UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

SCHEDULE 14A

 

(RULE 14a-101)

SCHEDULE 14A INFORMATION

 

Proxy Statement Pursuant to Section 14(a) of

the Securities Exchange Act of 1934

 

Filed by the Registrant þ

Filed by a Party other than the Registrant o

 

Check the appropriate box:

 

þ  Preliminary Proxy Statement.

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

o  Definitive Proxy Statement.

o  Definitive Additional Materials.

o  Soliciting Material Pursuant to §240.14a-12.

 

PROXYMED, INC.

(Name of Registrant as Specified in its Charter)

 

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

 

Payment of Filing Fee (Check the appropriate box):

 

o  No fee required.

 

þ  Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Persons who are to respond to the collection of information contained in this form are not required to respond unless the form displays a currently valid OMB control number.

Preliminary Copy

 

ProxyMed, Inc.

1854 SHACKLEFORD COURT, SUITE 200

NORCROSS, GEORGIA 30093

(770) 806-9918

 

December 31, 2007

 

Dear Shareholders:

 

I am pleased to enclose the proxy statement for our Special Meeting of shareholders to be held on Tuesday, January 22, 2008. We are asking shareholders to approve the sale of our cost containment business to Coalition America, Inc. for $23.5 million, subject to certain purchase price adjustments.

 

This sale will allow us to exit from a line of business that had experienced declining revenues under very competitive market conditions. We will use the proceeds to pay down a portion of our outstanding indebtedness allowing us to focus on our remaining lines of business.

 

The date, time, place and agenda for the Special Meeting are set forth in the accompanying notice of Special Meeting. The accompanying proxy statement contains important information about the proposals to be submitted for a vote at the meeting, including approval of the sale of our cost containment business to Coalition America, Inc. Please review this information carefully in deciding how to vote. Our board of directors unanimously recommends that you vote “FOR” each proposal.

 

YOUR VOTE ON THESE MATTERS IS IMPORTANT. Please see the accompanying notice of meeting for instructions on how to vote.

 

I look forward to seeing you at the meeting.

 

Sincerely,

 

John G. Lettko

Chief Executive Officer

ProxyMed, Inc.

1854 SHACKLEFORD COURT, SUITE 200

NORCROSS, GEORGIA 30093

(770) 806-9918

 

 

NOTICE OF SPECIAL MEETING OF SHAREHOLDERS

TO BE HELD ON JANUARY 22, 2008

 

 

 

NOTICE IS HEREBY GIVEN that a Special Meeting of shareholders (the “Special Meeting”) of ProxyMed, Inc., a Florida corporation, d/b/a MedAvant Healthcare Solutions (“MedAvant,” “we,” or “us”), will be held on January 22, 2008, at 10:00 a.m., Eastern Time, at our corporate offices located at 1854 Shackleford Court, Suite 200, Norcross, Georgia 30093. At our Special Meeting we will ask you to:

 

1. Approve the sale of substantially all of our assets that relate to our cost containment business (the “Cost Containment Business”) pursuant to a Stock Purchase Agreement dated November 8, 2007 by and among Coalition America, Inc., CCB Acquisition, LLC and us;

 

2. Approve one or more adjournments of the Special Meeting if deemed necessary to facilitate the approval of Proposal No. 1, including to permit the solicitation of additional proxies if there are not sufficient votes at the time of the Special Meeting to establish a quorum or to approve Proposal No. 1; and

 

3. Transact any other business that may properly come before the Special Meeting and any adjournment or postponement thereof.

 

Our board of directors recommends that you vote “FOR” Proposals 1 and 2 and that you allow our representatives to vote the shares represented by your proxy as recommended by our board of directors.

 

Pursuant to our bylaws, our board of directors has fixed the close of business on December 5, 2007, as the record date for determining those shareholders entitled to notice of and to vote at the Special Meeting.

 

BY ORDER OF THE BOARD OF DIRECTORS,

 

Peter E. Fleming, III

Executive Vice President, General Counsel and Secretary

 

December 31, 2007

Norcross, Georgia

 

 

 

 

TABLE OF CONTENTS

 

FORWARD LOOKING STATEMENTS

 

Statements in this Proxy Statement that are “forward-looking statements” are based on current expectations and assumptions that are subject to risks and uncertainties. In some cases, forward-looking statements can be identified by terminology such as “may,” “should,” “potential,” “continue,” “expects,” “anticipates,” “intends,” “plans,” “believes,” “estimates,” and similar expressions. Actual results could differ materially from projected results because of factors such as:

 

 

Any of these factors could affect our ability to consummate the transaction described herein and cause our actual results to differ materially from the guidance given at this time. For further information about the risks of the proposed transaction and our Company, we refer you to the documents we file from time to time with the Securities and Exchange Commission, particularly our Form 10-K for the year ended December 31, 2006.

 

There are representations and warranties contained in the Stock Purchase Agreement that is attached as an appendix and described herein which were made by the parties to each other as of specific dates. The assertions embodied in these representations and warranties were made solely for purposes of the Stock Purchase Agreement and may be subject to important qualifications and limitations agreed to by the parties in connection with negotiating its terms. Moreover, certain representations and warranties may not be accurate or complete as of any specified date because they are subject to a contractual standard of materiality that is different from certain standards generally applicable to shareholders or were used for the purpose of allocating risk between the parties rather than establishing matters as facts. Therefore, you should not rely on the representations and warranties contained in the Stock Purchase Agreement as statements of factual information.

 

We do not assume any obligation to update information contained in this document, except as required by federal securities laws. Although this Proxy Statement may remain available on our website or elsewhere, its continued availability does not indicate that we are reaffirming or confirming any of the information contained herein.

 

SUMMARY TERM SHEET

 

The following summary, together with the following question and answer section, provides an overview of the proposed sale of our Cost Containment Business discussed in this Proxy Statement and the attached appendices. The summary also contains cross-references to the more detailed discussions elsewhere in the Proxy Statement. This summary may not contain all of the information that is important to you. To understand fully the proposed sale of our Cost Containment Business, and for a more complete description of the terms thereto, you should carefully read this entire Proxy Statement and the attached appendices in their entirety.

 

Proposal No. 1: Sale of our Cost Containment Business:

 

General (see page 13)

 

We have entered into a Stock Purchase Agreement with Coalition America, Inc. (“CAI”) and CCB Acquisition, LLC (“CCB”), a wholly owned subsidiary of CAI (the “Stock Purchase Agreement”) in which we will sell to CAI the following subsidiaries: Plan Vista Solutions, Inc., National Network Services, LLC, Plan Vista Corporation, Medical Resource, LLC, and National Provider Network, Inc. (collectively, the “Cost Containment Subsidiaries”) that constitute our Cost Containment Business. In 2006, our Cost Containment Business had revenue of $23.9 million or 36.5% of our total revenue and operating income of $2.4 million, while our Company had a net loss of ($6.6 million). At September 30, 2007, our Cost Containment Business had total assets of $24.1 million or 54.2% of our total assets.

 

The Parties

 

MedAvant Healthcare Solutions

 

We, MedAvant Healthcare Solutions (“MedAvant” or the “Company”), are an information technology company that facilitates the exchange of medical claim and clinical information among doctors, hospitals, medical laboratories, and insurance payers. We also enable the electronic transmission of laboratory results. MedAvant is a trade name of ProxyMed, Inc. which was incorporated in 1989 in Florida. In December 2005, ProxyMed began doing business under the new operating name, MedAvant Healthcare Solutions, to unite all business units and employees under one brand identity. Adopting a new name was one of several results of a strategic analysis completed in the third quarter of 2005 following the acquisition of seven companies between 1997 and 2004. One of our core businesses is cost containment, which includes re-pricing of medical claims among healthcare providers and insurers and other payers (the “Cost Containment Business”).

 

Coalition America, Inc.

 

Coalition America, Inc. (“CAI”) is a Georgia corporation based in Atlanta, Georgia that specializes in healthcare cost containment. CAI offers its clients direct provider contracts, PPO networks and provider negotiations.

 

CCB Acquisition, LLC

 

CCB Acquisition, LLC (“CCB”) is a Delaware limited liability company and wholly owned subsidiary of CAI formed for the purpose of effectuating CAI’s purchase of our Cost Containment Business.

 

Background of the Proposed Sale of the Cost Containment Business (see page 13)

 

We believe MedAvant is the nation’s fourth largest claims processor, among the top five independent Preferred Provider Organizations (“PPO”) and the largest company that facilitates delivery of laboratory results. Our PPO is called the National Preferred Provider Network (“NPPN”) and is accessed by more than 550,000 physicians, 4,000 acute care facilities and 90,000 ancillary care providers. NPPN is the core of our Cost Containment Business. We generate revenue primarily by charging participating payers a percentage of the savings they receive through the Cost Containment Business, including NPPN. Because we operate a PPO, we can offer payers discounts on claims when a patient uses an out-of-network provider and we can negotiate non-discounted claims for payers.

We have faced declining operating performance and revenues in each of our business units for the last several years. In response to declining operating performance and revenues, beginning in the second quarter of 2007, our board began to actively explore strategic alternatives for us. We engaged a financial advisor, Cain Brothers & Company, LLC (“Cain Brothers”), with respect to, among other things, exploring and evaluating our strategic alternatives, including a sale of our entire company or any of our business units. Cain Brothers contacted approximately forty-nine potential acquirers regarding their interest in our entire company or our business units. Through that process, we did not receive any interest in a business combination or acquisition of our entire company, but we did receive some indications of interest in the purchase of our Cost Containment Business on a stand alone basis as well as interest in our other business units.

 

During the summer of 2007, CAI expressed interest in entering into a potential transaction with us for the sale of our Cost Containment Business. Since then, certain of our executive officers met with representatives from CAI to discuss and negotiate a potential transaction involving the sale of the Cost Containment Business to CAI. Our board met on multiple occasions to discuss and consider the proposed transaction with CAI. These efforts culminated with the execution of the Stock Purchase Agreement for the Cost Containment Business on November 8, 2007.

 

Reasons for the Sale of the Cost Containment Business (see page 15)

 

We believe that the sale of the Cost Containment Business and the terms of the Stock Purchase Agreement are in the best interests of our shareholders. The sale of the Cost Containment Business will permit us to focus on our other business units and provide the following anticipated benefits:

 

 

Our Board also considered various risks when evaluating the sale of the Cost Containment Business, which include:

 

 

Fairness Opinion of Financial Advisor (see page 18)

 

Our financial advisor, Cain Brothers, delivered a written opinion to our board as to the fairness to us of the sale of the Cost Containment Business, from a financial point of view, of the $23.5 million cash consideration (before any adjustments) to be paid to us in connection with the sale of the Cost Containment Business. The full text of the written opinion of Cain Brothers, dated November 8, 2007, is attached to as Appendix B to this Proxy Statement and should be read in its entirety for a description of the procedures followed, assumptions made, matters concerned and limitations on the review undertaken. We paid Cain Brothers a fee for the delivery of this opinion.

 

THE OPINION OF CAIN BROTHERS IS DIRECTED TO OUR BOARD OF DIRECTORS, WILL NOT BE UPDATED AND DOES NOT CONSTITUTE A RECOMMENDATION TO ANY SHAREHOLDER AS TO HOW SUCH SHAREHOLDER SHOULD VOTE ON THE PROPOSED SALE OF THE COST CONTAINMENT BUSINESS.

 

The Transaction (see page 14)

 

Purchase Price (see page 24)

 

As consideration for the sale of all the capital stock or equity interests relating to the Cost Containment Subsidiaries, CAI will pay us $23.5 million, subject to a post-closing adjustment based on the final net working capital of the Cost Containment Subsidiaries as of the closing. At closing, we will receive $20.5 million in cash, approximately $16.5 million will be immediately used to pay down senior debt and approximately $4.0 million will be used to pay transaction costs, outstanding accounts payable, and other debt of the Cost Containment Business. Also, $3.0 million will be placed in escrow to cover possible indemnification claims by CAI and CCB.

 

Terms of the Stock Purchase Agreement (see page 24)

 

The Stock Purchase Agreement is attached to this Proxy Statement as Appendix A. We encourage you to read the Stock Purchase Agreement carefully. Our board has approved the Stock Purchase Agreement, which is the binding legal agreement that governs the terms of the sale of our Cost Containment Business.

 

Some of the key provisions of the Stock Purchase Agreement are as follows:

 

Representations and Warranties

 

The Stock Purchase Agreement contains customary representations and warranties of the parties relating to, among other things, their authority to enter into the Stock Purchase Agreement and, in the case of MedAvant, various aspects of the Cost Containment Business.

 

Covenants

 

The Stock Purchase Agreement contains customary covenants of the parties, including agreements by us to conduct the Cost Containment Business in accordance with ordinary past practices, to refrain from certain actions between the time of signing the Stock Purchase Agreement and the closing of the sale of the Cost Containment Business, to use commercially reasonable efforts to solicit shareholder proxies approving the sale of the Cost Containment Business and to provide transition services to CAI pursuant to a separate transition services agreement.

 

Superior Offer

 

The Stock Purchase Agreement provides that our board may, at any time prior to obtaining shareholder approval of the sale of the Cost Containment Business, withdraw or modify its approval or recommendation of the Stock Purchase Agreement or the sale of the Cost Containment Business or approve or recommend a superior offer to purchase the Cost Containment Business if our board determines, in good faith, that such offer constitutes a superior offer and determines that to do otherwise would violate the board’s fiduciary duties.

 

Indemnification

 

The Stock Purchase Agreement provides that each party will indemnify the other for any losses incurred as a result of, among other things, breaches of representations, warranties and covenants, subject in certain circumstances to specified dollar and time limitations.

 

Conditions to Closing

 

The obligations of the parties to complete the sale of the Cost Containment Business are subject to certain customary closing conditions, including, among other things:

 

 

 

Termination

 

The Stock Purchase Agreement can be terminated:

 

 

Termination Payment and Expenses

 

All parties to the Stock Purchase Agreement have agreed that each party will pay its own expenses. However, in the event the Stock Purchase Agreement terminates because of a breach by a party, the non-breaching party’s right to pursue all legal remedies will survive the agreement’s termination unimpaired.

 

If the Stock Purchase Agreement is terminated because: (a) our shareholders fail to approve the sale of the Cost Containment Business; (b) we accept a superior proposal; or (c) Laurus fails to deliver a satisfactory consent; then we are obligated to pay CAI $940,000 plus fees and expenses incurred in connection with the proposed sale.

 

If the Stock Purchase Agreement is terminated because CAI is unable to obtain financing and all other conditions to closing have been satisfied on or before January 31, 2008, then CAI is obligated to pay us $940,000 plus fees and expenses incurred in connection with the proposed sale.

 

Certain Material Federal Income Tax Consequences (see page 30)

 

The sale of the Cost Containment Business will be a taxable transaction for us. We will realize gain (loss) measured by the difference between the proceeds received by us on such sale and our tax basis in the assets sold. For purposes of calculating gain, the proceeds received by us will include the cash we received, the amount of our indebtedness that is cancelled or assumed, and any other consideration we receive for our assets. It is anticipated that we will have sufficient losses (including net operating loss carryforwards) to offset any gain realized from the sale for regular Federal income tax purposes, subjecting us only to Federal alternative minimum tax.

 

We may be subject to state income taxes to the extent that gains exceed losses for state tax law purposes, but we do not anticipate that such taxes, if any, will be significant.

 

The sale of the Cost Containment Business will not result in any Federal income tax consequences to our shareholders.

 

Accounting Treatment (see page 30)

 

We will record the sale of the Cost Containment Business in accordance with generally accepted principles in the United States. Upon completion of the disposition, we will recognize a gain (loss) for financial statement purposes equal to the net proceeds (sum of purchase price less expenses of the sale) less the book value of the assets and liabilities sold.

 

Regulatory Approvals (see page 30)

 

We are not aware of any federal or state regulatory requirements that must be complied with or approvals that must be obtained to complete the sale of the Cost Containment Business, other than the filing of this Proxy Statement with the Securities Exchange Commission (the “SEC”). If any additional approvals or filings are required, we will use our commercially reasonable efforts to obtain those approvals and make any required filings before completing the transactions.

 

No Changes to the Rights of Shareholders (see page 30)

 

There will be no change in the rights of our shareholders as a result of the sale of the Cost Containment Business.

 

No Appraisal Rights (see page 31)

 

Our shareholders do not have appraisal rights under the Florida Business Corporation Act in connection with the sale of the Cost Containment Business because our common stock is listed on the NASDAQ Global Market.

 

Required Vote (see page 31)

 

The affirmative vote of holders of a majority of the shares of common stock and Series C 7% Convertible Preferred Stock (“Series C Preferred Stock”), on an as converted basis, voting together as a single class, is required in order to approve the sale of the Cost Containment Business. Because the affirmative vote of a majority of the votes entitled to be cast at the Special Meeting is required to approve the sale of the Cost Containment Business, abstentions, broker “non-votes” and shares not represented at the Special Meeting will have the same effect as a vote against the sale of the Cost Containment Business.

 

Recommendation of Our Board of Directors Regarding the Sale of the Cost Containment Business (see page 31)

 

For the reasons described above, our board has determined that the proposed sale of the Cost Containment Business is in the best interests of the Company and our shareholders. Accordingly, our board has unanimously approved the proposed sale of the Cost Containment Business and Stock Purchase Agreement and recommends to our shareholders that they vote “FOR” approval of Proposal No. 1.

 

Proposal No. 2: Adjournment of the Special Meeting:

 

Purpose (see page 32)

 

In the event there are not sufficient votes present, in person or by proxy, at the Special Meeting to approve the sale of the Cost Containment Business, our chief executive officer, acting in his capacity as chairperson of the meeting, may propose an adjournment of the Special Meeting to a later date or dates to permit further solicitation of proxies.

 

Required Shareholder Vote to Approve the Adjournment Proposal (see page 32)

 

Approval of the adjournment proposal will require that the number of votes cast in favor of the proposal exceed the number of votes cast against it. Assuming the presence of a quorum, abstentions, broker “non-votes” and shares not represented at the Special Meeting will have no effect on the adjournment proposal.

 

Recommendation of Our Board of Directors (see page 32)

 

Our board of directors unanimously recommends that our shareholders vote “FOR” approval of Proposal No. 2 to adjourn the Special Meeting, if necessary to obtain the requisite number of proxies required to approve Proposal No. 1.

 

QUESTIONS AND ANSWERS ABOUT THE SPECIAL MEETING AND RELATED PROPOSALS

 

Why am I receiving this Proxy Statement and proxy card?

 

You are receiving this Proxy Statement and proxy card because you own shares of our common stock or our Series C Preferred Stock. This Proxy Statement describes the proposals on which we would like you, as a shareholder, to vote. It also gives you information on the proposals so that you can make an informed decision.

 

Who can vote at the Special Meeting?

 

Only shareholders of record at the close of business on December 5, 2007 will be entitled to vote at the Special Meeting.

 

What is being voted on?

 

You are being asked to vote on the following matters:

 

1. To approve the sale of our Cost Containment Business; and

 

2. To approve one or more adjournments of the Special Meeting, if deemed necessary to facilitate the approval of Proposal No. 1, including to permit the solicitation of additional proxies if there are not sufficient votes at the time of the Special Meeting to establish a quorum or to approve Proposal No. 1.

 

What will happen if the proposed sale of the Cost Containment Business is approved?

 

If the proposed sale of the Cost Containment Business is approved, we will complete the sale subject to the satisfaction of the closing conditions set forth in the Stock Purchase Agreement. We anticipate that the transaction will close shortly after the Special Meeting.

 

What will happen if the proposed sale of the Cost Containment Business is not approved?

 

We believe that if we are unable to successfully close the sale of our Cost Containment Business and if we are not successful in obtaining additional financing, we may not be able to continue operations. In addition, we will owe a termination fee to CAI and we would continue to be in default under the terms of our agreement with Laurus, our senior secured lender, who has reserved all rights with respect to such default and who may exercise its right to foreclose on our assets.

 

Does the board of directors recommend that I vote on the proposals to be considered and voted upon at the Special Meeting?

 

Our board of directors recommends that you vote your shares:

 

 

Who should I call if I have any questions about the Special Meeting?

 

If you have any questions about the Special Meeting, you should contact our Corporate Secretary at 1854 Shackleford Court, Suite 200, Norcross, Georgia 30093, telephone 770-806-9918.

 

How do I vote?

 

After carefully reading and considering the information contained in this Proxy Statement, you may either complete, sign and date your proxy card and voting instructions and return them in the enclosed postage-paid envelope or vote in person at the Special Meeting. Please vote your shares as soon as possible so that your shares will be represented at the Special Meeting.

If my shares are held in “street name” by my broker, will my broker vote my shares for me?

 

Your broker will vote your shares only if you provide instructions on how to vote. Please tell your broker how you would like him or her to vote your shares. If you do not tell your broker how to vote, your shares will not be voted by your broker.

 

Can I change my vote after I have delivered my proxy?

 

Yes. You may revoke your proxy at any time before it is voted at the meeting by (i) delivering a written notice of revocation to our Corporate Secretary at 1854 Shackleford Court, Suite 200, Norcross, Georgia 30093, (ii) delivering a later-dated proxy, or (iii) attending the meeting and voting in person. Attendance at the Special Meeting, in and of itself, will not constitute a revocation of a proxy. If your shares are held in an account at a brokerage firm or a bank, you should contact your brokerage firm or bank for instructions on how to change your vote.

 

How many votes are required to approve the sale of the Cost Containment Business?

 

The affirmative vote of holders of a majority of the shares of common stock and Series C Preferred Stock, on an as converted basis, voting together as a single class, is required in order to approve the sale of the Cost Containment Business. Because the affirmative vote of a majority of the votes entitled to be cast at the Special Meeting is required to approve the sale of the Cost Containment Business, abstentions, broker “non-votes” and shares not represented at the Special Meeting will have the same effect as a vote against the sale of the Cost Containment Business.

 

Am I entitled to appraisal rights?

 

No, our shareholders do not have appraisal rights under the Florida Business Corporation Act in connection with the sale of the Cost Containment Business because our common stick is listed on the NASDAQ Global Market.

 

When do you expect the sale of the Cost Containment Business to be completed?

 

It is currently anticipated that the transactions and actions contemplated in the Stock Purchase Agreement will be completed as promptly as practicable following our Special Meeting to be held on January 22, 2008.

 

Who is paying for this proxy solicitation?

 

We will pay for the entire cost of soliciting proxies. In addition to these mailed proxy materials, our directors and employees may also solicit proxies in person, by telephone or by other means of communication. Directors and employees will not be paid any additional compensation for soliciting proxies. We may also reimburse brokerage firms, banks and other agents for the cost of forwarding proxy materials to beneficial owners.

 

THE SPECIAL MEETING

 

Time, Date and Place; Matters to be Considered

 

The Special Meeting will be held on January 22, 2008, at 10:00 a.m. local time, at our offices at 1854 Shackleford Court, Suite 200, Norcross, Georgia 30093. At the Special Meeting, shareholders will be asked to consider and vote upon each of the proposals and conduct such other business as may properly come before the Special Meeting and any adjournment thereof.

 

Voting and Record Date

 

The board of directors has fixed December 5, 2007, as the record date for determining holders of shares of our common stock and of shares of our Series C Preferred Stock that are entitled to receive notice of and to vote at the Special Meeting. Each holder of record of shares of our voting stock on the record date is entitled to cast one vote per share, exercisable in person or by a properly executed proxy, with respect to the approval of the proposals and any other matter to be submitted to a vote of shareholders at the Special Meeting. At November 16, 2007, there were 13,782,915 shares of common stock and 2,000 shares of Series C Preferred Stock that were outstanding.

 

Approval of Proposal No. 1 will require the affirmative vote of the holders of a majority of the outstanding shares entitled to vote thereon. Therefore, abstentions, broker “non-votes” and shares not represented at the Special Meeting will have the same effect as votes against Proposal No. 1. Approval of Proposal No. 2 requires that the number of votes cast in favor of the proposal exceed the number of votes cast against it. Assuming the presence of a quorum, abstentions, broker “non-votes” and shares not represented at the Special Meeting will have no effect on Proposal 2.

 

The board has unanimously approved each of the proposals and recommends that shareholders vote “FOR” the approval of each of the proposals. We are seeking requisite shareholder approval of each of the proposals.

 

Quorum

 

The required quorum for the transaction of business at the Special Meeting is a majority of the shares entitled to vote thereat by holders of shares of our common stock and Series C Preferred Stock outstanding on the record date. Broker non-votes and shares that are voted “FOR” or “AGAINST” a proposal or marked “ABSTAIN” are treated as being present at the Special Meeting for purposes of establishing a quorum and are also treated as shares entitled to vote at the Special Meeting with respect to such proposal. Florida law provides that the shareholders present may adjourn the Special Meeting despite the absence of a quorum.

 

Abstentions and Broker Non-Votes

 

Broker “non-votes” and the shares of voting stock as to which a shareholder abstains are included for purposes of determining whether a quorum of shares of voting stock is present at a meeting. A broker “non-vote” occurs when a nominee holding shares of voting stock for the beneficial owner does not vote on a particular proposal because the nominee does not have discretionary voting power with respect to that item and has not received instructions from the beneficial owner. Proposals 1 and 2 are non-discretionary items, which means that a nominee may not vote on either proposal without instructions from the beneficial owner. Since Proposal 1 requires the affirmative vote of a majority of our outstanding voting stock, abstentions and broker “non-votes” have the effect of votes against Proposal 1. Since Proposal 2 requires that the number of votes cast in favor of the proposal exceed the number of votes cast against it, assuming the presence of a quorum, abstentions and broker “non-votes” will have no effect on Proposal 2.

 

Brokerage Accounts

 

If any of your shares are held in the name of a brokerage firm, bank, bank nominee or other institution, only it can vote such shares and only upon receipt of your specific instructions. Accordingly, please contact the person responsible for your account and instruct that person to execute the proxy card representing your shares. In addition, if you hold your shares in a brokerage or bank account, your broker or bank may allow you to provide your voting

instructions by telephone or Internet. Please consult the materials you receive from your broker or bank prior to authorizing a proxy by telephone or Internet. We urge you to confirm in writing your instructions to us directly at 1854 Shackleford Court, Suite 200, Norcross, Georgia 30092 so that we will be aware of all instructions given and can attempt to ensure that such instructions are followed.

 

Proxies

 

Our board of directors is asking for your proxy. Giving the board of directors your proxy means you authorize it to vote your shares at the Special Meeting in the manner you direct. You may vote for or against the proposals or abstain from voting. All valid proxies received prior to the Special Meeting will be voted. All shares of common stock and Series C Preferred Stock that are represented at the Special Meeting by properly executed proxies received prior to or at the Special Meeting, and not duly and timely revoked, will be voted at the Special Meeting in accordance with the choices marked thereon by the shareholders. Unless a contrary choice is marked, the shares represented by each proxy will be voted FOR approval of each of the proposals. At the time this proxy statement was mailed to shareholders, we were not aware that any other matters not referred to herein would be presented for action at the Special Meeting. If any other matters properly come before the Special Meeting, the persons designated in the proxy intend to vote the shares represented thereby in accordance with their best judgment.

 

Any proxy given pursuant to this solicitation may be revoked by the person giving it at any time before it is voted. Proxies may be revoked by (i) filing with our Corporate Secretary at or before the taking of the vote at the Special Meeting, a written notice of revocation bearing a later date than the proxy, (ii) duly executing a later-dated proxy relating to the same shares and delivering it to our Corporate Secretary before the taking of the vote at the Special Meeting or (iii) attending the Special Meeting and voting in person (although attendance at the Special Meeting will not in and of itself constitute a revocation of a proxy).

 

Attendance at the Special Meeting

 

Only holders of common stock or Series C Preferred Stock, their proxy holders and guests we may invite may attend the Special Meeting. If you wish to attend the Special Meeting in person but you hold your shares through someone else, such as a stockbroker, you must bring proof of your ownership and photo identification at the Special Meeting. For example, you could bring an account statement showing that you beneficially owned shares of common stock or Series C Preferred Stock of the Company as of the record date as acceptable proof of ownership.

 

Costs of Solicitation

 

We will bear the cost of printing and mailing proxy materials, including the reasonable expenses of brokerage firms and others for forwarding the proxy materials to beneficial owners of voting stock. In addition to solicitation by mail, solicitation may be made by certain of our directors, officers and employees, or firms specializing in solicitation; and may be made in person or by telephone or telegraph. No additional compensation will be paid to any of our directors, officers or employees for such solicitation.

 

SPECIAL RISK CONSIDERATIONS

 

You should carefully consider the special risk considerations described below as well as other information provided to you or referenced in this Proxy Statement in deciding how to vote on the proposed sale of the Cost Containment Business. The special risk considerations described below are not the only ones we face. Additional considerations not presently known to us or that we currently believe are immaterial may also impair our business operations. If any of the following special risk considerations actually occur, our business, financial condition or results of operations could be materially adversely affected, the value of our common stock could decline, and you may lose all or part of your investment.

 

Special Risk Considerations Regarding the Proposed Sale of the Cost Containment Business:

 

If we fail to complete the sale of the Cost Containment Business, you may lose your entire investment.

 

If we are unable to close the sale of our Cost Containment Business, we may owe a termination fee to CAI that could either exhaust our cash reserves or cause us to be unable to pay our scheduled obligations. In addition, we would continue to be in default under the terms of our agreement with Laurus, our secured senior lender, who may exercise its right to foreclose on our assets.

 

If we fail to complete the sale of the Cost Containment Business, our business may be harmed.

 

We cannot assure you that the sale of the Cost Containment Business will be completed. As a result of our announcement of the sale of the Cost Containment Business, third parties may be unwilling to enter into material agreements with respect to our Cost Containment Business. New or existing customers may prefer to enter into agreements with our competitors who have not expressed an intention to sell their business because customers may perceive that such relationships are likely to be more stable. If we fail to complete the proposed sale of the Cost Containment Business, the failure to maintain existing business relationships or enter into new ones could adversely affect our business, results of operations and financial condition. In addition, if we fail to complete the proposed sale of the Cost Containment Business, we will retain and continue to operate the Cost Containment Business, and our operating losses and depletion in cash reserves could continue. The result would have a material, negative impact on the value of our company, which could result in a total loss of your investment.

 

You will not receive any of the proceeds from the sale of the Cost Containment Business.

 

The purchase price for the assets of the Cost Containment Business will be paid directly to us or our creditors. We intend to pay off a portion of our indebtedness with the proceeds of the sale of our Cost Containment Business. Therefore, no proceeds will be received by our shareholders as a result of the sale.

 

The Stock Purchase Agreement may expose us to contingent liabilities.

 

Under the Stock Purchase Agreement, we indemnify CAI for the breach or violation of any representation, warranty or covenant made by us in the Stock Purchase Agreement, subject to certain limitations. Significant indemnification claims by CAI could have a material adverse effect on our financial condition. Claims for indemnification for breach of certain covenants, agreements or other matters agreed to by us in the Stock Purchase Agreement are not subject to the $3.0 million held in escrow.

 

We will be prohibited from competing with the Cost Containment Business for three years from the date of the closing.

 

The Stock Purchase Agreement provides that for a period of three years after the closing of the transaction, we will not compete, directly or indirectly, with the Cost Containment Business or directly or indirectly own an interest in, manage, operate, control, as a partner, shareholder or otherwise, any person that engages in the business of cost containment, including repricing of medical claims among healthcare providers and insurance and other payors.

Special Risk Considerations Regarding the Remaining Business Assuming the Cost Containment Business is Sold:

 

In order to achieve our stated objectives, we need to engage in a substantial development program of our EDI Business that will require successful execution and sufficient working capital.

 

Following the sale of the Cost Containment Business, our strategy will be to focus on maintaining and developing our core EDI Business. We cannot assure you that we will successfully manage the challenges facing the EDI Business or that we will have sufficient working capital to maintain or develop the EDI Business as we intend. We may not be able to attract or retain sufficient numbers of customers to maintain and improve the operating performance of our EDI Business without the cross-selling opportunities afforded by the Cost Containment Business. Our management may not be able to effectively implement our EDI Business development program and internal growth strategy simultaneously. Any failure to maintain established customer relationships or expand our customer base for the EDI Business could lead to further operating losses and have a negative impact on our future results. We cannot readily predict the timing or success of our EDI Business development plan. While we are in discussions with our current lender to develop a financing plan for funding the remaining business, there can be no assurance that this funding will be available, or if available, that it will be available on acceptable terms.

 

Our company could be materially adversely affected as a result of EDI Business risks.

 

We may not be able to successfully manage our operations with a significantly reduced workforce and a greater focus on the EDI Business. Operating synergies or cross-marketing opportunities may exist between the Cost Containment Business and the EDI Business that we will miss after the sale of the Cost Containment Business. Additionally, any future growth in our EDI Business may increase the demands on our management, our internal systems, procedures and controls. We may be unable to successfully implement improvements to our information and control systems associated with our EDI Business in an efficient or timely manner.

 

The adoption rate of electronic processing of clinical transactions in the healthcare industry may have an adverse impact on our operations.

 

Our strategy anticipates that electronic processing of clinical healthcare transactions will become more widespread and that providers and third-party institutions increasingly will use electronic transaction processing networks for the processing and transmission of data. The rate at which providers adopt the use of electronic transmission of clinical healthcare transactions (and, in particular, the use of the Internet to transmit them) continues to be slow and the continued conversion from paper-based transaction processing to electronic transaction processing in the healthcare industry, using proprietary healthcare management systems or the Internet, may shift to processors that possess greater competitive advantages than us.

 

Our profitability will be dependent upon restructuring and executing planned cost savings.

 

The pro forma financial statements included in this Proxy Statement show significant operating losses for the periods presented. These pro forma financial statements do not reflect any planned cost savings that we expect to realize from restructuring of our overhead cost structure after the sale of the Cost Containment Business. If our cost reduction efforts are ineffective or our estimates of costs savings are inaccurate, our profitability could be negatively impacted. We may not be successful in achieving the operating efficiencies and operating cost reductions expected from these efforts, and may experience business disruptions associated with the restructuring and cost reduction activities. Further, cost reduction benefits may be realized later than expected, and the costs of implementing these measures may be greater than anticipated. If these efforts are not successful, we intend to undertake additional cost reduction efforts, which could result in future charges.

 

A significant amount of the revenues in our EDI Business is from one customer. Loss of this relationship may adversely affect our profitability.

 

For the years ended December 31, 2006, 2005 and 2004, approximately 6%, 8% and 8%, respectively, of consolidated revenues and 13%, 17% and 16%, respectively, of our EDI Business revenues were from one customer.

The loss or decline in business from this customer could have a material impact on the operating performance of our EDI Business.

 

The market for our products and services is affected by changing technology and if we fail to anticipate and adapt to such changes, our results of operations may suffer.

 

The market in which our EDI Business competes is characterized by technological change, new product introductions, evolving industry standards and changing needs of customers. Our future success will depend on our ability to anticipate and adapt to changes in technology and industry standards. If we fail to successfully manage the challenges of rapidly changing technology, our results of operations may suffer.

 

Market factors could cause a decline in spending for healthcare electronic data information processing, adversely affecting our financial results.

 

Our revenue and profitability depend on the overall demand for our products and services. Delays or reductions in demand for healthcare electronic data processing and services by end users could materially adversely affect the demand for our products and services. If competition for our products and services causes the prices we charge customers to decrease, our business, results of operations or financial condition could be materially adversely affected.

 

PROPOSAL NO. 1

 

APPROVAL OF THE SALE OF THE COST CONTAINMENT BUSINESS

 

General

 

Pursuant to the Stock Purchase Agreement, we will sell to CAI, acting through CCB, our Cost Containment Business, which includes all of the equity interests that relate to each of our Cost Containment Subsidiaries. Upon consummation of the proposed sale of the Cost Containment Business, ownership of the Cost Containment Subsidiaries will be transferred to CCB and the Cost Containment Subsidiaries will become direct subsidiaries of CCB. The sale of the Cost Containment Subsidiaries will constitute the sale of substantially all of our assets that relate to our Cost Containment Business.

 

The Parties

 

MedAvant Healthcare Solutions

 

We are an information technology company that facilitates the exchange of medical claim and clinical information among doctors, hospitals, medical laboratories, and insurance payers. We also enable the electronic transmission of laboratory results. MedAvant is a trade name of ProxyMed, Inc. which was incorporated in 1989 in Florida. In December 2005, ProxyMed began doing business under the new operating name, MedAvant Healthcare Solutions, to unite all business units and employees under one brand identity. Adopting a new name was one of several results of a strategic analysis completed in the third quarter of 2005 following the acquisition of seven companies between 1997 and 2004. One of our core businesses is the Cost Containment Business.

 

Coalition America, Inc.

 

CAI is a Georgia corporation based in Atlanta, Georgia that specializes in healthcare cost-containment. CAI offers its clients direct provider contracts, PPO networks and provider negotiations.

 

CCB Acquisition, LLC

 

CCB is a Delaware limited liability company and wholly owned subsidiary of CAI formed for the purpose of effectuating CAI’s purchase of our Cost Containment Business.

 

Background of the Proposed Sale of the Cost Containment Business

 

We believe MedAvant is the nation’s fourth largest claims processor, among the top five independent PPOs and the largest company that facilitates delivery of laboratory results. Our PPO is called the National Preferred Provider Network and is accessed by more than 550,000 physicians, 4,000 acute care facilities and 90,000 ancillary care providers. NPPN is the core of our Cost Containment Business. We generate revenue primarily by charging participating payers a percentage of the savings they receive through the Cost Containment Business, including NPPN. Because we operate a PPO, we can offer payers discounts on claims when a patient uses an out-of-network provider and we can negotiate non-discounted claims for payers.

 

We have faced declining operating performance and revenues in each of our business units for the last several years. In response to declining operating performance and revenues, beginning in the second quarter of 2007, our board began to actively explore strategic alternatives for us. In May 2007, we engaged a financial advisor, Cain Brothers, with respect to, among other things, exploring and evaluating our strategic alternatives, including a sale our entire company or our business units. Cain Brothers contacted approximately forty-nine potential acquirers regarding their interest in our entire company or our business units. Through that process, we did not receive any interest in a business combination or acquisition of our entire company, but we did receive some indications of interest in the purchase of our Cost Containment Business on a stand alone basis as well as interest in our other business units. Cain Brothers and our outside legal counsel, Foley and Lardner, LLP (“Foley”), communicated regularly with our board of directors throughout the process.

In the process of soliciting potential buyers for our entire company or our business units, CAI and one other alternate buyer expressed serious interest in the purchase of our Cost Containment Business. On June 28, 2007, we received a proposal to purchase the Cost Containment Business from the alternate buyer and engaged in initial negotiations regarding a possible transaction. During the negotiations with the alternate buyer, on July 6, 2007, we received a letter of intent from CAI to acquire the Cost Containment Business. Throughout the month of July, CAI and the alternate buyer conducted due diligence. On July 24, 2007, the alternate buyer submitted a revised proposal to acquire the Cost Containment Business. On the same day, we notified CAI that we were pursuing a transaction with the alternate buyer. On August 3, 2007, the alternate buyer withdrew from the sales process due to the financial performance of our business. On August 17, 2007, we re-engaged in discussions with CAI regarding the sale of our Cost Containment Business. On August 21, 2007, our board met with Cain Brothers and Foley to discuss the status of the potential transaction with CAI or other potential transactions.

 

On August 24, 2007, our board instructed Cain Brothers to distribute bidding instructions to six interested parties for the acquisition of our Cost Containment Business. Meanwhile, we continued to engage in discussions with CAI and had a due diligence call to discuss the transaction on August 30, 2007. On September 7, 2007, the due date for the bids on our Cost Containment Business, CAI submitted a letter of intent to acquire our Cost Containment Business. None of the other interested parties that we invited to participate in the bidding process submitted a bid for our Cost Containment Business on the due date.

 

On September 14, 2007, our board met with Cain Brothers and Foley to evaluate and discuss the proposal from CAI on the terms and conditions set forth in CAI’s letter of intent. At the meeting, our board determined that the offer from CAI represented a viable option for our shareholders due to the fact that: (i) CAI offered cash immediately upon the closing of the proposed sale of the Cost Containment Business, which could be used to pay off certain liabilities, and (ii) the total value of the CAI offer was acceptable to us. Our board authorized the execution of the letter of intent with CAI on September 14, 2007, which we executed on September 18, 2007.

 

After we executed the letter of intent with CAI, CAI worked to complete a financial and business due diligence review of our Cost Containment Business; which included meetings with us on September 25 and 26, 2007 as well as a due diligence conference call on October 6, 2007.

 

On October 16, 2007, we finalized a purchase price of $23.5 million for the Cost Containment Business. CAI indicated that it had received a financing commitment from Merrill Lynch Capital that would provide sufficient funding for payment of the purchase price to us upon the closing of the proposed transaction.

 

On October 3, 2007, we received a draft agreement that covered the basic terms of the proposed transaction, including that the purchase price for the Cost Containment Business would be $23.5 million in cash, subject to a post-closing adjustment for working capital, and that $3 million of the purchase price would be held in an escrow account to satisfy indemnification claims that CAI might have relating to the purchase of our Cost Containment Business. On October 23, 2007, we met with CAI and its advisors to negotiate the terms of the Stock Purchase Agreement.

 

Throughout the following weeks, we and our advisors negotiated the terms of the Stock Purchase Agreement with CAI and its advisors. The terms of the Stock Purchase Agreement negotiated by the parties were consistent with prior discussions between our officers and CAI. However, the first draft of the Stock Purchase Agreement contained many provisions that were not addressed, or that were only addressed in general terms, in our prior discussions, such as provisions relating to our representations and warranties regarding the assets associated with the Cost Containment Business to be purchased, our indemnification of CAI against losses arising from the breach of such representations and warranties, the purchase price adjustment, the conditions to closing the sale of the Cost Containment Business, the restrictions on our ability to operate our business prior to the closing of the sale and each party’s right to terminate the Stock Purchase Agreement on or before the closing.

 

Cain Brothers and Foley met with our board on November 2, 2007 to discuss the various terms of the Stock Purchase Agreement. On November 4, we met with CAI and its advisors to discuss the transition of the Cost Containment Business.

 

On November 7, 2007, our board convened a meeting to review the Stock Purchase Agreement and the proposed sale of the Cost Containment Business in accordance with the terms and conditions set forth in the Stock

Purchase Agreement. All of our directors attended this meeting. In addition, members of our management team, together with representatives of Foley and Cain Brothers attended this meeting. At the meeting, representatives of Foley and Cain Brothers reviewed the terms of the Stock Purchase Agreement and other related matters. Our board discussed the terms of the proposed sale of the Cost Containment Business, after which our board determined that entry into the Stock Purchase Agreement and completion of the proposed sale of the Cost Containment Business were in the best interests of the Company and our shareholders. Our board then approved (i) the Stock Purchase Agreement, (ii) the related transaction agreements, and (iii) the proposed sale of our Cost Containment Business to CAI on the terms set forth in those agreements, and authorized management to execute the transaction agreements on our behalf.

 

On November 8, 2007, we executed the Stock Purchase Agreement with CAI and we publicly announced the transaction.

 

Past Contacts, Transactions or Negotiations

 

Other than as described in the “Background and Material Terms of the Proposed Sale of the Cost Containment Business,” we and CAI have had prior contacts and negotiations. In 2005, CAI had discussions with us about establishing a business relationship to access our NPPN provider network. These discussions eventually led to us entering a contract with CAI effective April 1, 2006 whereby CAI could access our NPPN provider network.

 

On August 29, 2005, CAI’s chief executive officer called our chief executive officer to discuss the merits of a business combination. The parties entered into a non-disclosure agreement on January 16, 2006. The chief executive officers of both parties met on March 29, 2006 and discussed the merits of a business combination.

 

From August 2, 2006 through October 25, 2006, representatives of the parties periodically met to discuss a possible business combination.

 

There were no further contacts with CAI until we retained Cain Brothers.

 

Reasons for the Proposed Sale of the Cost Containment Business

 

Our board determined that the proposed sale of the Cost Containment Business is in our best interests and the best interests of our shareholders after considering a number of factors, including the following factors that weigh in favor of the proposed sale of the Cost Containment Business:

 

 

 

In its review of the proposed sale of the Cost Containment Business, our board also considered a number of factors that weigh against the proposed asset sale, including:

 

 

The foregoing list comprises the material factors considered by our board in its consideration of the proposed sale of the Cost Containment Business. In view of the wide variety of factors considered, our board did not find it practicable to quantify or otherwise assign relative weight to the specific factors considered. However, after taking into account all of the factors set forth above, both positive and negative, our board determined that the proposed sale of the Cost Containment Business is in the best interests of the Company and our shareholders and that we should proceed with the proposed sale.

 

Effect of the Sale of the Cost Containment Business on MedAvant and Our Shareholders

 

If our shareholders approve the sale of the Cost Containment Business, then we will seek to complete the sale. Following the completion of the sale of the Cost Containment Business, $16.5 million of the proceeds from the sale will be used to pay down a portion of the amount owed to Laurus while the remaining $4.0 million will be used to pay transaction costs, outstanding accounts payable, and other debt of the Cost Containment Business. Three million dollars of the purchase price will be placed in escrow pursuant to the terms of an Escrow Agreement. The purchase price will also be subject to adjustment based upon net working capital levels at closing.

 

We remain in discussions with Laurus regarding the status of our Loan Agreement and October Amendment discussed below (see “Laurus Financing”). At the same time, we are refining plans for our remaining business units while working with Laurus to develop a modified line of credit based on the reduced debt resulting from the sale of our Cost Containment Business. We will also continue to review product offerings, staffing, and other efficiencies arising from the more focused and streamlined organization following the sale, all of which affect our liquidity.

 

Our ability to have sufficient cash and cash equivalents on hand or available to us to fund our operations and capital requirements through September 2008 is dependent on the successful closing of the sale of our Cost Containment Business, which reduces our existing debt levels, and to obtain a revised line of credit from Laurus or another party. There can be no assurance that this additional funding will be available to us, or if available, that it will be available on acceptable terms. If we are successful in obtaining additional financing, the terms of the financing may have the effect of significantly diluting or adversely affecting the holdings or the rights of the holders of our common stock. We believe that if we are not successful in obtaining additional financing and if we are unable to close the sale of our Cost Containment Business, we may not be able to continue operations. In addition, we would continue to be in default under the terms of our agreement with Laurus, our senior secured lender, who has reserved all rights with respect to such default and who may exercise such rights under such circumstances, including its right to foreclose on all of our assets.

 

Laurus Financing

 

On December 7, 2005, we and certain of our wholly-owned subsidiaries, entered into a security and purchase agreement (the “Loan Agreement”) with Laurus to provide up to $20.0 million in financing to us.

 

Under the terms of the Loan Agreement, Laurus extended financing to us in the form of a $5.0 million secured term loan (the “Term Loan”) and a $15.0 million secured revolving credit facility (the “Revolving Credit Facility”). The Term Loan has a stated term of five years and accrues interest at Prime plus 2%, subject to a minimum interest rate of 8%. The Term Loan is payable in equal monthly principal installments of approximately $89,300 plus interest until the maturity date on December 6, 2010. The Revolving Credit Facility has a stated term of three years and accrues interest at the 90 day LIBOR rate plus 5%, subject to a minimum interest rate of 7%, and a maturity date of December 6, 2008 with two one-year extension-options at the discretion of Laurus. Additionally, in connection with the Loan Agreement, we issued 500,000 shares of our common stock to Laurus that were valued at approximately $2.4 million at the time of issuance.

 

We granted Laurus a first priority security interest in substantially all of our present and future tangible and intangible assets (including all intellectual property) to secure our obligations under the Loan Agreement. The Loan Agreement contains various customary representations and warranties by us as well as customary affirmative and negative covenants, including, without limitation, liens on property, maintaining specific forms of accounting and record maintenance, and limiting the incurrence of additional debt. The Loan Agreement does not contain restrictive covenants regarding minimum earning requirements, historical earning levels, fixed charge coverage, or working capital requirements. Per the Loan Agreement, we are required to maintain a lock box arrangement where monies are automatically swept to repay the loan balance of the revolving credit facility.

 

The Loan Agreement also contains customary events of default, including, among others, non-payment of principal and interest, violation of covenants, and in the event we are involved in certain insolvency proceedings. Upon the occurrence of an event of default, Laurus is entitled to, among other things, accelerate all obligations. In the event Laurus accelerates the loans, the amount due will include all accrued interest plus 120% of the then outstanding principal amount of the loans being accelerated as well as all unpaid fees and expenses of Laurus. In addition, if the Revolving Credit Facility is terminated for any reason, whether because of a prepayment or acceleration, we must pay an additional premium of up to 5% of the total amount of the Revolving Credit Facility. In the event we elect to prepay the Term Loan, we must pay accrued interest plus 115% of the then outstanding principal amount of the Term Loan. Due to certain subjective acceleration clauses contained in the agreement and a lockbox arrangement, the revolving credit facility is classified as current in the accompanying unaudited consolidated balance sheet.

 

On June 21, 2007, we entered into an Amendment to the Loan Agreement (the “June Amendment”) with Laurus increasing the amount available under the Revolving Credit Facility by $3.0 million to $18.0 million. The June Amendment has a maturity date of June 30, 2008. During the term of the June Amendment, the revised amounts available under the Revolving Credit Facility decrease, as defined in the June Amendment, and the amount available under the revolving credit facility at June 30, 2008 will return to $15.0 million as committed under the original Loan Agreement. In connection with the June Amendment, we issued 572,727 shares of our common stock to Laurus that were valued at approximately $1.0 million. The costs of these shares were capitalized as debt issuance costs and will be amortized over the term of the June Amendment.

 

We revised our estimate of revenue allowances and the allowance for doubtful accounts for the period ended June 30, 2007. These changes in estimates negatively impacted our availability under the Revolving Credit Facility (which is based on an earnings formula as defined in the Loan Agreement) and resulted in an overadvance on available borrowings at June 30, 2007. Subsequent to June 30, 2007, we obtained a waiver from Laurus regarding this overadvance on our available borrowings until June 30, 2008.

 

On October 10, 2007, we entered into an Amendment to the Loan Agreement (the “October Amendment”) in which Laurus has agreed to fix the available revolving credit facility at $16.5 million through December 31, 2007 in the event that certain conditions are met on dates specified in the October Amendment. The October Amendment supersedes the June Amendment. In consideration for the October Amendment, the Company has agreed to pay

Laurus $1.25 million as follows: (i) $1.0 million on October 10, 2007 and (ii) $0.25 million on the earlier of (a) an event of default under the Loan Agreement and October Amendment, if any, or (b) December 31, 2007.

 

On November 1, 2007, Laurus notified us that an Event of Default had occurred by our failure to execute an asset purchase or stock purchase agreement for the disposition of certain assets by October 31, 2007 as required by the terms of the October Amendment. In addition, Laurus notified us that it was taking no immediate action with respect to this Event of Default, but would reserve all right and remedies available to Laurus under the Loan Agreement and October Amendment. As a result of this Event of Default, we have classified all amounts due to Laurus as current liabilities in the accompanying unaudited consolidated balance sheet at September 30, 2007.

 

Laurus has indicated to us that it will consent to the proposed sale of our Cost Containment Business pursuant to the terms of the Stock Purchase Agreement.

 

Opinion of Financial Advisor to the Board of Directors

 

Our board of directors retained Cain Brothers to act as our exclusive financial advisor in connection with potential strategic transactions. Cain Brothers was selected by our board of directors because of Cain Brothers’ reputation and expertise as an investment banking firm and its familiarity with our company. As part of its investment banking business, Cain Brothers is regularly engaged in the valuation of businesses and securities in connection with mergers and acquisitions and related transactions and valuations for corporate and other purposes in the healthcare services and medical technology markets.

 

In accordance with the terms of its engagement letter with us, Cain Brothers, at the board’s request and with the approval of Cain Brothers’ Valuation Committee, delivered an oral opinion (which opinion was subsequently confirmed in writing) to the board of directors at a meeting of the board on November 7, 2007. Cain Brothers, on the basis of its analyses and review and in reliance on the accuracy and completeness of the information furnished to it and subject to the limitations, qualifications and assumptions noted below and in the full text of its opinion, rendered its opinion to our board of directors that, as of November 7, 2007, the $23.5 million consideration to be received by us for the sale of the Cost Containment Business (the “Transaction Consideration”) is fair to us from a financial point of view.

 

Pursuant to Cain Brothers’ engagement letter, Cain Brothers was not retained for the purpose of making a recommendation, nor did it make a recommendation, as to the amount of the Transaction Consideration, which was determined in arm’s length negotiations between Buyer and us. We imposed no restrictions or limitations upon Cain Brothers with respect to the investigations made or the procedures followed by Cain Brothers in rendering its opinion.

 

The full text of Cain Brothers’ opinion, which sets forth, among other things, assumptions made, procedures followed, matters considered and limitations on the scope of the review undertaken by Cain Brothers in rendering its opinion, is attached as Appendix B to this Proxy Statement and is incorporated herein by reference in its entirety. You are urged to, and you should, read the Cain Brothers opinion carefully and in its entirety. The summary of the Cain Brothers opinion in this Proxy Statement is qualified in its entirety by reference to the full text of the Cain Brothers opinion.

 

Cain Brothers’ opinion was provided for the benefit and use of our board of directors in connection with its evaluation of the sale of the Cost Containment Business. Cain Brothers’ opinion addresses only the fairness to us, from a financial point of view, of the Transaction Consideration. Because Cain Brothers’ opinion addresses only the fairness of the Transaction Consideration, it did not express any views on any other terms of the sale of the Cost Containment Business, including without limitation any possible reduction in the total consideration received by us in the transaction based upon the adjustments provided for in the Stock Purchase Agreement or otherwise, and Cain Brothers did not express any opinion about the fairness of the amount or nature of any compensation to any officers, directors or employees of us or the Business, or class of such persons, relative to the compensation to us.

 

Cain Brothers’ opinion does not address the merits of our entering into the Stock Purchase Agreement as compared to any alternative business transaction or strategy that might have been available to us or our underlying business decision to effect the sale of the Cost Containment Business, nor does it address the tax consequences to us arising from the sale of the Cost Containment Business and it does not constitute a recommendation to any

shareholder as to how such shareholder should vote or act on any matter relating to the sale of the Cost Containment Business. The opinion does not address the value of our company or our viability as a going concern after the consummation of the sale of the Cost Containment Business. In addition, Cain Brothers did not opine as to the market value or the prices at which any of our securities may trade at any time in the future.

 

Cain Brothers’ opinion spoke only as of the date it was rendered, was based on the economic, market and other conditions as they existed and information with which it was supplied as of such date and was without regard to any market, economic, financial, legal, tax or other circumstances or event of any kind or nature which might exist or occur after such date. Unless otherwise noted, all of Cain Brothers’ analyses were performed based on information available as of November 6, 2007.

 

For purposes of its opinion, Cain Brothers, among other things:

 

 

Cain Brothers noted that events occurring after the date it rendered its opinion may affect that opinion and the assumptions used in preparing it, and that Cain Brothers did not assume any obligation to update, revise, reaffirm or withdraw its opinion or to otherwise comment upon events occurring after its date. We announced our results of operations for the quarter ended September 30, 2007 subsequent to the date Cain Brothers rendered its opinion. Those results differed from preliminary information utilized by Cain Brothers in its analyses. At our request, Cain Brothers reviewed our results as announced and has advised us that the differences between those results and the information utilized in its analyses did not change its opinion described below.

 

In connection with its review, Cain Brothers did not assume any responsibility for independent verification of any of the financial information, forecasts and other information provided to it by us or that was publicly available to it and its opinion is expressly conditioned on such information being complete and accurate. With respect to the financial information, financial forecasts and other information with respect to the Cost Containment Business, including any adjustments thereto, that Cain Brothers reviewed, Cain Brothers was advised, and assumed, that such forecasts and such other information were reasonably prepared on bases reflecting the best currently available estimates and good faith judgments of our management team as to the future competitive, operating and regulatory environments and related financial performance of the Cost Containment Business. Cain Brothers discussed such forecasts, and the assumptions on which they were based, with the Company’s and the Business’ senior management, but Cain Brothers assumed no responsibility for and expressed no view as to such forecasts or the assumptions on which they were based. Cain Brothers was not requested to make, and did not make, an independent evaluation or appraisal of assets or liabilities of the business (contingent or otherwise) or conduct a comprehensive physical inspection of any of the assets of the business, nor was Cain Brothers furnished with any such evaluations or

appraisals or reports of such physical inspections, nor has Cain Brothers assumed any responsibility to obtain any such evaluations, appraisals or reports. Cain Brothers relied on advice of our legal counsel as to all legal and tax matters with respect to us and the Transaction and did not make any independent assessment of such matters. The Cain Brothers opinion necessarily is based upon information available to Cain Brothers as of the date of the opinion and upon financial, economic, market and other conditions as they existed and could be evaluated on the date of the opinion. In addition, Cain Brothers assumed that the sale of the Cost Containment Business would be completed upon the terms set forth in the Stock Purchase Agreement without waiver or modification of any material terms.

 

In preparing its opinion to our board of directors, Cain Brothers performed a variety of financial and comparative analyses. The preparation of a fairness opinion is a complex process and is not necessarily susceptible to partial analysis or summary description. Cain Brothers believes that its analyses must be considered as a whole and that selecting portions of its analyses and of the factors considered by it, without considering all analyses and factors, could create a misleading or incomplete view of the processes underlying its opinion. No company or transaction used in the analyses performed by Cain Brothers as a comparison is identical to the Cost Containment Business or to the proposed sale of the Cost Containment Business. In addition, Cain Brothers may have given various analyses more or less weight than other analyses, and may have deemed various assumptions more or less probable than other assumptions, so that the range of valuation resulting from any particular analysis described below should not be taken to be Cain Brothers’ view of the actual value of the Cost Containment Business. In performing its analyses, Cain Brothers made numerous assumptions with respect to industry performance, general business and economic conditions and other matters, many of which are beyond our control. Any estimates contained in analyses performed by Cain Brothers are not necessarily indicative of actual values or actual future results, which may be significantly more or less favorable than those suggested by such analyses. In addition, analyses relating to the value of businesses or assets do not purport to be appraisals or to necessarily reflect the prices at which businesses or assets may actually be sold. The analyses performed were prepared solely as part of Cain Brothers’ analysis of the fairness as of the date of the opinion, from a financial point of view, of the Transaction Consideration and were provided for the use of our board of directors in connection with the delivery of Cain Brothers’ opinion.

 

The following is a brief summary of the material analyses performed by Cain Brothers in connection with the preparation of its opinion, and presented to our board of directors at its meeting held on November 7, 2007. Cain Brothers notes that, while it believes that it has performed such analyses as are necessary to provide a reasonable basis for its opinion, we have not prepared a long-term financial forecast for the Cost Containment Business, and Cain Brothers therefore was unable to perform the discounted cash flow analysis that would customarily constitute part of its procedures. References to revenue, EBITDA (as defined below) and Adjusted EBITDA (as defined below) of the Business refer to such items derived from the historical and projected financial results of the Cost Containment Business, as adjusted by our management to reflect corporate overhead allocations, which we refer to above and which were provided to Cain Brothers by management. Certain of the summaries of the financial analyses include information presented in tabular format. In order to understand fully the material financial analyses used by Cain Brothers, the tables should be read together with the text of each summary. The tables alone do not constitute a complete description of the material financial analyses.

 

Precedent Transactions Analysis

 

Using publicly available information for transactions completed since January 1, 1999, Cain Brothers’ analysis included a review of 41 transactions involving companies in the Preferred Provider Organization (“PPO”) and managed care industry (the “Precedent Transactions Analysis”). No transaction utilized as a comparison in the Precedent Transactions Analysis is identical to the proposed sale of the Cost Containment Business nor is any target company identical to the Cost Containment Business. Accordingly, consideration of the results cannot be limited to a quantitative review of the mathematical analysis, such as determining the mean or median, and involves complex considerations and judgments concerning differences in industry performance, general business, economic, market and financial conditions and other matters concerning the companies as well as the Cost Containment Business.

 

 

In conducting its analysis, Cain Brothers compared, among other things, the enterprise value of the Cost Containment Business implied by the Transaction Consideration expressed as a multiple of the Cost Containment Business’ last 12 months (“LTM”) ended September 30, 2007 revenue and earnings before interest, taxes, depreciation and amortization (also referred to as “EBITDA”) as well as adjusted EBITDA, revenue and earnings before interest, taxes, depreciation and amortization and non-certain recurring charges (“Adjusted EBITDA”). For

each of the precedent transactions, Cain Brothers calculated a multiple of LTM revenue and EBITDA to the enterprise value for each transaction for which information was available, as of the announced date of each transaction, and compared such multiples to the corresponding multiples implied by the proposed Transaction.

 

 

 

 

Based on this analysis, Cain Brothers compared the Cost Containment Business’s implied enterprise value multiples at the Transaction Consideration to the implied range of enterprise value multiples of the precedent transactions. Cain Brothers noted that the Cost Containment Business’s implied multiples at the Transaction Consideration, where meaningful, fall within the multiple ranges of the precedent transactions.

 

Comparable Company Analysis

 

To provide contextual data and comparative market information, Cain Brothers compared selected historical and projected operating and financial ratios of the Cost Containment Business to certain publicly traded companies with market capitalizations below $10 billion that participate predominantly, or in part, in the managed care services industry (the “Comparable Company Analysis”). These comparable companies consisted of:

 

 

In conducting its analysis, Cain Brothers compared, among other things, the enterprise value of the Cost Containment Business implied by the Transaction Consideration expressed as a multiple of the Cost Containment Business’ last 12 months (“LTM”) ended September 30, 2007, projected 2007 and projected 2008 revenue, EBITDA and Adjusted EBITDA Cain Brothers then compared these multiples to the respective low, mean, median and high enterprise value multiples of the comparable companies implied by the public trading value of their common stock based on the closing price on November 6, 2007. Cain Brothers reviewed the comparable companies’ financials as of November 6, 2007 to calculate specified financial and operating information (as adjusted for one time or unusual items that were publicly disclosed), market values and trading multiples (as described below). Estimated financial data for the comparable public companies were based on the most recent public filings and Wall Street consensus estimates. Wall Street estimates are based on numerous variables and assumptions which are inherently unpredictable and cannot be considered certain or accurate as projected. Accordingly, actual results of these analyses are subject to substantial uncertainty and could vary significantly from those set forth in such estimates. Cain Brothers assumes no responsibility for and expresses no view as to any of these estimates or the assumptions on which they were based.

Although Cain Brothers used these companies for comparative purposes, no company utilized in the Comparable Company Analysis is identical to the Cost Containment Business. Accordingly, consideration of the results of the Comparable Company Analysis cannot be limited to a quantitative review of the mathematical analysis, such as determining the average or median, and involves complex considerations and judgments concerning differences in industry performance, general business, economic, market and financial conditions and other matters concerning the companies as well as the Cost Containment Business.

 

 

 

 

Based on this analysis, Cain Brothers compared the Cost Containment Business’s implied enterprise value multiples at the Transaction Consideration to the implied range of enterprise value multiples of the comparable public companies. Cain Brothers noted that the Cost Containment Business’s implied multiples based on the Transaction Consideration, where meaningful, fall within or exceed the multiple ranges of the comparable public companies.

 

Summary of Analyses

 

Based on the analyses described above, Cain Brothers noted that, where meaningful, the Transaction Consideration was within or exceeded the implied valuation range resulting from the two analyses. In reaching its opinion with respect to the fairness of the Transaction Consideration to us from a financial point of view, Cain Brothers did not assign any particular weight to any one analysis or the results yielded by that analysis. Rather, having reviewed these results in the aggregate together with certain qualitative considerations including operational, financial and market-related challenges facing us and the Cost Containment Business, Cain Brothers exercised its professional judgment and determined that, based on the aggregate of the analyses used and the results they yielded, the Transaction Consideration was fair to us from a financial point of view as of the date of its opinion.

 

Pursuant to our engagement letter with Cain Brothers as currently in effect, we agreed to pay Cain Brothers retainer fees aggregating $0.25 million, an additional $0.25 million upon delivery of its fairness opinion to our board of directors and a transaction success fee, upon the successful closing of the proposed sale of the Cost Containment Business, of $1.0 million, against which the retainer and opinion fees will be credited to the extent previously paid.

 

In addition to any fees for professional services, we have agreed to reimburse Cain Brothers, upon request, for certain reasonable out-of-pocket expenses incurred in connection with Cain Brothers carrying out the terms of the engagement letter. We have also agreed to indemnify Cain Brothers against claims related to any of the services rendered pursuant to the engagement letter or matters which are the subject of, or arise out of, the engagement of Cain Brothers contemplated by the engagement letter, including liabilities under the federal securities laws.

 

The foregoing summary does not purport to be a complete description of the analyses performed by Cain Brothers or the terms of its engagement by us. The foregoing summary of the analyses performed by Cain

Brothers is qualified in its entirety by reference to the opinion of Cain Brothers attached as Appendix B to this Proxy Statement.

 

The Stock Purchase Agreement

 

The following is a description of the material terms of the Stock Purchase Agreement. The following description does not purport to describe all of the terms and conditions of the Stock Purchase Agreement. The full text of the Stock Purchase Agreement is attached to this proxy statement as Appendix A and is incorporated by reference. You are urged to read the Stock Purchase Agreement in its entirety because it is the legal document that governs the terms and conditions of the proposed sale of the Cost Containment Business.

 

Structure

 

The Company’s Cost Containment Business is operated by the Cost Containment Subsidiaries. The transaction is structured as the sale of all of the capital stock or equity interests of the Cost Containment Subsidiaries by the Company to CCB, a subsidiary of CAI. The Cost Containment Subsidiaries and their assets will be free of liens and encumbrances other than certain permitted encumbrances. The Cost Containment Subsidiaries will be transferred free of all liabilities except for accounts payable, accrued expenses, customer contracts and an office lease.

 

Effective Time

 

The closing of the transaction is anticipated to occur shortly after we obtain shareholder approval and satisfy all other conditions to Closing.

 

Purchase Price

 

Pursuant to the Stock Purchase Agreement, CAI has agreed to pay $23.5 million in cash for all the capital stock or equity interests of our Cost Containment Subsidiaries (the “Purchase Price”). Also, $3.0 million of the Purchase Price will be placed in escrow for one year from the closing (the “Closing”) to satisfy potential indemnification obligations owed by us to CAI. Of the net proceeds of $20.5 million, approximately $16.5 million will be used to pay down senior debt and approximately $4.0 million will be used to pay transaction costs, outstanding accounts payable, and other debt of the Cost Containment Business.

 

The Purchase Price is subject to an adjustment based on the final net working capital of the Cost Containment Subsidiaries at Closing. Final net working capital of the Cost Containment Subsidiaries will be calculated 150 days after the Closing. The Purchase Price may then be adjusted upwards or downward depending upon the final net working capital.

 

Excluded Assets and Retained Liabilities

 

Certain assets and liabilities related to the Cost Containment Business are excluded from the sale and include:

 

 

Conduct of Cost Containment Business Prior to the Sale of the Cost Containment Business

 

We have agreed to customary covenants that from the date of the Stock Purchase Agreement through the effective time of the Closing that require us to, among other things:

 

 

Employee Matters

 

On or before the Closing, employees of the Company who provide services for the Cost Containment Subsidiaries (each, a “Cost Containment Business Employee”) may be interviewed by and offered employment with CAI.

 

We are responsible for (i) the payment of all wages and remuneration due to the Cost Containment Business Employees with respect to their services as our employees through the close of business on the date of the Closing, (ii) the payment of any termination or severance payments with respect to termination of any Cost Containment Business Employee that occurs on or before the date of the Closing; (iii) the provision of any continuation coverage to Cost Containment Business Employees as required under COBRA; and (iv) the continuation of any accrued benefits of Cost Containment Business Employees pursuant to our retirement plans as of the date of the Closing and the payment of such benefits if and when any Cost Containment Business Employee becomes eligible under our retirement plans.

 

No employment offers have been made by CAI as of the date of this Proxy Statement.

 

Representations and Warranties

 

The Stock Purchase Agreement contains customary representations and warranties made by us to CAI and by CAI to us for purposes of allocating the risks associated with the sale of the Cost Containment Business. The assertions embodied in the representations and warranties made by us are qualified by information set forth in a confidential disclosure schedule that was delivered in connection with the execution of the Stock Purchase

Agreement. While we do not believe that the disclosure schedule contains information that securities laws require us to publicly disclose, other than information that is being disclosed in this Proxy Statement, the disclosure schedule may contain information that modifies, qualifies and creates exceptions to the representations and warranties set forth in the Stock Purchase Agreement. Accordingly, you should not rely on any of these representations and warranties as characterizations of the actual state of facts, since they may be modified in important respects by the underlying disclosure schedule. Moreover, information concerning the subject matter of the representations and warranties may have changed since the date of the Stock Purchase Agreement, which subsequent information may or may not be fully reflected in the disclosure schedule we delivered to CAI at signing and which may not be delivered by us until the Closing and the consummation of the sale of the Cost Containment Business.

 

The representations and warranties made by the parties must be accurate in all material respects as of the date of the Stock Purchase Agreement and as of the time of the Closing.

 

Closing Conditions

 

CAI’s Conditions.  CAI’s obligation to complete the proposed sale of the Cost Containment Business is subject to certain conditions, including among other things:

 

 

CAI has obtained a financing commitment from Merrill Lynch Capital, a division of Merrill Lynch Business Financial Services, Inc., to fund the purchase of our Cost Containment Business. The financing commitment is subject to the satisfactory completion by Merrill Lynch of its legal and business due diligence. The financing commitment expires January 31, 2008, but Merrill Lynch will consider extending the commitment date depending upon the condition of CAI, the Cost Containment Subsidiaries and general market conditions.

 

Our Conditions.  Our obligation to complete the proposed sale of the Cost Containment Business is subject to certain conditions, including, among other things:

 

 

No Solicitation of Competitive Proposals and Board Recommendation of Sale of the Cost Containment Business

 

Under the terms of the Stock Purchase Agreement, we have agreed to immediately cease any discussions with any third party other than CAI with respect to any sale of our Cost Containment Business. In addition, we have agreed not to directly or indirectly solicit, initiate or encourage discussions or take any other action that is intended to facilitate any inquiries or the making of (i) any offer for, or proposed transfer of all or a portion of the assets related to the Cost Containment Business, (ii) any offer for the acquisition of more than 15% or more of our outstanding capital stock whether through merger, consolidation, tender offer, exchange offer or otherwise, or (iii) any proposal or offer regarding any merger, consolidation, business combination, recapitalization, liquidation, dissolution or similar transaction involving us, by a person other than CAI, or participate in any discussions or negotiations regarding the foregoing, directly or indirectly or through our officers, directors, affiliates or representatives. However, we may enter into discussions with a third party other than CAI in respect of proposals or offers of the types described in clauses (ii) and (iii) above if such a proposal specifically authorizes and permits the sale of the Cost Containment Business pursuant to the Stock Purchase Agreement and, with respect to the type of proposals or offers described in clause (ii) above, the third party enters into an agreement to vote any and all shares acquired upon consummation of such a proposed transaction with us in favor of the sale of the Cost Containment Business.

 

Our board may withdraw, modify, or change its recommendation in favor of approval of the proposed sale of the Cost Containment Business, or approve or recommend an offer or proposal of a type described in clauses (ii)-(iii) above, at any time prior to when our shareholders duly approve the proposed sale of the Cost Containment Business under applicable law, if:

 

 

Under the terms of the Stock Purchase agreement, we have also agreed to promptly advise CAI of any offer for, or proposed transfer of, all or a portion of the assets relating to our Cost Containment Business, by a third party (whether or not such proposal meets the criteria described above), and the material terms and conditions of such offer or proposal.

 

Non-Competition and Non-Solicitation

 

Pursuant to the Stock Purchase Agreement, we have agreed that neither we nor any of our subsidiaries will, directly or indirectly, invest in, own, manage, operate, finance, control, advise, render services to, or guarantee the obligations of anyone engaged in the business of cost containment for a period of three years from the Closing. However, we may purchase or otherwise acquire up to 5% of the securities of an entity engaged in business activities substantially similar to the Cost Containment Business so long as the entity’s securities are registered under the Exchange Act or are traded on any national or regional securities exchange. In addition, for a period of three years from the Closing, we have agreed that neither we nor any of our subsidiaries will not, directly or indirectly; solicit the business of a customer of CAI related to the Cost Containment Business; cause, induce or attempt to cause or

induce anyone to cease doing business with CAI; or hire, retain or attempt to hire or retain any employee or independent contractor of CAI.

 

Termination

 

The Stock Purchase Agreement may be terminated at any time prior to the date of the Closing:

 

 

Any event, change or effect that has occurred which has a material adverse effect upon the condition (financial or otherwise), business, results of operations, or prospects of the Cost Containment Subsidiaries or the Cost Containment Business will be deemed a material adverse change that may trigger the ability of CAI to terminate the Stock Purchase Agreement. Events, changes or effects resulting from:

 

 

will not be considered a Material Adverse Change unless changes to the economy, the healthcare industry or GAAP accounting rules and procedures disproportionately affect the Cost Containment Subsidiaries or the Cost Containment Business. A material adverse change will be deemed to have occurred if the average monthly cash collections of the Cost Containment Subsidiaries decline by more than 20% from an agreed upon historical average.

 

Termination Fee

 

Under the terms of the Stock Purchase Agreement, we have agreed to pay CAI a termination fee of $940,000 plus fees and expenses incurred by CAI in connection with the proposed sale of the Cost Containment Business if CCB terminates the Stock Purchase Agreement because:

 

 

In addition, under the terms of the Stock Purchase Agreement, CAI has agreed to pay us a termination fee of $940,000 plus our fees and expenses incurred in connection with negotiation of the proposed sale of the Cost Containment Business with CAI if the Stock Purchase Agreement is terminated because CAI is unable to obtain financing and all other conditions to closing have been satisfied on or before January 31, 2008.

 

Other Expenses

 

We and CAI are each responsible for our respective costs and expenses that we or CAI incur in connection with the proposed sale of the Cost Containment Business. We and CAI have further agreed that we and CAI will each pay one-half of the fees and expenses of the escrow agent responsible for administering the escrow fund established in connection with our indemnification obligations under the Stock Purchase Agreement.

 

Indemnification

 

Under the Stock Purchase Agreement, we have agreed to indemnify CAI, its representatives and other related parties against any losses, liabilities, damages or expenses, including reasonable attorneys’ fees and expenses, which arise from or in connection with: (a) any breach of any representation and warranty or covenant or agreement by us contained in the Stock Purchase Agreement or in any certificate, writing or instrument delivered pursuant to the Stock Purchase Agreement; (b) any claim for damages against CAI or any Cost Containment Subsidiary arising in connection with ownership or operation of the assets transferred upon consummation of the sale of the Cost Containment Business, which is alleged to have occurred with respect to the Cost Containment Business prior to the Closing; and (c) any claim for damages against CAI or any Cost Containment Subsidiary arising from or in connection with any services provided by us in connection with our operation of the Cost Containment Business prior to the Closing; provided that our liability for such indemnification claims shall not exceed the amount of the escrow fund, and provided further that we shall not be required to indemnify CAI unless and until the total claims for indemnification of CAI under any of clauses (a), (b), or (c), in the aggregate, equal or exceed $175,000.

 

Pursuant to the Stock Purchase Agreement, CAI will pay a total of $3.0 million of the Purchase Price that will be set aside in an escrow fund to be managed by an escrow agent agreed upon by CAI and us. This escrow fund is intended to satisfy our potential indemnification obligations to CAI for claims (including claims by third parties) arising from or related to the sale of the Cost Containment Business.

 

We have also agreed to indemnify CAI, its representatives and other related parties for certain claims that may exceed the amount of the escrow fund, in which case the Company would be obligated for such amounts. These claims include, among others: (i) an agreement by us to pay brokerage or finder’s fees relating to the sale of the Cost Containment Business; (ii) any failure by us to comply with any fraudulent transfer law applicable to the sale of the Cost Containment Business; (iii) tax matters relating to taxes owing or payable that accrued prior to the Closing; (iv) any matter related to improper access to health insurance networks and provider contracts associated with our Cost Containment Business arising prior to the Closing; and (v) the post-closing adjustment of the Purchase Price, if any.

CAI has agreed to indemnify us for any losses, liability, damages or expenses, including reasonable attorneys’ fees and expenses, which arise from or in connection with: (a) any breach of any representation and warranty or any breach of any covenant or agreement by CAI contained in the Stock Purchase Agreement or in any certificate, writing or instrument delivered pursuant to the Stock Purchase Agreement; or (b) any claim by any person for brokerage or finder’s fees or similar payments based upon an alleged agreement or arrangement for payment of such fees in connection with the sale of the Cost Containment Business.

 

Material Federal Income Tax Consequences of the Proposed Sale

 

The following discussion summarizes the material United States federal income tax consequences to us of the proposed sale of the Cost Containment Business.

 

The following discussion is based on the Internal Revenue Code of 1986, as amended (the “Code”), applicable Treasury Regulations, judicial authority and administrative rulings and practice, all as of the date hereof. The Internal Revenue Service could adopt a position contrary to that presented in the following discussion. In addition, future legislative, judicial or administrative changes or interpretations could adversely affect the accuracy of the statements and conclusions set forth herein. Any such changes or interpretations could be applied retroactively and could affect the tax consequences of the proposed asset sale to us.

 

Federal Income Tax Consequences to Us of the Proposed Sale of the Cost Containment Business

 

As a result of the proposed sale of the Cost Containment Business, we will sell all of the capital stock or equity interests related to the Cost Containment Subsidiaries to CAI in exchange for $23.5 million in cash. The sale of the stock of the corporate Cost Containment Subsidiaries will be treated as a deemed asset sale in accordance with elections under Section 338(h)(10) of the Code and the sale of the equity interests of the limited liability company Cost Containment Subsidiaries, which are disregarded entities for tax purposes, will be treated as a direct sale of assets to CAI for income tax purposes. The aggregate deemed sales price of the assets related to the Cost Containment Business will be allocated among each asset in accordance with elections under Section 338(h)(10) of the Code and as set forth in schedules to the Stock Purchase Agreement.

 

We will realize gain (loss) measured by the difference between the proceeds received by us on such sale and our tax basis in the assets sold. We do not believe the proposed sale of the Cost Containment Business will result in substantial federal or state corporate income tax liability (including any alternative minimum tax liability) because we anticipate that any taxable gain with respect to the sale of the Cost Containment Business will be substantially offset for income tax purposes by our operating losses, including losses from prior years. However, tax authorities may disagree with our determination of our available operating losses or our operating losses could be less than anticipated, which may increase our income tax liability as a result of the proposed sale of the Cost Containment Business.

 

Accounting Treatment

 

We will record the sale of the Cost Containment Business in accordance with generally accepted principles in the United States. Upon completion of the disposition, we will recognize a gain (loss) for financial reporting purposes equal to the net proceeds (sum of purchase price less expenses of the sale) less the book value of the assets and liabilities sold.

 

No Regulatory Requirements for the Proposed Sale

 

We are not aware of any federal or state regulatory requirements that must be complied with or approvals that must be obtained to complete the sale of the Cost Containment Business, other than the filing of this proxy statement with the SEC. If any additional approvals or filings are required, we will use our commercially reasonable efforts to obtain those approvals and make any required filings before completing the transactions.

 

No Changes to the Rights of Shareholders

 

There will be no change in the rights of our shareholders as a result of the sale of the Cost Containment Business.

 

No Appraisal Rights in Connection with the Proposed Sale of the Cost Containment Business

 

Our shareholders do not have appraisal rights under the Florida Business Corporation Act in connection with the sale of the Cost Containment Business because our common stock is listed on the NASDAQ Global Market.

 

Voting By Our Directors and Executive Officers

 

As of November 26, 2007, our directors and executive officers owned of record 167,105 shares of our common stock and no shares of our Series C Preferred Stock, representing approximately 1.21% of the outstanding votes of all of our common stock and Series C Preferred Stock (on an as-converted basis). We believe that each of our directors and executive officers intends to vote at the Special Meeting in favor of all of the proposals that shareholders are being asked to approve.

 

Required Vote

 

The affirmative vote of holders of a majority of the shares of common stock and Series C Preferred Stock, on an as converted basis, voting together as a single class, is required in order to approve the sale of the Cost Containment Business. Because the affirmative vote of a majority of the votes entitled to be cast at the Special Meeting is required to approve the sale of the Cost Containment Business, abstentions, broker “non-votes” and shares not represented at the Special Meeting will have the same effect as a vote against the sale.

 

Recommendation of Our Board of Directors Regarding the Sale of the Cost Containment Business

 

For the reasons described above, our board has determined that the proposed sale of the Cost Containment Business pursuant to the Stock Purchase Agreement is in the best interests of the Company and our shareholders. Accordingly, our board has unanimously approved the proposed sale of the Cost Containment Business and recommends to our shareholders that they vote “FOR” approval of Proposal No. 1.

 

Our board of directors recommends that you vote “FOR” the approval of the proposed sale of the Cost Containment Business pursuant to the Stock Purchase Agreement by completing and returning the enclosed proxy or by completing and returning the voting instructions that you receive from the broker or other nominee that holds your shares.

 

PROPOSAL 2: ADJOURNMENT

 

Purpose

 

In the event there are not sufficient votes present, in person or by proxy, at the Special Meeting to approve the sale of the Cost Containment Business, our chief executive officer or other officer, acting in his capacity as chairperson of the meeting, may propose an adjournment of the Special Meeting to a later date or dates to permit further solicitation of proxies.

 

Required Shareholder Vote to Approve the Adjournment Proposal

 

Approval of the adjournment proposal will require that the number of votes cast in favor of the proposal exceed the number of votes cast against it. Assuming the presence of a quorum, abstentions, broker “non-votes” and shares not represented at the Special Meeting will have no effect on the adjournment proposal.

 

Recommendation of our Board of Directors

 

Our board of directors unanimously recommends that our shareholders vote “FOR” approval of Proposal No. 2 to adjourn the Special Meeting, if necessary to obtain the requisite number of proxies to approve Proposal No. 1.

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Overview

 

Management’s discussion and analysis of financial condition and results of operations (“MD&A”) is provided as a supplement to, and should be read in conjunction with our audited consolidated financial statements and the notes thereto, which are attached hereto as Appendix C, and to our unaudited consolidated financial statements and notes thereto, which are attached hereto as Appendix D.

 

MedAvant is an information technology company that facilitates the exchange of medical claim and clinical information among doctors, hospitals, medical laboratories, and insurance payers. MedAvant also enables the electronic transmission of laboratory results.

 

MedAvant is a trade name of ProxyMed, Inc. which was incorporated in 1989 in Florida. In December 2005, ProxyMed began doing business under the new operating name, MedAvant Healthcare Solutions, to unite all business units and employees under one brand identity. The new name was one of several results of a strategic analysis completed in the third quarter of 2005 following the acquisition of seven companies between 1997 and 2004.

 

Whether we are working with our 550,000 healthcare provider-customers, 200 clinical laboratories or 1,500 insurance payers, our goal is the same: provide the business intelligence necessary to expedite clinical and healthcare transactions. We make the transactions secure, faster, more accurate and more economical by using our processing platform known as Phoenix^SM. With this real-time processing system, we provide visibility into an insurance claim’s entire lifecycle, from the time the provider files it to the time the insurance payer reimburses the provider. That information provides data our customers use to improve their business efficiencies. The Phoenix^SM platform is currently used at less than 40% of capacity; therefore, we can easily scale with future growth.

 

Management believes MedAvant is the nation’s fourth largest claims processor and is among the top five independent PPOs and the largest company that facilitates delivery of laboratory results.

 

Operating Segments

 

We operate two separately managed reportable segments: Transaction Services and Laboratory Communications Solutions. A description of these segments, their primary services and our source of revenue, in each, is as follows:

 

Transaction Services

 

 

Laboratory Communications Solutions

 

 

 

Results of Operations

 

Three Months Ended September 30, 2007 Compared to Three Months Ended September 30, 2006

 

Net Revenues.  Consolidated net revenues decreased $4.0 million, or 24.7%, to $12.0 million for the three months ended September 30, 2007 compared to $16.0 million for the three months ended September 30, 2006.

 

Net revenues in our Transaction Services segment decreased by $2.3 million, or 17.7%, for the three months ended September 30, 2007 compared to the same period in 2006. This decrease resulted primarily from lost customer volumes due to pricing pressures and increased direct customer connectivity to payers ($1.3 million) and declining realization rates within our Cost Containment Business ($0.9 million). We do not expect revenues to reverse the declining trends which we have experienced during the year 2006, and through the third quarter ended September 30, 2007; yet we do expect that our revenue will not continue the rate of decline as mentioned above. Revenue declines are likely as a result of continued competitive pressures which may affect pricing.

 

Laboratory Communication Solutions segment net revenues decreased by $1.7 million, or 52.7%, for the three months ended September 30, 2007, compared to the same period last year. This decrease is due primarily to a decline in orders from one of our largest customers.

 

Cost of Sales.  Consolidated cost of sales decreased $0.8 million, or 17.7%, to $3.7 million, for the three months ended September 30, 2007 compared to $4.5 million for the same period last year.

 

The following table illustrates our cost of sales as a percentage of segment net revenues:

 

 

Cost of sales in our Transaction Services segment consists of EDI transaction fees, provider network access fees, services and license fees, third-party electronic transaction processing costs, certain telecommunication and co-location center costs, and revenue sharing arrangements with our business partners. Cost of sales decreased $0.1 million, or 2.5%, to $2.9 million, for the three months ended September 30, 2007, compared to $3.0 million for the same period last year. Cost of sales as a percentage of segment net revenues increased 4.3% compared to the same period last year. This increase was primarily due to the additional revenue allowances recorded as a result of the loss experience rate change. Gross margins on Transaction Services decreased 4.3% during the three months ended September 30, 2007 compared to the same period last year again due to the reduction in revenue as a result of the loss experience rate change. Our management continues to focus on improving the profitability of our product lines. This is evidenced by recent provider network acquisitions which have helped us avoid costly monthly network access fees.

 

Cost of sales in our Laboratory Communication Solutions segment includes hardware, third party software, consumable materials, direct manufacturing labor and indirect manufacturing overhead. Cost of sales decreased by $0.7 million to $0.8 million for the three months ended September 30, 2007, compared to the same period in 2006. Cost of sales as a percentage of segment revenue increased to 53% during the period, from 48% last year. This increase was a result of a decreased proportion of Pilot in our sales mix, which has higher margins, which in this segment decreased gross margins to 47% during the period, compared to 52% last year.

 

Selling, General and Administrative Expenses (“SG&A”).  SG&A decreased for the three months ended September 30, 2007, by $1.5 million, or 14.8%, to $8.7 million from $10.2 million compared to the three months ended September 30, 2006. SG&A expenses as a percentage of total net revenues increased to 72% for the three

months ended September 30, 2007, from 64% in the same period last year. The number of our employees decreased to 263 at September 30, 2007, from 337 at September 30, 2006.

 

Transaction Services segment SG&A expenses decreased $1.3 million, or 14%, to $8.3 million for the three months ending September 30, 2007, compared to $9.6 million for the same period last year. This decrease is primarily due to a reduction in our number of employees resulting in savings of $1.1 million and lower bonus expense of $0.6 million. During May 2007, we implemented reductions to our operating expenses, including headcount reductions. The impact of those reductions was realized in the third quarter as the one time charge of $0.2 million for severance was charged against earnings in the previous quarter.

 

Laboratory Communication Solutions segment SG&A expenses decreased to $0.4 million for the three months ended September 30, 2007, as compared to the same period of 2006 due to reduced headcount.

 

Impairment Charges.  As a result of our continuing revenue declines during the third quarter of 2007, we performed an interim goodwill impairment test as of September 30, 2007. In accordance with the provisions of SFAS No. 142, we used a discounted cash flow analysis which indicated that the book value of the Laboratory Communications segment exceeded its estimated fair value and that goodwill impairment had occurred. In addition, as a result of the goodwill analysis, we assessed whether there had been an impairment of our long-lived assets in accordance with SFAS No. 144. This impairment analysis indicated that the carrying value of certain finite-lived intangible assets was less than their expected undiscounted future cash flows. Therefore, we concluded that these intangible assets were not impaired as of September 30, 2007. Accordingly, we recorded a non-cash impairment charge of $2.1 million in our Laboratory Communications segment. For the three months ended September 30, 2007 we recorded no impairment charge in our Transaction Services segment.

 

Depreciation and Amortization.  Depreciation and amortization decreased by $0.7 million to $1.3 million for the three months ended September 30, 2007, from $2.0 million for the same period last year. This decrease is primarily the result of the impairment charges against certain intangible assets recorded in the first quarter of 2007.

 

Operating Loss.  As a result of the foregoing, the combined operating loss for the three months ended September 30, 2007, was $3.8 million compared to an operating loss of $0.8 million for the same period last year.

 

Interest Expense.  Net interest expense for the three months ended September 30, 2007, was $1.4 million compared to $0.8 million for the same period last year. This increase in expense was primarily due to higher effective interest charges on our Laurus debt facility and increased borrowings.

 

Net Loss.  As a result of the foregoing, net loss for the three months ended September 30, 2007 and 2006, was $5.2 million and $1.6 million, respectively.

 

Nine Months Ended September 30, 2007 Compared to Nine Months Ended September 30, 2006

 

 

Net Revenues.  Consolidated net revenues decreased $8.3 million, or 17%, to $41.3 million for the nine months ended September 30, 2007 compared to $49.6 million for the nine months ended September 30, 2006.

 

Net revenues in our Transaction Services segment decreased by $6.5 million, or 16%, for the nine months ended September 30, 2007 compared to the same period in 2006. This decrease resulted primarily from lost customer volumes due to pricing pressures, increased direct customer connectivity to payers, and discontinued products ($5.9 million). Also, affecting the decline in revenue was the additional revenue allowances recorded as a result of our declining realization rates of ($1.2 million). These decreases in revenue were partially offset by revenue generated by our acquisition of MRL ($0.6 million). We do not expect revenues to reverse the declining trends which we have experienced during the year 2006, and through the third quarter ended September 30, 2007; yet we do expect that our revenue will not continue the rate of decline as mentioned above. Revenue declines are likely as a result of continued competitive pressures which may affect pricing.

 

Laboratory Communication Solutions segment net revenues decreased by $1.8 million, or 21.6%, for the nine months ended September 30, 2007, compared to the same period last year. This decrease is primarily related to the

downturn in business in one of our largest customers. We do not expect revenues to reverse the declining trends which we have experienced thus far during the year 2007. Revenue declines are likely as a result of continued competitive pressures which may affect pricing, revenues and cash flows.

 

Cost of Sales.  Consolidated cost of sales decreased $2.8 million, or 19%, to $12.1 million, for the nine months ended September 30, 2007 compared to $14.9 million for the same period last year.

 

The following table illustrates our cost of sales as a percentage of segment net revenues:

 

 

Cost of sales in our Transaction Services segment consists of EDI transaction fees, provider network access fees, services and license fees, third-party electronic transaction processing costs, certain telecommunication and co- location center costs, and revenue sharing arrangements with our business partners. Cost of sales decreased $1.7 million, or 16%, to $8.9 million, for the nine months ended September 30, 2007, compared to $10.6 million for the same period last year. Cost of sales as a percentage of segment net revenues remained steady at 26% for both periods. Gross margins on Transaction Services remained steady at 74% for both periods.

 

Cost of sales in our Laboratory Communication Solutions segment includes hardware, third party software, consumable materials, direct manufacturing labor and indirect manufacturing overhead. Cost of sales decreased $1.1 million for the nine months ended September 30, 2007, compared to the same period in 2006. Cost of sales as a percentage of segment revenue decreased to 48% during the period, from 51% last year. This decrease was a result of an increased proportion of Pilot in our sales mix, which has higher margins, which in this segment improved gross margins to 52% during the period, compared to 49% last year.

 

Selling, General and Administrative Expenses (“SG&A”).  SG&A decreased for the nine months ended September 30, 2007, by $0.6 million, or 2%, to $31.3 million from $31.9 million for the nine months ended September 30, 2006. SG&A expenses as a percentage of total net revenues increased to 76% for the nine months ended September 30, 2007, from 64% in the same period last year. The number of our employees decreased to 263 at September 30, 2007, from 337 at September 30, 2006.

 

Transaction Services segment SG&A expenses decreased $0.3 million, or 1%, to $29.6 million for the nine months ending September 30, 2007, compared to $29.9 million for the same period last year. This decrease is primarily due to lower personnel costs of $1.4 million, lower bonus expense of $1.8 million, offset by higher temporary labor and consulting expense of $0.6 million and a one time charge of $1.7 million to the provision for doubtful accounts due to uncollectible amounts from certain customers. Additional offsetting costs were reduced capitalized labor for the period ending September 30, 2007 of $0.4 million due to the elimination or completion of software development projects, and increased software license fees of $0.2 million.

 

Laboratory Communication Solutions segment SG&A expenses decreased $0.3 million, or 16%, to $1.7 million for the nine months ended September 30, 2007, as compared to the same period of 2006 resulting from headcount reductions.

Impairment Charges.  As a result of our continuing revenue and stock price declines during the first quarter of 2007, we performed an interim goodwill impairment test as of March 31, 2007. In accordance with the provisions of SFAS No. 142, we used a discounted cash flow analysis which indicated that the book value of the Transaction Services segment exceeded its estimated fair value and that goodwill impairment had occurred. In addition, as a result of the goodwill analysis, e assessed whether there had been an impairment of our long-lived assets in accordance with SFAS No. 144. This impairment analysis indicated that the carrying value of certain finite-lived intangible assets was greater than their expected undiscounted future cash flows. Therefore, we concluded that these intangible assets were impaired and adjusted the carrying value of these assets to fair value. Accordingly, we recorded a non-cash impairment charge of $19.4 million for the three months ended March 31, 2007 in our Transaction Services Segment. This charge included a $12.5 million impairment of goodwill and a $6.9 million impairment of certain other intangibles. For the three months ended March 31, 2007, we recorded no impairment charge in our Laboratory Communications segment.

 

As a result of our continuing revenue declines during the third quarter of 2007, we also performed an interim goodwill impairment test as of September 30, 2007. In accordance with the provisions of SFAS No. 142, we used a discounted cash flow analysis which indicated that the book value of the Laboratory Communications segment exceeded its estimated fair value and that goodwill impairment had occurred. In addition, as a result of the goodwill analysis, we assessed whether there had been an impairment of our long-lived assets in accordance with SFAS No. 144. This impairment analysis indicated that the carrying value of certain finite-lived intangible assets was less than their expected undiscounted future cash flows. Therefore, we concluded that these intangible assets were not impaired as of September 30, 2007. Accordingly, we recorded a non-cash impairment charge of $2.1 million in our Laboratory Communications segment. For the three months ended September 30, 2007 we recorded no impairment charge in our Transaction Communications segment.

 

Depreciation and Amortization.  Depreciation and amortization decreased by $1.0 million to $4.6 million for the nine months ended September 30, 2007, from $5.6 million for the same period last year. This decrease is primarily the result of the impairment charges against certain intangible assets recorded in the first quarter of 2007.

 

Operating Loss.  As a result of the foregoing, the combined operating loss for the nine months ended September 30, 2007, was $28.2 million compared to an operating loss of $2.8 million for the same period last year.

 

Interest Expense.  Net interest expense for the nine months ended September 30, 2007, was $3.3 million compared to $2.2 million for the same period last year. This increase in expense was primarily due to higher effective interest charges on our Laurus debt facility and increased borrowings.

 

Net Loss.  As a result of the foregoing, net loss for the nine months ended September 30, 2007 and 2006, was $31.5 million and $5.0 million, respectively.

 

Year Ended December 31, 2006, Compared to Year Ended December 31, 2005

 

Net Revenues.  Consolidated net revenues for 2006 decreased $12.1 million, or 16%, to $65.5 million from consolidated net revenues of $77.6 million in 2005. Net revenues classified by our reportable segments are as follows:

 

 

Net revenues in our Transaction Services segment for 2006 decreased by $12.1 million, or 18%, as compared to 2005. Much of this decrease is due to reductions or eliminations of certain products that we determined were not profitable or are not part of our future strategy. These products accounted for $3.4 million of the decrease and include patient statements, Planserv and Payerserv and an outsourcing arrangement. We also lost $3.9 million of revenue from certain customers due to increased competition. Additionally, the remaining decrease in revenue is a result of lost customer volume due to pricing pressure, from greater competition and increased direct customers’

connectivity to payers, which was partially offset by additional net revenue of $200,000 due to our acquisitions of MRL.

 

In 2006, approximately 82% of our consolidated revenues came from our Transaction Services segment compared to 85% from this segment in 2005.

 

Laboratory Communication Solutions segment net revenues in 2006 were consistent with 2005. We experienced a drop in revenue from our largest customer, which was offset by an increase from our second-largest customer purchasing our Pilot product. Additionally, during 2006, we eliminated certain revenue streams with little to no margins and replaced it with a new service contract with our largest customer.

 

Cost of Sales.  Consolidated cost of sales decreased as a percentage of net revenues to 30% in 2006, from 35% in 2005. Cost of sales classified by our reportable segments are as follows:

 

 

Cost of sales in our Transaction Services segment consists of transaction fees, services and license fees, third-party electronic transaction processing costs, certain telecommunication and co-location center costs, revenue sharing arrangements with our business partners, third-party database licenses, and certain travel expenses. Cost of sales in this segment decreased by $6.9 million, or 33%, in 2006 as compared to 2005, directly associated with the revenue decreases for this segment. Additionally, during late 2005 and into 2006, we renegotiated many of our vendor and network contracts, thereby reducing our direct costs. This is reflected in our margins increasing from 69% in 2005 to 75% in 2006. This margin increase was also impacted by the $200,000 of new revenue and $200,000 of reduced direct costs from our acquisition of MRL. Additionally, we had a reduction of direct costs of approximately $700,000 due to our acquisition of Zeneks, Inc.

 

Cost of sales in our Laboratory Communication Solutions segment includes hardware, third party software, consumable materials, direct manufacturing labor, and indirect manufacturing overhead. Cost of sales for this segment decreased by $600,000, or 10%, as compared to 2005. Cost of sales as a percentage of revenues in this segment was 49% in 2006 as compared to 55% in 2005. This decrease in costs is related to the higher margins attributable to sales of Pilot, the elimination of low margin business and a new service contract with our largest customer.

 

Selling, General and Administrative Expenses.  Consolidated SG&A decreased $6.2 million in 2006 to $41.8 million, as compared to $48.0 million in 2005. Consolidated SG&A expenses as a percentage of consolidated revenues increased to 64% in 2006, from 62% in 2005. SG&A expenses classified by our reportable segments are as follows:

 

 

Transaction Services segment SG&A expenses for the year ended December 31, 2006 decreased $6.2 million, or 14%, to $39.1 million, compared to $45.3 million in 2005. This decrease is attributable to lower payroll expenses ($6.0 million), lower commissions ($0.5 million), lower rent ($0.5 million) and lower recruiting expenses ($0.4 million) as compared to 2005. This decrease is significantly driven by the drop in our employee count, from 401 at December 31, 2005, compared to 340 as of December 31, 2006. These reductions were partially offset by increased bonus expense ($1.7 million), and stock option expenses ($0.9 million) related to our adoption of SFAS No. 123R. The 2006 bonus was based upon the achievement of companywide goals.

Laboratory Communication Solutions segment SG&A expenses for 2006 remained consistent with 2005 and this segment’s SG&A expenses as a percentage of segment net revenues remained steady at approximately 23% in 2006 from 2005.

 

Depreciation and Amortization.  Consolidated depreciation and amortization expense decreased by $1.9 million to $7.4 million in 2006 from $9.3 million in 2005. Depreciation and amortization classified by our reportable segments are as follows:

 

 

The decrease in depreciation and amortization is primarily due to the impairment charge on certain of our long-lived intangible assets taken in 2005 (see below). As a result, our amortization expense declined by $2.0 million, partially offset by approximately $0.2 million of amortization pertaining to our acquisition of MRL in October 2006 and additions of capitalized software. Depreciation declined $0.1 million from 2005 to 2006.

 

Litigation settlement.  During 2007, pertaining to the 2006 fiscal year, we settled outstanding litigation related to our 2005 name change, for approximately $1.3 million, for which we have accrued $0.3 million, net of insurance reimbursement amount. Additionally, we settled a non-compete agreement suit for approximately $0.1 million. These amounts are recorded in our Transaction Services segment for the fiscal year 2006.

 

Write-off of impaired assets.  No impairment charges were incurred or recognized during 2006. As a result of our stock price decline during 2005, a decrease in our revenues and a restructuring plan we initiated during the third quarter of 2005, we performed an interim goodwill impairment test as of September 30, 2005. In accordance with the provisions of SFAS No. 142, we performed a discounted cash flow analysis which indicated that the book value of the Transaction Services segment exceeded its estimated fair value. The second step of this impairment test, led us to conclude that an impairment of our goodwill had occurred. In addition, as a result of our goodwill analysis, we also performed an impairment analysis of our long-lived assets in our Transaction Services segment. This impairment analysis indicated that the carrying value of certain finite-lived intangible assets was greater than their expected undiscounted future cash flows. As a result, we concluded that these intangible assets were impaired and adjusted the carrying value of such assets to fair value. In addition, we also reduced the remaining useful lives of these intangible assets based on the results of this analysis. Accordingly, we recorded a non-cash impairment charge of $95.7 million at September 30, 2005, in our Transaction Services segment. The charges included $68.1 million impairment of goodwill and $27.6 million impairment of certain other intangibles. No further impairment was noted as of our annual testing conducted at December 31, 2005.

 

In June 2005, we performed an impairment analysis of certain finite-lived intangible assets in our Laboratory Communication Solutions segment due to a substantial decrease in revenues from one of our customers. This impairment analysis indicated that the carrying value of certain finite-lived intangible assets was greater than their expected undiscounted future cash flows. As a result, we concluded that these intangible assets were impaired and adjusted the carrying value of such assets to fair value by approximately $0.7 million.

 

Operating Income (Loss).  As a result of the foregoing, the consolidated operating loss in 2006 was ($3.4 million) compared to an operating loss of ($103.2 million) in 2005. The 2005 operating loss would have been ($6.8 million) without the impairment noted above as compared to ($3.4 million) during 2006. This improvement is driven primarily by our cost cutting initiatives that began at the end of 2005. Operating losses classified by our reportable segments are as follows:

 

Interest Expense.  Consolidated net interest expense for 2006 was $3.2 million compared to $2.1 million for the same period last year. This increase in expense is primarily due to the accelerated amortization of prepaid financing costs on the Company’s line of credit facility ($1.0 million) that was refinanced in December 2005. Our borrowings under the line of credit increased in October 2006 with our acquisition of MRL. In order to complete the MRL acquisition we borrowed $3.0 million under our line of credit (“LOC”) and issued $2.0 million notes to the seller (7% interest, payable in 24 equal monthly installments).

 

Net Loss.  As a result of the foregoing, our consolidated net loss in 2006 was ($6.6 million) compared to our consolidated net loss of ($105.3 million) in 2005.

 

Year Ended December 31, 2005, Compared to Year Ended December 31, 2004

 

Net Revenues.  Consolidated net revenues in 2005 decreased by $12.7 million, or 14%, to $77.6 million from consolidated net revenues of $90.2 million in 2004. Net revenues classified by our reportable segments were as follows:

 

 

Net revenues in our Transaction Services segment for 2005 decreased by $5.3 million, or 7%, as compared to 2004. This decrease was primarily due to declines in volumes of electronic claims, statements and other real-time transactions processed (decrease $1.8 million). Core transactions were down 5% compared to the prior year. This negatively impacted our transaction services revenue from our claims processing business. This decrease was partially offset by increased revenue from our PPO business. Our PPO business was generating revenues for two additional months in 2005 compared to 2004 due to the timing of acquisition of PlanVista in March 2004. Although our PPO business total revenues were increasing, there was a drop in revenue per transaction as competitive pressures have impacted pricing.

 

In 2005, approximately 85% of our consolidated revenues came from our Transaction Services segment compared to 79% from this segment in 2004. This increase was attributable to the drop in revenue from our Laboratory Communication Solutions segment as a result of the sale of our manufacturing unit in June 2004.

 

Laboratory Communication Solutions segment net revenues for 2005 decreased by $7.5 million, or 39%, from 2004 primarily as a result of the sale of the contract manufacturing assets in June 2004. This sale resulted in a decrease of $4.7 million in this segments revenue in 2005 compared to 2004. Additionally, we experienced a drop in revenue from our largest customer of $2.8 million as a result of budgeting issues with the customer.

 

Cost of Sales.  Consolidated cost of sales decreased as a percentage of net revenues to 35% in 2005 from 38% in 2004. Cost of sales classified by our reportable segments are as follows:

 

 

Cost of sales in our Transaction Services segment consists of transaction fees, provider network outsourcing fees, services and license fees, third-party electronic transaction processing costs, certain telecommunication and co-location center costs, revenue sharing arrangements with our business partners, third-party database licenses and certain travel expenses. Cost of sales in this segment decreased by $1.9 million, or 8%, in 2005 compared to 2004 primarily due to the 7% decrease in revenue in this segment. This decrease in cost of goods sold in 2005 would have been approximately $1.8 million less if the additional two months costs from PlanVista resulting from the acquisition in March 2004 was considered. As a percentage of revenues, cost of sales in this segment remained steady at 31% in 2005 and 2004.

Cost of sales in our Laboratory Communication Solutions segment includes cost of hardware, third party software, consumable materials, direct manufacturing labor and indirect manufacturing overhead. Cost of sales for this segment decreased $5.5 million, or 47%, as compared to 2004. This decrease was primarily due to the sale of our contract manufacturing assets. Cost of sales as a percentage of revenues in this segment was 55% in 2005 compared to 62% in 2004.

 

Selling, General and Administrative Expenses.  Consolidated SG&A remained flat in 2005 at $48.0 million as compared to 2004. Consolidated SG&A expenses as a percentage of consolidated revenues increased to 62% in 2005 from 53% in 2004. SG&A expenses classified by our reportable segments are as follows:

 

 

Transaction Services segment SG&A expenses for the year ended December 31, 2005, increased by $1.7 million, or 4%, over 2004. The primary reason for this increase was the inclusion of two additional months of expenses resulting from the PlanVista acquisition in March 2004 of approximately $1.8 million. Additionally, the Company incurred $0.8 million for severance related to a reduction in work force in 2005, partially offset by lower payroll related costs for the remainder of 2005.

 

Laboratory Communication Solutions segment SG&A expenses for 2005 decreased by $1.7 million, or 39% from 2004. This segment’s SG&A expenses as a percentage of segment net revenues remained steady at 23% in 2005 from 2004.

 

Impairment charges.  As a result of our stock price decline in 2005, a decrease in our revenues and a restructuring plan we initiated during the third quarter of 2005, we performed an interim goodwill impairment test as of September 30, 2005. In accordance with the provisions of SFAS No. 142, we performed a discounted cash flow analysis which indicated that the book value of the Transaction Services segment exceeded its estimated fair value. The second step of this impairment test, as prescribed by SFAS No. 142, led us to conclude that an impairment of our goodwill had occurred. In addition, as a result of our goodwill analysis, we also performed an impairment analysis of our long-lived assets in our Transaction Services segment. This impairment analysis indicated that the carrying value of certain finite-lived intangible assets was greater than their expected undiscounted future cash flows. As a result, we concluded that these intangible assets were impaired and adjusted the carrying value of such assets to fair value. In addition, we also reduced the remaining useful lives of these intangible assets based on the results of this analysis. Accordingly, we recorded a non-cash impairment charge of $95.7 million at September 30, 2005, in our Transaction Services segment. The charges included $68.1 million impairment of goodwill and $27.6 million impairment of certain other intangibles. No further decline was noted as of our annual testing conducted at December 31, 2005.

 

In June 2005, we performed an impairment analysis of certain finite-lived intangible assets in our Laboratory Communication Solutions segment due to a substantial decrease in revenues from one of our customers. This impairment analysis indicated that the carrying value of certain finite-lived intangible assets was greater than their expected undiscounted future cash flows. As a result, we concluded that these intangible assets were impaired and adjusted the carrying value of such assets to fair value by approximately $0.7 million.

Depreciation and Amortization.  Consolidated depreciation and amortization expense decreased by $500,000 to $9.3 million in 2005 from $9.8 million in 2004. Depreciation and amortization classified by our reportable segments are as follows:

 

 

Litigation settlement.  In September 2005 and December 2004, we settled outstanding preacquisition contingencies related to PlanVista for a total of $200,000, net of insurance reimbursement. These amounts were recorded in our Transaction Services segment.

 

Operating Income (Loss).  As a result of the foregoing, the consolidated operating loss in 2005 was ($103.2 million) compared to an operating loss of ($2.0 million) in 2004. Operating losses classified by our reportable segments are as follows:

 

 

Interest Expense.  Consolidated net interest expense for 2005 was $2.1 million compared to $1.9 million for the same period last year. This increase in expense is primarily due to the accelerated amortization of prepaid financing costs on the Company’s line of credit facility ($100,000) that was refinanced in December 2005, coupled with higher effective interest charges on the new debt facility.

 

Net Loss.  As a result of the foregoing, our consolidated net loss in 2005 was ($105.3 million) compared to our consolidated net loss of ($3.8 million) in 2004.

 

Liquidity and Capital Resources

 

Over the last several years we have experienced declining revenues, recurring losses from operations and have limitations on our access to capital. Our working capital deficit was approximately $16.6 million and our accumulated deficit was approximately $247.5 million at September 30, 2007. We had availability under our revolving credit facility of approximately $4.5 million at December 31, 2006. We had availability under our revolving credit facility and related amendments (further discussed below) of approximately $2.0 million at September 30, 2007 and approximately $0.6 million at November 14, 2007.

 

We have experienced attrition in our workforce and not all vacated positions have been re-filled. The result is that we have further reduced our labor and payroll expenses but do not believe that this additional reduction in workforce size has had a material adverse effect on our service levels; we continue to find ways to operate more efficiently.

 

Simultaneous with our expense management efforts, we have been continually evaluating and pursuing strategic transactions, such as the sale of our pharmacy transaction business that occurred on April 30, 2007. In May 2007, we retained Cain Brothers to further help us identify strategic alternatives related to the Company and its businesses. Cain Brothers is an investment banking and financial advisory firm that focuses exclusively on the healthcare services and medical technology and the combined efforts of management and Cain Brothers culminated in the November 8, 2007 announcement that we had signed a definitive agreement to sell our Cost Containment Business to CAI which is described in Note 10 to the unaudited consolidated financial statements attached hereto as Appendix D.

On December 7, 2005, we and certain of our wholly-owned subsidiaries, entered into the Loan Agreement with Laurus to provide up to $20.0 million in financing to us. Under the terms of the Loan Agreement, Laurus extended financing to us in the form of a $5.0 million secured term loan and a $15.0 million secured revolving credit facility. The Term Loan has a stated term of five (5) years and will accrue interest at Prime plus 2%, subject to a minimum interest rate of 8%. The Term Loan is payable in equal monthly principal installments of approximately $89,300 plus interest until the maturity date on December 6, 2010. The Revolving Credit Facility has a stated term of three (3) years and will accrue interest at the 90 day LIBOR rate plus 5%, subject to a minimum interest rate of 7%, and a maturity date of December 6, 2008 with two (2) one-year extension-options at the discretion of Laurus. Additionally, in connection with the Loan Agreement, we issued 500,000 shares of our common stock to Laurus that were valued at approximately $2.4 million at the time of issuance.

 

We granted Laurus a first priority security interest in substantially all of our present and future tangible and intangible assets (including all intellectual property) to secure our obligations under the Loan Agreement. The Loan Agreement contains various customary representations and warranties of us as well as customary affirmative and negative covenants, including, without limitation, liens of property, maintaining specific forms of accounting and record maintenance, and limiting the incurrence of additional debt. The Loan Agreement does not contain restrictive covenants regarding minimum earning requirements, historical earning levels, fixed charge coverage, or working capital requirements. We can borrow up to three times the trailing 12-months of historical earnings, as defined in the Loan Agreement. Per the Loan Agreement, we are required to maintain a lock box arrangement wherein monies received by us are automatically swept to repay the loan balance on the revolving credit facility.