<PAGE>
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 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 August 11, 2000 there were 9,089,064 shares of the Registrant's
Common Stock outstanding.
<PAGE>
CORE, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 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 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 14
PART II OTHER INFORMATION
Item 1. Legal Proceedings N/A
Item 2. Changes in Securities and Use of Proceeds 14
Item 3. Defaults Upon Senior Securities N/A
Item 4. Submission of Matters to a Vote of Security Holders N/A
Item 5. Other Information N/A
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
</TABLE>
2
<PAGE>
CORE, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
(UNAUDITED) (NOTE 1)
------------------- --------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $113,157 $ -
Accounts receivable, net of allowance for doubtful
accounts of $480,294 at June 30, 2000 and $476,444 at
December 31, 1999 9,422,116 8,669,329
Unbilled receivables 3,555,728 2,628,030
Notes receivable from officers 59,264 69,662
Prepaid expenses 614,052 802,990
Other current assets 652,647 182,584
------------------- --------------------
Total current assets 14,416,964 12,352,595
Unbilled receivables, net of current portion 1,761,607 2,577,723
Property and equipment, net 10,482,660 8,918,285
Other assets, net 1,682,740 1,787,226
Goodwill and intangibles, net of accumulated amortization of
$3,054,585 at June 30, 2000 and $2,308,023 at December 31, 1999 27,296,341 25,963,841
------------------- --------------------
Total assets $55,640,312 $51,599,670
=================== ====================
</TABLE>
3
<PAGE>
CORE, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS - CONTINUED
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
(UNAUDITED) (NOTE 1)
-------------------- --------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $1,199,507 $875,795
Accrued expenses 3,611,164 3,492,859
Accrued payroll 976,275 1,073,642
Borrowings under credit agreement 2,700,000 -
Notes payable 79,435 77,674
Capital lease obligations 75,494 71,981
-------------------- --------------------
Total current liabilities 8,641,875 5,591,951
Borrowings under credit agreement, net of current portion 11,500,000 14,300,000
Notes payable, net of current portion 1,800 41,528
Deferred rent, net of current portion 42,506 50,234
Capital lease obligations, net of current portion 254,808 276,878
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
June 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 (9,331,353) (9,988,010)
-------------------- --------------------
Total stockholders' equity 35,199,323 31,339,079
-------------------- --------------------
Total liabilities and stockholders' equity $55,640,312 $51,599,670
==================== ====================
</TABLE>
See accompanying notes.
4
<PAGE>
CORE, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
-------------------------------------------------------------------------
2000 1999 2000 1999
----------------- ---------------- ----------------- ------------------
<S> <C> <C> <C> <C>
Revenues $16,191,099 $16,706,465 $33,337,143 $31,402,096
Cost of services 8,528,691 9,808,111 17,320,408 18,327,696
----------------- ---------------- ----------------- ------------------
Gross profit 7,662,408 6,898,354 16,016,735 13,074,400
Operating expenses:
Selling, general and administrative 5,408,046 4,293,440 10,587,812 8,193,918
Depreciation and amortization 1,086,467 973,739 2,168,215 1,839,174
Non-recurring realignment charges 336,074 - 1,484,266 -
----------------- ---------------- ----------------- ------------------
Total operating expenses 6,830,587 5,267,179 14,240,293 10,033,092
----------------- ---------------- ----------------- ------------------
Income from operations 831,821 1,631,175 1,776,442 3,041,308
Other income (expense):
Gain on sale of subsidiary assets, net - 331,567 - 331,567
Interest income 10,763 2,121 21,564 4,442
Interest expense (437,355) (388,066) (866,349) (750,497)
----------------- ---------------- ----------------- ------------------
(426,592) (54,378) (844,785) (414,488)
----------------- ---------------- ----------------- ------------------
Income before income taxes 405,229 1,576,797 931,657 2,626,820
Income tax provision 115,000 315,359 275,000 483,320
----------------- ---------------- ----------------- ------------------
Net income $290,229 $1,261,438 $656,657 $2,143,500
================= ================ ================= ==================
Net income per common share:
Basic $0.03 $0.16 $0.08 $0.27
================= ================ ================= ==================
Diluted $0.03 $0.15 $0.07 $0.26
================= ================ ================= ==================
Weighted average shares:
Basic 9,071,000 7,904,000 8,626,000 7,879,000
================= ================ ================= ==================
Diluted 9,168,000 8,497,000 8,820,000 8,399,000
================= ================ ================= ==================
</TABLE>
See accompanying notes.
5
<PAGE>
CORE, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-----------------------------------------
2000 1999
------------------- ------------------
<S> <C> <C>
Net cash provided by operating activities $2,219,221 $166,085
Investing activities:
Additions to property and equipment (2,940,803) (2,203,539)
Additions to goodwill and intangible assets (40,000) -
Reductions on notes receivable 73,341 50,000
Increase in other assets (163,276) (23,994)
------------------ ------------------
Net cash used in investing activities (3,070,738) (2,177,533)
Financing activities:
Borrowings under credit agreement 9,475,000 4,300,000
Repayments under credit agreement (9,575,000) (3,900,000)
Payments for origination and other fees pursuant to credit agreement (28,590) (347,276)
Payments on notes payable (37,967) (132,638)
Payments on capital lease obligations (33,294) (21,732)
Issuance of common stock upon exercise of stock options 1,164,525 516,179
------------------ ------------------
Net cash provided by financing activities 964,674 414,533
------------------ ------------------
Net increase (decrease) in cash and cash equivalents 113,157 (1,596,915)
Cash and cash equivalents at beginning of period - 2,226,020
================== ==================
Cash and cash equivalents at end of period $113,157 $629,105
================== ==================
</TABLE>
See accompanying notes.
6
<PAGE>
CORE, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 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 six-month period ended June 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 First
Amendment to the Amended and Restated Credit Agreement dated June 30, 2000
(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%. The Restated Credit Agreement is scheduled to expire on December
31, 2004.
At June 30, 2000 and December 31, 1999, CORE had outstanding borrowings of
$14,200,000 and $14,300,000, respectively, under the credit facility which
were all tied to the prime base lending rate (9.50% at June 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 levels. Additionally, the Restated Credit Agreement
prohibits the payment of dividends by CORE without the Bank's written
consent. CORE was in compliance with the financial covenants contained in the
Restated Credit Agreement at June 30, 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.
7
<PAGE>
CORE, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED
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.
NOTE 5 - REALIGNMENT CHARGES
CORE recorded non-recurring charges of $336,000 and $1,484,000 during the
three and six-month periods ended June 30, 2000 as a result of realignment
activities within its service lines and administrative functions. The charges
primarily include severance costs related to a reduction in workforce and
costs to initiate the relocation of the WorkAbility(R) data center from the
East Coast to the West Coast.
8
<PAGE>
CORE, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED
NOTE 6 - EARNINGS PER COMMON SHARE
The following table sets forth the computation of basic and diluted earnings
per share for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
------------------------------------- ------------------------------------
2000 1999 2000 1999
----------------- ------------------ ----------------- -----------------
<S> <C> <C> <C> <C>
Numerator:
Net income $290,000 $1,261,000 $657,000 $2,144,000
================= ================== ================= =================
Denominator:
Denominator for basic earnings per
share: weighted-average shares 9,071,000 7,904,000 8,626,000 7,879,000
Effect of dilutive stock options and
warrants 97,000 593,000 194,000 520,000
----------------- ------------------ ----------------- -----------------
Denominator for diluted earnings per
share: adjusted weighted-average
shares and assumed conversions 9,168,000 8,497,000 8,820,000 8,399,000
================= ================== ================= =================
Basic earnings per share $0.03 $0.16 $0.08 $0.27
================= ================== ================= =================
Diluted earnings per share $0.03 $0.15 $0.07 $0.26
================= ================== ================= =================
</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.
NOTE 8 - COMPREHENSIVE INCOME
Total comprehensive income was $290,000 and $657,000 for the three and
six-month periods ended June 30, 2000 and $1,261,000 and $2,144,000 for the
three and six-month periods ended June 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.
9
<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.
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 dependence on key clients, 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
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.
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.
CORE recorded non-recurring charges of $336,000 and $1,484,000 during the
three and six-month periods ended June 30, 2000 as a result of realignment
activities within its service lines and administrative functions. The second
quarter charges primarily relate to the relocation of the WorkAbility data
center from the East Coast to the West Coast.
10
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain statement of operations data for the
periods indicated expressed as a percentage of revenues:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------- ------------ ------------ -------------
2000 1999 2000 1999
-------------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
Revenue 100.0% 100.0% 100.0% 100.0%
Cost of services 52.7 58.7 52.0 58.4
Gross profit 47.3 41.3 48.0 41.6
Selling, general and administrative expense 33.4 25.7 31.8 26.1
</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 JUNE 30, SIX MONTHS ENDED JUNE 30,
2000 1999 2000 1999
----------------------------------------- -----------------------------------------
Amount Percent Amount Percent Amount Percent Amount Percent
---------- --------- ---------- --------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(Dollars in thousands) (Dollars in thousands)
Integrated Disability Management $11,679 72% $12,131 73% $24,0689 74% $22,508 72%
Peer Review Analysis 2,952 18 2,242 13 5,706 17 4,471 14
Exiting /exited services - - 452 3 - - 1,008 3
Other service lines 1,560 10 1,881 11 2,942 9 3,415 11
----------------------------------------- -----------------------------------------
$16,191 100% $16,706 100% $33,337 100% $31,402 100%
========================================= =========================================
</TABLE>
THREE AND SIX MONTHS ENDED JUNE 30, 2000 AND 1999
CORE's overall revenues decreased by $515,000 or 3% for the three months
ended June 30, 2000 and increased by $1,935,000 or 6% for the six months
ended June 30, 2000, as compared to similar periods in 1999.
Revenues from Integrated Disability Management decreased by $452,000 or 4%
for the three months ended June 30, 2000 and increased $2,181,000 or 10% for
the six months ended June 30, 2000, as compared to the same periods in 1999.
The decrease in the three-month period primarily related to decreased
services to two large clients in CORE's WorkAbility Absence Management
program as offset by an increase in revenues from Disability Reinsurance
Management Services, Inc. ("DRMS"). Revenues from DRMS contributed 102% of
the increase in Integrated Disability Management revenues for the six months
ended June 30, 2000, as compared to the same period in 1999.
Revenues from the Peer Review Analysis service line increased $710,000 or 32%
and $1,235,000 or 28% for the three and six-month periods ended June 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.
11
<PAGE>
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.
Revenues from other service lines (which includes utilization review,
Medicare coordination of benefits and other case management services),
decreased $321,000 or 17% and $473,000 or 14% overall, for the three month
and six month periods ended June 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 six months ended
June 30, 2000 as compared to 43% for the same period in 1999. Bell Atlantic
accounted for approximately 14% and 18% of revenues for the six-month periods
ended June 30, 2000 and 1999, respectively. SBC Communications represented
11% of revenues for the six-month period ended June 30, 1999. No other single
client represented more than 10% of total revenues for the six-month periods
ended June 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
$1,279,000 or 13% for the three months ended June 30, 2000 as compared to the
second quarter of 1999. For the six months ended June 30, 2000, cost of
services decreased $1,008,000 or 5% 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 six months ended June 30, 2000
increased to 48% from 42% in 1999. Gross profit performance for each of
CORE's principal service lines for the six months ended June 30, 2000 and
1999, respectively, are: 48% and 42% for Integrated Disability Management,
46% and 38% for Peer Review Analysis, and 49% 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 DRMS. 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 $1,115,000 or 26% for the three months ended June 30, 2000
from the second quarter of 1999. For the six months ended June 30, 2000,
selling, general and administrative expenses increased $2,394,000 or 29% as
compared to the same period in 1999. Higher personnel and other costs
associated with supporting CORE's expanded growth in operations in 2000
contributed in part to the increase in selling, general and administrative
expenses. CORE also increased sales and product development activities during
the first six months of 2000 as compared to the same period in 1999. Finally,
CORE incurred additional costs associated with the maintenance of our
computer network hardware and software as capacity has been expanded to
accommodate anticipated growth. As a result of the increased activities,
selling, general and administrative expenses, as a percentage of revenues,
increased to 33% for the three months ended June 30, 2000 from 26% for the
second quarter of 1999. For the six months ended June 30, 2000, selling,
general and administrative costs increased to 32%, as compared to 26% for the
same period in 1999.
Depreciation and amortization expenses increased $113,000 or 12% and $329,000
or 18% for the three and six-month periods ended June 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.
12
<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 First
Amendment to the Amended and Restated Credit Agreement dated June 30, 2000
(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%. The Restated Credit Agreement is scheduled to expire on December
31, 2004.
At June 30, 2000 and December 31, 1999, CORE had outstanding borrowings of
$14,200,000 and $14,300,000, respectively, under the credit facility which
were all tied to the prime base lending rate (9.50% at June 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 levels. Additionally, the Restated Credit Agreement
prohibits the payment of dividends by CORE without the Bank's written
consent. CORE was in compliance with the financial covenants contained in the
Restated Credit Agreement at June 30, 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 six months ended June 30, 2000, CORE's cash and cash equivalents
increased by $113,000 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. Cash provided by operating activities during this
period was $2,219,000 which was in excess of net income of $657,000 for the
six-month period mainly due to the impact of non-cash expenses attributable
to depreciation and amortization, as offset by a net increase of accounts and
unbilled receivables. CORE's investing activities used $3,071,000 of cash
mostly to fund additions to property and equipment (including software
development) of $2,941,000. CORE's financing activities provided $965,000 of
cash for this period, mainly from 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 June 30, 2000, which relate substantially to space
rental, for the six months ended December 31, 2000 and the year ended
December 31, 2001 are approximately $1.5 million and $2.7 million,
respectively. All obligations held by CORE under lease commitments expire on
various dates through September 30, 2010 and total approximately $15.3
million as of June 30, 2000.
CORE has net operating loss carryforwards for federal and state income tax
purposes of approximately $2.0 million and $9.9 million, respectively, as of
June 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.
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<PAGE>
CORE plans to finance its operations and working capital requirements
primarily with future earnings from operations. 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 available
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 First 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 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Effective April 1, 2000, CORE issued 375,000 shares of its Common Stock to
the former stockholders of Disability Reinsurance Management Services, Inc.
("DRMS") as the remaining consideration for all their capital stock of DRMS
pursuant to the Amended Capital Stock Purchase Agreement between CORE, DRMS
and the former stockholders of DRMS.
These shares of Common Stock were not registered under the Securities Act at
the time of issuance, in reliance upon the exception contained in Section
4(2) of the Securities Act for transactions by an issuer not involving any
public offering. See "Notes to Consolidated Condensed Financial Statements
(Unaudited)," Note 3 contained elsewhere within this report for additional
information.
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* First Amendment to Amended and Restated Credit Agreement, dated as
of June 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
June 30, 2000.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CORE, INC.
Dated: August 14, 2000 By: /s/ William E. Nixon
-----------------------------------
William E. Nixon
Chief Financial Officer, Executive
Vice President and Treasurer
(Duly authorized officer and
Principal Financial Officer)
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