Friday, April 16, 2010

Splain Me Some More Ricky

PACSman: I love how women like Ms. PACS bait me by putting things up on a blog, then tell me about it after the fact once it’s up, as a comment in an e-mail in a “by the way” fashion. This must be her way of playing the Wicked Witch of the West, “I’ll get you my pretty and your little dog too ah ha ha ha ha …..” only her version of it is closer to “I’ll get you (to post something up on here one way or the other) my pretty (PACSMan)…” Once again, using her feminine wiles, she has succeeded…although if she keeps this up I’ll have my little dog Elvis (not Toto) hump her leg, then pee on her bookshelves too…although she might actually enjoy the former (laugh).

Yes, Ms P., I have been following the Merge/AMICAS story closely, and a lot of what is going on has me completely stumped. That said, I am not an investor in either company - my objectivity in this market would suffer if I invested in either of these PACS companies. One look at the past six months is enough to make any investor cry, although Merge stock has rebounded $0.50 in the past two weeks - although why is anyone’s guess.

Now we come to the good stuff.

On April 2, Merge completed a private placement of preferred and common stock totaling $41.75 million, which is specified for use in funding a portion of the proposed acquisition of AMICAS. The merger agreement contains a commitment from Merge to provide $40 million in preferred equity to the acquisition. This private placement will satisfy that commitment and is scheduled to close prior to the close of the tender offer to AMICAS shareholders.

Merge entered this securities purchase agreement with 14 institutional and other accredited investors, pursuant to which Merge will issue an aggregate of 41,750 shares of Series A Non-Voting Preferred Stock and 7,515,000 shares of common stock for a total purchase price of $41.75 million, before fees and expenses.

Now here is what I don’t understand. 99.45% of the $40M in stock issued is common stock, while only 0.55% is preferred. So what’s the big deal? A couple of days later Merge then announced its intent to offer $200 million aggregate principal amount of senior secured notes due 2015, which will be used to fund a portion of the proposed acquisition of AMICAS. The notes will be senior obligations of Merge and will be guaranteed on a senior basis by all of Merge’s domestic restricted subsidiaries.

Now what am I missing here? Fourteen investors said: “Yup we are in!!” and get 7.5M shares of common stock with no guarantees attached to it whatsoever. Four days later, Merge announces its intent to offer $200 million aggregate principal amount of senior secured notes due 2015, “guaranteed on a senior basis by all of Merge’s domestic restricted subsidiaries.” So if I read this right, the $200 million comes with guarantees, while almost all the $40 million comes with nada since it is “common stock.”

I have many friends in the industry that have been issued common stock before as employees, as have I, so that is my only frame of reference. Some have even been former e-Med employees (now part of Merge coincidentally). They worked hard and long for many years in the hope that once their company was sold they would finally get their just reward. And they did, right in the ……This isn’t just e-Med folks who have had this happen to them, I can give you a list of at least half a dozen companies where the rich got richer (a.k.a. management and investors), and those who truly made the company what it was were left to squeal like a pig Deliverance-style….

So what happened? Once all the preferred stock was paid the old Italian proverb that goes “Con nulla non si fa nulla” got put into play. Translated this means “Of nothing comes nothing.” And that is what they got. Top management and investors got theirs, but what of the people who made these companies what they were? Niente….nothing…They couldn’t even use the stock as TP, which they needed after the “good lovin” they just got by the companies they sacrificed their lives, marriages, and families for, all in the hopes of achieving the Great American Dream called financial freedom. They had common stock - just like the 7.5M shares that were issued on the 4th are…..

I hope I am wrong here, but….it sure seems to me like someone needs to be kissed. Would these 14 investors have ponied up and laid $40M on the bar knowing $200M in guaranteed stock would be offered a few days later? You’ll just have to ask them. But I bet a few are as confused as I am, if not outright pi$$d off. I know I would be, assuming my assumptions are right that is.

The other interesting thing (to me, at any rate) is with the $40M “the securities to be issued in the private placement have not been registered under the Securities Act of 1933, as amended (the Securities Act) or any state securities laws and may not be offered or sold in the United States absent registration with the Securities and Exchange Commission (SEC) or an applicable exemption from the registration requirements of the Securities Act. Merge has agreed to file a registration statement with the SEC covering the resale of the common stock issued in the private placement, provided however, that pursuant to the terms of the securities purchase agreement the investors shall be restricted from transferring the shares acquired in the private placement without the prior consent of Merge (other than to an affiliate) until the earlier of the first anniversary of their issuance or the occurrence of a “change of control” as defined in the securities purchase agreement.”

And the $200M? “The notes and the related guarantees will be offered in the United States to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended (the Securities Act), and outside the United States pursuant to Regulation S under the Securities Act. The notes and the related guarantees have not been registered under the Securities Act and may not be offered or sold in the United States absent registration or an applicable exemption from the registration requirements.”

One seems to be registered, the other isn’t. Now again I’m way out of my comfort zone here and have no idea what the difference nor can I explain it, but I’m not putting more than $250K of my hard earned money per bank account lest the FDIC not insure it. The same probably holds true here. Gimme a guarantee any day… Of course the FDIC will probably go bankrupt anyway, but at least I can say I’ve been prudent in trying…

Now, if Merge has already obtained $200 million of bridge financing from Morgan Stanley and has also started a cash tender offer for all of the outstanding shares of AMICAS, has been extended to 5:00 p.m., New York City, New York time, on Friday, April 23, 2010, unless further extended, why then do they need all this money? That’s sorta like your wife asking you to wear a condom five years after you had a vasectomy - and she is on birth control to boot…Someone please ‘splain me that to me, Ricky, too…

I’m not sure I buy the statement made that “The successful acquisition of AMICAS will enable Merge to acquire one of its main competitors and widen its customer base. This will in turn expand the company’s top line.” Merge and AMICAS competed in very few accounts in both the PACS and RIS arena over the past five years – a few handfuls per year at best that I know of if that - so who is coming up with a blanket statement like this is anyone’s guess. That is like me putting up my profile on Millionaire Match in the hopes of finding my very own gold digger once I hit my first million later this year (provided the FDIC doesn’t go belly up that is).

That same report said the following: “In the past, Merge has been paralyzed by several issues like a dwindling cash balance, management turnover, accounting miscues and litigations. The real turnaround started in the second quarter of 2008 when the company received the much-needed cash infusion of $20 million from Merrick RIS LLC in May 2008.” Real turnaround? You mean from $0.26 to over $2.00? Oh yeah, my bad again. But how soon some people forget the past:

Now let’s be fair and show the same time period they are referring to

Wait!! Does that not show $4 a share in June 2009? Then a $3 a share in 2010? Below $2.00 a share in March 2010? Maybe jumping back up to over $2.50 is the turnaround they are referring to here but in my book this is more of Mr. Toad’s Wild Ride or a trip in the Tower of Terror at Disney than anything else. Turnaround? Look closer...

Income Statement:

View: Annual Data | Quarterly Data
All numbers in thousands
PERIOD ENDING 31-Dec-09 31-Dec-08 31-Dec-07
Total Revenue 66,841 56,735 59,572
Cost of Revenue 19,377 20,072 29,348
Gross Profit 47,464 36,663 30,224

Operating Expenses
Research Development 10,689 13,240 21,065
Selling General and
Administrative 22,208 29,774 48,057
Non Recurring 2,838 11,816 124,131
Others 2,766 3,530 8,209

Total Operating
Expenses 38,501 58,360 201,462

Operating Income or Loss 8,963 (21,697) (171,238)
Income from Continuing Operations
Total Other Income/Expenses Net (6,097) (296) (481)
Earnings Before Interest And Taxes 2,866 (21,993) (171,719)
Interest Expense 2,716 1,750 89
Income Before Tax 150 (23,743) (171,808)
Income Tax Expense (135) (60) (240)
Minority Interest - - -

Net Income From Continuing Ops 285 (23,683) (171,568)

Non-recurring Events
Discontinued Operations - - -
Extraordinary Items - - -
Effect Of Accounting Changes - - -
Other Items - - -

Net Income 285 (23,683) (171,568)
Preferred Stock And Other Adjustments - - -

Net Income Applicable To Common Shares $285 ($23,683) ($171,568)

Um…. to me this looks like they still lost over $23.6M in 2008. I guess compared with losing $171M this is a turnaround for sure…but that’s like comparing me to John Holmes (God rest his perverted soul).

This year Merge made $285K (K is the symbol for thousand for those economically challenged) on almost $67M in revenue - although they would have made more if they didn’t lose over $2M in the 4th quarter. To me that’s hardly worth getting out of bed for…Now let me say that given the softness of the imaging marketplace ANY profit is commendable - you go Merge, especially since big boys could have used some Viagra this year their sales were so soft - but I’d feel a lot more comfortable if Merge made their profit on actual SALES rather than through a $20M (that’s million) reduction on operating expenses. Still a profit is a profit so…

Now I hear a lot about longs and shorts, and I’m not talking about anything other than Merge’s 2008 10K I found this:

Common Stock Market Prices:

2009     4th Quarter       3rd Quarter          2nd Quarter      1st Quarter
High     $4.25                 $4.78                         $4.48                    $1.84
Low     $2.93                  $2.98                        $1.25                     $1.07

High    $1.75                  $1.60                          $1.37                   $1.26
Low     $0.26                  $0.60                          $0.26                   $0.33

And this:

Now for those who have a hard time interpreting what this means, $100 invested
in Merge would bring you a $15 ROI today…Of course that is triple what it brought in 2007 and, yes, nearly as much in the turnaround year 2008 as well so again we have a turnabout…so to speak…


Date                    Merge Healthcare Inc.    Nasdaq Computer Index    Russell 2000 Index
                              (Nasdaq: MRGE)             (^IXCO)                               (^RUT)
12/31/2004             $100                                  $100                                   $100
12/30/2005            $113                                   $103                                    $103
12/29/2006              $29                                   $109                                    $121
12/31/2007                $5                                   $133                                    $118
12/31/2008                $6                                     $71                                      $77
12/31/2009             $15                                    $121                                     $96

So what’s going to happen?

Merge has a very very sharp, financially savvy management team that understands the financial marketplace. They are some of the best of the best from the finance world and know how to turn a profit. That, no doubt, is what they will do.

So here are the PACSMan’s predictions. A few months after the sale goes through (assuming it does go through, that is), the boys up top will get out their Ginsu knives and slice and dice both companies to maximize the investment and show a decent ROI to the investors. They will keep what the products and services they feel they can grow and profit from and ditch the rest. And if a few (or more than a few) people happen to get hurt along the way, well that’s called collateral damage. “It” happens and no one, especially not the investors, give a rat’s…..It’s all about the buck.

Now the burning question - will AMICAS PACS survive? I sure hope so. It’s a great product with even better potential - the best in the entire Merge/AMICAS portfolio.

What about the other products in the line, including the ones that have the strongest OEM relationships i.e. Cedera, Camtronics, and eFilm? That remains to be seen… I’d put money that there are a few buyers lined up for some of these products already. Don’t ask me who, though, cuz I’m not saying, but I have some very strong hunches.

In my hometown this week, we experienced nothing short of a miracle. A mere two miles from my house an 11-year-old girl who was lost in dense woods filled with snakes and alligators got rescued. Very near the 96-hour point where a search and rescue operation becomes a recovery operation, a volunteer from her former church, who really shouldn’t have been in there looking for her, found her - bug bitten and dehydrated, but very much alive… Everyone I know shed a tear or two. I have kids as well and know how it feels to not be able to find your child. When my “baby” Matt, who will be 17 on Friday, was age two he was “lost” for a whole 30 minutes, very well hidden in our house. During the time from when we called 911 until he was found, we had five sheriff’s deputies inside and out plus a chopper overhead looking for him. God bless these people. I can’t even fathom going for four days now knowing how or where our child is except being lost somewhere out there.

Yet the girl, her rescuer, and her parents all quoted a single bible verse that sustained them, Proverbs 3:5 “Trust in the Lord with all your heart and lean not on your own understanding.”

I put my trust in Him always and sincerely hope that the trust I have in Merge management to do the right thing for both its and AMICAS’ people, and not just the investors, is not displaced…

Only time will tell…stay tuned…

1 comment:

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