• AI
  • Molecular Imaging
  • CT
  • X-Ray
  • Ultrasound
  • MRI
  • Facility Management
  • Mammography

Turmoil rocks Medical Resources after departures of key executives


Legal issues surround acquisition advice feesObservers of the imaging services industry can be forgiven if they are experiencing déjà vu. For the second time this year, one of the industry's largest players has become embroiled in

Legal issues surround acquisition advice fees

Observers of the imaging services industry can be forgiven if they are experiencing déjà vu. For the second time this year, one of the industry's largest players has become embroiled in controversy related to acquisition consulting services. The turmoil has raised questions as to whether the rapid pace of consolidation over the past two years in the imaging center market will continue into 1998.

Medical Resources of Hackensack, NJ, is at the center of controversy this time. After watching arch-rival U.S. Diagnostic struggle with consulting-related problems through much of 1997, Medical Resources has found itself caught in a quagmire that may distract the company's management for months to come.

Medical Resources has been beset by legal claims since charges surfaced in November that payments for advice on center acquisitions made to 712 Advisory Services, a financial company run by chairman Gary Siegler, may have been inappropriate and inadequately disclosed.

Concern about the payments, called related-party transactions, first arose among Medical Resources shareholders in August. In October, president and COO William Farrell and general counsel Gary Fields brought the issue before the company's board, objecting to the transactions and the way in which they had been disclosed. Over the next several weeks, the two sides negotiated over how best to handle the dispute, but the talks eventually collapsed.

Farrell and Fields claim that the board then retaliated against them in ways that resulted in "an intolerable and humiliating work environment," according to a complaint the two filed in a wrongful termination suit brought before a New Jersey state court. The board in essence "constructively discharged" Farrell and Fields, according to the complaint. The company's CFO John O'Malley, who supported Farrell and Fields, was subsequently fired.

Medical Resources disputes that Farrell and Fields were forced to resign, and notes that the related-party transaction payments were disclosed in public reports. Siegler maintains that the questions regarding the fees are unfounded, and said he will cooperate with a company review of the matter.

To help fill the void left by Farrell and Fields, as their departure became imminent Medical Resources on Nov. 2 appointed Lawrence Ramaekers as acting CEO. Ramaekers is a principal in management consulting firm Jay Alix & Associates and specializes in interim management assignments. Ramaekers did not respond to requests from SCAN for comment.

Doubts about the future. Following the public airing of the dispute, Medical Resources' stock price dropped to $8.25 per share, a drop of 60% from its high of $20.63 in mid-October. The price has since remained near this low level, and the decline has sparked a number of class-action lawsuits filed against the company. The various claims will be consolidated Jan. 13 in U.S. District Court for the district of New Jersey, according to Andrew Barroway, an attorney with Schiffrin & Craig of Bala Cynwyd, PA.

The arguments behind the class-action cases center around allegations of inadequate disclosure, excessive payments for the amount of value received, and conflict of interest, Barroway said.

"There are inherent conflicts when you have the top officers of the company directing that payments be made to an affiliate that they control and are profiting from," he said.

Investor confidence in Medical Resources has plummeted despite the fact that the company more than doubled its net income in its third quarter (end-September), recording a net profit of $4.3 million for the most recent period, compared with net income of $1.8 million in the same period a year ago. New acquisitions prompted revenue to rise to $58.9 million from $24.8 million in the same quarter of 1996. The company operates 101 imaging centers.

Despite the good third-quarter results, the wholesale changes in the company's management have prompted concern about future operations. Also, with a lower share price, Medical Resources will have a harder time raising funds to fuel continued growth through center acquisitions, said Larry Smith, an analyst in the New York City office of investment firm Tucker Anthony of Boston.

"With the chief operating officer and chief financial officer leaving, it means right now you have an interim or caretaker management that is not likely to be out looking for acquisitions," Smith said. "They have to bring in a new chief executive officer and arrange financing, probably debt financing, in order for the company to begin to make acquisitions and grow again. The danger is that if they do not accomplish these factors, it could create disruption at the center level down the road."

Ironically, Medical Resources seems to have done a nice job growing through sound acquisitions. According to Farrell, his former employer is in good shape and is well positioned to continue acquisitions once the executive issues are resolved.

"It is an excellent company and has excellent management," he said. "The industry is ripe for continued acquisitions. Once Medical Resources resolves the issues between its senior management and the board, it will step right back into it."

There is a concern, however, that the skills needed to acquire a large network of centers are not necessarily related to those needed to successfully blend and operate a nationwide network of imaging centers.

"What the company really needs is some direction on how to integrate the tremendous growth they have had, or they are going to have another Columbia/HCA on their hands," said Ernest DeSalvo, founder of Medical Resources and owner of Strategic Outpatient Services of River Edge, NJ.

DeSalvo referred to the fast growth of leading managed-care hospital firm Columbia/HCA, which saw its acquisition drive falter this year following regulatory scrutiny of management abuses.

In fact, DeSalvo left Medical Resources in 1994 under a cloud of dispute that might have foreshadowed the current conflict. Siegler's company, Siegler Collery, assisted DeSalvo in pursuing a leveraged buyout of Medical Resources' original venture capitalists in 1990, and the company went public in 1992. DeSalvo had been operating Medical Resources since its beginning in 1979. Following the leveraged buyout, he was only one voice on a board dominated by executives with financial backgrounds, he said.

DeSalvo was hoping to bring on executives with the background to run large healthcare networks, but this effort was vetoed by the company's board, which was more concerned about increasing earnings, he said. DeSalvo then began to question nonmedical expenditures and acquisitions by the company, some of which were related to other Siegler investments. At one time, for example, Medical Resources operated a manufacturer and retailer of maternity wear, although the company was later divested.

"He (Siegler) was trying to package all of his other companies into a medical imaging company," DeSalvo said. "How do I go to Wall Street and explain that we are into medical imaging and making baby clothes? What is the rationale?"

Related Videos
Emerging Research at SNMMI Examines 18F-flotufolastat in Managing Primary and Recurrent Prostate Cancer
Could Pluvicto Have a Role in Taxane-Naïve mCRPC?: An Interview with Oliver Sartor, MD
New SNMMI President Cathy Cutler, PhD, Discusses Current Challenges and Goals for Nuclear Medicine
Where the USPSTF Breast Cancer Screening Recommendations Fall Short: An Interview with Stacy Smith-Foley, MD
A Closer Look at MRI-Guided Transurethral Ultrasound Ablation for Intermediate Risk Prostate Cancer
Improving the Quality of Breast MRI Acquisition and Processing
Can Fiber Optic RealShape (FORS) Technology Provide a Viable Alternative to X-Rays for Aortic Procedures?
Does Initial CCTA Provide the Best Assessment of Stable Chest Pain?
Making the Case for Intravascular Ultrasound Use in Peripheral Vascular Interventions
Can Diffusion Microstructural Imaging Provide Insights into Long Covid Beyond Conventional MRI?
Related Content
© 2024 MJH Life Sciences

All rights reserved.