Medical Resources reaches deal to avoid default on corporate debt

Default status resulted in ‘going concern’ statement

Imaging services provider Medical Resources has reached an agreement with corporate lenders on restructuring $78 million in senior notes owed by the company. The agreement is one of several steps the imaging center firm has taken in recent months to put itself back on solid footing following a year of corporate turbulence.

The problems at the Hackensack, NJ, company began late last year with the departure of several top executives in a dispute over acquisition advisory fees paid to a company owned by former chairman Gary Siegler (SCAN 12/17/97). Since then, Medical Resources has been hit with a falling stock price, lawsuits filed by shareholders and former employees, problems with its NASDAQ stock listing, and a default crisis on $78 million in senior notes that were issued last year, during the company's imaging center acquisition drive.

The company went into technical default on the corporate debt several months ago as a result of its financial results for 1997, when it posted a net loss of $31.2 million. Covenants in the debt included an interest coverage test, in which Medical Resources had to maintain net earnings that were 1.5 times its interest payments. Last year's net loss put the company in technical violation of the terms, according to CFO Geoffrey Whynot.

The default technically enabled the company's lenders to accelerate repayment by demanding the entire loan amount at once, although this was not a realistic option, given the fact that Medical Resources is otherwise a healthy company. The possibility of such a scenario, however, required Medical Resources to issue a statement in Securities and Exchange Commission filings questioning the firm's ability to continue as a going concern.

Medical Resources seems to be working its way out of the morass, however. The company on Aug. 18 announced that it has reached a deal with its senior note lenders on restructuring the debt. The holders of the notes have agreed to waive the company's past defaults through June 30, and to reduce the interest coverage test to 1.25 times operating earnings rather than 1.5 times net earnings. That will enable the company to meet the terms regardless of the one-time charges it has been incurring of late.

In exchange, Medical Resources has agreed to raise the interest rate on the notes from 7.87% to 9%, and to issue to the holders warrants to purchase 375,000 shares of Medical Resources common stock. Medical Resources also agreed to pay $2 million in principal on the notes and to pay a $500,000 fee to the note holders. The renegotiation will result in higher interest payments of about $700,000 a year, Whynot said.

Medical Resources gained added focus in mid-August, when the company completed the sale of its StarMed Staffing business to RehabCare Group for $33 million. After repaying the subsidiary's outstanding indebtedness, Medical Resources should net $15 million, of which $5 million will be recorded as a pretax gain on the company's third-quarter financial results.

The company divested StarMed to focus on medical imaging, rather than to raise cash, Whynot said. The StarMed divestiture should improve the liquidity of Medical Resources, strengthen the company's balance sheet, and enable the company to spend funds on upgrading its equipment.

Medical Resources is taking other steps to return to financial health. It plans to sell or close eight underperforming imaging centers in the third or fourth quarter of this year. With respect to its stock listing, the company effected a reverse stock split in July that raises its share price above NASDAQ's $5 minimum bid price.

The company still has several issues to resolve, such as the shareholder and employee lawsuits, but the firm is devoting more time to improving its operations rather than dealing with financial issues. It hopes to be able to resume acquisitions on a regular basis by early next year, Whynot said.