MedQuest continues strategy; eyes credit facility refinancing in near future

By Paul Deckelman

New York, May 25 - MedQuest Associates is continuing with its previously announced corporate strategy - careful expansion in the markets where the Alpharetta, Ga.-based provider of medical diagnostic imaging services already has a notable presence, combined with looking to reduce operating costs at its more than 90 centers and, especially, bad-debt expense arising from uninsured or inadequately insured clients.

Company executives, including chief executive officer C. Christian Winkle and recently installed chief financial officer Todd E. Andrews, outlined its plans at a meeting with investors Thursday in Atlanta, which was also available to out-of-area investors via a telephone conference call.

During that presentation, Andrews indicated that the company would look to refinance its $140 million of term and revolving credit facilities well in advance of the revolver's scheduled maturity date next summer. Its $313 million principal amount of outstanding bond debt isn't due for another six years.

Andrews said that as of the end of the 2006 first quarter on March 31, MedQuest had a cash balance of $7.8 million - but had nothing drawn on its $80 million revolver, giving it ample liquidity.

The $60 million term loan B, meantime, was still almost fully outstanding, with a balance of $58.4 million. It also had what the CFO called "minor" capital lease obligations for some imaging equipment of $2.4 million.

Besides that senior debt totaling $60.8 million, all of it at the MedQuest Inc. operating company level - the first direct subsidiary under its overall corporate holding company, MQ Associates Inc. -

the operating company also has the $177 million of 11 7/8% senior subordinated notes due 2012, issued when the company recapitalized in 2002.

At the holding company level of MQ Associates are the $136 million principal amount of 12¼% senior discount notes due 2012 (accreted value $102.6 million), for a total debt load of $340.4 million. That was not much changed from the $335.1 million of total debt which the company reported at the end of the 2005 fourth quarter on Dec. 31.

Schedule of credit events

During his investor day presentation, Andews took the opportunity to clarify what he termed was "unclear" investor understanding of the timing of significant credit events slated to occur over the next five years.

First, in August 2007, the revolver piece of the company's bank agreement - currently undrawn - is due. "We'll be looking to certainly address that in advance of 2007," he said.

In August 2008, the company has the option - though not an obligation - to prepay part of the accreted interest on the 12¼% discount notes, a distinction which he said was causing some uncertainty among investors. Such a payment at that time would reduce the future accretion on those notes, Andrews said.

He noted that six months later, in early 2009, those holding company notes, which up until then had only been accumulating accreted interest on a payment-in-kind basis, would start actually paying their interest in cash. He said that some investors confuse the optional interest payment date in August 2008 with when the notes go cash-pay, which actually is some six months later, in February 2009.

Later that year, in September, the term loan B matures - although he said that "likely we'll be looking at that [for refinancing purposes] at the same time as the revolver," that is, well in advance of the latter's August 2007 scheduled maturity.

In February 2010, the company has an obligatory accreted interest payment due on the 12¼% notes, although part of that interest may have already been pre-paid voluntarily in the summer of 2008. Both the 11 7/8% notes and the 12¼% notes become payable at maturity in August 2012.

Fewer scans cut revenue

Besides commenting on the company's debt and liquidity, Andrews noted that net revenues of $71.8 million in the first quarter were $2.1 million, or $2.9 million below year-earlier revenues of $73.9 million.

He blamed the revenue decrease on changes in scanned volume, primarily in lower-modality procedures such as X-rays and mammographies, although these were partially offset by changes in the mix of different kinds of diagnostic scans and pricing improvements.

He explained that the company had made the strategic decision last summer to discontinue lower modality procedures like X-rays and mammograms in centers where those procedures were unprofitable "and did not serve other strategic objectives."

It also elected at that time as a strategic decision to terminate all of its Placement Service Agreements with third-party physicians and physician groups. The latter decision alone accounted for the loss of $2.4 million of revenues in the first quarter, although MedQuest remains convinced that in the long-run it was the right step to take. Eliminating the latter decision's revenue effects, total revenues on a consolidated basis actually grew by 0.7% during the latest quarter, Andrews said.

MedQuest, like such sector peers in the diagnostic imaging industry as Alliance Imaging Inc., InSight Health and Radiologix Inc., not to mention other medical services providers, is carefully studying recent Medicare reimbursement rate changes imposed by the government under the Deficit Reduction Act of 2005. In November 2005, the government's Centers for Medicare and Medicaid Services published final regulations, reducing payments for certain diagnostic imaging procedures involving contiguous body parts performed in the same session. The new rules will lower the reimbursement for the technical component of each additional imaging procedure by 25% this year and by an additional 25% in 2007.

MedQuest has warned its investors that the company believes that the Deficit Reduction Act reimbursement reductions "will have a material adverse impact upon our results of operations, cash flows and overall financial condition."

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