<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
COMMISSION FILE NUMBER 0-19600
CORE, INC.
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-2828817
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
18881 VON KARMAN AVENUE, SUITE 1750, IRVINE, CALIFORNIA 92612
(Address of principal executive offices) (zip code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (949) 442-2100
Indicate by check "X" whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___
On August 9, 1999 there were 7,916,777 shares of the Registrant's
Common Stock outstanding.
<PAGE>
CORE, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1999
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
PART I FINANCIAL INFORMATION Page
Item 1. Financial Statements
Consolidated Condensed Balance Sheets 3
Consolidated Condensed Statements of Operations 5
Consolidated Condensed Statements of Cash Flows 6
Notes to Consolidated Condensed Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 16
PART II OTHER INFORMATION
Item 1. Legal Proceedings N/A
Item 2. Changes in Securities and Use of Proceeds N/A
Item 3. Defaults Upon Senior Securities N/A
Item 4. Submission of Matters to a Vote of Security Holders N/A
Item 5. Other Information N/A
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
</TABLE>
2
<PAGE>
CORE, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
(UNAUDITED) (NOTE 1)
-------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 629,105 $ 2,226,020
Accounts receivable, net of allowance for doubtful accounts of
$495,447 at June 30, 1999 and $405,013 at December 31, 1998 12,506,970 8,280,630
Unbilled receivables 1,984,825 1,395,500
Notes receivable from officers 80,062 90,462
Prepaid expenses and other current assets 915,714 1,080,993
-------------------------------------
Total current assets 16,116,676 13,073,605
Property and equipment, net 9,116,805 7,931,150
Deposits and other assets 1,814,353 618,487
Goodwill and intangibles, net of accumulated
amortization of $1,595,971 at June 30, 1999
and $863,077 at December 31, 1998 26,375,404 27,108,298
-------------------------------------
Total assets $ 53,423,238 $ 48,731,540
=====================================
</TABLE>
3
<PAGE>
CORE, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS - CONTINUED
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
(UNAUDITED) (NOTE 1)
-----------------------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,305,370 $ 1,363,785
Accrued expenses 2,089,359 2,076,933
Advances under revolving credit agreement 150,000 2,750,000
Accrued payroll 918,429 807,124
Accrued vacation 847,740 717,500
Notes payable 169,269 259,510
Capital lease obligations 62,868 6,015
-----------------------------------
Total current liabilities 6,543,035 7,980,867
Advances under revolving credit agreement, net of current portion 16,750,000 13,750,000
Notes payable, net of current portion 81,236 123,633
Deferred rent, net of current portion 62,898 50,410
Capital lease obligations, net of current portion 235,760 --
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 7,915,407 at
June 30, 1999 and 7,824,512 at December 31, 1998 791,541 782,451
Additional paid-in capital 38,549,729 37,778,640
Deferred compensation (6,697) (6,697)
Accumulated deficit (9,584,264) (11,727,764)
-----------------------------------
Total stockholders' equity 29,750,309 26,826,630
-----------------------------------
Total liabilities and stockholders' equity $ 53,423,238 $ 48,731,540
===================================
</TABLE>
See accompanying notes.
4
<PAGE>
CORE, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
------------------------------------------------------------------
1999 1998 1999 1998
------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 16,706,465 $ 10,760,251 $ 31,402,096 $ 20,930,741
Cost of services 9,808,111 6,822,535 18,327,696 13,442,573
------------------------------------------------------------------
Gross profit 6,898,354 3,937,716 13,074,400 7,488,168
Operating expenses:
General and administrative 2,986,906 2,247,152 5,872,416 4,478,289
Sales and marketing 1,091,534 899,770 2,106,502 1,717,516
Depreciation and amortization 973,739 495,206 1,839,174 1,011,052
Provision for doubtful accounts 215,000 15,000 215,000 15,000
Write-off of goodwill and intangibles -- 4,085,449 -- 4,085,449
Arbitration costs -- 736,006 -- 736,009
Other non-recurring charges -- 114,277 -- 114,277
------------------------------------------------------------------
Total operating expenses 5,267,179 8,592,860 10,033,092 12,157,592
------------------------------------------------------------------
Income (loss) from operations 1,631,175 (4,655,144) 3,041,308 (4,669,424)
Other income (expense):
Gain on sale of subsidiary assets, net 331,567 -- 331,567 --
Interest income 2,121 94,885 4,442 247,899
Interest expense (388,066) (5,558) (750,497) (8,436)
------------------------------------------------------------------
Total other income (expense) (54,378) 89,327 (414,488) 239,463
------------------------------------------------------------------
Income (loss) before income taxes 1,576,797 (4,565,817) 2,626,820 (4,429,961)
Income tax benefit (provision) (315,359) 60,000 (483,320) 135,000
------------------------------------------------------------------
Net income (loss) $ 1,261,438 $ (4,505,817) $ 2,143,500 $ (4,294,961)
==================================================================
Net income (loss) per common share:
Basic $ 0.16 $ (0.61) $ 0.27 $ (0.59)
==================================================================
Diluted $ 0.15 $ (0.61) $ 0.26 $ (0.59)
==================================================================
Weighted average number of common
shares and equivalents outstanding:
Basic 7,904,000 7,327,000 7,879,000 7,319,000
==================================================================
Diluted 8,497,000 7,327,000 8,399,000 7,319,000
==================================================================
</TABLE>
See accompanying notes.
5
<PAGE>
CORE, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
--------------------------------
1999 1998
--------------------------------
<S> <C> <C>
Net cash provided by (used in) operating activities $ 166,085 $ (445,574)
Investing activities:
Additions to property and equipment (2,203,539) (1,740,461)
Additions to goodwill and intangible assets -- (235,394)
Proceeds from sale of subsidiary assets 50,000 --
Decrease (increase) in deposits and other assets (23,994) 330,670
Purchases of investments available-for-sale -- (16,579,100)
Sales of investments available-for-sale -- 15,527,913
--------------------------------
Net cash used in investing activities (2,177,533) (2,696,372)
Financing activities:
Borrowings under credit agreement 4,300,000 --
Repayments under credit agreement (3,900,000) --
Payments for origination and other fees pursuant to credit agreement (347,276) --
Payments on obligation from acquisition -- (1,125,000)
Payments on notes payable (132,638) (26,543)
Payments on capital lease obligations (21,732) (16,651)
Issuance of common stock upon exercise of stock options 516,179 156,756
--------------------------------
Net cash provided by (used in) financing activities 414,533 (1,011,438)
--------------------------------
Net decrease in cash and cash equivalents (1,596,915) (4,153,384)
Cash and cash equivalents at beginning of period 2,226,020 7,944,595
--------------------------------
Cash and cash equivalents at end of period $ 629,105 $ 3,791,211
================================
</TABLE>
See accompanying notes.
6
<PAGE>
CORE, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 1999
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated condensed financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and pursuant to the rules and regulations of the
Securities and Exchange Commission, but do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. The balance sheet at December 31, 1998 has been derived
from the audited financial statements of CORE, INC. ("CORE") at that date.
In the opinion of management, all adjustments (consisting of only normal
recurring adjustments) considered necessary for a fair presentation have been
included. Operating results for the six-month period ended June 30, 1999 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 1999. For further information, refer to the consolidated financial
statements for the year ended December 31, 1998 contained in CORE's annual
report on Form 10-K filed April 1, 1999, as amended by CORE's Form 10-K/A filed
with the Securities and Exchange Commission on April 29, 1999.
NOTE 2 - BUSINESS ACQUISITIONS
On September 1, 1998, CORE 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
CORE's common stock and the future issuance of up to an additional $7,000,000 of
CORE'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 CORE, 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 CORE, 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.
The unaudited consolidated condensed financial statements include the operating
results of DRMS and TCM from the dates of acquisition. The following unaudited
pro forma results of operations for the six months ended June 30, 1999 and 1998
has been prepared as if the acquisition of DRMS had occurred on January 1, 1998
and the TCM acquisition and subsequent disposition had not occurred at all. The
pro forma financial information also includes adjustments related to the DRMS
acquisition for amortization of intangibles arising from the transaction,
interest expense incurred on funds borrowed to finance the transaction,
reductions in interest income from the use of short-term investments to fund the
transaction and for additional shares of common stock and stock options issued
in the transaction.
7
<PAGE>
CORE, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED
NOTE 2 - BUSINESS ACQUISITIONS (CONTINUED)
<TABLE>
<CAPTION>
Six months ended June 30,
1999 1998
------------------------------
<S> <C> <C>
Revenues $31,402,000 $23,113,000
==============================
Net income (loss) $ 2,144,000 $(4,735,000)
==============================
Net income (loss) per common share:
Basic $ 0.27 $ (0.61)
==============================
Diluted $ 0.26 $ (0.61)
==============================
</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 January 1, 1998.
NOTE 3 - SALE OF SUBSIDIARY ASSETS
On June 21, 1999, CORE sold the assets of one of its' operating subsidiaries,
Integrated Behavioral Health, a California corporation ("IBH"), to a
non-affiliated party for $50,000 in cash and a $462,500 promissory note. A net
gain of $332,000 was realized from the sale of assets. IBH provided mental
health case management services.
NOTE 4 - CREDIT AGREEMENT
On August 31, 1998, CORE entered into a revolving line of credit agreement (the
"Credit Agreement") with Fleet National Bank ("Fleet"). Under the terms of the
Third Amendment to the Credit Agreement dated April 28, 1999 (the "Third
Amendment"), CORE may borrow up to specified amounts at either (i) the prime
base rate plus 0.50%, or (ii) the London Interbank Offered Rate ("LIBOR") plus
3.50%. The maximum credit availability under the Third Amendment of $18,500,000
is subject to mandatory commitment reductions each quarter (beginning on March
31, 2000) in amounts ranging from $875,000 to $1,250,000. The Third Amendment
extended the credit facility through June 30, 2004.
At June 30, 1999 and December 31, 1998, CORE had outstanding borrowings of
$16,900,000 and $16,500,000, respectively, 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 CORE's assets and requires
CORE to meet certain financial covenants, including minimum ratios for interest,
debt service and fixed charge coverage along with minimum net worth levels.
Additionally, the Credit Agreement prohibits the payment of dividends by CORE
without the Bank's written consent. CORE was in compliance with the financial
covenants contained in the Credit Agreement at June 30, 1999.
CORE has entered into an interest rate protection arrangement with Fleet that
limits CORE's exposure to significant increases in the base lending rate. The
arrangement places an effective cap on the prime base lending rate at 9.75% (or
LIBOR at 6.75%) for a substantial portion of the outstanding borrowings over the
life of the Credit Agreement.
In connection with the Credit Agreement and related amendments, CORE has issued
two Warrants to purchase shares of its Common Stock to Fleet. The original
Warrant granted on August 31, 1998 entitles the holder to purchase up to 156,322
shares of CORE's Common Stock (subject to certain adjustments), at an exercise
price of $6.92 per share. The original Warrant is exercisable beginning August
31, 1999 and expires August 31, 2003. The second Warrant granted in connection
with the Third Amendment to the Credit Agreement, entitles the holder to
purchase up to 187,000 shares of CORE's Common Stock (subject to certain
adjustments), at an exercise price of $12.00 per share. The second Warrant was
exercisable upon the April 1999 execution of the Third Amendment and expires
June 30, 2004.
8
<PAGE>
CORE, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED
NOTE 5 - EARNINGS PER COMMON SHARE
The following table sets forth the computation of basic and diluted earnings
(loss) per share for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
1999 1998 1999 1998
-----------------------------------------------------------
<S> <C> <C> <C> <C>
Numerator:
Net income (loss) $ 1,261,000 $(4,506,000) $ 2,144,000 $(4,295,000)
===========================================================
Denominator:
Denominator for basic earnings (loss) per
share: weighted-average shares 7,904,000 7,327,000 7,879,000 7,319,000
Effect of dilutive stock options and warrants 593,000 -- 520,000 --
-----------------------------------------------------------
Denominator for diluted earnings (loss) per share:
adjusted weighted-average shares 8,497,000 7,327,000 8,399,000 7,319,000
and assumed conversions
===========================================================
Basic earnings (loss) per share $ 0.16 $ (0.61) $ 0.27 $ (0.59)
===========================================================
Diluted earnings (loss) per share $ 0.15 $ (0.61) $ 0.26 $ (0.59)
===========================================================
</TABLE>
NOTE 6 - SEGMENT REPORTING
CORE reports segment information in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 131 "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 131 establishes standards for the
way that public companies report information about operating segments and
related disclosures about products and services, geographic areas and major
customers. CORE operates in a single industry segment: employee absence
management services.
NOTE 7 - COMPREHENSIVE INCOME
Total comprehensive income (loss) was $1,261,000 and $2,144,000 for the three
and six months ended June 30, 1999 and $(4,506,000) and $(4,295,000) for the
three and six months ended June 30, 1998, respectively.
NOTE 8 - ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." CORE expects to
adopt the new Statement effective January 1, 2000. SFAS No. 133 will require
CORE to recognize all derivatives on the balance sheet at fair value. CORE does
not anticipate that the adoption of SFAS No. 133 will have a significant effect
on its results of operations or financial position.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
CORE, INC. ("CORE") is a national provider of employee absence management
services to Fortune 500 companies and other self-insured employers, third-party
administrators and insurance carriers. CORE's services include Integrated
Disability Management (which consist of CORE's proprietary WorkAbility(R)
Absence Management program, turnkey 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 is typically compensated for these services either on a per employee per
month, 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 six months ended June 30, 1999) from licensing fees attributable to
license grants by CORE of the medical protocol portion of the WorkAbility
software program.
This Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995 and CORE's
actual results could differ materially from those contemplated by such
statements. Such statements reflect management's current views, are based on
many assumptions and are subject to risks and uncertainties. Some important
factors CORE believes could cause such results to differ include CORE's reliance
on its WorkAbility program, CORE's dependence on key clients, risks associated
with CORE's growth strategy, increases or changes in government regulation and
competition. The foregoing list of factors is not intended to represent a
complete list of the general or specific risks that may affect CORE. It should
be recognized that other risks might be significant, presently or in the future.
CURRENT DEVELOPMENTS
On June 21, 1999, CORE sold the assets of one of its' operating subsidiaries,
Integrated Behavioral Health, a California corporation ("IBH"), to a
non-affiliated party for $50,000 in cash and a $462,500 promissory note. A net
gain of $332,000 was realized from the sale of assets. IBH provided mental
health case management services.
RESULTS OF OPERATIONS
The following table sets forth certain statement of operations data for the
periods indicated expressed as a percentage of revenues:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------------------------------
1999 1998 1999 1998
------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue 100.0% 100.0% 100.0% 100.0%
Cost of services 58.7 63.4 58.4 64.2
Gross profit 41.3 36.6 41.6 35.8
General and administrative expense 17.9 20.9 18.7 21.4
Sales and marketing expense 6.5 8.4 6.7 8.2
</TABLE>
10
<PAGE>
The following table sets forth the contribution to total revenues of each of
CORE's principal service lines for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
1999 1998 1999 1998
-----------------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent Amount Percent
-----------------------------------------------------------------------------------
(Dollars in thousands) (Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Integrated Disability
Management $12,131 73% $ 6,115 57% $22,508 72% $11,370 54%
Peer Review Analysis 2,242 13 1,909 18 4,471 14 3,949 19
Exiting/exited services 452 3 998 9 1,008 3 1,784 9
Other service lines 1,881 11 1,738 16 3,415 11 3,828 18
===================================================================================
$16,706 100% $10,760 100% $31,402 100% $20,931 100%
===================================================================================
</TABLE>
THREE AND SIX MONTHS ENDED JUNE 30, 1999 AND 1998
Revenues increased by $5,946,000 (55%) to $16,706,000 for the three months ended
June 30, 1999 from $10,760,000 for the second quarter of 1998. For the six
months ended June 30, 1999 revenues increased $10,471,000 (50%) to $31,402,000
in 1999 from $20,931,000 in 1998. Growth in Integrated Disability Management
contributed $6,016,000 (101%) and $11,138,000 (106%) of CORE's overall net
increase in revenues for the three and six-month periods ended June 30, 1999,
respectively, as compared to the same periods in 1998. CORE's WorkAbility
Absence Management program contributed 64% of the increase in Integrated
Disability Management for the six-month period ended in 1999 as compared to the
same period in 1998 due to the addition of new clients and expansion of services
to existing clients over the course of 1998 and into the first six months of
1999. Revenues for the Integrated Disability Management service line now include
revenues from Disability Reinsurance Management Services, Inc. ("DRMS") acquired
in September 1998 which expanded CORE's programs to include turnkey disability
reinsurance management services. Revenues from DRMS contributed 35% of the
increase in Integrated Disability Management revenues for the six month period
ended in 1999 as compared to the same period in 1998.
Revenues from the Peer Review Analysis service line increased $333,000 (17%) and
$522,000 (13%) for the three and six-month periods ended June 30, 1999 as
compared to the same periods in the prior year mostly due to an increase in the
volume of referrals for specialty physician review services.
Revenues from services that CORE exited or expected to exit decreased $546,000
(55%) and $776,000 (43%) for the three and six-month periods ended June 30, 1999
as compared to the same periods in the prior year. During 1998, these service
lines consisted of regional workers' compensation case management services of
both Cost Review Services, Inc. ("CRS") and TCM Services, Inc. ("TCM"), regional
bill audit activities of CRS, and the behavioral health programs of Integrated
Behavioral Health ("IBH"). The CRS operations, which contributed $161,000 to our
revenues in the second quarter of 1998 was closed as of October 31, 1998. The
operations of TCM, which was acquired on March 17, 1998 and contributed $411,000
of the second quarter 1998 revenues, was exited in December 1998. IBH
contributed all of the revenue in our exiting/exited services, amounting to
$452,000 for the three months ended June 30, 1999, an increase of $26,000 as
compared to revenue for the same period in 1998. As a result of the sale of
IBH's assets on June 21, 1999, operations within the exiting/exited services
line ceased.
Revenues from other service lines (which includes utilization review, Medicare
coordination of benefits and other case management services), increased 8%
overall for the second quarter ended in 1999, as compared to the same period in
1998. For the six months ended June 30, 1999, revenues from these service lines
decreased 11% compared to the same period in 1998. The decrease for the
six-month period ended June 30, 1999 as compared to prior year is primarily due
to an overall decline in enrollment in our clients' indemnity plan based group
health business under CORE's utilization review program. This overall decline
was offset in the second quarter of 1999 with an expansion of Medicare
coordination of benefits services to an existing client.
11
<PAGE>
CORE's top five clients represented 43% of revenues for the six-month period
ended June 30, 1999 as compared to 48% for the same period in 1998. Bell
Atlantic accounted for approximately 18% and 23% of revenues for the six-month
periods ended June 30, 1999 and 1998, respectively. SBC Communications
represented 11% of revenues for the six-month period ended June 30, 1999.
Motorola represented 10% of the Company's revenues for the six-month period
ended June 30, 1998. No other single client represented more than 10% of total
revenues for the six-month periods ended June 30, 1999 or 1998.
Cost of services for CORE include direct expenses associated with the delivery
of our review and managed care services, including salaries for professional,
clerical and license support staff, the cost of physician reviewer consultants
and telephone expense. Cost of services increased $2,985,000 (44%) to $9,808,000
for the three months ended June 30, 1999 from $6,823,000 for the second quarter
of 1998. For the six months ended June 30, 1999, cost of services increased
$4,885,000 (36%) as compared to the same period in 1998, rising to $18,328,000
from $13,443,000. The increase is primarily the result of increased staffing
levels required to service new and growing WorkAbility Absence Management
program clients in addition to the added cost of services associated with DRMS.
CORE's gross profit performance for the six months ended June 30, 1999 increased
to 42% from 36% in 1998. Gross profit performance for each of CORE's principal
service lines for the six months ended June 30, 1999 and 1998, respectively,
are: 42% and 35% for Integrated Disability Management, 38% and 36% for Peer
Review Analysis, 23% and 15% for exiting/exited services and 49% and 48% for
other service lines. The gross profit performance realized under Integrated
Disability Management was significantly enhanced by the growth in CORE's
WorkAbility Absence Management program which provided for greater efficiencies
in providing services to a larger client base. The addition of disability
reinsurance management services now provided by CORE pursuant to the DRMS
acquisition also increased the gross profit performance within Integrated
Disability Management for the first six months of 1999, as compared to the same
period in the prior year.
General and administrative expenses include the cost of executive,
administrative and information services personnel, rent and other overhead
items. General and administrative expenses increased $740,000 (33%) to
$2,987,000 for the three months ended June 30, 1999 from $2,247,000 for the
second quarter of 1998. For the six months ended June 30, 1999, general and
administrative expenses increased $1,394,000 (31%) as compared to the same
period in 1998, rising to $5,872,000 from $4,478,000. Higher personnel and other
costs associated with supporting CORE's expanded growth in operations primarily
contributed to the increase in general and administrative expenses. CORE has
also incurred additional costs associated with the maintenance of our computer
network hardware and software as capacity has been expanded to accommodate
growth. General and administrative expenses, as a percentage of revenues,
decreased to 19% for the first six months of 1999 from 21% for the first six
months of 1998. This improvement is generally due to greater economies of scale
related to higher revenues.
Sales and marketing expenses include, but are not limited to, salaries for sales
and account management personnel and travel expenses. Sales and marketing
expenses also include costs designed to increase revenues, such as our
participation in and attendance at industry trade shows and conferences. Sales
and marketing expenses increased $192,000 (21%) to $1,092,000 for the three
months ended June 30, 1999 from $900,000 for the second quarter of 1998. For the
six months ended June 30, 1999, sales and marketing expenses increased $389,000
(23%) as compared to the same period in 1998, rising to $2,107,000 from
$1,718,000. This increase is primarily due to expanded staffing to support the
sales and product development departments as well as additional travel costs and
costs incurred for participation in tradeshows. Sales and marketing expenses, as
a percentage of revenues, decreased to 7% for the first six months of 1999 from
8% for the first six months of 1998. CORE expects to continue to invest an
increased amount of resources in sales and marketing in future periods.
Depreciation and amortization expenses increased $479,000 (97%) to $974,000 for
the three months ended June 30, 1999 from $495,000 for the second quarter of
1998. For the six months ended June 30, 1999, depreciation and amortization
expenses increased $828,000 (82%) as compared to the same period in 1998, rising
to $1,839,000 from $1,011,000. The increase is primarily related to the
amortization of goodwill and intangibles acquired in the purchase of DRMS in
September 1998 which amounted to $586,000 for the six months ended June 30,
1999.
A provision for doubtful accounts was recorded for the six months ended June 30,
1999 in the amount of $215,000 as compared to $15,000 for the same period in
1998. The 1999 provision primarily relates to termination of an uncompleted
project within the onsite job profiling and analysis and workplace risk
management service's unit.
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During the second quarter of 1998, CORE 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 then 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. CORE also determined during the second quarter of
1998 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.
On June 2, 1998, CORE 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, CORE incurred approximately
$121,000 in other costs related to the arbitration (primarily legal and travel
expenses).
CORE recorded non-recurring charges during the quarter ended June 30, 1998 for
relocation costs in the amount of $64,000 and restructuring charges in the
amount of $50,000. The relocation costs related to CORE's relocation of our
accounting department from Boston, Massachusetts to our corporate offices in
Irvine, California and the restructuring charges related to the restructuring of
CRS operations.
Other income and expense, net, consists primarily of interest expense as offset
by interest income. For the three and six months ended June 30, 1999, total
other expense also includes as an offset, a gain of $332,000 recognized on the
June 21, 1999 sale of IBH assets, net of transaction costs. Interest expense
represents amounts incurred related to outstanding borrowings under CORE's
August 1998 Credit Agreement, as amended, with Fleet National Bank. Interest
income represents amounts earned by CORE's investments. Interest income
decreased to $4,000 for the six months ended June 30, 1999 from $248,000 in the
same period in 1998 and interest expense increased to $750,000 for the six
months ended June 30, 1999 from $8,000 in the same period in 1998. The decrease
in interest income and the concurrent rise in interest expense during the first
two quarters of 1999 as compared to the similar period in 1998 is primarily due
to a decrease in funds available for investment and an increase in outstanding
borrowings pursuant to the acquisition of DRMS.
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FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
On August 31, 1998, CORE entered into a revolving line of credit agreement (the
"Credit Agreement") with Fleet National Bank ("Fleet"). Under the terms of the
Third Amendment to the Credit Agreement dated April 28, 1999 (the "Third
Amendment"), CORE may borrow up to specified amounts at either (i) the prime
base rate plus 0.50%, or (ii) the London Interbank Offered Rate ("LIBOR") plus
3.50%. The maximum credit availability under the Third Amendment of $18,500,000
is subject to mandatory commitment reductions each quarter (beginning on March
31, 2000) in amounts ranging from $875,000 to $1,250,000. The Third Amendment
extended the credit facility through June 30, 2004.
At June 30, 1999 and December 31, 1998, CORE had outstanding borrowings of
$16,900,000 and $16,500,000, respectively, 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 CORE's assets and requires
CORE to meet certain financial covenants, including minimum ratios for interest,
debt service and fixed charge coverage along with minimum net worth levels.
Additionally, the Credit Agreement prohibits the payment of dividends by CORE
without the Bank's written consent. CORE was in compliance with the financial
covenants contained in the Credit Agreement at June 30, 1999.
CORE has entered into an interest rate protection arrangement with Fleet that
limits CORE's exposure to significant increases in the base lending rate. The
arrangement places an effective cap on the prime base lending rate at 9.75% (or
LIBOR at 6.75%) for a substantial portion of the outstanding borrowings over the
life of the Credit Agreement.
In connection with the Credit Agreement and related amendments, CORE has issued
two Warrants to purchase shares of its Common Stock to Fleet. The original
Warrant granted on August 31, 1998 entitles the holder to purchase up to 156,322
shares of CORE's Common Stock (subject to certain adjustments), at an exercise
price of $6.92 per share. The original Warrant is exercisable beginning August
31, 1999 and expires August 31, 2003. The second Warrant granted in connection
with the Third Amendment to the Credit Agreement, entitles the holder to
purchase up to 187,000 shares of CORE's Common Stock (subject to certain
adjustments), at an exercise price of $12.00 per share. The second Warrant was
exercisable upon the April 1999 execution of the Third Amendment and expires
June 30, 2004.
For the six months ended June 30, 1999, CORE's cash and cash equivalents
decreased by $1,597,000. For this period, cash provided by operating activities
was $166,000. Although net income for the period amounted to $2,144,000, an
increase in accounts and unbilled receivables of $4,906,000 significantly
reduced the amount of cash provided by operating activities. The increase in
receivables was due to the timing of cash collections on recurring services
provided to certain major customers (for which significant payments were
received in July), the increase in revenues during the six months ended June 30,
1999 and the contractual timing of certain client billings. CORE's investing
activities used $2,178,000 of cash mostly to fund additions to property and
equipment (including software development) of $2,204,000. CORE's financing
activities provided $415,000 of cash for this period due primarily to net
borrowings of $400,000 under the Credit Agreement.
CORE leases its facilities and certain computer and office equipment. Future
lease commitments as of June 30, 1999, which relate substantially to space
rental, for the six months ended December 31, 1999 and the year ended December
31, 2000 are approximately $1.6 million and $2.7 million, respectively. All
obligations held by CORE under lease commitments expire on various dates through
February 2004 and total approximately $7.4 million as of June 30, 1999.
CORE has net operating loss carry-forwards for income tax purposes of
approximately $4.7 million as of June 30, 1999, which can be used to reduce
future obligations for federal and state income taxes. The amount of net
operating loss carry-forwards 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 carry-forwards may be subject to further limitation
provided by the Internal Revenue Code of 1986 and similar state provisions.
CORE plans to finance its operations and working capital requirements primarily
with future earnings from operations. As of August 9, 1999, outstanding
borrowings under the Credit Agreement were $15,900,000. To the extent that
working capital needs exceed currently available working capital, CORE has the
flexibility to borrow additional funds up to the maximum commitment available
under the Credit Agreement. CORE believes that this available financing, along
with future earnings from operations and other sources of available funds will
be sufficient to meet its liquidity and funding requirements through at least
the year 2000.
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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, CORE'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 "19."
If not corrected, CORE 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.
CORE's primary computer application platforms were essentially designed to
process and store dates in a four-character format. CORE believes this
substantially reduces the magnitude of the effort required to address the Year
2000 issue. CORE has completed an assessment of internal applications and
licensed operating systems, software tools and utilities. Additionally, CORE has
evaluated third party data feeds, primarily to and from client 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. CORE 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 CORE.
CORE's plan to resolve the Year 2000 issue involves the following five phases:
assessment, remediation, testing, implementation, and certification. To date
CORE has fully completed its assessment of all systems that could be
significantly affected by the Year 2000 issue. The completed assessment
indicated that most of CORE's major systems are effectively Year 2000 compliant
and will require only minor modifications. CORE 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. CORE has
initiated formal communications with all of its significant vendors and large
customers to determine the extent to which CORE's interface systems are
vulnerable to those third parties' failure to remediate their own Year 2000
issues. There is no guarantee that the systems of other companies on which
CORE's systems rely will be timely converted and would not have an adverse
effect on CORE's systems.
For its internal applications and licensed operating systems, software tools and
utilities exposures, to date CORE is approximately 95% complete on the
remediation phase and expects to complete the software reprogramming and
replacement no later than the third quarter of 1999. Once software is
reprogrammed and replaced for a system, CORE begins testing and implementation.
These phases run concurrently for different systems. To date, CORE has completed
approximately 90% of its testing and has implemented approximately 90% of its
remediated systems. The testing and certification phases for all significant
systems is expected to be completed in the third quarter of 1999, which is prior
to any anticipated impact on its operating systems. Also, during the third
quarter of 1999, CORE plans to carry out a certification process to validate its
information technology environment, once again, to ensure Year 2000 compliance.
Because the results to date of the completed assessment have indicated that most
of CORE's major systems are effectively Year 2000 compliant and will require
only minor modifications, no contingency plans have been developed at this time.
CORE 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.
CORE has queried its material clients that do not share information systems with
CORE. To date, CORE is not aware of any external agent Year 2000 issue that
would materially impact CORE's results of operations, liquidity, or capital
resources. However, CORE 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 CORE. The effect of
non-compliance by external agents is not determinable.
CORE plans to continue utilizing both internal and external resources to
reprogram, or replace, test, and implement software for Year 2000 modifications.
The dates on which CORE believes it will complete the Year 2000 modifications
are based on management's best estimates, which were derived utilizing numerous
assumptions of future events, including the continued availability of certain
resources, and other factors. However, there can be no guarantee that these
estimates will be achieved and actual results could differ materially from those
anticipated. Specific factors that might cause such material differences
include, but are not limited to, the availability and cost of personnel trained
in this area, the ability to locate and correct all relevant computer codes, and
similar uncertainties.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK.
CORE entered into a Credit Agreement with Fleet National Bank on August 31,
1998. The Credit Agreement was entered into for purposes other than trading.
Under the terms of the Credit Agreement, as amended, outstanding borrowings bear
interest at variable rates which reset as prevailing market conditions change.
On January 15, 1999, CORE entered into an interest rate protection arrangement
with Fleet that limits CORE's exposure to significant increases in the base
lending rate. The arrangement places an effective cap on the prime base lending
rate at 9.75% (or LIBOR at 6.75%) for a substantial portion of the outstanding
borrowings over the life of the amended Credit Agreement.
PART II
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits. The following exhibits are included:
EXHIBIT
NUMBER DESCRIPTION
2.1* Asset Purchase Agreement, dated as of June 21, 1999, by and amongst
Integrated Behavioral Health, Tom H. Yankoff and TD Ventures, Inc.
(excluding Exhibits and Schedules).
4.1 Warrant Agreement, dated as of April 27, 1999, between CORE, INC. and
Fleet National Bank (excluding Exhibits). Filed as exhibit 4.1 to
registrant's Quarterly Report on 10-Q, filed May 14, 1999, and
incorporated herein by reference.
10.1 Third Amendment to Credit Agreement, dated as of April 27, 1999,
between CORE, INC. and Fleet National Bank (excluding Exhibits and
Schedules). Filed as exhibit 10.1 to registrant's Quarterly Report on
10-Q, filed May 14, 1999, and incorporated herein by reference.
10.2 Registration Rights Agreement, dated as of April 27, 1999, between
CORE, INC. and Fleet National Bank. Filed as exhibit 10.2 to
registrant's Quarterly Report on 10-Q, filed May 14, 1999, and
incorporated herein by reference.
27.1* Financial Data Schedule.
- ------------------------------------
* Filed herewith
(b) REPORTS ON FORM 8-K.
CORE did not file any reports on Form 8-K during the three months ended June 30,
1999.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CORE, INC.
Dated: August 12, 1999 By: /s/ William E. Nixon
--------------------------------------
William E. Nixon
Chief Financial Officer, Executive
Vice President and Treasurer
(Duly authorized officer and Principal
Financial Officer)
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ASSET PURCHASE AGREEMENT
THIS ASSET PURCHASE AGREEMENT (the "AGREEMENT") is dated as of June 21,
1999, and is entered into between TD Ventures, Inc., a California corporation
("PURCHASER"), Tom H. Yankoff, an individual residing in San Juan Capistrano,
California and the owner of 90% of the issued and outstanding capital stock of
Purchaser ("YANKOFF"), and Integrated Behavioral Health, a California
corporation ("IBH").
WHEREAS, IBH is a behavioral health care management company offering
services designed to control employer health care costs and to monitor the
quality of behavioral health care services provided under employer health care
plans (the "BUSINESS");
WHEREAS, pursuant to the terms of a Letter of Intent between IBH and
Yankoff dated January 12, (the "Letter of Intent"), Yankoff was granted an
option to purchase certain assets of IBH; and
WHEREAS, by letter dated April 1, 1999, Yankoff exercised such option;
WHEREAS, IBH desires to sell certain of the assets and to transfer certain
liabilities related to the Business to Purchaser;
WHEREAS, Yankoff and Purchaser desire that Purchaser acquire such assets and
liabilities under the terms and conditions hereinafter set forth and for the
consideration provided herein.
NOW, THEREFORE, in consideration of the premises and mutual covenants and
agreements set forth herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
Section 1. ASSETS TO BE PURCHASED BY PURCHASER. Upon the terms and
subject to the conditions and provisions set forth in this Agreement, on the
Closing Date (as defined in Section 12), IBH shall convey, sell, transfer,
assign, quitclaim and deliver to Purchaser, and Purchaser shall purchase from
IBH, all right, title and interest in and to those the Acquired Assets, as
described in Section 3 hereof.
Section 2. CONSIDERATION. Upon the terms and subject to the conditions
contained in this Agreement, as consideration for the Acquired Assets and in
full payment therefor, Purchaser will pay the aggregate sum of Five Hundred
Twelve Thousand Five Hundred Dollars ($512,500) (the "PURCHASE PRICE"), payable
to the order of IBH as follows:
(a) Purchaser shall pay to IBH at Closing the sum of Fifty Thousand
Dollars ($50,000) by certified check or wire transfer;
(b) Purchaser shall deliver to IBH at Closing a promissory note (the
"Note") payable to IBH in the principal amount of Four Hundred Sixty Two
Thousand Five Hundred Dollars ($462,500), bearing interest at ten percent (10%)
per annum, payable in 36 equal monthly installments of principal and interest,
such Note shall be in the form of EXHIBIT A hereto. The indebtedness evidenced
by the Note shall be secured pursuant to a Security Agreement in the form of
EXHIBIT B hereto.
(c) Purchaser will propose an allocation of the Purchase Price in
accordance with the allocation method required by Section 1060 of the Internal
Revenue Code of 1986, as amended (the "Code") and the regulations thereunder.
Subject to IBH's agreement with such allocation, which will not be unreasonably
withheld, IBH and Purchaser each agree to report the federal, state and local
income and other tax consequences of the transactions contemplated herein, and
in particular to report the information required by Code Section 1060(b), in a
manner consistent with such allocation.
Section 3. DESCRIPTION OF ASSETS. Subject to Section 4, below, the
assets of the Business to be sold by IBH and purchased by Purchaser (the
"ACQUIRED ASSETS") shall consist of the following:
(a) All of the equipment, machinery, and furniture related to the Business
and described on SCHEDULE 3;
(b) All contracts including real estate leases, equipment leases and
contracts with the current customers of IBH described in SCHEDULE 3(B)
to the extent transferable;
(c) All deposits, goodwill and accounts of IBH described on SCHEDULE 3;
(d) All of the applicable intellectual property rights, including but not
limited to "Integrated Behavioral Health," "IBH," and any other name,
trademark, trade name or symbol similar thereto) applied for, issued
or owned by IBH or otherwise relating to the Business of IBH,
including any fictitious business names all as described on SCHEDULE
3, provided, however, IBH shall not be obligated to change its
corporate name unless Purchaser agrees to reimburse IBH for costs
related to such name change (including reasonable attorneys' fees);
(e) All customer lists and all other information, whether or not
confidential, owned or used by IBH in support of the marketing,
service and sales of the Business, and all contact lists of service
providers and vendors for such items;
(f) All brochures, advertising materials, sales literature, reference
catalogs relating solely to the advertising and promotion of the
Business provided such material do not include mention of CORE,
WorkAbility or any derivatives or variations thereof;
(g) All express or implied warranties, rebates and credits from any
suppliers to the Business;
(h) The IBH's PPO Network as described in SCHEDULE 3; and
(i) All books, records and accounts, correspondence, employment records,
and to the extent transferable, telephone numbers, directory listings,
e-mail addresses, web pages, licenses, certifications, permits,
manuals, reference manuals, design drawings, warranties and any
confidential information stored on paper, computer or otherwise.
Section 4. ASSETS RETAINED. Notwithstanding any Schedule hereto or any
other provision of this Agreement, IBH shall retain, and Purchaser shall have no
rights to, any of the following rights or assets (the "RETAINED ASSETS"):
(a) Information or documents in the possession of CORE, INC. ("CORE") or
any of its affiliates at a location other than IBH's Irvine,
California offices; provided, however, IBH shall provide Purchaser
access to and permit Purchaser to make copies of any such documents to
the extent the documents are referred to in item 3(i), above;
(b) Cash, accounts receivable and bank accounts of IBH;
(c) Minute books, corporate and financial records of IBH;
(d) Any attorney-client privileged communication or document relating
directly or indirectly to IBH's operation of the Business;
(e) The trademarks and tradenames "CORE," "WorkAbility," and all
derivatives and variations thereof;
(f) The WorkAbility program or other intellectual property developed by
CORE and its affiliated corporations;
(g) The cash management and accounts receivable collection system utilized
by IBH in Boston, Massachusetts or Irvine, California.
(h) CORE's web site;
(i) The telephone switch utilized by both CORE and IBH; and
(j) CORE's information system, utilized by IBH, including server(s),
e-mail service, and winframes and related items and services, except
as specifically indicated in Section 7, below.
Section 5. LIABILITIES.
(a) ASSUMPTION OF LIABILITIES BY PURCHASER. As additional consideration
for the assignment and transfer of the Acquired Assets, and except as otherwise
provided in Section 5(b) hereof, effective the Closing Date, Purchaser shall
assume all liabilities of the Business, including liabilities of IBH pursuant to
lease obligations related to fixed assets and office space rental, accrued
employee benefits (including but not limited to accrued vacation benefits), and
liabilities and obligations under the customer contracts transferred or to be
transferred by IBH to Purchaser following the date of transfer of the Acquired
Assets including, without limitation those liabilities listed on SCHEDULE 5
hereto collectively, (the "ASSUMED LIABILITIES").
(b) RETENTION OF LIABILITIES BY IBH. IBH retains, and Purchaser shall not
assume, any obligations or liabilities of IBH relating to the Retained Assets
and all other obligations and liabilities, including professional liabilities
for services rendered by IBH prior to the Closing Date (whether or not related
to the Acquired Assets), other than the Assumed Liabilities (collectively, the
"RETAINED LIABILITIES").
Section 6. NON-ASSIGNMENT OF CERTAIN ITEMS. Notwithstanding anything
to the contrary in this Agreement, to the extent that the assignment hereunder
of any item of the Acquired Assets shall require the consent of any other party
(or in the event that any of the same shall be nonassignable), neither this
Agreement nor any action taken pursuant to its provisions shall constitute an
assignment or an agreement to assign if such assignment or attempted assignment
would constitute a breach thereof, a violation of law, or result in the loss or
diminution thereof; PROVIDED, HOWEVER, that in each such case, all parties
hereto shall use their best efforts to obtain the consent of such other party to
an assignment to Purchaser. If such consent is not obtained, IBH and Purchaser
shall cooperate in any reasonable arrangement designed to provide to Purchaser
the benefits and obligations under any such Acquired Asset.
Section 7. FURTHER ASSURANCES; EMPLOYEES; E-MAIL. At any time and from
time to time after the date hereof, at the request of Purchaser, and without
further consideration, IBH hereby agrees to execute and deliver such other bills
of sale and instruments of conveyance, assignment or transfer and take such
other action as is reasonably required to convey to, transfer to, or vest in
Purchaser or its successors and assigns, or put Purchaser or its successors and
assigns in possession of any or all of the Acquired Assets intended to be sold,
conveyed, assigned, transferred and delivered to Purchaser. Similarly,
Purchaser agrees to execute and deliver to IBH such documents and to take such
other actions as are necessary to confirm assumption of the Assumed Liabilities
or to otherwise confirm the actions intended to be taken under this Agreement.
Purchaser will offer employment, commencing as of the Closing Date, to all
employees listed on SCHEDULE 7. Notwithstanding the foregoing, and without
breaching the foregoing, Purchaser reserves the right to review staffing levels,
wages, benefits and conditions of employment after the Closing, and to make
appropriate changes, if in its judgment such changes are necessary in light of
then existing business conditions or individual employee performance.
IBH shall cause CORE to continue to provide to Purchaser through October
31, 1999 the e-mail system currently utilized by IBH at no cost, provided
Purchaser's use is consistent with IBH's use of such system prior to Closing.
For the period November 1 through December 31, 1999, Purchaser shall pay CORE
$150.00 per month in advance for continued use of the e-mail system. Neither
IBH nor CORE shall be responsible for upgrading or improving such e-mail beyond
its present uses or capacity nor have any obligation to make the system
available to Purchaser after December 31, 1999. Purchaser's sole and exclusive
remedy if dissatisfied with such e-mail system is a refund of the monthly
payment and such refund shall only be made if requested by Purchaser in writing
to CORE within fifteen (15) days of the cause of dissatisfaction. Following
CORE's receipt of a request for a refund or upon Purchaser's failure to make the
monthly pre-payments, CORE shall have no obligation to continue to provide such
e-mail service to Purchaser.
Section 8. ACCESS TO BOOKS AND RECORDS. In connection with any matter
relating to any period prior to the Closing Date, IBH and Purchaser shall, for a
period of three (3) years, upon the reasonable request and at the expense of the
other, permit the other and its representatives access, upon reasonable notice
and at reasonable times, to the books and records of IBH and Purchaser, to the
extent that such access is reasonably required by the other in connection with
(i) the preparation of any required tax returns or financial reports, or (ii)
any claim, litigation, audit or investigation or any other proper purpose
relating to the Business prior the Closing Date hereof; PROVIDED, HOWEVER, that
the foregoing shall be done in a manner so as to not interfere unreasonably with
the conduct of the business of IBH or Purchaser. During the five (5) year
period beginning on the Closing Date, IBH and Purchaser shall not dispose of or
permit the disposal of any such books and records not required to be retained
under such policies without first giving sixty (60) days' prior written notice
to the other offering to surrender the same to the other at the other's expense,
and IBH and Purchaser will use their reasonable efforts to assist the other in
identifying those documents related to the conduct of the Business.
IBH and Purchaser hereby agree in connection with their review of the books
and records of the other pursuant to this Section 8, that it will keep
confidential all information obtained by it (and unrelated to the Business)
until such information shall, other than by action of IBH or Purchaser (as the
case may be), become publicly known or available; PROVIDED, HOWEVER, that
nothing contained herein shall prevent IBH and Purchaser at any time from
furnishing any required information to any governmental authority or agency
pursuant to lawful process or from complying with its legal or contractual
obligations.
To the extent such records include confidential patient information, all
parties shall comply with all laws applicable to the confidentiality of patient
records.
Section 9. REPRESENTATIONS AND WARRANTS.
(a) PURCHASER'S REPRESENTATIONS AND WARRANTIES. Purchaser and
Yankoff hereby represent and warrant to IBH that:
(i) ORGANIZATION, AUTHORITY AND VALIDITY. Purchaser is a
corporation organized, validly existing and in good
standing under the laws of the State of California and
has all requisite corporate power and authority to
enter into this Agreement, perform its obligations
hereunder and consummate the transactions contemplated
hereby. All necessary and appropriate corporate
action has been taken by Purchaser with respect to the
execution and delivery of this Agreement and the other
documents and agreements referred to herein or related
hereto. This Agreement constitutes a valid and
binding obligation of Purchaser, enforceable in
accordance with its terms; and
(ii) ABSENCE OF CONFLICTING AGREEMENTS OR REQUIRED
CONSENTS. The execution, delivery and performance by
Purchaser of this Agreement and any other documents
contemplated hereby (with or without the giving of
notice, the lapse of time, or both): (i) does not
require the consent of any governmental or regulatory
authority or any other third party; (ii) will not
conflict with any provision of Purchaser's certificate
of incorporation or bylaws; (iii) will not conflict
with, result in a breach of, or constitute a default
under any law, ordinance, regulation, ruling,
judgment, order or injunction of any court or
governmental instrumentality to which Purchaser is a
party or by which Purchaser or its or his properties
are bound; (iv) will not conflict with, constitute
grounds for termination of, result in a breach of,
constitute a default under, require any notice under,
or accelerate or permit the acceleration of any
performance required by the terms of any agreement,
instrument, license or permit, material to this
transaction, to which Purchaser is a party or by which
Purchaser or any of its properties are bound.
(iii) OWNERSHIP OF PURCHASER. The authorized capital stock
of Purchaser consists of 1,000,000 shares of common
stock, 100,000 shares of common stock which are issued
and outstanding (the "SHARES") and 90% of which are
owned beneficially and of record by Yankoff.
(b) IBH'S REPRESENTATIONS AND WARRANTIES. IBH hereby represents
and warrants to Purchaser and Yankoff that:
(i) ORGANIZATION, AUTHORITY AND VALIDITY. IBH is a
corporation organized, validly existing and in good
standing under the laws of the state of California and
has all requisite corporate power and authority to
enter into this Agreement, perform its obligations
hereunder and consummate the transactions contemplated
hereby. All necessary and appropriate corporate
action has been taken by IBH with respect to the
execution and delivery of this Agreement and the other
documents and agreements referred to herein or related
hereto. This Agreement constitutes a valid and
binding obligation of IBH, enforceable in accordance
with its terms;
(ii) TRANSFER OF TITLE. Subject to Section 6 hereof, the
delivery to Purchaser of the Acquired Assets pursuant
to the provisions of this Agreement will transfer to
Purchaser good and marketable title to the Acquired
Assets, free and clear of all liens, charges, claims,
encumbrances or restrictions of any nature whatsoever;
(iii) ABSENCE OF CONFLICTING AGREEMENTS OR REQUIRED
CONSENTS. The execution, delivery and performance by
IBH of this Agreement and any other documents
contemplated hereby (with or without the giving of
notice, the lapse of time, or both): (i) does not
require the consent of any governmental or regulatory
authority or any other third party; (ii) will not
conflict with any provision of IBH's articles of
incorporation or bylaws, (iii) will not conflict with,
result in a breach of, or constitute a default under
any law, ordinance, regulation, ruling, judgment,
order or injunction of any court or governmental
instrumentality to which IBH is a party or by which
IBH or its properties are bound; (iv) will not
conflict with, constitute grounds for termination of,
result in a breach of, constitute a default under,
require any notice under, or accelerate or permit the
acceleration of any performance required by the terms
of any agreement, instrument, license or permit,
material to this transaction, to which IBH is a party
or by which IBH or any of its properties are bound;
and (v) will not create any claim, lien, charge,
encumbrances or restriction upon the Shares or any of
the assets or properties of IBH;
(iv) CONSENTS TO CERTAIN CONTRACTS AND AGREEMENTS.
Notwithstanding the representations and warranties in
Section 9(b)(ii) and (iii), above, certain contracts
and agreements to be assigned hereunder by IBH to
Purchaser require the written consent of the other
party thereto, and it is the responsibility of
Purchaser to obtain such written consents.
Accordingly, for the purposes of the foregoing
representations and warranties, such consents shall be
deemed to have been obtained by Purchaser; and
(v) FINANCIAL STATEMENTS. Attached hereto as SCHEDULE 9
are IBH's unaudited financial statements for the
fiscal year ended December 31, 1998 and unaudited
interim financial statements for the two-month period
ended February 28, 1999, reflecting statements of
operations for the periods indicated which have been
prepared in accordance with CORE's divisional format
and do not necessarily reflect generally accepted
accounting principles consistently applied,
(collectively, the "FINANCIAL STATEMENTS").
(c) IBH makes no representation or warranty concerning any of
the following matters and no indemnification shall be due
Purchaser or Yankoff in connection with any of the following
matters:
(i) any so-called Y2K issues relating to the Business or
Acquired Assets;
(ii) failure of the parties to comply with any applicable
bulk sales laws;
(iii) issues, matters or claims in any way relating to the
PPO Network transferred to Purchaser; and
(iv) issues, matters or claims in any way relating to
clients' claims accounts.
Section 10. CONSENTS; APPROVALS; COMPLIANCE WITH LAWS. (a) IBH and
Purchaser will use their reasonable best efforts in cooperation with each other
to obtain all consents from third parties and governmental authorizations or
approvals and to file any necessary notices or reports required in order to
consummate the transactions contemplated hereby.
(b) Yankoff and Purchaser each agree and acknowledge that no
consulting fees or other payments are due Yankoff for his services to IBH and
any of IBH's affiliated corporations.
Section 11. INDEMNIFICATION.
(a) PURCHASER INDEMNITY. Purchaser agrees effective the Closing
Date to indemnify and hold harmless IBH and any successors
to IBH and any other corporation affiliated with IBH,
including CORE, and their respective employees, officers,
directors, agents, attorneys and representatives from and
against any and all claims, demands, liabilities, actions,
lawsuits, proceedings, losses, damages, costs and expense,
including reasonable attorneys' fees (collectively,
"CLAIMS") asserted against, resulting to, imposed upon, or
incurred or suffered by IBH or the affiliated indemnified
parties, as a direct result of, or arising directly from,
(i) the Acquired Assets based upon events following the date
of transfer of the Acquired Assets or (ii) the Acquired
Liabilities.
(b) IBH INDEMNITY. Except for the Assumed Liabilities and
except as provided in Sections 5(b) and 6, IBH hereby agrees
to indemnify and hold harmless Purchaser and any successor
to Purchaser, and their respective employees, officers,
directors, agents, attorneys and representatives from and
against any and all (i) Claims asserted against, resulting
to, imposed upon, or incurred or suffered by, Purchaser as a
direct result of or arising directly from the Acquired
Assets prior to the Closing Date; PROVIDED, HOWEVER, no
indemnification with respect to the Acquired Assets shall be
provided for Claims for indemnification by Purchaser
asserted more than one year after the Closing Date and in no
event shall IBH's total indemnification obligation exceed
$100,000 (unless IBH's insurance covers such claims in which
event the $100,000 shall be increased to the amount of
coverage actually paid by the insurance carrier).
Section 12. CLOSING. The closing of the sale of the Business shall
occur at 10:00 A.M. on June 21, 1999 at the offices of CORE, Inc., 18881 Von
Karman Avenue, Irvine, California (the "CLOSING DATE"), or such other date and
time as shall be mutually agreed upon by the parties, provided that the
following requirements shall have been satisfied or waived, as applicable, on or
prior to the Closing Date:
(a) DELIVERY BY PURCHASER OF PURCHASE PRICE AND OTHER DOCUMENTS.
Purchaser shall have delivered to IBH :
(i) the $50,000 referred to in Section 2(a);
(ii) the Note in the form attached hereto as EXHIBIT A;
(iii) the Security Agreement in the form attached hereto as
EXHIBIT B; and
(iv) Written consents from all third parties listed on
SCHEDULE 12 whose consents are required in connection
with the transfer of the IBH contracts, agreements or
leases being transferred hereunder.
(b) DELIVERY OF DOCUMENTS BY IBH. IBH shall have delivered to
Purchaser:
(i) The Bill of Sale in the form attached hereto as
EXHIBIT C.
(ii) The Non-Competition Agreement with CORE, Inc., in the
form attached hereto as EXHIBIT D; and
(iii) UCC-3 termination statements releasing the security
interest of Fleet Bank in the Acquired Assets.
(c) OTHER DOCUMENTS. Purchaser and IBH shall have agreed on the
form and content of and/or delivered and/or entered into
other agreements, including:
(i) letters to be sent to IBH's customers and employees
notifying them of the sale of the Business to
Purchaser;
(ii) an Assignment and Assumption Agreement in the form
attached hereto as EXHIBIT E.
(iii) other reasonably requested documents in such form as
mutually agreed between the parties.
The parties agree that time shall be of the essence.
Section 13. NOTICES. All notices and other communications required or
permitted under this Agreement shall be deemed to have been duly given and made
if in writing and if served either by personal delivery (including overnight
delivery or courier service) to the party for whom intended or by being
deposited, postage prepaid, certified or registered mail, return receipt
requested, in the United States mail bearing the address shown in this Agreement
for, or such other address as may be designated in writing hereafter by, such
party:
if to IBH:
c/o CORE, INC.
18881 Von Karman Avenue
Irvine, CA 92612
Attention: Mr. William E. Nixon, Chief Financial Officer
with a copy to:
Stephen M. Kane, Esq.
Rich, May, Bilodeau & Flaherty, P.C.
294 Washington Street
Boston, MA 02108-4675
if to Purchaser or Yankoff:
Tom H. Yankoff
33741 Kildare Lane
San Juan Capistrano, CA 92675
With copies to:
Flemming & Allen, LLP
2030 Main Street
Suite 1300
Irvine, CA 92614
Section 14. BINDING EFFECT; ASSIGNMENT. This Agreement and the various
rights and obligations arising hereunder shall inure to the benefit of and be
binding upon IBH, its successors and permitted assigns, and Purchaser, and its
successors and permitted assigns. Neither this Agreement nor any of the rights,
interests or obligations hereunder shall be transferred or assigned (by
operation of law or otherwise) by any party hereto without the prior written
consent of the other.
Section 15. CAPTIONS. The Article and Section headings of this
Agreement are inserted for convenience only and shall not constitute a part of
this Agreement in construing or interpreting any provision hereof.
Section 16. EXPENSES OF TRANSACTION. Purchaser, Yankoff and IBH shall
each be responsible for the payment of their respective legal and financial
adviser and accounting fees, and any other costs or expenses incurred by them in
connection with this Agreement and the transactions contemplated hereby.
Section 17. WAIVER; CONSENT. This Agreement may not be changed,
amended, terminated, augmented, rescinded or discharged (other than by
performance), in whole or in part, except by the agreement in writing of the
parties hereto, and no waiver of any of the provisions or conditions of this
Agreement or any of the rights of a party hereto shall be effective or binding
unless such waiver shall be in writing and signed by the party claimed to have
given or consented thereto. Except to the extent that a party hereto may have
otherwise agreed in writing, no waiver by that party of any condition of this
Agreement or document delivered on the Closing Date or breach by any other party
of any of its obligations or representations hereunder or thereunder shall be
deemed to be a waiver of any other condition or subsequent or prior breach of
the same or any other obligation or representation by such other party, nor
shall any forbearance by the first party to seek a remedy for any noncompliance
or breach by such other party be deemed to be a waiver by the first party of its
rights and remedies with respect to such noncompliance or breach.
Section 18. NO THIRD-PARTY BENEFICIARIES. Except for the
indemnification rights set forth in Section 11, nothing herein, expressed or
implied, is intended or shall be construed to confer upon or give to any person,
firm, corporation or legal entity, other than the parties hereto and their
shareholders, any rights, remedies or other benefits under or by reason of this
Agreement.
Section 19. COUNTERPARTS. This Agreement may be executed in multiple
counterparts, each of which shall be deemed an original, but all of which when
taken together shall constitute one and the same instrument.
Section 20. SEVERABILITY. With respect to any provision of this
Agreement finally determined by a court of competent jurisdiction or arbitrator
pursuant to Section 21 to be unenforceable, or to violate law, IBH and Purchaser
hereby agree that such court or arbitrator shall have jurisdiction to reform
such provision so that it is enforceable to the maximum extent permitted by law,
and the parties agree to abide by such court's or arbitrator's determination.
In the event that any provision of this Agreement cannot be reformed, such
provision shall be deemed to be severed from this Agreement, but every other
provision of this Agreement shall remain in full force and effect.
Section 21. DISPUTES. If the parties are unable, after good faith
negotiations, which each hereby covenants to undertake, to resolve any dispute
arising between them within sixty (60) days after notice is given of such
dispute, then the dispute will be referred to arbitration before one arbitrator
in Orange County, California, or any other place mutually agreed upon by
Purchaser and IBH, in accordance with the applicable rules then in effect of the
Judicial Arbitration & Mediation Services (JAMS). The determination made by the
arbitrator in accordance with California rules of evidence and discovery shall
be delivered in writing to the parties hereto and shall be final and binding and
conclusive upon the parties hereto and the amount of the claim, if any,
determined to exist shall be a valid claim and judgment may be entered upon such
decision in accordance with applicable law in any court having jurisdiction
thereof. The arbitration award may include (i) a provision that the prevailing
party in such arbitration recover its costs relating to the arbitration and
reasonable attorneys' fees from the other party, (ii) the amount of such costs
and fees and (iii) an order that the losing party pay the fees and expenses of
the arbitrators.
Section 22. GOVERNING LAW. This Agreement shall in all respects be
construed in accordance with and governed by the laws of the State of
California.
Section 23. NO BROKERS. Yankoff and Purchaser represent and warrant to
IBH that no agent or broker or other person acting pursuant to authority of
Yankoff or Purchaser is entitled to any commission or finder's fee in connection
with this Agreement or the transactions contemplated by this Agreement. IBH
represents and warrants to Yankoff and Purchaser that no agent or broker or
other person acting pursuant to authority of IBH is entitled to any commission
or finder's fee in connection with this Agreement or the transactions
contemplated by this Agreement.
Section 24. ENTIRE AGREEMENT. This Agreement (including the documents
and other agreements referred to herein) constitutes the entire agreement among
the parties and supersedes any prior understandings, agreements, or
representations by or among the parties, written or oral, to the extent they
have related in any way to the subject matter hereof, including, without
limitation, the letter of intent between the parties dated January 12, 1999, as
amended.
INTEGRATED BEHAVIORAL HEALTH
By:_/S/ GEORGE C. CARPENTER IV__
George C. Carpenter IV
Chief Executive Officer
TD Venture, Inc.
By:_/S/TOM H. YANKOFF, PRESIDENT
Tom H. Yankoff
President
_/S/ TOM H. YANKOFF
Tom H. Yankoff, individually
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 629,105
<SECURITIES> 0
<RECEIVABLES> 13,002,417
<ALLOWANCES> 495,447
<INVENTORY> 0
<CURRENT-ASSETS> 16,116,676
<PP&E> 19,055,667
<DEPRECIATION> 9,938,862
<TOTAL-ASSETS> 53,423,238
<CURRENT-LIABILITIES> 6,543,035
<BONDS> 0
0
0
<COMMON> 791,541
<OTHER-SE> 28,958,768
<TOTAL-LIABILITY-AND-EQUITY> 53,423,238
<SALES> 0
<TOTAL-REVENUES> 31,402,096
<CGS> 0
<TOTAL-COSTS> 18,327,696
<OTHER-EXPENSES> 9,818,092
<LOSS-PROVISION> 215,000
<INTEREST-EXPENSE> 750,497
<INCOME-PRETAX> 2,626,820
<INCOME-TAX> 483,320
<INCOME-CONTINUING> 2,143,500
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,143,500
<EPS-BASIC> 0.27
<EPS-DILUTED> 0.26
</TABLE>
