A Medical Device Daily

Merge Technologies (d/b/a Merge Healthcare ; Milwaukee) provided an update earlier this week on the status of the previously disclosed investigation of accounting and financial disclosure matters being conducted by the Audit Committee of the company's board of directors with the assistance of independent advisors.

Changes also were reported to the company's senior management team, including the naming of Michael Dunham, chairman of the board, as the principal executive officer of the company on an interim basis, and the appointment of Brian Pedlar, senior vice president of the company and president of Cedara Software, and Robert White, senior vice president and president of Merge eMed, as co-presidents and co-CEOs, also on an interim basis.

Dunham has served as a director of the company since February 1998 and chairman of the board since May. “Brian, Bob and I will work collaboratively to strengthen relationships with our customers, ensure that Merge Technologies continues to be a compelling place for our employees to work, and to build value for our shareholders,“ he said.

“We remain committed to providing … solutions to our customers that improve clinicians' productivity and enhance the quality of the care they provide,“ said Dunham. “With approximately $60 million in cash and cash equivalents on hand as of June 30, the company is confident that it has sufficient liquidity for the foreseeable future.“

Since early January, Merge Healthcare has received a number of anonymous letters primarily alleging improprieties relating to the company's financial reporting, fulfillment of customer contracts and disclosure practices. The letters contained allegations of improper revenue recognition practices.

The Audit Committee retained the law firm of Sidley Austin, along with Alvarez & Marsal, a forensic accounting firm, to conduct an independent investigation of the allegations contained in the letters.

Those firms have conducted a comprehensive investigation of the company's accounting and financial reporting practices, which has included a review of relevant documents and interviews of current and former employees of the company and former employees of Cedara Software, which Merge acquired in June 2005.

Sidley Austin reported its findings to the Audit Committee on June 29, and on July 2 the board of directors held a meeting at which it accepted the resignations of William Mortimore, interim CEO; Scott Veech, CFO, treasurer and secretary; and David Noshay, senior vice president, strategic business development, as officers and employees of the company and its subsidiaries and, in the case of Mortimore, also as a director.

Steve Oreskovich, who has been serving as vice president and corporate controller since April 2004, has been appointed chief accounting officer and interim treasurer and secretary.

The company also provided an update with respect to the restatement of previously issued financial statements. The Audit Committee has determined that, because of improper accounting and financial reporting practices with respect to reporting periods in the fiscal years 2002 through 2005, the previously issued financial statements for each of the reporting periods in those years should no longer be relied upon, nor should the audit reports of KPMG with respect to those financial statements.

It will be necessary to restate previously issued financial statements for those periods. The company said it anticipates that the restatements will primarily relate to the timing of revenue recognition, with a significant amount of revenue recognized in 2002 through early 2005 expected to instead be recognized in late 2005 and 2006. It said it could not provide a precise estimate of the impact of these non-cash adjustments to the financial statements.

Merge Technologies said it continues to cooperate with the Securities and Exchange Commission with respect to its previously announced, informal, nonpublic inquiry that principally relates to the company's announcement on March 17 that it would revise its results of operations for the quarters ended June 30, 2005, and Sept. 30, 2005, as well as the Audit Committee's investigation.

Between March 22 and April 26, seven securities class-action lawsuits were filed in U.S. District Court for the Eastern District of Wisconsin, on behalf of a class of persons who acquired shares of the company's common stock between Aug. 2, 2005, and March 16, 2006, against Merge Technologies and two of its former officers. The cases arise out of the March 17 announcement that the company would revise the results of operations for June 2005 and September 2005 quarters, as well as the firm's investigation of the allegations made in anonymous complaints.

The complaints seek damages in unspecified amounts.

Merge Healthcare is a developer of medical imaging and information management software and services. Merge eMed is focused on accelerating productivity for radiology departments and specialty practices, imaging centers and hospitals. Cedara Software is focused on the development of custom-engineered software applications and development tools for the medical imaging OEM and international markets.