Medical Resources begins negotiations with lenders

The imaging services market may be more consolidated than it was in the mid-1990s, but companies competing in this niche continue to struggle in the managed-care environment.

Last month, one of the largest U.S. chains, Medical Resources, announced that it has begun negotiations with its lenders regarding $75 million worth of senior notes, for which it has been in default of certain covenants since September. Medical Resources delayed its January interest payment on the notes as it initiates these negotiations.

The company attributes its default on the note covenants to price erosion in the imaging center market and a reduction of its personal injury claims business, which have contributed to a decrease in the firm’s net revenues and cash flow to levels below what the company expected when it issued the senior notes.

“Managed-care companies have been driving down the price of diagnostic imaging services,” said one of the company’s two CEOs, Geoffrey Whynot. “They can step in and dictate the price based on what they’re willing to pay.”

The company’s lenders are not obligated to restructure its debt, and may, in fact, choose to hasten the repayment process. If Medical Resources is unable to secure waivers for its debt payments, and its lenders demand payment, “such acceleration would have a material adverse effect on the company, its operations, and its financial condition,” according to Medical Resources’ latest quarterly report filed with the Securities and Exchange Commission. The company’s auditors said that if this is the case, their report of the firm’s 1999 financials will include a going concern statement.

The news is the latest setback in a string of challenges that have plagued the company since 1997. The Hackensack, NJ, firm’s fortunes shifted late that year when it became involved in a dispute over consulting fees that led to the departure of several key executives. The controversy subsequently derailed the company’s acquisition drive (SCAN 12/17/97). Twelve months later, Medical Resources posted losses related to doubtful accounts receivable, charges associated with a December 1998 agreement to settle class-action suits against the firm, and charges incurred from the closing of some of its under-performing imaging centers. In 1999, the company hired investment banking firm BT Alex. Brown of New York City and decided to seek an acquisition partner (SCAN 3/31/99). Although Medical Resources has received inquiries, the quest for a partner is now on hold while the company negotiates with its lenders, according to Whynot.

Medical Resources’ struggles reflect the state of a market that has long fought to become profitable. After an acquisition boom in the mid-1990s, imaging center firms strove to incorporate new centers into their existing networks. Often these attempts were unsuccessful and produced poor financial results. A report published by SMG Marketing Group of Chicago indicates that the number of U.S. medical imaging centers increased in 1999 by a modest 5% (SCAN 1/19/00), which may indicate that in light of the fiscal difficulties experienced five years ago, companies are becoming more careful in their purchases, according to Whynot.

“A number of companies, including ourselves, made rapid acquisitions, and had a hard time integrating them,” he said. “We are seeing another increase in the level of center purchases, but companies are being much more cautious.”