UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

SCHEDULE 14A

(Rule 14a-101)

 

INFORMATION REQUIRED IN PROXY STATEMENT

SCHEDULE 14A INFORMATION

 

PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES

EXCHANGE ACT OF 1934

 

Filed by the Registrant þ

 

Filed by a Party other than the Registrant o

 

Check the appropriate box:

 

þ  Preliminary Proxy Statement

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

o  Definitive Proxy Statement

o  Definitive Additional Materials

o  Soliciting Material Pursuant to §240.14a-12

 

ORION HEALTHCORP, INC.

(Name of Registrant as Specified In Its Charter)

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

 

Payment of Filing Fee (Check the appropriate box):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   , 2007

 

To Our Stockholders:

 

On behalf of the board of directors and management of Orion HealthCorp, Inc., I cordially invite you to attend a special meeting of the stockholders (the “Special Meeting”) to be held on          , 2007, at 8:00 a.m. local time, at 1805 Old Alabama Road, Roswell, Georgia 30076. The attached Notice of Special Meeting and Proxy Statement describe the formal business to be transacted at the Special Meeting.

 

At the Special Meeting stockholders will be asked to consider and approve a proposal to amend our certificate of incorporation to provide for a 1-for-2,500 reverse stock split of our Class A Common Stock, immediately followed by a 2,500-for-1 forward stock split of our Class A Common Stock.

 

If approved by our stockholders, the proposal is expected to result in termination of the registration of our Class A Common Stock under the federal securities laws and thereby eliminate the significant expense required to comply with the reporting and related requirements under those laws. The proposed transaction is expected to reduce the number of holders of record for our Class A Common Stock to fewer than 300 holders, thereby permitting us to file for termination of registration of our Class A Common Stock under the federal securities laws.

 

If approved at the Special Meeting, the transaction will affect the holders of our Class A Common Stock as follows:

 

 

Because we have a significant number of holders of our Class A Common Stock who own fewer than 2,500 shares, we expect that the number of holders of record of our Class A Common Stock will be reduced from approximately 311 to approximately 137, while the number of outstanding shares of our Class A Common Stock will decrease by only approximately 1.1%, a reduction of approximately 1,153,541 shares from the 105,504,032 shares outstanding as of September 18, 2007.

 

After careful consideration, a special committee of our board of directors (the “Special Committee”) has concluded that the costs associated with being a Securities and Exchange Commission (“SEC”) reporting company are not justified by the benefits of being a public company. We estimate that we will save approximately $900,000 annually in compliance costs, as well as a considerable savings of time and attention of management. We believe that the cost-savings will be in our best interest and those of our stockholders who continue to own shares after consummation of the transaction. Although our Class A Common Stock will no longer be listed on the American Stock Exchange (“AMEX”) if the transaction is completed, we believe that our shares would be quoted on the “pink sheets” and our remaining stockholders would be able to trade their shares in the over-the-counter markets. In addition, the transaction would allow holders of fewer than 2,500 shares of our Class A Common Stock immediately before consummation of the transaction the opportunity to receive cash for their shares at a premium to the closing price of our Class A Common Stock on the last trading day before the public announcement of the approval of the transaction by the Special Committee, without having to pay brokerage commissions and other transaction costs.

 

Our board of directors created the Special Committee, which is comprised entirely of independent members of the board of directors, to review the proposed transaction and consider its fairness to both holders of fewer than

2,500 shares of our Class A Common Stock, as well as its fairness to holders of 2,500 or more shares of our Class A Common Stock. The Special Committee received an opinion from its financial advisor indicating that the per share cash amount to be paid to the unaffiliated holders of fewer than 2,500 shares of Class A Common Stock is fair to such holders from a financial point of view.

 

ACCORDINGLY, AFTER CAREFUL DELIBERATION OF THE ISSUES IT DEEMED PERTINENT, INCLUDING ALTERNATIVES TO THE TRANSACTION, THE COSTS AND BENEFITS OF REMAINING AN SEC REPORTING COMPANY AND THE FAIRNESS OF THE TRANSACTION, THE SPECIAL COMMITTEE HAS CONCLUDED THAT THIS TRANSACTION IS IN OUR BEST INTEREST AND THE BEST INTEREST OF OUR STOCKHOLDERS AND UNANIMOUSLY RECOMMENDS THAT YOU VOTE “FOR” THE PROPOSAL. The enclosed proxy statement includes a discussion of the alternatives and factors considered by the Special Committee in connection with the Special Committee’s approval of the proposed transaction. For more information regarding these factors see the section of the attached proxy statement titled “Special Factors — Background of the Transaction — Board and Special Committee Deliberations” and “Special Factors — Recommendation of the Special Committee.”

 

Consummation of the transaction is subject to certain conditions, including the affirmative vote of at least a majority of the shares of our Class A Common Stock and Class D Common Stock entitled to vote at the Special Meeting, voting as a single class. It is anticipated that the proposed transaction will become effective promptly after the approval, on or about          , 2007, or as soon as reasonably practicable thereafter. Details of the proposed transaction are set forth in the accompanying proxy statement, which we urge you to read carefully in its entirety.

 

IT IS VERY IMPORTANT THAT YOUR SHARES ARE REPRESENTED AND VOTED AT THE SPECIAL MEETING, WHETHER OR NOT YOU PLAN TO ATTEND. ACCORDINGLY, PLEASE SIGN, DATE AND RETURN YOUR PROXY IN THE ENCLOSED ENVELOPE AT YOUR EARLIEST CONVENIENCE.

 

Your interest and participation in the our affairs are greatly appreciated. Thank you for your continued support.

 

Sincerely,

 

Terrence L. Bauer

President and Chief Executive Officer

 

ORION HEALTHCORP, INC.
1805 OLD ALABAMA ROAD, SUITE 350
ROSWELL, GEORGIA 30076
(678)832-1800

 

NOTICE OF SPECIAL MEETING OF STOCKHOLDERS

To Be Held On          , 2007

 

To the Stockholders of Orion HealthCorp, Inc.:

 

NOTICE IS HEREBY GIVEN that a special meeting of stockholders (the “Special Meeting”) of Orion HealthCorp, Inc. will be held on          ,  , 2007, at 8:00 a.m. local time, at 1805 Old Alabama Road, Roswell, Georgia 30076, or at any adjournments or postponements thereof. The proxy statement and a proxy card for the Special Meeting are enclosed.

 

The Special Meeting is for the purpose of considering and acting upon the following proposal, as more fully described in the attached proxy statement:

 

To amend our certificate of incorporation to effect a 1-for-2,500 reverse stock split of our Class A Common Stock followed immediately by a 2,500-for-1 forward stock split of our Class A Common Stock.

 

The proposed Fourth Amended and Restated Certificate of Incorporation of Orion HealthCorp, Inc. reflecting these changes is attached as Appendix A to this proxy statement.

 

Execution of a proxy in the form enclosed also permits the proxy holders to vote, in their discretion, upon such other matters that may properly come before the Special Meeting or any adjournment or postponement thereof. Any action may be taken on the foregoing proposal at the Special Meeting on the date specified above or on any date or dates to which, by original or later adjournment or postponement, the Special Meeting may be adjourned or postponed. Holders of record of shares of our Class A Common Stock and Class D Common Stock at the close of business on October 1, 2007, the record date, will be entitled to vote at the Special Meeting and any adjournments or postponements thereof. If your shares are held in the name of a broker, trust or other nominee (often referred to as held in “street name”), you must instruct them on how to vote your shares.

 

WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING, YOU ARE REQUESTED TO SIGN, DATE AND RETURN THE ENCLOSED PROXY CARD, WITHOUT DELAY, IN THE ENCLOSED POSTAGE-PAID ENVELOPE. A PROXY MAY BE REVOKED, WITHOUT AFFECTING ANY VOTE PREVIOUSLY TAKEN, BY (I) WRITTEN NOTICE MAILED TO OUR CORPORATE SECRETARY OR DELIVERED IN PERSON AT THE SPECIAL MEETING, (II) FILING A DULY EXECUTED, LATER DATED PROXY OR (III) ATTENDING THE SPECIAL MEETING AND VOTING IN PERSON. HOWEVER, IF YOU ARE A STOCKHOLDER WHOSE SHARES ARE NOT REGISTERED IN YOUR OWN NAME, YOU WILL NEED ADDITIONAL DOCUMENTATION FROM YOUR RECORD HOLDER TO VOTE IN PERSON AT THE SPECIAL MEETING. A SPECIAL COMMITTEE OF THE BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” THE PROPOSAL.

 

By Order of the Board of Directors

 

Stephen H. Murdock

Corporate Secretary

 

Roswell, Georgia

          , 2007

 

 

 

 

 

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THE TRANSACTIONS DESCRIBED IN THIS PROXY STATEMENT; PASSED UPON THE MERITS OR FAIRNESS OF THE TRANSACTION; OR PASSED UPON THE ADEQUACY OR ACCURACY OF THE DISCLOSURE IN THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

 

PROXY STATEMENT

OF

ORION HEALTHCORP, INC.

 

SPECIAL MEETING OF STOCKHOLDERS

TO BE HELD ON          , 2007

 

INTRODUCTION

 

Our board of directors (the “Board of Directors”) is soliciting your proxy in connection with a special meeting of stockholders (the “Special Meeting”), which will be held on          ,  , 2007, at 8:00 a.m. local time, at 1805 Old Alabama Road, Roswell, Georgia 30076, and at any adjournments or postponements thereof, for the purposes set forth in the accompanying Notice of Special Meeting of Stockholders. All stockholders are entitled and encouraged to attend the Special Meeting in person. This proxy statement and the accompanying Notice of Special Meeting of Stockholders are being first mailed to stockholders on or about October   , 2007.

 

All shares represented by properly executed proxies received by the Board of Directors pursuant to this solicitation will be voted in accordance with the stockholder’s directions specified on the proxy or, in the absence of specific instructions to the contrary, will be voted in accordance with the unanimous recommendation of the special committee (the “Special Committee”) of our Board of Directors “FOR” the proposal (the “Proposal”):

 

To amend our certificate of incorporation to effect a 1-for-2,500 reverse stock split of our Class A Common Stock, $0.001 par value (“Class A Common Stock”) followed immediately by a 2,500-for-1 forward stock split of our Class A Common Stock (the “Stock Splits”).

 

As a result of the Stock Splits, (a) each stockholder owning fewer than 2,500 shares of Class A Common Stock immediately before the Stock Splits will receive $0.23 in cash, without interest, for each of such stockholder’s shares of Class A Common Stock; and (b) each share of Class A Common Stock held by a stockholder owning 2,500 or more shares immediately before the Stock Splits will continue to represent one share of Class A Common Stock after completion of the Stock Splits.

 

If the Proposal is approved, as permitted by Delaware law, holders of our Class A Common Stock whose shares are converted into less than one whole share in the reverse split (meaning they held fewer than 2,500 shares at the effective time of the reverse split) will receive a cash payment from us in the amount of $0.23 per share, without interest, upon consummation of the Stock Splits (such payments, collectively with the Stock Splits are referred to as the “Transaction”). These holders will cease to be our stockholders upon consummation of the Transaction and will solely be entitled to receipt of the specified payment amount.

 

Holders of 2,500 or more shares of our Class A Common Stock on the date that the Transaction occurs will continue to be our stockholders following consummation of the Transaction and each share of Class A Common Stock that they own will continue to represent one share of Class A Common Stock upon consummation of the Transaction.

 

Holders of shares of our Class D Common Stock, $0.001 par value (the “Class D Common Stock”) on the date that the Transaction occurs will continue to be our stockholders following consummation of the Transaction, and their shareholdings of Class D Common Stock will remain unchanged.

 

After consummation of the Transaction, we anticipate that we will have approximately 139 holders of record, including 137 holders of Class A Common Stock and two holders of Class D Common Stock. In the event that there are fewer than 300 holders of record of our Class A Common Stock following the Transaction, we intend to file a

Form 15 with the Securities and Exchange Commission (“SEC”) to terminate registration of our Class A Common Stock under the federal securities laws. As a result, we would no longer be subject to the current and periodic reporting requirements under the federal securities laws that are applicable to SEC reporting companies, although we currently intend to continue to provide reports as to our financial condition and results of operation which we expect may be accessed by our stockholders at www.pinksheets.com. In addition, shares of our Class A Common Stock would cease to be listed on the AMEX and any trading in shares of our Class A Common Stock after such deregistration of our Class A Common Stock will only occur in the over-the-counter market or in privately negotiated sales. At such time, the trading price of shares of our Class A Common Stock will likely only be quoted in the “pink sheets.”

 

This Transaction cannot occur unless the holders of a majority or more of the issued and outstanding shares of our Class A Common Stock and Class D Common Stock, voting as a single class, approve the Proposal. If the Proposal is adopted by our stockholders, our officers will incorporate the terms of the proposed amendment into our certificate of incorporation and file an amended and restated certificate of incorporation with the Secretary of State of the State of Delaware in the form of the Fourth Amended and Restated Certificate of Incorporation (the “Proposed Certificate of Incorporation”), which is attached as Appendix A to this proxy statement.

 

A proxy may be revoked, without affecting any vote previously taken, by (i) written notice mailed to our Corporate Secretary or delivered in person at the Special Meeting, (ii) filing a duly executed, later dated proxy, or (iii) attending the Special Meeting and voting in person.

 

Only stockholders of record at the close of business on October 1, 2007, are entitled to notice of and to vote at the Special Meeting and any adjournment thereof. Each share of Class A Common Stock and of Class D Common Stock so held entitles the holder thereof to one vote upon each matter to be voted on. As of the record date, we had outstanding           shares of Class A Common Stock and           shares of Class D Common Stock. The presence of holders of a majority of the issued and outstanding shares of Class A Common Stock and Class D Common Stock, represented as a single class, entitled to vote at the Special Meeting, either in person or represented by a properly executed proxy, is necessary to constitute a quorum for the transaction of business at the Special Meeting.

 

This document provides you with detailed information about the proposed Transaction. Please see “Where You Can Find More Information” beginning on page 61 for additional information about us on file with the SEC.

 

This proxy statement and the accompanying proxy were first mailed to stockholders on or about          , 2007.

 

SUMMARY TERM SHEET

 

THIS SUMMARY TERM SHEET, TOGETHER WITH THE “QUESTIONS AND ANSWERS” SECTION THAT FOLLOWS, HIGHLIGHTS SELECTED INFORMATION FROM THE PROXY STATEMENT, INCLUDING THE MATERIAL TERMS OF THE PROPOSED TRANSACTION. FOR A MORE COMPLETE DESCRIPTION YOU SHOULD CAREFULLY READ THIS PROXY STATEMENT AND BOTH OF ITS APPENDICES BEFORE YOU VOTE. FOR YOUR CONVENIENCE, WE HAVE CROSS-REFERENCED TO THE LOCATION IN THIS PROXY STATEMENT WHERE YOU CAN FIND A MORE COMPLETE DISCUSSION OF EACH ITEM BELOW.

 

AS USED IN THIS PROXY STATEMENT, “ORION,” THE “COMPANY,” “WE,” “OUR,” “OURS” AND “US” REFER TO ORION HEALTHCORP, INC., A DELAWARE CORPORATION, AND THE “TRANSACTION” REFERS TO THE 1-FOR-2,500 REVERSE STOCK SPLIT OF CLASS A COMMON STOCK AND THE 2,500-FOR-1 FORWARD STOCK SPLIT OF CLASS A COMMON STOCK, TOGETHER WITH THE RELATED CASH PAYMENTS TO COMMON STOCKHOLDERS HOLDING FEWER THAN 2,500 SHARES AT THE EFFECTIVE TIME OF THE TRANSACTION.

 

THE TRANSACTION

 

If the Transaction is approved and completed:

 

shares of our Class A Common Stock and Class D Common Stock vote as a single class on all matters presented to the stockholders (including the Transaction), the Transaction will not affect control of us;

 

 

Please read “Special Factors — Certain Effects of the Transaction” beginning on page 35.

 

VOTE REQUIRED

 

 

Please read “The Special Meeting — Vote Required” beginning on page 15 and “Security Ownership of Certain Beneficial Owners” beginning on page 56.

 

NO APPRAISAL OR DISSENTERS’ RIGHTS

 

 

Please read “Special Factors — No Appraisal or Dissenters’ Rights, Escheat Laws” beginning on page 41.

PURPOSE OF AND REASONS FOR THE TRANSACTION

 

If approved, the Transaction will enable us to terminate our registration as an SEC reporting company and thus terminate our obligation to comply with certain of the requirements of being a public company. The reasons for the proposed Transaction and subsequent termination of SEC registration include:

 

 

Please read “Special Factors — Purpose of and Reasons for the Transaction” beginning on page 20.

 

FAIRNESS OF THE TRANSACTION

 

 

See “Special Factors — Recommendation of the Special Committee” beginning on page 24, and “Special Factors — Opinion of Adams Capital, Inc.” beginning on page 27.

 

FAIRNESS OF THE PROCESS

 

 

 

See “Special Factors — Recommendation of the Special Committee” beginning on page 24 and “Special Factors — Opinion of Adams Capital, Inc.” beginning on page 27.

 

BENEFITS OF THE TRANSACTION

 

Benefits of the Transaction to us are expected to include the following:

 

 

Benefits of the Transaction to our affiliates are expected to include the following:

 

 

Benefits of the Transaction to our unaffiliated stockholders are expected to include the following:

 

 

See “Special Factors — Benefits of the Transaction” beginning on page 21.

 

DISADVANTAGES OF THE TRANSACTION

 

Disadvantages of the Transaction to us are expected to include the following:

 

 

 

Disadvantages of the Transaction to our affiliates are expected to include the following:

 

 

Disadvantages of the Transaction to our unaffiliated stockholders are expected to include the following:

 

 

See “Special Factors-Disadvantages of the Transaction” beginning on page 22.

 

RECOMMENDATION OF THE SPECIAL COMMITTEE

 

At a meeting held on September 19, 2007, the Special Committee unanimously determined that the Transaction and the $0.23 cash consideration per share to be paid to stockholders who hold less than 2,500 shares of our Class A Common Stock before the Transaction (the “cash consideration”) are advisable, fair to and in our best interest and the best interest of our stockholders, including all our unaffiliated stockholders (both those receiving the cash consideration and those remaining as stockholders following the Transaction), and the Special Committee approved the Transaction. See “Special Factors — Recommendation of the Special Committee,” beginning on page 24.

 

The Special Committee considered a number of factors that it believed support its determination that the Transaction is substantively and procedurally fair to our unaffiliated stockholders, including each of the following factors:

 

 

See “Special Factors — Recommendation of the Special Committee” beginning on page 24.

ALTERNATIVES CONSIDERED

 

 

See “Special Factors — Alternatives Considered” beginning on page 23.

 

CONDITIONS TO COMPLETION OF THE TRANSACTION

 

 

See “Special Factors — Conditions to Completion of the Transaction” beginning on page 38.

 

RESERVATION OF RIGHTS

 

 

See “Special Factors — Reservation of Rights” beginning on page 41.

 

SOURCE OF FUNDS; FINANCING OF THE TRANSACTION

 

 

See “Special Factors — Source of Funds and Financing of the Transaction” beginning on page 38.

 

CONFLICTS OF INTEREST OF DIRECTORS AND EXECUTIVE OFFICERS

 

Our directors and executive officers may have interests in the Transaction that are different from your interests as a stockholder, and have relationships that may present conflicts of interest, including the following:

 

 

 

See “Special Factors — Interests of Our Directors and Executive Officers in the Transaction” beginning on page 26.

 

EXCHANGE OF CERTIFICATES

 

 

See “The Proposed Amendment — Exchange of Certificates” beginning on page 43.

 

U.S. FEDERAL INCOME TAX CONSEQUENCES

 

 

Please read “Special Factors — U.S. Federal Income Tax Consequences” beginning on page 39.

 

QUESTIONS AND ANSWERS

 

ABOUT THE MEETING AND VOTING PROCEDURES

 

 

 

 

 

ABOUT THE TRANSACTION

 

 

 

FORWARD LOOKING STATEMENTS

 

Certain statements in this proxy statement constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act,” and collectively, with the Securities Act, the “Acts”). Forward-looking statements include statements preceded by, followed by or that include the words “may”, “will”, “would”, “could”, “should”, “estimates”, “predicts”, “potential”, “continue”, “strategy”, “believes”, “anticipates”, “plans”, “expects”, “intends” and similar expressions. Any statements contained herein that are not statements of historical fact are deemed to be forward-looking statements.

 

The forward-looking statements in this proxy statement are based on current beliefs, estimates and assumptions concerning our operations, future results, and prospects. As actual operations and results may materially differ from those assumed in forward-looking statements, there is no assurance that forward-looking statements will prove to be accurate. Forward-looking statements are subject to the safe harbors created in the Acts. Any number of factors could affect our future operations and results, including, without limitation, changes in federal or state healthcare laws and regulations and third party payer requirements, changes in costs of supplies, the loss of major customers, labor and employee benefits, increases in interest rates on our indebtedness as well as general market conditions, competition and pricing, and our ability to successfully implement our business strategies, including the impact and expense of any potential acquisitions and our ability to integrate acquired operations and to obtain necessary approvals and financing. We undertake no obligation to update publicly any forward-looking statements, whether as a result of new information or future events.

 

MARKET FOR CLASS A COMMON STOCK AND RELATED STOCKHOLDER MATTERS

 

Our Class A Common Stock is listed on the AMEX under the symbol “ONH.” The following table sets forth the range of high and low closing prices as reported on the AMEX for the calendar periods set forth below. On          , 2007 (the most recent practicable date prior to the printing of this proxy statement), the closing price of the common stock was $0.      per share.

 

There were approximately 311 stockholders of record of our Class A Common Stock and two holders of record of our Class D Common Stock as of September 18, 2007.

 

 

 

 

DIVIDENDS

 

We have not paid dividends on shares of our common stock within the last three years, and do not expect to declare or pay any cash dividends on our common stock in the foreseeable future. Additionally, without the prior written consent of Wells Fargo Foothill, Inc. (“Wells Fargo”), the four year senior secured credit facility we have

with Wells Fargo consisting of a $2,000,000 revolving loan commitment, a $4,500,000 term loan and $10,000,000 acquisition facility commitment (the “Credit Agreement”) does not allow payment of a distribution in cash to the holders of our Class A Common Stock or of our Class D Common Stock at any time (a) while there are any amounts owed by us to Wells Fargo under the Credit Agreement or (b) there is any commitment by Wells Fargo to make any loans under the Credit Agreement.

 

Subject to the terms of any preferred stock or any other class of stock (or any series thereof) having any preference or priority over, or rights superior to, the Class A Common Stock and Class D Common Stock that we may issue in the future, all dividends and other distributions will be made to the holders of the shares of our Class A Common Stock and Class D Common Stock in the following order of priority:

 

 

STOCK PURCHASES BY ORION

 

We have not repurchased any shares of our Class A Common Stock or Class D Common Stock within the past two years. However, on December 1, 2006, we repurchased approximately 1,722,983 shares of our Class B Common Stock, $0.001 par value per share, from Brantley Capital Partners (“Brantley Capital”) for approximately $0.28 per share of our Class B Common Stock in connection with certain equity and debt issuances. If Brantley Capital had converted its shares of Class B Common Stock into shares of Class A Common Stock at the time of our purchase, they would have converted into 10,965,895 shares of Class A Common Stock, or approximately $0.04 per share of Class A Common Stock then purchased.

 

STOCK PURCHASES BY DIRECTORS, OFFICERS AND CERTAIN SIGNIFICANT STOCKHOLDERS

 

Except as described below, the directors, officers and affiliated holders of in excess of 5% of the Class A Common Stock have not purchased any shares of our common stock within the past two years.

 

On December 1, 2006, we completed a private placement consisting of our issuance of (i) $15,909,003 shares of our newly created Class D Common Stock to Phoenix for a purchase price of $3,000,000 (ii) 8,749,952 shares of Class D Common Stock to Brantley IV for a purchase price of $1,650,000 and (iii) senior unsecured subordinated promissory notes due 2011 in the original principal amount of $3,350,000, bearing interest at an aggregate rate of 14% per annum, together with warrants to purchase 1,421,629 shares of our Class A Common Stock, to Phoenix for an aggregate purchase price of $3,350,000. The warrants are exercisable for five years from the date of issuance of the warrants at $0.01 per share.

 

Phoenix is a limited partner in Brantley IV and Brantley Partners V, L.P. and has also co-invested with Brantley IV and its affiliates in a number of transactions. Prior to the closing of the private placement, Phoenix did not own, of record, any shares of our capital stock.

Also on December 1, 2006 in connection with the consummation of the private placement, the following actions were taken:

 

 

THE SPECIAL MEETING

 

GENERAL

 

We are providing this proxy statement to our stockholders of record as of October 1, 2007, along with a form of proxy that our Board of Directors is soliciting for use at the Special Meeting to be held on          , 2007 at 8:00 a.m., at 1805 Old Alabama Road, Roswell, Georgia 30076. At the Special Meeting, our stockholders will vote upon a proposal to adopt the Fourth Amended and Restated Certificate of Incorporation of Orion HealthCorp, Inc. that will effect a 1-for-2,500 reverse stock split of our Class A Common Stock followed immediately by a 2,500-for-1 forward stock split of our Class A Common Stock.

 

WHO CAN VOTE AT AND ATTEND THE SPECIAL MEETING

 

You may vote all of the Class A Common Stock and Class D Common Stock that you own as of the close of business on the record date, which is October 1, 2007. These shares include:

 

 

Many of our stockholders hold their shares through a broker, bank or other nominee rather than directly in their own name. As summarized below, there are some distinctions between shares held of record and those owned beneficially.

 

Stockholder of Record.  If your shares are registered directly in your name with the Transfer Agent, you are considered the stockholder of record, with respect to those shares, and these proxy materials are being sent to you by us. As the stockholder of record, you have the right to vote by proxy or to vote in person at the Special Meeting. We have enclosed a proxy card for you to use.

 

Beneficial Owner.  If your shares are held in a stock brokerage account or by a bank or other nominee, you are considered the “beneficial owner” of shares held in “street name” and the proxy materials are being forwarded to you by your broker or other nominee. Your broker or other nominee is considered the stockholder of record with respect to those shares. As the beneficial owner, you have the right to direct your broker or other nominee how to vote those shares and are also invited to attend the Special Meeting. As a beneficial owner, however, you are not the stockholder of record, and you may not vote those shares in person at the Special Meeting unless you obtain a signed proxy appointment form from the stockholder of record giving you the right to vote the shares. Your broker or

nominee has enclosed or provided a voting instruction card for you to use in directing the broker or nominee how to vote your shares.

 

All holders of our Class A Common Stock and Class D Common Stock may attend the Special Meeting in person. If you are a beneficial owner of our Class A Common Stock held by a broker, bank or other nominee (i.e., in “street name”), you will need proof of ownership to be admitted to the Special Meeting. A recent brokerage statement or letter from a bank or broker are examples of proof of ownership. Only holders of record of our Class A Common Stock and Class D Common Stock as of October 1, 2007 may cast their votes in person at the Special Meeting.

 

Whether you hold your shares directly as stockholder of record or beneficially in street name, you may direct your vote without attending the Special Meeting. You may vote by signing your proxy card or, for shares held in street name, by signing the voting instruction card included by your broker or nominee and mailing it in the enclosed, pre-addressed envelope. If you provide specific voting instructions, your shares will be voted as you instruct. If you sign but do not provide instructions, your shares will be voted as described above in “Questions and Answers — About the Meeting and Voting Procedures” beginning on page 9.

 

VOTE REQUIRED

 

The required vote for the Proposal presented at the Special Meeting is the affirmative approval of holders of a majority of the outstanding shares of our Class A Common Stock and Class D Common Stock, voting as a single class.

 

The Proposal to approve the Transaction is a “non-discretionary” item, meaning that brokerage firms cannot vote shares in their discretion on behalf of a client if the client has not given voting instructions. Accordingly, shares held in “street name” that have been designated by brokers on proxy cards as not voted with respect to that proposal (known as “broker non-vote shares”) will not be counted as votes cast at the Special Meeting.

 

VOTING AND REVOCATION OF PROXIES

 

The shares of Class A Common Stock and Class D Common Stock represented by properly completed proxies received at or before the time for the Special Meeting (or any adjournment) will be voted as directed by the respective stockholders unless the proxies are revoked as described below. If no instructions are given, executed proxies will be voted “FOR” the Proposal.

 

You may revoke your proxy at any time before the vote is taken at the Special Meeting. To revoke your proxy, you must (i) notify our Corporate Secretary in writing at our principal executive office; (ii) submit a later dated proxy to our Corporate Secretary; or (iii) attend the Special Meeting and vote your shares in person. Your attendance at the Special Meeting will not automatically revoke your proxy. If you hold your shares in “street name”, please see the voting form provided by your broker for additional information regarding the voting of your shares. Your broker may allow you to deliver your voting instructions via the telephone or the internet. If your shares are not registered in your name, you will need additional documentation from your record holder to vote the shares in person.

 

RECOMMENDATION OF THE SPECIAL COMMITTEE

 

After careful consideration, the Special Committee has concluded that the costs associated with being an SEC reporting company are not justified by the benefits of being a public company. We estimate that we will save approximately $900,000 annually in compliance costs for being a public company. We believe that these cost-savings will be in our best interest and the best interest of our stockholders who remain after consummation of the Transaction. Although our Class A Common Stock will no longer be listed on the AMEX if the Transaction is completed, we believe that our shares would be quoted on the “pink sheets” and our remaining stockholders would be able to trade their shares in the over-the-counter markets. In addition, the Stock Splits would allow holders of fewer than 2,500 shares of our Class A Common Stock immediately before consummation of the transaction the opportunity to receive cash for their shares at a premium to the closing price of our Class A Common Stock on the last trading day before the public announcement of the approval of the Transaction by the Special Committee, without having to pay brokerage commissions and other transaction costs.

The Board of Directors created the Special Committee, which is comprised entirely of independent members of the Board of Directors, to review the proposed transaction and consider its fairness to holders of fewer than 2,500 shares of our Class A Common Stock, as well as its fairness to holders of 2,500 or more shares of our Class A Common Stock. The Special Committee received an opinion from its financial advisor indicating that the per share cash amount to be paid to the unaffiliated holders of fewer than 2,500 shares of Class A Common Stock is fair from a financial point of view.

 

ACCORDINGLY, AFTER CAREFUL DELIBERATION OF THE ISSUES IT DEEMED PERTINENT, INCLUDING ALTERNATIVES TO THE TRANSACTION, THE COSTS AND BENEFITS OF REMAINING AN SEC REPORTING COMPANY AND THE FAIRNESS OF THE TRANSACTION, THE SPECIAL COMMITTEE BELIEVES THAT THIS TRANSACTION IS IN OUR BEST INTEREST AND THE BEST INTEREST OF OUR STOCKHOLDERS AND UNANIMOUSLY RECOMMENDS THAT YOU VOTE “FOR” THE PROPOSAL. For more information regarding the alternatives and factors considered by the Special Committee in connection with the Special Committee’s approval of the proposed transaction, see the section titled “Special Factors — Background of the Transaction — Board and Special Committee Deliberations” beginning on page 16, “Special Factors — Alternatives Considered” beginning on page 23 and “Special Factors — Recommendation of the Special Committee” beginning on page 24.

 

SPECIAL FACTORS

 

BACKGROUND OF THE TRANSACTION — BOARD AND SPECIAL COMMITTEE DELIBERATIONS

 

In June of 2007, our management began to investigate the relative benefits and costs of being a reporting company under the Exchange Act. Management had discussions with outside counsel and with outside auditors regarding the process of “going private”. Preliminary analysis regarding the various costs related to being a reporting company were gathered or estimated and some preliminary information regarding possible “going private” transactions was obtained and reviewed by our management.

 

At a meeting of the Board of Directors held on June 29, 2007, with all directors present, Mr. Bauer led preliminary discussion regarding our cost of being a reporting company. The Board of Directors discussed generally the advantages and disadvantages of undertaking a transaction that would relieve us of our obligations under the Exchange Act and related federal securities regulation. Discussion of certain of the structures of relevant transactions followed, including a possible cash tender (with or without a “Dutch auction” feature), and a reverse stock split. After extended discussion regarding the potential process, the Board of Directors instructed management to continue investigating these and other alternatives, as they deemed appropriate, and to report back to the Board of Directors.

 

The next Board meeting was held on July 24, 2007, with all directors present. Management reported to the Board regarding the information obtained and analysis made by management, as requested by the Board of Directors. Management presented its further analysis regarding the estimated costs of remaining a reporting company, the benefits to us and to our stockholders of being a reporting company, the impact to us of being public in connection with potential acquisitions, and other related aspects of being a public company. With the assistance of outside counsel, management discussed, in greater detail, various structures and mechanisms to accomplish a “going private” process, including a possible third-party tender for shares, a possible self-tender and a possible reverse stock split. Some of the benefits and detriments of each technique were reviewed with the Board of Directors. In light of the need in connection with any of those transactions to obtain the consent of both lenders, Management reviewed its preliminary discussions with the our principal lender and with one of our debt holders regarding any such potential transaction. Numerous questions were raised and discussed, including potential “road blocks” to any such transaction, and other aspects of the relevant techniques being considered. There followed some discussion regarding potential sources of funds to complete any such transaction, including preliminary estimates of the cost of increasing the existing credit facility for these purposes. After additional discussion and questions, the Board of Directors authorized management to continue to investigate the advisability of a “going private” transaction, including, among other issues, the need and expense of engaging a financial advisor to counsel the Board of Directors and to potentially render a fairness opinion.

Immediately prior to the next meeting of the Audit Committee of the Board of Directors, held on August 7, 2007, Mr. Bauer discussed with David Crane and Joseph M. Valley, the members of our Audit Committee and two independent Directors, the possibility of serving on a special committee of the Board of Directors which would be authorized to act on behalf of the Board of Directors in connection with all aspects of a potential “going private” transaction, including the ability to determine not to proceed with such a transaction. Mr. Bauer expressed management’s belief that the process would be more even-handed if the determining body contemplating this issue was a special committee comprised solely of independent directors. Each of the independent directors agreed to consider such an appointment and it was agreed that this topic would be discussed at the next meeting of the Board of Directors.

 

The next Board of Directors meeting was held on August 24, 2007, with all directors present. The Board of Directors considered the possibility of undertaking a transaction that would result in it no longer being a reporting company under the Exchange Act. Management reviewed for the Board of Directors the additional investigation it had conducted regarding this matter since the last Board of Directors meeting. After discussion, the Board of Directors determined that considering the advisability of such a transaction was prudent and in our best interest and the best interest of our stockholders and that such consideration should be undertaken by a special committee of the Board of Directors (the “Special Committee”), which committee would be comprised of Messrs. Crane and Valley. The Board formed the Special Committee and empowered it to (i) consider whether taking steps to cause us to no longer be required to report under the Exchange Act is in our best interest and the best interest of our stockholders, (ii) consider and approve what means should be undertaken to cause us to no longer be required to report under the Exchange Act, if deemed appropriate as a result of the review undertaken, (iii) consider and approve any financing related to the transaction that may involve any related party, (iv) select and approve a firm to issue a fairness opinion with respect to any transaction deemed prudent to undertake as a result of the review referred to above, and (v) engage professional advisors as needed, as determined in the discretion of the Special Committee in connection with the foregoing.

 

Following the Board of Directors meeting, a meeting of the Special Committee was held on August 24, 2007, with both members present. The first matter to come before the meeting was a report by management of the benefits and burdens of being a public company required to report under the Exchange Act and to comply with the other federal securities laws. Management indicated that, from its point of view, the benefits to us were, at this time, more theoretical than real. The use of equity (i) as currency in pursuing acquisitions, (ii) as meaningful incentives to employees, or (iii) as a means of raising capital in the public market has proven not to be of great benefit due to the consistently low share price and thin trading volume of our Class A Common Stock. Management indicated, however, that it considered the burdens, both financial and otherwise, substantial and determined that they outweighed any current or foreseeable benefits to us. Those burdens included the substantial cost of being public. The estimated costs and anticipated savings were presented and appear below. See “Special Factors — Benefits of the Transaction” beginning on page 21. In addition, being required to report under the Exchange Act and compliance with the other federal securities laws requires substantial time and attention from management that management viewed as distractive and dilutive of time that would be better spent focusing on executing our business plan, improving operating performance and seeking out accretive acquisition opportunities.

 

Management reported to the Special Committee and led discussion regarding the work and analysis that had been done by management, at the direction of the Board of Directors, in assessing alternative structures for effecting the potential transaction. Those alternatives included a self-tender (whether utilizing a “Dutch auction” approach or not), a third party tender offer, a reverse stock split (with or without a forward split, whether equal or not) and the possibility of maintaining the status quo and allowing the market to accomplish a reduction in the number of stockholders. For the reasons discussed during the meeting and set forth below, management recommended a reverse stock split, followed by an equal forward stock split, of our Class A Common Stock.

Management then discussed with the Special Committee the anticipated out-of-pocket costs of effecting a reverse stock split and described to the Special Committee the possible means of financing that cost. The anticipated costs were estimated as:

 

 

Management then reviewed with the Special Committee possible means of financing a proposed transaction. One such possible means of financing presented was the issuance of additional subordinated debt carrying the same terms as our senior subordinated notes, which were issued in December 2006 to Phoenix. The investors in such debt issuance would be Phoenix, Brantley IV, (both significant stockholders of ours) and Mr. Bauer. The proposed amount to be raised would be $1,000,000, including funds for working capital needs, of which Phoenix would invest $700,000, Brantley IV would invest $250,000 and Mr. Bauer would invest $50,000. Inasmuch as this proposed financing would involve Brantley IV and Mr. Bauer, the Special Committee was empowered by the Board of Directors to consider this financing and approve or disapprove of the Transaction on our behalf.

 

The Special Committee discussed obtaining a fairness opinion as to the price to be paid for fractional shares resulting from the reverse stock split, if approved. Management reported that it had interviewed and requested terms of engagement from two potential financial advisory firms, and had discussions with two other firms. A discussion followed regarding the qualifications of each valuation firm as well as the cost to us of engaging each of the two firms which had presented terms. Based on several factors, including but not limited to the experience of Adams Capital, Inc. (“Adams Capital”), a business valuation firm that had advised management it had been involved in over 2,000 public and private transactions, representing over $50 billion in assets, management recommended to the Special Committee the selection of Adams Capital.

 

At this point, representatives of Adams Capital were invited into the meeting. They presented their qualifications as well as their initial thoughts on valuation methods, based on some preliminary information about us. Adams Capital also reviewed industry analysis as well as the other elements of their proposed engagement. Members of the Special Committee asked numerous questions concerning qualifications, approach, techniques and other related aspects of the potential engagement. Adams Capital noted the need for additional financial information from us, which would be provided if the Special Committee determined to engage Adams Capital.

 

The Special Committee then met in executive session. The Special Committee discussed again the matters described above, including the alternative structures for a potential transaction, the advantages and disadvantages of a potential transaction to us and to the unaffiliated holders of shares of the Class A Common Stock. The Special Committee also revisited the prior discussion about the proposed financing for the potential transaction. The Special Committee noted that the terms of such financing were the same as in the recently negotiated debt placement that was issued to an unaffiliated third party and negotiated in an arms-length manner, except that in that prior transaction the lender also received equity, without any price increase, and there would be no equity included in this transaction. In consideration of the foregoing analysis and in light of the recent disruption in the credit markets, the Special Committee was favorably disposed to the financing terms but reserved its approval subject to additional analysis and definitive documentation of the proposed terms for financing. The Special Committee unanimously determined (i) to engage Benesch Friedlander Coplan & Aronoff LLP as counsel to the Special Committee, (ii) to tentatively proceed with a proposed 1-for-2,500 reverse stock split (followed by a 2,500-for-1 forward stock split) of our Class A Common Stock as a means of going private, subject to (a) final approval of the transaction terms by the Special Committee, (b) reaching a determination as to the price per share to be paid for resulting fractional shares and (c) concluding that such price is fair to the unaffiliated holders of such shares from a financial point of view, (iii) to engage Adams Capital to advise the Special Committee on the proposed reverse stock split, including

specifically whether the price that would be paid to such holders was fair to them from a financial point of view, and (iv) tentatively to proceed with the described financing of such transaction, subject to approval of the final terms and documentation of such financing by the Special Committee. For the purposes of determining the appropriate reverse split fraction, the Special Committee reviewed an analysis prepared by management using the following stockholder information as of June 21, 2007:

 

 

 

 

 

Based on management’s knowledge of large stockholders not represented on the NOBO list, we can reasonably assume that the 241 OBO stockholder positions break out as follows:

 

 

Since we do not have information about the distribution of the shares among the 238 OBO stockholders, we determined that the most conservative position is to assume that we will have to purchase all shares held by unidentified OBOs in order to assure that the total number of our stockholders of record falls below 300 following the Transaction.

 

Based on the information detailed above, we analyzed a range of reverse stock split scenarios to determine the split ratio that would ensure that our total number of stockholders of record would fall below 300 following a reverse stock split, thus enabling us to “go private.” We determined that a reverse stock split of 1-for-2,500 would result in the purchase and retirement of approximately 1,153,541 fractional shares, on a pre-reverse split basis, representing 1,213 beneficial owners of our Class A Common Stock, reducing our total beneficial owners to 261 and record owners to 137.

 

The Special Committee also requested additional information from management to facilitate its review and determine an appropriate price per share to be paid for fractional shares resulting from the proposed reverse stock split.

 

The next meeting of the Special Committee was held on September 7, 2007, with both members present. In preparation for the meeting, the Special Committee received additional financial information it had requested from management regarding certain valuation metrics to assist in determining a fair price per share to be paid to redeem fractional shares of Class A Common Stock resulting from the proposed reverse stock split. Management also presented to the Special Committee a review of our current financial information. Preliminary calculation of the metrics referred to in “Special Factors — Recommendation of the Special Committee” were reviewed and discussed with management and additional requests for information and guidance from management and Adams Capital were made.

The next meeting of the Special Committee was held on September 10, 2007, with both members present. In preparation for the meeting, the Special Committee received updated preliminary analysis regarding valuation from Adams Capital. A representative from Adams Capital joined the meeting and reviewed that information. The members of the Special Committee asked numerous questions regarding the various methods of valuation, including the relevance of book value, the lack of applicability of a market based valuation due to the absence of comparable public companies with similar capital structures and the lack of liquidity of our Class A Common Stock, and the analysis of an income approach, such as one based on discounted cash flow, as more fully discussed in “Special Factors — Recommendation of the Special Committee.” As reflected below, the Special Committee, in executive session, adopted the analyses and conclusions set forth in Adams Capital’s preliminary valuation materials as its own. After further discussion, the Special Committee determined, on a preliminary basis, that, subject to receipt and review of a fairness opinion from Adams Capital, final approval of the financing for the Transaction and the terms and documentation thereof, and final review of the entire transaction by the Special Committee, a $0.23 per share valuation for the Class A Common Stock to be cashed out in the reverse stock split was appropriate. See “Special Factors — Recommendation of the Special Committee”.

 

The next meeting of the Special Committee was held on September 18, 2007, with both members present. During this meeting, a preliminary timetable of actions to be taken if the proposed reverse stock split were to be effected was reviewed along with supporting materials for the Transaction. Members of the Special Committee’s financial advisor and legal counsel were available at the meeting to review the materials provided and the proposed timeline. The proposed financing for the Transaction was discussed and the Special Committee was given a summary of Adams Capital’s fairness opinion letter and the backup materials that were provided in support of that opinion. After some deliberation, the Special Committee decided that it needed additional time to review the materials it received, and a meeting was set for the following day.

 

The next meeting of the Special Committee was held on September 19, 2007, with both members present. During this meeting, the members confirmed that they had reviewed and understood all material recently provided to them by Adams Capital and their legal counsel. They reviewed the terms of the proposed financing documents, reviewed again the basis for determining the valuation for shares of Class A Common Stock to be cashed out in the reverse stock split, including the most recent trading history of the Class A Common Stock, and their previous analysis of the advantages and disadvantages of the proposed Transaction, both to Orion and to its stockholders. After additional discussion, the Special Committee unanimously approved the Transaction, including the (i) cash consideration of $0.23 per share to be paid to stockholders to be cashed out in the reverse stock split, (ii) the reverse stock split and forward stock split ratios of 1-for-2,500 and 2,500-for-1, and (iii) the financing transaction consisting of the issuance of our New Senior Unsecured Notes. The Special Committee also unanimously recommended that our holders of Class A Common Stock and Class D Common Stock approve the Proposal.

 

PURPOSE OF AND REASONS FOR THE TRANSACTION

 

The purpose of the Transaction is to cash-out the equity interests of our stockholders who, as of the effective date, hold fewer than 2,500 shares of Class A Common Stock in any discrete account at a price determined to be fair by the Special Committee in order to enable us to deregister our Class A Common Stock under the Exchange Act and thus terminate our obligation to comply with certain regulations related to being a public company. The Transaction will also terminate our obligation to file annual and periodic reports and make other filings with the SEC, although we currently intend to continue to provide reports as to our financial condition and results of operation which we expect may be accessed at www.pinksheets.com.

 

The reasons for the Transaction and our subsequent deregistration as an SEC reporting company include:

 

the last trading day before the public announcement that the proposed Transaction had been approved by our Special Committee.

 

BENEFITS OF THE TRANSACTION

 

Benefits and Cost Savings of Termination as an SEC Reporting Company

 

We incur substantial costs as a result of our status as a reporting company and being required to file annual reports on Form 10-KSB, quarterly reports on Form 10-QSB, proxy statements and stockholder reports as required by Regulation 14A under the Exchange Act, and current reports on Form 8-K. We anticipate saving approximately $900,000 per year by not having to comply with certain regulations related to being a public company. The annual savings that we expect to realize as a result of the Transaction based upon our historical costs is estimated as follows for 2008:

 

 

The estimate regarding compliance with certain regulations related to being a public company is only an estimate, and the actual savings to be realized may be higher or lower than estimated above. Based on our size and resources, the Special Committee does not believe the costs associated with remaining an SEC reporting company are justified.

 

Comparing the Benefits of Termination versus Remaining an SEC Reporting Company

 

The Special Committee believes that we will not benefit significantly from remaining an SEC reporting company. Even as an SEC reporting company that is listed on the AMEX, there is a very limited trading market for our shares, especially for sales of larger blocks of our shares, and stockholders derive little benefit from our status as an SEC reporting company that is listed on the AMEX. During the 10 trading day, 20 trading day and 30 trading day periods prior to the announcement that the Special Committee had approved the Transaction, the average daily trading volume on the AMEX of our common stock was approximately 1,170 shares, 8,125 shares and 8,163 shares, respectively. We believe our small public float and limited trading volume have limited the ability of our stockholders to sell their shares without also reducing our trading price.

 

Further, we have no present intention to raise capital through sales of securities in a public offering in the future or to acquire other business entities using our stock as any significant part of the consideration for any acquisition, and we are therefore unlikely to have the opportunity to take advantage of our current status as an SEC reporting company for these purposes. If for any reason we decide in the future to access the public capital markets, we could do so by filing a registration statement for such securities.

 

Benefits of the Transaction to Our Affiliates

 

Benefits of the Transaction to our affiliates are expected to include the following:

 

 

 

See “Special Factors — Interests of Our Directors and Executive Officers in the Transaction,” beginning on page 26.

 

Benefits of the Transaction to Unaffiliated Stockholders

 

Benefits of the Transaction to our unaffiliated stockholders are expected to include the following:

 

 

DISADVANTAGES OF THE TRANSACTION

 

Disadvantages of the Transaction to Us

 

Disadvantages of the Transaction to us are expected to include the following:

 

 

Disadvantages of the Transaction to Our Affiliates

 

Disadvantage of the Transaction to our affiliates are expected to include the following:

 

 

Disadvantages of the Transaction to Our Unaffiliated Stockholders

 

Disadvantages of the Transaction to our unaffiliated stockholders are expected to include the following:

 

 

 

See “Special Factors — Certain Effects of the Transaction,” beginning on page 35.

 

TIMING OF THE TRANSACTION

 

In light of the foregoing, the Special Committee believes that it is in our best interest and the best interest of our stockholders, including unaffiliated stockholders, to change our status to a non-SEC reporting company at this time because the sooner the Proposal can be implemented, the sooner we will cease to incur the expenses and burdens and the sooner stockholders who are to receive cash in the Transaction will receive and be able to reinvest or otherwise make use of such cash payments.

 

ALTERNATIVES CONSIDERED

 

The Special Committee considered several other alternatives to accomplish the reduction in the number of stockholders of record to fewer than 300, but ultimately rejected these alternatives because the Special Committee believed that the proposed Transaction structured as a reverse stock split immediately followed by a forward stock split would be the most efficient and least costly method. The other alternatives considered by the Special Committee were:

 

 

 

RECOMMENDATION OF THE SPECIAL COMMITTEE

 

The Special Committee consisted of two directors, Messrs. David Crane and Joseph M. Valley, Jr. Each of these directors has been deemed independent by the Board of Directors as independence is defined in AMEX Company Guide Section 121A and Rule 10A-3(b)(1) of the Exchange Act. The Special Committee retained Adams Capital as its financial advisor and Benesch Friedlander Coplan & Aronoff LLP as independent legal counsel.

 

In evaluating the proposed Transaction and the cash consideration to be paid, the Special Committee relied on its knowledge of our business, financial condition and prospects as well as the advice of its financial advisor and legal counsel. In view of the wide variety of factors considered in connection with the evaluation of the Transaction and cash consideration to be paid, the Special Committee did not find it practicable to, and did not, quantify or otherwise attempt to assign relative weights to the specific factors it considered it reaching its determinations.

 

The discussion herein of the information and factors considered by the Special Committee is not intended to be exhaustive, but is believed to include all material factors considered by the Special Committee. In determining that the Special Committee would recommend the Transaction to our stockholders, the Special Committee considered the following substantive factors in the aggregate, which in the view of the Special Committee, supported such determination.

 

 

The Special Committee reviewed the closing and trading prices for our Class A Common Stock for the past several years, focusing most attention on the more recent price information. You should read the discussion under “Market for Class A Common Stock and Related Stockholder Matters” on page    for more information about our stock prices. The Special Committee noted that, as a positive factor, the cash payment of $0.23 per share payable to our stockholders in lieu of fractional shares represented a premium of approximately 44% over the $0.16 closing price of our Class A Common Stock on September 20, 2007, which was the last trading day before the public announcement that the Special Committee had approved the Transaction. In addition to stockholders receiving a premium to the trading price of our Class A Common Stock on any shares redeemed as a result of the reverse stock split, such stockholders will achieve liquidity without incurring brokerage commissions and other transaction costs.

 

In its analysis of recent and historical prices for our Class A Common Stock, the Special Committee noted that in each of the first two quarters of 2007, there were single days where the high trading price was significantly higher than any other day in the quarter, resulting in a high price for that quarter that it considered less meaningful in its analysis than the average price during those periods. In addition, the Special Committee noted that the proposed cash consideration constituted a premium over the average closing price of our Class A Common Stock for the 10 calendar days, 20 calendar days, 30 calendar days, 60 calendar days, 90 calendar days and even 365 calendar days immediately prior to the public announcement of the approval of the proposed Transaction by the Special Committee and over the closing price of the our Class A Common Stock immediately prior to such public announcement.

 

 

 

Despite the fact that (i) no unaffiliated stockholder representative was retained to act solely on behalf of the unaffiliated stockholders in the Transaction to negotiate the terms or prepare a report on behalf of the unaffiliated stockholders and (ii) the approval of a majority of the unaffiliated holders of our common stock is not required, the Special Committee believes that the Transaction is procedurally fair because, among other things:

 

 

Based on the foregoing analyses, the Special Committee believes that the Transaction is procedurally and substantively fair to all our stockholders, including the unaffiliated stockholders, regardless of whether a stockholder receives cash or continues to be a stockholder following the Transaction, and believes the $0.23 cash amount to be fair consideration for those stockholders holding less than 2,500 shares of our Class A Common Stock. The Transaction was unanimously approved by the Special Committee, all members of the Special Committee being non-employees of us.

 

INTERESTS OF OUR DIRECTORS AND EXECUTIVE OFFICERS IN THE TRANSACTION

 

In considering the recommendation of the Special Committee with respect to the Transaction, stockholders should be aware that our executive officers and directors have interests in the Transaction that are in addition to, or different from, our stockholders generally. These interests may create actual or potential conflicts of interest. The Special Committee was aware of these potential conflicts of interest and considered them, among other matters, in reaching its recommendations. The actual or potential conflicts of interest include the following:

 

 

 

 

OPINION OF ADAMS CAPITAL, INC.

 

Under an agreement dated August 7, 2007, the Special Committee retained Adams Capital to act as its financial advisor in connection with the Transaction. As part of that engagement, the Special Committee requested that Adams Capital evaluate the fairness, from a financial point of view, to the holders of shares of Class A Common Stock (other than our affiliated stockholders) of the Transaction. Adams Capital delivered an oral opinion to the Special Committee and the Board of Directors, which was subsequently confirmed by the delivery of a written opinion, dated September 18, 2007, to the effect that, as of September 6, 2007 and based upon and subject to certain assumptions, procedures, factors, limitations and qualifications set forth therein, the cash consideration to be paid to holders of shares of Class A Common Stock (other than our affiliated stockholders) pursuant to the Transaction was fair, from a financial point of view, to such holders.

 

The full text of Adams Capital’s opinion, which sets forth the procedures followed, assumptions made, factors considered and limitations and qualifications on the review undertaken in connection with the opinion, is attached as Annex B to this proxy statement and is incorporated into this proxy statement by reference. The following is a summary of Adams Capital’s opinion. The description of Adams Capital’s opinion set forth in this proxy statement is qualified in its entirety by reference to the full text of Adams Capital’s opinion attached as Annex B to this proxy statement. Holders of shares of Class A Common Stock and of Class D Common Stock are urged to read Adams Capital’s opinion carefully in its entirety for a description of the procedures followed, assumptions made, factors

considered and limitations and qualifications on the review undertaken by Adams Capital in connection with its opinion.

 

Adams Capital’s opinion was directed only to the Special Committee and the Board of Directors and only addresses the fairness, from a financial point of view, to the holders of shares of Class A Common Stock (other than our affiliated stockholders) of the cash consideration to be paid to such holders pursuant to the Transaction. Adams Capital’s opinion did not address the merits of the underlying decision by Orion to engage in the Transaction or the relative merits of the Transaction as compared to other business strategies or transactions that might be available to Orion. In that regard, Adams Capital was not authorized to, and did not, solicit third party indications of interest in acquiring all or a part of Orion or engaging in a business combination or any other strategic transaction with Orion in connection with its engagement prior to the date of Adams Capital’s opinion. Adams Capital’s opinion was not intended to and does not constitute a recommendation to any holder of Class A Common Stock or Class D Common Stock as to how such holder should vote with respect to the Transaction or any other matter relating thereto. Further, Adams Capital’s opinion was necessarily based on economic, monetary, market and other conditions as in effect on, and the information made available to Adams Capital as of, the date of its opinion. Adams Capital assumed no responsibility for updating or revising its opinion based on circumstances or events occurring after the date of its opinion.

 

In connection with its opinion, Adams Capital:

 

 

Adams Capital relied upon the accuracy and completeness of the foregoing information, and Adams Capital did not assume any responsibility for any independent verification of such information or any independent valuation or appraisal of any of the assets or liabilities of Orion, or concerning the solvency or fair value of Orion. With respect to the financial forecasts, Adams Capital assumed that they had been reasonably prepared on bases reflecting the best then currently available estimates and judgments of the management of Orion as to the future financial performance of Orion. Adams Capital did not assume any responsibility for and expressed no view as to such forecasts or the assumptions on which they were based.

 

In rendering its opinion, Adams Capital assumed that the Transaction would be consummated on the terms as described to us at the outset of the engagement, without any waiver or modification of any material terms or conditions, including our obtaining the necessary financing to effect the Transaction. Adams Capital further assumed that the executed Transaction would not differ in any material respect from the latest terms discussed with Adams Capital prior to the delivery of its opinion.

 

Adams Capital did not express any opinion as to any tax or other consequences that might result from the Transaction, nor did its opinion address any legal, tax, regulatory or accounting matters, as to which Adams Capital understood that the Special Committee, obtained such advice as they deemed necessary from qualified professionals. Adams Capital’s opinion did not address the solvency or fair value of Orion or any other entity, including under any state, federal or other applicable laws relating to bankruptcy, insolvency or similar matters. Adams Capital did not express any opinion as to the price at which shares of (any class of) common stock may trade subsequent to the date of its opinion.

In preparing its opinion, Adams Capital performed a variety of financial and comparative analyses that it deemed to be appropriate for this type of transaction, including those described below. The summary of Adams Capital’s analyses described below is not a complete description of the analyses underlying Adams Capital’s opinion. The preparation of a fairness opinion is a complex analytical process involving various determinations as to the most appropriate and relevant methods of financial analyses and the application of those methods to the particular circumstances and, therefore, is not readily susceptible to summary description. In arriving at its opinion, Adams Capital considered the results of all the analyses as a whole and did not, and believes that one should not, attribute any particular weight to any factor or analysis considered by it. Rather, Adams Capital made its determination as to fairness on the basis of its experience and professional judgment after considering the results of all of its analyses.

 

In its analyses, Adams Capital considered industry performance, regulatory, general business, economic, market and financial conditions and other matters, many of which are beyond our control. No company, transaction or business considered in Adams Capital’s analyses as a comparison is identical to us or the Transaction, and an evaluation of the results of those analyses is not entirely mathematical. Rather, the analyses involve complex considerations and judgments concerning financial and operating characteristics and other factors that could affect the acquisition, public trading or other values of the companies, business segments or transactions analyzed. The estimates contained in Adams Capital’s analyses and the ranges of valuations resulting from any particular analysis are not necessarily indicative of actual values or predictive of future results or values, which may be significantly more or less favorable than those suggested by the analyses. In addition, analyses relating to the value of businesses or securities do not purport to be appraisals or to reflect the prices at which businesses or securities actually may be sold. Accordingly, the estimates used in, and the results derived from, Adams Capital’s analyses and estimates are inherently subject to substantial uncertainty.

 

Adams Capital’s opinion was one of many factors taken into consideration by the Special Committee in determining the cash consideration offered in the Transaction. See “Special Factors — Recommendation of the Special Committee” beginning on page 24.” Consequently, the analyses described below should not be viewed as determinative of the opinion of the Special Committee with respect to the cash consideration or of whether the Special Committee would have been willing to determine that a different consideration was fair. The cash consideration to be paid to the holders of shares of Class A Common Stock pursuant to the Transaction was determined through the Special Committee’s internal analysis. Adams Capital did not recommend any specific consideration to the Special Committee, or that any given consideration constituted the only appropriate consideration for the Transaction.

 

The following is a brief summary of the material financial and comparative analyses that were performed by Adams Capital in connection with rendering its opinion. Adams Capital prepared these analyses for the purpose of providing an opinion to the Special Committee as to the fairness, from a financial point of view, to the holders of shares of Class A Common Stock (other than our affiliated stockholders) of the cash consideration to be paid to such holders pursuant to the Transaction. The financial analyses summarized below include information presented in tabular format. In order to fully understand Adams Capital’s financial analyses, the tables must be read together with the text of each summary. The tables alone do not constitute a complete description of the financial analyses. Considering the data in the tables below without considering the full narrative description of the financial analyses, including the methodologies and assumptions underlying the analyses, could create a misleading or incomplete view of Adams Capital’s financial analyses.

Historical Trading Prices

 

Adams Capital compared the cash consideration to the closing price of a share of Class A Common Stock on September 6, 2007, the date that was one trading day prior to the Special Committee’s preliminary decision regarding the cash consideration. The trading ranges and averages of the closing price for our Class A Common Stock as well as the offered price premium are presented below for the following time periods prior to September 6, 2007:

 

 

Comparable Public Companies Analysis

 

Adams Capital considered calculating an implied valuation for Orion based on an analysis of companies that Adams Capital believed to be potentially generally comparable to Orion. In performing these analyses, Adams Capital reviewed and analyzed certain publicly available financial information, valuation multiples and market trading data relating to the selected comparable companies and compared such information to the corresponding information for Orion. This analysis was performed to derive a range of implied equity values per share of Class A Common Stock based on the market values of shares of comparable publicly traded companies.

 

For purposes of this analysis, Adams Capital reviewed seven healthcare information technology and practice management services companies that had substantial operations in certain or all of healthcare revenue management, practice management consulting and/or health care billing and collections operations (Healthcare Practice Management and Support Companies). Adams Capital determined that none of the Healthcare Practice Management and Support Companies identified for this analysis was sufficiently similar to Orion in size, capital structure and/or overall business model to use their data to draw useful conclusions as to the implied value of Orion. The Healthcare Practice Management and Support Companies Adams Capital considered were:

 

 

In general, historical financial data used for this analysis was as of June 30, 2007 or December 31, 2006, depending on the date of the most recently available public information for each Healthcare Practice Management and Support Company, and market data used for this analysis was as of September 6, 2007.

 

Using this data, Adams Capital reviewed the market value of invested capital “MVIC” (debt plus market capitalization) of each of the Healthcare Practice Management and Support Companies as a multiple of the last

twelve months’ revenue, EBITDA, EBIT and market capitalization as a multiple of the last twelve months’ pretax income. The data are presented below:

 

 

 

nmf = not meaningful, indicating the result was a negative number or had zero as a divisor.

 

The foregoing data presentation is included for reference purposes. Because the companies included are not sufficiently comparable due to their size relative to Orion, capital structure, and other factors, they were not used as a basis to determine the value of shares of the Class A Common Stock for purposes of Adams Capital’s opinion.

 

Comparable Transactions Analysis

 

Adams Capital considered calculating an implied valuation for Orion based on an analysis of companies that Adams Capital believed to be potentially generally comparable to Orion that were involved in acquisition transactions. Adams Capital relied on publicly announced transactions in the healthcare information technology support and practice management industry to assess whether the companies involved in such transactions were sufficiently similar to Orion to provide relevant information about the value of Orion. Adams Capital determined that too few of the Healthcare Practice Management and Support Companies identified for this analysis was sufficiently similar to Orion in size, capital structure and/or overall business model to use their data to draw useful conclusions as to the implied value of Orion.

 

In selecting the potential comparable transactions it used in this analysis, Adams Capital reviewed merger transactions in 2006 and 2007 involving companies in the healthcare information technology support and practice management industries.

 

The comparable transactions identified by Adams Capital were (listed by the date publicly announced, the acquirer and the target company):

 

 

For each of the comparable transactions, Adams Capital (i) calculated the target company’s market value of invested capital as a multiple of revenues for the target company for the last twelve months prior to the announcement of the transaction, or LTM, (ii) the company’s market value of invested capital as a multiple of earnings before interest and taxes or EBIT, and (iii) the company’s market value of invested capital as a multiple of earnings before interest, taxes, depreciation and amortization or EBITDA.

Adams Capital calculated the following multiple and premia ranges based on the recent precedent transactions indicated above and for all of the selected precedent transactions indicated above:

 

 

As indicated above, there were too few potentially comparable transactions with available data to be useful as an indicator of our value or of our Class A Common Stock. Using comparable transaction data is further complicated by the companies’ capital structure as well as that of Orion. In order to allocate value among our different classes of shares, including those tied to stock options and warrants, Adams Capital used an option pricing model that is promulgated by the American Institute of Certified Public Accountants (AICPA) in the AICPA Audit and Accounting Practice Aid, “Valuation of Privately-Held-Company Equity Securities Issued as Compensation”. This methodology as well as the dilution analysis is described in the “Value Allocation and Dilution Analysis” section below. The information required to perform similar analyses is generally not available for privately held companies and therefore is a barrier to using implied values by companies in comparable transactions to determine the value of our shares of Class A Common Stock.

 

Discounted Cash Flow Analysis

 

Adams Capital performed an analysis of the present value of the projected debt-free free cash flows derived from each of our business segments using financial projections provided by management. This analysis was performed to determine a valuation of the Class A Common Stock as a function of the future debt-free free cash flows and going concern value of our enterprise as a whole.

 

The discounted cash flow analysis utilized cash flows from July 1, 2007 through December 31, 2011. Beyond 2011, a perpetuity was used for the terminal value of the cash flow analysis. The value of the perpetuity was calculated using a conventional Gordon growth model, assuming a long term growth rate of 4%, and a return of 11%. Adams Capital calculated our weighted average cost of capital to be 11.18%. A discount rate of 11% was applied to the discounted cash flow analysis.

 

The following table represents the results of the analysis performed by Adams Capital:

 

 

 

 

The range of value was generated by varying the discount rate from 9% to 13% and by varying the terminal growth rate from 2% to 6%. From this analysis, based on the assumptions set forth above, Adams Capital derived an implied equity reference range per share of Class A Common Stock of $0.13 to $0.32, as compared to the cash consideration of $0.23 per share.

 

Value Allocation and Dilution Analysis

 

Adams Capital used an option model to determine how much of our equity value should be allocated to the Class A Common Stock for purposes of determining the fair market value of the Class A Common Stock. A multiple warrant valuation model published in 2002 by Theofanis Darsinos and Stephen E. Satchell in 2002 was used to determine the appropriate level of dilution by way of the potential exercise of shares attached to stock options and warrants. This avoids the use of the simplifying, but potentially inaccurate, assumption of full dilution.

The AICPA Audit and Accounting Practice Aid, “Valuation of Privately-Held-Company Equity Securities Issued as Compensation” (the “Practice Aid”) suggests the use of option approaches to determine the value of preferred shares. These approaches treat the value of the company’s equity as a call option on the value of the entire enterprise. The well-known Black-Scholes model is frequently considered to be more appropriate for publicly-traded companies with continuous ranges of value and volatility. Adams Capital selected the binomial call option pricing model, a model which assumes a finite number of potential stock value outcomes, two, in order to determine the value of our equity from the perspective of an option based approach, because of the relative lack of liquidity of our stock.

 

It is appropriate to invoke assumptions from the Black-Scholes framework, rather than set hard assumptions externally. (The binomial option is closely related to Black-Scholes.) In particular, Black-Scholes’ assumption of symmetrical volatility is applied, meaning that a stock return is as likely to be above as below the mean at any given point in time. The implication of using the Black-Scholes assumption of symmetrical volatility is that if there is a default of the company it is not known at that point precisely what the value will be at the time of exercise. The Black-Scholes assumption is a straightforward way to address this uncertainty; we are not forced to decide how much in the money the option might or might not be at the option expiration date (in this case, five years from the issue of the warrant).

 

Both the Class A and Class D Common Stock are valued as a series of call options on the total enterprise value. The rights of the common stockholders are equivalent to a call option on any value of Orion above the Class D Common Stock stockholders’ liquidation preference.

 

The first step in the analysis is to establish the exercise prices, which, according to the Practice Aid, are equal to the cumulative liquidation preferences of any senior series of preferred stock. The Class D Common Stock has a $5,068,500 liquidation preference. The liquidation preference is calculated as the initial investment of the Class D Common Stock stockholders plus the cumulative dividends owed as reported in public disclosures as of the valuation date. The residual value is distributed pro rata to the owners of both Class A and Class D stockholders assuming their conversion to shares of Class A Common Stock.

 

The following key assumptions are applied in the binomial call option pricing model:

 

 

The incremental value between the first call option and the second call option was calculated. This is the present value of the liquidation preference for the Class D Common Stock. The second option was on the value between the value of the liquidation preference and the concluded equity value of the company. The residual value is then allocated pro rata to both series of stock.

 

Warrants and employee stock options have features that are similar to those of stock options. A call option is an option to buy the underlying security at a predetermined price (the “exercise” price) at some point in the future. A “European” option is the term used for options that can only be exercised at the expiration date. By contrast, an “American” option describes options that may be exercised at any time before the expiration date. American options require the application of a different option pricing model. Warrants, however, differ from call options in that the warrant is issued by the company on its own stock. As a result, the company issues more stock when the warrants are exercised, effectively diluting current stockholders. In addition, warrants often have provisions not seen in call options. For example, the issuing company may have the right to call the warrants, as well as the possibility to alter the maturity or exercise price.

 

The standard treatment for warrant valuation is based on the Black-Scholes model for European call options. The central difference between call options and warrants is the fact that new stock is issued when warrants are exercised, thereby diluting the ownership of existing stockholders. A warrant’s value issued by a company with prior warrant issues is more accurately calculated through the application of the Multiple-WVF than through the Black-Scholes model by itself (assuming the warrant is viewed as a call option on the value of the firm per share). The dilution effect causes an unadjusted Black-Scholes model to overvalue warrants whether there are single or multiple issues, and causes the Single-WVF model to over value warrants where multiple issues are outstanding.

To more accurately value warrants, the Black-Scholes model can be altered by incorporating a dilution factor to account for the newly-issued stock upon the warrant’s exercise. The dilution factor (lambda) is defined as the number of warrants outstanding (for that issue) divided by the total number of common shares outstanding. Also, a warrant is valued as a call option on the value of the firm per share, v, as opposed to a call option on the common stock.

 

Two separate models are used to value warrants. One is used when the warrant being valued belongs to the only group of warrants outstanding. However, in the case where a company has more than one set of warrants outstanding, this relationship would overvalue the warrant because it fails to consider the potential dilutive impact of the exercise of other outstanding warrants issued. If a warrant issued prior to the warrant being valued is called (exercised), then the dilution factor is altered.

 

Theofanis Darsinos and Stephen E. Satchell present the Multiple Warrant Valuation Framework ¹(“Multiple-WVF”) for pricing multiple-issue warrants with different exercise prices. Given multiple warrant issues with different maturities and different strike prices, Darsinos and Satchell derive the following equation for the value of warrant issue n:

 

 

In addition, the terms p_i, the probability that share value, v_Ti, will be greater than the exercise price for that warrant issue (and thus the probability the warrant will be exercised) and _i,j , the conditional function that determines if the warrant is called (if _i,j = 1, then it is called, if _i,j = 0, then it is not called) are given by the following equations:

 

 

 

The symbol represents the cumulative normal distribution. The mod function returns the remainder after a number is divided by a provided divisor, in this case two. As a result, the mod function returns a number less than two, but greater than or equal to zero. By rounding downward, the function _i,j returns either one or zero.

 

The probability that warrant issue i will be called is given by the equation for p_i, representing the probability that share value, v_Ti, will be greater than the exercise price for that warrant issue.

 

The Multiple-WVF can be seen as a summation series consisting of the following two cases: (i) prior warrants will be called and (ii) prior warrants will not be called. The probability that an issue is called is multiplied by the value of the warrant being valued given that the prior issue is exercised. This result is added to the probability that a prior issue is not called multiplied by the value given that the prior issue is not exercised. Because each warrant issue may have a different exercise price and time to maturity, this probability will be different for each issue, and the calculation must be done for every prior issue and set of circumstances.

 

 

¹ On the Valuation of Warrants and Executive Stock Options: Pricing Formulae for Firms with Multiple Warrant/Executive Options, Theofanis Darsinos and Stephen E. Satchell, April, 2002.

The calculated exercise of Orion’s various outstanding warrants and options is presented below:

 

 

Miscellaneous

 

In connection with Adams Capital’s services as the financial advisor to the Special Committee, we agreed to pay Adams Capital an aggregate fee of $42,500, $21,250 of which became payable upon the execution of the engagement agreement with Adams Capital and $21,250 of which became payable upon the delivery of Adams Capital’s opinion (which payment was not contingent upon the outcome of the opinion). We have also agreed to reimburse Adams Capital for its reasonable expenses and to indemnify Adams Capital against liabilities, including certain liabilities under the federal securities laws, arising out of its engagement.

 

Adams Capital has not in the past provided business valuation services to us but may have provided and may currently be providing valuation services or advisory services to one or more of our equity holders, or to one or more of our affiliates, for which Adams Capital has received and/or may receive customary fees.

 

Adams Capital is an independent, third party valuation firm. Adams Capital’s principal business is the valuation of businesses and business interests, including both privately held and publicly traded companies, for fairness opinions, mergers and acquisitions, divestitures, gift and estate taxes, employee stock ownership plans, corporate and partnership recapitalizations, and dissolutions. Adams Capital acts as financial advisor to the Special Committee with respect to this Transaction. As specified in its engagement agreement with us, Adams Capital’s compensation is not contingent on its findings and it has no other financial, advisory or other relationships with the Board of Directors, its officers or investors in Orion.

 

CERTAIN EFFECTS OF THE TRANSACTION

 

The Transaction will have various effects on us, the affiliated stockholders (consisting of our officers, directors and their affiliates), and the unaffiliated stockholders, which are described in the applicable sections below:

 

Effects on Orion

 

If approved at the Special Meeting and subsequently implemented, the Transaction will have various effects on us, including the following:

 

also will receive cash for their shares in the Transaction. Accordingly the number of outstanding shares of Class A Common Stock will decrease from 105,504,032 shares, as of September 18, 2007, to approximately 104,350,491 shares.

 

 

 

 

Effects on Affiliated Stockholders

 

The Transaction will have various effects on stockholders who are our affiliates, as described below. As used in this proxy statement, the term “affiliated stockholder” means any stockholder who is our director or executive officer, or who owns 10% or more of our outstanding Class A Common and Class D Common Stock, voting as a single class, and the term “unaffiliated stockholder” means any stockholder other than an affiliated stockholder. All affiliated stockholders except David Crane, a director, will retain beneficial ownership of all shares of our Class A Common Stock held by them prior to the Transaction. Mr. Crane holds 2,272 shares of Class A Common Stock, in two separate accounts. As a result, he will be treated the same as all other holders of less than 2,500 shares of our Class A Common Stock and will receive cash consideration from us in the amount of $0.23 per share for each share held by him, in lieu of fractional shares, upon consummation of the Transaction.

 

 

Effects on Unaffiliated Stockholders

 

The Transaction will have various effects on stockholders who are not our affiliates, as described below. The effects of the Transaction to an unaffiliated stockholder will vary based on whether or not the unaffiliated stockholder’s shares will be cashed-out in the Transaction.

 

 

 

 

 

 

CONDUCT OF OUR BUSINESS AFTER THE TRANSACTION

 

Our executive officers and Board of Directors will remain the same immediately following the Transaction. We expect to conduct our business and operations after the effective date of the Transaction in substantially the same manner as it is currently being conducted and, except as described in this proxy statement with respect to: (1) the use of funds to finance the Transaction and related costs and (2) our plans to deregister our Class A Common Stock under the 1934 Act and delist it from the AMEX, the Transaction is not anticipated to have a material effect upon the conduct of our business.

 

Neither we nor our management have any current plans or proposals to effect any extraordinary corporate transaction, such as a merger, reorganization or liquidation; a sale or transfer of any material amount of our assets; a change in our Board of Directors or management; a material change in our indebtedness or capitalization (except as described in this proxy statement); or any other material change in our corporate structure or business. However, we may engage in such a transaction in the future to the extent that management and the Board of Directors determines it to be in our best interest and the best interest of our stockholders.

 

CONDITIONS TO THE COMPLETION OF THE TRANSACTION

 

The Transaction will not be effected unless and until our stockholders approve the Transaction and the Special Committee determines that:

 

 

In addition, we may decide to abandon the Transaction (even after stockholder approval) at any time prior to its consummation if we believe that such action would be in the best interests of us and our stockholders. Assuming that these conditions are satisfied, we, as promptly as reasonably practicable, will file a Fourth Amended and Restated Certificate of Incorporation with the Delaware Secretary of State and thereby effect the stock split. If we do not effect the Transaction, we will continue with our Class A Common Stock registered under the Exchange Act, and we anticipate that the Class A Common Stock will continue to be traded on the AMEX.

 

SOURCE OF FUNDS AND FINANCING OF THE TRANSACTION

 

Based on estimates of ownership of shares of Class A Common Stock, the number of shares outstanding and other information as of September 18, 2007, and assuming that, as a result of the Transaction, 1,153,541 fractional shares are cashed out, we estimate that the total funds required to consummate the Transaction will be approximately $440,314, of which $265,314 will be used to pay the consideration to stockholders entitled to receive cash for their shares, and $175,000 will be used to pay the costs of the Transaction, as follows:

 

On December 1, 2006, we issued senior unsecured subordinated promissory notes due 2011 in the aggregate original principal amount of $3,350,000, bearing interest at an aggregate rate of 14% per annum, to Phoenix, pursuant to arm’s-length negotiations. The consideration to stockholders and the costs of the Transaction will be paid from the proceeds of our issuance of additional senior unsecured subordinated promissory notes due 2011 in the aggregate original principal amount of $1,000,000, bearing interest at an aggregate rate of 14% per annum, to Brantley IV, Phoenix and Terrence L. Bauer. These notes will be on the same terms as the senior unsecured subordinated promissory notes issued to Phoenix on December 1, 2006. The closing of this financing transaction is conditioned on no material adverse change to us since June 30, 2007 and the consummation of the Transaction. We plan to use the remaining amount from these notes for our general working capital purposes. We have no alternative financing source currently available to us if this financing transaction does not close.

 

ANTICIPATED ACCOUNTING TREATMENT

 

We anticipate that we will account for the purchase of our outstanding Class A Common Stock in the Transaction from stockholders as cancelled stock.

 

U.S. FEDERAL INCOME TAX CONSEQUENCES

 

Summarized below are certain material federal income tax consequences to us and our stockholders resulting from the Transaction. This summary is based on existing federal income tax law, which may change, even retroactively. This summary does not discuss all aspects of federal income taxation that may be important to you in light of your individual circumstances and no assurance can be given that the Internal Revenue Service will not assert, or that a court will not sustain, a position contrary to any of the tax consequences described below. Many types of stockholders (such as financial institutions, insurance companies, broker-dealers, tax-exempt organizations, and foreign persons) may be subject to special tax rules. Other stockholders may also be subject to special tax rules including, but not limited to, stockholders who received our Class A Common Stock as compensation for services or pursuant to the exercise of an employee stock option, or stockholders who have held, or will hold, stock as part of a straddle, hedging, or conversion transaction for federal income tax purposes. In addition, this summary does not discuss any state, local, foreign or other tax considerations.

 

This summary assumes that you are one of the following:

 

 

This summary also assumes that you have held and will continue to hold your shares as capital assets.

 

NO RULING FROM THE INTERNAL REVENUE SERVICE OR OPINION OF COUNSEL WILL BE OBTAINED REGARDING THE U.S. FEDERAL INCOME TAX CONSEQUENCES TO OUR STOCKHOLDERS IN CONNECTION WITH THE TRANSACTION. ACCORDINGLY, EACH STOCKHOLDER IS ENCOURAGED TO CONSULT THEIR OWN TAX ADVISOR AS TO THE PARTICULAR FEDERAL, STATE, LOCAL, FOREIGN, AND OTHER TAX CONSEQUENCES, IN LIGHT OF THEIR INDIVIDUAL CIRCUMSTANCES.

 

The Transaction

 

We believe that the Transaction will be treated as a tax-free “recapitalization” for federal income tax purposes and should not result in any material federal income tax consequences to us.

Federal Income Tax Consequences to Stockholders Who Are Not Cashed-out in the Transaction

 

If you continue to hold shares of our Class A Common Stock immediately after the Transaction, and you receive no cash as a result of the Transaction, you will not recognize any gain or loss in the Transaction and will have the same adjusted tax basis and holding period in the shares of our Class A Common Stock as you had in such stock immediately prior to the Transaction.

 

Federal Income Tax Consequences to Stockholders Who are Cashed-out in the Transaction

 

If you receive cash as a result of the Transaction and do not own, and are not deemed to constructively own shares of our Class A Common Stock immediately after the Transaction, you will recognize capital gain or loss as a result of the Transaction. The amount of capital gain or loss you recognize will equal the difference between the cash you receive for your cashed-out stock and your adjusted tax basis in such stock.

 

If you receive cash as a result of the Transaction and own, or are deemed to constructively own, our Class A Common Stock immediately after the Transaction, you should consult your own tax advisor on the consequences of the Transaction to you.

 

Capital Gain and Loss

 

For individuals, capital gain recognized on the sale of capital assets that have been held for more than 12 months (to the extent they exceed capital losses) generally will be subject to tax at a federal income tax rate not to exceed 15%. Net capital gain recognized from the sale of capital assets that have been held for 12 months or less will be subject to tax at ordinary income tax rates. In addition, capital gain recognized by a corporate taxpayer will be subject to tax at the ordinary income tax rates applicable to corporations. In general, the capital losses of individuals may only be deducted to the extent of the individual’s capital gains plus $3,000 each year. Any capital loss of an individual which is not deductible by reason of the foregoing limitation may be carried forward to subsequent years. In the case of corporations, capital losses may only be deducted to the extent of capital gains.

 

Any capital loss of a corporation which is not deductible by reason of the foregoing limitation may generally be carried back three years and carried forward five years.

 

Backup Withholding

 

Stockholders will be required to provide their social security or other taxpayer identification numbers (or, in some instances, additional information) in connection with the Transaction to avoid backup withholding requirements that might otherwise apply. The letter of transmittal will require each stockholder to deliver such information when the Class A Common Stock certificates are surrendered following the effective time of the Transaction. Failure to provide such information may result in backup withholding.

 

The discussion in this “U.S. Federal Income Tax Consequences” section is general in nature and is not intended to be a tax opinion or tax advice. The foregoing discussion was written exclusively in connection with the Transaction. Specific tax consequences may vary widely depending on a particular stockholder’s individual circumstances. The foregoing discussion may not be relied upon for the purpose of avoiding penalties that may be asserted by the Internal Revenue Service against any stockholder. Every stockholder is urged to consult, and must depend on, their own tax advisors concerning the tax consequences of the Transaction in connection with their own tax situation and potential and proposed changes in applicable law, including the application of state and local, foreign and other tax considerations.

 

REGULATORY APPROVALS

 

We are not aware of any material governmental or regulatory approval required for completion of the Transaction, other than compliance with the relevant federal and state securities laws and the corporate laws of the state of Delaware.

NO APPRAISAL OR DISSENTERS’ RIGHTS; ESCHEAT LAWS

 

Stockholders do not have appraisal or dissenters’ rights under Delaware state law or our certificate of incorporation or bylaws in connection with the Transaction.

 

The unclaimed property and escheat laws of each state provide that under circumstances defined in that state’s statutes, holders of unclaimed or abandoned property must surrender that property to the state. Persons whose shares are eliminated and whose addresses are unknown to us, or who do not return their common stock certificate(s) and request payment therefor, generally will have a period of years (depending on applicable state law) from the effective date of the Transaction in which to claim the cash payment payable to them. Following the expiration of that period, the escheat laws of states of residence of stockholders, as shown by our records, generally provide for such state to obtain either (i) custodial possession of property that has been unclaimed until the owner reclaims it or (ii) escheat of such property to the state. If we do not have an address for the holder of record of the shares, then unclaimed cash-out payments, without interest, would be turned over to our state of incorporation, the state of Delaware, in accordance with its escheat laws.

 

ADJOURNMENT OF MEETING

 

Although it is not expected, the Special Meeting may be adjourned for the purpose of soliciting additional proxies. Any adjournment of the Special Meeting may be made without notice, other than by announcement made at the Special Meeting, by approval of the holders of a majority of the shares of our Class A Common and Class D Common stock voting as a single class, represented in person or represented by proxy at the Special Meeting, whether or not a quorum exists.

 

RESERVATION OF RIGHTS

 

We have retained the absolute authority to reject (and not implement) the Transaction (even after approval thereof by our stockholders) if we subsequently determine that the Transaction is not then in our best interest and the best interest of our stockholders.

 

THE PROPOSED AMENDMENT

 

The following is a description of the material terms and effects of the Transaction. A copy of the proposed Fourth Amended and Restated Certificate of Incorporation effecting both the reverse split and the forward split following immediately thereafter is attached as Appendix A to this proxy statement. This discussion does not include all of the information that may be important to you. You should read the proposed Fourth Amended and Restated Certificate of Incorporation and this proxy statement and related appendices before deciding how to vote at the Special Meeting.

 

THE STRUCTURE OF THE TRANSACTION

 

The Transaction includes both a reverse stock split and a forward stock split of the Class A Common Stock. If the Transaction is approved by stockholders and implemented by the Board of Directors, the reverse and forward splits are expected to occur promptly after the approval, on or about          , 2007 (the “effective time”).

 

Upon consummation of the reverse split, each registered stockholder at the effective time will receive one share of Class A Common Stock for each 2,500 shares of Class A Common Stock held in his or her account at that time. If a registered stockholder holds 2,500 or more shares of Class A Common Stock in his or her account, any fractional shares in such account will not be cashed-out after the reverse stock split, and as a result of the forward stock split, the total number of shares held by such holder will not change as a result of the Transaction. Any registered stockholder who holds fewer than 2,500 shares of Class A Common Stock in his or her account at the effective time will receive a cash payment instead of fractional shares. This cash payment will be determined and paid as described under the section entitled, “The Proposed Amendment — Conversion of Shares in the Transaction” beginning on page 42.

 

We intend to treat stockholders holding shares of Class A Common Stock in “street name” through a nominee (such as a bank or broker) in the same manner as stockholders whose shares are registered in their names, and

nominees will be instructed to effect the Transaction for their beneficial holders. Nominees may have different procedures, however, and stockholders holding shares in “street name” should contact their nominees.

 

CONVERSION OF SHARES IN THE TRANSACTION

 

At the effective time of the Transaction:

 

 

As used above:

 

 

We (along with any other person or entity to which we may delegate or assign any responsibility or task with respect thereto) shall have full discretion and exclusive authority (subject to our right and power to so delegate or assign such authority) to:

 

 

For purposes of effecting the Transaction, we may, in our sole discretion, but without any obligation to do so:

 

 

Rule 12g5-1 under the Exchange Act provides that, for the purpose of determining whether an issuer is subject to the registration provisions of the Exchange Act, securities shall be deemed to be “held of record” by each person who is identified as the owner of such securities on the records of security holders maintained by or on behalf of the issuer, subject to the following:

 

 

 

EXCHANGE OF CERTIFICATES

 

Promptly after the Transaction, we will mail to each holder who appears to have owned fewer than 2,500 shares of our Class A Common Stock immediately prior to the effective time of the Transaction, based on information available to us, a letter of transmittal (which shall specify that delivery shall be effected, and risk of loss and title to the certificates shall pass, only upon receipt of the certificates by us) and instructions to effect the surrender of the certificates in exchange for a cash payment, if any, payable with respect to such certificates. Upon surrender of a certificate for cancellation to us, together with such letter of transmittal, duly completed and executed and containing the certification that the holder of the certificate holds fewer than 2,500 shares of our Class A Common Stock, and such other customary documents as may be required pursuant to such instructions, the holder of such certificate will receive a cash payment payable with respect to the shares formerly represented by such certificate and the certificate so surrendered shall be canceled.

 

All amounts payable to stockholders will be subject to applicable state laws relating to abandoned property. No service charges or brokerage commissions will be payable by stockholders in connection with the Transaction. We will not pay any interest on any cash amounts payable to our stockholders as a result of the Transaction.

 

YOU SHOULD NOT SEND YOUR STOCK CERTIFICATES NOW. YOU SHOULD SEND THEM ONLY AFTER YOU RECEIVE A LETTER OF TRANSMITTAL FROM US. LETTERS OF TRANSMITTAL WILL BE MAILED SOON AFTER THE STOCK SPLITS ARE EFFECTUATED.

 

TIME OF CLOSING

 

If the Transaction is approved by our stockholders, the Fourth Amended and Restated Certificate of Incorporation will be filed with the Secretary of State of Delaware as soon as practicable following the Special Meeting. Each of the reverse split and the forward split will become effective on the date and at the time specified in the Fourth Amended and Restated Certificate of Incorporation.

 

FINANCIAL INFORMATION

 

SUMMARY HISTORICAL FINANCIAL INFORMATION

 

The following summary of historical consolidated financial data was derived from our audited consolidated financial statements as of and for each of the fiscal years ended December 31, 2006 and 2005, and from unaudited interim consolidated financial statements as of and for the six months ended June 30, 2007. The statement of earnings data for the six months ended June 30, 2007 is not necessarily indicative of results to be expected for the full fiscal year. This financial information is only a summary and should be read in conjunction with our consolidated financial statements and other financial information, including the notes thereto, contained in our Annual Report on Form 10-KSB for the fiscal year ended December 31, 2006 and our Quarterly Report on Form 10-QSB for the quarter ended June 30, 2007, which information is incorporated by reference in this proxy statement. See “Where You Can Find More Information” and “Documents Incorporated by Reference,” both beginning on page   

SUMMARY FINANCIAL BALANCE SHEET

 

SUMMARY FINANCIAL STATEMENT OF EARNINGS

 

 

PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

The following unaudited pro forma consolidated balance sheet as of June 30, 2007, and the unaudited pro forma consolidated statements of earnings for the six months ended June 30, 2007 and for the fiscal year ended December 31, 2006, show the pro forma effect of the Transaction and related events as required by Rule 1102 of Regulation S-X. The historical figures for the fiscal year ended December 31, 2006, were derived from our audited consolidated financial statements that were included in our Annual Report on Form 10-KSB for the fiscal year ended December 31, 2006. The historical figures as of and for the period ended June 30, 2007 were derived from our unaudited consolidated financial statements that were included in our Quarterly Report on Form 10-QSB for the six months ended June 30, 2007.

 

The pro forma information below in this section giving effect to the Transaction is based on estimates of record ownership of shares of Class A Common Stock, the number of shares outstanding and other information as of June 30, 2007 and assumes that, as a result of the foregoing, 1,153,541 fractional shares are cancelled or cashed out at a price of $0.23 per share. Pro forma adjustments to the pro forma balance sheets are computed as if the Transaction had occurred at June 30, 2007, while the pro forma income statements are computed as if the Transaction had occurred at the beginning of the period. Management does not anticipate that the actual calculations of record ownership of shares of Class A Common Stock, the number of shares outstanding as of the record date or the anticipated closing of the Transaction will differ significantly from the estimates used in the following pro forma financial statements.

 

The pro forma information is not necessarily indicative of what our financial position or results of operations actually would have been if the Transaction had occurred on December 31, 2006 or June 30, 2007, or of our financial position or results of operations in the future.

UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
As of June 30, 2007

 

NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET:

 

(a) To record the senior subordinated unsecured promissory notes issued by us to various investors.

 

Represents the execution of a note purchase agreement between us and each of Phoenix, Brantley IV and Terrence L. Bauer (the “Subordinated Investors”), under which the Subordinated Investors agree to purchase four-year 14% senior subordinated unsecured promissory notes from us in the aggregate amount of $1,000,000 at the closing of the Transaction. The purpose of the sale of the senior subordinated unsecured promissory notes by us and the intended use of proceeds shall be to finance the cash-out of shares of Class A Common Stock in connection with the Transaction (to be consummated contemporaneously or substantially contemporaneously with the Closing) and for working capital purposes and related closing costs.