<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 SEPTEMBER 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 November 6, 1998 there were 7,822,842 shares of the Registrant's Common Stock
outstanding.
<PAGE>
CORE, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1998
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
PART I FINANCIAL INFORMATION
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 15
Item 3. Defaults Upon Senior Securities N/A
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information N/A
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
</TABLE>
2
<PAGE>
CORE, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1998
(NOTE 1) (UNAUDITED)
---------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $7,944,595 $1,992,497
Investments available-for-sale 1,188,037 -
Accounts receivable, net of allowance for doubtful accounts of
$151,633 at December 31, 1997 and $216,607 at September 30, 1998 6,473,037 10,792,884
Notes receivable from officers 106,388 90,462
Prepaid expenses and other current assets 815,100 1,198,752
---------------------------
Total current assets 16,527,157 14,074,595
Property and equipment, net 6,444,803 7,503,572
Deposits and other assets 494,208 840,860
Goodwill, net of accumulated amortization of $340,705 at
December 31, 1997 and $669,587 at September 30, 1998 8,818,159 26,784,862
Intangibles, net 530,705 80,478
--------------------------
Total assets $32,815,032 $49,284,367
--------------------------
--------------------------
</TABLE>
See accompanying notes.
3
<PAGE>
CORE, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS - CONTINUED
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1998
(NOTE 1) (UNAUDITED)
----------------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $833,898 $1,993,138
Accrued expenses 1,846,545 3,129,271
Advances under revolving credit agreement - 2,500,000
Accrued payroll 650,230 366,312
Deferred income taxes 74,816 68,316
Notes payable 64,900 207,400
Obligation from acquisition 1,125,000 -
Current portion of obligations to former shareholders 50,000 -
Current portion of capital lease obligations 31,651 12,354
---------------------------
Total current liabilities 4,677,040 8,276,791
Advances under revolving credit agreement, net of current portion - 14,500,000
Notes payable, net of current portion 185,049 189,638
Capital lease obligations, net of current portion 4,695 -
Deferred rent, net of current portion 146,592 105,020
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 7,816,142 at September 30, 1998 730,308 781,614
Additional paid-in capital 34,909,579 37,761,173
Deferred compensation (13,392) (13,392)
Accumulated deficit (7,967,839) (12,465,977)
---------------------------
Total stockholders' equity 27,658,656 26,063,418
---------------------------
Total liabilities and stockholders' equity $32,815,032 $49,284,367
---------------------------
---------------------------
</TABLE>
See accompanying notes.
4
<PAGE>
CORE, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-----------------------------------------------------------------
1997 1998 1997 1998
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $10,531,319 $11,442,913 $27,629,939 $32,373,654
Cost of services 6,152,346 6,998,044 16,843,247 20,440,617
-----------------------------------------------------------------
Gross profit 4,378,973 4,444,869 10,786,692 11,933,037
Operating expenses:
General and administrative 2,091,029 2,441,247 5,956,582 6,934,536
Sales and marketing 663,979 931,331 1,791,257 2,648,847
Depreciation and amortization 533,835 612,991 1,424,207 1,624,043
Write-off of goodwill - - - 4,085,449
Arbitration costs - - - 736,009
Charges in connection with disposal of
subsidiary - 541,410 - 541,410
Other non-recurring charges - 102,441 - 216,718
-----------------------------------------------------------------
Total operating expenses 3,288,843 4,629,420 9,172,046 16,787,012
-----------------------------------------------------------------
Income (loss) from operations 1,090,130 (184,551) 1,614,646 (4,853,975)
Other income (expense):
Interest income 122,707 49,796 464,724 297,695
Interest expense (6,538) (128,422) (18,661) (136,858)
Other income 250 - 250 -
-----------------------------------------------------------------
116,419 (78,626) 446,313 160,837
-----------------------------------------------------------------
Income (loss) before income taxes 1,206,549 (263,177) 2,060,959 (4,693,138)
Income tax (provision) benefit (98,144) 60,000 (129,144) 195,000
-----------------------------------------------------------------
Net income (loss) $1,108,405 $(203,177) $1,931,815 $(4,498,138)
-----------------------------------------------------------------
-----------------------------------------------------------------
Net income (loss) per common share:
Basic $0.15 $(0.03) $0.27 $(0.61)
-----------------------------------------------------------------
-----------------------------------------------------------------
Diluted $0.14 $(0.03) $0.25 $(0.61)
-----------------------------------------------------------------
-----------------------------------------------------------------
Weighted average number of common
shares and equivalents outstanding:
Basic 7,265,000 7,495,000 7,231,000 7,377,000
-----------------------------------------------------------------
-----------------------------------------------------------------
Diluted 7,970,000 7,495,000 7,855,000 7,377,000
-----------------------------------------------------------------
-----------------------------------------------------------------
</TABLE>
See accompanying notes.
5
<PAGE>
CORE, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1997 1998
-------------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $1,931,815 $(4,498,138)
Adjustments to reconcile net income (loss) to net cash provided by (used
in) operating activities:
Depreciation 1,225,074 1,412,534
Amortization 632,314 843,218
Write-off of goodwill - 4,085,449
Arbitration costs, net of cash payments - 190,000
Increase in allowance for doubtful accounts - 49,974
Write down of property and equipment - 102,064
Compensation recognized under stock option plans - 13,400
Changes in operating assets and liabilities, net of effects of acquisitions:
Increase in accounts receivable (910,721) (3,294,850)
(Increase) decrease in prepaid expenses and other current assets 105,306 (685,286)
Increase (decrease) in accounts payable and accrued expenses (331,138) 1,412,797
-------------------------------
Net cash provided by (used in) operating activities 2,652,650 (368,838)
INVESTING ACTIVITIES:
Additions to property and equipment (1,401,074) (2,431,545)
Additions to goodwill and intangibles, net (500,000) (235,394)
Decrease in notes receivables from officers 1,281 15,926
Decrease in deposits and other assets 122,894 53,348
Decrease in cash pledged as collateral 192,000 -
Payment for acquisitions, net of cash acquired (5,697,703) (20,091,229)
Payments on non-compete obligations to former shareholders (50,000) -
Purchases of investments available-for-sale (31,886,685) (16,579,100)
Sales of investments available-for-sale 35,442,048 17,767,137
-------------------------------
Net cash used in investing activities (3,777,239) (21,500,857)
FINANCING ACTIVITIES:
Payments on obligation from acquisition - (1,125,000)
Payments on notes payable (44,307) (92,911)
Payments on capital lease obligations (36,595) (23,992)
Borrowings under credit agreement - 17,000,000
Issuance of common stock upon exercise of stock options and warrants 390,626 159,500
-------------------------------
Net cash provided by financing activities 309,724 15,917,597
-------------------------------
Net decrease in cash and cash equivalents (814,865) (5,952,098)
Cash and cash equivalents at beginning of period 4,281,994 7,944,595
-------------------------------
Cash and cash equivalents at end of period $3,467,129 $1,992,497
-------------------------------
-------------------------------
Supplemental disclosure of cash flow information:
Interest paid $16,509 $134,522
-------------------------------
-------------------------------
Income taxes paid - $150,500
-------------------------------
-------------------------------
Non-cash investing and financing activities:
Obligations incurred in connection with the purchase of SSDC $1,125,000 -
-------------------------------
-------------------------------
Issuance of common stock in connection with purchase of DRMS - $2,730,000
-------------------------------
-------------------------------
</TABLE>
See accompanying notes.
6
<PAGE>
CORE, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 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. ("CORE" or 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 nine-month period ended September 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 September 1, 1998, the Company acquired all shares of stock of Disability
Reinsurance Management Services, Inc. ("DRMS"), a Delaware corporation, pursuant
to a Capital Stock Purchase Agreement dated as of August 31, 1998 (the "Purchase
Agreement"). Pursuant to the Purchase Agreement, all shares of stock of DRMS
were acquired in exchange for a $20,000,000 cash payment, the issuance of
480,000 shares of the Company's common stock and the future issuance of up to an
additional $7,000,000 of the Company's common stock after September 30, 2001,
based upon the future performance of DRMS. The purchase price is subject to
certain adjustments as set forth in the Purchase Agreement. DRMS is a full
service reinsurance intermediary manager providing marketing, underwriting
advice, claims, actuarial and compliance services to its insurance company
clients and risk management expertise for reinsurers in a reinsurance facility.
The acquisition has been accounted for as a purchase.
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
the Company, 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 September 30, 1998 and up to an
additional $300,000 is payable, based upon the future performance of SSDC. 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.
7
<PAGE>
CORE, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED
The pro forma unaudited results of operations for the nine months ended
September 30, 1997 and 1998, assuming consummation of the DRMS, TCM and SSDC
acquisitions as of January 1, 1997, are as follows:
<TABLE>
<CAPTION>
Nine months ended September 30,
1997 1998
-------------------------------
<S> <C> <C>
Revenues $35,203,842 $36,604,273
-------------------------------
-------------------------------
Income (loss) before extraordinary item $356,882 $(4,753,565)
-------------------------------
-------------------------------
Net income (loss) $1,460,752 $(4,753,565)
-------------------------------
-------------------------------
Earnings (loss) per common share:
Net income (loss) before extraordinary item:
Basic $0.05 $(0.61)
-------------------------------
-------------------------------
Diluted $0.04 $(0.61)
-------------------------------
-------------------------------
Net income (loss):
Basic $0.19 $(0.61)
-------------------------------
-------------------------------
Diluted $0.17 $(0.61)
-------------------------------
-------------------------------
</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.
Note 3 - Non-recurring Charges
During the quarter ended September 30, 1998, the Company adopted a plan to
discontinue the operations of one of its subsidiaries, Cost Review Services,
Inc. ("CRS"), effective October 31, 1998. In connection with this action, the
Company recorded estimated charges totaling $541,000. The major components of
the charges were $173,000 of employee separation costs, $150,000 of noncash
charges to dispose of certain assets through sale or abandonment and $128,000 to
terminate lease and other contractual obligations. The charges do not include
additional costs of servicing the existing customers through October 31, 1998.
These costs will be charged to operations, as appropriate, when incurred. CRS
provided bill audit and workers' compensation case management services to
insurance companies and third-party administrators of workers' compensation
programs.
Other non-recurring charges incurred during the quarter ended September 30, 1998
in the amount of $102,000 related to the Company's relocation of its accounting
department from Boston, Massachusetts to its corporate offices in Irvine,
California. For the nine months ended September 30, 1998, these relocation
costs total $166,000.
For the nine months ended September 30, 1998, CORE has written off goodwill in
the amount of $4,085,000 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"). As previously reported,
during the quarter ended June 30, 1998, CRS was informed that its principal
client (representing nearly 70% of CRS revenues) would not be renewing its
contract in October 1998. This information combined with a recent short-term
history of operating losses incurred by CRS indicated that the net book value of
the goodwill related to the CRS operations ($1,935,000) was not recoverable and
thus, written-off 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. As it appeared
that the decline in revenues would continue, goodwill in the amount of
$2,150,000 was written off during the quarter ended June 30, 1998.
8
<PAGE>
CORE, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED
The Company incurred costs of $736,000 during the nine months ended September
30, 1998 as a result of a settlement agreement entered into with the former
shareholders of CRS on June 2, 1998. 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 - Credit Agreement
On August 31, 1998, the Company entered into a revolving line of credit
agreement (the "Credit Agreement") with Fleet National Bank ("Fleet"). Under
the Credit Agreement, which expires August 31, 2003, the Company may borrow up
to $17,000,000 at the prime rate plus 0.50% or London Interbank Offered Rate
("LIBOR") plus 3.50% subject to mandatory commitment reductions each quarter in
amounts ranging from $250,000 to $1,000,000. At September 30, 1998, the Company
had outstanding borrowings of $17,000,000 under the Credit Agreement. The
Credit Agreement is secured by substantially all of the Company's assets and
requires the Company to meet certain financial covenants, including minimum
ratios for interest, debt service and fixed charge coverage along with minimum
net worth levels. Additionally, the Credit Agreement prohibits the payment of
dividends by the Company without the Bank's written consent. The Company was in
compliance with the financial covenants contained in the Credit Agreement at
September 30, 1998.
In connection with the Credit Agreement, the Company issued a Warrant to
purchase shares of its Common Stock to Fleet. The Warrant entitles the holder
to purchase up to 156,322 shares of the Company's Common Stock (subject to
certain adjustments), at an exercise price of $6.92 per share. The Warrant is
exercisable beginning August 31, 1999 and expires August 31, 2003.
Note 5 - 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 SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
1997 1998 1997 1998
------------------------------------------------------------------
<S> <C> <C> <C> <C>
Numerator:
Net income (loss) $1,108,000 $(203,000) $1,932,000 $(4,498,000)
------------------------------------------------------------------
Denominator:
Denominator for basic earnings (loss)
per share: weighted-average shares 7,265,000 7,495,000 7,231,000 7,377,000
Effect of dilutive stock options and
warrants 705,000 624,000
------------------------------------------------------------------
Denominator for diluted earnings (loss)
per share: adjusted weighted-average
shares and assumed conversions 7,970,000 7,495,000 7,855,000 7,377,000
------------------------------------------------------------------
Basic earnings (loss) per share $0.15 $(0.03) $0.27 $(0.61)
------------------------------------------------------------------
Diluted earnings (loss) per share $0.14 $(0.03) $0.25 $(0.61)
------------------------------------------------------------------
</TABLE>
Note 6 - 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 nine-month
period ended September 30, 1997, other comprehensive income was not significant.
There was no other comprehensive income during the nine-month period ended
September 30, 1998.
9
<PAGE>
CORE, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED
NOTE 7 - 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.
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, full service
reinsurance management services, analytic consulting services, social security
disability benefits advocacy, Medicare coordination of benefits 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 employee per month ("PEPM"), per
case, hourly, percentage of risk premium (for full service reinsurance
management services) 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 nine months ended
September 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 September 1, 1998, the Company acquired all shares of stock of Disability
Reinsurance Management Services, Inc. ("DRMS"), a Delaware corporation, pursuant
to a Capital Stock Purchase Agreement dated as of August 31, 1998 (the "Purchase
Agreement"). Pursuant to the Purchase Agreement, all shares of stock of DRMS
were acquired in exchange for a $20,000,000 cash payment, the issuance of
480,000 shares of the Company's common stock and the future issuance of up to an
additional $7,000,000 of the Company's common stock after September 30, 2001,
based upon the future performance of DRMS. The purchase price is subject to
certain adjustments as set forth in the Purchase Agreement. DRMS is a full
service reinsurance intermediary manager providing marketing, underwriting
advice, claims, actuarial and compliance services to its insurance company
clients and risk management expertise for reinsurers in a reinsurance facility.
The acquisition has been accounted for as a purchase.
On September 15, 1998, the Company adopted a plan to discontinue the operations
of one of its subsidiaries, Cost Review Services, Inc. ("CRS"), effective
October 31, 1998. In connection with this action, the Company recorded
estimated charges totaling $541,000. The major components of the charges were
$173,000 of employee separation costs, $150,000 of noncash charges to dispose of
certain assets through sale or abandonment and $128,000 to terminate lease and
other contractual obligations. The charges do not include additional costs of
servicing the existing customers through October 31, 1998. These costs will be
charged to operations, as appropriate, when incurred. CRS provided bill audit
and workers' compensation case management services to insurance companies and
third-party administrators of workers' compensation programs.
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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------------------
1997 1998 1997 1998
--------------------------------------
<S> <C> <C> <C> <C>
Revenue 100.0% 100.0% 100.0% 100.0%
Cost of services 58.4% 61.2% 61.0% 63.1%
Gross profit 41.6% 38.8% 39.0% 36.9%
General and administrative expense 19.9% 21.3% 21.6% 21.4%
Sales and marketing expense 6.3% 8.1% 6.5% 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 September 30, Nine months ended September 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 $ 6,345 60% $ 7,453 65% $15,018 55% $20,269 63%
Specialty review services 2,479 24% 2,384 21% 7,522 27% 7,201 22%
Utilization review and case
management services 1,707 16% 1,606 14% 5,090 18% 4,904 15%
------------------------------------------- -------------------------------------------
$10,531 100% $11,443 100% $27,630 100% $32,374 100%
------------------------------------------- -------------------------------------------
------------------------------------------- -------------------------------------------
</TABLE>
Managed disability services include: CORE's WorkAbility services, full service
reinsurance management 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 NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
Revenues increased by $912,000 (9%) from $10,531,000 for the three months ended
September 30, 1997 to $11,443,000 for the third quarter of 1998. For the nine
months ended September 30, 1998 revenues increased $4,744,000 (17%) from
$27,630,000 in 1997 to $32,374,000 in 1998. Most of the revenue growth realized
for the three and nine-month periods ended September 30, 1998 came from growth
in managed disability services. Specifically, revenues from managed disability
services grew $1,108,000 (17%) and $5,251,000 (35%) for the three and nine-month
periods ended September 30, 1998, respectively, as compared to the same periods
in 1997. CORE's WorkAbility program contributed 66% of the increase in managed
disability services during 1998 due to the addition of new clients and the
expansion of services to existing clients during the latter half of 1997 and the
first nine months of 1998. Also contributing to the increase in revenues during
the quarter ended September 30, 1998 was the acquisition of DRMS on September 1,
1998 which expanded CORE's managed disability services program to include
disability reinsurance management services. Revenues realized from CORE's
specialty review services decreased $95,000 (4%) for the three months ended
September 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 review services.
It is uncertain whether this decline in volume will continue. Revenues from
utilization review and case management services also decreased during the during
the three and nine-month periods ended September 30, 1998 as compared to the
same periods in 1997 due mostly to a 35% decline in revenues from utilization
review services. Offsetting this expected decline in utilization review
services was a more than 10% 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 and case
management services to continue to decline in future periods as compared to
prior year levels.
11
<PAGE>
The Company's top five clients represented 49% of revenues for the nine-month
period ended September 30, 1998 as compared to 41% for the same period in
1997. Bell Atlantic accounted for approximately 24% and 23% of revenues for
the nine-month periods ended September 30, 1998 and 1997, respectively. No
other single client represented more than 10% of total revenues for the
nine-month periods ended September 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 $846,000 (14%)
from $6,152,000 for the three months ended September 30, 1997 to $6,998,000 for
the third quarter of 1998. For the nine months ended September 30, 1998, cost
of services increased $3,597,000 (21%) as compared to the same period in 1997,
going from $16,843,000 to $20,441,000. The increase is primarily the result of
additional payroll costs associated with business acquisitions completed in 1998
and the summer of 1997 in addition to increased staffing levels required to
service new and growing WorkAbility clients.
CORE's gross profit performance for the nine months ended September 30, 1998
declined to 37% from 39% in 1997. The Company's gross profit performance was
significantly impacted by lower margins realized in its specialty review
services, going from 37% in 1997 down to 32% in 1998, and in its utilization
review and case management services, going from 42% down to 35%, while gross
margins realized within managed disability services remained constant at 42% for
the nine months ended September 30, 1998 and 1997. The decline in gross margins
under specialty review and utilization review and case management services was
due mostly to the decrease in revenues realized under these programs. 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 $350,000 (17%) from
$2,091,000 for the three months ended September 30, 1997 to $2,441,000 for the
third quarter of 1998. For the nine months ended September 30, 1998, general
and administrative expenses increased $978,000 (16%) as compared to the same
period in 1997, going from $5,957,000 to $6,935,000. Higher costs in payroll,
rent and other general and administrative expenses relate primarily to the
Company's acquisitions during 1998 and the summer of 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,
remained relatively constant at 21% for the nine months ended September 30,
1998, as compared to the same period in the prior year.
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 $267,000 (40%) from $664,000 for the three months ended
September 30, 1997 to $931,000 for the third quarter of 1998. For the nine
months ended September 30, 1998, sales and marketing expenses increased $858,000
(48%) as compared to the same period in 1997, going from $1,791,000 to
$2,649,000. This increase is directly related to the acquisitions of SSDC,
Protocol Work Systems and TCM completed during 1997 and 1998, which accounted
for 50% of the increase in sales and marketing expenses for the nine months
ended September 30, 1998. The balance of the increase is primarily due to
expanded staffing to support the sales and product development departments as
well as additional travel costs and costs incurred for participation in
tradeshows. The Company expects to continue to invest an increased amount of
resources in sales and marketing in future periods.
Depreciation and amortization expenses increased $79,000 (15%) from $534,000 for
the three months ended September 30, 1997 to $613,000 for the third quarter of
1998. The increase during the third quarter of 1998 is directly related to the
amortization of goodwill acquired in the purchase of DRMS on September 1, 1998
which is expected to amount to approximately $100,000 monthly. For the nine
months ended September 30, 1998, depreciation and amortization expenses
increased $200,000 (14%) as compared to the same period in 1997, going from
$1,424,000 to $1,624,000. The increase during the nine months ended September
30, 1998 is partly related to the amortization of the goodwill of DRMS and
mostly attributed to increased amortization expense on the goodwill acquired in
the purchases of SSDC and Protocol Work Systems in 1997.
12
<PAGE>
The Company recorded non-recurring charges during the quarter ended September
30, 1998 in the amount of $541,000 for costs related to the Company's plan to
discontinue the operations of CRS. In addition, the Company incurred relocation
costs in the amount of $102,000 related to the Company's relocation of its
accounting department from Boston, Massachusetts to its corporate offices in
Irvine, California.
Other income and expense, net, consists primarily of interest income, which
represents amounts earned by the Company's investments, as reduced by interest
expense. Other income and expenses decreased $195,000 from income of $116,000
for the three months ended September 30, 1997 to expenses of $79,000 for the
third quarter of 1998. For the nine months ended September 30, 1998, other
income decreased $285,000 as compared to the same period in 1997, going from
$446,000 to $161,000. The decrease is due to a decrease in funds available for
investment and an increase in borrowings outstanding used to complete the recent
acquisition of DRMS.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
On August 31, 1998, the Company entered into a revolving line of credit
agreement (the "Credit Agreement") with Fleet National Bank. Under the Credit
Agreement, which expires August 31, 2003, the Company may borrow up to
$17,000,000 at the prime rate plus 0.50% or London Interbank Offered Rate
("LIBOR") plus 3.50% subject to mandatory commitment reductions each quarter in
amounts ranging from $250,000 to $1,000,000. At September 30, 1998, the Company
had outstanding borrowings of $17,000,000 under the Credit Agreement. The
Credit Agreement is secured by substantially all of the Company's assets and
requires the Company to meet certain financial covenants, including minimum
ratios for interest, debt service and fixed charge coverage along with minimum
net worth levels. Additionally, the Credit Agreement prohibits the payment of
dividends by the Company without the Bank's written consent. The Company was in
compliance with the financial covenants contained in the Credit Agreement at
September 30, 1998.
For the nine months ended September 30, 1998, the Company's cash and cash
equivalents decreased by $5,952,000. For this period, operating activities used
$369,000 of cash due primarily to net losses of $4,498,000 and a net increase in
accounts receivable of $3,295,000, as offset by depreciation and amortization of
$2,256,000, the write-off of goodwill of $4,085,000 and an increase in accounts
payable and accrued expenses of $1,413,000. The increase in accounts receivable
is due primarily to the increase in revenues over 1997 and contractual timing of
certain client billings. The increase in accounts payable and accrued expenses
relates mostly to the deal costs incurred in connection with the acquisition of
DRMS and the costs accrued following the Company's plans to discontinue the
operations of CRS. The Company's investing activities used $21,501,000 of cash
due primarily to the acquisition of DRMS of $20,091,000 and additions to
property and equipment (including software development) of $2,432,000. The
Company's financing activities provided $15,918,000 of cash for this period due
primarily to $17,000,000 in borrowings under a new credit agreement dated August
31, 1998, as offset by $1,125,000 in payments made on obligations related to a
previous acquisition.
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 $0.7 million and $2.7
million, respectively. All obligations held by the Company under lease
commitments expire on various dates through June 30, 2003 and total $7.9 million
as of September 30, 1998.
The Company has net operating loss carryforwards for income tax purposes of
approximately $5 million as of September 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 the
net operating loss carryforwards may be subject to further limitation provided
by the Internal Revenue Code of 1986 and similar state provisions.
The Company is currently negotiating client service agreements that may require
the Company to expend working capital ahead of the contractual billing periods.
To the extent that such working capital needs exceed currently available
working capital, the Company believes that it can obtain such additional
working capital from its present lender or others. The Company believes that
this additional financing, along with future earnings from operations and
other sources of available funds will be sufficient to meet its liquidity
and funding requirements through at least the year 1999.
13
<PAGE>
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 and from clients 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.
14
<PAGE>
PART II
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In the quarter ended September 30, 1998, the Company issued the following shares
of Common Stock. All such shares were issued to stockholders of Disability
Reinsurance Management Services, Inc. ("DRMS") as partial consideration for all
their capital stock of DRMS pursuant to the Capital Stock Purchase Agreement
between CORE, DRMS and the stockholders of DRMS.
<TABLE>
<CAPTION>
Date Security Stockholder Number of Shares
-------------------------------------------------------------------------
<S> <C> <C> <C>
9/1/98 Common Stock James Fallon 129,600
9/1/98 Common Stock Lisa Hansen 129,600
9/1/98 Common Stock Michael Lachance 129,600
9/1/98 Common Stock David Rich 60,000
9/1/98 Common Stock David Mitchell 31,200
</TABLE>
On August 31, 1998, the Company issued a Warrant to purchase shares of its
Common Stock to Fleet National Bank ("Fleet"), in connection with the credit
facility the Company established with Fleet. The Warrant entitles the holder to
purchase up to 156,322 shares of the Company's Common Stock (subject to certain
adjustments), at an exercise price of $6.92 per share. The Warrant is
exercisable beginning August 31, 1999 and expires August 31, 2003.
These foregoing securities were not registered under the Securities Act at the
time of sale and issuance, in reliance upon the exemption contained in Section
4(2) of the Securities Act for transactions by an issuer not involving any
public offering. No underwriter was involved.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A Special Meeting in lieu of the Annual Meeting of Stockholders was held on July
30, 1998 in Irvine, California.
The vote to elect two persons as Class I Directors of the Company was as
follows:
<TABLE>
<CAPTION>
For Withheld Authority
--------- ------------------
<S> <C> <C>
Leslie Alexandre, Dr. P.H. 6,543,113 280,071
Stephen C. Caulfield 6,543,113 280,071
</TABLE>
Accordingly, Ms. Alexandre and Mr. Caulfield were re-elected as Class I
Directors to serve for a three year term until the 2001 annual stockholders
meeting and until their successors are duly elected and qualified. Class II
Director (Richard H. Egdahl) whose term is expiring at the 1999 annual meeting
of stockholders and Class III Directors (George C. Carpenter IV and Craig C.
Horton) whose terms are scheduled to expire at the 2000 annual meeting of
stockholders have terms as directors that continued after the July 1998 Special
Meeting.
The vote to approve the adoption of the Company's 1997 Stock Option Plan was as
follows:
<TABLE>
<CAPTION>
<S> <C>
For 3,128,783
Against 1,968,576
Abstain 9,825
Delivered, non-voted 1,716,000
</TABLE>
Accordingly, adoption of the Company's 1997 Stock Option Plan was approved.
15
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits. The following exhibits are included:
Exhibit
Number Description
- ------ -----------
2.1 Capital Stock Purchase Agreement, dated as of August 31, 1998, by and among
CORE, INC., Disability Reinsurance Management Services, Inc., and the
Stockholders of Disability Reinsurance Management Services, Inc., including
Exhibit A-1 (excluding other Exhibits and Schedules). Filed as exhibit 2.1
to Registrant's Current Report on Form 8-K, filed September 17, 1998, and
incorporated herein by reference.
4.1 Warrant Agreement, dated as of August 31, 1998, between CORE, INC. and
Fleet National Bank (excluding Exhibits). Filed as exhibit 4.1 to
Registrant's Current Report on Form 8-K, filed September 17, 1998, and
incorporated herein by reference.
10.1 Credit Agreement, dated as of August 31, 1998, between CORE, INC. and Fleet
National Bank, including Exhibit A (excluding Schedules and other
Exhibits). Filed as exhibit 10.1 to Registrant's Current Report on Form
8-K, filed September 17, 1998, and incorporated herein by reference.
10.2 Registration Rights Agreement, dated as of August 31, 1998, between CORE,
INC. and James T. Fallon, Lisa O. Hansen, Michael D. Lachance, David C.
Mitchell and David K. Rich. Filed as exhibit 10.2 to Registrant's Current
Report on Form 8-K, filed September 17, 1998, and incorporated herein by
reference.
10.3 Registration Rights Agreement, dated as of August 31, 1998, between CORE,
INC. and Fleet National Bank. Filed as exhibit 10.3 to Registrant's Current
Report on Form 8-K, filed September 17, 1998, and incorporated herein by
reference.
10.4 Employment Agreement by and between Disability Reinsurance Management
Services, Inc. and James T. Fallon (excluding Attachments). Filed as
exhibit 10.4 to Registrant's Current Report on Form 8-K, filed September
17, 1998, and incorporated herein by reference.
10.5 Employment Agreement by and between Disability Reinsurance Management
Services, Inc. and Lisa O. Hansen (excluding Attachments). Filed as exhibit
10.5 to Registrant's Current Report on Form 8-K, filed September 17, 1998,
and incorporated herein by reference.
10.6 Employment Agreement by and between Disability Reinsurance Management
Services, Inc. and Michael D. Lachance (excluding Attachments). Filed as
exhibit 10.6 to Registrant's Current Report on Form 8-K, filed September
17, 1998, and incorporated herein by reference.
27* Financial Data Schedule.
- ------------------------------------
* Filed herewith
(b) REPORTS ON FORM 8-K.
On September 17, 1998, the Company filed a report on Form 8-K dated September 1,
1998 concerning the acquisition of all shares of stock of Disability Reinsurance
Management Services, Inc. ("DRMS"). On October 20, 1998, the Company filed a
related Form 8-K/A (Amendment No. 1) which included the audited balance sheet of
DRMS as of June 30, 1998 and the related statements of income and accumulated
deficit, and cash flows for the six months then ended; the audited balance sheet
of DRMS as of December 31, 1997 and the related statements of income and
accumulated deficit, and cash flows for the year then ended; the unaudited
balance sheet of DRMS as of June 30, 1997 and the related statements of income
and accumulated deficit, and cash flows for the six months then ended; and the
audited balance sheets of DRMS as of December 31, 1996 and 1995 and the related
statements of operations, accumulated deficit and cash flows for the years then
ended.
16
<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: November 12, 1998 By: /s/ William E. Nixon
--------------------------------------
William E. Nixon
Chief Financial Officer, Executive
Vice President and Treasurer
(Duly authorized officer and Principal
Financial Officer)
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 1,992,497
<SECURITIES> 0
<RECEIVABLES> 11,009,491
<ALLOWANCES> (216,607)
<INVENTORY> 0
<CURRENT-ASSETS> 14,074,595
<PP&E> 16,068,792
<DEPRECIATION> (8,565,220)
<TOTAL-ASSETS> 49,284,367
<CURRENT-LIABILITIES> 8,276,791
<BONDS> 0
0
0
<COMMON> 781,614
<OTHER-SE> 25,281,804
<TOTAL-LIABILITY-AND-EQUITY> 49,284,367
<SALES> 0
<TOTAL-REVENUES> 32,373,654
<CGS> 0
<TOTAL-COSTS> 20,440,617
<OTHER-EXPENSES> 16,787,012
<LOSS-PROVISION> 64,974
<INTEREST-EXPENSE> 136,858
<INCOME-PRETAX> (4,693,138)
<INCOME-TAX> (195,000)
<INCOME-CONTINUING> (4,498,138)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,498,138)
<EPS-PRIMARY> (0.61)
<EPS-DILUTED> (0.61)
</TABLE>
