On October 28, 2002, when we last looked at Core Solutions, Inc. (OTCBB: CSUO), the Company had completed a series of reverse stock splits that stripped public stockholders of virtually all of their shares. (Update: Core Solutions, Inc. – A Shrinking Core). How bad was it? A Core Solutions stockholder who owned one billion shares on July 4, 2002 had just 4 shares left on October 28th.
Those investors were no longer holding many shares, but they may have been hanging on to the hope that Core Solutions would successfully develop its business plan - outsourcing human resources services. Those expectations were shattered late last month when the Company revealed that it was abandoning the human resource industry in favor of the real estate business. The Company attributed the change to lower employment rates, which translated into less demand for its human resource services.
This dramatic shift was a shocking departure from the Company’s recent public statements, which suggested that Core Solutions’ human resource operations were thriving. On January 9, 2003, for example, the Company declared that 2003 was off to a promising start. Core Solutions claimed that it was aiming to land $1 million in new accounts each week during 2003, and already had achieved that goal for the first week of January. The Company characterized its goal as “very feasible” and predicted that it was likely to secure $52 million in new accounts by the third quarter of the year.
That hardly sounded like a business that was expecting to suffer from a universally recognized downturn in employment. Indeed, the Company said that it planned to continue to focus on its long-term goal of achieving $250 million in annual revenues within thirty six months. That would require a period of unprecedented growth. During the first nine months of 2002 Core Solution’s revenues were under $700,000, while operating expenses exceeded $15 million, including almost $13 million in consulting fees.
By mid-January the Company had grown even more optimistic. A January 13th press release outlined a “2003 Strategic Development Plan” that would include “Mergers and Acquisitions, Sales and Marketing, and Operations”. As part of that plan, Core Solutions said it expected to make one acquisition each month during 2003, and anticipated that each acquisition would represent an additional $10 million in revenues. (By January 27th, the Company’s Chief Executive Officer had become even more confident, predicting that each acquisition would generate between $10 and $25 million in revenues). The Company claimed that negotiations for the January acquisitions already were underway.
Core Solution also said that it planned to beef up its sales staff, adding two new salespersons each month, and opening satellite offices for its human resource and payroll personnel by mid year.
The Company was equally positive about its financial prospects, predicting that sales for the first quarter of 2003 would “exceed 5 times” the revenues for any quarter in 2002, and that “due to exceptionally favorable market conditions and current mergers & acquisitions prospects, the company expects to generate revenue for 2003 exceeding 5 times that of any previous year.”
Core Solutions continued to pump up its prospects in a January 15th press release that forecast “$100 million by year end.” What had caused the Company to double its annual projections in less than a month? Core Solutions claimed that it would be seeking to develop more clients through strategic relationships with attorneys, accountants and insurance professionals. According to Christine Favara, Core Solutions’ CEO, “preliminary market research” indicated that each of those professionals would introduce an average of 10 new clients.
Ms. Favara did not indicate who had performed that preliminary market research or how, as a practical matter, a group of service professionals could deliver such a multitude of clients to Core Solutions. Nevertheless, the Company projected that the program was likely to produce an additional $2 million of new billings each week beginning in April 2003. Combined with the previously projected revenues of $1 million a week, this would result in more than $100 million of annual revenues.
On March 4, 2003, in the wake of these promises, the Company filed a Form S-8 Registration Statement, registering 2 billion shares of common stock which it planned to issue to unnamed officers, directors, employees, or consultants. The Form S-8 made no mention of the Company’s intention to reformulate its business plan.
Core Solutions’ repeated projections for 2003 seemed quite bold – particularly in light of the Company’s previous anemic performance. The Company offered no evidence of its ability to deliver even a fraction of the promised revenues. Nevertheless, the Company’s press releases appeared to reflect confidence in its plan to market outsourcing services in a weak economy that has been punctuated by unemployment and workforce reductions. At the time those press releases were issued, those economic woes were broadly recognized, as were the uncertainties posed by imminent war with Iraq. In other words, the prospect of a weak employment climate did not materialize suddenly on March 19, 2003.
All of which makes the Company’s most recent announcement even more puzzling. Core Solutions offers no apology for its earlier overly optimistic estimates, in effect disregarding investors who had relied upon the Company’s previous statements. Sidestepping that issue, CEO Christine Favara stated “I have been researching the real estate market and feel that the transition for us at this time is impeccable, and look forward to giving shareholders a company they can really sink their teeth into, with real, hard assets on the balance sheet.” On April 1st, Ms. Favara announced that the Company had “accepted an offer” to purchase property in Los Angeles California for $769,000. She did not identify the seller, describe the property, indicate whether it was commercial or residential real estate. or say how the Company intended to come up with the necessary funds. In other words, the Company provided virtually no meaningful information.
The Merriam-Webster Dictionary defines impeccable as “free from fault or blame.” Is that a fair definition for Core Solutions? The answer to that question remains in the hands of investors – and regulators.
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