UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
X QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
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ACT OF 1934
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For the quarterly period ended September 30, 1998
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_____ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from ________ to ________
COMMISSION FILE NUMBER:000-24807
CORECARE SYSTEMS, INC.
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(Name of small business issuer as specified in its charter)
Delaware 23-2840367
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(State of jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
c/o Kirkbride Center, 111 North 49th St., Phila., PA 19139
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(Address of principal executive offices)
(215) 471-2600
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(Issuer's Telephone Number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or 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 No X
---
As of November 1, 1998 the issuer had issued and outstanding
15,693,782 shares, $.001 par value, of Common Stock
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
--------------------------------
Page
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Consolidated Balance Sheet
Nine months ended
September 30, 1998 and
Fiscal Year Ended
December 31, 1997 F - 1
Consolidated Statement of Operations
Nine months ended
September 30, 1998 and 1997 F - 2
Consolidated Statement of operations
Quarter ended
September 30, 1998 and 1997 F - 3
Consolidated States of Cash Flows
Nine months ended
September 30, 1998 and 1997 F - 4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
CoreCare Systems, Inc. (the "Company") is a regional behavioral health care
network operating in Eastern Pennsylvania. The Company's headquarters are
located at c/o Kirkbride Center, 111 North 49th Street, Philadelphia, PA 19139
having recently moved its executive offices from 940 West Valley Road, Suite
2102, Wayne, PA 19087. Its telephone number at its new location is (215)
471-2600. In 1996, the Company transferred its state of incorporation from
Nevada to Delaware.
Management's discussion and analysis is based upon the unaudited
consolidated financial statements of the Company for the nine month periods
ended September 30, 1998 and 1997, and include the accounts of the Company and
its subsidiaries after elimination of any inter-company balances and
transactions.
RESULTS OF OPERATIONS:
Revenue - Revenue in the nine month period ending September 30, 1998,
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was $15,985,008, representing an increase of approximately 80% over total income
in the comparable 1997 period. The material increase in total income in the
first nine months of 1998, compared with the prior year period, is attributable
to a number of factors, including the following:
(a) Nine months operation of Kirkbride Center during 1998 as compared
to seven months during 1997;
(b) Patient days at the Kirkbride Center and Westmeade at Warwick
tripled during 1998 from 1997;
(c) Outpatient revenues at the Kirkbride Center and Penn
Interpersonal Communications, Inc. doubled in 1998 over 1997;
(d) New programs at the Kirkbride Center consisting of geriatric
partial hospitalization and 43 drug and alcohol rehabilitation beds opened in
July,1998;
(e) Dual diagnosis program at the Kirkbride Center expanded during
1998; and
(f) One of the Company's subsidiaries, Managed Careware, Inc. d/b/a
CoreCare Management, Inc. ("CMI"), had three months of operations in 1997 versus
nine months in 1998.
Operating, selling, general and administrative expenses - Operating
----------------------------------------------------------
expenses increased by approximately $900,000 during the nine months ended
September 30, 1998 over 1997, however, as a percentage of total income the
expense declined from 59% in 1997 to 39% in 1998. This was due primarily to the
improvement in selling, general and administrative (SG&A) expenses, which
declined to 15% in 1998 from 37% in 1997. This was partially offset by increase
salary and employee benefit expense from 9% in 1997 to 18% in 1998. The SG&A
declined by $900,000 due to cost savings realized from cancellation of a
management services contract for the Kirkbride Center for five months in 1997
and consolidation savings following the acquisition of CMI in July 1997. The
salary expenses increased by approximately $2.1 million to $2.9 million due to
an increase in volume and cancellation of the management services agreement.
Direct Costs - Direct costs include costs principally related to
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patient care such as costs of nursing, physicians, technicians, pharmacy,
dietary, laboratory, housekeeping and supplies. The ratio of direct costs to
revenue was 45% in 1998 versus 54% in 1997. The improvement in gross profit was
due to the stabilization of operations compared to the less efficient
utilization of resources following the acquisition of the Kirkbride Center.
Net Income - Net income in the nine months ended September 30, 1998
-----------
was $1,251,761 (approximately 7.8% of revenue) compared to a net loss in the
first nine months of 1997 of ($1,126,933), principally as the result of the
increase in total income and decrease in selling, general and administrative
expenses as a percentage of total income, as discussed above.
LIQUIDITY AND CAPITAL RESOURCES:
Due to the Company's rapid growth during 1998, the Company has
experienced liquidity constraints from time to time. This was offset by a
completion of a major financing with WRH Mortgage, Inc. during the first quarter
of 1998. These funds provided capital for improvements to the Kirkbride Center,
reduction of more expensive debt, and working capital. The Company is in the
process of attempting to consolidate its short-term debt and to refinance the
Kirkbride Center mortgage at a lower interest rate.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
The following sales of securities of the Company took place as
indicated below. Unless otherwise described, all such sales were a result of
transactions that were exempt from registration under the Securities Act
pursuant to Section 4(2) of such Act, and the shares of the Company's Common
Stock issued (or issuable in the case of warrants or options) were "restricted
securities" as that term is defined in Rule 144 and may be resold only in
compliance with registration provisions of the Securities Act or an exemption
thereunder.
RULE 504 OFFERING - 1998
- ----------------------------
In July 1998, the Company initiated an equity offering under Rule 504
("Rule 504") Regulation D, promulgated under the Securities Act of 1933, as
amended ("Securities Act") of a maximum of $1,000,000 in Common Stock of the
Company. Through September 30, 1998, a total of 274,000 shares to one
investment group and two individuals for a total amount of $232,220 were issued
pursuant to said offering.
The shares in this offering were not registered under Federal or any state
laws. Pursuant to Rule 504(b)(1), the shares are not "registered securities",
as that term is defined in Rule 144, promulgated under the Securities Act ("Rule
144"), and the Company does not intend to impose any restrictions on the resale
thereof, except to the extent that such restrictions is required by state law.
This offering was terminated as of October 12, 1998 when the Company's
registration statement on Form 10-SB became effective.
SHARES ISSUED FOR SERVICES
- -----------------------------
The following shares were issued during the nine months ended September 30,
1998: 250,000 shares were issued in private placements ; 1,025,804 shares were
issued as payment for services, 376,316 shares were issued pursuant forbearance
agreements with respect to certain notes financing; 350,000 shares were issued
as consideration for the acquisitions; 84,800 shares were issued to 199
employees pursuant to the Company's 1996 Stock Plan and for certain employee
compensation; 33,334 shares were issued with respect to a settlement agreement.
WARRANTS ISSUED
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Between July 1, 1998 and September 30, 1998, the Company issued warrants to
purchase a total of 75,000 shares of the Company's Common Stock at $1.00 per
share and an expiration date of June 30, 2002 to one of the Company's
lenders/investment group as part of an agreement to extinguish certain put
rights granted to the investment group in 1997. On September 30, 1998, the
Company issued warrants to purchase a total of 800,000 shares of the Company's
Common Stock at $1.00 per share and an expiration date of March 3, 2004 to WRH
Mortgage, Inc., the Mortgagee of the Kirkbride Center owned by the Company's
subsidiary, CoreCare Behavioral Health Management, Inc. in consideration of
advisory services rendered to the Company.
ITEM 3. DEFAULTS ON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
In October, 1999 the company announced a contractual relationship with the
Temple University Behavioral Network to integrate the Kirkbride continuum of
care with services provided by the Temple University Behavioral Health Network
(TUHS) to increase the services to TUHS' patient population. The scope of the
affiliation includes medical education and cooperation in the area of conducting
clinical trials on new pharmaceutical products.
Also, in October Quantum Clinical Services Group, a wholly owned subsidiary of
Corecare Systems, Inc., began generating revenues from previously announced
contracts to conduct clinical trials at the Kirkbride Center on new drug
products sponsored by pharmaceutical companies. The company initiated two
additional clinical trial contracts in the fourth quarter.
The company has applied for the necessary approvals to increase the number of
beds for its drug and alcohol rehabilitation program from 43 to 63. The company
expects to receive the approvals in January, 1999. The drug and alcohol
rehabilitation program has been operating at or close to capacity shortly after
its inception.
ITEM 6. EXHIBITS AND REPORTS
(a) Exhibits.
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SEC
Exhibit Reference
No. No.
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4.01 4 Form of Common Stock Purchase Warrant issued
to WRH Mortgage, Inc.
27 Financial Data Schedule
(b) Reports on Form 8-K.
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No new reports on Form 8-K were filed in the quarter ended
September 30, 1998.
SIGNATURES
In accordance with the requirements of the Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Date: December , 1998
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CORECARE SYSTEMS, INC.
BY:/s/_____________________________
ROSE S. DIOTTAVIO, PRESIDENT
F-1
CORECARE SYSTEMS, INC.
CONSOLIDATED BALANCE SHEET
ASSETS
9/30/98 12/31/97
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Cash and cash equivalents $ - $ 304,267
Accounts receivable, net $ 9,636,831 $ 4,955,473
Prepaid and Other Current Assets $ 1,674,388 $ 1,767,367
Due from Affiliates $ - $ 0
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Total current assets $11,311,219 7,027,107
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Contract rights, net of amortization $ 1,288,919 $ 1,079,674
Less accumulated amortization $ (873,808) ($531,011)
$ 415,111 548,663
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Property & equipment $17,272,665 $ 13,269,061
Less accumulated depreciation $(1,976,136) ($1,027,953)
$15,296,529 12,241,108
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Cost in excess of net assets of aquired businesses $ 1,801,155 $ 1,801,155
Less accumulated amortization $ (197,642) $ 0
$ 1,603,513 1,801,155
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Deferred finance costs $ 2,449,163 $ 546,822
Less accumulated amortization $ (258,772) ($241,468)
$ 2,190,392 305,354
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Restricted cash $ 13,644 $ 197,394
Deposits $ 109,334 $ 108,933
Other $ 3,096,505 $ 2,475,500
Total Other Assets $ 3,219,483 2,781,827
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TOTAL ASSETS $34,036,247 $ 24,705,212
============ =============
CORECARE SYSTEMS, INC.
CONSOLIDATED BALANCE SHEET
LIABILITIES
9/30/98 12/31/97
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Accounts payable $ 3,816,693 $ 2,275,442
Payrolls and related taxes $ 1,813,004 $ 0
Accrued exp. and other liab. $ 1,200,788 $ 3,779,780
Notes Payable: including current portion LTD $19,225,589 $ 11,857,428
Capital leases,current portion $ 48,810 $ 38,565
Loans Payable - Officers $ 913,172 $ 1,013,428
Total current liabilities $27,018,056 18,964,643
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Long-term debt, net current portion $ 2,206,460 $ 2,286,265
2,206,460 2,286,265
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TOTAL LIABILITIES 29,224,516 21,250,908
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SHAREHOLDERS EQUITY:
Preferred Stock $ 36 $ 36
Common Stock $ 13,846 $ 12,694
Add'l PIC $11,276,426 $ 10,650,975
Accumulated deficit $(6,478,577) ($7,209,400)
TOTAL SHAREHOLDERS EQUITY 4,811,731 3,454,305
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TOTAL LIABILITY & SHAREHOLDERS EQUITY $34,036,247 $ 24,705,212
============ =============
F-2
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
1998 1997
Revenue: 15,986,008 8,892,226
Direct Costs: 7,209,165 4,762,235
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Gross Profit 8,776,843 4,129,991
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Operating Expenses:
Salaries and employee benefits 2,942,453 834,830
Selling and administrative 2,183,344 3,264,273
Depreciation 315,388 259,879
Amortization 448,168 497,604
Bad debt expense 332,943 400,338
Total operating expenses 6,222,296 5,256,924
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Income(loss) from operations 2,554,547 (1,126,933)
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Other expenses:
Interest expense 1,243,500 1,408,688
Taxes 8,919 0
Factor fees 84,107 173,908
Total other expenses/(income) 1,336,526 1,582,596
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Net income(loss) before Taxes 1,218,021 (2,709,529)
Income Taxes 487,208 0
- ------------------------------- ---------- -----------
Net income(loss) 730,813 (2,709,529)
Earnings Per Share
Basic 0.051 (0.210)
Diluted 0.032 (0.210)
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F-3
CORECARE SYSTEMS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
QUARTER ENDED SEPTEMBER 30,
1998 1997
Revenue: 5,658,260 4,587,140
Direct Costs: 2,334,015 2,385,598
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Gross Profit 3,324,245 2,201,542
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Operating Expenses:
Salaries and employee benefits 1,203,835 149,853
Selling and administrative 771,715 1,226,109
Depreciation 120,515 87,194
Amortization 85,619 146,344
Bad debt expense 185,147 193,722
Total operating expenses 2,366,831 1,803,222
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Income(loss) from operations 957,414 398,320
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Other expenses:
Interest expense 490,107 404,849
Taxes 8,919 0
Factor fees 29,139 61,454
Total other expenses/(income) 528,165 466,303
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Net income(loss) before taxes 429,249 (67,983)
Income Tax Provision 171,700 0
- ------------------------------- --------- ----------
Net Income 257,549 (67,983)
Earnings Per Share
Basic 0.016 (0.005)
Diluted 0.011 (0.005)
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F-4
CORECARE SYSTEMS, INC.
STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDING SEPTEMBER 30, 1998 AND 1997
1998 1997
CASH FLOW FROM OPERATING ACTIVITIES
Net Income (loss) 730,823 (2,709,529)
Common stock issued for services and interest expense 518,075
Deferred income taxes 259,879
Depreciation 315,388 497,604
Amortization* 250,523 457,649
Accounts receivable, net (4,681,358) (3,498,473)
Prepaid and Other Current Assets 92,979 (186,384)
Accounts payable 1,541,251 1,827,712
Accrued exp. and other liab. (765,988) 1,492,581
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(2,516,382) (1,340,886)
CASH FROM INVESTING ACTIVITIES:
Purchase of property & equipment (3,063,591) (6,866,629)
Deferred finance costs (1,902,341) (69,157)
Contract Rights (209,245) -
Other Assets (437,656) -
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(5,612,833) (6,935,786)
CASH FROM FINANCING ACTIVITIES:
Long-term debt, net current portion 13,713,069 7,458,541
Repayment of notes payable (6,424,713) -
Capital leases,current portion 10,245 -
Loans Payable - Officers (100,256) -
Shareholder's Equity 626,603 800,188
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7,824,948 8,258,729
Change in cash (304,267) (17,943)
Beginning cash 304,267 44,249
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Ending cash -
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
INTEREST PAID 1,264,337 469,920
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TAXES PAID - -
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NON CASH INVESTING ACTIVITIES:
Common stock issued for services and interest expense 769,005 518,075
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Notes to Financial Statements
1. Basis of presentation:
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions for Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the nine months ended September 30, 1998 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1998. The unaudited financial statements should be read in
conjunction with the financial statements and footnote thereto included in the
Company's report on Form 10-SB for the year ended December 31, 1997.
2. The Business:
Corecare Systems, Inc. through its nine operating subsidiaries, provides
management services to behavioral health service providers; provides, owns, and
operates outpatient and inpatient behavioral health services; provides clinical
trial services to the pharmaceutical industry; and develops billing software for
the health industry.
3. Summary of significant accounting policies:
Principles of consolidation:
The September 30, 1998 and December 31, 1997 financial statements of the Company
include accounts of Corecare Systems, Inc. and its wholly owned subsidiaries.
EXHIBIT 27
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AS OF
SEPTEMBER 30, 1998 AND THE CONSOLIDATED STATEMENT OF
OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
ITEM DESCRIPTION AMOUNT
5-02(1) Cash and Cash Items 0
5-02(2) Marketable Securities 0
5-02(3)(a)(1) Notes and Accounts Receivable - trade $10,740,607
5-02(4) Allowances for Doubtful Accounts $(1,373,814)
5-02(6) Inventory $ 4,390,328
5-02(9) Total Current Assets $14,027,159
5-02(13) Property, Plant & Equipment $23,802,653
5-02(14) Accumulated Depreciation $(3,306,358)
5-02(18) Total Assets $34,523,455
5-02(21) Total Current Liabilities $27,018,056
5-02(22) Bonds, Mortgages and similar debt $ 2,206,460
5-02(28) Preferred Stock - Mandatory Redemption $ 10
5-02(29) Preferred Stock - No Mandatory Redemption $ 26
5-02(30) Common Stock $ 13,846
5-02(31) Other Stockholders' Equity $ 5,285,057
5-02(32) Total Liabilities & Stockholders' Equity $34,523,455
5-03(b)1(a) Net Sales of Tangible Products 0
5-03(b)1 Total Revenues $15,986,008
5-03(b)2(a) Cost of Tangible Goods Sold 0
5-03(b)2 Total Costs and Expenses Applicable
to Sales and Revenues $ 6,222,296
5-03(b)3 Other Costs and Expenses $ 1,336,526
5-03(b)5 Provision for Doubtful Accounts and Notes $ 332,943
5-03(b)(8) Interest and Amortization of Debt Discount 0
5-03(b)(10) Income Before Taxes and Other Items $ 1,218,021
5-03(b)(11) Income Tax Expense $ 487,208
5-03(b)(14) Income/Loss from Continuing Operations $ 730,813
5-03(b)(15) Discontinued Operations $ (321,983)
5-03(b)(17) Extraordinary Items 0
5-03(b)(18) Cumulative Effect - Changes in Accounting Principles 0
5-03(b)(19) Net Income or Loss 1,052,796
5-03(b)(20) Earnings Per Share - Primary 0.048
5-03(b)(20) Earnings Per Share - Fully Diluted 0.043