<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, 2000
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 10, 2000 there were 9,089,064 shares of the Registrant's
Common Stock outstanding.
<PAGE>
CORE, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2000
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Balance Sheets (Unaudited) 3
Consolidated Condensed Statements of Operations (Unaudited) 5
Consolidated Condensed Statements of Cash Flows (Unaudited) 6
Notes to Consolidated Condensed Financial Statements (Unaudited) 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk 15
PART II OTHER INFORMATION
Item 1. Legal Proceedings N/A
Item 2. Changes in Securities and Use of Proceeds N/A
Item 3. Defaults Upon Senior Securities N/A
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
</TABLE>
2
<PAGE>
CORE, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
(UNAUDITED) (NOTE 1)
------------------- --------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 233,569 $ -
Accounts receivable, net of allowance for doubtful
accounts of $705,466 at September 30, 2000 and $476,444
at December 31, 1999 11,825,715 8,669,329
Unbilled receivables 3,442,843 2,628,030
Notes receivable from officers 69,662 69,662
Prepaid expenses 279,597 802,990
Other current assets 749,837 182,584
--------------- ---------------
Total current assets 16,601,223 12,352,595
Unbilled receivables, net of current portion 597,541 2,577,723
Property and equipment, net 11,662,647 8,918,285
Other assets, net 1,635,045 1,787,226
Goodwill and intangibles, net of accumulated amortization of
$3,438,259 at September 30, 2000 and $2,308,023 at
December 31, 1999 26,912,667 25,963,841
--------------- ---------------
Total assets $57,409,123 $51,599,670
=============== ===============
</TABLE>
3
<PAGE>
CORE, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS - CONTINUED
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
(UNAUDITED) (NOTE 1)
------------------- -------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $738,511 $875,795
Accrued expenses 3,268,543 3,492,859
Accrued payroll 496,491 1,073,642
Borrowings under credit agreement 1,925,000 -
Notes payable 61,751 77,674
Capital lease obligations 140,869 71,981
-------------- -------------
Total current liabilities 6,631,165 5,591,951
Borrowings under credit agreement, net of current portion 16,750,000 14,300,000
Notes payable, net of current portion - 41,528
Deferred rent, net of current portion 144,967 50,234
Capital lease obligations, net of current portion 475,599 276,878
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 9,089,064 at
September 30, 2000 and 8,114,288 at December 31, 1999 908,906 811,429
Additional paid-in capital 43,621,770 40,515,660
Accumulated deficit (11,123,284) (9,988,010)
-------------- -------------
Total stockholders' equity 33,407,392 31,339,079
-------------- -------------
Total liabilities and stockholders' equity $57,409,123 $51,599,670
============== =============
</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,
----------------------------------------------------------------------------
2000 1999 2000 1999
------------------ ----------------- ---------------- ------------------
<S> <C> <C> <C> <C>
Revenues $14,612,468 $16,317,604 $47,949,611 $47,719,699
Cost of services 8,403,421 8,916,925 25,713,448 27,244,620
------------------ ----------------- ---------------- ------------------
Gross profit 6,209,047 7,400,679 22,236,163 20,475,079
Operating expenses:
Selling, general and administrative 5,801,115 4,680,572 16,268,333 12,659,491
Depreciation and amortization 1,065,866 958,249 3,234,081 2,797,423
Provision for doubtful accounts 206,000 75,000 336,975 290,000
Non-recurring restructuring charges 1,117,167 - 2,601,433 -
------------------ ----------------- ---------------- ------------------
Total operating expenses 8,190,148 5,713,821 22,440,822 15,746,914
------------------ ----------------- ---------------- ------------------
Income (loss) from operations (1,981,101) 1,686,858 (204,659) 4,728,165
Other income (expense):
Gain on sale of subsidiary assets, net - - - 331,567
Interest income 8,900 14,554 30,463 18,996
Interest expense (494,730) (428,321) (1,361,078) (1,178,818)
------------------ ----------------- ---------------- ------------------
(485,830) (413,767) (1,330,615) (818,255)
------------------ ----------------- ---------------- ------------------
Income (loss) before income taxes (2,466,931) 1,273,091 (1,535,274) 3,899,910
Income tax provision (benefit) (675,000) 255,000 (400,000) 738,320
------------------ ----------------- ---------------- ------------------
Net income (loss) $(1,791,931) $1,018,091 $(1,135,274) $3,161,590
================== ================= ================ ==================
Net income (loss) per common share:
Basic $(0.20) $0.13 $(0.13) $0.40
================== ================= ================ ==================
Diluted $(0.20) $0.12 $(0.13) $0.37
================== ================= ================ ==================
Weighted average shares:
Basic 9,089,000 7,981,000 8,780,000 7,913,000
================== ================= ================ ==================
Diluted 9,089,000 8,539,000 8,780,000 8,446,000
================== ================= ================ ==================
</TABLE>
See accompanying notes.
5
<PAGE>
CORE, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
------------------- -- ------------------
2000 1999
------------------- ------------------
<S> <C> <C>
Net cash provided by (used in) operating activities $ (444,326) $ 274,719
Investing activities:
Additions to property and equipment (4,529,540) (2,737,430)
Additions to goodwill and intangible assets (40,000) -
Proceeds from sale of subsidiary assets - 50,000
Reductions on notes receivable 97,900 35,425
Increase in other assets (61,493) (11,327)
------------------ -----------------
Net cash used in investing activities (4,533,133) (2,663,332)
Financing activities:
Borrowings under credit agreement 16,775,000 9,400,000
Repayments under credit agreement (12,400,000) (9,200,000)
Payments for origination and other fees pursuant to credit agreement (197,042) (472,276)
Payments on notes payable (57,452) (198,087)
Payments on capital lease obligations (74,003) (41,238)
Issuance of common stock upon exercise of stock options 1,164,525 674,194
------------------ -----------------
Net cash provided by financing activities 5,211,028 162,593
------------------ -----------------
Net increase (decrease) in cash and cash equivalents 233,569 (2,226,020)
Cash and cash equivalents at beginning of period - 2,226,020
------------------ -----------------
Cash and cash equivalents at end of period $ 233,569 $ -
================== =================
</TABLE>
See accompanying notes.
6
<PAGE>
CORE, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2000
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, 1999 has been derived from the audited financial statements of CORE, INC.
("CORE") 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,
2000 are not necessarily indicative of the results that may be expected for
the year ended December 31, 2000. For further information, refer to the
consolidated financial statements for the year ended December 31, 1999
contained in CORE's annual report on Form 10-K filed March 30, 2000, as
amended by CORE's Form 10-K/A filed with the Securities and Exchange
Commission on May 1, 2000.
NOTE 2 - CREDIT AGREEMENT
On August 31, 1998, CORE first entered into a credit agreement (the "Initial
Credit Agreement") with Fleet National Bank ("Fleet") which was later amended
and restated. The total credit facility under the terms of the Second
Amendment to the Amended and Restated Credit Agreement dated September 30,
2000 (as amended, the "Restated Credit Agreement") is $20,500,000 and is
comprised of a $14,500,000 Term Loan and an available commitment of up to
$6,000,000 in Revolving Loans. The Term Loan is subject to principal payments
each quarter (beginning on September 30, 2000) in amounts ranging from
$750,000 to $1,000,000. CORE can elect that the outstanding borrowings under
all or portions of the Term Loan and the Revolving Loans be at either (i) the
prime base rate plus 0.50%, or (ii) the London Interbank Offered Rate
("LIBOR") plus 3.50%. At September 30, 2000, the maximum credit availability
was $19,750,000. The Restated Credit Agreement is scheduled to expire on
December 31, 2004.
At September 30, 2000 and December 31, 1999, CORE had outstanding borrowings
of $18,675,000 and $14,300,000, respectively, under the credit facility which
were all tied to the prime base lending rate (9.50% at September 30, 2000)
plus the applicable margin.
The Restated Credit Agreement is secured by substantially all of CORE's
assets and requires CORE to meet certain financial covenants, including
minimum ratios for interest, debt service and fixed charge coverage along
with minimum net worth, minimum earnings and maximum capital expenditure
levels. Additionally, the Restated Credit Agreement prohibits the payment of
dividends by CORE without the Bank's written consent.
For the quarter ending September 30, 2000, CORE did not satisfy certain
financial covenants set forth in the Restated Credit Agreement. Specific
covenants that were out of compliance consisted of the minimum interest
coverage, minimum debt service coverage, minimum fixed charge coverage and
the minimum earnings requirement. A waiver, effective as of September 30,
2000, was granted by Fleet with respect to these unsatisfied covenants, in
exchange for certain modifications outlined in the second amendment to the
Restated Credit Agreement. These modifications primarily consist of
restrictions on future allowable capital expenditure levels and a requirement
to reduce the balance outstanding on the revolving loan commitment to
$3,000,000 or less for at least one business day during each fiscal quarter,
beginning in the fourth quarter 2000. CORE met this latter requirement for
the fourth quarter on October 23, 2000.
CORE has entered into an interest rate protection arrangement with Fleet that
limits CORE's exposure to significant increases in the base lending rate. The
arrangement places an effective cap on the prime base lending rate at 9.75%
(or LIBOR at 6.75%) for a substantial portion of the outstanding borrowings
through August 29, 2003.
7
<PAGE>
CORE, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED
NOTE 2 - CREDIT AGREEMENT (CONTINUED)
In connection with the Initial Credit Agreement and related amendments, CORE
has issued two Warrants to purchase shares of its Common Stock to Fleet. The
original Warrant granted on August 31, 1998 entitles the holder to purchase
up to 156,322 shares of CORE's Common Stock (subject to certain adjustments),
at an exercise price of $6.92 per share and expires August 31, 2003. The
second Warrant granted in connection with the Third Amendment to the Initial
Credit Agreement, dated April 28, 1999, entitles the holder to purchase up to
187,000 shares of CORE's Common Stock (subject to certain adjustments), at an
exercise price of $12.00 per share and expires June 30, 2004.
NOTE 3 - STOCK ISSUANCE
On April 1, 2000, CORE issued 375,000 shares of its Common Stock to the
former stockholders of Disability Reinsurance Management Services, Inc.
("DRMS"). CORE had acquired all of the shares of stock of DRMS pursuant to a
Capital Stock Purchase Agreement dated as of August 31, 1998 in a transaction
accounted for as a purchase. The purchase price was subject to certain
adjustments as set forth in the Capital Stock Purchase Agreement. The
issuance of Common Stock during the second quarter represented the remaining
consideration pursuant to an Agreement and Amended Capital Stock Purchase
Agreement effective April 1, 2000 between CORE, DRMS and the former
stockholders of DRMS. The stock issuance, representing additional goodwill
and intangibles valued at $2,039,000, is being amortized on a straight-line
basis over an average remaining life of 24.5 years.
NOTE 4 - ARBITRATION
On June 12, 2000, an arbitrator issued a Final Award pertaining to a dispute
over matters involving an Asset Purchase Agreement dated March 17, 1998
between CORE and its wholly owned subsidiary, TCM Services, Inc. ("TCM") and
Transcend Services, Inc. and Transcend Case Management, Inc. (collectively
"Transcend"). Under the terms of the Final Award, the parties agreed that
CORE and TCM have entirely fulfilled their obligations to Transcend with
respect to all of the matters in the proceeding.
The obligations of CORE and TCM were set forth in the arbitrator's Interim
Award dated February 10, 2000 in which he concluded that CORE and TCM
breached the Asset Purchase Agreement with Transcend. TCM had acquired in
March 1998 and subsequently returned in December 1998, certain assets
relating to Transcend's workers' compensation case management services (the
"Business.") The arbitrator ordered CORE and TCM to pay Transcend the
calculated earn-out payment based upon the formula established in the Asset
Purchase Agreement and to reimburse Transcend for its attorneys' fees and
costs. The resulting earn-out consideration, amounting to $1,740,920, was
required to be delivered in the form of CORE common stock based on the market
price as of December 20, 1999 ($7.00). On March 31, 2000, CORE issued 248,703
shares of its common stock to Transcend and reimbursed Transcend $183,270 for
associated attorney fees and costs. The charges associated with the stock
issuance and cost reimbursement to Transcend were recorded in December 1999.
8
<PAGE>
CORE, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED
NOTE 5 - RESTRUCTURING CHARGES
CORE recorded non-recurring charges of $1,117,000 and $2,601,000 during the
three and nine-month periods ended September 30, 2000, respectively, as a
result of restructuring activities within its service lines and
administrative functions. The charges primarily relate to workforce
reductions in the WorkAbility(R) Absence Management Program in the first and
third quarters of 2000 and costs to relocate the WorkAbility(R) data center
from the East Coast to the West Coast.
Severance and other separation costs relating to reductions in the overall
workforce amounted to approximately $905,000 and $1,706,000 for the three and
nine-month periods ended September 30, 2000, respectively. Approximately 70
positions have been eliminated in connection with these restructuring
activities. Other non-recurring costs, including $397,000 for the data center
move, were incurred during the nine months ended September 30, 2000 as a
result of related service line realignment activities to further streamline
the operations.
Unpaid restructuring charges of $1,075,000, which will be primarily disbursed
through June 2001, are included in accrued expenses on the accompanying
Consolidated Condensed Balance Sheet at September 30, 2000.
NOTE 6 - 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,
--------------------------------------- -------------------------------------
2000 1999 2000 1999
------------------- ------------------ ----------------- ------------------
<S> <C> <C> <C> <C>
Numerator:
Net income (loss) $(1,792,000) $1,018,000 $(1,135,000) $3,162,000
=================== ================== ================= ==================
Denominator:
Denominator for basic earnings
(loss) per share: weighted-
average shares 9,089,000 7,981,000 8,780,000 7,913,000
Effect of dilutive stock options and
warrants - 558,000 - 533,000
------------------- ------------------ ----------------- ------------------
Denominator for diluted earnings
(loss) per share: adjusted
weighted-average shares and
assumed conversions 9,089,000 8,539,000 8,780,000 8,446,000
=================== ================== ================= ==================
Basic earnings (loss) per share $(0.20) $0.13 $(0.13) $0.40
=================== ================== ================= ==================
Diluted earnings (loss) per share $(0.20) $0.12 $(0.13) $0.37
=================== ================== ================= ==================
</TABLE>
NOTE 7 - SEGMENT REPORTING
CORE reports segment information in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 131 "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 131 establishes standards for
the way that public companies report information about operating segments and
related disclosures about products and services, geographic areas and major
customers. CORE operates in a single industry segment: employee absence
management services.
9
<PAGE>
CORE, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED
NOTE 8 - COMPREHENSIVE INCOME (LOSS)
Total comprehensive income (loss) was $(1,792,000) and $(1,135,000) for the
three and nine-month periods ended September 30, 2000, and $1,018,000 and
$3,162,000 for the three and nine-month periods ended September 30, 1999,
respectively.
NOTE 9 - ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." CORE expects
to adopt the new Statement effective January 1, 2001. SFAS No. 133 will
require CORE to recognize all derivatives on the balance sheet at fair value.
CORE does not anticipate that the adoption of this Statement will have a
significant effect on its consolidated results of operations or financial
position.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
CORE, INC. ("CORE") is a national provider of employee absence management
services to Fortune 500 companies and other self-insured employers,
third-party administrators and insurance carriers. CORE's services include
Integrated Disability Management (which consist of CORE's proprietary
WorkAbility(R) Absence Management program, disability reinsurance management
services, social security disability benefits advocacy, analytic consulting
services, onsite job profiling analysis and workplace risk management
services, and licensing), Peer Review Analysis (which consist of specialty
physician and behavioral health review services), and other services
including Medicare coordination of benefits, health care benefits utilization
review and case management services. CORE's services are designed to prevent
absence, promote early return to work, improve productivity, and manage
disabilities from "day one" through return to work or retirement, without
compromising the quality of health care services provided to patients.
In September 2000, CORE established a new operation from its disability
reinsurance management services and WorkAbility businesses concerning
integrated disability management for small, mid-market and existing large
clients. This reorganized unit will accelerate the refinement and marketing
of CORE's optimized integrated disability management ("IDM") product called
WorkAbility IDM, designed for mid-market employers.
This Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995 and
CORE'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 CORE believes could cause such results to differ include CORE's
reliance on its WorkAbility program, CORE's ability to market and sell its
WorkAbility IDM product to mid-market employers, CORE's dependence on key
clients, CORE's ability to satisfy financial covenants in the credit
agreement with its lender, risks associated with CORE'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 CORE. It should be recognized that other
risks might be significant, presently or in the future. CORE does not intend
to update or publicly release any revisions to the forward-looking statements.
CURRENT DEVELOPMENTS
CORE recorded non-recurring charges of $1,117,000 and $2,601,000 during the
three and nine-month periods ended September 30, 2000, respectively, as a
result of restructuring activities within its service lines and
administrative functions. The charges primarily relate to workforce
reductions in the WorkAbility program in the first and third quarters of 2000
and costs to relocate the WorkAbility data center from the East Coast to the
West Coast.
Severance and other separation costs relating to reductions in the overall
workforce amounted to approximately $905,000 and $1,706,000 for the three and
nine-month periods ended September 30, 2000, respectively. Approximately 70
positions have been eliminated in connection with these restructuring
activities. Other non-recurring costs, including $397,000 for the data center
move, were incurred during the nine months ended September 30, 2000 as a
result of related service line realignment activities to further streamline
the operations.
Unpaid restructuring charges of $1,075,000, which will be primarily disbursed
through June 2001, are included in accrued expenses on the accompanying
Consolidated Condensed Balance Sheet at September 30, 2000.
Due in part to these restructuring charges, CORE did not satisfy certain
financial covenants of its credit facility entered into with Fleet National
Bank ("Fleet") as of the end of the third quarter 2000. Fleet has provided
CORE with a waiver for these unsatisfied covenants in connection with the
Second Amendment to the Amended and Restated Credit Agreement dated as of
September 30, 2000. See "Notes to Consolidated Condensed Financial Statements
(Unaudited)," Note 2 and "Financial Condition, Liquidity and Capital
Resources" contained elsewhere in this report for additional information.
11
<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,
-------------------------- -------------------------
2000 1999 2000 1999
------------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Revenue 100.0% 100.0% 100.0% 100.0%
Cost of services 57.5 54.6 53.6 57.1
Gross profit 42.5 45.4 46.4 42.9
Selling, general and administrative expense 39.7 28.7 33.9 26.5
Provision for doubtful accounts 1.4 0.5 0.7 0.6
</TABLE>
The following table sets forth the contribution to total revenues of each of
CORE's principal service lines for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
2000 1999 2000 1999
-------------------- ---------------------- ----------------------- ----------------------
Amount Percent Amount Percent Amount Percent Amount Percent
---------- ---------- ---------- ---------- ---------- ------------ ----------- ----------
(Dollars in thousands) (Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Integrated Disability
Management $10,473 72% $12,434 76% $35,162 73% $34,943 73%
Peer Review Analysis 2,636 18 2,327 14 8,343 17 6,798 14
Exiting /exited services - - - - - - 1,008 2
Other service lines 1,503 10 1,557 10 4,445 10 4,971 11
---------- ---------- ---------- ---------- ----------- ----------- ------------ ----------
$14,612 100% $16,318 100% $47,950 100% $47,720 100%
========== ========== ========== ========== =========== =========== ============ ==========
</TABLE>
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
CORE's overall revenues decreased by $1,706,000 or 10% for the three months
ended September 30, 2000 and increased by $230,000 or 0.5% for the nine
months ended September 30, 2000, as compared to similar periods in 1999.
Revenues from Integrated Disability Management decreased by $1,961,000 or 16%
for the three months ended September 30, 2000 and increased $219,000 or 1%
for the nine months ended September 30, 2000, as compared to the same periods
in 1999. The decrease in revenue for the three-month period is primarily
concentrated among a small number of clients within the WorkAbility(R)
Absence Management program. This was due to reductions in services and fees
from our largest client, the loss of a large client following a merger and
census adjustments with another large client.
Revenues from the Peer Review Analysis service line increased $309,000 or 13%
and $1,545,000 or 23% for the three and nine-month periods ended September
30, 2000, respectively, as compared to the same periods in the previous year.
The respective increases for this service line were due to the addition of
new clients and an increase in the volume of referrals from existing clients
over the past year.
Revenues from services that CORE expected to exit in 1999 contained the
behavioral health programs of Integrated Behavioral Health, Inc. ("IBH"). As
a result of the sale of IBH's assets on June 21, 1999, operations within the
exiting/exited service line ceased.
12
<PAGE>
Revenues from other service lines (which includes utilization review,
Medicare coordination of benefits and other case management services),
decreased $54,000 or 3% and $526,000 or 11% for the three month and
nine-month periods ended September 30, 2000, respectively, as compared to the
same periods in 1999. CORE expects that revenues from other service lines
will continue to decline in future periods.
CORE's top five clients represented 38% of revenues for the nine months ended
September 30, 2000 as compared to 43% for the same period in 1999. Verizon
accounted for approximately 13% and 18% of revenues for the nine-month
periods ended September 30, 2000 and 1999, respectively. SBC Communications
represented 9% and 10% of revenues for the nine-month periods ended September
30, 2000 and 1999, respectively. No other single client represented more than
10% of total revenues for the nine-month periods ended September 30, 2000 or
1999.
Cost of services for CORE include direct expenses associated with the
delivery of our 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 decreased
$514,000 or 6% for the three months ended September 30, 2000 as compared to
the third quarter of 1999. For the nine months ended September 30, 2000, cost
of services decreased $1,532,000 or 6% as compared to the same period in
1999. The decrease is primarily the result of decreased staffing levels
required to service CORE's WorkAbility Absence Management program clients in
addition to the elimination of expenses associated with the IBH operations
sold during 1999.
CORE's gross profit performance for the nine months ended September 30, 2000
increased to 46% from 43% in 1999. Gross profit performance for each of
CORE's principal service lines for the nine months ended September 30, 2000
and 1999, respectively, are: 46% and 44% for Integrated Disability
Management, 44% and 38% for Peer Review Analysis, and 50% and 49% for other
service lines. The gross profit performance realized under Integrated
Disability Management was significantly enhanced by efficiencies realized in
providing services to CORE's WorkAbility Absence Management program existing
client base along with the increased growth in disability reinsurance
management services. The increase realized under Peer Review Analysis is
primarily due to greater efficiencies in providing services to a larger
client base.
Selling, general and administrative expenses include the cost of salaries for
sales, executive, administrative and information services personnel, rent,
travel expenses and other overhead items. Selling, general and administrative
expenses increased $1,251,000 or 26% for the three months ended September 30,
2000 from the third quarter of 1999. For the nine months ended September 30,
2000, selling, general and administrative expenses increased $3,656,000 or
28% as compared to the same period in 1999. The increase in 2000 was due in
part to $495,000 in consulting expenses recognized during the third quarter
related to a special one-time project initiated to improve efficiencies
within the WorkAbility(R) Absent Management program. This project has
resulted in the streamlining of operations, leading to an expected annualized
reduction in payroll of approximately $2,900,000, and the development of an
optimized integrated disability management product appropriate for the middle
market. CORE also increased sales and product development activities during
the first nine months of 2000 as compared to the same period in 1999.
Finally, an increase in the levels of general and administrative personnel
and increased maintenance expenses for our computer network hardware and
software associated with supporting CORE's anticipated growth in operations
in 2000 also contributed to the increase in selling, general and
administrative expenses as compared to 1999. As a result of the increased
activities, selling, general and administrative expenses, as a percentage of
revenues, increased to 41% for the three months ended September 30, 2000 from
29% for the third quarter of 1999. For the nine months ended September 30,
2000, selling, general and administrative costs increased to 35%, as compared
to 27% for the same period in 1999.
Depreciation and amortization expenses increased $108,000 or 11% and $437,000
or 16% for the three and nine-month periods ended September 30, 2000,
respectively, as compared to similar periods in 1999. The increase is
primarily related to the development of internal use software and purchases
of network hardware that CORE has invested in over the past year.
13
<PAGE>
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
On August 31, 1998, CORE first entered into a credit agreement (the "Initial
Credit Agreement") with Fleet National Bank ("Fleet") which was later amended
and restated. The total credit facility under the terms of the Second
Amendment to the Amended and Restated Credit Agreement dated September 30,
2000 (as amended, the "Restated Credit Agreement") is $20,500,000 and is
comprised of a $14,500,000 Term Loan and an available commitment of up to
$6,000,000 in Revolving Loans. The Term Loan is subject to principal payments
each quarter (beginning on September 30, 2000) in amounts ranging from
$750,000 to $1,000,000. CORE can elect that the outstanding borrowings under
all or portions of the Term Loan and the Revolving Loans be at either (i) the
prime base rate plus 0.50%, or (ii) the London Interbank Offered Rate
("LIBOR") plus 3.50%. At September 30, 2000, the maximum credit availability
was $19,750,000. The Restated Credit Agreement is scheduled to expire on
December 31, 2004.
At September 30, 2000 and December 31, 1999, CORE had outstanding borrowings
of $18,675,000 and $14,300,000, respectively, under the credit facility which
were all tied to the prime base lending rate (9.50% at September 30, 2000)
plus the applicable margin.
The Restated Credit Agreement is secured by substantially all of CORE's
assets and requires CORE to meet certain financial covenants, including
minimum ratios for interest, debt service and fixed charge coverage along
with minimum net worth, minimum earnings and maximum capital expenditure
levels. Additionally, the Restated Credit Agreement prohibits the payment of
dividends by CORE without the Bank's written consent.
For the quarter ending September 30, 2000, CORE did not satisfy certain
financial covenants. Specific covenants that were out of compliance consisted
of the minimum interest coverage, minimum debt service coverage, minimum
fixed charge coverage and the minimum earnings requirement. A waiver,
effective as of September 30, 2000, was granted by Fleet with respect to
these unsatisfied covenants, in exchange for certain modifications outlined
in the second amendment to the Restated Credit Agreement. These modifications
primarily consist of restrictions on future allowable capital expenditure
levels and a requirement to reduce the balance outstanding on the revolving
loan commitment to $3,000,000 or less for at least one business day during
each fiscal quarter, beginning in the fourth quarter 2000. CORE met this
latter requirement for the fourth quarter on October 23, 2000.
CORE has entered into an interest rate protection arrangement with Fleet that
limits CORE's exposure to significant increases in the base lending rate. The
arrangement places an effective cap on the prime base lending rate at 9.75%
(or LIBOR at 6.75%) for a substantial portion of the outstanding borrowings
through August 29, 2003.
In connection with the Initial Credit Agreement and related amendments, CORE
has issued two Warrants to purchase shares of its Common Stock to Fleet. The
original Warrant granted on August 31, 1998 entitles the holder to purchase
up to 156,322 shares of CORE's Common Stock (subject to certain adjustments),
at an exercise price of $6.92 per share and expires August 31, 2003. The
second Warrant granted in connection with the Third Amendment to the Initial
Credit Agreement, dated April 28, 1999, entitles the holder to purchase up to
187,000 shares of CORE's Common Stock (subject to certain adjustments), at an
exercise price of $12.00 per share and expires June 30, 2004.
For the nine months ended September 30, 2000, CORE's cash and cash
equivalents increased by $234,000 from a balance of zero at December 31,
1999. CORE typically uses all available cash and cash equivalents to reduce
the revolving line of credit. CORE's operating activities during this period
used $444,000, which was mainly due to the net loss of $1,135,000 for the
nine-month period plus the net increase of accounts and unbilled receivables
of $1,991,000, as offset by the non-cash expenses attributable to
depreciation and amortization. CORE's investing activities used $4,533,000 of
cash mostly to fund additions to property and equipment (including software
development) of $4,530,000. CORE's financing activities provided $5,211,000
of cash for this period, mainly from borrowings on the credit facility in
addition to proceeds from the issuance of common stock upon exercise of stock
options.
CORE leases its facilities and certain computer and office equipment. Future
lease commitments as of September 30, 2000, which relate substantially to
space rental, for the three months ended December 31, 2000 and the year ended
December 31, 2001 are approximately $800,000 and $2,700,000, respectively.
All obligations held by CORE under lease commitments expire on various dates
through September 30, 2010 and total approximately $14,600,000 as of
September 30, 2000.
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<PAGE>
CORE has net operating loss carryforwards for federal and state income tax
purposes of approximately $6,000,000 and $18,000,000, respectively, as of
September 30, 2000, 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.
CORE plans to finance its operations and working capital requirements
primarily with future earnings from operations. As of November 10, 2000,
outstanding borrowings under the credit facility were $15,400,000. To the
extent that working capital needs exceed currently available working capital,
CORE has the flexibility to borrow additional funds up to the available
commitment under the Restated Credit Agreement. CORE believes that this
available financing, along with future earnings from operations and other
sources of funds will be sufficient to meet its liquidity and funding
requirements through at least the year 2001.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK.
CORE entered into a credit agreement with Fleet National Bank ("Fleet") on
August 31, 1998 (the "Initial Credit Agreement"). The Initial Credit
Agreement, as later amended and restated, was entered into for purposes other
than trading. The outstanding borrowings under the Second Amendment to
Amended and Restated Credit Agreement bear interest at variable rates, which
reset as prevailing market conditions change. CORE also entered into a
derivative financial instrument in January 1999 for purposes of managing its
interest rate exposure. See "Notes to Consolidated Condensed Financial
Statements (Unaudited)," Note 2 contained elsewhere within this report for
additional information.
PART II
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A Special Meeting in lieu of the Annual Meeting of Stockholders was held July
27, 2000 in Irvine, California.
The vote to elect two persons as Class III Directors of CORE was as follows:
<TABLE>
<CAPTION>
FOR WITHHELD AUTHORITY
----- ------------------
<S> <C> <C>
George C. Carpenter 8,055,222 218,150
Craig C. Horton 8,052,685 220,687
</TABLE>
Accordingly, Mr. Carpenter and Mr. Horton were re-elected as Class III
Directors to serve for a three year term until the 2003 Annual Meeting of
Stockholders and until their successors are elected and qualified. Class I
Directors (Leslie Alexandre, Dr.P.H. and Stephen C. Caulfield) whose terms
are scheduled to expire at the 2001 Annual Meeting of Stockholders and Class
II Directors (David M. Tourangeau and Richard J. Towle) whose terms are
scheduled to expire at the 2002 Annual Meeting of Stockholders have terms as
directors that continued after the July 2000 Special Meeting.
The vote to approve an amendment to CORE's 1997 Stock Option Plan to increase
the number of shares issuable under the Plan from 950,000 to 1,700,000 was as
follows:
<TABLE>
<S> <C>
For 3,760,280
Against 2,722,917
Abstain 63,848
</TABLE>
Accordingly, the amendment to CORE's 1997 Stock Option Plan was approved.
15
<PAGE>
ITEM 5. OTHER INFORMATION
On November 2, 2000, CORE appointed James R. Boris, former chief executive
officer of First Union Securities, to its Board of Directors. Boris, 56, is
currently chairman of JB Capital Management, LLC, a private investment firm.
Boris also serves on the board of directors of various organizations
including People's Energy Corporation, Community Health Services, Inc. and
Pragmatic Vision International. Additionally, he serves on the Board of
Trustees of Loyola University, Chicago, and the Advisory Board of J.L.
Kellogg Graduate School of Management at Northwestern University.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. The following exhibits are included:
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<S> <C>
10.1* Second Amendment to Amended and Restated Credit Agreement, dated as of
September 30, 2000 between CORE, INC. and Fleet National Bank
(excluding Schedules and Exhibits).
27.1* Financial Data Schedule
</TABLE>
------------------------------------
* Filed herewith
(b) REPORTS ON FORM 8-K
CORE did not file any reports on Form 8-K during the three months ended
September 30, 2000.
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 10, 2000 By: /s/ William E. Nixon
----------------------------------
William E. Nixon
Chief Financial Officer, Executive
Vice President and Treasurer
(Duly authorized officer and
Principal Financial Officer)
17
