By JOHN SCHMID

Hailing another step in a dramatic turnaround under its new management, West Allis medical software-maker Merge Healthcare Inc. on Friday announced plans to issue new stock.

"The company is significantly healthier," said Chief Executive Officer Justin Dearborn, who took over leadership of the company in June 2008 at a time when Merge was losing money, its share price was plummeting and its previous management was under investigation by the U.S. Securities and Exchange Commission.

Merge, which develops medical imaging and information software, plans to sell more than 9.03 million common shares to select institutional investors at a price of $3 a share, it wrote in an SEC filing. Merge estimates the sale will generate proceeds of about $25.2 million, after fees and other expenses.

Dearborn noted that the company's stock, which trades on Nasdaq, currently gives it a market capitalization of $250 million, up about 18-fold from $14 million when Dearborn took over.

"The company has been profitable and the momentum allowed us to raise new money," he said.

After the announcement Friday, Merge shares fell 48 cents, or 13.3%, to $3.12.

The SEC launched its investigation in 2006, after Merge disclosed that its former executives had inflated the company's financial results. When the investigation began, Merge had run an operating loss for six consecutive quarters and had no credit lines available.

Last year, new management was installed after Merge received a net investment of $16.6 million from Merrick Ventures LLC, a Chicago equity investment firm. Before Dearborn took over as CEO, he was managing director of Merrick Ventures, which became Merge's largest shareholder under the recapitalization.

Most of the proceeds from the share sale -- $18.1 million -- will be used to repay debt held by Merrick. The new issues will dilute Merrick's stake to 37% from 43%. The company said it intends to use the remaining proceeds from the stock sale for general corporate purposes, including working capital.

The latest share issue does not signal that Merrick is about to sell Merge in order to unwind its stake, a move that's common among venture capital-owned companies.

"Quite the opposite," Dearborn said. He added that he is a full- time CEO of Merge, not an interim or acting chief executive.

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