UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

SCHEDULE 14A

(Rule 14a-101)

 

INFORMATION REQUIRED IN PROXY STATEMENT

SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(a) of the Securities

Exchange Act of 1934 (Amendment No. 1)

 

Filed by the Registrant þ

 

Filed by a Party other than the Registrant o

 

Check the appropriate box:

 

þ  Preliminary Proxy Statement

o  Confidential, For Use of the Commission Only (as permitted by Rule 14a-6(e)(2))

o  Definitive Proxy Statement

o  Definitive Additional Materials

o  Soliciting Material Pursuant to §240.14a-12

 

ORION HEALTHCORP, INC.

(Name of Registrant as Specified In Its Charter)

 

(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)

 

Payment of Filing Fee (Check the appropriate box):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

October   , 2006

 

To Our Stockholders:

 

On behalf of the board of directors and management of Orion HealthCorp, Inc., I cordially invite you to attend a special meeting of the stockholders (the “Special Meeting”) to be held on          , November   , 2006, at 8:00 a.m. local time, at 1805 Old Alabama Road, Roswell, Georgia 30076.

 

The attached Notice of Special Meeting and Proxy Statement describe the formal business to be transacted at the Special Meeting. At the Special Meeting stockholders will be asked to approve (i) a proposal amending our certificate of incorporation to increase the aggregate number of shares of authorized capital stock available for issuance; (ii) a proposal amending our certificate of incorporation to increase the number of shares of Class A Common Stock authorized and available for issuance; (iii) a proposal amending our certificate of incorporation to create and authorize the issuance of a new class of our common stock, Class D Common Stock, which will be convertible into our Class A Common Stock, and establishing the rights and preferences of such Class D Common Stock; (iv) pursuant to the rules of the American Stock Exchange, a proposal authorizing the issuance of shares of the newly created Class D Common Stock to investors pursuant to a private placement; (v) pursuant to the rules of the Amercian Stock Exchange, a proposal authorizing the issuance of warrants to purchase shares of Class A Common Stock to an investor pursuant to a private placement; (vi) pursuant to the rules of the American Stock Exchange, a proposal authorizing the issuance of shares of Class A Common Stock as a portion of the consideration used for the acquisition of a medical billing services business; and (vii) a proposal to amend our 2004 Incentive Plan to increase the number of shares of our Class A Common Stock available for grants under the 2004 Incentive Plan and increase the maximum number of shares that can be granted to a participant in a calendar year under the 2004 Incentive Plan.

 

Each of the matters to be considered by stockholders at the Special Meeting are more fully described in the accompanying Notice of Special Meeting and Proxy Statement. Our board of directors, and in certain circumstances a special committee of our board of directors, has determined that the matters to be considered at the Special Meeting are in the best interests of us and our stockholders. For the reasons set forth in the Proxy Statement, the board of directors, and in certain circumstances a special committee of our board of directors, unanimously recommends a vote “FOR” each of these proposals.

 

WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING, PLEASE SIGN AND DATE THE ENCLOSED PROXY CARD AND RETURN IT IN THE ACCOMPANYING POSTAGE-PAID RETURN ENVELOPE AS PROMPTLY AS POSSIBLE. This will not prevent you from voting in person at the Special Meeting, but will assure that your vote is counted if you are unable to attend the Special Meeting. YOUR VOTE IS VERY IMPORTANT TO OUR COMPANY.

 

Sincerely,

 

Terrence L. Bauer

President and Chief Executive Officer

 

TABLE OF CONTENTS

 

 

ORION HEALTHCORP, INC.

1805 OLD ALABAMA ROAD, SUITE 350
ROSWELL, GEORGIA 30076

 

NOTICE OF SPECIAL MEETING OF STOCKHOLDERS

To Be Held On November   , 2006

 

NOTICE IS HEREBY GIVEN that a special meeting of stockholders (the “Special Meeting”) of Orion HealthCorp, Inc. will be held on          , November   , 2006, at 8:00 a.m. local time, at 1805 Old Alabama Road, Roswell, Georgia 30076, or at any adjournments or postponements thereof. The Proxy Statement and a proxy card for the Special Meeting are enclosed.

 

The Special Meeting is for the purpose of considering and acting upon the following matters, each as more fully described in the attached Proxy Statement:

 

1. To consider and vote upon a proposal to amend our certificate of incorporation to increase the aggregate number of shares of our authorized capital stock from 117,000,000 shares to 370,000,000 shares.

 

2. To consider and vote upon a proposal to amend our certificate of incorporation to increase the number of shares of Class A Common Stock authorized and available for issuance from 70,000,000 shares to 300,000,000 shares.

 

3. To consider and vote upon a proposal to amend our certificate of incorporation to authorize 50,000,000 shares of a new class of common stock, Class D Common Stock, which is convertible into our Class A Common Stock, and to provide for the rights and preferences of the Class D Common Stock.

 

4. To consider and vote upon a proposal to issue shares of our Class D Common Stock to investors in a private placement.

 

5. To consider and vote upon a proposal to issue warrants to purchase shares of our Class A Common Stock to an investor in a private placement.

 

6. To consider and vote upon a proposal to issue shares of our Class A Common Stock as a portion of the consideration to be paid for our acquisition of a medical billing services business.

 

7. To consider and vote upon a proposal to amend our 2004 Incentive Plan to increase the number of shares of our Class A Common Stock available for grants under the 2004 Incentive Plan from 2,200,000 shares to such number of shares representing 10% of our outstanding Class A Common Stock as of the date of closing of the private placement, on a fully diluted basis taking into account the shares issued in the private placement and the Rand acquisition, and to increase the maximum number of shares that can be granted to a participant in any calendar year under the 2004 Incentive Plan from 1,000,000 shares to 3,000,000 shares.

 

Execution of a proxy in the form enclosed also permits the proxy holders to vote, in their discretion, upon such other matters that may properly come before the Special Meeting or any adjournment or postponement thereof. Holders of Class A Common Stock should vote those shares on the WHITE proxy card, holders of Class B Common Stock should vote those shares on the GREEN proxy card and holders of Class C Common Stock should vote those shares on the BLUE proxy card. As of the date of mailing, the board of directors is not aware of any other matters that may come before the Special Meeting. Any action may be taken on the foregoing proposals at the Special Meeting on the date specified above or on any date or dates to which, by original or later adjournment or postponement, the Special Meeting may be adjourned or postponed. Stockholders of record at the close of business on October 20, 2006 are the stockholders entitled to vote at the Special Meeting and any adjournments or postponements thereof.

 

WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING, YOU ARE REQUESTED TO SIGN, DATE AND RETURN THE APPROPRIATE ENCLOSED PROXY CARD (WHITE PROXY CARD FOR CLASS A COMMON STOCK, GREEN PROXY CARD FOR CLASS B COMMON STOCK AND BLUE PROXY CARD FOR CLASS C COMMON STOCK) WITHOUT DELAY IN THE ENCLOSED

POSTAGE-PAID ENVELOPE. ANY PROXY YOU GIVE MAY BE REVOKED BEFORE THE VOTE AT THE SPECIAL MEETING BY DELIVERING TO THE CORPORATE SECRETARY A WRITTEN REVOCATION OR A DULY EXECUTED PROXY BEARING A LATER DATE. IF YOU ARE PRESENT AT THE SPECIAL MEETING YOU MAY REVOKE YOUR PROXY AND VOTE IN PERSON ON EACH MATTER BROUGHT BEFORE THE SPECIAL MEETING. HOWEVER, IF YOU ARE A STOCKHOLDER WHOSE SHARES ARE NOT REGISTERED IN YOUR OWN NAME, YOU WILL NEED ADDITIONAL DOCUMENTATION FROM YOUR RECORD HOLDER TO VOTE IN PERSON AT THE SPECIAL MEETING. OUR BOARD OF DIRECTORS, AND IN CERTAIN INSTANCES A SPECIAL COMMITTEE OF THE BOARD OF DIRECTORS, RECOMMENDS A VOTE “FOR” EACH OF THE PROPOSALS.

 

BY ORDER OF THE BOARD OF DIRECTORS

 

Stephen H. Murdock

Corporate Secretary

 

Roswell, Georgia

October   , 2006

 

 

IMPORTANT:  THE PROMPT RETURN OF PROXIES WILL SAVE US THE EXPENSE OF FURTHER REQUESTS FOR PROXIES IN ORDER TO ENSURE A QUORUM AT THE SPECIAL MEETING. A SELF ADDRESSED ENVELOPE IS ENCLOSED FOR YOUR CONVENIENCE. NO POSTAGE IS REQUIRED IF MAILED IN THE UNITED STATES.

PROXY STATEMENT
OF
ORION HEALTHCORP, INC.

 

SPECIAL MEETING OF STOCKHOLDERS

TO BE HELD ON NOVEMBER   , 2006

 

GENERAL

 

Our board of directors is soliciting your proxy in connection with a special meeting of stockholders (the “Special Meeting”), which will be held on          , November   , 2006, at 8:00 a.m. local time, at 1805 Old Alabama Road, Roswell, Georgia 30076, and at any adjournments or postponements thereof, for the purposes set forth in the accompanying Notice of Special Meeting of stockholders. All stockholders are entitled and encouraged to attend the Special Meeting in person. This Proxy Statement and the accompanying Notice of Special Meeting are being first mailed to stockholders on or about October   , 2006.

 

We are a healthcare services organization providing outsourced business services to physicians. We serve the physician market through two subsidiaries, Integrated Physician Solutions, Inc. (“IPS”), which provides business and management services to general and subspecialty pediatric physician practices, and Medical Billing Services, Inc. (“MBS”), which provides billing, collection and practice management services, primarily to hospital-based physicians. We currently have three classes of common stock outstanding: Class A Common Stock, par value $0.001 per share (“Class A Common Stock”), Class B Common Stock, par value $0.001 per share (“Class B Common Stock”) and Class Common Stock, par value $0.001 per share (“Class C common Stock”). Our Class A Common Stock is traded on the American Stock Exchange (“AMEX”) under the symbol ONH.

 

In April 2005, our board of directors initiated a strategic plan designed to accelerate our growth and enhance our future earnings potential. The plan focused on our strengths, which include providing billing, collections and complementary business management services to physician practices. As part of this plan, we completed a series of transactions involving the divestiture of non-strategic assets in 2005 and early 2006. In addition, we redirected financial resources and company personnel to areas that management believed would enhance long-term growth potential. A key component of our long-term strategic plan was the identification of potential acquisition targets that would increase our presence in the markets we serve and enhance stockholder value.

 

In furtherance of our strategic plan, we recently entered into separate stock purchase agreements for the acquisition of all of the issued and outstanding capital stock of (i) Rand Medical Billing, Inc. (“Rand”), and (ii) On Line Payroll Services, Inc. and On Line Alternatives, Inc. (collectively, “On Line”). As part of the consideration for our acquisition of Rand, we have agreed to issue such number of shares of our Class A Common Stock having a value equal to $600,000 based on the average closing price per share of our Class A Common Stock for the twenty day period prior to the closing date of the acquisition of Rand. In addition, we entered into (x) a Stock Purchase Agreement, dated September 8, 2006 (the “Stock Purchase Agreement”) with Phoenix Life Insurance Company (“Phoenix”) and Brantley Partners IV, L.P. (“Brantley IV”) to issue, for an aggregate purchase price of $4,650,000, shares of a newly created class of our common stock, Class D Common Stock, par value $0.001 per share (the “Class D Common Stock”), which would be convertible into our Class A Common Stock and (y) a Note Purchase Agreement, dated September 8, 2006 (the “Note Purchase Agreement,” and together with the Stock Purchase Agreement, the “Private Placement Agreements”) with Phoenix to issue, for an aggregate purchase price of $3,350,000, our senior unsecured subordinated promissory notes due 2011 in the original principal amount of $3,350,000, bearing interest at an aggregate rate of 14% per annum, together with warrants to purchase shares of our Class A Common Stock, as more fully described herein and in the Note Purchase Agreement and the form of common stock purchase warrant (the “Warrant Certificate”). Some or all of the proceeds we receive upon consummation of the transactions set forth in the Private Placement Agreements, along with proceeds from senior bank financing and other funds available to us, will be used to finance a portion of the acquisitions of the Rand and

On Line businesses and for general working capital purposes. The issuance of the shares of Class D Common Stock and Class A Common Stock underlying the warrants issued pursuant to the Private Placement Agreements and the Warrant Certificate and the issuance of the shares of our Class A Common Stock in connection with the Rand acquisition are the subject of Proposals IV, V and VI. Copies of the Private Placement Agreements, the form of Warrant Certificate, the Rand stock purchase agreement and the On Line stock purchase agreement are attached hereto as Annexes A, B, N, C and L, respectively.

 

Why am I receiving this Proxy Statement and proxy card?

 

You are receiving a Proxy Statement and proxy card because you own shares of our Class A Common Stock, shares of our Class B Common Stock, and/or shares of our Class C Common Stock (collectively, “Common Stock”). This Proxy Statement describes proposals on which we would like you, as a stockholder, to vote. It also gives you information on the proposals so that you can make an informed decision.

 

What am I being asked to vote on?

 

You are being asked to vote on the following proposals:

 

 

 

 

 

 

Why are we seeking approval for the issuance of our shares in the private placement and in connection with the Rand acquisition?

 

As a result of our Class A Common Stock being listed for trading on AMEX, issuances of our Common Stock are subject to the provisions of the AMEX Company Guide, including Sections 712 and 713. Pursuant to Section 712 of the AMEX Company Guide, prior to seeking to have any additional shares of our Class A Common Stock listed on AMEX which shares are to be used as consideration for the acquisition of another company, we must obtain stockholder approval if, among other things, the present or potential issuance of our Class A Common Stock (or securities convertible into our Class A Common Stock) could result in an increase by 20% or more in the number of our outstanding shares of Class A Common Stock.

 

Similarly, pursuant to Section 713 of the AMEX Company Guide, prior to seeking to have any additional shares of our Class A Common Stock listed on AMEX, we must obtain stockholder approval if such shares are to be sold, issued or potentially issued both (i) at a price less than the greater of book or market value, and (ii) either (a) such shares, together with shares sold by our officers, directors or principal stockholders, equals 20% or more of the number of shares of our presently outstanding Class A Common Stock (on an as converted basis) or (b) such shares equal to 20% or more of the number of shares of our presently outstanding Class A Common Stock (on an as converted basis).

 

Pursuant to the terms of the Private Placement Agreements and as more fully described in this Proxy Statement under Proposals IV and V, we intend to issue (i) shares of our Class D Common Stock, representing upon conversion 19.375% of our outstanding Class A Common Stock as of the date of issuance of the Class D Common Stock, on a fully-diluted basis taking into account the issuance of the shares of Class D Common Stock but excluding certain of our outstanding options, warrants and convertible securities and certain shares of Class B Common Stock to be purchased by us from Brantley Capital and (ii) warrants to purchase shares of our Class A Common Stock equal to 1.117% of our outstanding Class A Common Stock on the date of issuance of the Warrant Certificate, taking into account the issuance of the shares of Class D Common Stock described in this Proxy Statement but excluding certain of our outstanding options, warrants and convertible securities and certain shares of Class B Common Stock to be purchased by us from Brantley Capital. In addition, pursuant to the terms of the stock purchase agreement for the acquisition of Rand and as more fully described below under Proposal VI, we have agreed to issue such number of shares of our Class A Common Stock having a value of $600,000 based on the average closing price per share of our Class A Common Stock for the twenty day period prior to the closing of the acquisition of Rand.

 

If we were to consummate the private placement and the Rand acquisition as of our record date, October 20, 2006, we would be obligated to issue [20,662,163] shares of Class D Common Stock (representing [18.4%] of our Class A Common Stock on an as converted basis) pursuant to the Private Placement Agreements, warrants to purchase [1,191,207] shares of our Class A Common Stock (representing [1.1%] of our Class A Common Stock on an as converted basis) pursuant to the Private Placement Agreements and the Warrant Certificate and [2,400,000] shares of our Class A Common Stock (representing [2.1%] of our Class A Common Stock on an as converted basis) in connection with the Rand acquisition. The closing price of our Class A Common Stock on the record date was [$0.25] per share. While none of these transactions individually would require issuances in excess of 20% of our outstanding Class A Common Stock (on an as converted basis), the combination of all three issuances will exceed 20% of our outstanding Class A Common Stock (on an as converted basis) and the issuance of the shares to Phoenix and Brantley IV and the warrants to Phoenix in the private placement, if consummated on October 20, 2006, would be at a price per share of $0.     , representing a $0.      per share discount from the closing price of [$0.25] for a share of our Class A Common Stock. In addition, since the price per share used in the calculation of the shares to be issued in the Rand acquisition is based on a twenty day average, it is possible that the shares issued in that transaction may be issued at a discount, at a premium or at market. If consummated on October 20, 2006, the shares in the Rand acquisition would have been issued at $.      per share, representing a [discount][premium] of $0.      per share from the closing price of [$0.25] per share. Representatives of AMEX have advised us that these three transactions must be aggregated for the purposes of determining whether stockholder approval is required under Sections 712 and 713 of the AMEX Company Guide. Therefore, our board of directors has decided to submit Proposals IV, V and VI to our stockholders for their consideration and approval prior to consummating these transactions.

 

When do you expect the private placement and the acquisitions to be consummated?

 

It is currently contemplated that the private placement and the acquisitions of Rand and On Line will be simultaneously completed promptly following conclusion of our Special Meeting, assuming approval of Proposals I, II, III, IV, V and VI and the satisfaction or waiver of all closing conditions related to the private placement and the acquisitions set forth in the Private Placement Agreements and the acquisition agreements, respectively.

 

Will you consummate the private placement without consummating the acquisitions?

 

Under the terms of the Private Placement Agreements, we do not have the right to terminate the Private Placement Agreements in the event that we decide not to or are unable to consummate the acquisition of the Rand business and/or the acquisition of the On Line businesses. However, Phoenix and Brantley IV are not obligated to consummate the private placement unless we have consummated the acquisitions of both the Rand and the On Line businesses. Phoenix and Brantley IV have the discretion to waive this condition and consummate the private placement even if we decide not to or are unable to consummate the acquisition of the Rand business and/or the acquisition of the On Line businesses. There is no guarantee that Phoenix and Brantley IV would agree to waive this condition in those circumstances. If Phoenix and Brantley IV were to waive this condition to consummation of the private placement, then we would consummate the private placement and retain the proceeds for use in future acquisitions consistent with our strategic plan and for other working capital purposes.

 

Will you consummate the acquisitions without consummating the private placement?

 

Under the terms of the stock purchase agreements for the acquisitions of the Rand and the On Line businesses, we are not obligated to consummate these acquisitions unless we have received financing in amounts sufficient to pay our purchase price obligations under these agreements. We currently contemplate using some or all of the proceeds we will receive from the private placement, along with proceeds from senior bank financing and other funds available to us, to finance a portion of the acquisitions of the Rand and On Line businesses. However, our consummation of the acquisitions of the Rand and On Line businesses is not dependent on specifically consummating the private placement. If we do not consummate the private placement, then we could consummate the acquisitions of the Rand and On Line businesses if we are able to find sources of funding sufficient to pay the purchase prices for these businesses from sources other than the private placement. There is no guarantee that we

would either be able to find alternative financing sources on terms acceptable to us or find them timely enough to complete the acquisitions as presently negotiated.

 

Will you consummate one acquisition without consummating the other acquisition?

 

Under the terms of the stock purchase agreements for the acquisitions of the Rand and On Line businesses, our obligation to consummate each of the acquisitions is not conditioned upon our consummation of the other acquisition. However, Phoenix and Brantley IV are not obligated to consummate the private placement unless we have consummated the acquisitions of both the Rand and the On Line businesses. Phoenix and Brantley IV have the discretion to waive this condition and consummate the private placement even if we decide not to or are unable to consummate the acquisition of either or both of the Rand business or the On Line businesses. There is no guarantee that Phoenix and Brantley IV would agree to waive this condition in those circumstances. If Phoenix and Brantley IV were to waive this condition to consummation of the private placement, then we would consummate the private placement and the remaining acquisition and retain the remaining portion of the proceeds for use in future acquisitions consistent with our strategic plan and for other working capital purposes.

 

Will you consummate the Brantley Capital purchase without consummating the private placement?

 

Under the terms of the purchase agreement with Brantley Capital, we are not obligated to consummate the purchase of the shares of Class B Common Stock from Brantley Capital if the private placement is not consummated. The purchase agreement with Brantley Capital arose as a result of the closing condition to the Private Placement Agreements which required all holders of shares of Class B Common Stock and Class C Common Stock to convert such shares into shares of Class A Common Stock or our acquisition and retirement of all such shares. If the private placement does not close, we will not have the funds to consummate the purchase of these shares from Brantley Capital. Although we believe that this transaction is accretive to our other stockholders and in our best interests, if the private placement does not close we do not presently expect to seek an alternative source of funds to consummate the purchase of these shares from Brantley Capital.

 

Is stockholder approval the only condition to consummating the private placement and the Rand acquisition?

 

Each of the Private Placement Agreements and the Rand stock purchase agreement contain a number of conditions to both our obligation to consummate such transactions and the obligations of the other parties thereto to consummate such transactions. A summary of the specific conditions to each agreement are contained in the description of Proposals IV, V and VI. Many of these conditions require actions by parties other than us. While we believe that these actions will occur and such conditions can be satisfied in the time periods specified in each agreement, there is no guarantee that these actions will occur. Most notably, the Private Placement Agreements are conditioned upon all of the current holders of our Class B Common Stock and Class C Common Stock converting such shares into shares of Class A Common Stock or our acquisition and retirement of all such shares prior to consummation of the private placement. While we have discussed this condition with many of these stockholders and most of them have agreed to convert their shares, we do not have a binding commitment from any of these stockholders to convert their shares in such manner and we have not received an indication from all such stockholders that they affirmatively intend to convert their shares. We will continue to have discussions with such stockholders in order to obtain their commitments to convert such shares in the manner required under the Private Placement Agreements. If we are unable to obtain such commitments and such stockholders do not convert their shares in the manner required under the Private Placement Agreements, then we will not be able to consummate the private placement regardless of whether or not Proposals IV and V are approved by our stockholders at the Special Meeting.

 

Why are we proposing the three amendments to our certificate of incorporation?

 

Our certificate of incorporation currently authorizes us to issue up to 117,000,000 shares of our capital stock, which includes 70,000,000 shares of our Class A Common Stock. Approval of an increase in the number of shares of our Class A Common Stock and the creation of the terms of the Class D Common Stock is necessary to issue the securities required to consummate the private placement and the Rand acquisition on the terms currently set forth

therein. Also, an increase in the number of our authorized shares of capital stock, including the Class A Common Stock, is necessary to increase the number of shares of Class A Common Stock available for grants under our 2004 Incentive Plan.

 

Regardless of whether the private placement and the Rand acquisition are approved and consummated or the 2004 Incentive Plan amendment is approved, we may need additional shares of Class A Common Stock to reserve for the possible conversion of our Class B Common Stock and Class C Common Stock. The conversion factors for the Class B Common Stock and Class C Common Stock fluctuate based on the market price of our Class A Common Stock. Based on recent trading prices for our Class A Common Stock, we may not currently have enough shares of Class A Common Stock to satisfy the conversion of all of the Class B Common Stock and Class C Common Stock should all holders of the Class B Common Stock and Class C Common Stock seek to exercise their conversion rights. As a condition to consummation of the private placement, Phoenix and Brantley IV are requiring that all holders of shares of Class B Common Stock and Class C Common Stock convert those shares into shares of Class A Common Stock, or that such shares of Class B Common Stock and Class C Common Stock otherwise be acquired by us and retired prior to consummation of the private placement. Due to the fluctuating nature of the conversion factors, management is unable to determine with certainty at this time how many shares of Class A Common Stock will be necessary to satisfy this conversion obligation and the conversion obligation in connection with the remainder of the Class B Common Stock and Class C Common Stock when and if this conversion right is exercised. The number of additional shares of Class A Common Stock requested in Proposal II includes management’s reasonable estimate of the number of shares of Class A Common Stock that would be required to satisfy these conversion obligations if the trading price of our Class A Common Stock does not decrease below $0.10 per share. The closing price of our Class A Common Stock on the record date, October 20, 2006, was [$0.25] per share.

 

Why are we proposing an amendment to our 2004 Incentive Plan?

 

Our 2004 Incentive Plan currently provides that 2,200,000 shares of our Class A Common Stock are eligible for grants under the plan, of which only 476,000 shares are available for future grants. In addition our 2004 Incentive Plan currently limits the number of shares that we can grant to any participant in any calendar year under the 2004 Incentive Plan to 1,000,000 shares. Our board of directors believes that an increase in the incentive pool to such number of shares representing 10% of our outstanding Class A Common Stock as of the date of closing of the private placement, on a fully diluted basis taking into account the shares issued in the private placement and the Rand acquisition, and an increase in the amount that any single participant is eligible to receive in any calendar year to 3,000,000 shares, will provide us with the ability to attract and retain key employees and to align the interests of our key employees with the interests of our stockholders. If this increase were to have been implemented on our record date, October 20, 2006, assuming that the private placement and the Rand acquisition had been consummated as of such date, this would have resulted in an increase of [9,052,840] shares for an aggregate total of [9,528,840] shares available for grants under the 2004 Incentive Plan.

 

What will our capital structure look like following the private placement?

 

The following table summarizes our capital structure as it existed on the record date, October 20, 2006, and as we anticipate it will look upon consummation of the private placement, the Rand and On Line acquisitions and the purchase of our shares of Class B Common Stock from Brantley Capital. The pro-forma numbers reflected in this table assume that our stock price on the closing date for these transactions would be the same as it was on the record date, [$0.25] per share, and that all of the proposals set forth in this Proxy Statement were approved by the stockholders and such transactions were consummated.

 

 

Who is entitled to vote at the Special Meeting?

 

Our board of directors has fixed the close of business on October 20, 2006 as the record date for determination of stockholders entitled to notice of, and to vote at, the Special Meeting. As of the record date, there were [24,674,818] shares of Common Stock outstanding that were held by approximately [487] stockholders of record, including [12,788,776] shares of our Class A Common Stock issued and outstanding that were held by approximately [477] stockholders of record, [10,448,470] shares of our Class B Common Stock issued and outstanding that were held by approximately [4] stockholders of record, and [1,437,572] shares of our Class C Common Stock issued and outstanding that were held by approximately [6] stockholders of record. Stockholders of record as of the close of business on the record date are entitled to one vote for each share of Common Stock (regardless of class) then held.

 

How do I vote?

 

You may vote by mail.  You may vote by mail by signing your proxy card and mailing it in the enclosed, prepaid and self-addressed envelope. Holders of Class A Common Stock should vote those shares on the WHITE proxy card, holders of Class B Common Stock should vote those shares on the GREEN proxy card and holders of Class C Common Stock should vote those shares on the BLUE proxy card.

 

You may vote in person at the Special Meeting.  Written ballots will be passed out to anyone who wants to vote at the Special Meeting. If you hold your shares in “street name” (through a broker or other nominee), you must request a legal proxy from your stockbroker in order to vote at the meeting.

 

How many shares must be represented to have a quorum?

 

The holders of a majority of the total shares of our Common Stock outstanding on the record date, whether present at the Special Meeting in person or represented by proxy, will constitute a quorum for the transaction of business at the Special Meeting. The shares held by each stockholder who signs and returns the enclosed form of proxy card will be counted for the purposes of determining the presence of a quorum at the Special Meeting, whether or not the stockholder abstains on all matters or any matter to be acted on at the meeting. Abstentions and broker non-votes both will be counted toward fulfillment of quorum requirements. A broker non-vote occurs when a nominee holding shares for a beneficial owner does not vote on a particular proposal because the nominee does not have discretionary voting power with respect to that proposal and has not received instructions from the beneficial owner. In the event there are not sufficient votes for a quorum or to approve any proposals at the time of the Special Meeting, the Special Meeting may be adjourned or postponed in order to permit the further solicitation of proxies.

 

How many votes are required to approve the proposals?

 

For Proposals I and II, the affirmative vote of the holders of a majority of the votes attributable to the then outstanding shares of Common Stock voting together as a single class will be required to approve each proposal.

 

For Proposal III, the affirmative vote of each of the following will be required to approve such proposal: (i) the holders of a majority of the votes attributable to the then outstanding shares of Common Stock voting together as a single class, (ii) the holders of a majority of the votes attributable to the then outstanding shares of Class B Common Stock voting separately as a class and (iii) the holders of a majority of the votes attributable to the then outstanding shares of Class C Common Stock voting separately as a class. Because approval of Proposal III and filing of the Second Amended and Restated Certificate of Incorporation with the Secretary of State of Delaware would result in the elimination of our Class B Common Stock and Class C Common Stock, our current certificate of incorporation and Delaware law requires that we obtain the additional approval of the holders of a majority of the shares of Class B Common Stock and Class C Common Stock voting separately as classes.

 

For Proposals IV, V, VI and VII, the affirmative vote of the holders of a majority of the total number of shares of Common Stock represented in person or by proxy at the Special Meeting and entitled to vote will be required to approve each of these proposals.

 

Abstentions and broker non-votes are not counted in the tally of votes “FOR” or “AGAINST” a proposal. As a result, abstentions and broker non-votes will have the same effect as a vote “AGAINST” each of the proposals.

 

Are any of the proposals dependent on the approval by the stockholders of the other proposals?

 

Proposal I is not dependent on the approval by the stockholders of any of the other proposals.

 

Proposal II is dependent on the approval by the stockholders of Proposal I. If Proposal I is not approved by the stockholders then the amendment described in Proposal II will not be implemented regardless of whether Proposal II is approved by the stockholders.

 

Proposal III is dependent on the approval by the stockholders of Proposals I and II. If both Proposals I and II are not approved by the stockholders then the amendment described in Proposal III will not be implemented regardless of whether Proposal III is approved by the stockholders.

 

Proposal IV is dependent on the approval by the stockholders of Proposals  I, II, III, V and VI. If all of Proposals I, II, III, V and VI are not approved by the stockholders then the transaction described in Proposal IV will not be consummated regardless of whether Proposal IV is approved by the stockholders.

 

Proposal V is dependent on the approval by the stockholders of Proposals I, II, III, IV and VI. If all of Proposals I, II, III, IV and VI are not approved by the stockholders then the transaction described in Proposal V will not be consummated regardless of whether Proposal V is approved by the stockholders.

 

Proposal VI is dependent on the approval by the stockholders of Proposals I, II, III, IV and V. If all of Proposals I, II, III, IV and V are not approved by the stockholders then the transaction described in Proposal VI will not be consummated regardless of whether Proposal VI is approved by the stockholders.

 

Proposal VII is dependent on the approval by the stockholders of Proposals I and II. If both Proposals I and II are not approved by the stockholders then the amendment described in Proposal VII will not be implemented regardless of whether Proposal VII is approved by the stockholders.

 

What happens if one or more of our proposals are not approved by the stockholders?

 

If Proposal I is not approved by the stockholders, then regardless of whether Proposals II, III, IV, V, VI or VII are approved by the stockholders, we will not be able to consummate the private placement or the acquisition of the Rand business on the terms currently contemplated in the Private Placement Agreements and the Rand stock purchase agreement and we may not be able to increase the shares available under the 2004 Incentive Plan.

 

If Proposal II is not approved by the stockholders, then regardless of whether Proposals I, III, IV, V, VI or VII are approved by the stockholders, we will not be able to consummate the private placement or the acquisition of the Rand business on the terms currently contemplated in the Private Placement Agreements and the Rand stock purchase agreement and we may not be able to increase the shares available under the 2004 Incentive Plan.

 

If Proposal III is not approved by the stockholders, then regardless of whether Proposals I, II, IV, V, VI or VII are approved by the stockholders, we will not be able to consummate the private placement on the terms currently contemplated in the Private Placement Agreements because we would not have the shares of Class D Common Stock available for issuance. If Proposal III is not approved, we may still have enough shares of Class A Common

Stock available for consummation of the Rand acquisition on the terms currently contemplated in the Rand stock purchase agreement.

 

If either Proposal IV or Proposal V is not approved by the stockholders, then regardless of whether Proposals I, II, III, VI or VII are approved by the stockholders, we will not be able to consummate the private placement on the terms currently contemplated in the Private Placement Agreements. We would be permitted to consummate the acquisitions of the Rand and On Line businesses, but we would need to find sources of funding sufficient to pay the purchase prices for these businesses from sources other than the private placement and there is no guarantee that we would either be able to find alternative financing sources on terms acceptable to us or find them timely enough to continue with the acquisitions as presently negotiated. If either Proposal IV or Proposal V is not approved, we will not consummate the purchase of shares of our Class B Common Stock from Brantley Capital.

 

If Proposal VI is not approved by the stockholders, then regardless of whether Proposals I, II, III,IV, V or VII are approved by the stockholders, we will not be able to consummate the acquisition of the Rand business on the terms currently contemplated. We would also not be able to consummate the private placement on the terms currently contemplated by the Private Placement Agreements, since the Rand acquisition is a condition precedent to the private placement. We would be permitted to consummate the acquisition of the On Line business, but we would need to find sources of funding sufficient to pay the purchase price for this business from sources other than the private placement and there is no guarantee that we would either be able to find alternative financing sources on terms acceptable to us or find them timely enough to continue with the acquisition as presently negotiated. If Proposal VI is not approved and as a result the private placement is not consummated, we will not consummate the purchase of shares of our Class B Common Stock from Brantley Capital.

 

The failure of any of Proposals I, II, III, IV, V or VI would make if more difficult for us to continue to pursue our strategic plan through the identification of acquisition targets.

 

Unless each of Proposals I, II, III, IV, V and VI are approved and the private placement is ready to be consummated, we will not file the Second Amended and Restated Certificate of Incorporation.

 

If Proposal VII is not approved by the stockholders, then it would have no impact on our ability to consummate the private placement or the acquisitions of the Rand and On Line businesses (assuming that Proposals I, II, III, IV, V and VI are approved). However, it would make it more difficult for us to attract and retain key employees.

 

What does signing the proxy card mean?

 

When you sign the proxy card, you appoint each of Terrence L. Bauer and Stephen H. Murdock as your proxy to vote your shares of Common Stock at the Special Meeting and at all adjournments or postponements of the Special Meeting. All properly executed proxy cards delivered pursuant to this solicitation and not revoked will be voted in accordance with the directions given. Other than the proposals described in this Proxy Statement, we do not know of any other matters that will be considered at the Special Meeting. Execution of a proxy card, however, confers on the designated proxy holders discretionary authority to vote the shares represented by the proxy on other business, if any, that may properly come before the Special Meeting or any adjournment or postponement thereof.

 

What if I return my proxy card but do not provide voting instructions?

 

If you sign and return your proxy card, but do not include instructions, your proxy will be voted “FOR” each of the five proposals.

 

Do I need to vote all of my shares in the same manner?

 

Stockholders may vote part of their shares “FOR” a proposal and refrain from voting some or all of the remaining shares or, may vote some or all of the remaining shares “AGAINST” the proposal. If you execute a proxy card and do not affirmatively specify the number of shares that you are voting, the proxy may be voted with respect to all shares that you are entitled to vote at the Special Meeting.

 

Will my shares be voted if I do not sign and return my proxy card?

 

If you do not sign and return your proxy card (or grant your proxy to another person) and do not show up in person at the Special Meeting to vote your shares, then your shares will not be voted at the Special Meeting. If your shares are held in “street name” (i.e., in the name of your brokerage firm), your brokerage firm may not vote your

This summary discusses the material items of each of the proposals which are also described elsewhere in this Proxy Statement. You should carefully read this entire Proxy Statement and the other documents to which this Proxy Statement refers you. See “Where You Can Find More Information.”

 

The Amendments to Our Certificate Of Incorporation

 

Our certificate of incorporation currently authorizes the issuance of up to 117,000,000 shares of capital stock, consisting of (i) 97,000,000 shares of common stock, of which 70,000,000 shares are designated as Class A Common Stock, 25,000,000 shares are designated as Class B Common Stock and 2,000,000 shares are designated as Class C Common Stock and (ii) 20,000,000 shares of preferred stock.

 

Our board of directors has approved, subject to stockholder approval, amendments to our certificate of incorporation to (i) create a new class of common stock, the Class D Common Stock, and designate its rights and preferences and (ii) increase the number of authorized shares of our capital stock to 370,000,000 shares, consisting of (A) 350,000,000 shares of common stock, of which 300,000,000 shares are designated as Class A Common Stock and 50,000,000 shares are designated as Class D Common Stock and (B) 20,000,000 shares of preferred stock. The authorized shares of Class B Common Stock and Class C Common Stock would be eliminated as a result of the condition to consummation of the private placement that the holders of all such shares convert to shares of Class A Common Stock or we acquire and retire all such shares.

 

The Class D Common Stock will have the following rights and preferences:

 

 

 

 

to issue additional shares of our Common Stock or preferred stock. However, our board of directors believes that the benefits of providing it with the flexibility to issue shares without delay for any proper business purpose, including as an alternative to an unsolicited business combination opposed by the board of directors, outweigh the possible disadvantages of dilution and discouraging unsolicited business combination proposals and that it is prudent and in the best interests of stockholders to provide the advantage of greater flexibility which will result from the proposed amendments to our certificate of incorporation.

 

Sources and Uses of Funds

 

Below is a summary of the sources and uses of funds in connection with the transactions described in this Proxy Statement, followed by a description of each of the referenced sources and uses:

 

 

New Senior Secured Credit Facility

 

We have entered into a non-binding letter of intent (a copy of which is attached as Annex O) with Wells Fargo Foothill, Inc. for the provision of a new senior secured credit facility in the aggregate principal amount of $16,500,000, consisting of a $2,000,000 revolving loan commitment, a $4,500,000 term loan and a $10,000,000 acquisition facility commitment available for future acquisitions. We are currently negotiating the definitive terms of the documentation for this credit facility. If we are unable to reach agreement on a credit facility with this lender, then we will seek to find another institutional lender to provide a credit facility on similar terms, but there is no guarantee that we will be able to find such a lender or be able to negotiate similar terms to such credit facility.

 

The Private Placement

 

We are seeking to raise $8,000,000 through a private placement transaction providing for the issuance of shares of our Class D Common Stock, issuance of our senior unsecured subordinated promissory notes and issuance of warrants to purchase shares of our Class A Common Stock. As specified above, the proceeds from this private placement, along with proceeds from senior bank financing and other funds available to us, will be used to fund a portion of the purchase price for the acquisitions of the Rand and the On Line businesses, our purchase of certain shares of our Class B Common Stock from Brantley Capital, to repay certain outstanding senior indebtedness and for general working capital purposes.

 

Pursuant to the terms of the Stock Purchase Agreement, Phoenix and Brantley IV will purchase, for an aggregate purchase price of $4,650,000, shares of our Class D Common Stock representing upon conversion 19.375% of our outstanding Class A Common Stock as of the date of issuance of the Class D Common Stock, on a fully-diluted basis taking into account the issuance of the shares of Class D Common Stock but excluding certain of

our outstanding options, warrants and convertible securities and certain shares of Class B Common Stock to be purchased by us from Brantley Capital.

 

Pursuant to the terms of the Note Purchase Agreement, Phoenix will purchase, for an aggregate purchase price of $3,350,000, (i) our senior unsecured subordinated promissory notes, due 2011, in the original principal amount of $3,350,000 and (ii) warrants to purchase shares of our Class A Common Stock equal to 1.117% of our outstanding Class A Common Stock on the date of issuance of the Warrant Certificate, on a fully-diluted basis taking into account the issuance of the shares of Class D Common Stock described above but excluding certain of our outstanding options, warrants and convertible securities and certain shares of Class B Common Stock to be purchased by us from Brantley Capital. The notes will bear interest at the combined rate of (x) 12% per annum payable in cash on a quarterly basis and (y) 2% per annum payable in kind (meaning that the accrued interest will be capitalized as principal) on a quarterly basis, subject to our right to pay such amount in cash. The warrants will be exercisable for five years from the date of issuance of the Warrant Certificate at $0.01 per share.

 

In connection with the private placement, the parties will enter into a registration rights agreement, pursuant to which the holders of a majority of the shares of Class A Common Stock issuable upon either conversion of the Class D Common Stock or the exercise of the warrants will have the right to require us to register their shares of Class A Common Stock under the Securities Act. The agreement allows them one right to demand that we register their shares of Class A Common Stock under the Securities Act on a registration statement filed with the SEC and unlimited rights to include (or “piggy-back”) the registration of their shares of Class A Common Stock on certain registration statements that we may file with the SEC for other purposes.

 

The Private Placement Agreements and the form of Warrant Certificate are attached hereto as Annexes A, B and N and the terms thereof are incorporated herein by reference. We recommend that you review these documents.

 

The Acquisitions

 

We have identified several acquisition opportunities to expand our business that are consistent with our strategic plan. We have recently signed definitive agreements for the acquisition of two of these targets. The first acquisition involves the purchase of all of the issued and outstanding capital stock of Rand. Rand is a full service billing agency, providing medical billing exclusively for anatomic and clinical pathology practices located in Simi Valley, California.

 

On September 8, 2006 we entered into a stock purchase agreement with Rand and the stockholder of Rand to purchase all of the issued and outstanding capital stock of Rand for an aggregate purchase price of $9,365,333, subject to adjustments conditioned upon future revenue results. A portion of the purchase price is payable by our issuance of such number of shares of our Class A Common Stock having a value of $600,000 based on the average closing price per share of our Class A Common Stock for the twenty day period prior to the closing of the Rand acquisition. The remainder of the purchase price is payable in a combination of cash and the issuance of an unsecured subordinated promissory note in the original principal amount of $1,365,333. At the closing of the Rand acquisition, $6,800,000 of the purchase price will be paid in cash and the balance will be placed in escrow (including the shares of our Class A Common Stock) pending resolution of the purchase price adjustments and subject to claims, if any, for indemnification.

 

The second acquisition involves the purchase of all the issued and outstanding capital stock of the On Line businesses. On Line consists of two related companies, On Line Alternatives, Inc. (“OLA”) and On Line Payroll Services, Inc. (“OLP”).

 

OLA is an outsourcing company providing data entry, insurance filing, patient statements, payment posting, collection follow-up and patient refund processing to medical practices. Most of OLA’s customers are hospital-based physician practices including radiology, neurology and emergency medicine. Customers also include some other specialties as plastic surgery, family practice, internal medicine and orthopaedics. All billing functions are the responsibility of OLA, and include credentialing and accounts payable processing. OLA also has a group of contract transcriptionists who work out of their homes and OLA offers these services to clients as well.

OLP provides payroll processing services to small businesses, a few of which are also customers of OLA. OLP provides payroll services including direct deposit, time clock interface and tax reporting to clients in Alabama, Florida, Georgia, Louisiana, Mississippi, Tennessee and Texas.

 

On September 8, 2006 we entered into a stock purchase agreement with OLA, OLP and the stockholders of each of OLA and OLP to purchase all of the issued and outstanding capital stock of both OLA and OLP for an aggregate purchase price of $3,310,924, subject to adjustments conditioned upon future revenue results. The purchase price is payable in a combination of cash and the issuance of unsecured subordinated promissory notes. At the closing of the On Line acquisition, $2,476,943 of the purchase price will be paid in cash and the remainder through the issuance of an unsecured subordinated promissory note in the original principal amount of $833,981. We also have an option to pay up to $75,000 of the purchase price in the form of an additional unsecured promissory note in lieu of cash at the closing.

 

We plan to close these acquisitions simultaneous with the closing of the private placement and as soon as possible following the Special Meeting, assuming that Proposals I, II, III, IV, V and VI are approved by the stockholders. The stock purchase agreement relating to the Rand acquisition is attached hereto as Annex C and the stock purchase agreement relating to the On Line acquisition is attached hereto as Annex L, the terms of both of which are incorporated herein by reference. We recommend that you review these documents.

 

Purchase of our Class B Common Stock from Brantley Capital

 

On September 8, 2006 we entered into a purchase agreement with Brantley Capital to purchase all 1,722,983 shares of our Class B Common Stock owned by Brantley Capital at any time between now and December 31, 2006 for an aggregate purchase price of $482,435. Upon our acquisition of these shares of Class B Common Stock they will be retired in accordance with the terms of our certificate of incorporation. We plan to consummate this purchase simultaneous with the closing of the private placement. We anticipate using a portion of the proceeds from the private placement, along with proceeds from senior bank financing and other funds available to us, to fund the purchase price for our purchase of the shares of Class B Common Stock owned by Brantley Capital. A copy of the purchase agreement with Brantley Capital is attached hereto as Annex M and the terms thereof are incorporated herein by reference.

 

The Special Meeting

 

We are furnishing this Proxy Statement to you as part of the solicitation of proxies by our board of directors for use at the Special Meeting in connection with the consideration of Proposals I, II, III, IV, V, VI and VII described herein. This Proxy Statement provides you with the information you need to know to be able to vote or instruct your vote to be cast at the Special Meeting.

 

Date, Time, Place and Purpose

 

The Special Meeting of our stockholders will be held at 8:00 a.m. local time on          , November   , 2006 at our headquarters at 1805 Old Alabama Road, Roswell, Georgia 30076 to vote on Proposals I through VII as described herein.

 

Voting Power; Record Date

 

You will be entitled to vote or direct votes to be cast at the Special Meeting if you owned shares of our Common Stock on the close of business on October 20, 2006, which is the record date for the Special Meeting. You will have one vote for each share of Common Stock you owned at the close of business on the record date.

 

As of the record date, there were [24,674,818] shares of Common Stock outstanding that were held by approximately [487] stockholders of record, including [12,788,776] shares of our Class A Common Stock issued and outstanding that were held by approximately [477] stockholders of record, [10,448,470] shares of our Class B Common Stock issued and outstanding that were held by approximately [4] stockholders of record, and

[1,437,572] shares of our Class C Common Stock issued and outstanding that were held by approximately [6] stockholders of record. There are no outstanding shares of our preferred stock. Stockholders of record as of the close of business on the record date are entitled to one vote for each share of Common Stock (regardless of class) then held. With respect to Proposal III, the holders of our Class B Common Stock and Class C Common Stock will be entitled to vote separately as classes and are entitled to one vote per share of such class or each class vote.

 

Quorum

 

The holders of a majority of the total shares of our Common Stock outstanding on the record date, whether present at the Special Meeting in person or represented by proxy, will constitute a quorum for the transaction of business at the Special Meeting. The shares held by each stockholder who signs and returns the enclosed form of proxy card will be counted for the purposes of determining the presence of a quorum at the Special Meeting, whether or not the stockholder abstains on all matters or any matter to be acted on at the meeting. Abstentions and broker non-votes both will be counted toward fulfillment of quorum requirements. A broker non-vote occurs when a nominee holding shares for a beneficial owner does not vote on a particular proposal because the nominee does not have discretionary voting power with respect to that proposal and has not received instructions from the beneficial owner. In the event that there are not sufficient votes for a quorum or to approve any proposals at the time of the Special Meeting, the Special Meeting may be adjourned or postponed in order to permit the further solicitation of proxies.

 

Voting Your Shares

 

Each share of our Common Stock entitles you to one vote. Your proxy card shows the number of shares of our Common Stock that you own. If you receive more than one proxy card it means that you have multiple accounts at the transfer agent and/or with brokers or that you own shares of more than one class of our Common Stock.

 

There are two ways to vote your shares of our Common Stock at the Special Meeting:

 

 

 

Who Can Answer Your Questions About Voting Your Shares

 

If you have any questions about any of the proposals or about how to vote or direct a vote in respect of your Common Stock, you may write or call us at 1805 Old Alabama Road, Suite 350, Roswell, Georgia 30076, (678) 832-1800, Attention: Corporate Secretary.

 

Revoking Your Proxy

 

If you give a proxy, you may revoke your proxy and change your vote at any time before the polls close at the Special Meeting. You may do this by:

 

 

 

Vote Required

 

For Proposals I and II, the affirmative vote of the holders of a majority of the votes attributable to the then outstanding shares of Common Stock voting together as a single class will be required to approve each proposal. For Proposal III, the affirmative vote of each of the following will be required to approve such proposal: (i) the holders of a majority of the votes attributable to the then outstanding shares of Common Stock voting together as a single class, (ii) the holders of a majority of the votes attributable to the then outstanding shares of Class B Common Stock voting separately as a class and (iii) the holders of a majority of the votes attributable to the then outstanding shares of Class C Common Stock voting separately as a class. Because approval of Proposal III and filing of the Second Amended and Restated Certificate of Incorporation with the Secretary of State of Delaware would result in the elimination of our Class B Common Stock and Class C Common Stock, our current certificate of incorporation and Delaware law requires that we obtain the additional approval of the holders of a majority of the shares of Class B Common Stock and Class C Common Stock voting separately as classes. For Proposals IV, V, VI and VII, the affirmative vote of the holders of a majority of the total number of shares of Common Stock represented in person or by proxy at the Special Meeting and entitled to vote will be required to approve each of these proposals. Abstentions and broker non-votes are not counted in the tally of votes “FOR” or “AGAINST” a proposal. As a result, abstentions and broker non-votes will have the same effect as a vote “AGAINST” each of the proposals.

 

Abstentions and Broker Non-Votes

 

If your broker holds your shares in its name and you do not give the broker voting instructions, under the rules of the National Association of Securities Dealers (“NASD”), your broker may not vote your shares on any of the five proposals. If you do not give your broker voting instructions and the broker does not vote your shares, this is referred to as a “broker non-vote.” Abstentions and broker non-votes are counted for purposes of determining the presence of a quorum, and will have the effect of a vote “AGAINST” each of the proposals.

 

Cost of Solicitation of Proxies

 

The cost of soliciting proxies, including expenses in connection with preparing and mailing this Proxy Statement, will be borne by us. In addition, we will reimburse brokerage firms and other persons representing beneficial owners of our Common Stock for their expenses in forwarding proxy material to such beneficial owners. Solicitation of proxies by mail may be supplemented by telephone, and personal solicitations by our directors, officers or employees. We reserve the right to hire an independent proxy solicitor in connection with the Special Meeting. No additional compensation will be paid for such solicitation unless we engage an independent proxy solicitor.

 

Stock Ownership

 

Of the [24,674,818] outstanding shares of our Common Stock entitled to vote at the Special Meeting, Brantley IV and its affiliates, who own approximately [44.8%] of our outstanding Common Stock entitled to vote at the Special Meeting and approximately [83.5%] of our outstanding Class B Common Stock entitled to vote at the Special Meeting, and our named executive officers and directors who directly own an aggregate of approximately [8.9%] of our outstanding shares of Common Stock entitled to vote at the Special Meeting and [90.4%] of our outstanding Class C Common Stock entitled to vote at the Special Meeting, have indicated that they intend to vote such shares “FOR” each of the five proposals set forth in this Proxy Statement. Assuming that they all vote their shares as indicated “FOR” each of the proposals, we will have a sufficient number of votes to approve each of the proposals.

PROPOSAL I

APPROVAL OF THE AMENDMENT TO OUR CERTIFICATE OF INCORPORATION TO INCREASE THE NUMBER OF AUTHORIZED SHARES OF CAPITAL STOCK

 

Our board of directors has approved and is recommending to our stockholders for approval at the Special Meeting a proposal to increase the aggregate number of shares of our authorized capital stock from 117,000,000 shares to 370,000,000 shares, which includes an increase in the authorized shares of our Common Stock from 97,000,000 shares to 350,000,000 shares and leaves the number of authorized shares of our preferred stock at 20,000,000 shares. If the amendment to increase the number of authorized shares of our capital stock as set forth in Proposal I is approved by our stockholders at the Special Meeting and if Proposals II, III, IV, V and VI are approved and the private placement is ready to be consummated, we will amend and restate our certificate of incorporation in the manner provided in the form of Second Amended and Restated Certificate of Incorporation attached as Annex D. The form of Second Amended and Restated Certificate of Incorporation includes provisions for each of Proposals I, II and III and assumes that all three proposals will be approved by our stockholders. A vote “FOR” this proposal constitutes approval of the form of Second Amended and Restated Certificate of Incorporation as it relates to the increase in the number of shares of authorized stock, which additional shares will be designated as Common Stock. Because the implementation of Proposals I, II, III, IV, V and VI are interdependent, if Proposals I, II, III, IV, V and VI are not approved then we will not make any of the changes proposed in the form of Second Amended and Restated Certificate of Incorporation and will not file it with the Secretary of State of Delaware. In addition, we cannot complete any of the transactions contemplated by Proposals II, III, IV, V, VI or VII if this proposal is not approved by the stockholders at the Special Meeting, and in all likelihood will not be able to complete the Rand acquisition or the On Line acquisition.

 

The increase in the number of shares of authorized stock as reflected in Proposal I does not alter or change the powers, preferences, or special rights of the holders of shares of our existing Class A Common Stock, Class B Common Stock or Class C Common Stock.

 

Increase in the Number of Shares of Authorized Common Stock

 

The amendment to our certificate of incorporation will increase the aggregate number of shares of our authorized capital stock from 117,000,000 shares to 370,000,000 shares, which includes an increase in the authorized shares of our Common Stock from 97,000,000 shares to 350,000,000 shares and leaves the number of authorized shares of our preferred stock at 20,000,000 shares.

 

The board of directors recommends increasing the aggregate number of shares of our authorized capital stock in order to have a sufficient number of shares of our Common Stock available to issue the shares required under the Private Placement Agreements and the Warrant Certificate (see Proposals IV and V), in connection with the Rand acquisition (see Proposal VI) and in connection with the amendment to our 2004 Incentive Plan (see Proposal VII). Assuming the issuance of shares of our Common Stock in connection with the private placement is approved by our stockholders, we will be obligated to (i) create a new series of common stock, Class D Common Stock, and issue such number of shares of Class D Common Stock representing upon conversion 19.375% of our outstanding Class A Common Stock as of the date of issuance of the Class D Common Stock, on a fully-diluted basis taking into account the issuance of the shares of Class D Common Stock described below (see Proposal IV) but excluding certain of our outstanding options, warrants and convertible securities and certain shares of Class B Common Stock to be purchased by us from Brantley Capital and (ii) reserve for issuance pursuant to exercise of warrants such number of shares of Class A Common Stock equal to 1.117% of our outstanding Class A Common Stock on the date of issuance of the Warrant Certificate, on a fully-diluted basis taking into account the issuance of the shares of Class D Common Stock described above but excluding certain of our outstanding options, warrants and convertible securities and certain shares of Class B Common Stock to be purchased by us from Brantley Capital. In addition, we must also have shares available for issuance in connection with previously granted stock options and other stock based awards as well as any future grants under our 2004 Incentive Plan and our other option plans as well as our outstanding convertible notes and other existing convertible securities.

 

We may need additional shares of Class A Common Stock to reserve for the possible conversion of our Class B Common Stock and Class C Common Stock. The conversion factors for the Class B Common Stock and Class C

Common Stock fluctuate based on the market price of our Class A Common Stock. Based on recent trading prices for our Class A Common Stock, we may not currently have enough shares of Class A Common Stock to satisfy the conversion of all of the Class B Common Stock and Class C Common Stock should all holders of the Class B Common Stock and Class C Common Stock seek to exercise their conversion rights. As a condition to consummation of the private placement, Phoenix and Brantley IV are requiring that all holders of shares of Class B Common Stock and Class C Common Stock convert those shares to shares of Class A Common Stock, or that such shares of Class B Common Stock and Class C Common Stock otherwise be acquired by us and retired prior to consummation of the private placement. Due to the fluctuating nature of the conversion factors, management is unable to determine with certainty at this time how many shares of Class A Common Stock will be necessary to satisfy this conversion obligation and the conversion obligation in connection with the remainder of the Class B Common Stock and Class C Common Stock when and if such conversion right is exercised. The number of additional shares of Class A Common Stock requested in Proposal II (and included in the increase in authorized capital stock reflected in this proposal) represents management’s reasonable estimate of the number of shares of Class A Common Stock that would be required to satisfy these conversion obligations if the trading price of our Class A Common Stock does not decrease below $0.10 per share. The closing price of our Class A Common Stock on the record date, October 20, 2006, was [$0.25] per share.

 

The following table provides details regarding the approximate number of shares of our Common Stock authorized, issued and outstanding and reserved as of the periods indicated. Treasury stock is not included in these figures.

 

 

 

 

 

 

We have no current agreements, arrangements, or plans to issue additional shares of Common Stock other than as described above and in connection with the private placement, in connection with the acquisition of Rand and the other proposals in this Proxy Statement. We may need to issue additional shares of our Common Stock in the future to settle outstanding debts or liabilities, to attract or retain key employees, and to make future acquisitions.

 

The issuance of additional authorized shares of our Common Stock (other than through a stock split or a stock dividend) may dilute the voting power and equity interest of present stockholders. The holders of Common Stock do not presently have any preemptive rights to subscribe for any of our securities and holders of our Common Stock will not have any such rights for the additional shares of Common Stock to be authorized. Any future issuances of

authorized shares of Common Stock may be authorized by our board of directors without further action by the stockholders, unless required by law. However, as noted above, Sections 712 and 713 of the AMEX Company Guide would require us to seek stockholder approval prior to any issuance of our Class A Common Stock (or securities convertible into our Class A Common Stock) in connection with an acquisition or direct issuance by us that could result in an increase by 20% or more in the number of our outstanding shares of Class A Common Stock if shares are issued at a discount to market value.

 

Although our board of directors will issue capital stock only when required or when the board of directors considers such issuance to be in our best interests, the issuance of additional Common Stock or preferred stock may, among other things, have a dilutive effect on the earnings per share (if any) and on the equity and voting rights of our stockholders. Furthermore, since Delaware law requires the vote of a majority of shares of each class of capital stock in order to approve certain mergers and reorganizations, the proposed amendment could permit the board of directors to issue shares to persons supportive of management. Such persons might then be in a position to vote to prevent a proposed business combination that is deemed unacceptable to the board of directors, although deemed to be desirable by some stockholders, including, potentially, a majority of stockholders. Taking such an action could provide management with a means to block any majority vote which might be necessary to effect a business combination in accordance with applicable law, and could enhance the ability of our directors to retain their positions. Additionally, the presence of such additional authorized but unissued shares of Common Stock or preferred stock could discourage unsolicited business combination transactions that might otherwise be desirable to our stockholders.

 

Except for (i) shares of our Common Stock which may be issued in connection with the private placement, (ii) shares of Common Stock reserved for issuance under our stock option plans, (iii) shares of our Common Stock which we would be required to issue upon the exercise of outstanding warrants (including warrants to be issued in connection with the private placement, if approved by the stockholders), (iv) shares of our Common Stock which we would be required to issue upon conversion of our outstanding convertible notes, (v) shares of our Common Stock to be issued in connection with the Rand acquisition, and (vi) shares of our Common Stock that may be issuable upon the conversion of outstanding shares of Common Stock, the board of directors has no current plans to issue additional shares of our Common Stock or preferred stock. However, our board of directors believes that the benefits of providing it with the flexibility to issue shares without delay for any proper business purpose, including as an alternative to an unsolicited business combination opposed by the board of directors, outweigh the possible disadvantages of dilution and discouraging unsolicited business combination proposals and that it is prudent and in the best interests of stockholders to provide the advantage of greater flexibility which will result from the proposed amendments to our certificate of incorporation.

 

No Dissenter’s Rights

 

Under the Delaware General Corporation Law, our stockholders are not entitled to dissenter’s rights with respect to the increase in the number of shares of our authorized capital stock, and we will not independently provide stockholders with any such right.

 

Required Stockholder Approval

 

The affirmative vote of the holders of a majority of the votes attributable to the then outstanding shares of Common Stock voting together as a single class will be required to approve this proposal. As such, abstentions and broker non-votes will have the same effect as a vote “AGAINST” this proposal. If our stockholders approve the increase in the number of shares of our authorized capital stock, as well as Proposals II, III, IV, V and VI such increase in the number of shares will become effective upon our filing of the Second Amended and Restated Certificate of Incorporation with the Secretary of State of Delaware, which is expected to take place immediately prior to the consummation of the private placement and the Rand acquisition.

 

THE BOARD OF DIRECTORS RECOMMENDS THAT ALL STOCKHOLDERS VOTE, OR INSTRUCT THEIR VOTES TO BE CAST, “FOR” APPROVAL OF THE INCREASE IN THE NUMBER OF SHARES OF OUR AUTHORIZED CAPITAL STOCK.

PROPOSAL II

APPROVAL OF THE AMENDMENT TO OUR CERTIFICATE OF INCORPORATION TO INCREASE THE NUMBER OF AUTHORIZED SHARES OF CLASS A COMMON STOCK

 

Our board of directors has approved and is recommending to our stockholders for approval at the Special Meeting a proposal to increase the number of shares of Class A Common Stock authorized and available for issuance from 70,000,000 shares to 300,000,000 shares. If the increase in the number of shares of authorized Class A Common Stock is approved and if Proposals I, III, IV, V and VI are approved and the private placement is ready to be consummated, we will amend and restate our certificate of incorporation to effect the increase in the manner provided in the form of Second Amended and Restated Certificate of Incorporation attached as Annex D, the terms of which are incorporated herein by reference. The form of Second Amended and Restated Certificate of Incorporation includes provisions for each of Proposals I, II and III and assumes that all three proposals will be approved by our stockholders. Because the implementation of Proposals I, II, III, IV, V and VI are interdependent, if Proposals I, II, III, IV, V and VI are not approved then we will not make any of the changes proposed in the form of Second Amended and Restated Certificate of Incorporation and will not file it with the Secretary of State of Delaware. A vote “FOR” this proposal constitutes approval of the form of Second Amended and Restated Certificate of Incorporation as it relates to the increase in the number of shares of authorized Class A Common Stock. We cannot complete the private placement or implement the amendment to our 2004 Incentive Plan and in all likelihood will not be able to complete the Rand or On Line acquisitions unless this proposal to increase the number of shares of authorized Class A Common Stock is approved by the stockholders at the Special Meeting.

 

The increase in the number of shares of authorized Class A Common Stock as reflected in Proposal II does not alter or change the powers, preferences, or special rights of the holders of our existing shares of Class A Common Stock, Class B Common Stock or Class C Common Stock.

 

Increase in the Number of Shares of Authorized Class A Common Stock

 

The amendment to our certificate of incorporation will increase the number of shares of authorized Class A Common Stock from 70,000,000 shares to 300,000,000 shares.

 

The board of directors recommends increasing the number of shares of our authorized Class A Common Stock in order to have a sufficient number of shares of our Class A Common Stock available to reserve for issuance upon conversion of the Class D Common Stock (see Proposal IV) and exercise of the warrants (see Proposal V) issued under the Private Placement Agreements and the Warrant Certificate, for issuance of the Class A Common Stock in connection with the Rand acquisition (see Proposal VI) and to reserve for issuance in connection with the amendment to our 2004 Incentive Plan (see Proposal VII). Assuming the issuance of shares of our stock in connection with the private placement is approved by our stockholders, we will be obligated to (i) initially reserve for issuance pursuant to conversion of the Class D Common Stock such number of shares of Class A Common Stock representing upon conversion 19.375% of our outstanding Class A Common Stock as of the date of issuance of the Class D Common Stock, on a fully-diluted basis taking into account the issuance of the shares of Class D Common Stock described below but excluding certain of our outstanding options, warrants and convertible securities and certain shares of Class B Common Stock to be purchased by us from Brantley Capital and (ii) reserve for issuance pursuant to exercise of warrants such number of Class A Common Stock equal to 1.117% of our outstanding Class A Common Stock on the date of issuance of the Warrant Certificate, on a fully-diluted basis taking into account the issuance of the shares of Class D Common Stock described above but excluding certain of our outstanding options, warrants and convertible securities and certain shares of Class B Common Stock to be purchased by us from Brantley Capital. In addition, we must also have shares of Class A Common Stock available for issuance in connection with previously granted stock options and other stock based awards as well as any future grants under our 2004 Incentive Plan (particularly if Proposal VII is approved) and our other option plans as well as our outstanding convertible notes and other existing convertible securities.

 

We may need additional shares of Class A Common Stock to set aside for the possible conversion of our Class B Common Stock and Class C Common Stock. The conversion factors for the Class B Common Stock and Class C Common Stock fluctuate based on the market price of our Class A Common Stock. Based on recent trading prices for our Class A Common Stock, we may not currently have enough shares of Class A Common Stock to satisfy the

conversion of all of the Class B Common Stock and Class C Common Stock should all holders of the Class B Common Stock and Class C Common Stock seek to exercise their conversion rights. As a condition to consummation of the private placement, Phoenix and Brantley IV are requiring that all holders of shares of Class B Common Stock and Class C Common Stock convert those shares to shares of Class A Common Stock, or that such shares of Class B Common Stock and Class C Common Stock otherwise be acquired by us and retired prior to or simultaneous with consummation of the private placement. Due to the fluctuating nature of the conversion factors, management is unable to determine with certainty at this time how many shares of Class A Common Stock will be necessary to satisfy this conversion obligation and the conversion obligation in connection with the remainder of the Class B Common Stock and Class C Common Stock when and if it is exercised. The number of additional shares of Class A Common Stock requested in this proposal (and included in the increase in authorized capital stock reflected in Proposal I) includes management’s reasonable estimation of the number of shares of Class A Common Stock that would be required to satisfy these conversion obligations if the trading price of our Class A Common Stock does not decrease below $0.10 per share. The closing price of our Class A Common Stock on the record date, October 20, 2006, was [$0.25] per share.

 

No Dissenter’s Rights

 

Under the Delaware General Corporation Law, our stockholders are not entitled to dissenter’s rights with respect to the increase in the number of shares of authorized Class A Common Stock, and we will not independently provide stockholders with any such right.

 

Required Stockholder Approval

 

The affirmative vote of the holders of a majority of the votes attributable to the then outstanding shares of Common Stock voting together as a single class will be required to approve this proposal. As such, abstentions and broker non-votes will have the same effect as a vote “AGAINST” this proposal. If our stockholders approve the increase in the number of shares of authorized Class A Common Stock, as well as Proposals I, III, IV, V and VI, such increase in the number of shares will become effective upon our filing of the Second Amended and Restated Certificate of Incorporation with the Secretary of State of Delaware, which is expected to take place immediately prior to the consummation of the private placement and the Rand acquisition.

 

THE BOARD OF DIRECTORS RECOMMENDS THAT ALL STOCKHOLDERS VOTE, OR INSTRUCT THEIR VOTES TO BE CAST, “FOR” APPROVAL OF THE INCREASE IN THE NUMBER OF SHARES OF AUTHORIZED CLASS A COMMON STOCK.

PROPOSAL III

APPROVAL OF THE AMENDMENT TO OUR CERTIFICATE OF INCORPORATION TO
CREATE THE CLASS D COMMON STOCK

 

Our board of directors has approved and is recommending to our stockholders for approval at the Special Meeting a proposal to designate 50,000,000 shares of our Common Stock as Class D Common Stock and to establish the rights and preferences of such shares.

 

If this proposal is approved and if Proposals I, II, IV, V and VI are approved and the private placement is ready to be consummated, we will amend and restate our certificate of incorporation to create the Class D Common Stock in the manner provided in the form of Second Amended and Restated Certificate of Incorporation attached as Annex D, the terms of which are incorporated herein by reference. The form of Second Amended and Restated Certificate of Incorporation includes provisions for each of Proposals I, II and III and assumes that all three proposals will be approved by our stockholders. Because the implementation of Proposals I, II, III, IV, V and VI are interdependent, if Proposals I, II, III, IV, V and VI are not approved then we will not make any of the changes proposed in the form of Second Amended and Restated Certificate of Incorporation and will not file it with the Secretary of State of Delaware. A vote “FOR” this proposal constitutes approval of the form of Second Amended and Restated Certificate of Incorporation as it relates to the designation of the Class D Common Stock and

establishment of the rights and preferences related to such shares. We cannot complete the private placement unless this proposal to create the Class D Common Stock is approved at the Special Meeting.

 

Because approval of Proposal III and filing of the Second Amended and Restated Certificate of Incorporation with the Secretary of State of Delaware would result in the elimination of our Class B Common Stock and Class C Common Stock, our current certificate of incorporation and Delaware law requires that we obtain the additional approval of the holders of a majority of the shares of Class B Common Stock and Class C Common Stock voting separately as classes.

 

Description of Our Existing Classes of Common Stock

 

Our existing certificate of incorporation currently authorizes three classes of common stock. The following is a summary of the terms of our existing Class A Common Stock, Class B Common Stock and Class C Common Stock. Except as set forth below, the Class B Common Stock and Class C Common Stock have the same rights and preferences as our Class A Common Stock.

 

Voting Rights

 

Each holder of Class A Common Stock, Class B Common Stock or Class C Common Stock is entitled to one vote with respect to each share of Class A Common Stock, Class B Common Stock or Class C Common Stock held by such holder (regardless of class). The Class A Common Stock, Class B Common Stock and the Class C Common Stock vote together as a single class on all matters, except as otherwise required by the Delaware General Corporation Law or in the event of certain actions adversely affecting the rights and preferences of the Class B Common Stock or Class C Common Stock as more fully specified in our certificate of incorporation.

 

Subject to the provisions of Section 242(b)(2) of the Delaware General Corporation Law, any term or provision of our certificate of incorporation may be amended, and the number of authorized shares of our capital stock may be increased or decreased, by the affirmative vote of holders of a majority of the votes attributable to the then outstanding shares of Class A Common Stock, Class B Common Stock and Class C Common Stock voting together as a single class. Notwithstanding the foregoing, our certificate of incorporation currently provides that so long as any shares of either the Class B Common Stock or Class C Common Stock are outstanding, the certificate of incorporation may not be amended without the approval of the holders of a majority of the outstanding shares of the Class B Common Stock and/or Class C Common Stock, as applicable, voting separately as a class if such amendment would limit or otherwise modify the powers, designations, preferences, privileges or relative, participating, optional or other special rights of such class, whether by amendment or modification of the certificate of incorporation, by operation of a merger or combination or otherwise. However, the certificate of incorporation does provide that the number of authorized shares of any class or classes of capital stock may be increased or decreased (but not below the number of shares then outstanding) by affirmative vote of the holders of a majority of the votes attributable to then outstanding shares of Common Stock voting together as a single class. Therefore, no separate class vote would be required in this instance with respect to the increases in shares of authorized capital stock and authorized Class A Common Stock set forth in Proposals I and II. However, a separate class vote of the holders of the shares of Class B Common Stock and Class C Common Stock is required in connection with Proposal III because the creation of the Class D Common Stock in accordance with the terms of the form of Second Amended and Restated Certificate of Incorporation requires the elimination of the Class B Common Stock and Class C Common Stock.

 

Distributions

 

Subject to the terms of any preferred stock that our board of directors has the authority to designate and issue in the future, all distributions made by us to our stockholders shall be made to the holders of Class A Common Stock, Class B Common Stock and Class C Common Stock in the following order of priority:

 

 

 

All such distributions must be made ratably among the holders of the class of Common Stock in question, based on the number of shares of such class held or deemed to be held by such holders.

 

Certain events, however, are not considered a distribution for purposes of determining the priority of distributions described above. Such events include: (a) any redemption or repurchase by us of any shares of Class A Common Stock or Class B Common Stock pursuant to the provisions of any other agreement with any of our or our subsidiaries’ directors, officers or employees, (b) any subdivision or increase in the number of (by stock split, stock dividend or otherwise), or any combination in any manner of, the outstanding shares of Class A Common Stock or Class B Common Stock in accordance with our certificate of incorporation, (c) a merger, share exchange or consolidation after the consummation of which our stockholders immediately prior to such merger, share exchange or consolidation effectively have the power to elect a majority of the board of directors of the surviving corporation or its parent corporation and (d) any other distribution, redemption, repurchase or other action at any time when there is any share of Class B Common Stock outstanding if the holders of a majority of the shares of Class B Common Stock then outstanding determine that such distribution, redemption, repurchase or other action shall not constitute a distribution for purposes of the above.

 

If our sale or liquidation occurs, or if we enter into a merger or business combination, the liquidation and distribution preferences of the Class B Common Stock and Class C Common Stock would result in the holders of Class B Common Stock and Class C Common Stock receiving a greater portion of the proceeds of such a transaction than such holders would be entitled to if the proceeds were allocated to holders of common stock pro rata based on their portion of our total equity. That is, in a sale, liquidation, merger or business combination, the payment of the preferences described above means that holders of Class B Common Stock and Class C Common Stock receive a share of the proceeds first, and then any remaining proceeds are divided among all of the shareholders of all classes of common stock. For example, if we were sold for a price at or near the amount of the preferences owed to holders of Class B and Class C Common Stock, there could be little or nothing left for distribution to holders of Class A Common Stock after such preferences are paid.

 

Conversion

 

Holders of shares of Class B Common Stock have the option to convert their shares of Class B Common Stock into shares of Class A Common Stock at any time based on a conversion factor in effect at the time of the conversion. The conversion factor is designed to yield one share of Class A Common Stock per share of Class B Common Stock converted, plus such additional shares of Class A Common Stock, or portions thereof, necessary to approximate the unpaid portion of $1.15 per share, plus an amount equal to nine percent (9%) per annum on such amount, without compounding, from the date the Class B Common Stock was first issued to the date of conversion. The conversion factor is calculated based on a number equal to one plus the quotient of $1.15, plus 9% per annum (not

compounded), divided by the fair market value (which is determined by reference to the prices at which Class A Common Stock trades immediately prior to the conversion). Therefore, so long as the Class B Common Stock has not yet received a full return of its $1.15 and a 9% rate of return, if the market value of a share of Class A Common Stock increases, a share of Class B Common Stock will convert into fewer shares of Class A Common Stock, and if the market value of Class A Common Stock shares decreases, a share of Class B Common Stock will convert into more shares of Class A Common Stock. As of the record date, the current conversion factor is [6.313441095890] (one share of Class B Common Stock converts into [6.313441095890] shares of Class A Common Stock), and is subject to adjustment to account for anti-dilution protection, stock splits, stock dividends and certain other actions as more fully specified in our certificate of incorporation.

 

Holders of shares of Class C Common Stock have the option to convert their shares of Class C Common Stock into shares of Class A Common Stock at any time based on a conversion factor in effect at the time of the conversion. The conversion factor is designed initially to yield one share of Class A Common Stock per share of Class C Common Stock converted, with the number of shares of Class A Common Stock reducing to the extent that distributions are paid on the Class C Common Stock. The conversion factor is calculated as (x) the amount by which $3.30 exceeds the aggregate distributions made with respect to a share of Class C Common Stock divided by (y) $3.30. As of the record date, the current conversion factor is one (one share of Class C Common Stock converts into one share of Class A Common Stock) and is subject to adjustment to account for stock splits, stock dividends, combinations or other similar events affecting Class A Common Stock.

 

Notwithstanding the Class C Common Stock conversion formula described above, if the fair market value used in determining the conversion factor for the Class B Common Stock in connection with any conversion of Class B Common Stock is less than $3.30 (subject to adjustment to account for stock splits, stock dividends, combinations or other similar events affecting Class A Common Stock), holders of shares of Class C Common Stock have the option to convert their shares of Class C Common Stock (within 10 days of receipt of notice of the conversion of the Class B Common Stock) into a number of shares of Class A Common Stock equal to (x) the amount by which $3.30 exceeds the aggregate distributions made with respect to a share of Class C common stock divided by (y) the fair market value used in determining the conversion factor for the Class B Common Stock. The aggregate number of shares of Class C Common Stock so converted by any holder shall not exceed a number equal to (a) the number of shares of Class C Common Stock held by such holder immediately prior to such conversion plus the number of shares of Class C Common Stock previously converted into Class A Common Stock by such holder multiplied by (b) a fraction, the numerator of which is the number of shares of Class B Common Stock converted at the lower price and the denominator of which is the aggregate number of shares of Class B Common Stock issued on December 15, 2004. Assuming conversion of the shares of Class B Common Stock at [$0.25] on the record date, the conversion factor would be [13.2] (one share of Class C Common Stock converts into [13.2] shares of Class A Common Stock).

 

Rights and Preferences of the Class D Common Stock

 

Except as set forth below, the Class D Common Stock will have the same rights and preferences as our Class A Common Stock:

 

 

 

 

 

A copy of the form of Second Amended and Restated Certificate of Incorporation including the amendments proposed herein is attached to this Proxy Statement as Annex D. The form of Second Amended and Restated Certificate of Incorporation eliminates the terms of the Class B Common Stock and the Class C Common Stock because it is a condition to closing of the private placement that all of these shares are either converted into shares of Class A Common Stock or purchased by us and retired. Therefore, approval of Proposal III would result in elimination of the Class B Common Stock and the Class C Common Stock.

 

No Dissenter’s Rights

 

Under the Delaware General Corporation Law, our stockholders are not entitled to dissenter’s rights with respect to the designation of the Class D Common Stock and the establishment of the rights and preferences with respect to such shares, and we will not independently provide stockholders with any such right.

 

Required Stockholder Approval

 

The affirmative vote of each of the following will be required to approve this proposal: (i) the holders of a majority of the votes attributable to the then outstanding shares of Common Stock voting together as a single class, (ii) the holders of a majority of the votes attributable to the then outstanding shares of Class B Common Stock voting separately as a class and (iii) the holders of a majority of the votes attributable to the then outstanding shares of Class C Common Stock voting separately as a class. As such, abstentions and broker non-votes will have the same effect as a vote “AGAINST” this proposal. If our stockholders approve the creation of the Class D Common Stock, subject to approval by the stockholders of Proposals I, II and IV, it will become effective upon our filing of the Second Amended and Restated Certificate of Incorporation with the Secretary of State of Delaware, which is expected to take place immediately prior to the completion of the private placement.

 

THE BOARD OF DIRECTORS RECOMMENDS THAT ALL STOCKHOLDERS VOTE, OR INSTRUCT THEIR VOTES TO BE CAST, “FOR” APPROVAL OF THE CREATION OF THE CLASS D COMMON STOCK.

 

Due to the interrelated nature of each of the contemplated transactions to be consummated by us if Proposals IV, V and VI are approved, each transaction must also be understood in order to fully understand each of the other transactions. The following background material regarding the private placements, the acquisitions and

related matters is subject to and qualified in its entirety by reference to each of the Private Placement Agreements, the form of Warrant Certificate, the Rand stock purchase agreement, the On Line stock purchase agreement and the purchase agreement regarding the purchase of Class B Common Stock from Brantley Capital, copies of which are attached as Annexes A, B, N, C, L and M, respectively, to this Proxy Statement and the terms of which are incorporated into this Proxy Statement by reference.

 

General

 

At a meeting of the board of directors held on March 31, 2005, at which all board members were present, management presented an analysis of the strengths, weaknesses, opportunities and threats of each of the surgery center, physician billing and collection, ASP software and physician practice management businesses. The discussion included an analysis of current operations and new business and growth opportunities. After a lengthy discussion, the board determined that the strategy of the business would be to focus on the billing and collection business and to look at strategic alternatives for the ASP and surgery center businesses. The board also instructed management to look at reducing costs associated with the corporate infrastructure.

 

At our board meeting held on April 11, 2005, at which all board members were present, Mr. Cascio led a discussion on the strategic alternatives discussed at the March meeting and our strategic plan was further refined and management was directed to proceed with the implementation of this plan.

 

In April 2005, we announced the initiation of a strategic plan designed to accelerate our growth and enhance our future earnings potential. The plan was to focus on our strengths, which include providing billing, collections and complementary business management services to physician practices. As part of this strategic plan, we announced that we would begin to divest certain non-strategic assets. In addition, we announced that we would cease investment in business lines that do not complement our strategic plan and would redirect financial resources and company personnel to areas that we believe enhance long-term growth potential.

 

During the summer of 2005 in furtherance of our acquisition strategy, we engaged an investment banking firm to help us identify acquisition targets in the billing and collection services industry. At board meetings held on June 1, 2005 and August 16, 2005, at which all board members were present (other than Messrs. LeBlanc and McIntosh, who were absent from the August 16, 2005 meeting), management reported to the board on the progress of the implementation of our strategic plan. In particular, the board engaged in a discussion of acquisition opportunities and directed management to establish parameters for potential acquisitions. At the August meeting, management presented a proposed engagement letter with Stephens, Inc. to serve as an investment banker to assist us in raising additional capital to help finance our potential acquisitions. After discussion, the board directed management to engage in discussions with a number of investment banking firms to ensure that we engaged a firm that would be most beneficial to us throughout this process.

 

In the third quarter of 2005, we successfully completed the consolidation of corporate functions into our Roswell, Georgia facility and also completed a series of divestitures of non-strategic assets in late 2005 and early 2006. With the completion of these divestitures, we believe that we are now positioned to focus on our physician services business and the physician billing and collections market, leveraging our existing presence to expand into additional geographic regions and increase the range of services we provide to physicians. Part of this strategy is to acquire financially successful billing companies focused on providing services to hospital-based physicians and increasing sales and marketing efforts in existing markets.

 

We determined that any acquisitions would require additional capital, and, in November 2005, we made a determination to explore potential sources of financing. At that time we engaged the investment banking firm of Stephens, Inc. to help us identify sources of financing, as well as help us structure the financing required for us to complete potential acquisitions. At our board meeting held on November 15, 2005, at which all board members were present, management provided the board with a presentation provided by Stephens, Inc. as well as an engagement letter. After discussion the board unanimously approved the hiring of Stephens, Inc.

 

Acquisitions

 

In December 2005 we engaged a consultant to provide us with introductions to other potential acquisition targets. As a result of both the investment banker and consultant, introductions to management at Rand and the On

Line businesses were made in December 2005 and January 2006 and we began the diligence process with respect to these businesses.

 

During the first and second quarters of 2006 we identified a number of potential acquisition candidates in the physician billing and collection businesses. We approached several of these candidates regarding a potential acquisition and were able to come to an agreement in principle with two of these businesses. In January 2006 we negotiated a non-binding letter of intent with the owners of the On Line businesses, and after conducting our diligence investigations into their financial, legal and business operations, we began negotiating definitive agreements. Likewise, in March 2006, we negotiated a non-binding letter of intent with the owner of the Rand business, and after conducting our diligence investigations into their financial, legal and business operations, we began negotiating definitive agreements. These negotiations resulted in our execution of the Stock Purchase Agreement, dated September 8, 2006, with the stockholder of Rand and the Stock Purchase Agreement, dated September 8, 2006, with the stockholders of the On Line businesses. While these businesses do not represent the only acquisition candidates with which management negotiated and conducted diligence investigations, they represent the businesses that management was most desirous of acquiring at this time.

 

At meetings of the board of directors on March 3, 2006 and March 17, 2006, at which all board members were present (other than Mr. Finn who was absent from the March 3, 2006 meeting) the board engaged in discussions regarding our strategic plan. At the March 3, 2006 meeting, Stephens, Inc. led a presentation to the board reviewing our proposed capital raise, discussion of the process, strategy and potential acquisitions as well as discussed a partial list of potential investors. At the March 17, 2006 meeting, management led a discussion regarding potential acquisition opportunities including Rand and On Line as well as provided an investor presentation prepared by management and Stephens for use in connection with the capital raise.

 

The board held a meeting on May 12, 2006, at which all board members were present, to discuss the progress with the proposed acquisitions of the Rand and On Line businesses. Management identified the principal financial terms of the proposed transactions and the board engaged in a discussion of these terms. In addition, management updated the board on the current status of the private placement, including identifying potential investors contacted and their responses. The board directed management to solicit proposals from firms regarding a fairness opinion and to report back to the board.

 

Private Placements

 

During the time that management was negotiating with the owners of Rand and On Line, management, with the assistance of Stephens, identified potential investors to approach with respect to providing financing for our ongoing business operations and these potential acquisitions.

 

At the board meeting held on July 19, 2006, at which all board members were present, management reviewed the process and the numerous discussions and meetings that management had with potential investors. The board was advised that management had received a term sheet relating to an investment by Phoenix and Brantley IV. The terms of the proposed investment were presented to the board. The board discussed the terms of the proposed private placement in detail as well as the status of discussions with other potential investors.

 

Because of the affiliation of Messrs. Cascio and Finn with Brantley IV, and because Phoenix is a limited partner of Brantley IV, our board of directors appointed a special committee of the board of directors to consider all aspects of the negotiation and approval of the Private Placement Agreements with Brantley IV and Phoenix on behalf of our board of directors. The board empowered the special committee to (i) review, negotiate and approve all aspects of the proposed investment in which Brantley IV and Phoenix are involved, (ii) select and approve a firm to issue a fairness opinion with respect to the terms of such proposed investment, and (iii) to engage professional advisors, as needed. The special committee was appointed on July 19, 2006 and consisted of David Crane and Joseph M. Valley, Jr. During the negotiation of the Private Placement Agreements, we, on the one hand, and Brantley IV and Phoenix, on the other hand, were separately represented by counsel. Additionally, the special committee, after consideration of several proposals at its July 19, 2006 special committee meeting, engaged an independent firm, Valuation Research Corporation, to evaluate the price to be paid in the issuance of the Class D Common Stock for fairness from a financial point of view to our stockholders other than Brantley IV and Phoenix.

 

At the July 19, 2006, meeting of the special committee, at which both members were present, the members considered the terms of the investment by Brantley IV and Phoenix. The members discussed the terms, the status of

negotiations with other potential investors and other potential alternative transactions at that time. Following the discussions, the special committee approved the terms of the proposed investments and authorized management to negotiate and finalize the terms of such investment subject to special committee approval of the final documentation.

 

The special committee met on August 8, 2006, September 1, 2006, and September 8, 2006, at which both members were present, to discuss the status of, and approve changes to, the proposed investment terms and agreements. On August 25, 2006, Valuation Research Corporation made an oral presentation to the special committee consisting of a preliminary overview of the methodologies it was undertaking and the analysis it was performing with respect to its opinion. After changes were negotiated by management and approved by the special committee to the terms of the private placement, on September 1, 2006, Valuation Research once again made an oral presentation to the special committee regarding its analysis. At the meeting held on September 8, 2006, principals from Valuation Research presented the terms of the fairness opinion. The principals of Valuation Research recounted the analysis they performed and identified the substantive components of their findings. Copies of the fairness opinion and related presentation were provided to each member of the special committee prior to the meeting. Following the presentation, a discussion ensued and the members of the special committee questioned the principals from Valuation Research regarding the nature of their analysis and results. At this meeting the members of the special committee approved the terms and conditions of the Private Placement Agreements and authorized the executive officers to enter into the Private Placement Agreements and recommended that our stockholders approve the sale of the Class D Common Stock and the issuance of the warrants to purchase shares of Class A Common Stock, pursuant to the Private Placement Agreements and the Warrant Certificate.

 

On September 8, 2006, the board also held a meeting, at which all board members were present, to approve the terms of the Rand and On Line acquisition agreements, the amendments to our certificate of incorporation and the purchase agreement with Brantley Capital. After discussion the board unanimously approved the Rand and On Line acquisitions, the revised certificate of incorporation, the agreement with Brantley Capital, the issuance of shares of the Class A Common Stock as partial consideration for the Rand acquisition (and recommended that our stockholders approve such issuance) and the filing of our Proxy Statement.

 

After months of discussions and meetings with many of these parties, including weekly meetings with Stephens, Inc. personnel, we were ultimately able to reach agreement on terms of the private placement with Phoenix and Brantley IV.

 

We have entered into a Stock Purchase Agreement dated as of September 8, 2006 with Phoenix and Brantley IV. Pursuant to the terms of the Stock Purchase Agreement, we will, subject to stockholder approval and satisfaction of the other closing conditions set forth therein, issue, for an aggregate purchase price of $4,650,000, such number of shares of our Class D Common Stock representing upon conversion 19.375% of our outstanding Class A Common stock as of the date of issuance of the Class D common Stock, on a fully-diluted basis taking into account the issuance of the shares of Class D Common Stock but excluding certain of our outstanding options, warrants and convertible securities and certain shares of Class B Common Stock to be purchased by us from Brantley Capital.

 

We have also entered into a Note Purchase Agreement dated as of September 8, 2006 with Phoenix. Pursuant to the terms of the Note Purchase Agreement, we will, subject to stockholder approval and satisfaction of the other closing conditions set forth therein, issue, for an aggregate purchase price of $3,350,000, (i) our senior unsecured subordinated promissory notes due 2011 in the original principal amount of $3,350,000 and (ii) warrants to purchase shares of our Class A Common Stock equal to 1.117% of our outstanding Class A Common Stock on the date of issuance of the Warrant Certificate, on a fully-diluted basis taking into account the issuance of the shares of Class D Common Stock described above but excluding certain of our outstanding options, warrants and convertible securities and certain shares of Class B Common Stock to be purchased by us from Brantley Capital.

 

Interests of Our Directors and Officers in the Private Placement

 

Phoenix is a limited partner in Brantley IV and Brantley Partners V, L.P. Two of our directors, Paul H. Cascio and Michael J. Finn, are affiliated with Brantley IV and its related entities. Pursuant to the Stock Purchase Agreement, Phoenix and Brantley IV will pay $3,000,000 and $1,650,000, respectively, for the purchase of shares of our Class D Common Stock. Also, pursuant to the Note Purchase Agreement, Phoenix will pay $3,350,000 for our senior subordinated and notes and our warrants to purchase shares of our Class A Common Stock. Paul Cascio and Michael J.

Finn serve as general partners of the general partner of Brantley III and Brantley IV and are limited partners in these funds. Neither Phoenix, Brantley IV nor Messrs. Cascio or Finn are affiliated with Brantley Capital. The advisor to Brantley III is Brantley Venture Management III, L.P. and the advisor to Brantley IV is Brantley Management IV, L.P.

 

Because of the affiliation of Messrs. Cascio and Finn with Brantley IV, which is a purchaser under the Stock Purchase Agreement, and because Phoenix is a limited partner of Brantley IV, our board of directors appointed a special committee of the board of directors to consider all aspects of the negotiation and approval of the Private Placement Agreements with Brantley IV and Phoenix on behalf of our board of directors. The special committee consists of David Crane and Joseph M. Valley, Jr. When you consider the recommendation of our special committee that you vote “FOR” the adoption of Proposals IV and V, you should keep in mind that Messrs. Cascio and Finn may have interests in the private placement that are different from, or in addition to, your interest as a stockholder.

 

Our special committee was aware of these affiliations during its deliberations on the merits of the issuance of the shares of Class D Common Stock and the warrants to purchase shares of Class A Common Stock as part of the private placement and in determining to recommend to our stockholders that they vote “FOR” approval of the issuance of the Class D Common Stock and the warrants to purchase shares of Class A Common Stock pursuant to the Private Placement Agreements and the Warrant Certificate.

 

Our Reasons for the Private Placement

 

Our special committee has concluded that the terms of the Private Placement Agreements with Brantley IV and Phoenix are in the best interests of our stockholders and that the consummation of the private placement in accordance with the terms of the Private Placement Agreements (including the issuance of the Class D Common Stock and the warrants to purchase shares of Class A Common Stock) is in the best interests of our stockholders.

 

In approving the Private Placement Agreements and the issuance of our shares pursuant to the Private Placement Agreements, our special committee relied on information (including financial information) relating to our strategic plan, selected acquisition targets, the regulatory environment and industry, and the available financing opportunities. In addition, the special committee considered Valuation Research Corporation’s opinion that, based on conditions and considerations described in its opinion, the price to be paid for the Class D Common Stock to us is fair from a financial point of view to the stockholders other than Brantley IV and Phoenix.

 

In assessing the overall market for billing, collections and complementary business management services to physician practices and other factors, the special committee considered the following:

 

 

 

 

 

 

In addition, our special committee considered a wide variety of factors in connection with its evaluation of the Private Placement Agreements. In light of the complexity of those factors, the special committee did not consider it

practicable to, nor did it attempt to quantify or otherwise assign relative weights to specific factors it considered in reaching its decision. Some of the factors considered by the special committee are as follows:

 

Positive Factors:

 

 

 

 

 

 

 

 

Negative Factors:

 

 

 

 

 

 

 

In assessing the foregoing factors, the board, including the members of the special committee, was provided with reports and summaries regarding the status of the billing and collections industry based on market research conducted by management. The board also reviewed our historical financial information and performance; background, financial and general information regarding Rand and On Line; Valuation Research’s fairness opinion and background presentation; presentations prepared by Stephens, Inc. regarding financial opportunities, the presentation used by us in connection with discussions with private investors as well as copies of the Private Placement Agreements and acquisition agreements and related documents.

 

Purchase of our Class B Common Stock from Brantley Capital

 

On September 8, 2006 we entered into a purchase agreement with Brantley Capital to purchase all 1,722,983 shares of our Class B Common Stock owned by Brantley Capital at any time between now and December 31, 2006 for an aggregate purchase price of $482,435. Upon our acquisition of these shares of Class B Common Stock they will be retired in accordance with the terms of our certificate of incorporation. We plan to consummate this purchase simultaneous with the closing of the private placement. We anticipate using a portion of the proceeds from the private placement, along with proceeds from senior bank financing and other funds available to us, to fund the purchase price for our purchase of the shares of Class B Common Stock owned by Brantley Capital. A copy of the purchase agreement with Brantley Capital is attached here to as Annex M.

 

These shares represent about 16.5% of our outstanding shares of Class B Common Stock (and about [11.5%] of our outstanding shares of Class A Common Stock on a fully-diluted basis assuming conversion as of the record date) and our purchase of these shares will assist us in satisfying the closing condition to the private placement that requires all holders of shares of our Class B Common Stock and Class C Common Stock to have converted or been acquired by us. Brantley Capital had previously informed us that they would not convert their shares as required in connection with the consummation of the private placement and our board of directors determined that the terms of this purchase were in the best interests of our stockholders and our ability to consummate the private placement. If Brantley Capital were to convert these shares to shares of Class A Common Stock, then, as of the record date, they would convert into [10,877,952] shares of Class A Common Stock. Our purchase and retirement of these shares would eliminate the dilution resulting from conversion of these shares and would have an accretive effect to all other stockholders.

 

Sources and Use of Proceeds

 

Some or all of the proceeds we receive upon consummation of the transactions set forth in the Private Placement Agreements, along with proceeds from senior bank financing and other funds available to us, will be used to finance a portion of the acquisitions of the Rand and On Line businesses, our purchase of certain shares of our Class B Common Stock from Brantley Capital and for general working capital purposes.

 

Below is a summary of the sources and uses of funds in connection with the transactions described in this Proxy Statement. Additional information regarding the sources and uses of funds can be found under the headings “Private Placement Agreements” and “Acquisitions” below.

 

 

New Senior Secured Credit Facility

 

We have entered into a non-binding letter of intent (a copy of which is attached as Annex O) with Wells Fargo Foothill, Inc. for the provision of a new senior secured credit facility in the aggregate principal amount of

$16,500,000, consisting of a $2,000,000 revolving loan commitment, a $4,500,000 term loan and a $10,000,000 acquisition facility commitment available for future acquisitions. We are currently negotiating the definitive terms of the documentation for this credit facility but anticipate that the substantive provisions of the relevant agreements will be as follows. The credit facility will have a maturity of four years and will be secured by a first priority security interest in substantially all of our assets, including the assets of the Rand and On Line businesses following consummation of those acquisitions. The loans under the credit facility will bear interest at floating rates of interest that would be in the range of the prime rate plus 1.75% or LIBOR plus 3.75%. Availability under the revolving loan will be dependent on our ability to meet a borrowing base formula determined based on certain multiples of our pro forma trailing twelve month earnings before interest, taxes, depreciation and amortization (“EBITDA”). The credit facility will be subject to certain mandatory prepayment obligations and certain prepayment penalties. In addition, we will be obligated to meet certain financial covenants including maintenance of minimum levels of EBITDA and minimum levels of customer turnover, maintenance of certain fixed charge coverage ratios and maximum leverage ratios, and limitations on annual capital expenditures. The obligations of this lender to consummate the credit facility will be subject to certain closing conditions, including negotiation of definitive documentation and diligence investigations. We anticipate that the closing of the credit facility will occur simultaneously with the closing of the private placement and the acquisitions of the Rand and On Line businesses. Our consummation of a credit facility of at least $6,500,000 with a senior lender is a condition to the obligations of Phoenix and Brantley IV to consummate the private placement and a portion of the funds available under such credit facility will be necessary to consummate the acquisitions of the Rand and On Line businesses. There is no guarantee that we will be able to consummate this credit facility on these terms or with this institutional lender. If we are unable to reach agreement on a credit facility with this lender, then we will seek to find another institutional lender to provide a credit facility on similar terms, but there is no guarantee that we will be able to find such a lender or be able to negotiate similar terms to such credit facility.

 

Necessity for Stockholder Approval

 

As a result of our Class A Common Stock being listed for trading on AMEX, issuances of our Common Stock are subject to the provisions of the AMEX Company Guide, including Sections 712 and 713. Pursuant to Section 712 of the AMEX Company Guide, prior to seeking to have any additional shares of our Class A Common Stock listed on AMEX which shares are to be used as consideration for the acquisition of another company, we must seek stockholder approval if, among other things, the present or potential issuance of our Class A Common Stock (or securities convertible into our Class A Common Stock) could result in an increase by 20% or more in the number of our outstanding shares of Class A Common Stock.

 

Similarly, pursuant to Section 713 of the AMEX Company Guide, prior to seeking to have any additional shares of our Class A Common Stock listed on AMEX in connection with any such transaction, we must seek stockholder approval if such shares are to be sold, issued or potentially issued both (i) at a price less than the greater of book or market value, and (ii) either (a) such shares together with shares sold by our officers, directors or principal stockholders equals 20% or more of the number of shares of our presently outstanding Class A Common Stock (on an as converted basis) or (b) such shares equal to 20% or more of the number of shares of our presently outstanding Class A Common Stock (on an as converted basis).

 

Pursuant to the terms of the Private Placement Agreements and as more fully described in this Proxy Statement under Proposals IV and V, we intend to issue (i) shares of our Class D Common Stock, representing upon conversion 19.375% of our outstanding Class A Common Stock as of the date of issuance of the Class D Common Stock, on a fully-diluted basis taking into account the issuance of the shares of Class D Common Stock but excluding certain of our outstanding options, warrants and convertible securities and certain shares of Class B Common Stock to be purchased by us from Brantley Capital and (ii) warrants to purchase shares of our Class A Common Stock equal to 1.117% of our outstanding Class A Common Stock on the date of issuance of the warrants, taking into account the issuance of the shares of Class D Common Stock described in this Proxy Statement but excluding certain of our outstanding options, warrants and convertible securities and certain shares of Class B Common Stock to be purchased by us from Brantley Capital. In addition, pursuant to the terms of the stock purchase agreement for the acquisition of Rand and as more fully described below, we have agreed to issue such number of shares of our Class A

Common Stock having a value of $600,000 based on the average closing price per share of our Class A Common Stock for the twenty day period prior to the closing of the acquisition of Rand.

 

If we were to consummate the private placement and the Rand acquisition as of our record date, October 20, 2006, we would be obligated to issue [20,662,163] shares of Class D Common Stock (representing [18.4%] of our Class A Common Stock on an as converted basis) pursuant to the Private Placement Agreements, warrants to purchase [1,191,207] shares of our Class A Common Stock (representing [1.1%] of our Class A Common Stock on an as converted basis) pursuant to the Private Placement Agreements and the Warrant Certificate and [2,400,000] shares of our Class A Common Stock (representing [2.1%] of our Class A Common Stock on an as converted basis) in connection with the Rand acquisition. The closing price of our Class A Common Stock on the record date was [$0.25] per share. While none of these transactions individually would require issuances in excess of 20% of our outstanding Class A Common Stock (on an as converted basis), the combination of all three issuances will exceed 20% of our outstanding Class A Common Stock (on an as converted basis) and the issuance of the shares to Phoenix and Brantley IV and the warrants to Phoenix in the private placement, if consummated on October 20, 2006, would be at a price per share of $0.     , representing a $0.      per share discount from the closing price of [$0.25] for a share of our Class A Common Stock. In addition, since the price per share used in the calculation of the shares to be issued in the Rand acquisition is based on a twenty day average, it is possible that the shares issued in that transaction may be issued at a discount, at a premium or at market. If consummated on October 20, 2006, the shares in the Rand acquisition would have been issued at $.      per share, representing a [discount] [premium] of $0.      per share from the closing price of [$0.25] per share. Representatives of AMEX have advised us that they would aggregate these three transactions for purposes of determining whether stockholder approval is required under Sections 712 and 713 of the AMEX Company Guide. Therefore, our board of directors has decided to submit Proposals IV, V and VI to our stockholders for their consideration and approval prior to consummating these transactions.

 

As described above, as part of our financing, on September 8, 2006 we entered into a Stock Purchase Agreement with Phoenix and Brantley IV pursuant to which we agreed to issue, for an aggregate purchase price of $4,650,000, such number of shares of our Class D Common Stock representing upon conversion 19.375% of our outstanding Class A Common Stock as of the date of issuance of the Class D Common Stock, on a fully-diluted basis taking into account the issuance of the shares of Class D Common Stock but excluding certain of our outstanding options, warrants and convertible securities and certain shares of Class B Common Stock to be purchased by us from Brantley Capital. If we were to consummate the private placement as of our record date, October 20, 2006, we would be obligated to issue [20,662,163] shares of Class D Common Stock (representing [18.4%] of our Class A Common Stock on an as converted basis) pursuant to the Stock Purchase Agreement. Proposal IV seeks stockholder approval of the issuance of these shares of our Class D Common Stock to Phoenix and Brantley IV pursuant to the Stock Purchase Agreement. Reference is hereby made to the summary of terms of this transaction appearing above, the summary of the Stock Purchase Agreement appearing below, and the Stock Purchase Agreement attached hereto as Annex A.

 

Opinion of Financial Advisor

 

On July 21, 2006, our board of directors retained Valuation Research Corporation to provide an opinion to the board of directors and the special committee as to the fairness, from a financial point of view, to the stockholders other than Brantley IV and Phoenix of the price to be paid for the shares of Class D Common Stock to be issued to Brantley IV and Phoenix pursuant to the Stock Purchase Agreement. We paid Valuation Research Corporation approximately $88,000, plus reimbursement of reasonable out-of-pocket expenses, for its services with respect to providing the fairness opinion and related materials preparation. No portion of Valuation Research Corporation’s fee is contingent upon the conclusions reached in its opinion, the closing of the private placement transaction or consummation of any acquisition transaction.

On August 25, 2006, Valuation Research Corporation made an oral presentation to the special committee consisting of a preliminary overview of the methodologies it was undertaking and the analysis it was performing with respect to its opinion. After discussion with the special committee and further analysis, Valuation Research Corporation presented its opinion both orally and in writing on September 8, 2006 stating that, as of such date, and subject to the assumptions, limitations and qualifications set forth in its written opinion, the price to be paid for the shares of Class D Common Stock to be issued to Brantley IV and Phoenix pursuant to the Stock Purchase Agreement is fair to the stockholders, other than Brantley IV and Phoenix, from a financial point of view.

 

In undertaking its analysis Valuation Research Corporation, among other things, (i) reviewed drafts of relevant transaction documents; (ii) reviewed historic and projected financial information from our management; (iii) conducted an in-person visit to our corporate headquarters and held telephonic discussions with certain members of our management team with respect to, among other subjects, our past, present, and future operating and financial conditions; (iv) reviewed public information regarding our industry, including with respect to certain publicly traded companies that Valuation Research Corporation deemed comparable to us and certain mergers and acquisitions involving businesses that Valuation Research Corporation deemed comparable to us; and (v) conducted such other reviews, analyses and inquiries and considered such other economic, industry, market, financial, other information and data as they deemed appropriate.

 

Overview of Opinion

 

Valuation Research Corporation’s opinion is not intended to be, and does not constitute, a recommendation to any stockholder as to how such stockholder should vote with respect to the proposals set forth in this Proxy Statement. Valuation Research Corporation’s opinion does not address the fairness of the consideration to be paid, or received, in connection with or the fairness of the acquisitions of Rand or On Line. In addition, the only opinion expressed by Valuation Research Corporation is that the price to be paid to us for the shares of Class D Common Stock to be issued to Brantley IV and Phoenix pursuant to the Stock Purchase Agreement is fair, from a financial point of view, to our stockholders, excluding Brantley IV and Phoenix. Valuation Research Corporation does not express any opinion with respect to the fairness of the purchase by us of shares of our Class B Common Stock from Brantley Capital.

 

Valuation Research Corporation presented its analysis, as described below, at the meeting of the special committee on September 8, 2006, in connection with the special committee’s consideration of the approval of the terms of the Stock Purchase Agreement, including the issuance of the shares of Class D Common Stock. Valuation Research Corporation’s opinion assumes that we are a going concern and gives effect to the consummation of the transactions described in this Proxy Statement. For purposes of conducting its analysis, Valuation Research Corporation’s opinion assumes that the closing price of our Class A Common Stock at the time of consummation of the transactions described in this Proxy Statement is the same as it was on September 7, 2006, $0.23 per share. Based on this assumption Valuation Research Corporation calculated that 21,969,024 shares of Class D Common Stock would be sold to the investors for $4,650,000.

 

In undertaking its analysis, Valuation Research Corporation deemed that the $4,650,000 of consideration to be received by us in exchange for issuance of the Class D Common Stock consists of two components of value: (1) the value associated with the 9% per annum, non-compounding dividend on the shares of Class D Common Stock (the “Dividend Preference”) and (2) the residual equity value of the shares of Class D Common Stock (the “Class D Common Equity” or “Class D Common Equity Value”). Valuation Research Corporation used an internal rate of return analysis to allocate the $4,650,000 purchase price between the Class D Common Equity Value and the Dividend Preference value. Applying a 20.5% discount rate over five years, Valuation Research Corporation determined that the Dividend Preference had a value of $825,000, which resulted in a Class D Common Equity Value of $3,825,000. Valuation Research Corporation selected a 20.5% discount rate by adding a spread, determined through its professional judgment and experience, to the implied combined return of the 14% senior unsecured promissory note and warrant to purchase 1.117% of the outstanding Class A Common Stock issued to Phoenix. Valuation Research Corporation further determined, based on the Class D Common Equity Value and the number of shares of Class D Common Stock to be issued, that the investors would be paying a cash price of $0.17 per Class D Common Equity share.

Valuation Research Corporation used several methodologies to assess the fairness, from a financial point of view, of the deemed $0.17 price per Class D Common Equity share. The following is a summary of the financial analyses performed by Valuation Research Corporation in connection with rendering its opinion. The full text of Valuation Research Corporation’s opinion, dated September 8, 2006, which describes, among other things, the limitations on such opinion as well as the assumptions and qualifications made, general procedures followed, and matters considered by Valuation Research Corporation in its review, is attached as Annex E to this Proxy Statement. The summary of Valuation Research Corporation’s opinion contained in this Proxy Statement is qualified in its entirety by reference to the full text of the opinion. You are urged to carefully read Valuation Research Corporation’s opinion in its entirety, especially with respect to the qualifications and limitations set forth in it.

 

Valuation Research Corporation’s analyses included a fundamental valuation of us using a market and acquisition multiples approach and a discounted cash flow approach.

 

Valuation Research Corporation performed each of the following analyses based upon its view that each is appropriate and reflective of generally accepted valuation methodologies in light of the industries in which we operate, our trading volume relative to total shares outstanding, the accessibility of information regarding comparable publicly-traded companies and the availability of projections from our management. Further, Valuation Research Corporation did not rely exclusively on any one methodology but rather it considered all of the following methodologies in arriving at its conclusions.

 

No company, transaction or business used in the market and acquisition multiples approach as a comparison is identical to us. Accordingly, an analysis of the results of the foregoing is not entirely mathematical; rather it involves complex considerations and judgments concerning differences in the financial and operating characteristics and other factors that could affect the acquisitions, public trading and other values of the comparable companies, selected transactions or the business segment, company or transactions to which they are being compared. The analyses were prepared solely for purposes of Valuation Research Corporation’s opinion to our special committee as to the fairness, from a financial point of view, of the price to be paid for the Class D Common Stock.

 

Market and Acquisition Multiples Approach

 

The purpose of the market and acquisition multiples approach is to determine a range of values for shares of our Class A Common Stock on a fully diluted basis, which range is then compared to the $0.17 per share price deemed to be paid for the Class D Common Equity on a fully converted basis.

 

This approach to valuation involves the analysis of certain other publicly-traded companies and companies that have been acquired in recent change-of-control transactions that Valuation Research Corporation selected because they have certain business operations, financial characteristics and fundamental economic and industry drivers that provide a reasonable basis for comparison to us for valuation purposes. The analysis involves comparing financial and operating data, such as earnings and cash flow, to aggregate market value of equity and/or enterprise value (or aggregate value of equity plus debt, preferred stock and minority interest, net of cash) to generate valuation metrics, or multiples. The associated multiples, are derived from publicly-traded stock prices and acquisitions of controlling interests in companies. The multiples exhibited from the publicly-traded stock prices and from the selected change-of-control transactions are then used as a basis for selecting an appropriate range of multiples for us to generate a range of per share values for Class A Common Stock on a fully diluted basis, which range is then compared to the $0.17 per share price deemed to be paid for the Class D Common Equity. Multiples are generally regarded as an expression of what investors believe to be an appropriate rate of return for a particular security given the inherent risks of ownership of such security.

 

Accordingly, in connection with this analysis, Valuation Research Corporation reviewed certain financial information of publicly-traded companies engaged in the healthcare industry. The publicly-traded companies selected by Valuation Research Corporation for analysis included Triad Hospitals Inc., Universal Health Services Inc., Lifepoint Hospitals, Inc., Per-Se Technologies Inc., Alliance Imaging Inc., AmSurg Corp, Symbion Inc., Eresearchtechnology Inc., U.S. Physical Therapy Inc., Sunlink Health Systems, Inc., Propspect Medical Holdings,

Inc., UCI Medical Affiliates Inc., and Emergent Group Inc. Valuation Research Corporation noted that no single publicly-traded company used in this analysis is directly comparable to us.

 

Valuation Research Corporation calculated and considered certain financial ratios of the selected publicly-traded companies based on publicly available information, including, among others, the multiples of enterprise value (“EV”), the equity value of the comparable company plus all interest-bearing debt, preferred securities, and minority interests, less cash and cash equivalents to EBITDA for, the latest twelve month period ended June 30, 2006 (“LTM”), as projected for the fiscal year ending December 31, 2006 (current fiscal year, or “CFY”), and as projected for the fiscal year ending December 31, 2007 (next fiscal year, or “NFY”). Enterprise value to EBITDA multiples are commonly used by investment bankers, institutional research analysts and other financial professionals to determine the value of companies in connection with the market and acquisition multiples approach. Valuation Research Corporation noted that mean and median the multiples for the selected publicly-traded company group as of September 7, 2006 were as follows:

 

 

Accordingly, in connection with this analysis, Valuation Research Corporation reviewed certain publicly available financial information regarding transactions of companies engaged in lines of business in industries similar to us. Valuation Research Corporation identified announced change-of-control acquisitions of the following companies: HCA Inc., Beverly Enterprises Inc., Occupational Health & Rehabilitation Inc., NDC Health Corp, Select Medical Corp, US Oncology, Inc., Prime Medical Services, Inc., Landacorp Inc., Comprehensive Medical Imaging Inc., and Pro Vantage Health Services Inc.

 

This analysis resulted in indicated mean and median EV/ LTM EBITDA multiples of 7.5x and 7.1x, respectively. Enterprise value to EBITDA multiples are commonly used by investment bankers, institutional research analysts and other financial professionals to determine the value of companies in connection with change-of-control transactions.

 

To account for differences between us and certain publicly traded companies and companies that have been acquired in recent change of control transactions, Valuation Research Corporation, based on its professional judgment and experience, selected EV/LTM, EV/CFY and EV/NFY multiples that were lower than the median and mean multiples observed for certain publicly traded companies and companies that have been acquired in recent change of control transactions to reflect the inherent differences in companies. The use of EV/LTM, EV/CFY and EV/NFY multiples that are lower than the median and mean multiples observed for certain publicly traded companies and companies that have been acquired in recent change of control transactions result in a lower implied value of the Class A Common Stock on a fully-diluted basis than if the median and mean observed multiples were applied. Valuation Research Corporation derived enterprise value indications for us by applying multiples of 6.0x to

7.0x to our LTM, CFY, and NFY proforma EBITDA, which were adjusted for nonrecurring expenses such as professional fees, loss on sale of property, discontinued operations and consummation of the acquisitions of Rand and Online. In deriving our adjusted LTM, CFY and NFY EBITDA, Valuation Research Corporation assumed that we would not undertake any future acquisitions (other than the acquisitions of Rand and On Line) because our current financial position makes our ability to consummate future acquisitions speculative. Valuation Research Corporation subtracted all interest-bearing debt and Dividend Preference value and added cash and cash equivalents to the derived enterprise value to calculate the equity value. The equity value was divided by the proforma fully-diluted shares of Class A Common Stock outstanding assuming consummation of the transactions described in this Proxy Statement to determine the indications of equity value per share of Class A Common Stock. Using these assumptions, this approach yielded an implied price for our Class A Common Stock in the range of $0.03 to $0.07 per share on a fully diluted basis. The multiples selected were based on the mean and median multiples exhibited by the comparable publicly-traded companies and change-of-control transactions. Valuation Research Corporation noted that the $0.17 per share price deemed to be paid for the Class D Common Equity is above the range of values resulting from this analysis.

 

Valuation Research Corporation noted that the accuracy of this valuation methodology is dependent on the extent to which the selected publicly-traded companies are comparable to the company being analyzed and on the extent to which the selected change-of-control transaction target companies are comparable to the company being analyzed. In our case, Valuation Research Corporation observed that several of the publicly-traded companies and change-in-control target companies used in the analysis were of a different size than us, operated in channels different from us or operated in different economic environments than we do.

 

Discounted Cash Flow Approach

 

The purpose of the discounted cash flow approach is to determine a range of values for shares of our Class A Common Stock on a fully diluted basis, which range is then compared to the $0.17 per share deemed price to be paid for the Class D Common Equity. The discounted cash flow approach is another commonly used method of determining the value of a company. The approach involves calculating the present value of the estimated future debt free cash flows projected to be generated by the business and theoretically available (though not necessarily paid) to the capital providers of the company. The discounted cash flow approach involves calculating the present value of (i) the estimated debt free cash flows generated by a company and (ii) the value of the company at the end of the projection period, or terminal value. The present value of such amounts is determined by discounting the cash flows to present value using a discount rate that is intended to reflect all risks of ownership and the associated risks of realizing the stream of projected future cash flows. The discount rate can also be interpreted as the weighted average cost of capital or the rate of return that would be required by investors providing capital to a company to compensate them for the time value of their money and the risk inherent in the particular investment.

 

Valuation Research Corporation calculated a range of enterprise values for us as the sum of the present values of (i) our estimated future debt-free cash flows generated during the quarter ending September 30, 2006 through fiscal year ended 2011 and (ii) our terminal value at the end of the projection period. The estimated future debt-free cash flows were based on projections provided by our management. The range of our terminal values was calculated based on projected 2011 EBITDA and a range of EBITDA multiples of 5.5x to 6.5x. The representative EV/EBITDA multiple range was derived from a representative range of multiples observed with comparable public companies, acquisition transactions, and multiples paid by us in the transactions described in this Proxy Statement. Valuation Research Corporation used discount rates ranging from 16.0% to 18.0% for us based on our estimated weighted average cost of capital. The range of discount rates are based upon a range of implied weighted-average costs of capital observed with comparable publicly traded companies, certain published studies with respect to required rates of return, and Valuation Research Corporation’s professional judgement and experience. In calculating our EBITDA for purposes of this analysis, Valuation Research Corporation assumed that we would not undertake any future acquisitions (other than the acquisitions of Rand and On Line) because our current financial position makes our ability to consummate future acquisitions speculative. Valuation Research Corporation subtracted all interest-bearing debt and Dividend Preference value and added cash and cash equivalents to the derived enterprise value to calculate the equity value. The equity value was divided by the pro forma fully-diluted shares of Class A Common Stock outstanding assuming consummation of the transactions described in this Proxy Statement to determine the indications of equity value per share of Class A Common Stock. Using these

assumptions, this analysis indicated an implied price for our Class A Common Stock in the range of $0.05 to $0.09 per share on a fully diluted basis. Valuation Research Corporation noted that the $0.17 per share price deemed to be paid for the Class D Common Equity is above the range of values indicated by this analysis.

 

While the discounted cash flow approach is a widely accepted and practiced valuation methodology, it relies on a number of assumptions, including revenue growth rates, profit margins, working capital ratios, capital expenditures, terminal multiples and discount rates.

 

Conclusion

 

On September 8, 2006, Valuation Research Corporation delivered an oral opinion to the special committee, which was reconfirmed both orally and in writing on September 8, 2006, stating that, as of the date of the opinion, the price to be paid for the shares of Class D Common Stock to be issued to Brantley IV and Phoenix pursuant to the Stock Purchase Agreement is fair to our stockholders, excluding Brantley IV and Phoenix, from a financial point of view. This opinion was based upon and subject to the assumptions, qualifications and limitations made and matters considered by Valuation Research Corporation in its review as set forth in its written opinion.

 

As a matter of course, we do not publicly disclose forward-looking financial information. Nevertheless, in connection with its review, Valuation Research Corporation considered our financial projections. These financial projections were prepared by our management based on assumptions regarding our future performance. The financial projections were prepared under market conditions as they existed as of September 8, 2006. The financial projections do not take into account any circumstances or events occurring after the date they were prepared. In addition, factors such as industry performance, general business, economic, regulatory, market and financial conditions, as well as changes to our business, financial condition or results of operation, including without limitation such changes as may occur as a result of the risk factors we identified in this Proxy Statement and in our other filings with the SEC, may cause the financial projections or the underlying assumptions to be materially inaccurate. As a result, the financial projections are not necessarily indicative of future results.

 

Valuation Research Corporation’s opinion is necessarily based on economic, financial, industry, market and other conditions as in effect on, and the information made available to it as of, the date the opinion is issued. Valuation Research Corporation has not undertaken, and is under no obligation, to update, revise, reaffirm or withdraw its opinion, or otherwise comment on or consider events occurring after the date on which the opinion was issued.

 

Controlled Company Status

 

AMEX has adopted minimum requirements for director independence and nominating and compensation committee membership. These requirements do not apply to any company who has a majority of the voting power of its equity securities controlled by a single owner or group. Prior to April 12, 2006, Brantley III, Brantley IV and Brantley Capital were affiliated entities that owned over a majority of the voting power of our issued and outstanding Common Stock. Until that time, we were considered a “controlled company” under the AMEX rules and, as such, were not required to comply with certain of AMEX’s rules regarding director independence and nominating and compensation committee membership.

 

On April 12, 2006, Brantley IV and Brantley III filed with the SEC an amendment to their Schedule 13D relating to us indicating that Brantley Capital had terminated its investment advisory relationship with Brantley Capital Management on September 28, 2005, which resulted in Brantley Capital no longer being an affiliate of Brantley III or Brantley IV. Therefore, no individual or group now owns a majority of the voting power of our equity securities and we are no longer a “controlled company” under the listing rules of AMEX. The board of directors has since modified its nominating procedures and Compensation Committee membership to comply with the AMEX rules and we have one year from April 12, 2006 within which to establish a board of directors consisting of 50% directors who are “independent” for purposes of the corporate governance standards for small business issuers of AMEX. However, as a result of the issuance of the Class D Common Stock to Brantley IV in connection with the private placement, Brantley IV would own a majority of the voting power of our equity securities and we would once again become a “controlled company” under the listing rules of AMEX. As a controlled company, we would not need to comply with, and our stockholders would not have the protection provided by, certain AMEX requirements which mandate that (i) at least a majority of our directors must be independent; (ii) all board members must be nominated by a committee comprised solely of independent directors or by a majority of the independent

directors, and (iii) compensation for our chief executive officer must be determined by a compensation committee comprised of independent directors.

 

Appraisal or Dissenters Rights

 

No appraisal rights are available under the Delaware General Corporation Law for our stockholders in connection with the private placement or the issuance of the shares of Class A Common stock as part of the Rand acquisition.

 

Consequences If This Proposal and Other Proposals Are Not Approved

 

If Proposal IV is not approved by our stockholders at the Special Meeting, then we will not be able to consummate the transactions contemplated by the Private Placement Agreements on the terms currently contemplated and in all likelihood will not be able to complete the Rand acquisition or the On Line acquisition. We could seek alternative financing for the Rand and On Line acquisitions; however, there is no assurance that such financing will be available or, if available, on terms acceptable to us. If Proposals IV and V are not approved, we will not consummate the purchase of shares of our Class B Common Stock from Brantley Capital.

 

If the amendments to our certificate of incorporation set forth in Proposals I, II and III are not approved by our stockholders at the Special Meeting, then we will not be able to consummate the transactions contemplated by the private placement. In addition, we may not be able to engage in discussions relating to any future transactions involving our Common Stock until our certificate of incorporation is amended to increase the number of authorized shares of our Common Stock.

 

Required Vote

 

The affirmative vote of a majority of the total number of shares of Common Stock represented in person or by proxy at the Special Meeting and entitled to vote is needed to approve this proposal. As such, abstentions and broker non-votes will have the same effect as a vote “AGAINST” this proposal. If our stockholders approve the issuance of the Class D Common Stock in connection with the Stock Purchase Agreement (as set forth in this Proposal IV), as well as Proposals V and VI regarding the issuance of the warrants to purchase shares of Class A Common Stock in the private placement and the issuance of shares of Class A Common Stock in connection with the Rand acquisition, subject to approval by the stockholders of Proposals I, II and III and the satisfaction of the other closing conditions contained therein, we will file our Second Amended and Restated Certificate of Incorporation with the Secretary of State of Delaware and immediately consummate the private placement and the Rand acquisition.

 

Recommendation

 

After careful consideration, the special committee of our board of directors has determined that the issuance of the shares of Class D Common Stock to Brantley IV and Phoenix pursuant to the Stock Purchase Agreement as part of the private placement that is the subject of Proposal IV is fair to and in the best interests of our stockholders. In addition, the special committee has determined that the terms of the Stock Purchase Agreement, as a whole, are in the best interests of our stockholders and approved the execution of this document. In reaching its decision relating to the issuance of the Class D Common Stock, the special committee considered, among other things, the opinion of Valuation Research Corporation that, as of the date of its opinion and based upon such other matters as Valuation Research Corporation considered relevant, the price to be paid to us in connection with the issuance of the Class D Common Stock is fair to our current stockholders, other than Brantley IV and Phoenix, from a financial point of view. Accordingly, the special committee has approved and declared advisable Proposal IV relating to the issuance to Brantley IV and Phoenix of the shares of Class D Common stock.

 

THE SPECIAL COMMITTEE RECOMMENDS THAT ALL STOCKHOLDERS VOTE, OR INSTRUCT THEIR VOTES TO BE CAST, “FOR” APPROVAL OF PROPOSAL IV, APPROVING THE ISSUANCE OF CLASS D COMMON STOCK PURSUANT TO THE STOCK PURCHASE AGREEMENT.

 

As described above, as part of our financing, on September 8, 2006 we entered into a Note Purchase Agreement with Phoenix, pursuant to which we will, subject to stockholder approval and satisfaction of the other closing conditions set forth therein, issue, for an aggregate purchase price of $3,350,000, (i) our senior unsecured subordinated promissory notes due 2011 in the original principal amount of $3,350,000 and (ii) warrants to purchase shares of our Class A Common Stock equal to 1.117% of our outstanding Class A Common Stock on the date of issuance of the Warrant Certificate, on a fully-diluted basis taking into account the issuance of the shares of Class D Common Stock described above but excluding certain of our outstanding options, warrants and convertible securities and certain shares of Class B Common Stock to be purchased by us from Brantley Capital. If we were to consummate the private placement as of our record date, October 20, 2006, we would be obligated to issue warrants to purchase [1,191,207] shares of our Class A Common Stock (representing [1.1%] of our Class A Common Stock on an as converted basis) pursuant to the Note Purchase Agreement and the Warrant Certificate. Proposal V seeks stockholder approval of the issuance of these warrants to purchase shares of our Class A Common Stock to Phoenix pursuant to the Note Purchase Agreement, as well as approval to issue shares of Class A Common Stock upon exercise of the warrants. Reference is hereby made to the summary of terms of this transaction appearing above, the summary of the Note Purchase Agreement and the warrants appearing below, and the Note Purchase Agreement and the form of Warrant Certificate, attached hereto as Annexes B and N, respectively.

 

Appraisal or Dissenters Rights

 

No appraisal rights are available under the Delaware General Corporation Law for our stockholders in connection with the warrants to purchase shares of Class A Common Stock pursuant to the Note Purchase Agreement and the form of Warrant Certificate or the issuance of Class A Common Stock upon exercise of the warrants.

 

Consequences If This Proposal and Other Proposals Are Not Approved

 

If Proposal V is not approved by our stockholders at the Special Meeting, then we will not be able to consummate the transactions contemplated by the Private Placement Agreements on the terms currently contemplated and in all likelihood will not be able to complete the Rand acquisition or the On Line acquisition. We could seek alternative financing for the Rand and On Line acquisitions; however, there is no assurance that such financing will be available or, if available, on terms acceptable to us. If Proposals IV and V are not approved, we will not consummate the purchase of shares of our Class B Common Stock from Brantley Capital. If the amendments to our certificate of incorporation set forth in Proposals I, II and III are not approved by our stockholders at the Special Meeting, then we will not be able to consummate the transactions contemplated by the Private Placement Agreements. In addition, we may not be able to engage in discussions relating to any future transactions involving our Common Stock until our certificate of incorporation is amended to increase the number of authorized shares of our Common Stock.

 

Required Vote

 

The affirmative vote of a majority of the total number of shares of Common Stock represented in person or by proxy at the Special Meeting and entitled to vote is needed to approve this proposal. As such, abstentions and broker non-votes will have the same effect as a vote “AGAINST” this proposal. If our stockholders approve the issuance of the warrants to purchase shares of Class A Common Stock in connection with the Note Purchase Agreement and the Warrant Certificate, as well as Proposals IV and VI regarding the issuance of shares of Class D Common Stock in the private placement and the issuance of share of Class A Common Stock in connection with the Rand acquisition, subject to approval by the stockholders of Proposals I, II and III and the satisfaction of the other closing conditions contained therein, we will file our Second Amended and Restated Certificate of Incorporation with the Secretary of State of Delaware and immediately consummate the private placement and the Rand acquisition.

 

Recommendation

 

After careful consideration, the special committee of our board of directors has determined that the issuance of the warrants to purchase shares of Class A Common Stock to Phoenix pursuant to the Note Purchase Agreement and the Warrant Certificate and as part of the private placement that is the subject of Proposal V is fair to and in the best interests of our stockholders. In addition, the special committee has determined that the terms of the Note Purchase Agreement and the Warrant Certificate, as a whole, are in the best interests of our stockholders and approved the execution of these documents. Accordingly, the special committee has approved and declared advisable Proposal V relating to the issuance to Phoenix of the warrants to purchase shares of Class A Common Stock.

 

THE SPECIAL COMMITTEE RECOMMENDS THAT ALL STOCKHOLDERS VOTE, OR INSTRUCT THEIR VOTES TO BE CAST, “FOR” APPROVAL OF PROPOSAL V, APPROVING THE ISSUANCE OF WARRANTS TO PURCHASE SHARES OF CLASS A COMMON STOCK PURSUANT TO THE NOTE PURCHASE AGREEMENT AND THE WARRANT.

 

The following summary of the material provisions of the Private Placement Agreements and the form of Warrant Certificate is qualified by reference to the complete text of the Private Placement Agreements and the form of Warrant Certificate, copies of which are attached as Annexes A, B and N to this Proxy Statement. All stockholders are encouraged to read the Private Placement Agreements in their entirety for a more complete description of their terms and conditions.

 

General

 

On September 8, 2006 we entered into a Stock Purchase Agreement with Phoenix and Brantley IV pursuant to which we agreed to issue, for an aggregate purchase price of $4,650,000, such number of shares of our Class D Common Stock representing upon conversion 19.375% of our outstanding Class A Common Stock as of the date of issuance of the Class D Common Stock, on a fully-diluted basis taking into account the issuance of the shares of Class D Common Stock but excluding certain of our outstanding options, warrants and convertible securities and certain shares of Class B Common Stock to be purchased by us from Brantley Capital.

 

On September 8, 2006 we also entered into a Note Purchase Agreement with Phoenix pursuant to which we agreed to issue, for an aggregate purchase price of $3,350,000, (i) our senior unsecured subordinated promissory notes due 2011 in the original principal amount of $3,350,000 and (ii) warrants to purchase shares of our Class A Common Stock equal to 1.117% of our outstanding Class A Common Stock on the date of issuance of the Warrant Certificate, on a fully-diluted basis taking into account the issuance of the shares of Class D Common Stock described above but excluding certain of our outstanding options, warrants and convertible securities and certain shares of Class B Common Stock to be purchased by us from Brantley Capital.

 

Investors

 

As of the record date, Brantley IV owns 7,863,996 shares of our Class B Common Stock, warrants to purchase 20,455 shares of our Class A Common Stock and notes which are currently convertible into [1,358,054] shares of our Class A Common Stock (at the closing price of our Class A Common Stock on the record date of [$0.25] per share). As of the record date, this represents [31.9%] of our voting power and [52.4%] of our voting power on an as converted basis (at the closing price of our Class A Common Stock on the record date of [$0.25] per share). As of the record date, Brantley IV and its affiliates own [44.8%] of our voting power and [60.5%] of our voting power on an as converted basis (at the closing price of our Class A Common Stock on the record date of [$0.25] per share). Brantley IV will purchase, for an aggregate purchase price of $1,650,000, such number of shares of Class D Common Stock representing upon conversion 6.875% of our outstanding Class A Common Stock as of the date of issuance of the Class D Common Stock, on a fully-diluted basis taking into account the issuance of the shares of Class D Common Stock but excluding certain of our outstanding options, warrants and convertible securities and certain shares of Class B Common Stock to be purchased by us from Brantley Capital.

 

Phoenix is a limited partner in Brantley IV and Brantley Partners V, L.P. and has also co-invested with Brantley IV and its affiliates in a number of transactions. Prior to the consummation of the private placement, Phoenix is not a record owner of any shares of our capital stock. Phoenix will purchase (i) for an aggregate purchase price of $3,000,000, such number of shares of Class D Common Stock, representing upon conversion 12.5% of our outstanding Class A Common Stock as of the date of issuance of the Class D Common Stock, on a fully-diluted basis taking into account the issuance of the shares of Class D Common Stock but excluding certain of our outstanding options, warrants and convertible securities and certain shares of Class B Common Stock to be purchased by us from Brantley Capital, and (ii) for an aggregate purchase price of $3,350,000, (A) our senior unsecured subordinated promissory notes due 2011 in the original principal amount of $3,350,000 and (B) warrants to purchase shares of our Class A Common Stock equal to 1.117% of our outstanding Class A Common Stock on the date of issuance of the Warrant Certificate, on a fully-diluted basis taking into account the issuance of the shares of Class D Common Stock described above but excluding certain of our outstanding options, warrants and convertible securities and certain shares of Class B Common Stock to be purchased by us from Brantley Capital.

 

Class D Common Stock

 

We will issue to Brantley IV and Phoenix on the closing date, for an aggregate purchase price of $4,650,000, such number of shares of our Class D Common Stock representing upon conversion 19.375% of our outstanding Class A Common Stock as of the date of issuance of the Class D Common Stock, on a fully-diluted basis taking into account the issuance of the shares of Class D Common Stock but excluding certain of our outstanding options, warrants and convertible securities and certain shares of Class B Common Stock to be purchased by us from Brantley Capital. The rights and preferences of the Class D Common Stock are set forth under Proposal III.

 

Registration Rights

 

In connection with the private placement, the parties will enter into a registration rights agreement, pursuant to which the holders of a majority of the shares of Class A Common Stock issuable upon either conversion of the Class D Common Stock or the exercise of the warrants will have the right to require us to register their shares of Class A Common Stock under the Securities Act. The agreement allows them one right to demand that we register their shares of Class A Common stock under the Securities Act on a registration statement filed with the SEC and unlimited rights to include (or “piggy-back”) the registration of their shares of Class A Common stock on certain registration statements that we may file with the SEC for other purposes.

 

The investors may not exercise their demand rights unless the securities to be registered have an anticipated net aggregate offering price of at least $10,000,000. The investors may not exercise their piggy-back registration rights unless the shares to be registered have an anticipated net aggregate offering price of at least $1,000,000. We will bear the cost of the registration, unless the registration request is withdrawn by the investors, in which case the investors requesting withdrawal shall bear the expenses.

 

Note and Warrants

 

We will issue to Phoenix on the closing date, for an aggregate purchase price of $3,350,000, (i) our senior unsecured subordinated promissory notes due 2011 in the original principal amount of $3,350,000 and (ii) warrants to purchase shares of our Class A Common Stock equal to 1.117% of our outstanding Class A Common Stock on the date of issuance of the Warrant Certificate, on a fully-diluted basis taking into account the issuance of the shares of Class D Common Stock described above but excluding certain of our outstanding options, warrants and convertible securities and certain shares of Class B Common Stock to be purchased by us from Brantley Capital.

 

Our senior unsecured subordinated promissory notes will bear interest at the combined rate of (i) 12% per annum payable in cash on a quarterly basis and (ii) 2% per annum payable in kind (meaning that the accrued interest will be capitalized as principal) on a quarterly basis, subject to our right to pay such amount in cash. The notes will be unsecured and subordinated to all of our other senior debt. Upon the occurrence and during the continuance of an event of default the interest rate on the cash portion of the interest shall increase from 12% per annum to 14% per annum, for a combined rate of default interest of 16% per annum. We may prepay outstanding principal (together

with accrued interest) on the note subject to certain prepayment penalties and we are required to prepay outstanding principal (together with accrued interest) on the note upon certain specified circumstances.

 

The Warrant Certificate provide the holder with the right to purchase shares of our Class A Common Stock equal to 1.117% of our outstanding Class A Common Stock on the date of issuance of the Warrant Certificate, on a fully-diluted basis taking into account the issuance of the shares of Class D Common Stock described above but excluding certain of our outstanding options, warrants and convertible securities and certain shares of Class B Common Stock to be purchased by us from Brantley Capital. The warrants will be exercisable for five years from the date of issuance of the Warrant Certificate at $0.01 per share.

 

Closing the Private Placement

 

Subject to satisfaction of the conditions contained in the Private Placement Agreements, the closing of the transactions contemplated thereunder will take place on the third business day following the date our stockholders approve Proposals I, II, III, IV, V and VI, or at such other time as the parties may agree.

 

Representations and Warranties

 

The Private Placement Agreements contain a number of representations and warranties that the respective parties have made to each other. These representations and warranties relate to: (i) organization, power and authority; (ii) validity and binding effect of the agreements; (iii) financial statements; (iv) capitalization; (v) no material adverse change; (vi) conflicts; (vii) litigation; (viii) SEC filings; (ix) defaults; (x) compliance with law; (xi) intellectual property; (xii) taxes; (xiii) certain transactions; (xiv) environmental; (xv) title to properties; (xvi) insurance; (xvii) margin regulations; (xviii) subsidiaries; (xix) debt; (x) significant contracts; (xxi) ERISA; (xxii) registration rights; (xxiii) employees; and (xxiv) real property; (xxv) private offering status; (xxvi) fees and commissions; (xxvii) fairness opinion; (xxviii) special committee recommendations; (xxix) complete disclosure; (xxx) foreign assets control regulations, (xxxi) investment company status; and (xxxii) investment representations and warranties.

 

Stockholder Approval

 

The closing of the transactions contemplated under each of the Private Placement Agreements is subject to the approval of our stockholders of each of Proposals I, II, III, IV, V and VI at the Special Meeting.

 

Conditions to Closing

 

The obligations of Phoenix and Brantley IV to complete the private placement are subject to the satisfaction or waiver of many conditions in accordance with each of the Private Placement Agreements, including:

 

 

 

 

Indemnification

 

The Private Placement Agreements both provide that we will indemnify Phoenix and Brantley IV and certain of their affiliates for all losses incurred by any of the indemnified parties for (i) any breach of our representations and warranties or (ii) any breach of our covenants, agreements and obligations, other than losses resulting from action on the part of the indemnified party caused by their gross negligence or willful misconduct.

 

Termination, Amendment and Waiver

 

Each of the Private Placement Agreements may be terminated at any time prior to the consummation of the transactions contemplated thereunder, whether before or after receipt of the approval of our stockholders, by mutual written consent of Phoenix, Brantley IV and us, as applicable.

 

In addition, each Private Placement Agreement may be terminated:

 

 

If permitted under applicable law, any of the parties to a Private Placement Agreement may waive any conditions for their own respective benefit and consummate the transactions contemplated thereby even though one or more of the conditions have not been met.

Any purported amendment to the Private Placement Agreements shall be null and void unless it is in writing and signed by each of the respective parties to such agreement.

 

None of the rights and obligations of a party under the Private Placement Agreements may be assigned without the prior written consent of the other parties to such agreement, except that the investors may assign their rights to affiliates of such investors and we may assign our rights pursuant to a merger, recapitalization or other business combination transaction in which the surviving entity agrees in writing to assume our obligations under the Private Placement Agreements.

 

As described above, as part of our financing, on September 8, 2006 we entered into a stock purchase agreement with the stockholder of Rand, pursuant to which we will, subject to stockholder approval and satisfaction of the other closing conditions set forth therein, issue, as partial consideration for the purchase by us of the outstanding stock of Rand, such number of shares of our Class A Common Stock having a value of $600,000 based on the average closing price per share of our Class A Common Stock for the twenty day period prior to the closing of the acquisition of Rand. If we were to consummate the Rand acquisition as of our record date, October 20, 2006, we would be obligated to issue [2,400,000] shares of our Class A Common Stock (representing [2.1%] of our Class A Common Stock on an as converted basis) in connection with the Rand acquisition. Reference is hereby made to the summary of terms of this transaction appearing above, the summary of the Rand stock purchase agreement appearing below, and the Rand stock purchase agreement attached hereto as Annex C, the terms of which are incorporated herein by reference.

 

Appraisal or Dissenters Rights

 

No appraisal rights are available under the Delaware General Corporation Law for our stockholders in connection with the issuance of the shares of Class A Common Stock pursuant to the Rand stock purchase agreement.

 

Consequences If This Proposal and Other Proposals Are Not Approved

 

If Proposal VI is not approved by our stockholders at the Special Meeting, then we will not be able to consummate the Rand acquisition on the terms currently contemplated by the Rand stock purchase agreement and in all likelihood will not be able to complete the private placement. We could seek alternative terms for the Rand stock purchase agreement and alternative financing; however, there is no assurance that alternative terms can be obtained or that such financing will be available or, if available, on terms acceptable to us. If Proposal VI is not approved and we cannot complete the private placement, we will not consummate the purchase of shares of our Class B Common Stock from Brantley Capital. If the amendments to our certificate of incorporation set forth in Proposals I, II and III are not approved by our stockholders at the Special Meeting, then we will not be able to consummate the transactions contemplated by the Rand stock purchase agreement. In addition, we may not be able to engage in discussions relating to any future transactions involving our Common Stock until our certificate of incorporation is amended to increase the number of authorized shares of our Common Stock.

 

Required Vote

 

The affirmative vote of a majority of the total number of shares of Common Stock represented in person or by proxy at the Special Meeting and entitled to vote is needed to approve this proposal. As such, abstentions and broker non-votes will have the same effect as a vote “AGAINST” this proposal. If our stockholders approve the issuance of the shares of Class A Common Stock in connection with the Rand stock purchase agreement, as well as Proposals IV and V regarding the issuance of shares of Class D Common Stock and of warrants to purchase shares of Class A Common Stock in the private placement, subject to approval by the stockholders of Proposals I, II and III and the satisfaction of the other closing conditions contained therein, we will file our Second Amended and Restated

Certificate of Incorporation with the Secretary of State of Delaware and immediately consummate the private placement and the Rand acquisition.

 

Recommendation

 

After careful consideration, the board of directors has determined that the issuance of the shares of Class A Common Stock pursuant to the Rand stock purchase agreement that is the subject of Proposal VI is fair to and in the best interests of our stockholders. In addition, the board of directors has determined that the terms of the Rand stock purchase agreement, as a whole, are in the best interests of our stockholders and approved the execution of this document. Accordingly, the board of directors has approved and declared advisable Proposal VI relating to the issuance of shares of Class A Common Stock as partial consideration under the Rand stock purchase agreement.

 

THE BOARD OF DIRECTORS RECOMMENDS THAT ALL STOCKHOLDERS VOTE, OR INSTRUCT THEIR VOTES TO BE CAST, “FOR” APPROVAL OF PROPOSAL VI, APPROVING THE ISSUANCE OF SHARES OF CLASS A COMMON STOCK PURSUANT TO THE RAND STOCK PURCHASE AGREEMENT.

 

We have identified two acquisition opportunities to expand our medical billing services businesses. On September 8, 2006 we entered into a stock purchase agreement with Rand and its stockholder pursuant to which we will acquire all of the issued and outstanding capital stock of Rand. In addition, on September 8, 2006 we entered into a stock purchase agreement with On Line and their respective stockholders pursuant to which we have agreed to purchase all of the issued and outstanding capital stock of On Line. A copy of the stock purchase agreement with Rand is attached hereto as Annex C. A copy of the On Line stock purchase agreement is attached hereto as Annex L. The terms of these agreements are incorporated herein by reference.

 

The historical financial statements for each of these businesses are attached hereto as Annexes F, G and H, respectively. Additionally, pro forma financial information showing the effect of these acquisitions and the transactions contemplated by the Private Placement Agreements on us is attached hereto as Annex I, the terms of which are incorporated herein by reference.

 

Rand Acquisition

 

Rand Medical Billing, Inc. is a full service billing agency providing medical billing, exclusively for anatomic and clinical pathology practices located in Simi Valley, California.

 

On September 8, 2006 we entered into a stock purchase agreement with the stockholder of Rand to purchase all of the issued and outstanding capital stock of Rand for an aggregate purchase price of $9,365,333, subject to adjustments conditioned upon future revenue results.

 

The purchase price shall be paid as follows:

 

 

The purchase price shall be subject to adjustments conditioned upon future revenue results and claims, if any, for indemnification.

 

In the event that the gross revenue related to Rand for the period ending December 31, 2007 equals or exceeds the established 2007 minimum revenue target of $6,349,206 plus the amount of the aggregate losses (which arise

under the indemnification obligations of the sellers) then we will release all the cash and shares held in escrow to the stockholder of Rand within 30 days of the final determination of the gross revenue for the period. If the gross revenue for the period is less than $6,349,206 then the release of the cash and shares held in escrow will be postponed.

 

If the release of the purchase price consideration held in escrow is postponed, then we will calculate the gross revenue for the period ending December 31, 2008. Based on this calculation:

 

 

The stock purchase agreement with Rand contains customary representations and warranties and conditions to closing. In addition, the stockholder of Rand has agreed to a five-year non-compete and non-solicitation period. The indemnification provided by the Rand stockholder for breaches of representations is capped at the purchase price and we can not make claims until the aggregate amount of our losses exceeds $50,000.

 

The closing of the Rand acquisition is expected to occur shortly after the Special Meeting, subject to approval by our stockholders of Proposals I, II, III, IV, V and VI. No regulatory approval is required to consummate this acquisition.

 

On Line Acquisition

 

On Line consists of two related companies, OLA and OLP. OLA is an outsourcing company providing data entry, insurance filing, patient statements, payment posting, collection follow-up and patient refund processing to medical practices. Most of OLA’s customers are hospital-based physician practices including radiology, neurology and emergency medicine. Customers also include some other specialties as plastic surgery, family practice, internal medicine and orthopaedics. All billing functions are the responsibility of OLA, and include credentialing and accounts payable processing. OLA also has a group of contract transcriptionists who work out of their homes and OLA offers these services to clients as well.

 

OLP provides payroll processing services to small businesses, a few of which are also customers of OLA. OLP provides payroll services including direct deposit, time clock interface and tax reporting to clients in Alabama, Florida, Georgia, Louisiana, Mississippi, Tennessee and Texas.

 

On September 8, 2006 we entered into a stock purchase agreement with the stockholders of OLA and OLP to purchase all of the issued and outstanding capital stock of both OLA and OLP for an aggregate purchase price of $3,310,924, subject to adjustments conditioned upon future revenue results. The purchase price is payable in a combination of cash and unsecured subordinated promissory notes. At the closing of the On Line acquisition, $2,476,943 of the purchase price will be paid in cash and the remainder in an unsecured subordinated promissory note. We have an option to pay up to $75,000 of the purchase price in the form of an additional unsecured promissory note in lieu of cash at the closing.

Within 45 days following the end of the 12-month anniversary of the closing, we will deliver written notice to the former On Line stockholders detailing the revenue of the acquired businesses, determined on a cash basis in accordance with generally accepted accounting principles for such 12-month period. If the actual revenue exceeds $2,500,259 then the purchase price will be increased on a dollar-for-dollar basis by the lesser of (i) the amount of the excess or (ii) $500,052. If the actual revenue is less than $2,500,259 then the principal amount of the unsecured promissory note shall be reduced on a dollar-for-dollar basis. The downward adjustment of the purchase price will be capped at the value of the promissory note. In the event that we move the principal location of the business out of the greater Mobile, Alabama geographic region or the employment of William Suffich or Dorothy Matter is terminated by us without cause or by them for Good Reason, as defined in their respective employment agreements, there will be no downward adjustment in the purchase price.

 

The stock purchase agreement for the On Line acquisition contains customary representations and warranties and conditions to closing. The indemnification provided by the respective stockholders of OLA and OLP for breaches of representations and warranties is capped at $1,000,000 and we can not make claims until the aggregate amount of our losses exceeds $50,000.

 

The closing of the On Line acquisition is expected to occur shortly after the Special Meeting, subject to approval by our stockholders of Proposals I, II, III, IV, V and VI. No regulatory approval is required to consummate this acquisition.

 

APPROVAL OF THE AMENDMENT TO OUR 2004 INCENTIVE PLAN

 

On September 8, 2006, the board of directors voted to adopt an amendment to the our 2004 Incentive Plan to (i) to increase the number of shares of our Class A Common Stock available for grants under the 2004 Incentive Plan from 2,200,000 shares to such number of shares representing 10% of our outstanding Class A Common Stock as of the date of closing of the private placement, on a fully diluted basis taking into account the shares issued in the private placement and the Rand acquisition, and (ii) to increase the maximum number of shares that can be granted to a participant in any calendar year under the 2004 Incentive Plan from 1,000,000 shares to 3,000,000 shares. The board of directors unanimously (with the exception of Mr. Bauer who abstained) determined to recommend approval of the amendment by the stockholders. Section 711 of the AMEX Company Guide requires AMEX-listed companies to obtain stockholder approval with respect to certain amendments to option plans. Approval of this proposal is contingent upon approval of Proposals I, II, III, IV, V and VI and the filing of our Second Amended and Restated Certificate of Incorporation with the Secretary of State of Delaware.

 

Description of 2004 Incentive Plan

 

The following is a summary of the material features of the existing 2004 Incentive Plan and identifies, where applicable, the effect of these amendments. It may not contain all of the information important to you. We urge you to read the entire 2004 Incentive Plan, which was filed as Exhibit 10.19 to our Annual Report on Form 10-KSB for the year ending December 31, 2004 filed with the SEC on April 28, 2005. The 2004 Incentive Plan currently provides for issuance of up to 2,200,000 shares of Class A Common Stock, of which there are 476,000 shares left for issuance pursuant to future grants. If the amendment to the 2004 Incentive Plan is approved, this number will be increased to such number of shares representing 10% of our outstanding Class A Common Stock as of the date of closing of the private placement, on a fully diluted basis taking into account the shares issued in the private placement and the Rand acquisition. If this increase were to have been implemented on our record date, October 20, 2006, assuming that the private placement and the Rand acquisition had been consummated as of such date, this would have resulted in an increase of [9,052,840] shares for an aggregate total of [9,528,840] shares available for grants under the 2004 Incentive Plan.

 

Currently, there are no specific grants proposed to be made under the 2004 Incentive Plan.

 

The purpose of the 2004 Incentive Plan is to advance the interests of the Company and its affiliates by providing for the grant to participants of stock-based and other incentive awards, all as more fully described below.

The amendment to the 2004 Incentive Plan will become effective on the date of its approval by the stockholders. The plan will terminate when there are no remaining shares available for awards unless terminated as to future grants earlier by the Administrator (as defined below). No incentive stock options (“ISOs”) may be granted under the 2004 Incentive Plan after September 7, 2014, although ISOs granted before such date may extend beyond that date. A maximum of 2,200,000 shares of Class A Common Stock may be delivered in satisfaction of awards made under the 2004 Incentive Plan (which will increase to 10% of our outstanding Class A Common Stock as of the date of closing of the private placement, on a fully diluted basis taking into account the shares issued in the private placement and the Rand acquisition if the amendment is approved). For purposes of the preceding sentence, shares that have been forfeited in accordance with the terms of the applicable award and shares held back in satisfaction of the exercise price or tax withholding requirements from shares that would otherwise have been delivered pursuant to an award shall not be considered to have been delivered under the 2004 Incentive Plan. Also, the number of shares delivered under an award shall be determined net of any previously acquired shares tendered by the participant in payment of the exercise price or of withholding taxes.

 

The maximum number of shares of Class A Common Stock for which stock options may be granted to any person in any calendar year and the maximum number of shares of Class A Common Stock subject to stock appreciation rights, or “SARs”, granted to any person in any calendar year is 1,000,000 shares. The maximum benefit that may be paid to any person under other awards in any calendar year is, to the extent paid in shares, 1,000,000 shares (which will increase to 3,000,000 if the amendment is approved), and, to the extent paid in cash, $1,000,000. However, stock options and SARs that are granted with an exercise price that is less than the fair market value of the underlying shares on the date of the grant will be subject to both of the limits imposed by the two preceding sentences. These limitations will be construed in a manner consistent with Section 162(m) of the Internal Revenue Code of 1984, as amended (the “Internal Revenue Code”).

 

In the event of a stock dividend, stock split or other change in our capital structure, the Administrator will make appropriate adjustments to the limits described above and will also make appropriate adjustments to the number and kind of shares of stock or securities subject to awards, any exercise prices relating to awards and any other provisions of awards affected by the change. The Administrator may also make similar adjustments to take into account other distributions to stockholders or any other event, if the Administrator determines that adjustments are appropriate to avoid distortion in the operation of the 2004 Incentive Plan and to preserve the value of awards.

 

Administration

 

The board of directors or a committee appointed by the board of directors administers the 2004 Incentive Plan. In the case of awards granted to persons who are or are reasonably expected to become our officers, such committee shall be comprised solely of two or more directors, all of whom are “outside directors” within the meaning of Section 162(m) of the Internal Revenue Code and “non-employee directors” within the meaning of Rule 16b-3 under the Exchange Act. The term “Administrator” is used in this Proxy Statement to refer to the person (the board of directors or committee, and their delegates) charged with administering the 2004 Incentive Plan. The Administrator has full authority to determine who will receive awards and to determine the types of awards to be granted as well as the amounts, terms, and conditions of any awards. Awards may be in the form of options, SARs, restricted or unrestricted stock or restricted stock units, Deferred Stock (hereafter defined) or performance awards. The Administrator has the right to determine any questions that may arise regarding the interpretation and application of the provisions of the 2004 Incentive Plan and to make, administer, and interpret such rules and regulations as it deems necessary or advisable. Determinations of the Administrator made under the 2004 Incentive Plan are conclusive and bind all parties.

 

Eligibility

 

Participation is limited to those key employees and directors, as well as consultants and advisors, who in the Administrator’s opinion are in a position to make a significant contribution to our success and the success of our affiliates and who are selected by the Administrator to receive an award. The group of persons from which the Administrator will select participants currently consists of approximately 25 individuals.

Stock Options

 

The Administrator may from time to time award options to any participant subject to the limitations described above. Stock options give the holder the right to purchase shares of our Class A Common Stock within a specified period of time at a specified price. Two types of stock options may be granted under the 2004 Incentive Plan: “ISOs”, which are subject to special tax treatment as described below, and nonstatutory options (“NSOs”). Eligibility for ISOs is limited to our employees and employees of our subsidiaries.

 

The exercise price of an ISO cannot be less than the fair market value of the Class A Common Stock at the time of grant. In addition, the expiration date of an ISO cannot be more than ten years after the date of the original grant. In the case of NSOs, the exercise price and the expiration date are determined in the discretion of the Administrator. The Administrator also determines all other terms and conditions related to the exercise of an option, including the consideration to be paid, if any, for the grant of the option, the time at which options may be exercised and conditions related to the exercise of options. Unless the Administrator determines otherwise, and in all events in the case of any stock option intended to qualify as an ISO and any stock option or SAR (other than a Performance Award subject to Section 6(a)(7) of the 2004 Incentive Plan) intended to qualify as performance-based for purposes of Section 162(m) of the Internal Revenue Code, the exercise price of an award requiring exercise will not be less than the fair market value of the stock subject to the award determined as of the date of grant.

 

The closing price of our Class A Common Stock as reported on AMEX on our record date, October 20, 2006, was [$0.25] per share.

 

Stock Appreciation Rights

 

The Administrator may grant SARs under the 2004 Incentive Plan. An SAR entitles the holder upon exercise to receive an amount in cash or Class A Common Stock or a combination thereof (as determined by the Administrator) computed by reference to appreciation in the value of a share of Class A Common Stock.

 

Stock Awards; Deferred Stock

 

The 2004 Incentive Plan provides for awards of nontransferable shares of restricted Class A Common Stock, restricted stock units, which entitle the holder to receive such number of shares specified in the award or a cash payment for such shares equal to the fair market value on a specified date, as well as unrestricted shares of Class A Common Stock. Awards of restricted stock, restricted stock units and unrestricted stock may be made in exchange for past services or other lawful consideration. Generally, awards of restricted stock or restricted stock units are subject to the requirement that the shares be forfeited or resold to us unless specified conditions are met. Subject to these restrictions, conditions and forfeiture provisions, any recipient of an award of restricted stock will have all the rights of one of our stockholders, including the right to vote the shares and to receive dividends. Other awards under the 2004 Incentive Plan may also be settled with restricted stock. The 2004 Incentive Plan also provides for deferred grants (“Deferred Stock”) entitling the recipient to receive shares of Class A Common Stock in the future on such conditions as the Administrator may specify.

 

Performance Awards

 

The Administrator may also make awards subject to the satisfaction of specified performance criteria. Performance Awards may consist of Class A Common Stock or cash or a combination of the two. The performance criteria used in connection with a particular Performance Award will be determined by the Administrator. In the case of Performance Awards intended to qualify for exemption under Section 162(m) of the Internal Revenue Code, the Administrator will use objectively determinable measures of performance in accordance with Section 162(m) of the Internal Revenue Code that are based on any or any combination of the following (determined either on a consolidated basis or, as the context permits, on a divisional, subsidiary, line of business, project or geographical basis or in combinations thereof): sales; revenues; assets; expenses; earnings before or after deduction for all or any portion of interest, taxes, depreciation, or amortization, whether or not on a continuing operations or an aggregate or per share basis; return on equity, investment, capital or assets (in each case before or after deduction for all or any portion of interest, taxes, depreciation or amortization, whether or not on a continuing operations or an aggregate or per share basis); one or more operating ratios; one or more financial coverage ratios; book value per share;

borrowing levels, leverage ratios (including, without limitation, debt as a percentage of capitalization) or credit rating; market share; capital expenditures; cash flow; stock price; stockholder return; sales of particular products or services; customer acquisition or retention; acquisitions and divestitures (in whole or in part); joint ventures and strategic alliances; spin-offs, split-ups and the like; reorganizations; or recapitalizations, restructurings, financings (issuance of debt or equity) or refinancings. The Administrator will determine whether the performance targets or goals that have been chosen for a particular Performance Award have been met.

 

General Provisions Applicable to All Awards

 

Neither ISOs nor, except as the Administrator otherwise expressly provides, other awards may be transferred other than by will or by the laws of descent and distribution. During a recipient’s lifetime an ISO and, except as the Administrator may provide, other non-transferable awards requiring exercise may be exercised only by the recipient. Shares delivered under the 2004 Incentive Plan may consist of either authorized but unissued or treasury shares. The number of shares delivered upon exercise of a stock option is determined net of any shares transferred by the optionee to us (including through the holding back of shares that would otherwise have been deliverable upon exercise) in payment of the exercise price or tax withholding.

 

Mergers and Similar Transactions

 

In the event of a consolidation or merger in which we are not the surviving corporation or which results in the acquisition of substantially all of our stock by a person or entity or by a group of persons or entities acting together, or in the event of a sale of substantially all of our assets or our dissolution or liquidation, the following rules will apply except as otherwise provided in an Award:

 

 

If there is a surviving or acquiring entity, the Administrator may arrange to have that entity (or an affiliate) assume outstanding awards or grant substitute awards. In the case of shares of restricted stock, the Administrator may require that any amounts delivered, exchanged or otherwise paid in respect of those shares in connection with the transaction be placed in escrow or otherwise made subject to restrictions determined by the Administrator.

 

Amendment

 

The Administrator may at any time or times amend the 2004 Incentive Plan or any outstanding Award for any purpose which may at the time be permitted by law, and may at any time terminate the 2004 Incentive Plan as to any future grants of awards. The Administrator may not, however, alter the terms of an Award so as to affect adversely the participant’s rights under the Award without the participant’s consent, unless the Administrator expressly reserved the right to do so at the time of the Award.

 

New 2004 Incentive Plan Benefits

 

The future benefits or amounts that would be received under the 2004 Incentive Plan by executive officers, non-executive directors and non-executive officer employees are discretionary and are therefore not determinable at this time. In addition, the benefits or amounts which have been received by or allocated to the named executive officers and directors for the last completed fiscal year have been identified in this Proxy Statement in the section entitled “Director and Executive Officer Compensation.” In addition to those options reported in “Director and Executive Officer Compensation” for the last completed fiscal year, we granted options to purchase 10,000 shares at an exercise price of $0.47 per share on May 12, 2006 to each of David Crane and Joseph M. Valley, Jr., two of our directors.

Equity Compensation Plan Information

 

The following table gives information about our Class A Common Stock that may be issued upon the exercise of options, warrants and rights under all of our existing equity compensation plans as of October 20, 2006.

 

 

Federal Tax Effects

 

The following discussion summarizes certain federal income tax consequences of the issuance and receipt of options under the 2004 Incentive Plan under the law as in effect on the date of this Proxy Statement. The summary does not purport to cover federal employment tax or other federal tax consequences that may be associated with the 2004 Incentive Plan, nor does it cover state, local or non-U.S. taxes.

 

ISOs

 

In general, an optionee realizes no taxable income upon the grant or exercise of an ISO. However, the exercise of an ISO may result in an alternative minimum tax liability to the optionee. With certain exceptions, a disposition of shares purchased under an ISO within two years from the date of grant or within one year after exercise produces ordinary income to the optionee (and a deduction to us) equal to the value of the shares at the time of exercise less the exercise price. Any additional gain recognized in the disposition is treated as a capital gain for which we are not entitled to a deduction. If the optionee does not dispose of the shares until after the expiration of these one-and two-year holding periods, any gain or loss recognized upon a subsequent sale is treated as a long-term capital gain or loss for which we are not entitled to a deduction.

 

NSOs

 

In general, in the case of an NSO with an exercise price that is equal to or greater than the fair market value of our Class A Common Stock on the date of grant, the optionee has no taxable income at the time of grant but realizes income in connection with exercise of the option in an amount equal to the excess (at the time of exercise) of the fair market value of the shares acquired upon exercise over the exercise price; a corresponding deduction is available to us; and upon a subsequent sale or exchange of the shares, any recognized gain or loss after the date of exercise is treated as capital gain or loss for which we are not entitled to a deduction. Differing and adverse tax consequences would result if the exercise price of an NSO is less than the fair market value of a share of Class A Common Stock on the date of grant. We do not currently intend to grant any NSOs with an exercise price that is less than the fair market value of our Class A Common Stock on the date of grant.

 

In general, an ISO that is exercised by the optionee more than three months after termination of employment is treated as an NSO. ISOs are also treated as NSOs to the extent they first become exercisable by an individual in any calendar year for shares having a fair market value (determined as of the date of grant) in excess of $100,000.

 

The Administrator may award stock options that are exercisable for restricted stock. Under Section 83 of the Internal Revenue Code, an optionee who exercises an NSO for restricted stock will generally have income only

when the stock vests. The income will equal the fair market value of the stock at that time less the exercise price. However, the optionee may make a so-called “83 (b) election” in connection with the exercise to recognize taxable income at that time. Assuming no other applicable limitations, the amount and timing of the deduction available to us will correspond to the income recognized by the optionee. The application of Section 83 of the Internal Revenue Code to ISOs exercisable for restricted stock is less clear.

 

Under the so-called “golden parachute” provisions of the Internal Revenue Code, the accelerated vesting of awards in connection with our change in control may be required to be valued and taken into account in determining whether participants have received compensatory payments, contingent on the change in control, in excess of certain limits. If these limits are exceeded, a substantial portion of amounts payable to the participant, including income recognized by reason of the grant, vesting or exercise of awards under the 2004 Incentive Plan, may be subject to an additional 20% federal tax and may be nondeductible to us.

 

Stockholder Approval of the Amendment to the 2004 Incentive Plan

 

The affirmative vote of the holders of a majority of the outstanding shares of our Common Stock properly cast in person or by proxy at the Special Meeting, voting together as a single class, is required to approve the amendment to the 2004 Incentive Plan.

 

THE BOARD OF DIRECTORS RECOMMENDS THAT ALL STOCKHOLDERS VOTE, OR INSTRUCT THEIR VOTES TO BE CAST, “FOR” THE AMENDMENT TO THE 2004 INCENTIVE PLAN.

 

Pro forma financial information for the year ended December 31, 2005 and the six month period ended June 30, 2006, which reflects our proposed acquisition of the Rand and On Line businesses and the closing of the transactions contemplated under the Private Placement Agreements is set forth in Annex I attached hereto, which includes the unaudited pro forma combined financial statements and related notes thereto. Our historical financial statements for the years ended December 31, 2004 and December 31, 2005 and for the six month period ended June 30, 2006 are attached as Annexes J and K, respectively.

 

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations highlights the principal factors that have affected our financial condition and results of operations as well as our liquidity and capital resources for the periods described. All significant intercompany balances and transactions have been eliminated in consolidation.

 

The discussion that follows should be read in conjunction with our financial statements attached hereto as Annexes J and K.

 

Overview

 

We are a healthcare services organization providing outsourced business services to physicians, serving the physician market through two subsidiaries, MBS and IPS. MBS provides billing, collection, accounts receivable management, coding and reimbursement services, reimbursement analysis, practice consulting, managed care contract management and accounting and bookkeeping services, primarily to hospital-based physicians such as pathologists, anesthesiologists and radiologists. MBS currently provides services to approximately 58 clients, representing 337 physicians. IPS serves the general and subspecialty pediatric physician market, providing accounting and bookkeeping, human resource management, accounts receivable management, quality assurance services, physician credentialing, fee schedule review, training and continuing education and billing and reimbursement analysis. IPS currently provides services to five pediatric groups in Illinois and Ohio, representing 37 physicians. We believe our core competency is our long-term experience and success in working with and creating value for physicians.

Strategic Focus

 

In 2005, we initiated a strategic plan designed to accelerate our growth and enhance our future earnings potential. As part of this plan, we began to divest certain non-strategic assets and ceased investing in business lines that did not complement our plan, and redirected financial resources and company personnel to areas that management believes enhances long-term growth potential.

 

More specifically, we have taken the following actions since the first quarter of 2005:

 

 

With the completion of these activities, we no longer have any ownership or management interests in ASCs.

 

Additionally, we believe that we are now positioned to focus on our physician services business and the physician billing and collections market, leveraging our existing presence to expand into additional geographic regions and increase the range of services we provide to physicians. Part of this strategy will include acquiring financially successful billing companies focused on providing services to hospital-based physicians and increasing sales and marketing efforts in existing markets.

 

Financial Overview

 

As more fully described below, our results of operations for the six months ended June 30, 2006 as compared to the same period in 2005 and the year ended December 31, 2005 as compared to the same period in 2004 reflect several important factors, many relating to the impact of transactions which occurred as part of our strategic plan referred to above.

 

 

 

Critical Accounting Policies and Estimates

 

The preparation of our financial statements is in conformity with accounting principles generally accepted in the United States, which require management to make estimates and assumptions that affect the amounts reported in the financial statements and footnotes. Our management bases these estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments that are not readily apparent from other sources. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Changes in the facts or circumstances underlying these estimates could result in material changes and actual results could differ from these estimates. We believe the following critical accounting policies affect the most significant areas involving management’s judgments and estimates. In addition, please refer to Note 1. General of our unaudited consolidated condensed financial statements for the six months ended June 30, 2006 and 2005 and Note 1, Organization and Accounting Policies, of our consolidated financial statements for the year ended December 31, 2005 and 2004 included in Annex J of this Proxy Statement for further discussion of our accounting policies.

 

Consolidation of Physician Practice Management Companies.  In March 1998, the Emerging Issues Task Force (“EITF”) of the Financial Accounting Standards Board (“FASB”) issued its Consensus on Issue 97-2 (“EITF 97-2”). EITF 97-2 addresses the ability of physician practice management (“PPM”) companies to consolidate the results of medical groups with which it has an existing contractual relationship. Specifically, EITF 97-2 provides guidance for consolidation where PPM companies can establish a controlling financial interest in a physician practice through contractual management arrangements. A controlling financial interest exists, if, for a requisite period of time, the PPM has “control” over the physician practice and has a “financial interest” that meets six specific requirements. The six requirements for a controlling financial interest include:

 

(a) the contractual arrangement between the PPM and physician practice (1) has a term that is either the entire remaining legal life of the physician practice or a period of 10 years or more, and (2) is not terminable by the physician practice except in the case of gross negligence, fraud, or other illegal acts by the PPM or bankruptcy of the PPM;

 

(b) the PPM has exclusive authority over all decision making related to (1) ongoing, major, or central operations of the physician practice, except the dispensing of medical services, and (2) total practice compensation of the licensed medical professionals as well as the ability to establish and implement guidelines for the selection, hiring, and firing of them;

 

(c) the PPM must have a significant financial interest in the physician practice that (1) is unilaterally salable or transferable by the PPM and (2) provides the PPM with the right to receive income, both as ongoing fees and as proceeds from the sale of its interest in the physician practice, in an amount that fluctuates based upon the performance of the operations of the physician practice and the change in fair value thereof.

 

IPS is a PPM company. IPS’s management services agreements (“MSA” or, collectively, “MSAs”) governing the contractual relationship with its affiliated medical groups are for forty year terms; are not terminable by the physician practice other than for bankruptcy or fraud; provide IPS with decision making authority other than related to the practice of medicine; provide for employment and non-compete agreements with the physicians governing compensation; provide IPS the right to assign, transfer or sell its interest in the physician practice and assign the rights of the MSAs; provide IPS with the right to receive a management fee based on results of operations and the right to the proceeds from a sale of the practice to an outside party or, at the end of the MSA term, to the physician group. Based on this analysis, IPS has determined that its contracts meet the criteria of EITF 97-2 for consolidating

the results of operations of the affiliated medical groups and has adopted EITF 97-2 in its statement of operations. EITF 97-2 also has addressed the accounting method for future combinations with individual physician practices. IPS believes that, based on the criteria set forth in EITF 97-2, any future acquisitions of individual physician practices would be accounted for under the purchase method of accounting.

 

Revenue Recognition.  MBS’s principal source of revenues is fees charged to clients based on a percentage of net collections of the client’s accounts receivable. MBS recognizes revenue and bills its clients when the clients receive payment on those accounts receivable. MBS typically receives payment from the client within 30 days of billing. The fees vary depending on specialty, size of practice, payer mix, and complexity of the billing. In addition to the collection fee revenue, MBS also earns fees from the various consulting services that MBS provides, including medical practice management services, managed care contracting, coding and reimbursement services.

 

IPS records revenue based on patient services provided by its affiliated medical groups. Net patient service revenue is impacted by billing rates, changes in current procedural terminology code reimbursement and collection trends. IPS reviews billing rates at each of its affiliated medical groups on at least an annual basis and adjusts those rates based on each insurer’s current reimbursement practices. Amounts collected by IPS for treatment by its affiliated medical groups of patients covered by Medicare, Medicaid and other contractual reimbursement programs, which may be based on cost of services provided or predetermined rates, are generally less than the established billing rates of IPS’s affiliated medical groups. IPS estimates the amount of these contractual allowances and records a reserve against accounts receivable based on historical collection percentages for each of the affiliated medical groups, which include various payer categories. When payments are received, the contractual adjustment is written off against the established reserve for contractual allowances. The historical collection percentages are adjusted quarterly based on actual payments received, with any differences charged against net revenue for the quarter. Additionally, IPS tracks cash collection percentages for each medical group on a monthly basis, setting quarterly and annual goals for cash collections, bad debt write-offs and aging of accounts receivable. For the twelve months ended December 31, 2005 and 2004, IPS’s net fee-for-service revenue, less bad debt expense, totaled $17,207,226 and $14,875,133, respectively. Cash collections related to dates of service in 2005 and 2004 totaled $17,025,718 and $15,143,913, respectively. The variance between cash collections and net fee-for-service revenue for the twelve months ended December 31, 2005 was $181,508, or 1.1% of net fee-for-service revenue. For the year ended December 31, 2004, the variance between cash collections and net fee-for-service revenue was $268,780, or 1.8% of net fee-for-service revenue. IPS is not aware of any material claims, disputes or unsettled matters with third party payers and there have been no material settlements with third party payers for the six months ended June 30, 2006 and 2005 or the twelve months ended December 31, 2005 and 2004.

 

Accounts Receivable and Allowance for Doubtful Accounts.  MBS records uncollectible accounts receivable using the direct write-off method of accounting for bad debts. Historically, MBS has experienced minimal credit losses and has not written-off any material accounts for the six months ended June 30, 2006 and 2005 or the twelve months ended December 31, 2005 or 2004.

 

IPS’s affiliated medical groups grant credit without collateral to its patients, most of which are insured under third-party payer arrangements. The provision for bad debts that relates to patient service revenues is based on an evaluation of potentially uncollectible accounts. The provision for bad debts includes a reserve for 100% of the accounts receivable older than 180 days. Establishing an allowance for bad debt is subjective in nature. IPS uses historical collection percentages to determine the estimated allowance for bad debts, and adjusts the percentage on a quarterly basis.

 

The following table summarizes IPS’s aging of accounts receivable, by major payer classification, as of December 31, 2005 and 2004, respectively:

 

 

 

The following schedule provides a reconciliation of IPS’s aging of accounts receivable to the Company’s consolidated accounts receivable as of December 31, 2005 and 2004, respectively:

 

 

 

 

IPS’s affiliated medical groups follow a written policy regarding the write-off of accounts receivable older than 90 days. The billing department of each affiliated medical group complies with government and third party payer regulations regarding the collection of balance due amounts. Accounts receivable eligible for adjustment are reviewed monthly by the practice administrators, with accounts considered for assignment to a collection agency the latter of 180 days after the date of patient liability has been determined or as soon as the internal collection effort has been exhausted. All collection attempts and contacts are documented in the patient’s account record for future reference. Once maximum collection efforts are exhausted, both internally and through external collection agencies, adjustments and write-offs are reviewed in the following manner:

 

 

 

 

IPS’s days sales outstanding totaled 53.9 and 53.7, respectively, for the twelve months ended December 31, 2005 and 2004.

 

Investment in Limited Partnerships.  At December 31, 2005, we owned a 10% general partnership interest in San Jacinto. The investment is accounted for using the equity method. Under the equity method, the investment is initially recorded at cost and is subsequently increased to reflect our share of the income of the investee and reduced to reflect the share of the losses of the investee or distributions from the investee. Effective March 1, 2006, we sold our interest in San Jacinto. (See “Results of Operations — Discontinued Operations”.)

 

The general partnership interest was accounted for as an investment in limited partnership due to the interpretation of SFAS 94/Accounting Research Bulletin (“ARB”) 51 and the interpretations of such by Issue 96-16 and Statement of Position “SOP” 78-9. Under those interpretations, we could not consolidate our interest in an entity in which it held a minority general partnership interest due to management restrictions, shared operating decision-making, and capital expenditure and debt approval by limited partners and the general form versus substance analysis.

 

Goodwill and Other Intangible Assets.  Goodwill and intangible assets represent the excess of cost over the fair value of net assets of companies acquired in business combinations accounted for using the purchase method. In July 2001, the FASB issued SFAS No. 141, “Business Combinations,” and SFAS No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 141 eliminates pooling-of-interest accounting and requires that all business combinations initiated after June 30, 2001, be accounted for using the purchase method. SFAS No. 142 eliminates the amortization of goodwill and certain other intangible assets and requires us to evaluate goodwill for impairment on an annual basis by applying a fair value test. SFAS No. 142 also requires that an identifiable intangible asset that is determined to have an indefinite useful economic life not be amortized, but separately tested for impairment using a fair value-based approach at least annually. We evaluate our goodwill and other intangible assets in the fourth quarter of each fiscal year, unless circumstances require testing at other times. (See “Results of Operations — Charge for Impairment of Intangible Assets” for additional discussion regarding the impairment testing of identifiable intangible assets.)

 

Recent Accounting Pronouncements

 

In November 2004, the EITF reached a consensus in applying the conditions in Paragraph 42 of SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“EITF 03-13”). Evaluation of whether operations and cash flows have been eliminated depends on whether (1) continuing operations and cash flows are expected to be generated, and (2) the cash flows, based on their nature and significance are considered direct or indirect. This consensus should be applied to a component that is either disposed of or classified as held-for-sale in fiscal periods beginning after December 15, 2004. The adoption of EITF 03-13 did not have a material impact on our consolidated financial position, results of operations or cash flows.

 

In December 2004, the FASB published SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123(R)”). SFAS 123(R) requires that the compensation cost relating to share-based payment transactions, including grants of employee stock options, be recognized in the financial statements. That cost will be measured based on the fair value of the equity or liability instruments issued. SFAS 123(R) covers a wide range of share-based compensation arrangements including stock options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans. SFAS 123(R) is a replacement of SFAS No. 123, “Accounting for Stock-Based Compensation,” and supersedes Auditing Practices Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and its related interpretive guidance (“APB 25”).

 

The effect of SFAS 123(R) will be to require entities to measure the cost of employee services received in exchange for stock options based on the grant-date fair value of the award, and to recognize the cost over the period the employee is required to provide services for the award. SFAS 123(R) permits entities to use any option-pricing model that meets the fair value objective in SFAS 123(R). We were required to begin to apply SFAS 123(R) for the quarter ending March 31, 2006.

SFAS 123(R) allows two methods for determining the effects of the transition: the modified prospective transition method and the modified retrospective method of transition. We have adopted the modified prospective transition method beginning in 2006.

 

In June 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes,” an interpretation of FASB Statement No. 109 (“FIN 48”), which provides criteria for the recognition, measurement, presentation and disclosure of uncertain tax positions. A tax benefit from an uncertain position may be recognized only if it is “more likely than not” that the position is sustainable based on its technical merits. The provisions of FIN 48 are effective for fiscal years beginning after December 15, 2006. We do not expect FIN 48 will have a material effect on our consolidated financial condition or results of operations.

 

Results of Operations

 

The IPS Merger was treated as a reverse acquisition, meaning that the purchase price, comprised of the fair value of the outstanding shares of the Company prior to the transaction, plus applicable transaction costs, were allocated to the fair value of our tangible and intangible assets and liabilities prior to the transaction, with any excess being considered goodwill. IPS was treated as the continuing reporting entity, and, thus, IPS’s historical results became those of the combined company. Our results for the six months ended June 30, 2006 and 2005 include the results of IPS, MBS and our ambulatory surgery and diagnostic center business. Our results for fiscal 2005 include the results of IPS, MBS (which includes DCPS) and our ambulatory surgery and diagnostic center business for the twelve months ended December 31, 2005. Our results for fiscal 2004 include the results of IPS for the twelve months ended December 31, 2004 and the results of MBS (which includes DCPS) and our ambulatory surgery and diagnostic center business commencing on December 15, 2004. The descriptions of the business and results of operations of MBS set forth in this report include the business and results of operations of DCPS. This discussion should be read in conjunction with our unaudited consolidated condensed financial statements for the six months ended June 30, 2006 and 2005 and consolidated financial statements for the years ended December 31, 2005 and 2004 and related notes thereto, which are included as Annex J of this Proxy Statement.

 

Pursuant to paragraph 43 of SFAS 144, which states that, in a period in which a component of an entity either has been disposed of or is classified as held for sale, the income statement of a business enterprise for current and prior periods shall report the results of operations of the component, including any gain or loss recognized, in discontinued operations. As such, our financial results for the six months ended June 30, 2005 and the twelve months ended December 31, 2004 have been reclassified to reflect the operations, including our surgery and diagnostic center businesses, which were discontinued in 2005.

Six Months Ended June 30, 2006 as Compared to Six Months Ended June 30, 2005

 

The following table sets forth, for the periods indicated, the consolidated statements of operations of the Company.