Merge Technologies Inc. F3Q07 (Qtr End 09/30/07) Earnings Call Transcript

Feb.22.08 | About: Merge Healthcare (MRGE)

Merge Technologies Inc. (NASDAQ:MRGE)

F3Q07 Earnings Call

February 22, 2008 9:00 am ET

Executives

Mr. Kenneth D. Rardin – Chief Exec. Officer, Pres, Director

Mr. Steve Norton – Executive VPand CFO

Analysts

Bret Jones – Leerink Swann

Richard Close – Jeffries & Co.

Steven Halper – Thomas WeiselPartners

Thomas Isenberg – Open Road Partners

Poppel – PopTech. LPE.

Bill Dezellem – Tieton Capital

Host

We would like to welcome you tothe Merge Healthcare Incorporated Third Quarter 2007 Earnings Conference Call,which includes an update on the company’s business operations andstrategy. Participating in today’s callwill be Kenneth Rardin, President and CEO and Steve Norton, Executive VicePresident and CFO. Upon completion ofthe company’s prepared remarks, we will open the call for question.

Prior to review in our thirdquarter 2007 results, I would like to draw your attention to the company’s SafeHarbor Statement. Except for thehistorical information herein, the matters discussed in this conference callincludes forward-looking statements that may involve a number of risks anduncertainties. When used in this conference call, the words "guidance,""believes," "intends," "anticipates,""expects," “will,” and similar expressions are intended to identifyforward-looking statements, but are not exclusive means of identifyingthem. Actual results could differmaterially from those projected in, or implied by, the forward-lookingstatements based on a number of factors, including, but not limited to, providedin our recent press releases in SEC filings. The Company undertakes no obligation to publicly release the results,other new revisions to these forward-looking statements to reflect any futureevents or circumstances.

At this time, I would like toturn the call over to Steve Norton, Executive Vice President and ChiefFinancial Officer.

Steve Norton

Good morning everyone and thankyou for joining us. On the call with metoday is Ken Rardin, our President and Chief Executive Officer. The agenda for today’s call will be to firstdiscuss the financial results for the third quarter 2007, in comparison to thethird quarter 2006, and also the second quarter of 2007. We will also discuss certain non-GAAPinformation in this call that was included in the press release, although webelieve that this information is useful to investors in assessing theperformance of our company, both historical and in the future is also importantto understand that this information is not in conformity with GAAPs. In reconciliation from the non-GAAP numbersto the US GAAP information is included in the press release. I will then, turn the call over to Ken, whowill discuss in more detail the status of our business, the future strategy forour company and the operating results for the three and nine months periodsended September 30, 2007.

I would like to begin the callby saying that we are very happy to report that we are now current with our SECfilings. It has been an extremely longand argues process, but I guess there is a result of the WorldCom’s, the Enron’sin an incredibly cautious public accounting environment that we all live withtoday. I must admit that the publicaccounting industry is much different that when I was with KPMG when I wasstill young, ten plus years ago. However,I think it has gone way too far and has taken away the ability for managementto present its own financial statement and have any say in what we believe isright and wrong. But, that just myopinion, and probably that over a million plus other public companies CFOstoday, but unfortunately it is depressing to say the least.

After that one side, that Icould not just refuse, you have ask me in the Q3 financial results as requiredby US GAAP, we are entirely written off the remainder of the goodwill on ourbalance sheet, resulting in a charge of approximately $122 million and inadditional, approximately $1 million in trade name impairments. We were also required to write down some ofour intangible assets, including our customer relationships in quiet andcapitalized software. In the aggregate, werecognized the impairment charges of $131.6 million in the third quarterresults. The efforts associated with thisimpairment analysis have single-handedly caused the two month delay from thefiling of the restated in Q2 2007 financials in late December. Our net sales for the third quarter of 2007,totaled $14.1 million, which was a small increase from the $13.9 million in netsales in the third quarter of 2006 and the $14 million of revenue in the secondquarter of 2007.

We reach out to North America net sales, totaled $7.7 million during the quartercompared to $7.9 million in Q2 of 2007 and $8.8 million in Q3 of 2006. It is important to note that North America continues to be a challenging market forus. The depths of reduction on that has hada more dramatic effect on our customers’ willingness to invest in ours and ourcompetitors’ solutions that we and others in the industry originallyanticipated. Additionally, the majormove made during the fourth quarter last year to an onshore, offshoreengineering model had a negative impact on our productivity.

Although, we continue to seeimprovements and we continue to fine tune the balance of onshore versus offshorepersonnel, it has had an impact on our ability to deliver timely softwaresolutions, which is also caused us too after defer recognition of somerevenue. Revenues from the sales of thecompany’s eFilm diagnostic viewing product to VOE commerce distribution channelcontinue to grow and achieve record levels. Net sales from our AMIA business unit for the third quarter of 2007,totaled $1.4 million compared to $1.0 million in the second quarter of 2007 and$0.8 million in the third quarter of 2006. As announced in two different press releases during the second quarter,we were successful in selling our Electronic Patient Record solution at Cromer Hospitaland our Fusion RIS MX solution at Rams Hospital.

Although, these were great winsfor merging, very limited revenue has in recognized on these deals to date, asthe deployment of these solutions are on the early stages and requires thedelivery of software that is yet to be completed for Cromer. So their net sale aggregated $5 millionduring the third quarter of 2007, compared to $5 million during the secondquarter of 2007 and $4.4 million in third quarter of 2006, in improvement, a15% year-over-year. We continue to see afair amount interest on our custom engineering business and signed a dealduring the second quarter to perform our first onshore, offshore combinationcustom engineering project for customer utilizing, set areas, eye reach coresoftware solution. In addition, we signedthe contract for another custom engineering project for one of our existingcustomers in early Q3. And this contracthas a multiple year license agreement and also a significant amount of customengineering. The custom engineering is not included as a booking in thequarter, because it is on a time of material’s basis, but the estimate is ofgood size.

Overall gross margins for thethird quarter and the second quarter of 2007 were 56% and 57% respectively,excluding the write-downs of intangible assets in each of these quarters, comparedto 51% in the third quarter of last year. In addition, the mix of software sales versus service and maintenancecontinues to be last and in the past contributing to the lower than desiredgross margin percentage. We continue to believethat margins were slowly progressed toward the mid upper 60% range, assuming weare successful in growing our revenues in the product mix shifts more tosoftware and other versus service and maintenance which has historically hasbeen a low 50% gross margin. Also, weexpect that the future gross margin percentages will be positively affected bythe tall radiology business as we anticipate that the margins from thisbusiness will be sizeable.

Operating expenses, excluding goodwillimpairment, restructuring and other intangible asset impairments and otherexpenses aggregated $18.3 million during the third quarter of 2007, compared to$18.0 million in the second quarter of 2007 and $18.0 million for the thirdquarter of 2006. Legal fees relating tothe restatement law suits aggregated approximately $1.1 million during thethird quarter compared to $900,000.00 during the second quarter. In addition, we incur approximately $400thousand in fees during the third quarter of 2007 relating to the restatementof our financials and expect another $500 thousand or so in Q4. There is 123R stock compensation costsaggregated $1.4 million in the second and the third quarters of 2007 comparedto $1.9 million in the third quarter of 2006.

Our non-GAAP adjusted operatingloss for the third quarter of 2007, $5.5 million compares to a non-GAAPadjusted operating loss of $4.4 million in the third quarter of 2006 in anon-GAAP adjusted operating loss of $5.4 million in the second quarter of2007. The non-GAAP adjusted operatinglosses for all periods, exclude the impact of stud compensation costdepreciation, amortization and impairment charges. Non-recurring legal and accounting costsassociated with the re-statement and associated to the litigation. Goodwill and other long lived asset impairments,reduction in force and duplication of effort costs, we excluded these items inan attempt to show the approximate cash loss for the quarter from our ongoingcore operations.

We continue to anticipate thatthe effective income tax rate going forward for the remainder of 2007 willapproximate 0 as the company has fully reserve all net deferred tax assets andwe have substantial unrecognized in that operating loss to reports. Our net loss on a GAAP basis for the thirdquarter of 2007 totaled up $ 141.6 million or $4.17 per share, compared to anet loss of $11.2 millions or $0.33per share on the third quarter of 2006 andnet loss of $10.7 million or $0.32 per share in the second quarter of 2007.

Of the $141.6 million net loss ona GAAP basis for the third quarter of 2007, $131.6 million was related to theimpairment charges we recognized in the third quarter. As announced previously, bookings for thethird quarter totaled approximately $10 million, compared to approximately $10million in the second quarter of 2007. Bookings for the three months ended September 30, 2007, included twocontracts in excess of a $1 million each and 14 contracts with newcustomers. Aggregate bookings for thenine months ended September 30th, were approximately $40 million and included 6contracts and excess of $1 million each and 35 contracts with new customers.

Bookings as defined by thecompany has a total value of all the contract signed during the period andexcludes any value attributed to related maintenance other than the first yearof post-contract customers support. Duringthe quarter our cash balance decreased by approximately $8 million, from $29.7million at June 30, 2007 to approximately $21.7 million at September 30, 2007. During the fourth quarter, our cash hasdecreased to a balance of approximately $14 million at December 31. However, this balance is still preliminary,as it is not yet been audited or reviewed by outside orders.

As Ken will discuss in hisdetailed comments, the company is very focused on cash preservation, and theinfusion of additional capital into the company and is considering allstrategic options. This is and continuesto be a key focus of mine and Ken’s and we are committed to leaving no stoneunturned.

As part of these efforts, weannounced the right sizing and cost reduction initiative last week that havemade the majority of the cuts already in an attempt to get our head count downto approximately 440 persons, including consultants, by March 31, 2008. We anticipate that this reduction ofapproximately 160 employees and consultants, combined with the savings fromvacating our Bostonoffice and certain other smaller items, will aggregate approximately $10million per year. These savings shouldbegan during the second quarter of 2008 at the restruction charge to recognize inthe fourth quarter of 2008 income statement will be slightly higher than thequarterly savings realized from February 14th through the end of thequarter.

In addition, based on historicalattrition, we anticipate that we all have an additional net 20 person reductionbetween March 31, 2008 and year end, resulting in incrementally in your savingsof somewhere between $1 million and $2 million. Daily sales outstanding of September 30, 2007 was 88 days compared to110 days at June 30, 2007 and 96 days of September 30, 2006. The improvement in the DSO is attributable toa much more focused detention on collections and the very solid and successfulefforts from our collection person and some of our old accounts. Total deferred revenue decreased byapproximately $1.7 million during the quarter to a total of $21.8 million atSeptember 30, 2007. With that, I wouldnow like to turn the call over to Ken Rardin, our Chief Executive Officer.

Ken Rardin

As you can see from our thirdquarter of 2007 10-Q the first nine months of 2007 had been another verydifficult and challenging period for Merge Healthcare. We will begin 2007 with a lot of positivemomentum after their challenging year in 2006, which included a majorrestatement of our financials, class action and derived law suits, filedagainst Merge Healthcare because of the restatement and the initiation of anSEC informal query. We kicked off 2007with the best quarter of the year with approximately $16 million in revenue andapproximately $20 million on new bookings. Then, in the second quarter of 2007, our entire industry got hit veryhard from a negative impact caused by the Deficit Reduction Act or DRA.

Our direct selling businessMerge Healthcare in North America is primaryfocused on the inventory or imaging center market, where most of the DRAreductions were focused. In June 2007the SEC changed their position from an informal query to a formal investigationand then just prior to the following our second quarter press release in 10-Q, ourauditors informed us that we had to restate our financials again due to a verytechnical accounting rule. Fortunately,every statement was not as bad as we originally were told.

When we announced in August 2007that we have to restate, we are expecting to restate our financials as far backas 1999, which would have included several hundred contracts and tens of millionsof dollars. During the next five monthswe invested substantial time and money revealing our auditor’s position, wehired another law firm to review the historical contracts. We hired an outside financial advisory firm,as a result of our efforts, we finally determined with auditors that we did nothave to restate hundreds of contracts. Ultimately, we did determined that we have to restate 15 contracts fromthe period of 2003 to 2004, in connection with our RIS Logic acquisition andthe contracts employees prior to the acquisition of RIS Logic in 2003.

The aggregate restated revenuefrom these 15 contracts from 2003 and 2004 represented approximately $2 millionand our revenues were just shifted to the recorders, rather that going away. The only reason that we have to restate therevenues for these 15 contracts was because we did not have in our possessiondocumentation for our position that was considered acceptable by auditors;otherwise, we would have been able to avoid the reinstatement entirely.

I have been the CEO of severalpublic and private companies and I have never experienced this level of scrutinyand what I believe to be over regulation by the accounting industry. Unfortunately, the public company environmenttoday requires restatements likely we have experienced, even though the actualimpact of these last reinstatement was minimal. There is nothing we can do about it, except to spend the money and spendthe time to deal with issues like these.

As you know, in December 2007,we did complete the restatement of our 2006 10-K and our first quarter 2007 10-Qand the fine of our second quarter 2007 10-Q. However, we were not yet current with SEC filings and we still had tofile our third quarter 10-Q, which was started last night, so Steve said we arevery happy to say we are now current with our SEC filings.

The significant management froma time and the millions of dollars spent on these two restatements. The two law suits and the formal SECinvestigation have nothing to do with helping the operations of our business. These matters have continued to adverselyeffect the morale of our employees our relationship with some of our current andreceptive customers and our genuine reputation of market place, because ofdeclining new sales and the significant dollars spent on these matters, we aredeputing are cash reserves. Many of ourcompetitors continued to make these very few remarks about Merge Healthcare andwe spent a lot of time explaining to our current prospected customers what allthese means. As you can see from ourresults, this continues to be a major drag in our ability to increase bookingand revenue.

We have recognized the negativefinancial impact this is having on the company. As a result to these events, we announced another restructuring justlast week, which included the reduction of force of approximately 160 employeesand consultants, which should result in annualized savings of approximately $10million to $12 million, including the anticipated attrition that we will notreplace.

Over the past 18 months, we havesent millions of dollars from our cap reserves to pay for non-operational legalfees. We are optimistic that within thenext few weeks our D&O carriers will begin paying for some of our significant,historical and ongoing legal expenses, which were incurred from the classaction and driven law suits and the SEC investigation. Our number one focus today is operation efficiencies,ongoing cost reduction majors, revenue and cash generation and all possible financialalternatives including the possible sale of assets. We are considering in detail all situatedoptions available to the company. Evenwith the negative news and this trashing caused for the legal and restatementissues, and the industry wide impact of DRA, Merge Healthcare still generated$44 million in revenues during the first nine months of 2007. We signed approximately $40 million newcontracts, we signed 35 new customers.

During the time of significantdestruction of the past twelve months, we made significant progress in severalareas. Cedara Software entered the oncologymarket with a large OEM order for customized version of our Eye Responseproduct, which we uses a patented Molecular Imaging technique to access tumorresponse from cellular mechanisms for the early detection of radiationtreatment responses for brain cancer. Wereleased to the market our first integrated version of our Merge and EMETproducts, which we call Fusion RIS/PACS MX, which is the combination of ourEMET industry leading visualization product matrix, along with the Merge FusingRIS product and our Merge Fusion PACS.net backend. Based upon industry expert feedback andfeedback from our current and prospective customers, we believe that we now hadone of the best integrated RIS-PACS products in the market today. It is important know that this is a newproduct and is not an upgrade or enhancement that would be included in ourmaintenance contract to our existing customers. We have identified over 250 of our current customers, who maybe candidatesto upgrades to our new Fusion RIS/PACS MX product.

Since announcing this mainproduct in April, we have sold 10 systems, which included three new accountsand seven upgrades from current customers. The average upgrade price to theseseven accounts was approximately $230,000.00 and the average new account salefor these three accounts was approximately $410,000.00. Considering the negative news in the marketplace about Merge, we are very pleased with acceptance of our new Fusion RIS/PACSMX product.

In September o 2007, we openedthe doors of our new Cedara Software Services India operation. We will just focus on Cedara OEM custom andengineering projects. This is a worldclass facility that is completely built at and equipped for approximately 100personnel. We currently have 30 peoplein this office and we continued to add technical staff to this facility tosupport our growing custom engineering projects. We also shifted the current customengineering projects from our outsourcing partner to this new facility.

We announced in November our neweFilm RIS/PACS product that is targeted at the single sight imaging center marketwith ten thousand or fewer studies per year. This product will be sold from our eCommerce unit and it will be shippedto the customer preconfigured and preinstalled on required hardware and can beeasily installed by the customer. Incontrast, a typical RIS installation takes 6 to 12 months, because of itssignificant customization used to require by our larger imaging clients.

Also, in November we announced theavailability of the eFilm versions 3.0, which was the first significant newrelease of this product since 2005. Thisproduct release was the culmination of 11 months of coordinated efforts betweenour onshore product management and our offshore R&D teams and was the firstmajor product release to be developed in our Indian office in our offshoredevelopment facility.

And, after a year of planningand development, in November we announced our new Teleradiology product andservice initiative, which included our new TeleRead software and ConsultPreRead teleradiology service. This is ahigh differentiated and very exciting new teleradiology product and serviceoffering. Our Consult PreRead offeringis a consulting service that provides a preliminary port of medical imagingstudy that has been double read by our offshore radiologist. Our offshore radiologist produced a detailedreport of their findings, which were reviewed by US radiologist as a consult to helphim or her prepare their final interpretation report. Our Consult PreRead report includesreferences to prior studies and relevant, current and historical patient clinicalinformation, along with extensive management of relevant and incidentalpathology and their associated key images.

Our new Merge TeleRead softwareis a proprietary product that supports the complex environment that hascompleted final read to a teleradiology, by accessing current studies, priorstudies and prior reports along with all available current and historicalpatient information. There are manyarticles and reports to talk about this significant size of the teleradiologyfinal read market, but today there has been very little penetration of thismarket, because the technology did not exist to support this complex environment. We believe that our teleradiology technology willprovide the missing link that will allow Merge Healthcare and our customers toenter this multi-billion dollar Teleradiology Final Read Business.

This new offering combined withour RIS/PACS products, provides us with a highly differentiated productoffering. We believe this significantdifferentiation will not only help us improve our win rate for new deals, butwe will also be very attractive to our large customer based.

This new combined offering isthe key to our gross strategy, it is highly differentiated, it provides arecurring revenue stream and provides with product and service that allows usto leverage our large off balanced asset, which is our customer-based. The initial market acceptance, more customershave been very positive. We have two signedbeta agreements and we expect to sign 2 to 4 additional beta agreements in thenext few weeks. We are seeing earlyindications that this differentiations is helping drive RIS/PACS sales. We also have a number of installed customerswell along the sale cycle who are interested in using our Consult PreReadservice.

We believe a package offering ofour new RIS/PACS MX, combined with our new Teleradiology offering will be avery attractive value proposition to our current and prospectivecustomers. Cedara software has also beenon the discussion with one its larger OEM clients to provide Teleradiology servicesas an integrated packs in Teleradiology service offering for role hospitals,catastrophic event like tsunami and Third World countries that have access toradiologists.

I am not going to go into thespecific details to these new offerings on this call. If you want more information, please send usa request to receive a copy by CD that includes the power point and voice overof the presentation that I gave on November 21, when we announced new offeringto the market. Before I open up the callfor questions and answers, I want to assure you that we are highly focused onour liquidity issue, we are focused on revenue and cash generation. We are focused on ongoing cost reductions, asyou can see from last week restructured announcement and we are revealing all strategicoptions available to us, including depth or equity financing in the sale ofassets. We have engaged outside expertsand advisers to help us review all strategic options available through thecompany.

Thank you for your time thismorning and Carol, could you please open the call up for questions and answers.

Question and Answer Session

Operator

(Operator’s instruction)

Your first question comes fromthe line of Bret Jones with Leerink Swann.

Bret Jones – Leerink Swann

To focus on the liquidityposition, I was wondering if you could answer this question. With the credit and facility in place, do youbelieve that spinning off the European, Middle East and Africabusiness to provide enough liquidity to allow you guys to reach on a break evenpoint on cash basis, without having to do that directly offering or you wouldpotentially need to do both?

Steve Norton

The spin-off of the operationreally is independent of a financing operation that would not see the path andare in itself would provide the appropriate liquidity. We will have to look at other options inaddition to that.

Ken Rardin

One of the things as company, weare getting highly focused on our core competencies and dealing with theEuropean market in the European business is a public company, is somewhat a bitdestruction to us and it is a destruction to the business there, because of ourregulations in accounting. So, it ispart of a highly focused business strategy going forward and that is the majorreason, in addition to potentially reducing some of our expenses, for spinningoff this operation.

Bret Jones – Leerink Swann

In the past, I think you said youneeded to get to a run rate, a revenue run rate of about $25 million to get toa cash break even point, with the restruction that has been undertaken already,can you update us on what that number, would you anticipate that number needingto be?

Steve Norton

We are not going to give anyguidance on that, but you can do your own math. We said that, I think $25 million was in order to get a US GAAP breakeven, I think it will last if we can get to adjusted EBITDA positive, but ifyou are seeing $10 million of annualized cost savings, break them into fourquarters at $2.5 million, you can do your math and try to figure out aboutwhere that is going to be, but we do not want to give specific guidances as towhere we think that is going to happen.

Bret Jones – Leerink Swann

Okay, fair enough and lastly,before I jump back in the queue, I just wondering to ask you about the existingcustomers, you said there was a drop in the third revenue. I wonder is that indicative of a customer’sconcerns and not wanting to prepay for services, or am I really reading toomuch too into that matter.

Steve Norton

I think the deferred revenue doesfluctuate on a quarterly basis, the other quarters’ work goes up, quarters workgoes down, it depends on billings and a variety of other factors. I do not think you can make that assumptionthat these people are not willing, you know, portion of this is the fact that we had some continuing professionalservices and installation of some of our matrix products and that we arerecognizing that revenue and previously had been sitting in the deferred accounts. So, I would not read too much into that.

Bret Jones – Leerink Swann

But, have you guys lost anycustomers? I was thinking the last callyou had, it has been awhile since your last call.

Steve Norton

Obviously, every company nowlosses customers periodically, it is in our business, where we do not see a lotof customers going away, most of our customers, in our retention rates on ourmaintenance is quite high. But, youcannot say that there have never been any lost customers. It does happen periodically, but I would notsay that anything in the last several months, we will see a significant changein the normal attrition rate of customers.

Operator

Your question comes from theline of Richard Close with Jeffries & Co.

Richard Close – Jeffries & Co.

Curious on the Teleradiology sideof things, you mentioned hopefully 2 to 4 beta agreements in the coming weeks, youhave two signed currently. When do youbegin to start generating revenue associated with the Teleradiology product?

Steve Norton

We are in discussions with thenumber of installed accounts right now. I personally met with probably 20, 25 of our customers on this specificsubject. Along with potential upgradesto our RIS/PACS product line our new MX RIS/PACS and I would expect that wewill see contracts this quarter for new clients using the Teleradiology serviceand start receiving revenue in the first quarter of 2008.

Richard Close – Jeffries & Co.

With respect to beta, if youcould walk me through that, when will those convert your revenue generatingcustomers? Is there any timetable forthat?

Ken Rardin

Typically, we are looking atprobably 30 to 60 days and we are doing this for a couple of reasons. One, we need it in multiple accounts just makesure our technology is working as advertised, as we think it should work. Test out volumes and also to providereference sites to customers that are talking about coming on board with theservice. So, after we get 4, 5 or 6 upand running, it is going to help us in closing both current and new accountsales, because we are going to have the results in experiences from more thanon of our customers.

Steve Norton

Just to add on that a bit, when Kenmentioned that we are hopeful that we will actually see some revenue on the firstquarter. The revenue that will come inthe first quarter will not be sizeable, but we do expect to get some cash, butit will not be of any magnitude.

Richard Close – Jeffries & Co.

With respect to, I guess to twobetas you have currently up and going. What has been the general conclusion, how did the customers view that?

Steve Norton

So far, very positive, the scenewas nature of this thing, because with the service we are doing, called theConsult PreRead, is effectively proof varying at the closing of a file of the report,which means that we should get all the prior history, all the prior studies andthat is going to be workloads to radiologist and report to me back. So, our experience has been very positive on thequality, which is really the number one test here. If there is high quality in the report, thenet obviously improves productivity by radiologist. But, two is running, we had very positivefeedback especially on the quality ratings, which is really the key toproductivity.

Richard Close – Jeffries & Co.

Moving over to bookings and allthat, I guess you are pretty even second quarter and third quarter from your commentsabout the restatement impacting your business and all that. I would say that should we sort of think ofthe fourth quarter is being maybe the bottom possibly in terms of the negativeimpact associated with the restatement?

Steve Norton

It is kind of hard to get into alot of details, but obviously if we can improve our liquidity position, if wecan get some of our negative factors behind us. Obviously, the first one is getting current with our financials. If we can make some progress on the litigation,if we could get the idea in all insurancecarriers to provide some cash and if we can improve our liquidity position, wedo believe that there a lot of opportunities for us to improve, so until thathappens, this is probably is going to somewhat difficult. But, assuming that we can achieve that and whenwe think that we could have positive improvements going forward.

Richard Close – Jeffries & Co.

Okay, let me ask you insomething little different, the third quarter was essentially when you had to goto the restatement and do all that. Youtalked about customers using this against and you and negative impactedDRA. I guess I am trying to get a senseof, did you see any deterioration from third quarter to fourth quarter. How is the market or has there been anychanges, with respect to the market place and customer demand or anything likethat in the fourth quarter?

Ken Rardin

We have seen some pretty majorpush back. I spend a lot of my time,both on telephone calls and going to clients that are very much worried aboutthis, especially on the liquidity issues. Are you guys going to be around, are you going to be in business? It has how impact from a point of view,people slowing things down. I think thatthere is a bunch of people sitting to wait and see right now. You look at our OEM business, which dealswith very large strategic counts, we do not believe we are loosing much or anyof that, but there is going to be a lot of people sitting in the side lines, tosee what happens right now.

So, it is critical to get thesethings behind us, get our financial current as we are now. And I think thereare some positive things that maybe happening on liquidity side that we startedgetting some reimbursement for all those legal expenses that we have beenpaying for almost the last two years. And, if we can maybe have something happening on the financing side, Ithink that is going to have a very positive impact going forward, but it has othernegative impacts. It has taken a lot ofour time and a lot of people are concerned about it.

Operator

Your next question comes fromthe line of Steven Halper with Thomas Weisel Partners.

Steven Halper – Thomas Weisel Partners

Could you give us some moredetails about the 160 people that you are eliminating? Positions that you areeliminating, what areas are they from and tell us about the process that youwent through to identify these people, because obviously you need to keep thesales effort, customer service, all those things, are you cutting muscle, as tosuppose to fat?

Steve Norton

We went through a very detailedeffort with our entire management team, from all sides of the business. There was no business that was really left untouched,but some other people that where I go really came from all facets, some of thereal people are in sales, some people in development, people in engineering,focusing on the administrative of areas, but obviously, the majority of ourpeople are in engineering and the good portion of the cuts were consultantsthat were being used offshore, so a fair number of those have actually wentaway. Some are going at September 30th,so the terminations that occurred on February 14th, there were notactually a 160 people that were let go on that day. There were number of folks, there is a largemajority of those with the consultants that were used offshore and those havebeen scaled down over the past 4 or 5 months.

So, since September 30th,or down, probably cost to 160 number, so I say the vast majority of those arein the engineering area.

Ken Rardin

We had very little reduction onthe customers’ support side. We werevery careful that we are able to maintain the ongoing support of our clientsand as part I mentioned on opening our own facility offshore. Obviously, the cost of that facility on ourper percent basis is much lower than a consultant of any use in, so we didshift some of the projects there. Even thoughwe did do a reduction of the employees and consultants, our offshore Cedara Softwareservices business, were actually increasing headcount there.

Steve Norton

We mentioned the press release,we are talking about fine tuning it really was trying to figure out what is theproper mix and we have added people at the CS society and prepare our ownbusiness there, but we also added some folks onshore, so as we can get thebetter mix and better productivity out of the other business. I think that is all related to the finaltuning.

Steven Halper – Thomas Weisel Partners

You have been through yourcurrent on your filings and gone through this latest restructuring. Have you gone through a more traditional budgetprocess, at this point or it does yet to happen?

Ken Rardin

That was actually done inconnection with these whole effort, so when we do an internal budgeting processand that internal budgeting process correlates basely right on line with theaddresses that we made. So it went tothe board, talked about our budget, on moving forward with our plan, based onthe headcounts and the changes that we have made. So, they are right on line with each other.

Steven Halper – Thomas Weisel Partners

Does the internal budget processassume a financing or capital infusion? Do you need that capital infusion to affect your plans?

Steve Norton

Well, you have seen the cash positionof the company where, we were running $8 million a quarter. We ended the year at $14 million, so we arenot going to give guidance, but I think it would be fair to say that we aregoing to have to find ways to get some cash into the company, through a numberof means, one being cost reduction as one we actually already taken, anotherway is revenue generation, but we will be doing everything we can to try in cashfrom another source.

Operator

Your next question comes fromthe line of Tom Isenberg with Open Road Partners.

Thomas Isenberg - Open Road Partners

Congratulations through thefinancial statements that seems like a mountain, out of a mow hill that wasunfortunately, as you mentioned at the beginning of the call that you just hadto unnecessarily cross. On the otherhand, you will be out of cash by June, unless you get the DNO and leaving theside financing and I am just trying to wonder and trying to figure out what thesales safe strategy is. I have alwayssaid that you had good enterprise software and it would be valuable, perhaps tosomeone, I do not know if there would be a Toshiba, GE or Siemens, who does nothave such software. And you mentionedthat it is hard to keep the clients on-board without them knowing whether you aregoing to be in business or not.

Sure you can sell 20 millionshares at $0.80 give up a bunch of warrants and all and hopefully it would allwork out, one of the strategies is to sell the company or if you are notlooking at that, if you can assure shareholders, how could we run out of money,the basic software, you know $40 million in a year of sales, two times sales,the company is still worth a buck or two a share in a sale scenario. I realized that may not be your firstchoice. So, you can see where I amgetting at, what is the basic, deadlock value in the company and especially to inquirewho would have the deep pockets to make the sales efforts that you know youmight be able to make.

Ken Rardin

I am not going to comment on marketevaluation and whether to resell the company or not. As we said earlier, we are not going to make detailedcomments at this; we are looking at all of our alternatives. We are looking at all strategic alternatives,in order to provide ongoing liquidity for the company, so I am not going to sayany more and that, except that we are looking at all options.

Thomas Isenberg - Open Road Partners

Do you think your software hasvalue to a larger entity?

Ken Rardin

I think our software and ourservices have tremendous value to us, to our shareholders and to otherentities, yes.

Thomas Isenberg - Open Road Partners

So, bankruptcy, which is a crazything, would be a very low probability event, do your feel in your opinion?

Ken Rardin

Like I said, we are not gong tocomment on any of those on the go-forward basis. We are looking on all our alternatives and weare not going to talk about any of the specifics of that.

Steve Norton

Obviously, our objective is toavoid that.

Operator

Your next question comes fromthe line of Harvey Poppel with PopTech. LPE.

Harvey Poppel – PopTech. LPE.

I am trying to be very objectiveabout the situations. It is difficulthaving been there at one point, couple of years back as the largest shareholder in the company. As I look at theoutlook and it would seem to me, if one looks at the two extremes, which we sellthe company or sizeable divestitures versus raising money and going forward as theentity is today. It seems to me that thelatter alternative just does not have any basis of attraction, given what youwere saying about the state of the market, about the absence of any remarksabout your ability to pick up revenue and still obviously a large GAAP, usingthe calculations you mentioned between the results of the reduction in forceand the need to break even point. It isjust seems that raising cash at this point would not in at of it itself, even avery large sum get you out of the hole you are in. Unless, there will be a dramatic change inthe market, which I do not think an investor or investors would be counting on. So, that is just an observation, I do notknow if you want to comment on that at all.

Steve Norton

Well, Harvery since it is anobservation and I probably will not really to comment in detail, but aninteresting market at the end. I thinkthat with our technology and our products and combined with this new offeringwe came out with. Hopefully we could getsome of these major distractions behind us that have nothing to do with ouroperations and we can generate some liquidity, I think this could be a growthmarket and a very attracted market to be in. Beyond that, I am not going to comment on your observations.

Harvey Poppel – PopTech. LPE.

Okay, let met shift gears, onthe Teleradiology initiative, is there someway to monetize that in the nearerterm, rather than just the ramped up of revenues and their ordinary course ofbusiness.

Steve Norton

Well, Harvey again that goes down to the strategicoptions, as you can imagine, we have said we are looking at all of them. We believe there is a lot of growthopportunity in the Teleradiology business. There is a lot of interest, I do not think we have talked to very manyof our customers about this opportunity that do not have an interest in it,there is a tremendous amount of interests, it is a balancing as to whatstrategy we will take. We believe we cangrow the business if we can find the band to address in the time due up toinvest that.

Harvey Poppel – PopTech. LPE.

Are you marketing the Teleradiologycapability on the Cedara side, the OEM side?

Steve Norton

It primarily, focuses on theimaging center market, which is primarily in the North American MergeHealthcare business, the direct business. However, as Ken mentioned in his scripted comments, there is a Cedara customerthat we are working very closely with that has a little bit of a uniquebusiness that could very much be interested in a Teleradiology type offering.

Operator

Your next question comes fromthe line of Bill Dezellem with TietonCapital.

Bill Dezellem – Tieton Capital

We have a group of questions,first of all, may we start with the insurance carriers and what is the ballparkdollar amount of historic legal fees that you are looking for them to pay for duringthe next few weeks and what is your current digest, where the ongoing quarterlypayment will be from them?

Steve Norton

Radically, for the historical wesaid in the past that to date actually the first restructuring, I believe,including all the restatement, accounting fees, all the legal fees incurred todate were somewhere in the $ 68 million range. Obviously, we continued to incur some costs. The legal cases, that are also going on noware actually in a pretty quiet mode. There is not a lot of activity, we are hoping that it stays that way. With regards to the amount of cash that wecould expect to get from them that is really a $60 million question. We are working very closely with them, tryingto get it in hand, we are hoping that we will make some progress here veryshortly and as soon as we do we will update everyone on that fact, but toproject or anticipate how much they are going to cover and when they are goingto cover it is outside of my ability to look in the crystal ball.

Bill Dezellem – Tieton Capital

And, then shifting to the AMIAbusiness, what was the loss or income generated from that business in the firstnine months of 2007?

Steve Norton

We break out our business unitson a revenue basis only, but the costs are quite integrated and we do not have theability to break out profitability or loss by individual business units.

Bill Dezellem – Tieton Capital

The dollar amount of cash maybearranged or cash that would flow into the business if you were to spend thatbusiness off as you referenced in your release?

Steve Norton

We are not a position to havethat discussion it is obviously something that we are looking at. We have not entered to any agreements oranything. So, when that happens we willinform everyone, where at this point it is difficult to say.

Bill Dezellem – Tieton Capital

This maybe another one of thosequestions that it is difficult to answer right now, but in addition to the AMIAbusiness, do you have other asset that you feel that you could sell to helpbridge the gap between here and the company reaching profitability?

Steve Norton

As you know, we have a lot ofassets. There is a variety of things. We have investments in certain of ourcustomers. We have tremendous amounts ofassets in the electrical property area. We got patents, we have got a host of software; we got businesslines. There are all kinds of assetsthat could potentially be sold, obviously, in some cases, some of those assetsare more instrumental to us on a go-forward basis, but understand that we arein a process of looking which if any those will be appropriate to try to sell,if there is anything at all.

Bill Dezellem – Tieton Capital

And, on that note, there was anew line item on the balance sheet, the $8.8 million in investments that arelisted. Would you please detail whatthose are and to what degree those could be saleable?

Steve Norton

Yes, that is what I wasreferring to you briefly, earlier it is a largely the investments in our customers. Primarily, in the Cedara business, when weentered into relationships with some of our customers, some of the smallercustomers we sometimes take on our ownership interest in their company andmajority of that investments is investment in several entities that ourcustomers of Cedara.

In most instances those companiesare not large. They are not publiclytraded, so the ability to liquidate some of those assets is somewhatrestricted, but as we said before, we are looking on all options and that isone possibility, but there are also, obviously customers, when you have aninvestment or customer it is important to keep that investment and relationshipgoing forward.

Bill Dezellem – Tieton Capital

In a good scenario, you wouldfind yourself maybe with the ability to receive nearly a quarter’s worth ofcash to operate the business from your insurance carriers. Another quarter from the investments that areon the balance sheet, in which case we give you enough time maybe to line upsome other alternative and you could move forward.

Steve Norton

It is tough to respond to thatbecause as I said, I do not know how much money is, if any we will get from ourinsurance carriers and if we attempted to sell any of those investments, againit would be difficult to say.

Ken Rardin

Well, even if we warrant, we arenot saying we are going to sell assets. Also we are looking at financing alternatives.

Bill Dezellem – Tieton Capital

On the note, was thererestatement that you have now completed as of yesterday? Was that a pre-requisite to some of thefinancing alternatives that presumably you have been discussing with external parties?

Steve Norton

We are not going to get into anydetails, as to what pre-requisites are for doing getting cash or exactly whatwe are doing. As a matter a fact, thethird quarter was not a restatement, the filing of the 10-Q yesterday was not arestatement, the second quarter was not a restatement. The only thing we restated was the 2006 10-Kand the first quarter 10-Q. The secondquarter Q delayed and the third quarter was delayed but either the second orthird quarter were actually restatements.

Bill Dezellem – Tieton Capital

I stand corrected here, I missedboth so basically, becoming current with the filings, we are wondering if thatwas a pre-requisite of before some of your external parties with -entertainmoving forward.

Steve Norton

I am not in the position to beable to talk about that.

Bill Dezellem – Tieton Capital

Okay, and one final question foryou is, relative to the fourth quarter, given your comments about the marketplace, would it be fair to assume that bookings in the fourth quarter willprobably somewhat similar to what they were in the second and third quarters?

Steve Norton

We have addressed that with theprevious question and we are really not going talk about what the fourthquarter bookings were, until we have our Fourth Quarter Conference Call, whichwill hopefully be sometime in mid-March.

Operator

You have a follow-up questioncomes from Bret Jones with Leerink Swann.

Bret Jones – Leerink Swann

Just one quick clean-up questionhere, I was wondering if you could break the impairment charge out, as far aswhat is in the amortization, the cost gets sold and how much is in the D&Aline below?

Steve Norton

In the D&A line and the costit sold, it was about $4.2 million and I think the D& A line in operatingexpenses was almost the same number from up $4.2 million.

Operator

You have a follow-up questionfrom Richard Close with Jeffries & Co.

Richard Close – Jeffries & Co.

The $4.3 million in Merge NorthAmerica service and maintenance revenue, Steve can you give us some sort offeel of how much is that is service versus maintenance?

Steve Norton

Which $4.3 million are youtalking about?

Richard Close – Jeffries & Co.

4355, it is the Merge NorthAmerica service and maintenance revenue border.

Steve Norton

Merge North America maintenance, a good portion of that is maintenance. There is probably, I would say, 15% to 20% isprofessional services and the rest would be actual maintenance.

Operator

You have a follow-up questionfrom Tom Isenberg with Open Road Partners.

Thomas Isenberg - Open Road Partners

You are attempting to get moneyfrom the D&O - carriers for various costs and legal costs. What about the shareholder law suits againstthe company? As the stock prices comedown and the missed statements and all, probably you are going to owe somemoney there and I am wondering a) how those suits are gong and b) how much youanticipate having to pay for those?

Steve Norton

Three cases that areoutstanding, there is the derivative law suit, which is against some of theformer Executive Officers and some of the current board members. There is also a class action law suit and thenthere is the SEC action. The derivativelaw suit and the class action suit are both litigation law suits that aretypically subjected to our cover D&O claim, so if they are covered all bythe insurance and there is a settlement on those claims, then the company wouldnot have to pay anything other than whatever the insurance carrier would notcover.

Operator

You have a follow-up questionfrom Bill Dezellem with Tieton Capital

Bill Dezellem – Tieton Capital

Few follow-ups relative to thebusiness itself, assuming that you can work your way through the financing sideof the equation, would you please discuss the software delays, I think youreferenced them in your comments, but they were also highlighted in the 10-Qthat had limited your ability or delayed your ability to recognize some revenuewith customers. Would you discuss whatthose delays were and to what degree those delays, I guess the software has nowbeen developed?

Steve Norton

I would say, probably most ofthose have to do with the RIS/PACS MX product, we brought out in April. We brought that out and released for and therewere some updates that we had to make to that and we called release 4.1 and 4.2and there was revenue tied to the delivery of those releases and those releaseswere delayed.

Bill Dezellem – Tieton Capital

And, the 4.1 and 4.2, those werebrought out when?

Steve Norton

4.1 came out, probably June –July time frame and 4.2 is just coming out now.

Bill Dezellem – Tieton Capital

Basically, some of the revenuethat you are were not able to previously recognize, now that 4.2 is coming out,you will be able to recognize, is that a correct interpretation?

Steve Norton

We should be able to recognizingsome of that. We also have, depending onsome of the professional services, so at least we will be able to startorganizing it soon, yes.

Bill Dezellem – Tieton Capital

Relative to the Teleradiologybusiness, given the strong potential that that business has, if you are able togain construction, how quickly can you ramp new customers, once you turn thatbusiness on?

Steve Norton

Well it is a combination eventsget this minor software to install in our clients, what we should understandright now is, we are only focused on our install-base, where our RIS/PACS areinstalled. It would come to that install-baseand qualify them install-base and break it into A, B and C prospects and the A prospectsare the ones that are larger clients that had currently releases by our product,where we can easily install the TeleRead module and the ramp up is going to beconditioned in a couple of things.

One what types of study theywant us to do in the volume and what is the delivery. From what we have lookedat over the next several months we do not think ramping up is going to be muchof an issue for us to a point of delivery, but it takes a little bit of time,because on the front end, these clients have to go through and understand thedelivery, they have to look at the quality of it and we would wrap up a clientover a period, probably 3 to 4 months to the level of business they would bewilling to give us.

Bill Dezellem – Tieton Capital

Finally, it has been quitesometimes since you have updated this on the varying relationship with Cedara. Would you please provide an update with that?

Steve Norton

Well, we continue to work withtheir aim. As you know, we announced ourproject with them early in the year, in the area of the eye response the tumortracking product and that was a very large contract. We continue to talk to talk to varying aboutother possibilities and other projects on the go-forward basis. At this point, the only major contract we arevarying is that product we announced early in the year.

Ken Rardin

But that software product wasdelivered to the customer, so they do have the software that we ultimately willrequire to deliver to them.

Bill Dezellem – Tieton Capital

In terms of that relationship,is there any on-going revenue post-delivery of the software or what is the bulkof agreement and therefore, revenues for the delivery of that software.

Steve Norton

The revenue from that contract isspecifically is actually spread out over a number of years, so the revenue fromthe actual delivery of the software, majority of that revenue will berecognized on a quarterly basis over next several years. There is a minimum commitment that they have ona quarterly basis, so they have to purchase at least a certain number oflicenses every quarter. Anything overthat amount, they have to sent forth, so the entire value of that contractwould not be recognized until the fifth year when the contract is completed.

Bill Dezellem – Tieton Capital

What is your initial perceptionof how varying in sales of that products are going to, it sound like thatultimately is going to lead to lack for Cedara.

Steve Norton

Yes, it is in the very, veryearly stages and they are just in the process of talking to people, so it isway to really, to give any indications as to how successful it has or will beand that was known from the beginning, we did not expect to have significantvolume early on.

Operator

There are no further questionsat this time.

Steve Norton

Thank you operator, weappreciate everybody joining us for the day and we will talk to you sometime inMarch. Take care.

Operator

This concludes today’s MergeHealthcare Conference Call, you may now disconnect.

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