A Diagnostics & Imaging Week
Merge Healthcare (Milwaukee) reported that it has entered into a securities purchase agreement and related agreements with Merrick RIS for $20 million in financing through a private placement. The company intends to sell a $15 million senior secured term note due 2010 and 6,800,000 shares of the company's common stock as partial consideration for the term note and 14,285,715 shares of common stock at a price per share of $.35.
The private placement is scheduled to close on or about June 3, subject to customary closing conditions. After giving effect to the payment of certain transactions costs, closing fees and the payment of prepaid interest, the net proceeds of the private placement to the company will be about $16.6 million.
In connection with the private placement, Merrick will be entitled to designate five persons to replace five of the 11 current directors on Merge's board of directors, effective upon the closing of the placement. The company has also agreed that Merrick will continue to have the right to designate five persons to be nominated for election to the board in the future, subject to reduction upon a decrease in Merrick's ownership percentage in the company.
The term note contains various operating and financial covenants, including a requirement that the company have positive adjusted EBITDA for 4Q08 and cumulatively thereafter through the term of the note.
The note will be a senior secured obligation and will be senior to the company's existing and future indebtedness. It will be secured by all of the company's U.S. and Canadian assets.
Even with stringent rules attached, the financing comes as a light at the end of the tunnel for the financially troubled company.
In March, Merge reported an agreement in principle with the plaintiff and other defendants, which are comprised of company shareholders in the derivative action against it, providing for the settlement and release and dismissal of all claims asserted.
In exchange, the company has agreed to a one-time payment of $250,000 for legal costs incurred by the plaintiff. In addition, the settlement will reflect that Merge and the other defendants continue to deny that they have committed or attempted to commit any violations or breached any duty owed to Merge or its shareholders.
The settlement is subject to court approval.
Merge also reported receiving $1.05 million in cash from its primary directors and officers' liability insurance carrier for reimbursement of legal expenses in connection with the class action and derivative action against it and some of its current and former directors and officers.
The company said the collection of cash is only a partial reimbursement of the costs incurred in connection with the defense of the class action, derivative action and SEC investigation that the company is facing.
Beginning in January 2006, the company received anonymous letters alleging improprieties in its financial reporting, fulfillment of customer contracts and disclosure practices and improper revenue recognition. Its audit committee retained the law firm of Sidley Austin, along with Alvarez & Marsal, a forensic accounting firm, to investigate these allegations.
Those firms conducted an investigation which included review of documents and interviews with current and former employees of the company and former employees of Cedara Software (Milwaukee), which Merge acquired in June 2005.
The company is under investigation by the SEC because it determined that it would have to restate all of its earning reports from 2002 through 2005 because of improper accounting and financial reporting practices.
Also earlier this month, the company sold its subsidiaries in China, France and the Netherlands after posting another loss during 1Q08. Merge had reported that the net loss for the quarter was $7.8 million or 23 cents per share.
In its report, company officials said the financial problem stem from a loss of customers and failure to attract new customers, low employee morale and increasing employee attrition. Merge also stated that vendors and suppliers are terminating contracts or tightening credit, and management is distracted from focusing on the business.
Last month, the company also settled a lawsuit for $250,000 with public investors who acquired the securities of Merge during the period of Aug. 2, 2005, through March 16, 2006. The lawsuit stemmed from improper accounting that required the company to restate financial reports during that time period.
Merge develops medical imaging and clinical software applications and developmental tools.
In other financings:
• OccuLogix (Mississauga, Ontario) reported that it has entered into a definitive agreement with a number of investors for the private placement of 5,076,500 shares of common stock at a per-share price equal to the lower of 10 cents and the volume-weighted average closing price of the company's common stock on Nasdaq for the 15-trading day period immediately preceding the closing date of the sale.
OccuLogix also reported that it has filed a preliminary proxy statement to solicit the proxies of its stockholders for, among other approvals, the approval of this private placement and the approval of the definitive merger agreement that the company had entered into, and disclosed in April to acquire the minority ownership interest in OcuSense (San Diego) that the company does not already own. Currently, OccuLogix owns 50.1% of the capital stock of OcuSense on a fully diluted basis.