A Diagnostics & Imaging Week

Digirad (Poway, California), a provider of solid-state imaging products and services to physician offices, hospitals and imaging centers, reported that David Sheehan re-signed as its president and CEO and as a board member, effective Thursday, following an investigation into whether the sale and delivery of a single digital gamma camera in 1Q04 properly recognized revenue.

The company also fired its senior vice president of operations, Herb Belucci, terminated one sales employee and forced the resignation of another.

To replace Sheehan, Digirad named Gary Burbach president and CEO. Burbach has served on Digirad's board since October 2004. He currently serves as president and CEO of Bacchus Vascular (Santa Clara, California), a developer of catheter-based medical devices for the removal of blood clots. Burbach will assume his new role at Digirad immediately, devoting the majority of his time to his new responsibilities with the company while he transitions out of his current role with Bacchus Vascular.

Previously, Burbach served as CEO of Philips Nuclear Medicine, a division of Royal Phillips Electronics (Best, the Netherlands) from January 2001 to July 2003. Prior to its acquisition by Phillips, Burbach worked for four years for ADAC Laboratories (Milpitas, California), most recently as president and general manager of its nuclear medicine division.

"Our company is very fortunate to attract a senior executive with tremendous industry experience and success, as well as significant experience at larger companies," said Timothy Wollaeger, chairman of the Digirad board. "Gary's extensive nuclear imaging background and his knowledge of Digirad from his service on the board will allow us to continue to successfully execute on our strategic opportunities."

Digirad reported that it has conducted an investigation, under the direction of the audit committee of its board, into whether the company properly recognized revenue with respect to the sale and delivery of a single digital gamma camera in 1Q04 and related matters.

The company and its independent accountants confirmed the propriety of the revenue recognition with respect to the camera sale, Digirad said, and also concluded that no adjustment to its recorded revenue was necessary and no restatement of its prior issued financial statements was required.

However, Digirad said it had discovered "a material weakness in [its] internal controls relating to this camera sale transaction."

The audit committee and board concluded that certain employees had "attempted to circumvent internal controls over the company's financial reporting or failed to reveal facts related to the delivery of the camera." The company said it has found no evidence of any other material departure from internal control policies.

As a result of the findings, Digirad has implemented a series of remedial actions, including requesting and receiving the resignation of Sheehan as president and CEO and terminating Belucci, as well as the departure of two sales employees. It also assigned more senior accounting personnel to oversee revenue recognition and adopted "more stringent controls" over delivery procedures and documentation.

Digirad said it expects those changes to "fully address" the weakness in its internal controls. The company also notified the Securities and Exchange Commission of the investigation.

The company said it "anticipates incurring extraordinary legal, accounting and other expenses" in connection with the termination and investigation which could have a material, adverse affect on its second quarter results of operations and previously issued financial guidance.

The company said it would release first quarter earnings on May 2. However, it reported preliminary financial results for the quarter, saying that it expects total revenues of $17.7 million to $18 million and a net loss of $850,000 to $1 million, or 5 cents to 6 cents a share.