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UPDATE 1-Merge Healthcare says ex-employee fabricated contracts

Wednesday, 8 Jan 2014 | 12:14 PM ET

(Adds analyst comment, share movement)

Jan 8 (Reuters) - Merge Healthcare Inc, a medical imaging software maker, said a former employee falsified contracts, forcing it to cut its backlog of orders and sending its shares down as much as 10 percent in morning trade.

The news follows a tough period for the company last year. The stock has nearly halved since August when Merge Healthcare reported weak quarterly results and said its chief executive resigned.

The company, which has reported a fall in revenue for the past two quarters, on Wednesday said it would cut the adjusted backlog in its data and analytics business by more than $15 million.

B Riley & Co analyst Gene Mannheimer said investors were over-reacting since the affected business accounted for just about 15 percent of the company's revenue.

"Despite the backlog adjustments, they're still forecasting good growth in the business," said Mannheimer, who has a "buy" rating on the company's stock.

While the company said it expects sales in the data and analytics business to grow at least another 20 percent this year, Mannheimer said he expected the cut would have a greater impact in 2015 when the backlog converted to revenue.

The company said the cut to its backlog would not affect its prior results as it had not billed customers or recognized revenue from the falsified contracts.

There was no evidence that other employees were a part of or aware of the falsification, according to an independent investigation authorized by Merge Healthcare.

The company said the employee, who acknowledged that the contracts were invalid, was paid commissions worth $250,000 on the falsified contracts through six quarters ending Sept. 30. The employee resigned in September.

Merge Healthcare said it has referred the matter to the U.S. Attorney's Office for the Northern District of Illinois, and will consider other legal action.

Shares of the company were down 7.5 percent at $2.33 in morning trade on the Nasdaq. They hit a low of $2.26 earlier.

(Reporting by Vrinda Manocha in Bangalore; Editing by Savio D'Souza)

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