Merge Says Finances Scrutinized: SEC Has Launched Investigation into Accounting Practices of Software Company

By Guy Boulton, Milwaukee Journal Sentinel

Dec. 29–Merge Technologies, a medical software company in West Allis, said Friday that the Securities and Exchange Commission has launched a formal investigation into the company’s accounting.

The company, which does business as Merge Healthcare, has struggled to regain its footing since disclosing last year that former executives had bypassed internal accounting controls, resulting in inflated profits and revenue in its financial statements since 2002.

The announcement of the formal SEC investigation was one of several on Friday that suggest the challenges facing the once fast-growing company.

Merge also reported that:

–It lost $10.7 million, or 32 cents a share, on revenue of $14 million for its second quarter ended June 30. Revenue was down 55% compared with the same quarter of 2006. The company has lost money from its operations for six consecutive quarters.

–Its management and audit committee concluded this month that substantially all of the company’s goodwill has been impaired and will result in a non-cash charge in its quarter ending Sept. 30. Goodwill is a bookkeeping entry that places a value on intangible assets such as a business’ name and customer relations.

–It had no credit lines and is dependent on its available cash and cash flow to pay for its operations. Its cash balance was $22 million on Sept. 30, down from $29.7 million on June 30 and $45.9 million on Dec. 31. The company said it was considering a wide range of alternatives to raise money.

Merge stock, which hit $30.05 a share in December 2005, closed Friday at $1.11 a share, down 29 cents, or 20.7%.

The company develops software for diagnostic imaging centers and small to midsize hospitals as well as for manufacturers of medical imaging equipment.

For the six months ending June 30, the company posted a net loss of $20.5 million, or 60 cents a share, compared with a net loss of $216.3 million, or $6.43 a share, for the same period of 2006.

The company’s results for 2006 include $214.1 million in goodwill, restructuring and other charges.

Revenue fell to $29.9 million in the first six months of this year, down 37% from the $47.6 million reported in the same period of 2006.

The company said it will file its third-quarter results in January.

Merge also filed with the SEC restated financial results for 2004 through 2006 and for the first quarter of this year. The company has said the restatements — the second for some of its financial results — would result in a decrease of about $1 million in previously reported revenue for 2004 through 2006.

Last year, Merge eliminated about 150 jobs, about 28% of its work force, and opened a software development and customer service center in India as part of a broad restructuring.

The company said it employed about 105 people working in software development in India as of June 30.

Merge Technologies Inc.

2nd quarter

%

6/30 2007 2006* change

Sales $14.0 $31.4 -55.4

Net income -$10.7 -$211.0 n/a

EPS (diluted) -$0.32 -$6.27 n/a

6 months

Sales $29.9 $47.6 -37.1

Net income -$20.5 -$216.3 n/a

EPS (diluted) -$0.60 -$6.43 n/a

*Includes $214.1 million in charges for goodwill impairment, restructuring and other expenses.

Figures in millions except for earnings per share. Percentages are based on unrounded sales and income figures.

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