—
|
923,845
|
|||||||||
Software
license fees
|
18,911
|
—
|
—
|
18,911
|
|||||||||
Intangible
assets, net
|
2,529,111
|
—
|
5,185,400
|
(2) |
7,714,511
|
||||||||
Goodwill
|
3,965,543
|
—
|
7,576,151
|
(2) |
11,541,694
|
||||||||
Other
assets
|
37,188
|
—
|
—
|
37,188
|
|||||||||
|
|||||||||||||
|
$
|
10,854,813
|
$
|
290,370
|
$
|
12,761,551
|
$
|
23,906,734
|
|||||
|
|||||||||||||
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|||||||||||||
Current
liabilities:
|
|||||||||||||
Current
maturities of debt
|
$
|
3,674,690
|
$
|
4,669,398
|
$
|
1,257,991
|
$
|
9,602,079
|
|||||
(1,257,991
|
)(5)
|
||||||||||||
Accounts
payable
|
1,693,920
|
1,533,085
|
250,000
|
(6)
|
2,219,014
|
||||||||
Accrued
expenses
|
1,498,931
|
791,711
|
—
|
2,290,642
|
|||||||||
Deferred
revenues
|
1,683,843
|
436,605
|
—
|
2,120,448
|
|||||||||
Advance
xxxxxxxx
|
810,510
|
—
|
—
|
810,510
|
|||||||||
Other
current liabilities
|
165,612
|
53,126
|
—
|
218,738
|
|||||||||
|
|||||||||||||
Total
current liabilities
|
9,527,506
|
7,483,925
|
250,000
|
17,261,431
|
|||||||||
|
|||||||||||||
Debt,
net of current maturities
|
713,519
|
150,362
|
—
|
863,881
|
|||||||||
|
|||||||||||||
Total
liabilities
|
10,241,025
|
7,634,287
|
250,000
|
18,125,312
|
|||||||||
|
|||||||||||||
Shareholders’
equity:
|
|||||||||||||
Preferred
Stock
|
—
|
66
|
(66
|
)(4)
|
—
|
||||||||
390 |
(3)
|
||||||||||||
Common
stock
|
1,711
|
230
|
(230
|
)(4)
|
2,101
|
||||||||
5,167,244
|
(3)
|
||||||||||||
Additional
paid-in capital
|
13,009,362
|
7,144,331
|
(7,144,331
|
)(4)
|
18,176,606
|
||||||||
Accumulated
deficit
|
(12,397,285
|
) |
(14,460,099
|
)
|
14,460,099
|
(4)
|
(12,397,285
|
)
|
|||||
Accumulated
other comprehensive loss
|
—
|
(28,445
|
)
|
28,445
|
(4)
|
—
|
|||||||
|
|||||||||||||
Total
shareholders’ equity (deficit)
|
613,788
|
(7,343,917
|
)
|
12,511,551
|
5,781,422
|
||||||||
|
|||||||||||||
Total
liabilities and shareholders’ equity
|
$
|
10,854,813
|
$
|
290,370
|
$
|
12,761,551
|
$
|
23,906,734
|
v
See
notes
to unaudited pro forma combined consolidated financial statements
3
UNAUDITED
PRO FORMA COMBINED STATEMENT OF OPERATIONS
OF
CAPITAL GROWTH SYSTEMS, INC. (CGSI) & 20/20 TECHNOLOGIES, INC.
(20/20)
For
the six months ended June 30, 2006
|
Historical
|
Pro Forma
|
|||||||||||
|
CGSI
|
20/20
|
Adjustments
|
Combined
|
|||||||||
Revenues:
|
|
|
|
|
|||||||||
Total
revenues
|
$
|
7,516,461
|
1,036,788
|
—
|
8,553,249
|
||||||||
|
|||||||||||||
Total
cost of revenues
|
3,838,590
|
—
|
—
|
3,838,590
|
|||||||||
|
|||||||||||||
Gross
margin
|
3,677,871
|
1,036,788
|
—
|
4,714,659
|
|||||||||
|
|||||||||||||
Operating
Expenses:
|
|||||||||||||
Compensation
|
2,902,805
|
927,996
|
—
|
3,830,801
|
|||||||||
Travel
and entertainment
|
112,277
|
187,983
|
—
|
300,260
|
|||||||||
Occupancy
|
272,259
|
172,025
|
—
|
444,284
|
|||||||||
Professional
fees
|
542,305
|
192,650
|
—
|
734,955
|
|||||||||
Insurance
|
159,853
|
—
|
—
|
159.853
|
|||||||||
Depreciation
and amortization
|
408,164
|
12,011
|
250,000
|
(7) |
670,175
|
||||||||
Other
operating expenses
|
453,516
|
100,966
|
—
|
554,482
|
|||||||||
Merger
& acquisition costs
|
—
|
3,730
|
—
|
3,730
|
|||||||||
|
|||||||||||||
Total
operating expenses
|
4,851,179
|
1,597,361
|
250,000
|
6,698,540
|
|||||||||
|
|||||||||||||
Loss
from Operations
|
(1,173,308
|
)
|
(560,573
|
)
|
(250,000
|
) |
(1,983,881
|
)
|
|||||
|
|||||||||||||
Interest
expense, net
|
209,511
|
317,379
|
229,115
|
(1) |
756,005
|
||||||||
|
|||||||||||||
Net
loss before income taxes
|
$
|
(1,382,819
|
) |
$
|
(877,952
|
)
|
$
|
(479,115
|
)
|
$
|
(2,739,886
|
)
|
|
Income
taxes
|
30,151
|
—
|
—
|
30,151
|
|||||||||
Net
loss
|
$
|
(1,412,970
|
)
|
$
|
(877,952
|
)
|
$
|
(479,115
|
)
|
$
|
(2,770,037
|
)
|
|
|
|||||||||||||
Loss
per share
|
$
|
(.08
|
)
|
$
|
(.13
|
)
|
|||||||
Weighted
average shares outstanding:
|
17,066,303
|
3,899,315
|
(3) |
20,965,618
|
See
notes
to unaudited pro forma combined consolidated financial statements
4
NOTES
TO UNAUDITED PROFORMA COMBINED FINANCIAL STATEMENTS
1.
Basis of Pro Forma Presentation
On
September 8, 2006, Capital Growth Systems, Inc., a Florida corporation (the
“Company”), entered into an Agreement and Plan of Merger (the “20/20 Merger
Agreement”) by and among the Company, 20/20 Merger Sub, Inc., a Delaware
corporation and a wholly owned subsidiary of the Company (“20/20 Mergeco”), and
20/20 Technologies, Inc., a Delaware corporation (“20/20”). Also party to the
Agreement for the specific purposes called for therein was 20/20 Representative,
Inc. (“20/20 Representative”). The transactions contemplated pursuant to the
20/20 Merger Agreement (the “20/20 Acquisition”) were consummated on September
8, 2006 (the “Closing Date”).
The
aggregate consideration paid to 20/20 in connection with the Merger was
$8,727,050, comprised of debt refinanced in the amount of $3,559,416 and stock
valued at $5,167,634 and comprised of 3,899,315 shares of the Company's common
stock, par value of $0.0001 (“Common Stock”) and 2,516.10 shares of the
Company's Series B preferred stock, par value $.0001 (the “Series B Preferred
Stock”, and collectively with the shares of Common Stock, the “Transaction
Shares”). The Company’s Series B preferred stock, by its terms will
automatically convert into an additional 3,700,147 shares of common stock upon
the filing of articles of amendment to the Company’s articles of incorporation
authorizing the issuance of not less than 50,000,000 shares of common stock,
and
enjoys a liquidation preference prior to conversion equal to$0.68 per share.
The
unaudited pro forma combined balance sheet at June 30, 2006 is presented to
give
effect to the acquisition of 20/20 by the Company had it been consummated on
that date. The unaudited pro forma combined statements of operations of the
Company and 20/20 for the year ended December 31, 2005 and for the six months
ended June 30, 2006 are presented as if the acquisition took place on January
1,
2005.
The
Company has hired a third-party independent valuation firm to assist in
determining the fair value of the assets acquired and liabilities assumed,
including identifying the value of intangible assets that existed at the date
of
the acquisition of 20/20. Under the purchase method of accounting, the total
estimated consideration as shown in the table below is allocated to 20/20’s
tangible and intangible assets and liabilities based on their estimated fair
values as of June 30, 2006 for purposes of illustrating the unaudited pro forma
combined balance sheet. The estimated consideration is allocated as
follows:
Debt
refinanced
|
3,559,416
|
||||||
Value
of stock issued
|
5,167,634
|
||||||
Professional
fees
|
250,000
|
||||||
Total
purchase price
|
$
|
8,977,050
|
|||||
Assets
and liabilities acquired/assumed
|
|||||||
Current
assets
|
$
|
272,553
|
|||||
Property
and equipment, net
|
17,817
|
||||||
Current
liabilities
|
(4,074,871
|
)
|
|||||
Net
liabilities assumed
|
(3,784,501
|
)
|
|||||
Intangible assets |
5,185,400
|
||||||
Goodwill
|
7,576,151
|
||||||
Total
|
$
|
8,977,050
|
The
excess of the total purchase price over preliminary fair values of all
identifiable assets acquired, net of liabilities assumed, amounted to $12.7
million of which $7.6 million was allocated to goodwill and $5.2 million
intangible assets pending the final valuation being performed by an independent
third-party valuation firm. A final determination of fair values could differ
materially from the preliminary estimates and will include management’s final
valuation of the fair values of assets acquired and liabilities assumed. This
final valuation will be based on the actual net tangible assets of 20/20 that
exist as of the date of the completion of the 20/20 acquisition. The final
valuation will change the allocations of purchase price, which will affect
the
fair value assigned to the assets and liabilities and will result in a change
to
the unaudited pro forma combined financial statements data. Among the factors
that could affect the preliminary fair value estimates are changes in the
amounts allocated to intangible assets, changes in the net realizable value
of
assets, and changes in accrued liability and accounts payable
balances.
2.
Pro Forma Adjustments
Certain
reclassifications have been made to conform 20/20’s historical amounts to the
Company’s financial statement presentation.
The
accompanying unaudited pro forma combined financial statements have been
prepared as if the acquisition was completed on June 30, 2006 for the balance
sheet purposes and as of January 1, 2005 for the statements of operations
purposes and reflect the following pro forma adjustments:
5
(1)
|
This
reflects the interest expense on the notes payable that was issued
as part
of the merger agreement in the amount of $644,000 and $322,000 for
the
twelve month and six month periods ended December 31, 2005 and June
30,
2006 respectively,
and
by imputed interest on the accounts payable converted to debt in
the
amount of $101,000 and $50,000 for the twelve month and six month
periods
ended December 31, 2005 and June 30, 2006 respectively. These amounts
were
offset by interest expense associated with the 20/20 note payable
that was
paid off at closing totaling $286,000 and $143,000, for the twelve
month.
December 31, 2005 and June 30, 2006, respectively.
|
(2)
|
Of
the total purchase price, $7.6 million has been allocated to goodwill.
Goodwill represents the excess of the purchase price over the fair
value
of the underlying net tangible and intangible assets acquired.
20/20,
whose assets include UK-based Magenta, Ltd., a global leader in circuit
pricing and network optimization. The Magenta technology and proprietary
knowledge base is one of a very limited set of databases in the world
and,
to the best of the Company’s knowledge, the only one with competitive
global access information coupled with automation tools for calculating,
configuring and quoting enterprise connectivity solutions. These
capabilities were significant contributing factors to the establishment
of
the purchase price, resulting in the recognition of a significant
amount
of goodwill. In accordance with Statement of Financial Accounting
Standard
No. 142, Goodwill and Other Intangible Assets, goodwill is not
amortized but will be reviewed at least annually for impairment,
or more
frequently if certain triggering events occur. In the event that
management determines that the value of goodwill has become impaired,
the
Company will incur an expense in the amount of the impairment during
the
fiscal quarter in which the determination is made. The Company has
preliminarily allocated $5.2 million to intangible assets related
to a
database, customer lists, and a trade name. The amount will be adjusted
upon the completion of a valuation being performed by an independent
third-party valuation firm.
|
|
|
|
|
(3)
|
Represents
stock valued at $5,167,634 and comprised of 3,899,315 shares of the
Company's common stock, par value of $0.0001 (“Common Stock”) and 2,651.53
shares of the Company's Series B preferred stock, par value $.0001
(the
“Series B Preferred Stock”, and collectively with the shares of Common
Stock, the “Transaction Shares”).
|
|
|
|
|
(4)
|
This
represents the elimination of 20/20’s equity.
|
|
(5)
|
This represents the reclassification of 20/20 accounts payable that were converted into debt as of the acquisition. | |
(6)
|
This represents the accrual for professional fees incurred associated with the acquisition of 20/20. | |
(7) | Amount represents estimated amortization expense related to the acquired intangible assets. |
6