<PAGE>
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
Commission file number 0-19600
CORE, INC.
(Exact name of registrant as specified in its charter)
Massachusetts 04-2828817
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
18881 Von Karman Avenue, Suite 1750, Irvine, California 92612
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (949) 442-2100
Indicate by check "X" 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 |_|
On August 4, 1998 there were 7,333,917 shares of the Registrant's Common
Stock outstanding.
<PAGE>
CORE, INC.
FORM 10-Q
for the quarter ended June 30, 1998
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION Page
<S> <C> <C>
Item 1. Financial Statements
Consolidated Condensed Balance Sheets 3
Consolidated Condensed Statements of Operations 5
Consolidated Condensed Statements of Cash Flows 6
Notes to Consolidated Condensed Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk N/A
PART II OTHER INFORMATION
Item 1. Legal Proceedings N/A
Item 2. Changes in Securities and Use of Proceeds 14
Item 3. Defaults Upon Senior Securities N/A
Item 4. Submission of Matters to a Vote of Security Holders N/A
Item 5. Other Information N/A
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
</TABLE>
2
<PAGE>
CORE, INC.
Consolidated Condensed Balance Sheets
<TABLE>
<CAPTION>
December 31, June 30,
1997 1998
(Note 1) (Unaudited)
----------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 7,944,595 $ 3,791,211
Investments available-for-sale 1,188,037 2,239,224
Accounts receivable, net of allowance for doubtful
accounts of $151,633 in 1997 and $166,633 at June
30, 1998 6,473,037 8,362,788
Notes receivable from officers 106,388 95,662
Prepaid expenses and other current assets 815,100 1,066,655
----------------------------
Total current assets 16,527,157 15,555,540
Property and equipment, net 6,444,803 7,181,023
Deposits and other assets 494,208 563,538
Goodwill, net of accumulated amortization of
$340,705 in 1997 and $4,599,591 at June 30, 1998 8,818,159 4,453,734
Intangibles, net 530,705 91,839
----------------------------
Total assets $32,815,032 $27,845,674
----------------------------
</TABLE>
See accompanying notes.
3
<PAGE>
CORE, INC.
Consolidated Condensed Balance Sheets - Continued
<TABLE>
<CAPTION>
December 31, June 30,
1997 1998
(Note 1) (Unaudited)
-------------------------------------
<S> <C> <C>
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 833,898 $ 922,528
Accrued expenses 1,846,545 1,796,526
Accrued payroll 650,230 800,232
Deferred income taxes 74,816 68,316
Notes payable 64,900 184,582
Obligation from acquisition 1,125,000 -
Current portion of obligations to former shareholders 50,000 -
Current portion of capital lease obligations 31,651 16,707
-------------------------------------
Total current liabilities 4,677,040 3,788,891
Notes payable, net of current portion 185,049 228,824
Capital lease obligations, net of current portion 4,695 2,988
Deferred rent, net of current portion 146,592 155,020
Deferred income taxes 143,000 149,500
Stockholders' equity
Preferred stock, no par value, authorized 500,000 shares;
no shares outstanding
Common stock, $0.10 par value per share; authorized
30,000,000 shares; issued and outstanding 7,303,079 at
December 31, 1997 and 7,333,214 at June 30, 1998 730,308 733,321
Additional paid-in capital 34,909,579 35,063,322
Deferred compensation (13,392) (13,392)
Accumulated deficit (7,967,839) (12,262,800)
-------------------------------------
Total stockholders' equity 27,658,656 23,520,451
-------------------------------------
Total liabilities and stockholders' equity $32,815,032 $27,845,674
-------------------------------------
-------------------------------------
</TABLE>
See accompanying notes.
4
<PAGE>
CORE, INC.
Consolidated Condensed Statements of Operations (Unaudited)
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
-----------------------------------------------------------------
1997 1998 1997 1998
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $8,971,573 $10,760,251 $17,098,622 $20,930,741
Cost of services 5,447,286 6,822,535 10,690,909 13,442,573
-----------------------------------------------------------------
Gross profit 3,524,287 3,937,716 6,407,713 7,488,168
Operating expenses:
General and administrative 1,983,392 2,262,152 3,865,554 4,493,289
Sales and marketing 531,554 899,770 1,127,281 1,717,516
Depreciation and amortization 452,974 495,206 890,372 1,011,052
Write-off of goodwill 4,085,449 4,085,449
Arbitration costs 736,006 736,009
Other non-recurring charges 114,277 114,277
-----------------------------------------------------------------
Total operating expenses 2,967,920 8,592,860 5,883,207 12,157,592
-----------------------------------------------------------------
Income (loss) from operations 556,367 (4,655,144) 524,506 (4,669,424)
Other income:
Interest income 164,578 94,885 342,018 247,899
Interest expense (6,615) (5,558) (12,123) (8,436)
-----------------------------------------------------------------
157,963 89,327 329,895 239,463
-----------------------------------------------------------------
Income (loss) before income taxes 714,330 (4,565,817) 854,401 (4,429,961)
Income tax (provision) benefit (31,000) 60,000 (31,000) 135,000
-----------------------------------------------------------------
Net income (loss) $ 683,330 $(4,505,817) $ 823,401 $(4,294,961)
-----------------------------------------------------------------
-----------------------------------------------------------------
Net income (loss) per common share:
Basic $0.09 $(0.61) $0.11 $(0.59)
-----------------------------------------------------------------
-----------------------------------------------------------------
Diluted $0.09 $(0.61) $0.11 $(0.59)
-----------------------------------------------------------------
-----------------------------------------------------------------
Weighted average number of common shares
and equivalents outstanding:
Basic 7,231,000 7,327,000 7,214,000 7,319,000
-----------------------------------------------------------------
-----------------------------------------------------------------
Diluted 7,781,000 7,327,000 7,797,000 7,319,000
-----------------------------------------------------------------
-----------------------------------------------------------------
</TABLE>
See accompanying notes.
5
<PAGE>
CORE, INC.
Consolidated Condensed Statements of Cash Flows (Unaudited)
<TABLE>
<CAPTION>
Six months ended June 30,
---------------------------------
1997 1998
---------------------------------
<S> <C> <C>
Operating activities:
Net income (loss) $ 823,401 $(4,294,961)
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Depreciation 809,250 862,183
Amortization 349,149 567,841
Write-off of goodwill 4,085,449
Arbitration costs, net of cash payments 190,000
Changes in operating assets and liabilities, net of effects of
acquisition:
Increase in accounts receivable (499,900) (1,538,551)
(Increase) decrease in prepaid expenses and other current
assets 194,129 (456,545)
Increase (decrease) in accounts payable and accrued expenses (401,085) 128,284
---------------------------------
Net cash provided by (used in) operating activities 1,274,944 (456,300)
Investing activities:
Additions to property and equipment (1,070,546) (1,740,461)
Additions to goodwill and intangibles, net (499,524) (235,394)
Decrease in notes receivables from officers 2,019 10,726
Decrease in deposits and other assets 25,771 330,670
Payment for acquisition, net of cash acquired (4,973,778)
Payments on non-compete obligations to former shareholders (50,000)
Purchases of investments available-for-sale (24,691,181) (16,579,100)
Sales of investments available-for-sale 28,805,536 15,527,913
---------------------------------
Net cash used in investing activities (2,451,703) (2,685,646)
Financing activities:
Payments on obligation from acquisition (1,125,000)
Payments on notes payable (29,307) (26,543)
Payments on capital lease obligations (22,103) (16,651)
Issuance of common stock upon exercise of stock options and
warrants 300,019 156,756
---------------------------------
Net cash provided by (used in) financing activities 248,609 (1,011,438)
---------------------------------
Net decrease in cash and cash equivalents (928,150) (4,153,384)
Cash and cash equivalents at beginning of period 4,281,994 7,944,595
---------------------------------
Cash and cash equivalents at end of period $3,353,844 $3,791,211
---------------------------------
---------------------------------
Supplemental disclosure of cash flow information:
Interest paid $11,325 $6,100
---------------------------------
---------------------------------
Income taxes paid $53,325
---------------------------------
---------------------------------
</TABLE>
See accompanying notes.
6
<PAGE>
CORE, INC.
Notes to Consolidated Condensed Financial Statements (Unaudited)
June 30, 1998
Note 1 - Basis of Presentation
The accompanying unaudited consolidated condensed financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and pursuant to the rules and regulations of the
Securities and Exchange Commission, but do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. The balance sheet at December 31, 1997 has been derived
from the audited financial statements of CORE, INC. (the "Company") at that
date.
In the opinion of management, all adjustments (consisting of only normal
recurring adjustments) considered necessary for a fair presentation have been
included. Operating results for the six-month period ended June 30, 1998 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 1998. For further information, refer to the consolidated financial
statements for the year ended December 31, 1997 contained in the Company's
annual report filed on Form 10-K filed on April 1, 1998, as amended by the
Company's 10-K/A filed with the Securities and Exchange Commission on April 10,
1998.
Note 2 - Business Acquisitions
On March 17, 1998, a wholly owned subsidiary of the Company acquired the assets
of Transcend Case Management, Inc., a Georgia corporation ("TCM"), pursuant to
an Asset Purchase Agreement (the "Purchase Agreement"). Pursuant to the Purchase
Agreement, all of the assets of TCM were acquired in exchange for the assumption
of certain liabilities and the issuance of shares of common stock of CORE, the
number of which shall be equal to a valuation based upon future revenue
performance of TCM. The purchase price is subject to certain adjustments as set
forth in the Purchase Agreement. TCM is a provider of workers' compensation case
management services. The acquisition has been accounted for as a purchase.
On June 25, 1997, a wholly-owned subsidiary of the Company purchased certain
assets and liabilities of Social Security Disability Consultants and Disability
Services, Inc. (collectively, "SSDC") for an initial purchase price of
$6,500,000 and additional performance related cash payments. Performance based
payments of $139,000 have been made as of June 30, 1998 and additional
performance based payments of up to $300,000 are payable through June 1999. SSDC
provides disability management services with two key areas of business: social
security disability benefits advocacy and Medicare coordination of benefits. The
acquisition has been accounted for as a purchase.
The pro forma unaudited results of operations for the six months ended June 30,
1997 and 1998, assuming consummation of the TCM and SSDC acquisitions as of
January 1, 1997, are as follows:
<TABLE>
<CAPTION>
Six months ended June 30,
1997 1998
-------------------------------
<S> <C> <C>
Revenues $21,414,954 $21,337,830
Income (loss) before
extraordinary item $1,268,906 $(4,264,649)
Net income (loss) $2,372,776 $(4,264,649)
Earnings (loss) per common
share:
Net income (loss) before
extraordinary item:
Basic $0.17 $(0.58)
Diluted $0.16 $(0.58)
Net income (loss):
Basic $0.32 $(0.58)
Diluted $0.29 $(0.58)
</TABLE>
The pro forma financial information is presented for informational purposes only
and is not necessarily indicative of what the actual consolidated results of
operations might have been had the transactions occurred on the date indicated.
7
<PAGE>
CORE, INC.
Notes to Consolidated Condensed Financial Statements (Unaudited) - Continued
Note 3 -Non-recurring Charges
During the quarter ended June 30, 1998, one of the Company's subsidiaries (Cost
Review Services or "CRS") was informed that its' principal client (representing
nearly 70% of the CRS revenues) may not renew their contract which expires in
October 1998. As a result, the goodwill related to the CRS operations may not be
recoverable. CRS has a recent short-term history of operating losses and the
revised forecast (excluding CRS' principal client's revenues) indicates that
these operating losses will continue. In accordance with Statement of Financial
Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of ("Statement 121"), the Company has
written off the net book value of the goodwill ($1,935,000) as of June 30, 1998.
Also during the quarter ended June 30, 1998, the Company performed a review of
its other long-lived assets in accordance with Statement 121. The results of its
review indicated that an impairment loss in the amount of $2,150,000 existed
related to the identifiable intangibles (i.e. goodwill) acquired from SSDC in
June 1997. This impairment loss represented approximately 30% of the net book
value of goodwill as of June 30, 1998 and has resulted primarily from a
significant decline in revenues realized under SSDC's Medicare coordination of
benefits program. It appears that this decline in revenues will continue, thus
goodwill in the amount of $2,150,000 has been written off during the quarter
ended June 30, 1998.
On June 2, 1998, the Company entered into a settlement agreement with the former
shareholders of CRS. The settlement agreement related to an arbitration dispute
and included the immediate payment of $425,000 and the issuance of promissory
notes in the amount of $190,000 payable in twelve monthly installments beginning
January 1999. In addition, the Company incurred approximately $120,000 in other
costs related to the arbitration (mostly legal and travel).
Note 4 - Earnings (loss) per Common Share
The following table sets forth the computation of basic and diluted earnings
(loss) per share for the periods indicated:
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
1997 1998 1997 1998
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Numerator:
Net income (loss) $683,000 $(4,506,000) $ 823,000 $(4,295,000)
----------------------------------------------------------------
----------------------------------------------------------------
Denominator:
Denominator for basic earnings (loss) per
share: weighted-average shares 7,231,000 7,327,000 7,214,000 7,319,000
Effect of dilutive stock options and
warrants 550,000 583,000
----------------------------------------------------------------
Denominator for diluted earnings per share:
adjusted weighted-average shares
and assumed conversions 7,781,000 7,327,000 7,797,000 7,319,000
----------------------------------------------------------------
----------------------------------------------------------------
Basic earnings (loss) per share $0.09 $(0.61) $0.11 $(0.59)
----------------------------------------------------------------
----------------------------------------------------------------
Diluted earnings per share $0.09 $(0.61) $0.11 $(0.59)
----------------------------------------------------------------
----------------------------------------------------------------
</TABLE>
Note 5 - Comprehensive Income
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 ("Statement 130"), Reporting
Comprehensive Income. As of January 1, 1998, the Company adopted Statement 130.
Statement 130 establishes new rules for the reporting and display of
comprehensive income and its components; however, the adoption of this statement
had no impact on the Company's net income or stockholders' equity. Statement 130
requires unrealized gains or losses on the Company's available-for-sale
securities, which prior to adoption were reported separately in stockholders'
equity to be included in other comprehensive income.
During the six-month period ended June 30, 1997, other comprehensive income was
not significant. There was no other comprehensive income during the six-month
period ended June 30, 1998.
8
<PAGE>
CORE, INC.
Notes to Consolidated Condensed Financial Statements (Unaudited) - Continued
Note 6 - Effect of Recently Issued Accounting Pronouncements
Disclosures about Segments of an Enterprise and Related Information. In June
1997, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 131 ("Statement 131"), Disclosures about Segments of an
Enterprise and Related Information which is effective for fiscal years beginning
after December 15, 1997. Statement 131 changes the way public companies report
information about segments of their business in their annual financial
statements and requires them to report selected segment information in their
quarterly reports on a comparative basis beginning with the Company's quarter
ending March 31, 1999. Adoption of Statement 131 is not expected to have a
material effect on the Company's financial statements.
9
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Overview
CORE, INC. ("CORE" or the "Company") provides managed disability
services (which consist of the Company's WorkAbility-Registered Trademark-
program, analytic consulting services, social security disability benefits
advocacy, Medicare coordination of benefits, bill audit services and job
analysis and loss prevention services), specialty physician and behavioral
health review services and health care benefits utilization review and case
management services. These services are provided principally to self-insured
employers, third-party administrators and insurance carriers. The Company is
typically compensated for these services either on a per review (i.e., per
case), hourly, per enrollee or percentage of cost recovery (for social
security advocacy and Medicare benefits services) basis. The managed
disability service line also includes a limited amount of revenue (1% for the
six months ended June 30, 1998) from licensing fees attributable to license
grants by the Company of the medical protocol portion of the WorkAbility
software program.
This Quarterly Report on Form 10-Q contains forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995 and
the Company's actual results could differ materially from those contemplated by
such statements. Such statements reflect management's current views, are based
on many assumptions and are subject to risks and uncertainties. Some important
factors the Company believes could cause such results to differ include the
Company's reliance on its WorkAbility program, the Company's dependence on key
clients, risks associated with the Company's growth strategy, increases or
changes in government regulation and competition. The foregoing list of factors
is not intended to represent a complete list of the general or specific risks
that may affect the Company. It should be recognized that other risks might be
significant, presently or in the future.
Current Developments
On June 2, 1998, the Company entered into a settlement agreement with the
former shareholders of Cost Review Services, Inc. ("CRS"). CORE acquired CRS in
October 1995. The settlement agreement related to an arbitration dispute and
included the immediate payment of $425,000 and the issuance of promissory notes
in the amount of $190,000 payable in twelve monthly installments beginning
January 1999. In addition, the Company incurred approximately $120,000 in other
costs related to the arbitration (mostly legal and travel).
On March 17, 1998, the Company purchased the operating assets and certain
liabilities of Transcend Case Management, Inc. ("TCM"). TCM, with its corporate
offices based in Orlando, Florida is a provider of workers' compensation case
management services to clients located principally in Florida, Texas and
Georgia. During the three months ended June 30, 1998, the Company restructured
its CRS operations based in Texas to incorporate the newly acquired Texas based
TCM clients and employees. As a result, CORE incurred restructuring costs in the
amount of $50,000 during the quarter ended June 30, 1998.
During the quarter ended June 30, 1998, the Company was informed that its'
principal CRS client (representing nearly 70% of the CRS revenues) may not renew
their contract which expires in October 1998. As a result, the goodwill related
to the CRS operations may not be recoverable. CRS has a recent short-term
history of operating losses and the revised forecast (excluding their principal
client's revenues) indicates that these operating losses will continue. In
accordance with Statement of Financial Accounting Standards No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of ("Statement 121"), the Company has written off the net book value of the
goodwill ($1,935,000) as of June 30, 1998.
Also during the quarter ended June 30, 1998, the Company performed a
review of its other long-lived assets in accordance with Statement 121. The
results of its review indicated that an impairment loss in the amount of
$2,150,000 existed related to the identifiable intangibles (i.e. goodwill)
acquired from SSDC in June 1997. This impairment loss represented approximately
30% of the net book value of goodwill as of June 30, 1998 and has resulted
primarily from the significant decline in revenues realized under SSDC's
Medicare coordination of benefits program. SSDC's Medicare revenues during the
quarter ended June 30, 1998 decreased 35% to $473,000 (down $252,000 from
$725,000) as compared to the first quarter of 1998 and decreased 50% compared to
the fourth quarter of 1997 (down $475,000 from $948,000). It appears that this
decline in revenues will continue, thus goodwill in the amount of $2,150,000 has
been written off during the quarter ended June 30, 1998.
10
<PAGE>
Results of Operations
The following table sets forth-certain statement of operations data for
the periods indicated expressed as a percentage of revenues:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
-------------------------------------
1997 1998 1997 1998
-------------------------------------
<S> <C> <C> <C> <C>
Revenue 100.0% 100.0% 100.0% 100.0%
Cost of services 60.7 63.4 62.5 64.2
Gross profit 39.3 36.6 37.5 35.8
General and administrative
expense 22.1 21.0 22.6 21.4
Sales and marketing expense 5.9 8.4 6.6 8.2
</TABLE>
The following table sets forth the contribution to total revenues of each
of the Company's principal service lines for the periods indicated:
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
1997 1998 1997 1998
-------------------------------------------- ----------------------------------------------
Amount Percent Amount Percent Amount Percent Amount Percent
-------------------------------------------- ----------------------------------------------
(Dollars in thousands) (Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Managed disability
services $4,708 52% $ 6,704 62% $ 8,673 51% $12,815 61%
Specialty review
services 2,589 29 2,335 22 5,044 29 4,818 23
Utilization review
and case
management services 1,675 19 1,721 16 3,382 20 3,298 16
----------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------
$8,972 100% $10,760 100% $17,099 100% $20,931 100%
----------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------
</TABLE>
Managed disability services include: CORE's WorkAbility services, analytic
consulting, social security disability benefits advocacy, Medicare coordination
of benefits, bill audit services, job analysis/loss prevention services, long
term disability case management and license fees.
Three and Six Months Ended June 30, 1998 and 1997
Revenues increased by $1,788,000 (20%) from $8,972,000 for the three
months ended June 30, 1997 to $10,760,000 for the second quarter of 1998. For
the six months ended June 30, 1998 revenues increased $3,832,000 (22%) from
$17,099,000 in 1997 to $20,931,000 in 1998. Most of the revenue growth realized
for the three and six-month periods ended June 30, 1998 came from growth in
managed disability services. Specifically, revenues from managed disability
services grew $1,996,000 (42%) and $4,142,000 (48%) for the three and six-month
periods ended June 30, 1998, respectively, as compared to the same periods in
1997. CORE's WorkAbility program contributed 54% of the increase in managed
disability services due to the addition of new clients and the expansion of
services to existing clients during the latter half of 1997 and the first six
months of 1998. Managed disability services also grew through the addition of
services including social security disability benefits advocacy, Medicare
coordination of benefits and job analysis/loss prevention following acquisitions
completed during June and July 1997. Revenues realized from CORE's specialty
review services decreased $254,000 (10%) for the three months ended June 30,
1998 as compared to the same period in the prior year due mostly to a decrease
in the volume of referrals for behavioral health services. It is uncertain
whether this decline in volume will continue. Revenues from utilization review
and case management services remained relatively constant during the three and
six-month periods ended June 30, 1998 as compared to the same periods in 1997
despite a 35% decline in revenues from utilization review services. Offsetting
the expected decline in utilization review services was a comparable increase in
revenues from case management services following the acquisition of the
operating assets and certain liabilities of TCM in March 1998. The Company
expects revenues from utilization review services to continue to decline in
future periods as compared to prior year levels.
11
<PAGE>
The Company's top five clients represented 48% of revenues for the
six-month period ended June 30, 1998 as compared to 44% for the same period in
1997. Bell Atlantic accounted for approximately 23% and 25% of revenues for the
six-month periods ended June 30, 1998 and 1997, respectively. Motorola
represented 10% of the Company's revenues for the six-month period ended June
30, 1998. No other single client represented more than 10% of total revenues for
the six-month periods ended June 30, 1998 or 1997.
Cost of services for the Company include direct expenses associated with
the delivery of its review and managed care services, including salaries for
professional, clerical and license support staff, the cost of physician reviewer
consultants and telephone expense. Cost of services increased $1,376,000 (25%)
from $5,447,000 for the three months ended June 30, 1997 to $6,823,000 for the
second quarter of 1998. For the six months ended June 30, 1998, cost of services
increased $2,752,000 (26%) as compared to the same period in 1997, going from
$10,691,000 to $13,443,000. The increase is primarily the result of additional
payroll costs associated with business acquisitions completed in June and July
of 1997 and increased staffing levels required to service new and growing
WorkAbility clients. Additionally, amortization expense continues to increase as
software enhancements to the Company's operating systems are developed and
placed into service.
CORE's gross profit performance for the six months ended June 30, 1998
declined to 36% from 38% in 1997. The Company's gross profit performance was
impacted by lower margins realized in its specialty review services. Gross
profit performance for each of the Company's principal service lines for the six
month periods ended June 30, 1998 and 1997, respectively are: 38% and 38% for
managed disability services; 33% and 38% for specialty review services; and 32%
and 34% for utilization review and case management services. During the first
six months of 1998, gross profit performance under specialty review services was
adversely impacted by the decrease in revenues. In addition, expenses (mostly
payroll) have been added in advance of expected program revenues with certain
new specialty review clients.
General and administrative expenses include the cost of executive,
administrative and information services personnel, rent and other overhead
items. General and administrative expenses increased $279,000 (14%) from
$1,983,000 for the three months ended June 30, 1997 to $2,262,000 for the second
quarter of 1998. For the six months ended June 30, 1998, general and
administrative expenses increased $627,000 (16%) as compared to the same period
in 1997, going from $3,866,000 to $4,493,000. Higher costs in payroll, rent and
other general and administrative expenses relate primarily to the Company's
acquisitions of SSDC and Protocol Work Systems in June and July 1997. The
Company has also incurred additional costs associated with the maintenance of
its computer network hardware and software as capacity has been expanded to
accommodate growth. General and administrative expenses, as a percentage of
revenues, decreased from 23% for the six months ended June 30, 1997 to 21% for
the six months ended June 30, 1998. This improvement is generally due to greater
economies of scale related to higher revenues.
Sales and marketing expenses include, but are not limited to, salaries for
sales and account management personnel and travel expenses. Sales and marketing
expenses also include costs designed to increase revenues, such as participation
in and attendance at industry trade shows and conferences. Sales and marketing
expenses increased $368,000 (69%) from $532,000 for the three months ended June
30, 1997 to $900,000 for the second quarter of 1998. For the six months ended
June 30, 1998, sales and marketing expenses increased $591,000 (52%) as compared
to the same period in 1997, going from $1,127,000 to $1,718,000. The increase is
primarily due to increased staffing to support the sales and product development
departments as well as additional travel costs and costs incurred for
participation in tradeshows. During the latter half of 1997, the Company
expanded its sales organization, organized its sales force into five
geographical regions and began its plan to prospect all Fortune 500 companies.
Additionally, a sales tracking system was implemented in late 1997 to streamline
prospective sales activities, centrally manage the Company's sales activities
and assist in identifying cross-selling opportunities of the Company's products
and services to take advantage of the 1997 acquisitions of SSDC and Protocol
Work Systems and the 1998 acquisition of TCM. The Company expects to continue to
invest an increased amount of resources in sales and marketing in future
periods.
Depreciation and amortization expenses increased $42,000 (9%) from
$453,000 for the three months ended June 30, 1997 to $495,000 for the second
quarter of 1998. For the six months ended June 30, 1998, depreciation and
amortization expenses increased $121,000 (14%) as compared to the same period in
1997, going from $890,000 to $1,011,000. The increase is largely attributable to
increased amortization expense on the goodwill acquired in the purchases of SSDC
and Protocol Work Systems.
12
<PAGE>
The Company recorded non-recurring charges during the quarter ended June
30, 1998 for relocation costs in the amount of $64,000 and restructuring charges
in the amount of $50,000. The relocation costs related to the Company's
relocation of its' accounting department from Boston, Massachusetts to its
corporate offices in Irvine, California and the restructuring charges related to
the restructuring of the Company's CRS operations based in Texas to incorporate
the newly acquired Texas based TCM clients and employees.
Other income consists primarily of interest income, which represents
amounts earned by the Company's investments as reduced by interest expense.
Other income decreased $69,000 (44%) from $158,000 for the three months ended
June 30, 1997 to $89,000 for the second quarter of 1998. For the six months
ended June 30, 1998, other income decreased $91,000 (28%) as compared to the
same period in 1997, going from $330,000 to $239,000. The decrease is due to a
decrease in funds available for investment.
Financial Condition, Liquidity and Capital Resources
For the six months ended June 30, 1998, the Company's cash and cash
equivalents decreased by $4,154,000. For this period, operating activities used
$456,000 due primarily to net losses of $4,295,000 and a net increase in
accounts receivable of $1,539,000 (resulting from the increase in revenues), as
offset by depreciation and amortization of $1,430,000 and the write-off of
goodwill of $4,085,000. The Company's investing activities used $2,686,000 of
cash due primarily to the purchases of property and equipment (including
software development) of $1,740,000. The Company's financing activities used
$1,011,000 for this period due primarily to payments made on obligations for
acquisitions.
The Company leases its facilities and certain office equipment. Future
lease commitments, which relate substantially to space rental, for the years
ended December 31, 1998 and December 31, 1999 are approximately $1.0 million and
$2.0 million, respectively. All obligations held by the Company under lease
commitments expire on various dates through June 2003 and total $5.2 million as
of June 30, 1998.
The Company has net operating loss carryforwards for income tax purposes
of approximately $5 million as of June 30, 1998, which can be used to reduce
future obligations for federal and state income taxes. The amount of net
operating loss carryforwards that can be utilized in any future year are limited
due to "equity structure shifts" in 1995 involving "5% shareholders" (as these
terms are defined in Section 382 of the Internal Revenue Code), which resulted
in a more than 50 percentage point change in ownership. The utilization of these
net operating loss carryforwards may be subject to further limitation provided
by the Internal Revenue Code of 1986 and similar state provisions.
The Company plans to finance its operations and working capital
requirements with the proceeds of the August 1996 offering, earnings from
operations, investments on hand and other sources of available funds. The
Company presently believes that these resources will be sufficient to meet its
liquidity and funding requirements through at least the year 1999.
The Company's primary computer application platforms were originally
designed to process and store dates in a four-character year format. The Company
believes this substantially reduces the magnitude of the effort required to
address the Year 2000 issue. Management believes CORE's major systems are
effectively Year 2000 compliant and will require minor modifications. The
Company has completed an assessment of internal applications and licensed
operating systems, software tools and utilities. Additionally, the Company has
evaluated third party data feeds, primarily to/from client's information systems
and will have to modify or replace portions of its software so that its computer
systems will function properly with respect to dates in the Year 2000 and
thereafter. The Company estimates that the Year 2000 project will be completed
no later than December 31, 1998, which is prior to any anticipated impact on its
operating systems. The Company believes that with modifications to existing
software and conversions to new software, the Year 2000 Issue will not pose
significant operational problems for its computer systems. The Company has
initiated formal communications with all of its significant suppliers and large
customers to determine the extent to which the Company's interface systems are
vulnerable to those third parties' failure to remediate their own Year 2000
Issues. There is no guarantee that the systems of other companies on which the
Company's systems rely will be timely converted and would not have an adverse
effect on the Company's systems. The costs of the Year 2000 project and the date
on which the Company believes it will complete the Year 2000 modifications are
based on management's best estimates, which were derived utilizing numerous
assumptions of future events, including the continued availability of certain
resources and other factors. However, there can be no guarantee that these
estimates will be achieved and actual results could differ materially from those
anticipated. Specific factors that might cause such material differences
include, but are not limited to, the availability and cost of personnel trained
in this area, the ability to locate and correct all relevant computer codes, and
similar uncertainties.
13
<PAGE>
PART II
Item 2. Changes in Securities and Use of Proceeds
In the quarter ended June 30, 1998, the Company sold the following shares of
Common Stock, which were not registered under Securities Act at the time of
issuance. All such shares were sold to present and former employees or
consultants upon the exercise of stock options.
<TABLE>
<CAPTION>
Purchase Price
Date Security Purchaser Number of Shares per Share
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
4/9/98 Common Stock H. Fife 122 $6.25
5/6/98 Common Stock S. Vaziri 53 $6.25
</TABLE>
These shares of Common Stock were not registered under the Securities Act at the
time of sale and issuance, in reliance upon the exception contained in Section
4(2) of the Securities Act for transactions by an issuer not involving any
public offering.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits. The following exhibits are included:
Exhibit
Number Description
- ------ -----------
27* Financial Data Schedule.
- ------------------------------------
* Filed herewith
(b) Reports on Form 8-K.
On April 2, 1998 the Company filed a report on Form 8-K dated March 17,
1998 concerning the acquisition of the operating assets and certain liabilities
of Transcend Case Management ("TCM"). On May 29, 1998 the Company filed a
related Form 8-K/A (Amendment No. 1) which included the audited balance sheet of
TCM as of December 31, 1997 and the related statements of operations,
accumulated deficit and cash flows for the year then ended. The Report on Form
8-K/A (Amendment No. 1) also included the unaudited interim statements of
operations, accumulated deficit and cash flows for the period from January 1,
1998 through March 16, 1998. Pursuant to the TCM Purchase Agreement, the
operating assets of TCM were acquired in exchange for the assumption of certain
liabilities and the future issuance of shares of common stock of CORE, the
number of which shall be equal to a valuation based upon future revenue
performance of TCM. The purchase price is subject to certain adjustments as set
forth in the Purchase Agreement.
14
<PAGE>
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.
CORE, INC.
Dated: August 13,1998 By: /s/ William E. Nixon
----------------------------------
William E. Nixon
Chief Financial Officer, Executive
Vice President and Treasurer
(Duly authorized officer and
Principal Financial Officer)
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-START> APR-01-1998 JAN-01-1998
<PERIOD-END> JUN-30-1998 JUN-30-1998
<CASH> 3,791,211 3,791,211
<SECURITIES> 2,239,224 2,239,224
<RECEIVABLES> 8,529,421 8,529,421
<ALLOWANCES> 166,633 166,633
<INVENTORY> 0 0
<CURRENT-ASSETS> 15,555,540 15,555,540
<PP&E> 15,195,892 15,195,892
<DEPRECIATION> 8,014,869 8,014,869
<TOTAL-ASSETS> 27,845,674 27,845,674
<CURRENT-LIABILITIES> 3,788,891 3,788,891
<BONDS> 0 0
0 0
0 0
<COMMON> 733,321 733,321
<OTHER-SE> 22,787,130 22,787,130
<TOTAL-LIABILITY-AND-EQUITY> 27,845,674 27,845,674
<SALES> 0 0
<TOTAL-REVENUES> 10,760,251 20,930,741
<CGS> 0 0
<TOTAL-COSTS> 6,822,535 13,442,573
<OTHER-EXPENSES> 8,592,860 12,157,592
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 5,588 8,436
<INCOME-PRETAX> (4,565,817) (4,429,961)
<INCOME-TAX> (60,000) (135,000)
<INCOME-CONTINUING> (4,505,817) (4,294,961)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (4,505,817) (4,294,961)
<EPS-PRIMARY> (.61) (.59)
<EPS-DILUTED> (.61) (.59)
</TABLE>
