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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended DECEMBER 31, 1998
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Commission file number 0-19600
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CORE, INC.
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(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-2828817
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(State of jurisdiction of incorporation or organization) (IRS employer
identification no.)
18881 VON KARMAN AVENUE, SUITE 1750, IRVINE, CALIFORNIA 92612
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(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (949) 442-2100
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Securities registered pursuant to Section 12(b) of the Act: NONE
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Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $0.10 PER SHARE
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(Title of class)
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
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Indicate by check "X" if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of March 22, 1999 was $54,771,047. On March 22, 1999, there
were 7,891,577 shares of the Registrant's Common Stock outstanding.
Documents incorporated by reference: INFORMATION CALLED FOR IN PART
III OF THIS FORM 10-K IS INCORPORATED BY REFERENCE TO THE REGISTRANT'S
DEFINITIVE PROXY STATEMENT WITH RESPECT TO THE 1999 ANNUAL MEETING OF
STOCKHOLDERS, TO BE FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
PURSUANT TO REGULATION 14A.
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TABLE OF CONTENTS
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PART I
Item 1 Business 3
Item 2 Properties 14
Item 3 Legal Proceedings 15
Item 4 Submission of Matters to a Vote of Security Holders 15
Executive Officers of the Registrant 16
PART II
Item 5 Market for Registrant's Common Equity and Related Stockholder Matters 18
Item 6 Selected Financial Data 20
Item 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations 21
Item 7a Quantitative and Qualitative Disclosures About Market Risk 28
Item 8 Financial Statements and Supplementary Data 28
Item 9 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 28
PART III
Item 10 Directors and Executive Officers of the Registrant 28
Item 11 Executive Compensation 28
Item 12 Security Ownership of Certain Beneficial Owners and Management 28
Item 13 Certain Relationships and Related Transactions 28
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K 29
Index to Financial Statements F-1
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PART I
ITEM 1. BUSINESS.
CORE, INC. ("CORE" or the "Company") is a national provider of
employee absence management services to Fortune 500 companies and other
self-insured employers, third-party administrators and insurance carriers.
The Company's services include Integrated Disability Management (which
consist of the Company's proprietary WorkAbility-Registered Trademark-
Absence Management program, disability reinsurance management services,
social security disability benefits advocacy, analytic consulting services,
onsite job profiling and 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.
CORE's Integrated Disability Management services include monitoring
the appropriateness of absences and durations under short and long term
disability plans, family medical leave and similar plans, and workers'
compensation programs, in order to reduce unnecessary absenteeism and its
related costs of wage replacement, hiring and training replacement personnel
and lost productivity. These services are provided through CORE's WorkAbility
program, which uses a proprietary software program developed and supported
through the statistical analysis of disability utilization data collected
over a 10 year period. CORE's WorkAbility program provides an objective,
medically based method for recommending and monitoring employees'
return-to-work status. The WorkAbility program is designed to obtain and
analyze relevant medical and work-related information with the initial onset
of the employee's absence and thus assure that the employee, attending
physician and employer all have reasonable and consistent expectations as to
the projected return-to-work date. CORE's reinsurance and group disability
risk management services include providing marketing, underwriting advice,
claims, actuarial and compliance services to its insurance company clients
and risk management expertise for reinsurers in a reinsurance facility. The
Company's social security disability benefits advocacy program provides
assistance to disabled employees with obtaining their Social Security
Disability Insurance benefits.
CORE's Peer Review Analysis program provides pre-certification,
concurrent, appellate, medical policy and quality independent specialty
physician review services for use within utilization management programs of
the Company's insurance company and self-insured corporate clients. The
Company believes its more than 325 Board certified physician reviewers
comprise the largest independent physician review service in the country.
CORE's behavioral health review program provides comparable review service by
psychiatric specialists in specialties such as general, child and adolescent
and addiction psychiatry.
This Annual Report on Form 10-K 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 may be significant, presently or in
the future.
HISTORY OF CORE
The Company was incorporated in Massachusetts in April 1984 under
the name Peer Review Analysis, Inc. ("PRA") to provide physician-intensive
utilization management services to commercial insurance companies and
self-insured employers. PRA became a publicly-held entity in December 1991
with the completion of an initial public offering.
In March of 1995, PRA completed its merger (the "CMI/PRA Merger")
involving Core Management, Inc., a Delaware corporation ("CMI"). CMI was
incorporated in 1990 to acquire the health and disability cost management
services business (including the WorkAbility program) of Health Data
Institute, Inc., a subsidiary of Baxter International, Inc. The CMI/PRA
Merger was treated as a pooling of interests for accounting purposes. In July
1995, the Company changed its name from Peer Review Analysis, Inc. to CORE,
INC. The description herein of the business of the Company includes the
operations of both PRA and CMI from the inception of both companies.
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On October 2, 1995, CORE acquired all the capital stock of Cost
Review Services, Inc. ("CRS"), a regional workers' compensation bill audit
firm. In June 1997, CORE purchased certain of the assets of Social Security
Disability Consultants and Disability Services, Inc. (collectively, "SSDC"),
a disability management services firm which provides social security
disability benefits advocacy and Medicare coordination of benefits. In July
1997, the Company purchased the assets and certain liabilities of Protocol
Work Systems, Inc. ("PWS"), a provider of job analysis, employee physical
agility testing and other loss prevention services to the workers'
compensation market. In March 1998, a wholly-owned subsidiary of the Company,
TCM Services, Inc. ("TCM"), acquired substantially all of the assets and
certain liabilities of Transcend Case Management, Inc. ("Transcend"), a
regional provider of workers' compensation case management services. In
September 1998, the Company acquired all shares of stock of Disability
Reinsurance Management Services, Inc. ("DRMS"), a full-service reinsurance
intermediary manager.
Effective October 31, 1998, the Company discontinued the operations
of CRS. On December 23, 1998, TCM transferred substantially all its assets
and certain liabilities to Transcend following the exercise by Transcend of
its option to reacquire the assets, as described in the Asset Purchase
Agreement dated March 17, 1998.
The Company's executive offices are located at 18881 Von Karman
Avenue, Suite 1750, Irvine, California 92612, and its telephone number at
that address is (949) 442-2100.
"WorkAbility," "Peer Review Analysis," "PRA" and "CORE" are
registered trademarks of the Company.
INDUSTRY OVERVIEW
In recent years, large corporations have begun to recognize the
magnitude of the annual cost of occupational and non-occupational injuries
and illnesses, which according to several 1997 studies exceeded $2,200 per
employee, or 8% of total payroll costs. These expenses present a significant
challenge to corporate productivity. The Company estimates that total U.S.
costs due to injury and illness-related workplace absence will grow to $340
billion by the year 2000, double what they were at the start of the decade.
According to industry sources, disability costs including workers'
compensation expenditures grew at an average annual rate of over 18% from
1990 through 1996, and the Company believes this growth is continuing. The
Company estimates that workers' compensation costs were approximately $80
billion in 1998. Despite the general awareness of this high level of workers'
compensation costs, expenditures for group disability (including short-term
disability and long-term disability plans), sick pay and family leave
represent a far larger share of total expenditures, estimated at 60%-75% of
total disability costs. Two driving factors behind the increase in group
disability and workers' compensation expenditures are workplace and
legislative changes. Work-related changes that have contributed to rising
benefits costs include the aging of the active workforce, increased
volatility in hiring and layoffs (which often results in increased benefits
utilization) and increased diagnoses of repetitive stress-related injuries.
Also contributing to rising disability benefit costs and awareness are
legislative changes such as the Family and Medical Leave Act and the
Americans with Disabilities Act, which mandate accommodation for family
circumstances and disabled workers, which both have a growing impact on
accommodation and lost time issues.
In response to these rising costs, a variety of insurance companies,
managed care organizations and self-insured employers have used various cost
reduction techniques, often borrowed from group health managed care,
including securing pricing concessions from providers, using case management
tools, and implementing "gatekeepers" as a means to control utilization.
However, these managed care initiatives focus almost entirely on medical
costs generated after a disability claim is received, not on the more
significant productivity (lost time) impacts of employee ill health.
Furthermore, work absence duration, and consequently disability payments,
have traditionally been driven by the decision of the treating physician.
While workers' compensation cases are typically attended by an occupational
specialist, employees with non-occupational disabilities tend to utilize
their own primary care physician who have little or no interaction with the
employer and limited sensitivity to productivity (lost time) issues.
As traditional managed care tools become standard industry-wide, they
are generating diminishing marginal savings for employers, who must find more
aggressive and sophisticated utilization review mechanisms to yield further
savings. In addition, the new-found awareness of the additional costs
associated with workplace absence has brought with it an increasing demand
for cost saving strategies that address both health care expenditures and the
productivity impact of an employee's ill health. Corporate downsizing and
global competition have focused Corporate America on achieving real
productivity gains. With the importance of each remaining job magnified,
employers are actively looking for new tools to help control workplace
absence. Until recently, recognition and management of these productivity
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costs have been impaired by their difficulty in measurement, the
fragmentation of responsibilities for disability programs within human
resources and risk management departments of most corporations and the
historical focus on group health managed care.
While a small group of companies is emerging that are applying managed
care principles to the workers' compensation industry, historically there
have been few, if any, companies focusing on the provision of managed care
techniques to the broader disabilities market. With the support of its
analytic and physician services, CORE's products provide employers with an
integrated and comprehensive approach to disability benefits management.
SERVICES AND PRODUCTS
CORE offers services and products designed to assist the Company's
clients control and monitor disability, workers' compensation and health care
costs without compromising the quality of care or services available to
patients. The Company's service lines include:
(1) Integrated Disability Management,
(2) Peer Review Analysis,
(3) Exiting/exited services, and
(4) Other service lines.
INTEGRATED DISABILITY MANAGEMENT
Integrated Disability Management includes the following products and services:
WorkAbility Absence Management Program
Disability Reinsurance Management Services
Social Security Advocacy
CORE Analytic
Protocol Work Systems
Licensing
WORKABILITY ABSENCE MANAGEMENT PROGRAM
The Company estimates that total direct and indirect expenditures
for medically-related workplace absence are approximately $260 billion
annually, of which less than 25% are related to workers' compensation
payments. The cost of absenteeism includes wage replacement, the costs of
hiring and training replacement personnel and lost productivity. CORE's
WorkAbility Absence Management Program provides for the monitoring of the
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appropriateness of absences and their duration under short and long term
disability plans, family medical leave and similar plans, and workers'
compensation programs. The program is focused on reducing unnecessary
absenteeism and the costs associated with such absences, thereby improving
workplace productivity.
The WorkAbility program is built on the foundation of a proprietary
software system developed by the Company and maintained through the
statistical and clinical analysis of disability utilization data. The
WorkAbility program allows the Company to work with employee's physicians to
establish expected absence duration using duration guidelines that are
specific and objective. These guidelines are packaged in a software module
called WorkAbility On-Line Medical Protocols (WOMP). WOMP is proprietary to
CORE. The WorkAbility program, which contains WOMP, was developed along six
key absence management concepts:
DAY ONE INTERVENTION. Unlike retrospective disability review which
is triggered only after an extended employee absence or after
significant costs have been incurred, the WorkAbility program is
designed to facilitate absence management from the first day of the
absence (or sooner, in the case of planned absences such as elective
surgery or childbirth). This proactive approach allows
return-to-work expectations to be set early with the doctor, the
patient and the workplace, and supports efforts to return patients
to work on modified hours or with modified duties.
PROPRIETARY TECHNOLOGY AND DATABASE. CORE began developing its
WorkAbility program in 1986. The WOMP protocols are regularly
updated using COREbase, a database of more than 650,000 disability
and workers' compensation records collected by CORE over a period of
10 years. This database-driven updating process allows CORE to field
absence duration guidelines that are based on actual return-to-work
experience. The database continues to grow as CORE adds more
clients, and as clients integrate across more lost time benefits.
CLINICAL COLLEGIALITY AND CREDIBILITY. The WorkAbility program is
based on conducting a clinically credible dialog with an employee's
physician to reach agreement on an appropriate return-to-work plan.
The clinical depth and complexity of the WOMP protocols support this
activity by providing a foundation of clinical credibility. Our
approach is focused on making this dialog a collegial interaction.
CONCURRENT REVIEW. In addition to the initial recommendation of an
appropriate return-to-work plan, the WorkAbility program includes
ongoing review of the progress of the case. The information from
these subsequent reviews add to the cumulative database driving the
development of the protocol system, thereby ensuring that the
guidelines serve both the initial review, as well as the sequential
reviews over time as an illness or injury progresses toward return
to work.
COMPLETE WORKFORCE COVERAGE. The WorkAbility program is designed to
cover all workplace absences, not only the longer term and more
costly absences. The WOMP protocols cover over 10,000 clinical
endpoints for medical conditions and surgical procedures. The
breadth of the protocols ensures consistent return-to-work planning,
regardless of whether the condition causing the absence is a result
of workplace injury covered by workers' compensation or an injury
occurring outside of the workplace covered by a disability plan.
FLEXIBILITY. The system is designed to allow the Company to
customize the product and services to meet client needs and culture.
The guidelines are based on a statistical distribution so that a
client can choose how to monitor and to manage durations. The system
generates communications that are all customized to the client's
benefit plan. In addition, depending on the technical capability of
the client, other modalities such as e-mail, intranet and internet
can be used to disseminate information on claim approvals and
status.
The WorkAbility software system is used by customer service
representatives and registered nurse reviewers to assess each disability
claim in the early stages of an employee's absence. Under the WorkAbility
program, the employee contacts CORE and the employee's eligibility for the
benefit is assessed using information previously supplied by the employer and
loaded onto CORE's system. Once eligibility is determined, CORE's nurse
reviewer contacts the employee's physician or office staff (depending on the
severity of the case). The nurse reviewer enters information on the diagnosis
and severity of the condition into CORE's proprietary WorkAbility system. The
return-to-work plan is established by the nurse using the WorkAbility
program's automated clinical protocols. The protocols consider such factors
as the employee's age and general health, job requirements, symptoms and
severity of the condition, diagnosis of the attending physician, treatment
plan, medical procedure(s) performed, prognosis for recovery and comorbid
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factors in establishing a recommended absence duration.
To assure consistency, reviews are guided by program standards based
on both statistical and clinical analysis and, in certain circumstances, are
referred to physicians for further review. If CORE and the attending
physician agree with respect to the anticipated absence duration, letters
stating the expected return-to-work date are sent to the employee and
physician on the date the review is completed. The employer is notified of
the return-to-work date electronically. If the employee's physician disagrees
with the suggested return-to-work plan (as occurs in less than 15% of the
cases), the case is referred to a WorkAbility physician advisor who will
discuss the case with the treating physician. In the event that they cannot
reach agreement, the case is referred to the employer for consultation to
determine whether or not an independent medical examination (IME) should be
requested. IMEs are required in fewer than 2% of the cases. If the employee's
condition or medical treatment changes during the absence or the employee is
not ready to return to work on the expected date, a request for an extension
of the absence is reviewed on a case-by-case basis using the WOMP duration
guidelines with the additional information provided by the attending
physician and/or patient.
In general, CORE's WorkAbility services are advisory only. The
attending physician and the patient remain responsible for determining the
work-absence period and all other aspects of the plan of treatment.
Generally, the employer or other payor is responsible for making all
decisions with respect to the payment or denial of benefits under the
applicable benefits plan. Certain clients, including Bell Atlantic
Corporation, have delegated to CORE the authority to decide whether an
employee is eligible for benefits under the client's plan.
In addition to direct absence management activities, the WorkAbility
program provides to clients reports that track utilization and cost trends
and return-to-work plan performance. In addition to the standard report
package, clients can obtain additional services, such as adding health care
claims to provide a more complete picture of the clinical factors and costs
associated with disability. Clients with integrated benefits often customize
the reporting packages to present their utilization separately by plan (e.g.
short-term disability, long term disability) as well as on a combined basis.
DISABILITY REINSURANCE MANAGEMENT SERVICES
DRMS, acquired by the Company in September 1998, is a reinsurance
intermediary providing turnkey disability reinsurance and management services
for insurance company clients marketing other forms of employee benefit
products such as medical, dental, and group life insurance. DRMS provides a
comprehensive array of services designed to increase its clients success at
marketing disability products. These services include strategic planning,
sales and marketing, product development, actuarial, underwriting, claims
management and compliance services. DRMS' customer-focused team uses
proprietary systems to provide creative solutions and day-to day decisions
quicker and more efficiently than its competitors.
As a reinsurance intermediary, DRMS does not assume insurance risk.
Reinsurance risk protection to DRMS' clients is provided through the
Disability Alliance for Reinsurance Treaties ("DART"). The lead reinsurer for
DART assumes the risk from DRMS clients and passes on portions of it to a
group of participating reinsurers. In addition to managing the reinsurance
risk, DRMS provides accounting and administrative services to DART.
The addition of DRMS to the CORE family provides a strategic
opportunity to provide additional long-term disability services to CORE
customers. Through DRMS, CORE can also provide an insurance option to CORE
clients. Finally, DRMS' network of insurance contacts can provide possible
opportunities for CORE to provide services to insurance carriers.
SOCIAL SECURITY ADVOCACY
The Company's social security disability benefits advocacy program
includes claim file reviews, auditing, designing and implementing Social
Security assistance programs, and representation and assistance with Social
Security claims and appeals. The Company's model is unique in that it
integrates all aspects of the Social Security process, producing a
streamlined, efficient and effective service.
CORE ANALYTIC
In addition to the services provided to WorkAbility clients, CORE
Analytic provides data analysis and consulting services directly to large
corporate clients. These services include in-depth customized information
concerning their disability and health care costs and utilization experience.
Health care costs, disability costs and workers' compensation costs
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are often under separate departments in a large employer (human resources,
benefits and risk management), which has historically impaired corporations'
ability to recognize the magnitude of, and to manage, these costs. The basic
objectives of CORE's Analytic services are to help employers and insurers
obtain better value for their disability, workers' compensation and health
care expenditures with a company's specific goals in mind. CORE assists in
identifying the best means to reduce the total costs of these benefits or
slow the rate of increase, enhance the appropriateness and quality of care,
predict future benefit costs and increase the return on investment from
managed care programs. CORE's Analytic consulting services can coordinate and
analyze information on a company-wide basis and use the client's information
and CORE's proprietary disability and medical cost data analysis
methodologies to simulate changes in a benefit plan's structure and the
resulting impacts on overall benefit program cost. For example, CORE serves
as a data partner to several Fortune 500 companies and provides quarterly
"CORE Impact Reports" on integrated claims experience of the client covering
disability, workers' compensation and group health benefits.
PROTOCOL WORK SYSTEMS
The JobSafe program of CORE's Protocol Work Systems division
provides on-site job profiling and functionality assessments in a program
that compares the physical agility of each worker with the actual demands of
the job to create a safer working environment. The JobSafe program is
tailored to each client's specific facility to help ensure compliance with
the Americans with Disabilities Act, Occupational Safety Health
Administration regulations and quality control requirements of ISO 9000. The
program begins with an on-site tour of the client's facility. The tour is
followed by a meeting with supervisors, interviews with employees, and the
collection of measurement and weight statistics. Job descriptions then are
created, videotapes are produced with descriptive commentary for each job,
and finally, physical agility testing of each employee is conducted. The
process culminates with a compilation of information for the client, along
with instructions on how to operate the program.
LICENSING
In addition to the key role the WOMP protocols plays within the
WorkAbility software system, the WOMP protocols have also been licensed by
the Company to third parties as a separate product. These WorkAbility
protocols are updated annually to, among other things, reflect recent
advancements in medical technology and procedures, and to update the
recommended disability durations using the collective experiential data
collected by CORE through its services to clients.
The Company is also considering licensing other software products,
such as the family medical leave administration system to third parties.
PEER REVIEW ANALYSIS
Peer Review Analysis includes the following products and services:
Physician Review Services
Behavioral Health Review
PHYSICIAN REVIEW SERVICES
CORE's independent specialty physician review program, known
commercially as Peer Review Analysis or PRA, provides pre-certification,
concurrent, appellate, medical policy and quality physician review services
for use with existing utilization management programs of clients, including
insurance carriers that service the group health, disability and workers'
compensation markets, and other managed care companies. The Company believes
its more than 325 Board certified physician reviewers comprise the largest
independent physician review organization in the country. The Company's
consulting relationship with this large base of physicians has positioned the
Company to offer an independent external appeal review service, which is
mandated under several state laws and generally requires specialty-matched
reviews. The Company believes that appellate review is one of the growing
sectors of the otherwise mature health care utilization management industry.
When a client's nurse reviewer determines that a case does not
meet the client's established criteria, the nurse reviewer will forward a
referral to CORE. The referral describes the principal diagnosis of the
patient and the reason for referral for physician review. In most instances
the reason for referral is based upon a question of medical necessity or
therapeutic benefit of a proposed treatment plan. CORE's independent
physician reviews the case information, which will
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have been previously entered into CORE's data processing systems, and then
telephones the attending physician to ascertain any additional clinical data,
the attending physician's rationale for the proposed treatment plan or the
proposed length of hospital stay. Based on discussions with the attending
physician, including, when appropriate, discussions of possible alternative
treatment plans, and using clinical judgment as well as criteria based on
national norms, CORE's physician makes a recommendation concerning the
appropriateness of the proposed or revised treatment plan.
CORE then notifies its client of its recommendation regarding the
medical necessity or appropriateness under the client's health care benefit
plan of the proposed treatment plan, hospitalization or length of stay. If
the proposed hospitalization is not certifiable as such under the plan, the
payor typically denies or reduces the payment of benefits for the proposed
hospitalization. The decision of the payor may be appealed by the patient or
the attending physician. In such event a second CORE independent physician of
the same specialty who was not involved in the original decision will review
the case on the merits of the clinical criteria or any additional information.
Reviews under the Company's specialty physician review program are
managed from CORE's offices, and the majority of all review decisions are
completed within 24 hours of referral. In most instances, CORE's physician
review services are advisory in nature. Determinations as to the payment or
denial of benefits are typically made by the third party payor, and the
patient and the attending physician make decisions as to the patient's
medical treatment.
The Company is certified by the American Accreditation HealthCare
Commission ("AAHC/URAC") to perform various utilization review functions.
AAHC/URAC is a nationally recognized organization that has developed
standards to encourage the availability of effective, efficient and
consistent utilization review of health care services throughout the United
States. One of AAHC/URAC's objectives is to establish standards for the
procedures used to process appeals of utilization review determinations. Many
of the Company's clients rely on CORE's specialty physician and behavioral
health review services to comply with AAHC/URAC's appellate procedures.
BEHAVIORAL HEALTH REVIEW
CORE's behavioral health review program provides psychiatric review
services similar to the Company's specialty physician review services by
psychiatrists who are supported by a team of multi-specialty physicians.
CORE's independent psychiatrists include specialists in various psychiatric
specialties such as general psychiatry, child and adolescent psychiatry and
addiction psychiatry. CORE believes that its multi-specialty psychiatrists
and CORE's emphasis on intensive specialty review distinguish it from
psychiatric review performed by other utilization management firms and better
addresses the more subjective nature of many behavioral health reviews.
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EXITING/EXITED SERVICES
Exiting/exited services includes the following products and services:
Regional workers' compensation field case management (CRS and TCM)
Regional workers' compensation bill audit (CRS)
Integrated Behavioral Health
During 1998, the Company assessed the performance and outlook for
each of its service lines and made a strategic decision to focus on building
CORE's leadership position in employee absence management services and to
exit certain businesses in which market leadership or minimum profit margins
did not appear to be attainable. The following three product lines were
identified as not satisfying the long-term goals of the Company:
- Regional workers' compensation field case management services as
delivered through CORE's subsidiaries, CRS and TCM. Both of
these subsidiaries operated at a loss during 1998. Core believed
that these subsidiaries could not operate at minimum profit margin
targets. Accordingly, the Company exited CRS's and TCM's regional
field case management services on October 31 and December 23,
1998, respectively.
- Regional workers' compensation bill audit services were delivered
by CRS. Again, it was determined that these services would not
meet CORE's profit and market leadership goals, and as such, were
exited as of October 31, 1998.
- Integrated Behavioral Health, a California corporation ("IBH") is
a wholly-owned subsidiary that provides mental health case
management services. Because of the size of the operations, and
the limited market share it enjoys, the Company does not believe
that IBH is compatible, on a long-term basis, with CORE's profit
margin and product leadership goals. The Company has granted an
exclusive option to a non-affiliated party to purchase the assets
of IBH and intends to exit the operations of this unit during
1999. See "Notes to Consolidated Financial Statements," Note 17,
contained elsewhere within this report for additional information.
OTHER SERVICE LINES
Other service lines includes the following products and services:
Utilization Review and Case Management
Medicare Coordination of Benefits
UTILIZATION REVIEW AND CASE MANAGEMENT
The Company provides medical and behavioral health utilization
review and case management services to Fortune 500 companies and other
self-insured employers, third-party administrators ("TPAs") and an insurance
carrier. The Company's services are designed to evaluate the medical
necessity and appropriateness of health care services prescribed for
participants in health care benefits plans, including hospital admissions,
proposed length of hospital stay, use of outpatient facilities and other
treatment alternatives. In cases of high cost diseases, conditions or
catastrophic illnesses, CORE may also render case management services of
individual cases in order to assure that cost-effective treatment
alternatives are utilized. Clients may elect to contract for all of the
services offered under the programs or, in the alternative, may elect to
contract for only certain portions of services offered.
CORE provides its utilization review services and case management
services through a staff consisting primarily of registered nurses and
physicians. Clients which utilize CORE's utilization review programs advise
their participants of review requirements including the requirement to
contact CORE within a specified period of time. From these contacts, CORE's
medical and behavioral health review staff gathers the necessary personal and
medical information and enters this information into CORE's review system.
Based on this information and using CORE's review criteria, CORE conducts its
review.
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For cases requiring intensive case management, CORE assigns a nurse
case manager to the case. These nurse reviewers work with providers and
insurers to provide the appropriate health care benefits to patients facing
catastrophic or chronic illness.
The Company plans to continue to offer these services to support our
existing clients, especially those who have integrated their medical and
disability case management programs. Our ability to manage catastrophic cases
with an absence management perspective continues to provide value to the
Company by building relationships with providers and expanding our clinical
credibility.
MEDICARE COORDINATION OF BENEFITS
Through its SSDC subsidiary, the Company provides services to help
large employers identify those employees or retirees who should be receiving
Medicare benefits. The Company then assists the client in establishing or
documenting Medicare primacy, identifying the health care plan payments and
costs that can be offset by Medicare, and implements an overpayment recovery
program.
Because this product is geared toward the large employer client,
which is CORE's target market, the Company will continue to market and
provide these services.
CLIENTS AND MARKETING
CORE has over 325 customers across the country, including
numerous Fortune 500 companies. Revenues from Fortune 500 companies accounted
for approximately 62% of total revenues in 1998. The following is a selected
list of CORE's clients which, the Company believes, is representative of its
overall client base:
BELL ATLANTIC CORPORATION MOTOROLA CORPORATION
DAIMLERCHRYSLER HUGHES ELECTRONICS CORPORATION
RELIASTAR FINANCIAL CORP. CNA INSURANCE COMPANY
FLEET FINANCIAL GROUP COMMONWEALTH OF VIRGINIA
CHAMPION INTERNATIONAL CORPORATION DANA CORPORATION
MEDICAL MUTUAL OF OHIO PCS HEALTH SYSTEMS, INC.
LIBERTY MUTUAL INSURANCE COMPANY, INC. GENERAL ELECTRIC CORPORATION
GTE COMMUNICATIONS SYSTEM CORPORATION
CORE markets its services primarily to national, direct accounts,
including self-insured employers, and through group health and disability
insurance carriers and third party administrators. The Company also maintains
a distribution agreement with Reliastar Financial Corp. to offer CORE's
WorkAbility services to their customers. For providing WorkAbility services,
the Company is paid fees by the insurance company.
During 1997 and 1998, Bell Atlantic Corporation represented 23% and
21%, respectively, of total revenues. No other client represented more than
10% of total revenues. During the years ended December 31, 1997 and 1998, the
Company's five largest clients represented 43% and 45%, respectively, of
total revenue.
CORE typically enters into service agreements with its clients.
These agreements have automatically renewable successive terms of between one
and three years, but are generally terminable upon 60 to 90 days notice. They
do not generally provide for minimum payments and are usually non-exclusive.
Subject to earlier termination provisions set forth therein, CORE's Bell
Atlantic agreements range from three to ten years. Certain contracts include
provisions that the fees payable to CORE can vary based upon CORE's
performance and the savings achieved by the client under the contract.
For many of its programs, CORE charges its clients a "capitated fee"
(i.e. a fixed per employee per month ("PEPM") fee or a fixed per employee per
quarter fee). The amount of this fee varies depending on the number and type
of
11
<PAGE>
review programs selected by the client and the size of the client. For other
services, CORE charges fees on an hourly, per case, percentage of risk
premium (for turn-key and reinsurance management services) or percentage of
cost recovery (for social security advocacy and Medicare programs) basis
rather than a capitated basis. Notwithstanding the outcome of CORE's review,
decisions as to the payment or denial of benefits and eligibility or coverage
under the benefit plan are typically made by the administrator of the
participant's health care plan, not by CORE. The patient and the attending
physician always make decisions as to the patient's medical treatment, not
CORE.
During 1998, several clients requested that CORE accept fiduciary
responsibility for their disability benefit program. The Company's confidence
in its clinical decisions permitted it to assume these responsibilities. CORE
charges increased fees to those clients for which it serves as a plan
fiduciary.
During the second half of 1998, the Company bid on and was awarded
several significant contracts, including contracts with the Commonwealth of
Virginia and GTE. CORE's services to these clients are for an integrated
disability management program, which further validated the Company's
marketing strategy of offering a range of disability management services that
operate in an integrated fashion.
INFORMATION SYSTEMS
CORE's key products and services are supported by administrative
software that was developed and is maintained by in-house staff. Each of
these software programs incorporates E-Mail and other external data exchange
features for client and remote user communications.
CORE's wide area network ("WAN") is designed to support the
organization's rapid growth. A scalable architecture has provided
flexibility, allowing for timely deployment of upgraded facilities in
response to the business' needs. Additionally, CORE provides for alternative
backup WAN capability that will assure continuous business operations during
network outages. Another ongoing initiative within information systems
development is the continual implementation of available information
technology to significantly enhance the productivity of all CORE's key
products and services. This includes, specifically, the integration of
imaging, network fax computer integrated telephony, and Internet technologies
into the workflow. Additionally, CORE's largest WorkAbility client has direct
access to real-time information via an Extranet. This "self service" model
application provides for both the initiation, as well as, the checking of
status on claims on a near 24 hours by seven days per week basis. CORE plans
to offer this service to other clients in 1999.
The WorkAbility-Plus system, CORE's multi-tier, client/server
technology based application, has provided for the ability to migrate rapidly
into expanding business opportunities. CORE continues to expand its industry
leading capabilities in regard to the burgeoning family medical leave ("FML")
business. Totally integrated with other absence management capabilities, the
FML module provides robust capabilities tailored to Federal guidelines as set
forth in the Family and Medical Leave Act and other state sponsored legislation.
This architecture is designed to allow for client server operation and rapid
feature development. Additionally, CORE continues to evolve the system
capabilities in regard to the management and payment of long-term disability
claims. Integration with software developed by CORE's newest subsidiary, DRMS
is near completion. The WorkAbility-Plus application utilizes software
architecture that provides maximum flexibility in attaching industry-standard
databases to support growth and varying client needs. The Company believes
that this architecture will support the integration of additional absence
management capabilities.
Funding for the initial development of CORE's WorkAbility software
(original version) was provided by Chrysler Motor Corporation ("Chrysler") in
exchange for a perpetual, non-exclusive, non-transferable license to use such
software. Ownership of the WorkAbility software has been retained by CORE,
which has the exclusive right to market the software to others.
12
<PAGE>
GOVERNMENT REGULATION; REIMBURSEMENT; HEALTH CARE REFORM
A number of states, including several of those in which the Company
transacts business, have extensive licensing and other requirements
applicable to the Company's business. Additionally, the Company's clients,
including insurance companies, are subject to regulations that indirectly
affect the Company.
The laws of many states regulate the provision of health care
utilization management services. These regulations generally require the
provider of utilization management services to be reasonably accessible by
telephone to doctors and patients, to have adequately qualified personnel, to
provide physicians and patients a procedure to appeal determinations of
non-reimbursement, and to maintain the confidentiality of patient records.
Other states regulate the provision of claims administration services and
preferred provider organizations which may affect CORE. CORE believes it is
in compliance with all applicable regulations governing the provision of
managed health care services in the states where CORE is subject to such
regulations, as currently in force and as currently interpreted.
CORE's operations depend upon its continued good standing under
applicable laws and regulations. To date, the cost of compliance has not been
material. Such laws and regulations, however, are subject to amendment or new
interpretation by authorities in each jurisdiction. If amended regulations or
new interpretations of federal or state laws or regulations arise, CORE, may
have difficulty complying without significant expense or changes in
operations. The Company is unable to predict what additional government
regulations, if any, directly or indirectly affecting its business may be
promulgated. Although the Company believes that it is currently in compliance
with applicable regulations in those states in which it is subject to
regulation, the Company's business could be adversely affected by a
revocation of or failure to obtain required licenses and governmental
approvals, a failure to comply with applicable regulations or significant
changes in regulations applicable to its clients.
In addition to existing government health care regulation, there
have been numerous initiatives at the federal and state levels, as well as by
third-party payers, for comprehensive reforms affecting the payment for and
availability of health care services. The Company believes that such
initiatives will continue during the foreseeable future. The Company is
unable to predict what, if any, reform initiatives may be adopted, or what
effect, if any, their adoption may have on the Company.
COMPETITION
CORE presently competes in two different markets: (1) managed
disability and workers' compensation and (2) health care utilization
management.
The managed disability and workers' compensation market is a
developing market, which is highly competitive. Competitors include both new
companies focused solely on the workers' compensation market and large
established disability insurance carriers who have traditionally dealt with
disability from an underwriting rather than an employee productivity
perspective. Some of the competitors are significantly larger and have
greater financial and marketing resources than CORE. CORE competes on the
basis of quality and cost-effectiveness in this market, and the Company
believes that its proprietary disability management protocols and database of
clinically defined disability episodes give it a significant competitive
advantage.
The health care utilization management market is fragmented but is
consolidating rapidly as national health care reform and other forces drive
independent utilization review and cost management firms into niche markets
or to consolidation with large insurance carriers and provider groups. The
health care utilization management market is also highly competitive.
Competitors include large established insurance carriers and large managed
care organizations. Some of the competitors are significantly larger and have
greater financial and marketing resources than CORE. CORE competes on the
basis of quality, cost-effectiveness and service.
13
<PAGE>
EMPLOYEES AND PHYSICIAN CONSULTANTS
In addition to its available staff of over 325 physician consultants
covering the major medical specialties, CORE has over 600 employees.
Generally, CORE's physician consultants are paid by CORE on a per hour or per
case review basis. Almost all of CORE's physicians are retained by the
Company as independent contractors and also maintain active practices. The
majority of the Company's physicians work between 5 and 20 hours per week for
the Company. Compensation to CORE's reviewers is not related to any cost
savings achieved by CORE's clients.
ITEM 2. PROPERTIES.
The Company occupies its executive headquarters in Irvine,
California pursuant to leases for approximately 20,600 sq. feet, which expire
in September 2000 and June 2003. The Company also leases facilities of
approximately 18,000 sq. feet in Boston, Massachusetts under a lease that
expires in May 2000, and approximately 22,500 sq. feet in Burlington,
Massachusetts under leases that expire in December 2001 and April 2002.
Additionally, the Company leases facilities of approximately 23,700 sq. feet
in Los Angeles, California under lease agreements that expire in November
2001 and January 2002; approximately 18,000 sq. feet in Silver Spring,
Maryland under a lease that expires in June 2001; approximately 12,000 sq.
feet in Novi, Michigan under a lease that expires in August 2001; and
approximately 6,500 sq. feet in Portland, Maine under a lease agreement that
expires in August 1999.
14
<PAGE>
ITEM 3. LEGAL PROCEEDINGS.
Transcend Case Management, Inc. and Transcend Services, Inc.
(collectively "Transcend") initiated an arbitration proceeding with the
American Arbitration Association on December 16, 1998, in Atlanta, Georgia,
against CORE and its wholly-owned subsidiary TCM Services, Inc. ("TCM") in
connection with the sale to TCM and subsequent re-acquisition by Transcend of
the certain assets. Upon a motion by the Company, the matter was transferred
and the arbitration will occur in Orange County, California. Transcend seeks
unspecified damages relating to TCM's obligations under an Asset Purchase
Agreement (the "Agreement") dated March 17, 1998, pursuant to which TCM
acquired substantially all of the assets relating to Transcend's workers'
compensation case management business (the "Business").
In lieu of a payment at closing, the Agreement provided for a
subsequent earn-out payment based on TCM's quarterly revenues in either 1999
or 2000. The Agreement also provided TCM with the opportunity to discontinue
the operation of the Business if the Business incurred substantial losses,
provided TCM first allowed Transcend the option to reacquire the assets of
the Business prior to TCM's discontinuance of the Business (the "Option to
Reacquire the Assets"). In October 1998, TCM notified Transcend that due to
operating losses TCM intended to discontinue the Business. Transcend elected
to exercise its Option to Reacquire the Assets of the Business. On December
23, 1998, TCM transferred substantially all of the assets relating to the
Business to Transcend.
In their Demand for Arbitration, Transcend maintains that
notwithstanding Transcend's exercise of the Option to Reacquire the Assets,
CORE and TCM are required to compensate Transcend for unspecified damages.
CORE intends to vigorously defend against Transcend's claims in the
arbitration and has asserted a counterclaim in the amount of $337,054.55
against Transcend based on a provision in the Agreement that sets forth a
formula for establishing the book value of the assets TCM was required to
transfer back to the Transcend upon Transcend's exercise of the Option to
Reacquire the Assets.
Generally, the review services provided by the Company are advisory
in nature, and final determination as to payment or nonpayment of benefits is
not made by the Company. Certain clients, including Bell Atlantic
Corporation, have delegated to CORE the authority to decide whether an
employee is eligible for benefits under the client's plan. Determinations as
to the medical care provided to a patient are always made by the patient or
the attending physician and are not made by CORE. However, due to the
significant number of claims in the medical malpractice field in general, it
is possible that a patient may assert claims against the Company for damages
due to adverse medical consequences. New or existing legal theories by which
patients or physicians may attempt to assert liability against the Company or
other companies engaged in the industry are developing and are expected to
continue to develop. Although the Company believes that its procedures result
in reasonable and accurate determinations of coverage, there can be no
assurance that claims will not be made or that the Company's procedures for
limiting liability will be effective. The Company maintains professional
liability insurance and such other coverages as the Company believes are
reasonable in light of the Company's experience to date. However, there can
be no assurance that such insurance will be sufficient to protect the Company
from liability which might adversely affect the Company's business, operating
results or financial condition or will continue to be available to the
Company at reasonable cost or at all.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
15
<PAGE>
EXECUTIVE OFFICERS OF THE REGISTRANT
The following is a list of CORE's executive officers:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
George C. Carpenter IV 40 Chairman of the Board of Directors
and Chief Executive Officer
Craig C. Horton 44 President and Chief Operating Officer
William E. Nixon 38 Executive Vice President, Chief Financial Officer,
Treasurer and Clerk
Nancy S. Moore 49 Senior Vice President, Operations
Michael Darkoch 55 Senior Vice President, Client Development
James T. Fallon 35 Managing Director, DRMS
Lisa O. Hansen 36 Managing Director, DRMS
Michael D. Lachance 44 Managing Director, DRMS
</TABLE>
Executive officers of the Company are elected by the Board of
Directors on an annual basis and serve at the discretion of the Board of
Directors.
George C. Carpenter IV was re-elected a Class III Director at the
June 1997 Annual Stockholders Meeting, and was elected the Chairman of the
Board of Directors and Chief Executive Officer of the Company effective with
the Company's March 24, 1995 merger involving Core Management, Inc. (the
"CMI/PRA Merger"). Mr. Carpenter served as the Chief Executive Officer and a
Director of Core Management, Inc., a Delaware corporation ("CMI") and now
wholly-owned subsidiary of the Company, since its formation in 1990. From
1988 to 1990, Mr. Carpenter served as a Vice President, Operations of The
Health Data Institute, Inc., a provider of utilization review, case
management and analytic services and a developer of related software, a
subsidiary of Baxter International, Inc.
Craig C. Horton was re-elected a Class III Director at the June 1997
Annual Stockholders Meeting and was elected the President and Chief Operating
Officer of the Company on March 30, 1995. Mr. Horton served as the President
and a Director of CMI from its formation in 1990, and also served as the
acting Chief Financial Officer of CMI from 1994 to 1995. From 1988 to 1990,
Mr. Horton was Vice President, Operations of The Health Data Institute, Inc.,
a subsidiary of Baxter International, Inc.
William E. Nixon is the Executive Vice President, Chief Financial
Officer, Treasurer and Clerk of the Company. Mr. Nixon joined the Company in
December 1988 as Controller. In June 1989, Mr. Nixon became Assistant
Treasurer; in September 1990, he was elected Vice President, Finance and
Administration; in September 1991, he assumed his position as Treasurer. In
December 1993, Mr. Nixon was elected Chief Financial Officer of the Company.
In December 1994, Mr. Nixon was elected Executive Vice President and in March
1995, he was elected Clerk. Prior to his employment with the Company, from
1985 to 1988, Mr. Nixon served as a Senior Accountant at Gray, Gray and Gray,
a public accounting firm.
Nancy S. Moore was elected Senior Vice President, Operations in
September 1997. Ms. Moore served as Vice President, Eastern Operations of the
Company since the March 24, 1995 CMI/PRA merger. Ms. Moore joined the
Company in July 1990 as Manager, Case Management. In November 1992 she
became Director, Operations and was promoted to Vice President, Operations in
May 1994. Prior to her employment with the Company, Ms. Moore served as
Administrator, Behavioral Health Utilization Review Department of Blue Cross
and Blue Shield of Massachusetts and Director of Nursing Services of Charles
River Hospital, Community Care Systems, Inc.
Michael Darkoch joined the Company in September 1997 and was elected
Senior Vice President, Client Development in December 1997. Mr. Darkoch came
to CORE from Caremark International, where he held senior management
positions, including Vice President of Corporate Account Management and Vice
President of Business Development. His background includes account management
process design and sales development. Mr. Darkoch has over 23 years of
experience in the health care industry.
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<PAGE>
James T. Fallon joined the Company with Ms. Hansen and Mr. Lachance
in September 1998 upon the Company's acquisition of Disability Reinsurance
Management Services, Inc. ("DRMS"). Mr. Fallon was a founder of DRMS and has
served as a Managing Director of DRMS since its establishment in 1993.
Previously, from 1985 through 1993, Mr. Fallon held various sales and
marketing management positions with UNUM Life Insurance Company of America
("UNUM") and UNUM's reinsurance division (later Duncanson & Holt).
Lisa O. Hansen joined the Company with Mr. Fallon and Mr. Lachance
in September 1998 upon the Company's acquisition of DRMS. Ms. Hansen was a
founder of DRMS and has served as a Managing Director of DRMS since its
establishment in 1993. Ms. Hansen began her insurance career in Paul Revere
Life Insurance Company's sales force in 1984, then joined UNUM in 1985 where
she held several sales and marketing management positions within UNUM's
reinsurance division (later Duncanson & Holt.)
Michael D. Lachance joined the Company with Mr. Fallon and Ms.
Hansen in September 1998 upon the Company's acquisition of DRMS. Mr. Lachance
was a founder of DRMS and has served as a Managing Director of DRMS since its
establishment in 1993. In 1983, Mr. Lachance joined UNUM where he spent over
eleven years in a variety of Individual Disability and Group Reinsurance
management positions. Mr. Lachance earned his Fellow Society of Actuaries
("FSA") designation in 1986.
17
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is traded on the Nasdaq National Market tier of
The Nasdaq Stock Market ("Nasdaq - NNM") under the symbol: "CORE." The
following table shows the range of high and low sales prices per share for
the shares of Common Stock on the Nasdaq - NNM for the calendar quarters
indicated as reported by Nasdaq. Over-the-counter market quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commission and do
not necessarily represent actual transactions.
<TABLE>
<CAPTION>
HIGH LOW
---------- ----------
<S> <C> <C>
1997
First quarter $ 9 5/8 $ 5 7/8
Second quarter 9 6 1/8
Third quarter 11 1/8 8 5/8
Fourth quarter 12 1/2 9 7/8
1998
First quarter $16 3/8 $11 1/4
Second quarter 16 7 3/4
Third quarter 10 1/16 3 3/4
Fourth quarter 8 1/2 5 1/2
</TABLE>
On March 22, 1999, the closing sale price of the Company's Common
Stock, as quoted on the Nasdaq - NNM, was $8.19 per share.
As of March 22, 1999, there were approximately 152 record holders of
the Company's Common Stock and over 1,000 beneficial owners. There are no
outstanding shares of the Company's Preferred Stock and, accordingly, no
market for said shares.
DIVIDEND POLICY
The Company has never paid a cash dividend. Inasmuch as the Company
intends to retain earnings for the operation and expansion of its business,
the Company does not intend to pay dividends on its Common Stock for the
foreseeable future. The Company's Board of Directors will determine future
dividend policy in light of the then prevailing financial condition of the
Company and other relevant factors.
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<PAGE>
RECENT SALES OF UNREGISTERED SECURITIES
During the quarter ended December 31, 1998, the Company sold the
following shares of Common Stock, which were not registered under the
Securities Act at the time of issuance. Except as otherwise noted, such
shares were sold to a former investor upon the exercise of previously granted
stock warrants.
<TABLE>
<CAPTION>
NUMBER OF PURCHASE PRICE
DATE SECURITY PURCHASER SHARES PER SHARE
- ----------------- ------------------ --------------------------- -------------- ---------------
<S> <C> <C> <C> <C>
10/27/98 Common Stock Ventana Partnership III, L.P. 6,700 $3.73
</TABLE>
These foregoing securities were not registered under the Securities
Act at the time of sale and issuance, in reliance upon the exemption
contained in Section 4(2) of the Securities Act for transactions by an issuer
not involving any public offering.
19
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
The data should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations," the
consolidated financial statements and related notes, and other financial
information included elsewhere herein.
<TABLE>
<CAPTION>
Year ended December 31,
------------- ------------- --------------- -------------- -------------
1994 1995 1996 1997 1998
------------- ------------- --------------- -------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues $16,746 $20,769 $28,806 $38,507 $45,609
Cost of services 11,305 12,839 17,741 23,330 27,833
------------- ------------- --------------- ------------- -------------
Gross profit 5,441 7,930 11,065 15,177 17,776
Operating expenses:
General and administrative 4,265 4,787 6,285 7,940 9,740
Sales and marketing 1,563 1,499 1,744 2,483 3,649
Depreciation and amortization 915 905 1,338 1,955 2,503
Merger costs 1,114 994 - - -
Non-recurring write-off of AmHealth acquisition
- - 1,920 - -
Write-off of goodwill 2,294 - - - 4,085
Arbitration costs - - - - 736
Charges in connection with disposal of
subsidiaries - - - - 658
Other non-recurring charges - - - - 156
------------- ------------- --------------- ------------- -------------
Total operating expenses 10,151 8,185 11,287 12,378 21,527
------------- ------------- --------------- ------------- -------------
Income (loss) from operations (4,710) (255) (222) 2,799 (3,751)
Other income (expense):
Interest income 296 240 385 590 303
Interest expense (158) ( 83) (35) (27) (505)
Other income (expense) (127) 19 16 - -
------------- ------------- --------------- ------------- -------------
11 176 366 563 (202)
------------- ------------- --------------- ------------- -------------
Income (loss) before income taxes (4,699) (79) 144 3,362 (3,953)
Income tax (provision) benefit - - - (610) 193
------------- ------------- --------------- ------------- -------------
Net income (loss) $ (4,699) $ (79) $144 $2,752 $ (3,760)
============= ============= =============== ============= =============
Net income (loss) per common share:
Basic $ (1.01) $ (0.02) $ 0.03 $ 0.38 $ (0.50)
============= ============= =============== ============= =============
Diluted $ (1.01) $ (0.02) $ 0.02 $ 0.35 $ (0.50)
============= ============= =============== ============= =============
Weighted average number of common shares
and equivalents outstanding:
Basic 4,668 4,755 5,713 7,246 7,489
============= ============= =============== ============= =============
============= ============= =============== ============= =============
Diluted 4,668 4,755 6,473 7,934 7,489
============= ============= =============== ============= =============
</TABLE>
<TABLE>
<CAPTION>
December 31,
------------- ------------- --------------- ------------- -------------
1994 1995 1996 1997 1998
------------- ------------- --------------- ------------- -------------
(In thousands)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents $ - $1,006 $4,282 $7,945 $2,226
Working capital 4,612 3,152 15,781 11,850 5,093
Total assets 12,504 11,869 27,844 32,815 48,732
Long-term debt and capital lease obligations 121 817 344 190 13,874
Stockholders' equity 7,553 7,648 24,456 27,659 26,827
</TABLE>
20
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
OVERVIEW
CORE, INC. is a national provider of employee absence management
services to Fortune 500 companies and other self-insured employers,
third-party administrators and insurance carriers. The Company's services
include Integrated Disability Management (which consist of the Company's
proprietary WorkAbility(R) Absence Management program, disability reinsurance
management services, social security disability benefits advocacy, analytic
consulting services, onsite job profiling and 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.
The Company is typically compensated for these services either on a
per employee per month ("PEPM"), per case, hourly, percentage of risk premium
(for full service reinsurance management services) or percentage of cost
recovery (for social security advocacy and Medicare benefits services) basis.
The integrated disability management services line also includes a limited
amount of revenue (1% for the year ended December 31, 1998) from licensing
fees attributable to license grants by the Company of the medical protocol
portion of the WorkAbility software program.
CURRENT DEVELOPMENTS
On March 17, 1998, a wholly-owned subsidiary of the Company, TCM
Services, Inc. ("TCM") purchased the operating assets and certain liabilities
of Transcend Case Management, Inc. ("Transcend"). Transcend, with offices
based in Orlando, Florida is a provider of workers' compensation case
management services to clients located principally in Florida, Texas and
Georgia. On December 23, 1998, TCM transferred substantially all its assets
and certain liabilities to Transcend following the exercise by Transcend of
its option to reacquire the assets, as described in the Asset Purchase
Agreement dated March 17, 1998. The Company recorded charges of $241,000 in
connection with this transfer.
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 by CORE of $425,000 and the
issuance by CORE of promissory notes in the amount of $190,000 payable in
twelve monthly installments beginning January 1999. In addition, the Company
incurred approximately $121,000 in other costs related to the arbitration
(primarily legal and travel expenses).
During June 1998, CRS was informed that its principal client
(representing nearly 70% of CRS revenues) would not be renewing its contract
in October 1998. This information combined with present operating losses
incurred by CRS indicated that the net book value of the goodwill and
intangibles related to the CRS operations, amounting to $1,935,000, was not
recoverable and thus, was written-off. The Company also performed a review of
other long-lived assets prior to the close of its results for the quarter
ended June 30, 1998. The results of its review indicated that an impairment
loss existed related to certain identifiable intangible contract values
resulting from the acquisition of Social Security Disability Consultants and
Disability Services, Inc. (collectively, "SSDC") in June 1997. The impairment
loss primarily resulted from a significant decline in revenues realized under
SSDC's Medicare coordination of benefits program. As it appeared that the
decline in revenues would continue, intangibles in the amount of $2,150,000
were written off.
On September 1, 1998, the Company acquired all shares of stock of
Disability Reinsurance Management Services, Inc. ("DRMS"), a Delaware
corporation, pursuant to a Capital Stock Purchase Agreement dated as of
August 31, 1998 (the "Stock Purchase Agreement"). Pursuant to the Stock
Purchase Agreement, all shares of stock of DRMS were acquired in exchange for
a $20,000,000 cash payment, the issuance of 480,000 shares of the Company's
common stock and the future issuance of up to an additional $7,000,000 of the
Company's common stock after September 30, 2001, based upon the future
performance of DRMS. The purchase price is subject to certain adjustments as
set forth in the Stock Purchase Agreement. The excess of the purchase price
over the estimated fair market value of the net assets acquired, representing
goodwill and certain identifiable intangibles amounting to approximately
$22,762,000, is being amortized on a straight-line basis over periods of
three to thirty-five years. DRMS is a full service reinsurance intermediary
manager providing marketing, underwriting advice, claims, actuarial and
compliance services to its insurance company clients and risk management
expertise for reinsurers in a reinsurance facility.
Effective October 31, 1998, the Company discontinued the operations of
CRS. In connection with this action, the Company recorded charges totaling
$417,000. The major components of the charges were $157,000 of employee
separation costs, $58,000 of non-cash charges to dispose of certain assets
through abandonment and $75,000 to terminate lease and other contractual
obligations. CRS provided regional bill audit and workers' compensation case
management services to insurance companies and third-party administrators of
workers' compensation programs.
21
<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>
YEAR ENDED DECEMBER 31,
---------- ------------ -----------
1996 1997 1998
---------- ------------ -----------
<S> <C> <C> <C>
Revenue 100.0% 100.0% 100.0%
Cost of services 61.6 60.6 61.0
Gross profit 38.4 39.4 39.0
General and administrative expense 21.8 20.6 21.4
Sales and marketing expense 6.1 6.4 8.0
</TABLE>
The following table sets forth the contribution to total revenues of
each of the Company's principal service lines for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------- ------------------------ -----------------------
1996 1997 1998
----------------------- ------------------------ -----------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
----------- ----------- ------------ ----------- ----------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Integrated Disability Management $10,696 37% $18,514 48% $26,959 59%
Peer Review Analysis 7,670 27% 8,415 22% 8,004 17%
Exiting/exited services 4,454 15% 3,049 8% 3,558 8%
Other service lines 5,986 21% 8,529 22% 7,088 16%
----------- ----------- ------------ ----------- ----------- -----------
$28,806 100% $38,507 100% $45,609 100%
=========== =========== ============ =========== =========== ===========
</TABLE>
YEARS ENDED DECEMBER 31, 1998 AND 1997
Revenues increased by $7,102,000 (18%) from $38,507,000 in 1997 to
$45,609,000 in 1998. Growth in Integrated Disability Management contributed
$8,445,000 (119%) of the Company's overall net increase in revenues. Revenues
for this service line include revenues from DRMS acquired in September 1998
(which expanded CORE's programs to include disability reinsurance management
services) and a full year of operations from SSDC and PWS, which were
acquired in June and July 1997, respectively. CORE's WorkAbility Absence
Management program contributed 52% of the revenue increase in Integrated
Disability Management during 1998 due to the addition of new clients and the
expansion of services to existing clients during the latter half of 1997 and
throughout 1998. Revenues from DRMS contributed 36% of the increase in
Integrated Disability Management revenues during 1998.
A decrease in the volume of referrals in the behavioral health
review services program resulted in an overall reduction of 5% in revenues
realized from the Peer Review Analysis service line in 1998, as compared to
1997.
Revenues from services that the Company exited in 1998 or expects to
exit in 1999 increased overall by 17% during 1998, as compared to the prior
year. These service lines consist of regional workers' compensation case
management services (of both CRS and TCM), regional bill audit activities of
CRS, and the behavioral health programs of the Company's wholly-owned
subsidiary, Integrated Behavioral Health ("IBH"). The net increase in these
services during 1998 related principally to the acquisition of TCM in March
1998. Specifically, TCM contributed $1,287,000 in new workers' compensation
case management revenues, however TCM operations were exited in December 1998
due to poor net operating performance. The CRS operations were closed as of
October 31, 1998 due to the loss of a significant portion of its customer
base. The Company expects revenues in these service lines to decrease
significantly in 1999 due to the exiting of the CRS and TCM operations
together with its intent to exit the operations of IBH in 1999.
Revenues from other service lines (which includes utilization review,
Medicare coordination of benefits and other case management services),
decreased 17% overall for 1998, as compared to 1997. This decrease was
primarily attributable
22
<PAGE>
to the utilization review program stemming from a decline in enrollment in
our clients' indemnity plan based group health business. Although the Company
expects revenues from utilization review and other case management services
to further decline during 1999, these anticipated decreases may be partially
offset by an increase in revenues from its Medicare coordination of benefits
program, following the introduction of certain new products developed during
1998.
For 1998, the Company's top five clients represented 45% of revenues
compared to 43% during 1997. Bell Atlantic accounted for approximately 21% of
revenue in 1998 and 23% of revenues for 1997. No other single client
represented more than 10% of total revenues in 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
$4,503,000 (19%) from $23,330,000 in 1997 to $27,833,000 in 1998. The
increase is primarily the result of additional payroll costs associated with
business acquisitions completed in 1998 and the summer of 1997 in addition to
increased staffing levels required to service new and growing WorkAbility
clients. Additionally, increased amortization expense was incurred as
software enhancements to the Company's operating systems were placed into
service.
CORE's gross profit performance for 1998 remained unchanged compared to
1997 at 39%. Gross profit performance for each of the Company's principal
lines of service for the years ended 1998 and 1997, respectively, are: 41%
and 35% for Integrated Disability Management, 36% and 39% for Peer Review
Analysis, 16% and 27% for exiting/exited services and 47% and 52% for other
service lines. The increase in gross margins realized under Integrated
Disability Management is primarily due to the addition of disability
reinsurance management services now provided by the Company pursuant to the
acquisition of DRMS. The decline in gross margins realized under Peer Review
Analysis is due mostly to the decrease in revenues generated under the
behavioral health program and an increase in expenses (mostly payroll) added
in advance of expected program revenues with certain new Peer Review Analysis
clients. The decline in gross margins realized under other service lines is
primarily due to a decrease in revenues generated from the utilization review
and Medicare coordination of benefits programs.
General and administrative expenses include the cost of executive,
administrative and information services personnel, rent and other overhead
items. General and administrative expenses increased $1,800,000 (23%) from
$7,940,000 in 1997 to $9,740,000 in 1998. Expenses increased due primarily to
higher costs associated with additional staffing in the information services
areas to support the growth of the Company. Higher costs in rent, insurance
costs, equipment rental and other general and administrative expenses relate
primarily to the Company's acquisitions during the summer of 1997 and March
and September of 1998. 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, remained unchanged in
1998, compared to 1997, at 21%.
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 exposure, such as
participation in and attendance at industry trade shows and conferences.
Sales and marketing expenses increased $1,166,000 (47%) from $2,483,000 in
1997 to $3,649,000 in 1998. The increase is primarily due to the Company's
acquisitions during the summer of 1997 and March and September of 1998. The
balance of the increase is primarily due to expanded staffing to support the
sales and product development departments. The Company expects to continue to
invest an increased amount of resources in sales and marketing in future
periods.
Depreciation and amortization expenses increased $548,000 (28%) from
$1,955,000 in 1997 to $2,503,000 in 1998. The increase is mainly attributable
to increased amortization on the goodwill acquired in the purchases of DRMS
in September 1998 and of SSDC and PWS in June and July 1997, respectively.
During 1998, the Company recorded write-offs of goodwill and
intangibles totaling $4,085,000 pursuant to its review of long-lived assets.
During June 1998, CRS was informed that its principal client (representing
nearly 70% of CRS revenues) would not be renewing its contract in October
1998. This information combined with CRS's present operating losses indicated
that the net book value of the goodwill and intangibles related to the CRS
operations, amounting to $1,935,000, was not recoverable and thus,
written-off effective as of June 30, 1998. The Company also determined that
an impairment loss existed related to certain identifiable intangibles
acquired from SSDC in June 1997. The impairment loss primarily resulted from
a significant decline in revenues realized under SSDC's Medicare coordination
of benefits program. As it appeared that the decline in revenues would
continue, intangibles in the amount of $2,150,000 were written off as of June
30, 1998.
23
<PAGE>
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 by CORE of $425,000
and CORE's issuance of promissory notes in the amount of $190,000 payable in
twelve monthly installments beginning January 1999. In addition, the Company
incurred approximately $121,000 in other costs related to the arbitration
(primarily legal and travel expenses).
During 1998, the Company recorded $658,000 in charges relating to its
termination of operations at two subsidiaries. Effective October 31, 1998,
the Company discontinued the operations of CRS. In connection with this
action, the Company recorded estimated charges totaling $417,000. CRS
provided regional bill audit and workers' compensation case management
services to insurance companies and third-party administrators of workers'
compensation programs. On December 23, 1998, substantially all the assets and
certain liabilities relating to TCM were reacquired by the original seller
pursuant to terms set forth in the Asset Purchase Agreement dated March 17,
1998. The Company recorded charges of $241,000 in connection with this
transfer. TCM provided regional worker's compensation case management
services.
During 1998, the Company recorded other non-recurring charges totaling
$156,000. These costs primarily consisted of costs related to the Company's
relocation of its accounting department from Boston, Massachusetts to its
corporate offices in Irvine, California.
Other income and expense, net, consists primarily of interest expense
as offset by interest income. Interest expense represents amounts incurred
related to outstanding borrowings under the Company's August 1998 Credit
Agreement with Fleet National Bank. Interest income represents amounts earned
by the Company's investments. Other income and expense, net, decreased
$765,000 from a net other income of $563,000 in 1997 to a net other expense
of $202,000 in 1998. The decrease is due to a decrease in funds available for
investment and an increase in borrowings outstanding used to complete the
acquisition of DRMS in September 1998.
YEARS ENDED DECEMBER 31, 1997 AND 1996
Revenues increased by $9,701,000 (34%) from $28,806,000 in 1996 to
$38,507,000 in 1997. Growth in Integrated Disability Management contributed
$7,818,000 (81%) of the Company's increase in revenues which included
revenues from the June and July 1997 acquisitions of SSDC and Protocol Work
Systems, respectively. Approximately 50% of the total revenue increase for
the year is attributable to revenues generated from Bell Atlantic
Corporation. CORE continued to expand its services provided to Bell Atlantic
Corporation during 1997, its first full year as a client. Each of the revenue
components of Integrated Disability Management services grew during 1997,
except for analytic consulting which had a slight decline of 2%. An increase
in the volume of referrals resulted in increased revenues realized from Peer
Review Analysis, growing 10% for the year ended 1997, as compared to the
prior year.
Revenues from service lines that the Company exited in 1998 or
expects to exit in 1999 declined overall by 32% during 1997, as compared to
1996. The principal reason for the overall decline related to bill audit
services, which recorded significantly lower revenues as a result of
renegotiated client contracts.
Revenues from other service lines increased 42% overall for 1997 as
compared to 1996 despite a slight decline in enrollment in our clients'
indemnity plan based group health business. The increase was primarily
attributable to the June 1997 acquisition of SSDC (which expanded CORE's
programs to include Medicare coordination of benefits services). The Company
expects utilization review and case management revenues to decline in future
periods, as compared to current year levels.
For 1997, the Company's top five clients represented 43% of revenues
compared to 36% during 1996. Bell Atlantic accounted for approximately 23% of
revenue in 1997 and 13% of revenues for 1996. No other single client
represented more than 10% of total revenues in 1997 or 1996.
Cost of services increased $5,589,000 (32%) from $17,741,000 in 1996
to $23,330,000 in 1997. 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 and growth in the Company's Peer Review Analysis
services. Additionally, increased amortization expense was incurred as
software enhancements to the Company's operating systems were placed into
service.
CORE's gross profit performance for 1997 improved slightly to 39%
from 38% in 1996. Gross profit performance for each of the Company's
principal service lines for the years ended 1997 and 1996, respectively, are:
35% and 41% for Integrated Disability Management, 39% and 39% for Peer Review
Analysis, 27% and 42% for
24
<PAGE>
exiting/exited services and 52% and 30% for other service lines. The decline
in gross margins realized by Integrated Disability Management is largely
attributable to costs of integrating the new programs pursuant to the June
1997 acquisition of SSDC (which added social security disability benefits
advocacy services) and the July 1997 acquisition of PWS. The significant
decline in overall gross margins realized for those service lines being
exited in 1998 or expected to be exited in 1999 is mainly attributable to a
62% decrease in revenues generated from bill audit services during 1997. The
increase in gross margins realized for other service lines is attributable to
the addition of Medicare coordination of benefits services in June 1997.
General and administrative expenses increased $1,655,000 (26%) from
$6,285,000 in 1996 to $7,940,000 in 1997. Expenses increased due primarily to
higher costs associated with additional staffing in the information services
areas to support the growth of the Company. Higher costs in rent, insurance
costs, equipment rental and other general and administrative expenses relate
primarily to the Company's Silver Spring, Maryland operating center that
opened in July 1996, the expansion of space in the Company's Burlington,
Massachusetts facility in early 1997, and the acquisitions of SSDC and
Protocol Work Systems in June and July 1997, respectively. General and
administrative expenses, as a percentage of revenues, decreased from 22% for
1996 to 21% for 1997. This improvement is generally due to greater economies
of scale related to higher revenues.
Sales and marketing expenses increased $739,000 (42%) from
$1,744,000 in 1996 to $2,483,000 in 1997. The increase is primarily due to
increased staffing to support the sales and product development departments
as well as additional travel costs and costs for participation in tradeshows.
During 1997, the Company expanded its sales organization to focus its efforts
on Fortune 500 company prospects. Additionally, a sales tracking system was
implemented in 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
acquisitions of SSDC and Protocol Work Systems.
Depreciation and amortization expenses increased $617,000 (46%) from
$1,338,000 in 1996 to $1,955,000 in 1997. The increase is largely
attributable to increased depreciation expense on assets purchased for the
operating center in Silver Spring, Maryland to service the Bell Atlantic
Corporation contract as well as increased amortization expense on the
goodwill acquired in the purchases of SSDC and Protocol Work Systems.
Other income consists primarily of interest income, which represents
amounts earned by the Company's investments as reduced by interest expense.
Other income increased $196,000 (54%) from $366,000 in 1996 to $562,000 in
1997. The increase is due to an increase in funds available for investment
following a public offering in August 1996 and a reduction in the use of the
Company's line of credit.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
On August 31, 1998, the Company entered into a revolving line of
credit agreement (the "Credit Agreement") with Fleet National Bank ("Fleet").
Under the Credit Agreement, which was amended on December 31, 1998 and
expires August 31, 2003, the Company may borrow up to specified amounts
beginning at $17,000,000 at the prime base rate plus 0.50% or London
Interbank Offered Rate ("LIBOR") plus 3.50%. The $17,000,000 credit
availability is subject to mandatory commitment reductions each quarter in
amounts ranging from $250,000 to $1,000,000. At December 31, 1998, the
Company had outstanding borrowings of $16,500,000 under the Credit Agreement
which were all tied to the prime base lending rate (7.75%) plus the
applicable margin. The Credit Agreement is secured by substantially all of
the Company's assets and requires the Company to meet certain financial
covenants, including minimum ratios for interest, debt service and fixed
charge coverage along with minimum net worth levels. Additionally, the Credit
Agreement prohibits the payment of dividends by the Company without the
Bank's written consent. The Company was in compliance with the financial
covenants contained in the Credit Agreement at December 31, 1998.
In connection with the Credit Agreement, the Company issued a
Warrant to purchase shares of its Common Stock to Fleet. The Warrant entitles
the holder to purchase up to 156,322 shares of the Company's Common Stock
(subject to certain adjustments), at an exercise price of $6.92 per share.
The Warrant is exercisable beginning August 31, 1999 and expires August 31,
2003.
On January 15 1999, the Company entered into an interest rate
protection arrangement with Fleet that limits the Company'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%)
over the life of the Credit Agreement.
25
<PAGE>
A Second Amendment to the Credit Agreement, dated February 19, 1999
revised the scheduled maximum commitment available from $16,000,000 as of the
date of the second amendment to $17,000,000, subject to a revised schedule of
mandatory commitment reductions.
For the year ended December 31, 1998, the Company's cash and cash
equivalents decreased by $5,719,000. For this period, operating activities
provided $1,484,000 of cash despite net losses of $3,760,000 and a net
increase in accounts receivable and other current assets of $3,343,000, as
these were offset by depreciation and amortization of $3,332,000 and the
write-off of goodwill and intangibles of $4,085,000. The increase in accounts
receivable and other current assets is due primarily to the increase in
revenues over 1997 and the contractual timing of certain client billings. The
Company's investing activities used $22,618,000 of cash mostly to fund the
acquisition of DRMS for $20,366,000 and additions to property and equipment
(including software development) of $3,504,000. The Company's financing
activities provided $15,416,000 of cash for this period due primarily to
$16,500,000 in net borrowings under a new credit agreement dated August 31,
1998, as offset by $1,125,000 in payments made on an obligation related to a
prior year acquisition.
The Company leases its facilities and certain office equipment. Future
lease commitments, which relate substantially to space rental, for the years
ended December 31, 1999 and December 31, 2000 are approximately $2.4 million and
$2.1 million, respectively. All obligations held by the Company under lease
commitments expire on various dates through June 30, 2003 and total $6.1 million
as of December 31, 1998.
The Company has net operating loss carryforwards for income tax
purposes of approximately $5.5 million as of December 31, 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 the net operating loss carryforwards may be subject to further limitation
provided by the Internal Revenue Code of 1986 and similar state provisions.
The Company has recently entered into certain client service agreements
and is currently negotiating other client service agreements that may require
the Company to expend working capital ahead of the contractual billing periods.
To the extent that such working capital needs exceed currently available working
capital, the Company believes that it can obtain such additional working capital
from its present lender or others. The Company believes that this additional
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 1999.
YEAR 2000 SYSTEM COMPLIANCE
The Year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year. As a result,
the Company's computer programs or hardware that have date-sensitive software or
embedded chips may not properly recognize a year that begins with "20" instead
of the familiar "19." If not corrected, the Company is at risk of a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
The Company's primary computer application platforms were essentially
designed to process and store dates in a four-character format. The Company
believes this substantially reduces the magnitude of the effort required to
address the Year 2000 issue. 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 and
from clients 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 presently believes that with
modifications and replacement of existing software, the Year 2000 issue can be
mitigated. However, if such modifications and replacements are not made, or are
not completed timely, the Year 2000 issue could have an impact on the operations
of the Company.
The Company's plan to resolve the Year 2000 issue involves the
following five phases: assessment, remediation, testing, implementation, and
certification. To date the Company has fully completed its assessment of all
systems that could be significantly affected by the year 2000. The completed
assessment indicated that most of the Company's major systems are effectively
Year 2000 compliant and will require only minor modifications. 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 vendors and large customers to determine the extent to which
the Company's interface systems are vulnerable to those third parties'
26
<PAGE>
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.
For its internal applications and licensed operating systems, software
tools and utilities exposures, to date the Company is approximately 80% complete
on the remediation phase and expects to complete the software reprogramming and
replacement no later than the second quarter of 1999. Once software is
reprogrammed and replaced for a system, the Company begins testing and
implementation. These phases run concurrently for different systems. To date,
the Company has completed approximately 70% of its testing and has implemented
approximately 80% of its remediated systems. The testing phase for all
significant systems is expected to be completed in the second quarter of 1999,
with all remediated systems fully tested and certified in the third quarter of
1999, which is prior to any anticipated impact on its operating systems. Also,
during the third quarter of 1999, the Company plans to carry out a certification
process to validate the whole information technology environment, once again, to
ensure Year 2000 compliance.
Because the results to date of the completed assessment have indicated
that most of the Company's major systems are effectively Year 2000 compliant and
will require only minor modifications, no contingency plans have been developed
at this time. The Company will develop contingency plans as deemed necessary if
a significant risk related to our Year 2000 compliance or a delay in the
anticipated timeline for compliance occurs. These contingency plans may involve,
among other actions, manual workarounds.
The Company has queried its material clients that do not share
information systems with the Company. To date, the Company is not aware of any
external agent Year 2000 issue that would materially impact the Company's
results of operations, liquidity, or capital resources. However, the Company has
no means of ensuring that external agents will be Year 2000 issue compliant. The
inability of external agents to resolve their Year 2000 issues in a timely
manner could materially impact the Company. The effect of non-compliance by
external agents is not determinable.
The Company will utilize both internal and external resources to
reprogram, or replace, test, and implement software for Year 2000 modifications.
The total cost of the Year 2000 project is estimated at $800,000 and is being
funded through operating cash flows. These costs include internal information
systems resources redirected to the Company's Year 2000 program. To date, the
costs incurred by the Company related to all phases of the Year 2000 project
have been immaterial and have been expensed as incurred. Of the total remaining
project costs, approximately $200,000 is attributable to the purchase of new
software and operating equipment, which will be capitalized. The remaining
$580,000 related to repair of hardware and software and will be expensed as
incurred.
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. Estimates on the status of completion and the expected completion dates
are based on costs incurred to date compared to total expected costs. 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. Readers are
cautioned that forward-looking statements contained in this discussion should be
read in conjunction with our disclosure with regard to forward-looking
statements, see "Item 1. Business."
27
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company entered into a revolving line of credit agreement with
Fleet National Bank ("Fleet") on August 31, 1998 (the "Credit Agreement").
The Credit Agreement was entered into for purposes other than trading. The
outstanding borrowings under the Credit Agreement bear interest at variable
rates which reset as prevailing market conditions change. The Company also
entered into a derivative financial instrument in January 1999 for purposes
of managing its interest rate exposure.
See "Notes to Consolidated Financial Statements," Notes 3 and 9
contained elsewhere within this report for additional information.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements and supplementary data of CORE called for
by this item appear under the caption Index to Financial Statements (page F-1
hereof). Such information is included elsewhere herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
Not Applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Pursuant to General Instruction G(3) to Form 10-K, information
required under this item is incorporated by reference from the Registrant's
definitive proxy statement with respect to the 1999 Annual Stockholders Meeting,
to be filed with the Securities and Exchange Commission pursuant to Regulation
14A.
Certain information as it pertains to executive officers, is
included at the end of Part I of this Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION.
Pursuant to General Instruction G(3) to Form 10-K, information
required under this item is incorporated by reference from the Registrant's
definitive proxy statement with respect to the 1999 Annual Stockholders Meeting,
to be filed with the Securities and Exchange Commission pursuant to Regulation
14A.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Pursuant to General Instruction G(3) to Form 10-K, information
required under this item is incorporated by reference from the Registrant's
definitive proxy statement with respect to the 1999 Annual Stockholders Meeting,
to be filed with the Securities and Exchange Commission pursuant to Regulation
14A.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Pursuant to General Instruction G(3) to Form 10-K, information
required under this item is incorporated by reference from the Registrant's
definitive proxy statement with respect to the 1999 Annual Stockholders Meeting,
to be filed with the Securities and Exchange Commission pursuant to Regulation
14A.
28
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULE, AND REPORTS ON FORM 8-K.
(a) Financial Statements, Financial Statements Schedule and Exhibits.
1. FINANCIAL STATEMENTS. The information called for by this item
appears under the caption Index to Financial Statements (page F-1
hereof). Such information is incorporated by reference herein.
2. FINANCIAL STATEMENTS SCHEDULE. The information called for by this
item appears under the caption Index to Financial Statements
(page F-1 hereof). Such information is incorporated by reference
herein.
3. EXHIBITS.
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
2.1 Second Agreement and Plan or Reorganization by and between Core
Management, Inc., Registrant and PRA Sub, Inc. dated as of
December 19, 1994. Filed as Appendix I to Prospectus and Joint
Proxy Statement in Amendment No. 5 to Registrant's Registration
Statement on Form S-4 (Registration No. 33-73906), filed February
14, 1995, and incorporated herein by reference.
2.2 Capital Stock Purchase Agreement, by and between Registrant, Cost
Review Services, Inc., Larry Bertrand Wallace and Leigh B. Goodwin,
dated October 2, 1995 (without exhibits). Filed as exhibit 2.1 to
Registrant's Current Report on Form 8-K, filed October 16, 1995, and
incorporated herein by reference.
2.3 Asset Purchase Agreement dated June 14, 1997, by and among CORE, INC.,
SSDC Corp., Social Security Disability Consultants Limited
Partnership, Disability Services, Inc., DSI Medicare Consultants,
Inc., R. Gary Dolenga and Phylis M. Dolenga, including Amendment No. 1
to Asset Purchase Agreement, dated June 25, 1997, and Exhibit A -
Performance Criteria (excluding other Exhibits and Schedules). Filed
as exhibit 2.1 to Registrant's Current Report on Form 8-K, filed July
15, 1997, and incorporated herein by reference.
2.4 Asset Purchase Agreement dated March 17, 1998, by and among CORE,
INC., TCM Services, Inc., Transcend Case Management, Inc. and
Transcend Services, Inc. (excluding exhibits and schedules). Filed as
exhibit 2.4 to Registrant's Annual Report on Form 10-K, filed April 1,
1998, and incorporated herein by reference.
2.5 Capital Stock Purchase Agreement, dated as of August 31, 1998, by and
among CORE, INC., Disability Reinsurance Management Services, Inc.,
and the Stockholders of Disability Reinsurance Management Services,
Inc., including Exhibit A-1 (excluding other Exhibits and Schedules).
Filed as exhibit 2.1 to Registrant's Current Report on Form 8-K, filed
September 17, 1998, and incorporated herein by reference.
3.1 Restated Articles of Organization of the Registrant, dated November
22, 1991, as further amended by Articles of Amendment, dated March 24,
1995, July 28, 1995 and October 28, 1996. Filed as exhibit no. 4.1 to
Registrant's Quarterly Report on Form 10-Q, filed November 13, 1996,
and incorporated herein by reference.
3.2 By-Laws of the Registrant, as amended. Filed as exhibit no. 3.2 to
Registrant's Annual Report on Form 10-K, filed March 30, 1993, and
incorporated herein by reference.
4.1 Specimen Common Stock certificate. Filed as exhibit no. 4.1 to
Registrant's Annual Report on Form 10-K, filed April 1, 1996, and
incorporated herein by reference.
4.2 Warrant Agreement, dated as of August 31, 1998, between CORE, INC. and
Fleet National Bank (excluding Exhibits). Filed as exhibit 4.1 to
Registrant's Current Report on Form 8-K, filed September 17, 1998, and
incorporated herein by reference.
10.1 Software License Agreement, dated August 26, 1986, between Chrysler
Corporation ("Chrysler") and The Health
29
<PAGE>
Data Institute ("HDI"). Filed as exhibit no. 10.59 to the Registrant's
Registration Statement on Form S-4 (Registration No. 33-73906), filed
January 10, 1994, and incorporated herein by reference.
10.2 Amendment No. 1 to Software License Agreement, dated December 23, 1987,
between Chrysler and HDI. Filed as exhibit no. 10.60 to the Registrant's
Registration Statement on Form S-4 (Registration No. 33-73906), filed
January 10, 1994, and incorporated herein by reference.
10.3 Services Agreement, dated as of August 1, 1996, between CORE, INC. and
Bell Atlantic Corporation (without schedules and appendices). Filed
as exhibit 10.1 to Registrant's Quarterly Report Form 10-Q, filed
August 13, 1997, and incorporated herein by reference.
10.4 Credit Agreement, dated as of August 31, 1998, between CORE, INC. and
Fleet National Bank, including Exhibit A (excluding Schedules and
other Exhibits). Filed as exhibit 10.1 to Registrant's Current Report
on Form 8-K, filed September 17, 1998, and incorporated herein by
reference.
10.5* First Amendment to the Credit Agreement, dated as of December 31,
1998, betweeen CORE, INC. and Fleet National Bank.
10.6* Second Amendment to the Credit Agreement, dated as of February 19,
1999, between CORE, INC. and Fleet National Bank.
10.7 Registrant's Amended and Restated 1991 Stock Option Plan. Filed as
exhibit no. 4.3 to the Registrant's Registration Statement on Form S-8
(Registration No. 333-15261), filed October 31, 1996, and
incorporated herein by reference.
10.8 Form of Stock Option Agreement, dated as of May 17, 1993, between
Registrant and William E. Nixon. Filed as exhibit no. 10.5 to
Registrant's Quarterly Report on Form 10-Q, filed June 30, 1993, and
incorporated herein by reference.
10.9 Form of Stock Option Agreement, granted March 23, 1995, to
non-employee directors for services in 1994 and through March 23,
1995, including schedule of optionees. Filed as Exhibit No. 10.1 to
Registrant's Quarterly Report on Form 10-Q, filed November 14, 1995,
and incorporated herein by reference.
10.10 Form of Stock Option Agreement for 19,500 shares to vest quarterly
over three years granted March 24, 1995, to non-employee directors,
including schedule of optionees. Filed as Exhibit No. 10.2 to
Registrant's Quarterly Report on Form 10-Q, filed November 14, 1995,
and incorporated herein by reference.
10.11 Form of Stock Option Agreement for 4,875 shares, granted March 24,
1995 to non-employee directors, including schedule of optionees. Filed
as Exhibit No. 10.3 to Registrant's Quarterly Report on Form 10-Q,
filed November 14, 1995, and incorporated herein by reference.
10.12 Form of Stock Option Agreement, granted April 27, 1995, to executive
officers, including schedule of executive officer optionees. Filed as
Exhibit No. 10.4 to Registrant's Quarterly Report on Form 10-Q, filed
November 14, 1995, and incorporated herein by reference.
10.13 Form of Stock Option Agreement, granted April 27, 1995, for consulting
and other services, including schedule of optionees. Filed as Exhibit
No. 10.5 to Registrant's Quarterly Report on Form 10-Q, filed November
14, 1995, and incorporated herein by reference.
10.14 Form of Stock Option Agreement for 12,375 shares of Registrant's
common stock granted November 8, 1995 to four non-employee directors.
Filed as exhibit no. 10.58 to the Registrant's Annual Report on Form
10-K, filed April 1, 1996, and incorporated herein by reference.
10.15 Form of Stock Option Agreement, granted March 29, 1996, to officers,
including schedule of officer optionees. Filed as exhibit no. 10.31 to
Registrant's Registration Statement on Form S-1 (Registration No.
333-03639), filed May 13, 1996, and incorporated herein by reference.
10.16 Form of Stock Option Agreement, granted March 29, 1996, for consulting
services, including schedule of optionees. Filed as exhibit no. 10.32
to Registrant's Registration Statement on Form S-1 (Registration No.
333-03639), filed May 13, 1996, and incorporated herein by reference.
10.17 Core Management, Inc. Employee Stock Option Plan. Filed as exhibit no.
10.65 to the Company's Registration Statement on Form S-4 (Registration
No. 33-73906), filed January 10, 1994, and incorporated herein by
reference.
10.18 Forms of Stock Option Agreement under Core Management, Inc. Employee
Stock Option Plan. Filed as exhibit no.
30
<PAGE>
10.66 to the Registrant's Registration Statement on Form S-4
(Registration No. 33-73906), filed January 10, 1994, and incorporated
herein by reference.
10.19 Form of Non-Employee Director Stock Option Agreement of Core
Management, Inc. Filed as exhibit no. 10.67 to the Company's
Registration Statement on Form S-4 (Registration No. 33-73906),
filed January 10, 1994, and incorporated herein by reference.
10.20 Registration Rights Agreement, dated February 23, 1994, between CMI
and Silicon Valley Bank. Filed as exhibit no. 10.81 to Amendment No. 1
to the Registrant's Registration Statement on Form S-4 (Registration
No. 33-73906), filed June 8, 1994, and incorporated herein by
reference.
10.21 Registration Rights Agreement, dated March 17, 1998, between CORE,
INC. and Transcend Services, Inc. Filed as exhibit 10.22 to
Registrant's Annual Report on Form 10-K, filed April 1, 1998, and
incorporated herein by reference.
10.22 Registration Rights Agreement, dated as of August 31, 1998, between
CORE, INC. and James T. Fallon, Lisa O. Hansen, Michael D. Lachance,
David C. Mitchell and David K. Rich. Filed as exhibit 10.2 to
Registrant's Current Report on Form 8-K, filed September 17, 1998,
and incorporated herein by reference.
10.23 Registration Rights Agreement, dated as of August 31, 1998, between
CORE, INC. and Fleet National Bank. Filed as exhibit 10.3 to
Registrant's Current Report on Form 8-K, filed September 17, 1998, and
incorporated herein by reference.
10.24 Option Agreement, dated June 14, 1997, by and between CORE, INC. and
R. Gary Dolenga. Filed as exhibit 99.1 to Registrant's current Report
on Form 8-K, filed July 15, 1997, and incorporated herein by
reference.
10.25 CORE, INC. 1997 Stock Option Plan, including forms of stock option
agreements. Filed as exhibit no. 10.1 to Registrant's Quarterly
Report on Form 10-Q, filed November 14, 1997, and incorporated
herein by reference.
10.26 Employment Agreement, dated November 19, 1993, between the Registrant
and William E. Nixon. Filed as exhibit no. 10.49 to Registrant's
Registration Statement on Form S-4 (Registration No. 33-73906),
filed January 10, 1994, and incorporated herein by reference.
10.27 Employment Agreement, dated June 25, 1997, by and between SSDC Corp.
and R. Gary Dolenga. Filed as exhibit 99.2 to Registrant's Current
Report on Form 8-K, filed July 15, 1997, and incorporated herein by
reference.
10.28 Employment Agreement by and between Disability Reinsurance Management
Services, Inc. and James T. Fallon (excluding Attachments). Filed as
exhibit 10.4 to Registrant's Current Report on Form 8-K, filed
September 17, 1998, and incorporated herein by reference.
10.29 Employment Agreement by and between Disability Reinsurance Management
Services, Inc. and Lisa O. Hansen (excluding Attachments). Filed as
exhibit 10.5 to Registrant's Current Report on Form 8-K, filed
September 17, 1998, and incorporated herein by reference.
10.30 Employment Agreement by and between Disability Reinsurance Management
Services, Inc. and Michael D. Lachance (excluding Attachments). Filed
as exhibit 10.6 to Registrant's Current Report on Form 8-K, filed
September 17, 1998, and incorporated herein by reference.
10.31 401(k) Plan. Filed as exhibit no. 10.34 to the Registrant's
Registration Statement on Form S-1 (Registration No.
33-43418), filed October 18, 1991, and incorporated herein by
reference.
10.32 Form of Indemnification Agreement. Filed as exhibit no. 10.35 to the
Registrant's Registration Statement on Form S-1 (Registration No.
33-43418), filed October 18, 1991, and incorporated herein by
reference.
21.1* Subsidiaries of the Registrant.
23.1* Consent of Independent Auditors.
31
<PAGE>
27.1* Financial Data Schedule for year ended December 31, 1998.
</TABLE>
- --------------------------------
* Filed herewith
(b) Reports on Form 8-K.
On October 20, 1998, the Company filed a Form 8-K/A (Amendment No. 1)
related to the acquisition of all shares of stock of Disability Reinsurance
Management Services, Inc. ("DRMS") which included the audited balance sheet of
DRMS as of June 30, 1998 and the related statements of income and accumulated
deficit, and cash flows for the six months then ended; the audited balance sheet
of DRMS as of December 31, 1997 and the related statements of income and
accumulated deficit, and cash flows for the year then ended; the unaudited
balance sheet of DRMS as of June 30, 1997 and the related statements of income
and accumulated deficit, and cash flows for the six months then ended; and the
audited balance sheets of Disability Reinsurance Management Services, Inc. as of
December 31, 1996 and 1995 and the related statements of operations, accumulated
deficit and cash flows for the years then ended.
32
<PAGE>
CORE, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
CORE, INC. audited financial statements
Report of Independent Auditors F-2
Consolidated Balance Sheets - December 31, 1997 and 1998 F-3
Consolidated Statements of Operations - Years ended December 31, 1996, 1997 and 1998 F-5
Consolidated Statements of Stockholders' Equity - Years ended December 31, 1996, 1997 and 1998 F-6
Consolidated Statements of Cash Flows - Years ended December 31, 1996, 1997 and 1998 F-7
Notes to Consolidated Financial Statements F-9
FINANCIAL STATEMENTS SCHEDULE
Schedule II - Valuation and Qualifying Accounts F-20
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are
not required under the related instructions or are inapplicable and,
therefore, have been omitted.
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
BOARD OF DIRECTORS AND STOCKHOLDERS
CORE, INC.
We have audited the accompanying consolidated balance sheets of CORE, INC. as
of December 31, 1997 and 1998, and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the three years
in the period ended December 31, 1998. Our audits also included the financial
statement schedule listed in the Index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of CORE, INC. at December 31, 1997 and 1998, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule,
when considered in relation to the basic financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
/s/ ERNST & YOUNG LLP
Orange County, California
March 26, 1999
F-2
<PAGE>
CORE, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------
1997 1998
--------------- ----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $7,944,595 $ 2,226,020
Investments available-for-sale 1,188,037 --
Accounts receivable, net of allowance for doubtful
accounts of $151,633 in 1997 and $405,013 in 1998 6,473,037 8,280,630
Unbilled receivables -- 1,395,500
Notes receivable from officers 106,388 90,462
Prepaid expenses and other current assets 815,100 1,080,993
--------------- ----------------
Total current assets 16,527,157 13,073,605
Property and equipment, net 6,444,803 7,931,150
Deposits and other assets 494,208 618,487
Goodwill and intangibles, net of accumulated
amortization of $460,000 in 1997 and
$863,077 in 1998 9,348,864 27,108,298
---------------- ----------------
Total assets $32,815,032 $48,731,540
================ ================
</TABLE>
F-3
<PAGE>
CORE, INC.
CONSOLIDATED BALANCE SHEETS - CONTINUED
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------
1997 1998
--------------- -----------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 833,898 $ 1,363,785
Accrued expenses 1,201,283 2,076,933
Accrued payroll 650,230 807,124
Accrued vacation 645,262 717,500
Advances under revolving credit agreement -- 2,750,000
Deferred income taxes 74,816 --
Notes payable 64,900 259,510
Obligation from acquisition 1,125,000 --
Current portion of obligations to former shareholders 50,000 --
Current portion of capital lease obligations 31,651 6,015
--------------- -----------------
Total current liabilities 4,677,040 7,980,867
Advances under revolving credit agreement, net of current portion -- 13,750,000
Note payable, net of current portion 185,049 123,633
Capital lease obligations, net of current portion 4,695 --
Deferred rent, net of current portion 146,592 50,410
Deferred income taxes 143,000 --
Commitments and contingencies
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 and 7,824,512 at
December 31, 1997 and 1998, respectively 730,308 782,451
Additional paid-in capital 34,909,579 37,778,640
Deferred compensation (13,392) (6,697)
Accumulated deficit (7,967,839) (11,727,764)
----------------------------------
Total stockholders' equity 27,658,656 26,826,630
----------------------------------
Total liabilities and stockholders' equity $32,815,032 $48,731,540
==================================
</TABLE>
See accompanying notes.
F-4
<PAGE>
CORE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------- ----------------- ----------------
1996 1997 1998
---------------- ----------------- ----------------
<S> <C> <C> <C>
Revenues $28,805,590 $38,506,563 $45,609,284
Cost of services 17,740,901 23,330,004 27,832,974
---------------- ----------------- ----------------
Gross profit 11,064,689 15,176,559 17,776,310
Operating expenses:
General and administrative 6,284,651 7,940,005 9,739,920
Sales and marketing 1,744,386 2,482,561 3,648,707
Depreciation and amortization 1,338,122 1,954,810 2,503,402
Write-off of AmHealth acquisition 1,919,871 -- --
Write-off of goodwill and intangibles -- -- 4,085,449
Arbitration costs -- -- 736,009
Charges in connection with disposal of subsidiaries -- -- 657,670
Other non-recurring charges -- -- 156,116
---------------- ----------------- ----------------
Total operating expenses 11,287,030 12,377,376 21,527,273
Income (loss) from operations (222,341) 2,799,183 (3,750,963)
Other income (expense):
Interest income 385,394 589,853 302,784
Interest expense (35,512) (27,315) (504,746)
Realized gain on sale of investments available-for-sale 16,003 -- --
Other income 481 -- --
---------------- ----------------- ----------------
366,366 562,538 (201,962)
---------------- ----------------- ----------------
Income (loss) before income taxes 144,025 3,361,721 (3,952,925)
Income tax (provision) benefit -- (610,000) 193,000
---------------- ----------------- ----------------
Net income (loss) $144,025 $2,751,721 $(3,759,925)
================ ================= ================
Net income (loss) per common share:
Basic $0.03 $0.38 $(0.50)
================ ================= ================
Diluted $0.02 $0.35 $(0.50)
================ ================= ================
Weighted average number of common shares and
equivalents outstanding:
Basic 5,713,000 7,246,000 7,489,000
================ ================= ================
Diluted 6,473,000 7,934,000 7,489,000
================ ================= ================
</TABLE>
See accompanying notes.
F-5
<PAGE>
CORE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL
COMMON STOCK PAID-IN DEFERRED
SHARES AMOUNT CAPITAL COMPENSATION
------ ------ ------- ------------
<S> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1995 4,794,403 $ 479,440 $18,052,547 $ (51,120)
Exercise of stock options 129,508 12,951 349,416 -
Issuance of common stock from
public offering (net of
offering costs) 2,248,800 224,880 16,063,183 -
Amortization of deferred
compensation - - - 12,480
Change in unrealized
gain (loss) on investments
available-for-sale - - - -
Net income - - - -
--------------------------------------------------
BALANCE AT DECEMBER 31, 1996 7,172,711 717,271 34,465,146 (38,640)
Exercise of stock options 130,368 13,037 462,986 -
Amortization of deferred
compensation costs - - - 6,695
Reduction of deferred
compensation costs due
to extinguishment of
unvested options - - (18,553) 18,553
Change in unrealized gain
(loss) on investments
available-for-sale - - - -
Net income - - - -
--------------------------------------------------
BALANCE AT DECEMBER 31, 1997 7,303,079 730,308 34,909,579 (13,392)
Exercise of stock options 41,433 4,143 173,661 -
Amortization of deferred
compensation costs - - - 6,695
Compensation recognized
under stock option plan - - 13,400 -
Issuance of common stock
pursuant to acquisition
of Disability Reinsurance
Management Services, Inc. 480,000 48,000 2,682,000 -
Net loss - - - -
--------------------------------------------------
BALANCE AT DECEMBER 31, 1998 7,824,512 $ 782,451 $37,778,640 $ (6,697)
==================================================
<CAPTION>
ACCUMULATED
OTHER TOTAL
COMPREHENSIVE ACCUMULATED STOCKHOLDERS' COMPREHENSIVE
INCOME DEFICIT EQUITY INCOME
-------------- ------- ------ ------
<S> <C> <C> <C>
BALANCE AT DECEMBER 31, 1995 $ 30,975 $(10,863,585) $ 7,648,257
Exercise of stock options - - 362,367
Issuance of common stock from
public offering (net of
offering costs) - - 16,288,063
Amortization of deferred
compensation - - 12,480
Change in unrealized
gain (loss) on investments
available-for-sale 1,008 - 1,008 $ 1,008
Net income - 144,025 144,025 144,025
-----------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 31,983 (10,719,560) 24,456,200 $ 145,033
==============
Exercise of stock options - - 476,023
Amortization of deferred
compensation costs - - 6,695
Reduction of deferred
compensation costs due
to extinguishment of
unvested options - - -
Change in unrealized gain
(loss) on investments
available-for-sale (31,983) - (31,983) $ (31,983)
Net income - 2,751,721 2,751,721 2,751,721
-----------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997 - (7,967,839) 27,658,656 $ 2,719,738
==============
Exercise of stock options - - 177,804
Amortization of deferred
compensation costs - - 6,695
Compensation recognized
under stock option plan - - 13,400
Issuance of common stock
pursuant to acquisition
of Disability Reinsurance
Management Services, Inc. - - 2,730,000
Net loss - (3,759,925) (3,759,925) $(3,759,925)
-----------------------------------------------------------------
BALANCE AT DECEMBER 31, 1998 $ - $ (11,727,764) $26,826,630 $(3,759,925)
=================================================================
</TABLE>
See accompanying notes.
F-6
<PAGE>
CORE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------- -------------- ----------------
1996 1997 1998
--------------- -------------- ----------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $144,025 $2,751,721 $(3,759,925)
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Depreciation 1,189,488 1,651,110 2,195,378
Amortization 374,799 931,206 1,136,243
Write-off of goodwill and intangibles - - 4,085,449
Disposal of subsidiaries, net of cash payments and other
charges - - 520,421
Provision for losses on accounts receivable - - 253,380
Arbitration costs, net of cash payments - - 239,605
Realized gain on sale of investments available-for-sale (16,003) - -
Compensation expense related to issuance of stock options 12,480 6,695 20,095
Decrease in obligations to former shareholders (261,225) - -
Changes in operating assets and liabilities:
Increase in accounts receivable (1,558,382) (1,927,299) (1,258,378)
Increase in unbilled receivables - - (1,395,500)
Increase in prepaid expenses and other assets (1,000,060) (71,408) (688,900)
Increase in accounts payable and accrued expenses 31,140 585,849 136,283
--------------- -------------- ----------------
Net cash provided by (used in) operating activities (1,083,738) 3,927,874 1,484,151
INVESTING ACTIVITIES:
Net additions to property and equipment (4,589,839) (1,828,321) (3,504,240)
Net additions to intangible assets (176,119) (391,307) -
Decrease in cash pledged as collateral 106,000 192,000 -
(Increase) decrease in deposits (69,268) 42,162 64,081
(Increase) decrease in notes receivable from officers (71,419) 538 -
Payments for acquisitions, net of cash acquired - (5,434,612) (20,366,271)
Payments on non-compete obligations to former shareholders - (50,000) -
Purchases of investments available-for-sale (23,612,768) (44,647,453) (16,579,100)
Sales of investments available-for-sale 16,725,858 51,862,964 17,767,137
--------------- -------------- ----------------
Net cash used in investing activities (11,687,555) (254,029) (22,618,393)
FINANCING ACTIVITIES:
Borrowings under credit agreement - - 17,000,000
Repayments under credit agreement - - (500,000)
Payments on obligation from acquisition - (375,000) (1,125,000)
Payments on obligations to former shareholders (682,390) - (50,000)
Issuance of notes payable 328,518 - -
Payments on notes payable (169,723) (64,840) (56,806)
Payments on capital lease obligations (79,355) (47,427) (30,331)
Proceeds from issuance of common stock, net of offering costs 16,288,063 - -
Issuance of common stock upon exercise of stock options and
warrants 362,367 476,023 177,804
--------------- -------------- ----------------
Net cash provided by (used in) financing activities 16,047,480 (11,244) 15,415,667
--------------- -------------- ----------------
Net increase (decrease) in cash and cash equivalents 3,276,187 3,662,601 (5,718,575)
Cash and cash equivalents at beginning of year 1,005,807 4,281,994 7,944,595
--------------- -------------- ----------------
Cash and cash equivalents at end of year $4,281,994 $ 7,944,595 $ 2,226,020
=============== ============== ================
</TABLE>
F-7
<PAGE>
CORE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1996 1997 1998
-----------------------------------------------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $55,697 $23,492 $500,612
Income taxes paid - $221,393 $164,500
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Issuance of common stock in connection with acquisition - - $2,730,000
Increase in accrued expenses in connection with acquisition - - $618,286
Net decrease in intangibles pursuant to licensing agreement - - $200,000
</TABLE>
See accompanying notes.
F-8
<PAGE>
CORE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
1. ORGANIZATION AND PURPOSE
CORE, INC. ("CORE" or the "Company") is a national provider of employee
absence management services to Fortune 500 companies and other self-insured
employers, third-party administrators and insurance carriers. The Company's
services include Integrated Disability Management (which consist of the
Company's proprietary WorkAbility Absence Management program, disability
reinsurance management services, social security disability benefits
advocacy, analytic consulting services, onsite job profiling and 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.
2. BUSINESS ACQUISITIONS
On September 1, 1998, the Company acquired all shares of stock of Disability
Reinsurance Management Services, Inc. ("DRMS"), a Delaware corporation,
pursuant to a Capital Stock Purchase Agreement dated as of August 31, 1998
(the "Stock Purchase Agreement") in a transaction accounted for as a
purchase. Pursuant to the Stock Purchase Agreement, all shares of stock of
DRMS were acquired in exchange for a $20,000,000 cash payment, the issuance
of 480,000 shares of the Company's common stock and the future issuance of up
to an additional $7,000,000 of the Company's common stock after September 30,
2001, based upon the future performance of DRMS. The purchase price is
subject to certain adjustments as set forth in the Stock Purchase Agreement.
The excess of the purchase price over the estimated fair market value of the
net assets acquired, representing goodwill and certain identifiable
intangibles amounting to approximately $22,762,000, is being amortized on a
straight-line basis over periods of three to thirty-five years. DRMS is a
full service reinsurance intermediary manager providing marketing,
underwriting advice, claims, actuarial and compliance services to its
insurance company clients and risk management expertise for reinsurers in a
reinsurance facility.
On March 17, 1998, a wholly-owned subsidiary of the Company, TCM Services,
Inc. ("TCM") purchased the operating assets and certain liabilities of
Transcend Case Management, Inc. ("Transcend") pursuant to an Asset Purchase
Agreement (the "Asset Purchase Agreement") in a transaction accounted for as
a purchase. Transcend is a provider of workers' compensation case management
services. Pursuant to the Asset Purchase Agreement, the assets of Transcend
were acquired in exchange for the assumption of certain liabilities and a
contingent issuance of shares of common stock of the Company, the number of
which was to be equal to a valuation based upon the future performance of the
acquired operations. On December 23, 1998, TCM transferred substantially all
its assets and certain liabilities to Transcend following the exercise by
Transcend of its option to reacquire the assets, as described in the Asset
Purchase Agreement. See Note 7.
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 cash payment
of $5,000,000, additional obligations of $1,500,000 (paid in quarterly
installments through June 30, 1998), and additional performance related cash
payments in a transaction accounted for as a purchase. Performance based
payments of $139,000 have been made as of December 31, 1998 and up to an
additional $320,000 is payable, based upon the future performance of SSDC.
SSDC provides disability management services with two key areas of business:
social security disability benefits advocacy and Medicare coordination of
benefits.
F-9
<PAGE>
CORE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
2. BUSINESS ACQUISITIONS (continued)
The consolidated financial statements include the operating results of DRMS,
TCM, and SSDC from the dates of acquisition. The following unaudited pro
forma information has been prepared as if the acquisitions of DRMS and SSDC
had occurred on January 1, 1997 and the TCM acquisition and subsequent
disposition had not occurred at all. The pro forma financial information set
forth below includes adjustments for amortization of intangibles arising from
the transactions, interest expense incurred on funds borrowed to finance the
transactions, reductions in interest income from the use of short-term
investments to fund the transactions and for additional shares of common
stock issued in the DRMS transaction.
<TABLE>
<CAPTION>
Year ended December 31,
1997 1998
--------------------------------------------
<S> <C> <C>
Revenues $46,452,000 $48,145,000
Income (loss) before extraordinary item $3,018,000 $(3,640,000)
--------------------------------------------
--------------------------------------------
Net income (loss) $4,122,000 $(3,640,000)
--------------------------------------------
--------------------------------------------
Earnings (loss) per common share:
Net income (loss) before extraordinary item:
Basic $0.39 $ (0.47)
--------------------------------------------
--------------------------------------------
Diluted $0.36 $ (0.47)
--------------------------------------------
--------------------------------------------
Net income (loss):
Basic $0.53 $ (0.47)
--------------------------------------------
--------------------------------------------
Diluted $0.49 $ (0.47)
--------------------------------------------
--------------------------------------------
</TABLE>
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.
F-10
<PAGE>
CORE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
3. ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All significant intercompany transactions have
been eliminated in consolidation.
RISKS AND UNCERTAINTIES
The Company provides its services to companies throughout the United States in
various industries, including, but not limited to the healthcare and insurance
industries. Management does not believe significant credit risk exists at
December 31, 1998 as a result of the large and diverse nature of the Company's
customer base. The Company maintains allowances for potential credit losses, and
these losses have consistently been within management's expectations.
SIGNIFICANT ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
FINANCIAL INSTRUMENTS
Financial instruments primarily consist of cash and cash equivalents,
investments available-for-sale, receivables, payables and borrowings. The
Company also entered into a derivative financial instrument in January 1999
for purposes of managing its interest rate exposure. The cost of the interest
rate protection arrangement will be included in interest expense ratably over
the life of the arrangement. Payments to be received as a result of the
arrangement will be accrued, if applicable, as a reduction of interest
expense. The unamortized cost of the arrangement will be included in other
assets.
CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially subject the Company to concentrations
of credit risk, principally consist of cash and cash equivalents, investments
available-for-sale and receivables.
FAIR VALUES
Cash, receivables, notes receivable, accounts payable, accrued expenses and
notes payable are reflected in the financial statements at fair value because
of the short-term maturity of those instruments. Outstanding borrowings under
a revolving line of credit agreement are reflected in the financial
statements at fair value because the variable borrowing rates accruing on the
debt approximate the current rates offered for similar debt.
INVESTMENTS
Investments are accounted for in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." Under the SFAS 115, debt securities that the
Company has both the positive intent and ability to hold to maturity are
classified as held-to-maturity securities and are carried at amortized cost.
Debt securities that the Company does not have the positive intent or ability to
hold to maturity and equity securities are classified as available-for-sale and
are carried at fair market value. Increases or declines in fair market value of
available-for-sale securities judged to be other than temporary are recorded as
a component of other income. Temporary declines are reported as a separate
component of stockholders' equity.
The Company considers all highly liquid investments with a maturity of three
months or less at the date of purchase to be cash equivalents. Investments
available-for-sale represent the investment of excess cash in commercial
paper, corporate bonds and United States Government securities.
PRECONTRACT COSTS
Precontract costs incurred for a specific contract are deferred if the costs
can be directly associated with the contract and the recoverability from the
gross profits on the revenue generated by the contract is probable. The
anticipated gross profit must be sufficient to absorb deferred precontract
costs as well as future period costs. Precontract costs are amortized on a
straight-line basis over the contract period, generally not longer than
three years.
F-11
<PAGE>
CORE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
3. ACCOUNTING POLICIES (continued)
REVENUE RECOGNITION
The Company engages principally in capitated (fixed per employee per month),
hourly, or per case basis contracts. Revenue on these contracts is recognized
using either the percentage-of-completion method or as services are performed
based on contracted rates. The percentage-of-completion method measures
revenue principally by comparing the cost of services performed to date with
the total estimated cost of services required through completion applied to
the entire estimated contract value. Management fees, representing a
percentage of the premiums on disability policies of the Disability Alliance
for Reinsurance Treaties ("DART") pool that are managed by the Company, are
recorded monthly as earned. Profit commissions, representing a percentage of
the overall profits on the pooled policies under management are not
recognized until annual operating results of the DART are determinable.
Licensing fees are primarily based on use by the customer and are recognized
as revenue when earned.
Unbilled receivables and revenues are recorded as costs are incurred on
certain contracts, and will be billed as services are commenced under the
specified contracts.
Costs to complete estimates are reviewed periodically and revised as
required. Provisions are made for the full amount of anticipated losses, if
any, on all contracts in the period in which they are first determinable.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Major additions and betterments are
capitalized while repairs and maintenance expenditures, which do not improve or
extend the life of the respective assets, are expensed when incurred.
DEPRECIATION AND AMORTIZATION
Property and equipment are depreciated using the straight-line method. The
estimated useful lives of the related assets are as follows:
<TABLE>
<S> <C>
Computer and office equipment 3-7 years
Software and software development costs 3-5 years
Furniture and fixtures 7 years
Leasehold improvements Shorter of lease term or estimated useful life
</TABLE>
SOFTWARE DEVELOPMENT COSTS
Certain costs of software, developed for internal use, are capitalized during
the application development stage. Costs incurred for maintenance and
customer support are charged to expense as incurred. The Company capitalized
software development costs of $718,589 and $1,780,161 during the years ended
December 31, 1997 and 1998, respectively. Software development costs are
amortized using the straight-line method. Amortization in the amount of
$110,165, $262,956 and $360,580 is included in cost of services for the years
ended December 31, 1996, 1997 and 1998, respectively.
GOODWILL AND OTHER INTANGIBLES
Goodwill and other intangibles, which include the cost of customer contracts,
management agreements and license agreements are being amortized over three to
thirty-five years, on a straight-line basis. Recoverability of all intangible
assets, including goodwill arising from business acquisitions, is reviewed
annually or sooner if events or changes in circumstances indicate that the
carrying amount may exceed fair value.
F-12
<PAGE>
CORE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
3. ACCOUNTING POLICIES (continued)
INCOME TAXES
The Company provides for income taxes under the liability method. Under this
method, deferred income taxes are recognized for the future tax consequences of
differences between the tax and financial accounting of assets and liabilities
at each year-end. Deferred income taxes are based on enacted tax laws and
statutory tax rates applicable to the periods in which the differences are
expected to effect taxable income. Valuation allowances are established when
necessary to reduce deferred tax assets to the amounts expected to be realized.
INCOME (LOSS) PER COMMON SHARE
The Company accounts for income (loss) per share in accordance with SFAS No.
128, "Earnings per Share." Under SFAS No. 128, basic earnings per share
excludes any dilutive effect of options, warrants and convertible
securities. Diluted earnings per share is similar to fully diluted earnings
per share.
COMPREHENSIVE INCOME
As of January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." SFAS No. 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. SFAS No. 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.
SEGMENT REPORTING
The Company adopted SFAS No. 131 "Disclosures about Segments of an Enterprise
and Related Information," during 1998. SFAS No. 131 supercedes SFAS No. 14
"Financial Reporting for Segments of a Business Enterprise." 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 in annual consolidated financial
statements. The Company operates in a single industry segment: employee
absence management services. The adoption of SFAS No. 131 did not affect the
consolidated results of operations or financial position of the Company.
STOCK-BASED COMPENSATION
The Company applies Accounting Principles Board Opinion No. 25 and related
interpretations in accounting for stock option grants to employees (and
non-employees prior to January 1, 1996). Since January 1, 1996, the Company
applies SFAS No. 123, "Accounting for Stock-Based Compensation" and related
interpretations for accounting for stock option grants to non-employees.
RECLASSIFICATIONS
Certain reclassifications of 1996 and 1997 amounts have been made to permit
comparison.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." The Company
expects to adopt the new Statement effective January 1, 2000. SFAS No. 133 will
require the Company to recognize all derivatives on the balance sheet at fair
value. The Company does not anticipate that the adoption of this Statement will
have a significant effect on its results of operations or financial position.
4. INVESTMENTS
At December 31, 1997 the Company's investments consisted of mortgaged-backed
securities with maturities due after three months through one year. The
amortized cost and estimated fair value of the investments at December 31, 1997
were $1,188,037.
For the years ended December 31, 1997 and 1998, the Company sold
available-for-sale securities with a fair value on the date of sale of
$51,862,964 and $17,767,137, respectively. There were no realized gains and
losses on sales during 1997 and 1998.
F-13
<PAGE>
CORE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 31:
<TABLE>
<CAPTION>
1997 1998
--------------------------------
<S> <C> <C>
Computer and office equipment $6,315,821 $7,298,554
Software and software development costs 3,157,620 5,430,844
Furniture and fixtures 1,979,795 2,131,005
Leasehold improvements 1,963,954 2,001,217
--------------------------------
--------------------------------
13,417,190 16,861,620
Accumulated depreciation (6,972,387) (8,930,470)
--------------------------------
Property and equipment, net $6,444,803 $7,931,150
--------------------------------
--------------------------------
</TABLE>
6. IMPAIRMENT LOSSES ON LONG LIVED ASSETS
In accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and of Long-Lived Assets to be Disposed Of", the Company records
impairment losses on long-lived assets used in operations when indicators of
impairment are present and the undiscounted cash flows estimated to be
generated by those assets are less than the assets' carrying amount.
During June 1998, the Company's wholly owned subsidiary, Cost Review
Services, Inc. ("CRS") was informed that its principal client (representing
nearly 70% of CRS revenues) would not be renewing its contract in October
1998. This information combined with present operating losses incurred by CRS
indicated that the net book value of the goodwill and intangibles related to
the CRS operations, amounting to $1,935,000, was not recoverable and thus,
was written-off (see note 7).
The Company also performed a review of other long-lived assets during 1998.
The results of its review indicated that an impairment loss existed related
to certain identifiable intangible contract values resulting from the
acquisition of SSDC in June 1997. The impairment loss primarily resulted from
a significant decline in revenues realized under SSDC's Medicare coordination
of benefits program. As it appeared that the decline in revenues would
continue, intangibles in the amount of $2,150,000 were written off during
1998.
7. DISPOSAL OF SUBSIDIARIES
Effective October 31, 1998, the Company discontinued the operations of its
subsidiary, CRS. In connection with this action, the Company recorded
estimated charges totaling $417,000. The major components of the charges were
$157,000 of employee separation costs, $58,000 of non-cash charges to dispose
of certain assets through abandonment and $75,000 to terminate lease and
other contractual obligations. CRS provided regional bill audit and workers'
compensation case management services to insurance companies and third-party
administrators of workers' compensation programs.
On December 23, 1998, TCM transferred substantially all its assets and
certain liabilities to Transcend following the exercise by Transcend of its
option to reacquire the assets, as described in the Asset Purchase Agreement
dated March 17, 1998 (see Note 2). The Company recorded charges of $241,000
in connection with this transfer.
8. ARBITRATION
The Company incurred costs of $736,000 as a result of a settlement agreement
entered into with the former shareholders of CRS on June 2, 1998. 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 $121,000 in other costs related to
the arbitration.
F-14
<PAGE>
CORE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
9. CREDIT AGREEMENT
On August 31, 1998, the Company entered into a revolving line of credit
agreement (the "Credit Agreement") with Fleet National Bank ("Fleet"). Under
the Credit Agreement, which was amended on December 31, 1998 and expires
August 31, 2003, the Company may borrow up to specified amounts beginning at
$17,000,000 at the prime base rate plus 0.50% or London Interbank Offered
Rate ("LIBOR") plus 3.50%. The $17,000,000 credit availability is subject to
mandatory commitment reductions each quarter in amounts ranging from $250,000
to $1,000,000. At December 31, 1998, the Company had outstanding borrowings
of $16,500,000 under the Credit Agreement which were all tied to the prime
base lending rate (7.75%) plus the applicable margin. The Credit Agreement is
secured by substantially all of the Company's assets and requires the Company
to meet certain financial covenants, including minimum ratios for interest,
debt service and fixed charge coverage along with minimum net worth levels.
Additionally, the Credit Agreement prohibits the payment of dividends by the
Company without the Bank's written consent. The Company was in compliance
with the financial covenants contained in the Credit Agreement at December
31, 1998.
In connection with the Credit Agreement, the Company issued a Warrant to
purchase shares of its Common Stock to Fleet. The Warrant entitles the holder
to purchase up to 156,322 shares of the Company's Common Stock (subject to
certain adjustments), at an exercise price of $6.92 per share. The Warrant is
exercisable beginning August 31, 1999 and expires August 31, 2003.
On January 15 1999, the Company entered into an interest rate protection
arrangement with Fleet that limits the Company'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%) over the life of
the Credit Agreement.
A Second Amendment to the Credit Agreement, dated February 19, 1999 revised
the scheduled maximum commitment available from $16,000,000 as of the date of
the second amendment to $17,000,000, subject to a revised schedule of
mandatory commitment reductions.
Scheduled mandatory commitment reductions, as amended, for the next five
years are as follows:
<TABLE>
<S> <C>
1999 $2,750,000
2000 3,125,000
2001 3,625,000
2002 4,000,000
2003 3,000,000
-----------------
$16,500,000
-----------------
-----------------
</TABLE>
F-15
<PAGE>
CORE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
10. STOCK OPTION PLANS
The Company has elected to follow Accounting Principals Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") and related
Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under
SFAS No. 123, "Accounting for Stock-Based Compensation," requires use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, because the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized. On March 28, 1997,
options for the purchase of 586,189 shares with exercise prices ranging
between $7.46 and $12.25 were re-priced to $6.25. The re-pricing of these
options did not affect the financial statements under APB 25; however, the
affect of the re-pricing has been reflected in the SFAS 123 pro forma
disclosures set forth below.
Pro forma information regarding net income and earnings per share is required
by SFAS No. 123, and has been determined as if the Company had accounted for
its employee stock options under the fair value method of that Statement. The
fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted average
assumptions for 1996, 1997 and 1998, respectively: risk-free interest rates
of 6.18%, 6.12% and 5.28%; volatility factors of the expected market price of
the Company's common stock of 99%, 93%, and 90%; and a weighted average
expected life of the options of 5 years.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options.
For purposes of pro-forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The
Company's pro forma information for the years ended December 31, is as
follows:
<TABLE>
<CAPTION>
1996 1997 1998
--------------- --------------- ---------------
<S> <C> <C> <C>
Pro forma net income (loss) $(1,390,000) $181,000 $(7,212,000)
=============== =============== ===============
Pro forma net income (loss) per share $(0.24) $0.02 $(0.96)
=============== =============== ===============
</TABLE>
The Company has reserved 1,800,000 shares of common stock for issuance under
stock option plans established in 1991 and 1997. The Company has also granted
or assumed 1,124,082 non-plan stock options and warrants of which 223,904,
308,758 and 329,758 have been exercised as of December 31, 1996, 1997 and
1998, respectively. As of December 31, 1997 and 1998, respectively, 7,812 and
21,212 of these non-plan stock options have been cancelled. Other than the
773,112 non-plan stock options outstanding at December 31, 1998, no shares
have been reserved for non-plan stock options.
Plan and non-plan stock options activity and related information for the
years ended December 31, is as follows:
<TABLE>
<CAPTION>
------------------------------------------------------
1996 1997 1998
------------------------------------------------------
<S> <C> <C> <C>
Outstanding at beginning of year 1,267,853 1,395,693 2,008,083
Granted 429,589 795,126 595,139
Canceled (172,241) (52,368) (91,597)
Exercised (129,508) (130,368) (41,433)
------------------------------------------------------
Outstanding at end of year 1,395,693 2,008,083 2,470,192
======================================================
Price range of outstanding options $2.50 - $13.38 $2.94 - $11.13 $2.94 - $13.75
======================================================
Price range of options exercised $2.50 - $ 9.38 $2.50 - $8.75 $2.94 - $8.75
======================================================
Exercisable at end of year 811,132 1,004,625 1,393,743
======================================================
Available for grant at end of year 175,338 369,768 9,150
======================================================
</TABLE>
F-16
<PAGE>
CORE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
10. STOCK OPTION PLANS (continued)
The weighted average exercise prices are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------
1996 1997 1998
---------------------------------------
<S> <C> <C> <C>
Granted $11.10 $8.90 $8.76
Canceled $7.90 $6.92 $9.12
Exercised $3.40 $3.92 $4.89
Outstanding at end of year $6.25 $6.29 $6.80
Exercisable at end of year $5.50 $5.15 $5.96
</TABLE>
The weighted average fair value of options granted during the years ended
December 31, 1996, 1997 and 1998 are $8.80, $6.80 and $5.84, respectively.
Stock options will expire on various dates through November 2003. The
weighted average remaining contractual life of options outstanding at
December 31, 1998 is 2.9 years.
11. INCOME TAXES
The income tax provision (benefit) is comprised of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1996 1997 1998
--------------------------------------
<S> <C> <C> <C>
Current:
Federal $ - $ (490,000) $ 116,000
State - (120,000) (141,000)
--------------------------------------
- (610,000) (25,000)
Deferred:
Federal - - 218,000
--------------------------------------
$ - $ (610,000) $ 193,000
======================================
</TABLE>
The approximate effect of temporary differences and carryforwards that give rise
to deferred tax assets and liabilities as of December 31 is as follows:
<TABLE>
<CAPTION>
1997 1998
----------------- ----------------
<S> <C> <C>
Deferred tax assets:
Bad debt reserve $ 62,000 $ 136,000
Expense accruals 320,000 347,000
Goodwill amortization - 710,000
Net operating loss carryforwards 1,050,000 901,000
Valuation allowance (1,391,000) (1,987,000)
----------------- ----------------
41,000 107,000
Deferred tax liabilities:
Change in accounting method from cash to accrual (95,000) -
Depreciation (164,000) (107,000)
----------------- ----------------
(259,000) (107,000)
----------------- ----------------
Net deferred tax liability $ (218,000) $ -
================= ================
</TABLE>
F-17
<PAGE>
CORE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
11. INCOME TAXES (continued)
The valuation allowance primarily relates to deferred tax assets for federal
and state net operating loss carryforwards of approximately $2.0 million and
$3.5 million, respectively. These unutilized net operating loss ("NOL")
carryforwards, which expire through 2011, will be carried forward for
reduction of future federal and state income taxes payable. 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 NOL carryforwards may be subject to further limitation
provided by the Internal Revenue Service Code of 1986 and similar state
provisions. No benefit for these carryforwards has been recognized in the
financial statements.
Income tax expense for the years ended December 31, 1996, 1997 and 1998 is
different than the amount computed by applying the U.S. federal income tax
rate to income before income taxes. The reasons for these differences are as
follows:
<TABLE>
<CAPTION>
------------------------------------------------
1996 1997 1998
------------------------------------------------
<S> <C> <C> <C>
Statutory federal tax (benefit) $ 49,000 $ 1,143,000 $ (1,344,000)
State income taxes (benefit), net of federal benefit (16,000) 202,000 94,000
Utilization of net operating loss carryforwards (119,000) (978,000) (149,000)
Goodwill amortization not deductible for tax purposes - - 1,467,000
Other 86,000 243,000 22,000
Resolution of prior years' tax exposures - - (283,000)
-----------------------------------------------
Effective tax expense $ - $ 610,000 $ (193,000)
===============================================
</TABLE>
12. LEASES
The Company leases its facilities and certain office equipment under
non-cancelable operating leases, which expire at various dates through June
2003.
The terms of the lease agreements at the Boston, Massachusetts location,
scheduled to expire in May 2000, and the Irvine, California location,
scheduled to expire in September 2000 include base rent increases over the
terms of the leases and options to renew for one five-year term at the then
prevailing rental rate. The total amount of the base rent payments is being
charged to expense on the straight-line method over the term of the lease.
The Company has recorded a deferred credit to reflect the excess of rent
expense over cash payments since inception of the lease.
The Company received free rent concessions under terms of lease agreements at
the Boston, Massachusetts, Burlington, Massachusetts and Los Angeles,
California locations. Total lease payments under these agreements are
amortized on a straight-line basis over the terms of the related leases. The
excess of the expense incurred over the cash paid is included as deferred
rent in the accompanying balance sheets.
At December 31, 1998, future minimum annual rental commitments under all of
the lease agreements described above are as follows:
<TABLE>
<S> <C>
1999 $2,431,000
2000 2,061,000
2001 1,161,000
2002 300,000
2003 127,000
-----------------
$6,080,000
=================
</TABLE>
Total rent expense amounted to $1,432,851, $1,848,220 and $2,016,635 for the
years ended December 31, 1996, 1997 and 1998, respectively.
F-18
<PAGE>
CORE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
13. COMMITMENTS AND CONTINGENCIES
Certain of the Company's service agreement contracts have provisions which
allow clients to audit the Company's performance under the contracts.
The Company has several 401(k) profit sharing plans covering all employees
meeting certain service requirements. The Plans provide for discretionary
contributions by the Company. Matching contributions for the years ended
December 31, 1996, 1997 and 1998 were $131,948, $136,112 and $195,580,
respectively, and are included in general and administrative expenses in the
accompanying statements of operations.
The Company is involved in various claims and legal proceedings arising in
the ordinary course of business. While it is not feasible to predict or
determine the outcome of these proceedings, management believes that they
will not result in a materially adverse effect on the Company's financial
position, results of operations or liquidity.
14. EARNINGS PER SHARE
The following table sets forth the computation of earnings (loss) per share
as of December 31:
<TABLE>
<CAPTION>
1996 1997 1998
--------------------- ------------------- --------------------
<S> <C> <C> <C>
Numerator:
Net income (loss) $ 144,025 $ 2,751,721 $ (3,759,925)
Denominator:
Denominator for basic earnings (loss) per share
weighted-average shares outstanding 5,713,000 7,246,000 7,489,000
Effect of dilutive stock options and warrants 760,000 688,000 -
--------------------- ------------------- --------------------
Denominator for diluted earnings (loss) per share 6,473,000 7,934,000 7,489,000
===================== =================== ====================
Basic earnings (loss) per share $0.03 $0.38 $(0.50)
===================== =================== ====================
Diluted earnings (loss) per share $0.02 $0.35 $(0.50)
===================== =================== ====================
</TABLE>
15. RELATED PARTIES
The notes receivable from officers are due in April 1999 and accrue interest
at current market rates.
16. SIGNIFICANT CLIENTS
The Company has service agreements with a major client, which accounted for
approximately 13%, 23% and 21% of total revenues for the years ended December
31, 1996, 1997 and 1998, respectively. No other client represented 10% or
more of revenue during these years.
17. SUBSEQUENT EVENT
On January 7, 1999, the Company granted an exclusive option to sell the
assets of one of its' operating subsidiaries, Integrated Behavioral Health, a
California corporation ("IBH") to a non-affiliated party. This exclusive
option was granted in exchange for consulting services. If the option is
exercised, the sale of the assets of IBH is expected to close on or before
July 15, 1999, however the closing of the exercise of the option and the sale
of the assets of IBH is subject to a definitive agreement (the "Agreement").
The purchaser and IBH have not yet begun negotiations concerning or executed
the Agreement.
F-19
<PAGE>
CORE, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT
BEGINNING OF CHARGED TO COSTS DEDUCTIONS - BALANCE AT END OF
DESCRIPTION PERIOD AND EXPENSES DESCRIBE PERIOD
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Year ended December 31, 1998:
Allowance for doubtful accounts $151,633 $253,380(a) $ - $405,013
Year ended December 31, 1997:
Allowance for doubtful accounts $221,925 $ - $ 70,292(b) $151,633
Year ended December 31, 1996:
Allowance for doubtful accounts $170,337 $ 52,026(c) $ 438(b) $221,925
</TABLE>
(a) The allowance for doubtful accounts was increased by a reserve against
receivables which related to revenues recorded during previous years and
thus, charged to expense during the current year.
(b) The allowance for doubtful accounts was reduced by the actual write-off of
receivables which had been reserved for in previous years and deemed
uncollectible.
(c) The allowance for doubtful accounts was increased by a reserve against
receivables which related to revenues recorded during the current year and
thus, charged directly against revenues during the current year.
F-20
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: March 29, 1999 By: /s/ George C. Carpenter IV
------------------------------------
George C. Carpenter IV
Chairman of the Board and
Chief Executive Officer
Date: March 29, 1999 By: /s/ William E. Nixon
------------------------------------
William E. Nixon
Chief Financial Officer, Executive
Vice President and Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
/s/ George C. Carpenter IV Chairman of the Board of Directors and March 29, 1999
- -------------------------------- Chief Executive Officer
George C. Carpenter IV
/s/ Craig C. Horton Director, President and Chief March 29, 1999
- ------------------------------- Operating Officer
Craig C. Horton
/s/ William E. Nixon Chief Financial Officer, Executive March 29, 1999
- ------------------------------- Vice President and Treasurer
William E. Nixon
/s/ Bradley J. Timon Controller March 29, 1999
- -------------------------------
Bradley J. Timon
/s/ Leslie M. Alexandre, Dr.P.H. Director March 29, 1999
- -------------------------------
Leslie M. Alexandre, Dr.P.H.
/s/ Stephen C. Caulfield Director March 29, 1999
- -------------------------------
Stephen C. Caulfield
/s/ Richard H. Egdahl, M.D. Director March 29, 1999
- -------------------------------
Richard H. Egdahl, M.D.
/s/ David M. Tourangeau Director March 29, 1999
- -------------------------------
David M. Tourangeau
/s/ Richard J. Towle Director March 29, 1999
- -------------------------------
Richard J. Towle
</TABLE>
<PAGE>
FIRST AMENDMENT
TO THE
CREDIT AGREEMENT
Dated as of December 31, 1998
This FIRST AMENDMENT dated as of December 31, 1998 (this "First
Amendment") is between CORE, INC., a Massachusetts corporation (the
"Borrower"), and FLEET NATIONAL BANK, a national banking association (the
"Bank").
PRELIMINARY STATEMENTS. The Borrower and the Bank entered into a Credit
Agreement dated as of August 31, 1998 (the "Credit Agreement"). The Borrower
has requested the Bank to amend the Commitment reduction schedule and fix
the date for entering into interest rate protection agreements and the Bank
has agreed to such request.
NOW, THEREFORE, for valuable consideration, receipt of which is hereby
acknowledged, the Borrower and the Bank agree as follows:
Section 1. AMENDMENTS TO THE CREDIT AGREEMENT. Effective as of the
effective date hereof and subject to the satisfaction of the conditions
precedent set forth in Section 2 hereof, the Credit Agreement is hereby
amended as follows:
(a) SUBSECTION (a) OF SECTION 2.5 (MANDATORY REDUCTION OF
COMMITMENT) of the Credit Agreement is amended by decreasing to
$500,000 the mandatory Commitment reduction required on December 31,
1998 and by adding the requirement for a $500,000 mandatory Commitment
reduction on January 29, 1999. All other Commitment reduction amounts
and dates shall remain unchanged.
(b) SECTION 5.14 (INTEREST RATE PROTECTION) is deleted and
replaced with the following:
"On or before January 15, 1999, the Borrower shall
enter into interest rate protection arrangements
covering the amount of the Commitment, on terms
and conditions satisfactory to the Bank."
(c) SUBSECTION (c) OF SECTION 7.1 (EVENTS OF DEFAULT) is amended
by adding "Section 5.14" to clause (i) thereof.
<PAGE>
-2-
(d) SCHEDULE 4.4 TO THE CREDIT AGREEMENT is deleted and replaced
with SCHEDULE 4.4 to the First Amendment to the Credit Agreement
dated as of December 31, 1998 between the Borrower and the Bank.
Section 2. CONDITIONS OF EFFECTIVENESS. This First Amendment shall
become effective when, and only when, the Bank shall have received a
counterpart of this First Amendment executed by the Borrower and an amendment
fee of $5,000.
Section 3. REPRESENTATIONS AND WARRANTIES OF THE BORROWER. The
Borrower represents as follows:
(a) The execution, delivery and performance by the Borrower of
this First Amendment has been duly authorized by all necessary
corporate action and does not and will not (a) require any consent or
approval of its shareholders; (b) violate any provisions of its
certificate of incorporation or by-laws; (c) violate any provision of
or require any filing, registration, consent or approval under, any
law, rule, regulation (including without limitation, Regulation U and
X), order, writ, judgment, injunction, decree, determination or award
presently in effect having applicability to and binding upon the
Borrower or any Subsidiary; (d) result in a breach of or constitute a
default or require any consent under any indenture, mortgage or loan
or credit agreement or any other material agreement, lease or
instrument to which the Borrower or any Subsidiary is a party or by
which it or its Properties may be bound; or (e) result in, or require,
the creation or imposition of any Lien upon or with respect to any of
the Properties now owned or hereafter acquired by the Borrower.
(b) The representations and warranties contained in Article 4 of
the Credit Agreement, as amended by this First Amendment, are correct
in all material respects on and as of the date hereof as though made
on and as of the date hereof.
(c) No Event of Default or Default has occurred and is
continuing or would result from the signing of this First Amendment or
the transactions contemplated hereby.
(d) There has been no material adverse change in the financial
condition, operations, Properties, business or business prospects of
the Borrower and its Subsidiaries, if any, since the date of the last
financial statements furnished to the Bank.
(e) No actions, suits or proceedings or investigations are
pending or, as far as the Borrower can reasonably foresee, threatened
against or affecting the Borrower or any Subsidiary, or any Property
of any of them before any court, governmental agency or arbitrator,
which if determined adversely to the Borrower or any Subsidiary would
in any one case or in the aggregate have a Materially Adverse Effect.
<PAGE>
-3-
(f) No information, exhibit or report furnished in writing by or
on behalf of the Borrower or any officer or director of the Borrower
to the Bank in connection with the negotiation of, or pursuant to the
terms of this First Amendment, contained when made any material
misstatement of fact or omitted to state a material fact necessary to
make the statements contained therein not misleading.
Section 4. REFERENCE TO AND EFFECT ON THE CREDIT AGREEMENT.
(a) Upon the effectiveness of this First Amendment, on and after
the date hereof, each reference in the Credit Agreement to "this
Credit Agreement", "hereunder", "hereof", "herein" or words of the
like import shall mean and be a reference to the Credit Agreement as
amended hereby.
(b) Except as specifically amended above, the Credit Agreement
shall remain in full force and effect and is hereby ratified and
confirmed.
(c) The execution, delivery and effectiveness of this First Amendment
shall not, except as expressly provided herein, operate as a waiver of any
right, power or remedy of the Bank under the Credit Agreement, nor
constitute a waiver of any provision of the Credit Agreement.
Section 5. COSTS, EXPENSES AND TAXES. The Borrower agrees to pay on
demand all costs and expenses of the Bank in connection with the preparation,
execution and delivery of this First Amendment including, without limitation,
the reasonable fees and out-of-pocket expenses of counsel for the Bank with
respect thereto.
Section 6. EXECUTION IN COUNTERPARTS. This First Amendment may be
executed in any number of counterparts, each of which when so executed and
delivered shall be deemed to be an original and all of which taken together
shall constitute but one and the same instrument.
Section 7. GOVERNING LAW. This First Amendment shall be governed
by, and construed in accordance with, the laws of the State of Connecticut.
Section 8. DEFINED TERMS. Capitalized terms used herein which are
not expressly defined herein shall have the meanings ascribed to them in the
Credit Agreement.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
S-1
IN WITNESS WHEREOF, the parties hereto have caused this First Amendment
to be executed by their respective officers thereunto duly authorized, as of
the date first above written.
CORE, INC.
By: /s/ William E. Nixon
-----------------------------
Name: William E. Nixon
Title: EVP & CFO
FLEET NATIONAL BANK
By: /s/ James H. Sterns
-----------------------------
Name: James H. Sterns
Title: SVP
<PAGE>
SCHEDULE 4.4
TO
FIRST AMENDMENT TO CREDIT AGREEMENT
DATED 12/31/98
BETWEEN CORE, INC. AND FLEET NATIONAL BANK
The Litigation status of CORE, INC. and each of its subsidiaries:
CORE, INC.
See TCM Services, below
CORE MANAGEMENT INC. (DELAWARE)
None
CORE MANAGEMENT, INC. (CALIFORNIA)
None
CORE SECURITIES CORP.
None
COST REVIEW SERVICES, INC.
None
INTEGRATED BEHAVIORAL HEALTH
None
PROTOCOL WORK SYSTEMS, INC.
None
SSDC CORP.
None
TCM SERVICES, INC.
Arbitration has been initiated with American Arbitration Association
("AAA") in Atlanta, Georgia by Transcend Services, Inc. and Transcend Case
Management, Inc. (collectively "Transcend") against CORE, INC. and its
wholly-owned subsidiary TCM Services, Inc. Management of CORE, INC. believes
it has meritorious defenses to the claims made by Transcend, intends to
vigorously defend against such claims and intends to assert counterclaims
against Transcend in the arbitration. A copy of Transcend's filing with the
AAA has been supplied to Fleet Bank.
DISABILITY REINSURANCE MANAGEMENT SERVICES, INC.
None*
<PAGE>
*Notwithstanding the above, Disability Reinsurance Management Services,
Inc. ("DRMS") has been notified of the following claims against DRMS clients
which may impact DART results:
1. FORT DEARBORN - Claim for Fibromyalgia received 4/3/96. Claim denied
1/8/97 based on lack of any objective medical evidence to support the
claim. Appealed 1/31/97 and denial upheld 6/24/97. Lawsuit filed against
Fort Dearborn on 4/15/98. We are jointly trying to settle this lawsuit
with claimant. DART liability $808/month with potential duration to
5/25/2002.
2. SHENANDOAH - Claim for Syncope (fainting) received 1/2/97. Five months
of benefits paid to date. DART liability $719/month up to an additional 19
months.
3. PROTECTIVE LIFE INSURANCE COMPANY - While Protective has not yet been
named in the suit, they have notified us that one of our joint claimants
has filed suit against their employer contending that they violated the
Americans with Disabilities Act (ADA). The Employer purchased a contract
from Protective Life which limits benefits for Mental & Nervous conditions
to 24 months while paying claims to age 65 for other types of disabilities.
Claimant now contends that he has physical disabilities and has been
awarded Social Security benefits based on these disabilities.
<PAGE>
SECOND AMENDMENT
TO THE
CREDIT AGREEMENT
Dated as of February 19, 1999
This SECOND AMENDMENT dated as of February 19, 1999 (this "Second
Amendment") is between CORE, INC., a Massachusetts corporation (the
"Borrower"), and FLEET NATIONAL BANK, a national banking association (the
"Bank").
PRELIMINARY STATEMENTS. The Borrower and the Bank entered into a Credit
Agreement dated as of August 31, 1998, which Credit Agreement was amended by
a First Amendment to the Credit Agreement dated as of December 31, 1998 (as
so amended, the "Credit Agreement"). The initial maximum Commitment under
the Credit Agreement was $17,000,000 but has been reduced to $16,000,000 as a
result of two scheduled Commitment reductions prior to the date hereof. The
Borrower has now requested that the Bank amend the Credit Agreement to
restore the maximum Commitment to $17,000,000, subject to a revised schedule
of mandatory Commitment reductions. The Bank has agreed to such request upon
certain terms and conditions.
NOW, THEREFORE, for valuable consideration, receipt of which is hereby
acknowledged, the Borrower and the Bank agree as follows:
Section 1. AMENDMENTS TO THE CREDIT AGREEMENT. Effective as of the
effective date hereof and subject to the satisfaction of the conditions
precedent set forth in Section 2 hereof, the Credit Agreement shall be
amended so that (a) the amount of the Commitment under the Credit Agreement
shall be up to, but not exceeding in aggregate principal amount at any one
time outstanding, the amount of $17,000,000 and (b) subsection (a) of Section
2.5 (Mandatory Reduction of Commitment) of the Credit Agreement shall be
deleted and replaced with the following:
(a) On each of the dates indicated below, commencing on March 31, 1999,
the Commitment of the Bank shall be reduced automatically in the following
amounts:
<TABLE>
<CAPTION>
Mandatory
Date Commitment Amount Available
---- Reduction After Reduction
---------- ----------------
<S> <C> <C>
March 31, 1999 $1,000,000 $16,000,000
May 19, 1999 $1,000,000 $15,000,000
<PAGE>
-2-
<CAPTION>
Mandatory
Date Commitment Amount Available
---- Reduction After Reduction
---------- ----------------
<S> <C> <C>
June 30, 1999 $250,000 $14,750,000
September 30, 1999 $250,000 $14,500,000
December 31, 1999 $750,000 $13,750,000
March 31, 2000 $750,000 $13,000,000
June 30, 2000 $750,000 $12,250,000
September 30, 2000 $750,000 $11,500,000
December 31, 2000 $875,000 $10,625,000
March 31, 2001 $875,000 $9,750,000
June 30, 2001 $875,000 $8,875,000
September 30, 2001 $875,000 $8,000,000
December 31, 2001 $1,000,000 $7,000,000
March 31, 2002 $1,000,000 $6,000,000
June 30, 2002 $1,000,000 $5,000,000
September 30, 2002 $1,000,000 $4,000,000
December 31, 2002 $1,000,000 $3,000,000
March 31, 2003 $1,000,000 $2,000,000
June 30, 2003 $1,000,000 $1,000,000
August 31, 2003 $1,000,000 $0
</TABLE>
Section 2. CONDITIONS OF EFFECTIVENESS. This Second Amendment shall
become effective when, and only when, the Bank shall have received a
counterpart of this Second Amendment executed by the Borrower and an
amendment fee of $10,000.
<PAGE>
-3-
Section 3. REPRESENTATIONS AND WARRANTIES OF THE BORROWER. The
Borrower represents as follows:
(a) The execution, delivery and performance by the Borrower of this
Second Amendment has been duly authorized by all necessary corporate action
and does not and will not (a) require any consent or approval of its
shareholders; (b) violate any provisions of its certificate of
incorporation or by-laws; (c) violate any provision of or require any
filing, registration, consent or approval under, any law, rule, regulation
(including without limitation, Regulation U and X), order, writ, judgment,
injunction, decree, determination or award presently in effect having
applicability to and binding upon the Borrower or any Subsidiary; (d)
result in a breach of or constitute a default or require any consent under
any indenture, mortgage or loan or credit agreement or any other material
agreement, lease or instrument to which the Borrower or any Subsidiary is a
party or by which it or its Properties may be bound; or (e) result in, or
require, the creation or imposition of any Lien upon or with respect to any
of the Properties now owned or hereafter acquired by the Borrower.
(b) The representations and warranties contained in Article 4 of
the Credit Agreement, as amended by this Second Amendment, are correct
in all material respects on and as of the date hereof as though made
on and as of the date hereof.
(c) No Event of Default or Default has occurred and is
continuing or would result from the signing of this Second Amendment
or the transactions contemplated hereby.
(d) There has been no material adverse change in the financial
condition, operations, Properties, business or business prospects of
the Borrower and its Subsidiaries, if any, since the date of the last
financial statements furnished to the Bank.
(e) No actions, suits or proceedings or investigations are
pending or, as far as the Borrower can reasonably foresee, threatened
against or affecting the Borrower or any Subsidiary, or any Property
of any of them before any court, governmental agency or arbitrator,
which if determined adversely to the Borrower or any Subsidiary would
in any one case or in the aggregate have a Materially Adverse Effect.
(f) No information, exhibit or report furnished in writing by or
on behalf of the Borrower or any officer or director of the Borrower
to the Bank in connection with the negotiation of, or pursuant to the
terms of this Second Amendment, contained when made any material
misstatement of fact or omitted to state a material fact necessary to
make the statements contained therein not misleading.
<PAGE>
-4-
Section 4. REFERENCE TO AND EFFECT ON THE CREDIT AGREEMENT.
(a) Upon the effectiveness of this Second Amendment, on and
after the date hereof, each reference in the Credit Agreement to "this
Credit Agreement", "hereunder", "hereof", "herein" or words of the
like import shall mean and be a reference to the Credit Agreement as
amended hereby.
(b) Except as specifically amended above, the Credit Agreement
shall remain in full force and effect and is hereby ratified and
confirmed.
(c) The execution, delivery and effectiveness of this Second
Amendment shall not, except as expressly provided herein, operate as a
waiver of any right, power or remedy of the Bank under the Credit
Agreement, nor constitute a waiver of any provision of the Credit
Agreement.
Section 5. COSTS, EXPENSES AND TAXES. The Borrower agrees to pay on
demand all costs and expenses of the Bank in connection with the preparation,
execution and delivery of this Second Amendment including, without limitation,
the reasonable fees and out-of-pocket expenses of counsel for the Bank with
respect thereto.
Section 6. EXECUTION IN COUNTERPARTS. This Second Amendment may be
executed in any number of counterparts, each of which when so executed and
delivered shall be deemed to be an original and all of which taken together
shall constitute but one and the same instrument.
Section 7. GOVERNING LAW. This Second Amendment shall be governed
by, and construed in accordance with, the laws of the State of Connecticut.
Section 8. DEFINED TERMS. Capitalized terms used herein which are
not expressly defined herein shall have the meanings ascribed to them in the
Credit Agreement.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
S-1
IN WITNESS WHEREOF, the parties hereto have caused this Second Amendment
to be executed by their respective officers thereunto duly authorized, as of
the date first above written.
CORE, INC.
By /s/ William E. Nixon
----------------------------
Name: WILLIAM E. NIXON
Title: EVP & CFO
FLEET NATIONAL BANK
By /s/ Jeffrey A. Simpson
----------------------------
Name: JEFFREY A. SIMPSON
TITLE: VICE PRESIDENT
<PAGE>
EXHIBIT 21.1
CORE, INC.
SUBSIDIARIES OF THE REGISTRANT
The following corporations are wholly-owned subsidiaries of CORE, INC.:
Core Management, Inc. (a Delaware corporation)
Cost Review Services, Inc. (a Texas corporation)
CORE Securities Corp. (a Massachusetts corporation)
Disability Reinsurance Management Services, Inc. (a Delaware corporation)
Protocol Work Systems, Inc. (a Delaware corporation)
SSDC Corp. (a Delaware corporation)
TCM Services, Inc. (a Delaware corporation)
The following corporations are wholly-owned subsidiaries of Core Management,
Inc. (a Delaware corporation):
Integrated Behavioral Health (a California corporation)
Core Management, Inc. (a California corporation)
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 33-59740) pertaining to the Amended and Restated 1986 Stock
Option Plan, 1991 Stock Option Plan and Stock Option Plan for Directors of
Peer Review Analysis, Inc., and in the Registration Statement (Form S-8 No.
333-00354) pertaining to the CORE, INC. 1991 Stock Option Plan, as amended,
and in the Registration Statement (Form S-8 No. 333-4144) pertaining to the
CORE, INC. 1991 Stock Option Plan, as amended, and in the Registration
Statement (Form S-8 No. 333-15261) pertaining to the CORE, INC. 1991 Stock
Option Plan, as amended, and in the Registration Statement (Form S-8 No.
333-16961) pertaining to the CORE, INC. 1991 Stock Option Plan, as amended,
and in the Registration Statement (Form S-8 No. 333-52923) pertaining to the
CORE, INC. 1991 Stock Option Plan, as amended, Core Management, Inc. Employee
Stock Option Plan and other Stock Options, of our report dated March 26,
1999, to the consolidated financial statements and schedule of CORE, INC.
included in the Annual Report (Form 10-K) for the year ended December 31,
1998.
/s/ ERNST & YOUNG LLP
Orange County, California
March 26, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 2,226,020
<SECURITIES> 0
<RECEIVABLES> 10,081,143
<ALLOWANCES> 405,013
<INVENTORY> 0
<CURRENT-ASSETS> 13,073,605
<PP&E> 16,861,620
<DEPRECIATION> (8,930,470)
<TOTAL-ASSETS> 48,731,540
<CURRENT-LIABILITIES> 7,980,867
<BONDS> 0
0
0
<COMMON> 782,451
<OTHER-SE> 26,044,179
<TOTAL-LIABILITY-AND-EQUITY> 48,731,540
<SALES> 0
<TOTAL-REVENUES> 45,609,284
<CGS> 0
<TOTAL-COSTS> 27,832,974
<OTHER-EXPENSES> 21,527,273
<LOSS-PROVISION> 253,380
<INTEREST-EXPENSE> 504,746
<INCOME-PRETAX> (3,952,925)
<INCOME-TAX> (193,000)
<INCOME-CONTINUING> (3,759,925)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,759,925)
<EPS-PRIMARY> (0.50)
<EPS-DILUTED> (0.50)
</TABLE>
