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:
¨
Preliminary Information Statement
¨
Confidential, for Use of the Commission Only (as permitted by Rule 14c-5(d)(2))
x
Definitive Information Statement
 
CAREGUIDE, INC.
(Name of Registrant as Specified In Its Charter)
 
Payment of Filing Fee (Check the appropriate box):
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o
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(1)
Title of each class of securities to which transaction applies:
     
 
(2)
Aggregate number of securities to which transaction applies:
     
 
(3)
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):
     
 
(4)
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(5)
Total fee paid:
     
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Fee paid previously with preliminary materials.
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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.
 
(1)
Amount Previously Paid:
     
 
(2)
Form, Schedule or Registration Statement No.:
     
 
(3)
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(4)
Date Filed:
     
 
 
 

 

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.
 
 
i

 

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.
 
 
ii

 

By Order of the Board of Directors,

/s/ Chris E. Paterson

Chris E. Paterson
Chief Executive Officer
 
 
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Table of Contents

 
Page
   
SUMMARY TERM SHEET
1
   
QUESTIONS AND ANSWERS ABOUT THE REVERSE/FORWARD STOCK SPLIT AND THE AUTHORIZED SHARE INCREASE
4
   
SPECIAL FACTORS
11
   
GENERAL INFORMATION ABOUT THE REVERSE/FORWARD STOCK SPLIT
41
   
GENERAL INFORMATION ABOUT THE AUTHORIZED SHARE INCREASE
49
   
INFORMATION ABOUT THE COMPANY
50
   
INFORMATION ABOUT OTHER FILING PERSONS
59
   
INDEMNIFICATION OF DIRECTORS AND OFFICERS
63
   
FORWARD-LOOKING STATEMENTS
64
   
AVAILABLE INFORMATION
64
   
NOTICE TO STOCKHOLDERS SHARING AN ADDRESS
65

Annex A-1/A-2
Certificates of Amendment
Annex B
Fairness Opinion
Annex C
Stockholders Agreement
Annex D
Certificate of Designations
Annex E-1/E-2
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.
 
 
·
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.
 
 
·
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.
 
 
·
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.
 
 
·
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.
 
 
·
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.
 
 
·
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.
 
 
·
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.
 
 
·
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.
 
 
·
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.
 
 
·
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.
 
 
·
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.
 
 
·
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.
 
 
·
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.
 
 
·
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.
 
 
·
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.
 
 
·
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.
 
 
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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;
 
 
·
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;
 
 
·
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;
 
 
·
it will be more difficult for us to access the public capital markets;
 
 
·
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;
 
 
·
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.
 
 
-5-

 

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:
 
 
·
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;
 
 
·
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;
 
 
·
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;
 
 
·
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;
 
 
·
the projected tangible and intangible cost savings to us by terminating our status as a public company; and
 
 
·
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:
 
 
·
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;
 
 
·
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
 
 
·
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.
 
 
-6-

 

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.
 
 
-7-

 

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.
 
 
-8-

 

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.
 
 
-9-

 

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”);
 
 
-10-

 

 
·
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.
 
 
-11-

 

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.
 
 
-12-

 

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.
 
 
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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.
 
 
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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.
 
 
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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.
 
 
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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.
 
 
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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:
 
 
·
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.
 
 
·
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:
 
 
o
increasing the cost of the annual audit process by approximately $100,000;
 
 
o
increasing annual consulting and legal fees that we incur by approximately $75,000; and
 
 
o
increasing our annual personnel costs (primarily as a result of new hires related to Section 404) by approximately $75,000.
 
 
·
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.
 
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.
 
 
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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:
 
 
·
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.
 
 
·
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.
 
 
·
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.
 
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:
 
   
Prior to the
Reverse/Forward
Stock Split and
Authorized Share
Increase
   
After the
Reverse/Forward
 Stock Split and
Authorized Share
Increase
 
Shares of Common Stock Authorized
    100,000,000       200,000,000  
Shares Issued and Outstanding (1)
    67,538,976       61,691,317  
Shares Reserved for Issuance(2)
    95,477,166       95,477,166  
Common Shares Available for Issuance
    0       42,831,517  
Number of Estimated Beneficial Holders
    1,260       160  
Number of Estimated Holders of Record
    360       160  

(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).
 
 
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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:

 
·
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;

 
·
no longer be entitled to vote as a stockholder; and

 
·
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.

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
 
 
·
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.
 
 
·
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.
 
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:

 
·
continue to be stockholders and will therefore continue to participate, as a stockholder, in our future potential earnings or growth, if any;

 
·
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);

 
·
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

 
·
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.

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.
 
 
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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;
 
 
·
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:
 
 
o
increasing the cost of the annual audit process by approximately $100,000;
 
 
o
increasing annual consulting and legal fees that we incur by approximately $75,000; and
 
 
o
increasing our annual personnel costs (primarily as a result of new hires related to Section 404) by approximately $75,000.
 
 
·
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.
 
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.
 
 
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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.
 
 
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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.
 
 
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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:
 
 
·
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.
 
 
·
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.
 
 
·
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.
 
 
·
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.
 
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:
 
 
·
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;
 
 
·
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;
 
 
·
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
 
 
·
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.
 
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:
 
 
·
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.
 
 
·
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.
 
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:
 
 
·
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;
 
 
·
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.
 
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.
 
 
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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.

 
- 31 -

 

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.

 
- 32 -

 
 
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.

 
- 33 -

 

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%.

 
- 34 -

 
 
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.

 
- 35 -

 
 
 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.

 
- 36 -

 
 
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
 
 
 
- 37 -

 
 
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.

 
- 38 -

 

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:
 
 
·
banks, insurance companies or other financial institutions;
 
 
·
persons subject to the alternative minimum tax;
 
 
·
tax-exempt organizations;
 
 
·
dealers in securities or currencies;
 
 
·
traders in securities that elect to use a mark-to-market method of accounting for their securities holdings;
 
 
·
persons that own, or are deemed to own, more than five percent of our Company (except to the extent specifically set forth below);
 
 
·
certain former citizens or long-term residents of the United States;

 
- 39 -

 

 
·
persons who own our Common Stock in multiple brokerage accounts;
 
 
·
persons who hold our Common Stock as a position in a hedging transaction, “straddle,” “conversion transaction” or other risk reduction transaction; or
 
 
·
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.
 
 
CareGuide, Inc.
 
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:
 
 
·
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
 
 
·
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 t