News article in Barron’s slaps COHR for alleged improprieties in service

Company is also hit with shareholder lawsuit

Embattled independent service organization COHR found itself under siege last week following a highly critical article in the financial newsweekly Barron's that prompted a sharp drop in the company's stock. Shares of Chatsworth, CA-based COHR dropped even further a day later on news that the company is the defendant in a shareholder lawsuit.

The article in the April 20 edition of Barron's was titled "Rotten at the COHR?" and painted an unflattering picture of a company that appeared rife with accounting irregularities related to its Maintenance MasterPlan offering. The article cited company accounting records, as well as interviews with current and former COHR employees, which alleged that COHR withheld rebates owed to hospital clients participating in Maintenance MasterPlan.

COHR's Maintenance MasterPlan provides hospital customers with a fixed service price that guarantees savings in the first year, according to Barron's. If the company's actual spending is less than the guarantee, COHR rebates to the hospital 80% of the additional savings, according to the publication. The article stated, however, that COHR pocketed rebates rather than return them to customers.

In an April 20 press release, COHR fired back. The company said that while it was aware of the rebate allegations raised in the article, it had reviewed the charges with its outside auditors and had determined that no additional rebates are due to any of the company's hospital customers. Furthermore, the company stated that its management is not aware of any customer over the 13 years of the operation of Maintenance MasterPlan that has questioned the rebate accounting or the detailed reconciliation and activity reports customers regularly receive. COHR did say it would review any additional information related to these allegations, should it become available.

In addition to the Maintenance MasterPlan allegations, the Barron's article alleged that COHR directors Stephen Gamble and James Barber had received and sold COHR shares shortly after the company's initial public offering. COHR also disputed that charge, stating that neither Gamble nor Barber have ever sold any shares of COHR. A company spokesperson was not immediately available for additional comment on the article.

Just one day after COHR's response to the Barron's article, a class-action lawsuit was filed against the ISO by Philadelphia law firm Barrack, Rodos & Bacine on behalf of COHR stock purchasers between August 1996 and October 1997, when COHR announced that it expected second-quarter revenues to decline. The suit charges that COHR's officers, directors, and financial advisors generated false financial statements through the claim period that overstated the company's financial performance, while at the same time the defendants sold shares into the allegedly inflated market.

The lawsuit claims that the October revelations prompted shares of COHR to fall 65%, from a high of $29 per share during the claim period to $10.50. COHR shares were pummeled even harder in last week's turmoil, however: COHR shares went from $10.75 in mid-April to $6.81 on April 21.

The negative publicity follows a February announcement by COHR that it had uncovered accounting irregularities, which forced a restatement of its financial results, and that the company was putting itself up for sale (SCAN 3/4/98). The company said that the restatement was due to the premature recording of equipment and software sales, and the understatement of liabilities.

Whether last week's turmoil will affect COHR's efforts to find a buyer are unknown. Also in question is COHR's relationship with Toshiba America Medical Systems of Tustin, CA, which uses COHR as its multivendor service provider through an agreement signed last year (SCAN 4/30/97). The relationship between Toshiba and COHR has not changed, according to Brian Turnbull, vice president of the vendor's Technology Services Business unit.

"Toshiba America Medical Systems has an agreement with COHR regarding the provision of multivendor service and asset management capabilities," Turnbull said. "We will continue to honor the terms of that agreement until such a time as a final decision is rendered regarding COHR's future, at which point we can assess the outcome."