Unassociated Document
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
SCHEDULE
14C
Information
Statement Pursuant to Section 14(c)
of
the Securities Exchange Act of 1934
Check
the appropriate box:
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¨
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Preliminary
Information Statement
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¨
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Confidential,
for Use of the Commission Only (as permitted by
Rule 14c-5(d)(2))
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Definitive
Information Statement
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CAREGUIDE,
INC.
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(Name
of Registrant as Specified In Its Charter)
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Payment
of Filing Fee (Check the appropriate box):
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x
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No
fee required.
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o
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Fee
computed on table below per Exchange Act
Rules 14c-5(g) and 0-11.
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(1)
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Title
of each class of securities to which transaction
applies:
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(2)
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Aggregate
number of securities to which transaction applies:
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(3)
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Per
unit price or other underlying value of transaction computed pursuant to
Exchange Act Rule 0-11 (set forth the amount on which the filing fee
is calculated and state how it was determined):
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(4)
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Proposed
maximum aggregate value of transaction:
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(5)
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Total
fee paid:
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o
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Fee
paid previously with preliminary materials.
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o
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Check
box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting
fee was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its
filing.
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(1)
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Amount
Previously Paid:
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(2)
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Form,
Schedule or Registration Statement No.:
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(3)
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Filing
Party:
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(4)
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Date
Filed:
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CAREGUIDE,
INC.
4401
N.W. 124th
AVENUE
CORAL
SPRINGS, FLORIDA 33065
(954)
796-3714
INFORMATION
STATEMENT
WE
ARE NOT ASKING YOU FOR A PROXY AND
YOU
ARE REQUESTED NOT TO SEND US A PROXY.
Dear
Stockholder,
This
Information Statement is being furnished to you, as a record holder of common
stock, par value $0.01 per share (the “Common
Stock”) or Series A Preferred Stock, par value $0.01 per share (the
“Preferred
Stock”), of CareGuide, Inc., a Delaware corporation (the “Company,”
“we,”
“our” or
“us”) to
inform you of (i) the approval on November 21, 2008 of resolutions by our
Board of Directors (the “Board”)
proposing amendments (the “Certificates of
Amendment”) to our Certificate of Incorporation, as amended to date
(the “Certificate of
Incorporation”) to (A) effect a reverse split of the Common Stock (the
“Reverse
Split”) pursuant to which each 50,000 shares of Common Stock registered
in the name of a stockholder holding at least 50,000 shares of Common Stock
immediately prior to the effective time of the Reverse Split will be converted
and combined into one share of Common Stock, followed immediately thereafter by
a forward split of the Common Stock (the “Forward
Split” and, together with the Reverse Split, the “Reverse/Forward
Stock Split”) pursuant to which each share of Common Stock registered in
the name of a stockholder holding at least one share of Common Stock immediately
after the effective time of the Reverse Split, including fractions thereof for
holders holding in excess of one whole share following the Reverse Split, will
be converted and subdivided into 50,000 shares of Common Stock and (B) increase
the number of authorized shares of Common Stock from 100,000,000 shares to
200,000,000 shares (the “Authorized Share
Increase”) and (ii) our receipt of written consents effective as of
December 5, 2008 (the “Approval
Date”), approving such amendments by the requisite
stockholders.
Under
Section 228 of the Delaware General Corporation Law (the “DGCL”),
any action that can be taken at an annual or special meeting of stockholders may
be taken without a meeting, without prior notice and without a vote, if the
holders of outstanding stock having not less than the minimum number of votes
that are necessary to authorize or take such action at a meeting at which all
shares entitled to vote thereon were present have consented to such action in
writing. Under Section 242 of the DGCL, the approval of the
Reverse/Forward Stock Split and the Authorized Share Increase requires the
affirmative vote or written consent of a majority of the votes entitled to be
cast by holders of each of (a) the issued and outstanding shares of Common
Stock, voting as a separate class and (b) the issued and outstanding shares of
Common Stock and Preferred Stock, voting together as a single class on an
as-converted basis. Each holder of Common Stock is entitled to one
vote per share held of record on any matter which may properly come before the
stockholders, and each holder of a share of Preferred Stock is entitled to that
number of votes equal to the number of shares of Common Stock into which such
share of Preferred Stock may then be converted. As of the Approval
Date and the date hereof, each share of Preferred Stock was and is convertible
into five shares of Common Stock. In order to eliminate the costs and
management time involved in holding a special meeting and in order to effect and
ratify the Reverse/Forward Stock Split and the Authorized Share Increase as
early as possible in order to accomplish the purposes described in this
Information Statement, we obtained written consents approving the
Reverse/Forward Stock Split and the Authorized Share Increase from holders of
the requisite voting power.
As of the
Approval Date and the date hereof, there were and are 67,538,976 shares of
Common Stock and 6,250,000 shares of Preferred Stock issued and
outstanding. Stockholders holding 41,073,003 shares of our issued and
outstanding Common Stock, or approximately 61% of the total Common Stock class
vote, have approved the Reverse/Forward Stock Split and the Authorized Share
Increase. In addition, stockholders holding 6,250,000 shares of our
issued and outstanding Preferred Stock, or 100% of such class, have approved the
Reverse/Forward Stock Split and the Authorized Share
Increase. Therefore, on an as-converted to Common Stock basis,
stockholders holding 72,323,003 shares of Common Stock, or approximately 73% of
our total voting power on an as-converted basis, have approved the
Reverse/Forward Stock Split and the Authorized Share Increase. The resolutions
adopted by the Board and the written consents of the stockholders grant us the
authority to file the Certificates of Amendment. The Certificates of
Amendment cannot be filed with the Secretary of State of the State of Delaware
until at least 20 calendar days after the date this Information Statement is
first mailed to our stockholders. As a result, it is anticipated that
the Certificates of Amendment will be filed with the Secretary of State of the
State of Delaware, and the Reverse/Forward Stock Split and Authorized Share
Increase will be consummated, on January 20, 2009, or as soon thereafter as
practicable.
You are urged to
read this Information Statement in its entirety for a description of the
Reverse/Forward Stock Split and the Authorized Share
Increase.
As a
result of the Reverse/Forward Stock Split, stockholders owning fewer than 50,000
shares of Common Stock will be paid, in lieu of fractional shares, cash in an
amount equal to $0.14 per share for each share of Common Stock owned immediately
prior to the Reverse Split and will no longer be stockholders. The
holdings of all other stockholders will remain unchanged. Please
note, if you hold your shares in “street name” (i.e., in a brokerage account),
you are not
considered
to be the record holder of those shares. Accordingly, even though
your broker is expected to provide Continental Stock Transfer and Trust Company,
who will act as our exchange and payment agent (the “Exchange
Agent”), with
information regarding the beneficial ownership positions it holds, if you wish
to ensure that your ownership position is accurately reported to the Exchange
Agent, you should instruct your broker to transfer your shares into a record
account in your name immediately. If your broker holds more than
50,000 shares of our Common Stock in the aggregate, we cannot ensure that you
will be paid cash in lieu of fractional interests with respect to such
shares.
We intend
to finance the purchase of fractional shares through the sale and issuance of
additional shares of Preferred Stock for gross proceeds of up to $4.0 million,
as described in this Information Statement (the “Financing”). The
intended effect of the Reverse/Forward Stock Split is to reduce the number of
record holders of Common Stock to fewer than 300 so that we will be eligible to
terminate the public registration of our Common Stock under the Securities
Exchange Act of 1934, as amended (the “Exchange
Act”). If the Reverse/Forward Stock Split has the intended
effect, we intend to immediately file with the Securities and Exchange
Commission (the “Commission”)
a Certificate and Notice of Termination of Registration under
Section 12(g) of the Exchange Act on Form 15 to terminate the
registration of our Common Stock. Immediately upon filing the
Form 15, our obligation to file periodic reports with the Securities and
Exchange Commission (the “Commission”),
such as quarterly, annual and current reports on Forms 10-Q, 10-K and 8-K,
respectively, will be suspended, and we will no longer be subject to the
Commission’s proxy rules. However, we will continue to be subject to
the general anti-fraud provisions of federal and applicable state securities
laws. Deregistration of our Common Stock will be effective 90 days
after the filing of the Form 15, although this period may be accelerated by
the Commission.
The
Reverse/Forward Stock Split was approved by the Board which, among other
factors, considered the recommendation of a duly appointed special committee of
the Board comprised entirely of independent directors (the “Special
Committee”) formed to evaluate the feasibility and fairness from a
financial point of view to our unaffiliated stockholders of a reverse split
followed by a cash out of fractional interests and to recommend a price to
effect the cash out that is fair to those stockholders. Although the
Reverse/Forward Stock Split has been approved by the requisite stockholders, the
Board may determine not to effect the Reverse/Forward Stock Split under certain
circumstances. We have entered into an agreement with certain of our
existing investors to issue additional shares of Preferred Stock in order to
finance the payment of cash for fractional shares as part of the Reverse Split
(the “Financing”). However,
if the Board elects to abandon the Reverse Split prior to the closing of the
Financing we may, under certain circumstances, be required to pay a termination
fee of $160,000 plus expenses to the investor group that has committed to
finance the cash out of fractional interests in connection with the Reverse
Split.
This
Information Statement is being furnished to all of our stockholders pursuant to
Section 14(c) of the Exchange Act, the rules promulgated
thereunder and the provisions of the DGCL, solely for the purpose of informing
stockholders of the Reverse/Forward Stock Split, the Authorized Share Increase,
the Financing and the other transactions described herein before they take
effect. This Information Statement also serves as notice of the
action taken by stockholders without a meeting, pursuant to
Section 228(e) of the DGCL.
NEITHER
THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS
APPROVED OR DISAPPROVED OF THIS INFORMATION STATEMENT OR THE TRANSACTIONS
DESCRIBED IN THIS INFORMATION STATEMENT, PASSED UPON THE MERITS OR FAIRNESS OF
THE TRANSACTIONS DESCRIBED IN THIS INFORMATION STATEMENT, OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THE DISCLOSURE IN THIS INFORMATION
STATEMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
This
Information Statement is dated December 24, 2008 and is first being mailed to
our stockholders on or about December 31, 2008. We will pay the
expenses of furnishing this information statement to stockholders, including the
cost of preparing, assembling and mailing this Information
Statement.
By Order
of the Board of Directors,
/s/
Chris E. Paterson
Chris E.
Paterson
Chief
Executive Officer
Table
of Contents
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Page
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SUMMARY
TERM SHEET
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1
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QUESTIONS
AND ANSWERS ABOUT THE REVERSE/FORWARD STOCK SPLIT AND THE AUTHORIZED SHARE
INCREASE
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4
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SPECIAL
FACTORS
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11
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GENERAL
INFORMATION ABOUT THE REVERSE/FORWARD STOCK SPLIT
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41
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GENERAL
INFORMATION ABOUT THE AUTHORIZED SHARE INCREASE
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49
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INFORMATION
ABOUT THE COMPANY
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50
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INFORMATION
ABOUT OTHER FILING PERSONS
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59
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INDEMNIFICATION
OF DIRECTORS AND OFFICERS
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63
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FORWARD-LOOKING
STATEMENTS
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64
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AVAILABLE
INFORMATION
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64
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NOTICE
TO STOCKHOLDERS SHARING AN ADDRESS
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65
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Annex
A-1/A-2
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Certificates
of Amendment
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Annex
B
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Fairness
Opinion
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Annex
C
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Stockholders
Agreement
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Annex
D
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Certificate
of Designations
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Annex
E-1/E-2
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Financial
Statements
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SUMMARY
TERM SHEET
The
following is a summary of the material information regarding the Reverse/Forward
Stock Split and the Authorized Share Increase. For a more complete
description of the terms and effects of the Reverse/Forward Stock Split and the
Authorized Share Increase, you are urged to read carefully the entire
Information Statement and each of the documents that we have attached as Annexes
to this Information Statement.
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After
consideration of several factors, including the recommendation of the
Special Committee of a reverse split followed by a cash out of fractional
interests, the Board has unanimously approved a 1-for-50,000 Reverse Split
of our Common Stock, followed immediately thereafter by a 50,000-for-1
Forward Split of our Common Stock. See the information under
the caption “General Information About the Reverse/Forward Stock Split” in
this Information Statement.
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Our
Board has also unanimously approved increasing the number of authorized
shares of our Common Stock under our Certificate of Incorporation from
100,000,000 shares to 200,000,000 shares. We intend to effect
the Authorized Share Increase in order to provide us with additional
flexibility to use our capital stock for future business and financial
purposes, including the issuance of shares pursuant to convertible
securities outstanding as of the date of this Information Statement and
shares of Preferred Stock that we intend to issue in connection with
the Financing. See the information under the captions
“General Information About the Authorized Share Increase” and “General
Information About the Reverse/Forward Stock Split—Financing of the
Reverse/Forward Stock Split” in this Information
Statement.
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The
approval of the Reverse/Forward Stock Split and the Authorized Share
Increase requires the affirmative vote or written consent of a majority of
the votes entitled to be cast by holders of each of (a) the issued and
outstanding shares of Common Stock, voting as a separate class, and (b)
the issued and outstanding shares of Common Stock and Preferred Stock,
voting together as a single class on an as-converted
basis. Each share of Preferred Stock outstanding has the same
voting power as five shares of Common Stock. Stockholders
holding 41,073,003 shares of our issued and outstanding Common Stock, or
approximately 61% of the total Common Stock class vote, executed written
consents approving the Authorized Share Increase and the Reverse/Forward
Stock Split. In addition, stockholders holding 6,250,000 shares
of our issued and outstanding Preferred Stock, or 100% of such class,
executed written consents approving the Authorized Share Increase and the
Reverse/Forward Stock Split. Therefore, on an as-converted to
Common Stock basis, stockholders holding 72,323,003 shares of Common
Stock, or approximately 73% of our total voting power on an as-converted
basis, have approved the Reverse/Forward Stock Split and the Authorized
Share Increase. See the information under the captions “General
Information About the Reverse/Forward Stock Split—Vote Required” and
“General Information About the Authorized Share Increase—Vote Required” in
this Information Statement.
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The
Reverse/Forward Stock Split and the Authorized Share Increase will be
effected pursuant to the filing of the Certificates of Amendment attached
to this Information Statement as Annexes A-1 and A-2
with the Secretary of State of the State of
Delaware.
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When
the Reverse/Forward Stock Split becomes effective, if you hold at least
50,000 shares of Common Stock, the number of shares of Common Stock that
you hold will not change, and you will not be entitled to receive any cash
payment. You will not need to take any immediate action,
including exchanging or returning any existing stock certificates, which
will continue to evidence ownership of the same number of shares as set
forth currently on the face of such certificates (although we may contact
you after the completion of the Reverse/Forward Stock Split to reissue you
a new certificate representing the same number of shares). See
the information under the captions “Special Factors—Effects of the
Reverse/Forward Stock Split” and “General Information About the
Reverse/Forward Stock Split—Financing of the Reverse/Forward Stock
Split—Stockholders Agreement” in this Information
Statement.
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When
the Reverse/Forward Stock Split becomes effective, if you hold fewer than
a total of 50,000 shares of Common Stock, you will receive a cash payment
of $0.14 per pre-split share. As soon as practicable after the
Reverse/Forward Stock Split, you will be notified and asked to surrender
your stock certificates to our Exchange Agent. You should allow
for approximately five business days after mailing for the Exchange Agent
to receive your stock certificates surrendered. Upon receipt of
a properly completed letter of transmittal and your stock certificates by
the Exchange Agent, you will receive your cash payment within
approximately seven to 10 business days. See the information
under the captions “Special Factors—Effects of the Reverse/Forward Stock
Split” and “General Information About the Reverse/Forward Stock
Split—Exchange of Certificates for Cash Payment” in this Information
Statement.
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Please note, if you hold
your shares in “street name” (i.e., in a brokerage account), you are
not
considered to
be the record holder of those shares. Accordingly, even though your
broker is expected to provide our Exchange Agent with information regarding the
beneficial ownership positions it holds, if you wish to ensure that your
ownership position is accurately reported to the Exchange Agent, you should
instruct your broker to transfer your shares into a record account in your name
immediately. If your broker holds more than 50,000 shares of our
Common Stock in the aggregate, we cannot ensure that you will be paid cash in
lieu of fractional interests with respect to such shares.
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The
Reverse/Forward Stock Split will not affect holders of our outstanding
Preferred Stock, options and warrants to purchase shares of our Common
Stock, whether exercisable or unexercisable, or outstanding convertible
promissory notes. Holders of those convertible and exercisable
securities will, following the Reverse/Forward Stock Split, continue to
hold such securities and their terms will not be affected. See
the information under the caption “Special Factors—Effects of the
Reverse/Forward Stock Split” in this Information
Statement.
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When
the Reverse/Forward Stock Split becomes effective, we intend to terminate
the registration of our Common Stock with the Commission. Upon
termination of our registration, we will no longer file periodic reports
with the Commission, including Annual Reports on Form 10-K, Quarterly
Reports on Form 10-Q and Current Reports on Form 8-K, and we
will not be subject to the Commission’s proxy rules. See the information
under the captions “Special Factors—Purposes of and Reasons for the
Reverse/Forward Stock Split” and “General Information About the
Reverse/Forward Stock Split—Termination of Exchange Act Registration” in
this Information Statement.
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After
consummation of the Reverse/Forward Stock Split, we expect our business
and operations generally to continue as they are currently being
conducted. We do not currently plan to initiate any new
operational or strategic projects. However, we may seek to
restructure our corporate organization in order to consolidate certain of
our wholly-owned subsidiaries formed in jurisdictions where we no longer
engage in business. We may also seek to upgrade and/or
integrate certain of our information technology systems, in order to make
such systems more scalable and efficient. Also, we expect to
have certain changes in our Board and management. Our executive
vice chairman and board member, Michael J. Condron, will become our
president and chief executive officer upon the deregistration of our
Common Stock. Our current chief executive officer, Chris E.
Paterson, will continue to serve in that role until Mr. Condron takes
office. Our current executive vice president of administration,
Thomas J. Hannon, who joined us in November 2008, will become our chief
financial officer upon the earlier of the consummation of the
Reverse/Forward Stock Split or March 31, 2009. See the information under
the caption “General Information About the Reverse/Forward Stock
Split—Conduct of Our Business After the Reverse/Forward Stock Split” in this
Information Statement.
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The
Special Committee retained the services of a financial advisory firm,
Navigant Consulting, Inc. (“Navigant”), to render an
opinion as to the fairness from a financial point of view of the
consideration to be paid to the unaffiliated holders of shares of our
Common Stock who will receive cash payments for their pre-split shares and
will not be continuing stockholders. See the information under
the caption “Special Factors—Summary of Fairness Opinion” in this
Information Statement. The full text of the written opinion of Navigant,
which sets forth assumptions made, procedures followed, matters considered
and the qualifications and limitations on the scope of the review
undertaken in connection with the opinion, is attached to this Information
Statement as Annex
B. You are urged to, and should, read the opinion of
Navigant carefully and in its
entirety.
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For
those stockholders who receive a cash payment as a result of the
Reverse/Forward Stock Split, your receipt of cash will be a taxable
transaction for United States federal income tax purposes and may be
taxable for state, local, foreign and other tax purposes as
well. For our continuing stockholders who retain their Common
Stock immediately following the Reverse/Forward Stock Split without the
receipt of a cash payment, you will not recognize any gain or loss for
federal income tax purposes. See the information under the
caption “Special Factors—Federal Income Tax Consequences of the
Reverse/Forward Stock Split” in this Information
Statement. You are
urged to consult with your own tax advisor regarding the tax consequences
of the Reverse/Forward Stock Split in light of your particular
circumstances.
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Stockholders
are not entitled to appraisal rights under either our governance documents
or the DGCL. See the information under the caption “General
Information About the Reverse/Forward Stock Split—Appraisal Rights” in
this Information Statement.
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Under
the rules of the Commission, certain individuals and entities are required
to provide certain disclosures to our stockholders in order for us to
effect the Reverse/Forward Stock Split. These entities and
individuals are: (1) the Company; (2) Psilos Group Partners, L.P., a
Delaware limited partnership (“Psilos Fund
I”), (3) Psilos Group Partners II, L.P., a Delaware limited
partnership (“Psilos Fund
II”), (4) Psilos/CareGuide Investment, L.P., a Delaware limited
partnership (“Psilos/CareGuide,”
and, together with Psilos Fund I and Psilos Fund II, the “Psilos
Funds”), (5) Derace Schaffer, M.D., a member of our Board, (6) John
Pappajohn, a member of our Board, (7) Essex Woodlands Health Ventures IV,
L.P., a Delaware limited partnership (“Essex
IV”), (8) Essex Woodlands Health Ventures V, L.P., a Delaware
limited partnership (“Essex
V” and, together with Essex IV, the “Essex
Funds”), and (9) Hickory Venture Capital Corporation (“Hickory,”
and, together with the Psilos Funds, the Essex Funds, Dr. Schaffer and Mr.
Pappajohn, the “Investor
Group”). In this Information Statement, we refer to the
Company and the Investor Group collectively as the “Filing
Persons.” See the information under the captions
“Information About the Company” and “Information About Other Filing
Persons” in this Information
Statement.
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Upon
consummation of the Reverse/Forward Stock Split, we estimate that we will
pay approximately $0.8 million to cash out fractional shares as part of
the Reverse/Forward Stock Split, including certain of the shares
previously held by Radius Venture Partners I, L.P. (“Radius”). However,
this amount could increase or decrease depending on how many shares we are
actually required to cash out upon consummation of the Reverse/Forward
Stock Split, which will depend in part on whether stockholders who
presently own less than 50,000 shares buy additional shares in order to
remain stockholders following the Reverse/Forward Stock Split and whether
stockholders who presently own 50,000 or more shares sell shares in order
to participate in the cash out. In addition, we anticipate
incurring approximately $1.0 million in advisory, legal, financial,
accounting, printing and other fees and costs in connection with the
Reverse/Forward Stock Split and related transactions. See the
information under the caption “General Information About the
Reverse/Forward Stock Split—Fees and Expenses” in this Information
Statement.
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To
fund the Reverse/Forward Stock Split, including associated fees and costs,
we will issue shares of our Preferred Stock in the
Financing. We expect to receive gross proceeds of up to $4.0
million from the Financing, under which the members of the Investor Group
have agreed to purchase our Preferred Stock at a price of $0.60 per share
(or, since each share of Preferred Stock issued in the Financing will
initially convertible into five shares of Common Stock, $0.12 on a common
equivalent basis). As a result of issuing additional shares of
Preferred Stock, continuing stockholders who are not members of the
Investor Group will incur dilution of approximately 22% in terms of their
percentage ownership of our Company, on an as-converted to Common Stock
basis, assuming the consummation of the Reverse/Forward Stock Split, the
repurchase of fractional interests and the completion of the Financing in
the amount of $4.0 million. Any proceeds of the Financing
beyond those necessary to repurchase shares and the costs of the
Reverse/Forward Stock Split, will be used for working capital and other
general corporate purposes. See the information under the
captions “Special Factors—Potential Disadvantages of the Reverse/Forward
Stock Split” and “General Information About the Reverse/Forward Stock
Split—Financing of the Reverse/Forward Stock Split” in this Information
Statement.
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The
terms and conditions of the Financing are set forth in a stock purchase
agreement, as amended (the “Purchase
Agreement”) by and among the Company and each member of the
Investor Group. The Investor Group’s obligations under the
Purchase Agreement are expressly contingent on, among other things, the
consummation of the Reverse/Forward Stock Split and deregistration of our
Common Stock with the Commission. If we are unable to
consummate the Reverse/Forward Stock Split or the deregistration of our
Common Stock, or if we are unable to satisfy any of the other conditions
set forth in the Purchase Agreement, we may not receive any proceeds under
the Purchase Agreement and therefore may not be able to consummate the
transactions described in this Information Statement. See the
information under the caption “General Information About the
Reverse/Forward Stock Split—Financing of the Reverse/Forward Stock
Split—Purchase Agreement” in this Information
Statement.
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Upon
consummation of the Reverse/Forward Stock Split and the other transactions
described in this Information Statement, we also intend to enter into a
stockholders agreement (the “Stockholders
Agreement”), substantially in the form attached to this Information
Statement as Annex
C, with certain of our continuing stockholders. Each
member of the Investor Group has agreed to become a party to the
Stockholders Agreement upon the closing of the Financing. Also,
as a condition to the Investor Group’s performance of its obligations
under the Purchase Agreement, each of our directors and officers are
required to become a party to the Stockholders Agreement upon the closing
of the Financing. Following the consummation of the Reverse/Forward Stock
Split, all other continuing stockholders will be contacted regarding
becoming parties to the Stockholders Agreement, but are not required to do
so. The Stockholders Agreement will provide to each stockholder
party to it certain rights, including registration rights, the right,
under certain circumstances, to purchase shares of stock proposed to be
transferred by other stockholders who are party to the agreement or to
sell stock along with such stockholder, and, for the Investor Group only,
the right to specified financial information and preemptive rights to
purchase its pro rata portion of equity securities that we may issue,
subject, in all circumstances, to the terms of the Stockholders
Agreement. Stockholders who are party to the agreement will
also be subject to certain obligations, including restrictions on their
ability to transfer their shares and an agreement to vote their shares in
favor of the Board members designated by the Psilos Funds, the Essex
Funds, Mr. Pappajohn and Dr. Schaffer and, in certain circumstances, to
vote in favor of a “sale of the Company” (as such term is defined in the
Stockholders Agreement), to the extent such a sale is approved by holders
of at least two-thirds of the outstanding Preferred Stock. Upon
the consummation of the Reverse/Forward Stock Split, we will not be
obligated, except as may be provided by law, to provide continuing
stockholders other than members of the Investor Group with any ongoing
financial information about us. See the information under the
caption “General Information About the Reverse/Forward Stock
Split—Financing of the Reverse/Forward Stock Split—Stockholders Agreement”
in this Information Statement.
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Our
Board has unanimously determined that the Reverse/Forward Stock Split,
including the other transactions contemplated in connection with the
Reverse/Forward Stock Split, is fair to and in the best interests of all
of our unaffiliated stockholders, including those stockholders who will
receive only cash as a result of the Reverse/Forward Stock Split as well
as those stockholders who will continue as stockholders after the
consummation of the Reverse/Forward Stock Split. Nonetheless,
the Board believes that it is prudent to recognize that, between the date
of this Information Statement and the date that the Reverse/Forward Stock
Split will become effective, factual circumstances could change such that
it might not be appropriate or desirable to effect the Reverse/Forward
Stock Split at that time or on the terms currently
proposed. Such factual circumstances could include a superior
offer to our stockholders, a material change in our business or financial
condition or litigation affecting our ability to proceed with the
Reverse/Forward Stock Split. If the Board decides to withdraw
or modify the Reverse/Forward Stock Split, the Board will notify the
stockholders of such decision promptly in accordance with applicable
rules and regulations. We may terminate the Purchase
Agreement in order to engage in a transaction that the Board concludes in
good faith is (1) on terms and conditions materially more favorable from a
financial point of view to our stockholders than those contemplated by the
Reverse/Forward Stock Split, (2) the conditions to the consummation of
which are all reasonably capable of being satisfied without undue delay
and (3) for which financing, to the extent required, is committed (a
“Superior
Offer”), if the Board concludes in good faith that such action is
required in order for the Board to comply with its fiduciary obligations
to our stockholders under applicable law. If we terminate
the Purchase Agreement as a result of a Superior Offer, we would be
obligated to pay the Investor Group $160,000 plus all of its out-of-pocket
costs and expenses, including reasonable legal fees and expenses (the
“Termination
Fee”), incurred in connection with the Purchase Agreement and the
transactions contemplated by it. See the disclosure under the
caption “General Information About the Reverse/Forward Stock
Split—Financing of the Reverse/Forward Stock Split” in this Information
Statement.
|
QUESTIONS
AND ANSWERS ABOUT THE REVERSE/FORWARD STOCK SPLIT AND THE AUTHORIZED SHARE
INCREASE
Following
are some questions about the Reverse/Forward Stock Split, the Authorized Share
Increase and the related transactions that may be raised by our stockholders,
and answers to each of those questions. The answers to the questions
below may not include all the information that is important to
you. You are urged to read carefully the entire Information Statement
and each of the documents that we have attached as Annexes to this Information
Statement.
Q:
|
What
are some of the advantages of the Reverse/Forward Stock
Split?
|
A:
|
Our Board believes
that the Reverse/Forward Stock Split may have the following advantages,
among others:
|
|
·
|
we
will terminate the registration of our Common Stock under the Exchange
Act, which will eliminate the significant costs related to complying with
our obligations as a public company. We estimate that following
our deregistration we will save approximately $750,000 before taxes
annually and a portion of approximately $250,000 in one-time expense, as a
result of not having to incur certain external auditor, consulting and
legal fees and other expenses, including the hiring of additional
personnel, related to preparation for and ongoing compliance with the
internal controls audit requirements imposed by Section 404 (“Section
404”) of
the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley
Act”), which we would become subject to beginning with our fiscal
year ending December 31, 2009;
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|
·
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small
stockholders will not be obligated to pay any commissions in connection
with the Reverse/Forward Stock Split. However, if you hold your
shares through a nominee your nominee may charge you a
fee;
|
|
·
|
we
believe we will be able to achieve overhead reductions associated with the
Reverse/Forward Stock Split without negatively affecting our business
operations. Since we will no longer have to comply with the
public reporting and other requirements of the Exchange Act and the
Sarbanes-Oxley Act, we will no longer need to incur certain expenses
relating to printing and mailing stockholder documents, Commission filing
fees and personnel time required to comply with our obligations under
certain federal securities laws;
|
|
·
|
we
will be able to provide complete liquidity for our stockholders holding
fewer than 50,000 shares where there has, recently, been limited liquidity
available through the public trading markets;
and
|
|
·
|
we
may benefit from not having to reveal detailed financial and operational
information to the public and our
competitors.
|
See the
information under the captions “Special Factors—Purposes of and Reasons for the
Reverse/Forward Stock Split” and “Special Factors—Potential Advantages of the
Reverse/Forward Stock Split” in this Information Statement.
Q:
|
What
are some of the disadvantages of the Reverse/Forward Stock
Split?
|
A:
|
Our Board believes
that the Reverse/Forward Stock Split may have the following disadvantages,
among others:
|
|
·
|
stockholders
owning fewer than 50,000 shares of our Common Stock will not have an
opportunity to liquidate their shares at a time and for a price of their
choosing. Instead, such stockholders will be cashed out, will
no longer be stockholders and will not have the opportunity to participate
in or benefit from any future potential appreciation in our
value;
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|
·
|
stockholders
holding our Common Stock following the Reverse/Forward Stock Split will no
longer have readily available to them all of the legally mandated
information regarding our operations and financial results that is
currently available in our filings with the
Commission;
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|
·
|
it
will be more difficult for us to access the public capital
markets;
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|
·
|
the
termination of our Exchange Act registration will make many of the
provisions of the Exchange Act that are intended to protect investors,
such as certain short-swing profit provisions of Section 16, the
proxy solicitation rules under Section 14 and the stock
ownership reporting rules under Section 13, no longer
applicable;
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|
·
|
the
Sarbanes-Oxley Act, which imposed many additional rules and
regulations on public companies that were designed to protect investors,
will no longer apply to us; and
|
|
·
|
stockholders
will no longer have certain other rights and protections that the federal
securities laws give to stockholders of public
companies.
|
See the
information under the caption “Special Factors—Potential Disadvantages of the
Reverse/Forward Stock Split” in this Information Statement.
Q:
|
What
are some of the factors that the Board considered in approving the
Reverse/Forward Stock Split?
|
A:
|
The
Board considered numerous factors in approving the Reverse/Forward Stock
Split, including:
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|
·
|
the
financial presentations and analyses of management, the Special Committee
and Navigant, including Navigant’s valuation of the Company and
determination of a range of fair prices per pre-split
share;
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|
·
|
the
Board’s discussions and conclusions about the fairness of the price of
$0.14 per pre-split share to be paid following the Reverse/Forward Stock
Split to our stockholders owning fewer than 50,000 shares of our Common
Stock at the time of the Reverse/Forward Stock
Split;
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·
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the
recommendation of the Special Committee to the Board regarding the
feasibility and fairness from a financial point of view to our
unaffiliated stockholders of a reverse split followed by a cash out of
fractional interests and its recommendation of a price to effect such a
cash out that is fair to those
stockholders;
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·
|
the
opinion of Navigant to the effect that, as of June 18, 2008 (the date of
the opinion), consideration of $0.14 per pre-split share is fair, from a
financial point of view, to holders of shares of Common Stock who will
receive cash payments for their pre-split shares and will not be
continuing stockholders;
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·
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the
projected tangible and intangible cost savings to us by terminating our
status as a public company; and
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·
|
the
fact that there has been only a limited public trading market for our
Common Stock.
|
For a
more comprehensive review of the factors considered by the Board, see the
information under the caption “Special Factors” in this Information
Statement.
Q:
|
What
will the effect of the Reverse/Forward Stock Split
be?
|
A:
|
The
effect of the Reverse/Forward Stock Split will be as
follows:
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|
·
|
when
the Reverse/Forward Stock Split becomes effective, if you are a holder of
at least 50,000 shares of Common Stock, the number of shares of Common
Stock that you hold will not change, and you will not be entitled to
receive any cash payment. You will not need to take any
immediate action, including exchanging or returning any existing stock
certificates, which will continue to evidence ownership of the same number
of shares as set forth currently on the face of the certificates, although
you may be contacted after the transaction to exchange your stock
certificates for stock certificates appropriate for a private
company;
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|
·
|
when
the Reverse/Forward Stock Split becomes effective, if you are a holder of
fewer than 50,000 shares of Common Stock, you will receive a cash payment
of $0.14 per pre-split share. As soon as practicable after the
Reverse/Forward Stock Split, you will be notified and asked to surrender
your stock certificates to the Exchange Agent. You should allow
for approximately five business days after mailing for the Exchange Agent
to receive your stock certificates surrendered. Upon receipt of
a properly completed letter of transmittal and your stock certificates by
the Exchange Agent, you will receive your cash payment within
approximately seven to 10 business days;
and
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|
·
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the
Reverse/Forward Stock Split will not affect holders of our outstanding
Preferred Stock or options and warrants to purchase shares of our Common
Stock, whether exercisable or unexercisable, or
outstanding convertible promissory notes. Holders of
these convertible and exercisable securities will, following the
Reverse/Forward Stock Split, continue to hold such securities and their
terms will not be affected.
|
Stockholders
holding our Common Stock in “street name” (i.e., in a brokerage account) may be
subject to special requirements. Please carefully review the
information under the caption “Special Factors—Effects of the Reverse/Forward
Stock Split” in this Information Statement.
Q:
|
How
will payment for shares be
effected?
|
A:
|
As
soon as practicable after the Reverse/Forward Stock Split, the Exchange
Agent will send all stockholders with stock certificates representing the
right to receive cash payments a letter of transmittal to be used to
transmit Common Stock certificates. Upon proper completion and
execution of the letter of transmittal, and the return of the letter of
transmittal and accompanying stock certificate(s) to the Exchange
Agent, each stockholder entitled to receive payment will receive a check
for such stockholder’s stock. Stockholders should allow for
approximately five business days after mailing for the Exchange Agent to
receive the letter of transmittal and accompanying stock
certificate. The Exchange Agent will send a check for such
stockholder’s stock within approximately seven to 10 business days after
receiving such letter of transmittal and accompanying stock
certificate. In the event we are unable to locate a
stockholder, or if a stockholder fails properly to complete, execute and
return the letter of transmittal and accompanying stock certificate to the
Exchange Agent, any funds payable to such holder pursuant to the
Reverse/Forward Stock Split will be held in escrow until a proper claim is
made, subject to applicable abandoned property laws. Please do
not send your stock certificates to us or the Exchange Agent until after
you have received the instructions. See the information under
the caption “General Information About the Reverse/Forward Stock
Split—Exchange of Certificates for Cash Payment” in this Information
Statement.
|
Q:
|
What
are the interests of our directors and executive officers in the
Reverse/Forward Stock Split and the
Financing?
|
A:
|
As
a result of the Reverse/Forward Stock Split and the Financing (assuming
the sale of an aggregate of $4.0 million of our Preferred Stock), we
estimate that our directors and executive officers and their affiliated
entities, collectively, will increase their beneficial ownership of our
Common Stock from approximately 71% to 83%. The number of
shares held by our directors and officers immediately prior to the
Reverse/Forward Stock Split will remain substantially unchanged as a
result of the Reverse/Forward Stock Split. Those of our directors who are
participating or who are representatives of investors who are
participating in the Financing will increase their beneficial ownership as
a result of the Financing. Their aggregate interest will also increase as
a percentage of outstanding shares due to the retirement of fractional
shares purchased by us as part of the Reverse/Forward Stock
Split. Each share of Preferred Stock is, and each share of
Preferred Stock to be issued in the Financing initially will be,
convertible into five shares of Common Stock. In addition, in
December 2008, Radius distributed all of its shares of our Common Stock to
its partners. Albert Waxman, the chairman of our Board, is a
limited partner of Radius and, by virtue of the distribution, Dr. Waxman
received approximately 34,000 shares of Common Stock. Because
these are the only shares that Dr. Waxman owns directly in his name, and
because they are fewer than 50,000 shares, we expect these shares to be
cashed out, at a price of $0.14 per pre-split share, upon consummation of
the Reverse/Forward Stock Split on the same terms as all other
stockholders holding less than 50,000 shares. See the
information under the caption “Information About the Company—Interests of
our Executive Officers and Directors in the Reverse/Forward Stock Split
and the Financing” in this Information
Statement.
|
Q:
|
What
is the interest of the Investor Group in the Reverse/Forward Stock Split
and the Financing?
|
A:
|
As
a result of the Reverse/Forward Stock Split and the Financing (assuming
the sale of an aggregate of $4.0 million of our Preferred Stock), we
estimate that the Investor Group will increase its aggregate beneficial
ownership of our Common Stock from approximately 75% to
84%. The number of shares of Common Stock and Preferred Stock
held by the Investor Group immediately prior to the Reverse/Forward Stock
Split will remain substantially unchanged as a result of the
Reverse/Forward Stock Split. However, its aggregate percentage
ownership of our Common Stock on an as-converted basis will increase due
to the retirement of fractional shares purchased by us as part of the
Reverse Split, as well as its acquisition of additional shares of
Preferred Stock in the Financing. In addition, the Investor
Group will have certain rights not shared by our other stockholders under
the Stockholders Agreement, including the right to designate members of
our Board, the right to receive periodic financial information about us
and preemptive rights to purchase our equity securities that may be issued
from time to time. See the information under the caption
“Information About Other Filing Persons—Interests of the Investor Group in
the Reverse/Forward Stock Split and the Financing” in this Information
Statement.
|
Q:
|
What
if I hold shares of Common Stock in “street
name”?
|
A:
|
If
you hold shares of our Common Stock in “street name,” then your broker,
bank or other nominee is considered the stockholder of record with respect
to those shares and not you. We intend to treat stockholders
holding shares of our Common Stock in street name through a nominee (such
as a bank or broker) in the same manner as stockholders whose shares are
registered in their own name. Accordingly, if you hold 50,000
or more shares of Common Stock in street name you will remain a
stockholder after consummation of the Reverse/Forward Stock
Split. On the other hand, if you hold fewer than
50,000 shares of Common Stock in street name it is intended that you
receive cash for your shares. However, it is also possible that the bank,
broker or other nominee also holds shares for other beneficial owners of
our Common Stock and that it may hold 50,000 or more shares in the
aggregate. Therefore, depending upon your nominee’s
procedures, your nominee may not be obligated to treat the Reverse/Forward
Stock Split as affecting its beneficial holders’ shares and you may not
receive cash for your fractional interests. If
you hold fewer than 50,000 shares of our Common Stock in street name, we
encourage you to contact your bank, broker or other nominee directly as
soon as possible so that arrangements can be made, if necessary, to
register your holdings to ensure that you receive the cash payment of
$0.14 per share. See the information under the caption
“Special Factors—Effects of the Reverse/Forward Stock Split” in this
Information Statement.
|
Q:
|
What
if I hold 50,000 or more shares of Common Stock in the aggregate through
multiple brokerage or record accounts or a combination of brokerage and
record accounts, each with fewer than 50,000
shares?
|
A:
|
We
do not intend to pay cash to holders of 50,000 or more shares of our
Common Stock in the aggregate. In the event that you hold a
total of 50,000 or more shares of Common Stock, but these shares are
divided up among multiple brokerage and/or record accounts, each with
fewer than 50,000 shares, our Exchange Agent will attempt to contact you
at the address we have on record or through your brokerage to make the
necessary arrangements to register and, where applicable, aggregate your
positions. However, there can be no assurance that our Exchange
Agent will be able to contact you or, where applicable, that our Exchange
Agent will be able to successfully compare your holdings across multiple
brokerage and/or record accounts. If
you hold a total of 50,000 or more shares of Common Stock divided up among
multiple brokerage and/or record accounts, each with fewer than 50,000
shares, we urge you to contact your broker immediately to make
arrangements to register and/or consolidate your holdings or take such
other steps as may be necessary in order to avoid processing delays after
consummation of the Reverse/Forward Stock Split. See the
information under the caption “Special Factors—Effects of the
Reverse/Forward Stock Split” in this Information
Statement.
|
Q:
|
I
understand that the Board previously proposed a reverse split ratio of
1-for-100,000. Why did the Board determine it was in the best interests of
the Company’s stockholders to reduce this ratio to
1-for-50,000?
|
A:
|
The
Board approved an initial ratio for the reverse split of 1-for-100,000
(the “Initial
Ratio” and, along with the initial ratio of 100,000-for-1 for the
forward split, the “Initial
Ratios”) in order to reduce our record holders to a number
sufficiently below 300 that we would be unlikely, in the future, to
inadvertently increase our record holder base to 300 or more, and thus be
required to re-register our Common Stock with the
Commission. In late October 2008 and early November 2008, the
Investor Group indicated to us, on several occasions, that, in light of
current economic conditions, it would not be willing to fund a cash out of
fractional interests using the Initial Ratios and proposed reducing the
ratio for the reverse split to 1-for-50,000 (the “New
Ratio” and, along with the new ratio of 50,000-for-1 for the
forward split, the “New
Ratios”) in order to reduce the amount of proceeds from the
Financing that would be required to cash out fractional interests in the
Reverse/Forward Stock Split. In light of these changed
circumstances, and recognizing that we could not undertake the transaction
without the financial support of the Investor Group, the Board determined
to proceed with the transaction using the New Ratios. See the
information under the caption “Special Factors—Background of the
Reverse/Forward Stock Split” in this Information
Statement.
|
Q:
|
What
will be the effect of reducing the ratio of the reverse split from
1-for-100,000 to 1-for-50,000?
|
A:
|
Reducing
the ratio of the reverse split from 1-for-100,000 to 1-for-50,000 is
expected to decrease the number of shares to be cashed out in connection
with the Reverse/Forward Stock Split. As a result of reducing
the number of shares we expect to cash out, we estimate that the cost of
the cash out to us will decrease from our prior projection of
approximately $1.1 million (which excluded the amount we previously
estimated would be used to repurchase shares held by Radius) to
approximately $0.8 million (which includes $0.2 million we currently
estimate will be needed to cash out fractional interests held by Radius
distributees following the Reverse/Forward Stock
Split). However, this amount could increase or decrease
depending on how many shares we are actually required to cash out upon
consummation of the Reverse/Forward Stock Split, which will depend in part
on whether stockholders who presently own less than 50,000 shares buy
additional shares in order to remain stockholders following the
Reverse/Forward Stock Split and whether stockholders who presently own
50,000 or more shares sell shares in order to participate in the cash
out. We intend to pay for the cash out using proceeds from the
Financing. The reduction in the split ratio will also increase
the number of stockholders who we expect will remain stockholders
following the consummation of the Reverse/Forward Stock Split from our
prior estimate of approximately 30 to approximately 160
holders. However, we do not believe that such an increase would
materially increase our risk of having to re-register our Common Stock due
to an inadvertent increase in the number of our record holders in the
future.
|
Q:
|
Could
the Board again determine that a different ratio should be used for the
Reverse Split?
|
A:
|
The
Board may at any time prior to the effectiveness of the Reverse Split, and
only with the consent of the Investor Group, again determine to use a
different ratio if the Board determines that it is necessary to reduce the
number of our record holders in order to effect the deregistration of our
Common Stock under the Exchange Act or otherwise in our best interest or
the best interest of our stockholders to do so. If the Board
alters the ratio again, we will provide you with notice through an
amendment to this Information
Statement.
|
Q:
|
Can
the Board determine not to proceed with the Reverse/Forward Stock Split as
currently contemplated?
|
A:
|
The
Board may determine not to proceed with the Reverse/Forward Stock Split as
currently contemplated, or to change certain of the terms of the
Reverse/Forward Stock Split, if it believes that abandoning or changing
the terms of the Reverse/Forward Stock Split is in our best interest and
the best interest of our stockholders. If the Board determines
not to proceed with the Reverse/Forward Stock Split, we will continue to
operate our business as presently conducted. In addition, the
Board may determine not to proceed with the Reverse/Forward Stock Split in
order to consider and/or pursue a Superior Offer. However, if
we abandon the Reverse/Forward Stock Split in order to consider and/or
pursue a Superior Offer, we will have to pay the Termination Fee of
$160,000 plus all out-of-pocket costs and expenses (including reasonable
legal fees and expenses) incurred by the Investor Group in connection with
the Purchase Agreement and the Financing. See the information under the
caption “General Information About the Reverse/Forward Stock
Split—Reservation of Rights” in this Information
Statement.
|
Q:
|
What
are the federal income tax consequences of the Reverse/Forward Stock Split
to me?
|
A:
|
If
you are not subject to any special rules that may be applicable to you
under federal tax laws, then generally, a stockholder receiving cash in
exchange for his, her or its shares or in lieu of fractional shares in
connection with the Reverse/Forward Stock Split will recognize capital
gain or loss for United States federal income tax purposes. A
continuing stockholder who does not receive any cash for fractional shares
as a result of the Reverse/Forward Stock Split generally will not
recognize any gain or loss for United States federal income tax
purposes. See the information under the caption “Special
Factors—Federal Income Tax Consequences of the Reverse/Forward Stock
Split” in this Information Statement. We urge
you, however, to consult with your personal tax advisor with regard to the
individual tax consequences to you of the Reverse/Forward Stock
Split.
|
Q:
|
What
information will I be able to get about the Company if I continue to hold
stock after the Reverse/Forward Stock
Split?
|
A:
|
After
the Reverse/Forward Stock Split, other than to members of the Investor
Group, we do not intend to make available to our stockholders any
financial or other information about us that is not required by
law. We do not intend, but may in our discretion elect, to
distribute press releases for material and other events. We
will continue to hold stockholder meetings as required under Delaware law,
including annual meetings, or to take actions by written consent of our
stockholders in lieu of meetings. See the information under the
caption “General Information About the Reverse/Forward Stock
Split—Financing of the Reverse/Forward Stock Split—Stockholders Agreement”
in this Information Statement.
|
Q:
|
What
is the total cost of the Reverse/Forward Stock Split to the
Company?
|
A:
|
We
estimate that we will pay approximately $0.8 million to cash out
fractional shares as part of the Reverse/Forward Stock Split, including
certain of the shares previously held by Radius. However, this
amount could increase or decrease depending on how many shares we are
actually required to cash out upon consummation of the Reverse/Forward
Stock Split, which will depend in part on whether stockholders who
presently own less than 50,000 shares buy additional shares in order to
remain stockholders following the Reverse/Forward Stock Split and whether
stockholders who presently own 50,000 or more shares sell shares in order
to participate in the cash out. In addition, we anticipate
incurring approximately $1.0 million in advisory, legal, financial,
accounting, printing and other fees and costs in connection with the
Reverse/Forward Stock Split and related transactions. See the
information under the caption “General Information About the
Reverse/Forward Stock Split—Fees and Expenses” in this Information
Statement.
|
Q:
|
What
does the deregistration of our Common Stock
mean?
|
A:
|
Following
the Reverse/Forward Stock Split, we expect to have fewer than
300 stockholders of record, which will enable us to terminate the
registration of our Common Stock under the Exchange
Act. Following the termination of the registration of our
Common Stock under the Exchange Act, we will no longer be required to file
annual, quarterly and other reports with the Commission, and beginning 90
days after such deregistration, our executive officers, directors and 10%
stockholders will no longer be required to file reports with the
Commission relating to their transactions in our Common
Stock. Our shares of Common Stock will not be registered on any
stock exchange, and we expect that our Common Stock will cease to be
quoted on the OTC Bulletin Board (the “OTCBB”)
and that any trading in our Common Stock would continue only in privately
negotiated sales. See the information under the captions
“Special Factors—Purposes of and Reasons for the Reverse/Forward Stock
Split” and “General Information About the Reverse/Forward Stock
Split—Termination of Exchange Act Registration” in this Information
Statement.
|
Q:
|
Am
I entitled to appraisal rights in connection with the Reverse/Forward
Stock Split?
|
A:
|
You
are not entitled to appraisal rights under either our governance documents
or the DGCL. See the information under the caption “General
Information About the Reverse/Forward Stock Split—Appraisal Rights” in
this Information Statement.
|
Q:
|
At
what prices has our stock traded
recently?
|
A:
|
As
of the date of this Information Statement, our Common Stock is traded on
the OTCBB. From January 1, 2008, through July 17, 2008 (the
date immediately prior to our announcement of our intention to undertake a
reverse split followed by a cash out of fractional interests), the closing
price of our Common Stock ranged between $0.06 and $0.10 per
share. Following the announcement on July 18, 2008, through the
date of this Information Statement, the closing price of our Common Stock
has ranged between $0.08 and $0.13 per share. See the
information under the caption “Information About the Company—Price Range
of Common Stock” in this Information
Statement.
|
Q:
|
How
is the Reverse/Forward Stock Split being
financed?
|
A:
|
To
fund the Reverse/Forward Stock Split, including associated fees and costs,
we will issue shares of our Preferred Stock in the
Financing. We expect to receive gross proceeds of up to $4.0
million from the Financing, under which the members of the Investor Group
have agreed to purchase our Preferred Stock at a price of $0.60 per share
(or, since each share of Preferred Stock issued in the Financing will
initially convertible into five shares of Common Stock, $0.12 on a common
equivalent basis). As a result of issuing additional shares of
Preferred Stock, continuing stockholders who are not members of the
Investor Group will incur dilution of approximately 22% in terms of their
percentage ownership of our Company, on an as-converted to Common Stock
basis, assuming the consummation of the Reverse/Forward Stock Split, the
repurchase of fractional interests and the completion of the Financing in
the amount of $4.0 million. Any proceeds of the Financing
beyond those necessary to repurchase shares and pay the costs of the
Reverse/Forward Stock Split will be used for working capital and other
general corporate purposes. See the information under the
caption “General Information About the Reverse/Forward Stock
Split—Financing of the Reverse/Forward Stock Split” in this Information
Statement.
|
Q:
|
Why
is the Company undertaking the Authorized Share
Increase?
|
A:
|
The
Board has approved the Authorized Share Increase in order to provide us
with additional flexibility to use our capital stock for future business
and financial purposes, including the issuance of shares pursuant to
convertible securities outstanding as of the date of this Information
Statement and shares of Preferred Stock that we intend to
issuein
connection with the Financing. In addition to the 67.5
million shares of Common Stock outstanding as of the date of this
Information Statement, we have
reserved:
|
|
·
|
approximately
16.3 million shares of Common Stock for issuance upon exercise of options
granted or which may be granted under our stock option
plans;
|
|
·
|
approximately
7.0 million shares of Common Stock for issuance upon exercise of warrants
currently held by the Investor Group as well as certain of our current and
former directors, executive officers and service
providers;
|
|
·
|
a
maximum of approximately 7.5 million shares of Common Stock that may be
issued upon conversion of outstanding convertible promissory notes (the
“Convertible
Notes”);
|
|
·
|
approximately
31.3 million shares of Common Stock for issuance upon conversion of
currently outstanding shares of Preferred Stock;
and
|
|
·
|
a
maximum of approximately 33.3 million shares of Common Stock for issuance
upon conversion of shares of Preferred Stock that may be issued in the
Financing.
|
In the
Reverse/Forward Stock Split, we currently estimate that we will repurchase
approximately 5.9 million shares of Common Stock. Therefore, after
the Authorized Share Increase and the Reverse/Forward Stock Split, we estimate
that we will have approximately 157.0 million shares of Common Stock outstanding
or reserved for future issuance (although this number may change depending on
how many shares of Common Stock we ultimately repurchase in connection with the
cash out).
See the
information under the caption “General Information About the Authorized Share
Increase” in this Information Statement.
Q:
|
Does
the Company currently have any plans to issue additional shares of capital
stock?
|
A:
|
Other
than as described in this Information Statement, including as a result of
the Financing, we do not currently have any definitive plans to issue
additional shares of our capital stock. However, the Authorized
Share Increase is intended to give us additional flexibility to use our
capital stock for business and financial purposes in the
future. The additional shares may be used for various purposes
without further stockholder approval, except as may be required by law or
by the terms of any agreements to which we are a party. These
purposes may include: raising capital, providing equity incentives to
employees, officers or directors, establishing strategic relationships
with other companies, expanding our business or product lines through the
acquisition of other businesses or products, and other
purposes.
|
Q:
|
Who
are the Filing Persons?
|
A:
|
For
the purposes of this Information Statement, the Filing Persons are those
individuals and entities required under the rules of the Commission to
provide certain disclosures to our stockholders in order for us to effect
the Reverse/Forward Stock Split. In addition to the Company,
the Filing Persons include each member of the Investor
Group. See the information under the captions “Information
About the Company” and “Information About Other Filing Persons” in this
Information Statement.
|
Q:
|
Who
can help answer my questions?
|
A.
|
If
you have additional questions about the Reverse/Forward Stock Split, the
Authorized Share Increase, the Financing or any of the other disclosures
in this Information Statement, you should contact us at (954)
796-3714.
|
SPECIAL
FACTORS
Background
of the Reverse/Forward Stock Split
The Company is the product of a merger
between Patient Infosystems, Inc., a public company, and CCS Consolidated, Inc.
(“CCS”), a
private company, that was completed in January 2006. We later changed
our name to CareGuide, Inc. Throughout 2006, our primary focus was to
integrate the merged businesses and to establish a new business
model. Specifically, during 2006 we sought to transition away from
capitated contracts, in which we accept risk with respect to the cost of
services rendered, to an administrative services and fee-for-service revenue
model, in which we do not accept risk. Also, in December 2006, we
acquired the Haelan Corporation (“Haelan”),
through which we acquired our One Care Street product. The
acquisition of Haelan was also part of our transition to an integrated total
healthcare management company.
However, during 2007, despite efforts
to reduce our expenses, we experienced losses from operations and negative cash
flows. Our cash position was further hurt by our release of a letter
of credit in order to reconcile an account with one of our
customers. For the three months and six months ended June 30, 2007,
we realized a net loss of approximately $3.3 million and $6.0 million,
respectively. As of June 30, 2007, we had approximately $2.0 million
in cash and cash equivalents, after experiencing a net decrease in cash and cash
equivalents of approximately $4.0 million during the second
quarter.
Following the integration of the merged
businesses and establishment of a new business model, we began to consider
alternative strategies during the summer of 2007 when, in light of our
continuing losses and negative cash flow, our Board and management began
discussions regarding strategic alternatives for raising additional funds for
operations. In June 2007, we engaged Dougherty & Company LLC
(“Dougherty”)
as our financial advisor with respect to a proposed private placement of our
securities. From July 2007 through September 2007, we met with a
number of prospective investors who conducted initial due diligence on us, but
no agreements were reached regarding a financing transaction.
During
September and October 2007, with the assistance of Dougherty, we explored other
alternatives, such as a recapitalization with financing from a third
party. We also continued to seek outside financing, in the form of
debt, convertible debt or equity. In October 2007, we formally
engaged Dougherty as our financial advisor with respect to the potential sale of
the Company or other consolidation or merger.
In late
October 2007, we received a preliminary, conditional offer from a private equity
firm to acquire all of our outstanding shares of Common Stock for $0.23 per
share, which represented approximately a 15% premium to the price of our Common
Stock quoted on the OTCBB at that time. This offer expired on October
26, 2007. At a meeting on October 29, 2007, the Board discussed the
merits of the transaction and authorized Dr. Waxman to continue negotiations
with the private equity firm. The private equity firm later raised
its conditional offer to $0.27 per share, subject to its completion of due
diligence and documentation of a final agreement. This offer was
never put in writing. After diligence activities, the private equity
firm withdrew its offer and informed Dr. Waxman that it would not be proceeding
with negotiations. In November 2007, we also received an offer for a
term loan and convertible note, in aggregate principal amount of $12 million,
from an institutional lender. However, the lender sought guarantees
from certain of our principal investors for 75% of the principal amount, which
we were not able to obtain. Accordingly, we determined not to pursue
this line of financing.
Without
any other firm offers to acquire control of us or otherwise invest funds in us
on terms acceptable to the Board, the Investor Group began discussions with
management regarding a potential financing led by our current
investors. In November 2007, representatives of the Psilos Funds and
Mr. Pappajohn made an initial proposal to us regarding a potential equity
financing by the Investor Group in the amount of up to $4.0
million. At a meeting of the Board on November 20, 2007, the
directors affiliated with the Investor Group presented a proposal to the Board
whereby the Investor Group would agree to fund our short-term cash needs in
exchange for Preferred Stock as set forth in a term sheet presented to the
Board.
Because
of the interested nature of the proposed transaction, the Board determined that
it would be in our best interest and the best interest of our stockholders to
form a special committee, comprised of Michael Barber and William C. Stapleton,
to evaluate the financing proposal from, and to negotiate the terms of the
financing with, the Investor Group. Dr. Barber and Mr. Stapleton are
independent members of our Board not affiliated with any member of the Investor
Group. The Board considered Mr. Stapleton and Dr. Barber to be
independent because neither director (nor any family member of such director)
was or is employed by, or otherwise receives any compensation from, us other
than for service as a director and, in Dr. Barber’s case, for consulting
services, on an hourly basis, related to our sales and marketing activities; and
neither Mr. Stapleton nor Dr. Barber owns any shares of our Common Stock or any
other of our securities, other than (i) a warrant owned by each director to
purchase 100,000 shares of Common Stock (of which 25,000 shares are vested in
each case) and (ii) in the case of Dr. Barber, a convertible promissory note in
the principal amount of approximately $848,000. Neither the terms of
the warrants nor the convertible promissory note will be affected by the
Reverse/Forward Stock Split.
In early
December 2007, the special committee accepted the Investor Group’s proposal to
invest up to $4.0 million through the purchase of Preferred Stock and directed
management to finalize the terms of the investment. Over the
following weeks, we and the Investor Group negotiated the documentation for the
investment, including the size and pro rata allocation of the investment among
the Investor Group. The Investor Group also contacted Radius
regarding its interest in participating in the financing, but Radius declined to
participate. On December 28, 2007, we and the Investor Group executed
a purchase agreement providing for the purchase of $3.75 million worth of
Preferred Stock in four tranches through April 2008. The timing of
drawing down each tranche would be determined by us.
Although
we had secured interim funding through the Preferred Stock investment from the
Investor Group, the Board recognized that additional measures would be required
during 2008. At special meetings of the Board held on February 28,
2008 and March 20, 2008, the Board discussed concerns regarding the significant
and increasing ongoing costs of remaining a public company as a result of the
rules and regulations of the Commission, relative to the limited value realized
by our stockholders. The Board discussed, among others, the lack of
an active trading market for the Common Stock, the lack of substantial analyst
coverage of us and our inability to access the public capital markets as some of
the instances where our stockholders are not receiving the typical benefits of
public company ownership. Representatives of Cooley Godward Kronish
LLP, our outside legal counsel (“Cooley”),
discussed generally some of the alternatives available to us in light of the
Board’s concerns, including the possibility of considering a transaction or
series of transactions that would allow us to become a private
company by terminating the registration of our Common Stock with the
Commission. After a review, including the advantages and
disadvantages of the various alternatives, the Board generally concurred that
deregistering our Common Stock following a reverse split and cash out of
fractional interests that would reduce the number of record stockholders to
considerably fewer than 300 (a “going-private transaction”) might be a desirable
strategic alternative to consider, provided that it was effected at a price and
on terms fair to all of our stockholders.
Following
the discussion on March 20, 2008, the Board formed the Special Committee, also
comprised of Mr. Stapleton and Dr. Barber, to evaluate the feasibility and
fairness from a financial point of view to our unaffiliated stockholders of such
a transaction and to recommend a price to effect that transaction that is fair
to those stockholders. The Board authorized management to assist with
the introductory and organizational matters of the Special Committee and to
assist the Special Committee on an as-needed basis throughout its analyses so
that the Special Committee could perform its evaluation on a fully informed and
efficient basis. In light of the additional responsibilities being
taken on by the members of the Special Committee, the Board compensated them
with a one-time payment of $10,000 each. This payment was in no way
contingent on the nature of their recommendation to the Board or the success of
the contemplated transaction.
On April
4, 2008, the Special Committee held a telephonic meeting to consider and select
its counsel and to evaluate the candidates to serve as financial advisor to the
Special Committee. Dr. Paterson, as our chief executive officer,
attended the meeting, as did a representative of Cooley. The Special
Committee decided to interview Navigant, Dougherty and Bridgehead Partners and
instructed our management to schedule telephone meetings between the Special
Committee and representatives of each firm. In addition, the Special
Committee considered candidates to serve as counsel to the committee and, after
discussion, selected Frost Brown Todd LLC (“Frost Brown
Todd”).
On April
8, 2008 the Special Committee held a telephonic meeting to decide which
financial advisor it would retain to consider the fairness, from a financial
point of view, of the consideration to be paid to the unaffiliated stockholders
who would be cashed out in the proposed reverse split. Dr. Paterson
and Tom Tran, our president, chief operating officer and chief financial officer
at that time, and a representative of Frost Brown Todd attended the
meeting. The Special Committee reported that it had conducted
telephone interviews with each of Dougherty and Navigant. The Special
Committee and management discussed our experience in connection with our
previous retention of Dougherty. After this discussion, the
management members exited the call. The Special Committee considered
the advantages and disadvantages of the retention of each financial advisor
candidate and determined to retain Navigant as its financial
advisor. In addition, the Special Committee discussed whether it
should request a term sheet from the Investor Group (with respect to the
financing that would be necessary to effect a reverse split) at that time or
delay such request until Navigant had commenced its engagement. The
Special Committee decided to request that we obtain a written term sheet from
the Investor Group.
On April
9, 2008, the Special Committee held a telephonic meeting to inform Navigant that
it was being retained as the financial advisor to the Special
Committee. Dr. Paterson and Mr. Tran, along with representatives of
Navigant and a representative of Frost Brown Todd, attended the
meeting. Navigant was, thereafter, formally engaged as
the financial advisor to the Special Committee.
On April
16, 2008, we received a term sheet from the Investor Group setting forth the
general terms under which the Investor Group would consider undertaking a
financing in an amount of up to $4.0 million (the “Term
Sheet”). The Term Sheet provided that the financing would be
contingent on (1) the receipt by the Board of a fairness opinion to the effect
that a reverse split, including the price to be paid to unaffiliated
stockholders in lieu of fractional interests, was fair from a financial point of
view to such stockholders and (2) our completion of all steps necessary to
effect the deregistration of our Common Stock. The Term Sheet did not
provide for a price or price range at which unaffiliated stockholders were to be
cashed out. We directed Cooley to begin negotiating agreements with
representatives of the Investor Group on the terms set forth in Term Sheet in
order to provide proceeds to finance the purchase of fractional shares resulting
from a reverse split. Negotiations between Cooley and DLA Piper LLP
(US), as counsel to the Investor Group (“DLA
Piper”), continued throughout the remainder of April, all of May and a
portion of June.
During
April and May of 2008, Navigant reviewed financial and other information
concerning us, including our audited and interim financial statements, our
financial models and other information described above under the caption
“Special Factors— Summary of Fairness Opinion.” Representatives of
Navigant also engaged in discussions with members of our management on several
occasions in connection with its due diligence investigation.
In early
May 2008, we were approached by a third party that expressed an interest in
acquiring us. We supplied certain financial information to that third
party and the third party commenced initial due diligence.
On May 9,
2008, the Special Committee held a telephonic meeting with representatives of
Navigant and Frost Brown Todd to discuss the progress of Navigant’s analysis. At
that time, Navigant indicated that it had substantially completed its financial
due diligence of our business and outlined the methods it was using to evaluate
the fairness of the consideration to be paid to fractional stockholders in
connection with the proposed transaction. Navigant did not provide
the Special Committee with a valuation at that time. The Special
Committee discussed with Navigant the valuation methodologies Navigant was
employing. For a summary of such methodologies, see the information
described above under the caption “Special Factors— Summary of Fairness
Opinion.” The Special Committee also disclosed to Navigant that we
had been approached as a possible acquisition candidate by a third
party. Navigant advised the Special Committee that a resolution of
discussions between the two sides would be necessary before it could issue a
fairness opinion.
We were
never presented with any formal proposal by the third party nor did we negotiate
a possible transaction with it. In late May, we were informed by the
third party that it was no longer in a position to continue discussing an
acquisition transaction involving us because the third party had itself entered
into an agreement to be acquired. Later in the month, the Special
Committee informed Navigant that the third party was itself being acquired and
was not in a position to explore a possible transaction with us at such
time.
On May
21, 2008, the Special Committee discussed a reverse split by telephone with the
Investor Group, including a proposed reverse split ratio of
1-for-100,000. Dr. Paterson participated on behalf of management in
this call and also discussed additional potential ratios at which to effect a
reverse split that would likely reduce the number of our record holders to
various levels below 300. The Special Committee and the Investor
Group agreed that the proposed reverse split ratio of 1-for-100,000 would enable
us to deregister our Common Stock and noted that the amount of cash expected to
be paid for fractional share purchases at such a ratio would be less than the
maximum $4.0 million proposed commitment by the Investor Group for the proposed
financing. Dr. Barber also informed the participants that Navigant
had requested the Special Committee provide it with a summary of the proposed
reverse split in writing, including the proposed cash-out price and reverse
split ratio, before Navigant would deliver a fairness opinion.
On May
21, 2008, Mr. Tran notified us of his intent to resign his position as our
president, chief operating officer and chief financial officer effective as of
the close of business on June 20, 2008.
On May
23, 2008, the Special Committee held a telephonic meeting in which
representatives of Navigant and Frost Brown Todd were present. Navigant updated
the Special Committee as to its progress and the steps it followed to date, as
described in more detail under the caption “Special Factors—Summary of Fairness
Opinion,” and provided the Special Committee with a preliminary range of equity
valuations from $0.14 to $0.18 per pre-split share of Common Stock subject to
continued diligence. Because this range of equity valuations had been
prepared prior to Navigant learning of Mr. Tran’s departure, Navigant informed
the Special Committee that it intended to engage in continued evaluation
focused, in large part, on the decision by Mr. Tran to resign and the
implications that this action might have on our ability to satisfy certain
financial objectives contained in our projections. Navigant informed
the Special Committee that it believed that Mr. Tran brought to us a significant
background in the healthcare industry and that it considered Mr. Tran to be
critical to our short- and intermediate-term prospects. Mr. Tran’s
departure also came at a time when our internal projections contemplated a
transition from continuing losses to profitability.
On June
3, 2008, Dr. Barber, on behalf of the Special Committee, delivered to Navigant a
brief written summary of the proposed financing, the proposed cash-out price of
$0.14 per pre-split share to be paid to unaffiliated stockholders and the
proposed reverse split at a ratio of 1-for-100,000. The Special
Committee determined to use a cash-out price of $0.14 because it was within the
range of valuations provided by Navigant on a preliminary basis, but still
higher than the price of $0.12 per share (on a common-equivalent basis) being
offered to the Investor Group in the proposed financing and significantly higher
than the prevailing market price on the OTCBB at that time, which was
approximately $0.07 per share. The Special Committee also considered
the proposed cash-out price to be appropriate in light of Mr. Tran’s
resignation, which it expected to have a materially negative impact on our
business until we were able to locate a replacement for Mr. Tran.
On June
13, 2008, Navigant distributed to the Special Committee a draft of its final
valuation analysis, including a range of equity valuations from $0.12 to $0.18
per pre-split share of Common Stock, and a draft of its fairness opinion, which
concluded that a price of $0.14 per pre-split share to be paid to the
unaffiliated stockholders in lieu of fractional interests would be fair, from a
financial point of view, to such stockholders. Navigant informed the
Special Committee that the final range of equity valuations was wider than
Navigant’s preliminary range as a result of adjustments made in light of Mr.
Tran’s departure and uncertainty surrounding public policy in the healthcare
industry. Navigant determined that the disruption in our day-to-day
operations caused by Mr. Tran’s departure coupled with the loss of institutional
knowledge that Mr. Tran brought to his position created a materially greater
amount of risk in our short- and intermediate-term ability to meet our projected
financial goals, and warranted a significantly greater range of value to adjust
for the potential outcome risk. Navigant also expressed concern about
the impact on us of the changing political environment around healthcare and
healthcare management. At the time Navigant was preparing to issue
its final report to the Special Committee, at least one of the two major
political parties had made it clear that healthcare would be a major focus of
the next administration. The precise impact of such a focus was not
known. In finalizing its preliminary valuation, Navigant determined
that the uncertainty surrounding public policy in this area, which could have a
material impact on our business and financial prospects, was substantial and
warranted a wider range of value. Although the quantification of the
risks related to Mr. Tran’s departure and the changing political environment
around healthcare and healthcare management is inherently subjective, Navigant
quantified the effect of these factors by increasing the maximum discount rate
used in its discounted cashflow analysis from 22% to 24%, which caused the low
end of the valuation range to decrease from $0.14 to $0.12 per pre-split
share. You can read more about Navigant’s analysis under the section
entitled “—Summary of Fairness Opinion” in this Information
Statement.
On June
17, 2008, the Special Committee held a telephonic meeting at which a
representative of Frost Brown Todd was present. The Special Committee
discussed the previously distributed draft of the fairness opinion and indicated
that its members had reviewed the Navigant valuation analysis and had the
opportunity to ask Navigant questions about it and to discuss it prior to this
meeting. The Special Committee noted that a price of $0.14 per
pre-split share to be paid to holders of fractional shares of our Common Stock
was within the range of amounts that Navigant’s valuation analysis indicated
would be fair to our unaffiliated stockholders from a financial point of
view. Further, the Special Committee recommended to the Board that we
continue to negotiate definitive agreements with the Investor Group on the terms
set forth in the Term Sheet in order to provide proceeds to finance the purchase
of fractional shares resulting from the proposed reverse split.
On June
18, 2008, the Board held a regular meeting at which all members were
present. Also present were representatives of Cooley and Frost Brown
Todd. Representatives of Navigant participated by
telephone. The sole agenda item was the continuation of discussion
and consideration of the going-private transaction and the proposed
financing. Mr. Stapleton and Dr. Barber made a presentation to the
Board on behalf of the Special Committee. They discussed with the
Board the various advantages and disadvantages to us and all of our stockholders
of effecting a reverse split. Mr. Stapleton and Dr. Barber informed
the Board that the Special Committee believed it was in our best interest and
the best interest of our stockholders, including our unaffiliated stockholders,
to effect a reverse split and recommended a reverse split at a ratio of
1-for-100,000 to the Board. At this point, representatives of Cooley
advised the Board that we should consider a forward split at a ratio of
100,000-for-1 in conjunction with the proposed reverse split. This
approach would allow us to avoid paying cash to our continuing stockholders,
thereby preserving funds for working capital purposes, and would permit
outstanding convertible and exercisable securities, such as stock options and
warrants, to be unaffected by the transaction.
Navigant
also delivered its oral opinion (which opinion was later confirmed in writing)
to the Board that, as of June 18, 2008, the proposed consideration of $0.14 per
pre-split share to be paid to stockholders being cashed out as a result of the
proposed reverse split was fair, from a financial point of view, to such
holders. Representatives of Navigant presented the valuation analysis
prepared by Navigant and the basis therefor. The Board engaged in a
substantial discussion regarding the fairness opinion, financial analyses and
the various assumptions underlying the analyses, and the methodologies employed
in reaching the final equity valuation ranges. The Board reviewed,
for accuracy and completeness, certain internal financial projections provided
by our senior management to Navigant and found Navigant’s reliance upon those
materials to be reasonable. After a discussion, the Board also
determined that the proposed reverse split and the proposed value being paid is
also fair to our stockholders who would not be cashed out. Based on
the recommendation of the Special Committee and Navigant’s fairness opinion and
after a general discussion, the Board determined that the proposed reverse
split, combined with the proposed forward split, is fair to and in the best
interest of all of our unaffiliated stockholders and unanimously approved the
proposals.
At the
June 18, 2008 meeting, the Board also received an update from Cooley regarding
the status of the negotiations of documentation related to the proposed
financing. Following a full discussion, the Board approved entering
into the financing, subject to its review of final documentation. The
Board also authorized management to begin preparing drafts of the necessary
filings with the Commission in connection with the proposed going-private
transaction.
Between
June 18, 2008 and July 11, 2008, Cooley and DLA Piper completed negotiations
regarding, and finalized, the definitive agreements to document the financing,
including the Purchase Agreement, the Stockholders Agreement, the charter
amendments to effect the proposed reverse and forward splits and the Authorized
Share Increase, an amended Certificate of Designations setting forth the rights,
preferences and privileges of the Preferred Stock, and a securities restriction
agreement (the “Securities
Restriction Agreement”), placing certain transfer and other restrictions
on the Common Stock or Common Stock underlying securities convertible into
Common Stock (including stock options) held by our employees and certain other
persons not expected to become party to the Stockholders Agreement.
At a
meeting held on July 14, 2008, the Board took a number of actions, including the
approval of the proposed financing and the forms of Purchase Agreement,
Stockholders Agreement, Securities Restriction Agreement and the Certificate of
Designations for the Preferred Stock to be issued in the
financing. The Board also approved the Authorized Share Increase,
subject to stockholder approval. The Board also ratified its prior
approval of the proposed reverse and forward splits.
On July
17, 2008, we received the written consent of stockholders holding sufficient
shares to approve the Certificates of Amendment to effect the proposed
1-for-100,000 reverse and forward splits and the Authorized Share
Increase. The stockholder consents were executed by the members of
the Investor Group, which represented approximately 73% of our voting stock on
an as-converted to Common Stock basis on such date. On July 17, 2008,
we entered into the Purchase Agreement with the members of the Investor
Group. On July 18, 2008, we issued a press release, and on July 21,
2008, we filed a Current Report on Form 8-K with the Commission announcing our
intent to effect the reverse and forward splits and the Authorized Share
Increase and the execution of the Purchase Agreement.
In August
2008, we and Radius, one of our then-largest stockholders, began discussing our
potential repurchase of approximately 6.7 million shares held by Radius at the
same $0.14 per share price proposed to be paid in connection with the
Reverse/Forward Stock Split. Any such repurchase would have been
consummated concurrently with the Reverse/Forward Stock Split and would have
also been funded using a portion of the proceeds of the Financing. We
believed the repurchase of Radius’ shares to be advisable in order to avoid the
prospect of Radius distributing shares to its partners following the completion
of the Reverse/Forward Stock Split, which could possibly have the effect of
increasing the number of our record holders to in excess of 300 and thereby
subject us once again to registration of our Common Stock with the
Commission. We and Radius agreed that any such repurchase would be
subject to the approval of our Board.
In late October 2008 and early November
2008, in response to the sustained and severe downturn in the United States
economy and the price of United States equities generally, as well as the
unprecedented shortage of available credit, the Investor Group informed us that
it was no longer willing to fund the cash out of fractional interests based on
the Initial Ratios. Instead, the Investor Group suggested that we
pursue the going-private transaction using the New Ratios. Using the
Initial Ratios, the Investor Group would have been committed, under the terms of
the Purchase Agreement, to purchase approximately $1.1 million in Preferred
Stock from us in order to fund the cash out of fractional
interests. Before considering the impact of Radius’ distribution
described below, using the New Ratios, the Investor Group would be committed,
under the terms of the Purchase Agreement, to purchase approximately $0.6
million in Preferred Stock from us in order to fund the cash out of fractional
interests (approximately $0.8 million after giving effect to the cash out of
fractional interests held by Radius distributees who we estimate currently hold
fewer than 50,000 shares). The Investor Group will also continue to
be committed to fund the payment of approximately $1.0 million in advisory,
legal, financial, accounting, printing and other fees and costs related to the
transaction.
In view of the new position of the
Investor Group, members of the Board and management held discussions through the
first three weeks of November as to whether it would still be in our best
interest and the best interest of our stockholders to move forward with the
going-private transaction using the New Ratios.
In mid-November 2008, we hired Thomas
J. Hannon as our executive vice president of administration, with the
understanding that Mr. Hannon would, subject to the approval of the Board,
become our chief financial officer upon the earlier of the consummation of the
Reverse/Forward Stock Split or March 31, 2009. The Board approved Mr.
Hannon’s appointment as an executive officer and our future chief financial
officer on December 10, 2008.
On November 18, 2008, Dr. Paterson, Mr.
Condron, Dr. Barber and Mr. Stapleton, along with a representative of Frost
Brown Todd, convened a teleconference to discuss whether the Special Committee
needed to take any action with respect to the change in the ratio of the
proposed reverse split and whether the Board should obtain a revised fairness
opinion from Navigant regarding such change. Dr. Paterson and Mr.
Condron reviewed the background described above leading up to the proposal to
change the ratio of the proposed reverse split. After discussion, Dr.
Barber and Mr. Condron agreed that they would contact a representative of
Navigant the next day to discuss whether, in Navigant’s view, a change in the
ratio of the proposed reverse split would be considered a factor relevant to the
fairness, from a financial point of view, of the proposed cash out price to be
paid to our unaffiliated stockholders. Dr. Barber and Mr. Condron
were also asked by the Special Committee to discuss with Navigant the cost and
timing of obtaining an update to Navigant’s June 18, 2008 fairness
opinion. After Dr. Paterson and Mr. Condron exited the
teleconference, the Special Committee determined, pending the outcome of Dr.
Barber’s conversation with Navigant, that a change in the split ratio did not
require any action by the Special Committee, as the split ratio did not appear
to be relevant to a determination of the fairness, from a financial point of
view, of the proposed cash out price to be paid to our unaffiliated
stockholders.
On November 19, 2008, Dr. Barber and
Mr. Condron met with a representative of Navigant and asked whether, in
Navigant’s view, a change in the ratio of the proposed reverse split would be
considered a factor relevant to the fairness, from a financial point of view, of
the proposed cash out price to be paid to our unaffiliated
stockholders. Although Navigant’s engagement was limited to delivery
of the June 18, 2008 fairness opinion and we did not retain Navigant to advise
us relative to the structure of the transaction or any changes to the
transaction, including a change in the reverse split ratio, Navigant confirmed
that it did not consider the size of the reverse split ratio as a factor in
developing the fairness opinion that it delivered to the Board on June 18, 2008
(although Navigant’s opinion does refer to the initial reverse split ratio as a
matter of background). Navigant, Dr. Barber and Mr. Condron also
discussed the potential cost associated with updating the June 18, 2008 fairness
opinion and the potential time that could be required in order for Navigant to
deliver an updated opinion.
On or around November 20, 2008, Radius
contacted us and indicated that instead of entering into the proposed repurchase
agreement it would be undertaking a distribution of its shares of our Common
Stock to its partners. This distribution, which was effected in the
first week of December, resulted in an additional approximately 90 stockholders,
approximately 50 of which we estimate currently hold fewer than 50,000 shares
that we will pay to cash out fractional interests in connection with the
Reverse/Forward Stock Split. We estimate that the distribution of our
shares by Radius and the resulting increase in the number of shares to be cashed
out in the Reverse/Forward Stock Split will cause the aggregate amount of the
cash out to increase by approximately $0.2 million, to $0.8 million in the
aggregate. To the extent Radius distributees with 50,000 or more
shares of our Common Stock also sell some of their shares prior to the
consummation of the going-private transaction, this amount could
increase.
At a meeting of the Board on November
21, 2008, Dr. Barber reported to the Board on Dr. Barber’s and Mr. Condron’s
conversation with Navigant, including Navigant’s statement that it did not
consider the size of the reverse split ratio as a factor relevant to a
determination of the fairness of the price to be paid to unaffiliated
stockholders in connection with the proposed cash out of fractional interests
described in the Navigant fairness opinion, and also the Special Committee’s
conclusion that the proposed change in split ratios did not require any action
on its part. A full discussion ensued, during which the Board
determined that the same benefits that would have accrued to holders of
fractional interests and to continuing stockholders using the Initial Ratios
would continue to accrue to such holders using the New Ratios. The
Board noted that the only change would be in the relative size of these
groups. In light of this, the Board concluded that the size of the
reverse split ratio was not a factor relevant to a determination of the fairness
of the price to be paid to unaffiliated stockholders in connection with the
proposed cash out of fractional interests and that, as a result, it was
appropriate for the Board to continue to rely on Navigant’s June 18, 2008
fairness opinion and the prior recommendation of the Special Committee and that
it was not necessary to solicit an updated fairness opinion. In
reaching this conclusion, the Board also determined that it would not be
cost-effective to obtain an updated fairness opinion and that any such request
would also potentially lead to significant delays in the consummation of the
going-private transaction, which could increase the risk that we would be
required to file an annual report on Form 10-K for the year ending December 31,
2008, at significant cost to us. The Board acknowledged that the
distribution of our shares by Radius to its partners, as well as the reduction
of the ratio of the reverse split from 100,000 to 50,000, would increase the
number of stockholders who will remain stockholders following the consummation
of the Reverse/Forward Stock Split from our previous estimate of approximately
30 to approximately 160. However, the Board concluded that this
increase would not materially increase our risk of having to re-register our
Common Stock due to an inadvertent increase in the number of our record holders
in the future. The Board also recognized that without funding by the
Investor Group, we would be unable to purchase fractional interests following a
reverse split in order to effect a going-private transaction, which it still
considered to be in our best interest and the best interest of our
stockholders.
Based on the foregoing considerations,
the Board determined that a reverse split following by a forward split, using
the New Ratios, is fair to and in the best interest of all of our unaffiliated
stockholders and unanimously approved the Reverse/Forward Stock Split using the
New Ratios, with all other aspects of the transaction to remain the
same. The Board authorized management to make such changes as may be
necessary to the constituent documents, including the Certificates of
Amendment and our filings with the Commission, in order to effectuate the
Reverse/Forward Stock Split using the New Ratios. The Board also
re-approved the Authorized Share Increase that was contemplated by the
Certificates of Amendment.
On
December 5, 2008, we received the written consent of stockholders holding
sufficient shares to approve the Certificates of Amendment, as revised to
reflect the New Ratios, and the Authorized Share Increase. The
stockholder consents were solicited by the Psilos Funds and were executed by
members of the Investor Group holding shares of our capital stock representing
approximately 73% of our voting stock on an as-converted to Common Stock basis
on that date. On December 5, 2008, we also entered into an amendment
to the Purchase Agreement with the members of the Investor Group to effect
certain technical amendments to conform the language of the Purchase Agreement
to the New Ratios.
Purposes
of and Reasons for the Reverse/Forward Stock Split
The
primary purpose of the Reverse/Forward Stock Split is to reduce the number of
record holders of our Common Stock to fewer than 300, so that we can terminate
the registration of our Common Stock under Section 12(g) of the
Exchange Act. We believe that deregistration of our Common Stock
would result in the elimination of the expenses related to our disclosure,
compliance and reporting requirements under the Exchange Act and our ability to
reallocate management resources currently deployed to comply with applicable
federal securities laws.
The Board
believes that any material benefit derived from continued registration under the
Exchange Act is outweighed by the significant and increasing cost of being a
public company. Those costs may be summarized as
follows:
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Our
historical costs associated with being a public company are approximately
$500,000 annually, before taxes, consisting of approximately $210,000 for
audit-related fees, $100,000 for legal fees, $150,000 for fees related to
Sarbanes-Oxley Act compliance (other than compliance with Section 404) and
$40,000 for other items, such as printing and stock transfer
fees.
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Beginning
in our fiscal year ending December 31, 2009, as a public company we would
need to comply with the auditor attestation provisions of
Section 404, which require the filing of an attestation report of our
independent registered public accounting firm on management’s assessment
of our internal control over financial reporting. Adding
Section 404 attestation procedures will increase our ongoing costs
significantly, including:
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o
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increasing
the cost of the annual audit process by approximately
$100,000;
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increasing
annual consulting and legal fees that we incur by approximately $75,000;
and
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increasing
our annual personnel costs (primarily as a result of new hires related to
Section 404) by approximately
$75,000.
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We
also expect that we would incur a total one-time expense of approximately
$100,000 for documentation and implementation of internal systems and
other consulting fees and a total one-time audit expense of approximately
$150,000 relating to preparation for compliance with the audit attestation
requirements of Section 404. We have started incurring some of these
one-time expenses in advance of our 2009 fiscal year end as we implement
the procedures to comply with the audit attestation requirements of
Section 404. We will avoid further expenses by ceasing to
be a public company.
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The
dollar amounts set forth above are only estimates. The actual savings
that we may realize may be higher or lower than the estimates set forth
above.
In
addition to increasing costs, the burdens imposed on us as a result of being
public have significantly increased since the passage of the Sarbanes-Oxley Act
and the implementation of regulatory reforms adopted by the
Commission. The overall management time expended on the preparation
and review of our public filings has increased substantially in order for our
principal executive officer and principal financial officer to certify the
financial statements in each of our public filings as required under the
Sarbanes-Oxley Act. Since we have relatively few management
personnel, these indirect costs are significant relative to our overall expenses
and, although there will be no direct monetary savings with respect to these
indirect costs when the Reverse/Forward Stock Split is effected and we cease
filing periodic reports with the Commission, the time currently devoted by
management to our public company reporting and compliance obligations could be
devoted to growing our business.
The
corporate governance, reporting, internal control documentation, attestation
procedures and disclosure compliance obligations required by the Sarbanes-Oxley
Act are also disproportionately more burdensome to us based on our size,
financial resources, human capital, small number and percentage of shares that
are held by unaffiliated stockholders, absence of sustained interest from public
investors and securities research analysts and inability to access the capital
markets, compared to a larger public company.
The Board
also believes that the significant tangible and intangible costs of our being a
public company are not justified because we have not been able to realize many
of the benefits that publicly traded companies sometimes realize. The
lack of an active trading market for our Common Stock has limited our ability to
use our securities as acquisition currency or to attract and retain
employees. In addition, the lack of an active trading market for our
Common Stock has also impaired our stockholders’ ability to sell their shares,
which has prevented them from realizing the full benefits of holding public
company stock. We believe our status as a public company has not only
failed to benefit our stockholders materially, but also places an unnecessary
financial, management and competitive burden on us.
The
Reverse/Forward Stock Split and the deregistration of our Common Stock are also
expected to provide small stockholders with an efficient mechanism to liquidate
their equity interest at a fair price for their shares and without a broker’s
commission. Based on information available to us, we estimate that we
presently have an aggregate of approximately 360 record holders of our Common
Stock and 1,260 beneficial holders of our Common Stock. We estimate
that approximately 1,100 of our beneficial holders own fewer than 50,000
shares each. In the aggregate, the shares held by these small holders
comprise less than approximately 10% of our outstanding shares of Common Stock,
but represented approximately 87% of our total number of beneficial
holders.
After
consummation of the Reverse/Forward Stock Split, we expect our business and
operations generally to continue as they are currently being
conducted. We do not currently plan to initiate any new operational
or strategic projects. However, we may seek to restructure our
corporate organization in order to consolidate certain of our wholly-owned
subsidiaries formed in jurisdictions where we no longer engage in
business. We may also seek to upgrade and/or integrate certain of our
information technology systems, in order to make such systems more scalable and
efficient. Also, we expect to have certain changes in our Board and
management. Our executive vice chairman and board member, Mr.
Condron, will become our president and chief executive officer upon the
deregistration of our Common Stock. Our current chief executive
officer, Dr. Paterson, will continue to serve in that role until Mr. Condron
takes office. Our executive vice president of administration, Mr.
Hannon, will become our chief financial officer upon the earlier of the
consummation of the Reverse/Forward Stock Split or March 31,
2009. See the information under the caption “General Information
About the Reverse/Forward Stock Split—Conduct of Our Business After the
Reverse/Forward Stock Split” in this Information Statement.
Strategic
Alternatives Considered By the Board
In making
the determination to proceed with the Reverse/Forward Stock Split, the Board
evaluated other strategic alternatives. As discussed below, the Board
ultimately rejected the alternatives to the Reverse/Forward Stock Split because
the Board believed that the Reverse/Forward Stock Split would be the simplest
and most cost-effective approach to achieve the purposes described in this
Information Statement. These alternatives were:
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Self-tender
offer. The Board considered a self-tender offer by
which we would offer to repurchase shares of our outstanding Common
Stock. However, due to the voluntary nature of a self-tender,
the Board was uncertain whether this alternative would result in shares
being tendered by a sufficient number of record stockholders so as to
permit us to reduce the number of record stockholders to fewer than 300
and to terminate our public reporting requirements under the Exchange
Act. In addition, the Board considered that the estimated
transaction costs of completing a tender offer would be similar to or
greater than the costs of the Reverse/Forward Stock Split, and these costs
could be significant in relation to the value of the shares purchased
since there could be no certainty that stockholders would tender a
significant number of shares. The Board did not believe it was
in the best interest of our stockholders to incur such additional expenses
without reasonable assurances that a tender offer would result in the
reduction of our record stockholders to fewer than
300.
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Asset sale or business
combination. The Board considered selling substantially
all of our assets or stock or undertaking another type of business
combination. As described above in “Special Factors—Background
of the Reverse/Forward Stock Split,” the Board engaged a financial adviser
during 2007 to assist in this effort. In late October 2007, we
received a preliminary, conditional offer from a private equity firm to
acquire all of our outstanding shares of Common Stock for $0.23 per share.
The private equity firm later raised its conditional offer to $0.27 per
share, subject to its completion of due diligence and documentation of a
final agreement. After diligence activities, the private equity
firm withdrew its offer and informed us that it would not be proceeding
with negotiations. Also, as described above in “Special
Factors—Background of the Reverse/Forward Stock Split,” in May 2008 we
were approached by a third party interested in acquiring
us. Before any formal negotiations commenced or any preliminary
agreement had been reached, the third party was itself
acquired. To date, the Board has been unsuccessful in securing
any other potential counterparties to an asset or stock sale or a business
combination transaction.
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Convertible debt and term
loan. In November 2007, we also received an offer for a
term loan and convertible note, in aggregate principal amount of $12
million, from an institutional lender. However, the lender
sought guarantees from certain of our principal investors for 75% of the
principal amount, which we were not able to
obtain. Accordingly, we determined not to pursue this line of
financing.
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Maintaining the status
quo. The Board also considered taking no action to
reduce the number of our stockholders and therefore remaining a public
company. However, due to the significant and increasing costs
of being public, the Board believed that maintaining the status quo would
be detrimental to all of our stockholders. We would continue to
incur the costs of being a public company without realizing the benefits
of public company status. Furthermore, the Board believed that
smaller stockholders would not be able to efficiently liquidate their
investment in us in the foreseeable
future.
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Effects
of the Reverse/Forward Stock Split and the Financing
Effects
on the Number of Our Authorized and Outstanding Shares and Registered
Holders
The
following table illustrates the principal effects of the Reverse/Forward Stock
Split and the Financing on shares of our Common Stock based on the number of
shares issued and outstanding as of the date hereof, and the number of shares
authorized following the consummation of the Authorized Share Increase and
Reverse/Forward Stock Split:
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Prior to the
Reverse/Forward
Stock Split and
Authorized Share
Increase
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After the
Reverse/Forward
Stock Split and
Authorized Share
Increase
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Shares of
Common Stock Authorized
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100,000,000 |
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200,000,000 |
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Shares
Issued and Outstanding (1)
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67,538,976 |
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61,691,317 |
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Shares
Reserved for Issuance(2)
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95,477,166 |
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95,477,166 |
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Common
Shares Available for Issuance
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0 |
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42,831,517 |
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Number
of Estimated Beneficial Holders
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1,260 |
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160 |
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Number
of Estimated Holders of Record
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360 |
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160 |
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(1) Amount
after the Reverse/Forward Stock Split and Authorized Share Increase assumes the
repurchase of approximately 5.9 million shares from holders of less than 50,000
shares of Common Stock.
(2) Amounts
before and after the Reverse/Forward Stock Split reflect the reservation of (i)
approximately 16.3 million shares of Common Stock reserved for issuance pursuant
to our equity incentive plans; (ii) approximately 7.0 million shares of Common
Stock underlying currently issued and outstanding warrants; (iii) approximately
7.5 million shares of Common Stock representing the maximum number of shares of
Common Stock issuable upon conversion of the Convertible Notes; (iv)
approximately 31.3 million shares of Common Stock representing the number of
shares of Common Stock issuable upon conversion of Preferred Stock issued and
outstanding as of the date hereof; and (v) approximately 33.3 million shares of
Common Stock representing the maximum number of shares of Common Stock issuable
upon conversion of the Preferred Stock that may be issued in connection with the
Financing (assuming gross proceeds of $4.0 million). With respect to
clause (v) above, in the event that fewer warrants are issued to the Investor
Group or fewer shares of Preferred Stock are issued in the Financing, additional
shares of Common Stock would be available for issuance.
This
reduction in the number of our holders of record will enable us to terminate the
registration of our Common Stock under the Exchange Act, which will
substantially reduce the information required to be furnished by us to our
stockholders and to the Commission. Additionally, certain provisions
of the Exchange Act will no longer apply, such as the proxy rules and the
short-swing profit recovery provisions of Section 16(b).
Stockholders
receiving cash in lieu of fractional shares will be paid $0.14 for each share of
Common Stock held immediately prior to the Reverse/Forward Stock
Split. Shares we repurchase as a result of the Reverse/Forward Stock
Split will be retired and will be authorized but unissued shares. The Reverse/Forward
Stock Split will not alter the relative voting and other rights of our
outstanding Common Stock or the voting and other rights of our Preferred
Stock. Each share of Common Stock that remains outstanding after the
completion of the Reverse/Forward Stock Split will continue to entitle its owner
to one vote, and regarding matters presented to holders of shares of Common
Stock, owners of shares of Preferred Stock will still be entitled to one vote
for each share of Common Stock into which such Preferred Stock could be
converted. Each share of Preferred Stock is currently, and each
share of Preferred Stock to be issued in the Financing will initially be,
convertible into five shares of Common Stock following the Reverse/Forward Stock
Split and the Financing. As the table above illustrates, the number
of shares of our Common Stock outstanding will be reduced as a result of the
Reverse/Forward Stock Split, but the number of shares of Common Stock authorized
for issuance will remain unchanged (other than as a result of the Authorized
Share Increase).
Completion
of the Reverse/Forward Stock Split is expected to require approximately $1.8
million of cash, which includes approximately $0.8 million for the acquisition
of Common Stock being cashed out as a result of the transaction and
approximately $1.0 million for advisory, legal, financial, accounting, printing
and other fees and costs related to the transaction. To fund the
Reverse/Forward Stock Split, including associated fees and costs, we will issue
shares of our Preferred Stock in the Financing. We expect to receive
gross proceeds of up to $4.0 million from the Financing, under which the members
of the Investor Group have agreed to purchase our Preferred Stock at a price of
$0.60 per share (or, since each share of Preferred Stock issued in the Financing
will initially convertible into five shares of Common Stock, $0.12 on a common
equivalent basis). As a result of issuing additional shares of
Preferred Stock, continuing stockholders who are not members of the Investor
Group will incur dilution of approximately 22% in terms of their percentage
ownership of our Company, on an as-converted to Common Stock basis, assuming the
consummation of the Reverse/Forward Stock Split, the repurchase of fractional
interests and the completion of the Financing in the amount of $4.0
million. Any proceeds of the Financing beyond those necessary to
repurchase shares and the costs of the Reverse/Forward Stock Split will be used
for working capital and other general corporate purposes.
If the
Reverse/Forward Stock Split is consummated, we intend to apply for the
termination of the registration of our Common Stock under the Exchange Act as
soon as practicable after completion of the Reverse/Forward Stock
Split. The Reverse/Forward Stock Split is expected to reduce the
number of our stockholders of record from approximately 360 to approximately
160, based on recent stockholder records and determined in accordance with the
rules promulgated by the Commission with respect to calculating stockholders of
record. Upon suspension of our reporting obligations under the
Exchange Act, we expect that our Common Stock will cease to be quoted on the
OTCBB.
The
termination of the registration of our Common Stock under the Exchange Act means
that certain provisions of the Exchange Act, such as proxy statement disclosure
in connection with stockholder meetings and the related requirement of an annual
report to stockholders, are no longer applicable to us. Other than to
satisfy certain information obligations we have to the Investor Group under the
Stockholders Agreement and as may be required by law, we do not anticipate
issuing any financial or other reports to stockholders after we deregister our
Common Stock.
We have
no current plans to issue Common Stock or securities convertible into, or
exercisable for, Common Stock after the deregistration of our Common Stock,
other than pursuant to options to purchase shares of our Common Stock currently
held by our officers and directors that have been previously approved by our
Board or reserved for issuance under our equity incentive plans, pursuant to the
exercise of warrants to purchase Common Stock currently outstanding or committed
to be issued as described in this Information Statement, or pursuant to the
conversion of outstanding Preferred Stock and Preferred Stock to be issued in
the Financing. As described elsewhere in this Information Statement,
we have also issued the Convertible Notes that by their terms may be converted
into shares of Common Stock, although we currently expect that our obligations
under the Convertible Notes will be satisfied in cash. However,
we reserve the right to issue shares of our Common Stock, or securities
convertible into, or exercisable for, shares of our Common Stock, at any time
and from time to time, at prices and on terms as our Board determines to be in
our best interest. Continuing stockholders will not have any
preemptive or other preferential rights to purchase any of our stock that we may
issue in the future, except those rights that will be specifically granted to
the Investor Group under the Stockholders Agreement. See the
information under the caption “General Information About the Reverse/Forward
Stock Split—Financing of the Reverse/Forward Stock Split—Stockholders Agreement”
in this Information Statement.
Effects
on Holders of Fewer Than 50,000 Shares
Once the
Reverse/Forward Stock Split is effected, a stockholder owning less than an
aggregate of 50,000 shares of Common Stock immediately prior to the
Reverse/Forward Stock Split will:
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have
his, her or its stock ownership right converted into a right to receive a
cash payment equal to $0.14 per share of Common Stock held immediately
prior to the Reverse Split;
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no
longer have any equity interest in us and therefore will not participate,
as a stockholder, in our future potential earnings or growth, if
any;
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no
longer be entitled to vote as a stockholder;
and
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possibly
be required to pay federal, state, and local income taxes, as applicable,
on the cash amount received for the purchase of the shares cashed out
pursuant to the Reverse/Forward Stock
Split.
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Please
note, if you hold fewer than 50,000 shares of our Common Stock before the
Reverse/Forward Stock Split and wish to continue to be a stockholder after the
Reverse/Forward Stock Split, you may seek to purchase, prior to the effective
time of the Reverse/Forward Stock Split, sufficient additional shares to cause
you to hold a minimum of 50,000 shares at the effective time of the
Reverse/Forward Stock Split. However, we cannot assure you that any
shares will be available for purchase or that the Board will not change the
ratio prior to the effective time of the Reverse/Forward Stock
Split. The Board may elect to change the ratio if it appears that the
current ratio will not reduce the number of our record holders sufficiently to
enable us to effect and maintain the deregistration of our Common
Stock. If the Board changes the ratio, we will notify you of such
change through an amendment to this Information Statement. You may,
as a result of any such change, be required to purchase additional shares in
order to remain a stockholder following such Reverse/Forward Stock Split, and we
cannot assure you that such shares would be available for purchase.
Special
Considerations for Shares Held in Street Name
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If
you hold shares of our Common Stock in “street name,” then your broker,
bank or other nominee is considered the stockholder of record with respect
to those shares and not you. We intend to treat stockholders
holding shares of our Common Stock in street name through a nominee (such
as a bank or broker) in the same manner as stockholders whose shares are
registered in their own name. Accordingly, if you hold 50,000
or more shares of Common Stock in street name you will remain a
stockholder after consummation of the Reverse/Forward Stock
Split. On the other hand, if you hold fewer than
50,000 shares of Common Stock in street name it is intended that you
receive cash for your shares. However, it is also possible that the bank,
broker or other nominee also holds shares for other beneficial owners of
our Common Stock and that it may hold 50,000 or more shares in the
aggregate. Therefore, depending upon your nominee’s
procedures, your nominee may not be obligated to treat the Reverse/Forward
Stock Split as affecting its beneficial holders’ shares and you may not
receive cash for your fractional interests. If
you hold fewer than 50,000 shares of our Common Stock in street name, we
encourage you to contact your bank, broker or other nominee directly as
soon as possible so that arrangements can be made, if necessary, to
register your holdings to ensure that you receive the cash payment of
$0.14 per share.
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We
do not intend to pay cash to holders of 50,000 or more shares of our
Common Stock in the aggregate. In the event that you hold a
total of 50,000 or more shares of Common Stock, but these shares are
divided up among multiple brokerage and/or record accounts, each with
fewer than 50,000 shares, our Exchange Agent will attempt to contact you
at the address we have on record or through your brokerage to make the
necessary arrangements to register and, where applicable, aggregate your
positions. However, there can be no assurance that our Exchange
Agent will be able to contact you or, where applicable, that our Exchange
Agent will be able to successfully compare your holdings across multiple
brokerage and/or record accounts. If
you hold a total of 50,000 or more shares of Common Stock divided up among
multiple brokerage and/or record accounts, each with fewer than 50,000
shares, we urge you to contact your broker immediately to make
arrangements to register and/or consolidate your holdings or take such
other steps as may be necessary in order to avoid processing delays after
consummation of the Reverse/Forward Stock
Split.
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Effects
on Continuing Stockholders
If the
Reverse/Forward Stock Split is implemented, stockholders owning 50,000 shares or
more of Common Stock immediately prior to the Reverse/Forward Stock Split
will:
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continue
to be stockholders and will therefore continue to participate, as a
stockholder, in our future potential earnings or growth, if
any;
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not
receive a cash payment for any of their
shares;
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increase
their percentage ownership of our Common Stock because such stockholders
will continue to own the same number of shares of Common Stock they owned
prior to the Reverse/Forward Stock Split, while the number of shares of
Common Stock outstanding will be reduced following the transaction
(although stockholders will suffer significant dilution caused by
Preferred Stock issued in the
Financing);
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face
a decrease in the liquidity of their shares because it expected that our
Common Stock will no longer be quoted on the OTCBB, nor do we intend to
take any actions to facilitate the quoting of our stock on the Pink
Sheets; and
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receive
less information about us and our business operations because we will no
longer be subject to the proxy and periodic reporting rules of the
Exchange Act.
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Following
the Reverse/Forward Stock Split, any stockholder who becomes a party to the
Stockholders Agreement will be subject to certain restrictions on transfer that
will restrict their ability to sell or otherwise transfer our
stock. Each member of the Investor Group has agreed to become a party
to the Stockholders Agreement upon the closing of the
Financing. Also, as a condition to the Investor Group’s performance
of its obligations under the Purchase Agreement, each of our directors and
officers is required to become a party to the Stockholders Agreement upon the
closing of the Financing. Following the consummation of the Reverse/Forward
Stock Split, all other continuing stockholders will be contacted regarding
becoming parties to the Stockholders Agreement, but are not required to do so.
Please note, if you hold 50,000 or more shares of our Common Stock before the
Reverse/Forward Stock Split, you can only receive cash for all of your shares
if, prior to the effective time of the Reverse/Forward Stock Split, you reduce
your ownership to fewer than 50,000 shares by selling or otherwise transferring
shares to a different holder. However, we cannot assure you that any
purchaser for your shares will be available or the price at which you may be
able to sell such shares, which could be less than $0.14 per pre-split
share. In addition, we cannot assure you that that the Board will not
change the ratio prior to the effective time of the Reverse/Forward Stock
Split. If the Board changes the ratio, we will notify you of such
change through an amendment to this Information Statement. You may,
as a result of any such change, be required to sell or transfer additional
shares in order to remain a stockholder following such Reverse/Forward Stock
Split, and we cannot assure you that any purchaser for your shares will be
available or the price at which you may be able to sell such shares, which could
be less than $0.14 per share.
Effects
on Our Directors and Executive Officers
As a
result of the Reverse/Forward Stock Split and the Financing (assuming the sale
of an aggregate of $4.0 million of our Preferred Stock), we estimate that our
directors and executive officers and their affiliated entities will increase
their collective beneficial ownership of our Common Stock from approximately 71%
to 83%. The number of shares held by our directors and officers
immediately prior to the Reverse/Forward Stock Split will remain substantially
unchanged as a result of the Reverse/Forward Stock Split. Those of
our directors who are participating, or are representatives of investors who are
participating, in the Financing will increase their beneficial ownership as a
result of the Financing. Their aggregate interest will also increase
as a percentage of outstanding shares due to the retirement of fractional shares
purchased by us as part of the Reverse/Forward Stock Split. Each
share of Preferred Stock is, and each share of Preferred Stock to be issued in
the Financing will initially be, convertible into five shares of Common
Stock. See the information under the caption “Information About the
Company—Interests of Our Executive Officers and Directors in the Reverse/Forward
Stock Split” in this Information Statement. In addition, we expect
that all of our directors and executive officers, in addition to each member of
the Investor Group, will become party to the Stockholders Agreement, which will
give these holders certain benefits and subject them to certain
restrictions. See the information under the caption “General
Information About the Reverse/Forward Stock Split—Financing of the
Reverse/Forward Stock Split—Stockholders Agreement” in this Information
Statement.
Effects
on the Investor Group
As a
result of the Reverse/Forward Stock Split and the Financing (assuming the sale
of an aggregate of the maximum $4.0 million of our Preferred Stock), we estimate
that the Investor Group will increase its aggregate beneficial ownership of our
Common Stock from approximately 75% to 84%. The number of shares of
Common Stock and Preferred Stock held by the members of the Investor Group
immediately prior to the Reverse/Forward Stock Split will remain substantially
unchanged as a result of the Reverse/Forward Stock Split. However,
its aggregate percentage ownership of our Common Stock on an as-converted basis
will increase due to the retirement of fractional shares purchased by us as part
of the Reverse Split, as well as its acquisition of additional shares of
Preferred Stock in the Financing. In addition, the members of the
Investor Group, each of which will become party to the Stockholders Agreement,
will have certain rights not shared by our other stockholders under the
Stockholders Agreement, including the right of certain members to designate
members of our Board, the right to receive periodic financial information about
us and preemptive rights to purchase equity securities that we may propose to
issue from time to time. See the information under the caption
“Information About Other Filing Persons—Interests of the Investor Group in the
Reverse/Forward Stock Split” in this Information Statement.
Effects
on Holders of Preferred Stock
The
Reverse/Forward Stock Split will have no impact on the outstanding number of
shares of Preferred Stock. However, the aggregate percentage
ownership of our Common Stock on an as-converted basis represented by the
Preferred Stock will increase due to the retirement of fractional shares
purchased by us as part of the Reverse/Forward Stock Split, as well as the
issuance of additional shares of Preferred Stock in the Financing. As
of the date hereof, each share of Preferred Stock is convertible into five
shares of Common Stock, and this conversion rate will not be affected by the
transactions described in this Information Statement.
Effects
on Option and Warrant Holders
Regardless
of whether an outstanding stock option or warrant provides a right to purchase
less than, equal to or greater than 50,000 shares, the number of shares
underlying each such outstanding stock option granted under our equity incentive
plans (the “Plans”)
and each outstanding warrant to purchase our Common Stock will not change as a
result of the Reverse/Forward Stock Split. The Board, as
administrator of each of the Plans, has determined that no adjustment to the
outstanding stock options is necessary or appropriate in connection with the
Reverse/Forward Stock Split. Because of the symmetry of the
1-for-50,000 Reverse Split and the 50,000-for-1 Forward Split, the Board has
determined that the Reverse/Forward Stock Split will not cause dilution or
enlargement of the benefits intended by us to be made available under the Plans
or with respect to any outstanding stock options or warrants.
Effects
on Convertible Notes
The
Reverse/Forward Stock Split will not affect the Convertible
Notes. The terms of these Convertible Notes will remain the same
after the consummation of the Reverse/Forward Stock Split. The
Convertible Notes carry an interest rate of 5% per year, compounding annually,
mature on December 8, 2009 and are convertible at maturity into shares of Common
Stock. In the event that the value of our Common Stock is equal to or
greater than $1.50 per share, the outstanding principal and accrued interest
under the Convertible Notes will automatically convert into shares of Common
Stock at $1.50 per share. In the event that such value at the time of conversion
is less than $1.50 per share, the outstanding principal and accrued interest
under the Convertible Notes will convert into shares of Common Stock at a
conversion price equal to the greater of such value or $1.00 per share, and in
such case each holder of a Convertible Note may elect to receive all or a
portion of the amounts due under the note in cash in lieu of shares of Common
Stock. As a result of the Reverse/Forward Stock Split, including the cashing out
of fractional shares at a price of $0.14 per pre-split share and the subsequent
deregistration of our Common Stock, we do not believe the holders of the
Convertible Notes will elect to convert their notes into Common Stock at $1.00
per share, but will instead request repayment of the Convertible Notes and
accrued interest in cash upon maturity. We estimate that, if the
Convertible Notes are held to maturity, we will owe approximately $7.5 million
to the holders of the Convertible Notes in the aggregate. While we do
not currently expect the Convertible Notes to be converted into shares of our
Common Stock, in the event that under the terms of the Convertible Notes they
are converted into Common Stock, the maximum number of shares of Common Stock
that we would be obligated to issue, based on a conversion price of $1.00 per
share, is approximately 7.5 million.
Potential
Advantages of the Reverse/Forward Stock Split
In addition to providing our smaller
stockholders with a cost-effective mechanism to liquidate their shares at a
price determined to be fair by the Board and Special Committee and allowing our
management to focus its time and resources on developing our business, as
opposed to devoting substantial time to compliance with our obligations under
the Exchange Act, the Sarbanes-Oxley Act and other federal securities laws, our
Board believes we would realize material financial and non-financial benefits
from deregistering our Common Stock. The financial benefits may be
summarized by the following anticipated cost savings:
The Board
believes that any material benefit derived from continued registration under the
Exchange Act is outweighed by the significant and increasing cost of being a
public company. Those costs may be summarized as
follows:
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Our
historical costs associated with being a public company are approximately
$500,000 annually, before taxes, consisting of approximately $210,000 for
audit-related fees, $100,000 for legal fees, $150,000 for fees related to
Sarbanes-Oxley Act compliance (other than compliance with Section 404) and
$40,000 for other items, such as printing and stock transfer
fees;
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Beginning
in our fiscal year ending December 31, 2009, as a public company we would
need to comply with the auditor attestation provisions of
Section 404, which require the filing of an attestation report of our
independent registered public accounting firm on management’s assessment
of our internal control over financial reporting. Adding
Section 404 attestation procedures will increase our ongoing costs
significantly, including:
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increasing
the cost of the annual audit process by approximately
$100,000;
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increasing
annual consulting and legal fees that we incur by approximately $75,000;
and
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increasing
our annual personnel costs (primarily as a result of new hires related to
Section 404) by approximately
$75,000.
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We
also expect that we would incur a total one-time expense of approximately
$100,000 for documentation and implementation of internal systems and
other consulting fees and a total one-time audit expense of approximately
$150,000 relating to preparation for compliance with the audit attestation
requirements of Section 404. We have started incurring some of these
one-time expenses in advance of our 2009 fiscal year end as we implement
the procedures to comply with the audit attestation requirements of
Section 404. We will avoid further expenses by ceasing to
be a public company.
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The
dollar amounts set forth above are only estimates. The actual savings
that we may realize may be higher or lower than the estimates set forth
above.
In
addition to increasing costs, the burdens imposed on us as a result of being
public have significantly increased since the passage of the Sarbanes-Oxley Act
and the implementation of regulatory reforms adopted by the
Commission. The overall management time expended on the preparation
and review of our public filings has increased substantially in order for our
principal executive officer and principal financial officer to certify the
financial statements in each of our public filings as required under the
Sarbanes-Oxley Act. Since we have relatively few management
personnel, these indirect costs are significant relative to our overall expenses
and, although there will be no direct monetary savings with respect to these
indirect costs when the Reverse/Forward Stock Split is effected and we cease
filing periodic reports with the Commission, the time currently devoted by
management to our public company reporting and compliance obligations could be
devoted to growing our business.
The
corporate governance, reporting, internal control documentation, attestation
procedures and disclosure compliance obligations required by the Sarbanes-Oxley
Act are also disproportionately more burdensome to us based on our size,
financial resources, human capital, small number and percentage of shares that
are held by unaffiliated stockholders, absence of sustained interest from public
investors and securities research analysts and inability to access the capital
markets, compared to a larger public company.
The Board
also believes that the significant tangible and intangible costs of our being a
public company are not justified because we have not been able to realize many
of the benefits that publicly traded companies sometimes realize. The
lack of an active trading market for our Common Stock has limited our ability to
use our securities as acquisition currency or to attract and retain
employees. In addition, the recent lack of an active trading market
for our Common Stock has also impaired our stockholders’ ability to sell their
shares, which has prevented them from realizing the full benefits of holding
public company stock. We believe our status as a public company has
not only failed to benefit our stockholders materially, but also places an
unnecessary financial, management and competitive burden on us.
The
Reverse/Forward Stock Split and the deregistration of our Common Stock are also
expected to provide small stockholders with an efficient mechanism to liquidate
their equity interest at a fair price for their shares and without a broker’s
commission. Based on information available to us, we estimate that we
presently have an aggregate of approximately 360 record holders of our Common
Stock and 1,260 beneficial holders of our Common Stock. We estimate
that approximately 1,100 of our beneficial holders own fewer than 50,000
shares each. In the aggregate, the shares held by these small holders
comprise less than approximately 10% of our outstanding shares of Common Stock,
but represent approximately 87% of our total number of beneficial
holders.
We intend
to apply for termination of registration of our Common Stock under the Exchange
Act as soon as practicable following completion of the Reverse/Forward Stock
Split. However, the Board reserves the right, in its discretion, to
abandon the Reverse/Forward Stock Split if it determines that abandoning the
Reverse/Forward Stock Split is in our best interest and the best interest of our
stockholders.
Potential
Disadvantages of the Reverse/Forward Stock Split
Stockholders
owning fewer than 50,000 shares of Common Stock immediately prior to the
effectiveness of the Reverse/Forward Stock Split will, after giving effect to
the Reverse/Forward Stock Split, no longer have any equity interest in us and
therefore will not participate in our future potential earnings or
growth. It is expected that all but approximately 160 record holders
will be fully cashed out in the Reverse/Forward Stock Split. It will
be difficult or impossible for cashed out stockholders to re-acquire an equity
interest in us unless they purchase an interest from the remaining stockholders
or an active public market for the Common Stock develops, which the Board
believes is unlikely.
The
Reverse/Forward Stock Split will require stockholders who own fewer than 50,000
shares of Common Stock to surrender their shares for a cash payment of $0.14 per
pre-split share. These stockholders will not have the ability to
continue to hold their shares. The ownership interest of these
stockholders will be terminated as a result of the Reverse/Forward Stock Split,
but the Board has concluded that the completion of the Reverse/Forward Stock
Split overall will benefit these stockholders because of, among other reasons,
the immediate liquidity provided to them by the transaction at a price
determined by the Special Committee and Navigant to be fair, from a financial
point of view, to these stockholders.
Potential
disadvantages to certain of our stockholders who will remain as stockholders
after the Reverse/Forward Stock Split include reduced disclosure of information
about us and lack of a liquid market for their Common Stock. When the
Reverse/Forward Stock Split is effected, we intend to terminate the registration
of our Common Stock under the Exchange Act. As a result of the
termination, we will no longer be subject to the periodic reporting requirements
of the Exchange Act or the proxy rules thereunder.
Termination
of our registration under the Exchange Act will substantially reduce the
information which we will be required to furnish to our
stockholders. After we become a non-reporting, privately-held
company, our stockholders will have access to our corporate books and records
only to the extent provided by the DGCL or required by our directors’ and
officers’ fiduciary duties to us and our stockholders, and only the Investor
Group will have the information rights set forth in the Stockholders
Agreement. Any documents provided to our continuing stockholders may
not be as detailed or extensive as the information we currently file with the
Commission and deliver to stockholders.
Termination
of our registration under the Exchange Act also will make many of the provisions
of the Exchange Act intended to protect investors no longer applicable to us,
including the short-swing profit provisions of Section 16, the proxy
solicitation rules under Section 14 and the stock ownership reporting
rules under Section 13. In addition, affiliate stockholders
may be deprived of the ability to dispose of their Common Stock in accordance
with Rule 144 under the Securities Act. We will also no longer
be subject to the Sarbanes-Oxley Act, which imposes many additional
rules and regulations on public companies that were designed to protect
investors, including rules related to director independence and certification of
financial reports.
For those
stockholders who receive a cash payment as a result of the Reverse/Forward Stock
Split, your receipt of cash will be a taxable transaction for United States
federal income tax purposes and may be taxable for state, local, foreign and
other tax purposes as well. Amounts received may result in capital
gains or losses depending on your situation. See the information
under the caption “—Federal Income Tax Consequences of the Reverse/Forward Stock
Split” in this Information Statement. You are urged to
consult with your own tax advisor regarding the tax consequences of the
Reverse/Forward Stock Split in light of your particular
circumstances.
Completion
of the Reverse/Forward Stock Split is expected to require approximately $1.8
million of cash, which includes approximately $0.8 million for the acquisition
of Common Stock being cashed out as a result of the transaction and
approximately $1.0 million for advisory, legal, financial, accounting, printing
and other fees and costs related to the transaction. To fund the
Reverse/Forward Stock Split, including associated fees and costs, we will issue
shares of our Preferred Stock in the Financing. We expect to receive
gross proceeds of up to $4.0 million from the Financing, under which the members
of the Investor Group have agreed to purchase our Preferred Stock at a price of
$0.60 per share (or, since each share of Preferred Stock issued in the Financing
will initially convertible into five shares of Common Stock, $0.12 on a common
equivalent basis). As a result of issuing additional shares of
Preferred Stock, continuing stockholders will incur significant
dilution. Any proceeds of the Financing beyond those necessary to
repurchase shares, and the costs of the Reverse/Forward Stock Split, will be
used for working capital and other general corporate purposes. As a result of
issuing additional shares of Preferred Stock, continuing stockholders who are
not members of the Investor Group will incur dilution of approximately 22% in
terms of their percentage ownership of our Company, on an as-converted to Common
Stock basis, assuming the consummation of the Reverse/Forward Stock Split, the
repurchase of fractional interests and the completion of the Financing in the
amount of $4.0 million.
As a
result of the Reverse/Forward Stock Split and the Financing (assuming the sale
of an aggregate of $4.0 million of our Preferred Stock), we estimate that the
Investor Group will increase its aggregate beneficial ownership of our Common
Stock from approximately 75% to 84%. This increase in the
concentration of our equity ownership will enable the Investor Group to continue
to cause the election of each member of our Board. In addition,
following the Reverse/Forward Stock Split, any stockholder who becomes a party
to the Stockholders Agreement (including each member of the Investor Group and
each of our directors and officers) will be subject to certain voting
restrictions pursuant to which such stockholder will be required to vote his,
her or its shares of Common Stock and Preferred Stock to elect seven directors,
determined as follows: (i) two individuals designated by the Psilos
Funds, (ii) one individual designated by the Essex Funds, (iii) Mr. Pappajohn or
an individual designated by him, (iv) Dr. Schaffer or an individual designated
by him, (v) one individual mutually designated by the foregoing five directors
and (vi) the person serving as our chief executive officer from time to
time. Accordingly, our unaffiliated stockholders who remain
stockholders after the consummation of the Reverse/Forward Stock Split and the
Financing will have little or no ability to affect the constitution of the
Board, whether such stockholders become party to the Stockholders Agreement or
not.
As a
private company, we will no longer be subject to the corporate governance
standards set forth in the rules of the Commission, including rules related to
director independence, related party transactions, maintenance of a code of
ethics and the requirement that we have an audit committee. Many of
these rules were set up with the objective of protecting unaffiliated holders of
a company’s stock from conflicts of interest between a company and its
affiliates. Once we are private, we will no longer be subject to such
rules, although our Board and officers will continue to be subject to their
fiduciary obligations under state law. In addition, upon termination
of our registration, we will no longer file periodic reports with the
Commission, including Annual Reports on Form 10-K, Quarterly Reports on
Form 10-Q and Current Reports on Form 8-K, and we will not be subject
to the Commission’s proxy rules. Accordingly, you will have access to
much less information about us once we are a private company than you currently
have. Moreover, once we are private, we do not intend to make
available to our stockholders any financial or other information about us that
is not required by law.
The
intended effect of the Reverse/Forward Stock Split is to reduce the number of
record holders of Common Stock to fewer than 300 so that we will be eligible to
terminate the public registration of our Common Stock under the Exchange
Act. We expect to reduce the number of our record holders to
approximately 160 as a result of the Reverse/Forward Stock Split. In
addition, following the Reverse/Forward Stock Split, any stockholder who becomes
a party to the Stockholders Agreement (including each member of the Investor
Group and each of our directors and officers) will be subject to certain
restrictions on transfer that will restrict their ability to sell or otherwise
transfer our stock. However, if the Reverse/Forward Stock Split does
not have the intended effect, or if the number of stockholders rises to 300 or
more after the consummation of the Reverse/Forward Stock Split for any reason,
we will once again be subject to the periodic reporting obligations under the
Exchange Act and the Commission’s proxy rules, which would negate much, if not
all, of the savings intended to be accomplished through the Reverse/Forward
Stock Split.
Fairness
of the Reverse/Forward Stock Split
Following
consultation with, and upon the recommendation of, the Special Committee, the
Board determined unanimously that the Reverse/Forward Stock Split, including the
proposed cash payment of $0.14 per pre-split share to stockholders whose shares
will be cashed out, is fair, from a financial point of view, to all of our
unaffiliated stockholders, including those whose shares will be cashed out and
those who will be continuing stockholders. Each of the Filing Persons
joins us in making the disclosures under the this section “—Fairness of the
Reverse/Forward Stock Split” as well as the disclosure immediately below under
“—Factors Considered in Determining Fairness.” The Company and each
of the other Filing Persons expressly adopts the fairness determination analysis
of the Special Committee as his or its own.
Factors
Considered in Determining Fairness
Substantive
Fairness
Factors relevant to stockholders
receiving cash in lieu of fractional interests. With respect to the
stockholders whose shares would be cashed out, the Board and the Special
Committee relied upon, among other things, a range of estimates of our value on
a going concern basis, as determined by Navigant. As described below,
Navigant’s opinion was delivered in June 2008 and does not address the November
2008 change in the reverse split ratio. In delivering its June 2008
fairness opinion, Navigant developed ranges of equity values for our Common
Stock using income and market approaches to valuation. Using
Navigant’s analyses, the Special Committee estimated the value of the Common
Stock at a point within Navigant’s supplied range of estimated equity values and
then requested that Navigant render an opinion as to the fairness of the
proposed consideration to be paid to fractional stockholders following a reverse
split. The Board adopted the analyses and conclusions developed by
Navigant in June 2008 in reaching its conclusion that the cash payment to those
unaffiliated holders of shares of Common Stock who will receive cash payments in
connection with a reverse split and will not be continuing stockholders is fair,
from a financial point of view, to those unaffiliated holders. You
can read more about Navigant’s analysis under the section entitled “—Summary of
Fairness Opinion” in this Information Statement.
The Board
and the Special Committee believe that an indicator of our value as a going
concern is the value of companies comparable to us and our available cash
flow. As part of its review, the Board and the Special Committee
considered the following:
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The
Board and the Special Committee considered Navigant’s valuation analysis,
including its market approach using a similar transactions valuation
method, in which Navigant analyzed similar transactions in the healthcare
services industry and derived a market multiple of business enterprise
value compared to revenue, which multiple was then applied to our
financial statements. Navigant derived a range of equity values
between $0.13 to $0.16 per pre-split share based on this market
approach.
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The
Board and the Special Committee also considered Navigant’s income approach
using a discounted cash flow valuation method, in which it analyzed our
future financial projections and discounted our estimated future cash
flows to their present values. Navigant derived a range of
equity values between $0.12 to $0.18 per pre-split share based on this
income approach.
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The
Board and the Special Committee noted that the cash out price of $0.14 per
pre-split share was within the ranges suggested by both the income
approach and the market approach analyses performed by
Navigant.
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The
Board and the Special Committee also considered Navigant’s opinion that
the price of $0.14 per pre-split share to be paid to unaffiliated
stockholders in lieu of fractional interests was fair, from a financial
point of view, to such
stockholders.
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While
Navigant’s analysis was a significant factor in the Special Committee’s
determination of a specific price and the Board’s fairness determination, it was
not the only factor. The Special Committee and the Board considered
other factors, including:
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Financial
Condition. During 2007 and, to date, in 2008, despite
efforts to reduce our expenses and integrate and expand our business
lines, we have experienced losses from operations and negative cash
flows. The Board recognized that additional financing or
cost-reduction measures are still required. Since the Investor
Group expressed an interest in financing the cash out of fractional
interests in connection with a reverse split, which we believed would help
us reduce our cost structure by enabling us to deregister our Common
Stock, the Board determined that our financial position, and the fact that
we do not, at this time, have any viable financing alternatives, were
additional indications of fairness to the holders of Common Stock to be
cashed out;
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Liquidity of Common
Stock. The Board discussed the lack of an active trading
market for the Common Stock, the lack of substantial analyst coverage of
us and our inability to access the public capital markets as some of the
indications that our stockholders are not receiving the typical benefits
of public company stock ownership. Since we and our
stockholders were not receiving these typical benefits, the Board
considered that the lack of liquidity of our Common Stock was an
additional indication of fairness to the holders of Common Stock to be
cashed out;
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Price of Preferred Stock in
the Financing. The Board considered as a positive factor
that the shares of Common Stock into which the Preferred Stock being sold
in the Financing could be converted had an implied value, based on the
conversion of ratio of five shares of Common Stock for one share of
Preferred Stock to be purchased for $0.60 per preferred share, or $0.12
per equivalent common share. As the Preferred Stock has rights,
privileges and preferences superior to those of the Common Stock, the
Board believed that a cash out price for the Common Stock that was higher
than the purchase price for the Preferred Stock was an additional
indication of fairness to the holders of Common Stock to be cashed
out;
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Avoidance of
Commissions. The Board and the Special Committee
determined that the fairness of a reverse split to those unaffiliated
stockholders whose shares will be cashed out was also supported by the
fact that these stockholders will receive a cash payment of $0.14 per
pre-split share and will not pay the commissions that such stockholders
would have to pay if they attempted to sell their shares in the open
market; and
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Book
Value. The Special Committee did not consider our book
value in its determination of a cash-out price because it did not consider
book value to be relevant to determining the value of a going
concern. However, the Board noted that our book value of
approximately $0.14 per share as of September 30, 2008, on an as-converted
basis, was supportive of the cash out
price.
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Factors relevant to continuing
stockholders. With respect to the fairness of a reverse split
to our unaffiliated continuing stockholders, the Board relied on the fact that
the amount being paid to stockholders being cashed out was not in excess of the
range of values determined to be fair by Navigant. The Board also
determined that the primary additional factors supporting the fairness of the
Reverse/Forward Stock Split to those unaffiliated stockholders who will be
continuing stockholders are the cost reduction anticipated to result from the
deregistration of our Common Stock and the anticipated benefit to us by virtue
of management’s expected ability to focus more completely on our business and to
redeploy resources designed to create value for our continuing
stockholders. The Board also noted that the relative voting power of
the continuing stockholders would remain unchanged after consummation of the
Reverse/Forward Stock Split, before giving effect to the
Financing. The Board also noted that our book value of approximately
$0.14 per share as of September 30, 2008, on an as-converted basis, was
supportive of the cash out price.
Factors relevant to all
stockholders. The Board (and, as to the second bullet below
only, the Special Committee) determined that certain additional factors
supported the fairness of a reverse split to all of our unaffiliated
stockholders, whether or not expected to be cashed out, including:
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Sales or transfers to
discontinue or retain stock ownership. Stockholders who
would otherwise retain an equity interest in us after the completion of a
reverse split may, depending on the demand for their shares and the
limited liquidity available through the public market, have some control
as to whether they will retain an interest by selling or transferring
shares of Common Stock prior to the effectiveness of a reverse split to
bring their equity interest to below 50,000 shares and, therefore, be in a
position to be cashed out pursuant to a reverse split. However,
stockholders contemplating such sales or transfers should note that,
although the Reverse/Forward Stock Split has been approved by the
requisite stockholders, the Board reserves the right, in its discretion,
to abandon the Reverse/Forward Stock Split prior to its effectiveness if
it determines that doing so is in our best interest and the best interest
of our stockholders. Alternatively, those stockholders who
would otherwise be cashed out pursuant to a reverse split may seek to
acquire shares in the market to bring their holdings to at least 50,000
shares and therefore retain an equity interest in us and participate in
any future increases in our equity value. The Board did not
place undue emphasis on this factor, however, due to the limited trading
market for the Common Stock.
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No firm, unconditional offers
to acquire control of the Company. While our Board and
management have been involved in discussions with third parties from time
to time, we have not received, during the past two years, any firm,
unconditional offers for our merger or consolidation with or into another
company, or vice versa, or the sale or transfer of all or substantially
all of our assets to another company, or a purchase of our securities by
another person that would involve a change in our
control.
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Factors not considered. The
Board and the Special Committee did not consider, or discounted the effect of, a
number of factors that might, under certain circumstances, have been relevant to
assessing fairness. For example:
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The
Board and Special Committee discounted the effect of current and
historical market prices of our shares as a factor since there has not
been an active trading market for our Common Stock on the OTCBB during the
past two years;
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We
have not previously repurchased shares of our Common Stock, and therefore
the Board and the Special Committee could not consider any such
repurchases as the basis for fairness;
and
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The
Board and the Special Committee also did not assign any weight to our
liquidation value. The liquidation process would involve
additional legal fees, costs of sale and other expenses, and, as a result,
the Board and the Special Committee believed that our liquidation value
would be less than the cash out price of $0.14 per pre-split
share.
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Fairness
determination. In June 2008, upon the recommendation of the
Special Committee, the Board determined that, as provided in Navigant’s fairness
opinion, the proposed payment of $0.14 per pre-split share in connection with a
reverse split is fair, from a financial point of view to the unaffiliated
stockholders who will be cashed out. In November 2008, the Board
determined that changing the ratio of the reverse split from 1-for-100,000 to
1-for-50,000 did not alter the substantive fairness of the transaction because
the size of the ratio was not a factor in assessing the substantive fairness of
the transaction.
Procedural
Fairness
Following
consultation with, and upon the recommendation of, the Special Committee, the
Board determined that the Reverse/Forward Stock Split is procedurally fair to
all unaffiliated stockholders, including both stockholders who will receive cash
payments in connection with the Reverse/Forward Stock Split and stockholders who
will retain an equity interest in us. In reaching this conclusion,
the Board determined that its receipt of an opinion from Navigant was a critical
procedural safeguard protecting the interests of all unaffiliated
stockholders. In June 2008, Navigant provided an opinion with respect
to the fairness, from a financial point of view, of the consideration to be paid
to the holders of shares of our Common Stock who will receive cash payments for
their pre-split shares and will not be continuing stockholders. In
connection with providing its fairness opinion, Navigant conducted an
independent valuation of the Company and determined a range of equity values per
pre-split share of our Common Stock. We did not have any relationship
with Navigant prior to this transaction. Navigant and its affiliates
provide investment banking, restructuring, valuation, and transaction advisory
services to middle market companies, private equity groups, lenders, and other
creditor constituencies.
The Board
also relied significantly on the independent determination by Navigant of the
range of fair prices at which shares of pre-split Common Stock could be cashed
out in the Reverse/Forward Stock Split to conclude that the Reverse/Forward
Stock Split is procedurally fair to the stockholders who would remain
stockholders after the transaction, in this case because the independent
determination demonstrates that we are not paying more than fair market value
for the shares that will be cashed out.
The Board
determined not to condition the approval of the Reverse/Forward Stock Split on
approval by a majority of our unaffiliated stockholders because the Board
believed that any such vote would not provide meaningful additional protection
to those unaffiliated stockholders. Based on information available to
us, approximately 27% of our outstanding Common Stock, on an as-converted basis,
is held by non-affiliates. The Board did not believe it was in our
best interest and the best interest of our stockholders to incur the increased
costs associated with allowing a minority of investors to make a determination
with respect to the Reverse/Forward Stock Split alone. In addition,
the Reverse/Forward Stock Split is a matter that could not be voted on by
brokers without instruction from the beneficial owners of the
shares. Accordingly, the Board considered that there was a strong
possibility that a large percentage of shares held in brokerage accounts would
not be voted. Finally, the Board noted that the vote of a majority of
unaffiliated stockholders was not required under Delaware law.
The Board
also did not retain an unaffiliated representative to act solely on behalf of
the unaffiliated stockholders. Retaining an unaffiliated
representative on behalf of the unaffiliated stockholders would be an added
expense of the Reverse/Forward Stock Split and would not affect the outcome of
the transaction because a majority vote of the unaffiliated stockholders is not
required under applicable law. The Board also did not retain an
unaffiliated representative because the Special Committee was formed to protect
the interests of the unaffiliated stockholders. In addition, one of
the main purposes of engaging Navigant was to obtain a third-party valuation to
provide assistance to the Special Committee in setting a price that would be
fair to our unaffiliated stockholders, whether or not they would receive cash in
lieu of fractional interests in the transaction.
The Board
has not granted unaffiliated stockholders access to our corporate files, except
as required by the DGCL, nor has it extended the right to retain counsel or
appraisal services at our expense. With respect to unaffiliated
stockholders’ access to our corporate files, the Board believes that this
Information Statement, together with our other filings with the Commission,
provide adequate information for unaffiliated stockholders. The Board
also considered the fact that under the DGCL and subject to specified conditions
set forth under Delaware law, stockholders have the right to review our relevant
books and records of account. In deciding not to adopt these
additional procedures, the Board also took into account factors such as our size
and financial capacity and the costs of such procedures.
The Board
determined that the process leading up to the approval of the Reverse/Forward
Stock Split was procedurally fair to the stockholders because of the structural
fairness of the Reverse/Forward Stock Split and the safeguards that the Board
put into place. The critical procedural safeguards that the Board
used were (i) the formation of the Special Committee comprised of
independent directors to evaluate and make a recommendation to the full Board
regarding the going-private transaction, (ii) the Special Committee’s engagement
of independent counsel to advise it on legal matters and (iii) the Special
Committee’s engagement of Navigant to render an opinion as to the fairness, from
a financial point of view, of the consideration to be paid to our unaffiliated
stockholders in lieu of the issuance of fractional interests.
The Board
also determined that changing the ratio of the reverse split from 1-for-100,000
to 1-for-50,000 did not alter the procedural fairness of the transaction because
the procedural protections employed by the Board were not dependent on the
specific split ratios.
This
discussion of the information and factors considered by the Board is not
intended to be exhaustive and may not include all of the factors
considered. In reaching its determination to approve and recommend
the Reverse/Forward Stock Split and the transactions contemplated thereby, the
Board did not quantify or assign any relative or specific weights to the various
factors that it considered in reaching its determination that the
Reverse/Forward Stock Split and the transactions contemplated thereby are
advisable and in our best interest and the best interest of our
stockholders. Rather, the Board viewed its position and
recommendation as being based on an overall analysis and on the totality of the
information presented to and factors considered by it.
Summary
of Fairness Opinion
The
Special Committee retained Navigant to act as its financial advisor with respect
to the proposed going-private transaction, including the proposed reverse split
(1-for-100,000 at the time that Navigant conducted its analysis and delivered
its opinion) and the cash out of fractional interests. Navigant’s
services were limited to the delivery of a fairness opinion with respect to the
consideration to be paid to unaffiliated holders of our Common Stock who will
receive cash payments in connection with a reverse split and will not be
continuing stockholders. Navigant was not engaged to advise us on the
structure of the transaction or any changes to the transaction, including the
November 2008 change in the reverse split ratio, and Navigant did not recommend
any course of action to us. In selecting Navigant, the Special
Committee considered, among other things, the fact that Navigant is a nationally
recognized financial advisory firm with substantial experience advising
companies in the healthcare industry as well as substantial experience providing
strategic advisory services. Navigant is engaged in the evaluation of
businesses and their debt and equity securities in connection with going-private
transactions, mergers and acquisitions, underwritings, private placements and
other securities offerings, valuations and general corporate advisory
services.
On June
18, 2008, Navigant delivered to the Board its oral opinion, which was
subsequently confirmed in writing, that, as of that date and based on and
subject to the factors and assumptions set forth in the fairness opinion, the
consideration to be paid to the stockholders receiving cash in lieu of
fractional shares as a result of the proposed reverse split was fair from a
financial point of view to holders of fractional interests. The
fairness opinion is directed to the Board and addresses only the fairness of the
consideration to be paid to holders of fractional interests from a financial
point of view. The fairness opinion does not address the November 2008 change in
the reverse split ratio or the impact of such a change on stockholders who may
remain stockholders following consummation of the proposed
transactions. The summary of the fairness opinion set forth herein is
qualified in its entirety by reference to the full text of the fairness opinion,
which sets forth the assumptions made, procedures followed, matters considered
and limitations on the review undertaken in connection with the fairness
opinion. The fairness opinion is attached as Annex B to this Information
Statement and should be read carefully and in its entirety in connection with
this Information Statement. Navigant is not obligated to update its
fairness opinion after the date of the fairness opinion. Although a
Navigant representative confirmed to us that Navigant did not consider the size
of the reverse split ratio as a factor in rendering the fairness opinion that it
delivered to the Board on June 18, 2008, Navigant was not engaged to update its
fairness opinion to address the November 2008 change in the reverse split ratio
or any other events or developments since the opinion was delivered on June 18,
2008.
The
fairness opinion does not address the relative merits of a reverse split or any
particular ratio to be used in connection with such a split (although the
opinion refers to the original 1-for-100,000 reverse split ratio in its
description of the transaction) or any alternatives to the transaction, the
underlying decision of the Board to proceed with or effect a reverse split or
any other aspect of the transaction as proposed to Navigant. Navigant
did not determine or recommend the consideration to be paid to holders of
fractional interests. In furnishing its fairness opinion, Navigant
did not represent that it is an expert within the meaning of the term “expert”
as used in the Securities Act, nor did it represent that the fairness opinion
constitutes a report or valuation within the meaning of the Securities
Act.
In
connection with rendering the fairness opinion, Navigant performed various
reviews, analyses, and inquiries as it deemed necessary and appropriate under
the circumstances. The Special Committee did not limit the investigations made
or procedures followed by Navigant in giving the fairness opinion. In
the course of performing its review and analysis for rendering the fairness
opinion, Navigant:
|
·
|
reviewed
the letter and attached term sheet dated April 16, 2008 executed by
members of the Investor Group and delivered to us, setting forth the terms
upon which the Investor Group would be willing to undertake the proposed
financing, as well as a June 3, 2008 letter from Michael Barber, M.D., a
member of the Special Committee, summarizing the terms of the proposed
reverse split as of that date;
|
|
·
|
reviewed
our publicly available Commission filings, including its annual reports
for the periods ended December 31, 2006 and 2007, which include audited
financial statements for the fiscal years 2006 and 2007, as well as
quarterly financial reports for fiscal 2006 and
2007;
|
|
·
|
reviewed
our financial statements, in the form provided to Navigant by our
management, for the fiscal years ended December 31, 2006 and December 31,
2007, and for the three-month periods ended March 31, 2007 and March 31,
2008;
|
|
·
|
reviewed
minutes of meetings of the Board for the previous two
years;
|
|
·
|
reviewed
a marketing presentation dated April 2008 prepared by our management
highlighting our business, ownership, leadership, repositioning strategy,
industry trends, competitors, product and service offerings, key
customers, and financial
information;
|
|
·
|
visited
our headquarters in Coral Springs,
Florida;
|
|
·
|
met
with members of our senior and operating management to discuss our
operations, repositioning strategy, key customers, historical and
prospective financial results, future prospects (including risk factors),
net operating loss carryforwards, potential merger/acquisition candidates,
and the rationale for the going-private
transaction;
|
|
·
|
reviewed
publicly available financial data, stock market performance data, and
market multiples of companies in the healthcare services, managed health,
and healthcare technology sectors for comparative
purposes;
|
|
·
|
reviewed
recent, arms-length transactions involving similar
companies;
|
|
·
|
reviewed
our stock price history and reported events;
and
|
|
·
|
conducted
such other studies, analyses and inquiries as Navigant deemed
appropriate.
|
Such
other studies, analyses and inquiries included a review of industry research
related to the care and disease management industry and economic trends in the
United States and inquiries related to a change in our business model
implemented in 2006, which sought to transition away from capitated contracts,
in which we accept risk with respect to the cost of services rendered, to an
administrative services and fee-for-service revenue model, in which we do not
accept risk. Navigant’s investigation also considered management’s
strategic review, the rationale for the business model change and its projected
benefits, as well as the risks involved.
In
rendering the fairness opinion, Navigant has assumed the accuracy and
completeness of all of the information that we supplied with respect to our
business and our industry. With respect to the financial forecast
information furnished to or discussed with Navigant by our management, Navigant
assumed that such information was reasonably prepared and that it reflected the
best currently available estimates and judgment of our management as to our
expected future financial performance.
For
purposes of the fairness opinion, it was represented to Navigant that we have
not consummated and do not contemplate any material transaction other than a
reverse split followed by a forward split, the proposed financing and those
activities undertaken in the ordinary course of business. Navigant
does not assume any responsibility for any independent verification of any
information provided to it, and Navigant has further relied upon the assurance
of our management that it is not aware of any facts or circumstances that would
make such information inaccurate or misleading in any respect material to its
analysis.
The
following is a summary of Navigant’s material financial analyses used in
developing the fairness opinion. Navigant employed accepted valuation
practices and methods in reaching its conclusion described in the fairness
opinion. The discussion herein does not constitute a complete
description of Navigant’s analyses, including the assumptions and methodologies
that underlie the analyses that comprise the fairness opinion.
In
arriving at its fairness opinion, Navigant considered all of the financial
analyses it performed and did not attribute any particular weight to any
specific analysis, nor did it reach a conclusion based on any single
analysis. Consequently, no single analysis should be considered
independently, as it may lead to a misleading conclusion about the fairness of
the payment of $0.14 per pre-split share to holders of fractional
interests. Instead, Navigant developed its conclusion on the fairness
of the payment of $0.14 per pre-split share to holders of fractional interests
from a financial point of view based on its experience and professional judgment
after considering the results of its analyses taken as a whole.
In
performing its valuation of us and arriving at a range of Common Stock values on
a going concern basis, Navigant performed the following valuation
analyses:
|
·
|
Discounted
Cash Flow Analysis and
|
|
·
|
Similar
Transactions Analysis.
|
Navigant
also considered, but did not use, a Guideline Company Analysis in developing its
valuation conclusions.
Discounted Cash Flow
Analysis. Discounted cash flow (“DCF”)
analysis estimates value based upon a company’s projected future free cash flow
discounted at a rate reflecting risks inherent in its business and capital
structure. The DCF analysis values an asset as the present value of the sum of
(i) its unlevered free cash flows over a forecast period and (ii) its
theoretical terminal value at the end of the forecast period. Unlevered free
cash flow represents the amount of cash generated and available for principal,
interest and dividend payments after providing for ongoing business operations.
Our terminal value was calculated based on projected adjusted revenue for 2017
(calculated as 2017 net revenue increased by an assumed long-term growth rate of
3%). While the DCF analysis is the most scientific of the
methodologies used, it is dependent on projections and is further dependent on
numerous industry-specific and macroeconomic factors.
For
purposes of the DCF analysis, Navigant relied upon financial projections
provided by our management for fiscal years ending December 31, 2008 through
2017. These include projections for each of our major business lines
related to revenue, cost of sales, selling, general and administrative expense,
other income, net working capital changes, capital expenditures, and
depreciation and amortization. The projections assume that there will not be any
strategic acquisitions or material changes in the legal or regulatory
environment governing our key businesses. The underlying expectation for our
projected performance was that our complex care management and One Care Street™
service lines are expected to increase in revenue substantially as sales efforts
and market penetration from these services grow. Navigant reviewed management’s
projections against market participant results and closely discussed the results
of these forecasts with management to ensure an understanding of the underlying
assumptions.
Our
management’s projected annual revenue and earning before interest, taxes,
depreciation and amortization (“EBITDA”)
are outlined in the table below:
|
|
|
|
|
TTM
|
|
|
Projections
for the Years Ending December 31 (1)
|
|
|
Terminal
|
|
|
|
|
|
|
3/31/2008
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
Year
|
|
Net
Revenue
|
|
|
|
|
$ |
18,986 |
|
|
$ |
18,650 |
|
|
$ |
26,311 |
|
|
$ |
33,066 |
|
|
$ |
38,464 |
|
|
$ |
43,507 |
|
|
$ |
47,858 |
|
|
$ |
50,729 |
|
|
$ |
52,251 |
|
|
$ |
53,819 |
|
|
$ |
55,433 |
|
|
$ |
57,096 |
|
Growth
Rate
|
|
|
|
|
|
|
|
|
|
(16.2) |
% |
|
|
41.1 |
% |
|
|
25.7 |
% |
|
|
16.3 |
% |
|
|
13.1 |
% |
|
|
10.0 |
% |
|
|
6.0 |
% |
|
|
3.0 |
% |
|
|
3.0 |
% |
|
|
3.0 |
% |
|
|
3.0 |
% |
Cost
of Sales
|
|
|
|
|
|
11,433 |
|
|
|
11,245 |
|
|
|
14,881 |
|
|
|
18,146 |
|
|
|
20,569 |
|
|
|
22,845 |
|
|
|
25,130 |
|
|
|
26,637 |
|
|
|
27,436 |
|
|
|
28,259 |
|
|
|
29,107 |
|
|
|
29,980 |
|
Gross
Profit
|
|
|
|
|
|
7,553 |
|
|
|
7,406 |
|
|
|
11,430 |
|
|
|
14,920 |
|
|
|
17,896 |
|
|
|
20,662 |
|
|
|
22,728 |
|
|
|
24,092 |
|
|
|
24,815 |
|
|
|
25,559 |
|
|
|
26,326 |
|
|
|
27,116 |
|
Operating
Expenses
|
|
|
|
|
|
11,101 |
|
|
|
6,467 |
|
|
|
7,371 |
|
|
|
8,186 |
|
|
|
8,816 |
|
|
|
9,369 |
|
|
|
10,306 |
|
|
|
10,925 |
|
|
|
11,252 |
|
|
|
11,590 |
|
|
|
11,938 |
|
|
|
12,296 |
|
EBITDA
|
|
|
|
|
|
(3,548 |
) |
|
|
938 |
|
|
|
4,059 |
|
|
|
6,734 |
|
|
|
9,080 |
|
|
|
11,293 |
|
|
|
12,422 |
|
|
|
13,168 |
|
|
|
13,563 |
|
|
|
13,969 |
|
|
|
14,389 |
|
|
|
14,820 |
|
EBITDA
as a % of Revenue
|
|
|
|
|
|
(18.7) |
% |
|
|
5.0 |
% |
|
|
15.4 |
% |
|
|
20.4 |
% |
|
|
23.6 |
% |
|
|
26.0 |
% |
|
|
26.0 |
% |
|
|
26.0 |
% |
|
|
26.0 |
% |
|
|
26.0 |
% |
|
|
26.0 |
% |
|
|
26.0 |
% |
Depreciation
|
|
|
(2 |
) |
|
|
3,006 |
|
|
|
1,959 |
|
|
|
1,418 |
|
|
|
1,099 |
|
|
|
1,036 |
|
|
|
1,154 |
|
|
|
1,154 |
|
|
|
1,154 |
|
|
|
1,154 |
|
|
|
1,154 |
|
|
|
1,154 |
|
|
|
1,154 |
|
Operating
Income (EBIT)
|
|
|
|
|
|
|
(6,554 |
) |
|
|
(1,020 |
) |
|
|
2,641 |
|
|
|
5,636 |
|
|
|
8,044 |
|
|
|
10,139 |
|
|
|
11,268 |
|
|
|
12,013 |
|
|
|
12,408 |
|
|
|
12,815 |
|
|
|
13,234 |
|
|
|
13,666 |
|
EBIT
as a % of Revenue
|
|
|
|
|
|
|
(34.5) |
% |
|
|
(5.5) |
% |
|
|
10.0 |
% |
|
|
17.0 |
% |
|
|
20.9 |
% |
|
|
23.3 |
% |
|
|
23.5 |
% |
|
|
23.7 |
% |
|
|
23.7 |
% |
|
|
23.8 |
% |
|
|
23.9 |
% |
|
|
23.9 |
% |
NOLs
Accrued
|
|
|
|
|
|
|
|
|
|
|
74,831 |
|
|
|
75,852 |
|
|
|
73,211 |
|
|
|
67,575 |
|
|
|
59,531 |
|
|
|
49,392 |
|
|
|
38,124 |
|
|
|
26,111 |
|
|
|
13,702 |
|
|
|
887 |
|
|
|
0 |
|
NOL
Adjustment Applied
|
|
|
|
|
|
|
|
|
|
|
0 |
|
|
|
2,641 |
|
|
|
5,636 |
|
|
|
8,044 |
|
|
|
10,139 |
|
|
|
11,268 |
|
|
|
12,013 |
|
|
|
12,408 |
|
|
|
12,815 |
|
|
|
887 |
|
|
|
0 |
|
Taxable
EBIT
|
|
|
|
|
|
|
|
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
12,347 |
|
|
|
13,666 |
|
Income
Taxes
|
|
|
38.6 |
% |
|
|
|
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
4,763 |
|
|
|
5,272 |
|
Debt-Free
Net Income
|
|
|
|
|
|
|
|
|
|
|
(1,020 |
) |
|
|
2,641 |
|
|
|
5,636 |
|
|
|
8,044 |
|
|
|
10,139 |
|
|
|
11,268 |
|
|
|
12,013 |
|
|
|
12,408 |
|
|
|
12,815 |
|
|
|
8,471 |
|
|
|
8,394 |
|
After-Tax
Margin
|
|
|
|
|
|
|
|
|
|
|
(5.5) |
% |
|
|
10.0 |
% |
|
|
17.0 |
% |
|
|
20.9 |
% |
|
|
23.3 |
% |
|
|
23.5 |
% |
|
|
23.7 |
% |
|
|
23.7 |
% |
|
|
23.8 |
% |
|
|
15.3 |
% |
|
|
14.7 |
% |
Cash
Flow
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
Expense
|
|
|
|
|
|
|
|
|
|
|
1,959 |
|
|
|
1,418 |
|
|
|
1,099 |
|
|
|
1,036 |
|
|
|
1,154 |
|
|
|
1,154 |
|
|
|
1,154 |
|
|
|
1,154 |
|
|
|
1,154 |
|
|
|
1,154 |
|
|
|
1,154 |
|
Working
Capital Investment
|
|
|
5.0 |
% |
|
|
|
|
|
|
(180 |
) |
|
|
383 |
|
|
|
338 |
|
|
|
270 |
|
|
|
252 |
|
|
|
218 |
|
|
|
144 |
|
|
|
76 |
|
|
|
78 |
|
|
|
81 |
|
|
|
83 |
|
Capital
Expenditures
|
|
|
n/a |
|
|
|
|
|
|
|
500 |
|
|
|
500 |
|
|
|
500 |
|
|
|
500 |
|
|
|
500 |
|
|
|
500 |
|
|
|
500 |
|
|
|
500 |
|
|
|
500 |
|
|
|
500 |
|
|
|
500 |
|
Available
Cash Flow
|
|
|
|
|
|
|
|
|
|
|
618 |
|
|
|
3,176 |
|
|
|
5,897 |
|
|
|
8,310 |
|
|
|
10,541 |
|
|
|
11,705 |
|
|
|
12,524 |
|
|
|
12,986 |
|
|
|
13,391 |
|
|
|
9,044 |
|
|
|
8,965 |
|
Notes:
(1) Based
on management prepared projections.
(2) Present
value factors are adjusted to a mid-period convention.
We have
accumulated significant net operating loss carryforwards (“NOLs”)
arising from losses prior to and during 2008. These NOLs total $74.8
million as of December 31, 2007 and are expected to increase to $75.9 million by
December 31, 2008. Our projections assume that these NOLs will be utilized going
forward to offset taxable income. These NOLs are expected to be consumed by 2017
based on our management’s projections and are sufficient to keep us from
incurring a tax liability until that time.
A
discount rate of 22% was used in the DCF analysis. The discount rate used by
Navigant was computed based on a weighted average cost of capital (“WACC”)
measuring the costs of debt and equity weighted by the percentage of debt and
percentage of equity in an estimated capital structure. The cost of
equity was determined to be 26.74%, based on the capital asset pricing model,
which estimates the return required by equity investors given a company's risk
profile. The pretax cost of debt capital was determined
based on the Moody’s Baa Corporate Bond Yield as of the valuation date, which
was equal to 7.02%. In addition, since interest expense is deductible
for income tax purposes, the pretax cost of debt was tax-affected using a 38.9%
corporate United States tax rate based on a blended rate of federal and state
income tax rates, which resulted in a tax-affected cost of debt capital of
4.31%. The estimated proportion of debt and equity financing, 20%
debt and 80% equity in Navigant’s analysis, was based on the capital structure
of comparable companies used in the WACC analysis. Navigant selected
the companies utilized in the WACC analysis because they face similar economic
and industry factors to us and represent an alternative investment to
us. The average debt weighting of the comparable companies was 12.50%
and the median debt weighting was 15.14%. Navigant rounded the median
debt weighting up to 20%. This capital structure was then used to
weight the cost of debt and equity financing. Based on the forgoing,
Navigant estimated the WACC to be approximately 22%.
The
foregoing calculations are outlined in the tables below:
Company Name
|
|
Market Value
of Equity
|
|
|
Interest Bearing
Debt
|
|
|
Market Value
of Capital
|
|
|
Debt to
Capital
|
|
|
Equity to
Capital
|
|
|
Effective
Tax Rate
|
|
|
Levered
Beta (1)
|
|
|
Unlevered
Beta
|
|
Healthways,
Inc.
|
|
$ |
1,124,156 |
|
|
$ |
278,169 |
|
|
$ |
1,402,325 |
|
|
|
19.84 |
% |
|
|
80.16 |
% |
|
|
40.7 |
% |
|
|
1.05 |
|
|
|
0.92 |
|
ADAM
Inc.
|
|
|
75,126 |
|
|
|
15,161 |
|
|
|
90,287 |
|
|
|
16.79 |
% |
|
|
83.21 |
% |
|
|
38.6 |
% |
|
|
1.84 |
|
|
|
1.64 |
|
Hooper
Holmes Inc.
|
|
|
65,889 |
|
|
|
0 |
|
|
|
65,889 |
|
|
|
0.00 |
% |
|
|
100.00 |
% |
|
|
38.6 |
% |
|
|
2.64 |
|
|
|
2.64 |
|
MEDecision,
Inc.
|
|
|
26,634 |
|
|
|
5,409 |
|
|
|
32,043 |
|
|
|
16.88 |
% |
|
|
83.12 |
% |
|
|
38.6 |
% |
|
|
0.26 |
|
|
|
0.23 |
|
Health
Fitness Corp.
|
|
|
41,618 |
|
|
|
0 |
|
|
|
41,618 |
|
|
|
0.00 |
% |
|
|
100.00 |
% |
|
|
51.8 |
% |
|
|
2.20 |
|
|
|
2.20 |
|
McKesson
Corp.
|
|
|
16,029,513 |
|
|
|
1,797,000 |
|
|
|
17,826,513 |
|
|
|
10.08 |
% |
|
|
89.92 |
% |
|
|
32.1 |
% |
|
|
0.56 |
|
|
|
0.52 |
|
WellPoint
Inc.
|
|
|
28,923,950 |
|
|
|
9,286,400 |
|
|
|
38,210,350 |
|
|
|
24.30 |
% |
|
|
75.70 |
% |
|
|
35.6 |
% |
|
|
0.93 |
|
|
|
0.77 |
|
CIGNA
Corp.
|
|
|
11,429,130 |
|
|
|
2,353,000 |
|
|
|
13,782,130 |
|
|
|
17.07 |
% |
|
|
82.93 |
% |
|
|
30.4 |
% |
|
|
1.51 |
|
|
|
1.32 |
|
Aetna
Inc.
|
|
|
22,557,744 |
|
|
|
3,517,900 |
|
|
|
26,075,644 |
|
|
|
13.49 |
% |
|
|
86.51 |
% |
|
|
34.6 |
% |
|
|
1.01 |
|
|
|
0.92 |
|
WellCare
Health Plans, Inc.
|
|
|
2,219,178 |
|
|
|
154,901 |
|
|
|
2,374,079 |
|
|
|
6.52 |
% |
|
|
93.48 |
% |
|
|
38.5 |
% |
|
|
(0.35 |
) |
|
|
(0.34 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
12.50 |
% |
|
|
87.50 |
% |
|
|
37.9 |
% |
|
|
1.17 |
|
|
|
1.08 |
|
|
|
|
|
|
|
|
|
|
|
Median
|
|
|
|
15.14 |
% |
|
|
84.86 |
% |
|
|
38.5 |
% |
|
|
1.03 |
|
|
|
0.92 |
|
|
|
|
|
|
|
|
|
|
|
Selected
|
|
|
|
20.00 |
% |
|
|
80.00 |
% |
|
|
|
|
|
|
|
|
|
|
0.92 |
|
Relevered
Beta
|
|
|
|
Cost
of Equity
|
|
|
Unlevered
Beta
|
0.92
|
|
|
Risk-free
Rate (Rf)
(2)
|
4.71
|
%
|
Target
Equity to Capital Weight
|
80.00
|
%
|
|
Equity
Risk Premium (Rm -
Rf)
(3)
|
5.00
|
%
|
Target
Debt to Capital Weight
|
20.00
|
%
|
|
Levered
Beta
|
1.06
|
|
Target
Preferred Stock to Capital Weight
|
0.00
|
%
|
|
Small
Stock Premium (SSP) (4)
|
9.73
|
%
|
Target
Minority Interest to Capital Weight
|
0.00
|
%
|
|
Specific
Risk Premium (SRP)
|
7.00
|
%
|
Subject
Tax Rate
|
35.58
|
%
|
|
Calculated
Cost of Equity (5)
|
26.74
|
%
|
Calculated
Beta
|
1.06
|
|
|
|
|
|
Cost
of Debt
|
|
|
|
Pretax
Cost of Debt (6)
|
|
|
7.01
|
% |
Combined
Effective Tax Rate
|
|
|
38.58
|
% |
Calculated
Cost of Debt (7)
|
|
|
4.31
|
% |
|
|
Weighted
|
Capital
Structure and WACC
|
|
Value
|
Equity
to Capital Weight 80.00% x 26.74% =
|
|
|
21.39
|
% |
Debt
to Capital Weight 20.00% x 4.31% =
|
|
|
0.86
|
% |
Calculated
WACC (8)
|
|
|
22
|
% |
Notes
(1)
Represents a five-year monthly historical beta, utilizing the S&P 500 as a
proxy for the market.
(2) Based
on twenty-year treasury constant security as of the Valuation Date.
(3)
Grabowski, R.J. (2008), "Risk Premium Report: 2008" Business Valuation
Resources.
(4)
Ibbotson Associates, 2008.
(5) Cost
of Equity using the Capital Asset Pricing Model = Rf + B x
(Rm -
Rf) +
SSP + SRP.
(6)
Moody's Baa corporate rated bond as of the Valuation Date.
(7) Cost
of Debt = Pretax Cost of Debt x (1 - Tax Rate).
(8)
Weighted Average Cost of Capital = Equity Weight x Cost of Equity + Debt Weight
x Cost of Debt.
Combining
the sum of the discounted cash flows, including the terminal value, and working
capital (as adjusted, based on Navigant’s comparison of our actual working
capital as of the valuation date and an analysis of our required level of
working capital based on industry research, which Navigant estimated to be 5% of
net revenue and which resulted in a negative adjustment to our working capital
to account for the possibility that a buyer would have to “infuse” us with
additional working capital in order to fund our operations) resulted in our
business enterprise value (“BEV”) on a
marketable, controlling basis. The value of the interest-bearing debt
was subtracted from BEV to indicate the value of equity on a marketable,
controlling basis. To this analysis, Navigant applied a minority interest
discount (i.e., a discount for lack of control) and a discount for lack of
marketability (due to our lack of liquidity even though we are a public company)
to determine the value of equity of the Company on a non-marketable, minority
basis. The discount for lack of control or minority interest was
based on an analysis of majority interest transactions in the healthcare
services industries for the three years prior to the proposed
transaction. Navigant utilized a nationally recognized database to
evaluate minority interest discounts. The median control premium in
the transactions analyzed by Navigant was approximately 28%, which implies a
discount of approximately 22%. In selecting an appropriate lack of
marketability discount, Navigant considered the potential interest in us by
private equity firms and others seeking a stake in the healthcare
industry. Based on this analysis, Navigant selected a marketability
discount of 10%, somewhat below the historical range of discounts for lack of
marketability (based on an established industry source) of between 20% to
40%.
Navigant
performed a sensitivity analysis on the results of the DCF
analysis. In assessing terminal year values, Navigant elected to
consider terminal growth rates from 2% to 6% in a DCF sensitivity analysis with
a central focus on a 2% to 3% expected terminal growth rate. Navigant
determined the appropriate range of terminal growth rates to consider based on a
review of forecasted growth rates provided by, and discussions with, our
management and an examination of publicly available information contained in
Commission filings by healthcare companies. Navigant utilized a nationally
recognized database to search for healthcare companies which had made Commission
filings related to a potential acquisition. The filings of ten
comparable healthcare companies were reviewed for information related to the
terminal year growth rates utilized in the analysis. Only one
healthcare company reviewed had a filing containing a table with multiple growth
rates and discount rates and it had a projected terminal year growth rate of
between 2% and 4%, consistent with management’s forecast of our terminal year
growth rate. Navigant did not expect that the range of terminal year
growth rates would change if the search criteria were expanded. In
light of the foregoing, Navigant concluded that our normalized growth rate
beyond the projection period should be 3%.
Navigant
developed a matrix of equity values for us based on an assumption that we would
remain independent. Given this matrix, presented below, Navigant, in
its professional judgment, estimated a range of value of $12.0 million to $18.0
million, or approximately $0.12 to $0.18 per pre-split share of Common Stock
outstanding, assuming the conversion of outstanding Preferred
Stock.
|
|
Equity
Value
|
|
|
|
Terminal
year growth rate
|
|
|
|
|
|
|
|
2%
|
|
|
|
3%
|
|
|
|
4%
|
|
|
|
5%
|
|
|
|
6%
|
|
WACC
|
|
|
18 |
% |
|
|
21,653 |
|
|
|
22,301 |
|
|
|
23,041 |
|
|
|
23,894 |
|
|
|
24,891 |
|
|
|
|
20 |
% |
|
|
17,599 |
|
|
|
18,041 |
|
|
|
18,538 |
|
|
|
19,101 |
|
|
|
19,745 |
|
|
|
|
22 |
% |
|
|
14,325 |
|
|
|
14,636 |
|
|
|
14,980 |
|
|
|
15,365 |
|
|
|
15,798 |
|
|
|
|
24 |
% |
|
|
11,626 |
|
|
|
11,849 |
|
|
|
12,094 |
|
|
|
12,365 |
|
|
|
12,666 |
|
|
|
|
26 |
% |
|
|
9,363 |
|
|
|
9,526 |
|
|
|
9,704 |
|
|
|
9,899 |
|
|
|
10,114 |
|
|
|
|
28 |
% |
|
|
7,439 |
|
|
|
7,561 |
|
|
|
7,693 |
|
|
|
7,836 |
|
|
|
7,992 |
|
|
|
Per
Share Value
|
|
|
|
Terminal
year growth rate
|
|
|
|
|
|
|
|
2%
|
|
|
|
3%
|
|
|
|
4%
|
|
|
|
5%
|
|
|
|
6%
|
|
WACC
|
|
|
18 |
% |
|
|
0.22 |
|
|
|
0.23 |
|
|
|
0.23 |
|
|
|
0.24 |
|
|
|
0.25 |
|
|
|
|
20 |
% |
|
|
0.18 |
|
|
|
0.18 |
|
|
|
0.19 |
|
|
|
0.19 |
|
|
|
0.20 |
|
|
|
|
22 |
% |
|
|
0.15 |
|
|
|
0.15 |
|
|
|
0.15 |
|
|
|
0.16 |
|
|
|
0.16 |
|
|
|
|
24 |
% |
|
|
0.12 |
|
|
|
0.12 |
|
|
|
0.12 |
|
|
|
0.13 |
|
|
|
0.13 |
|
|
|
|
26 |
% |
|
|
0.09 |
|
|
|
0.10 |
|
|
|
0.10 |
|
|
|
0.10 |
|
|
|
0.10 |
|
|
|
|
28 |
% |
|
|
0.08 |
|
|
|
0.08 |
|
|
|
0.08 |
|
|
|
0.08 |
|
|
|
0.08 |
|
Similar Transactions
Analysis. Navigant also considered the results of a similar transactions
analysis in developing its valuation conclusions. Evaluating similar
transactions provides insight into the prices at which companies similar to the
subject company have sold in transactions (mergers and acquisitions) in which at
least a controlling interest in the company is sold. Target companies
are compared to the subject company, and multiples paid in transactions are
analyzed and applied to subject company data resulting in value
indications. Similarity can be affected by, among other things, the
product or service produced or sold, geographic markets served, competitive
position, profitability, growth expectations, size, risk perception, and capital
structure.
A summary
of the similar transactions analysis performed by Navigant in our case is as
follows:
|
·
|
Five
transactions that occurred between January 1, 2006 and May 15, 2008 and
one pending transaction as of May 15, 2008 were considered as part of the
similar transactions method.
|
|
·
|
Each
transaction involved broadly comparable companies based on businesses in
the healthcare service sector and of a comparable
size.
|
|
·
|
A
BEV/revenue multiple of 2.0x was selected based on the low end of the
range of the six transactions analyzed. The selection was made in part
because of our negative EBITDA and the uncertainty related to a recent
change in our business model.
|
|
·
|
Applying
the selected multiple to our current fundamentals resulted in an
indication of our BEV on a marketable, controlling basis. The
value of the interest-bearing debt was subtracted from BEV to indicate the
value of the equity on a marketable, controlling
basis.
|
|
·
|
Adjustments
were made for the lack of control and working capital deficit as described
under the DCF analysis above. The selected multiple was based
on a cash-free multiple analysis; therefore, cash was added to calculate
the indicated value of our equity on a marketable, minority
basis.
|
|
·
|
Finally,
a discount for lack of marketability was applied. After
applying the adjustments for lack of control, working capital, cash, and
lack of marketability, an indication of the value of our equity on a
non-marketable, minority basis was determined. The selected
multiple resulted in a total equity value range of $13.0 million to $16.0
million, or approximately $0.13 to $0.16 cents per pre-split share of
Common Stock outstanding, assuming the conversion of outstanding Preferred
Stock.
|
The
financial analysis described in the foregoing bullet points was applied to our
financial results for the trailing twelve months ended March 31,
2008. Using such methodology, the calculation of the value of our
equity on a non-marketable, minority basis is as follows:
|
|
|
|
|
BEV/
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
Selected
Transaction Multiple
|
|
|
|
|
|
2.0 |
x |
|
|
|
|
|
|
|
|
Subject
Company Fundamentals
|
|
|
|
|
$ |
18,986 |
|
|
|
|
|
|
|
|
|
Indicated
BEV on a Marketable, Controlling Basis
|
|
|
|
|
|
37,972 |
|
Less:
Interest-Bearing Debt
|
|
|
|
|
|
15,347 |
|
Indicated
Equity Value on a Marketable, Controlling Basis
|
|
|
|
|
|
22,625 |
|
Discount
for Lack of Control
|
|
|
22 |
% |
|
|
4,978 |
|
Indicated
Equity Value on a Marketable, Minority Basis
|
|
|
|
|
|
|
17,648 |
|
Plus:
Cash
|
|
|
|
|
|
|
1,653 |
|
Plus:
Net Working Capital Excess/(Deficit)
|
|
|
|
|
|
|
(2,857 |
) |
|
|
|
|
|
|
|
|
|
Indicated
Equity Value on a Marketable, Minority Basis
|
|
|
|
|
|
|
16,443 |
|
|
|
10
|
% |
|
1,644
|
|
Fair
Value on a Non-Marketable, Minority Basis
|
|
|
|
|
14,799
|
|
|
|
|
|
|
|
|
Indicated Equity Value
Range
|
|
$13,000 -
$16,000
|
|
The
indicated equity range of $13.0 million to $16.0 million is a function of the
sensitivity related to the selected BEV-to-revenue multiple and the discount for
lack of marketability. Navigant considered BEV-to-revenue multiples
of 1.9x to 2.1x and discounts for lack of marketability from 8% to 14% in the
sensitivity analysis.
The
comparative group of transactions referred to in the bullet points above is
outlined in the table below:
Effective
Date
|
|
Acquiring
Company
|
|
Target
Company
|
|
|
|
|
|
Pending
as of the date of Navigant’s analysis
|
|
Inverness
Medical Innovations Inc. (AMEX:IMA)
|
|
Matria
Healthcare Inc. (NasdaqNM:MATR)
|
4/24/2008
|
|
Walgreen
Co. (NYSE:WAG)
|
|
I-trax
Inc.
|
12/21/2007
|
|
Inverness
Medical Innovations Inc. (AMEX:IMA)
|
|
ParadigmHealth,
Inc.
|
12/1/2006
|
|
Healthways
Inc. (NasdaqNM:HWAY)
|
|
AXIA
Health Management, LLC
|
6/13/2006
|
|
WebMD
Health Corp. (NasdaqNM:WBMD)
|
|
Summex
Corporation
|
1/19/2006
|
|
Matria
Healthcare Inc. (NasdaqNM:MATR)
|
|
CorSolutions
Medical, Inc.
|
The
relevant business metrics analyzed with respect to the comparative group are set
forth below. These metrics all related to the target:
|
|
Dollars
in millions
|
|
|
|
|
Acquiring
Company
|
|
Implied
BEV
|
|
|
Revenue
|
|
|
EBITDA
|
|
|
BEV/
Revenue
|
|
Inverness
Medical Innovations Inc. (AMEX:IMA)
|
|
|
1,123 |
|
|
|
352 |
|
|
|
77 |
|
|
|
3.2 |
x |
Walgreen
Co. (NYSE: WAG)
|
|
|
261 |
|
|
|
143 |
|
|
|
5 |
|
|
|
1.8 |
x |
Inverness
Medical Innovations Inc. (AMEX:IMA)
|
|
|
230 |
|
|
|
59 |
|
|
|
N/A |
|
|
|
3.9 |
x |
Healthways
Inc. (NasdaqNM:HWAY)
|
|
|
499 |
|
|
|
69 |
|
|
|
12 |
|
|
|
7.2 |
x |
WebMD
Health Corp. (NasdaqNM: WBMD)
|
|
|
40 |
|
|
|
6 |
|
|
|
N/A |
|
|
|
6.7 |
x |
Matria
Healthcare Inc. (NasdaqNM: MATR)
|
|
|
429 |
|
|
|
86 |
|
|
|
17 |
|
|
|
5.0 |
x |
|
|
|
|
|
|
|
|
|
|
High
|
|
|
|
7.2 |
x |
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
4.6 |
x |
|
|
|
|
|
|
|
|
|
|
Median
|
|
|
|
4.5 |
x |
|
|
|
|
|
|
|
|
|
|
Low
|
|
|
|
1.8 |
x |
|
|
Selected
Multiples (1)
|
|
|
|
2.0 |
x |
(1) The
selected multiple is the minimum value from the comparative transactions,
rounded to the nearest whole number.
Guideline Company Analysis.
Navigant considered, but did not use, a Guideline Company analysis in developing
its valuation conclusions. Navigant did not find a sufficient number
of comparable guideline companies in terms of company size and scope of
services. As a result, Navigant abandoned the Guideline Company
analysis prior to reaching a conclusion with respect to our
valuation.
In
searching for comparables, Navigant’s criteria in terms of size of company
included companies with less than $100 million in revenue, negative EBITDA,
market value of invested capital of less than $400 million and total assets
of less than $100 million. Navigant’s criteria in terms of scope
of services included companies that: focus on care and disease management under
an administrative services organization model (as opposed to a risk-based
capitated business model) and those who were undergoing a recent transition in
their business model.
The
determination of the number of companies necessary to utilize the Guideline
Company approach depends on the degree of comparability of the companies to the
subject company. If the guideline companies are similar in terms of
industry, size, geographic location, profitability, growth, and other factors,
three companies may be a sufficient sample size to utilize this
approach. However, if there are material differences between the
subject company and the guideline companies in terms of the factors listed
above, the Guideline Company approach may not be reliable regardless of the
number of companies selected.
Given
these parameters, Navigant determined that there were no companies that could
serve as a guideline company.
If a
Guideline Company analysis had been performed by Navigant, it would have
entailed the development of various market-based valuation multiples including,
for example, BEV-to-revenue, BEV-to-EBITDA and BEV-to-EBIT (or earnings before
interest and taxes). The market-based valuation multiples would then
have been applied to our financial information, resulting in an indication of
our value.
Other Information About
Navigant. For the rendering of the fairness opinion, Navigant
was paid a fee of $125,000. We also agreed to reimburse Navigant for
out-of-pocket expenses, including legal fees, which we estimate to be
approximately $15,000, and to indemnify Navigant against certain liabilities,
including any such liabilities that may arise under federal securities
law. No portion of Navigant’s fee or reimbursement of its expenses is
contingent on consummation of the proposed reverse split or the financing, nor
is any of Navigant’s fee or expense reimbursement contingent on the conclusions
reached in the fairness opinion.
Navigant
and its affiliates have not previously been engaged by us or any of our
affiliates, including any member of the Investor Group. Navigant and
its affiliates may seek to provide us or our respective affiliates or any member
of the Investor Group or their respective affiliates with certain investment
banking, consulting or other services unrelated to the proposed reverse split or
the financing in the future.
The
opinion of Navigant, which is attached as Annex B to this Information
Statement, will be made available for inspection and copying at our principal
executive offices during our regular business hours by any interested equity
security holder or representative who has been so designated in
writing.
Federal
Income Tax Consequences of the Reverse/Forward Stock Split
The
following is a summary of the material United States federal income tax
consequences of the Reverse/Forward Stock Split, but does not purport to be a
complete analysis of all the potential tax considerations relating
thereto. This summary is based upon the provisions of the Internal
Revenue Code of 1986, as amended (the “Code”),
Treasury regulations promulgated thereunder, administrative rulings and judicial
decisions, all as of the date hereof. These authorities may be
changed, possibly retroactively, so as to result in United States federal income
tax consequences different from those set forth below. We have not
sought any ruling from the Internal Revenue Service (the “IRS”) with
respect to the statements made and the conclusions reached in the following
summary, and there can be no assurance that the IRS will agree with such
statements and conclusions.
This
summary also does not address the tax considerations arising under the laws of
any foreign, state or local jurisdiction or the tax consequences of transactions
(such as the Financing) effectuated prior or subsequent to, or concurrently
with, the Reverse/Forward Split, whether or not any such transactions are
undertaken in connection with the Reverse/Forward Split. This summary applies
only to stockholders who hold our stock as a capital asset. In
addition, this discussion does not address tax considerations applicable to a
stockholder’s particular circumstances or to stockholders that may be subject to
special tax rules, including, without limitation:
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banks,
insurance companies or other financial
institutions;
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persons
subject to the alternative minimum
tax;
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tax-exempt
organizations;
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dealers
in securities or currencies;
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traders
in securities that elect to use a mark-to-market method of accounting for
their securities holdings;
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persons
that own, or are deemed to own, more than five percent of our Company
(except to the extent specifically set forth
below);
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certain
former citizens or long-term residents of the United
States;
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persons
who own our Common Stock in multiple brokerage
accounts;
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·
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persons
who hold our Common Stock as a position in a hedging transaction,
“straddle,” “conversion transaction” or other risk reduction transaction;
or
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persons
deemed to sell our Common Stock under the constructive sale provisions of
the Code.
|
In
addition, if a partnership holds our Common Stock, the tax treatment of a
partner generally will depend on the status of the partner and upon the
activities of the partnership. Accordingly, partnerships which hold
our Common Stock and partners in such partnerships should consult their tax
advisors.
YOU
ARE URGED TO CONSULT YOUR TAX ADVISOR WITH RESPECT TO THE APPLICATION OF THE
UNITED STATES FEDERAL INCOME TAX LAWS TO YOUR PARTICULAR SITUATION, AS WELL AS
ANY TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF OUR COMMON
STOCK ARISING UNDER THE UNITED STATES FEDERAL ESTATE OR GIFT TAX RULES OR UNDER
THE LAWS OF ANY STATE, LOCAL, FOREIGN OR OTHER TAXING JURISDICTION OR UNDER ANY
APPLICABLE TAX TREATY.
We will
not recognize taxable income, gain or loss in connection with the
Reverse/Forward Stock Split.
Stockholders
Receiving No Cash
A
stockholder who receives no cash in the transaction generally will not recognize
gain or loss or dividend income as a result of the Reverse/Forward Stock Split,
and the tax basis (as adjusted for the Reverse/Forward Stock Split) and holding
period of such stockholder in shares of pre-split Common Stock will carry over
as the tax basis and holding period of such stockholder’s shares of post-split
Common Stock.
Stockholders
Who Receive Cash
A
stockholder who receives cash in the Reverse/Forward Stock Split in exchange for
such stockholder’s Common Stock will be treated as having such shares redeemed
in a taxable transaction governed by Section 302 of the Code and, depending
on a stockholder’s situation, the transaction will be taxed as
either:
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·
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a
sale or exchange of the redeemed shares, in which case the stockholder
will recognize gain or loss equal to the difference between the cash
payment and the stockholder’s tax basis for the redeemed shares;
or
|
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·
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a
cash distribution which is treated: (i) first, as a taxable dividend
to the extent of the stockholder’s allocable share of our earnings and
profits, if any; (ii) second, as a tax-free return of capital to the
extent of the stockholder’s tax basis in our shares; and
(iii) finally, as gain from the sale or exchange of our
shares.
|
We do not
expect to have current or accumulated earnings and profits as of the end of
either the 2008 or 2009 taxable years. Accordingly, it is unlikely
that stockholders will recognize dividend income even if Section 302 of the Code
results in treatment of cash amounts as a “distribution” for a given
stockholder, and, for stockholders who do not constructively own
shares of our Common Stock after the Reverse/Forward Stock Split, the
federal income tax treatment of the transaction generally should be the same
regardless of whether Section 302 of the Code treats cash paid by us as a
“distribution” or instead as a sale/exchange. Although we do not
expect to have current or accumulated earnings and profits as of the end of
either the 2008 or 2009 taxable years, there can be no assurances of such result
until after the closing of such taxable years. In the event we do
have current or accumulated earnings and profits viewed as of the end of the tax
year in which the Reverse/Forward Stock Split actually occurs, stockholders who
constructively own shares of our Common Stock after the Reverse/Forward Stock
Split could recognize dividend income and we would be obligated to report such
income to the stockholders. For stockholders who recognize a gain or
loss from the sale or exchange of redeemed shares, such gain or loss generally
will be capital gain or loss, and would be long-term capital gain or loss if the
shares relinquished in the Reverse/Forward Stock Split have been held by the
stockholder for more than one year at the time of the
transaction. Each stockholder who does not constructively own shares
of our Common Stock after the Reverse/Forward Stock Split generally will be
required to calculate the amount, and determine the long-term or short-term
nature, of gain or loss separately with respect to different blocks of our
Common Stock acquired by such stockholder at different times and
prices.
A
stockholder may be deemed to “constructively” own shares of our Common Stock
before and after the Reverse/Forward Stock Split, even if all shares owned
directly by such stockholder are cancelled in the transaction. Such
constructive ownership may occur by attribution from family members, entities
owned by (or owning) the stockholder, or co-owners of certain entities (such as
partnerships). Any stockholder who receives cash in the transaction
and continues to constructively own shares of our Common Stock thereafter should
consult with a tax advisor concerning the treatment of the
transaction. The tax treatment of the transaction for such
stockholders involves complexities for which little or no tax authority
exists. In addition, certain individual stockholders may be eligible
to make a special reporting election under Section 302(c)(2) of the Code to
“waive” constructive ownership (through family members) of our Common
Stock. Stockholders should consult a tax advisor concerning whether
such election is available to and advisable for them.
Reporting
Backup Tax Withholding
We are
required to furnish to the holders of Common Stock, other than corporations and
other exempt holders, and to the IRS, information with respect to distributions
paid on the Common Stock.
You may
be subject to backup withholding at the rate of 28% with respect to proceeds
received from a disposition of the shares of Common Stock. Certain
holders (including, among others, corporations and certain tax-exempt
organizations) are generally not subject to backup withholding. You
will be subject to backup withholding if you are not otherwise exempt and you
(a) fail to furnish your taxpayer identification number (“TIN”),
which, for an individual, is ordinarily his or her social security number;
(b) furnish an incorrect TIN; (c) are notified by the IRS that you
have failed to properly report payments of interest or dividends; or
(d) fail to certify, under penalties of perjury, that you have furnished a
correct TIN and that the IRS has not notified you that you are subject to backup
withholding. Backup withholding is not an additional tax but, rather,
is a method of tax collection. You generally will be entitled to
credit any amounts withheld under the backup withholding rules against your
United States federal income tax liability provided that the required
information is furnished to the IRS in a timely manner.
GENERAL
INFORMATION ABOUT THE REVERSE/FORWARD STOCK SPLIT
Financing
of the Reverse/Forward Stock Split
We
currently estimate that completion of the Reverse/Forward Stock Split will
require approximately $1.8 million, which includes approximately $0.8 million to
repurchase fractional shares and approximately $1.0 million in advisory, legal,
financial, accounting, printing, insurance and other fees and
costs. As we do not have sufficient cash on hand, we intend to
finance the Reverse/Forward Stock Split, as well as the transaction costs we
will incur in connection with the Reverse/Forward Stock Split and the related
transactions, through the sale of up to $4.0 million of our Preferred Stock to
the Investor Group pursuant to the terms, and subject to the conditions, of the
Purchase Agreement. The Investor Group will purchase shares of
Preferred Stock at $0.60 per share in the Financing, and each such share will be
initially convertible into five shares of our Common Stock. The
Purchase Agreement includes a number of conditions that must be satisfied prior
to funding by the Investor Group, including:
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the
representations and warranties made by us in the Purchase Agreement being
true as of the closing date;
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·
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Navigant’s
fairness opinion being in full force and effect as of the closing
date;
|
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·
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all
of the conditions (other than payment of any amounts to be paid for
fractional shares with the proceeds of the Financing) to the
Reverse/Forward Stock Split having been satisfied, including the filing of
the Certificates of Amendment to effect the Reverse/Forward Stock Split
and the filing of a Form 15 with the Commission to effect the
deregistration of our Common Stock;
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|
·
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holders
of an aggregate of at least 85% of our capital stock (after giving effect
to the Reverse/Forward Stock Split and the Financing) having executed the
Stockholders Agreement, as shall any of our officers or directors who hold
any of our capital stock or any security convertible into our capital
stock; and
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no
event or circumstance having occurred since the date of the Purchase
Agreement that has had or would reasonably be expected to have a material
adverse effect on our business, assets, financial condition or results of
operations or that could reasonably be expected to prevent or materially
impede, interfere with, hinder or delay the consummation of the Financing,
subject to certain exceptions.
|
To fund
the Reverse/Forward Stock Split, including associated fees and costs, we will
issue shares of our Preferred Stock in the Financing. The Purchase
Agreement (under which the members of the Investor Group have agreed to purchase
our Preferred Stock at a price of $0.60 per share or, since each share of
Preferred Stock issued in the Financing will initially convertible into five
shares of Common Stock, $0.12 on a common equivalent basis) provides for the
sale and issuance by us and the purchase by the Investor Group of up to an
aggregate of $4.0 million in Preferred Stock. However, we are
required, under the terms of the Purchase Agreement, to provide the Investor
Group, no later than three business days prior to the proposed closing date of
the Financing, with our good faith estimate of the total consideration to be
paid to stockholders in connection with the cash out of fractional interests and
the professional fees that we have incurred to date and will incur in the future
(including legal and investment banking fees) in connection with the
Reverse/Forward Stock Split and the Financing (collectively, the “Estimated Use of
Proceeds”). The Investor Group is obligated to purchase our
Preferred Stock in quantities sufficient to cover the Estimated Use of Proceeds,
up to $4.0 million. However, in the event that our Estimated Use of
Proceeds is less than $4.0 million, the Investor Group may purchase on a pro
rata basis based on amounts previously committed under the Purchase Agreement
additional Preferred Stock, up to an aggregate of $4.0 million, upon the written
agreement of us and the Investor Group.
We
currently expect to receive gross proceeds of up to $4.0 million from the
Financing. As a result of issuing such additional shares of Preferred
Stock (and assuming the consummation of the Reverse/Forward Stock Split and the
repurchase of fractional interests), continuing stockholders who are not members
of the Investor Group will incur dilution of approximately 22% in terms of their
percentage ownership of our Company, on an as-converted to Common Stock
basis. Any proceeds of the Financing beyond those necessary to
repurchase shares and pay the costs of the Reverse/Forward Stock Split, will be
used for working capital and other general corporate purposes.
We may
terminate the Purchase Agreement at any time prior to the closing of the
Financing upon receiving an offer from a third party to engage in a transaction
that the Board concludes in good faith (i) is on terms and conditions materially
more favorable from a financial point of view to our stockholders than the
Financing, (ii) is reasonably capable of being satisfied without undue delay and
(iii) has financing that is committed, to the extent
required. However, in the event of any such termination, we would be
obligated to pay to the Investor Group the Termination Fee of $160,000 plus all
out-of-pocket costs and expenses (including reasonable legal fees and expenses)
incurred by the Investor Group in connection with the Purchase Agreement and the
Financing.
On July
14, 2008, in connection with the Financing, the Board approved the form of
Stockholders Agreement to be entered into by and among us and certain of our
stockholders, including the Investor Group, upon the consummation of the
Financing and the Reverse/Forward Stock Split. Each member of the
Investor Group has agreed to become a party to the Stockholders Agreement upon
the closing of the Financing. Also, as a condition to the Investor Group’s
performance of its obligations under the Purchase Agreement, each of our
directors and officers is required to become a party to the Stockholders
Agreement upon the closing of the Financing. Following the consummation of the
Reverse/Forward Stock Split, all other continuing stockholders will be contacted
regarding becoming parties to the Stockholders Agreement, but are not required
to do so. The Stockholders Agreement does not require the consent of our
stockholders to become effective. The Stockholders Agreement
provides, among other things, that:
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·
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Each
stockholder who is a party to the agreement agrees to vote his, her or its
shares of Common Stock and Preferred Stock to elect seven directors,
determined as follows: (i) two individuals designated by the
Psilos Funds, (ii) one individual designated by the Essex Funds, (iii) Mr.
Pappajohn or an individual designated by him, (iv) Dr. Schaffer or an
individual designated by him, (v) one individual mutually designated by
the foregoing five directors and (vi) the person serving as our chief
executive officer from time to
time;
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·
|
Each
stockholder who is a party to the agreement agrees to vote his, her or its
shares of Common Stock and Preferred Stock in favor of any sale of the
Company approved by the Board and holders of at least two-thirds of the
outstanding Preferred Stock;
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·
|
Each
stockholder who is a party to the agreement agrees to restrict the manner
by which such stockholder may sell his, her or its shares of our capital
stock;
|
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·
|
The
Company, first, and the other stockholders who are party to the
Stockholders Agreement, second, have rights of first refusal to purchase
shares of capital stock proposed to be transferred by any selling
stockholder who is a party to the Stockholders Agreement, subject to
limited exceptions specified in the Stockholders
Agreement;
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·
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Stockholders
who are party to the Stockholders Agreement have rights of co-sale to
participate in proposed sales of capital stock by any other stockholder
who is also a party to the Stockholders Agreement, subject to limited
exceptions specified in the Stockholders
Agreement;
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·
|
Upon
the election of holders of at least two-thirds of the outstanding
Preferred Stock or the Common Stock issuable upon conversion thereof, the
stockholders party to the Stockholders Agreement will have the right to
require the us to effect a registration of the stockholders’ shares of
Common Stock under the Securities Act of 1933, as amended, subject to
certain exceptions specified in the Stockholders
Agreement;
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·
|
In
the event that we propose to register shares of Common Stock, stockholders
who are party to the Stockholders Agreement will have “piggyback”
registration rights to include shares that they own in such registration,
subject to customary restrictions specified in the Stockholders Agreement
such as lock-up periods and discretionary underwriters’
cutbacks;
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|
The
Investor Group will receive annual, quarterly and monthly financial
statements and an annual budget;
and
|
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·
|
The
Investor Group will have preemptive rights to purchase their pro rata
portion of any new issuance of capital stock or securities convertible for
capital stock issued by us, subject to exceptions specified in the
Stockholders Agreement.
|
The
foregoing description of the Stockholders Agreement does not purport to be
complete and is qualified in its entirety by reference to the Stockholders
Agreement, which is attached as Annex C to this Information
Statement. We encourage you to read the Stockholders Agreement in its
entirety. Following the consummation of the Reverse/Forward Stock
Split, all continuing stockholders will be contacted regarding becoming parties
to the Stockholders Agreement, but are not required to do so.
Certificate
of Designations
On July
14, 2008, in connection with the Financing, the Board approved an amended
Certificate of Designations setting forth the rights, preferences and privileges
of the Preferred Stock to be sold pursuant to the Purchase
Agreement. We expect to file the amended Certificate of Designations
with the Delaware Secretary of State immediately prior to the closing of the
Financing. The Certificate of Designations, a copy of which is
attached to this Information Statement as Annex D, will provide, among
other things, that:
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The
shares of Preferred Stock accrue dividends at the rate of 8% per annum,
based on the initial purchase price of $0.60 per share of Preferred Stock,
subject to adjustment under certain conditions, and this dividend must be
paid before any dividend on Common Stock may be declared or
paid;
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·
|
The
holders of Preferred Stock are entitled, upon certain liquidation events,
to a liquidation preference senior to the Common Stock that is equal to
the greater of the purchase price of their Preferred Stock plus all
accrued but unpaid dividends or the amount they would receive in the
transaction if they were to participate on an as-converted-to-Common Stock
basis;
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·
|
Subject
to certain exceptions, the holders of Preferred Stock are entitled to a
downward adjustment in the price at which their shares convert into Common
Stock (increasing the number of shares of Common Stock issuable upon
conversion) upon the issuance of securities by us at a price below the
conversion price of the Preferred Stock then in
effect.
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·
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For
so long as at least 100,000 shares of Preferred Stock remain outstanding,
the vote or written consent of the holders of two-thirds of the
outstanding Preferred Stock shall be necessary for us to take any of the
following actions:
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·
|
effecting
or validating any amendment, alteration or repeal of any provision of our
Certificate of Incorporation or bylaws (including the Certificate of
Designations) that adversely affects the holders of Preferred
Stock;
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·
|
effecting
a “liquidation event” as defined in the Certificate of
Designations;
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·
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incurring
or guaranteeing any indebtedness for borrowed money in excess of $1.0
million in the aggregate, not including amounts of indebtedness set forth
in an approved annual budget, operating budget or business
plan;
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redeeming,
purchasing or otherwise acquiring for value (or paying into or setting
aside for a sinking fund for such purpose), or declaring or paying
dividends on or making other distributions with respect to, any securities
other than the Preferred Stock (except for certain
exceptions);
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·
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authorizing
or issuing (A) additional shares of Preferred Stock, (B) equity securities
convertible into or exercisable for shares of Preferred Stock, or (C) any
equity securities senior or pari passu with the
Preferred Stock as to liquidation preferences, redemption rights or
dividend rights;
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acquiring,
directly or through a subsidiary, any business (whether by purchase of
stock or assets) for consideration in excess of $5.0
million;
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making
any changes in tax or accounting methods or policies, other than as
required by United States generally accepted accounting principles, or any
change in our auditors;
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·
|
selling
or disposing of assets by us exceeding $1.0
million;
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·
|
adopting
an annual budget, operating budget or business
plan;
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·
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making
capital expenditures in excess of $1.0 million, in the aggregate, per
fiscal year, not included in an approved annual budget, operating budget
or business plan;
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·
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deviating
in any material manner from the approved business
plan;
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creating
any direct or indirect subsidiary;
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making
of any investments in any other entity, other than approved
investments;
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commencing
or terminating the employment of any executive officer, or amending or
revising the terms of any employment agreement with any such
officer;
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|
altering
the size of the Board;
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·
|
agreeing
to take any action which could impair our ability to honor the rights and
preferences of the Preferred Stock;
|
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·
|
entering
into any transaction with an affiliate other than transactions involving
compensation, benefits, personnel and related matters with respect to our
employees who are not executive officers;
and
|
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|
granting
any exclusive rights to any of our intellectual
property.
|
Securities
Restriction Agreement
On July
14, 2008, in connection with the Financing, the Board approved the form of
Securities Restriction Agreement to be entered into by and among us and,
primarily, certain of our employees who will not become party to the
Stockholders Agreement. The Securities Restriction Agreement provides, among
other things, that:
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Each
stockholder who is a party to the agreement agrees to vote his, her or its
shares of Common Stock and Preferred Stock in favor of any sale of the
Company approved by the Board and holders of at least two-thirds of the
outstanding Preferred Stock; and
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·
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Each
stockholder who is a party to the agreement agrees to restrict the manner
by which such stockholder may sell his, her or its shares of our capital
stock.
|
The
following is an estimate of the costs incurred or expected to be incurred by us
in connection with the Reverse/Forward Stock Split and the
Financing. Final costs of the transactions may be more or less than
the estimates shown below. We will be responsible for paying these
costs. Please note that the following estimate of costs does not
include the cost of paying for shares of those stockholders holding fewer than
50,000 shares pursuant to the Reverse/Forward Stock Split, including certain of
the shares previously held by Radius, which we currently estimate to be
approximately $0.8 million in the aggregate (although this amount could increase
or decrease depending on how many shares we are actually required to cash out
upon consummation of the Reverse/Forward Stock Split, which will depend in part
on whether stockholders who presently own less than 50,000 shares buy additional
shares in order to remain stockholders following the Reverse/Forward Stock Split
and whether stockholders who presently own 50,000 or more shares sell shares in
order to participate in the cash out). The costs set forth below
include a director and officer insurance tail policy that we anticipate
purchasing upon termination of our public company status. This policy
will provide coverage for our current directors and officers in lieu of the
existing director and officer insurance.
Legal
fees
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|
$ |
735,000 |
|
Transfer
and exchange agent fees
|
|
|
6,000 |
|
Fees
and expenses for Navigant fairness opinion
|
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140,000 |
|
Printing
and mailing costs
|
|
|
4,000 |
|
Accounting
|
|
|
10,000 |
|
Special
Committee Compensation
|
|
|
20,000 |
|
Insurance
|
|
|
82,000 |
|
Miscellaneous
(including Commission filing fees)
|
|
|
3,000 |
|
Total
|
|
$ |
1,000,000 |
|
Regulatory
Approvals
Aside
from stockholder approval of the Certificates of Amendment, which has been
obtained, the Reverse/Forward Stock Split is not subject to any regulatory
approvals.
A
majority of the votes entitled to be cast by holders of the issued and
outstanding shares of Common Stock and Preferred Stock, voting together as a
single class on an as-converted basis, was required to approve the
Reverse/Forward Stock Split. We have received the written consent of
stockholders, including each member of the Investor Group, holding 41,073,003
shares of our issued and outstanding Common Stock and 6,250,000 shares of our
issued and outstanding Preferred Stock to approve the Reverse/Forward Stock
Split and the Certificates of Amendment. Therefore, on an
as-converted to Common Stock basis, stockholders holding 72,323,003 shares of
Common Stock, or approximately 73% of our total voting power on an as-converted
basis, have voted in favor of the Reverse/Forward Stock Split and the
Certificates of Amendment. No special meeting of stockholders is
required under Delaware law, since the requisite vote for adoption of the
Reverse/Forward Stock Split has been obtained and the vote of other stockholders
is not necessary. The Board determined not to condition the approval
of the Reverse/Forward Stock Split on approval by a majority of our unaffiliated
stockholders because the Board believes that any such vote would not provide
additional protection to such holders. Based on information available
to us, approximately 27% of our outstanding Common Stock, on an as-converted
basis, is held by non-affiliates. The Board did not believe it was in
our best interest and the best interest of our stockholders to incur the
increased costs associated with allowing a minority of investors to make a
determination with respect to the Reverse/Forward Stock Split
alone. In addition, the Reverse/Forward Stock Split is a matter that
could not be voted on by brokers without instruction from the beneficial owners
of the shares. Accordingly, the Board felt that there was a strong
possibility that a large percentage of shares held in brokerage accounts would
not be voted. Finally, the Board noted that the vote of a majority of
unaffiliated stockholders was not required under Delaware law.
No
appraisal rights are available under either the DGCL or our Certificate of
Incorporation to any stockholder in connection with the Reverse/Forward Stock
Split.
Effective
Date of the Reverse/Forward Stock Split
The
Reverse/Forward Stock Split will become effective by filing the Certificates of
Amendment with the Secretary of State of the State of Delaware. The
proposed Certificates of Amendment are attached as Annexes A-1 and A-2 to this
Information Statement. We will determine when such filings will
occur, but we anticipate filing the Certificates of Amendment as soon as
practicable after the date that is 20 days after the date of the mailing of this
Information Statement. After the Reverse/Forward Stock Split is
effective, certificates representing shares of Common Stock held by stockholders
holding fewer than 50,000 shares will be deemed to represent only the right the
receive a cash payment equal to $0.14 per share for each share held by such
stockholder immediately preceding the Reverse/Forward Stock
Split. Certificates representing shares of Common Stock held by our
stockholders who remain stockholders after the Reverse/Forward Stock Split will
continue to represent the shares of Common Stock held by them.
Please note, if you hold
your shares in “street name” (i.e., in a brokerage account), you are
not
considered to
be the record holder of those shares. Accordingly, even though your
broker is expected to provide our Exchange Agent with information regarding the
beneficial ownership positions it holds, if you wish to ensure that your
ownership position is accurately reported to the Exchange Agent, you should
instruct your broker to transfer your shares into a record account in your name
immediately. If your broker holds more than 50,000 shares of our
Common Stock in the aggregate, we cannot ensure that you will be paid cash in
lieu of fractional interests with respect to such shares.
Termination
of Exchange Act Registration
Our
Common Stock is currently registered under the Exchange Act. We are
permitted to terminate such registration if there are fewer than 300 record
holders of outstanding shares of our Common Stock. As of the date of
this Information Statement, we had approximately 360 record holders of our
Common Stock. Upon the effectiveness of the Reverse/Forward Stock
Split, we expect to have approximately 160 record holders of our Common
Stock. We intend to terminate the registration of our Common Stock
under the Exchange Act as promptly as possible after the effective date of the
Reverse/Forward Stock Split. See the disclosure under the caption
“Special Factors—Effects of the Reverse/Forward Stock Split” in this Information
Statement.
Exchange
of Certificates for Cash Payment
We will
file the Certificates of Amendment included as Annexes A-1 and A-2 to this
Information Statement with the Office of the Secretary of State of the State of
Delaware as soon as practicable after the date that is 20 calendar days after
the mailing date of this Information Statement. Continental Stock
Transfer and Trust Company has been appointed as the Exchange Agent to carry out
the exchange of certificates for the cash payment of $0.14 per pre-split
share.
As soon
as practicable after the Effective Date, holders of fewer than 50,000 shares
will be notified and sent a letter of transmittal and instructed how to transmit
their certificates representing shares of Common Stock to the Exchange
Agent. Upon proper completion and execution of the letter of
transmittal, and the return of the letter of transmittal and accompanying stock
certificate(s) to the Exchange Agent, each stockholder entitled to receive
payment will receive payment from the Exchange Agent as outlined in the letter
of transmittal. Stockholders should allow for approximately five
business days after mailing for the Exchange Agent to receive the letter of
transmittal and accompanying stock certificate and approximately seven to 10
business days following receipt of materials by the Exchange Agent for payment
to be made. In the event we are unable to locate a stockholder, or if
a stockholder fails to properly complete, execute and return the letter of
transmittal and accompanying stock certificate to the Exchange Agent, any funds
payable to such stockholder pursuant to the Reverse/Forward Stock Split will be
held in escrow until a proper claim is made, subject to applicable abandoned
property laws. Holders of fewer than 50,000 shares of Common Stock on
the effective date of the Reverse/Forward Stock Split will receive in exchange a
cash payment in the amount of $0.14 per pre-split share. Holders of
at least 50,000 shares of Common Stock will continue to hold the same number of
shares of Common Stock as they held prior to the Reverse/Forward Stock Split,
with no cash payment.
No
service charges will be payable by stockholders in connection with the exchange
of certificates for cash. All such expenses will be borne by us
except for expenses, if any, imposed by your nominee. In the event
that any certificate representing shares of Common Stock is not presented, the
applicable cash payment will be administered in accordance with the relevant
state abandoned property laws. Until the cash payments have been
delivered to the appropriate public official pursuant to the abandoned property
laws, such payments will be paid to the holder of the eligible certificate or
his, her or its designee, without interest, at such time as the shares of Common
Stock have been properly presented for exchange.
Conduct
of Our Business After the Reverse/Forward Stock Split
After
consummation of the Reverse/Forward Stock Split, we expect our business and
operations generally to continue as they are currently being
conducted. We do not currently plan to initiate any new operational
or strategic projects. However, we may seek to restructure our
corporate organization in order to consolidate certain of our wholly-owned
subsidiaries formed in jurisdictions where we no longer engage in
business. We may also seek to upgrade and/or integrate certain of our
information technology systems, in order to make such systems more scalable and
efficient. Also, we expect to have certain changes in our Board and
management. Our executive vice chairman and board member, Mr.
Condron, will become our president and chief executive officer upon the
deregistration of our Common Stock. Our current chief executive
officer, Dr. Paterson, will continue to serve in that role until Mr. Condron
takes office. Our executive vice president of administration, Mr.
Hannon, will become our chief financial officer upon the earlier of the
consummation of the Reverse/Forward Stock Split or March 31, 2009.
As a
result of the Reverse/Forward Stock Split, we expect to realize management time
and cost savings as a result of terminating our public company
status. When the Reverse/Forward Stock Split is consummated, all
persons owning fewer than 50,000 shares of Common Stock at the effective time of
the Reverse/Forward Stock Split will no longer have any equity interest in us,
will not be stockholders and will therefore not participate in our future
potential earnings and growth.
When the
Reverse/Forward Stock Split is effected, we believe that, based on our
stockholder records, approximately 160 holders, who currently own approximately
94% of the outstanding voting stock, assuming the conversion of outstanding
Preferred Stock, will own 100% of our outstanding voting stock. When
the Reverse/Forward Stock Split and the Financing are effected, assuming
aggregate proceeds of the Financing of $4.0 million the Investor Group will
collectively own approximately 84% of our outstanding voting stock, determined
on an as-converted basis, compared to approximately 75% of our voting stock, on
the same basis, as of the date of this Information Statement, and our directors
and executive officers and their affiliated entities will collectively
beneficially own approximately 83% of our outstanding voting stock on an
as-converted basis, compared to approximately 71% of our voting stock, on the
same basis, as of the date of this Information Statement. For more
information about stock ownership of our executive officers and directors and
the Investor Group, please see the information under the caption “Information
About the Company—Security Ownership of Certain Beneficial Owners and
Management” in this Information Statement.
We plan,
following the consummation of the Reverse/Forward Stock Split, to become a
privately held company. The registration of our Common Stock under
the Exchange Act will be terminated. In addition, because our Common
Stock will no longer be publicly held, we will be relieved of the obligation to
comply with the proxy rules of Regulation 14A under Section 14 of the
Exchange Act. We will no longer be subject to the periodic reporting
requirements of the Exchange Act and will cease filing information with the
Commission, such as annual, quarterly and current reports. Among
other things, the effect of this change will be to enable us to realize
management time and cost savings from not having to comply with the requirements
of the Exchange Act. Further, following a period of 90 days after the effective
date of termination of our registration, our officers and directors and
stockholders beneficially owning at least 10% of our Common Stock will be
relieved of the stock ownership reporting requirements and “short swing” trading
restrictions under Section 16 of the Exchange Act.
As stated
throughout this Information Statement, we believe that there are significant
advantages to effecting the Reverse/Forward Stock Split and going private, and
we plan to avail ourselves of any opportunities we have as a private
company. Although we do not presently have an interest in any
transaction, nor are we currently in negotiations with respect to any
transaction, it is possible that we may enter into an arrangement in the future
and our remaining stockholders may receive payment for their shares in any
transaction in an amount less than or greater than $0.14 per
share.
Other
than as described in this Information Statement, neither we nor our management
has any current plans or proposals to (i) effect any extraordinary
corporate transaction, such as a merger, reorganization or liquidation;
(ii) sell or transfer any material amount of our assets; (iii) change
our Board or management; (iv) materially change our indebtedness or
capitalization; or (v) otherwise effect any material change in our
corporate structure or business.
Recommendation
of the Board
The Board
believes that the Reverse/Forward Stock Split is fair to our unaffiliated
stockholders, including those whose interests are being cashed out pursuant to
the Reverse/Forward Stock Split and those who will retain an equity interest in
us subsequent to the consummation of the Reverse/Forward Stock Split, and
recommended that our stockholders approve the Reverse/Forward Stock
Split. The discussion above, under the caption “Special
Factors—Factors Considered in Determining Fairness—Substantive Fairness,”
summarizes the material factors, both positive and negative, considered by the
Board in reaching its fairness determination. For the reasons
described above under the caption “Special Factors—Factors Considered in
Determining Fairness—Procedural Fairness,” the Board also believes that the
process by which the transaction has been approved is fair to all unaffiliated
stockholders, including those whose interests are being cashed out pursuant to
the Reverse/Forward Stock Split and those who will retain an equity interest in
us subsequent to the consummation of the Reverse/Forward Stock
Split.
In
consideration of the factors discussed under the captions “Special
Factors—Purposes of and Reasons for the Reverse/Forward Stock Split,” “Special
Factors—Strategic Alternatives Considered by the Board,” “Special
Factors—Effects of the Reverse/Forward Stock Split,” “Special Factors—Factors
Considered in Determining Fairness” and “Special Factors—Background of the
Reverse/Forward Stock Split,” the Board unanimously approved the Reverse/Forward
Stock Split and related transactions, including the Financing, at meetings held
on June 18, 2008, July 14, 2008 and November 21, 2008. In addition,
on December 5, 2008, we received the written consent of stockholders holding
sufficient shares to approve the Reverse/Forward Stock Split.
The Board
concluded that the Reverse/Forward Stock Split is in our best interest and the
best interest of our stockholders receiving cash in lieu of fractional interests
and stockholders who will retain an equity interest in us subsequent to the
consummation of the Reverse/Forward Stock Split, and thus recommended a vote to
approve the Reverse/Forward Stock Split and the Certificates of Amendment as
revised to reflect the New Ratios. Nonetheless, the Board believes
that it is prudent to recognize that, between the date of this Information
Statement and the date that the Reverse/Forward Stock Split will become
effective, factual circumstances could possibly change again such that it might
not be appropriate or desirable to effect the Reverse/Forward Stock Split at
that time or on the terms currently proposed. Such factual
circumstances could include a superior offer to our stockholders, a material
change in our business or financial condition or litigation affecting our
ability to proceed with the Reverse/Forward Stock Split. If the Board
decides to withdraw or modify the Reverse/Forward Stock Split, the Board will
notify the stockholders of such decision promptly in accordance with applicable
rules and regulations. We may terminate the Purchase Agreement
if we receive an offer from a third party that the Board determines is
materially superior to the Financing. If we terminate the Purchase
Agreement as a result of a Superior Offer, we would be obligated to pay the
Investor Group the Termination Fee of $160,000 plus all of their out-of-pocket
costs and expenses (including reasonable legal fees and expenses) incurred in
connection with the Purchase Agreement. In addition, if we modify the
exchange ratio or price to be paid to unaffiliated stockholders in lieu of
fractional interests, currently $0.14 per pre-split share, we may not satisfy
certain of the closing conditions set forth in the Purchase Agreement and may
not be able to close the Financing or fund the purchase of such fractional
interests. See the disclosure under the caption “General Information
About the Reverse/Forward Stock Split—Financing of the Reverse/Forward Stock
Split” in this Information Statement.
Provisions
for Unaffiliated Stockholders
We have
not made any provisions for unaffiliated stockholders to access our corporate
files or the corporate files of any of the other Filing Persons or to obtain
counsel in connection with the Reverse/Forward Stock Split at our expense or the
expense of any of the other Filing Persons, unless otherwise required by
DGCL.
Intent
to Participate and Recommendations of Others
To the
best knowledge of the Filing Persons, after reasonable inquiry, none of our
executive officers, directors or affiliates intends to participate in the cash
out of fractional interests in connection with the Reverse Split other than Dr.
Waxman. In December 2008, Radius distributed all of its shares of our Common
Stock to its partners. Dr. Waxman is a limited partner of Radius and,
by virtue of the distribution, Dr. Waxman received approximately 34,000 shares
of Common Stock. Because these are the only shares that Dr. Waxman
owns directly in his name, and because they are fewer than 50,000 shares, we
expect these shares to be cashed out, at a price of $0.14 per pre-split share
for aggregate proceeds of approximately $5,000 to Dr. Waxman, upon consummation
of the Reverse/Forward Stock Split.
In
addition, each member of the Investor Group has already consented to the
Reverse/Forward Stock Split. Accordingly, no further vote of
stockholders is required. See the disclosure under “—Vote Required”
in this section. To the best knowledge of the Filing Persons, after
reasonable inquiry, no person has made a recommendation in support of or opposed
to the Reverse/Forward Stock Split and the other transactions contemplated
hereby, other than the unanimous recommendation of our Board, as described in
more detail above. See the disclosure under “—Recommendation of the
Board” in this section.
GENERAL
INFORMATION ABOUT THE AUTHORIZED SHARE INCREASE
The Board
and our stockholders have approved an amendment to our Certificate of
Incorporation to increase the authorized number of shares of Common Stock from
100,000,000 shares to 200,000,000 shares.
The
additional Common Stock to be authorized by the Authorized Share Increase would
have rights identical to the currently outstanding Common Stock. The
Authorized Share Increase and any issuance of additional Common Stock will not
affect the rights of the holders of our Common Stock to be outstanding following
the Reverse/Forward Stock Split, except for effects incidental to increasing the
number of shares of Common Stock outstanding, such as dilution of the earnings
per share and voting rights of holders of Common Stock.
In
addition to the 67.5 million shares of Common Stock outstanding on the date of
this Information Statement, we have reserved:
|
·
|
approximately
16.3 million shares of Common Stock for issuance upon exercise of options
granted or which may be granted under our stock option
plans;
|
|
·
|
approximately
7.0 million shares of Common Stock for issuance upon exercise of warrants
currently held by the Investor Group as well as certain of our current and
former directors, executive officers and service
providers;
|
|
·
|
a
maximum of approximately 7.5 million shares of Common Stock that may be
issued upon conversion of outstanding Convertible
Notes;
|
|
·
|
approximately
31.3 million shares of Common Stock for issuance upon conversion of
currently outstanding shares of Preferred Stock;
and
|
|
·
|
a
maximum of approximately 33.3 million shares of Common Stock for issuance
upon conversion of shares of Preferred Stock that may be issued in the
Financing.
|
In the
Reverse/Forward Stock Split, we currently estimate that we will repurchase
approximately 5.9 million shares of Common Stock. Therefore, after
the Authorized Share Increase and the Reverse/Forward Stock Split, we estimate
that we will have approximately 157.0 million shares of Common Stock outstanding
or reserved for future issuance (although this number may change depending on
how many shares of Common Stock we ultimately repurchase in connection with the
cash out).
As noted
above, in December 2006, we acquired Haelan and issued the Convertible Notes to
the former security holders of that company in the aggregate principal amount of
$6.5 million. The Reverse/Forward Stock Split will not affect holders of the
Convertible Notes. The Convertible Notes carry an interest rate of 5%
per year, compounding annually, mature on December 8, 2009 and are convertible
at maturity into shares of Common Stock. In the event that the value
of our Common Stock is equal to or greater than $1.50 per share, the outstanding
principal and accrued interest under the Convertible Notes will automatically
convert into shares of Common Stock at $1.50 per share. In the event that such
value at the time of conversion is less than $1.50 per share, the outstanding
principal and accrued interest under the Convertible Notes will convert into
shares of Common Stock at the greater of such value or $1.00 per share, and in
such case each holder of a Convertible Note may elect to receive all or a
portion of the amounts due under the note in cash in lieu of shares of Common
Stock. As a result of the Reverse/Forward Stock Split, including the cashing out
of fractional shares at a price of $0.14 per pre-split share and the subsequent
deregistration of our Common Stock, we do not believe the holders of the
Convertible Notes will elect to convert their notes into Common Stock at $1.00
per share, but will instead request repayment of the Convertible Notes and
accrued interest in cash upon maturity. We estimate that, if the
Convertible Notes are held to maturity, we will owe approximately $7.5 million
to the holders of the Convertible Notes in the aggregate. While we do
not currently expect the Convertible Notes to be converted into shares of our
Common Stock, in the event that under the terms of the Convertible Notes they
are converted into Common Stock, the maximum number of shares of Common Stock
that we would be obligated to issue, based on a conversion price of $1.00 per
share, is approximately 7.5 million.
Although
at present we have no definitive plans to issue any additional shares of capital
stock, other than as reserved for the uses described above, we desire to have
the shares available to provide additional flexibility to use our capital stock
for business and financial purposes in the future. The additional
shares may be used for various purposes without further stockholder
approval. These purposes may include: raising capital, providing
equity incentives to employees, officers or directors, establishing strategic
relationships with other companies, expanding our business or product lines
through the acquisition of other businesses or products, and other
purposes.
Regulatory
Approvals
Aside
from stockholder approval of the Certificates of Amendment, which has been
obtained, the Authorized Share Increase is not subject to any regulatory
approvals.
Vote
Required
A
majority of the votes entitled to be cast by holders of each of (a) the issued
and outstanding shares of Common Stock, voting as a separate class, and (b) the
issued and outstanding shares of Common Stock and Preferred Stock, voting
together as a single class on an as-converted basis, was required to approve the
Authorized Share Increase. We have received the written consent of
stockholders holding 41,073,003 shares of our issued and outstanding Common
Stock, or approximately 61% of the total Common Stock class vote, to approve the
Authorized Share Increase and the Certificates of Amendment. In
addition, stockholders holding 6,250,000 shares of our issued and outstanding
Preferred Stock, or 100% of such class, approved the Authorized Share Increase
and the Certificates of Amendment by written consent. Therefore, on
an as-converted to Common Stock basis, stockholders holding 72,323,003 shares of
Common Stock, or approximately 73% of our total voting power on an as-converted
basis, have voted in favor of the Authorized Share Increase and the Certificates
of Amendment. No special meeting of stockholders is required under
Delaware law, since the requisite vote for adoption of the Authorized Share
Increase has been obtained and the vote of other stockholders is not
necessary.
Effective
Date of the Authorized Share Increase
The
Authorized Share Increase will become effective by filing the Certificates of
Amendment with the Secretary of State of the State of Delaware. The
proposed Certificates of Amendment are attached as Annexes A-1 and A-2 to this
Information Statement. We will determine when such filings will
occur, but we anticipate filing the Certificates of Amendment as soon as
practicable after the date that is 20 days after the date of the mailing of this
Information Statement.
Recommendation
of the Board
The Board
recommended that our stockholders approve the Authorized Share
Increase. The Board, including all of the non-employee directors,
unanimously approved the Authorized Share Increase at a meeting held on November
21, 2008. On December 5, 2008, we received the written consent of
stockholders holding sufficient shares to approve the Authorized Share
Increase.
INFORMATION
ABOUT THE COMPANY
Price
Range of Common Stock
Our
Common Stock is quoted on the OTCBB under the symbol CGDE. The following table
sets forth, for the periods indicated, the range of high and low bid quotations
for our Common Stock on the OTCBB. The reported bid quotations reflect
inter-dealer prices without retail markup, markdown or commissions, and may not
necessarily represent actual transactions.
|
|
High
|
|
|
Low
|
|
|
|
|
|
|
|
|
Year Ended December 31,
2006
|
|
|
|
|
|
|
First
Quarter
|
|
$ |
1.53 |
|
|
$ |
1.01 |
|
Second
Quarter
|
|
|
1.50 |
|
|
|
1.05 |
|
Third
Quarter
|
|
|
1.17 |
|
|
|
0.76 |
|
Fourth
Quarter
|
|
|
0.98 |
|
|
|
0.49 |
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
2007
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
$ |
0.67 |
|
|
$ |
0.52 |
|
Second
Quarter
|
|
|
0.53 |
|
|
|
0.18 |
|
Third
Quarter
|
|
|
0.39 |
|
|
|
0.18 |
|
Fourth
Quarter
|
|
|
0.25 |
|
|
|
0.05 |
|
Year Ending December 31,
2008
|
|
|
|
|
|
|
First
Quarter
|
|
$ |
0.11 |
|
|
$ |
0.07 |
|
Second
Quarter
|
|
|
0.10 |
|
|
|
0.05 |
|
Third
Quarter
|
|
|
0.13 |
|
|
|
0.06 |
|
Fourth
Quarter (through December 19, 2008)
|
|
|
0.13 |
|
|
|
0.08 |
|
On July
17, 2008, the last trading day before the announcement of the going-private
transaction, the closing price of our Common Stock on the OTCBB was $0.06 per
share. On July 18, 2008, the date on which we publicly announced our
intent to effect a going-private transaction, the closing price of our Common
Stock on the OTCBB was $0.12 per share.
We have
not declared or paid any dividends on our Common Stock or Preferred Stock during
the past two years. Cumulative dividends on our Preferred Stock
accrue at the rate of 8% per year. In addition, the terms of our
Preferred Stock limit our ability to declare or pay dividends on our Common
Stock without the consent of the holders of the Preferred Stock.
Prior
Public Offerings and Stock Purchases
We have
not made an underwritten offering of our Common Stock for cash in the past three
years nor have we repurchased any of our Common Stock in the past two
years.
Security
Ownership of Certain Beneficial Owners and Management
The
following table sets forth certain information regarding the ownership of our
Common Stock as of December 5, 2008 by (i) each member of the
Investor Group; (ii) each other holder known by us to be the beneficial owner of
more than 5% of our Common Stock; (iii) each of our directors and current
executive officers; (iv) our directors and executive officers as a group; and
(v) each of our other named executive officers, as defined by the rules of the
Commission. Unless otherwise stated, the address for all directors
and executive officers is c/o CareGuide, Inc., 4401 N.W. 124th Avenue,
Coral Springs, FL 33065.
Beneficial Owner (1)
|
|
Number of Shares
Beneficially Owned Prior to
the Reverse/Forward Stock
Split and the Financing
|
|
|
Percent of
Total
|
|
|
Number of Shares
Beneficially Owned After
the Reverse/Forward Stock
Split and the Financing(2)
|
|
|
Percent
of
Total
|
|
Investor Group:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Entities
affiliated with Essex Woodlands Health Ventures(3)
|
|
|
23,685,378 |
|
|
|
31.4 |
% |
|
|
27,018,711 |
|
|
|
37.1 |
% |
21
Waterway Avenue, Suite 225
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Woodlands, TX 77380
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Entities
affiliated with Psilos Group Partners (4)
|
|
|
16,654,920 |
|
|
|
21.4 |
% |
|
|
37,904,920 |
|
|
|
40.7 |
% |
140
Broadway, 51st
Floor
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
New
York, NY 10005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
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|
|
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|
|
|
John
Pappajohn (5)
|
|
|
17,383,765 |
|
|
|
22.7 |
% |
|
|
19,467,098 |
|
|
|
26.7 |
% |
c/o
Equity Dynamics, Inc.
2116
Financial Center
Des
Moines, IA 50309
|
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|
Hickory
Venture Capital Corporation (6)
|
|
|
14,462,016 |
|
|
|
19.9 |
% |
|
|
16,962,016 |
|
|
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24.4 |
% |
301
Washington Street, NW, Suite 301
|
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Huntsville,
AL 35801
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Derace
L. Schaffer (7)
|
|
|
5,967,074 |
|
|
|
8.2 |
% |
|
|
10,133,741 |
|
|
|
14.3 |
% |
c/o
The Lan Group
3611
Cole Avenue, Suite #188
Dallas,
TX 75204
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Other
5% Stockholders:
|
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Principal
Life Insurance Company
|
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|
3,745,350 |
|
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|
5.5 |
% |
|
|
3,745,350 |
|
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|
6.1 |
% |
711
High Street
Des
Moines, IA 50392
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Executive
Officers and Other Directors:
|
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Chris
E. Paterson (8)
|
|
|
1,317,666 |
|
|
|
1.9 |
% |
|
|
2,067,666 |
|
|
|
3.2 |
% |
Michael
J. Condron(9)
|
|
|
789,474 |
|
|
|
1.2 |
% |
|
|
789,474 |
|
|
|
1.3 |
% |
Thomas
J. Hannon
|
|
|
— |
|
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— |
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— |
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— |
|
Mark
L. Pacala (3)
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— |
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— |
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— |
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— |
|
Albert
S. Waxman (4)
|
|
|
16,688,627 |
|
|
|
21.5 |
% |
|
|
37,904,920 |
|
|
|
40.7 |
% |
William
C. Stapleton (10)
|
|
|
50,000 |
|
|
|
* |
|
|
|
50,000 |
|
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* |
|
Michael
J. Barber (11)
|
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|
50,000 |
|
|
|
* |
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|
50,000 |
|
|
|
* |
|
|
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|
Directors
and Executive Officers as a group (8 persons)
|
|
|
42,212,899 |
|
|
|
45.0 |
% |
|
|
70,462,899 |
|
|
|
60.7 |
% |
|
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|
Other
Named Executive Officers:
|
|
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Thomas
L. Tran
|
|
|
— |
|
|
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* |
|
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— |
|
|
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— |
|
Julie
A. Meek (12)
|
|
|
250,000 |
|
|
|
* |
|
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|
250,000 |
|
|
|
* |
|
John
R. Pegues(13)
|
|
|
250,000 |
|
|
|
* |
|
|
|
250,000 |
|
|
|
* |
|
* Less
than one percent.
|
(1)
|
This
table is based upon information supplied by officers, directors and
principal stockholders and Schedules 13D and 13G filed with the
Commission. Unless otherwise indicated in the footnotes to this table and
subject to community property laws where applicable, we believe that each
of the stockholders named in this table has sole voting and investment
power with respect to the shares indicated as beneficially owned.
Applicable percentages with respect to shares beneficially owned prior to
the Reverse/Forward Stock Split and Financing are based on 67,538,976
shares of our Common Stock outstanding on December 5, 2008, adjusted as
required by rules promulgated by the Commission, including the effects of
6,250,000 shares of our Preferred Stock outstanding on December 5, 2008
that are convertible into an aggregate of 31,250,000 shares of Common
Stock. Applicable percentages with respect to shares
beneficially owned after the consummation of the Reverse/Forward Stock
Split and Financing are based on 61,691,317 shares of our Common Stock
outstanding, adjusted as required by rules promulgated by the Commission,
including the effects of an additional 6,666,667 shares of our Preferred
Stock that will be issued in connection with the Financing (assuming gross
proceeds of $4.0 million) and that will initially be immediately
convertible into an aggregate of 33,333,333 shares of Common
Stock.
|
|
(2)
|
For
purposes of the calculations in this table, we have assumed (i) the
repurchase of 5,847,659 shares of our Common Stock as part of the
Reverse/Forward Stock Split and (ii) the maximum issuance of $4.0 million
in shares of Preferred Stock in the
Financing.
|
|
(3)
|
Amounts
beneficially owned prior to the Reverse/Forward Stock Split and Financing
consist of 3,476,930 shares of Common Stock, 386,277 shares of Common
Stock issuable upon exercise of fully exercisable warrants, and 1,562,500
shares of Common Stock issuable upon conversion of shares of Preferred
Stock, in each case held of record by Essex Woodlands Health Ventures Fund
IV, L.P., and 12,413,346 shares of Common Stock, 1,158,825 shares of
Common Stock issuable upon exercise of fully exercisable warrants, and
4,687,500 shares of Common Stock issuable upon conversion of shares of
Preferred Stock, in each case held of record by Essex Woodlands Health
Ventures Fund V, L.P. James L. Currie, Martin P. Sutter and
Immanuel Thangaraj are the managers of each of Essex Woodlands Health
Ventures IV, LLC and Essex Woodlands Health Ventures V, LLC, the
respective general partners of the stockholders of record. Mr.
Pacala, one of our directors, is a manager of other entities affiliated
with the general partners. Amounts beneficially owned after the
Reverse/Forward Stock Split and the Financing assume the issuance of
166,667 shares of Preferred Stock to Essex Woodlands Health Ventures Fund
IV, L.P. in the Financing, which would be convertible into 833,335 shares
of our Common Stock and the issuance of 500,000 shares of Preferred Stock
to Essex Woodlands Health Ventures Fund V, L.P. in the Financing, which
would be convertible into 2,500,000 shares of our Common
Stock. Assuming the conversion of all outstanding Preferred
Stock into an additional 64,583,333 shares of Common Stock, the entities
affiliated with Essex Woodlands Health Ventures would hold an aggregate of
approximately 21.1% of the total shares outstanding after consummation of
the Reverse/Forward Stock Split and
Financing.
|
|
(4)
|
Amounts
beneficially owned prior to the Reverse/Forward Stock Split and Financing
consist of 3,347,510 shares of Common Stock and 4,166,670 shares of Common
Stock issuable upon conversion of shares of Preferred Stock, in each case
held of record by Psilos Group Partners, L.P., 3,155,066 shares of Common
Stock held of record, 4,166,670 shares of Common Stock issuable upon
conversion of shares of Preferred Stock held of record and 1,485,671
shares of Common Stock issuable upon exercise of fully exercisable
warrants, in each case held of record by Psilos Group Partners II, L.P.,
and 333,333 shares of Common Stock issuable upon exercise of warrants
exercisable within 60 days of December 5, 2008, held by Psilos/CareGuide
Investment, L.P. For Dr. Waxman only, amounts also include
33,707 shares of Common Stock held of record by Dr.
Waxman. Amounts beneficially owned after the Reverse/Forward
Stock Split and the Financing assume the issuance of 4,250,000 shares of
Preferred Stock in the Financing to Psilos/CareGuide Investment, L.P.,
which would be convertible into 21,250,000 shares of our Common Stock, and
333,333 shares of Common Stock issuable upon the exercise of warrants
exercisable within 60 days of December 5, 2008, held by Psilos/CareGuide
Investment, L.P., and the repurchase of shares held of record
by Dr. Waxman. Dr. Waxman and Stephen M. Krupa are
the managing members of Psilos Group Investors, LLC (“Psilos
Investors I”). Dr. Waxman, Jeffrey M. Krauss and Stephen M. Krupa
are the managing members of each of Psilos Group Investors II, LLC (“Psilos
Investors II”) and, along with Joseph Riley, David Eichler and Lisa
Suennen, Psilos Group Investors III, LLC (“Psilos
Investors III”). Each of Psilos Investors I, Psilos
Investors II and Psilos Investors III are the respective general partners
of the securityholders of record. Each of such individuals
shares voting and dispositive power with respect to the shares held by the
securityholders of record and disclaims beneficial ownership of the shares
in which he or she has no pecuniary interest. Assuming the
conversion of all outstanding Preferred Stock into an additional
64,583,333 shares of Common Stock, the entities affiliated with Psilos
Group Partners would hold an aggregate of approximately 29.6% of the total
shares outstanding after consummation of the Reverse/Forward Stock Split
and Financing.
|
|
(5)
|
Amounts
beneficially owned prior to the Reverse/Forward Stock Split and Financing
consist of 6,625,521 shares of Common Stock held of record by Mr.
Pappajohn; 30,000 shares of Common Stock held of record by Halkis, Ltd., a
sole proprietorship owned by Mr. Pappajohn; 30,000 shares of Common
Stock held of record by Thebes, Ltd., a sole proprietorship owned by
Mr. Pappajohn’s wife; 30,000 shares of Common Stock held directly by
Mr. Pappajohn’s wife; 1,666,936 shares of Common Stock held by a
voting trust; 8,333,340 shares of Common Stock issuable upon conversion of
shares of Preferred Stock held of record by Mr. Pappajohn; and 667,968
shares of Common Stock issuable upon exercise of warrants exercisable
within 60 days of December 5, 2008. Amounts beneficially owned
after the Reverse/Forward Stock Split and the Financing assume the
issuance of 416,667 shares of Preferred Stock in the Financing, which
would be convertible into 2,083,335 shares of our Common Stock, and
667,968 shares of Common Stock issuable upon the exercise of warrants
exercisable within 60 days of December 5,
2008. Mr. Pappajohn disclaims beneficial ownership of the
shares owned by Thebes, Ltd., by his spouse and by the voting
trust. Assuming the conversion of all outstanding Preferred
Stock into an additional 64,583,333 shares of Common Stock, Mr. Pappajohn
would hold an aggregate of approximately 15.3% of the total shares
outstanding after consummation of the Reverse/Forward Stock Split and
Financing.
|
|
(6)
|
Amounts
beneficially owned prior to the Reverse/Forward Stock Split and Financing
consist of 9,166,247 shares of Common Stock, 1,129,109 shares of Common
Stock issuable upon exercise of fully exercisable warrants and 4,166,660
shares of Common Stock issuable upon conversion of shares of Preferred
Stock. Amounts beneficially owned after the Reverse/Forward
Stock Split and the Financing assume the issuance of 500,000 shares of
Preferred Stock in the Financing, which would be convertible into
2,500,000 shares of our Common Stock. Assuming the conversion
of all outstanding Preferred Stock into an additional 64,583,333 shares of
Common Stock, Hickory would hold an aggregate of approximately 13.3% of
the total shares outstanding after consummation of the Reverse/Forward
Stock Split and Financing.
|
|
(7)
|
Amounts
beneficially owned prior to the Reverse/Forward Stock Split and Financing
consist of 1,120,447 shares of Common Stock held of record by Dr.
Schaffer; 12,000 shares of Common Stock held of record by
Dr. Schaffer’s children; 4,166,660 shares of Common Stock issuable
upon conversion of shares of Preferred Stock, in each case held of record
by Dr. Schaffer; and 667,967 shares of Common Stock issuable upon exercise
of warrants exercisable within 60 days of December 5,
2008. Amounts beneficially owned after the Reverse/Forward
Stock Split and the Financing assume the issuance of 833,333 shares of
Preferred Stock in the Financing, which would be convertible into
4,166,667 shares of our Common Stock, and 667,967 shares of Common Stock
issuable upon the exercise of warrants exercisable within 60 days of
December 5, 2008. Assuming the conversion of all outstanding
Preferred Stock into an additional 64,583,333 shares of Common Stock, Dr.
Schaffer would hold an aggregate of approximately 8.0% of the total shares
outstanding after consummation of the Reverse/Forward Stock Split and
Financing.
|
|
(8)
|
Amounts
beneficially owned prior to the Reverse/Forward Stock Split and Financing
consist of 1,017,666 shares of Common Stock issuable pursuant to early
exercise features of an option exercisable within 60 days of December 5,
2008 and 300,000 shares of Common Stock issuable upon exercise of other
options exercisable within 60 days of December 5, 2008. Of the
shares issuable pursuant to early exercise features, 56,537 shares had not
vested as of December 5, 2008 and were not transferable by Dr. Paterson at
that time. Accordingly, Dr. Paterson is not deemed to have investment
power over such shares.
|
|
|
|
|
(9)
|
Represents
shares of Common Stock issuable pursuant to an option exercisable within
60 days of December 5, 2008.
|
|
(10)
|
Represents
shares of Common Stock issuable pursuant to a warrant exercisable within
60 days of December 5, 2008.
|
|
|
|
|
(11)
|
Represents
shares of Common Stock issuable pursuant to a warrant exercisable within
60 days of December 5, 2008.
|
|
|
|
|
(12)
|
Represents
shares of Common Stock issuable pursuant to an option exercisable within
60 days of December 5, 2008. Ms. Meek is currently a consultant
to us.
|
|
|
|
|
(13)
|
Represents
shares of Common Stock issuable pursuant to an option exercisable within
60 days of December 5, 2008. Mr. Pegues’ employment with us
ceased as of September 12, 2008 and according to the terms of the option,
it is not exercisable after December 11,
2008.
|
Financial
Information
Our
audited consolidated financial statements as of and for the years December 31,
2007 and 2006 are included with this information statement as Annex E-1. Our
unaudited consolidated financial statements as of and for the nine months ended
September 30, 2008 and 2007 are included with this information statement as
Annex
E-2. Our consolidated statement of operations data for the
nine months ended September 30, 2008 are not necessarily indicative of results
for the full fiscal year ending December 31, 2008.
Ratio
of Earnings to Fixed Charges
The
following table sets forth our ratio of earnings to fixed charges and our ratio
of earnings/(losses) to combined fixed charges and preference dividends for the
nine months ended September 30, 2008 and 2007, the year ended December 31, 2007
and the nine months ended December 31, 2006.
Ratio
of Earnings/(Losses) to Fixed Charges
(In
thousands)
|
|
Nine months
Ended
September 30,
2008
|
|
|
Nine months
Ended
September 30,
2007
|
|
|
Year ended
December 31,
2007
|
|
|
Nine months ended
December 31,
2006
|
|
Pretax
income from continuing operations
|
|
$ |
(3,162 |
) |
|
$ |
(7,096 |
) |
|
$ |
(16,486 |
) |
|
$ |
(229 |
) |
Fixed
charges (1)
|
|
|
1,207 |
|
|
|
1,374 |
|
|
|
1,788 |
|
|
|
1,381 |
|
Preference
dividends (2)
|
|
|
165 |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
Earnings/(Losses)
from continuing operations before fixed charges
|
|
|
(1,955 |
) |
|
|
(5,722 |
) |
|
|
(14,698 |
) |
|
|
1,152 |
|
Ratio
of earnings to fixed charges
|
|
|
(3 |
) |
|
|
(3 |
) |
|
|
(3 |
) |
|
|
(3 |
) |
Ratio
of earnings to combined fixed charges and preference
dividends
|
|
|
(4 |
) |
|
|
(4 |
) |
|
|
(4 |
) |
|
|
(4 |
) |
(1) In
accordance with the regulations of the Commission, this amount is the sum of the
following: (a) interest expensed and capitalized, (b) amortized premiums,
discounts and capitalized expenses related to indebtedness and (c) an estimate
of the interest within rental expense.
(2) Represents
the pre-tax earnings required to pay deemed and cumulative preferred dividends
on our Preferred Stock. As of September 30, 2008, approximately $165,000 of
dividends had accumulated.
(3) Earnings
from continuing operations were not sufficient to cover fixed charges by
approximately $3,162,000 and $7,096,000 for the nine months ended September 30,
2008 and 2007, respectively, approximately $16,486,000 for the year ended
December 31, 2007, and approximately $229,000 for the nine months ended December
31, 2006.
(4) Earnings
from continuing operations were not sufficient to cover combined fixed charges
and preference dividends by approximately $3,327,000 and $7,096,000 for the nine
months ended September 30, 2008 and 2007, respectively, approximately
$16,486,000 for the year ended December 31, 2007, and approximately $229,000 for
the nine months ended December 31, 2006.
Book
Value Per Share
As of
September 30, 2008, our book value per share was $0.14.
Executive
Officers and Directors
The
following table sets forth as of November 30, 2008 the name, age and position of
each person who serves us as an executive officer or director. There
are no family relationships among any of our executive officers or
directors. Unless
otherwise stated in this Information Statement, the address of each officer and
director is c/o CareGuide, Inc., 4401 N.W. 124th Avenue,
Coral Springs, Florida 33065, and the business telephone number is (954)
796-3714.
Name
|
|
Age
|
|
Position
|
Executive
Officers:
|
|
|
|
|
Dr.
Chris E. Paterson
|
|
48
|
|
Chief
Executive Officer and Director
|
Mr.
Michael J. Condron
|
|
38
|
|
Executive
Vice Chairman and Director
|
Mr.
Thomas J. Hannon
|
|
45
|
|
Executive
Vice President of Administration
|
|
|
|
|
|
Non-Employee
Directors:
|
|
|
|
|
Dr.
Albert S. Waxman
|
|
67
|
|
Senior
Managing Member, Psilos Group and Chairman of the Board
|
Mr.
John Pappajohn
|
|
80
|
|
President,
Equity Dynamics, Inc.
|
Dr.
Derace L. Schaffer
|
|
61
|
|
Physician
and Chief Executive Officer, The Lan Group
|
Mr.
Mark L. Pacala
|
|
53
|
|
Managing
Director, Essex Woodlands Health Ventures
|
Mr.
William C. Stapleton
|
|
44
|
|
Chief
Executive Officer, Healthplanone
|
Dr.
Michael J. Barber
|
|
60
|
|
Physician
and Healthcare
Consultant
|
Chris E.
Paterson, Ph.D. Dr. Paterson has served as our chief executive officer
since January 2006. He also served as our president from January 2006 until June
2007. He has served as a member of our Board since June 2007. Dr.
Paterson joined our subsidiary CCS Consolidated, Inc. as executive vice
president in July 2004 and became its president and a member of its board of
directors in January 2005. From 2002 to July 2004, Dr. Paterson served as the
president of the Central Region of AmeriChoice Corporation, a subsidiary of
UnitedHealth Group, and from 1998 to 2002 served as chief executive officer of
the AmeriChoice health plans in Pennsylvania. From 1990 to 1998, he was employed
by Merit Behavioral Care Corporation in senior positions including executive
vice president of the Eastern Division and president of Tennessee Behavioral
Health. Dr. Paterson has also served on the boards of directors of the City of
Philadelphia Department of Health and the American Heart Association
Southeastern Pennsylvania Region. Dr. Paterson received his Ph.D. in psychology
from Ohio State University, interned at the University of Florida and served on
the faculty of the University of Miami early in his career.
Michael J.
Condron. Mr. Condron has served as our executive vice chairman
and as a member of our Board since July 2008. In October 2007 he founded, and
has since served as president of, MEJC Consulting, LLC, a healthcare consulting
company. Since April 2006, Mr. Condron has also served as an executive in
residence with Beecken Petty O’Keefe & Company, a private equity firm based
in Chicago. In 2002, Mr. Condron joined CorSolutions Medical, Inc., a disease
management and health solutions company, as its general counsel. In August 2005,
he was named president and chief operating officer of CorSolutions, and served
in that role through the company’s acquisition by Matria Healthcare in January
2006. From 1995 to 2002, Mr. Condron was an attorney with the firms of Pederson
& Houpt and Gardner, Carton & Douglas, both in Chicago, and Verner,
Liipfert, Bernhard, McPherson & Hand in Washington, D.C. In his legal
practice, Mr. Condron specialized in labor and employment matters and employment
litigation. He holds a B.S. degree in finance and political science from the
University of Illinois, Urbana and a J.D. degree from the Northwestern
University School of Law.
Thomas J.
Hannon. Mr. Hannon has served as our executive vice
president of administration since November 2008 and will become our executive
vice president and chief financial officer on the earlier of the consummation of
the Reverse/Forward Stock Split or March 31, 2009. Prior to joining us, Mr.
Hannon served since January 2007 as the chief financial officer of Alma Lasers
Ltd., a global medical technology company that designs, develops, manufactures
and markets non-invasive, energy-based aesthetic treatment systems. Prior to
that, Mr. Hannon was an executive vice president and chief financial
officer at CorSolutions Medical Inc., a disease management company, from 2001 to
January 2006. From 1998 to 2001, he served as the controller at Everest
Healthcare Services Inc., a healthcare services company which specializes in
dialysis. Before Everest Healthcare Services Inc., Mr. Hannon held various
financial positions at Baxter International Inc. and was an auditor with
Deloitte & Touche LLP. Mr. Hannon earned his Bachelor of Science in
Accounting from Northern Illinois University and is a Certified Public
Accountant.
Albert S. Waxman,
Ph.D. Dr. Waxman has served as a member of our Board since January 2006
and also serves as chairman. In 1998, he co-founded and has since served as
senior managing member of Psilos Group, a venture capital firm specializing in
e-health and healthcare services investments. From 1993 to 1998, Dr.
Waxman was chairman and chief executive officer of Merit Behavioral Care
Corporation, a healthcare company, and its predecessor companies, American
Biodyne and Medco Behavioral Care, which was acquired by Merck. He founded and
served as president, chief executive officer and chairman of Diasonics, Inc., a
medical company providing ultrasound and magnetic resonance imaging. Dr. Waxman
has served on the board of directors of Orthometrix, Inc., a publicly held
biotechnology company, since 1994 and is also a director of several private
Psilos Group portfolio companies. He received a B.S. degree in Electrical
Engineering from the City College of New York and M.A. and Ph.D. degrees from
Princeton University. He serves on the Advisor Council of Princeton University’s
School of Engineering and Applied Sciences and holds United States and foreign
patents for display, imaging and diagnostic technologies and
products.
John Pappajohn.
Mr. Pappajohn has served as a member of our Board since 1995. Since 1969, Mr.
Pappajohn has owned Pappajohn Capital Resources, a venture capital firm, and has
served as president of Equity Dynamics, Inc., a financial consulting firm, both
located in Des Moines, Iowa. He also serves as a director for several public
companies, including Allion Healthcare, Inc., a provider of specialty pharmacy
and disease management services, since 1996; American Caresource Holdings, Inc.,
an ancillary healthcare services company, since November 2004; Conmed Healthcare
Management, Inc., formerly Pace Health Management Systems, Inc., a provider of
correctional healthcare services, since 2005; PharmAthene, Inc., formerly
Healthcare Acquisition Corp., a biotechnology company, since 2007; and
Spectrascience, Inc. a manufacturer of spectrophotometry systems, since 2007.
Mr. Pappajohn received a B.S.C. degree in business from the University of
Iowa.
Derace L.
Schaffer, M.D. Dr. Schaffer has served as a member of our Board since
1995 and served as our chairman until November 2004. From 1980 to 2001, Dr.
Schaffer served as chief executive officer and chairman of Ide Imaging Group,
P.C. In 1990 he founded, and has since served as the chief executive officer of,
The Lan Group, a venture capital firm specializing in healthcare and high
technology investments. He also serves as a director for several public
companies, including Allion Healthcare, Inc., a provider of specialty pharmacy
and disease management services, since 1996; American Caresource Holdings, Inc.,
an ancillary healthcare services company, since November 2004; and PharmAthene,
Inc., formerly Healthcare Acquisition Corp., a biotechnology company, since
2007, as well as several private companies. Dr. Schaffer received his
postgraduate radiology training at Harvard Medical School and Massachusetts
General Hospital, where he served as chief resident. He is Clinical Professor of
Radiology at the Weill Cornell Medical College and a member of Alpha Omega Alpha
– the National Medical Honor Society.
Mark L. Pacala.
Mr. Pacala has served as a member of our Board since January 2006. He has
been a managing director of Essex Woodlands Health Ventures, a venture capital
firm, since December 2003 and previously served as venture partner from 2002 to
December 2003. From 2001 to 2002, Mr. Pacala was self-employed as a venture
capital consultant. In 1997, he was recruited by Essex Woodlands to serve as the
chief executive officer of American WholeHealth, Inc., an integrative health
network company, and he served in that capacity until 2001. From 1994 to 1996,
he was chief executive officer of Forum Group, a public senior housing and
healthcare company. From 1989 to 1994, Mr. Pacala was a senior vice president
and general manager at The Walt Disney Company. From 1984 to 1989, he served as
director of corporate planning and vice president of operations at Marriott
Corporation. Mr. Pacala began his career as a banker at Manufacturers Hanover
Trust Co. and also worked as a healthcare consultant at Booz, Allen and
Hamilton. Mr. Pacala currently serves on the board of directors of several
private Essex Woodlands portfolio companies. He received a B.A. degree magna cum
laude from Hamilton College and was elected to Phi Beta Kappa, and he received
an M.B.A. degree with distinction from Harvard Business School.
William C.
Stapleton. Mr. Stapleton has served as a member of our Board since August
2006. In October 2005, Mr. Stapleton founded, and has been serving as the chief
executive officer of, Healthplanone, an online health insurance brokerage firm.
From August 2003 to June 2005, Mr. Stapleton was commercial products and
underwriting officer at Health Net, Inc., a managed healthcare company, where he
was responsible for product development and the Medicaid units for a regional
managed care division. In 2001 he founded and, until June 2003, was principal
of, Assured Remit, a healthcare consulting company. From 1999 to 2001, Mr.
Stapleton served as chief financial officer of CCN Managed Care, Inc., a managed
healthcare company that was a subsidiary of HCA, Inc. From 1997 to 1999, Mr.
Stapleton was with Oxford Health Plans, Inc. as regional chief financial officer
and regional general manager. From 1993 to 1997, he was chief financial officer
of Health Partners, Inc., a physical practice management company. Mr. Stapleton
began his career as an accountant with KPMG Peat Marwick. He previously served
as a director and as chairman of the audit committee of America Service Group, a
provider of correctional healthcare services, from 2002 to June 2004. Mr.
Stapleton received a B.A. degree in economics and accounting from Holy Cross
College and an M.B.A. degree from Harvard Business School. He is a certified
public accountant.
Michael J.
Barber, M.D. Dr. Barber has served as a member of our Board since
December 2006. In July 2006, Dr. Barber founded and has since been serving as
the chief executive officer of The Advanced Practice Institute, a healthcare
consulting company. From February 2003 to May 2006, Dr. Barber served as the
chief executive officer and chief operating officer of Group Health Associates,
a medical group. From 2001 to February 2003, he was a healthcare consultant for
The Scheller Bradford Group. From 1999 to 2001, Dr. Barber served in executive
roles with our subsidiary Haelan and served on Haelan’s board of directors from
1999 to December 2006. From 1998 to 1999, he was chief executive officer of
Momentum Health Solutions, a venture associated with a long-term care managed
care company. From 1991 to 1997, Dr. Barber was with ChoiceCare, where he served
in a series of executive roles, including vice president of clinical services,
senior medical director, executive vice president and chief medical officer.
From 1976 to 1990, Dr. Barber was a staff physician and the president of The
Fairfield Group, a family medical practice. From 1981 to 1990, he was also an
associate clinical professor of family practice at the University of Cincinnati.
Dr. Barber received his B.A. degree from Indiana University, where he was
elected to Phi Beta Kappa. He received his M.D. degree from the Indiana
University School of Medicine. Dr. Barber is certified by the American Board of
Medical Management and is a member of the American College of Physician
Executives and the American Academy of Family Practice. He also serves on the
boards of directors of Beech Acres Parenting Center and Episcopal Retirement
Homes of Ohio.
None of
our directors and executive officers (i) has been convicted in a criminal
proceeding during the past five years (excluding traffic violations or similar
misdemeanors); or (ii) has been a party to any judicial or administrative
proceeding during the past five years (except for matters that were dismissed
without sanction or settlement) that resulted in a judgment, decree or final
order enjoining the person from future violations of, or prohibition activities
subject to, federal or state securities laws. Each of our directors
and executive officers is a citizen of the United States.
Prior
Share Purchases, Contacts, Transactions, Negotiations and Agreements Involving
the Company and its Directors and Officers
Mr.
Pappajohn and Dr. Schaffer
Between
December 2007 and May 2008, Mr. Pappajohn and Dr. Schaffer, both members of our
Board, purchased an aggregate of 1,666,668 shares and 833,332 shares,
respectively, of our Preferred Stock at a price of $0.60 per
share. Each share of Preferred Stock will be convertible into five
shares of our Common Stock. Under the Purchase Agreement, Mr.
Pappajohn and Dr. Schaffer have agreed to purchase up to an additional 416,667
shares and 833,333 shares, respectively, of our Preferred Stock at a price of
$0.60 per share. Their purchases of Preferred Stock are discussed in
more detail below under the caption “Information About Other Filing
Persons.”
Mr.
Pappajohn and Dr. Schaffer have also received and will continue to receive
warrants to purchase Common Stock as compensation for their guarantees of our
obligations under our credit facility with Comerica Bank (the “Comerica
Warrants”) and a commitment to fund our operations through January 1,
2009 (the “Backstop
Warrants”). The issuance of the Comerica Warrants and the
Backstop Warrants, as well as certain other indirect interests that Mr.
Pappajohn and Dr. Schaffer may have, is discussed in more detail below under the
caption “Information About Other Filing Persons.”
Dr. Waxman and Mr.
Pacala
Dr.
Waxman, the chairman of our Board, is a manager of and has an interest in the
Psilos Funds, which purchased an aggregate of 1,666,668 shares of our Preferred
Stock between December 2007 and May 2008. In addition
Psilos/CareGuide has agreed to purchase up to 4,250,000 shares of our Preferred
Stock at a price of $0.60 per share pursuant to the Purchase
Agreement.
Mr.
Pacala, a member of our Board, is a managing director of entities affiliated
with the Essex Funds, which purchased an aggregate of 1,250,000 shares of our
Preferred Stock between December 2007 and May 2008. In addition, the
Essex Funds have agreed to purchase up to 666,667 shares of our Preferred Stock
at a price of $0.60 per share pursuant to the Purchase Agreement.
The
Psilos Funds and the Essex Funds have also received and will continue to receive
Comerica Warrants. The Psilos Funds have also received Backstop
Warrants. Their purchases under the Purchase Agreement and the
issuances of the Comerica Warrants and the Backstop Warrants are discussed in
more detail below under the caption “Information About Other Filing
Persons.”
In December 2008, Radius distributed
all of its shares of our Common Stock to its partners. Dr. Waxman is
a limited partner of Radius and, by virtue of the distribution, Dr. Waxman
received approximately 34,000 shares of Common Stock. Because these
are the only shares that Dr. Waxman owns directly in his name, and because they
are fewer than 50,000 shares, we expect these shares to be cashed out, at a
price of $0.14 per pre-split share for aggregate proceeds of approximately
$5,000 to Dr. Waxman, upon consummation of the Reverse/Forward Stock
Split.
Dr.
Barber
In
connection with our acquisition of Haelan in December 2006, Dr. Barber, one of
our directors, received a Convertible Note in the principal amount of
approximately $848,000 on the same terms as all of the other securityholders of
Haelan. Dr. Barber joined our Board upon the closing of the
acquisition.
Employment
Arrangements Involving Our Officers
In
connection with his appointment as an executive officer, on July 14, 2008, the
Board approved the grant to Mr. Condron of a stock option to purchase up to
6,315,789 shares of Common Stock, which was intended to represent approximately
5% of our capital stock on an as-converted basis after the Reverse/Forward Stock
Split and the Financing. This option has a term of 10 years from the date of
grant and an exercise price equal to $0.12 per share, which the Board determined
to be not less than the fair market value of the Common Stock on the date of
grant. This stock option will vest over a period of four years, in 48 equal
monthly installments beginning one month after the date of grant. We
have also agreed that Mr. Condron is entitled to receive an additional grant of
stock options in the event we issue securities, including, without limitation,
stock equivalents, beyond those currently contemplated, between the effective
date of the employment agreement and December 31, 2008, including in the event
the gross proceeds of the Financing exceed $2.5 million. In the event
our Common Stock equivalent capitalization exceeds the amounts contemplated at
the time of his appointment, Mr. Condron would receive an additional grant of
stock options to purchase an amount of our Common Stock equal to 5% of the
excess amount. Because we now expect to repurchase fewer shares of
our Common Stock as a result of the Reverse/Forward Stock Split using the New
Ratios, we currently expect that we will be required to grant Mr. Condron an
additional option in order to maintain his 5% ownership
interest.
Pursuant
to the terms of a transition letter agreement that we entered into with Dr.
Paterson, the Board granted Dr. Paterson an option to purchase up to 50,000
shares of Common Stock. This option has an exercise price of
approximately $0.13 per share. This option will vest in full at the end of Dr.
Paterson’s transition out of his role of our chief executive officer. In addition, all of Dr.
Paterson’s currently outstanding options to purchase Common Stock will be
accelerated in full in the event that he ceases to be our employee, and the
exercise period for such options will be extended. Furthermore, we
have agreed with Dr. Paterson that he shall be entitled to receive an additional
grant of stock options in the event of certain issuances of equity securities by
us between the date of the transition letter agreement and the later of December
31, 2008 or the date on which we cease to be a public company.
In
November 2008, we hired Mr. Hannon to be our executive vice president of
administration. On December 10, 2008, the Board approved an
employment agreement with Mr. Hannon pursuant to which Mr. Hannon will become
our chief financial officer at such time as we become a private company or, if
earlier, March 31, 2009. The Board also approved the grant to Mr.
Hannon of stock options to purchase up to 3,587,585 shares of Common Stock,
which was intended to represent 3% of our fully diluted capital shares as of his
date of employment. These options have a term of 10 years from the
dates of grant and an exercise price equal to $0.12 per share, which the Board
determined to be not less than the fair market value of the Common Stock on the
dates of grant. These stock options will vest over a period of four years, in 48
equal monthly installments beginning one month after the commencement date of
Mr. Hannon’s employment with us. Mr. Hannon is also eligible for an
additional grant of stock options in the event we issue securities beyond those
currently contemplated between the date of Mr. Hannon’s employment and the date
on which we cease to be a public company, including in the event the gross
proceeds of the Financing exceed $2.5 million. In the event our
Common Stock equivalent capitalization exceeds the amounts contemplated at the
time of his appointment, Mr. Hannon will receive an additional grant of stock
options to purchase an amount of our Common Stock equal to 3% of the excess
amount. Because we now expect to repurchase fewer shares of our
Common Stock as a result of the Reverse/Forward Stock Split using the New
Ratios, we currently expect that we will be required to grant Mr. Hannon an
additional option in order to maintain his 3% ownership interest. We
expect a portion of Mr. Hannon’s options will vest automatically on a periodic
basis and a portion will vest upon the achievement of mutually agreed-on
performance criteria, each over a four-year period.
Interests
of our Executive Officers and Directors in the Reverse/Forward Stock Split and
the Financing
As a
result of the Reverse/Forward Stock Split and the Financing (assuming the sale
of an aggregate of $4.0 million of our Preferred Stock we estimate that our
directors and executive officers and their affiliated entities, collectively,
will increase their beneficial ownership of our Common Stock from approximately
71% to 83%. The number of shares held by our directors and officers
immediately prior to the Reverse/Forward Stock Split will remain substantially
unchanged as a result of the Reverse/Forward Stock Split. Those of
our directors who are members of, or are representatives of members of, the
Investor Group, will increase their beneficial ownership as a result of the
Financing. Their aggregate interest will also increase as a
percentage of outstanding shares due to the retirement of fractional shares
purchased by us as part of the Reverse Split. Each share of Preferred
Stock is currently, and each share of Preferred Stock to be issued in the
Financing will be initially convertible into five shares of Common
Stock. In addition, in December 2008, Radius distributed all of its
shares of our Common Stock to its partners. Dr. Waxman is a limited
partner of Radius and, by virtue of the distribution, Dr. Waxman received
approximately 34,000 shares of Common Stock. Because these are the
only shares that Dr. Waxman owns directly in his name, and because they are
fewer than 50,000 shares, we expect these shares to be cashed out, at a price of
$0.14 per pre-split share for aggregate proceeds to Dr. Waxman of approximately
$5,000, upon consummation of the Reverse/Forward Stock Split. Certain
of our directors are also affiliated with members of the Investor Group and have
other interests in the Reverse/Forward Stock Split described below under the
caption “Information About Other Filing Persons—Interests of Certain Persons in
the Reverse/Forward Stock Split.”
INFORMATION
ABOUT OTHER FILING PERSONS
The
Investor Group and Related Persons
For
purposes of this Information Statement, the Filing Persons are those individuals
and entities required under the rules of the Commission to provide certain
disclosures to our stockholders in order for us to effect the Reverse/Forward
Stock Split. In addition to the Company, as discussed above, the
Filing Persons include each member of the Investor Group.
Business
and Background of Entities and Certain Related Persons
Psilos Fund I. The
principal business of the Psilos Fund I is venture capital
investments. Psilos Group Investors, L.L.C., a Delaware limited
liability company, is the general partner of Psilos Fund I (“Psilos General
Partner I”). The principal business of the Psilos General
Partner I is to serve as the general partner of the Psilos Fund
I. Dr. Waxman is the senior managing member and Mr. Krupa
is a managing member of Psilos General Partner I (the “Psilos I
Managers”). Each of the Psilos I Managers is an investment
professional. The principal place of business of Psilos Fund I,
Psilos General Partner I and each of the Psilos Managers is 140 Broadway,
51st
Floor, New York, New York 10005, and their business telephone number is
212-242-8844.
Psilos Fund
II. The principal business of the Psilos Fund II is venture
capital investments. Psilos Group Investors II, L.L.C., a Delaware
limited liability company, is the general partner of Psilos Fund II (“Psilos General
Partner II”). The principal business of the Psilos General
Partner II is to serve as the general partner of the Psilos Fund
II. Dr. Waxman is the senior managing member and Messrs. Krauss and
Krupa are managing members of Psilos General Partner II (the “Psilos II
Managers”). Each of the Psilos II Managers is an investment
professional. The principal place of business of Psilos Fund II,
Psilos General Partner II and each of the Psilos II Managers is 140 Broadway,
51st
Floor, New York, New York 10005, and their business telephone number is
281-364-1555.
Psilos/CareGuide. The
principal business of Psilos/CareGuide is venture capital
investments. Psilos Group Investors III, LLC, a Delaware limited
liability company, is the general partner of Psilos/CareGuide (“Psilos General
Partner III”). The principal business of Psilos General
Partner III is to serve as the general partner of Psilos/CareGuide. Dr. Waxman
is the senior managing member and Messrs. Krauss, Krupa, Riley and Eichler and
Ms. Suennen are
managing members of Psilos General Partner III (the “Psilos/CareGuide
Managers”). Each of the Psilos/CareGuide Managers is an
investment professional. The principal place of business of
Psilos/CareGuide, Psilos General Partner III and each of the Psilos/CareGuide
Managers is 140 Broadway, 51st Floor,
New York, New York 10005, and their business telephone number is
281-364-1555.
Essex IV. The
principal business of the Essex IV is venture capital investments. Essex
Woodlands Health Ventures IV, L.L.C., a Delaware limited liability company, is
the general partner of Essex IV (the “Essex IV General
Partner”). The principal business of the Essex IV General
Partner is to serve as general partner of the Essex IV. Messrs. Currie, Sutter
and Thangaraj are the managers of the Essex IV General Partner (the “Essex IV
Managers”). Each of the Essex IV Managers is an investment
professional. The principal place of business of Essex IV, Essex IV
General Partner and each of the Essex IV Managers is 21 Waterway Avenue, Suite
225, The Woodlands, Texas 77380, and their business telephone number is
281-364-1555.
Essex V. The principal
business of the Essex V is venture capital investments. Essex Woodlands Health
Ventures V, L.L.C., a Delaware limited liability company, is the general partner
of Essex V (the “Essex V General
Partner”). The principal business of the Essex V General
Partner is to serve as general partner of Essex V. Messrs. Currie, Sutter, and
Thangaraj are the managers of the Essex V General Partner (the “Essex V
Managers”). Each of the Essex V Managers is an investment
professional. The principal place of business of Essex V, Essex V
General Partner and each of the Essex V Managers is 21 Waterway Avenue, Suite
225, The Woodlands, Texas 77380, and their business telephone number is
281-364-1555.
Hickory. The
principal business of Hickory is venture capital investments. Its
business address is 301 Washington Street, NW, Suite 301, Huntsville, Alabama
35801, and its business telephone number is 256-539-1931. The sole
shareholder of Hickory is the First Tennessee Bank National
Association. The names of the directors and executive officers of
Hickory, their business addresses and telephone numbers, their present principal
occupation or employment, and the name, principal business and address of any
corporation or other organization in which such employment is conducted other
than Hickory are set forth below:
|
·
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J.
Thomas Noojin is the president of Hickory. His business address
is 301 Washington Street NW, Suite 301, Huntsville, Alabama 35801, and his
business telephone number is
256-539-1931;
|
|
·
|
Monro
B. Lanier, III, is the vice president of Hickory. His business
address is 301 Washington Street NW, Suite 301, Huntsville, Alabama 35801,
and his business telephone number is
256-539-1931;
|
|
·
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C.W.
Knight is executive vice president of the First Tennessee Bank National
Association. His business address is 165 Madison Street, 3rd
Floor, Memphis, Tennessee 38103, and his business telephone number is
901-523-4591; and
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|
·
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Christine
B. Munson is executive vice president of the First Tennessee Bank National
Association. Her business address is 165 Madison Street, 3rd
Floor, Memphis, Tennessee 38103, and her business telephone number is
901-523-4246.
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No
natural person set forth above (i) was convicted in a criminal proceeding during
the past five years (excluding traffic violations or similar misdemeanors); or
(ii) was a party to any judicial or administrative proceeding during the past
five years (except for matters that were dismissed without sanction or
settlement) that resulted in a judgment, decree or final order enjoining the
person from future violations of, or prohibition activities subject to, federal
or state securities laws. Each of the natural persons set forth above
is a citizen of the United States.
Prior
Share Purchases, Contacts, Transactions, Negotiations and Agreements Involving
the Investor Group and Related Persons
Prior
Stockholders Agreement
In
January 2006, entities affiliated with each of the members of the Investor
Group, as well as Radius, which collectively represented at that time 80% of our
outstanding Common Stock on an as-converted basis, entered into a stockholders
agreement by which they agreed to vote their shares in favor of the election to
our Board of Mr. Pappajohn and Dr. Schaffer, three individuals collectively
designated by Essex, Hickory, Radius and Psilos, and two additional independent
directors who have been approved unanimously by the other members of our
Board. As part of the Reverse/Forward Stock Split and the Financing,
this agreement has been terminated and will be superseded by the Stockholders
Agreement.
Investor
Guarantees of Indebtedness
In
January 2006, we assumed the obligations of our subsidiary, CCS Consolidated,
Inc., under a line of credit arrangement. The satisfaction of our obligations
under the line of credit was guaranteed by certain of our stockholders. Mr.
Pacala, Dr. Waxman and our former director Daniel Lubin are or were members of
our Board and are managing directors and/or general partners of entities
affiliated with the Essex Funds, the Psilos Funds and Radius, respectively, who
are among the stockholders who guaranteed our obligations under the line of
credit. Hickory was also a guarantor of our obligations under this
arrangement.
In
exchange for delivering guarantees to the lender, we issued the Essex Funds, the
Psilos Funds, Radius and Hickory warrants to purchase Common Stock. In November
2006 the warrants vested in full and all warrants were exercised in full by cash
payment of the aggregate exercise price. The shares underlying these warrants
had been previously placed into escrow, and therefore no new shares were issued
upon exercise. Upon exercise of these warrants, we released approximately 3.1
million shares of Common Stock from the escrow to the Essex Funds, Radius, the
Psilos Funds and Hickory.
In
October 2007, we extended the maturity of the line of credit to January 1, 2009.
Each of the stockholders described above, other than Radius, continues to
guarantee our obligations under the line of credit, and beginning in October
2007, Mr. Pappajohn and Dr. Schaffer are also guarantors of our obligations
under this arrangement. We refer to the current stockholders who have guaranteed
our obligations under the line of credit as the “Guarantors.” Under
the terms of the guarantees, each Guarantor has unconditionally and irrevocably
guaranteed prompt and complete payment of its or his pro rata share (based on
the amount of principal indebtedness guaranteed by each) of the amount we owe
under the line of credit, up to the full $8.0 million principal balance. As
compensation for their guarantees, we have issued warrants to these Guarantors
that are exercisable for shares of our Common Stock. As compensation
for the period from October 1, 2007 to April 30, 2008, on July 1, 2008 we issued
warrants (the “Initial
Warrants”) to the Guarantors to purchase an aggregate of 1,306,667 shares
of Common Stock at an exercise price of $0.25 per share. As
compensation for the period from May 1, 2008 to December 31, 2008, the
Guarantors were to be issued warrants to purchase shares of Common Stock for
each calendar month (each, a “Monthly
Warrant” and collectively, the “Monthly
Warrants”). Each Monthly Warrant is exercisable for a number
of shares of Common Stock equal to (i) 0.00583 times (ii) the principal balance
outstanding under the line of credit as of the close of business on the last day
of the immediately preceding month, divided by (iii) the product of (x) the
closing price of the Common Stock as of the last day of the immediately
preceding month, or the fair market value of the Common Stock as of the last day
of the immediately preceding month as determined by the Board if such stock is
not publicly traded (in either case, the “Monthly Stock
Price”) times (y) 125%. The exercise price of each Monthly
Warrant is equal to 125% times the applicable Monthly Stock
Price.
On July
1, 2008, as compensation for the calendar months of May, June and July, we
issued Monthly Warrants to the Guarantors to purchase an aggregate of 1,776,762
shares of Common Stock. Of these Monthly Warrants, warrants to
purchase 1,243,734 shares have an exercise price of $0.075 per share and
warrants to purchase 533,028 shares have an exercise price of $0.0875 per
share. On August 1, 2008, we issued Monthly Warrants to purchase an
aggregate of 327,298 shares of Common Stock with an exercise price of $0.1425
per share. On September 1, 2008, we issued Monthly Warrants to
purchase an aggregate of 324,452 shares of Common Stock with an exercise price
of $0.14375 per share. On October 1, 2008, we issued Monthly Warrants
to purchase an aggregate of 287,015 shares of Common Stock with an exercise
price of $0.1625 per share. On November 1, 2008, we issued Monthly
Warrants to purchase an aggregate of 339,200 shares of Common Stock with an
exercise price of $0.1375 per share. On December 1, 2008, we issued Monthly
Warrants to purchase an aggregate of 392,758 shares of Common Stock with an
exercise price of $0.11875 per share. Each of the Initial Warrants
and the Monthly Warrants were apportioned among the Guarantors pro rata, based
on the amount of each such Guarantor’s respective guaranty of the maximum amount
under the line of credit. Each such warrant is fully exercisable upon
issuance and is exercisable until the close of business on October 1,
2012.
Funding Letters
The
Psilos Funds, Mr. Pappajohn and Dr. Schaffer have provided us with a funding
letter providing that, in the event that we should require additional funding to
continue our operations through January 1, 2009, these stockholders will provide
the necessary additional funding, up to $1.0 million in aggregate, to us in
amounts to be determined between and among these investors. As
compensation for their commitments under the funding letter, in August 2008 we
issued Backstop Warrants to purchase an aggregate of 1,000,000 shares of Common
Stock to these parties, allocated equally. Each Backstop Warrant has
an exercise price of $0.08 per share, and was exercisable for 50% of the shares
underlying the warrant as of August 31, 2008, with the remaining shares vesting
monthly through December 31, 2008. Each Backstop Warrant is
exercisable until January 1, 2012.
First
Series A Preferred Stock Financing
In
December 2007, we entered into a Series A Preferred Stock Purchase Agreement
with each of the members of the Investor Group. Under the purchase agreement, we
issued and sold to the Investor Group an aggregate of up to 6,250,000 shares of
Preferred Stock, at a price of $0.60 per share, for aggregate gross proceeds of
$3.75 million. Each share of Preferred Stock is convertible, at the holder’s
election, into five shares of our Common Stock. As described in this
Information Statement, we expect to issue additional shares of Preferred Stock,
and amend the terms of the Series A Preferred Stock, in connection with the
Financing for aggregate gross proceeds of up to $4.0 million.
Purchase
of Software from HealthEdge Software, Inc.
In
November 2006, we entered into a three-year agreement with HealthEdge Software,
Inc. (“HealthEdge”)
under which HealthEdge provides its software application to us as well as
hosting services relating to the application. On June 25, 2008, we entered into
a termination agreement pursuant to which we are obligated to pay HealthEdge an
aggregate of $565,000 in installments. Approximately, $57,000
has already been paid to date. We also expect to enter into a new
agreement with HealthEdge under which we expect to pay HealthEdge $3,500 per
month for software application and claims services. HealthEdge has
already begun to provide these services and we have already begun to pay this
fee in advance of the formal documentation of this
arrangement. Affiliates of Psilos are controlling stockholders of
HealthEdge, and Dr. Waxman, the chairman of our Board, is the senior managing
member of Psilos and also serves on HealthEdge’s board of directors. Dr. Waxman
may be deemed to have an indirect interest in this transaction to the extent of
his pecuniary interest in Psilos. Our agreement with HealthEdge was approved by
the Board, with Dr. Waxman recusing himself from the discussion and vote, after
disclosure of Dr. Waxman’s potential interest to the other
directors.
Transactions
Involving American CareSource Holdings
In
December 2005, we effected a spin-off of American CareSource Holdings, Inc., our
former subsidiary. Mr. Pappajohn and Dr. Schaffer are also directors of and
holders of in excess of 5% of the outstanding voting stock of American
CareSource Holdings. In January 2006, American CareSource Holdings issued a
promissory note to us in the amount of approximately $300,000, which note was
paid in full, including accrued interest, in February 2007.
As part
of the spin-off, we retained approximately 167,000 shares of Common Stock of
American Caresource Holdings that we held for investment. In June
2008, we entered into a stock purchase agreement with a third party to sell
these shares at a price of approximately $1.71 per share. To date, we
have sold approximately 166,000 of the shares for total gross proceeds of
approximately $283,000. The general partner of the third party
purchaser is also an executive officer of certain companies owned by Mr.
Pappajohn. The sale of the shares of American Caresource Holdings was
approved by the Board after disclosure of the relationship of the purchaser to
Mr. Pappajohn.
Purchase
Agreement
We
currently estimate that completion of the Reverse/Forward Stock Split will
require approximately $0.8 million to repurchase fractional shares and
approximately $1.0 million in advisory, legal, financial, accounting, printing,
insurance and other fees and costs. We intend to finance these cash requirements
through the sale of up to $4.0 million of our Preferred Stock to the Investor
Group pursuant to the terms of the Purchase Agreement. As described
elsewhere in this Information Statement, the Investor Group will purchase shares
of Preferred Stock at $0.60 per share in the Financing, and each such share will
be initially convertible into five shares of our Common Stock.
Under the
terms of the Purchase Agreement, prior to the closing of the Financing, we will
deliver to the Investor Group our good faith estimate of the cash necessary to
repurchase all shares of Common Stock to be repurchased as part of the
Reverse/Forward Stock Split as well as our costs related to the
transaction. The Investor Group has committed to fund all of such
requirements, up to an aggregate of $4.0 million. If our cash
requirements for the Reverse/Forward Stock Split are less than $4.0 million, the
Investor Group may purchase on a pro rata basis based on amounts committed under
the Purchase Agreement additional shares of our Preferred Stock up to an
aggregate investment of $4.0 million. Of the amounts to be funded
pursuant to the Purchase Agreement, the Psilos Funds have committed to purchase
63.75% of the total amount and the Essex Funds, Hickory, Mr. Pappajohn and Dr.
Schaffer have committed to purchase 10.0%, 7.5%, 6.25% and 12.5%,
respectively.
Stockholders
Agreement
As a
condition to the consummation of the Financing, each of the Filing Persons and
each of our directors and executive officers is required to enter into the
Stockholders Agreement. See the information under the caption
“General Information About the Reverse/Forward Stock Split—Financing of the
Reverse/Forward Stock Split—Stockholders Agreement” in this Information
Statement.
Interests
of the Investor Group in the Reverse/Forward Stock Split and the
Financing
As a
result of the Reverse/Forward Stock Split and the Financing (assuming the sale
of an aggregate of $4.0 million of our Preferred Stock), we estimate that the
Investor Group will increase its aggregate beneficial ownership of our Common
Stock from approximately 75% to 84%. The number of shares of Common
Stock and Preferred Stock held by the Investor Group immediately prior to the
Reverse/Forward Stock Split will remain unchanged as a result of the
Reverse/Forward Stock Split. However, its aggregate percentage
ownership of our Common Stock on an as-converted basis will increase due to the
retirement of fractional shares purchased by us as part of the Reverse/Forward
Stock Split, as well as its acquisition of additional shares of Preferred Stock
in the Financing. In addition, the Investor Group will have certain
rights not shared by our other stockholders under the Stockholders Agreement,
including the right to designate members of our Board, the right to receive
periodic financial information about us and preemptive rights to acquire our
equity securities that we may issue from time to time. See the
information under the caption “General Information About the Reverse/Forward
Stock Split—Financing of the Reverse/Forward Stock Split—Stockholders
Agreement.”
INDEMNIFICATION
OF DIRECTORS AND OFFICERS
Under
Section 145 of the Delaware General Corporation Law, or the DGCL, we have broad
powers to indemnify our directors and officers against liabilities they may
incur in such capacities, including liabilities under the Securities
Act.
Our
Certificate of Incorporation and Bylaws, each as amended, include provisions
that (i) eliminate the personal liability of our directors for monetary damages
resulting from breaches of their fiduciary duty to the fullest extent permitted
under applicable law, (ii) require us to indemnify our directors and officers to
the fullest extent permitted by the DGCL or other applicable law and (iii)
provide us with the power, in our discretion, to indemnify our employees and
other agents as set forth in the DGCL or other applicable law. Pursuant to
Section 145 of the DGCL, a corporation generally has the power to indemnify its
present and former directors, officers, employees and agents against expenses
incurred by them in connection with any suit to which they are, or are
threatened to be, made a party by reason of their serving in such positions so
long as they acted in good faith and in a manner they reasonably believed to be
in, or not opposed to, the best interest of the corporation and, with respect to
any criminal action, they had no reasonable cause to believe their conduct was
unlawful. We believe that these provisions of our Certificate of Incorporation
and Bylaws, each as amended, are necessary to attract and retain qualified
persons as directors and officers. These provisions do not eliminate the
directors’ or officers’ duty of care, and, in appropriate circumstances,
equitable remedies such as injunctive or other forms of non-monetary relief will
remain available under the DGCL. In addition, each director will continue to be
subject to liability pursuant to Section 174 of the DGCL, for breach of the
director’s duty of loyalty to us, for acts or omissions not in good faith or
involving intentional misconduct, for knowing violations of law, for acts or
omissions that the director believes to be contrary to our best interest and the
best interest of our stockholders, for any transaction from which the director
derived an improper personal benefit, for acts or omissions involving a reckless
disregard for the director’s duty to us or our stockholders when the director
was aware or should have been aware of a risk of serious injury to us or our
stockholders, for acts or omission that constitute an unexcused pattern of
inattention that amounts to an abdication of the director’s duty to us or our
stockholders, for improper transactions between the director and us and for
improper loans to directors and officers. The provision also does not affect a
director’s responsibilities under any other law, such as the federal securities
law or state or federal environmental laws.
There is
no pending litigation or proceeding involving a director, officer, employee or
other agent of ours as to which indemnification is being sought, nor are we
aware of any pending or threatened litigation that may result in claims for
indemnification by any director, officer, employee or other agent.
FORWARD-LOOKING
STATEMENTS
This
Information Statement and other reports that we file with the Commission contain
forward-looking statements about our business. For this purpose, any
statements that are not statements of historical fact may be deemed to be
forward-looking statements. Words such as “believes,” “contemplates,”
“expects,” “anticipates,” “estimates,” “intends,” “plans,” “can,” “will,” “may”
and similar expressions are intended to identify forward-looking statements,
which speak only as of the date of this Information
Statement. Neither we nor any other person assumes responsibility for
the accuracy and completeness of these forward-looking
statements. Future events and actual results could differ materially
from those described in, contemplated by or underlying the forward-looking
statements. Some of these risks and uncertainties include, but are
not limited to:
|
·
|
the
occurrence of any event, change or other circumstance that could give rise
to the abandonment of the Reverse/Forward Stock
Split;
|
|
·
|
the
failure of the Reverse/Forward Stock Split to be consummated for any other
reason, including, without limitation, failure to consummate the
Financing;
|
|
·
|
the
outcome of any legal proceedings that may be instituted against us and
others relating to the Reverse/Forward Stock Split, the deregistration of
our Common Stock, or the termination of the quotation of our Common Stock
on the OTCBB;
|
|
·
|
the
occurrence of any event, change or other circumstance that could prevent
or delay us from deregistering our Common Stock, including, without
limitation, any failure of the Reverse/Forward Stock Split to result in
the reduction of the number of our stockholders of record to below
300;
|
|
·
|
the
effect of the Reverse/Forward Stock Split and deregistration of our Common
Stock on our customer relationships, operating results and business
generally;
|
|
·
|
the
amount of the costs, fees, expenses and charges related to the
Reverse/Forward Stock Split and the other transactions described
herein;
|
|
·
|
the
amount of cost savings that we expect to achieve as a result of
deregistering our Common Stock; and
|
|
·
|
the risk factors
discussed in our Annual Report on Form 10-K for the fiscal year ended
December 31, 2007 and our Quarterly Report on Form 10-Q for
the quarter ended September 30, 2008, which you are urged to read in their
entirety in connection with any decision to buy or sell or engage in any
other kind of transaction involving our Common Stock in advance of the
consummation of the Reverse/Forward Stock Split.
|
For these
reasons, you should not place undue reliance on any forward-looking statements
included in this Information Statement. Except as specified in
Commission regulations, we have no duty to publicly release information that
updates the forward-looking statements contained in this Information
Statement.
AVAILABLE
INFORMATION
We are
subject to the informational requirements of the Exchange Act and in accordance
with the Exchange Act file reports, proxy statements and other information with
the Commission. These reports, proxy statements and other information
can be inspected and copied at the public reference facilities of the Commission
at Room 1580, 100 F Street, NE, Washington, D.C. 20549. Copies
of this material can also be obtained at prescribed rates by writing to the
Public Reference Section of the Commission at Room 1580, 100 F Street,
NE, Washington, D.C. 20549. In addition, these reports, proxy
statements and other information are available from the EDGAR filings obtained
through the Commission’s website (http://www.sec.gov).
NOTICE
TO STOCKHOLDERS SHARING AN ADDRESS
Only one
Information Statement is being delivered to two or more stockholders who share
an address unless we have received contrary instruction from one or more of the
stockholders. We will promptly deliver upon written or oral request a
separate copy of this Information Statement to a stockholder at a shared address
to which a single copy of the document was delivered upon oral or written
request to:
CareGuide,
Inc.
Attn:
Finance Department
4401
N.W. 124th Avenue
Coral
Springs, Florida 33065
Stockholders
may also address future requests for separate delivery of Information
Statements, or request delivery of a single copy of Information Statements if
they are receiving multiple copies, to us at the address listed above or by
contacting us by telephone at (954) 796-3714.
SIGNATURE
Pursuant
to the requirements of the Exchange Act, the Company has duly caused this
Information Statement to be signed on its behalf by the undersigned hereunto
authorized.
|
By
Order of the Board,
|
|
/s/
Chris E. Paterson
|
|
Chris
E. Paterson
Chief
Executive Officer
|
Coral
Springs, Florida
December
24, 2008
Annex
A-1
CERTIFICATE
OF AMENDMENT
OF
THE CERTIFICATE OF INCORPORATION OF
CAREGUIDE,
INC.
CareGuide,
Inc. (the “Company”),
a corporation organized and existing under the General Corporation Law of the
State of Delaware, does hereby certify:
FIRST: The original
name of this company is DSMI Corp. and the date of filing the original
Certificate of Incorporation of this company with the Secretary of State of the
State of Delaware was February 22, 1995.
SECOND: The Board of
Directors of the Company, acting in accordance with the provisions of Sections
141 and 242 of the General Corporation Law of the State of Delaware, adopted
resolutions amending its Certificate of Incorporation as follows:
Article 4(a) is hereby amended and
restated in its entirety to read as follows:
“The
total number of shares which the Corporation shall have authority to issue is
220,000,000 shares of capital stock, divided into 200,000,000 shares of Common
Stock, par value $0.01 per share, and 20,000,000 shares of Preferred Stock, par
value $0.01 per share. Without regard to any other provision in this
Certificate of Incorporation, each 50,000 shares of issued and outstanding
Common Stock immediately prior to the time this amendment becomes effective
shall be and is automatically reclassified and changed (without any further act)
into one (1) fully paid and nonassessable share of Common Stock of the
Corporation without increasing or decreasing the amount of stated capital or
paid-in surplus of the Corporation, provided that no fractional shares shall be
issued to any holder of fewer than 50,000 shares of Common Stock of the
Corporation immediately prior to the time this amendment becomes effective, and
that instead of issuing such fractional shares, the Corporation shall pay an
amount in cash equivalent to $0.14 per share of Common Stock of the Corporation
held by such holder immediately prior to the time this amendment becomes
effective.”
THIRD: Pursuant to
a resolution of the Board of Directors, an action by written consent of the
stockholders of the Company, in lieu of a special meeting, was duly executed in
accordance with Section 228 of the General Corporation Law of the State of
Delaware, by the holders of outstanding stock of the Company having not less
than the minimum number of votes that would be necessary to approve this
Certificate of Amendment at a meeting at which all shares entitled to vote
thereon were present and voting.
FOURTH: This
Certificate of Amendment has been duly adopted in accordance with the provisions
of Section 242 of the General Corporation Law of the State of
Delaware.
FIFTH: All
other provisions of the Certificate of Incorporation, as currently on file with
the Secretary of State of the State of Delaware, shall remain in full force and
effect.
* * * * *
In Witness
Whereof, CareGuide,
Inc. has caused this Certificate of Amendment to be signed by its Chief
Executive Officer this _______ day of January, 2009.
|
CareGuide,
Inc.
|
|
|
|
/s/ Chris E. Paterson
|
|
Chris
E. Paterson
|
|
Chief
Executive Officer
|
Annex
A-2
CERTIFICATE
OF AMENDMENT
OF
THE CERTIFICATE OF INCORPORATION OF
CAREGUIDE,
INC.
CareGuide,
Inc. (the “Company”),
a corporation organized and existing under the General Corporation Law of the
State of Delaware, does hereby certify:
FIRST: The original
name of this company is DSMI Corp. and the date of filing the original
Certificate of Incorporation of this company with the Secretary of State of the
State of Delaware was February 22, 1995.
SECOND: The Board of
Directors of the Company, acting in accordance with the provisions of Sections
141 and 242 of the General Corporation Law of the State of Delaware, adopted
resolutions amending its Certificate of Incorporation as follows:
Article 4(a) is hereby amended and
restated in its entirety to read as follows:
“The
total number of shares which the Corporation shall have authority to issue is
220,000,000 shares of capital stock, divided into 200,000,000 shares of Common
Stock, par value $0.01 per share, and 20,000,000 shares of Preferred Stock, par
value $0.01 per share. Without regard to any other provision of this
Certificate of Incorporation, each one (1) share of Common Stock of the
Corporation issued and outstanding (including each fractional share in excess of
one (1) share held by any stockholder) immediately prior to the time this
amendment becomes effective shall be and is automatically reclassified and
changed (without any further act) into 50,000 fully paid and nonassessable
shares of Common Stock of the Corporation (or, with respect to any fractional
shares, such lesser number of shares as may be applicable based upon such
50,000-for-1 ratio) without increasing or decreasing the amount of stated
capital or paid-in surplus of the Corporation, provided that no fractional
shares shall be issued.”
THIRD: Pursuant to
a resolution of the Board of Directors, an action by written consent of the
stockholders of the Company, in lieu of a special meeting, was duly executed in
accordance with Section 228 of the General Corporation Law of the State of
Delaware, by the holders of outstanding stock of the Company having not less
than the minimum number of votes that would be necessary to approve this
Certificate of Amendment at a meeting at which all shares entitled to vote
thereon were present and voting.
FOURTH: This
Certificate of Amendment has been duly adopted in accordance with the provisions
of Section 242 of the General Corporation Law of the State of
Delaware.
FIFTH: All
other provisions of the Certificate of Incorporation, as currently on file with
the Secretary of State of the State of Delaware, shall remain in full force and
effect.
* * * * *
In Witness
Whereof, CareGuide,
Inc. has caused this Certificate of Amendment to be signed by its Chief
Executive Officer this _______ day of January, 2009.
|
CareGuide,
Inc.
|
|
|
|
/s/ Chris E. Paterson
|
|
Chris
E. Paterson
|
|
Chief
Executive Officer
|
Annex
B
|
Navigant
Consulting, Inc.
30
South Wacker Drive, Suite 3100
Chicago,
IL 60606
Telephone
312.583.5700
|
June 18,
2008
Board of
Directors
CareGuide,
Inc.
4401 NW
124th
Avenue
Coral
Springs, FL 33065
Gentlemen:
We
understand that CareGuide, Inc. (“CareGuide” or the “Company”) is
proposing to implement a transaction in which it will undertake a 1-for-100,000
reverse stock split of the Company’s common stock, par value $0.01 per share
(the “Common Stock”) for all shareholders with less than 100,000 shares, and
make a cash payment to public shareholders who, on completion of the reverse
stock split, will hold fractional shares of the Common Stock (the “Fractional
Shareholders”). It is our understanding that fractional shares held
by the Fractional Shareholders following the reverse stock split will be
cashed-out at a price of $14,000 per share on a post-reverse split basis, or 14
cents per share on a pre-split basis (the “Transaction”). On
completion of the Transaction (as defined below), the Fractional Shareholders
will no longer have an interest in CareGuide and the Company will cease to be a
reporting company. A group of investors (the “Purchasing Group”)
primarily comprised of entities affiliated with members of the Company’s Board
of Directors will finance the Transaction by investing in the Company and will
own the Company following completion of the Transaction.
You have
requested our opinion (the “Opinion”) as to the fairness, from a financial point
of view, of the consideration to be paid to the Fractional Shareholders in the
Transaction.
As part
of our analysis for this Opinion, we have made such reviews, analyses and
inquiries as we have deemed necessary and appropriate under the
circumstances. We also took into account our experience in connection
with similar transactions. Among other things, we have:
|
1.
|
Reviewed
the letter agreement (including the attached term sheet) dated April 16,
2008 by the members of the Purchasing Group and addressed to the Company
related to the Transaction (the “April 2008 Letter Agreement”) as well as
a June 3, 2008 letter from Dr. Michael Barber, a member of the Special
Committee of the Board of Directors (the “Barber Letter”), outlining the
going private transaction proposal;
|
|
2.
|
Reviewed
the Company’s financial statements, in the form provided to
Navigant by CareGuide management, for the fiscal years ended December 31,
2006 and December 31, 2007, and for the three-month periods ended March
31, 2007 and March 31, 2008;
|
|
3.
|
Reviewed
the Company’s publicly available SEC filings, including its annual reports
for the periods ended December 31, 2006 and 2007, which include audited
financial statements for the fiscal years 2006 and 2007 as well as
quarterly financial reports for fiscal 2006 and
2007;
|
Board of
Directors
CareGuide,
Inc.
Page 2
of 4
|
4.
|
Reviewed
minutes of the Company’s board of directors for the previous two
years;
|
|
5.
|
Reviewed
a marketing presentation dated April 2008 prepared by Company management
highlighting the Company’s business, ownership, leadership, repositioning
strategy, industry trends, competitors, product/service offerings, key
customers, and financial
information;
|
|
6.
|
Visited
the Company’s headquarters in Coral Springs,
Florida;
|
|
7.
|
Met
with certain members of the Company’s senior and operating management to
discuss the Company’s operations, repositioning strategy, key customers,
historical/prospective financial results, future prospects (including risk
factors), net operating loss (“NOL”) carryforwards, potential
merger/acquisition candidates, and the rationale for the
Transaction;
|
|
8.
|
Reviewed
publicly available financial data, stock market performance data, and
market multiples of companies in the healthcare services, managed health,
and healthcare technology sectors for comparative
purposes;
|
|
9.
|
Reviewed
recent, arms-length transactions involving similar
companies;
|
|
10.
|
Reviewed
the stock price history and reported events of the Company;
and
|
|
11.
|
Conducted
such other studies, analyses and inquiries as we deemed
appropriate.
|
In
rendering our Opinion, we have assumed the accuracy and completeness of all of
the information that has been supplied to us with respect to CareGuide, its
business and its industry. With respect to the financial forecast
information furnished to or discussed with us by CareGuide, we have assumed that
such information has been reasonably prepared and that it reflects the best
currently available estimates and judgment of CareGuide’s management as to the
expected future financial performance of CareGuide. For purposes of
this Opinion, it has been represented to us that CareGuide has not consummated
and does not contemplate any material transaction other than the Transaction and
those activities undertaken in the ordinary course of business. We do
not assume any responsibility for any independent verification of any
information provided to us, and have further relied upon the assurance of
management of CareGuide that it is not aware of any facts or circumstances that
would make such information inaccurate or misleading in any respect material to
our analysis.
We have
not made any physical inspection of any of the properties or assets of
CareGuide, nor have we performed or obtained any independent appraisal of the
properties or assets. Further, we have not evaluated the solvency or
fair value of CareGuide under any domestic or international laws relating to
bankruptcy, insolvency, or similar matters. In rendering our Opinion,
we have assumed the following: (i) that the Transaction will occur
consistent with the Barber Letter at a price of $14,000 per post-split share or
14 cents per pre-split share for all shareholders that hold less than 100,000
shares of common stock; (ii) that the Transaction will be consummated in a
manner that complies in all respects with the applicable provisions of the
Securities Act of 1933, the Securities Exchange Act of 1934 and all other
applicable foreign, federal and state securities rules and regulations; (iii)
that all requirements for the reverse stock split and payments to the Fractional
Shareholders have been met; and, (iv) that in all material respects the
Transaction has been structured subject to (i) through (iii) above.
Our
opinion is necessarily based on business, economic, market and other conditions
as they exist and can be evaluated by us at the date of this
letter. Accordingly, although subsequent developments may affect the
conclusions expressed in this Opinion, we do not assume any obligation to
update, review or reaffirm our opinion.
Board of
Directors
CareGuide,
Inc.
Page 3
of 4
This
Opinion only addresses the matters specifically addressed
hereby. Without limiting the foregoing, this Opinion does not
address: (i) matters that require legal, regulatory, accounting, insurance, tax
or other professional advice; (ii) the underlying business decision of CareGuide
or any other party to proceed with or effect the Transaction; (iii) the fairness
of any portion or aspect of the Transaction not expressly addressed in this
Opinion including, without limitation, the fairness of any compensation to any
of the Company’s officers, directors or employees, or any group of such persons,
relative to the consideration to be received by the shareholders of the Company;
(iv) the relative merits of the Transaction as compared to any alternative
business strategies that might exist for CareGuide or the effect of any other
transaction in which CareGuide might engage; (v) any matters related to the
risks associated with being involved in the health care business, including but
not limited to changes in federal, state or local law, ordinance or regulation,
changes in technology or competitive climate; or, (vi) the tax or legal
consequences of the Transaction to either CareGuide, its shareholders or any
other party or (vii) the actual value which may be received in connection with
the Transaction.
It is
understood that this Opinion is intended for the benefit and use of the Board of
Directors of the Company in connection with its consideration of the
Transaction. This letter is not to be used for any other purpose, or
be reproduced, disseminated, quoted from or referred to at any time, in whole or
in part, without our prior written consent; provided, however, that this letter
may be used by the Company in conjunction with any proxy mailing to shareholders
of the Company and related registration statement filing in connection with the
Transaction, provided that Navigant Consulting has the right to review and
approve the framework in which this document is used or referenced.
We have
acted as a financial advisor to the Board of Directors of CareGuide and will
receive a fee from CareGuide for this Opinion, no portion of which is contingent
upon the consummation of the Transaction or the conclusions reached in this
Opinion. In addition, CareGuide has agreed to indemnify us for
certain liabilities that may arise out of the rendering of this
opinion.
Navigant
Consulting and its affiliates have not previously been engaged by CareGuide or
any other party to the Transaction. Navigant and its affiliates may
seek to provide CareGuide and its respective affiliates with certain investment
banking, consulting or other services unrelated to the Transaction in the
future.
This
Opinion has been approved by the Fairness Opinion Committee of Navigant
Consulting. The Opinion does not constitute a recommendation to the
Board or any shareholders of CareGuide regarding the proposed
Transaction. Furthermore, this Opinion should not be construed as
creating any fiduciary duty on the part of Navigant Consulting to any such
party. Our Opinion is delivered to the recipient subject to the
conditions, scope of engagement, limitations and understandings set forth in
this Opinion and our retainer agreement, and subject to the understanding that
the obligations of Navigant Consulting in connection with this Opinion are
solely corporate obligations, and no officer, director, employee, agent,
shareholder or controlling person of Navigant Consulting shall be subjected to
any personal liability whatsoever to any person, nor will any such claim be
asserted by or on behalf of you or your affiliates.
Board of
Directors
CareGuide,
Inc.
Page 4 of
4
Based
upon and subject to the foregoing, and in reliance thereon, it is our opinion
that the consideration to be paid by CareGuide to the Fractional Shareholders in
connection with the Transaction is fair from a financial point of view to the
Fractional Shareholders.
NAVIGANT
CONSULTING, INC.
Annex
C
CAREGUIDE,
INC.
STOCKHOLDERS
AGREEMENT
[____________],
2008
Table
Of Contents
|
|
|
|
|
|
1.
|
Board
of Directors
|
1
|
2.
|
Irrevocable
Proxy; Conflicting Agreements
|
3
|
3.
|
Legend
|
4
|
4.
|
Disposition
of Securities; No Circumvention
|
4
|
5.
|
Right
of First Refusal
|
4
|
6.
|
Tag-Along
|
5
|
7.
|
Sale
of the Company
|
6
|
8.
|
Permitted
Transfers
|
8
|
9.
|
Preemptive
Rights
|
8
|
10.
|
Financial
Statements and Other Information
|
10
|
11.
|
Representations
and Warranties
|
11
|
12.
|
Registration
Rights
|
12
|
13.
|
Term
|
22
|
14.
|
Definitions
|
22
|
15.
|
Transfer;
Transfers in Violation of Agreement
|
26
|
16.
|
Additional
Investors
|
27
|
17.
|
Descriptive
Headings
|
27
|
18.
|
Amendment
and Waiver
|
27
|
19.
|
Severability
|
27
|
20.
|
Entire
Agreement
|
27
|
21.
|
Successors
and Assigns
|
27
|
22.
|
Counterparts
|
27
|
23.
|
Remedies
|
28
|
24.
|
Notices
|
28
|
25.
|
Governing
Law
|
29
|
26.
|
Venue
|
29
|
27.
|
Waiver
of Jury Trial
|
29
|
28.
|
No
Effect Upon Lender Relationship
|
29
|
29.
|
References
to Securities
|
30
|
30.
|
Attorneys’
Fees
|
30
|
31.
|
Existing
Stockholders Agreement
|
30
|
32.
|
Exculpation
|
30
|
33.
|
Dealings
with the Company
|
30
|
34.
|
Fiduciary
Duty
|
31
|
35.
|
No
Third-Party Beneficiaries
|
31
|
36.
|
Recapitalization,
etc
|
31
|
STOCKHOLDERS
AGREEMENT
THIS
STOCKHOLDERS AGREEMENT (this “Agreement”) is made
as of [________
___], 2008, by and among (i) CAREGUIDE, INC., a Delaware corporation (the
“Company”),
(ii) PSILOS GROUP PARTNERS, L.P. (“Psilos I”), and
PSILOS GROUP PARTNERS II, L.P. (“Psilos II” and,
together with Psilos I, “Psilos”), (iii) ESSEX
WOODLANDS HEALTH VENTURES FUND IV, L.P. and ESSEX WOODLANDS HEALTH VENTURES FUND
V, L.P. (collectively, “Essex”), HICKORY
VENTURE CAPITAL CORPORATION (“Hickory”), DERACE L.
SCHAFFER, M.D. (“Schaffer”) and JOHN
PAPPAJOHN (“Pappajohn” and,
together with Psilos, Essex, Hickory, Schaffer and any additional purchaser
deemed an Investor pursuant to Section 16, the
“Investors”),
(iv) CHRIS E. PATERSON, M.D., MICHAEL J. CONDRON, WILLIAM C. STAPLETON, and
MICHAEL J. BARBER, M.D. (each, individually, an “Executive” and,
collectively with any additional purchaser deemed an Executive pursuant to Section 16, the
“Executives”)
and (v) the other Stockholders (as defined herein) party hereto. The
Investors and the Executives are collectively referred to herein, along with the
other stockholders who are parties to this Agreement or who become parties to
this Agreement pursuant to the provisions of Section 16, as the
“Stockholders”
and each, individually, as a “Stockholder.” A
schedule of Stockholders (the “Schedule of
Stockholders”) is attached hereto. Capitalized terms used but
not otherwise defined herein are defined in Section
14.
The
Company and each of the Investors are parties to that certain Series A Preferred
Stock Purchase Agreement dated as of [ ], 2008 (the “Purchase Agreement”),
whereby on the date hereof such Investors will purchase shares of Series A
Preferred Stock of the Company (the “Series A Preferred
Stock”), a portion of the proceeds of which will be used by the Company
to repurchase fractional shares of Common Stock following a reverse stock split
(the “Reverse Stock
Split”).
The
execution and delivery of this Agreement is a condition to the consummation of
the transactions contemplated by the Purchase Agreement.
NOW,
THEREFORE, in consideration of the mutual covenants contained herein and other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, and intending to be legally bound, the parties to this Agreement
hereby agree as follows:
1. Board of
Directors.
(a) Voting
Agreement. Each Stockholder agrees that until the termination
of this Agreement in accordance with its terms, such Stockholder shall vote all
of such Stockholder’s shares of Common Stock and any other voting Securities of
the Company over which such Stockholder has voting control and shall take all
other actions reasonably necessary or desirable within such Stockholder’s
control (whether in such Stockholder’s capacity as a stockholder, director,
member of a board committee or officer of the Company or otherwise, and
including, without limitation, attendance at meetings in person or by proxy for
purposes of obtaining a quorum and execution of written consents in lieu of
meetings), and the Company shall take all necessary and desirable actions within
its control (including, without limitation, calling special board and
stockholder meetings), so that:
(i) the
authorized number of members on the board of directors of the Company (the
“Board of
Directors”) shall comprise seven (7) members;
(ii) the
following Persons shall be elected to the Board of Directors:
(A) two
(2) representatives designated by Psilos (the “Psilos Directors”),
who shall initially be [__________] and [__________], and after the
date of this Agreement, such other Persons who are designated by Psilos as
replacements from time to time pursuant to this clause (A), for so long as
Psilos holds not less than 20% of the Outstanding Common Stock that it holds on
the date hereof;
(B) one
(1) representative designated by Schaffer, who shall initially be [__________], and after the
date of this Agreement, such other Persons who are designated by Schaffer from
time to time as replacements pursuant to this clause (B), for so long as
Schaffer holds not less than 20% of the Outstanding Common Stock that it holds
on the date hereof;
(C) one
(1) representative designated by Essex, who shall initially be [__________], and after the
date of this Agreement, such other Persons who are designated by Essex from time
to time as replacements pursuant to this clause (C), for so long as Essex holds
not less than 20% of the Outstanding Common Stock that it holds on the date
hereof;
(D) one
(1) representative designated by Pappajohn, who shall initially be [__________], and after the
date of this Agreement, such other Persons who are designated by Pappajohn from
time to time as replacements pursuant to this clause (D), for so long as
Pappajohn holds not less than 20% of the Outstanding Common Stock that it holds
on the date hereof;
(E) the
Company’s Chief Executive Officer, who initially shall be [__________]; and
(F) one
(1) representative designated unanimously by the Persons described in clauses
(A) through (E), who shall initially be [ ], and after the date
of this Agreement, such other Persons who are designated unanimously by the
Persons described in clauses (A) through (E) as replacements from time to time
pursuant to this clause (F).
(iii) the
removal (with or without cause) from the Board of Directors of any member
thereof shall be only upon the written request to the Board of Directors by the
Person or Persons entitled to designate such director pursuant to Section 1(a)(ii)
above;
(iv) in
the event that any representative designated hereunder for any reason ceases to
serve as a member of the Board of Directors during his or her term of office,
the resulting vacancy on the Board of Directors shall be filled by a
representative designated by the Person or Persons entitled to designate such
director pursuant to Section 1(a)(ii)
above; and
(v) if
any party fails (but is otherwise entitled) to designate a representative to the
Board of Directors pursuant to the terms of this Section 1, the
election of a Person to the Board of Directors shall be accomplished in
accordance with the Organizational Documents and applicable law; provided that the
parties shall take all necessary actions to remove such individual if the party
or parties which failed (and are otherwise entitled) to designate such a
representative so directs.
(b) Other
Subsidiaries. The governing body of any Subsidiary shall be
comprised as determined by the Board of Directors.
(c) Required Meetings; Expenses;
Insurance. There shall be at least one (1) meeting of the
Board of Directors during every fiscal year. The Company shall pay
all reasonable out-of-pocket expenses incurred by each member of the Board of
Directors (or any governing body of any Subsidiary) in connection with attending
regular and special meetings of the Board or such other governing body, as
applicable. The Company shall maintain customary directors and
officers’ insurance covering members of the Board of Directors (and members of
the governing body of any Subsidiary) in amounts commensurate with
similarly-situated companies.
2. Irrevocable Proxy;
Conflicting Agreements.
(a) Grant of
Proxy. In order to secure each Stockholder’s obligation to
vote his, her or its Common Stock and other voting securities of the Company in
accordance with the provisions of Section 1 and Section 7 hereof, and
for other good and valuable consideration, each Stockholder hereby appoints
Psilos II as his, her or its true and lawful proxy and attorney-in-fact, with
full power of substitution, to vote all of his, her or its Common Stock and
other voting securities of the Company on all matters that may be submitted to a
vote of the holders of Common Stock in furtherance of the provisions of Section 1 and Section 7
hereof. Psilos II may exercise the irrevocable proxies granted to it
hereunder at any time any Stockholder fails to comply with the provisions of
this Agreement. The proxies and powers granted by each Stockholder
pursuant to this Section 2 are coupled
with an interest and are given to secure the performance of each Stockholder’s
obligations under this Agreement. Such proxies and powers will be
irrevocable for the term of this Agreement and will survive the death,
incompetency and disability of each Stockholder and the respective holders of
their Securities.
(b) No
Conflict. Each Stockholder represents that he, she or it has
not granted and is not a party to any proxy, voting trust or other agreement
which is inconsistent with or conflicts with the provisions of this Agreement,
and no Holder of Securities shall grant any proxy or become party to any voting
trust or other agreement which is inconsistent with or conflicts with the
provisions of this Agreement.
3. Legend. Each
certificate evidencing Securities and each certificate issued in exchange for or
upon the Transfer (as defined below) of any Securities (if such shares remain
Securities as defined herein after such Transfer) shall (in addition to any
other legends required by the terms of such Securities or the agreements under
which such Securities were issued) be stamped or otherwise imprinted with a
legend in substantially the following form:
“THE
TRANSFER OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE IS SUBJECT TO THE
CONDITIONS SPECIFIED IN THE STOCKHOLDERS AGREEMENT DATED AS OF [__________ ___], 2008, AMONG
THE ISSUER (THE “COMPANY”) AND CERTAIN
STOCKHOLDERS, AND THE COMPANY RESERVES THE RIGHT TO REFUSE THE TRANSFER OF SUCH
SECURITIES UNTIL SUCH CONDITIONS HAVE BEEN FULFILLED WITH RESPECT TO SUCH
TRANSFER. A COPY OF SUCH CONDITIONS SHALL BE FURNISHED BY THE COMPANY
TO THE HOLDER HEREOF UPON WRITTEN REQUEST AND WITHOUT CHARGE.”
The
Company shall imprint such legend on certificates evidencing Securities
outstanding prior to the date hereof. The legend set forth above
shall be removed from the certificates evidencing any securities that cease to
be Securities.
4. Disposition of Securities;
No Circumvention. No Stockholder (other than an Executive,
whose restrictions are described in the following sentence) may transfer, sell,
convey, exchange, pledge, hypothecate, encumber or otherwise dispose of
(collectively, “Transfer”) any
Securities, except in compliance with Sections 5, 6, 7, 8
and 15
hereof. No Executive may Transfer any Securities, except in
compliance with Sections 6, 7, 8 and
15
hereof. Any attempted Transfer other than in accordance with this
Agreement shall be null and void. No Stockholder or any of its
Permitted Transferees may do indirectly, through the sale of capital stock of
its or their Subsidiaries or otherwise, that which is not permitted by this
Agreement (including, without limitation, the provisions of Sections 5, 6 and 8).
5. Right of First
Refusal. Any Stockholder (other than an Executive, who may
only Transfer Securities as permitted by the second sentence of Section 4) proposing
to make any Transfer of Securities (a “Disposing
Stockholder”), other than a Transfer permitted pursuant to Sections 5(e), 6, 7 or 8 hereof, agrees not
to consummate such Transfer until the parties to such Transfer have been finally
determined pursuant to and in compliance with this Section
5.
(a) Sale Notice by Disposing
Stockholder. The Disposing Stockholder will deliver a written
notice (the “Sale
Notice”) to the Company, and each of the other Holders who are not the
Disposing Stockholder (collectively, the “Other Stockholders”)
disclosing in reasonable detail the identity of the prospective transferees, the
Securities proposed
to be Transferred (the “Offered Securities”)
and the terms and conditions of the proposed Transfer.
(b) Company
Election. The Company may elect to purchase all or a portion
of the Offered Securities upon the same terms and conditions as those set forth
in the Sale Notice by delivering a written notice of such election to the
Disposing Stockholder and the Other Stockholders within fifteen (15) days after
the receipt of the Sale Notice by the Company. If the Company elects
to purchase less than all of the Offered Securities, it will so notify the Other
Stockholders (the “Availability Notice”)
specifying the quantity of Offered Securities that the Company did not subscribe
for (the “Available
Securities”).
(c) Purchase by Other
Stockholders. Each Other Stockholder may elect to purchase all
or a portion of such Other Stockholder’s Pro Rata Portion of the Available
Securities upon the same terms and conditions as those set forth in the Sale
Notice by delivering a written notice of such election to the Disposing
Stockholder and the Company within fifteen (15) days after the receipt of the
Availability Notice from the Company. If an Other Stockholder elects
to purchase such Other Stockholder’s full Pro Rata Portion (a “Subscribing
Stockholder”), such Subscribing Stockholder may also specify in its
election notice the maximum number of additional Available Securities the
Subscribing Stockholder is committed to purchase in the event that any Other
Stockholder elects to purchase less than its entire Pro Rata Portion of the
Available Securities. In the event of oversubscription by the
Subscribing Stockholders, the Company will allocate the remaining Available
Securities among the Subscribing Stockholders according to their respective Pro
Rata Portions.
(d) Time for
Completion. If the Other Stockholders and/or the Company have
not elected to purchase all of the Offered Securities within forty-five (45)
days after the delivery of the Sale Notice, or have so elected to purchase the
Offered Securities but have not consummated the purchase of the Offered
Securities within sixty (60) days after the delivery of the Sale Notice (“Sales Notice
Expiration”), the Disposing Stockholder may Transfer the Offered
Securities not purchased by the Other Stockholders and/or the Company within
thirty (30) days of the Sales Notice Expiration at a price and on terms no more
favorable to the transferees thereof than those specified in the Sale Notice;
provided, however, that no
transferee shall be a Competitor of the Company. Any Securities not
Transferred within such thirty (30) day period will again be subject to the
provisions of this Section 5 upon
subsequent Transfer.
(e) Exception for Certain
Transfers. Notwithstanding the foregoing provisions of this
Section 5,
provided that
the transferees agree to be bound by the provisions of this Agreement to the
same extent as their transferors, the provisions of this Section 5 shall not
apply to Transfers of Securities to Permitted Transferrees.
6. Tag-Along.
(a) Notice of
Sale. In the event the Company and the Other Stockholders fail
to exercise their respective rights to purchase all of the Offered Securities or
Available Securities pursuant to Section 5, following
the exercise or expiration of the rights of purchase set forth in Section 5, and
subject to Section
6(d), if at any time or from time to time prior to an Initial Public
Offering a Stockholder other than an Executive (a “Disposing Tag-Along
Stockholder”) shall wish to Transfer any of the Securities owned by such
Disposing Tag-Along Stockholder pursuant to a bona fide offer to or from a third
party (the “Buyer”), then such
Disposing Tag-Along Stockholder shall notify each of the non-disposing
Stockholders (the “Non-Disposing
Stockholder”) in writing of such offer and its terms and conditions (a
“Tag-Along Sale
Notice”).
(b) Right to Participate in
Sale. Upon receipt of a Tag-Along Sale Notice, each
Non-Disposing Stockholder shall have the right to sell to the Buyer (the “Tag-Along Sale”), on
the same terms and conditions applicable to the Disposing Tag-Along Stockholder,
in lieu of the sale to the Buyer by the Disposing Tag-Along Stockholder, that
number of shares of the Securities proposed to be sold equal to the product
obtained by multiplying (a) the number of shares of such Securities to be sold
to the Buyer and (b) the quotient derived by dividing (i) the number of shares
of Common Stock held (or deemed to be held) on an as-converted basis by such
Non-Disposing Stockholder by (ii) the total number of shares of Common Stock
held (or deemed to be held) on an as-converted basis by each such Non-Disposing
Stockholder and the Disposing Tag-Along Stockholder. The Non-Disposing
Stockholders’ rights to sell pursuant to this Section 6 can be
exercised by delivery of a written notice to the Disposing Tag-Along Stockholder
within thirty (30) days following the delivery of the Tag-Along Sale Notice to
the Non-Disposing Stockholders of the proposed sale to the Buyer by the
Disposing Tag-Along Stockholder.
(c) Failure to Provide Notice of
Participation. In the event that any of the Non-Disposing
Stockholders do not deliver to the Disposing Tag-Along Stockholder a notice
within such thirty (30) day period, the Disposing Tag-Along Stockholder may
proceed with such sale to such Buyer at the same price and on substantially the
same terms and conditions set forth in such Tag-Along Sale Notice.
(d) Exception. Notwithstanding
the foregoing or anything herein to the contrary, the provisions of this Section 6 shall not
apply to (A) any repurchase of any outstanding Securities by the Company that is
(i) approved by the Board of Directors and 66⅔% in Interest (as such term is
defined in the Certificate of Designations), or (ii) by the Company pursuant to
agreements which permit the Company to repurchase such shares at cost (or the
lesser of cost or fair market value) upon termination of services to the Company
or (B) any purchase of outstanding Securities by the Company or an Other
Stockholder in exercise of the right of first refusal pursuant to Section 5 hereof or
by the Company pursuant to any right of first refusal contained in an agreement
approved by the Board of Directors and 66⅔% in Interest.
7. Sale of the
Company.
(a) Approval of
Sale. Subject to the other applicable terms of this Agreement,
including, without limitation, Section 7(b) hereof,
if (x) the Board of Directors and (y) Holders of an aggregate of two-thirds of
the outstanding Series A Preferred Stock, approve a Liquidation Event (as
defined in the Certificate of Designations) or a Sale of the Company to an
Independent Third Party (collectively, an “Approved Sale”), each
Holder shall vote for, consent to and raise no objections against such Approved
Sale. If the Approved Sale is structured as a (i) merger or
consolidation, each Holder shall waive any dissenters’ rights, appraisal rights
or similar rights in connection with such merger or consolidation or (ii) sale
of stock, each Holder shall agree to sell all of its, his or her Securities and
rights to acquire Securities on the terms and conditions approved by the Board
of Directors. Each Holder shall take all necessary actions in
connection with the consummation of the Approved Sale as requested by the
Company, including the execution of such agreements and such instruments and
other actions reasonably necessary to execute the transfer documents negotiated
by the Company or Psilos, as the case may be; provided that the
terms of such transfer documents are applied equally to similarly situated
Holders. The Holders acknowledge and agree that such transfer
documents are expected to provide customary representations, warranties,
indemnities, and escrow arrangements relating to such Approved Sale and further
may provide for the appointment of a “stockholder’s representative” selected by
Psilos for purposes of purchase price adjustments and proper allocation
and distribution of the final aggregate consideration upon the Approved Sale,
among other things. Such stockholders representative shall be
entitled to reasonable reimbursement of expenses out of the proceeds of the
Approved Sale, and the Company shall set aside funds for such
purpose. The Holders shall be permitted to sell their Securities in
an Approved Sale pursuant to this Section 7 without
complying with the provisions of Sections 5 or 6 of this
Agreement.
(b) Conditions to
Approval. The obligations of the Holders to participate in the
Approved Sale of the Company are subject to the satisfaction of the following
conditions: (i) upon the consummation of the Approved Sale, each Holder shall
receive the same form and amount of consideration (in proportion to the
respective amounts of each class of Security that such Holder owns or has the
right to acquire, but with identical rights and preferences, without giving
effect to any minority or majority ownership interests or voting interests) as
each other Holder of such class of Security, and (ii) if any Holders are given
an option as to the form and amount of consideration to be received, each such
Holder shall be given the same option (in proportion to the respective amount of
each class of Security that such Holder owns or has the right to acquire, but
with identical rights and preferences, without giving effect to any minority or
majority ownership interests or voting interests); provided, however, that the
fact that, in connection with an Approved Sale, certain Holders may receive
either (x) reasonable additional consideration commensurate with the burdens
imposed by entering into restrictive covenants in favor of a purchaser or one of
its affiliates, (y) the right to make a debt or equity investment in a purchaser
or one of its affiliates (whether directly or through contribution of a
Security) or (z) an employment or consulting agreement with purchaser or one of
its affiliates, shall not constitute a failure to satisfy any of the conditions
set forth in this Section
7(b).
(c) Purchaser
Representative. If the Company or the Holders enter into any
negotiation or transaction for which Rule 506 (or any similar rule then in
effect) promulgated by the Commission may be available with respect to such
negotiation or transaction (including a merger, consolidation or other
reorganization), then those Holders that do not qualify at the time as
Accredited Investors shall, at the request of the Company, appoint a “purchaser
representative” (as such term is defined in Rule 501) reasonably acceptable to
the Company. If any Holder appoints a purchaser representative designated by the
Company, the Company shall pay the fees of such purchaser
representative. However, if any Holder declines to appoint the
purchaser representative designated by the Company, such Holder shall appoint
another purchaser representative (reasonably acceptable to the Company), and
such Holder shall be responsible for the fees of the purchaser representative so
appointed.
(d) Costs. All
Holders will bear their respective pro rata share (based upon their pro rata
share of the Aggregate Net Proceeds of the sale of all such Securities) of any
reasonable costs related to the sale of Securities pursuant to an Approved Sale
to the extent such costs are not otherwise paid by the Company or the acquiring
party and to the extent such costs are incurred on behalf of all
Holders. Costs incurred by the Holders on their own behalf shall not
be considered costs of the Approved Sale.
(e) Retained
Proceeds. Any proceeds from an Approved Sale due or owing to
the Company which are subject to claims or potential claims for indemnification
or purchase price adjustment from the Company shall, unless the Company elects
otherwise, be held in escrow or reserve accounts pending expiration of all such
claims or potential claims.
(f) Actions by
Holder. Each Holder will take all necessary or desirable
actions in connection with the consummation of any Approved Sale.
(g) Termination of
Provisions. The provisions of this Section 7 shall cease
to apply following completion of an Initial Public Offering.
8. Permitted
Transfers. Any Stockholder may Transfer Securities (other than
Securities held by an Executive that have not vested in accordance with the
grant terms) without complying with Sections 4, 5 and 6 hereof to Permitted
Transferees (as defined below) who consent in a writing delivered to the Company
to be bound by the terms of this Agreement. With respect to any
Holder who is a natural person, a “Permitted Transferee”
means the spouse or lineal descendants of such Holder, any trust for the benefit
of such Holder, or the benefit of the spouse or lineal descendants of such
Holder, any corporation, partnership or limited liability company in which such
Holder, the spouse and the lineal descendants of such Holder are the direct and
beneficial owners of all of the equity interests (provided such Holder,
spouse and lineal descendants agree in writing to remain the direct and
beneficial owners of all such equity interests), and the personal representative
of such Holder’s estate or upon such Holder’s incompetency for purposes of the
protection and management of the assets of such Holder. With respect
to a Holder who is not a natural person, a “Permitted Transferee”
means any Affiliate of such Holder.
9. Preemptive
Rights. Subject to Section 9(d) and the
limitations set forth in Section 9(c) below,
each time the Company proposes to issue any equity securities, or other
securities of any kind that are or may become convertible into any equity
securities (collectively, “New Issue
Securities”) to any Person, the Company shall first offer the New Issue
Securities to the Investors in accordance with the following
provisions:
(a) The
Company shall give to each Investor hereunder who is at the
time an Accredited Investor a notice stating: (i) the Company’s
intention to issue the New Issue Securities; (ii) the number and description of
such shares or the amount of the New Issue Securities to be issued; (iii) the
purchase price (calculated as of the proposed issuance date) and the other terms
upon which the Company is offering the New Issue Securities; and (iv) the names
of the Persons to whom the Company seeks to issue such New Issue Securities (the
“Preemptive
Notice”).
(b) Transmittal
of the Preemptive Notice to the Investors by the Company shall give each
Investor the right to purchase from the Company his, her or its Pro Rata
Portion, or any lesser number specified by the Investor, of the New Issue
Securities for the price and upon the terms set forth in the Preemptive
Notice. For a period of twenty (20) days after the submission of the
Preemptive Notice to the Investors, each Investor shall have the option,
exercisable by written notice to the Company, to accept the Company’s offer as
to all or any part of such Investor’s Pro Rata Portion or any lesser number of
the New Issue Securities. If two (2) or more types of New Issue
Securities are to be issued or New Issue Securities are to be issued together
with other types of securities, including, without limitation, debt securities,
in a single transaction or related transactions, the rights to purchase New
Issue Securities granted to the Investors under this Section 9 must be
exercised to purchase all types of New Issue Securities and such other
securities in the same proportion as such New Issue Securities and other
securities are to be issued by the Company. If the Investors (as a
group) agree to purchase less than the total number of New Issue Securities
proposed to be issued and sold, the Company shall have one hundred twenty (120)
days thereafter to sell any or all of the remaining New Issue Securities (i.e.,
those not to be sold to any Investor) to the Person or Persons set forth in the
Preemptive Notice, upon terms and conditions no less favorable to the Company,
and no more favorable to such Person or Persons, than those set forth in the
Preemptive Notice. In the event the Company has not sold such New
Issue Securities within said one hundred twenty (120) day period, the Company
will not thereafter issue or sell any New Issue Securities without first
offering such New Issue Securities to the Investors in the manner provided
above.
(c) The
preemptive rights contained in this Section 9 shall not
apply to:
(i) The
issuance and sale by the Company, from time to time pursuant to plans, programs
or agreements approved by the Board of Directors, of shares of Common Stock or
options, rights, or warrants to acquire shares of Common Stock, or of securities
convertible or exchangeable for shares of Common Stock (A) to employees,
officers, or members of or consultants or advisors to the Board of Directors as
compensation for their services to the Company or any of its Subsidiaries or (B)
in connection with a Company Acquisition or other strategic transaction
involving the Company and other entities, including, without limitation, joint
ventures, manufacturing, marketing or distribution arrangements or technology
transfer or development arrangements;
(ii) The
issuance of Securities in a Public Offering;
(iii) The
issuance of Securities to credit financing sources in connection with any
equipment loan or leasing arrangement, real property leasing arrangement, or
debt financing of the Company or its Subsidiaries;
(iv) The
issuance of securities by any Subsidiary of the Company to the
Company;
(v) The
issuance of Securities upon the exercise or exchange of other Securities which
were issued in compliance with this Section 9(c) or
Securities which were issued in an issuance which is exempt from this Section
9(c);
(vi) The
issuance of Securities in connection with any stock split, stock dividend,
reverse split, consolidation, recapitalization of the Company or any other form
of strategic transaction; and
(vii) The
issuance of Securities pursuant to any rights or agreements, options, warrants
or convertible securities outstanding as of the date of this
Agreement.
(d) Notwithstanding
anything to the contrary contained in this Section 9, the
Company may, in order to expedite the issuance of New Issue Securities
hereunder, issue all or a portion of the New Issue Securities to one or more
Persons (each, an “Initial Subscribing
Stockholder”) without complying with the provisions of this Section 9; provided that, prior to such
issuance, either (i) each Initial Subscribing Stockholder agrees to offer to
sell to each Investor who is an Accredited Investor and who is not an Initial
Subscribing Stockholder (each, an “Other Accredited
Stockholder”) his, her or its respective Pro Rata Portion of such New
Issue Securities on the same terms and conditions as issued to the Initial
Subscribing Stockholders and in a manner which provides such Other Accredited
Stockholder with rights substantially similar to the rights outlined in Sections 9(a) and
9(b) or (ii)
the Company shall offer to sell an additional amount of New Issue Securities to
each Investor (other that Initial Subscribing Stockholders) only in an amount
and manner which provides such Investor with rights substantially similar to the
rights outlined in Sections 9(a) and
9(b). The
Initial Subscribing Stockholders or the Company, as applicable, shall offer to
sell such New Issue Securities to each Other Accredited Stockholder or Investor
(other that Initial Subscribing Stockholders), respectively and as applicable,
within ninety (90) days after the closing of the purchase of the New Issue
Securities by the Initial Subscribing Stockholders.
10. Financial Statements and
Other Information.
(a) The
Company shall deliver the following information to each Stockholder with a
continuing right to designate a member of the Board of Directors pursuant to
Section 1
hereof (and if such Stockholder is also a lender to the Company, such
information will be provided to such Stockholder to the extent not also received
by such Stockholder in its capacity as a lender):
(i) as
soon as available but in any event within thirty (30) days after the end of each
monthly accounting period in each fiscal year, unaudited consolidated and
consolidating statements of income and cash flows of the Company and its
Subsidiaries for such monthly period and for the period from the beginning of
the fiscal year to the end of such month, and unaudited consolidated and
consolidating balance sheets of the Company and its Subsidiaries as of the end
of such monthly period, setting forth in each case comparisons to the
corresponding period in the preceding fiscal year, and all such items shall be
prepared in accordance with United States generally accepted accounting
principles (“GAAP”), consistently
applied, subject to normal year-end adjustments and the absence of footnote
disclosure;
(ii) as
soon as available but in any event within sixty (60) days after the end of each
of the first three fiscal quarters in each fiscal year, unaudited consolidated
and consolidating statements of income and cash flows of the Company and its
Subsidiaries for such quarterly period and for the period from the beginning of
the fiscal year to the end of such fiscal quarter, and unaudited consolidated
and consolidating balance sheets of the Company and its Subsidiaries as of the
end of such quarterly period, setting forth in each case comparisons to the
corresponding period in the preceding fiscal year, and all such items shall be
prepared in accordance with GAAP, consistently applied, subject to normal
year-end adjustments and the absence of footnote disclosure; and
(iii) within
120 days after the end of each fiscal year, consolidated and consolidating
statements of income, cash flows and stockholders’ equity of the Company and its
Subsidiaries for such fiscal year, and consolidated and consolidating balance
sheets of the Company and its Subsidiaries as of the end of such fiscal year,
setting forth in each case in comparative form the figures for the previous
fiscal year, all
prepared in accordance with GAAP, consistently applied.
(b) The
Company shall deliver, not more than forty-five (45) days after the beginning of
each fiscal year, to each Stockholder with a continuing right to designate a
member of the Board of Directors pursuant to Section 1 hereof, an
annual budget prepared on a monthly basis for the Company and its Subsidiaries
for such fiscal year (displaying anticipated statements of income and cash flows
and balance sheets) and comparable actual and budgeted figures for the current
year, and promptly upon preparation thereof any revisions of such annual
budget. Delivery of such materials pursuant to this Section 10(b) to the
individual or individuals designated by each such Stockholder pursuant to Section 1 shall
satisfy the Company’s obligations under this Section
10(b).
(c) Each
Stockholder with a continuing right to designate a member of the Board of
Directors pursuant to Section 1 hereof
shall have the right, at his, her or its own expense, to inspect the books,
records and premises of the Company, and to discuss the Company’s affairs with
officers, directors, employees and accountants, at any time, with the Company’s
prior consent, which shall not be unreasonably withheld.
11. Representations and
Warranties. Each of the Holders hereby represents and warrants
to the following with respect to himself, herself or itself, as the case may
be:
(a) Authorization. All
corporate, partnership, member or other action on the part of the Holder, its
directors, holders, members or partners necessary for the authorization,
execution, delivery and performance by such Holder (if a corporation,
partnership, limited liability company or other entity) of this Agreement has
been taken. This Agreement is a legal, valid and binding obligation
of such Holder, enforceable against such Holder strictly in accordance with its
terms, except as such enforceability may be limited by (i) applicable
bankruptcy, insolvency, reorganization, moratorium or other similar laws
affecting the enforcement of creditor’s rights generally and (ii) general
principles of equity (regardless of whether such enforceability is considered in
a proceeding in equity or at law).
(b) No
Violation. The execution and delivery of this Agreement will
not (with or without notice or passage of time or both) (a) conflict with or
result in a breach of any provision of the certificate of incorporation,
by-laws, partnership agreement, operating agreement or other organizational
documents of a Holder (if a corporation, partnership, limited liability company
or other entity), (b) result in a default, give rise to any right of
termination, cancellation or acceleration, or require any consent or approval,
under any of the terms, conditions or provisions of any note, bond, mortgage,
indenture, loan, factoring arrangement, license, agreement, lease or other
instrument or obligation to which such Holder is a party or by which it or any
of its assets may be bound, other than any default which would not have a
material adverse effect on the business, operations, financial condition, assets
or properties of such Holder or (c) violate any law, judgment, order, writ,
injunction, decree, statute, rule or regulation of any court, administrative
agency, bureau, board, commission, office, authority, department or other
governmental entity applicable to such Holder or any of its assets, other than
any violation which would not have a material adverse effect on the business,
operations, financial condition, assets or properties of such
Holder.
12. Registration
Rights.
(a) Demand Registration
Rights.
(i) Subject
to Section
12(a)(iii) below, upon written notice (the “Demand Notice”) from
Holders of not less than two-thirds of the outstanding Series A Preferred Stock
(the “Requesting
Stockholders” and any Registrable Securities thereof to be included in
such demand, the “Demand Securities”),
the Company shall give written notice of such request to all Holders within
thirty (30) days of receipt of such notice and shall use all reasonable efforts
to effect at the earliest possible date and maintain a registration of the
Registrable Securities held by the Requesting Stockholders and any underwriter
with respect to such Registrable Securities, in accordance with the intended
method or methods of disposition specified by the Requesting Stockholders
(including, but not limited to, an offering on a delayed or continuous basis
pursuant to Rule 415 (or any successor rule) promulgated under the Securities
Act); provided,
that if, after a Registration request pursuant to this Section 12(a) has
been made, the Company has determined in good faith, after consultation with its
outside legal counsel, that the filing of a Registration would be seriously
detrimental to the Company and its stockholders, the Company shall have the
right to defer a Registration pursuant to this Section 12(a) for a
period of not more than ninety (90) days after such good faith determination;
provided, further, that the
Requesting Stockholders shall not have the right to utilize the services of an
underwriter unless the anticipated gross proceeds of the shares of Company Stock
to be offered exceed $15,000,000. The Requesting Stockholders
requesting a Registration under this Section 12(a) may, at
any time prior to the effective date of the registration statement relating to
such Registration, revoke such request by providing written notice thereof to
the Company.
(ii) In
connection with any Registration requested pursuant to this Section 12(a), (A)
the Requesting Stockholders shall have the right to designate the managing
underwriter(s) and (B) the Company shall take such other actions, including,
without limitation, listing such shares of Company Stock for trading on any
securities exchange (to the extent such shares are not then listed on a
securities exchange) and registering or qualifying such shares of Company Stock
under state securities laws, as may be reasonably requested by the Requesting
Stockholders. If the Requesting Stockholders consent to the inclusion
of offers and sales of any other securities in a Registration of shares of
Company Stock by the Requesting Stockholders pursuant to this Section 12(a) and the
underwriter(s) retained in connection with such Registration advise the Company
in writing that such offering would be materially and adversely affected by the
inclusion of such securities, the Requesting Stockholders may in their sole
discretion exclude all or some of such securities from such offering; provided that this
sentence shall not apply to shares of Company Stock included in any such
Registration pursuant to the exercise of rights pursuant to Section
12(b).
(iii) The
Requesting Stockholders shall be entitled to request a Registration pursuant to
this Section
12(a) only one time. Notwithstanding anything to the contrary,
any Registration requested by the Requesting Stockholders pursuant to this Section 12(a) shall
not be deemed to have been effected (and, therefore, not requested for purposes
of this Section
12(a)(iii)), (x) unless it has become effective, provided, that a
registration which does not become effective after the Company has filed a
registration statement with respect thereto solely by reason of the refusal to
proceed by the Requesting Stockholders (other than a refusal to
proceed based upon the written advice of counsel relating to the occurrence,
following the date of the Demand Notice, of a material adverse event with
respect to the Company) shall be deemed to have been effected by the Company at
the request of such Requesting Stockholders pursuant to this Section 12(a) unless
the Requesting Stockholders shall have paid all Registration Expenses in
connection with such registration, (y) if after it has become effective such
Registration is interfered with by any stop order, injunction or other order or
requirement of the SEC or other governmental agency or court for any reason
other than a misrepresentation or an omission by the Requesting Stockholders
and, as a result thereof, the shares of Company Stock requested to be registered
cannot be completely distributed in accordance with the plan of distribution set
forth in the related registration statement or (z) if the closing pursuant to
the purchase agreement or underwriting agreement entered into in connection with
such Registration does not occur, except because of a breach of such agreement
by the Requesting Stockholders. Any Registration of Registrable
Securities effected pursuant to Section 12(b) by a
Stockholder exercising its rights pursuant to Section 12(b) shall
not be deemed to have been requested by the Requesting Stockholders for purposes
of this Section
12(a)(iii).
(iv) In
addition to the limitations described in this Section 12(a), the
Company shall not be required to effect a registration pursuant to this Section
12(a): (i) during the period starting with the date of filing
of, and ending on the date one hundred eighty (180) days following the effective
date of the registration statement pertaining to an Initial Public Offering,
provided that the Company makes reasonable good faith efforts to cause such
registration statement to become effective; (ii) if within thirty (30) days of
receipt of a written request from Requesting Stockholders pursuant to this Section 12(a), the
Company gives notice to the Requesting Stockholders of the Company’s intention
to file a registration statement for its Initial Public Offering within ninety
(90) days; or (iii) in any particular jurisdiction in which the Company would be
required to qualify to do business or to execute a general consent to service of
process in effecting such registration, qualification or
compliance.
(b) Piggyback Registration
Rights. If at any time following the consummation of a
Qualified Public Offering the Company proposes to effect a Registration, whether
or not for sale for its own account and (subject to the provisions of Section 12(a) above)
whether or not pursuant to the exercise of any of the demand registration rights
referred to in Section
12(a) hereof, the Company will each such time, subject to the provisions
of Sections
12(a) and 12(b)(iii), give
prompt written notice to all Investors (and such other Persons granted such
piggyback registration rights) of record of Registrable Securities of its
intention to do so and of the rights under this Section 12 of such
Investor (and such other Persons granted such piggyback registration rights), at
least ten (10) days prior to the anticipated filing date of the registration
statement relating to such Registration. Such notice shall offer all
such Investors (and such other Persons granted such piggyback registration
rights) the opportunity to include in such registration statement such number of
Registrable Securities as each such Person may request (the “Piggyback
Securities”). Upon the written request of any such Investor
(or such other Persons granted such piggyback registration rights) made within
ten (10) days after the receipt of the Company’s notice (which request shall
specify the number of Registrable Securities intended to be disposed of by such
Investor), the Company will use its commercially reasonable efforts to effect
the Registration under the Securities Act and the qualification under any
applicable state securities or blue sky laws of all Registrable Securities which
the Company has been so requested to register by the Investor thereof, to the
extent required to permit the disposition (in accordance with such intended
methods thereof) of the Registrable Securities so requested to be registered;
provided,
that:
(i) if
such Registration involves an underwritten public offering, all Investors
requesting that their Piggyback Securities be included in the Company’s
Registration must, upon request by the underwriter(s), sell their Registrable
Securities to such underwriter(s) selected by the Company (or the Requesting
Stockholders in accordance with Section 12(a), as the
case may be) on the same terms and conditions as apply to the Company or any
selling security holder (or on equivalent terms and conditions, in the event
that such Requesting Stockholders hold different securities from those being
sold by the Company or such selling security holder), including, without
limitation, executing and delivering such underwriting agreements or other
related agreements to which the Company or any such selling security holder has
agreed to execute and deliver;
(ii) if,
at any time after giving written notice of its intention to register any
securities pursuant to this Section 12(b) and
prior to the effective date of the registration statement filed in connection
with such Registration, the Company shall determine for any reason not to
register such securities, the Company shall give written notice to all Investors
of Registrable Securities and, thereupon, shall be relieved of its obligation to
register any Piggyback Securities in connection with such Registration (without
prejudice, however, to the rights of the Requesting Stockholders immediately to
request that such registration be effected as a Registration under Section
12(a));
(iii) if
a Registration pursuant to this Section 12(b)
involves an underwritten public offering, any Investor holding Registrable
Securities requesting to be included in such Registration may elect, in writing
at least seven (7) days prior to the effective date of the registration
statement filed in connection with such Registration, not to register such
securities in connection with such Registration;
(iv) the
Company shall not be required to effect any Registration of shares of Company
Stock under this Section 12(b)
incidental to the registration of any of its securities in connection with
mergers, acquisitions, exchange offers, subscription offers, dividend
reinvestment plans or stock option or other executive or employee benefit or
compensation plans (including, without limitation, any registration of
securities on a Form S-4 or S-8 registration statement or any successor or
similar forms), other than in connection with an employee stock ownership plan
meeting the requirements of §1042 of the Code and involving an acquisition by an
employee stock ownership plan of more than 30% of the outstanding shares of
Common Stock (excluding any unexercised options); and
(v) no
Registration of Securities effected under this Section 12(b) shall
relieve the Company of its obligation to effect a Registration of shares of the
Common Stock of the Company (the “Company Stock”)
pursuant to Section
12(a).
(c) Priority in Piggyback
Registrations.
(i) Except
as set forth in Section 12(c)(ii), if
at any time following a Qualified Public Offering (or in connection with a
Qualified Public Offering as contemplated in Section 12(c)(iii)
below) the Company proposes to effect another Registration in connection with an
underwritten offering (including any Registration pursuant to the exercise of
any of the demand registration rights referred to in Section 12(a)),
including any Registration for the Company’s account, and the managing
underwriter(s) advise the Company in writing that, in its or their judgment, the
number of shares of equity securities of the Company (including all shares of
Registrable Securities) which the Company, the Stockholders and any other
persons intend to include in such Registration exceeds the largest number of
securities which can be sold without having an adverse effect on such offering,
including the price at which such securities can be sold, the Company shall
include in such Registration:
(A) first,
all securities the Company proposes to sell for its own account (the “Company Securities”)
except if such Registration of shares of Company Stock is pursuant to a demand
registration by Requesting Stockholders pursuant to Section 12(a), in
which case such Requesting Stockholders shall have first priority and the
Company shall have second priority;
(B) thereafter,
to the extent that the number or dollar amount of the Company Securities to be
offered by the Company (or the Company and any Requesting Stockholders
exercising demand rights pursuant to Section 12(a)), if
any, is less than the number of shares of securities which the Company has been
advised by the managing underwriter(s) can be sold in such offering without
having the adverse effect referred to above, all Piggyback Securities requested
to be sold by any Investor; provided, that if the
number of the Company Securities, Demand Securities and Piggyback Securities
exceeds the number of shares of securities which the Company has been advised
can be sold in such offering without having the adverse effect referred to
above, the number of such Piggyback Securities that may be included by each such
Investor in such offering shall be the product of (x) the total number of
Piggyback Securities that are capable of being sold in such offering without
having the adverse effect referred to above, times (y) a fraction,
(1) the numerator of which shall be the number of Registrable Securities held or
deemed to be held by each such requesting Investor that such Investor has
requested to be included in such Registration and (2) the denominator of which
shall be the aggregate number of Registrable Securities held or deemed to be
held on such date by the requesting Investors that such Investors have requested
to be included in such Registration; provided, further, that in the
event any such Investor desires to include fewer shares of Registrable
Securities in such offering than such Investor has been so allocated, the
resulting number of remaining available shares of securities which the Company
has been advised can be sold in such offering without having the adverse effect
referred to above, shall be allocated among the other Investors entitled to
include their Registrable Securities as set forth in this Section 12(c)(i)(B)
in accordance with the formula set forth above, and such process of remainder
allocation shall be applied iteratively until such time as all requesting
holders shall be satisfied; and
(C) third,
to the extent that the number of Company Securities, Demand Securities and
Piggyback Securities held by Investors is less than the number of shares of
securities which the Company has been advised can be sold in such offering
without having the adverse effect referred to above, the equity securities
requested to be sold for the account of any other Persons (allocated among the
Persons holding such other securities in such proportions as such Persons and
the Company may agree).
(ii) Notwithstanding
anything contained in Section 12(c)(i), in
the event of the demand registration granted to the Requesting Stockholders
pursuant to Section
12(a), the Company shall include in such Registration:
(A) first,
all Demand Securities proposed to be sold by the Requesting
Stockholders;
(B) second,
to the extent that the number of Demand Securities is less than the number of
shares of securities which the Company has been advised can be sold in such
offering without having the adverse effect referred to in Section 12(c)(i), all
Company Securities requested to be sold by the Company;
(C) third,
to the extent that the number of Company Securities and Demand Securities is
less than the number of shares of securities which the Company has been advised
can be sold in such offering without having the adverse effect referred to in
Section
12(c)(i), all Piggyback Securities requested to be sold by any Investor;
provided, that
if the number of the Piggyback Securities requested to be sold by such Investors
exceeds the number of shares of securities which the Company has been advised
can be sold in such offering without having the adverse effect referred to in
Section
12(c)(i), the number of such Piggyback Securities that may be included by
each such Investor in such offering shall be determined in a manner consistent
with the calculation set forth in Section 12(c)(i)(B);
and
(D) fourth,
to the extent that the number of Company Securities, Demand Securities and
Piggyback Securities held by Investors is less than the number of shares of
securities which the Company has been advised can be sold in such offering
without having the adverse effect referred to in Section 12(c)(i), the
equity securities requested to be sold for the account of any other Persons
(allocated among the Persons holding such other securities in such proportions
as such Persons and the Company may agree).
(iii) Notwithstanding
any rights provided in this Section 12, in any
Qualified Public Offering which affords any Stockholder the right to sell shares
of Company Stock, all Investors shall be entitled to the rights set forth in
Section 12(b)
and Section
12(c)(i) above as if the offering occurred following a Qualified Public
Offering.
(d) Expenses. The
Company will pay all Registration Expenses in connection with each Registration
of Registrable Securities requested pursuant to this Section 12 (including
any Registration deemed not to be “effected” under Section 12(a)(iii) or
not consummated as contemplated by Section 12(b)(ii))
and any other actions that may be taken in connection with any such Registration
as contemplated by this Section 12; provided, that the
Company will not be obligated to pay any underwriting discounts or commissions
or transfer taxes, if any, relating to the sale or disposition of securities
sold by Persons other than the Company pursuant to any such
Registration.
(e) Other
Actions. In connection with any offering of securities of the
Company contemplated by this Section 12, the
Company shall take such other actions in connection therewith as may be
necessary or appropriate, including, without limitation, entering into customary
underwriting arrangements and customary indemnification of the Requesting
Stockholders or any other Stockholder selling shares of Company Stock in such
offering.
(f) Indemnification by the
Company. In the event of any Registration of any securities of
the Company under the Securities Act pursuant to this Section 12, the
Company will, and it hereby does, indemnify and hold harmless, to the full
extent permitted by law, each of the Stockholders holding any Registrable
Securities covered by such registration statement, its Representatives, each
other Person who participates as an underwriter in the offering or sale of such
securities and each other Person, if any, who controls, is controlled by or is
under common control with such Stockholder or any such underwriter within the
meaning of the Securities Act, against any and all losses, claims, damages or
liabilities, joint or several, and expenses (including any amounts paid in any
settlement effected with the Company’s consent, which consent shall not be
unreasonably withheld) to which such Stockholder, any such Representative or any
such underwriter or controlling Person may become subject under the Securities
Act, state securities or blue sky laws, common law or otherwise, insofar as such
losses, claims, damages or liabilities (or actions or proceedings in respect
thereof) or expenses arise out of or are based upon (i) any untrue statement or
alleged untrue statement of any material fact contained in any registration
statement under which such securities were registered under the Securities Act,
any preliminary, final or summary prospectus contained therein, or any amendment
or supplement thereto, or a document incorporated by reference into any of the
foregoing, (ii) any omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements therein
not misleading, or (iii) any violation by the Company of any federal, state or
common law rule or regulation applicable to the Company and relating to action
required of or inaction by the Company in connection with any such Registration,
and the Company will reimburse such Stockholder and each such Representative or
underwriter and controlling person for any legal or any other expenses
reasonably incurred by them in connection with investigating or defending such
loss, claim, liability, action or proceeding; provided, that the
Company shall not be liable in any such case to the extent that any such loss,
claim, damage, liability (or action or proceeding in respect thereof) or
expenses arises out of or is based upon any untrue statement or alleged untrue
statement or omission or alleged omission made in such registration statement,
preliminary, final or summary prospectus or amendment or supplement thereto, or
a document incorporated by reference into any of the foregoing, in reliance upon
and in conformity with written information furnished to the Company by or on
behalf of such Stockholder or any such Representative or underwriter expressly
for use in the preparation of such registration statement, preliminary, final or
summary prospectus or amendment or supplement thereto, or a document
incorporated by reference into any of the foregoing. Such indemnity
shall remain in full force and effect regardless of any investigation made by or
on behalf of such Stockholder or any such Representative or underwriter and
shall survive the transfer of such securities by such Stockholder.
(g) Indemnification by the
Stockholders and Underwriters. The Company may require, as a
condition to including any Registrable Securities in any registration statement
filed in accordance with this Section 12, that the
Company shall have received an undertaking reasonably satisfactory to it from
the Stockholders of such Registrable Securities and any underwriter, to
indemnify and hold harmless severally, and not jointly and severally (in the
same manner and to the same extent as set forth in Section 12(f)), the
Company and its Representatives and all other prospective sellers and their
respective Representatives, and their respective controlling persons with
respect to any statement or alleged statement in or omission or alleged omission
from such registration statement, preliminary, final or summary prospectus or
amendment or supplement thereto, or a document incorporated by reference into
any of the foregoing, if such statement or alleged statement or omission or
alleged omission was made in reliance upon and in conformity with written
information furnished to the Company by or on behalf of such Stockholder or any
such Representative or underwriter expressly for use in the preparation of such
registration statement, preliminary, final or summary prospectus or amendment or
supplement thereto, or a document incorporated by reference into any of the
foregoing. Such indemnity shall remain in full force and effect
regardless of any investigation made by or on behalf of the Company or any of
the Stockholders, underwriters or any of their respective Representatives or
controlling persons and shall survive the transfer of such securities by such
Stockholder; provided, that no
such Stockholder shall be liable under this Section 12(g) for any
amounts exceeding the product of the sale price per Registrable Security (net of
any underwriters’ or placement agents’ fees, discounts or commissions related
thereto) and the number of Registrable Securities being sold pursuant to such
registration statement or prospectus by such Stockholder.
(h) Notices of Claims,
Etc. Promptly after receipt by an indemnified party hereunder
of written notice of the commencement of any action or proceeding with respect
to which a claim for indemnification may be made pursuant to this Section 12, such
indemnified party will, if a claim in respect thereof is to be made against an
indemnifying party, promptly give written notice to the latter of the
commencement of such action; provided, however, that the
failure of any indemnified party to give notice as provided herein shall not
relieve the indemnifying party of its obligations under the preceding
subsections of this Section 12, except to
the extent that the indemnifying party is actually materially prejudiced by such
failure to give notice. In case any such action is brought against an
indemnified party, unless in such indemnified party’s reasonable judgment a
conflict of interest between such indemnified and indemnifying parties may exist
in respect of such claim, the indemnifying party will be entitled to participate
in and, jointly with any other indemnifying party similarly notified, to assume
the defense thereof, to the extent that it may wish, with counsel reasonably
satisfactory to such indemnified party, and after notice from the indemnifying
party of its election so to assume the defense thereof, the indemnifying party
will not be liable to such indemnified party for any legal or other expenses
subsequently incurred by the latter in connection with the defense thereof,
unless in such indemnified party’s reasonable judgment a conflict of interest
between such indemnified and indemnifying parties arises in respect of such
claim after the assumption of the defense thereof, and the indemnifying party
will not be subject to any liability for any settlement made without its consent
(which consent shall not be unreasonably withheld). No indemnifying
party will consent to entry of any judgment or enter into any settlement which
does not include as an unconditional term thereof the giving by the claimant or
plaintiff to such indemnified party of a release from all liability in respect
of such claim or litigation. An indemnifying party who is not
entitled to, or elects not to, assume the defense of a claim will not be
obligated to pay the fees and expenses of more than one counsel for all parties
indemnified by such indemnifying party with respect to such claim, unless in the
reasonable judgment of any indemnified party a conflict of interest may exist
between such indemnified party and any other of such indemnified parties with
respect to such claim, in which event the indemnifying party shall be obligated
to pay the fees and expenses of such additional counsel or
counsels.
(i) Other
Indemnification. Indemnification similar to that specified in
the preceding Sections of this Section 12 (with
appropriate modifications) shall be given by the Company and each Stockholder
holding Registrable Securities with respect to any required Registration or
other qualification of securities under any federal or state law or any
regulation of a governmental authority other than arising under the Securities
Act.
(j) Registration
Procedure.
(i) If
and whenever the Company is required to effect or cause the Registration of any
Registrable Securities pursuant to this Section 12, the
Company will, as expeditiously as possible:
(A) Prepare
in cooperation with the sellers (and, in the event of an underwritten public
offering, with the underwriter(s)), and file with the SEC, in a manner
consistent with the provisions of this Section 12, a
registration statement with respect to such Registrable Securities on any form
for which the Company then qualifies or which counsel for the Company shall deem
appropriate as the case may be, and which form shall be available for the sale
of the Registrable Securities in accordance with the intended methods of
distribution thereof, and use its commercially reasonable efforts to cause such
registration statement to become and remain effective; provided, that before
filing with the SEC a registration statement or prospectus or any amendments or
supplements thereto, the Company will (i) furnish to one counsel selected by the
Requesting Stockholders, in the event of a Registration effected pursuant to
Section 12(a),
or selected by the holders of a majority of the Registrable Securities covered
by such registration statement, in the event of any other Registration, copies
of all such documents proposed to be filed, which documents will be subject to
the timely review of such counsel, and (ii) notify each holder of Registrable
Securities covered by such registration statement of any stop order issued or
threatened by the SEC and take all reasonable actions required to prevent the
entry of such stop order or to remove it if entered.
(B) Prepare
and file with the SEC such amendments and supplements to such registration
statement and the prospectus used in connection therewith as may be necessary to
keep such registration statement effective for a period of not less than one
hundred twenty (120) days or such shorter period which will terminate when all
Registrable Securities covered by such registration statement have been sold
(but not before the expiration of the ninety (90) day period referred to in
Section 4(3) of the Securities Act and Rule 174 thereunder, if applicable) and
comply with the provisions of the Securities Act with respect to the disposition
of all securities covered by such registration statement during such period in
accordance with the intended methods of disposition by the seller or sellers
thereof set forth in such registration statement.
(C) Furnish
to each holder of Registrable Securities covered by the registration statement
and to each underwriter, if any, of such Registrable Securities, such number of
copies of such registration statement, each amendment and supplement thereto (in
each case including all exhibits thereto), and the prospectus included in such
registration statement (including each preliminary prospectus), and such other
documents, as such Person may reasonably request, in order to facilitate the
public sale or other disposition of the Registrable Securities owned by such
holder.
(D) Use
its commercially reasonable efforts to register or qualify such Registrable
Securities covered by such registration statement under such other securities or
blue sky laws of such jurisdictions as any holder, and underwriter, if any, of
Registrable Securities covered by such registration statement shall reasonably
request, and do any and all other acts and things which may be reasonably
necessary or advisable to enable such seller to consummate the disposition in
such jurisdictions of the Registrable Securities owned by such seller; provided, that the
Company shall not for any such purpose, be required to (A) qualify to do
business as a foreign corporation in any jurisdiction where, but for the
requirements of this Section 12(j), it is
not then so qualified, (B) subject itself to taxation in any such jurisdiction,
or (C) take any action which would subject it to consent to general or unlimited
service of process not then so subject.
(E) Use
its commercially reasonable efforts to cause such Registrable Securities covered
by such registration statement to be registered with or approved by such other
governmental agencies or authorities as may be necessary by virtue of the
business and operations of the Company to enable the seller or sellers thereof
to consummate the disposition of such Registrable Securities.
(F) Immediately
notify each seller of Registrable Securities covered by such registration
statement, at any time when a prospectus relating thereto is required to be
delivered under the Securities Act, of the happening of any event which comes to
the Company’s attention if as a result of such event the prospectus included in
such registration statement, as then in effect, includes any untrue statement of
a material fact or omits to state a material fact necessary in order to make the
statements made therein, in the light of the circumstances under which they were
made, not misleading and at the request of any such seller, deliver a reasonable
number of copies of an amended or supplemental prospectus as may be necessary so
that, as thereafter delivered to the purchasers of such Registrable Securities,
such prospectus shall not include any untrue statement of a material fact or
omit to state a material fact necessary in order to make the statements made
therein, in the light of the circumstances under which they were made, not
misleading.
(G) Otherwise
use its commercially reasonable efforts to comply with all applicable rules and
regulations of the SEC and make available to its security holders, in each case
as soon as practicable, an earnings statement covering a period of at least 12
months, beginning with the first month after the effective date of the
registration statement (as the term “effective date” is defined in Rule 158(c)
under the Securities Act), which earnings statement shall satisfy the provisions
of Section 11(a) of the Securities Act including, at the option of the Company,
Rule 158 thereunder.
(H) Use
its commercially reasonable efforts to cause all such Registrable Securities to
be listed on such national securities exchange as may be reasonably requested by
the Requesting Stockholders, and if any similar securities issued by the Company
are then listed on any securities exchanges, to also list all such Registrable
Securities on such securities exchanges, and enter into such customary
agreements including a listing application and indemnification agreement in
customary form, provided, that the
applicable listing requirements are satisfied, and to provide a transfer agent
and registrar for such Registrable Securities covered by such registration
statement no later than the effective date of such registration
statement.
(I) Use
its commercially reasonable efforts to obtain a “cold comfort” letter from the
independent public accountants for the Company in customary form and covering
matters of the type customarily covered by such letters as may be reasonably
requested by the Requesting Stockholders, in the event of a Registration
effected pursuant to Section 12(a), or by
the holders of a majority of the Registrable Securities covered by such
registration statement, in the event of any other Registration.
(J) Execute
and deliver all instruments and documents (including in an underwritten offering
an underwriting agreement in customary form) and take such other actions and
obtain such certificates and opinions as sellers of a majority of the
Registrable Securities being sold reasonably request in order to effect an
underwritten public offering of such Registrable Securities. The
Company may require each holder of Registrable Securities as to which any
Registration is being effected to furnish to the Company such information
regarding such holder and the distribution of such Registrable Securities as the
Company may from time to time reasonably request in writing in connection with
effecting such offering.
(ii) Each
holder of Registrable Securities will, upon receipt of any notice from the
Company of the happening of any event of the kind described in Section 12(j)(i)(F),
forthwith discontinue disposition of the Registrable Securities pursuant to the
registration statement covering such Registrable Securities until such holder’s
receipt of the copies of the supplemented or amended prospectus contemplated by
Section
12(j)(i)(F), and, if so directed by the Company, such holder will deliver
to the Company (at the Company’s expense) all copies, other than permanent file
copies, then in such holder’s possession, of the prospectus covering such
Registrable Securities at the time of receipt of such notice.
(k) Rule
144. If the Company shall have filed a registration statement
pursuant to the requirements of Section 12 of the Exchange Act or a registration
statement pursuant to the requirements of the Securities Act following the date
hereof, the Company covenants that it will file the reports required to be filed
by it under the Securities Act and the Exchange Act and the rules and
regulations adopted by the SEC thereunder, and it will take such further action
as any holder of Registrable Securities may reasonably request, all to the
extent required from time to time to enable such holder to sell shares of
Registrable Securities without registration under the Securities Act within the
limitation of the exemptions provided by (i) Rule 144 under the Securities Act,
as such Rule may be amended from time to time, or (ii) any similar rule or
regulation hereafter adopted by the SEC. Upon the request of any
holder of Registrable Securities, the Company will deliver to such holder a
written statement as to whether it has complied with such
requirements.
(l) Lock-Up
Period. Each Stockholder, if requested by the Board of
Directors and an underwriter of Company Stock or other securities of the
Company, shall agree pursuant to a written agreement not to sell or otherwise
transfer or dispose of any Registrable Securities or other securities of the
Company held by such Stockholder for a specified period of time (not longer than
thirty (30) days) prior to the effective date of a Registration Statement and
for a specified period of time (not longer than one hundred eighty (180) days,
in the case of the Company’s Initial Public Offering, or ninety (90) days in any
subsequent public offering or, in each case, such longer period as the
underwriters or the Company shall reasonably request in order to facilitate
compliance with NASD Rule 2711 or NYSE Member Rule 472 or any successor or
similar rule or regulation) following the effective date of a Registration
Statement; provided, however, that such
agreement shall not apply to any Registrable Securities (or other securities of
the Company) held by such Stockholder if they are included in the Registration
Statement. The Company may impose stop transfer instructions with
respect to the Registrable Shares or other securities subject to the foregoing
restrictions, until the end of the lock-up period. The written
agreement referred to in the first sentence of this Section 12(l) is in
addition to and not in replacement of other transfer restrictions contained in
this Agreement.
(m) No Other Registration
Rights. The Company agrees that it will not grant registration
rights to any other Person without the consent of Holders of two-thirds of the
outstanding shares of Series A Preferred Stock.
13. Term. This
Agreement will terminate upon the consummation of a (i) Qualified Public
Offering (other than the provisions of Sections 12 through
14 and Sections 17 through
35, which shall
survive any Qualified Public Offering) or (ii) Sale of the Company.
14. Definitions.
(a) The
following terms have the following definitions in this Agreement:
“10% Owner” has the
meaning given such term in the definition of “Independent Third
Party.”
“Accredited Investor”
has the meaning set forth in Rule 501 promulgated under the Securities
Act.
“Affiliate” of a
Holder means any general or limited partner of a Holder or any other Person,
entity or investment fund controlling, controlled by or under common control
with the Holder.
“Aggregate Net
Proceeds” means the aggregate proceeds received by Holders in connection
with an Approved Sale after reduction for the applicable transaction expenses of
the Company, its Subsidiaries and the Holders.
“Business Day” means
any day that is not a Saturday, Sunday or other day on which banks are required
or authorized by law to be closed in New York, New York.
“Certificate of
Designations” means the Second Amended Certificate of Designations,
Powers, Preferences and Relative, Participating, Optional or Other
Special Rights, and the Qualifications, Limitations or Restrictions thereof of
the Series A Preferred Stock, as it may be amended from time to time in
accordance with the terms thereof and of this Agreement.
“Commission” means the
Securities and Exchange Commission.
“Common Stock” means
the Company’s voting common stock, par value $0.01 per share, and includes all
securities of the Company issued or issuable with respect to such securities by
way of a stock split, stock dividend or other recapitalization.
“Company Acquisition”
means an acquisition of another Person by the Company by merger, purchase of all
or substantially all of such other Person’s assets, or by other reorganization
whereby the Company ends up owning, directly or indirectly, greater than fifty
percent (50%) of the voting power of such other Person.
“Competitor” means any
Person which is primarily engaged in substantially similar lines of business in
which the Company or any of its Subsidiaries are then engaged; provided that (a) the
provision of investment advisory services by a Person to an ERISA plan which is
owned or controlled by a Person which would otherwise be a Competitor shall not
in any event cause the Person providing such services to be deemed to be a
Competitor, and (b) in no event shall any bank, trust company, savings and loan
association or other financial institution, investment fund, any pension plan,
any investment company, any insurance company, any broker or dealer, or any
other financial institution or entity, regardless of legal form, be
deemed a Competitor, notwithstanding the fact that a portfolio company of any
such institution may be a Competitor.
“FINRA” has the
meaning given such term in the definition of “Registration
Expenses.”
“Holder” means any
holder (or deemed holder) of Securities who is a party to this Agreement or is a
successor or assign or subsequent holder contemplated by this
Agreement.
“Independent Third
Party” means any Person who, immediately prior to the contemplated
transaction, (i) does not own, directly or indirectly, in excess of 10% of the
Common Stock on an as-converted basis (a “10% Owner”), (ii) is
not controlling, controlled by or under common control with any such 10% Owner,
and (iii) is not the spouse or descendant (by birth or adoption) of any such 10%
Owner or a trust for the benefit of any such 10% Owner and/or such
Persons.
“Initial Public
Offering” means the initial Public Offering by the Company after the date
hereof.
“Organizational
Documents” means, (i) in the case of a corporation, that corporation’s
charter and by-laws, (ii) in the case of a limited liability company, that
company’s articles or certificate of formation and operating agreement, if any,
and (iii) in the case of a partnership, the partnership agreement.
“Outstanding Common
Stock” means the outstanding Common Stock on an as-converted
basis.
“Person” means an
individual, a partnership, a limited liability company, a corporation, an
association, a joint stock company, a trust, a joint venture, an unincorporated
organization and a governmental entity or any department, agency or political
subdivision thereof.
“Pro Rata Portion”
means, with respect to each Holder, that percentage of the total shares of
Outstanding Common Stock owned by such Holder.
“Public Offering”
means any offering of shares of Common Stock to the public pursuant to an
effective registration statement under the Securities Act or any comparable
statement under any similar federal statute then in force.
“Qualified Public
Offering” means any firmly underwritten Public Offering by the Company in
which the Company receives no less than $15 million of gross cash proceeds
(before underwriting discounts, commissions and fees) at a per share price of at
least two times the Series A Conversion Price (as defined in the Certificate of
Designations) then in effect, from sales to Persons other than Affiliates of the
Company pursuant to a public distribution in which Common Stock of the Company
shall be listed or traded on a national or regional exchange.
“Registrable
Securities” means all shares of Common Stock, including, without
limitation, Common Stock issuable upon the conversion, exercise or exchange of
such other securities, granted registration rights as described in Section 12 hereof,
that by their terms are converted into shares of Common Stock. As to
any particular Registrable Securities, such securities shall cease to be
Registrable Securities when (v) such securities shall have been registered under
the Securities Act, the registration statement with respect to the sale of such
securities shall have become effective under the Securities Act and such
securities shall have been disposed of pursuant to such effective registration
statement, (w) such securities shall have been distributed pursuant to Rule 144
(or any similar provision then in force) under the Securities Act, (x) such
securities shall have been otherwise transferred, if new certificates or other
evidences of ownership for them not bearing a legend restricting further
transfer and not subject to any stop transfer order or other restrictions on
transfer shall have been delivered by the Company and subsequent disposition of
such securities shall not require registration or qualification of such
securities under the Securities Act or any state securities laws then in force,
(y) such securities shall cease to be outstanding or (z) such securities can be
resold in accordance with Rule 144 in a three (3) month period or, in the case
of a Holder that is not an “affiliate” (as defined in Rule 144) of the Company,
without compliance with Rule 144.
“Registration” means a
bona-fide public offering and sale of Securities or other direct or indirect
equity interests of the Company pursuant to an effective registration statement
under the Securities Act and in compliance with all applicable state securities
laws.
“Registration
Expenses” means all fees and expenses of the Company incident to the
Company’s performance of or compliance with Article VII hereof, including,
without limitation, all SEC and stock exchange or the Financial Industry
Regulatory Authority (“FINRA”) registration,
filing and listing fees and expenses, fees and expenses of compliance with
securities or blue sky laws (including, without limitation, reasonable fees and
disbursements of counsel for the underwriters in connection with blue sky
qualifications of the Registrable Securities), rating agency fees, all fees and
expenses of the transfer agent and registrar for the Registrable Securities,
printing expenses, messenger and delivery expenses, the reasonable fees and
expenses incurred in connection with the listing of the securities to be
registered on each securities exchange on which Registrable Securities are to be
listed or on which similar securities issued by the Company are to be listed in
connection with such transaction, reasonable fees and disbursements of counsel
for the Company and all independent certified public accountants for the Company
(including the expenses of any annual audit, special audit and “cold comfort”
letters required in connection therewith or incident thereto), securities laws
liability insurance (if the Company so desires or if the underwriters so
desire), the reasonable fees and disbursements of underwriters customarily paid
by issuers or sellers of securities, all fees and expenses of any qualified
independent underwriter or any Person acting in a similar capacity under the
rules of the FINRA, the reasonable fees and disbursements of one counsel
retained in connection with each such registration on behalf of the Stockholders
(which shall be counsel selected by the Requesting Stockholders in the event of
a Registration effected pursuant to Section 12(a) hereof,
or counsel elected by the holders of a majority of the Registrable Securities
being registered in the event of any other Registration), the reasonable fees
and expenses of any special experts retained by the Company in connection with
such registration, and fees and expenses of other Persons retained by the
Company (but not including any underwriting discounts or commissions or transfer
taxes, if any, attributable to the sale of Registrable Securities by the holders
of such Registrable Securities).
“Representative”
means, with respect to a particular Person, any director, officer, general
partner, limited partner, co-owner, member, nominee, managing director or
controlling Person of such Person.
“Sale of the Company”
means any transaction or series of transactions pursuant to which any
Independent Third Party in the aggregate acquires (i) capital stock of the
Company possessing the voting power to elect a majority of the Board of
Directors (whether by merger, consolidation, reorganization, combination, sale
or Transfer of the Company’s capital stock) or (ii) all or substantially all of
the Company’s assets determined on a consolidated basis.
“Securities” means
Common Stock, Series A Preferred Stock, any other equity securities of the
Company and any shares of capital stock or other securities directly or
indirectly exercisable for, or convertible into, such securities in each case
held by a Stockholder as of or following the date hereof; provided, however, that
Securities shall not include any securities which have been sold to the public
(i) pursuant to a registration statement declared effective by the Commission or
(ii) pursuant to Rule 144 promulgated by the Commission under the Securities
Act.
“Securities Act” means
the Securities Act of 1933, as amended from time to time.
“Subsidiary” means,
with respect to any Person, any corporation, limited liability company,
partnership, association or other business entity of which (i) if a corporation,
a majority of the total voting power of shares of stock entitled (without regard
to the occurrence of any contingency) to vote in the election of directors,
managers or trustees thereof is at the time owned or controlled, directly or
indirectly, by that Person or one or more of the other Subsidiaries of that
Person or a combination thereof, or (ii) if a limited liability company,
partnership, association or other business entity, a majority of the partnership
or other similar ownership interest thereof is at the time owned or controlled,
directly or indirectly, by any Person or one or more Subsidiaries of that Person
or a combination thereof. For purposes hereof, a Person or Persons
shall be deemed to have a majority ownership interest in a limited liability
company, partnership, association or other business entity if such Person or
Persons shall be allocated a majority of limited liability company, partnership,
association or other business entity gains or losses or shall be or control the
managing general partner of such limited liability company, partnership,
association or other business entity.
(b) The
following terms have the meaning set forth in the corresponding section of this
Agreement:
Term
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Section
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Term
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Section
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“Agreement”
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Recitals
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“Other Accredited
Stockholder”
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§9(d)
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“Approved Sale”
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§7(a)
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“Other
Stockholders”
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§5(a)
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“Availability
Notice”
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§5(b)
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“Pappajohn”
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Recitals
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“Available
Securities”
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§5(b)
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“Permitted
Transferee”
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§8
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“Board of
Directors”
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§1(a)
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“Piggyback
Securities”
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§12(b)
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“Buyer”
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§6(a)
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“Preemptive
Notice”
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§9(a)
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“Company
Securities”
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§12(c)(i)(A)
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“Psilos
Directors”
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§1(a)(ii)(A)
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“Company Stock”
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§12(b)(iv)
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“Psilos I”
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Recitals
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“Covered Person”
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§31
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“Psilos II”
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Recitals
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“Demand Notice”
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§12(a)(i)
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“Psilos”
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Recitals
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“Demand
Securities”
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§12(a)
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“Purchase
Agreement”
|
|
Recitals
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“Disposing
Stockholder”
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§5
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“Requesting
Stockholders”
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§12(a)
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“Disposing Tag-Along
Stockholder”
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§6(a)
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“Reverse Stock
Split”
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Recitals
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“Essex”
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Recitals
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“Sale Notice”
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§5(a)
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“Executive”
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Recitals
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“Sales Notice
Expiration”
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§5(d)
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“Existing Stockholders
Agreement”
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§30
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“Schaffer”
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Recitals
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“GAAP”
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§10(a)(i)
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“Schedule of
Stockholders”
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Recitals
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“Hickory”
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Recitals
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“Series A Preferred
Stock”
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Recitals
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“Initial Subscribing
Stockholder”
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§9(d)
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“Stockholders”
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Recitals
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“Investor Group”
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§32
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“Subscribing
Stockholder”
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§5(c)
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“Investors”
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Recitals
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“Tag-Along Sale
Notice”
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§6(a)
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“New Issue
Securities”
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§9
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“Tag-Along Sale”
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§6(b)
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“Non-Disposing
Stockholder”
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§6(a)
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“Transfer”
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§4
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“Offered
Securities”
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§5(a)
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15. Transfer; Transfers in
Violation of Agreement. Prior to Transferring any Securities
to any Person, the transferring Stockholder shall cause the prospective
transferee to execute and deliver to the Company and the other Stockholders a
counterpart of this Agreement, and such prospective transferee shall acknowledge
that such Securities are subject to the terms and conditions of this Agreement,
including, without limitation, Section
5. Any Transfer or attempted Transfer of any Securities in
violation of any provision of this Agreement shall be void, and the Company
shall not record such Transfer on its books or treat any purported transferee of
such Securities as the owner of such Securities for any purpose.
16. Additional
Investors. In connection with the issuance of any additional
equity securities of the Company to any Person or the Transfer of any equity
securities of the Company to any Person, the Company may permit such Person to
become a party to this Agreement and succeed to all of the rights and
obligations of an Investor, Executive and/or a Stockholder, as applicable, under
this Agreement by obtaining an executed counterpart signature page to this
Agreement or a joinder to this Agreement, and, upon such execution, such Person
shall for all purposes be party to this Agreement as an Investor, Executive
and/or a Stockholder, as applicable, and the Schedule of Stockholders shall be
accordingly updated.
17. Descriptive
Headings. The descriptive headings of this Agreement are
inserted for convenience only and do not constitute a part of this
Agreement.
18. Amendment and
Waiver. Except as otherwise expressly provided herein, the
provisions of this Agreement may be amended or waived at any time only by the
written agreement of (a) the Company, and (b) by Holders holding not less than
two-thirds of the Outstanding Common Stock. Notwithstanding the
foregoing, no provision of this Agreement may be amended or waived if such
amendment or waiver of any provision would have the effect of (x) imposing
additional obligations (including the changing of existing obligations) on any
of the Stockholders, or (y) adversely affecting any of the rights of any of the
Stockholders, or (z) treating preferentially (including the changing of any
existing right or preference) in any way any other Stockholder over another
Stockholder except by written agreement of such affected
Stockholder. Any waiver, permit, consent or approval of any kind or
character on the part of any such Holder of any provisions or conditions of this
Agreement must be made in writing and shall be effective only to the extent
specifically set forth in such writing.
19. Severability. Whenever
possible, each provision of this Agreement shall be interpreted in such manner
as to be effective and valid under applicable law, but if any provision of this
Agreement is held to be invalid, illegal or unenforceable in any respect under
any applicable law or rule in any jurisdiction, such invalidity, illegality or
unenforceability shall not affect any other provision or any other jurisdiction,
but this Agreement shall be reformed, construed and enforced in such
jurisdiction as if such invalid, illegal or unenforceable provision had never
been contained herein.
20. Entire
Agreement. Except as otherwise expressly set forth herein,
this Agreement, the Purchase Agreement and the other agreements contemplated
thereby embody the complete agreement and understanding among the parties hereto
with respect to the subject matter hereof and supersede and preempt any prior
understandings, agreements or representations by or among the parties, written
or oral, which may have related to the subject matter hereof in any
way.
21. Successors and
Assigns. Except as otherwise provided herein, this
Agreement shall bind and inure to the benefit of, and be enforceable by, the
Company and its successors and assigns and the Holders and the respective
successors and permitted assigns of each of them, so long as they hold
Securities.
22. Counterparts. This
Agreement may be executed in separate counterparts, each of which shall be an
original and all of which taken together shall constitute one and the same
agreement.
23. Remedies. The
Company and each Stockholder shall be entitled to enforce their rights under
this Agreement specifically to recover damages by reason of any breach of any
provision of this Agreement and to exercise all other rights existing in their
favor. The parties hereto agree and acknowledge that money damages may not be an
adequate remedy for any breach of the provisions of this Agreement and that the
Company and each Stockholder may in his, her or its sole discretion apply to any
court of law or equity of competent jurisdiction for specific performance and/or
injunctive relief (without posting a bond or other security) in order to enforce
or prevent any violation of the provisions of this Agreement.
24. Notices. All
notices, demands or other communications to be given or delivered under or by
reason of the provisions of this Agreement shall be in writing and shall be
deemed to have been given (a) when delivered personally to the recipient, (b)
one (1) Business Day following deposit with a reputable express courier service
for next day delivery (charges prepaid), (c) three (3) Business Days after it is
mailed to the recipient by certified or registered mail, return receipt
requested and postage prepaid, or (d) one (1) Business Day after receipt is
electronically confirmed, if sent by fax, email or other electronic means (provided that a hard
copy shall be promptly sent by first class mail, postage
prepaid). Such notices, demands and other communications shall be
sent to the Stockholders and to the Company at the address indicated below or to
such other address or to the attention of such other Person as the recipient
party has specified by prior written notice to the sending party.
If to the Company,
to:
CareGuide,
Inc.
4401 NW 124th
Avenue
Coral Springs,
Florida 33065
Fax: (954)
796-5551
Attn: Chief Executive
Officer
|
with
a copy (which shall not constitute effective notice) to:
Cooley
Godward Kronish LLP
777
6th Street, NW
Suite
1100
Washington,
D.C. 20001
Fax: (202)
842-7899
Attn: Aaron
J. Velli
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If to Psilos,
to:
Psilos
Group Managers, L.L.C.
140
Broadway, 51st Floor
New
York, New York 10005
Attn: Jeffrey
M. Krauss
|
with
a copy (which shall not constitute effective notice) to:
DLA
Piper US LLP
1251
Avenue of the Americas
New
York, New York 10020
Fax: (212)
884-8522
Attn: Christopher
P. Giordano
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If
to an Executive or a Stockholder other than Psilos, to his, her or its
address set forth on the Company’s
records.
|
25. Governing
Law. The corporate law of Delaware shall govern all issues
concerning the relative rights of the Company and its stockholders, including,
without limitation, those rights set forth in Sections 1 and 2 of this
Agreement. All other questions concerning the construction, validity
and interpretation of this Agreement shall be governed by and construed in
accordance with the internal laws of the State of New York, without giving
effect to any choice of law or other conflict of law provision or rule (whether
of the State of New York or any other jurisdiction) that would cause the
application of the laws of any jurisdiction other than the State of New
York.
26. Venue. Each
Stockholder hereby irrevocably submits to the non-exclusive jurisdiction of any
United States federal or New York state court sitting in New York, New York, in
any action or proceeding arising out of or relating to this Agreement, and each
Stockholder hereby irrevocably agrees that all claims in respect of such action
or proceeding may be heard and determined in any such court and irrevocably
waives any objection it may now or hereafter have as to the venue of any such
suit, action or proceeding brought in such a court or that such court is an
inconvenient forum. Nothing herein shall limit the right of the
Company to bring proceedings against any Stockholder in the courts of any other
jurisdiction. Any judicial proceeding by any Stockholder against the
Company or any Affiliate thereof involving, directly or indirectly, any matter
in any way arising out of, related to, or connected with this Agreement shall be
brought only in a court sitting in New York, New York.
27. Waiver of Jury
Trial. Each of the parties hereto hereby irrevocably waives
any and all right to trial by jury of any claim or cause of action in any legal
proceeding arising out of or related to this Agreement or the transactions or
events contemplated hereby or any course of conduct, course of dealing,
statements (whether verbal or written) or actions of any party hereto. The
parties hereto each agree that any and all such claims and causes of action
shall be tried by a court trial without a jury. Each of the parties
hereto further waives any right to seek to consolidate any such legal proceeding
in which a jury trial has been waived with any other legal proceeding in which a
jury trial cannot or has not been waived.
28. No Effect Upon Lender
Relationship. Notwithstanding anything herein to the contrary,
nothing contained in this Agreement shall affect, limit or impair the rights and
remedies of a Stockholder in its capacity as a lender to the Company or any of
its Subsidiaries pursuant to any agreement under which the Company or any of its
Subsidiaries has borrowed money. Without limiting the generality of
the foregoing, any such Person, in exercising its rights as a lender, including
making its decision on whether to foreclose on any collateral security, will
have no duty to consider (i) its status or the status of any of its Affiliates
as a direct or indirect Stockholder, (ii) the interests of the Company or (iii)
any duty it may have to any other direct or indirect Stockholder, except as may
be required under the applicable loan documents or by commercial law applicable
to creditors generally.
29. References to
Securities. Any references herein to any Stockholder’s
specific number of Securities shall be deemed a reference to the corresponding
number of shares of Securities which have been issued in respect of, in exchange
for, or in substitution for such Securities, by recapitalization,
reclassification, dividend or distribution.
30. Attorneys’
Fees. In the event that any suit or action is instituted under
or in relation to this Agreement, including without limitation to enforce any
provision in this Agreement, the prevailing party in such dispute shall be
entitled to recover from the losing party all fees, costs and expenses of
enforcing any right of such prevailing party under or with respect to this
Agreement, including without limitation, such reasonable fees and expenses of
attorneys and accountants, which shall include, without limitation, all fees,
costs and expenses of appeals.
31. Existing Stockholders
Agreement. Each of the parties hereto who are also parties to
that certain stockholders agreement dated January 25, 2006 (the “Existing Stockholders
Agreement”) hereby agrees to execute such further instruments and take
such other actions as the Company shall reasonably request in order to
effectuate or document the termination of such agreement.
32. Exculpation. Notwithstanding
any other provisions of this Agreement, whether express or implied, or
obligation or duty at law or in equity, neither the directors, nor any of the
Stockholders, or any officers, directors, stockholders, partners, employees,
representatives, consultants or agents of either of the foregoing, nor any
officer, employee, representative, consultant or agent of the Company or any of
its Affiliates (individually, a “Covered Person” and,
collectively, the “Covered Persons”)
shall be liable to the Company or any other Person for any act or omission
(relating to the Company and the conduct of its business, the Agreement, any
related document or any transaction contemplated hereby or thereby) taken or
omitted in good faith by a Covered Person and in the reasonable belief that such
act or omission was in or was not contrary to the best interests of the Company;
provided, that
such act or omission does not constitute fraud, willful misconduct, bad faith,
or gross negligence.
33. Dealings with the
Company. The Company and each of the other Stockholders
acknowledge that the Investors and their Affiliates (other than the Company and
its Subsidiaries) and each of their respective direct and indirect stockholders,
directors, officers, controlling persons, partners, members, managers and
employees (collectively, the “Investor Group”) have
business interests and engage in business activities or commercial transactions
in addition to those relating to the Company (including those which may compete
with the Company). The Company and each of the other Stockholders agree (and to
the fullest extent permitted by applicable law, hereby waive
and agree not to assert any claim to the contrary) that no member of
the Investor Group shall be obligated to present any particular investment or
business opportunity to the Company even if such opportunity is of a character
which, if presented to the Company could be undertaken by the Company, and, in
fact, each member of the Investor Group shall have the right to undertake any
such opportunity for itself, for its own account or on behalf of another or to
recommend any such opportunity to other Persons.
34. Fiduciary
Duty. Notwithstanding any other provision of this Agreement,
to the fullest extent permitted by the Delaware General Corporation Law, no
Covered Person shall owe any duties at law or in equity (including fiduciary
duties) to any other Covered Person other than any duties and obligations
expressly set forth in this Agreement. The provisions of this
Agreement, to the extent that they restrict the duties and liabilities of a
Covered Person otherwise existing at law or in equity, are agreed by the
Stockholders to replace such other duties and liabilities of such Covered
Person. A Covered Person acting under this Agreement shall not be
liable to the Company or to any other Covered Person for its good faith reliance
on the provisions of this Agreement. Nothing in this Section 33 shall
eliminate any implied covenant of good faith and fair dealing between Covered
Persons.
35. No Third-Party
Beneficiaries. Except as otherwise expressly provided herein,
the covenants, agreements and other provisions contained in this Agreement are
for the sole benefit of the parties hereto and their permitted successors and
assigns, and they shall not be construed as conferring, and are not intended to
confer, any rights, remedies or other benefits hereunder on any other
Persons. Neither this Agreement nor any purchase or sale of shares of
Company Stock shall create, or be construed or deemed to create, any right to
employment in favor of the Company or shareholders or employers thereof or any
Management Stockholder or any other Person by the Company or any Subsidiaries of
the Company.
36. Recapitalization,
etc. Except as otherwise provided in this Agreement, the
provisions of this Agreement shall apply to any and all Securities or shares of
stock of any successor or assign of the Company (whether by merger,
consolidation, transfer or sale of assets, conversion or otherwise) which may be
issued in respect of, in exchange for, or in substitution of, any Securities by
reason of any reorganization, any recapitalization, reclassification, merger,
consolidation, partial or complete liquidation, sale of assets, spin-off, stock
dividend, split, distribution to Stockholders or combination of Securities or
any other change in the Company’s capital structure, in order to preserve fairly
and equitably as far as practicable, the original rights and obligations of the
parties hereto under this Agreement.
* * * * *
IN WITNESS WHEREOF, the
parties hereto have executed this Stockholders Agreement as of the day and year
first above written.
[Signature
Page to Stockholders Agreement]
IN WITNESS WHEREOF, the
parties hereto have executed this Stockholders Agreement as of the day and year
first above written.
INVESTORS:
|
|
Essex
Woodlands Health Ventures Fund IV, L.P.
|
By: Essex
Woodlands Health Ventures IV, L.L.C.
|
Its
General Partner
|
|
|
By:
|
|
Name: Mark
Pacala
|
Title: Authorized
Signatory
|
|
|
Essex
Woodlands Health Ventures Fund V, L.P.
|
By: Essex
Woodlands Health Ventures V, L.L.C.
|
Its
General Partner
|
|
|
By:
|
|
Name: Mark
Pacala
|
Title: Authorized
Signatory
|
[Signature
Page to Stockholders Agreement]
IN WITNESS WHEREOF, the
parties hereto have executed this Stockholders Agreement as of the day and year
first above written.
INVESTORS:
|
|
Psilos
Group Partners II, L.P.
|
By: Psilos
Group Investors II, LLC
|
Its
General Partner
|
|
|
By:
|
|
Name: Albert
S. Waxman
|
Title: Senior
Managing Member
|
|
|
Psilos
Group Partners, L.P.
|
By: Psilos
Group Investors, LLC
|
Its
General Partner
|
|
|
By:
|
|
Name: Albert
S. Waxman
|
Title: Senior
Managing
Member
|
[Signature
Page to Stockholders Agreement]
IN WITNESS WHEREOF, the
parties hereto have executed this Stockholders Agreement as of the day and year
first above written.
INVESTORS:
|
|
Hickory
Venture Capital Corporation
|
|
|
By:
|
|
Name: J.
Thomas Noojin
|
Title: President
|
[Signature
Page to Stockholders Agreement]
IN WITNESS WHEREOF, the
parties hereto have executed this Stockholders Agreement as of the day and year
first above written.
INVESTORS:
|
|
|
John
Pappajohn
|
[Signature
Page to Stockholders Agreement]
IN WITNESS WHEREOF, the
parties hereto have executed this Stockholders Agreement as of the day and year
first above written.
INVESTORS:
|
|
|
Derace
L. Schaffer,
M.D.
|
[Signature
Page to Stockholders Agreement]
IN WITNESS WHEREOF, the
parties hereto have executed this Stockholders Agreement as of the day and year
first above written.
EXECUTIVE:
|
|
|
Chris
E. Paterson
|
[Signature
Page to Stockholders Agreement]
IN WITNESS WHEREOF, the
parties hereto have executed this Stockholders Agreement as of the day and year
first above written.
EXECUTIVE:
|
|
|
Michael
J. Condron
|
[Signature
Page to Stockholders Agreement]
IN WITNESS WHEREOF, the
parties hereto have executed this Stockholders Agreement as of the day and year
first above written.
EXECUTIVE:
|
|
|
William
C.
Stapleton
|
[Signature
Page to Stockholders Agreement]
IN WITNESS WHEREOF, the
parties hereto have executed this Stockholders Agreement as of the day and year
first above written.
[Signature
Page to Stockholders Agreement]
Schedule
of Stockholders
Stockholder
|
|
Classification
|
|
Number of Shares of
Outstanding Common
Stock
|
|
|
|
|
|
Essex
Woodlands Health Ventures Fund IV, L.P.
|
|
Investor
|
|
|
|
|
|
|
|
Essex
Woodlands Health Ventures Fund V, L.P.
|
|
Investor
|
|
|
|
|
|
|
|
Psilos
Group Partners, L.P.
|
|
Investor
|
|
|
|
|
|
|
|
Psilos
Group Partners II, L.P.
|
|
Investor
|
|
|
|
|
|
|
|
Hickory
Venture Capital Corporation
|
|
Investor
|
|
|
|
|
|
|
|
Derace
L. Schaffer, M.D.
|
|
Investor
|
|
|
|
|
|
|
|
John
Pappajohn
|
|
Investor
|
|
|
|
|
|
|
|
Chris
E. Paterson
|
|
Executive
|
|
|
|
|
|
|
|
Michael
J. Condron
|
|
Executive
|
|
|
|
|
|
|
|
William
C. Stapleton
|
|
Executive
|
|
|
|
|
|
|
|
Michael
J. Barber, M.D.
|
|
Executive
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
Annex
D
SECOND
AMENDED
CERTIFICATE
OF DESIGNATIONS, POWERS, PREFERENCES AND
RELATIVE,
PARTICIPATING, OPTIONAL OR OTHER SPECIAL RIGHTS, AND
THE
QUALIFICATIONS, LIMITATIONS OR RESTRICTIONS THEREOF
OF
THE
SERIES A PREFERRED STOCK
OF
CAREGUIDE,
INC.
Pursuant
to Section 151 of the General Corporation Law of the State of Delaware,
CareGuide, Inc. a Delaware corporation (the “Corporation”)
certifies that, pursuant to the authority contained in paragraph 4 of its
Certificate of Incorporation, as amended (the “Certificate of
Incorporation”), and in accordance with the provisions of Section 151 of
the General Corporation Law of the State of Delaware, its Board of Directors
(the “Board”)
has adopted the following resolution amending and restating the terms of a
series of its Preferred Stock, par value $0.01 per share, previously designated
as Series A Preferred Stock:
RESOLVED,
that the terms of the series of the class of authorized $0.01 par value
Preferred Stock of the Corporation previously designated as Series A Preferred
Stock be hereby amended, and that the designation and the amount thereof and the
voting powers, preferences and relative, participating, optional and other
special rights of the shares of such series, and the qualifications, limitations
or restrictions thereof are amended in their entirety as follows:
1. Designation and
Amount.
|
(a)
|
The
shares of such series shall be designated as “Series A Preferred Stock”
and the number of shares constituting such series is hereby increased from
6,250,000 to 12,916,667 in the
aggregate.
|
2. Voting Rights.
|
(a)
|
General
Rights. Each holder of shares of the Series A Preferred
Stock shall be entitled to the number of votes equal to the number of
shares of Common Stock into which such shares of Series A Preferred Stock
could be converted (pursuant to Section 5 hereof) immediately after the
close of business on the record date fixed for such meeting or the
effective date of such written consent and shall have voting rights and
powers equal to the voting rights and powers of the Common Stock and shall
be entitled to notice of any stockholders’ meeting in accordance with the
bylaws of the Corporation. Except as otherwise provided herein
or as required by law, the Series A Preferred Stock shall vote together
with the Common Stock at any annual or special meeting of the stockholders
and not as a separate class, and may act by written consent in the same
manner as the Common Stock.
|
|
(b)
|
Separate Vote of Series A
Preferred Stock. For so long as at least one-hundred
thousand (100,000) shares of Series A Preferred Stock remain outstanding,
in addition to any other vote or consent required herein or by law, the
vote or written consent of the holders of at least sixty-six and
two-thirds percent (66⅔%) of the outstanding Series A Preferred Stock
(“66⅔% in
Interest”) shall be necessary for any of the following
actions:
|
|
(i)
|
effecting
or validating any amendment, alteration, or repeal of any provision of the
Certificate of Incorporation or the bylaws of the Corporation (including
any filing or amending of a Certificate of Designation), that adversely
affects the holders of the Series A Preferred Stock including, without
limitation, any such amendment, alteration or repeal that alters or
changes the voting or other powers, preferences, or other special rights,
privileges or restrictions of the Series A Preferred Stock so as to affect
them adversely;
|
|
(ii)
|
a
Liquidation Event;
|
|
(iii)
|
incurring
or guaranteeing any indebtedness for borrowed money in excess of
$1,000,000 in the aggregate, not including amounts of indebtedness set
forth in an annual budget, operating budget or business plan approved
pursuant to clause (ix) below;
|
|
(iv)
|
redeeming,
purchasing or otherwise acquiring for value (or paying into or setting
aside for a sinking fund for such purpose), or declaring or paying
dividends on or making other distributions with respect to, any securities
other than the Series A Preferred Stock (except for any acquisition of
Common Stock by the Corporation otherwise permitted by Section 3(c)(i) and
(ii) hereof);
|
|
(v)
|
authorizing
or issuing (A) additional shares of Series A Preferred Stock, (B) equity
securities convertible into or exercisable for shares of Series A
Preferred Stock, or (C) any equity securities senior or pari passu with the
Series A Preferred Stock as to liquidation preferences, redemption rights
or dividend rights;
|
|
(vi)
|
the
acquisition by the Corporation or any subsidiary of the Corporation of any
business (whether by purchase of stock or assets) for consideration in
excess of $5,000,000;
|
|
(vii)
|
any
changes in tax or accounting methods or policies, other than as required
by United States generally accepted accounting principles (“GAAP”),
and any change in the auditors of the Corporation or any subsidiary of the
Corporation;
|
|
(viii)
|
any
sales or dispositions of assets of the Corporation exceeding
$1,000,000;
|
|
(ix)
|
the
adoption of an annual budget, operating budget or business plan of the
Corporation or any subsidiary of the
Corporation;
|
|
(x)
|
capital
expenditures in excess of $1,000,000, in the aggregate, per fiscal year,
not included in annual budget, operating budget or business plan of the
Corporation or any subsidiary of the
Corporation;
|
|
(xi)
|
deviate
in any material manner from the business plan of the Corporation approved
pursuant to clause (ix) above;
|
|
(xii)
|
the
creation of any direct or indirect subsidiary of the
Corporation;
|
|
(xiii)
|
the
making of any investments in any other entity, other than investments
approved pursuant to clause (vi) or
(xii);
|
|
(xiv)
|
commencing
or terminating the employment of any executive officer of the Corporation
or any subsidiary of the Corporation, or amending or revising the terms of
any employment agreement with any such
officer;
|
|
(xv)
|
altering
the size of the Board;
|
|
(xvi)
|
agreeing
to take any action which could impair the Corporation’s ability to honor
the rights and preferences of the Series A Preferred
Stock;
|
|
(xvii)
|
entering
into any transaction with an affiliate other than transactions involving
compensation, benefits, personnel and related matters with respect to the
Corporation’s employees who are not executive officers of the
Corporation;
|
|
(xviii)
|
the
granting of any exclusive rights to any intellectual property of the
Corporation or any subsidiary of the Corporation;
and
|
|
(xix)
|
agreeing
to take any of the foregoing
actions.
|
3. Dividends.
|
(a)
|
Holders
of Series A Preferred Stock, in preference to the holders of Common Stock,
shall be entitled to accrue dividends from the date of issuance of such
shares of Series A Preferred Stock at the rate of eight percent (8%) of
the Original Issue Price (as defined below) per annum on each outstanding
share of Series A Preferred Stock, which amounts shall be payable in
arrears, on June 30 and December 31 of each year shares of Series A
Preferred Stock remain outstanding on such dates, in either cash or, at
the election of the Corporation, additional shares of Series A Preferred
Stock with a face value, based on the Original Issue Price (as defined
below), equal to the dividend payment required
hereunder.
|
|
(b)
|
The
“Original
Issue Price” of the Series A Preferred Stock shall be sixty cents
($0.60) per share (as adjusted for any stock dividends, combinations,
splits, recapitalizations and the like with respect to such shares after
the filing date hereof).
|
|
(c)
|
So
long as any shares of Series A Preferred Stock are outstanding, the
Corporation shall not pay or declare any dividend, whether in cash or
property, or make any other distribution on the Common Stock, or purchase,
redeem or otherwise acquire for value any shares of Common Stock until all
dividends as set forth in Section 3(a) above on the Series A Preferred
Stock shall have been paid or declared and set apart, except
for:
|
|
(i)
|
acquisitions
of Common Stock by the Corporation pursuant to agreements which permit the
Corporation to repurchase such shares at cost (or the lesser of cost or
fair market value) upon termination of services to the Corporation;
and
|
|
(ii)
|
acquisitions
of Common Stock in exercise of the Corporation’s right of first refusal to
repurchase such shares.
|
|
(d)
|
The
provisions of Section 3(c) shall not apply to a dividend payable solely in
Common Stock to which the provisions of Section 5(f) hereof are
applicable, or any repurchase of any outstanding securities of the
Corporation that is approved by the Board and 66⅔% in
Interest.
|
4. Liquidation
Preference.
|
(a)
|
Upon
any liquidation, dissolution, or winding up of the Corporation, whether
voluntary or involuntary, or any change in control of the Corporation,
including any Acquisition or Asset Transfer (a “Liquidation
Event”), before any distribution or payment shall be made to the
holders of any Common Stock, the holders of Series A Preferred Stock shall
be entitled to be paid out of the assets of the Corporation legally
available for distribution for each share of Series A Preferred Stock held
by them, an amount per share of Series A Preferred Stock equal to the
greater of (i) the Original Issue Price (as defined below) plus all
accrued and unpaid dividends on the Series A Preferred Stock or (ii) the
amount such share of Series A Preferred Stock would be entitled to receive
on an as-if-converted basis with the holders of the Common Stock (such
greater amount, the “Liquidation
Preference Amount”). If, upon any such Liquidation
Event, the assets of the Corporation shall be insufficient to make payment
in full to all holders of Series A Preferred Stock of the Liquidation
Preference Amount set forth in this Section 4(a), then such assets (or
consideration) shall be distributed among the holders of Series A
Preferred Stock at the time outstanding, ratably in proportion to the full
amounts to which they would otherwise be respectively
entitled.
|
|
(b)
|
After
the payment of the full Liquidation Preference Amount of the Series A
Preferred Stock as set forth in Section 4(a) above, the remaining assets
of the Corporation legally available for distribution, if any, shall be
distributed ratably to the holders of the Common
Stock.
|
|
(c)
|
For
purposes of Section 4(a), (i) “Acquisition”
shall mean (x) any consolidation or merger of the Corporation with or into
any other corporation or other entity or person, or any other corporate
reorganization, other than any such consolidation, merger or
reorganization in which the shareholders of the Corporation immediately
prior to such consolidation, merger or reorganization, continue to hold at
least a majority of the voting power of the surviving entity in
substantially the same proportions (or, if the surviving entity is a
wholly owned subsidiary, its parent) immediately after such consolidation,
merger or reorganization; or (y) any transaction or series of related
transactions to which the Corporation is a party in which in excess of
fifty percent (50%) of the Corporation’s voting power is transferred;
provided that an
Acquisition shall not include any transaction or series of transactions
principally for bona fide equity financing purposes in which cash is
received by the Corporation or any successor or indebtedness of the
Corporation is cancelled or converted or a combination thereof; and (ii)
“Asset
Transfer” shall mean a sale, lease, exclusive license or other
disposition of all or substantially all of the assets of the
Corporation. In any Acquisition or Asset Transfer, if the
consideration to be received is securities of a corporation or other
property other than cash, its value will be deemed its fair market value
as determined in good faith by the Board on the date such determination is
made.
|
5. Conversion.
The
holders of the Series A Preferred Stock shall have the following rights with
respect to the conversion of the Series A Preferred Stock into shares of Common
Stock (the “Conversion
Rights”):
|
(a)
|
Optional
Conversion. Subject to and in compliance with the
provisions of this Section 5, any shares of Series A Preferred Stock may,
at the option of the holder, be converted at any time into fully-paid and
nonassessable shares of Common Stock. The number of shares of
Common Stock to which a holder of Series A Preferred Stock shall be
entitled upon conversion shall be the product obtained by multiplying the
“Series A Preferred Stock Conversion Rate” then in effect (determined as
provided in Section 5(b)) by the number of shares of Series A Preferred
Stock being converted.
|
|
(b)
|
Series A Preferred Stock
Conversion Rate. The conversion rate in effect at any
time for conversion of the Series A Preferred Stock (the “Series A
Preferred Stock Conversion Rate”) shall be the quotient obtained by
dividing the Original Issue Price of the Series A Preferred Stock by the
“Series A Preferred Stock Conversion Price,” calculated as provided in
Section 5(c). As of the date of filing hereof, the Series A
Preferred Stock Conversion Rate shall be five (5) shares of Common Stock
for each share of Series A Preferred
Stock.
|
|
(c)
|
Series A Preferred Stock
Conversion Price. The conversion price for the Series A
Preferred Stock shall initially be twelve cents ($0.12) (the “Series A
Preferred Stock Conversion Price”). Such initial Series
A Preferred Stock Conversion Price shall be adjusted from time to time in
accordance with this Section 5. All references to the Series A
Preferred Stock Conversion Price herein shall mean the Series A Preferred
Stock Conversion Price as so
adjusted.
|
|
(d)
|
Mechanics of
Conversion. Each holder of Series A Preferred Stock who
desires to convert the same into shares of Common Stock pursuant to this
Section 5 shall surrender the certificate or certificates therefor, duly
endorsed, at the office of the Corporation or any transfer agent for the
Series A Preferred Stock, and shall give written notice to the Corporation
at such office that such holder elects to convert the
same. Such notice shall state the number of shares of Series A
Preferred Stock being converted. Thereupon, the Corporation
shall promptly issue and deliver at such office to such holder a
certificate or certificates for the number of shares of Common Stock to
which such holder is entitled and shall promptly pay in cash (at the
Common Stock’s fair market value determined by the Board as of the date of
conversion) the value of any fractional share of Common Stock otherwise
issuable to any holder of Series A Preferred Stock. Such
conversion shall be deemed to have been made at the close of business on
the date of such surrender of the certificates representing the shares of
Series A Preferred Stock to be converted, and the person entitled to
receive the shares of Common Stock issuable upon such conversion shall be
treated for all purposes as the record holder of such shares of Common
Stock on such date.
|
|
(e)
|
Adjustment for Stock Splits and
Combinations. If at any time or from time to time on or
after December 28, 2007, the date that the first share of Series A
Preferred Stock was issued (the “Original
Issue Date”), the Corporation effects a subdivision of the
outstanding Common Stock, the Series A Preferred Stock Conversion Price in
effect immediately before that subdivision shall be proportionately
decreased. Conversely, if at any time or from time to time
after the Original Issue Date the Corporation combines the outstanding
shares of Common Stock into a smaller number of shares, the Series A
Preferred Stock Conversion Price in effect immediately before the
combination shall be proportionately increased. Any adjustment
under this Section 5(e) shall become effective at the close of business on
the date the subdivision or combination becomes
effective.
|
|
(f)
|
Adjustment for Common Stock
Dividends and Distributions. If at any time or from time
to time on or after the Original Issue Date the Corporation pays to
holders of Common Stock a dividend or other distribution in additional
shares of Common Stock, the Series A Preferred Stock Conversion Price then
in effect shall be decreased as of the time of such issuance, as provided
below:
|
|
(i)
|
The
Series A Preferred Stock Conversion Price shall be adjusted by multiplying
the Series A Preferred Stock Conversion Price then in effect by a fraction
equal to:
|
|
(1)
|
the
numerator of which is the total number of shares of Common Stock issued
and outstanding immediately prior to the time of such issuance,
and
|
|
(2)
|
the
denominator of which is the total number of shares of Common Stock issued
and outstanding immediately prior to the time of such issuance plus the
number of shares of Common Stock issuable in payment of such dividend or
distribution;
|
|
(ii)
|
If
the Corporation fixes a record date to determine which holders of Common
Stock are entitled to receive such dividend or other distribution, the
Series A Preferred Stock Conversion Price shall be fixed as of the close
of business on such record date and the number of shares of Common Stock
shall be calculated immediately prior to the close of business on such
record date; and
|
|
(iii)
|
If
such record date is fixed and such dividend is not fully paid or if such
distribution is not fully made on the date fixed therefor, the Series A
Preferred Stock Conversion Price shall be recomputed accordingly as of the
close of business on such record date and thereafter the Series A
Preferred Stock Conversion Price shall be adjusted pursuant to this
Section 5(f) to reflect the actual payment of such dividend or
distribution.
|
|
(g)
|
Adjustment for
Reclassification, Exchange, Substitution, Reorganization, Merger or
Consolidation. If at any time or from time to time on or
after the Original Issue Date the Common Stock issuable upon the
conversion of the Series A Preferred Stock is changed into the same or a
different number of shares of any class or classes of stock, whether by
recapitalization, reclassification, merger, consolidation or otherwise
(other than an Acquisition or Asset Transfer as defined in Section 4 or a
subdivision or combination of shares or stock dividend provided for
elsewhere in this Section 5), in any such event each holder of Series A
Preferred Stock shall then have the right to convert such stock into the
kind and amount of stock and other securities and property receivable upon
such recapitalization, reclassification, merger, consolidation or other
change by holders of the maximum number of shares of Common Stock into
which such shares of Series A Preferred Stock could have been converted
immediately prior to such recapitalization, reclassification, merger,
consolidation or change, all subject to further adjustment as provided
herein or with respect to such other securities or property by the terms
thereof. In any such case, appropriate adjustment shall be made
in the application of the provisions of this Section 5 with respect to the
rights of the holders of Series A Preferred Stock after the capital
reorganization to the end that the provisions of this Section 5 (including
adjustment of the Series A Preferred Stock Conversion Price then in effect
and the number of shares issuable upon conversion of the Series A
Preferred Stock) shall be applicable after that event and be as nearly
equivalent as practicable.
|
|
(h)
|
Sale of Shares Below Series A
Preferred Stock Conversion
Price.
|
|
(i)
|
If
at any time or from time to time on or after the Original Issue Date the
Corporation issues or sells or reserves for issuance or sale, or is deemed
by the express provisions of this Section 5(h) to have issued or sold,
Additional Shares of Common Stock (as defined below), other than as
provided in Section 5(e), 5(f) or 5(g) above, for an Effective Price (as
defined below) less than the then effective Series A Preferred Stock
Conversion Price (a “Qualifying
Dilutive Issuance”), then and in each such case, the then existing
Series A Preferred Stock Conversion Price shall be reduced, as of the
opening of business on the date of such issue or sale, to a price equal to
such Effective Price.
|
|
(ii)
|
No
adjustment shall be made to the Series A Preferred Stock Conversion Price
in an amount less than one cent ($0.01) per share. Any
adjustment required by this Section 5(h) shall be rounded to the nearest
one cent ($0.01) per share. Any adjustment otherwise required
by this Section 5(h) that is not required to be made due to the preceding
two sentences shall be included in any subsequent adjustment to the Series
A Preferred Stock Conversion Price.
|
|
(iii)
|
For
the purpose of making any adjustment required under this Section 5(h), the
aggregate consideration received by the Corporation for any issue or sale
of securities (the “Aggregate
Consideration”) shall be defined as: (A) to the extent
it consists of cash, be computed at the gross amount of cash received by
the Corporation before deduction of any underwriting or similar
commissions, compensation or concessions paid or allowed by the
Corporation in connection with such issue or sale and without deduction of
any expenses payable by the Corporation, (B) to the extent it consists of
property other than cash, be computed at the fair value of that property
as determined in good faith by the Board, and (C) if Additional Shares of
Common Stock, Convertible Securities (as defined below) or rights or
options to purchase either Additional Shares of Common Stock or
Convertible Securities are issued or sold together with other stock or
securities or other assets of the Corporation for a consideration which
covers both, be computed as the portion of the consideration so received
that may be reasonably determined in good faith by the Board to be
allocable to such Additional Shares of Common Stock, Convertible
Securities or rights or options.
|
|
(iv)
|
For
the purpose of the adjustment required under this Section 5(h), if the
Corporation issues or sells (x) Preferred Stock or other stock, options,
warrants, purchase rights or other securities convertible into, Additional
Shares of Common Stock (such convertible stock or securities being herein
referred to as “Convertible
Securities”) or (y) rights or options for the purchase of
Additional Shares of Common Stock or Convertible Securities and if the
Effective Price of such Additional Shares of Common Stock is less than the
Series A Preferred Stock Conversion Price, in each case the Corporation
shall be deemed to have issued at the time of the issuance of such rights
or options or Convertible Securities the maximum number of Additional
Shares of Common Stock issuable upon exercise or conversion thereof and to
have received as consideration for the issuance of such shares an amount
equal to the total amount of the consideration, if any, received by the
Corporation for the issuance of such rights or options or Convertible
Securities plus:
|
|
(1)
|
in
the case of such rights or options, the minimum amounts of consideration,
if any, payable to the Corporation upon the exercise of such rights or
options; and
|
|
(2)
|
in
the case of Convertible Securities, the minimum amounts of consideration,
if any, payable to the Corporation upon the conversion thereof (other than
by cancellation of liabilities or obligations evidenced by such
Convertible Securities); provided that if the
minimum amounts of such consideration cannot be ascertained, but are a
function of antidilution or similar protective clauses, the Corporation
shall be deemed to have received the minimum amounts of consideration
without reference to such clauses.
|
|
(3)
|
If
the minimum amount of consideration payable to the Corporation upon the
exercise or conversion of rights, options or Convertible Securities is
reduced over time or on the occurrence or non-occurrence of specified
events other than by reason of antidilution adjustments, the Effective
Price shall be recalculated using the figure to which such minimum amount
of consideration is reduced; provided further, that
if the minimum amount of consideration payable to the Corporation upon the
exercise or conversion of such rights, options or Convertible Securities
is subsequently increased, the Effective Price shall be again recalculated
using the increased minimum amount of consideration payable to the
Corporation upon the exercise or conversion of such rights, options or
Convertible Securities.
|
|
(4)
|
No
further adjustment of the Series A Preferred Stock Conversion Price, as
adjusted upon the issuance of such rights, options or Convertible
Securities, shall be made as a result of the actual issuance of Additional
Shares of Common Stock or the exercise of any such rights or options or
the conversion of any such Convertible Securities. If any such
rights or options or the conversion privilege represented by any such
Convertible Securities shall expire without having been exercised, the
Series A Preferred Stock Conversion Price as adjusted upon the issuance of
such rights, options or Convertible Securities shall be readjusted to the
Series A Preferred Stock Conversion Price which would have been in effect
had an adjustment been made on the basis that the only Additional Shares
of Common Stock so issued were the Additional Shares of Common Stock, if
any, actually issued or sold on the exercise of such rights or options or
rights of conversion of such Convertible Securities, and such Additional
Shares of Common Stock, if any, were issued or sold for the consideration
actually received by the Corporation upon such exercise, plus the
consideration, if any, actually received by the Corporation for the
granting of all such rights or options, whether or not exercised, plus the
consideration received for issuing or selling the Convertible Securities
actually converted, plus the consideration, if any, actually received by
the Corporation (other than by cancellation of liabilities or obligations
evidenced by such Convertible Securities) on the conversion of such
Convertible Securities, provided that such
readjustment shall not apply to prior conversions of Series A Preferred
Stock.
|
|
(v)
|
For
the purpose of making any adjustment to the Conversion Price of the Series
A Preferred Stock required under this Section 5(h), “Additional
Shares of Common Stock” shall mean all shares of Common Stock
issued by the Corporation or deemed to be issued pursuant to this Section
5(h) (including shares of Common Stock subsequently reacquired or retired
by the Corporation), other than:
|
|
(1)
|
shares
of Common Stock issued upon conversion of the Series A Preferred
Stock;
|
|
(2)
|
shares
of Common Stock or Convertible Securities issued after the Original Issue
Date to employees, officers or directors of, or consultants or advisors to
the Corporation or any subsidiary pursuant to stock purchase or stock
option plans or other arrangements that are approved by the
Board;
|
|
(3)
|
shares
of Common Stock issued pursuant to the exercise of Convertible Securities
outstanding as of the Original Issue Date;
and
|
|
(4)
|
shares
of Common Stock or Convertible Securities issued for consideration other
than cash pursuant to a merger, consolidation, acquisition, strategic
alliance or similar business combination approved by the
Board.
|
References
to Common Stock in the subsections of this clause (v) above shall mean all
shares of Common Stock issued by the Corporation or deemed to be issued pursuant
to this Section 5(h). The “Effective
Price” of Additional Shares of Common Stock shall mean the quotient
determined by dividing the total number of Additional Shares of Common Stock
issued or sold, or deemed to have been issued or sold by the Corporation under
this Section 5(h), into the Aggregate Consideration received, or deemed to have
been received by the Corporation for such issue under this Section 5(h), for
such Additional Shares of Common Stock. In the event that the number
of shares of Additional Shares of Common Stock or the Effective Price cannot be
ascertained at the time of issuance, such Additional Shares of Common Stock
shall be deemed issued immediately upon the occurrence of the first event that
makes such number of shares or the Effective Price, as applicable,
ascertainable.
|
(vi)
|
In
the event that the Corporation issues or sells, or is deemed to have
issued or sold, Additional shares of Common Stock in a Qualifying Dilutive
Issuance (the “First
Dilutive Issuance”), then in the event that the Corporation issues
or sells, or is deemed to have issued or sold, Additional Shares of Common
Stock in a Qualifying Dilutive Issuance other than the First Dilutive
Issuance as a part of the same transaction or series of related
transactions as the First Dilutive Issuance (a “Subsequent
Dilutive Issuance”), then and in each such case upon a Subsequent
Dilutive Issuance the Series A Preferred Stock Conversion Price shall be
reduced to the Series A Preferred Stock Conversion Price that would have
been in effect had the First Dilutive Issuance and each Subsequent
Dilutive Issuance all occurred on the closing date of the First Dilutive
Issuance.
|
|
(i)
|
Certificate of
Adjustment. In each case of an adjustment or
readjustment of the Series A Preferred Stock Conversion Price for the
number of shares of Common Stock or other securities issuable upon
conversion of the Series A Preferred Stock, if the Series A Preferred
Stock is then convertible pursuant to this Section 5, the Corporation, at
its expense, shall compute such adjustment or readjustment in accordance
with the provisions hereof and shall, upon request, prepare a certificate
showing such adjustment or readjustment, and shall mail such certificate,
by first class mail, postage prepaid, to each registered holder of Series
A Preferred Stock so requesting at the holder’s address as shown in the
Corporation’s books. The certificate shall set forth such
adjustment or readjustment, showing in detail the facts upon which such
adjustment or readjustment is based, including a statement of (i) the
consideration received or deemed to be received by the Corporation for any
Additional Shares of Common Stock issued or sold or deemed to have been
issued or sold, (ii) the Series A Preferred Stock Conversion Price at the
time in effect, (iii) the number of Additional Shares of Common Stock and
(iv) the type and amount, if any, of other property which at the time
would be received upon conversion of the Series A Preferred
Stock. Failure to request or provide such notice shall have no
effect on any such adjustment.
|
|
(j)
|
Notices of Record
Date. Upon (i) any taking by the Corporation of a record
of the holders of any class of securities for the purpose of determining
the holders thereof who are entitled to receive any dividend or other
distribution, or (ii) any Acquisition (as defined in Section 4) or other
capital reorganization of the Corporation, any reclassification or
recapitalization of the capital stock of the Corporation, any merger or
consolidation of the Corporation with or into any other corporation, or
any Asset Transfer (as defined in Section 4), or any voluntary or
involuntary dissolution, liquidation or winding up of the Corporation, the
Corporation shall mail to each holder of Series A Preferred Stock at least
ten (10) days prior to (x) the record date, if any, specified therein; or
(y) if no record date is specified, the date upon which such action is to
take effect (or, in either case, such shorter period approved by 66⅔% in
Interest) a notice specifying (A) the date on which any such record is to
be taken for the purpose of such dividend or distribution and a
description of such dividend or distribution, (B) the date on which any
such Acquisition, reorganization, reclassification, transfer,
consolidation, merger, Asset Transfer, dissolution, liquidation or winding
up is expected to become effective, and (C) the date, if any, that is to
be fixed as to when the holders of record of Common Stock (or other
securities) shall be entitled to exchange their shares of Common Stock (or
other securities) for securities or other property deliverable upon such
Acquisition, reorganization, reclassification, transfer, consolidation,
merger, Asset Transfer, dissolution, liquidation or winding
up.
|
|
(k)
|
Automatic
Conversion.
|
|
(i)
|
Each
share of Series A Preferred Stock shall automatically be converted into
shares of Common Stock, based on the then-effective Series A Preferred
Stock Conversion Price, (A) at any time upon the affirmative election of
66⅔% in Interest, (B) immediately upon the closing of a firmly
underwritten public offering pursuant to an effective registration
statement under the Securities Act of 1933, as amended, covering the offer
and sale of Common Stock for the account of the Corporation or (C),
immediately upon the effectiveness of a resale registration statement
filed pursuant to the terms of a private placement of securities by the
Corporation (a “Private
Placement”) in which (I) the per share price of the securities sold
in connection with such Private Placement was at least two (2) times the
Series A Preferred Stock Conversion price then in effect and (II) the
gross cash proceeds to the Corporation from such Private Placement (before
any applicable underwriting or placement agent discounts, commissions and
fees) were at least fifteen million dollars ($15,000,000). Upon
such automatic conversion, any accrued and unpaid dividends shall be paid
in cash or, to the extent sufficient funds are not then legally available
therefor, in Common Stock (at the Common Stock’s fair market value
determined by the Board as of the date of such
conversion).
|
|
(ii)
|
Upon
the occurrence of either of the events specified in Section 5(k)(i) above,
the outstanding shares of Series A Preferred Stock shall be converted
automatically without any further action by the holders of such shares and
whether or not the certificates representing such shares are surrendered
to the Corporation or its transfer agent; provided, however, that
the Corporation shall not be obligated to issue certificates evidencing
the shares of Common Stock issuable upon such conversion unless the
certificates evidencing such shares of Series A Preferred Stock are either
delivered to the Corporation or its transfer agent as provided below, or
the holder notifies the Corporation or its transfer agent that such
certificates have been lost, stolen or destroyed and executes an agreement
satisfactory to the Corporation to indemnify the Corporation from any loss
incurred by it in connection with such certificates. Upon the
occurrence of such automatic conversion of the Series A Preferred Stock,
the holders of Series A Preferred Stock shall surrender the certificates
representing such shares at the office of the Corporation or any transfer
agent for the Series A Preferred Stock. Thereupon, there shall
be issued and delivered to such holder promptly at such office and in its
name as shown on such surrendered certificate or certificates, a
certificate or certificates for the number of shares of Common Stock into
which the shares of Series A Preferred Stock surrendered were convertible
on the date on which such automatic conversion
occurred.
|
|
(l)
|
Fractional
Shares. No fractional shares of Common Stock shall be
issued upon conversion of Series A Preferred Stock. All shares
of Common Stock (including fractions thereof) issuable upon conversion of
more than one share of Series A Preferred Stock by a holder thereof shall
be aggregated for purposes of determining whether the conversion would
result in the issuance of any fractional share. If, after the
aforementioned aggregation, the conversion would result in the issuance of
any fractional share, the Corporation shall, in lieu of issuing any
fractional share, pay cash equal to the product of such fraction
multiplied by the fair market value of one share of Common Stock (as
determined by the Board) on the date of
conversion.
|
|
(m)
|
Reservation of Stock Issuable
Upon Conversion. The Corporation shall at all times
reserve and keep available out of its authorized but unissued shares of
Common Stock, solely for the purpose of effecting the conversion of the
shares of the Series A Preferred Stock, such number of its shares of
Common Stock as shall from time to time be sufficient to effect the
conversion of all outstanding shares of the Series A Preferred
Stock. If at any time the number of authorized but unissued
shares of Common Stock shall not be sufficient to effect the conversion of
all then outstanding shares of the Series A Preferred Stock, the
Corporation will take such corporate action as may be necessary to
increase its authorized but unissued shares of Common Stock to such number
of shares as shall be sufficient for such
purpose.
|
|
(n)
|
Notices. Any
notice required by the provisions of this Section 5 shall be in writing
and shall be deemed effectively given: (i) upon personal
delivery to the party to be notified, (ii) when sent by confirmed
electronic mail or facsimile if sent during normal business hours of the
recipient; if not, then on the next business day, (iii) five (5) days
after having been sent by registered or certified mail, return receipt
requested, postage prepaid, or (iv) one (1) day after deposit with a
nationally recognized overnight courier, specifying next day delivery,
with verification of receipt. All notices shall be addressed to
each holder of record at the address of such holder appearing on the books
of the Corporation.
|
|
(o)
|
Payment of
Taxes. The Corporation will pay all taxes (other than
taxes based upon income) and other governmental charges that may be
imposed with respect to the issue or delivery of shares of Common Stock
upon conversion of shares of Series A Preferred Stock, excluding any tax
or other charge imposed in connection with any transfer involved in the
issue and delivery of shares of Common Stock in a name other than that in
which the shares of Series A Preferred Stock so converted were
registered.
|
AND BE IT
FURTHER RESOLVED, that the proper officers of the Corporation are hereby
authorized, empowered and directed to take all such further action and to
execute, deliver, certify and file all instruments and documents in the name of
and on behalf of this Corporation as such officers executing same shall approve
as necessary or advisable to effectuate and accomplish the purpose of the
foregoing resolution and the transactions contemplated thereby, the taking of
such action and the execution, delivery, certification, and filing of such
documents to be conclusive evidence of such approval.
* * * * *
Annex
D
IN
WITNESS WHEREOF, CareGuide, Inc. has caused this Second Amended Certificate of
Designations, Powers, Preferences and Relative, Participating, Optional or Other
Special Rights, and the Qualifications, Limitations or Restrictions thereof of
the Series A Preferred Stock to be duly executed by its Chief Executive Officer
this [ ] day of January, 2009.
CAREGUIDE,
INC.
By:
|
|
|
Chris
E. Paterson
|
|
Chief
Executive
Officer
|
Annex
E-1
CareGuide,
Inc. and Subsidiaries
Consolidated
Financial Statements
Year
Ended December 31, 2007 and Nine Months Ended December 31, 2006
Contents
Report
of Independent Registered Public Accounting Firm
|
F-2
|
|
|
Financial
Statements
|
|
|
|
Consolidated
Balance Sheets
|
F-3
|
Consolidated
Statements of Operations
|
F-4
|
Consolidated
Statements of Stockholders’ Equity
|
F-5
|
Consolidated
Statements of Cash Flows
|
F-6
|
Notes
to Consolidated Financial Statements
|
F-8
|
Report
of Independent Registered Public Accounting Firm
To the
Board of Directors and Stockholders
CareGuide,
Inc.
We have
audited the consolidated balance sheets of CareGuide, Inc. and subsidiaries as
of December 31, 2007 and 2006, and the related consolidated statements of
operations, stockholders’ equity and cash flows for the year ended December 31,
2007 and the nine months ended December 31, 2006. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of CareGuide, Inc. and
subsidiaries as of December 31, 2007 and 2006, and the results of their
operations and their cash flows for the year ended December 31, 2007 and the
nine months ended December 31, 2006, in conformity with U.S. generally accepted
accounting principles.
We were
not engaged to examine management's assertion about the effectiveness of
CareGuide, Inc. and subsidiaries internal control over financial reporting as of
December 31, 2007 included in the Company’s Annual Report on Form 10-K and,
accordingly, we do not express an opinion thereon.
/s/
McGladrey & Pullen,
LLP
|
Des
Moines, Iowa
May 8,
2008
CareGuide,
Inc. and Subsidiaries
Consolidated
Balance Sheets
(Dollars
in thousands, except shares and par values)
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
Assets
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
1,014 |
|
|
$ |
5,975 |
|
Restricted
cash available for current liabilities
|
|
|
868 |
|
|
|
4,717 |
|
Securities
available for sale
|
|
|
42 |
|
|
|
24 |
|
Securities
held for trading
|
|
|
491 |
|
|
|
284 |
|
Notes
receivable
|
|
|
- |
|
|
|
308 |
|
Accounts
receivable, net of allowance for doubtful accounts of $712 and
$544,
respectively
|
|
|
1,779 |
|
|
|
3,503 |
|
Prepaid
expenses and other current assets
|
|
|
362 |
|
|
|
587 |
|
Current
assets of discontinued operations
|
|
|
334 |
|
|
|
344 |
|
Total
current assets
|
|
|
4,890 |
|
|
|
15,742 |
|
Property
and equipment, net
|
|
|
2,087 |
|
|
|
2,948 |
|
Intangibles
and other assets, net
|
|
|
4,451 |
|
|
|
5,963 |
|
Goodwill
|
|
|
25,349 |
|
|
|
32,629 |
|
Restricted
cash
|
|
|
300 |
|
|
|
908 |
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
37,077 |
|
|
$ |
58,190 |
|
|
|
|
|
|
|
|
|
|
Liabilities
and stockholders’ equity
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Claims
payable
|
|
$ |
167 |
|
|
$ |
7,260 |
|
Line
of credit
|
|
|
500 |
|
|
|
8,000 |
|
Accounts
payable and accrued expenses
|
|
|
5,679 |
|
|
|
4,932 |
|
Deferred
revenue
|
|
|
232 |
|
|
|
1,500 |
|
Current
tax liability
|
|
|
250 |
|
|
|
344 |
|
Current
portion of lease obligations
|
|
|
453 |
|
|
|
365 |
|
Current
liabilities of discontinued operations
|
|
|
360 |
|
|
|
425 |
|
Total
current liabilities
|
|
|
7,641 |
|
|
|
22,826 |
|
|
|
|
|
|
|
|
|
|
Long-term
liabilities:
|
|
|
|
|
|
|
|
|
Line
of credit
|
|
|
8,000 |
|
|
|
- |
|
Convertible
notes payable
|
|
|
6,847 |
|
|
|
6,520 |
|
Deferred
tax liability
|
|
|
7 |
|
|
|
7 |
|
Lease
obligations, net of current portion
|
|
|
1,637 |
|
|
|
1,107 |
|
Total
liabilities
|
|
|
24,132 |
|
|
|
30,460 |
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
|
Series
A convertible preferred stock, $.01 par value, 6,250,000 shares
authorized 1,562,500 shares issued and outstanding
|
|
|
938 |
|
|
|
- |
|
Common
stock, $.01 par value, 100,000,000 shares authorized; 67,538,976 shares
issued and outstanding
|
|
|
675 |
|
|
|
675 |
|
Additional
paid-in capital
|
|
|
63,343 |
|
|
|
62,474 |
|
Accumulated
other comprehensive loss
|
|
|
(30 |
) |
|
|
(32 |
) |
Accumulated
deficit
|
|
|
(51,981 |
) |
|
|
(35,387 |
) |
Total
stockholders’ equity
|
|
|
12,945 |
|
|
|
27,730 |
|
Total
liabilities and stockholders’ equity
|
|
$ |
37,077 |
|
|
$ |
58,190 |
|
See
accompanying notes.
CareGuide,
Inc. and Subsidiaries
Consolidated
Statements of Operations
(In
thousands, except per share data)
|
|
Year Ended
|
|
|
Nine Months Ended
|
|
|
|
December 31, 2007
|
|
|
December 31, 2006
|
|
Revenues:
|
|
|
|
|
|
|
Capitation
revenue
|
|
$ |
3,032 |
|
|
$ |
27,061 |
|
Administrative
and fee revenue
|
|
|
19,214 |
|
|
|
14,277 |
|
Total
revenues
|
|
|
22,246 |
|
|
|
41,338 |
|
Cost
of services – direct service costs, excluding depreciation and
amortization of $2,386 and $808, respectively
|
|
|
14,849 |
|
|
|
31,429 |
|
Gross
profit
|
|
|
7,397 |
|
|
|
9,909 |
|
|
|
|
|
|
|
|
|
|
Operating
costs and expenses:
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expense
|
|
|
12,064 |
|
|
|
6,641 |
|
Depreciation
and amortization
|
|
|
3,087 |
|
|
|
1,959 |
|
Goodwill
impairment
|
|
|
7,523 |
|
|
|
- |
|
Total
operating costs and expenses
|
|
|
22,674 |
|
|
|
8,600 |
|
|
|
|
|
|
|
|
|
|
Operating
(loss) income from continuing operations
|
|
|
(15,277 |
) |
|
|
1,309 |
|
|
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
Interest
and other income
|
|
|
177 |
|
|
|
360 |
|
Trading
portfolio gain (loss)
|
|
|
207 |
|
|
|
(543 |
) |
Interest
expense
|
|
|
(1,593 |
) |
|
|
(1,355 |
) |
Loss
from continuing operations before income
|
|
|
|
|
|
|
|
|
taxes
and discontinued operations
|
|
|
(16,486 |
) |
|
|
(229 |
) |
Income
tax expense
|
|
|
(162 |
) |
|
|
(377 |
) |
Loss
from continuing operations
|
|
|
(16,648 |
) |
|
|
(606 |
) |
Income
from discontinued operations
|
|
|
54 |
|
|
|
675 |
|
Net
income (loss) attributable to common stockholders
|
|
$ |
(16,594 |
) |
|
$ |
69 |
|
|
|
|
|
|
|
|
|
|
Net
(loss) income common share-basic and diluted:
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$ |
(0.25 |
) |
|
$ |
(0.01 |
) |
Discontinued
operations
|
|
|
- |
|
|
|
0.01 |
|
Net
loss
|
|
$ |
(0.25 |
) |
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
67,539 |
|
|
|
67,539 |
|
Diluted
|
|
|
67,539 |
|
|
|
67,539 |
|
See
accompanying notes.
CareGuide,
Inc. and Subsidiaries
Consolidated
Statements of Stockholders’ Equity
Year
Ended December 31, 2007 and Nine Months Ended December 31, 2006
(Dollars
in Thousands)
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
Series A
Convertible Preferred Stock
|
|
|
Common Stock
|
|
|
Additional
Paid-in
|
|
|
Other
Comprehensive
|
|
|
Accumulated
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Loss
|
|
|
Deficit
|
|
|
Total
|
|
Balance
at March 31, 2006
|
|
|
- |
|
|
$ |
- |
|
|
|
67,538,976 |
|
|
$ |
675 |
|
|
$ |
61,742 |
|
|
$ |
(1 |
) |
|
$ |
(35,456 |
) |
|
$ |
26,960 |
|
Stock
option compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65 |
|
|
|
|
|
|
|
|
|
|
|
65 |
|
Amortization
of warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
657 |
|
|
|
|
|
|
|
|
|
|
|
657 |
|
Warrant
exercises
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
10 |
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
loss on securities available for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(31 |
) |
|
|
|
|
|
|
(31 |
) |
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
69 |
|
|
|
69 |
|
Net
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38 |
|
Balance
at December 31, 2006
|
|
|
- |
|
|
|
- |
|
|
|
67,538,976 |
|
|
|
675 |
|
|
|
62,474 |
|
|
|
(32 |
) |
|
|
(35,387 |
) |
|
|
27,730 |
|
Preferred
stock issuance
|
|
|
1,562,500 |
|
|
|
938 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
938 |
|
Stock
option compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
332 |
|
|
|
|
|
|
|
|
|
|
|
332 |
|
Amortization
of warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
537 |
|
|
|
|
|
|
|
|
|
|
|
537 |
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
gain on securities available for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
2 |
|
Net
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16,594 |
) |
|
|
(16,594 |
) |
Net
comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16,592 |
) |
Balance
at December 31, 2007
|
|
|
1,562,500 |
|
|
$ |
938 |
|
|
|
67,538,976 |
|
|
$ |
675 |
|
|
$ |
63,343 |
|
|
$ |
(30 |
) |
|
$ |
(51,981 |
) |
|
$ |
12,945 |
|
See
accompanying notes.
CareGuide,
Inc. and Subsidiaries
Consolidated
Statements of Cash Flows
(Dollars
in thousands)
|
|
Year Ended
|
|
|
Nine Months Ended
|
|
|
|
December 31, 2007
|
|
|
December 31, 2006
|
|
Cash
(used in) provided by operations:
|
|
|
|
|
|
|
Net
(loss) income
|
|
$ |
(16,594 |
) |
|
$ |
69 |
|
Adjustments
to reconcile net (loss) income to net cash (used in) provided by
continuing operations:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization and loss on disposal
|
|
|
3,087 |
|
|
|
1,959 |
|
Goodwill
impairment
|
|
|
7,523 |
|
|
|
- |
|
Stock
option compensation
|
|
|
332 |
|
|
|
65 |
|
Amortization
of warrants
|
|
|
537 |
|
|
|
657 |
|
Unrealized
(gain) loss in trading portfolio
|
|
|
(207 |
) |
|
|
543 |
|
Increase
in accrual for lease abandonment
|
|
|
618 |
|
|
|
- |
|
Increase
in accrued interest expense on note payable
|
|
|
327 |
|
|
|
- |
|
Decrease
in accounts receivable
|
|
|
1,724 |
|
|
|
480 |
|
Decrease
(increase ) in prepaid expenses and other current assets
|
|
|
315 |
|
|
|
(137 |
) |
Decrease
in claims payable
|
|
|
(7,093 |
) |
|
|
(1,000 |
) |
Increase
(decrease) in accounts payable and accrued expenses
|
|
|
567 |
|
|
|
(1,577 |
) |
(Decrease)
increase in deferred revenue
|
|
|
(1,268 |
) |
|
|
12 |
|
Decrease
(increase) in current tax liability
|
|
|
(94 |
) |
|
|
251 |
|
Deferred
tax (expense) benefit
|
|
|
- |
|
|
|
(10 |
) |
Decrease
in current assets of discontinued operations
|
|
|
10 |
|
|
|
7 |
|
Decrease
in current liabilities of discontinued operations
|
|
|
(65 |
) |
|
|
(593 |
) |
Net
cash (used in) provided by operating activities
|
|
|
(10,281 |
) |
|
|
726 |
|
|
|
|
|
|
|
|
|
|
Cash
provided by (used in) investing activities:
|
|
|
|
|
|
|
|
|
Purchases
of property and equipment
|
|
|
(820 |
) |
|
|
(381 |
) |
Restricted
deposits, net
|
|
|
4,457 |
|
|
|
(113 |
) |
Repayment
of note receivable
|
|
|
308 |
|
|
|
- |
|
Cash
used in mergers, including acquisition costs
|
|
|
(63 |
) |
|
|
(2,596 |
) |
Net
cash provided by (used in) investing activities
|
|
|
3,882 |
|
|
|
(3,090 |
) |
|
|
|
|
|
|
|
|
|
Cash
provided by (used in) financing activities:
|
|
|
|
|
|
|
|
|
Principal
payments of capital lease obligations
|
|
|
- |
|
|
|
(70 |
) |
Proceeds
from borrowing under line of credit facility
|
|
|
500 |
|
|
|
- |
|
Issuance
of preferred stock
|
|
|
938 |
|
|
|
|
|
Proceeds
received from warrant exercises
|
|
|
- |
|
|
|
10 |
|
Net
cash provided (used in) by financing activities
|
|
|
1,438 |
|
|
|
(60 |
) |
Net
decrease in cash and cash equivalents
|
|
|
(4,961 |
) |
|
|
(2,424 |
) |
Cash
and cash equivalents, beginning of period
|
|
|
5,975 |
|
|
|
8,399 |
|
Cash
and cash equivalents, end of period
|
|
$ |
1,014 |
|
|
$ |
5,975 |
|
CareGuide,
Inc. and Subsidiaries
Consolidated
Statements of Cash Flows
Supplemental
cash flow information:
|
|
Year Ended
December 31, 2007
|
|
|
Nine Months Ended
December 31, 2006
|
|
Cash
paid for interest
|
|
$ |
744,000 |
|
|
$ |
553,000 |
|
Cash
paid for taxes
|
|
|
256,000 |
|
|
|
139,000 |
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of non-cash operating and investing activities, accrual of
Haelan earn-out
|
|
$ |
180,000 |
|
|
$ |
- |
|
See
accompanying notes.
1.
Organization and Description of Business
On
January 25, 2006, CareGuide, Inc. (the "Company" or "CareGuide", formerly known
as Patient Infosystems, Inc.) acquired all the outstanding common stock of CCS
Consolidated, Inc., ("CCS") through the issuance of 43,224,352 shares of
CareGuide common stock. CCS was the accounting acquirer, but CareGuide was the
surviving legal entity.
On
December 8, 2006, the Company acquired Haelan Corporation, a privately held
corporation ("Haelan"). As of the closing of the acquisition, Haelan
became a wholly owned subsidiary of the Company. The financial
statements presented herein as of and for the nine months ended December 31,
2006 include the combined results of operations since the date of the
acquisition.
CCS was
incorporated on March 4, 1998. As a result of the merger with Patient
Infosystems, CCS became a wholly owned subsidiary of the Company. During the
nine months ended December 31, 2006, the Company changed its name from Patient
Infosystems, Inc. to CareGuide, Inc.
The
Company is a population health management company that provides a full range of
healthcare management services to health plans, work/life companies, government
entities, and self-funded employers to help them to reduce health care costs
while improving the quality of care for the members. The Company has
approximately 80 customers across the United States.
The
Company’s services may be provided under a variety of contractual arrangements,
including capitation, fee-for-service, and case rates. The Company has
terminated all capitated risk contracts as of January 31,
2007. CareGuide also provides case management and disease management
for administrative fees only. Contracts may include performance bonuses and
shared cost savings arrangements.
2.
Summary of Significant Accounting Policies
Principles
of Consolidation
The
consolidated financial statements include the accounts of the Company and its
wholly owned subsidiaries, CCS, Haelan, Coordinated Care Solutions, Inc.
(formerly Integrated Health Services Network, Inc.), Coordinated Care Solutions,
IPA, Inc., Coordinated Care Solutions of Texas, Inc. (CCS of Texas), Careguide
at Home, Inc., CCS New Jersey Inc, CCS/CG Holdings, Inc., and CBCA Care
Management, Inc. During the year ended December 31, 2007, the Company
dissolved the following entities that were no longer operating: Coordinated
Physician Solutions, Inc., Coordinated Care Solutions of Connecticut, Inc., IHS
Network Services, Inc., CCS Merger Corp., and Professional Review Network,
Inc. The activity, if any, of these entities is included through the
date of dissolution. All material intercompany accounts and
transactions have been eliminated in consolidation. The Company and its
subsidiaries collectively do business under the name "CareGuide".
The
accompanying consolidated statements of operations and statements of cash flows
for the nine months ended December 31, 2006 include the accounts of Haelan from
the merger date of December 8, 2006 through December 31, 2006.
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the amounts reported and disclosures at the date of
the financial statements and the reported amounts of the revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
2.
Summary of Significant Accounting Policies (continued)
Risks
and Uncertainties
The
Company’s business could be impacted by continuing price pressure on new and
renewal business, the Company’s ability to effectively control provider costs,
additional competitors entering the Company’s markets and changes in federal and
state legislation or governmental regulations. Changes in these areas could
adversely impact the Company’s financial position, results of operations and/or
cash flows in the future.
Direct
service costs are comprised of the incurred claims paid to third-party providers
for services for which the Company is at risk and the related expenses of the
Company associated with the providing of its services. Network provider and
facility charges for authorized services that have yet to be billed to the
Company are estimated and accrued in its Incurred But Not Reported (“IBNR”)
claims payable liability. Such accruals are based on historical
experience, current enrollment statistics, patient census data, adjudication and
authorization decisions and other information. The IBNR liability is
adjusted as changes in these factors occur and such adjustments are reported in
the period of determination. Although it is possible that actual
results could vary materially from recorded claims in the near term, management
believes that the recorded IBNR liability is adequate. The Company
has terminated all risk based contracts as of January 31, 2007 and has settled
substantially all claims related to these contracts. As of December
31, 2007, the Company has an estimated claim liability of $167,000 outstanding,
as compared to $7.3 million as of December 31, 2006.
Reportable
Operating Segments
The
operations of the Company are reported herein as one reportable segment for the
year ended December 31, 2007 and the nine months ended December 31, 2006. The
Company uses the "management approach" for reporting information about segments
in annual and interim financial statements. The management approach is based on
the way the chief operating decision-maker organizes segments within a company
for making operating decisions and assessing performance. Reportable
segments are based on products and services, geography, legal structure,
management structure and any other manner in which management disaggregates a
company. Based on the "management approach" model, the Company has
determined that its business is comprised of a single reportable segment.
Revenues from a non-reporting segment, whose financial amounts are below the
quantitative thresholds for separate disclosure, totaled approximately $1.3
million for the nine months ended December 31, 2006. The non-reporting segment
ceased operation as of December 31, 2006; there will be no further revenues from
this non-reporting segment.
Cash
and Cash Equivalents
Cash and
cash equivalents includes cash on hand, cash on deposit, and amounts invested in
short-term financial instruments with a maturity of three months or less from
the date of acquisition, the use of which is not restricted.
Accounts
Receivable
The
Company’s accounts receivable, which are unsecured, are due from companies who
have contracted through the Company for care management services. The Company
does not charge interest on accounts receivable. Accounts receivable are
recorded net of an estimated allowance for doubtful accounts in the accompanying
financial statements, which is recorded primarily based upon an analysis of the
individual accounts. Accounts are written off only after all collection efforts
are exhausted. During the year ended December 31, 2007 and the nine
months ended December 31, 2006, net expenses related to doubtful accounts were
approximately $179,000 and $79,000, respectively.
2.
Summary of Significant Accounting Policies (continued)
Property
and Equipment
Property
and equipment is stated at cost. Depreciation is computed using accelerated and
straight-line methods, as deemed appropriate, over the estimated useful lives of
the related assets ranging from three to ten years. Leasehold improvements are
amortized over the lesser of the remaining lease term or the asset’s useful
life.
Intangible
and Other Assets
Intangible
and other assets consist primarily of a website, trademarks, customer
relationships and other intangibles associated with acquisitions. Amortization
is computed using accelerated and straight-line methods, as deemed appropriate,
over the estimated useful lives of the related assets ranging from three to ten
years. Any asset deemed to have an indefinite life will be tested at
least annually for impairment; the extent of any impairment will be recorded in
the period in which any such impairment determination is made.
Restricted
Cash
On
March 31, 2001, the Company was licensed to operate as a limited service
HMO in the State of Texas. In accordance with the regulations of the Texas
Department of Insurance, the Company was required to maintain a statutory
deposit in a restricted account. Interest earned on these funds accrues to the
Company. As of December 31, 2007 and 2006, the Company included the deposits of
$325,000 in current assets of discontinued operations in the consolidated
balance sheets (see Note 6).
In
connection with several of the Company’s customer contracts and office leases,
the Company is required to maintain unconditional, irrevocable letters of credit
totaling $530,000 and $4,999,000 at December 31, 2007 and 2006, respectively. At
December 31, 2007 and 2006, the Company has secured these letters of credit by
establishing certificates of deposit totaling $531,000 and $5,018,000,
respectively. These certificates of deposit are included in restricted cash in
the consolidated balance sheets.
In
addition, at December 31, 2007 and 2006, CCS New Jersey, Inc. had $637,000 and
$607,000, respectively, on deposit with the State of New Jersey as a condition
of licensure as an Organized Delivery System (“ODS”) in New Jersey. This deposit
is included as restricted cash in the consolidated balance sheets. As
a result of the Company’s decision to exit the risk-based business, the Company
has applied to surrender its ODS license and accordingly has requested that the
State of New Jersey release the statutory funds. The Company intends
to use these released funds to settle a liability.
The
portion of restricted cash that is available and that the Company intends to use
to satisfy current liabilities is included in current assets. The fair value of
restricted cash approximates its carrying value.
Securities
Securities
available-for-sale and held for trading each consists solely of common shares of
American Caresource Holdings, Inc. ("ACSH") acquired in the merger with Patient
Infosystems, Inc. The available-for-sale portfolio consisting of
13,092 shares of ACSH common stock is carried at fair value, with unrealized
gains and losses reported as a separate component of stockholders’
equity. The remaining 153,518 shares of ACSH common stock are
classified as a trading portfolio as such shares may be needed to satisfy a call
option granted on those shares (see Note 15). Such trading portfolio
is carried at fair value, with an unrealized gain of approximately $207,000
included in the consolidated statements of operations for the year ended
December 31, 2007 and an unrealized loss of approximately $543,000 included in
the consolidated statements of operations for the nine months ended December 31,
2006. No securities have been sold to date.
2.
Summary of Significant Accounting Policies (continued)
Long-Lived
Assets
In
accordance with SFAS No. 144 "Accounting for the Impairment or Disposal of
Long-Lived Assets", the Company reviews the carrying value of its long-lived
assets to assess recoverability and impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. An evaluation of the recovery of the long-lived assets
was performed as of the year ended December 31, 2007. No impairments
were recorded for the year ended December 31, 2007 and the nine months ended
December 31, 2006.
Goodwill
and Indefinite Lived Intangible Assets
In
accordance with SFAS No. 142 "Goodwill and Other Intangible Assets", the
goodwill and intangible assets with indefinite useful lives are not amortized,
but instead tested annually for impairment on March 31 or whenever events or
changes in circumstances indicate that the carrying value may not be
recoverable. As discussed above, the Company is treated as one
reportable segment under the management approach to reportable
segments. As such, the goodwill impairment test is performed using
the entire Company as the reporting unit.
Due to
the loss of a significant customer, the Company performed a goodwill impairment
test as of December 31, 2006 which resulted in no goodwill
impairment. Due to certain conditions present during 2007 (including
the Company’s 2007 net operating loss, net decrease in cash and declining market
price for its common stock), the Company performed a goodwill and intangible
asset impairment test as of December 31, 2007. Based on an
independent valuation of the goodwill as of December 31, 2007, a goodwill
impairment loss of approximately $7,523,000 was recognized. The fair value of
the Company was estimated using a combination of valuation methods, including
the expected present value of future cash flows, comparison to guideline
companies and analysis of the Company’s stock.
SFAS
No. 142 also requires that intangible assets with definite useful lives be
amortized over their respective estimated useful lives to their estimated
residual values, and reviewed for impairment in accordance with SFAS No.
144. No impairments were recorded for the year ended December 31,
2007 or the nine months ended December 31, 2006.
2.
Summary of Significant Accounting Policies (continued)
Claims
Payable
The
Company provides for claims incurred but not yet reported based primarily on
past experience, together with current factors, using generally accepted
actuarial methods. Estimates are adjusted as changes in these factors occur and
such adjustments are reported in the period of
determination. Accordingly, amounts designated as “prior periods”
relate to the favorable or unfavorable settlement of claims for services
incurred prior to the beginning of each period presented
below. Although it is reasonably possible that actual results could
vary materially from recorded claims in the near term, management believes that
recorded reserves are adequate.
The
estimates for claims payable are continually reviewed and adjusted as necessary,
as experience develops or new information becomes known. Such adjustments are
included in current operations. Incurred claims for the year ended December 31,
2007 and the nine months ended December 31, 2006 are as follows (dollars in
thousands):
|
|
Year Ended
|
|
|
Nine Months Ended
|
|
|
|
December 31, 2007
|
|
|
December 31, 2006
|
|
|
|
|
|
|
|
|
Claims
payable, beginning of period
|
|
$ |
7,260 |
|
|
$ |
8,260 |
|
|
|
|
|
|
|
|
|
|
Claims Incurred:
|
|
|
|
|
|
|
|
|
Current
period
|
|
|
2,613 |
|
|
|
23,255 |
|
Prior
periods
|
|
|
(2,209 |
) |
|
|
(3,181 |
) |
|
|
|
|
|
|
|
|
|
Net
incurred claims
|
|
|
404 |
|
|
|
20,074 |
|
|
|
|
|
|
|
|
|
|
Paid Claims:
|
|
|
|
|
|
|
|
|
Current
period
|
|
|
(433 |
) |
|
|
(2,500 |
) |
Prior
periods
|
|
|
(5,245 |
) |
|
|
(2,359 |
) |
Claims
paid by health plan
|
|
|
(1,819 |
) |
|
|
(16,215 |
) |
Total
paid claims
|
|
|
(7,497 |
) |
|
|
(21,074 |
) |
|
|
|
|
|
|
|
|
|
Claims
payable, end of period
|
|
$ |
167 |
|
|
$ |
7,260 |
|
Cost of
services for the year ended December 31, 2007 and the nine months ended December
31, 2006 include a benefit of approximately $2.2 million and $3.2 million,
respectively, related to the favorable settlement of claims for services
included in the prior reporting periods.
2.
Summary of Significant Accounting Policies (continued)
Fair
Value of Financial Instruments
The
Company's financial instruments consist primarily of cash and cash equivalents,
available-for-sale and trading securities, accounts receivable, restricted cash,
accounts payable, accrued expenses, a line of credit and long-term
debt. The fair value of instruments is determined by reference to
various market data and other valuation techniques, as
appropriate. Unless otherwise disclosed, the fair value of short-term
financial instruments approximates their recorded values due to the short-term
nature of the instruments. Securities are valued using market trading prices and
are carried at market value. Based on the borrowing rates currently available to
the Company for bank loans with similar terms and average maturities, the fair
value of long-term debt approximates its carrying value.
Revenue
and Major Customers
Capitated
fees are due monthly and are recognized as revenue during the period in which
the Company is obligated to provide services to members. Administrative fees are
recognized during the period in which case management and disease management
services are provided. Fee-for-service revenues are recognized during the period
in which the related services are provided to members. Fees received in advance
are deferred to the period in which the Company is obligated to provide service
to members.
For the
year ended December 31, 2007 and nine months ended December 31, 2006,
approximately 21% and 7%, respectively, of the Company’s total revenue from
continuing operations was earned under contracts with Blue Cross Blue Shield of
Michigan. For the year ended December 31, 2007 and nine months ended
December 31, 2006, approximately 14% and 66%, respectively, of the Company’s
total revenue from continuing operations was earned under contracts with
affiliates of a single company, Aetna, Inc. (Aetna). The
capitated-risk contracts with Aetna were terminated effective as of January 31,
2007. Other than these customers, no other one customer accounted for
more than 10% of the Company’s total revenue for the year ended December 31,
2007 or nine months ended December 31, 2006.
Direct
Service Costs
Direct
service costs are comprised principally of expenses associated with providing
the Company’s services, including third-party network provider charges. The
Company’s direct service costs require pre-authorization and are recognized in
the month in which services are rendered. Network provider and facility charges
for authorized services that have not been billed to the Company (known as
incurred but not reported expenses) are estimated and accrued based on the
Company’s historical experience, current enrollment statistics, patient census
data, adjudication decisions and other information. The liability for such costs
is included in the caption “Claims payable” in the accompanying consolidated
balance sheets. For the year ended December 31, 2007 and nine months
ended December 31, 2006, direct service costs excluded $2,386,000 and $808,000,
respectively, of depreciation and amortization which were attributable to direct
service operations but are reported as operating expenses.
Income
Taxes
The
Company and its subsidiaries file federal tax returns on a consolidated basis,
and certain of its subsidiaries file state income tax returns on a separate
basis. The Company’s provision for income taxes includes federal and state
income taxes currently payable and changes in deferred tax assets and
liabilities, excluding the establishment of deferred tax assets and liabilities
related to acquisitions. Deferred income taxes are accounted for in accordance
with SFAS No. 109, Accounting
for Income Taxes and represent the estimated future tax effects resulting
from temporary differences between financial and tax reporting bases of certain
assets and liabilities. In addition, future tax benefits, such as net operating
loss (NOL) carryforwards, are required to be recognized to the extent that
realization of such benefits is more likely than not. Deferred tax assets are
reduced by a valuation allowance when, in the opinion of the management, it is
more likely than not that some or all of the deferred tax assets will not be
realized.
2.
Summary of Significant Accounting Policies (continued)
Earnings
Per Share
The
calculations for the basic (loss) income per share were based on net loss
attributable to common stockholders of $16,594,000 and net income attributable
to common stockholders of $69,000 for the year ended December 31, 2007 and nine
months ended December 31, 2006, respectively. For both periods, the
weighted average outstanding common shares was 67,538,976. The
calculation of the diluted (loss) income per share was based on a weighted
average number of common shares and equivalents outstanding of 67,538,976 for
both the year ended December 31, 2007 and nine months ended December 31,
2006. In accordance with SFAS No. 128 "Earnings per Share", the
computation of fully diluted loss per share for such periods did not include
18,154,673 and 2,831,418 shares of common stock, respectively, which consist of
the common equivalents of outstanding options, warrants and convertible
preferred stock, because the effect would be antidilutive due to the net losses
from continuing operations in those years. The calculation of the Company's net
(loss) income per share for the year ended December 31, 2007 and nine months
ended December 31, 2006 (dollars in thousands, except for per share
amounts):
|
|
Year Ended
|
|
|
Nine Months Ended
|
|
|
|
December 31, 2007
|
|
|
December 31, 2006
|
|
Net
loss from continuing operations
|
|
$ |
(16,648 |
) |
|
$ |
(606 |
) |
Income
from discontinued operations
|
|
|
54 |
|
|
|
675 |
|
Net
(loss) income attributable to common stockholders
|
|
$ |
(16,594 |
) |
|
$ |
69 |
|
|
|
|
|
|
|
|
|
|
Net
(loss) income per common share-basic and diluted:
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$ |
(0.25 |
) |
|
$ |
(0.01 |
) |
Discontinued
operations
|
|
|
- |
|
|
|
0.01 |
|
Loss
attributable to common stockholders
|
|
$ |
(0.25 |
) |
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding – basic
and diluted
|
|
|
67,538,976 |
|
|
|
67,538,976 |
|
2.
Summary of Significant Accounting Policies (continued)
Stock-Based
Compensation Plans
In
December 2004, the FASB issued Statement of Financial Accounting Standard (SFAS)
No. 123(Revised), “Share-Based Payment” (“SFAS No. 123(R)”), establishing
accounting standards for transactions in which an entity exchanges its equity
instruments for goods or services. SFAS No. 123(R) also addresses transactions
in which an entity incurs liabilities in exchange for goods or services that are
based on the fair value of the entity’s equity instruments, or that may be
settled by the issuance of those equity instruments. SFAS No. 123(R) covers a
wide range of share-based compensation arrangements including stock options,
restricted stock plans, performance-based stock awards, stock appreciation
rights, and employee stock purchase plans. SFAS No. 123(R) replaces existing
requirements under SFAS No. 123, “Accounting for Stock-Based Compensation,” and
eliminates the ability to account for share-based compensation transactions
using APB Opinion No. 25. SFAS 123(R) was adopted by the Company on
April 1, 2006.
The
Company's net income for the year ended December 31, 2007 and nine months ended
December 31, 2006 gives effect to $332,000 and $65,000, respectively, of expense
related to certain stock options. There is an additional $22,000 of
compensation expense related to warrants issued to Board members for the year
ended December 31, 2007. Upon adoption of SFAS No. 123(R), the
Company used the modified prospective transaction method, which requires that
compensation expense be recorded for all non-vested options beginning with the
first quarter of adoption. The Company determines the stock-based
employee compensation using the Black-Scholes Option Pricing
Model. Prior periods were not restated to reflect the impact of
adopting SFAS No. 123(R) on April 1, 2006.
Amended
and Restated 1995 Stock Option Plan
The
Company continues to administer the Patient Infosystems 1995 Stock Option Plan
(the “PATY Plan”). As of December 31, 2007, there are options to
purchase 53,500 shares of the Company's common stock outstanding under the PATY
Plan, with a weighted average exercise price of $2.80 per share. The
PATY Plan expired in 2005 and no further grants of options may be awarded under
the PATY Plan.
2005
Equity Incentive Plan
During
the fiscal year ended March 31, 2006, CCS’s board of directors and stockholders
adopted the CCS Consolidated, Inc. 2005 Equity Incentive Plan (the "2005
Plan"). Prior to the merger between CCS and Patient Infosystems (the
“PATY Merger”), CCS granted options to certain of its officers under the 2005
Plan. These options were assumed by the Company as part of the PATY
Merger and were converted into options to purchase shares of the Company's
common stock at an exercise price of $0.2337 per share, based on the exchange
ratio for CCS’s common stock in the PATY Merger. As of December 31,
2007, options to purchase 1,272,082 shares of the Company’s common stock were
outstanding under the 2005 Plan. The options granted under the 2005
Plan and assumed by the Company have a term of ten years from the date of
grant. The options were accelerated in connection with the PATY
Merger so that they were 25% vested as of January 25, 2006 and vest in 36
monthly installments thereafter. No options were granted under the
2005 Plan during the year ended December 31, 2007. During the year
ended December 31, 2007, the Company recognized compensation expense related to
options granted under the 2005 Plan of $99,000, as compared to $66,000 for the
nine months ended December 31, 2006.
2.
Summary of Significant Accounting Policies (continued)
2007
Equity Incentive Plan
In March
2007, the Company’s board of directors approved a 2007 Equity Incentive Plan
(the “2007 Plan”) subject to approval of the stockholders of the Company, and
the 2007 Plan was adopted by the Company’s stockholders in June
2007. The Company has reserved 7,000,000 shares of its common stock
for issuance under the terms of the 2007 Plan. As of December 31,
2007, options to purchase 4,927,055 shares of the Company’s common stock were
outstanding at a weighted-average purchase price of $0.44 per
share. Options granted under the 2007 Plan generally vest over a
period of 4 years and have a term of ten years from the date of
grant. During the year ended December 31, 2007, the Company
recognized compensation expense of $233,000 related to options granted under the
Plan.
Concentrations
of Credit Risk
Financial
instruments that potentially subject the Company to concentrations of credit
risk consist of trade receivables and deposits in banks. Concentrations of
credit risk with respect to trade receivables are partially mitigated by the
fact that some of Company’s customers are large and well-established companies.
As of December 31, 2007 and 2006, approximately $537,000 and $326,000,
respectively, of the Company’s total accounts receivable were due from Blue
Cross Blue Shield of Michigan. As of December 31, 2007 and 2006, $282,000 and
$46,000, respectively, of the Company’s total accounts receivable were due from
WellPoint. As of December 31, 2006, approximately $692,000 and $85,000 of the
Company’s total accounts receivable were due from Health Net and Aetna,
respectively. There were no receivables from HealthNet or Aetna as of
December 31, 2007.
The
Company has deposits exceeding the federal deposit insurance limits in three
commercial banks. The Company has not experienced any losses in such
accounts.
Recently
Issued Accounting Pronouncements
In June
2006, the FASB issued Interpretation No. 48 ("FIN 48"), Accounting for
Uncertainty in Income Taxes - an interpretation of SFAS Statement No. 109, to
clarify certain aspects of accounting for uncertain tax positions, including
issues related to the recognition and measurement of those tax
positions. FIN 48 is effective for fiscal years beginning after
December 15, 2006. The Company adopted the provisions of FIN 48 during the first
quarter of 2007. There was no material impact of FIN 48 on its
consolidated financial statements.
In
September 2006, FASB issued FASB Statement No. 157, “Fair Value Measurements”
(“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a framework
for measuring fair value and expands disclosures about fair value
measurements. SFAS No. 157 also emphasizes that fair value is a
market-based measurement, not an entity-specific measurement, and sets out a
fair value hierarchy, with the highest priority being quoted prices in active
markets. Under SFAS No. 157, fair value measurements are disclosed by
level within that hierarchy. The requirements of SFAS No. 157 are
first effective for the Company’s fiscal year beginning January 1,
2008. However, in February 2008, the FASB decided that an entity need
not apply this standard to nonfinancial assets and liabilities that are
recognized or disclosed at fair value in the financial statements on a
nonrecurring basis until the subsequent year. Accordingly, the
Company’s adoption of this standard on January 1, 2008 is limited to financial
assets and liabilities, and any nonfinancial assets and liabilities recognized
or disclosed at fair value on a recurring basis. The Company is
currently assessing the potential effect of SFAS No. 157 on its financial
position, results of operations and cash flows.
2.
Summary of Significant Accounting Policies (continued)
In
February 2007, FASB issued SFAS No. 159, "The Fair Value Option for Financial
Assets and Financial Liabilities—Including an amendment of FASB Statement No.
115" ("SFAS No. 159"). This Statement permits entities to choose to measure many
financial instruments and certain other items at fair value. The objective is to
improve financial reporting by providing entities with the opportunity to
mitigate volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting
provisions. This Statement is expected to expand the use of fair value
measurement, which is consistent with the Board’s long-term measurement
objectives for accounting for financial instruments. This Statement is effective
as of the beginning of an entity’s first fiscal year that begins after November
15, 2007. Early adoption is permitted as of the beginning of a fiscal year that
begins on or before November 15, 2007, provided the entity also elects to apply
the provisions of FASB Statement No. 157, Fair Value Measurements. The
Company has not yet assessed the impact, if any, of SFAS No. 159 on its
consolidated financial statements.
In
December 2007, FASB issued SFAS No. 141 (revised), “Business Combinations”,
(“SFAS No. 141R”). SFAS No. 141R establishes principles and
requirements for how an acquirer recognizes and measures tangible assets
acquired, liabilities assumed, goodwill and any noncontrolling interests and
identifies related disclosure requirements for business
combinations. Measurement requirements will result in all assets,
liabilities, contingencies and contingent consideration being recorded at fair
value on the acquisition date, with limited exceptions. Acquisition
costs and restructuring costs will generally be expenses as
incurred. SFAS No. 141R is effective for business combinations for
which the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2008. The Company
is currently evaluating the impact that the adoption of SFAS No. 141R will have
on its financial statements.
3.
Merger with Patient Infosystems, Inc. (PATY)
On
September 19, 2005, CCS entered into an agreement to merge with PATY Acquisition
Corp., a wholly owned subsidiary of the Company, which was then known as Patient
Infosystems, Inc. (“PATY” and such transaction the "PATY
Merger"). The PATY Merger was completed on January 25,
2006. As a result, CCS became a wholly-owned subsidiary of
PATY. CCS was deemed to be the acquiring company for accounting
purposes.
On
September 19, 2006, the company formerly known as Patient Infosystems, Inc.
filed an amendment to its certificate of incorporation which changed the name of
this entity to CareGuide, Inc. (the "Company" or "CareGuide").
In
accordance with SFAS No. 141, the total purchase price was allocated to the
acquired tangible and intangible assets and assumed liabilities of PATY based on
their estimated fair values as of the PATY Merger closing date of January 25,
2006. A third party valuation consultant was engaged to assist in the process of
determining the fair value of the assets acquired and liabilities assumed. The
excess of the purchase price over the fair value of assets acquired and
liabilities assumed was allocated to goodwill.
3.
Merger with Patient Infosystems, Inc. (PATY) (continued)
The
purchase price was allocated to the assets and liabilities of PATY as of the
merger date of January 25, 2006, as follows (dollars in
thousands):
Cash
acquired
|
|
$ |
4,457 |
|
Other
current assets
|
|
|
2,129 |
|
Identified
intangible assets
|
|
|
2,470 |
|
Goodwill
|
|
|
28,608 |
|
Current
liabilities
|
|
|
(2,173 |
) |
Net
assets acquired
|
|
$ |
35,491 |
|
The
weighted-average amortization period of intangible assets acquired is 4.4 years.
None of the goodwill acquired is expected to be deductible for tax
purposes. As discussed above in Note 2, the Company recorded a
consolidated goodwill impairment of $7.5 million during the year ended December
31, 2007.
4.
Merger with Haelan Corporation (Haelan)
On
December 8, 2006, pursuant to an Agreement and Plan of Merger, dated as of
November 3, 2006, by and among CareGuide, Haelan Acquisition Corporation, an
Indiana corporation and a newly formed wholly-owned subsidiary of CareGuide
(“Merger Sub”), Haelan Corporation, an Indiana corporation (“Haelan”) and
Richard L. Westheimer, as securityholders’ representative (the “Haelan Merger
Agreement”), Merger Sub merged with and into Haelan (the “Haelan Merger”), and
as a result Haelan became a wholly-owned subsidiary of CareGuide. The
Haelan Merger Agreement and the Haelan Merger were approved by the shareholders
of Haelan at a meeting held on November 20, 2006. In the Haelan
Merger, CareGuide paid $1.5 million in cash to Haelan to satisfy certain
liabilities of Haelan existing at the closing and specified in the Haelan Merger
Agreement, and all outstanding securities of Haelan were exchanged for
convertible promissory notes of CareGuide (the “Convertible Notes”) in the
aggregate principal amount of $6.5 million. The Convertible Notes are
subordinated to the rights of CareGuide’s senior lender (see Note
9).
The
Convertible Notes carry an interest rate of 5% per year, compounding annually,
mature on December 8, 2009 and are convertible at maturity into shares of common
stock of CareGuide, valued based upon the average closing price of the common
stock for the 20 consecutive trading days ending on the date prior to
conversion. The maturity date of the notes may be accelerated in the
event of a sale transaction, as defined in the Convertible Notes, involving
CareGuide.
4.
Merger with Haelan Corporation (Haelan) (continued)
In the
event that the average closing price of the common stock of CareGuide for the 20
consecutive trading days ending on the date prior to conversion is equal to or
greater than $1.50 per share, the outstanding principal and accrued interest
under the Convertible Notes will automatically convert into shares of common
stock at $1.50 per share. In the event that such average closing
price at the time of conversion is less than $1.50 per share, the outstanding
principal and accrued interest under the Convertible Notes will convert into
shares of common stock at such average closing price, but not less than $1.00
per share, and in such case each holder of a Convertible Note may elect to
receive all or a portion of the amounts due under the note in cash in lieu of
shares of common stock of CareGuide. CareGuide may elect to prepay
the amounts then outstanding under the Convertible Notes in cash, subject to the
prior approval of CareGuide’s senior lender under its credit facility, but upon
any such election by CareGuide, if the average closing price of CareGuide’s
common stock for the 20 consecutive trading days ending on the date prior to
conversion is at least $1.00 per share, each holder of a Convertible Note may
elect to receive all or any portion of the amounts due under the Convertible
Note in the form of shares of common stock valued at such average closing
price.
The
Haelan Merger Agreement also contains an “earn-out” provision under which
CareGuide is required to pay additional amounts to the former Haelan
securityholders in the event that Haelan’s revenues during the year ending
December 31, 2007 exceeded certain threshold amounts. As of December
31, 2007, the Company has calculated an estimated “earn-out” payable to the
Haelan securityholders of approximately $180,000 and expects that such amount
will be paid in cash.
The
accompanying consolidated balance sheets as of December 31, 2007 and December
31, 2006 include the assets and liabilities of Haelan. The
accompanying consolidated statements of operations and cash flows for the year
ended December 31, 2007 include the operations and cash flows of Haelan for the
entire period. The accompanying consolidated statements of operations
and cash flows for the nine months ended December 31, 2006 include the
operations and cash flows of Haelan from the merger date of December 8, 2006
through December 31, 2006.
In
accordance with SFAS No. 141, the total purchase price was allocated to the
acquired tangible and intangible assets and assumed liabilities of Haelan based
on their estimated fair values as of the Haelan Merger closing date of December
8, 2006. A third party valuation consultant was engaged to assist in the process
of determining the fair value of the assets acquired and liabilities assumed.
The excess of the purchase price over the fair value of assets acquired and
liabilities assumed is allocated to goodwill. The resulting goodwill
is subject to an annual impairment test. If the goodwill is impaired,
the Company will recognize a non-cash charge to earnings during the period in
which the impairment is determined.
The
purchase price of Haelan in the Haelan Merger was calculated as follows (dollars
in thousands):
Cash
paid at closing
|
|
$ |
1,500 |
|
Expenses
of the Haelan Merger
|
|
|
309 |
|
Earn-out
|
|
|
180 |
|
Notes
issued to the former Haelan securityholders
|
|
|
6,500 |
|
Total
purchase price
|
|
$ |
8,489 |
|
4.
Merger with Haelan Corporation (Haelan) (continued)
The
purchase price was allocated to the assets and liabilities of Haelan as of the
merger date of December 8, 2006. An adjustment was made for the
estimated earn-out and additional expenses related to the
acquisition. The allocation is as follows (dollars in
thousands):
Cash
acquired
|
|
$ |
133 |
|
Other
current assets
|
|
|
156 |
|
Property
and equipment
|
|
|
2,389 |
|
Identified
intangible assets
|
|
|
2,600 |
|
Goodwill
|
|
|
3,969 |
|
Current
liabilities
|
|
|
(751 |
) |
Long-term
liabilities
|
|
|
(7 |
) |
Net
assets acquired
|
|
$ |
8,489 |
|
As of the
date of the acquisition, the weighted-average amortization period of amortizing
intangible assets acquired was 4.3 years. None of the goodwill
acquired is expected to be deductible for tax purposes. As discussed above in
Note 2, the Company recorded a consolidated goodwill impairment of $7.5 million
during the year ended December 31, 2007.
The
following unaudited pro forma summary presents CareGuide's consolidated results
of operations for the nine months ended December 31, 2006 had the Haelan Merger
been consummated on first day of the period. The pro forma
consolidated results of operations include certain pro forma adjustments,
including the amortization of identifiable intangible assets, interest and
expenses on certain debt (dollars in thousands, except for share and per share
data).
|
|
Nine Months Ended
December 31, 2006
|
|
|
|
|
|
Total
revenues
|
|
$ |
44,425 |
|
|
|
|
|
|
Cost
of services – direct service costs
|
|
|
(32,704 |
) |
Total
operating costs and expenses
|
|
|
(10,819 |
) |
Other
income and expenses, net
|
|
|
(2,189 |
) |
Accretion
of preferred stock
|
|
|
- |
|
Net
loss attributable to common stockholders
|
|
$ |
(1,287 |
) |
Net
loss per common share attributable to common stockholders - basic and
diluted
|
|
$ |
(0.02 |
) |
|
|
|
|
|
Weighted
average shares outstanding - basic
|
|
|
67,538,976 |
|
Weighted
average shares outstanding - diluted
|
|
|
67,538,976 |
|
The pro
forma results are not necessarily indicative of those that would have occurred
had the acquisition taken place at the beginning of the periods
presented.
5.
Business Operations
The
Company incurred a net loss from continuing operations of approximately
$16,648,000 for the year ended December 31, 2007 and a net loss from continuing
operations of $606,000 for the nine months ended December 31, 2006. At
December 31, 2007 the Company had a working capital deficit of $2,751,000. The
Company’s ability to continue as a going concern is dependent upon achieving
profitability from future operations sufficient to maintain adequate working
capital. These financial statements have been prepared assuming the Company will
continue as a going concern. Until the Company has sufficient profitable
operations or other revenue-generating activities to be self sufficient, the
Company will remain dependent on other sources of capital. Currently, such
capital has been obtained from the issuance of common and preferred stock and
borrowings from a financial institution. The Company’s primary investors have
guaranteed the borrowings from a financial institution through January 1, 2009
(see Note 9) and certain of these investors have committed to provide additional
funding of up to $1 million to the Company, if required, through January 1,
2009. These primary investors purchased 1,562,500 shares of preferred
stock for $0.9 million during 2007 and committed to purchasing an additional
4,687,500 shares of preferred stock during 2008, for aggregate additional gross
proceeds of up to $2.8 million, under a stock purchase agreement entered into
during December 2007.
Management’s
plans for dealing with the adverse effects of these conditions include entering
into contracts with additional health plans, achieving positive gross margins by
exiting or renegotiating under-performing contracts, reducing operating expenses
by challenging staffing levels at all of the Company’s locations and considering
strategic partnerships with other healthcare companies. The Company has
eliminated a number of staff positions and plans additional eliminations of
positions, as appropriate, as it transitions from risk-based contracts to
contracts under which the Company is not at risk for provider
claims. However, there can be no assurance that the Company will be
successful in achieving positive financial results.
6.
Discontinued Operations
During
the year ended March 31, 2005, the Company terminated its contractual
relationship with Oxford Health Plans (“Oxford”). Pursuant to the contract
termination provisions, the Company performed under the terms of the contract
through May 31, 2005 and provided transitional assistance to Oxford's
members through July 31, 2005. The Company had no continuing involvement
thereafter. Therefore, the operations of Oxford are accounted for as
discontinued operations, and accordingly, the operating results and related
assets and liabilities of Oxford are segregated in the accompanying consolidated
financial statements.
The
Oxford contract included risk-sharing provisions and provided for an annual
settlement after the conclusion of each contract year. During the year ended
March 31, 2006, Oxford submitted its calculation of the amount due from the
Company for the contract year ended December 31, 2004 which included many
matters which management believed were contrary to the terms of the contract,
and management notified Oxford of the disputed items. Oxford did not agree with
the Company’s position on these matters, and Oxford drew down a $500,000 letter
of credit that had been established for Oxford’s benefit pursuant to this
contract. At March 31, 2006, the Company recorded a liability based upon
management’s best estimate of the ultimate liability to settle the contractual
dispute with Oxford for services rendered through March 31, 2006. The
parties agreed to arbitration in 2006. In September 2006, the
arbitration panel rendered a decision in the Company's favor. On
November 10, 2006, Oxford paid the Company the award in the amount of
approximately $661,000. The related legal costs, net of the elimination of the
liability the Company had recorded at March 31, 2006, resulted in $131,000 of
expenses related to Oxford for the nine months ended December 31,
2006.
During
the year ended March 31, 2003, the Company ceased operations in Texas and began
the process of dissolving CCS of Texas. The operations of CCS of Texas are
accounted for as discontinued operations, and accordingly, the operating results
and related assets and liabilities of CCS of Texas are segregated in the
accompanying consolidated financial statements. During the year ended December
31, 2007 and the nine months ended December 31, 2006, the Company revised its
estimate of the expenses to wind down the operations, including the ultimate
settlement to providers, and as a result released $42,000 and $140,000 of
liabilities (including liabilities for claims), respectively, which were
recorded as income from discontinued operations. Income (expense) of
discontinued operations consist of the following (dollars in
thousands):
|
|
Year Ended
|
|
|
Nine Months Ended
|
|
|
|
December 31, 2007
|
|
|
December 31, 2006
|
|
|
|
|
|
|
|
|
Revenues
from Oxford
|
|
$ |
- |
|
|
$ |
661 |
|
Revenues
from CCS of Texas
|
|
|
9 |
|
|
|
5 |
|
Total
revenues from discontinued operations
|
|
|
9 |
|
|
|
666 |
|
Reductions
in expense (expense) from Oxford
|
|
|
3 |
|
|
|
(131 |
) |
Net
reductions in expense from CCS of Texas
|
|
|
42 |
|
|
|
140 |
|
Net
reductions in expense (expense) from discontinued
operations
|
|
|
45 |
|
|
|
9 |
|
Net
income from discontinued operations
|
|
$ |
54 |
|
|
$ |
675 |
|
In
connection with the discontinuation of the Company’s Texas operations, the
remaining long-lived assets associated with the operations of CCS of Texas have
been transferred to the Company’s corporate headquarters. No tax expense or tax
benefit has been allocated to the above results of discontinued operations,
since no such expense or benefit would have been recorded by Oxford or CCS of
Texas on a separate return basis.
7.
Property and Equipment
Property
and equipment consisted of the following (dollars in thousands):
|
|
December 31, 2007
|
|
|
December 31, 2006
|
|
|
|
|
|
|
|
|
Computer
equipment and software
|
|
$ |
7,084 |
|
|
$ |
6,087 |
|
Furniture
and equipment
|
|
|
1,336 |
|
|
|
1,326 |
|
Equipment
held under capital leases
|
|
|
2,335 |
|
|
|
2,335 |
|
Leasehold
improvements
|
|
|
115 |
|
|
|
978 |
|
|
|
|
10,870 |
|
|
|
10,726 |
|
Accumulated
depreciation
|
|
|
(8,783 |
) |
|
|
(7,778 |
) |
Total
property and equipment, net
|
|
$ |
2,087 |
|
|
$ |
2,948 |
|
Depreciation
and amortization expense related to property and equipment was approximately
$1,681,000 and $961,000 for the year ended December 31, 2007 and nine months
ended December 31, 2006, respectively. Included in the depreciation and
amortization expense related to property and equipment for the year ended
December 31, 2007 was $343,000 related to the write-off of unamortized software
the Company determined was of no further value. In addition, certain
fully depreciated assets with both an original cost and accumulated depreciation
of $330,000 were written off during the year ended December 31,
2007. Included in the depreciation and amortization expense related
to property and equipment for the nine months ended December 31, 2006 was
$325,000 related to the write-off of unamortized software the Company determined
was of no further value and $221,000 of unamortized leasehold improvements that
were deemed to have no further use.
8.
Professional Malpractice Insurance
The
Company maintains general liability and professional malpractice liability
insurance on its staff and other insurance coverage appropriate for its
operations. The general liability policy is occurrence based and provides
coverage of $1,000,000 per occurrence and $2,000,000 in the aggregate. The
professional liability policy is on a claims-made basis and provides coverage
for professional medical activities. This policy provides coverage of $5,000,000
per occurrence and $5,000,000 in the aggregate, subject to a deductible of
$75,000 per claim and annual aggregate. In
addition, the Company maintains an umbrella policy which provides coverage of
$5,000,000 per claim and in the aggregate.
9.
Long-Term Obligations
Line
of Credit
The
Company has an $8,000,000 revolving line of credit (the "Line of Credit") with
an outside lender for working capital purposes. The Line of Credit bears
interest at the outside lender’s prime rate plus 1%, which was 8.25% and 9.25%
at December 31, 2007 and December 31, 2006, respectively, and is due in full on
January 1, 2009. The Line of Credit is collateralized by all of the Company’s
assets, including its investment in all of its subsidiaries. As of December 31,
2007 and at December 31, 2006, $8,000,000 was outstanding under the Line of
Credit.
9.
Long-Term Obligations (continued)
In
September 2007, the Company obtained a second credit facility with the same
lender (“Revolving Line B”), under which the Company may borrow up to an
additional amount equal to the lesser of (a) $1.0 million or (b) 60% of its
eligible accounts receivable, which percentage will increase to 75% of its
eligible accounts receivable upon the satisfaction of certain
conditions. Revolving Line B is collateralized by certain accounts
receivable of the Company. Any amounts borrowed under Revolving Line
B bear interest at the lender’s prime rate plus 2%, and all outstanding amounts
under Revolving Line B are due on September 23, 2008. As of December
31, 2007, $500,000 had been drawn on Revolving Line B and the interest rate on
this facility was 9.25%. As of December 31, 2007, the additional
amount available under Revolving Line B was minimal. Any additional
amounts borrowed under Revolving Line B would be limited to the amount indicated
by a borrowing base calculation completed at the time of the borrowing
request.
The loan
agreement underlying the Line of Credit and Revolving Line B contains
representations and warranties and affirmative and negative covenants that are
customary for credit facilities of this type. The Line of Credit and
Revolving Line B could restrict the Company’s ability to, among other things,
sell certain assets, change our business, engage in a merger or change in
control transaction, incur debt, pay cash dividends, make investments and
encumber our assets. The Line of Credit also contains events of
default that are customary for credit facilities of this type, including payment
defaults, covenant defaults, insolvency type defaults and events of default
relating to liens, judgments, material misrepresentations and the occurrence of
certain material adverse events.
During
the fourth quarter of 2007 and through April 2008, the Company was in violation
of certain of the loan covenants. In May 2008, the Company entered into an
amendment to the loan agreement with Comerica, as part of which Comerica waived
the Company’s failure to comply with the loan covenants during this
period.
The
outside lender required that the Company obtain unconditional guarantees (the
"Guarantees") from its primary investors. Under the terms of the Guarantees,
each participating primary investor unconditionally and irrevocably guarantees
prompt and complete payment of its pro rata share of the amount the Company owes
under the Line of Credit, up to $8 million. As compensation for their
guarantees, the Company estimates that it will issue warrants to purchase an
aggregate of 2,800,000 shares of common stock to these stockholders during 2008,
which will vest based on the outstanding balance of the Line of Credit through
its maturity date. The Company has estimated the value of these
warrants under the Black-Scholes model at approximately $396,000 and recognized
additional interest expense of approximately $79,000 during the year ended
December 31, 2007 related to these Guarantees.
In
exchange for prior Guarantees of the Line of Credit, the primary investors were
issued warrants to purchase up to 2,000,000 shares of Series AA Convertible
Preferred Stock of CCS, par value of $0.01 per share, in the
aggregate. Such warrants each had an exercise price of $0.01 per
share and a ten-year exercise period through November 17, 2014 and vested based
on the outstanding balance of the Line of Credit as a percentage of the total
available amount under the Line of Credit at each quarterly vesting
date. In January 2006, warrants to purchase an additional 400,000
shares of Series AA Preferred Stock of CCS in the aggregate were issued under
similar terms in exchange for extending the then guarantee period to June 30,
2007, except that such additional warrants were fully vested at the time of
grant (collectively the "Guaranty Warrants").
9.
Long-Term Obligations (continued)
Immediately
prior to the PATY Merger, the vested portions of the Guaranty Warrants were
net-share exercised for shares of Series AA Convertible Preferred Stock of CCS,
which were then exchanged for shares of PATY common stock in the PATY
Merger. As part of the PATY Merger, the unvested portions of the
Guaranty Warrants were terminated and replaced by warrants to purchase an
aggregate of 3,152,141 shares of PATY common stock which were issued to an
escrow agent at the closing of the PATY Merger (the "Replacement Warrants").
Each of the Replacement Warrants had an exercise price of $0.003172 per share of
PATY common stock. These Replacement Warrants fully vested during the
nine months ended December 31, 2006 and were exercised in full, and the
underlying shares were issued to the guarantors during the nine months ended
December 31, 2006. The aggregate fair value of the Guaranty Warrants in the
amount of $1,980,000 was amortized to interest expense over the guarantee
period, and the initial value was computed using the Black-Scholes
model. Approximately $436,000 and $657,000 was recognized as
additional interest expense for the year ended December 31, 2007 and the nine
months ended December 31, 2006, respectively.
As more
fully described in Note 4, the Company completed the Haelan Merger on December
8, 2006, resulting in the issuance of $6.5 million of Convertible
Notes. The Convertible Notes are subordinated to the rights to prior
payment of the Company's senior lender under the Line of Credit. The Convertible
Notes carry an interest rate of 5% per year, compounding annually, mature on
December 8, 2009 and are convertible at maturity into shares of common stock of
CareGuide, valued based upon the average closing price of the common stock for
the 20 consecutive trading days ending on the date prior to
conversion. The maturity date of the Convertible Notes may be
accelerated in the event of a sale transaction, as defined in the Convertible
Notes, involving the Company.
In the
event that the average closing price of the common stock of the Company for the
20 consecutive trading days ending on the date prior to conversion is equal to
or greater than $1.50 per share, the outstanding principal and accrued interest
under the Convertible Notes will automatically convert into shares of common
stock at $1.50 per share. In the event that such average closing
price at the time of conversion is less than $1.50 per share, the outstanding
principal and accrued interest under the Convertible Notes will convert into
shares of common stock at such average closing price, but not less than $1.00
per share, and in such case each holder of a Convertible Note may elect to
receive all or a portion of the amounts due under the note in cash in lieu of
shares of common stock of CareGuide. The Company may elect to prepay
the amounts then outstanding under the Convertible Notes in cash, subject to the
prior approval of the Company’s senior lender under the Line of Credit, but upon
any such election by the Company, if the average closing price of the Company’s
common stock for the 20 consecutive trading days ending on the date prior to
conversion is at least $1.00 per share, each holder of a Convertible Note may
elect to receive all or any portion of the amounts due under the Convertible
Note in the form of shares of common stock valued at such average closing
price.
Lease
Obligations
At
December 31, 2007 and December 31, 2006, the Company had recorded obligations
for the fair value of the remaining lease rentals due under operating leases
without any remaining economic benefit to the Company aggregating $2,090,000 and
$1,472,000. See Note 15 for operating lease
commitments.
10.
Stockholders' Equity and Subsequent Event
Capital
Stock
The
Company is authorized to issue up to 120,000,000 shares of capital stock,
100,000,000 designated as common stock, and 20,000,000 designated as preferred
stock, of which 6,250,000 shares have been designated as “Series A Preferred
Stock.” As of December 31, 2007 and December 31, 2006, there were
67,538,976 shares of common stock outstanding.
As of
December 31, 2007, there were 1,562,500 shares of Series A Convertible Preferred
Stock issued and outstanding. Between December 31, 2007 and May 6,
2008, the Company issued an additional 3,125,000 shares of the Series A
Convertible Preferred Stock. The Company has also requested that the
Investors purchase the remaining authorized shares of Series A Preferred Stock
on a pro rata basis, based on the number of shares purchased at the initial
closing. The Series A Convertible Preferred Stock (i) is entitled to cumulative
dividends at the rate of 8% per year, payable in arrears semiannually; (ii) is
entitled to a liquidation preference equal to its original purchase price plus
all accrued and unpaid dividends; (iii) has a preference over the common stock
with respect to dividends and distributions; (iv) votes on an as-converted basis
with the common stock on matters submitted to common stockholders for approval;
and (v) is initially convertible into common stock on a five-for-one basis
(subject to adjustment in the event of stock dividends, stock splits, reverse
stock splits, recapitalizations, etc. and in the event of certain dilutive
issuances by the Company). The consent of the holders of at least two-thirds of
the Series A Preferred Stock is required for certain other actions that alter or
change the voting or other powers, preferences, or other special rights,
privileges or restrictions of the Series A Preferred Stock so as to affect them
adversely.
The
Series A Preferred Stock will be automatically converted into shares of common
stock, at the then-effective conversion rate, at any time upon the affirmative
election of the holders of at least a majority of the outstanding shares of the
Series A Preferred Stock or immediately upon the closing of certain public
offerings of the Company’s common stock. Upon such automatic conversion, any
accrued and unpaid dividends will be paid in cash or, to the extent sufficient
funds are not then legally available therefore, in common stock (at the common
stock’s fair market value determined by the Board of Directors as of the date of
such conversion).
11.
Intangible and Other Assets
The
Company’s intangible and other assets consisted of the following (dollars in
thousands):
|
|
December 31,
|
|
|
December 31,
|
|
Description
|
|
2007
|
|
|
2006
|
|
CareGuide
trademark acquired July 2001 (i)
|
|
$ |
1,513 |
|
|
$ |
1,513 |
|
CareGuide
website acquired July 2001 (ii)
|
|
|
1,430 |
|
|
|
1,430 |
|
PATY
customer relationships acquired January 2006 (iii)
|
|
|
1,236 |
|
|
|
1,236 |
|
PATY
non-compete agreements acquired January 2006 (iv)
|
|
|
718 |
|
|
|
718 |
|
PATY
co-marketing agreements acquired January 2006 (v)
|
|
|
516 |
|
|
|
516 |
|
Haelan
customer relationships acquired December 2006 (iii)
|
|
|
1,460 |
|
|
|
1,460 |
|
Haelan
non-compete agreements acquired December 2006 (iv)
|
|
|
360 |
|
|
|
360 |
|
Haelan
trademarks acquired December 2006 (vi)
|
|
|
780 |
|
|
|
780 |
|
|
|
|
8,013 |
|
|
|
8,013 |
|
Accumulated
amortization
|
|
|
(3,620 |
) |
|
|
(2,214 |
) |
Net
intangible assets
|
|
|
4,393 |
|
|
|
5,799 |
|
Security
deposits and other assets
|
|
|
58 |
|
|
|
164 |
|
Total
intangibles and other assets, net
|
|
$ |
4,451 |
|
|
$ |
5,963 |
|
(i)
|
The
acquired trademark is classified as an intangible asset with an indefinite
life and is not subject to amortization, but is tested annually for
impairment.
|
(ii)
|
The
website is subject to amortization and was being amortized using over a
five-year life using the straight line method. It is now fully
amortized.
|
(iii)
|
Customer
lists are subject to amortization and are being amortized over a five-year
life using an accelerated
method.
|
(iv)
|
The
non-compete agreements are subject to amortization and are being amortized
over a three-year life using the straight line
method.
|
(v)
|
The
co-marketing agreements are subject to amortization and are being
amortized over a five-year life using the straight line
method.
|
(vi)
|
The
Haelan trademarks are subject to amortization and are being amortized over
a ten-year life using the straight line
method.
|
Amortization
expense related to acquired intangible assets and other assets was approximately
$1,406,000 and $998,000 for the year ended December 31, 2007 and nine months
ended December 31, 2006, respectively.
11.
Intangible and Other Assets (continued)
The
estimated annual amortization expenses of intangible assets for the five years
subsequent to December 31, 2007 are as follows (dollar in
thousands):
Years
Ended
December
31,
|
|
Estimated
Intangible
Amortization
Expense
|
|
2008
|
|
$ |
1,193 |
|
2009
|
|
|
752 |
|
2010
|
|
|
409 |
|
2011
|
|
|
140 |
|
2012
|
|
|
78 |
|
|
|
|
|
|
Total
|
|
$ |
2,572 |
|
12.
Income Taxes
The
components of the income tax (expense) benefit consist of the following (dollars
in thousands):
|
|
Year Ended
December 31, 2007
|
|
|
Nine Months Ended
December 31, 2006
|
|
Current
federal income taxes
|
|
$ |
54 |
|
|
$ |
(25 |
) |
Current
state income taxes
|
|
|
(216 |
) |
|
|
(365 |
) |
Deferred
taxes
|
|
|
- |
|
|
|
13 |
|
Net
income tax expense
|
|
$ |
(162 |
) |
|
$ |
(377 |
) |
12.
Income Taxes (continued)
The
tax-effected components of deferred income tax assets and (liabilities) consist
of the following (dollars in thousands):
|
|
December 31, 2007
|
|
|
December 31, 2006
|
|
|
|
|
|
Deferred
income tax assets:
|
|
|
|
|
|
|
Federal
income tax net operating losses
|
|
$ |
25,443 |
|
|
$ |
22,517 |
|
State
and other income tax net operating losses
|
|
|
5,238 |
|
|
|
4,636 |
|
Goodwill
and intangible impairment and amortization
|
|
|
1,104 |
|
|
|
1,215 |
|
Accrued
liabilities
|
|
|
809 |
|
|
|
954 |
|
Allowance
for doubtful accounts
|
|
|
292 |
|
|
|
223 |
|
Depreciation
|
|
|
331 |
|
|
|
481 |
|
Deferred
revenue
|
|
|
- |
|
|
|
15 |
|
Stock
option compensation expense
|
|
|
280 |
|
|
|
144 |
|
Tax
credits
|
|
|
75 |
|
|
|
75 |
|
Trading
portfolio losses
|
|
|
177 |
|
|
|
249 |
|
Change
in accounting method
|
|
|
- |
|
|
|
142 |
|
Other
|
|
|
28 |
|
|
|
31 |
|
|
|
|
33,777 |
|
|
|
30,682 |
|
Less
valuation allowance
|
|
|
(32,304 |
) |
|
|
(28,358 |
) |
Net
deferred income tax assets
|
|
|
1,473 |
|
|
|
2,324 |
|
|
|
|
|
|
|
|
|
|
Deferred
income tax liabilities:
|
|
|
|
|
|
|
|
|
Intangible
assets acquired in mergers
|
|
|
(1,478 |
) |
|
|
(2,312 |
) |
Amortization
of website
|
|
|
- |
|
|
|
(2 |
) |
Other
|
|
|
(2 |
) |
|
|
(17 |
) |
Net
deferred income tax liabilities
|
|
|
(1,480 |
) |
|
|
(2,331 |
) |
Net
deferred income tax liability
|
|
$ |
(7 |
) |
|
$ |
(7 |
) |
The
reconciliation of the expected income tax (expense) benefit with the actual
income tax (expense) benefit from continuing operations reported for the year
ended December 31, 2007 and the nine months ended December 31, 2006 computed on
income (loss) before income taxes at federal statutory rates is as
follows:
|
|
Year Ended
December 31, 2007
|
|
|
Nine Months Ended
December 31, 2006
|
|
|
|
|
|
|
|
|
Tax
at federal statutory rate
|
|
|
34.0 |
% |
|
|
34.0 |
% |
State
income taxes, net of federal income tax benefit
|
|
|
2.7 |
|
|
|
(159.3 |
) |
Non-deductible
items
|
|
|
(16.7 |
) |
|
|
(101.7 |
) |
Change
in valuation allowance
|
|
|
(24.0 |
) |
|
|
49.0 |
|
Other,
net
|
|
|
3.0 |
|
|
|
13.4 |
|
Net
effective tax rate
|
|
|
(1.0 |
)% |
|
|
(164.6 |
)% |
12.
Income Taxes (continued)
The
Company accounts for income taxes in accordance with Statement of Financial
Standards No. 109, Accounting for Income Taxes (“SFAS 109)” issued by the
FASB. SFAS 109 requires a valuation allowance to reduce the deferred
tax assets reported if, based on the weight of the evidence, it is more likely
than not that some portion or all of the deferred tax assets will not be
realized. After consideration of all of the evidence, both positive and
negative, management has determined that a valuation allowance of approximately
$32,304,000 and $28,358,000 is necessary at December 31, 2007 and December 31,
2006, respectively to reduce the deferred tax assets to the amount that will
more likely than not be realized. The increase (decrease) in the valuation
allowance for the year ended December 31, 2007 and nine months ended December
31, 2006 was approximately $3,946,000 and $(1,876,000), respectively. Included
in the decrease in the valuation allowance for the nine months ended December
31, 2006 was $2,312,000 for the tax effect of certain assets acquired in
connection with the acquisition of Haelan.
At
December 31, 2007, the Company has available federal net operating losses
("NOLs") of approximately $74,831,000 expiring between 2009 and 2027.
Approximately $1,820,000 were acquired in the Haelan merger. In addition, the
Company has tax credit carryforwards of $75,000, which are available to offset
future federal income taxes, if any, which begin to expire in 2010. The NOLs and
tax credit carryforwards may be subject to limitation by certain sections of the
Internal Revenue Code relating to ownership changes.
13.
Employee Benefit Plan
The
Company has a 401(k) savings plan covering substantially all eligible employees
who have completed 90 days of active employment. Under the plan, an employee may
elect to contribute on a pre-tax basis to a retirement account up to 15% of the
employee’s compensation up to the maximum annual contribution permitted by the
Internal Revenue Code. The Company matches employee contributions on a
discretionary basis as determined by the Company’s board of directors. The
Company made discretionary contributions to the 401(k) savings plan of
approximately $44,000 and $76,000 during the year ended December 31, 2007 and
nine months ended December 31, 2006, respectively.
14.
Stock Options and Warrants
During
the year ended March 31, 2006, CCS's board of directors and stockholders adopted
the CCS Consolidated, Inc. 2005 Equity Incentive Plan (the 2005 Plan) and
reserved 1,776,238 shares of CCS common stock for issuance under the 2005
Plan. CCS granted options to certain of its officers under the 2005
Plan to purchase an aggregate of 1,090,095 shares of CCS common stock at $0.30
per share. These options were assumed by CareGuide as part of the
PATY Merger and were converted into options to purchase an aggregate of
1,399,290 shares of CareGuide common stock at an exercise price of $0.2337 per
share, based on the exchange ratio for CareGuide’s common stock in the PATY
Merger. The options granted under the 2005 Plan and assumed by
CareGuide have a term of ten years from the date of grant. The
options were accelerated in connection with the PATY Merger so that they were
25% vested as of January 25, 2006 and vest in 36 monthly installments
thereafter. CareGuide recorded approximately $99,000 and $66,000 in
compensation expense associated with these grants during the year ended December
31, 2007 and nine months ended December 31, 2006, respectively. As of
December 31, 2007, options to purchase 1,272,082 shares of the Company’s common
stock were outstanding under the 2005 Plan.
14.
Stock Options and Warrants (continued)
As a
result of the PATY Merger, CareGuide continues to administer the PATY 1995 Stock
Option Plan (the PATY Plan). As of December 31, 2007, there were
options to purchase 53,500 shares of the Company's common stock outstanding
under the PATY Plan, with a weighted average exercise price of $2.80 per share.
The PATY Plan expired in 2005 and no further grants of options may be awarded
under the PATY Plan.
In March
2007, the Company’s board of directors approved a 2007 Equity Incentive Plan
(the “2007 Plan”) subject to approval of the stockholders of the Company, and
the 2007 Plan was adopted by the Company’s stockholders in June
2007. The Company has reserved 7,000,000 shares of its common stock
for issuance under the terms of the 2007 Plan. As of December 31,
2007, options to purchase 4,927,055 shares of the Company’s common stock were
outstanding at a weighted-average purchase price of $0.44 per
share. Options granted under the 2007 Plan generally vest over a
period of 4 years and have a term of ten years from the date of
grant. During the year ended December 31, 2007, the Company
recognized compensation expense of $233,000 related to options granted under the
Plan.
The
non-qualified options granted to employees and outside directors under the 2007
Plan become exercisable over periods of 0.25 to 4 years and expire after 10
years. The fair value of each option award granted is estimated on
the date of grant using the Black-Scholes valuation model that uses the
assumptions noted in the following table. Volatility is calculated
using an analysis of the Company’s historical volatility. The
expected lives of options are determined based on the Company’s historical
exercise experience. The Company believes the historical experience
method is the best estimate of future exercise patterns currently
available. The risk-free interest rates are determined using the
implied yield currently available for zero-coupon U.S. government issues with a
remaining term equal to the expected life of the options. The
expected dividend yields are based on the approved annual dividend rate in
effect and current market price of the underlying common stock at the time of
grant.
|
|
2007
|
|
|
|
|
|
Weighted
average grant date fair value
|
|
$ |
0.32 |
|
|
|
|
|
|
Weighted
average assumptions used:
|
|
|
|
|
Expected
volatility
|
|
|
74.10 |
% |
Risk
free interest rate
|
|
|
4.69 |
% |
|
|
|
7.05 |
% |
Expected
lives
|
|
7
years
|
|
A summary
of the status of and the changes in the options outstanding under all plans
maintained by CareGuide during the year ended December 31, 2007 and nine months
ended December 31, 2006 is presented below.
|
|
Shares
|
|
|
Weighted
Average Exercise
Price
|
|
Outstanding
at March 31, 2006
|
|
|
1,847,367 |
|
|
$ |
0.86 |
|
Forfeited
|
|
|
(120,449 |
) |
|
|
(2.79 |
) |
Outstanding
at December 31, 2006
|
|
|
1,726,918 |
|
|
|
0.72 |
|
Granted
|
|
|
6,163,525 |
|
|
|
0.44 |
|
Forfeited
|
|
|
(1,637,806 |
) |
|
|
( 0.83 |
) |
Outstanding
at December 31, 2007
|
|
|
6,252,637 |
|
|
$ |
0.42 |
|
14.
Stock Options and Warrants (continued)
The
following table summarizes information about options outstanding at December 31,
2007:
Options Outstanding
|
|
|
Options Exercisable
|
|
Range of
Exercise
Prices
|
|
|
Number
Outstanding
|
|
|
Remaining
Contractual
Life
(in Years)
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Number
Exercisable
|
|
|
Weighted
Average
Exercise
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.23
|
|
|
|
1,272,082 |
|
|
|
7.3 |
|
|
$ |
0.23 |
|
|
|
954,061 |
|
|
$ |
0.23 |
|
|
0.24-0.46
|
|
|
|
4,927,055 |
|
|
|
9.5 |
|
|
|
0.44 |
|
|
|
218,750 |
|
|
|
0.45 |
|
|
2.80
|
|
|
|
53,500 |
|
|
|
6.9 |
|
|
|
2.80 |
|
|
|
53,500 |
|
|
|
2.80 |
|
|
$0.23
- $2.80
|
|
|
|
6,252,637 |
|
|
|
|
|
|
|
|
|
|
|
1,226,311 |
|
|
|
|
|
As of
December 31, 2007, there was no intrinsic value related to the options
outstanding and approximately $1,662,000 in unrecognized stock compensation to
be recognized over a weighted average period of 3.4 years.
During
the year ended December 31, 2007, the Company issued a warrant to purchase up to
100,000 shares of CareGuide's common stock at $0.55 per share to a director of
the Company. Such warrant provides that 25,000 shares shall become
exercisable on each of December 8, 2007, 2008, 2009 and 2010 and that the
warrant must be exercised on or before December 8, 2016. During the
nine months ended December 31, 2006, the Company issued a warrant to purchase up
to 100,000 shares of CareGuide's common stock at $0.76 per share to a director
of the Company. Such warrant provides that 25,000 shares shall become
exercisable on each of August 16, 2007, 2008, 2009 and 2010 and that the warrant
must be exercised on or before August 16, 2016.
Additionally,
as described in Note 9, certain investors have guaranteed the Company’s
obligations under a Line of Credit. As compensation for the
guarantees, the Company expects to issue warrants to these stockholders during
2008 that will be exercisable for shares of common stock and which will vest
based on the outstanding balance of the Line of Credit through its maturity
date. The Company has recorded expense based upon the anticipated
terms of the warrants.
14.
Stock Options and Warrants (continued)
The
common stock warrants outstanding (including the warrants anticipated to be
issued as described above) and exercisable as of December 31, 2007 and December
31, 2006 are as follows:
|
|
Warrants outstanding at
|
|
|
|
December 31, 2007
|
|
|
December 31, 2006
|
|
|
|
Shares
|
|
|
Weighted
average
exercise price
|
|
|
Shares
|
|
|
Weighted
average
exercise price
|
|
Warrants
outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
|
4,089,536 |
|
|
$ |
0.51 |
|
|
|
1,189,536 |
|
|
$ |
1.12 |
|
Warrants
exercisable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
|
1,139,536 |
|
|
|
1.14 |
|
|
|
1,089,536 |
|
|
|
1.16 |
|
As of
December 31, 2007, the Company has approximately $368,000 of unrecognized
expense related to warrants outstanding. There were no warrants
outstanding to purchase any preferred stock of the Company as of December 31, 2007
or 2006.
15.
Commitments and Contingencies
Commitments
The
Company has operating lease agreements principally for its corporate office
space and for certain contract site offices. Future minimum lease payments for
the next five years under noncancelable operating leases as of December 31,
2007 are as follows (dollars in thousands):
Year
Ending December 31,
|
|
Operating
Leases
|
|
|
Non-
Cancelable
Subleases
|
|
|
Net
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
$ |
2,092 |
|
|
$ |
(711 |
) |
|
$ |
1,381 |
|
2009
|
|
|
2,020 |
|
|
|
(739 |
) |
|
|
1,281 |
|
2010
|
|
|
1,315 |
|
|
|
(436 |
) |
|
|
879 |
|
2011
|
|
|
586 |
|
|
|
- |
|
|
|
586 |
|
2012
|
|
|
506 |
|
|
|
- |
|
|
|
506 |
|
Total
|
|
$ |
6,519 |
|
|
$ |
(1,886 |
) |
|
$ |
4,633 |
|
The table
above includes lease payments and related sublease rental income related to
leasing arrangements where there is no further economic benefit to the Company
and for which a liability is accrued (see Note 9). Net rent expense for the year
ended December 31, 2007 and nine months ended December 31, 2006 was
approximately $1,850,000 and $803,000, respectively. Included in rent
expense for the year ended December 31, 2007 was a charge of approximately
$999,000 related to the abandonment of the Company’s Rochester, New York
location.
15.
Commitments and Contingencies (continued)
Employment
Agreements
The
Company has entered into employment agreements with certain management
employees, which include, among other things, annual base salaries,
non-competition provisions, salary continuation benefits, performance bonuses
based upon the overall profitability of the Company and certain other non-cash
benefits, including life, health and disability insurance. Employment agreements
are automatically renewed for successive one-year terms. The
employment agreement for one executive officer provides that the executive be
issued additional options in order for him to maintain an interest in 2.25% of
the Company on a fully diluted basis through June 2008.
Call
Option Liability
The
Company is party to a call option agreement with an underwriter which entitles
the holder to purchase up to 153,518 shares of ACSH common stock from the
Company for $6.00 per share at any time until October 31, 2010. The option was
granted in connection with an offering of the Company's securities underwritten
by the holder. The 153,518 shares held for trading are valued at market price,
and the call option is considered a derivative instrument and is carried at its
estimated fair value. The estimated fair value of the call option
liability was approximately $78,000 and $48,000 at December 31, 2007 and
December 31, 2006, respectively, and is included in accounts payable and accrued
expenses. The fair value of the call option is determined using the
Black-Scholes method using the following assumptions:
|
|
December 31, 2007
|
|
|
December 31, 2006
|
|
Volatility
|
|
|
71.3 |
% |
|
|
83.7 |
% |
Interest
rate
|
|
|
3.34 |
% |
|
|
4.72 |
% |
Average
life
|
|
1.42
years
|
|
|
1.88
years
|
|
Changes
to the fair market value of the trading portfolio and the call option obligation
are recognized in the accompanying consolidated statement of
operations.
As of
December 31, 2007, the Company held 166,610 shares of ACSH common stock and has
designated 153,518 shares as trading securities because these shares would be
used to satisfy the call option.
Provisions
of Contractual Arrangements
The
Company has entered into contracts in the ordinary course of business which
include reconciliation or savings sharing provisions. In such contracts, savings
achieved by the Company against contractual benchmarks are measured to determine
a potential penalty or bonus to be paid by or to the Company. No additional
revenue is recognized under the contractual provisions until the amount is
estimable and realization is reasonably assured. At this time, the Company has
no losses under such arrangements which appear to be probable of assertion and
for which a reasonable estimate can be determined.
Litigation
The
Company resolved a dispute with Oxford during the nine months ended December 31,
2006, which is described in Note 6.
The
Company is subject to claims and suits arising in the ordinary course of
business. In the opinion of management, the ultimate resolution of such pending
legal proceedings will not have a material adverse effect on the Company’s
results of operations or financial position.
16.
Quarterly Results (unaudited)
The
following is a summary of the unaudited interim results of operations by quarter
(dollars in thousands, except per share amounts).
|
|
First(1)
|
|
|
Second
|
|
|
Third
|
|
|
Fourth(2)
|
|
Year
ended December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
8,171 |
|
|
$ |
4,925 |
|
|
$ |
4,632 |
|
|
$ |
4,518 |
|
Gross
profit
|
|
|
1,436 |
|
|
|
1,387 |
|
|
|
3,012 |
|
|
|
1,562 |
|
Net
loss - continuing operations
|
|
|
(2,722 |
) |
|
|
(3,367 |
) |
|
|
(1,219 |
) |
|
|
(9,340 |
) |
Net
income (loss) - discontinued operations
|
|
|
3 |
|
|
|
54 |
|
|
|
(2 |
) |
|
|
(1 |
) |
Net
loss
|
|
|
(2,719 |
) |
|
|
(3,313 |
) |
|
|
(1,221 |
) |
|
|
(9,341 |
) |
Net
loss per common share-basic and diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations
|
|
|
(0.04 |
) |
|
|
(0.05 |
) |
|
|
(0.02 |
) |
|
|
(0.14 |
) |
Discontinued
operations
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Net
loss
|
|
|
(0.04 |
) |
|
|
(0.05 |
) |
|
|
(0.02 |
) |
|
|
(0.14 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
months ended December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
- |
|
|
$ |
13,797 |
|
|
$ |
13,751 |
|
|
$ |
13,790 |
|
Gross
profit
|
|
|
- |
|
|
|
3,908 |
|
|
|
2,951 |
|
|
|
3,050 |
|
Net
income (loss) - continuing operations
|
|
|
- |
|
|
|
204 |
|
|
|
(85 |
) |
|
|
(725 |
) |
Net
(loss) income - discontinued operations
|
|
|
- |
|
|
|
(286 |
) |
|
|
711 |
|
|
|
250 |
|
Net
(loss) income
|
|
|
- |
|
|
|
(82 |
) |
|
|
626 |
|
|
|
(475 |
) |
Net
income (loss) per common share-basic and diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(0.01 |
) |
Discontinued
operations
|
|
|
- |
|
|
|
- |
|
|
|
0.01 |
|
|
|
- |
|
Net
income (loss)
|
|
|
- |
|
|
|
- |
|
|
|
0.01 |
|
|
|
(0.01 |
) |
|
(1)
|
During
the nine months ended December 31, 2006, the Company changed its fiscal
year end from March 31, to December 31 and, therefore, the period ended
December 31, 2006 only contains three fiscal
quarters.
|
|
(2)
|
Net
loss from continuing operations for the fourth quarter 2007 was adversely
impacted by a goodwill impairment charge of
$7,523,000.
|
Annex
E-2
CareGuide,
Inc. and Subsidiaries
Unaudited
Financial Statements
For
the Three and Nine Months Ended
September
30, 2008 and 2007
PART
I – FINANCIAL INFORMATION
Item
1. Financial Statements
CareGuide,
Inc. and Subsidiaries
Consolidated
Balance Sheets
(Dollars
in thousands, except shares and par values)
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2008 (unaudited)
|
|
|
2007
|
|
Assets
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
1,395 |
|
|
$ |
1,014 |
|
Restricted
cash available for current liabilities
|
|
|
200 |
|
|
|
868 |
|
Securities
available for sale
|
|
|
- |
|
|
|
42 |
|
Securities
held for trading
|
|
|
9 |
|
|
|
491 |
|
Accounts
receivable, net of allowance for doubtful accounts of $129 and $712,
respectively
|
|
|
2,784 |
|
|
|
1,779 |
|
Prepaid
expenses and other current assets
|
|
|
288 |
|
|
|
362 |
|
Current
assets of discontinued operations
|
|
|
197 |
|
|
|
334 |
|
Total
current assets
|
|
|
4,873 |
|
|
|
4,890 |
|
Property
and equipment, net
|
|
|
1,591 |
|
|
|
2,087 |
|
Intangibles
and other assets, net
|
|
|
3,993 |
|
|
|
4,451 |
|
Goodwill
|
|
|
25,349 |
|
|
|
25,349 |
|
Restricted
cash
|
|
|
300 |
|
|
|
300 |
|
Total
assets
|
|
$ |
36,106 |
|
|
$ |
37,077 |
|
|
|
|
|
|
|
|
|
|
Liabilities
and stockholders’ equity
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Claims
payable
|
|
$ |
52 |
|
|
$ |
167 |
|
Line
of credit
|
|
|
8,493 |
|
|
|
500 |
|
Accounts
payable and accrued expenses
|
|
|
5,229 |
|
|
|
5,679 |
|
Deferred
revenue
|
|
|
87 |
|
|
|
232 |
|
Current
tax liability
|
|
|
70 |
|
|
|
250 |
|
Current
portion of lease obligations
|
|
|
855 |
|
|
|
453 |
|
Current
liabilities of discontinued operations
|
|
|
129 |
|
|
|
360 |
|
Total
current liabilities
|
|
|
14,915 |
|
|
|
7,641 |
|
|
|
|
|
|
|
|
|
|
Long-term
liabilities:
|
|
|
|
|
|
|
|
|
Line
of credit
|
|
|
- |
|
|
|
8,000 |
|
Notes
payable
|
|
|
7,103 |
|
|
|
6,847 |
|
Lease
obligations, net of current portion
|
|
|
386 |
|
|
|
1,637 |
|
Deferred
tax liability
|
|
|
7 |
|
|
|
7 |
|
Total
liabilities
|
|
|
22,411 |
|
|
|
24,132 |
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
|
Series
A convertible preferred stock, $.01 par value, 6,250,000 shares
authorized; 6,250,000 and 1,562,500 shares issued and outstanding,
respectively
|
|
|
3,915 |
|
|
|
938 |
|
Common
stock, $.01 par value 100,000,000 shares authorized; 67,538,976 shares
issued and outstanding
|
|
|
675 |
|
|
|
675 |
|
Additional
paid-in capital
|
|
|
64,329 |
|
|
|
63,343 |
|
Accumulated
other comprehensive loss
|
|
|
- |
|
|
|
(30 |
) |
Accumulated
deficit
|
|
|
(55,224 |
) |
|
|
(51,981 |
) |
Total
stockholders’ equity
|
|
|
13,695 |
|
|
|
12,945 |
|
Total
liabilities and stockholders’ equity
|
|
$ |
36,106 |
|
|
$ |
37,077 |
|
See
notes to unaudited consolidated financial statements.
CareGuide,
Inc. and Subsidiaries
Consolidated
Statements of Operations (unaudited)
(Shares
and dollars in thousands, except per share data)
|
|
Three Months
Ended September 30,
|
|
|
Nine Months
Ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitation
revenue
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
3,032 |
|
Administrative
and fee revenue
|
|
|
6,192 |
|
|
|
4,632 |
|
|
|
17,185 |
|
|
|
14,696 |
|
Total
revenues
|
|
|
6,192 |
|
|
|
4,632 |
|
|
|
17,185 |
|
|
|
17,728 |
|
Cost of services –
direct service costs, excluding depreciation and amortization
of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$566,
$578, $1,614 and $1,602, respectively
|
|
|
3,900 |
|
|
|
1,620 |
|
|
|
11,286 |
|
|
|
11,893 |
|
Gross
profit
|
|
|
2,292 |
|
|
|
3,012 |
|
|
|
5,899 |
|
|
|
5,835 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expense
|
|
|
2,713 |
|
|
|
2,263 |
|
|
|
6,416 |
|
|
|
8,005 |
|
Restructuring
costs
|
|
|
(355 |
) |
|
|
992 |
|
|
|
(355 |
) |
|
|
1,692 |
|
Depreciation
and amortization
|
|
|
582 |
|
|
|
737 |
|
|
|
1,816 |
|
|
|
2,238 |
|
Total
operating costs and expenses
|
|
|
2,940 |
|
|
|
3,992 |
|
|
|
7,877 |
|
|
|
11,935 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
loss from continuing operations
|
|
|
(648 |
) |
|
|
(980 |
) |
|
|
(1,978 |
) |
|
|
(6,100 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
and other income
|
|
|
8 |
|
|
|
20 |
|
|
|
37 |
|
|
|
153 |
|
(Loss)
gain on sale of investments and trading portfolio
|
|
|
(2 |
) |
|
|
138 |
|
|
|
(196 |
) |
|
|
101 |
|
Interest
expense
|
|
|
(394 |
) |
|
|
(270 |
) |
|
|
(1,025 |
) |
|
|
(1,250 |
) |
Loss
from continuing operations before income taxes and discontinued
operations
|
|
|
(1,036 |
) |
|
|
(1,092 |
) |
|
|
(3,162 |
) |
|
|
(7,096 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense
|
|
|
- |
|
|
|
(127 |
) |
|
|
(12 |
) |
|
|
(212 |
) |
Loss
from continuing operations
|
|
|
(1,036 |
) |
|
|
(1,219 |
) |
|
|
(3,174 |
) |
|
|
(7,308 |
) |
Income
(loss) from discontinued operations
|
|
|
49 |
|
|
|
(2 |
) |
|
|
95 |
|
|
|
55 |
|
Net
loss
|
|
|
(987 |
) |
|
|
(1,221 |
) |
|
|
(3,079 |
) |
|
|
(7,253 |
) |
Accretion
of preferred stock
|
|
|
(75 |
) |
|
|
- |
|
|
|
(165 |
) |
|
|
- |
|
Net
loss attributable to common stockholders
|
|
$ |
(1,062 |
) |
|
$ |
(1,221 |
) |
|
$ |
(3,244 |
) |
|
$ |
(7,253 |
) |
Net
comprehensive loss attributable to common stockholders
|
|
$ |
(1,062 |
) |
|
$ |
(1,209 |
) |
|
$ |
(3,214 |
) |
|
$ |
(7,230 |
) |
Net
loss per common share-basic and diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations
|
|
$ |
(0.02 |
) |
|
$ |
(0.02 |
) |
|
$ |
(0.05 |
) |
|
$ |
(0.11 |
) |
Discontinued
operations
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Net
loss
|
|
$ |
(0.02 |
) |
|
$ |
(0.02 |
) |
|
$ |
(0.05 |
) |
|
$ |
(0.11 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
67,539 |
|
|
|
67,539 |
|
|
|
67,539 |
|
|
|
67,539 |
|
Diluted
|
|
|
67,539 |
|
|
|
67,539 |
|
|
|
67,539 |
|
|
|
67,539 |
|
See
notes to unaudited consolidated financial statements.
CareGuide,
Inc. and Subsidiaries
Consolidated
Statements of Cash Flows (unaudited)
(Dollars
in thousands)
|
|
Nine months ended
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
Cash
used in operations:
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(3,079 |
) |
|
$ |
(7,253 |
) |
Adjustments
to reconcile net loss to net cash used in continuing
operations:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
1,816 |
|
|
|
2,238 |
|
Stock
option compensation
|
|
|
635 |
|
|
|
224 |
|
Amortization
of warrants
|
|
|
351 |
|
|
|
436 |
|
Change
in value of trading portfolio
|
|
|
225 |
|
|
|
(101 |
) |
Loss
on sale of available for sale portfolio
|
|
|
50 |
|
|
|
- |
|
Increase
in accrued interest expense on note payable
|
|
|
256 |
|
|
|
243 |
|
(Increase)
decrease in accounts receivable
|
|
|
(1,005 |
) |
|
|
1,594 |
|
Decrease
in prepaid expenses and other assets
|
|
|
89 |
|
|
|
207 |
|
Decrease
in claims payable
|
|
|
(115 |
) |
|
|
(6,981 |
) |
(Decrease)
increase in accounts payable and accrued expenses
|
|
|
(450 |
) |
|
|
3,140 |
|
Decrease
in deferred revenue
|
|
|
(145 |
) |
|
|
(1,285 |
) |
Decrease
in current tax liability
|
|
|
(180 |
) |
|
|
(50 |
) |
Accrual
of (reduction of) lease obligation
|
|
|
(578 |
) |
|
|
482 |
|
Decrease
in current assets of discontinued operations
|
|
|
137 |
|
|
|
- |
|
Decrease
in current liabilities of discontinued operations
|
|
|
(231 |
) |
|
|
(56 |
) |
Net
cash used in operating activities
|
|
|
(2,224 |
) |
|
|
(7,162 |
) |
|
|
|
|
|
|
|
|
|
Cash
provided by investing activities:
|
|
|
|
|
|
|
|
|
Purchases
of property and equipment
|
|
|
(406 |
) |
|
|
(769 |
) |
Restricted
deposits, net
|
|
|
668 |
|
|
|
2,813 |
|
Collection
of notes receivable
|
|
|
- |
|
|
|
310 |
|
Cash
used in acquisitions
|
|
|
- |
|
|
|
(62 |
) |
Proceeds
from sale of investments
|
|
|
279 |
|
|
|
- |
|
Net
cash provided by investing activities
|
|
|
541 |
|
|
|
2,292 |
|
|
|
|
|
|
|
|
|
|
Cash
provided by (used in) financing activities:
|
|
|
|
|
|
|
|
|
Preferred
stock issuance
|
|
|
2,813 |
|
|
|
- |
|
Principal
payments of capital lease obligations
|
|
|
(271 |
) |
|
|
(3 |
) |
Net
borrowings/(payments) under line of credit facilities
|
|
|
(7 |
) |
|
|
- |
|
Payment
of private financing costs
|
|
|
(471 |
) |
|
|
- |
|
Net
cash provided by (used in) financing activities
|
|
|
2,064 |
|
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
381 |
|
|
|
(4,873 |
) |
Cash
and cash equivalents, beginning of period
|
|
|
1,014 |
|
|
|
5,975 |
|
Cash
and cash equivalents, end of period
|
|
$ |
1,395 |
|
|
$ |
1,102 |
|
Continued
on next page.
Supplemental
cash flow information (dollars in thousands):
|
|
Nine months ended September 30, 2008
|
|
|
Nine months ended September 30, 2007
|
|
Cash
paid for interest
|
|
$ |
437 |
|
|
$ |
563 |
|
Cash
paid for taxes
|
|
|
192 |
|
|
|
261 |
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of non-cash operating and investing activities:
|
|
|
|
|
|
|
|
|
Accretion
of preferred stock dividends
|
|
|
165 |
|
|
|
- |
|
Unrealized
gain on securities held for sale
|
|
|
- |
|
|
|
23 |
|
See
notes to unaudited consolidated financial statements.
CAREGUIDE,
INC. AND SUBSIDIARIES
Notes
to Unaudited Consolidated Financial Statements for the three and nine month
periods ended September 30, 2008
1.
Organization and Description of Business
The
accompanying financial statements for the three and nine months ended September
30, 2008 and 2007 are unaudited and reflect all adjustments (consisting only of
normal recurring adjustments) which are, in the opinion of management, necessary
for a fair presentation of the financial position and operating results for
these interim periods. These financial statements should be read in
conjunction with the audited financial statements, and notes thereto, for the
year ended December 31, 2007. The results of operations for the three
and nine months ended September 30, 2008 are not necessarily indicative of the
results for the entire year.
CareGuide,
Inc. (the “Company” or “CareGuide”) is a population health management company
that provides a full range of healthcare management services to health plans,
work/life companies, government entities, and self-funded employers to help them
to reduce health care costs while improving the quality of care for the
members. The Company has approximately 80 customers across the United
States.
The
Company’s services may be provided under a variety of contractual arrangements,
including capitation, fee-for-service, and case rates. The Company terminated
all capitated risk contracts as of January 31, 2007. CareGuide also
provides case management and disease management for administrative fees only.
Contracts may include performance bonuses and shared cost savings
arrangements.
2.
Business Operations
The
Company realized a net loss of approximately $1.0 million and $3.1 million for
the three and nine months ended September 30, 2008, respectively, and had a
working capital deficit of $10.0 million at September 30, 2008. The Company’s
ability to continue as a going concern is dependent upon achieving profitability
from future operations sufficient to maintain adequate working capital. These
financial statements have been prepared assuming the Company will continue as a
going concern. Until the Company has sufficient profitable operations or other
revenue-generating activities to be self-sufficient, the Company will remain
dependent on other sources of capital.
Currently,
such capital has been obtained from the issuance of preferred stock and
borrowings from a financial institution. Between December 2007 and May 2008, the
Company issued preferred stock to certain of its primary investors, including
certain of its directors, for gross proceeds of $3.75 million. The
holders of the preferred stock have also guaranteed the majority of borrowings
from the financial institution through January 1, 2009 (see Note 4) and certain
of these investors have committed to provide additional funding of up to $1.0
million to the Company, if required, through January 1, 2009.
2.
Business Operations (continued)
As
described in Note 4, the Company has an $8.0 million revolving line of credit
(the "Line of Credit") with an outside lender for working capital purposes and a
second credit facility (“Revolving Line B”) with the same lender under which the
Company may borrow up to an additional amount equal to the lesser of a specified
amount or a percentage of its eligible accounts receivable. A total
of $8.5 million is due and payable to the Company’s lender on January 1, 2009
under these facilities. The Company does not currently anticipate that it will
be able to satisfy its obligations under the Line of Credit or Revolving Line B
with operating cash. As a result, the Company expects that it will be
necessary to restructure the Line of Credit and Revolving Line B or to find an
alternative lender before maturity of these facilities. There can be no
assurance that the Company will be able to restructure the Line of Credit or
Revolving Line B on terms favorable to it or at all prior to their current
maturity dates. If the Company is successful in negotiating an
extension and/or increase in the Line of Credit and Revolving Line B, the
Company believes that all or a portion of its obligations will continue to be
guaranteed by certain of its subsidiaries as well as certain of its principal
stockholders, which may be different from the stockholders that currently
guarantee the Company’s obligations under the Line of Credit. The
Company also anticipates that it would be required to provide consideration,
which the Company believes would likely be in the form of warrants to purchase
shares of its common stock, to any guarantors of the extended credit facilities
as compensation for their guarantees, and the Company's stockholders would
experience dilution of their ownership to the extent that the Company issues any
such warrants. Any such dilution could be substantial. The
fair market value of any such warrants would be expensed over the life of the
extension of the related credit facility.
Management’s
plans for dealing with the adverse effects of its current inability to generate
sufficient revenues or profitable operations include entering into contracts
with additional customers, achieving positive gross margins by renegotiating
under-performing contracts, reducing operating expenses by challenging staffing
levels at all of the Company’s locations and considering strategic partnerships
with other healthcare companies. However, there can be no assurance that the
Company will be successful in any of these activities or in achieving positive
financial results in the future.
As
described in Note 7 below, in July 2008, the Company announced its intent to go
private upon the consummation of a reverse/forward stock split.
3.
Summary of Significant Accounting Policies
Risks
and Uncertainties
The
Company’s business could be impacted by continuing price pressure on new and
renewal business, the Company’s ability to effectively control provider costs,
additional competitors entering the Company’s markets and changes in federal and
state legislation or governmental regulations. Changes in these areas could
adversely impact the Company’s financial position, results of operations and/or
cash flows in the future.
Depreciation
and Amortization
The
Company reports all depreciation and amortization expense as an operating
expense. For the three months ended September 30, 2008 and 2007, the reported
amounts included $566,000 and $578,000, respectively, of depreciation and
amortization expenses that were attributable to cost of services. For each of
the nine month periods ended September 30, 2008 and 2007, the reported amounts
included $1.6 million of depreciation and amortization expenses that were
attributable to cost of services.
3.
Summary of Significant Accounting Policies (continued)
Restricted
Cash
In
connection with certain office leases, the Company is required to maintain
letters of credit and has secured these letters of credit by establishing
certificates of deposit and money market accounts totaling $500,000 at September
30, 2008. These accounts are included in restricted cash in the
consolidated balance sheets.
The
portion of restricted cash that is available and that the Company intends to use
to satisfy current liabilities is included in current assets. The fair value of
restricted cash approximates its carrying value.
Long-Lived
Assets
In August
2001, the Financial Accounting Standards Board issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, which addresses financial accounting and
reporting for the impairment or disposal of long-lived assets and supersedes
SFAS No. 121 and the accounting and reporting provisions of Accounting
Principles Board (APB) Opinion No. 30, Reporting the Results of
Operations, for a disposal of a segment of a business. The Company
periodically reviews the carrying value of its long-lived assets to assess
recoverability and impairment. The Company recorded no impairments
during the three or nine months ended September 30, 2008 and 2007.
Fair
Value Measurements
As
discussed below, the Company adopted SFAS No. 157, Fair Value Measurements, on
January 1, 2008. SFAS No. 157 defines fair value, establishes a framework
for measuring fair value and expands disclosures about fair value. It also
establishes a hierarchy for determining fair value measurement. The hierarchy
includes three levels and is based upon the valuation techniques used to measure
assets and liabilities. The three levels are as follows:
Level
1 – Inputs to the valuation methodology are quoted prices (unadjusted) for
identical assets or liabilities in markets;
Level 2 –
Inputs to the valuation methodology include quoted prices for similar assets and
liabilities in active markets and inputs that are observable for the asset or
liability, either directly or indirectly, for substantially the full term of the
financial instrument; and
Level 3 –
Inputs to the valuation methodology are unobservable and significant to the fair
value measurement
As of
September 30, 2008, the Company has securities held for trading totaling $9,000
which are valued using quoted market pricing under the Level 1 methodology
described above.
3.
Summary of Significant Accounting Policies (continued)
Revenue
and Major Customers
Administrative
fees are recognized during the period in which case management, utilization
management, and disease management services are provided. Fee-for-service
revenues are recognized during the period in which the related services are
provided to members. Fees received in advance are deferred and ultimately
recognized in the period in which the Company is obligated to provide service to
members.
For the
three and nine months ended September 30, 2008, 33.2% and 31.0%, respectively,
of the Company’s total revenue was earned under contracts with Blue Cross Blue
Shield of Michigan compared to 25.4% and 19.8%, respectively, of the Company’s
total revenue earned under contracts with Blue Cross Blue Shield of Michigan for
the three and nine months ended September 30, 2007. For the three and
nine months ended September 30, 2008, 18.5% and 17.8%, respectively, of the
Company’s total revenue was earned under contracts with Anthem. For
the three and nine months ended September 30, 2007, 9.7% and 6.8%, respectively,
of the Company’s total revenue was earned under contracts with
Anthem. During the quarter ended June 30, 2008, the Company received
notification from Anthem of its intention to terminate its contract with the
Company in six months. For the nine months ended September 30, 2007,
17.1% of the Company’s total revenue was earned under contracts with Aetna
Health Plans (Aetna). The Company’s capitated risk contacts with Aetna were
terminated effective January 31, 2007. Other than these customers, no single
customer accounted for more than 10% of the Company’s total revenue for the
three or nine months ended September 30, 2008 or 2007.
Direct
Service Costs
Direct
service costs are comprised principally of expenses associated with providing
the Company’s services, including third-party network provider charges. The
Company’s direct service costs require pre-authorization and are recognized in
the month in which services are rendered. Network provider charges for
authorized services that have not been billed to the Company, known as incurred
but not reported expenses, are estimated and accrued based on the Company’s
historical experience, current enrollment statistics, patient census data,
adjudication decisions and other information. The liability for such costs is
included in the caption “Claims payable” in the accompanying consolidated
balance sheets.
Income
Taxes
The
Company and its subsidiaries file federal tax returns on a consolidated basis,
and certain of its subsidiaries file state income tax returns on a separate
basis. The Company’s provision for income taxes includes federal and state
income taxes currently payable and changes in deferred tax assets and
liabilities, excluding the establishment of deferred tax assets and liabilities
related to acquisitions. Deferred income taxes are accounted for in accordance
with SFAS No. 109, Accounting
for Income Taxes, and represent the estimated future tax effects
resulting from temporary differences between financial and tax reporting bases
of certain assets and liabilities. In addition, future tax benefits, such as net
operating loss (NOL) carryforwards, are required to be recognized to the extent
that realization of such benefits is more likely than not. Deferred tax assets
are reduced by a valuation allowance when, in the opinion of the management, it
is more likely than not that some or all of the deferred tax assets will not be
realized.
3.
Summary of Significant Accounting Policies (continued)
Stock-Based
Compensation Plans
The
Company accounts for stock-based compensation in accordance with Statement of
Financial Accounting Standard (“SFAS”) No. 123(Revised), Share-Based Payment (“SFAS
No. 123(R)”), which established accounting standards for transactions in which
an entity exchanges its equity instruments for goods or services. SFAS No.
123(R) also addresses transactions in which an entity incurs liabilities in
exchange for goods or services that are based on the fair value of the entity’s
equity instruments, or that may be settled by the issuance of those equity
instruments. SFAS No. 123(R) covers a wide range of share-based compensation
arrangements including stock options, restricted stock plans, performance-based
stock awards, stock appreciation rights, and employee stock purchase plans.
During the three and nine months ended September 30, 2008 the Company recorded
$444,000 and $635,000, respectively, in stock-based compensation expense for
stock options in accordance with SFAS No. 123(R). During the three and nine
months ended September 30, 2007 the Company recorded $127,000 and $224,000,
respectively, in stock-based compensation expense for stock options in
accordance with SFAS No. 123(R).
Goodwill
and Indefinite Lived Intangible Assets
The
Company accounts for business combinations in accordance with SFAS No. 141,
Business Combinations
(“SFAS No. 141”), and goodwill and other intangible assets in accordance with
SFAS No. 142, Goodwill and
Other Intangible Assets (“SFAS No. 142”). SFAS No. 141 requires that
the purchase method of accounting be used for all business combinations. SFAS
No. 141 also specifies criteria intangible assets acquired in a purchase method
business combination must meet in order to be recognized and reported apart from
goodwill, noting that any purchase price allocable to an assembled workforce may
not be accounted for separately. SFAS No. 142 requires that goodwill and
intangible assets with indeterminable useful lives not be amortized, but instead
tested for impairment at least annually in accordance with the provisions of
SFAS No. 142. SFAS No. 142 also requires that intangible assets with
definite useful lives be amortized over their respective estimated useful lives
to their estimated residual values, and reviewed for impairment.
The
Company performed a goodwill and intangible asset impairment test as of December
31, 2007. Based on an independent valuation of the Company’s goodwill
on its balance sheet as of December 31, 2007, the Company recognized a loss from
the impairment of its goodwill of approximately $7,523,000 during the year ended
December 31, 2007. The fair value of the goodwill was estimated using a
combination of valuation methods, including the expected present value of future
cash flows, comparison to guideline companies and analysis of the Company’s
stock. The Company performs an annual goodwill and intangible asset
impairment test as of March 31 each year. At March 31, 2008, the
Company tested goodwill and intangible assets with indeterminable useful lives
for impairment and determined that no further impairment had
occurred.
Recently
Issued Accounting Pronouncements
In
September 2006, FASB issued FASB Statement No. 157, Fair Value Measurements
(“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a framework
for measuring fair value and expands disclosures about fair value
measurements. SFAS No. 157 also emphasizes that fair value is a
market-based measurement, not an entity-specific measurement, and sets out a
fair value hierarchy, with the highest priority being quoted prices in active
markets. Under SFAS No. 157, fair value measurements are disclosed by
level within that hierarchy. The requirements of SFAS No. 157 are
effective for the Company’s fiscal year beginning January 1,
2008. However, in February 2008, the FASB decided that an entity need
not apply SFAS No. 157 to nonfinancial assets and liabilities that are
recognized or disclosed at fair value in the financial statements on a
nonrecurring basis until the subsequent year. Accordingly, the
Company’s adoption of SFAS No. 157 on January 1, 2008 is limited to financial
assets and liabilities, and any nonfinancial assets and liabilities recognized
or disclosed at fair value on a recurring basis. The adoption of SFAS
No. 157 had no material effect on the Company’s financial position, results of
operations or cash flows.
3.
Summary of Significant Accounting Policies (continued)
In
February 2007, FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities—Including an amendment of FASB Statement No.
115 ("SFAS No. 159"). SFAS No. 159 permits entities to choose
to measure many financial instruments and certain other items at fair value. The
objective is to improve financial reporting by providing entities with the
opportunity to mitigate volatility in reported earnings caused by measuring
related assets and liabilities differently without having to apply complex hedge
accounting provisions. SFAS No. 159 is expected to expand the use of
fair value measurement, which is consistent with FASB’s long-term measurement
objectives for accounting for financial instruments. SFAS No. 159 is
effective as of the beginning of an entity’s first fiscal year that begins after
November 15, 2007. Early adoption is permitted as of the beginning of a fiscal
year that begins on or before November 15, 2007, provided the entity also elects
to apply the provisions of FASB Statement No. 157, Fair Value Measurements. The
adoption of SFAS No. 159 as of January 1, 2008 had no material effect on the
Company’s financial position, results of operations or cash flows.
In May
2008, FASB issued SFAS No. 162, The Hierarchy of Generally Accepted
Accounting Principles (“SFAS No. 162”). SFAS No. 162 identifies the
sources of accounting principles and the framework for selecting the principles
to be used in the preparation of financial statements of nongovernmental
entities that are presented in conformity with generally accepted accounting
principles (“GAAP”) in the United States (the GAAP hierarchy). The hierarchical
guidance provided by SFAS No. 162 did not have a significant impact on the
Company’s financial statements.
3.
Summary of Significant Accounting Policies (continued)
For the
three and nine months ended September 30, 2008, the calculations of basic and
diluted net loss per share were based on loss attributable to common
stockholders of $1,062,000 and $3,244,000, respectively, and a basic and diluted
weighted average number of common shares outstanding of 67,538,976 for each of
these periods. For the three and nine months ended September 30,
2007, the calculations of basic and diluted net loss per share were based on
loss attributable to common stockholders of $1,221,000 and $7,253,000,
respectively, and a basic and diluted weighted average number of common shares
outstanding of 67,538,976 for each of these periods. The computation
of fully diluted loss per share for all periods presented excluded common stock
equivalents, such as, options, warrants and convertible preferred stock, because
the effect would have been anti-dilutive due to the net losses from continuing
operations in those periods. The calculation of the Company’s net
loss per share for the three and nine months ended September 30, 2008 and 2007
is as follows (shares and dollars in thousands, except per share
amounts):
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Loss
from continuing operations
|
|
$ |
(1,036 |
) |
|
$ |
(1,219 |
) |
|
$ |
(3,174 |
) |
|
$ |
(7,308 |
) |
Dividends
and accretion of preferred stock
|
|
|
(75 |
) |
|
|
- |
|
|
|
(165 |
) |
|
|
- |
|
Net
loss attributable to common stockholders from continuing
operations
|
|
|
(1,111 |
) |
|
|
(1,219 |
) |
|
|
(3,339 |
) |
|
|
(7,308 |
) |
Income
(loss) from discontinued operations
|
|
|
49 |
|
|
|
(2 |
) |
|
|
95 |
|
|
|
55 |
|
Net
loss attributable to common stockholders
|
|
$ |
(1,062 |
) |
|
$ |
(1,221 |
) |
|
$ |
(3,244 |
) |
|
$ |
(7,253 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common stock outstanding - basic
|
|
|
67,539 |
|
|
|
67,539 |
|
|
|
67,539 |
|
|
|
67,539 |
|
Weighted
average common stock outstanding - diluted
|
|
|
67,539 |
|
|
|
67,539 |
|
|
|
67,539 |
|
|
|
67,539 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss per share, basic and diluted, continuing operations
|
|
$ |
(0.02 |
) |
|
$ |
(0.02 |
) |
|
$ |
(0.05 |
) |
|
$ |
(0.11 |
) |
Income
per share, basic and diluted, discontinued operations
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Net
loss per share, basic and diluted
|
|
$ |
(0.02 |
) |
|
$ |
(0.02 |
) |
|
$ |
(0.05 |
) |
|
$ |
(0.11 |
) |
Line
of Credit
The
Company has an $8.0 million revolving line of credit (the "Line of Credit") with
an outside lender for working capital purposes. The Line of Credit bears
interest at the outside lender’s prime rate plus 1.0%, which was 6.00% and 8.75%
at September 30, 2008 and 2007, respectively, and is scheduled to mature on
January 1, 2009. The Line of Credit is collateralized by substantially all of
the Company’s assets, including its investment in all of its subsidiaries. In
addition, the outside lender required that the Company obtain unconditional
guarantees (the "Guarantees") from several of its primary investors (the
“Guarantors”). Under the terms of the Guarantees, each participating Guarantor
unconditionally and irrevocably guarantees prompt and complete payment of its
pro rata share of the amount the Company owes under the Line of
Credit. At September 30, 2008, the full balance of $8.0 million was
outstanding under the Line of Credit.
In
September 2007, the Company obtained a second credit facility with the same
lender (“Revolving Line B”), under which the Company may borrow up to an
additional amount equal to the lesser of (a) $1.0 million or (b) 75% of its
eligible accounts receivable. Revolving Line B is collateralized by
certain accounts receivable of the Company. Any amounts borrowed
under Revolving Line B bear interest at the lender’s prime rate plus 2.0%, and
all outstanding amounts under Revolving Line B are also due on January 1,
2009. As of September 30, 2008, $493,000 had been drawn on Revolving
Line B, and the interest rate on this facility was 7.00%. As of
September 30, 2008, an additional approximately $507,000 under Revolving Line B
was available. Any additional amounts borrowed under Revolving Line B would be
limited to the amount indicated by a borrowing base calculation completed at the
time of the borrowing request.
The loan
agreement underlying the Line of Credit and Revolving Line B contains
representations and warranties and affirmative and negative covenants that are
customary for credit facilities of this type. The agreement also
requires the Company to maintain certain EBITDA financial covenants, such that
the Company is required to earn EBITDA (as defined in the loan agreement) of not
less than the applicable amounts set forth in the agreement on a trailing
six-month basis. The Line of Credit and Revolving Line B could restrict the
Company’s ability to, among other things, sell certain assets, change our
business, engage in a merger or change in control transaction, incur debt, pay
cash dividends, make investments and encumber assets. The loan
agreement also contains events of default that are customary for credit
facilities of this type, including payment defaults, covenant defaults,
insolvency type defaults and events of default relating to liens, judgments,
material misrepresentations and the occurrence of certain material adverse
events.
During
the fourth quarter of 2007 and through April 2008, the Company was in violation
of certain of the loan covenants. In May 2008, the Company entered into an
amendment to the loan agreement with the lender, as part of which the lender
waived the Company’s failure to comply with the loan covenants during this
period.
4. Long-Term
Obligations (continued)
As
compensation for the Guarantees, on July 1, 2008, the Company issued warrants to
purchase common stock to the Guarantors. As compensation for the
period from October 1, 2007 to April 30, 2008, the Guarantors were issued
warrants (the “Initial Warrants”) to purchase an aggregate of 1,306,667 shares
of Common Stock at an exercise price of $0.25 per share. As compensation for the
period from May 1, 2008 to December 31, 2008, the Guarantors were and are to be
issued warrants to purchase shares of Common Stock for each calendar month
(each, a “Monthly Warrant” and collectively, the “Monthly Warrants”). Each
Monthly Warrant is exercisable for a number of shares of the Company’s common
stock equal to (i) 0.00583 times (ii) the principal balance outstanding under
the Line of Credit as of the close of business on the last day of the
immediately preceding month, divided by (iii) the product of (x) the closing
price of the Company’s common stock as of the last day of the immediately
preceding month (the “Monthly Stock
Price”) times (y) 125%.
The exercise price of each Monthly Warrant will be equal to 125% times the
Monthly Stock Price. In no event, however, may the Monthly Stock Price be less
than $0.01 per share for purposes of the Monthly Warrants.
On July
1, 2008, as compensation for the calendar months of May, June and July, the
Company issued Monthly Warrants to the Guarantors to purchase an aggregate of
1,776,762 shares of Common Stock. Of these Monthly Warrants, warrants to
purchase 1,243,734 shares have an exercise price of $0.075 per share and
warrants to purchase 533,028 shares have an exercise price of $0.0875 per
share. On August 1, 2008, as compensation for August, the Company
issued Monthly Warrants to the Guarantors to purchase an aggregate of 327,298
shares of Common Stock at an exercise price of $0.1425 per share. On September
1, 2008, as compensation for September, Monthly Warrants to purchase 324,452
shares of Common Stock at an exercise price of $0.14375 per share were
issued. On October 1, 2008, as compensation for October, Monthly
Warrants to purchase 287,015 shares of Common Stock at an exercise price of
$0.1625 per share were issued. On November 1, 2008, as compensation
for November, Monthly Warrants to purchase 339,200 shares of Common Stock at an
exercise price of $0.1375 per share were issued.
The
Company will issue additional Monthly Warrants to the Guarantors on December 1,
2008, with the number of shares underlying such warrants and the exercise prices
thereof to be determined in the manner described above. Each of the Initial
Warrants and the Monthly Warrants are being apportioned among the Guarantors pro
rata, based on the amount of each such Guarantor’s respective guaranty of the
maximum amount under the Line of Credit. Each such warrant is fully exercisable
upon issuance and is exercisable until the close of business on October 1,
2012.
The
Company estimated the value of the warrants to be issued as compensation for the
period through September 30, 2008 under the Black-Scholes model. The
Company recognized interest expense of approximately $120,000 and $280,000
during the three and nine months ended September 30, 2008, respectively,
relating to these warrants. The Company estimates that it will
record an additional $104,000 in interest expense related to the warrants issued
in October, November and December related to these Guarantees.
4. Long-Term
Obligations (continued)
Convertible
Notes Issued in Haelan Merger
In
December 2006, the Company acquired its subsidiary Haelan Corporation (“Haelan”)
by merger of a subsidiary of the Company with and into Haelan. The
merger agreement relating to this transaction (the “Haelan Merger Agreement”)
provided for the issuance of $6.5 million in aggregate principal amount of
convertible promissory notes of CareGuide (the “Convertible Notes”). The
Convertible Notes are subordinated to the rights to prior payment of the
Company's senior lender under the Line of Credit and Revolving Line B. The
Convertible Notes carry an interest rate of 5% per year, compounding annually,
mature on December 8, 2009 and are convertible at maturity into shares of common
stock of CareGuide, valued based upon the average closing price of the common
stock for the 20 consecutive trading days ending on the date prior to
conversion. The maturity date of the Convertible Notes may be
accelerated in the event of a sale transaction, as defined in the Convertible
Notes, involving the Company.
In the
event that the average closing price of the common stock of the Company for the
20 consecutive trading days ending on the date prior to conversion is equal to
or greater than $1.50 per share, the outstanding principal and accrued interest
under the Convertible Notes will automatically convert into shares of common
stock at $1.50 per share. In the event that such average closing
price at the time of conversion is less than $1.50 per share, the outstanding
principal and accrued interest under the Convertible Notes will convert into
shares of common stock at such average closing price, but not less than $1.00
per share, and in such case each holder of a Convertible Note may elect to
receive all or a portion of the amounts due under the note in cash in lieu of
shares of common stock of CareGuide. The Company may elect to prepay
the amounts then outstanding under the Convertible Notes in cash, subject to the
prior approval of the Company’s senior lender under the Line of Credit and
Revolving Line B, but upon any such election by the Company, if the average
closing price of the Company’s common stock for the 20 consecutive trading days
ending on the date prior to conversion is at least $1.00 per share, each holder
of a Convertible Note may elect to receive all or any portion of the amounts due
under the Convertible Note in the form of shares of common stock valued at such
average closing price.
5.
Stockholders’ Equity
Capital
Stock
The
Company is authorized to issue up to 120,000,000 shares of capital stock,
100,000,000 designated as common stock, and 20,000,000 designated as preferred
stock. As of September 30, 2008 and 2007, there were 67,538,976
shares of common stock outstanding. In July 2008, the Board of
Directors and the Company’s directors approved an amendment to the Company’s
certificate of incorporation that will have the effect of increasing the
authorized number of shares of common stock from 100,000,000 to
200,000,000. Of the authorized shares of preferred stock, 6,250,000
shares have been designated as “Series A Preferred Stock.” As of
September 30, 2008, there were 6,250,000 shares of Series A Preferred Stock
issued and outstanding. In July 2008, the Board of Directors approved
an amendment to the Certificate of Designations for the Series A Preferred Stock
that, when it becomes effective, will increase the number of shares designated
as Series A Preferred Stock from 6,250,000 shares to 12,916,667
shares.
The
Series A Preferred Stock (i) is entitled to cumulative dividends at the rate of
8% per year, payable in arrears semiannually; (ii) is entitled to a liquidation
preference equal to its original purchase price plus all accrued and unpaid
dividends; (iii) has a preference over the common stock with respect to
dividends and distributions; (iv) votes on an as-converted basis with the common
stock on matters submitted to common stockholders for approval; and (v) is
initially convertible into common stock on a five-for-one basis (subject to
adjustment in the event of stock dividends, stock splits, reverse stock splits,
recapitalizations, etc. and in the event of certain dilutive issuances by the
Company). The consent of the holders of at least two-thirds of the Series A
Preferred Stock is required for certain other specified actions including those
that alter or change the voting or other powers, preferences, or other special
rights, privileges or restrictions of the Series A Preferred Stock so as to
affect them adversely.
5.
Stockholders’ Equity (continued)
The
Series A Preferred Stock will be automatically converted into shares of common
stock, at the then-effective conversion rate, at any time upon the affirmative
election of the holders of at least a majority of the outstanding shares of the
Series A Preferred Stock or immediately upon the closing of certain public
offerings of the Company’s common stock. Upon such automatic conversion, any
accrued and unpaid dividends will be paid in cash or, to the extent sufficient
funds are not then legally available, in common stock (at the common stock’s
fair market value determined by the Board of Directors as of the date of such
conversion).
On July
17, 2008, the Company entered into a Series A Preferred Stock Purchase Agreement
(the “Purchase Agreement”) with the Guarantors, pursuant to which the Company
has agreed to sell to the Guarantors an aggregate of up to 6,666,667 shares of
Series A Preferred Stock, at a price of $0.60 per share, for aggregate gross
proceeds of up to $4.0 million. The additional shares of Series A
Preferred Stock to be sold under the Purchase Agreement have rights
substantially similar to the currently outstanding Series A Preferred Stock,
including an initial conversion rate of five shares of common stock per
share. The closing of the sale and issuance of the Series A Preferred
Stock under the Purchase Agreement is subject to a number of conditions,
including the completion of the Reverse/Forward Stock Split and the termination
of the registration of the Company’s common stock with the Securities and
Exchange Commission as further described in Note 7.
2005
Equity Incentive Plan
The
Company’s predecessor adopted the CCS Consolidated, Inc. 2005 Equity Incentive
Plan (the "2005 Plan"). As of September 30, 2008, options to purchase
an aggregate of 1,272,082 shares of the Company’s common stock were outstanding
under the 2005 Plan with a weighted average exercise price of $0.23 per
share. All of the options outstanding under the 2005 Plan are fully
vested. 254,416 of these options have a term that expires in June
2009. The remaining 1,017,666 options have a term that expires in
July 2018. No options were granted under the 2005 Plan during the
three or nine months ended September 30, 2008 or 2007. During the
three and nine months ended September 30, 2008, the Company recognized
compensation expense related to options granted under the 2005 Plan of $65,000
and $97,000, respectively. During the three and nine months ended September 30,
2007, the Company recognized compensation expense related to options granted
under the 2005 Plan of $16,000 and $83,000, respectively.
Amended
and Restated 1995 Stock Option Plan
The
Company administers the Patient Infosystems 1995 Stock Option Plan (the “PATY
Plan”). As of September 30, 2008, there are options outstanding under
the PATY Plan to purchase an aggregate of 51,500 shares of the Company's common
stock with a weighted average exercise price of $2.80 per share. The
PATY Plan expired in 2005 and no further grants of options may be awarded under
the PATY Plan.
2007
Equity Incentive Plan
In March
2007, the Company’s board of directors approved a 2007 Equity Incentive Plan
(the “2007 Plan”) subject to approval of the stockholders of the Company, and
the 2007 Plan was adopted by the Company’s stockholders in June
2007. In July 2008, the Company’s Board of Directors approved an
amendment to the 2007 Plan to increase the number of shares of common stock
reserved for issuance under the 2007 Plan from 7,000,000 shares to 15,000,000
shares. As of September 30, 2008, options to purchase an aggregate of
9,204,757 shares of the Company’s common stock were outstanding at a
weighted-average exercise price of $0.20 per share. Options granted
under the 2007 Plan generally vest over a period of 4 years and have a term of
ten years from the date of grant. During the three and nine months ended
September 30, 2008, the Company recognized stock-based compensation expense
related to options granted under the 2007 Plan of $380,000 and $539,000,
respectively. During the three and nine months ended September 30, 2007, the
Company recognized $108,000 and $125,000, respectively, of stock-based
compensation expense under SFAS No. 123(R) related to the options granted in
June 2007.
6.
Commitments and Contingencies
Commitments
Employment
Agreements
The
Company has entered into employment agreements with certain management
employees, which include, among other things, annual base salaries,
non-competition provisions, salary continuation benefits, performance bonuses
based upon the overall profitability of the Company and certain other non-cash
benefits, including life, health and disability insurance. In July, 2008, the
Company entered into an employment agreement with Michael J. Condron under which
Mr. Condron will serve as the Executive Vice Chairman and ultimately Chief
Executive Officer of the Company. As part of this employment agreement,
Mr. Condron was granted a stock option to acquire 6,315,789 shares of the
Company’s common stock. Employment agreements are generally automatically
renewable for successive one-year terms.
Also in
July, 2008, the Company entered into a transition letter agreement with Chris
Paterson, its current Chief Executive Officer. Under the terms of the
letter agreement, all of Mr. Paterson’s stock options will be fully vested and
the terms extended when Mr. Paterson’s service with the Company
ceases. In addition, in October 2008, Mr. Paterson was granted stock
options to purchase 50,000 shares of common stock in accordance with the terms
of the transition letter agreement. He is also entitled to receive additional
stock options upon his separation from the Company for a number of shares that
allows Mr. Paterson to maintain his current fully-diluted ownership percentage
of the Company as of June 30, 2008. Upon Mr. Paterson’s termination
of employment with the Company, he will receive severance pay equal to one times
his current annual salary. Due to the expectation of the transition
occurring, the Company has recognized stock-based compensation expense of
$305,000 and severance expense of approximately $288,000 related to the
transition agreement, which is included in SG&A expenses for the three
months ended September 30, 2008.
Provisions
of Contractual Arrangements
The
Company has entered into contracts in the ordinary course of business which
include reconciliation or savings sharing provisions. In such contracts, savings
achieved by the Company against contractual benchmarks are measured to determine
a potential penalty or bonus to be paid by or to the Company. No additional
revenue is recognized under the contractual provisions until the amount is
estimable and realization is reasonably assured. The Company has not recorded
any losses that appear to be probable of assertion and for which a reasonable
estimate can be determined under any such arrangements.
Litigation
The
Company is subject to claims and suits arising in the ordinary course of
business. In the opinion of management, the ultimate resolution of any currently
pending legal proceedings will not have a material adverse effect on the
Company’s results of operations or financial position.
6.
Commitments and Contingencies (continued)
Call
Option Liability
As of
September 30, 2008, the Company was party to call option agreements with an
underwriter and its affiliates, which entitle the holders of the call options to
purchase up to 999 shares of American Caresource Holdings, Inc. common stock
(“ACSH”) from the Company for $6.00 per share at any time until October 31,
2010. The call options had been granted in connection with an
offering of the Company’s securities underwritten by the one of the
holders. The ACSH shares held for trading are valued at their market
price based on the closing price of the ACSH shares as of each balance sheet
date, and the call options are considered derivative instruments and are carried
at fair value. The fair value of each call option is determined using
the Black-Scholes method using the following assumptions at September 30,
2008: volatility 54.17%, interest rate 2.08%, average life of 1.04
years. Changes in the fair market value of the trading portfolio and
the call option obligation between each reporting date are recognized in the
Company’s consolidated statement of operations. For the three and
nine months ended September 30, 2008, the Company recognized losses of $2,000
and $275,000, respectively, on the sale of available for sale shares and shares
held in the trading portfolio. For the three and nine months ended
September 30, 2007, the Company recognized gains of $138,000 and $101,000,
respectively, in the trading portfolio.
As of
September 30, 2008, the Company held 999 shares of ACSH common stock and has
designated the shares as trading securities because these shares would be used
to satisfy the remaining call options.
Haelan
Earn-Out
The
Haelan Merger Agreement also contains an “earn-out” provision under which
CareGuide is required to pay additional amounts to the former Haelan
securityholders in the event that Haelan’s revenues during the year ended
December 31, 2007 exceeded certain threshold amounts. As of September 30,
2008, the Company calculated and accrued an estimated “earn-out” payable to the
Haelan securityholders. The Company’s calculation is currently under
review by the representative of the Haelan securityholders and has not yet been
approved.
7. Reverse/Forward
Stock Split and Going Private Transaction
In July
2008, the Company received the written consent from a majority of its
stockholders, acting by written consent, approving a reverse stock split (the
“Reverse Split”) which is intended to take the Company private. Under the terms
of the Reverse Split, each 100,000 shares of the Company’s common stock will be
converted into one share of common stock and holders of less than 100,000 shares
of common stock prior to the Reverse Split will receive cash in the amount of
$0.14 per pre-split share at a total estimated cost of approximately $2.0
million. The Reverse Split is expected to be financed by the issuance
of the Series A Preferred Stock described in Note 5 above.
Following
the Reverse Split, the Company will effect a 100,000-for-one forward split (the
“Forward Split,” and together with the Reverse Split, the “Reverse/Forward Stock
Split”) so that the number of shares held by each holder of at least one share
of common stock following the Reverse Split will ultimately be
unchanged.
The
Company obtained this approval of the holders of a majority of its shares of
common stock and a majority of its shares entitled to vote as a class by written
consent in accordance with Delaware law. The Company filed a preliminary
Information Statement on Schedule 14C under the Securities Exchange Act of 1934,
as amended in September 2008. In response to a review by the
Securities and Exchange Commission (“SEC”), the Company filed a revised
preliminary Information Statement on Schedule 14C under the Securities Exchange
Act of 1934, as amended, in October 2008. Once final approval is
received from the SEC, the Company intends to distribute a definitive
Information Statement to all holders of its common stock and to effect the
Reverse/Forward Stock Split 20 days following distribution of the Information
Statement to its stockholders.
7. Reverse/Forward
Stock Split and Going Private Transaction (continued)
The
anticipated result of the Reverse Stock Split will be to reduce the number of
the Company’s stockholders of record to fewer than 300. Thereafter,
the Company intends to cease filing periodic reports with the SEC following
consummation of the Reverse/Forward Stock Split in accordance with the rules and
regulations of the SEC.
The Board
of Directors approved the Reverse/Forward Stock Split based on the
recommendation of a Special Committee of the Board comprised of independent
directors and its determination that the Company achieves few of the benefits of
public ownership because, among other things, of a lack of an active trading
market for its common stock while remaining burdened with the significant and
increasing costs of being a publicly held company.
The
special committee and the Board have retained the right to change the ratio of
the Reverse/Forward Stock Split, or to abandon the Reverse/Forward Stock Split,
if either the special committee or the Board believes that the Reverse/Forward
Stock Split is no longer in the Company’s best interests or the best interests
of the Company’s stockholders.