A Medical Device Daily

Merge Technologies (Milwaukee), an imaging software and services company that does business as Merge Healthcare , reported the immediate implementation of what it called a “reorganization and rightsizing initiative.”

The initiative includes the reduction of about 150 jobs, or 28% of its workforce, with anticipated cost savings of $13 million to $16 million annually.

While it noted that many of these reductions will be effective immediately, others will be transitioned over the next six months to assure “continuity and customer satisfaction.” Therefore, from an accounting perspective, the company said it does not anticipate an expense reduction of this entire amount during 2007 due to the timing of reductions as well as associated stay bonuses and retention costs associated with remaining employees totaling about $1 million to $2 million. The company also anticipates that it will incur additional costs of about $3 million to $5 million in 4Q06, primarily consisting of severance.

With the downsizing from about 550 personnel to roughly 400, Merge Healthcare said it expects to ramp staffing to the 550 level within three to six months, utilizing its “off-shore resources” from its planned software development and support center in India with an anticipated annual run-rate cost of $4 million to $6 million.

The company said it will be closing offices in San Francisco and Tokyo and downsizing operations in Burlington, Massachusetts; Cleveland; and Toronto.

Through this consolidation, Merge said it will increase the size of its headquarters office in Milwaukee.

“Our entire management team has spent several weeks reexamining every facet of our organization,” said Kenneth Rardin, president/CEO. “We have emerged from this review with even greater confidence regarding Merge Healthcare’s customer relationships, our strong product portfolio, and our long-term market leadership opportunities. However, we also identified several challenges that this reorganization is designed to address. First, we have a short-term need to better align our cost structure with our revenue-generating strategies. Second, our team has identified several redundancies within the consolidated organization, having not benefited from all of the economies of scale and synergies that should have resulted from the Merge and Cedaramerger.”

The company has undergone several problems recently. In early July, the company said it had uncovered improper accounting that required it to restate financial reports from 2002 to 2005 and prompted the resignation of three executives, including its then-interim CEO, William Mortimore (Medical Device Daily, July 7, 2006).

Beginning in early January, Merge Healthcare received a number of anonymous letters alleging improprieties relating to the company’s financial reporting, fulfillment of customer contracts and disclosure practices. The letters contained charges of improper revenue recognition.

The audit committee retained the law firm of Sidley Austin, along with Alvarez & Marsal, a forensic accounting firm, to conduct an independent investigation of the allegations contained in the letters.

Those firms conducted an investigation of the company’s accounting and financial reporting practices, which included a review of relevant documents and interviews of current and former employees of the company and former employees of Cedara Software (Milwaukee), which Merge acquired in June 2005.