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Merge Healthcare appoints new CEO, reports $215 million Q2 loss

West Allis, Wis. - Merge Healthcare, a supplier of medical imaging and information technology, has appointed a new company leader and reported a $215.8 million quarterly loss.

Kenneth Rardin has assumed the role of president and CEO of the financially troubled company, replacing interim CEO Michael Dunham, chairman of the board of directors. The appointment comes in the wake of resignations by president and CEO Richard Linden in May and the subsequent resignations of three top executives in July.

With 25 years of senior management experience in healthcare IT, computer software, and computer services, Rardin has completed two successful IPOs with Software AG International and IMNET Systems, a company he founded.

Rardin said IMNET had a similar experience to the one Merge finds itself in, and lived through it by re-establishing its credibility.

He touted Merge's product line, history of satisfied customers, and experienced research and development group as the assets that will be needed to help the company regain some traction in the market. "I'm here because I think there is significant long-term opportunity at Merge Healthcare," Rardin said.
The announcement coincides with the naming of two additional board members: Kevin Moley, a former U.S. Ambassador, and Kevin Quinn, a principal of the investment firm WYE River Group, Inc., Annapolis, Md.

Financial difficulties

Due primarily to its recent financial disclosures, Merge incurred a loss of almost $221 million, or $6.56 per fully diluted share, during the first six months of 2006. Company revenues for the six-month period totaled $47.9 million, but $31.7 million of that came during the first quarter.

Merge faces seven class action lawsuits filed by shareholders against the company, claiming it issued false statements in its 2005 purchase of Cedara Software for $325 million. The suit sparked an investigation that led to the discovery of material errors in its financial statements, followed by the resignations of top executives, including company founder Bill Mortimore. Last week, the company acknowledged that former executives did not use internal accounting controls.

Compounding the financial setbacks, Merge has faced repeated delisting warnings from the NASDAQ Stock Market after failing to meet filing deadlines for financial reports. The company announced it had completed all its overdue filings as of today.

"Our second quarter was obviously hampered by the shadow of the accounting restatements that we have now completed," Dunham said in a statement.

As of 2:30 p.m. Central Standard Time on Sept. 6, shares of Merge were up 51 cents to $8.05, after closing Tuesday at $7.54.

Future opportunity

Despite its recent setbacks, Rardin noted that Merge is in a growth market. There are almost 6,000 imaging centers and over 5,500 hospitals in the U.S., 85 percent of which are in Merge's target market space. Sales of Merge's U.S. "PACS" systems are projected to grow 15 percent per year for the next several years.

In addition, Merge has a growing suite of medical imaging products, a large infrastructure, an established OEM channel, and penetration in the international marketplace, which made up 40 percent of its revenue in 2005, Rardin explained.

“It’s going to take us some time to regain credibility and to educate our current and prospective customers about what really happened," Rardin said. "Our competitors are taking this opportunity to make disparaging comments about Merge, and I expect this to continue.

“When I was chairman and CEO of IMNET Systems, I lived through some of these same issues,” Rardin added.

IMNET was investigated after anonymous letters were sent to its auditors, and it underwent an "informal inquiry" from the U.S. Securities and Exchange Commission.

The investigation had "significant" short-term revenue impacts on the company due to the unknowns caused by the late filing and the ongoing negative comments by its competitors, "and we lived through that," Rardin repeated.

Time for stability and growth

“I love the healthcare technology space," Rardin told investors and analysts during a conference call, "and I think it’s a growing space. We have an aging population, and it continues to age both domestically and internationally.”

He said most industry analysts are talking about tremendous growth opportunity on the clinical side.

“It’s an industry that’s under-invested in technology, and it's an industry that has recognized that it has to invest in technology, and that spells future opportunity for a company like this.”

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