-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AjT70xpl5t2UyEYZafeR5jVx+Hs+98H5vFTAfy0or2STdu2MviH6mU2YjkvUB+g3 gZi57K5cq4pftLahndN+Dg== 0001047469-98-031411.txt : 19980817 0001047469-98-031411.hdr.sgml : 19980817 ACCESSION NUMBER: 0001047469-98-031411 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980814 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CORE INC CENTRAL INDEX KEY: 0000880238 STANDARD INDUSTRIAL CLASSIFICATION: INSURANCE AGENTS BROKERS & SERVICES [6411] IRS NUMBER: 042828817 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-19600 FILM NUMBER: 98688129 BUSINESS ADDRESS: STREET 1: 18881 VON KARMAN AVE STREET 2: STE 1750 CITY: IRVINE STATE: CA ZIP: 92715 BUSINESS PHONE: 6173226400 MAIL ADDRESS: STREET 1: 18881 VON KARMAN AVE STREET 2: SUITE 1750 CITY: IRVINE STATE: CA ZIP: 92715 FORMER COMPANY: FORMER CONFORMED NAME: PEER REVIEW ANALYSIS INC DATE OF NAME CHANGE: 19930328 10-Q 1 10-Q - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1998 Commission file number 0-19600 CORE, INC. (Exact name of registrant as specified in its charter) Massachusetts 04-2828817 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 18881 Von Karman Avenue, Suite 1750, Irvine, California 92612 (Address of principal executive offices) (zip code) Registrant's telephone number, including area code: (949) 442-2100 Indicate by check "X" whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| On August 4, 1998 there were 7,333,917 shares of the Registrant's Common Stock outstanding. CORE, INC. FORM 10-Q for the quarter ended June 30, 1998 TABLE OF CONTENTS
PART I FINANCIAL INFORMATION Page Item 1. Financial Statements Consolidated Condensed Balance Sheets 3 Consolidated Condensed Statements of Operations 5 Consolidated Condensed Statements of Cash Flows 6 Notes to Consolidated Condensed Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 Item 3. Quantitative and Qualitative Disclosures About Market Risk N/A PART II OTHER INFORMATION Item 1. Legal Proceedings N/A Item 2. Changes in Securities and Use of Proceeds 14 Item 3. Defaults Upon Senior Securities N/A Item 4. Submission of Matters to a Vote of Security Holders N/A Item 5. Other Information N/A Item 6. Exhibits and Reports on Form 8-K 14 Signatures 15
2 CORE, INC. Consolidated Condensed Balance Sheets
December 31, June 30, 1997 1998 (Note 1) (Unaudited) ---------------------------- Assets Current assets: Cash and cash equivalents $ 7,944,595 $ 3,791,211 Investments available-for-sale 1,188,037 2,239,224 Accounts receivable, net of allowance for doubtful accounts of $151,633 in 1997 and $166,633 at June 30, 1998 6,473,037 8,362,788 Notes receivable from officers 106,388 95,662 Prepaid expenses and other current assets 815,100 1,066,655 ---------------------------- Total current assets 16,527,157 15,555,540 Property and equipment, net 6,444,803 7,181,023 Deposits and other assets 494,208 563,538 Goodwill, net of accumulated amortization of $340,705 in 1997 and $4,599,591 at June 30, 1998 8,818,159 4,453,734 Intangibles, net 530,705 91,839 ---------------------------- Total assets $32,815,032 $27,845,674 ----------------------------
See accompanying notes. 3 CORE, INC. Consolidated Condensed Balance Sheets - Continued
December 31, June 30, 1997 1998 (Note 1) (Unaudited) ------------------------------------- Liabilities and stockholders' equity Current liabilities: Accounts payable $ 833,898 $ 922,528 Accrued expenses 1,846,545 1,796,526 Accrued payroll 650,230 800,232 Deferred income taxes 74,816 68,316 Notes payable 64,900 184,582 Obligation from acquisition 1,125,000 - Current portion of obligations to former shareholders 50,000 - Current portion of capital lease obligations 31,651 16,707 ------------------------------------- Total current liabilities 4,677,040 3,788,891 Notes payable, net of current portion 185,049 228,824 Capital lease obligations, net of current portion 4,695 2,988 Deferred rent, net of current portion 146,592 155,020 Deferred income taxes 143,000 149,500 Stockholders' equity Preferred stock, no par value, authorized 500,000 shares; no shares outstanding Common stock, $0.10 par value per share; authorized 30,000,000 shares; issued and outstanding 7,303,079 at December 31, 1997 and 7,333,214 at June 30, 1998 730,308 733,321 Additional paid-in capital 34,909,579 35,063,322 Deferred compensation (13,392) (13,392) Accumulated deficit (7,967,839) (12,262,800) ------------------------------------- Total stockholders' equity 27,658,656 23,520,451 ------------------------------------- Total liabilities and stockholders' equity $32,815,032 $27,845,674 ------------------------------------- -------------------------------------
See accompanying notes. 4 CORE, INC. Consolidated Condensed Statements of Operations (Unaudited)
Three months ended June 30, Six months ended June 30, ----------------------------------------------------------------- 1997 1998 1997 1998 ----------------------------------------------------------------- Revenues $8,971,573 $10,760,251 $17,098,622 $20,930,741 Cost of services 5,447,286 6,822,535 10,690,909 13,442,573 ----------------------------------------------------------------- Gross profit 3,524,287 3,937,716 6,407,713 7,488,168 Operating expenses: General and administrative 1,983,392 2,262,152 3,865,554 4,493,289 Sales and marketing 531,554 899,770 1,127,281 1,717,516 Depreciation and amortization 452,974 495,206 890,372 1,011,052 Write-off of goodwill 4,085,449 4,085,449 Arbitration costs 736,006 736,009 Other non-recurring charges 114,277 114,277 ----------------------------------------------------------------- Total operating expenses 2,967,920 8,592,860 5,883,207 12,157,592 ----------------------------------------------------------------- Income (loss) from operations 556,367 (4,655,144) 524,506 (4,669,424) Other income: Interest income 164,578 94,885 342,018 247,899 Interest expense (6,615) (5,558) (12,123) (8,436) ----------------------------------------------------------------- 157,963 89,327 329,895 239,463 ----------------------------------------------------------------- Income (loss) before income taxes 714,330 (4,565,817) 854,401 (4,429,961) Income tax (provision) benefit (31,000) 60,000 (31,000) 135,000 ----------------------------------------------------------------- Net income (loss) $ 683,330 $(4,505,817) $ 823,401 $(4,294,961) ----------------------------------------------------------------- ----------------------------------------------------------------- Net income (loss) per common share: Basic $0.09 $(0.61) $0.11 $(0.59) ----------------------------------------------------------------- ----------------------------------------------------------------- Diluted $0.09 $(0.61) $0.11 $(0.59) ----------------------------------------------------------------- ----------------------------------------------------------------- Weighted average number of common shares and equivalents outstanding: Basic 7,231,000 7,327,000 7,214,000 7,319,000 ----------------------------------------------------------------- ----------------------------------------------------------------- Diluted 7,781,000 7,327,000 7,797,000 7,319,000 ----------------------------------------------------------------- -----------------------------------------------------------------
See accompanying notes. 5 CORE, INC. Consolidated Condensed Statements of Cash Flows (Unaudited)
Six months ended June 30, --------------------------------- 1997 1998 --------------------------------- Operating activities: Net income (loss) $ 823,401 $(4,294,961) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation 809,250 862,183 Amortization 349,149 567,841 Write-off of goodwill 4,085,449 Arbitration costs, net of cash payments 190,000 Changes in operating assets and liabilities, net of effects of acquisition: Increase in accounts receivable (499,900) (1,538,551) (Increase) decrease in prepaid expenses and other current assets 194,129 (456,545) Increase (decrease) in accounts payable and accrued expenses (401,085) 128,284 --------------------------------- Net cash provided by (used in) operating activities 1,274,944 (456,300) Investing activities: Additions to property and equipment (1,070,546) (1,740,461) Additions to goodwill and intangibles, net (499,524) (235,394) Decrease in notes receivables from officers 2,019 10,726 Decrease in deposits and other assets 25,771 330,670 Payment for acquisition, net of cash acquired (4,973,778) Payments on non-compete obligations to former shareholders (50,000) Purchases of investments available-for-sale (24,691,181) (16,579,100) Sales of investments available-for-sale 28,805,536 15,527,913 --------------------------------- Net cash used in investing activities (2,451,703) (2,685,646) Financing activities: Payments on obligation from acquisition (1,125,000) Payments on notes payable (29,307) (26,543) Payments on capital lease obligations (22,103) (16,651) Issuance of common stock upon exercise of stock options and warrants 300,019 156,756 --------------------------------- Net cash provided by (used in) financing activities 248,609 (1,011,438) --------------------------------- Net decrease in cash and cash equivalents (928,150) (4,153,384) Cash and cash equivalents at beginning of period 4,281,994 7,944,595 --------------------------------- Cash and cash equivalents at end of period $3,353,844 $3,791,211 --------------------------------- --------------------------------- Supplemental disclosure of cash flow information: Interest paid $11,325 $6,100 --------------------------------- --------------------------------- Income taxes paid $53,325 --------------------------------- ---------------------------------
See accompanying notes. 6 CORE, INC. Notes to Consolidated Condensed Financial Statements (Unaudited) June 30, 1998 Note 1 - Basis of Presentation The accompanying unaudited consolidated condensed financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission, but do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The balance sheet at December 31, 1997 has been derived from the audited financial statements of CORE, INC. (the "Company") at that date. In the opinion of management, all adjustments (consisting of only normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the six-month period ended June 30, 1998 are not necessarily indicative of the results that may be expected for the year ended December 31, 1998. For further information, refer to the consolidated financial statements for the year ended December 31, 1997 contained in the Company's annual report filed on Form 10-K filed on April 1, 1998, as amended by the Company's 10-K/A filed with the Securities and Exchange Commission on April 10, 1998. Note 2 - Business Acquisitions On March 17, 1998, a wholly owned subsidiary of the Company acquired the assets of Transcend Case Management, Inc., a Georgia corporation ("TCM"), pursuant to an Asset Purchase Agreement (the "Purchase Agreement"). Pursuant to the Purchase Agreement, all of the assets of TCM were acquired in exchange for the assumption of certain liabilities and the issuance of shares of common stock of CORE, the number of which shall be equal to a valuation based upon future revenue performance of TCM. The purchase price is subject to certain adjustments as set forth in the Purchase Agreement. TCM is a provider of workers' compensation case management services. The acquisition has been accounted for as a purchase. On June 25, 1997, a wholly-owned subsidiary of the Company purchased certain assets and liabilities of Social Security Disability Consultants and Disability Services, Inc. (collectively, "SSDC") for an initial purchase price of $6,500,000 and additional performance related cash payments. Performance based payments of $139,000 have been made as of June 30, 1998 and additional performance based payments of up to $300,000 are payable through June 1999. SSDC provides disability management services with two key areas of business: social security disability benefits advocacy and Medicare coordination of benefits. The acquisition has been accounted for as a purchase. The pro forma unaudited results of operations for the six months ended June 30, 1997 and 1998, assuming consummation of the TCM and SSDC acquisitions as of January 1, 1997, are as follows:
Six months ended June 30, 1997 1998 ------------------------------- Revenues $21,414,954 $21,337,830 Income (loss) before extraordinary item $1,268,906 $(4,264,649) Net income (loss) $2,372,776 $(4,264,649) Earnings (loss) per common share: Net income (loss) before extraordinary item: Basic $0.17 $(0.58) Diluted $0.16 $(0.58) Net income (loss): Basic $0.32 $(0.58) Diluted $0.29 $(0.58)
The pro forma financial information is presented for informational purposes only and is not necessarily indicative of what the actual consolidated results of operations might have been had the transactions occurred on the date indicated. 7 CORE, INC. Notes to Consolidated Condensed Financial Statements (Unaudited) - Continued Note 3 -Non-recurring Charges During the quarter ended June 30, 1998, one of the Company's subsidiaries (Cost Review Services or "CRS") was informed that its' principal client (representing nearly 70% of the CRS revenues) may not renew their contract which expires in October 1998. As a result, the goodwill related to the CRS operations may not be recoverable. CRS has a recent short-term history of operating losses and the revised forecast (excluding CRS' principal client's revenues) indicates that these operating losses will continue. In accordance with Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of ("Statement 121"), the Company has written off the net book value of the goodwill ($1,935,000) as of June 30, 1998. Also during the quarter ended June 30, 1998, the Company performed a review of its other long-lived assets in accordance with Statement 121. The results of its review indicated that an impairment loss in the amount of $2,150,000 existed related to the identifiable intangibles (i.e. goodwill) acquired from SSDC in June 1997. This impairment loss represented approximately 30% of the net book value of goodwill as of June 30, 1998 and has resulted primarily from a significant decline in revenues realized under SSDC's Medicare coordination of benefits program. It appears that this decline in revenues will continue, thus goodwill in the amount of $2,150,000 has been written off during the quarter ended June 30, 1998. On June 2, 1998, the Company entered into a settlement agreement with the former shareholders of CRS. The settlement agreement related to an arbitration dispute and included the immediate payment of $425,000 and the issuance of promissory notes in the amount of $190,000 payable in twelve monthly installments beginning January 1999. In addition, the Company incurred approximately $120,000 in other costs related to the arbitration (mostly legal and travel). Note 4 - Earnings (loss) per Common Share The following table sets forth the computation of basic and diluted earnings (loss) per share for the periods indicated:
Three months ended June 30, Six months ended June 30, 1997 1998 1997 1998 ---------------------------------------------------------------- Numerator: Net income (loss) $683,000 $(4,506,000) $ 823,000 $(4,295,000) ---------------------------------------------------------------- ---------------------------------------------------------------- Denominator: Denominator for basic earnings (loss) per share: weighted-average shares 7,231,000 7,327,000 7,214,000 7,319,000 Effect of dilutive stock options and warrants 550,000 583,000 ---------------------------------------------------------------- Denominator for diluted earnings per share: adjusted weighted-average shares and assumed conversions 7,781,000 7,327,000 7,797,000 7,319,000 ---------------------------------------------------------------- ---------------------------------------------------------------- Basic earnings (loss) per share $0.09 $(0.61) $0.11 $(0.59) ---------------------------------------------------------------- ---------------------------------------------------------------- Diluted earnings per share $0.09 $(0.61) $0.11 $(0.59) ---------------------------------------------------------------- ----------------------------------------------------------------
Note 5 - Comprehensive Income In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130 ("Statement 130"), Reporting Comprehensive Income. As of January 1, 1998, the Company adopted Statement 130. Statement 130 establishes new rules for the reporting and display of comprehensive income and its components; however, the adoption of this statement had no impact on the Company's net income or stockholders' equity. Statement 130 requires unrealized gains or losses on the Company's available-for-sale securities, which prior to adoption were reported separately in stockholders' equity to be included in other comprehensive income. During the six-month period ended June 30, 1997, other comprehensive income was not significant. There was no other comprehensive income during the six-month period ended June 30, 1998. 8 CORE, INC. Notes to Consolidated Condensed Financial Statements (Unaudited) - Continued Note 6 - Effect of Recently Issued Accounting Pronouncements Disclosures about Segments of an Enterprise and Related Information. In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131 ("Statement 131"), Disclosures about Segments of an Enterprise and Related Information which is effective for fiscal years beginning after December 15, 1997. Statement 131 changes the way public companies report information about segments of their business in their annual financial statements and requires them to report selected segment information in their quarterly reports on a comparative basis beginning with the Company's quarter ending March 31, 1999. Adoption of Statement 131 is not expected to have a material effect on the Company's financial statements. 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. Overview CORE, INC. ("CORE" or the "Company") provides managed disability services (which consist of the Company's WorkAbility-Registered Trademark- program, analytic consulting services, social security disability benefits advocacy, Medicare coordination of benefits, bill audit services and job analysis and loss prevention services), specialty physician and behavioral health review services and health care benefits utilization review and case management services. These services are provided principally to self-insured employers, third-party administrators and insurance carriers. The Company is typically compensated for these services either on a per review (i.e., per case), hourly, per enrollee or percentage of cost recovery (for social security advocacy and Medicare benefits services) basis. The managed disability service line also includes a limited amount of revenue (1% for the six months ended June 30, 1998) from licensing fees attributable to license grants by the Company of the medical protocol portion of the WorkAbility software program. This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and the Company's actual results could differ materially from those contemplated by such statements. Such statements reflect management's current views, are based on many assumptions and are subject to risks and uncertainties. Some important factors the Company believes could cause such results to differ include the Company's reliance on its WorkAbility program, the Company's dependence on key clients, risks associated with the Company's growth strategy, increases or changes in government regulation and competition. The foregoing list of factors is not intended to represent a complete list of the general or specific risks that may affect the Company. It should be recognized that other risks might be significant, presently or in the future. Current Developments On June 2, 1998, the Company entered into a settlement agreement with the former shareholders of Cost Review Services, Inc. ("CRS"). CORE acquired CRS in October 1995. The settlement agreement related to an arbitration dispute and included the immediate payment of $425,000 and the issuance of promissory notes in the amount of $190,000 payable in twelve monthly installments beginning January 1999. In addition, the Company incurred approximately $120,000 in other costs related to the arbitration (mostly legal and travel). On March 17, 1998, the Company purchased the operating assets and certain liabilities of Transcend Case Management, Inc. ("TCM"). TCM, with its corporate offices based in Orlando, Florida is a provider of workers' compensation case management services to clients located principally in Florida, Texas and Georgia. During the three months ended June 30, 1998, the Company restructured its CRS operations based in Texas to incorporate the newly acquired Texas based TCM clients and employees. As a result, CORE incurred restructuring costs in the amount of $50,000 during the quarter ended June 30, 1998. During the quarter ended June 30, 1998, the Company was informed that its' principal CRS client (representing nearly 70% of the CRS revenues) may not renew their contract which expires in October 1998. As a result, the goodwill related to the CRS operations may not be recoverable. CRS has a recent short-term history of operating losses and the revised forecast (excluding their principal client's revenues) indicates that these operating losses will continue. In accordance with Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of ("Statement 121"), the Company has written off the net book value of the goodwill ($1,935,000) as of June 30, 1998. Also during the quarter ended June 30, 1998, the Company performed a review of its other long-lived assets in accordance with Statement 121. The results of its review indicated that an impairment loss in the amount of $2,150,000 existed related to the identifiable intangibles (i.e. goodwill) acquired from SSDC in June 1997. This impairment loss represented approximately 30% of the net book value of goodwill as of June 30, 1998 and has resulted primarily from the significant decline in revenues realized under SSDC's Medicare coordination of benefits program. SSDC's Medicare revenues during the quarter ended June 30, 1998 decreased 35% to $473,000 (down $252,000 from $725,000) as compared to the first quarter of 1998 and decreased 50% compared to the fourth quarter of 1997 (down $475,000 from $948,000). It appears that this decline in revenues will continue, thus goodwill in the amount of $2,150,000 has been written off during the quarter ended June 30, 1998. 10 Results of Operations The following table sets forth-certain statement of operations data for the periods indicated expressed as a percentage of revenues:
Three months ended Six months ended June 30, June 30, ------------------------------------- 1997 1998 1997 1998 ------------------------------------- Revenue 100.0% 100.0% 100.0% 100.0% Cost of services 60.7 63.4 62.5 64.2 Gross profit 39.3 36.6 37.5 35.8 General and administrative expense 22.1 21.0 22.6 21.4 Sales and marketing expense 5.9 8.4 6.6 8.2
The following table sets forth the contribution to total revenues of each of the Company's principal service lines for the periods indicated:
Three months ended June 30, Six months ended June 30, 1997 1998 1997 1998 -------------------------------------------- ---------------------------------------------- Amount Percent Amount Percent Amount Percent Amount Percent -------------------------------------------- ---------------------------------------------- (Dollars in thousands) (Dollars in thousands) Managed disability services $4,708 52% $ 6,704 62% $ 8,673 51% $12,815 61% Specialty review services 2,589 29 2,335 22 5,044 29 4,818 23 Utilization review and case management services 1,675 19 1,721 16 3,382 20 3,298 16 ---------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------- $8,972 100% $10,760 100% $17,099 100% $20,931 100% ---------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------
Managed disability services include: CORE's WorkAbility services, analytic consulting, social security disability benefits advocacy, Medicare coordination of benefits, bill audit services, job analysis/loss prevention services, long term disability case management and license fees. Three and Six Months Ended June 30, 1998 and 1997 Revenues increased by $1,788,000 (20%) from $8,972,000 for the three months ended June 30, 1997 to $10,760,000 for the second quarter of 1998. For the six months ended June 30, 1998 revenues increased $3,832,000 (22%) from $17,099,000 in 1997 to $20,931,000 in 1998. Most of the revenue growth realized for the three and six-month periods ended June 30, 1998 came from growth in managed disability services. Specifically, revenues from managed disability services grew $1,996,000 (42%) and $4,142,000 (48%) for the three and six-month periods ended June 30, 1998, respectively, as compared to the same periods in 1997. CORE's WorkAbility program contributed 54% of the increase in managed disability services due to the addition of new clients and the expansion of services to existing clients during the latter half of 1997 and the first six months of 1998. Managed disability services also grew through the addition of services including social security disability benefits advocacy, Medicare coordination of benefits and job analysis/loss prevention following acquisitions completed during June and July 1997. Revenues realized from CORE's specialty review services decreased $254,000 (10%) for the three months ended June 30, 1998 as compared to the same period in the prior year due mostly to a decrease in the volume of referrals for behavioral health services. It is uncertain whether this decline in volume will continue. Revenues from utilization review and case management services remained relatively constant during the three and six-month periods ended June 30, 1998 as compared to the same periods in 1997 despite a 35% decline in revenues from utilization review services. Offsetting the expected decline in utilization review services was a comparable increase in revenues from case management services following the acquisition of the operating assets and certain liabilities of TCM in March 1998. The Company expects revenues from utilization review services to continue to decline in future periods as compared to prior year levels. 11 The Company's top five clients represented 48% of revenues for the six-month period ended June 30, 1998 as compared to 44% for the same period in 1997. Bell Atlantic accounted for approximately 23% and 25% of revenues for the six-month periods ended June 30, 1998 and 1997, respectively. Motorola represented 10% of the Company's revenues for the six-month period ended June 30, 1998. No other single client represented more than 10% of total revenues for the six-month periods ended June 30, 1998 or 1997. Cost of services for the Company include direct expenses associated with the delivery of its review and managed care services, including salaries for professional, clerical and license support staff, the cost of physician reviewer consultants and telephone expense. Cost of services increased $1,376,000 (25%) from $5,447,000 for the three months ended June 30, 1997 to $6,823,000 for the second quarter of 1998. For the six months ended June 30, 1998, cost of services increased $2,752,000 (26%) as compared to the same period in 1997, going from $10,691,000 to $13,443,000. The increase is primarily the result of additional payroll costs associated with business acquisitions completed in June and July of 1997 and increased staffing levels required to service new and growing WorkAbility clients. Additionally, amortization expense continues to increase as software enhancements to the Company's operating systems are developed and placed into service. CORE's gross profit performance for the six months ended June 30, 1998 declined to 36% from 38% in 1997. The Company's gross profit performance was impacted by lower margins realized in its specialty review services. Gross profit performance for each of the Company's principal service lines for the six month periods ended June 30, 1998 and 1997, respectively are: 38% and 38% for managed disability services; 33% and 38% for specialty review services; and 32% and 34% for utilization review and case management services. During the first six months of 1998, gross profit performance under specialty review services was adversely impacted by the decrease in revenues. In addition, expenses (mostly payroll) have been added in advance of expected program revenues with certain new specialty review clients. General and administrative expenses include the cost of executive, administrative and information services personnel, rent and other overhead items. General and administrative expenses increased $279,000 (14%) from $1,983,000 for the three months ended June 30, 1997 to $2,262,000 for the second quarter of 1998. For the six months ended June 30, 1998, general and administrative expenses increased $627,000 (16%) as compared to the same period in 1997, going from $3,866,000 to $4,493,000. Higher costs in payroll, rent and other general and administrative expenses relate primarily to the Company's acquisitions of SSDC and Protocol Work Systems in June and July 1997. The Company has also incurred additional costs associated with the maintenance of its computer network hardware and software as capacity has been expanded to accommodate growth. General and administrative expenses, as a percentage of revenues, decreased from 23% for the six months ended June 30, 1997 to 21% for the six months ended June 30, 1998. This improvement is generally due to greater economies of scale related to higher revenues. Sales and marketing expenses include, but are not limited to, salaries for sales and account management personnel and travel expenses. Sales and marketing expenses also include costs designed to increase revenues, such as participation in and attendance at industry trade shows and conferences. Sales and marketing expenses increased $368,000 (69%) from $532,000 for the three months ended June 30, 1997 to $900,000 for the second quarter of 1998. For the six months ended June 30, 1998, sales and marketing expenses increased $591,000 (52%) as compared to the same period in 1997, going from $1,127,000 to $1,718,000. The increase is primarily due to increased staffing to support the sales and product development departments as well as additional travel costs and costs incurred for participation in tradeshows. During the latter half of 1997, the Company expanded its sales organization, organized its sales force into five geographical regions and began its plan to prospect all Fortune 500 companies. Additionally, a sales tracking system was implemented in late 1997 to streamline prospective sales activities, centrally manage the Company's sales activities and assist in identifying cross-selling opportunities of the Company's products and services to take advantage of the 1997 acquisitions of SSDC and Protocol Work Systems and the 1998 acquisition of TCM. The Company expects to continue to invest an increased amount of resources in sales and marketing in future periods. Depreciation and amortization expenses increased $42,000 (9%) from $453,000 for the three months ended June 30, 1997 to $495,000 for the second quarter of 1998. For the six months ended June 30, 1998, depreciation and amortization expenses increased $121,000 (14%) as compared to the same period in 1997, going from $890,000 to $1,011,000. The increase is largely attributable to increased amortization expense on the goodwill acquired in the purchases of SSDC and Protocol Work Systems. 12 The Company recorded non-recurring charges during the quarter ended June 30, 1998 for relocation costs in the amount of $64,000 and restructuring charges in the amount of $50,000. The relocation costs related to the Company's relocation of its' accounting department from Boston, Massachusetts to its corporate offices in Irvine, California and the restructuring charges related to the restructuring of the Company's CRS operations based in Texas to incorporate the newly acquired Texas based TCM clients and employees. Other income consists primarily of interest income, which represents amounts earned by the Company's investments as reduced by interest expense. Other income decreased $69,000 (44%) from $158,000 for the three months ended June 30, 1997 to $89,000 for the second quarter of 1998. For the six months ended June 30, 1998, other income decreased $91,000 (28%) as compared to the same period in 1997, going from $330,000 to $239,000. The decrease is due to a decrease in funds available for investment. Financial Condition, Liquidity and Capital Resources For the six months ended June 30, 1998, the Company's cash and cash equivalents decreased by $4,154,000. For this period, operating activities used $456,000 due primarily to net losses of $4,295,000 and a net increase in accounts receivable of $1,539,000 (resulting from the increase in revenues), as offset by depreciation and amortization of $1,430,000 and the write-off of goodwill of $4,085,000. The Company's investing activities used $2,686,000 of cash due primarily to the purchases of property and equipment (including software development) of $1,740,000. The Company's financing activities used $1,011,000 for this period due primarily to payments made on obligations for acquisitions. The Company leases its facilities and certain office equipment. Future lease commitments, which relate substantially to space rental, for the years ended December 31, 1998 and December 31, 1999 are approximately $1.0 million and $2.0 million, respectively. All obligations held by the Company under lease commitments expire on various dates through June 2003 and total $5.2 million as of June 30, 1998. The Company has net operating loss carryforwards for income tax purposes of approximately $5 million as of June 30, 1998, which can be used to reduce future obligations for federal and state income taxes. The amount of net operating loss carryforwards that can be utilized in any future year are limited due to "equity structure shifts" in 1995 involving "5% shareholders" (as these terms are defined in Section 382 of the Internal Revenue Code), which resulted in a more than 50 percentage point change in ownership. The utilization of these net operating loss carryforwards may be subject to further limitation provided by the Internal Revenue Code of 1986 and similar state provisions. The Company plans to finance its operations and working capital requirements with the proceeds of the August 1996 offering, earnings from operations, investments on hand and other sources of available funds. The Company presently believes that these resources will be sufficient to meet its liquidity and funding requirements through at least the year 1999. The Company's primary computer application platforms were originally designed to process and store dates in a four-character year format. The Company believes this substantially reduces the magnitude of the effort required to address the Year 2000 issue. Management believes CORE's major systems are effectively Year 2000 compliant and will require minor modifications. The Company has completed an assessment of internal applications and licensed operating systems, software tools and utilities. Additionally, the Company has evaluated third party data feeds, primarily to/from client's information systems and will have to modify or replace portions of its software so that its computer systems will function properly with respect to dates in the Year 2000 and thereafter. The Company estimates that the Year 2000 project will be completed no later than December 31, 1998, which is prior to any anticipated impact on its operating systems. The Company believes that with modifications to existing software and conversions to new software, the Year 2000 Issue will not pose significant operational problems for its computer systems. The Company has initiated formal communications with all of its significant suppliers and large customers to determine the extent to which the Company's interface systems are vulnerable to those third parties' failure to remediate their own Year 2000 Issues. There is no guarantee that the systems of other companies on which the Company's systems rely will be timely converted and would not have an adverse effect on the Company's systems. The costs of the Year 2000 project and the date on which the Company believes it will complete the Year 2000 modifications are based on management's best estimates, which were derived utilizing numerous assumptions of future events, including the continued availability of certain resources and other factors. However, there can be no guarantee that these estimates will be achieved and actual results could differ materially from those anticipated. Specific factors that might cause such material differences include, but are not limited to, the availability and cost of personnel trained in this area, the ability to locate and correct all relevant computer codes, and similar uncertainties. 13 PART II Item 2. Changes in Securities and Use of Proceeds In the quarter ended June 30, 1998, the Company sold the following shares of Common Stock, which were not registered under Securities Act at the time of issuance. All such shares were sold to present and former employees or consultants upon the exercise of stock options.
Purchase Price Date Security Purchaser Number of Shares per Share - ------------------------------------------------------------------------------- 4/9/98 Common Stock H. Fife 122 $6.25 5/6/98 Common Stock S. Vaziri 53 $6.25
These shares of Common Stock were not registered under the Securities Act at the time of sale and issuance, in reliance upon the exception contained in Section 4(2) of the Securities Act for transactions by an issuer not involving any public offering. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits. The following exhibits are included: Exhibit Number Description - ------ ----------- 27* Financial Data Schedule. - ------------------------------------ * Filed herewith (b) Reports on Form 8-K. On April 2, 1998 the Company filed a report on Form 8-K dated March 17, 1998 concerning the acquisition of the operating assets and certain liabilities of Transcend Case Management ("TCM"). On May 29, 1998 the Company filed a related Form 8-K/A (Amendment No. 1) which included the audited balance sheet of TCM as of December 31, 1997 and the related statements of operations, accumulated deficit and cash flows for the year then ended. The Report on Form 8-K/A (Amendment No. 1) also included the unaudited interim statements of operations, accumulated deficit and cash flows for the period from January 1, 1998 through March 16, 1998. Pursuant to the TCM Purchase Agreement, the operating assets of TCM were acquired in exchange for the assumption of certain liabilities and the future issuance of shares of common stock of CORE, the number of which shall be equal to a valuation based upon future revenue performance of TCM. The purchase price is subject to certain adjustments as set forth in the Purchase Agreement. 14 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CORE, INC. Dated: August 13,1998 By: /s/ William E. Nixon ---------------------------------- William E. Nixon Chief Financial Officer, Executive Vice President and Treasurer (Duly authorized officer and Principal Financial Officer) 15 EX-27 2 EX-27
5 3-MOS 6-MOS DEC-31-1998 DEC-31-1998 APR-01-1998 JAN-01-1998 JUN-30-1998 JUN-30-1998 3,791,211 3,791,211 2,239,224 2,239,224 8,529,421 8,529,421 166,633 166,633 0 0 15,555,540 15,555,540 15,195,892 15,195,892 8,014,869 8,014,869 27,845,674 27,845,674 3,788,891 3,788,891 0 0 0 0 0 0 733,321 733,321 22,787,130 22,787,130 27,845,674 27,845,674 0 0 10,760,251 20,930,741 0 0 6,822,535 13,442,573 8,592,860 12,157,592 0 0 5,588 8,436 (4,565,817) (4,429,961) (60,000) (135,000) (4,505,817) (4,294,961) 0 0 0 0 0 0 (4,505,817) (4,294,961) (.61) (.59) (.61) (.59)
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