16 May Merge president steps down in wake of shareholder suits
West Allis, Wis. – In the wake of shareholder lawsuits alleging violations of federal securities law, the board of directors of Merge Technologies, Inc. has accepted the resignation of company president and CEO Richard Linden.
Bill Mortimore, who founded the company and served as its chief executive officer from 1987 to 2000, has been appointed as the company’s interim CEO. Mike Dunham, the company’s lead independent director, was named chairman of the board of directors, succeeding Mortimore, who had been serving as chief strategist and chairman of the board. The board also launched a search for a permanent CEO.
Meanwhile, the company provided a status report on the previously announced investigation of accounting and financial disclosure issues being conducted by the board’s Audit Committee. The committee expects the investigation to be completed within the next few weeks.
The shake up
In late March, the medical imaging software developer was hit with shareholder lawsuits in U.S. District Court. The lawsuits, which seek class action status, stem from Merge’s $325 million stock purchase of Cedara Corp., a Canadian software company that develops products for the medical imaging OEM market. Shareholders claim that Merge executives broke securities laws by issuing materially false and misleading statements that claimed the merger was successful.
In naming Mortimore, the new chairman said the board of directors had chosen a person that is uniquely suited to lead the company at this time. “Bill will be heading a deep and experienced management team,” Dunham said, noting that the team also includes Brian Pedlar, president of the Cedara Software division, and Bob White, president of the Merge eMed division.
“Our board will work together with management, as well as our independent advisors and auditors, to resolve the financial disclosure issues facing the company as quickly as possible,” Dunham added.
The lawsuits represent people who bought shares of Merge between August 2, 2005, and March 16, 2006. The lawsuits against Merge were filed less than one week after the company acknowledged that it expects to report “material weaknesses” related to its internal controls over financial reporting. As a result, the company said financial statements issued for the quarters ended June 30, 2005, and September 30, 2005, were unreliable and would have to be adjusted.
The company determined that approximately $3.8 million of additional tax liability related to the merger with Cedara must be recorded as of June 30, 2005. Another error occurred when $1 million in revenue that was recognized on a sales contract in the second quarter of 2005 should not have been recognized in that quarter because collectibility was not reasonably assured. The company said this was an error in the timing of recognition, and it ultimately collected $150,000 in the fourth quarter of 2005 and $850,000 in the first quarter of 2006, and the revenue will be recognized in those periods.
Veech remains as CFO
For the time being, the company’s executive team also will include Scott T. Veech, who will continue to serve as chief financial officer. Merge reached an agreement with Veech for him to continue in the CFO role for a limited period after he expressed a desire to move out of the position to reduce his workload. He has agreed to stay on while the company completes its SEC filings for 2005 and the first quarter of 2006, and the board has begun the search for his replacement. Veech may remain with Merge in another capacity.
Merge has retained an independent registered public accounting firm, KPMG, LLP, which is proceeding with an audit of the company’s 2005 financial statements. “Our goal is that the company become current in its SEC filings as soon as possible, and we are devoting significant resources to this effort,” stated Dennis Brown, chairman of the company’s Audit Committee.
On March 20, Merge received written notification from the NASDAQ Stock Market that its common stock was subject to delisting because it did not timely file its 2005 annual report. In April, representatives of the company appeared before a NASDAQ Listing Qualifications Panel to request an extension until June 30, but the panel has yet to issue a ruling on the request.