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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NO. 0-27506
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COHR INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 95-4559155
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION)
21540 PLUMMER STREET, CHATSWORTH, CALIFORNIA 91311-4103
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (818) 773-2647
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
As of February 11, 1999 there were outstanding 6,433,189 shares of the
Registrant's Common Stock, par value $0.01, which is the only class of common
stock of the Registrant.
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COHR INC. AND SUBSIDIARIES
FORM 10-Q
TABLE OF CONTENTS
FOR THE NINE MONTHS ENDED DECEMBER 31, 1998
PAGE
NUMBER
------
PART I. FINANCIAL INFORMATION
Item Consolidated Financial Statements: Consolidated Balance 4
1. Sheets as of December 31, 1998 (unaudited) and March 31,
1998........................................................
Consolidated (unaudited) Statements of Operations for the 5
three months ended December 31, 1998 and 1997 and the nine
months ended December 31, 1998 and 1997.....................
Consolidated (unaudited) Statements of Cash Flows for the 6
nine months ended December 31, 1998 and 1997................
Notes to Consolidated Financial Statements.................. 8
Item Management's Discussion and Analysis of Financial Condition 10
2. and Results of Operations...................................
PART II. OTHER INFORMATION
Item Legal Proceedings........................................... 15
1.
Item Other Information........................................... 16
5.
Item Exhibits and Reports on Form 8-K............................ 17
6.
2
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FORWARD-LOOKING STATEMENTS
Statements in this Form 10-Q that are not historical facts are hereby
identified as "forward-looking statements" for the purposes of the safe harbor
provided by Section 21E of the Securities Exchange Act of 1934, as amended and
Section 27A of the Securities Act of 1933, as amended. COHR Inc. ("COHR" or the
"Company") cautions readers that such "forward-looking statements," including,
without limitation, those relating to the Company's future business prospects,
revenues, working capital, liquidity, capital needs, income/(loss) and
operations, wherever they may appear in this document or in other statements
attributable to the Company, are necessarily estimates reflecting the best
judgment of the Company's management and involve a number of risks and
uncertainties that could cause actual results to differ materially from those
suggested by the "forward-looking statements." Such "forward-looking statements"
should, therefore, be considered in light of various important factors
("Cautionary Statements"), including those set forth from time to time in the
Company's reports and registration statements filed with the Securities and
Exchange Commission (the "SEC").
These "forward-looking statements" are found at various places throughout
this document. In addition, forward-looking statements generally can be
identified by the use of forward-looking terminology such as "may," "will,"
"expect," "should," "intend," "estimate," "anticipate," "believe," or "continue"
or the negative thereof or variations thereon or similar terminology. Moreover,
the Company, through its senior management or persons acting on its behalf, may
from time to time make "forward-looking statements" about the matters described
herein or other matters concerning the Company and such statements are subject
to the qualifications set forth herein and in the Cautionary Statements. The
Company disclaims any intent and undertakes no obligation to update publicly or
revise "forward-looking statements."
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PART I. FINANCIAL INFORMATION
COHR INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
ITEM 1. FINANCIAL STATEMENTS
ASSETS
DECEMBER 31, MARCH 31,
1998 1998
------------ ---------
(UNAUDITED)
Current assets:
Cash and cash equivalents................................. $11,769 $14,026
Accounts receivable, net of allowance for doubtful
accounts of $3,199 (December 31) and $4,232 (March
31).................................................... 13,390 16,946
Inventory................................................. 4,567 6,891
Prepaid expenses and other................................ 736 716
Income tax refund receivable.............................. 5,671 8,391
------- -------
Total current assets.............................. 36,133 46,970
Equipment and improvements, net of accumulated depreciation
of $6,518 (December 31) and $5,416 (March 31)............. 5,127 6,804
Intangible assets, net of accumulated amortization of $419
(December 31) and $261 (March 31)......................... 2,501 2,615
Other assets................................................ 381 195
------- -------
Total............................................. $44,142 $56,584
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable............................................. $ $ 40
Accounts payable.......................................... 2,759 6,183
Accrued expenses.......................................... 12,389 11,174
Deferred revenue.......................................... 243 734
Current portion of long-term debt......................... 358 649
------- -------
Total current liabilities......................... 15,749 18,780
Long-term debt.............................................. 278 498
Other long-term liabilities................................. 193 136
SHAREHOLDERS' EQUITY
Preferred Stock, $.01 par value; 2,000,000 shares
authorized; no shares issued and outstanding...........
Common Stock, $.01 par value; 20,000,000 shares
authorized; 6,433,189 shares issued and outstanding.... 887 887
Additional paid in capital................................ 55,153 55,153
Accumulated deficit....................................... (28,118) (18,870)
------- -------
Total shareholders' equity........................ 27,922 37,170
------- -------
Total............................................. $44,142 $56,584
======= =======
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COHR INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------- -------------------
1998 1997 1998 1997
------- -------- ------- --------
Revenues.......................................... $22,864 $ 24,422 $74,175 $ 75,197
Direct operating expenses......................... 17,550 20,607 57,061 55,757
------- -------- ------- --------
Gross margin...................................... 5,314 3,815 17,114 19,440
Selling, general and administrative expenses...... 7,162 13,268 23,446 30,580
Special charges................................... 1,432 4,115 3,444 4,115
------- -------- ------- --------
Operating loss.................................... (3,280) (13,568) (9,776) (15,255)
Interest income, net.............................. 153 234 528 771
------- -------- ------- --------
Loss before income tax benefit.................... (3,127) (13,334) (9,248) (14,484)
Income tax benefit................................ (2,679) (3,075)
------- -------- ------- --------
Net loss.......................................... $(3,127) $(10,655) $(9,248) $(11,409)
======= ======== ======= ========
Net loss per common share -- Basic and Diluted.... $ (0.49) $ (1.66) $ (1.44) $ (1.77)
======= ======== ======= ========
Number of shares used to compute net loss per
common share.................................... 6,433 6,433 6,433 6,429
======= ======== ======= ========
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COHR INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
NINE MONTHS ENDED
DECEMBER 31,
-------------------
1998 1997
------- --------
Cash flows from operating activities:
Net loss.................................................. $(9,248) $(11,409)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Depreciation and amortization.......................... 1,128 1,578
Special charges........................................ 2,740
Provision for doubtful accounts........................ 530 4,328
Deferred income tax asset -- current portion........... 1,895
Other, net............................................. (109)
Changes in assets and liabilities, net of effect of
acquisitions of certain assets:
(Increase) decrease in:
Accounts receivable.................................. 2,112 2,183
Inventory............................................ 2,809 (834)
Prepaid expense and other............................ (20) 531
Income tax refund receivable......................... 2,720 (8,679)
Other assets......................................... (192) 1,628
Increase (decrease) in:
Accounts payable..................................... (3,424) 1,687
Accrued expenses..................................... (285) 4,264
Deferred revenue..................................... (491) (2,738)
------- --------
Total adjustments................................. 7,518 5,843
------- --------
Net cash used in operating activities.................. (1,730) (5,566)
------- --------
Cash flows from investing activities:
Capital expenditures...................................... (173) (1,894)
Proceeds from sale of fixed assets........................ 56
Payment for business acquisitions......................... (44) (1,262)
Sale of investments....................................... 4,500
------- --------
Net cash (used in) provided by investing activities.... (161) 1,344
------- --------
Cash flows from financing activities:
Repayments of long-term debt and notes payable............ (366) (2,241)
------- --------
Net decrease in cash and cash equivalents................... (2,257) (6,463)
Cash and cash equivalents, beginning of period.............. 14,026 22,948
------- --------
Cash and cash equivalents, end of period.................... $11,769 $ 16,485
======= ========
Supplemental disclosures of cash flow information -- Cash
paid during the period for:
Income taxes........................................... $ $ 3,720
======= ========
Interest............................................... $ 27 $ 135
======= ========
Details of businesses or assets acquired at fair value are
as follows:
Current assets............................................ $ $ 526
Equipment................................................. 196
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NINE MONTHS ENDED
DECEMBER 31,
-------------------
1998 1997
------- --------
Goodwill and other intangibles............................ 44 1,065
------- --------
44 1,787
------- --------
Liabilities assumed....................................... 525
------- --------
Net cash paid for acquisitions............................ $ 44 $ 1,262
======= ========
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COHR INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
In the opinion of management, the accompanying consolidated financial
statements include all adjustments necessary for a fair presentation of the
financial position of COHR Inc. ("COHR") and subsidiaries (collectively, the
"Company"), and the results of its operations and its cash flows for the interim
periods presented. Although COHR believes that the disclosures in these
consolidated financial statements are adequate to make the information presented
not misleading, certain information and footnote disclosures normally included
in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission. Results of operations for
the interim periods are not necessarily indicative of results to be expected for
any other interim period or for the full year.
The consolidated financial statements for the three months and nine months
ended December 31, 1998 and 1997 are unaudited and should be read in conjunction
with the audited consolidated financial statements and notes thereto included in
COHR's Annual Report on Form 10-K for the year ended March 31, 1998.
On February 17, 1998, the Company disclosed that it had restated its
financial statements for the fiscal year ended March 31, 1997 and for the first
two quarters of the fiscal year ended March 31, 1998 ("the Restatement"). All
references herein to the financial statements for such periods refer to such
financial statements as restated. These restatements related primarily to
management's determination that certain equipment and software sales were
prematurely recorded and that certain liabilities and reserves were understated.
Consolidation of Subsidiaries -- The Company's financial statements include
the activity of all of its wholly owned subsidiaries over which the Company has
direct or indirect unilateral and perpetual control. All intercompany
transactions have been eliminated in consolidation.
2. SPECIAL CHARGES
The Company recorded special charges of $3.4 million for the nine months
ended December 31, 1998. Included in the $3.4 million total were the disposition
costs and write-down of certain assets related to operations abandoned or to be
closed, financial advisory services and severance costs for those officers and
employees who were terminated or removed from office by the Company and so
notified during the nine months ended December 31, 1998.
3. INCOME TAXES
On December 31, 1998, the Company had net operating loss carryforwards
("NOLs") of approximately $8.8 million for federal income tax purposes and $4.6
million for state income tax purposes. The NOLs will expire in 2013 and 2003,
respectively. Assuming the Company has sufficient taxable income, the NOLs could
be of significant value to the Company, because generally the NOLs could be used
to offset future taxable income. However, the Company has undergone two
"ownership changes" within the meaning of Section 382 of the Internal Revenue
Code on January 8, 1998 and on December 24, 1998. As such, the Company's
utilization of the NOL carryforwards listed above, including the NOLs incurred
through December 24, 1998, generally will be limited to an annual amount equal
to the product of (a) the fair market value of the Company's stock immediately
before the ownership change and (b) the applicable long-term tax-exempt rate
published by the Internal Revenue Service at the time of the ownership change.
Such annual limitation is approximately $1.5 million.
Generally, an ownership change occurs whenever there is a greater than
50-percentage point change in ownership (based on the value of stock owned) of
the stock of the loss corporation owned by one or more "five percent
shareholders" (as defined by the applicable federal income tax regulations) over
the lowest percentage
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ownership of the stock of the loss corporation owned by such shareholders at any
time during the testing period: generally, a three-year period ending on the day
of the ownership change.
4. BUSINESS SEGMENTS (UNAUDITED)
The Company currently provides services to the health care industry through
two principal business segments. The COHR MasterPlan segment provides equipment
servicing and sales to hospitals and other health care providers. The Purchase
Connection segment consists primarily of a group purchasing organization that
negotiates pricing for its membership with manufacturers and distributors. Other
services in the Purchase Connection segment include providing on-site security,
management consulting, employee-benefits insurance brokerage, medical
credentials verification and insurance claims-management software to hospitals,
integrated health systems and alternate site providers. Effective December 1,
1998, the management consulting and medical credentials verification division
was contributed to a limited liability corporation in consideration of a 40%
membership interest therein. General corporate expenses are classified as
Corporate. Identifiable assets are those used in the Company's operations in
each segment as estimated by management based upon factors such as revenue
generated, number of personnel and space occupied by each segment. Information
concerning the Company's business segments for the periods ended December 31,
1998 and 1997 is as follows:
EQUIPMENT PURCHASING
SERVICES SERVICES CORPORATE TOTAL
--------- ---------- --------- --------
(DOLLARS IN THOUSANDS)
For the three months ended December 31, 1998
Revenues............................................ $18,042 $ 4,822 $ 22,864
Operating income (loss)............................. (454) 2,023 $ (4,849) (3,280)
Interest income, net................................ 153 153
Identifiable assets................................. 27,368 4,414 12,360 44,142
Depreciation and amortization....................... 190 56 126 372
Capital expenditures................................ 40 16 56
For the three months ended December 31, 1997
Revenues............................................ $20,098 $ 4,324 $ 24,422
Operating income (loss)............................. (2,518) 593 $(11,643) (13,568)
Interest income, net................................ 234 234
Identifiable assets................................. 46,604 7,517 21,046 75,167
Depreciation and amortization....................... 271 80 181 532
Capital expenditures................................ 461 18 442 921
For the nine months ended December 31, 1998
Revenues............................................ $58,607 $15,568 $ 74,175
Operating income (loss)............................. (849) 6,407 $(15,334) (9,776)
Interest income, net................................ 528 528
Identifiable assets................................. 27,368 4,414 12,360 44,142
Depreciation and amortization....................... 575 169 384 1,128
Capital expenditures................................ 130 43 173
For the nine months ended December 31, 1997
Revenues............................................ $59,683 $15,514 $ 75,197
Operating income (loss)............................. (2,359) 4,825 $(17,721) (15,255)
Interest income, net................................ 771 771
Identifiable assets................................. 46,604 7,517 21,046 75,167
Depreciation and amortization....................... 805 237 536 1,578
Capital expenditures................................ 947 38 909 1,894
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5. TRANSACTION WITH THREE CITIES FUNDS
On December 24, 1998, Three Cities Fund II, L.P. and Three Cities Offshore
II, C.V. (the "Three Cities Funds") purchased approximately 48% of the issued
and outstanding common stock, par value $.01 per share (the "Common Stock"), of
the Company, and TCF Acquisition Corporation, a wholly owned subsidiary of the
Three Cities Funds (the "Purchaser"), entered a Plan and Agreement of Merger
(the "Merger Agreement") with the Company that provided for, among other things,
the acquisition of all remaining Common Stock by the Purchaser at a price of
$5.375 per share (which would have increased to $6.375 per share if the Company
settled certain existing stockholder litigation on a basis which would not
require it to pay more than $3.0 million, net of any insurance proceeds) and,
under certain circumstances, the merger of the Purchaser with and into the
Company.
In response to a proposal by a third party to purchase the Company, the
Purchaser and the Company entered into an Amended and Restated Plan and
Agreement of Merger, dated as of February 4, 1999 (the "Amended Merger
Agreement"), pursuant to which the Purchaser modified its outstanding tender
offer to, among other things, increase the price to $6.50 per share and extend
its expiration to 12:00 midnight, Eastern Standard Time, on February 24, 1999,
unless it is further extended. The Amended Merger Agreement provides for the
subsequent merger of the Purchaser with and into the Company (the "Merger"), and
each share of Common Stock outstanding at the time of the Merger (other than
Common Stock held by the Three Cities Funds, the Purchaser, or shares held by
stockholders validly exercising appraisal rights pursuant to the General
Corporation Law of the State of Delaware) will, by virtue of the Merger and
without any action by the holder thereof, be converted into the right to
receive, without interest, $6.50 per share in cash.
The Company's Board of Directors unanimously approved the terms of the
Amended Merger Agreement, the tender offer, and the Merger contemplated
thereunder, determined that the such tender offer and the Merger are fair to,
and in the best interests of, the holders of Common Stock, and recommended that
all such holders accept such offer and tender their shares pursuant thereto.
6. RECLASSIFICATIONS
Certain reclassifications have been made to the prior period's consolidated
financial statements to conform to the current period's presentation.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of the Company's unaudited
consolidated results of operations and financial position should be read in
conjunction with the Company's unaudited consolidated financial statements,
including the notes thereto, appearing elsewhere in this Quarterly Report.
GENERAL
The Company is a national outsourcing service company, providing equipment
servicing and sales, group purchasing and other ancillary services to hospitals,
integrated health systems and alternative site providers.
During the fourth quarter of fiscal year 1998 and the first three quarters
of fiscal year 1999, the Company undertook a cost-reduction program which
resulted in a reduction in overall personnel, the closing or restructuring of
certain MasterPlan refurbishment and service operations, the closing of certain
under-utilized MasterPlan field offices and the decision to dispose of a
claims-management software business. The Company will continue to pursue
additional cost-reduction opportunities during the balance of fiscal year 1999.
The goal to improve profitability may include the elimination or repricing of
certain low margin or unprofitable contracts. The Company has also instituted
stronger credit and collection policies.
In connection with the Company's fiscal year end audit at March 31, 1998,
the Company's auditors noted certain conditions involving the Company's internal
control structure and its operations that were deemed to be material weaknesses
during the period from April 1, 1997 to March 31, 1998. The Company has
initiated actions it deems to be appropriate to address these conditions,
including the hiring of a new management
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team, improving communications between departments, centralizing certain
accounting functions and formalizing methodologies for certain accounting
procedures.
Federal and state civil lawsuits have been filed against the Company
alleging, among other things, federal and/or state securities law violations and
the Securities and Exchange Commission (the "SEC") and the NASDAQ Listing
Investigations, a division of the NASDAQ Stock Market, have commenced formal
investigations of the Company. See Part II, Item 1 "Legal Proceedings" below.
RESULTS OF OPERATIONS
NINE MONTHS ENDED DECEMBER 31, 1998 VERSUS NINE MONTHS ENDED DECEMBER 31, 1997
Revenues. The Company's revenues for the nine months ended December 31,
1998 totaled $74.2 million, a decrease of $1 million or 1.4% from revenues of
$75.2 million for the nine months ended December 31, 1997. Revenues of the COHR
MasterPlan segment declined 1.8% to $58.6 million in the nine months ended
December 31, 1998 from $59.7 million in the same period last year. An increase
in COHR MasterPlan contract revenues was more than offset by a decrease in
equipment sales. The Purchase Connection segment, which consists primarily of
the Company's group purchasing organization (GPO) but includes other ancillary
businesses, experienced a slight increase in revenues to $15.6 million in the
nine months ended December 31, 1998 over $15.5 million in the same period last
year. Revenue growth in the GPO more than offset the decline in revenues for the
ancillary businesses.
Direct Operating Expenses. The Company's direct expenses for the nine
months ended December 31, 1998 totaled $57.1 million, which represented an
increase of $1.3 million or 2.3% over the nine months ended December 31, 1997
total of $55.8 million. This increase was primarily attributable to the
write-down of inventory related to operations to be closed which was offset in
part by the cost-reduction program implemented during the fourth quarter of
fiscal year 1998 and the first three quarters of fiscal year 1999. Direct
operating expenses as a percentage of revenues for the nine months ended
December 31, 1998 increased to 76.9% compared to 74.1% for the same period ended
December 31, 1997.
Gross Margin. The Company's gross margin for the nine months ended December
31, 1998 totaled $17.1 million, a decrease of $2.3 million or 12% from the nine
months ended December 31, 1997 total of $19.4 million. Gross margin as a
percentage of revenues decreased to 23.1% for the nine months ended December 31,
1998 compared to 25.9% for the same period ended December 31, 1997.
Selling, General and Administrative Expenses. The Company's selling,
general and administrative expenses for the nine months ended December 31, 1998
totaled $23.4 million, a decrease of $7.2 million or 23.3% from the nine months
ended December 31, 1997 total of $30.6 million. The decrease was primarily
attributable to lower personnel and administrative expenses resulting from the
Company's ongoing cost-reduction program and a reduction in the provision for
doubtful accounts. These reductions were partially offset by higher professional
outside services and insurance costs. As a percentage of revenues, selling,
general and administrative expenses decreased during the nine months ended
December 31, 1998 to 31.6% from 40.7% during the nine months ended December 31,
1997.
Special Charges. The Company's special charges totaled $3.4 million for the
nine months ended December 31, 1998, a decrease of $700,000 from special charges
of $4.1 million for the nine months ended December 31, 1997. Special charges for
the nine months ended December 31, 1998 consisted of disposition costs and the
write-down of certain assets related to operations to be abandoned or closed,
financial advisory services and severance costs for those officers and employees
who were terminated or removed from office by the Company and so notified during
the nine months ended December 31, 1998. Special charges for the nine months
ended December 31, 1997 consisted of a write-off of approximately $2.6 million
of goodwill related to an acquisition of one of its operating units, legal,
accounting and related costs resulting from the special review conducted at the
direction of the Board of Directors and severance costs for an officer who was
removed from office by the Company as of December 31, 1997.
Operating Loss. The Company's operating loss for the nine months ended
December 31, 1998 totaled $9.8 million, a decrease of $5.5 million from the
operating loss for the nine months ended December 31, 1997
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of $15.3 million. The operating loss as a percentage of revenues for the nine
months ended December 31, 1998 was 13.2% compared to 20.3% for the nine months
ended December 31, 1997.
Income Tax Benefit. The Company recognized no income tax benefit for the
nine months ended December 31, 1998 due to the Company's being in a net
operating loss carryforward position. The income tax benefit for the nine months
ended December 31, 1997 was $3.1 million. The Company's effective tax benefit
rate was 21.2% for the nine months ended December 31, 1997 which was lower than
it would have otherwise been due to the fact that the Company was unable to
utilize a tax benefit of $1.9 million due to limitations on the carryback of net
operating losses.
Net Loss. The Company's net loss for the nine months ended December 31,
1998 totaled $9.2 million, a decrease of $2.2 million from the net loss for the
nine months ended December 31, 1997 of $11.4 million. As a percentage of
revenues, the net loss was 12.5% for the nine months ended December 31, 1998
compared to 15.2% for the nine months ended December 31, 1997.
THREE MONTHS ENDED DECEMBER 31, 1998 VERSUS THREE MONTHS ENDED DECEMBER 31, 1997
Revenues. The Company's revenues for the three months ended December 31,
1998 totaled $22.9 million, a decrease of $1.5 million or 6.4% from revenues of
$24.4 million for the three months ended December 31, 1997. The decline in
revenues was attributable primarily to operations that were either disposed of
or identified for closure or sale during the past four quarters. The COHR
MasterPlan segment generated revenues of $18.0 million in the three months ended
December 31, 1998, compared to $20.1 million in the same quarter last year,
which primarily represented a decrease in equipment sales. The Purchase
Connection segment, which consists primarily of the Company's group purchasing
organization (GPO) but includes other ancillary businesses, produced revenues of
$4.8 million in the three months ended December 31, 1998, compared to $4.3
million in the same quarter last year. Revenue growth in the GPO more than
offset revenue declines in the ancillary businesses.
Direct Operating Expenses. The Company's direct expenses for the three
months ended December 31, 1998 totaled $17.6 million, which represented a
decrease of $3 million or 14.8% from the three months ended December 31, 1997
total of $20.6 million. This decrease was primarily attributable to lower parts
and equipment costs and personnel costs associated with the cost reduction
program implemented during the past four quarters. As a percentage of revenues,
direct operating expenses decreased to 76.8% for the three month period ended
December 31, 1998 from 84.4% for the three months ended December 31, 1997.
Gross Margin. The Company's gross margin for the three months ended
December 31, 1998 totaled $5.3 million, an increase of $1.5 million or 39.3%
over the three months ended December 31, 1997 total of $3.8 million. Gross
margin as a percentage of revenues increased to 23.2% for the three months ended
December 31, 1998 from 15.6% for the three months ended December 31, 1997.
Selling, General and Administrative Expenses. The Company's selling,
general and administrative expenses for the three months ended December 31, 1998
totaled $7.2 million, a decrease of $6.1 million or 46% from the three months
ended December 31, 1997 total of $13.3 million. This decrease was primarily
attributable to lower personnel and administrative expenses resulting from the
Company's ongoing cost-reduction program and a reduction in the provision for
doubtful accounts, which were partially offset by higher professional outside
services and insurance costs. As a percentage of revenues, selling, general and
administrative expenses decreased during the three months ended December 31,
1998 to 31.3% from 54.3% during the three months ended December 31, 1997.
Special Charges. Special charges of $1.4 million for the three months ended
December 31, 1998 consisted primarily of financial advisory services and
disposition costs and write-down of certain assets related to operations to be
abandoned or closed. Special charges for the three months ended December 31,
1997 consisted of a write-off of approximately $2.6 million of goodwill related
to an acquisition of one of its operating units, legal, accounting and related
costs resulting from the special review conducted at the direction of the Board
of Directors and severance costs for an officer who was removed from office by
the Company as of December 31, 1997.
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Operating Loss. The Company's operating loss for the three months ended
December 31, 1998 totaled $3.3 million, a decrease of $10.3 million from an
operating loss for the three months ended December 31, 1997 of $13.6 million.
The operating loss as a percentage of revenues for the three months ended
December 31, 1998 was 14.3% compared to 55.6% for the three months ended
December 31, 1997.
Income Tax Benefit. The Company recognized no income tax benefit for the
three months ended December 31, 1998 due to the Company's being in a net
operating loss carryforward position. The income tax benefit for the three
months ended December 31, 1997 was $2.7 million. The Company's effective tax
benefit rate was 20.1% for the three months ended December 31, 1997.
Net Loss. The Company's net loss for the three months ended December 31,
1998 totaled $3.1 million, a decrease of $7.6 million from the net loss for the
three months ended December 31, 1997 of $10.7 million. As a percentage of
revenues, the net loss was 13.7% for the three months ended December 31, 1998 as
compared to 43.6% for the three months ended December 31, 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company had working capital of $20.4 million and $28.2 million as of
December 31, 1998 and March 31, 1998, respectively. The Company had cash and
cash equivalents of $11.8 million and $14.0 million at those same respective
dates.
Net cash used in operating activities amounted to $1.7 million and $5.6
million for the nine months ended December 31, 1998 and 1997, respectively. The
factors contributing to the negative cash flow from operations for the nine
months ended December 31, 1998 were the net loss (offset in part by non-cash
charges for depreciation and amortization, provision for doubtful accounts and
certain special charges) and a reduction in trade accounts payable which were
partially offset by the receipt of a $2.7 million income tax refund and a $2.1
million reduction in accounts receivable. Included in accrued expenses at
December 31, 1998 are unpaid amounts related to special charges, primarily
financial advisory services and severance expense for officers and employees.
Accrued expenses will be charged when these payments are made.
Net cash (used in) provided by investing activities was $(161,000) and $1.3
million in the nine months ended December 31, 1998 and 1997, respectively. There
were acquisitions of businesses and or assets of $44,000 for the nine months
ended December 31, 1998 as compared to spending on acquisitions of $1.3 million
for the same period in the prior year. The Company had sale of investments of
$4.5 million for the nine months ended December 31, 1997. The Company also had
capital expenditures of $173,000 for the nine months ended December 31, 1998
compared to capital expenditures of $1.9 million for the same period in the
prior year.
Cash used in financing activities for the repayment of long-term debt and
notes payable totaled $366,000 for the nine months ended December 31, 1998 as
compared to $2.2 million for the nine months ended December 31, 1997.
At present, the Company does not have a credit facility or line of credit.
The Company believes that its cash on hand and anticipated cash flows will be
sufficient to meet the Company's operating needs for the next twelve months. The
Company has not paid dividends since its initial public offering in February of
1996.
The Company is subject to various commitments and contingencies. See Part
II, Item 1 "Legal Proceedings" and "Additional Factors Affecting Operating
Results" below.
INFLATION
The Company believes that its operations have not been materially adversely
affected by inflation. The Company expects that salary and wage increases for
its skilled staff will continue to be higher than average wage increases, as is
common in the Company's industry.
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ADDITIONAL FACTORS AFFECTING OPERATING RESULTS
The Company's business is subject to a number of risks, some of which are
beyond the Company's control. In addition to the factors described herein, the
Company has identified in "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Risk Factors" in its Annual Report on
Form 10-K for the fiscal year ending March 31, 1998, important factors that
could cause actual results to differ materially from those projected in any
forward-looking statements the Company may make from time to time.
RISKS ASSOCIATED WITH MANAGEMENT OF DATA AND YEAR 2000 ISSUES
The Company's business is dependent upon its ongoing ability to obtain,
process, analyze and manage data and to maintain and upgrade its data processing
capabilities. Interruption of data processing capabilities for any extended
period of time, the failure to upgrade data services, difficulties in converting
data and information systems after acquisitions, loss of stored data,
programming errors or other computer programs could have a material adverse
effect on the Company's business. As the year 2000 approaches, an issue ("Year
2000 Issue") affecting many companies has emerged regarding how existing
application software programs and operating systems can accommodate the date
value as described herein. In brief, many existing applications in the
marketplace and some proprietary database applications developed by the Company
were designed to use a two-digit data position to represent the year (e.g., "98"
is stored on the systems and represents the year 1998). The Company has
initiated an assessment of its own computer systems and other date-sensitive
electronic systems, such as security systems. The financial and general ledger
systems of the Company are substantially compliant already; the cost to upgrade
these systems is not expected to be material. The Company is currently in
varying stages of assessing year 2000 related modifications and conversions to
its own systems and software, including testing, and its target date for
completion of year 2000 compliant efforts is June 1999. The Company has also
commenced communications with suppliers, customers, financial institutions and
others with whom it conducts business to assess whether the systems of these
other companies, with which the Company interfaces or on which the Company
relies, will be upgraded on a timely basis or that such systems will not have an
adverse effect on the Company's systems. The Company does not believe that it
will incur a material financial impact from the risk, or from assessing the
risk, arising from the Year 2000 Issues. However, there can be no assurance that
the Company's initial assessment of this risk will be accurate or that the Year
2000 Issue will not materially affect future financial results or future
financial conditions.
Another area of potential risk is with certain medical equipment which
belongs to the Company's customers but which is maintained or serviced by the
Company and has microprocessors with date functionality which could malfunction
in the year 2000. Among other steps, the Company has initiated formal
communications with all of its customers and with all of the major suppliers of
medical equipment to ensure that these third parties are also working to
remediate their own Year 2000 Issues, if applicable. Unless the Company has
contracted with a customer specifically to provide year 2000 services, the
Company believes that its maintenance agreements do not require the provision of
such services because of the latent nature of the problem. However, the Company
is unable to determine whether the Year 2000 Issue related to customer's medical
equipment which is serviced or maintained by the Company will materially affect
future financial results or future financial conditions.
Upon the completion of the Company's assessment of its exposure to the risk
of Year 2000 non-compliance by third parties, the Company will formulate
contingency plans to handle the most likely worst-case Year 2000 scenarios.
Until the assessment is completed, the Company cannot reasonably define what
those scenarios might be.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
None.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company, certain of its present and former officers and directors and
others are named as defendants in four purported class action lawsuits which
allege, among other things, false and misleading statements in various public
disclosures in violation of federal and/or state securities laws. Sherleigh
Associates Inc. Profit Sharing Plan v. Cohr Inc. et al. (Case No. 98-3028 JSL)
was filed in the United States District Court for Central District of California
on or about April 21, 1998. Zabronsky et al. v. Cohr Inc. et al.(Case No. 98-
3493 JSL) was filed in the same court on May 6, 1998. Bird v. Cohr Inc. et al.
(Case No. 98-4177 WMB) was filed in the same court on May 27, 1998. Leeds v.
Malhotra et al. (Case No. BC198490) was filed in the Superior Court of the State
of California, Los Angeles County, on April 16, 1998. The plaintiffs in each
action seek to represent a class of purchasers of the Company's common stock
during various time periods between 1996 and 1998.
The plaintiffs in each of the three federal actions filed in the United
States District Court for the Central District of California assert claims of
violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934,
and of certain regulations promulgated thereunder. The plaintiffs in each of the
three federal actions seek unspecified compensatory damages, interest,
attorneys' fees and costs, and injunctive and/or other relief as permitted by
law. The plaintiff in the action filed in California Superior Court asserts
claims of violations of California Corporations Code Section 25400 and 25500.
The plaintiff in that action seeks unspecified compensatory damages, interest,
attorneys' fees and costs, and injunctive and/or other relief as permitted by
law. No class has been certified in any of these actions.
A shareholder of the Company has brought a derivative lawsuit purportedly
on behalf of the Company, alleging breaches of fiduciary duty and related
claims, and naming certain of its present and former officers and directors as
defendants, with the Company as a nominal defendant. This action, which is
entitled Schug v. Chopra et al. (Case No. BC190933) was filed in the Superior
Court for the State of California, Los Angeles County, on May 12, 1998. The
shareholder-plaintiff seeks unspecified compensatory and punitive damages,
disgorgement of profits and gains, attorneys' fees and costs, injunctive relief,
and other relief as permitted by law.
The SEC is conducting an investigation relating to the Company. The Company
understands that the investigation relates to, among other things: (1) the
accuracy of the Company's financial statements and periodic filings with the
SEC; (2) the accuracy of the Company's books and records; (3) the adequacy of
the Company's system of internal accounting controls; and (4) trading of the
Company's securities by certain present or former officers, directors, or
employees, or other persons. In addition, the NASDAQ Listing Investigations, a
division of the NASDAQ Stock Market, has requested from the Company certain
documents in connection with its review of the Restatement and the Company's
compliance with its rules and regulations. The Company is cooperating fully with
the inquiries from all regulatory agencies.
Management is unable to predict at this time the final outcome of the
matters described above or whether the resolution of such matters will
materially affect the Company's results of operations, cash flows or financial
position.
The Company is also involved from time to time in various legal proceedings
incidental to the normal conduct of its business. Management does not believe
that such proceedings are likely, individually or in the aggregate, to have a
material adverse effect on the Company's business.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
Three Cities Transactions
On December 24, 1998, Three Cities Fund II, L.P. and Three Cities Offshore
II, C.V. (the "Three Cities Funds") purchased approximately 48% of the issued
and outstanding common stock, par value $.01 per share (the "Common Stock"), of
the Company, and TCF Acquisition Corporation, a wholly owned subsidiary of the
Three Cities Funds (the "Purchaser"), entered a Plan and Agreement of Merger
with the Company that provided for, among other things, the acquisition of all
remaining Common Stock by the Purchaser at a price of $5.375 per share (which
would have increased to $6.375 per share if the Company settled certain existing
stockholder litigation on a basis which would not require it to pay more than
$3.0 million, net of any insurance proceeds) and, under certain circumstances,
the merger of the Purchaser with and into the Company.
In response to a proposal by a third party to purchase the Company, the
Purchaser and the Company entered into an Amended and Restated Plan and
Agreement of Merger, dated as of February 4, 1999 (the "Amended Merger
Agreement"), pursuant to which the Purchaser modified its outstanding tender
offer to, among other things, increase the price to $6.50 per share and extend
its expiration to 12:00 midnight, Eastern Standard Time, on February 24, 1999,
unless it is further extended. The Amended Merger Agreement provides for the
subsequent merger of the Purchaser with and into the Company (the "Merger"), and
each share of Common Stock outstanding at the time of the Merger (other than
Common Stock held by the Three Cities Funds, the Purchaser, or shares held by
stockholders validly exercising appraisal rights pursuant to the General
Corporation Law of the State of Delaware) will, by virtue of the Merger and
without any action by the holder thereof, be converted into the right to
receive, without interest, $6.50 per share in cash.
The Company's Board of Directors unanimously approved the terms of the
Amended Merger Agreement, the tender offer, and the Merger contemplated
thereunder, determined that the such tender offer and the Merger are fair to,
and in the best interests of, the holders of Common Stock, and recommended that
all such holders accept such offer and tender their shares pursuant thereto.
Pacific Health Services Group, LLC
Effective December 1, 1998, COHR Pacific Health, Inc., a wholly owned
subsidiary of the Company, together with AllHealth, Inc. ("AllHealth") and
California Hospitals Investments and Publications, Inc. ("CHIP"), formed Pacific
Health Services Group, LLC ("PHSG") to engage in the businesses of medical
credentials verification and operational quality and managed care consulting
(the "Businesses"). AllHealth is an affiliate of Healthcare Association of
Southern California, a significant stockholder of the Company, and CHIP is an
affiliate of California Healthcare Association.
The Company contributed substantially all of its assets related to the
Businesses to PHSG (and PHSG assumed the related obligations and liabilities)
for a forty percent (40%) membership interest therein, and AllHealth and CHIP
contributed cash to PHSG for a forty percent (40%) and twenty percent (20%)
membership interest, respectively.
Employment Agreements
(a) Raymond E. List, President and Chief Executive Officer of the Company,
(b) Daniel F. Clark, Chief Financial Officer of the Company, and (c) Steven W.
Ritterbush, Managing Director of the Company, had each previously agreed in
principle to new employment agreements with the Company, and in January 1999
Messrs. List and Clark each executed a three-year employment agreement, and Mr.
Ritterbush executed a one-year employment agreement, with the Company, each of
which is effective as of September 1, 1998.
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Matters Related to Paul Chopra
As described in the Company's Proxy Statement dated July 24, 1998 for the
Annual Meeting of Stockholders, the Company and Mr. Paul Chopra, the Company's
former Chief Executive Officer, entered into a Standstill Agreement, dated April
3, 1998 (the "Standstill Agreement"), pursuant to which each party has agreed
that the passage of time will not waive or prejudice the rights of either of the
parties with respect to the termination of Mr. Chopra's employment. As of
November 10, 1998, the parties extended the period of the Standstill Agreement,
which was to expire on November 10, 1998, to January 31, 1999 on substantially
the same terms as the prior agreement (except that Mr. Chopra was paid $5,000
per month instead of $10,000 per month and agreed to the cancellation of 182,500
of his 280,000 stock options outstanding), and as of January 31, 1999, the
parties again extended the period of the Standstill Agreement to February 28,
1999 on substantially the same terms as the prior amendment (except that there
was no cancellation of stock options).
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits included or incorporated herein:
See Index to Exhibits
(b) Reports on Form 8-K:
A Current Report on Form 8-K was filed on December 21, 1998 concerning the
dividend of one preferred share purchase right (a "Right") for each outstanding
share of Common Stock declared and distributed by the Company and issued
pursuant to a rights agreement.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COHR INC.
(Registrant)
Date: February 16, 1999 /s/ RAYMOND E. LIST
--------------------------------------
Raymond E. List
President and Chief Executive Officer
(Principal Executive Officer)
Date: February 16, 1999 /s/ DANIEL F. CLARK
--------------------------------------
Daniel F. Clark
Executive Vice President and Chief
Financial Officer
(Principal Accounting and Financial
Officer)
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COHR INC. AND SUBSIDIARIES
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
2.1* Amended and Restated Plan and Agreement of Merger, dated as
of February 4, 1999, by and between Registrant and TCF
Acquisition Corp.
3.1** Certificate of Incorporation of Registrant
3.2** By-laws of Registrant
3.3+ By-laws of Registrant as amended on June 29, 1998
3.4 Amendment to Bylaws effective as of December 24, 1998
4.1** Form of Warrant to be issued to the Representatives of the
Underwriters
4.2** Form of Registration Rights Agreement between Registrant,
Healthcare Association of Southern California ("HASC") and
Hospital Council Coordinated Programs, Inc
4.3** Specimen Stock Certificate
4.4++ Rights Agreement dated as of November 23, 1998 (the "Rights
Agreement"), by and between Registrant and ChaseMellon
Shareholder Services LLC, as Rights Agent (the "Rights
Agent")
4.5 Amendment to Rights Agreement dated as of December 24, 1998
by and between Registrant and the Rights Agent
4.6++ Certificate of the Designations, Preferences and Rights of
Series A Junior Participating Cumulative Preferred Stock of
Registrant, dated November 25, 1998
10.2c Amendment to Standstill Agreement dated as of January 31,
1999 between Registrant and Mr. Paul Chopra
10.15 Employment Agreement, dated as of January 20, 1999 and
effective as of September 1, 1998, between Registrant and
Daniel F. Clark
10.16 Employment Agreement, dated as of January 20, 1999 and
effective as of September 1, 1998, between Registrant and
Raymond E. List
10.18 Employment Agreement, dated as of January 20, 1999 and
effective as of September 1, 1998, between Registrant and
Stephen W. Ritterbush
11 Computation of Net Loss Per Share
27.1 Financial Data Schedule
- ---------------
* Incorporated by reference from Registrant's Amendment No. 2 to Schedule 14D-9
filed on February 8, 1999 (File No. 0-27506).
** Incorporated by reference from Registrant's Registration Statement on Form
S-1, Registration No. 33-80635.
+ Incorporated by reference from Registrant's Quarterly Report on Form 10-Q for
the quarterly period ended June 30, 1998 (File No. 0-27506).
++ Incorporated by reference from Registrant's Registration Statement on Form
8-A, filed on November 25, 1998 (File No. 0-27506).
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