ANMR to sell imaging services to USDL to avert impending financial crisis

Vendor's future hinges on rehab and MR breast imaging services

Faced with the possibility of losing imaging centers that werecollateral for an $11.9 million loan, Advanced NMR announced lastmonth that it has agreed to sell its wholly owned subsidiary MedicalDiagnostics to imaging services giant U.S. Diagnostic.

USDL, of West Palm Beach, FL, will pay $22 million for 10 mobileMR routes and three mobile nuclear medicine routes operated byMDI in Massachusetts, New York, Virginia, West Virginia, and Tennessee.Pending federal antitrust review, USDL will also get two full-serviceimaging centers in Massachusetts and rights to the MDI name andtrademark.

USDL officials were elated about the acquisition.

"From our standpoint, MDI is one of the last large entitiesleft available for acquisition in the imaging services sector,"said USDL chief executive Jeffrey Goffman.

The MDI imaging services businesses that would be merged intoUSDL generated $4.5 million in pretax profits from revenues of$21.5 million in the fiscal year ending Sept. 30, 1996, Goffmansaid. The entire MDI business—including rehabilitation services—contributed $26.1 million in revenue, while ANMR in its recentfinancial results stated that MDI had pretax profit of $817,000.USDL expects to boost that figure to $4.5 million based on synergiesachieved through the acquisition.

MDI has been particularly successful in securing mobile MR contractsthat face little local competition because of document-of-needrestrictions in Massachusetts and certificate-of-need barriersin New York, Tennessee, Virginia, and West Virginia. Its mobileMR routes serve 43 hospital customers, and its mobile SPECT servicesare contracted by 10 hospitals and clinics, according to ANMRfinancial disclosures. Goffman envisions especially strong synergiesbetween MDI and USDL services in New York and West Virginia.

The value of the cash and rehabilitation services properties retainedby ANMR roughly equals the $28 million that the company paid forMDI two years ago, Goffman said.

After paying off debts, ANMR will be left with $10 million incash, a 48% interest in Advanced Mammography Systems—developerof the Aurora MR breast scanner—and a majority interest inMVA Rehabilitation Associates. MVA operates two head-trauma rehabilitationfacilities and a satellite office in Massachusetts.

Wilmington, MA-based ANMR also assumed responsibility for possiblecosts arising from pending lawsuits against MDI filed by the company'sfounder, John Lynch, as well as by Raytel Medical, an imagingand cardiac services company in San Mateo, CA. Lynch sued MDIlast year after he was fired from his position as chief executivein 1995 (SCAN 12/13/95). Raytel sued MDI in November 1994, allegingirregularities in MDI's defense against Raytel's tender offer,which was withdrawn after ANMR bought MDI in a white-knight rescue(SCAN 5/10/95).

ANMR's credit woes. ANMR made the decision to sell most of MDIto alleviate a credit crunch that imperiled the company (SCAN1/22/97). If the deal goes through, about $12 million of USDL'spayment for MDI will retire a problem ANMR loan taken out as partof the MDI acquisition.

According to ANMR's 10-K report with the Securities and ExchangeCommission, a $500,000 payment on that loan—which was originallydue last year but which was deferred in agreement with ANMR'slender—comes due on March 31. The company was also out of compliancewith several restrictive covenants that were waived by the lenderonly through March 31, according to the SEC filing. The 10-K concludedthat ANMR would be unable to fulfill its financial obligationsif it couldn't sell off assets to raise cash.

USDL officials were aware of the unflattering 10-K report andrushed to complete a due diligence analysis of the MDI acquisitionbefore ANMR was required by law to submit the report for publicdissemination, according to Goffman.

"We tried to get them to delay their 10-K filing, but theirattorneys were uncomfortable with that request," he said.

ANMR chairman Jack Nelson was unavailable for interview. In awritten statement, he noted that the action is being taken incombination with cost reduction efforts to give the company financialsecurity and liquidity to invest in its rehabilitation business.

Still, the buyout raises questions about ANMR's future. Nelsonannounced a new strategic direction for the company in August1996 (SCAN 8/28/96). The plan featured a halt to production ofits InstaScan MR echo-planar imaging gradient coil and an endto R&D of other imaging devices. Resources were redirectedto developing MR breast imaging services performed by AMS Aurorascanners and conventional MR imaging and rehabilitation servicesthrough MDI.

The new mission left untouched ANMR's ultra-high-field MRI systemsupply relationship with GE Medical Systems. ANMR is contractedas GE's exclusive integrator of investigational 3-tesla and 4-teslascanners through mid-1999. Two of the $3 million devices wereshipped to Japanese customers in 1996.

Lynch's written statement on the USDL acquisition noted that continuinglosses incurred by ANMR's technology operation did not allow thecompany to invest in the imaging services business or in MDI'sother businesses to the degree envisioned when the original acquisitionwas made.

USDL owns 118 diagnostic imaging centers and four radiation therapyfacilities in 17 states, according to Goffman. In addition tothe MDI merger, deals that would add another 29 mobile and fixed-siteservices to its network are pending.

One of those deals is the acquisition of American Shared HospitalServices of San Francisco (SCAN 12/18/96). Last month, AmericanShared announced a revision in the terms of the deal that is designedto allow USDL to account for the transaction as a pooling of interestsrather than as a purchase. Under the revised terms, USDL proposesto acquire all of the 4.8 million shares of American Shared for$2.40 per share, slightly higher than the $2.25 previously agreedupon. USDL also proposed to pay $2.40 a share for the 2.2 millionoutstanding American Shared options and warrants.

The revision will require additional concessions from GE MedicalSystems, which holds some of American Shared's leasing-relateddebt. American Shared said that GE and USDL have reached a preliminaryagreement on those additional concessions. The negotiations overthe debt have enabled USDL and GE to start talks about developinga longer term relationship, according to USDL's Goffman.

Finally, USDL announced last week that it has severed its relationshipwith Keith Greenberg, a mergers and acquisitions consultant whohad helped identify many of the centers purchased by USDL. Revelationslate last year about a fraud conviction in Greenberg's past promptedshareholder litigation against USDL (SCAN 1/8/97).