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December 11, 2006

iSoft continues talks with suitors as sales decline

Troubled healthcare software provider iSoft Group Plc has revealed that it is continuing to have talks with possible suitors, after it took a heavy hit from exceptional items in its interim period during which it posted a sales decline of 11.6%.

By CBR Staff Writer

For the six months ending October 31, its net loss fell to 647,000 pounds ($1.2m), compared to a net loss of 8.5m pounds ($16.5m) in the year ago period. Sales meanwhile declined to 85.8m pounds ($167m) from 97.1m pounds ($189m). The year-ago figures had to be restated under a new accounting policy following revenue recognition problems.

In actual fact, the company said that profit from operations before exceptional items was at break-even, but then it was hit with exceptional costs of 11.6m pounds ($22.6m) including 4m pounds ($7.8m) for the closure of its former head office in Manchester, and 3.6m pounds ($7m) for redundancy and reorganization costs after it let go 15% of its UK workforce accounting for 150 jobs. It was also hit with a 4m pounds ($7.8m) charge for legal fees relating to changes in its funding arrangements, strategic discussions and the ongoing FSA (Financial Services Authority) investigation.

This meant that iSoft actually posted a 14.3m pounds ($28m) loss before tax. However, a timely tax credit of 13.7m pounds ($26.7m) helped it record only a net loss of just 647,000 pounds ($1.2m) for the six-month period.

It has been challenging to sign new contracts during 2006, admitted chairman and acting chief executive officer John Weston, but the group has a solid core of contracted and recurring maintenance revenues from its substantial installed base.

It is fair to say that 2006 has been a terrible year for the Manchester, UK-based company. In January and February its share price all but collapsed after serious problems with the company’s work on the UK National Health Service Connecting for Health project came to light.

Worse was to follow when the company admitted it was being investigated by the UK financial watchdog, the Financial Services Authority, after an internal investigation had found accounting irregularities for 2004 and 2005 which merited a more formal investigation. iSoft suspended two members of staff and also changed its accounting policy.

The company has also been searching for a replacement CEO after Tim Whiston stepped down in mid June.

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In August it narrowly avoided its shares being delisted when it finally published its annual results for the 12 months ending April 30, 2006, which recorded a net loss of 382.2m pounds ($714.7m) on sales of 201.7m pounds ($377.2m).

But August did bring some much needed good news, after iSoft revealed that it had secured new financing deals with its banks to support its business until late 2007. But it made clear that if the company was to prosper, it had to put in place long-term funding arrangements, especially as it faces a big rise in interest repayments in the new year. Cash and cash equivalents are down to 26.8m pounds ($52.3m) from 77.5m pounds ($151m) at the end of April.

In October Weston announced that iSoft was looking at alternatives for securing the long-term financing of the group after it had received expressions of interest from a number of parties interested in acquiring iSoft.

We confirmed that we were taking forward discussion with a number of these parties with the objective of clarifying the options and determining the most appropriate route forward for the company and its shareholders, Weston told the London Stock Exchange on Monday. These discussion are continuing satisfactorily at this time and we will make a further announcement in due course.

It is thought that a deal could take the form of a takeover, a strategic alliance, or an outside investor taking a large shareholding in iSoft. One potential suitor could be IT services vendor Computer Sciences Corp, which in September took over the two Connecting for Health contracts previously run by Accenture Ltd.

CSC is now running three of the five regional clusters that make up the project, with iSoft acting as its software subcontractor. In August, as part of a restructuring of the deal between the two companies, iSoft gave CSC the right to assume control of the software development team should iSoft fail to fulfill its obligations. iSoft also said it had agreed with Accenture not to make any further payments. The deal removes the threat of potential legal action.

In January 2006, before the troubles, shares in iSoft had been trading at the 400 pence ($7.81) mark. On Monday, shares rose 16.5% on the London Stock Exchange to 47.5 pence ($0.92).

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