-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QgW767164jA4u/GEZOet3MRCvaP1fhjievLjrnT4UiWFGaBJRBuYHv+cjVDNcWuP rn1VJLwtzc/lYmQF1LcFRQ== 0000927016-96-000716.txt : 19960807 0000927016-96-000716.hdr.sgml : 19960807 ACCESSION NUMBER: 0000927016-96-000716 CONFORMED SUBMISSION TYPE: 424B1 PUBLIC DOCUMENT COUNT: 1 FILED AS OF DATE: 19960806 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: CORE INC CENTRAL INDEX KEY: 0000880238 STANDARD INDUSTRIAL CLASSIFICATION: INSURANCE AGENTS BROKERS & SERVICES [6411] IRS NUMBER: 042828817 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 424B1 SEC ACT: 1933 Act SEC FILE NUMBER: 333-03639 FILM NUMBER: 96604219 BUSINESS ADDRESS: STREET 1: TWO COPLEY PLACE CITY: BOSTON STATE: MA ZIP: 02116 BUSINESS PHONE: 6173226400 MAIL ADDRESS: STREET 1: 18881 VON KARMAN AVE STREET 2: SUITE 1750 CITY: IRVINE STATE: CA ZIP: 92715 FORMER COMPANY: FORMER CONFORMED NAME: PEER REVIEW ANALYSIS INC DATE OF NAME CHANGE: 19930328 424B1 1 FORM 424(B)(1) Filed pursuant to Rule 424(b) Registration No. 333-03639 PROSPECTUS 2,000,000 SHARES [CORE DYNAMO SYMBOL] COMMON STOCK ------------ All of the shares of Common Stock offered hereby are being sold by CORE, INC. ("CORE" or the "Company"). The Common Stock of the Company is traded on the Nasdaq National Market under the symbol "CORE." On August 5, 1996, the last sale price of the Common Stock as reported by Nasdaq was $8 3/8 per share. SEE "RISK FACTORS" ON PAGE 6 OF THIS PROSPECTUS FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE SHARES OF COMMON STOCK OFFERED HEREBY. ------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
UNDERWRITING PRICE TO DISCOUNTS AND PROCEEDS TO PUBLIC COMMISSIONS(1) COMPANY(2) - -------------------------------------------------------------------------------- Per Share $8.00 $.52 $7.48 - -------------------------------------------------------------------------------- Total(3) $16,000,000 $1,040,000 $14,960,000
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (1) The Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended. See "Underwriting." (2) Before deducting estimated expenses of the offering of $600,000 payable by the Company. (3) The Company has granted the Underwriters a 30-day option to purchase up to 300,000 additional shares of Common Stock on the same terms as set forth above solely to cover over-allotments, if any. If the Underwriters exercise such option in full, the total Price to Public, Underwriting Discounts and Commissions and Proceeds to Company will be $18,400,000, $1,196,000 and $17,204,000, respectively. See "Underwriting." ------------ The shares of Common Stock are being offered by the several Underwriters named herein, subject to prior sale, when, as and if accepted by them subject to certain conditions. It is expected that certificates for the shares of Common Stock offered hereby will be available for delivery on or about August 9, 1996 at the offices of Smith Barney Inc., 333 West 34th Street, New York, New York 10001. ------------ SMITH BARNEY INC. COWEN & COMPANY August 5, 1996 [ARTWORK APPEARS HERE INCLUDING FOUR PHOTOGRAPHS OF PERSONS IN OFFICES AND HEALTHCARE ENVIRONMENTS, AND THE FOLLOWING COPY DISPLAYED IN GRAPHIC FORMS] CORE's services are focused on the management and measurement of the clinical events that drive disability costs. CUSTOMERS FORTUNE 500 COMPANIES INSURANCE CARRIERS SELF INSURED EMPLOYERS $260 BILLION* (FOOTNOTE) WORKABILITY(R) because the most effective disability management begins on Day 1. CLAIMS DURATION MEDICAL JOB PAYMENTS PEER BILL ANALYSIS & MANAGEMENT MANAGEMENT ACCOMMODATION ADVICE REVIEW REVIEW REPORTING MANAGED DISABILITY SERVICE CONTINUUM NETWORK SERVICES PROVIDERS Primary Care Physicians Preferred Provider Networks Independent Medical Exams Occupational Health Clinics The foundation of the WorkAbility(R) program is an extensive experience base of clinical event reviews used to derive duration guidelines and management protocols. This information technology focus, combined with our peer review panel of over 230 Board Certified physicians, makes CORE the clinically credible choice for disability management services. CORE's comprehensive services position the company to manage workplace absence for an employer's entire workforce, including sick time, short term disability (STD), long term disability (LTD), workers' compensation, wage continuance and Family Medical Leave Act (FMLA) absences. (FOOTNOTE) * The company estimates that the total U.S. costs due to injury and illness related workplace absence are approximately $260 billion per year. [END OF DESCRIPTION OF ART WORK] IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP MEMBERS MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON NASDAQ IN ACCORDANCE WITH RULE 10b-6A UNDER THE SECURITIES EXCHANGE ACT OF 1934. SEE "UNDERWRITING." PROSPECTUS SUMMARY The following information is qualified in its entirety by the more detailed information and financial statements (including the notes thereto) appearing elsewhere in this Prospectus. See "Risk Factors" for a discussion of certain factors to be considered by prospective investors. THE COMPANY CORE, INC. is a national provider of managed disability and health care benefits management services to Fortune 500 companies and other self-insured employers, third-party administrators and insurance carriers. The Company's services include managed disability services using CORE's proprietary WorkAbility(R) disability management software, specialty physician and behavioral health review services and health care benefits utilization review and case management services. The Company's services are designed to assist its clients monitor and control disability and health care benefits costs without compromising the quality of health care services provided to the patient. CORE's managed disability services include monitoring the appropriateness of disability durations under short and long-term disability 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 based on CORE's WorkAbility program, a proprietary software program developed over a ten-year period through the statistical analysis of disability utilization data. CORE's WorkAbility managed disability program provides an objective, medically based method for recommending and monitoring employee's return-to-work dates. 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 independent physician review programs provide pre-certification, concurrent and appellate physician review services for use with utilization management programs of the Company's insurance company and self-insured corporate clients. The Company believes its more than 230 Board certified physician reviewers comprise the largest independent physician review service in the country. CORE's behavioral health review program provides comparable review services by psychiatric specialists in sub-specialties such as adult and child psychiatry, alcoholism and chemical dependency. The Company also provides utilization review services designed to evaluate the medical necessity and appropriateness of health care services prescribed for participants in health care and medical plans. In cases of high cost injuries or illness, CORE also renders case management services for individual cases to assure that cost- effective treatment alternatives are utilized. 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 a 1991 publication 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 are approximately $260 billion per year. According to an industry source, workers' compensation expenditures grew at an average annual rate of over 10% from 1982 through 1991, and the Company believes this growth is continuing. The Company estimates that workers' compensation costs were approximately $60 billion in 1994. 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 at approximately $200 billion in 1994. 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 Medical 3 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. Until recently, recognition and management of these productivity 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. CORE intends to expand its position as a leading provider of managed disability benefits services by utilizing its proprietary WorkAbility program and related services to assist its clients in reducing the direct costs of short and long-term disability and workers' compensation benefits and improving employee productivity. The Company believes that the combination of its health care and disability management tools and its strong information technology foundation provide an effective management platform that can be tailored to meet the needs of self-insured employers and third-party payors. The principal elements of the Company's strategy for achieving its objectives are (i) to market aggressively its WorkAbility program in order to achieve greater penetration into the managed disability market; (ii) to pursue disability management outsourcing contracts with large employers; (iii) to make selective acquisitions of businesses that can provide service line extensions and cross- selling synergies in the managed disability market; (iv) to utilize its WorkAbility program as a technology platform in developing managed disability networks in certain geographical markets; and (v) to establish through the WorkAbility program the capability to enter into capitated or other "at risk" arrangements with payors in the managed disability market. On May 10, 1996, CORE entered into an Asset Purchase Agreement (the "AmHealth Agreement") to acquire substantially all of the assets and operations of AmHealth, Inc. (excluding its accounts receivable). AmHealth, Inc. is a management services organization that manages occupational health clinics and on-site industrial facilities in California. On July 24, 1996, the Company terminated the AmHealth Agreement. See "Risk Factors--Termination of AmHealth Acquisition Agreement," "Recent Developments" and "Management's Discussion and Analysis of Financial Condition and Results of Operations--Overview." THE OFFERING Common Stock being offered......... 2,000,000 shares(1) Common Stock outstanding after the offering.......................... 6,842,271 shares(1)(2) Use of Proceeds.................... To expand operating capacity and for other working capital and general corporate purposes Nasdaq National Market Symbol...... CORE
- -------- (1) Excludes up to 300,000 shares of Common Stock that may be sold by the Company pursuant to the Underwriters' over-allotment option. See "Underwriting." (2) Based on the number of shares of Common Stock outstanding as of May 31, 1996. Excludes 1,535,979 shares of Common Stock issuable upon exercise of stock options and warrants outstanding at such date. See "Management." 4 SUMMARY FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS YEAR ENDED DECEMBER 31, ENDED MARCH 31, --------------------------------------- ------------------ 1993 1994 1995 1995 1996 ------- ------- --------------------- -------- -------- ACTUAL PRO FORMA(2) ------- ------------ STATEMENT OF OPERATIONS DATA: Revenues................ $16,316 $16,746 $20,769 $24,847 $ 4,729 $6,584 Cost of services........ 10,714 11,305 12,839 14,352 3,117 3,939 ------- ------- ------- ------- -------- ------- Gross profit.......... 5,602 5,441 7,930 10,495 1,612 2,645 Total operating ex- penses................. 9,295 10,151 8,185 10,171 2,791 2,151 ------- ------- ------- ------- -------- ------- Income (loss) from operations(1).......... (3,693) (4,710) (255) 324 (1,179) 494 Other income, net....... 317 11 176 14 27 41 ------- ------- ------- ------- -------- ------- Net income (loss)....... $(3,376) $(4,699) $ (79) $ 338 $(1,152) $ 535 ======= ======= ======= ======= ======== ======= Net income (loss) per common share........... $ (0.73) $ (1.01) $ (0.02) $ 0.07 $ (.24) $ .10 ======= ======= ======= ======= ======== ======= Weighted average number of common shares outstanding............ 4,611 4,668 4,755 5,069 4,740 5,532 ======= ======= ======= ======= ======== =======
MARCH 31, 1996 ------------------------ ACTUAL AS ADJUSTED(3) -------- -------------- BALANCE SHEET DATA: Working capital........................................ $ 2,850 $ 17,210 Total assets........................................... 12,866 27,226 Long-term obligations.................................. 427 427 Accumulated deficit.................................... (10,329) (10,329) Stockholders' equity................................... 8,213 22,573
- -------- (1) Includes the write-off of goodwill in the amount of $2,294,000 and merger related costs and expenses of $1,114,000 in 1994 and merger related costs and expenses of $994,000 in 1995. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." (2) Gives effect to the CRS Acquisition (as defined herein) as if such transaction had been completed as of January 1, 1995. See "Pro Forma Combined Condensed Statement of Operations (Unaudited)." (3) Gives effect to the sale of the shares of Common Stock offered hereby and the receipt of the estimated net proceeds therefrom as if such transaction had occurred as of March 31, 1996. See "Use of Proceeds." ---------------- Except as otherwise indicated herein, information in this Prospectus assumes no exercise of the Underwriters' option to purchase from the Company up to an aggregate of 300,000 shares of Common Stock to cover over-allotments, if any. See "Underwriting." 5 RISK FACTORS An investment in the shares being offered hereby involves a high degree of risk. Prospective investors should carefully consider the following risk factors, in addition to the other information contained in this Prospectus, in evaluating an investment in the shares of Common Stock offered hereby. In particular, prospective investors are cautioned that this Prospectus contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and that 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. The factors listed below represent certain important factors the Company believes could cause such results to differ. These factors are 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, and the risks set forth below may affect the Company to a greater extent than indicated. HISTORY OF LOSSES; UNCERTAINTY OF FUTURE PROFITABILITY The Company has recorded net losses of $253,000 for 1991, $2,014,000 for 1992, $3,376,000 for 1993, $4,699,000 for 1994 and $79,000 for 1995. The Company's losses have resulted in an accumulated deficit of approximately $10.3 million at March 31, 1996. Furthermore, as a result of the termination of the AmHealth Agreement, the Company expects to record in the three months ending September 30, 1996 a one-time charge to earnings of between $1.5 million and $2.0 million. There can be no assurance that the Company will become profitable, or if profitable, that profitability will be maintained on a quarterly or annual basis. Moreover, if profitability is achieved, the level of profitability cannot be accurately predicted. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." RECENT AND PROPOSED ACQUISITIONS; RISKS OF INTEGRATION; NEW BUSINESS LINES The Company's operations have expanded significantly as a result of the March 1995 merger with Core Management, Inc. ("CMI") and the October 1995 acquisition of Cost Review Services, Inc. ("CRS"). In addition, the Company intends to continue to pursue the growth of its business through the acquisition of other businesses complementary to its existing businesses. See "Business--Strategy." The merger with CMI and the acquisition of CRS have resulted in the Company becoming much larger, more complex and more operationally and geographically diverse, presenting challenges for the Company's management and potentially detracting attention of management from the day-to-day operations of CORE. In light of this recent and potential future growth, the success of the Company's efforts to integrate acquired operations and streamline overlapping business and administrative functions will be crucial in order for the Company to be profitable. The various systems and procedures of the Company's operations will have to be coordinated and integrated with those of previously acquired companies as well as any other businesses which may be acquired in the future. There can be no assurance that the process of integrating the businesses acquired through the CMI merger and CRS acquisition and to be acquired through possible future acquisitions will be successful. Furthermore, the successful integration of acquired operations may require significant expenditures and involve substantial unanticipated costs. TERMINATION OF AMHEALTH ACQUISITION AGREEMENT On May 10, 1996, CORE entered into an Asset Purchase Agreement (the "AmHealth Agreement") to acquire substantially all of the assets and operations (excluding accounts receivable) of AmHealth, Inc. ("AmHealth"), a management services organization that manages occupational health clinics and on-site industrial medical facilities in California. On July 24, 1996, the Company terminated the AmHealth Agreement. On July 30, 1996, AmHealth notified CORE that AmHealth disputes the validity of CORE's grounds for terminating the AmHealth Agreement. In addition, AmHealth asserted a contractual right to terminate the agreement and CORE's consequent obligation to credit AmHealth's obligation under the AmHealth Loan described below in the amount of $500,000. Although the Company believes that it was entitled 6 under the terms of the AmHealth Agreement to effect such termination, there can be no assurance that AmHealth will not institute a legal proceeding to challenge the Company's right to effect such termination. Any such legal proceeding could involve significant legal expenses and an award for damages. AmHealth has suffered recurring losses, has defaulted on its debt obligations and has a net capital deficiency which raises substantial doubt about its ability to continue as a going concern. In connection with the termination of the AmHealth Agreement, the Company expects to incur during the three months ending September 30, 1996 a one-time charge to earnings of between $0.5 million and $1.0 million related to transaction costs. In addition, during the first quarter of 1996 the Company made a $1.0 million loan (the "AmHealth Loan") to AmHealth. Because there is substantial doubt about AmHealth's ability to repay the AmHealth Loan, the Company intends to write-off the AmHealth Loan during the three months ending September 30, 1996 which will result in an additional non-recurring charge to earnings of $1.0 million. See "Recent Developments." RELIANCE ON WORKABILITY(R) PROGRAM The Company's strategy involves focusing its growth efforts on, and consequently committing significant management, marketing and other resources to expanding, its managed disability services, and in particular its WorkAbility disability management program. However, revenue derived from this area of operations represented only 26% of the Company's total revenue for the year ended December 31, 1995 and 36% for the three months ended March 31, 1996. There can be no assurance that the Company's focus on its managed disability services will ultimately be profitable for the Company. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business--Strategy." The Company's managed disability services are dependent upon the WorkAbility computer software. The Company's success in deriving revenue from its WorkAbility software is dependent upon its maintaining the proprietary and confidential nature of this software. The Company relies on a combination of database size, trade secret, copyright, trademark and contractual protections to establish and protect its proprietary rights to the WorkAbility software. There can be no assurance, however, that the precautions taken by the Company will be adequate to prevent misappropriation or re-creation of the Company's database. In addition, these protections and precautions will not prevent development by independent third parties of competitive technology or products, and some companies have developed products which, to some extent, perform functions similar to those performed by the WorkAbility software. DEPENDENCE ON KEY CLIENTS The Company has contracts with several key clients which account for a substantial portion of its revenues. During the years ended December 31, 1994 and 1995 and the three months ended March 31, 1996, the Company's five largest clients represented 36.5%, 30.1% and 31.2%, respectively, of total revenue, and its ten largest clients represented 45.0%, 51.0% and 51.0%, respectively, of total revenue. The majority of the Company's contracts with its clients, including those with its major clients, permit cancellation by the client upon 60 to 90 days' notice, while certain other of the Company's contracts permit immediate cancellation under certain circumstances. Additionally, with a few exceptions, the Company's contracts with its customers do not require minimum payments or purchase of minimum levels of services. The failure to renew, or the exercise of cancellation rights contained in the Company's contracts with its clients, or a significant reduction in the volume of services requested by the Company's clients, could have a material adverse effect on the Company. See "Business--Clients and Marketing" and Note 15 to the Audited Consolidated Financial Statements of the Company. RISKS RELATED TO GROWTH STRATEGY The Company's strategy is to continue its internal growth and, as strategic opportunities arise in the managed disability services market, to pursue acquisitions of, or relationships with, other companies in related lines of business. As a result, the Company is subject to certain growth-related risks, including the risks that it will be unable to retain personnel or acquire other resources necessary to service such growth adequately. Expenses arising from the Company's efforts to increase its market penetration may have a negative impact on operating results. In addition, there can be no assurance that any suitable opportunities for strategic acquisitions or relationships will arise or, if they do arise, that the transactions contemplated thereby could be completed. See "Business--Strategy." 7 EXPOSURE TO PROFESSIONAL LIABILITY The Company, through its managed care services, makes recommendations regarding benefit plan coverage and work absence periods based upon judgments of the appropriateness of proposed medical treatment plans and length of absence, and in certain instances CORE has the discretion to determine or deny such benefit plan coverage and work absence periods. Consequently, the Company has from time to time and may in the future become subject to claims related to adverse medical consequences or for the costs of services denied and claims, such as malpractice, arising from the errors or omissions of health care professionals. A successful claim against the Company could have a material adverse effect on the Company's financial position and results of operations. Furthermore, claims against the Company, regardless of their merit or eventual outcome, may involve substantial defense costs. There can be no assurance that procedures implemented by the Company to limit its liability have been or will be effective or that litigation to which the Company is or may become subject will not adversely affect its financial position or results of operations. 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. GOVERNMENT REGULATION; REIMBURSEMENT; HEALTH CARE REFORM The health care industry is subject to extensive federal and state regulation relating to licensure, conduct of operations and prices for services. A number of states, including several of those in which the Company transacts business, have extensive licensing and other regulatory requirements applicable to the Company's business, including utilization review and workers' compensation. These requirements include compliance with federal and state prohibitions on the offer or receipt of remuneration for the referral of patients or other items or services. Additionally, the Company's clients, including insurance companies, are subject to regulations which indirectly affect the Company. Regulation in the health care field is constantly evolving. 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 in material compliance with applicable statutes, licensing requirements and 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 statutes or regulations or significant changes in regulations applicable to its clients. See "Business--Government Regulation; Reimbursement; Health Care Reform." In addition to existing government health care regulation, there have been numerous initiatives at the federal and state levels, as well as by private third-party payors, 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. RELIANCE ON DATA PROCESSING CAPABILITIES The Company's business in general, and its WorkAbility disability management program in particular, is dependent upon the ability to continuously store, retrieve, process and manage data. Interruption of data processing capabilities for any extended length of time, loss of stored data, programming errors or other computer problems could have a material adverse effect on the business of the Company. COMPETITION The markets in which the Company is engaged are highly competitive. In addition to other utilization management and disability management companies, the Company competes with insurance companies, third party administrators and preferred provider organizations. Many of the Company's competitors are larger and 8 have greater financial and other resources than the Company. There can be no assurance that competitive factors in the Company's markets will not have an adverse effect on the Company. See "Business--Competition." DEPENDENCE ON KEY PERSONNEL The Company's success will depend to a significant extent upon the skills of a number of key employees, including Mr. George C. Carpenter IV, the Company's Chairman of the Board and Chief Executive Officer, Craig C. Horton, the Company's President and Chief Operating Officer and William E. Nixon, the Company's Executive Vice President and Chief Financial Officer. The Company does not have employment agreements with Mr. Carpenter or Mr. Horton. See "Management--Employment Contracts and Termination of Employment and Change in Control Arrangements." In addition, the Company's success will depend to an extent on its ability to recruit credentialed physicians for the Company's peer review activities. The future loss of the services of one or more key persons could adversely affect the Company. CONTROL BY OFFICERS AND DIRECTORS Upon completion of this offering, the Company's executive officers and directors will beneficially own (including options exercisable as of May 31, 1996) approximately 20.6% of the Common Stock (approximately 23.3% if all options granted to such officers and directors become vested and are exercised). As a result, the executive officers and directors of the Company acting together would be able to exert considerable influence over the election of the Company's directors and the outcome of most corporate actions requiring stockholder approval. Such concentration of ownership may have the effect of delaying or preventing a change in control of the Company, which could adversely affect the market price for the Common Stock. See "Principal Stockholders." DILUTION; OUTSTANDING OPTIONS Purchasers of shares in this offering will experience an immediate dilution of $5.01 per share (after deducting the estimated offering expenses and underwriting discounts). On May 31, 1996, there were outstanding options and warrants to purchase 1,535,979 shares of Common Stock at a weighted average exercise price of $6.03 per share. The exercise of these options would result in significant book value and earnings dilution to purchasers of shares of Common Stock in this offering. See "Dilution" and "Management." ANTI-TAKEOVER CONSIDERATIONS Certain provisions of the Company's certificate of incorporation and by-laws and Massachusetts law could discourage potential acquisition proposals, delay or prevent a change in control of the Company and, consequently, limit the price that investors might be willing to pay in the future for shares of Common Stock. These provisions include a classified board of directors and the ability to issue, without further stockholder approval, shares of preferred stock with rights and privileges senior to the Common Stock. The Company is also subject to Chapters 110F and 110D of the Massachusetts General Laws, which, in general, prohibit a corporation with sufficient ties to Massachusetts from engaging in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which the person becomes an interested stockholder, subject to certain exceptions. For purposes of the statute, an "interested stockholder" is defined as a person who, together with affiliates and associates, owns (or, if an affiliate of the Company, owned at any time within the prior three years) 5% or more of the corporation's voting stock. As of May 31, 1996, the following persons met the statutory definition of an "interested stockholder" of the Company: Fiduciary Trust Company International, John Pappajohn, Craig C. Horton, George C. Carpenter IV and James Franklin. See "Management-- Directors and Executive Officers," "Principal Stockholders" and "Description of Capital Stock." 9 POTENTIAL VOLATILITY OF STOCK PRICE The market prices for the Common Stock and the securities of certain other companies in the health care industry have had a history of significant volatility. The trading price of the Common Stock could continue to be subject to significant fluctuations due to uncertainties regarding the consolidation of the businesses of the Company, announcements or actions by competitors, developments involving the Company's relationships with key clients, government regulation, fluctuations in quarterly results and other factors. These broad market fluctuations, as well as general economic conditions and the financial performance of the Company, may adversely affect the market price of the Common Stock. See "Price Range of Common Stock." SHARES ELIGIBLE FOR FUTURE SALE Future sales of substantial amounts of the Common Stock in the public market could adversely affect prevailing market prices and could impair the Company's ability to raise additional capital through the sale of its equity securities. The Company is unable to make any prediction as to the effect, if any, that future sales of Common Stock or the availability of Common Stock for sale may have on the market price of the Common Stock prevailing from time to time. See "Shares Eligible for Future Sale." THE COMPANY 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 1995, PRA completed its merger (the "CMI/PRA Merger") involving Core Management, Inc., a Delaware corporation ("CMI"). CMI offers a broad range of disability management, health care utilization review and analysis and consulting services, and CMI's Integrated Behavioral Health Division ("IBH") specializes in utilization review of and case management services with respect to mental health and substance abuse cases. 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. IBH became a subsidiary of CMI in a March 1993 acquisition. The CMI/PRA Merger was treated as a pooling of interests for accounting purposes. The description herein of the business of the Company includes the operations of both PRA and CMI from the inception of both companies. In July 1995, the Company changed its name from Peer Review Analysis, Inc. to CORE, INC. On October 2, 1995, CORE acquired all the capital stock of Cost Review Services, Inc., a workers' compensation bill audit firm. The Company's executive offices are located at 18881 Von Karman Avenue, Suite 1750, Irvine, California 92715, and its telephone number at that address is (714) 442-2100. WorkAbility is a registered trademark of the Company. 10 RECENT DEVELOPMENTS For the three months ended June 30, 1996, CORE has announced total revenues of $6.56 million and net income of $499,000 or $.09 per share on approximately 5.74 million weighted average shares outstanding. The revenues earned for the quarter ended June 30, 1996 represent an increase of $1.68 million (or 34%) as compared to revenues reported for the quarter ended June 30, 1995 of $4.88 million. The net income of $499,000 for the quarter ended June 30, 1996 as compared to net income of $254,000 for the quarter ended June 30, 1995 represents an increase of $245,000 (or 97%). Earnings per share for the quarter ended June 30, 1996 represents an increase of $.04 from the earnings per share reported for the quarter ended June 30, 1995 which was $.05 per share. On May 10, 1996, CORE entered into an Asset Purchase Agreement to acquire substantially all of the assets and operations of AmHealth (excluding its accounts receivable). AmHealth is a management services organization that manages occupational health clinics and on-site industrial medical facilities in California. The Company had anticipated using approximately $15.7 million of the proceeds from this offering to fund the AmHealth Acquisition and to close such acquisition simultaneously with the closing of this offering. In connection with the proposed acquisition, in the first quarter of 1996 the Company made a $1.0 million loan (the "AmHealth Loan") to AmHealth. On July 24, 1996, the Company terminated the AmHealth Agreement. As a result of such termination, the Company expects to incur an estimated one-time charge to earnings of between $0.5 million and $1.0 million during the three months ending September 30, 1996 in connection with the write-off of transaction costs related to the proposed AmHealth Acquisition. In addition, because there is substantial doubt about AmHealth's ability to repay the AmHealth Loan, the Company intends to write-off the AmHealth Loan during the three months ending September 30, 1996 which will result in an additional non-recurring charge to earnings of $1.0 million. See "Risk Factors--Termination of AmHealth Acquisition Agreement." On April 8, 1996, CORE announced that it had been selected (subject to negotiation of a definitive service agreement) by Bell Atlantic Corporation ("Bell Atlantic") to provide managed disability services, including utilization of CORE's WorkAbility program, for approximately 57,000 employees. The Company and Bell Atlantic are currently negotiating the agreement. On August 1, 1996, CORE began providing such services to Bell Atlantic. On April 29, 1996, in connection with the Company's hiring of Peter P. Greaney, M.D. as the Company's Chief Medical Officer, CORE entered into an agreement with Dr. Greaney, pursuant to which the Company has been granted an irrevocable option, exercisable through December 31, 1996, to purchase Greaney Medical Group. GMG Workcare(TM), a division of Greaney Medical Group, is a national consulting organization specializing in all aspects of occupational medicine, including managed occupational health care and outsourcing of occupational health programs for national employers. The exercise price of the option is estimated to be approximately $8.1 million payable in shares of Common Stock. The option exercise price is equal to a multiple of 1996 estimated operating after-tax net income adjusted for certain non-recurring items but not less than $8 million or more than $10 million. The multiple represents what the Company believes to be an appropriate discount from price- earnings multiples of publicly-traded companies in similar businesses to Greaney Medical Group. The Company will elect whether to exercise its option to purchase Greaney Medical Group based on several contingencies, including Greaney Medical Group's financial performance in 1996 and whether the acquisition will qualify for accounting purposes as a pooling of interests transaction. Through May 31, 1996 (the most recent month for which Greaney Medical Group financial statements have been supplied to CORE), Greaney Medical Group financial results are substantially below projections. Additionally, the Company has not yet definitively determined that the transaction will qualify for pooling of interests accounting treatment. Accordingly, although CORE reserves its right to exercise the option, CORE presently believes exercise of the option to acquire Greaney Medical Group is not probable. On April 30, 1996, the Company announced its negotiations with respect to the Company's providing long-term administrative and managerial service to Continental FirstCare, an MSO which is affiliated with an independent practice association ("IPA") of approximately 75 occupational health facilities in California. These services are expected to commence during the summer of 1996. 11 USE OF PROCEEDS The net proceeds to the Company from the sale of the shares of Common Stock offered hereby are estimated to be approximately $14.4 million ($16.6 million if the Underwriters' over-allotment option is exercised in full), after deducting underwriting discounts and commissions and estimated offering expenses. The Company expects to use approximately $3.5 million of the proceeds from the offering for investments in its operating capacity, including approximately $1.5 million to fund costs and expenses in establishing a Maryland office to service the Company's anticipated contract with Bell Atlantic Corporation (with respect to which a contract is currently under negotiation) and approximately $2.0 million to fund expansion and upgrades to the Company's information systems. The net proceeds to the Company will further be used to pay-down the outstanding balance on the Company's revolving line of credit (approximately $1.5 million at June 30, 1996) and to fund the transaction costs related to the termination of the AmHealth Acquisition Agreement (estimated between $0.5 million and $1.0 million). See "Risk Factors--Termination of AmHealth Acquisition Agreement" and "Recent Developments." The remainder of the net proceeds will be used for other working capital and general corporate purposes. A portion of the net proceeds could also be used for acquisitions of new products, services or businesses complementary to the Company's business. However, other than the Company's option to purchase the occupational health business presently owned by Peter P. Greaney, M.D. and discussions with Continental FirstCare, the Company has no present definitive agreements or letters of intent with respect to any such transactions. See "Recent Developments." Pending such uses, the Company intends to invest the net proceeds from the offering in short-term, investment-grade, interest-bearing securities. PRICE RANGE OF COMMON STOCK The Common Stock is quoted on the Nasdaq National Market System ("Nasdaq- NMS") under the symbol "CORE." Prior to July 31, 1995, the Company's Nasdaq- NMS symbol was "PRAI." The following table shows the range of high and low sales prices per share for the shares of Common Stock on the Nasdaq-NMS 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.
HIGH LOW -------- ------ 1994 First quarter........................................... $5 3/8 $3 3/8 Second quarter.......................................... 4 1/8 2 1/4 Third quarter........................................... 3 15/16 2 3/8 Fourth quarter.......................................... 3 13/16 2 1/8 1995 First quarter........................................... 4 1/2 2 7/8 Second quarter.......................................... 4 2 3/8 Third quarter........................................... 8 1/2 2 7/8 Fourth quarter.......................................... 10 3/8 7 3/8 1996 First quarter........................................... 13 3/8 8 3/8 Second quarter.......................................... 17 1/4 11 Third quarter (through August 5)........................ 15 1/2 8 1/4
On August 5, 1996, the last sale price of the Common Stock as reported by Nasdaq was $8 3/8 per share. As of May 31, 1996, there were approximately 141 record holders of the Common Stock. 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 bank credit line prohibits the payment of dividends on the Common Stock. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Future dividend policy will be determined by the Company's Board of Directors in light of the then prevailing financial condition of the Company and other relevant factors. 12 CAPITALIZATION The following table sets forth the capitalization of the Company as of March 31, 1996 and as adjusted to give effect to the sale of the shares of Common Stock offered hereby and the application of the net proceeds therefrom as described under "Use of Proceeds."
MARCH 31, 1996 -------------------------- ACTUAL AS ADJUSTED ------------ ------------ Current maturities of long-term obligations........ $ 559,373 $ 559,373 ============ ============ Long-term obligations, less current maturities..... $ 426,713 $ 426,713 ------------ ------------ Stockholders' equity: Preferred Stock, no par value, 500,000 shares authorized; no shares issued or outstanding..... -- -- Common Stock, par value $0.10 per share; 10,000,000 shares authorized; 4,815,781 shares issued and outstanding, actual; and 6,815,781 shares issued and outstanding, as adjusted(1)... 481,578 681,578 Additional paid-in capital....................... 18,104,718 32,264,718 Deferred compensation............................ (51,120) (51,120) Cumulative unrealized gain on investments available-for-sale.............................. 6,778 6,778 Accumulated deficit.............................. (10,328,620) (10,328,620) ------------ ------------ Net stockholders' equity....................... 8,213,334 22,573,334 ------------ ------------ Total capitalization............................... $ 8,640,047 $ 23,000,047 ============ ============
- -------- (1) Excludes 1,510,475 shares of common stock issuable upon the exercise of outstanding options and warrants. See "Management." 13 DILUTION The net tangible book value of the Company at March 31, 1996 was approximately $6,028,000, or $1.25 per share. Net tangible book value per share represents the amount of total tangible assets less total liabilities, divided by the number of shares of Common Stock outstanding as of such date. Without taking into account any changes in net tangible book value after March 31, 1996, other than to give effect to the sale of the shares of Common Stock offered hereby and after deducting underwriting discounts and commissions and estimated offering expenses payable by the Company, the net tangible book value of the Company at March 31, 1996, would have been approximately $20,388,000 or $2.99 per share. This represents an immediate net increase in net tangible book value of $1.74 per share to existing stockholders and an immediate dilution in net tangible book value of $5.01 per share to purchasers of Common Stock in this offering. The following table illustrates this dilution: Public offering price per share................................... $8.00 Net tangible book value per share as of March 31, 1996.......... $1.25 Net increase per share attributable to the offering............. 1.74 ----- Net tangible book value per share after the offering.............. 2.99 ----- Dilution per share to new investors............................... $5.01 =====
The foregoing table does not take into account the exercise of outstanding stock options and warrants after March 31, 1996. As of such date, there were outstanding stock options and warrants to purchase an aggregate of 1,510,475 additional shares of Common Stock at a weighted average exercise price of $5.82 per share. To the extent that these options and warrants are exercised, there will be further dilution to new investors. See "Management." 14 PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS (UNAUDITED) The unaudited pro forma combined condensed statement of operations set forth below is based on the consolidated historical financial statements of the Company included elsewhere herein after giving effect to the CRS Acquisition, as if such transaction had occurred on January 1, 1995. The unaudited pro forma combined condensed statement of operations does not purport to represent what the Company's results of operations would have been had the transaction described above occurred on the date indicated, or to project the Company's results of operations for any future period or date, nor does it give effect to any matters other than those described in the notes thereto. The unaudited pro forma combined condensed statement of operations should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements of the Company appearing elsewhere in this Prospectus. PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS (UNAUDITED) FOR THE YEAR ENDED DECEMBER 31, 1995
COST PRO FORMA REVIEW CRS AFTER THE SERVICES, ACQUISITION CRS CORE INC. ADJUSTMENTS ACQUISITION ----------- ---------- ----------- ----------- Revenues................ $20,768,521 $4,078,677 $24,847,198 Cost of services........ 12,838,971 $1,512,798 (1a) 14,351,769 ----------- ---------- ---------- ----------- Gross profit........... 7,929,550 4,078,677 (1,512,798) 10,495,429 Operating expenses: Sales and marketing.... 1,499,120 937,832 (1a) 2,436,952 General and administrative........ 4,787,238 1,012,624 (69,946)(1a) 5,729,916 Salaries and benefits.. 2,380,684 (2,380,684)(1a) Corporate relocation and reorganization expense............... 993,619 993,619 Depreciation and amortization.......... 904,900 51,816 54,000 (1b) 1,010,716 ----------- ---------- ---------- ----------- Total operating expenses............... 8,184,877 3,445,124 (1,458,798) 10,171,203 Income (loss) from operations............. (255,327) 633,553 (54,000) 324,226 Other income (expense): Interest income........ 239,590 13,837 (92,250)(1c) 161,177 Interest expense....... (83,410) (26,883) (57,000)(1d) (167,293) Other.................. 19,974 19,974 ----------- ---------- ---------- ----------- 176,154 (13,046) (149,250) 13,858 ----------- ---------- ---------- ----------- Income (loss) before in- come taxes............ (79,173) 620,507 (203,250) 338,084 Provision for income taxes.................. 138,425 (138,425)(1e) ----------- ---------- ---------- ----------- Net income (loss)....... $ (79,173) $ 482,082 $ (64,825) $ 338,084 =========== ========== ========== =========== Net income (loss) per common share........... $ (0.02) $ 0.07 =========== =========== Weighted average number of common shares outstanding............ 4,755,000 5,069,000 =========== ===========
See accompanying notes. 15 NOTES TO PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS (UNAUDITED) (1.) The Cost Review Services ("CRS") Acquisition adjustments consist of the following and represent: (a). The reclassifications of certain of CRS's expenses to be consistent with CORE's expense classifications. The reclassifications have no impact on income (loss) from operations. Expenses reclassified include salaries and benefits and result in the reclassification of a portion of CRS's general and administrative expenses to cost of services and sales and marketing. (b). An increase in amortization to reflect the pro forma effect of the CRS purchase as of January 1, 1995 of the excess of purchase price over the estimated fair value of the acquired net tangible and intangible assets relating to CRS valued at $1,950,000, which is being amortized on a straight-line basis over 27.5 years. (c). The decrease in investment income resulting from the reduction of short-term investments used to fund the purchase of CRS. (d). The increase in interest expense relating to the long-term obligations to former shareholders' of CRS incurred in connection with the purchase of CRS. (e). Decrease in tax provision as a result of the pro forma adjustments. The pro forma provision for income taxes has been computed assuming the Company's pro forma results of operations had been included in a consolidated federal income tax return. The Company has elected to file consolidated income tax returns in the future which will include all subsidiaries. 16 SELECTED CONSOLIDATED FINANCIAL DATA The following selected consolidated financial data are derived from the consolidated financial statements of the Company. The financial statements for the years ended December 31, 1991, 1992, 1993, 1994 and 1995, have been audited by Ernst & Young LLP, independent auditors. The financial data for the three month periods ended March 31, 1995 and 1996 are derived from unaudited financial statements. The unaudited financial statements include all adjustments, consisting of normal recurring accruals which the Company considers necessary for a fair presentation of the financial position and results of operations for these periods. 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.
THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, ------------------------------------------- ---------------------- 1991 1992 1993 1994 1995 1995 1996 ------- ------- ------- ------- ------- --------- ----------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) STATEMENT OF OPERATIONS DATA: Revenues................ $14,671 $16,415 $16,316 $16,746 $20,769 $ 4,729 $ 6,584 Cost of services........ 9,374 10,371 10,714 11,305 12,839 3,117 3,939 ------- ------- ------- ------- ------- --------- -------- Gross profit........ 5,297 6,044 5,602 5,441 7,930 1,612 2,645 Operating expenses: General and administrative....... 3,491 4,875 5,096 4,265 4,787 1,191 1,403 Sales and marketing... 1,604 2,272 1,787 1,563 1,499 382 470 Restructuring costs... 558 558 Merger costs and expenses............. 215 1,182 1,114 436 428 Corporate relocation.. 394 163 Depreciation and amortization......... 500 637 1,067 915 905 232 278 Write-off of goodwill............. 2,294 ------- ------- ------- ------- ------- --------- -------- Total operating expenses........... 5,595 8,393 9,295 10,151 8,185 2,791 2,151 Income (loss) from operations............. (298) (2,349) (3,693) (4,710) (255) (1,179) 494 Other income (expense): Interest income (expense), net....... (41) 337 288 138 157 26 27 Other income (expense)............ 29 (127) 19 1 14 ------- ------- ------- ------- ------- --------- -------- (41) 337 317 11 176 27 41 Income (loss) before income taxes and extraordinary item..... (339) (2,012) (3,376) (4,699) (79) (1,152) 535 Provision for income taxes.................. (33) 2 ------- ------- ------- ------- ------- --------- -------- Income (loss) before extraordinary item..... (306) (2,014) (3,376) (4,699) (79) (1,152) 535 Extraordinary item-- benefit of federal income tax loss carryforwards.......... 53 ------- ------- ------- ------- ------- --------- -------- Net income (loss)....... $ (253) $(2,014) $(3,376) $(4,699) $ (79) $ (1,152) $ 535 ======= ======= ======= ======= ======= ========= ======== Net income (loss) per common share: Income (loss) before extraordinary item... $ (0.12) $ (0.54) $ (0.73) $ (1.01) $ (0.02) $ (0.24) $ 0.10 Extraordinary item.... 0.02 ------- ------- ------- ------- ------- --------- -------- Net income (loss) per common share... $ (0.10) $ (0.54) $ (0.73) $ (1.01) $ (0.02) $ (0.24) $ 0.10 ======= ======= ======= ======= ======= ========= ======== Weighted average number of common shares outstanding............ 2,577 3,751 4,611 4,668 4,755 4,740 5,532 ======= ======= ======= ======= ======= ========= ======== DECEMBER 31, ------------------------------------------- MARCH 31, 1991 1992 1993 1994 1995 1996 ------- ------- ------- ------- ------- ----------- (IN THOUSANDS) BALANCE SHEET DATA: Working capital......... $ 9,772 $ 7,659 $ 6,597 $ 4,612 $ 3,152 $ 2,850 Total assets............ 14,033 16,934 15,972 12,504 12,195 12,866 Long-term obligations... 237 270 223 121 817 427 Accumulated deficit..... 695 2,709 6,085 10,784 10,864 10,329 Stockholders' equity.... 11,216 11,481 12,237 7,553 7,648 8,213
17 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW CORE is a national provider of managed disability and health care benefits management services. The Company was incorporated in 1984 under the name Peer Review Analysis, Inc. 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 1995 PRA completed the CMI/PRA Merger. CMI provides managed disability services, including benefits analysis and consulting services and health care benefits utilization review and case management services. CMI's utilization review and case management services with respect to mental health and substance abuse cases were acquired in an acquisition in March 1993. The CMI/PRA Merger has been accounted for as a pooling of interests, and consequently the financial statements of the Company have been retroactively restated to include the financial position and results of operations of CMI for all periods presented. In July 1995, the Company changed its name to CORE, INC., and in October 1995, the Company acquired Cost Review Services, Inc., a provider of bill audit and case management services in the workers' compensation market. The Company has entered into an agreement pursuant to which it has been granted an option (the "Greaney Option") to purchase Greaney Medical Group, which includes a national consulting organization specializing in all aspects of occupational health care. The exercise price of the Greaney Option is approximately $8.1 million payable in shares of Common Stock. See "Risk Factors--Recent and Proposed Acquisitions; Risks of Integration; New Business Lines" and "--Risks Related to Growth Strategy" and "Recent Developments." The Company provides managed disability services (which consist of the Company's WorkAbility program as well as its bill audit and analytic consulting services), specialty physician and behavioral health review services and health care benefits utilization review and case management services. These services are provided principally to self-insured employers, third-party administrators and insurance carriers, and the Company is typically compensated for these services either on a per review (i.e., per case), hourly or, to a lesser extent, per enrollee basis. In a limited number of cases, the Company's compensation varies with cost savings realized by the client as a result of the Company's services. A significant portion of the Company's revenues have historically been derived from a limited number of key clients. See "Risk Factors--Dependence on Key Clients" and Note 15 to the Audited Consolidated Financial Statements of the Company. Also included in managed disability services revenue is a limited amount (3% of revenue in 1995) of licensing revenue attributable to license grants by the Company of the medical protocol portion of the WorkAbility software program. In connection with the termination of the proposed AmHealth Acquisition, the Company expects to incur one-time charges to earnings during the three months ending September 30, 1996 of $1.0 million related to the write-off of the AmHealth Loan and, based on the Company's preliminary estimates, between $0.5 million and $1.0 million related to the write-off of transaction costs. See "Recent Developments." CORE's quarterly operating results may vary depending on factors such as the addition or loss of key clients and the seasonal nature of the demand for elective medical services (which is lower in the summer months and between Thanksgiving and New Year's Day). CORE's expenses are based, in part, on its expectations regarding future demand for its services, insofar as the Company typically hires and trains additional personnel to service new clients or new programs in advance of the receipt of revenues from such clients and programs. 18 RESULTS OF OPERATIONS The following table sets forth certain statement of operations data for the periods indicated expressed as a percentage of revenues:
THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, ------------------------- ----------------- 1993 1994 1995 1995 1996 ------- ------- ------- ------- ------- Revenue................. 100.0% 100.0% 100.0% 100.0% 100.0% Costs of services....... 65.7 67.5 61.8 65.9 59.8 Gross profit............ 34.3 32.5 38.2 34.1 40.2 General and administrative expense................ 31.2 25.5 23.0 25.2 21.3 Sales and marketing expense................ 11.0 9.3 7.2 8.1 7.1
The following table sets forth the contribution to total revenues of each of the Company's principal service lines for the periods indicated:
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31, ----------------------------------------------- ----------------------------- 1993 1994 1995 1995 1996 --------------- --------------- --------------- -------------- -------------- AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT ------- ------- ------- ------- ------- ------- ------ ------- ------ ------- (DOLLARS IN THOUSANDS) Specialty physician and behavioral health review................. $ 7,564 46.3% $ 7,425 44.3% $ 8,845 42.6% $2,259 47.8% $2,325 35.3% Utilization review and case management........ 5,604 34.3 6,069 36.2 6,448 31.0 1,568 33.1 1,909 29.0 Managed disability (including WorkAbility, analytic and bill audit)................. 3,148 19.4 3,252 19.5 5,476 26.4 902 19.1 2,350 35.7 ------- ----- ------- ----- ------- ----- ------ ----- ------ ----- $16,316 100.0% $16,746 100.0% $20,769 100.0% $4,729 100.0% $6,584 100.0% ======= ===== ======= ===== ======= ===== ====== ===== ====== =====
THREE MONTHS ENDED MARCH 31, 1996 AND 1995 Revenues increased by $1,855,000 (39%) from $4,729,000 in 1995 to $6,584,000 in 1996. This increase can be attributed to continued growth in the volume of reviews being processed by the Company from existing clients in each of its principal service lines as well as the addition of new clients. Approximately $1,448,000 (78%) of the Company's increase in revenues during the first quarter of 1996 came from managed disability services. The majority of this increase resulted from the addition in 1995 of Hughes Electronics Corporation and Champion International as key WorkAbility clients, increased services to smaller corporate clients under the Company's distribution relationship with CIGNA Insurance and the acquisition of CRS in October 1995 giving CORE the ability to service the workers' compensation market with bill audit services. During the first quarter of 1996, the Company's top five clients represented 31% of revenues compared to 33% during the first quarter of 1995. No single client represented more than 10% of total revenues in the quarter ended March 31, 1996. Chrysler Corporation accounted for 10% of the Company's total revenue in the quarter ended March 31, 1995. No other single client represented more than 10% of total revenues during the quarter ended March 31, 1995. 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 by $822,000 (26%) from $3,117,000 for the three months ended March 31, 1995 to $3,939,000 for the three months ended March 31, 1996. The increase is primarily the result of additional payroll associated with processing a higher volume of referrals and increased staffing levels required to service new and growing WorkAbility clients. Gross profit performance improved from 34% for the quarter ended March 31, 1995 to 40% for the quarter ended March 31, 1996 due primarily to the 19 efficiencies obtained from the restructuring of operations following the CMI/PRA Merger (March 1995), including a consolidation of management staff and the companies' benefit plans, and greater economies of scale related to higher revenues. General and administrative expenses include the cost of executive, administrative and information services personnel, rent and other overhead items. General and administrative expenses increased $212,000 (18%) from $1,191,000 or 25% of revenues for the quarter ended March 31, 1995 to $1,403,000 or 21% of revenues for the quarter ended March 31, 1996. Expenses increased due to additional staffing in the accounting and information services areas to support the growth of the Company's sales. Additionally, rent and other general and administrative expenses have increased due to the purchase of CRS. The improvement as a percentage of revenue is generally due to efficiencies obtained as a result of the CMI/PRA Merger and the greater economies of scale related to higher revenues. Sales and marketing expenses include salaries for sales and account management and travel expense. Sales and marketing expenses also include costs designed to increase revenues, such as participation in and attendance at industry trade shows and conferences. Sales and marketing expenses increased $88,000 (23%) from $382,000 for the quarter ended March 31, 1995 to $470,000 for the quarter ended March 31, 1996. The increase is primarily due to increased travel expenses. The Company's sales and marketing strategy focuses the efforts of an industry known senior management team and a smaller sales and marketing staff on fewer but significantly larger sales prospects. Years Ended December 31, 1995 and 1994 Revenues increased by $4,023,000 (24%), from $16,746,000 in 1994 to $20,769,000 in 1995. The volume of reviews processed in each of the Company's three principal service lines increased. These increases were primarily attributable to the addition of new clients and an increase in review volume from existing clients. Approximately $2,224,000 (55%) of the Company's increase in revenues during 1995 came from growth in managed disability services, including WorkAbility, analytic and bill audit services. During 1995, CORE added Hughes Electronics Corporation as a key WorkAbility client and increased its services to smaller corporate clients under the Company's distribution relationship with CIGNA Insurance. Additionally, with the acquisition of Cost Review Services, Inc. ("CRS") in October 1995, CORE expanded its ability to service the workers' compensation market with bill audit services. CRS revenues represented 21% of the Company's 1995 increase in revenues. CORE's specialty physician and behavioral health review services grew by $1,420,000 (19%) in 1995. This growth was due primarily to increased demand for specialty-matched physician reviews across a broad range of markets, including but not limited to the group health, workers' compensation and disability management markets. During 1995 the Company's top five clients represented 30% of revenues, compared to 37% during 1994. No single client represented more than 10% of total revenues in 1995. Cost of services increased by $1,534,000 (14%), from $11,305,000 for 1994 to $12,839,000 for 1995. This increase is primarily the result of additional payroll and physician review costs associated with processing a higher volume of referrals and increased staffing levels required to service new and growing WorkAbility clients. During 1995, CORE's cost of services increased by only 14% to service a 24% increase in revenue. Accordingly, gross profit performance improved from 33% in 1994 to 38% in 1995. This improvement is generally due to efficiencies obtained as the result of the CMI/PRA Merger, which included a consolidation of facilities and management staff, a consolidation of the companies' benefit plans and greater economies of scale related to higher revenues. General and administrative expenses increased $522,000 (12%), from $4,265,000 for 1994 to $4,787,000 for 1995, due principally to higher costs associated with additional staffing in the information services area to support the growth of the Company. General and administrative expenses as a percentage of revenue decreased from 25% in 1994 to 23% in 1995. This improvement is generally due to efficiencies obtained as the result of the CMI/PRA Merger, which included a consolidation of facilities and management staff, a consolidation of the previously separate companies' benefit plans and greater economies of scale related to higher revenues. 20 Sales and marketing expenses also include costs designed to increase revenues, such as participation in and attendance at industry trade shows and conferences. Sales and marketing expenses decreased $64,000 (4%), from $1,563,000 in 1994 to $1,499,000 in 1995. This decrease was due to the net effect of a reduction in the Company's sales staff and associated expenses during 1995 as a result of the CMI/PRA Merger and increased marketing related expenditures such as hosting and co-hosting a number of conferences across the country that addressed various market-specific issues that the Company's clients and prospective clients are facing. Merger costs and expenses of $436,000 recorded during 1995 consist primarily of professional fees, investment advisor services and printing expenses associated with the completed CMI/PRA Merger. This was a $678,000 decrease from the $1,114,000 recorded during 1994. Restructuring costs of $558,000 consist of charges for the Company's plan of termination and exit plan. In conjunction with the CMI/PRA Merger completed on March 24, 1995, the Company reduced its workforce where overlapping functions existed. The Company also reduced its sales and marketing workforce to better address the marketing strategy of the Company. The termination of employees as a result of these actions caused the recognition of severance and outplacement costs for the quarter ended March 31, 1995. The Company also abandoned excess leased space at its Burlington, Massachusetts location, and a charge was recorded for the cost of future rental expense on the abandoned space. Other income consists primarily of interest income, which represents amounts earned by the Company on investments held, as reduced by interest expense, which primarily relates to borrowings under lines of credit. During 1995, other income increased $166,000, from $10,000 in 1994 to $176,000 in 1995. This increase was due primarily to the Company using more of its invested funds and significantly reducing its use of its lines of credit. Years Ended December 31, 1994 and 1993 Revenues increased by $430,000 (3%), from $16,316,000 in 1993 to $16,746,000 in 1994. This increase in revenue is primarily attributable to growth in the Company's managed disability and utilization review and case management service lines, including WorkAbility revenues from new clients such as General Electric and Hoechst Celanese Corporation and the initiation of disability review services to Northwestern National Life (now known as Reliastar Financial Corp.). Licensing of CORE's software, including WorkAbility On-Line Medical Protocols ("WOMP"), a product developed in late 1993, increased 1994 licensing revenues to nearly 5% of total revenues, a significant increase over 1993. While revenues in the Company's specialty physician and behavioral health review service line remained constant during 1994, the Company handled a decreased volume of reviews. The Company helped sustain revenues in this service line by enhancing its services and implementing service sensitive pricing during 1994 which increased the average price charged per review. These revenue increases were offset in significant part by a decreased number of referrals in 1994 compared to the prior year and the loss of revenues from Digital Equipment Corporation ("DEC") effective December 31, 1993. DEC revenues were $1,202,000 for 1993. In 1994, the Company's top five clients represented 37% of revenue compared to 39% during 1993. During 1994, Northwestern National Life represented 12% of revenues. No other client represented more than 10% of total revenue in 1994. Cost of services increased by $591,000 (6%), from $10,714,000 in 1993 to $11,305,000 in 1994. This increase resulted from the creation of a customer service department in Physician Review Services ("PRS"); the addition of management personnel to quality assurance efforts; and the hiring of additional nurse reviewers to better process more clinically and administratively complex physician reviews. In the fourth quarter of 1993, the PRS unit implemented a "team" structure approach to processing physician reviews. Staff reductions attendant with the loss of DEC in December 1993 were offset in part by increased staffing required to service start-up units for CIGNA Insurance and General Electric Corporation. The Company also hired and trained new personnel and implemented a new case management program to service anticipated new business in advance of the initial receipt of program revenues. These factors adversely impacted the Company's gross profit performance, which decreased slightly, from 34% in 1993 to 33% in 1994. 21 General and administrative expenses decreased $831,000 (16%), from $5,096,000 in 1993 to $4,265,000 in 1994. This decrease was due primarily to the Company's ability to reduce its overhead expenses by consolidating the operations of three Orange County, California offices into a single facility in Irvine, California and consolidating the executive and operating functions in anticipation of the CMI/PRA Merger. The Company also reduced its expenditures for legal and investment banking services during 1994. The actions taken during 1994 significantly reduced general and administrative expense as a percentage of revenue from 31% in 1993 to 25% in 1994. Sales and marketing expenses decreased by $224,000 (13%), from $1,787,000 for 1993 to $1,563,000 for 1994. The Company reduced its sales and marketing activity during 1993 and 1994 in response to a declining revenue base in some of its lines of business. The change in strategy, from aggressively pursuing new client revenue toward better servicing of and increased marketing to its current client base prompted the Company to move many of its marketing efforts in-house. The Company also made reductions in certain sales personnel in California in anticipation of a consolidated sales organization under the CMI/PRA Merger. Merger costs and expenses of $1,114,000 consist primarily of professional fees, investment advisor services and printing expenses associated with the completed CMI/PRA Merger. Merger costs and expenses decreased by $68,000 for 1994 over 1993, in which expenses incurred were related to both the CMI/PRA Merger and the March 1993 purchase of Integrated Behavioral Health. Depreciation and amortization expenses decreased by $153,000 (14%), from $1,067,000 in 1993 to $914,000 in 1994. This decrease was primarily due to the write-off of goodwill related to the IBH purchase and to the accelerated amortization of a portion of the value assigned to customer contracts associated with the June 1992 acquisition of Interventions, a Chicago behavioral health plan, during 1993, due to the loss at that time of one of the unit's larger customers. Other income decreased by $307,000 (97%), from $317,000 in 1993 to $10,000 in 1994. This decrease was due largely to a realized loss of $158,000 incurred on the sale of investments, fewer dollars available for investment and a decline in interest rates. LIQUIDITY AND CAPITAL RESOURCES For the year ended December 31, 1995, the Company's cash and cash equivalents increased by $1,006,000. For this period, operating activities provided $439,000. The Company's investing activities provided $1,995,000 of cash, primarily due to the net sale of available-for-sale securities of $4,406,000 as reduced by $1,510,000 for the purchase of Cost Review Services, Inc. and $1,279,000 for the funding of equipment and furniture purchases and for leasehold improvements. The Company's financing activities used $1,428,000 for this period. During the year the Company paid off CMI's line of credit of $1,200,000 and notes payable to officers of $200,000. For the three months ended March 31, 1996, the Company's cash and cash equivalents decreased by $987,000. For this period, operating activities used $141,000 due primarily to an increase of $1,314,000 in accounts receivable, offset by income for the quarter of $535,000 and an increase in accounts payable and accrued expenses of $482,000. The increase in accounts receivable can be attributed to continued revenue growth while the increase in accounts payable and accrued expenses relates to the timing of payments. The net cash used in investing activities of $658,000 is essentially related to the use of $635,000 of cash to fund software development and leasehold improvements at the Company's Burlington office. In addition, the Company issued notes receivable to AmHealth in connection with the proposed AmHealth Acquisition and to Continental FirstCare in connection with the Company's proposed relationship with Continental FirstCare in the aggregate amount of $1,041,000, using cash provided from the sale of investments available-for-sale of $1,085,000. See "Recent Developments." The Company's financing activities used $188,000 for payments due on contractual obligations, notes payable and capital leases. 22 During the first quarter of 1996, the Company increased its available line of credit by $1,000,000 up to $2,500,000, subject to certain limitations based on the Company's accounts receivable. The line of credit prohibits the payment of dividends on Common Stock without the prior written consent of the banking institution. Additionally, the Company must obtain the written consent of the banking institution before entering into certain other transactions, including any loans to third parties and acquisitions, mergers or other consolidations which exceed certain size thresholds. The Company expects to utilize this line of credit to meet short-term demands for cash that fluctuate based on the timing of collections on accounts receivable. The Company leases its facilities and certain office equipment. Lease commitments, which relate substantially to space rental, for the years ended December 31, 1996 and December 31, 1997 are approximately $1.5 million and $1.3 million, respectively. All obligations held by the Company under lease commitments expire on various dates through the end of the year 2001 and total $5.7 million as of December 31, 1995. The Company has net operating loss carryforwards for income tax purposes of approximately $9 million as of December 31, 1995, which can be used to reduce the cash flow necessary to pay taxes. The amount of net operating loss carryforwards that can be utilized in any future year may be limited due to "equity structure shifts" and "owner shifts" 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 Code of 1986 and similar state provisions. See Note 11 of Notes to Consolidated Financial Statements of the Company. The Company plans to finance its operations and working capital requirements with the proceeds of this offering, earnings from operations, investments on hand and other sources of available funds, including the Company's available line of credit of $2,500,000. The Company presently believes that these resources will be sufficient to meet its liquidity and funding requirements through at least the year 1997. PENDING ACCOUNTING STANDARDS The Financial Accounting Standards Board has issued SFAS No. 123 "Accounting for Stock-Based Compensation." SFAS No. 123 is effective for fiscal years beginning after December 15, 1995 and will not have a material impact on the Company's statement of operations or financial position. 23 BUSINESS CORE is a national provider of managed disability and health care benefits management services to Fortune 500 companies and other self-insured employers, third-party administrators and insurance carriers. The Company's services include managed disability services using CORE's proprietary WorkAbility disability management software, specialty physician and behavioral health review services and health care benefits utilization review and case management services. The Company's services are designed to assist its clients monitor and control disability and health care benefits costs without compromising the quality of health care services provided to the patient. CORE's managed disability services include monitoring the appropriateness of disability durations under short and long-term disability 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 based on CORE's WorkAbility program, a proprietary software program developed over a ten-year period through the statistical analysis of disability utilization data. CORE's WorkAbility managed disability program provides an objective, medically based method for recommending and monitoring employee's return-to-work dates. 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 independent physician review programs provide pre-certification, concurrent and appellate physician review services for use with utilization management programs of the Company's insurance company and self-insured corporate clients. The Company believes its more than 230 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 sub-specialties such as adult and child psychiatry, alcoholism and chemical dependency. The Company also provides utilization review services designed to evaluate the medical necessity and appropriateness of health care services prescribed for participants in health care and medical plans. In cases of high cost injuries or illness, CORE also renders case management services for individual cases to assure that cost-effective treatment alternatives are utilized. 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 a 1991 publication 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 are approximately $260 billion per year. According to an industry source, workers' compensation expenditures grew at an average annual rate of over 10% from 1982 through 1991, and the Company believes this growth is continuing. The Company estimates that workers' compensation costs were approximately $60 billion in 1994. 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 at approximately $200 billion in 1994. 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 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. 24 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 industrywide, 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 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. STRATEGY CORE intends to expand its position as a leading provider of managed disability services by utilizing its proprietary WorkAbility program and related services to reduce the direct costs of group disability and workers' compensation benefits and to improve employee productivity. The Company believes that the combination of its health care and disability management tools and its strong information technology foundation provides an effective management platform that can be tailored to meet the needs of employers and managed care organizations. The principal elements of the Company's strategy for achieving its objective are as follows: EXPAND WORKABILITY CLIENT BASE. The Company intends to aggressively market its WorkAbility program to achieve greater penetration into the managed disability market through direct sales to large employers, sales to small employers through distribution agreements with insurance companies and licensing arrangements with selected domestic and international third parties. PURSUE OUTSOURCING OPPORTUNITIES. In response to the increasing demand by large employers for outsourcing their disability management activities, CORE intends to actively pursue contracts to provide comprehensive managed disability services on an outsourced basis. In addition to the WorkAbility program, these services can include development of analytic databases, management of related vendor contracts, establishment and review of occupational health networks and provision of onsite occupational health services. In April 1996, Bell Atlantic Corporation selected the Company to provide comprehensive disability management services. ACQUIRE COMPLEMENTARY SERVICES. The managed disability industry is highly fragmented and in an early stage of development. The evolution of this marketplace may present opportunities for the Company to complement its managed disability services by obtaining service line extensions and cross- selling synergies 25 through strategic acquisitions. The Company's October 1995 acquisition of Cost Review Services, Inc., a workers' compensation bill audit firm, is an example of an acquisition which met the Company's criteria. DEVELOP DISABILITY MANAGED CARE NETWORKS. CORE intends to use the WorkAbility program as the technological platform to develop integrated networks of disability managed care services in certain geographical markets which support the local needs of CORE's clients. ESTABLISH CAPABILITY FOR RISK SHARING ARRANGEMENTS. The Company believes that the disability management market will evolve toward a risk sharing model similar to other segments of the health care industry, and that the WorkAbility program and related database will provide CORE with a significant advantage in assessing and managing risk. The Company ultimately intends to be in a position to utilize the WorkAbility program and its regional clinical networks to enter into capitated or other "at risk" arrangements with payors. 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 services include: (i) managed disability services using CORE's WorkAbility products and services, (ii) specialty physician and behavioral health review services using more than 230 CORE-affiliated board certified physicians and (iii) utilization review ("UR") and case management services. With the proposed AmHealth Acquisition, CORE will also manage a network of nine occupational health clinics and an employer services division which render occupational and industrial medical services. For the year ended December 31, 1995 and the three months ended March 31, 1996, managed disability services accounted for approximately 26% and 36%, respectively, of CORE's revenue, specialty physician and behavioral health review services represented 43% and 35%, respectively, of revenue and UR and case management services represented 31% and 29%, respectively, of revenue. Managed disability services, which include the Company's WorkAbility program as well as its bill audit and analytic consulting services, accounted for more than 50% of the Company's 1995 total revenue increase and more than 75% of the Company's revenue increase for the first quarter of 1996 as compared to the first quarter of 1995. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." MANAGED DISABILITY SERVICES The Company estimates that total direct and indirect disability expenditures are approximately $260 billion annually, of which approximately $60 billion is attributable to workers' compensation costs. CORE's managed disability services include monitoring of the appropriateness of disability durations under short and long-term disability plans and workers' compensation programs in order to reduce unnecessary absenteeism and the costs associated with such absences. The cost of absenteeism includes wage replacement, the costs of hiring and training replacement personnel and lost productivity. The Company's managed disability services are based on the WorkAbility program, a proprietary software program developed and maintained through the statistical analysis of disability utilization data. CORE's WorkAbility program provides an objective, medically based method for managing disability and employees' return-to-work dates. 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. Among the characteristics of CORE's WorkAbility program which differentiate it from other disability review programs are the following: 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 26 interact with the treating physician immediately upon occurrence of the disability event. Early intervention permits establishment of an appropriate return-to-work date prior to a significant absence. PROPRIETARY DATABASE. CORE began developing its WorkAbility program in 1986. The program uses a database of more than 265,000 disability and workers' compensation cases collected by CORE over ten years. From this data base, the Company has developed protocols with over 10,000 clinical endpoints. As a result, the WorkAbility protocols and projected return-to- work dates are in most instances based on an historical record of similarly situated patients rather than theoretical models. As the WorkAbility program is utilized, the database is growing. CLINICAL CREDIBILITY. WorkAbility assists the Company in establishing clinical credibility with the attending physician by comparing CORE's database of similar medical episodes with the patient's medical and job profile. This information can be shared with the attending physician to assist in the development of an effective treatment plan and in determining the appropriate return-to-work schedule. The WorkAbility program, supported by the Company's more than 230 Board certified physicians, allows a treating physician to talk to a CORE physician specialist for peer review of complex diagnoses and treatment plans. CONCURRENT REVIEW. In addition to the initial recommendation of an appropriate return-to-work date, WorkAbility services include ongoing review of patient status to assure the expected date remains accurate. At these intervals, new information may be gathered about the treatment or the illness or injury requiring an adjustment to the return-to-work date. COMPLETE WORKFORCE COVERAGE. The WorkAbility program is designed to cover all workplace absences, not just the longer term and more costly absences. The program also provides consistent return-to-work dates for clinical conditions whether the condition causing the absence is a result of a workers' compensation workplace injury or an injury outside of the workplace covered by a disability plan. The WorkAbility program is operated primarily by registered nurse reviewers using an automated review system to assess each disability claim in the early stages of an employee's absence. Under the WorkAbility program, the attending physician or office staff (depending on the severity of the case) uses a toll- free number to contact CORE and speaks to a trained WorkAbility program nurse reviewer who enters information on the diagnosis and severity of the condition into CORE's proprietary WorkAbility system. Each case is then reviewed by the nurse using the WorkAbility program's computerized medical protocols, which 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 and comorbid factors which may affect the duration of the disability. Using the WorkAbility program, the nurse reviewer considers these various factors and recommends an appropriate length of disability duration based on the specifics of the case. 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. The WorkAbility program can assign specific lengths of disability for more than 10,000 clinical descriptions, or "endpoints." If CORE and the attending physician agree with respect to the anticipated disability duration, a letter stating the expected return-to-work date is 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 length of disability assigned by CORE's nurse reviewer (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 should be requested. 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 disability leave is reviewed on a case by case basis using the WorkAbility program and additional information provided by the attending physician or patient. 27 The Company's WorkAbility program includes return-to-work case management for high intensity, potentially high cost disability cases. This service is focused on returning the patient to work as soon as clinically appropriate through intensive involvement by a dedicated nurse case manager with the patient, the health care providers and the workplace. Depending on the client's benefits structure, the Company's return-to-work case managers can negotiate services, coordinate on-site activities and channel the patient to appropriate treatments or providers. The WorkAbility program has the capability to collect and report information relating to the ongoing disability claims history of each employee and documents all case reviews, thus allowing the identification of employee disability patterns and physician treatment patterns. The WorkAbility program is also able to identify prospective high cost disability events which can be monitored in more detail through return-to-work case management. In addition, the Company believes that the data transfer capabilities of the WorkAbility program can also substantially improve the efficiency of its clients' claims administration function. Electronic transfer of data required by the employer or disability program administrator can minimize errors and reduce paperwork, allowing faster processing of disability payments to employees. The WorkAbility On-line Medical Protocols ("WOMP") were developed and are maintained by CORE and are 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 WorkAbility system automatically provides to the Company's clients monthly and quarterly management reports which monitor disability benefits utilization trends and identify potential problem areas. 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, while 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. See "Risk Factors--Exposure to Professional Liability." In order to assist employers identify and quantify the direct and indirect costs associated with disability benefits and, to a lesser extent, health care benefits, CORE also provides data analysis and consulting services 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 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 consulting service 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. The Company's workers' compensation bill audit services involve auditing medical bills, pharmacy bills and hospital bills for medical services or products received by the client which are subject to applicable state fee schedules. The bills are audited to determine whether the services or products which are the subject of the medical bill are from legitimate medical providers, contain the proper procedural codes and are billed accurately based on the procedure codes. Finally, an audit report is prepared stating the result of such audit with a recommendation for payment. 28 SPECIALTY PHYSICIAN AND BEHAVIORAL HEALTH REVIEW CORE's independent physician review programs provide pre-certification, concurrent and appellate 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 230 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 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 few growing sectors of the otherwise mature 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's physician reviewer. 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 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 Company 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 services are advisory in nature. Determinations as to the payment or denial of benefits are typically made by the third party payor, and decisions as to the patient's medical treatment are made by the patient and the attending physician. See "Risk Factors--Exposure to Professional Liability." CORE's behavioral health review program provides 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 sub-specialties such as adult psychiatry, child psychiatry and addictionology, including alcoholism and chemical dependency. CORE believes that its multi-specialty psychiatrists (including those in its Integrated Behavioral Health Division) 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. The Company is certified by the Utilization Review Accreditation Commission ("URAC") to perform various utilization review functions. 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 URAC's key 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 URAC's appellate procedures. 29 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. CORE's review criteria and procedures are structured so that a nurse reviewer or nurse case manager can initially review the majority of cases presented. If a hospital admission or outpatient service fails to meet established criteria, a CORE employed or retained physician (or other doctoral level practitioner such as a Doctor of Chiropractic or Doctor of Psychology) reviews the case and may contact the patient's doctor to obtain additional information or otherwise discuss the proposed treatment plan. Upon completion of the medical review, CORE notifies the participant, the attending physician and other affected providers of the outcome of such review. CORE also notifies its client as to whether the proposed hospitalization and length of stay or outpatient service appears to be medically necessary and appropriate under the terms of the benefit plan. CORE provides both an expedited and standard appeals process to patients or plan members in instances where a non- certification determination is made by CORE. CORE's UR appellate process utilizes the Company's relationships with more than 230 Board certified physicians to provide specialty matched physician review. For many of its programs, CORE charges its clients a "capitated fee," i.e., a fixed per employee per month fee. The amount of this fee varies depending on the size of the client and the number and type of review programs selected by the client. For other services, including case management, CORE charges fees on an hourly rather than a capitated basis. In most cases, CORE's services are advisory in nature. 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. Decisions as to the patient's medical treatment are made by the patient and the attending physician, not by CORE. See "Risk Factors--Exposure to Professional Liability." CLIENTS AND MARKETING CORE has over 200 customers across the country, including 36 Fortune 500 companies. Revenues from Fortune 500 companies accounted for approximately 40% of total revenues in 1995 and 1994. The following is a selected list of CORE's clients which, the Company believes, is representative of its overall client base: Chrysler Motor Corporation Hughes Electronics Corporation Reliastar Financial Corp. (owned by General Motors) (formerly known as Northwestern Champion International Corporation National Life) Blue Cross/Blue Shield of Texas Lockheed Martin Corporation Liberty Mutual Insurance Company, Aetna Life Insurance Company Inc. General Electric Corporation Health Plans, Inc. 30 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's marketing strategy is to use its senior management team and a small sales and marketing staff to focus on potential sales to a limited number of large sales prospects. The Company has also entered into distribution agreements with Reliastar Financial Corp., CIGNA and other insurance companies pursuant to which these companies offer CORE's WorkAbility services to their customers. For providing WorkAbility services, the Company is paid fees by the insurance companies. Also, the Company is active in conferences addressing disability management issues the Company's clients and prospective clients face, including acting as a host or a co-host to several conferences in 1995. The Company recognized 50% of its revenues in 1995 from self-insured employers, as compared to 46% in 1994. Revenues from insurance carriers represented approximately 37% and 43% of total revenues in 1995 and 1994, respectively. The remaining 13% and 11% of total revenues in 1995 and 1994, respectively, were recognized from other clients, including managed care companies. During 1995, no client represented 10% or more of revenues. During 1994, Northwestern National Life Insurance (now known as Reliastar Financial Corp.) represented approximately 12% of revenues. During the years ended December 31, 1994 and 1995, the Company's five largest clients represented 36.5% and 30.1%, respectively, of total revenue, and its ten largest clients represented 45.0% and 51.0%, 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. 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. INFORMATION SYSTEMS CORE's key products and services--the WorkAbility program, utilization review and case management programs and physician review 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. These software programs were developed at different times and, although designed with similar features and on similar platforms, are not yet fully integrated. CORE has begun two major initiatives in its information systems development. First is the upgrade and expansion of its wide area network (WAN) to expand capability in multiple office operation of its computer and telephone systems and to expand direct computer connections with clients and remote users. Second, is the redesign of the WorkAbility product to allow integration of UR and physician review services functionality into a single operational software. The WorkAbility system has recently undergone significant architecture redesign to allow for client server operation and rapid feature development. The enhanced product, "WorkAbility Plus," utilizes software architecture that provides maximum flexibility in attaching industry-standard databases to support growth and varying client needs. The Company believes that this new architecture will support the integration of UR and physician review services into a single software centered around the WorkAbility system. Concurrent with this planned integration is the development of new medical necessity protocols focused on common occupational injuries and disease. Funding for the development of CORE's WorkAbility software 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. Pursuant to the terms of its agreement with Chrysler, CORE is paying Chrysler 25% of certain licensing fees paid to CORE with respect to the WorkAbility software until the total of such payments equal 140% of the development costs (approximately $2.8 million). Only limited payments have been paid by CORE through March 31, 1996. In addition, in the event that CORE fails to attempt to market the software to third parties, Chrysler will have certain rights to market and license the software independently. 31 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 indirectly 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 payors, 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: (i) health care utilization management and (ii) managed disability and workers' compensation. The managed health care 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 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. The managed disability and workers' compensation market is a developing market which is also competitive. Competitors include both new companies focused solely on the workers' compensation market and established disability insurance carriers who have traditionally dealt with disability from an underwriting rather than an employee productivity perspective. 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. EMPLOYEES AND PHYSICIAN CONSULTANTS In addition to its available staff of approximately 280 physician consultants (230 of whom are Board certified) covering the major medical specialties, CORE had approximately 300 employees as of May 31, 1996. 32 Generally, CORE's physician consultants are paid by CORE on a per case review or per hour 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 five 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. PROPERTIES The Company occupies its executive headquarters in Irvine, California pursuant to a lease for approximately 14,000 sq. feet which expires in September 2000. The Company also leases facilities of approximately 18,000 sq. feet in Boston, Massachusetts under a lease that expires in May 2000, and approximately 15,000 sq. feet in Burlington, Massachusetts under a lease that expires in December 2001. Additionally, the Company leases a facility of approximately 16,000 sq. feet in Los Angeles, California under a lease that expires in June 1998, as well as approximately 18,000 sq. feet in Silver Spring, Maryland under a lease that expires in June 2001, approximately 1,300 sq. feet in Chicago, Illinois under a lease that expires in May 1998, approximately 10,000 sq. feet in Austin, Texas under leases that expire in September 1996 and approximately 2,400 sq. feet in Forth Worth, Texas under a lease that expires in July 1998. PROFESSIONAL LIABILITIES; LEGAL PROCEEDINGS The Company is not currently a party to or aware of any material pending litigation or material legal proceedings. The review services provided by the Company are advisory in nature, and final determination as to payment or nonpayment of benefits are not made by the Company. Determinations as to the medical care provided to a patient are made by the patient or the attending physician. 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. 33 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The following table sets forth certain information with respect to the directors and executive officers of the Company.
NAME AGE POSITION - ---- --- -------- George C. Carpenter IV...... 38 Chairman of the Board of Directors and Chief Executive Officer Craig C. Horton............. 41 Director, President and Chief Operating Officer William E. Nixon............ 35 Executive Vice President, Chief Financial Officer, Treasurer and Clerk Fredric L. Sattler.......... 52 Executive Vice President Ophelia Galindo............. 38 Corporate Vice President, Product Management and Technical Development Leslie Alexandre, Dr.P.H.(1)................. 38 Director Stephen C. Caulfield(1)..... 55 Director Richard H. Egdahl, M.D.(2).. 69 Director John Pappajohn(1)(2)........ 67 Director
- -------- (1) Member of the Compensation Committee. (2) Member of the Audit Committee. George C. Carpenter IV was appointed a Class III Director, and was elected Chairman of the Board of Directors and Chief Executive Officer of the Company by the Board effective with the Company's March 24, 1995 merger involving Core Management, Inc. Mr. Carpenter served as the Chief Executive Officer and a Director of Core Management, Inc., a Delaware corporation ("CMI") and now a wholly-owned subsidiary of the Company, since its formation in 1990. In addition, Mr. Carpenter served as the Chairman, Chief Executive Officer, Secretary and a Director of Core Management, Inc., a California corporation and wholly-owned subsidiary of CMI ("CMI-California"), from its formation in 1990. As a result of the reorganization of CMI-California and Integrated Behavioral Health, a California corporation and wholly-owned subsidiary of CMI ("IBH") in March 1993, Mr. Carpenter was appointed as a director of IBH. 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 appointed a Class III Director in March 1995 effective with the CMI/PRA Merger, and was elected President and Chief Operating Officer of the Company by the Board on March 30, 1995. Mr. Horton served as the President and a Director of CMI and CMI-California from their respective formations in 1990, and also served as the acting Chief Financial Officer of CMI from 1994 to 1995. In December 1994, Mr. Horton was named as a Director and Chief Executive Officer of IBH. From 1988 to 1990, Mr. Horton was a 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 present 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. Fredric L. Sattler became an Executive Vice President of the Company in January 1996. Prior to his employment with the Company, Mr. Sattler was employed as Vice President of National Benefit Resources of Minneapolis, Minnesota in 1995 and as Vice President of NovaCare of King of Prussia, Pennsylvania from 1994 34 to 1995. From 1981 to 1994 Mr. Sattler held various offices with Northwestern National Life Insurance Co. (now known as Reliastar Financial Corp.) and its affiliates, including Vice President of Health Care Management (1987 to 1994) and President and Chief Executive Officer (1991 to 1994) of NWNL Health Management Corp., a health management organization (HMO) management company, wholly-owned by Northwestern National Life Insurance Co. Ophelia Galindo was elected the Corporate Vice President, Product Management and Technical Development of the Company by the Board on March 30, 1995. Formerly, Ms. Galindo was employed by CMI, beginning in February 1986 as a senior consultant; in June 1994, Ms. Galindo was promoted by CMI to be its Vice President, Disability Analysis. Leslie Alexandre, Dr.P.H. was appointed a Class I Director in March 1995, effective with the CMI/PRA Merger, and was elected a Class I Director by the Company's stockholders in July 1995. Formerly, Dr. Alexandre served as a director of CMI from 1993 to 1995. Since February 1995, Dr. Alexandre has been the Vice President, Corporate Affairs for OncorMed, Inc., a provider of genetic testing and information services for the early detection and management of cancer. From 1992 to 1995, Dr. Alexandre was employed as Government Affairs Representative, Health Policy for EDS, Inc., an information technology company and subsidiary of General Motors. Prior to joining EDS in 1992, Dr. Alexandre was Senior Health Legislative Assistant for United States Senator David Durenberger. From January 1990 until the death of U.S. Senator John Heinz in April 1991, she served as Professional Staff on the Senate Special Committee on Aging. Prior to 1990, Dr. Alexandre was an independent health care consultant. Stephen C. Caulfield was appointed a Class I Director by the Board effective December 1994, and was elected a Class I Director by the Company's stockholders in July 1995. Mr. Caulfield is a Managing Director of William M. Mercer, Incorporated, a management consulting firm, where he has specialized in health care issues since 1987. Mr. Caulfield has more than 30 years of experience in the health care field, having previously been employed as a faculty member and Assistant Dean of the Albert Einstein College of Medicine in New York, as the Director of Health Affairs and Regional Operations for the United Mine Workers Multi-Employer Trust, and as the President and Chief Executive Officer of Government Research Corporation, a consulting firm previously located in Washington, D.C. (subsequently acquired by Hill and Knowlton). Richard H. Egdahl, M.D. has been a director since 1985, and was classified a Class II Director in 1995 effective with the CMI/PRA Merger. Since 1973, Dr. Egdahl has been the Director of the Medical Center of Boston University and Academic Vice President for Health Affairs at Boston University; since 1976, Dr. Egdahl has been the Director of The Health Policy Institute at Boston University. Dr. Egdahl was also a practicing surgeon through 1989. Dr. Egdahl is a trustee of the Pioneer Group of Mutual Funds, a director of HPR, Inc. (a developer of health care software and database products) and a member of the Institute of Medicine of the National Academy of Sciences. John Pappajohn was appointed a Class II Director in March 1995 effective with the CMI/PRA Merger. Formerly, Mr. Pappajohn was a director of CMI from its formation in 1990 to 1995; Mr. Pappajohn served on the Board of Directors of Integrated Behavioral Health, a California corporation ("IBH"), from 1991 to the time of its acquisition by CMI in 1993. Since 1969, Mr. Pappajohn has been the sole owner of Pappajohn Capital Resources, a venture capital fund, and President of Equity Dynamics, Inc., a financial consulting firm in Des Moines, Iowa. Mr. Pappajohn serves as a Director of the following public companies: BioCryst Pharmaceuticals, Inc., Drug Screening Systems, Inc., Fuisz Technologies Ltd., GalaGen, Inc., OncorMed, Inc., PACE Health Management Systems, Inc., and United Systems Technologies, Inc. ---------------- The Company's Board of Directors is divided into three classes, each of whose members serve for staggered three-year terms. The term of the Class I Directors (presently Dr. Alexandre and Mr. Caulfield) expires in 1998; the term of the Class II Directors (presently Dr. Egdahl and Mr. Pappajohn) expires in 1996; and the term of the Class III Directors (presently Mr. Carpenter and Mr. Horton) expires in 1997. At each annual meeting of stockholders, directors are elected for a three-year term to succeed the directors of the same class whose terms are then expiring. 35 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. COMPENSATION OF EXECUTIVE OFFICERS The following table sets forth information concerning the compensation paid or accrued by the Company and its subsidiaries to each of its officers who was either the chief executive officer, or an executive officer whose aggregate salary and bonus exceeded $100,000 in the most recent fiscal year (the "Named Executive Officers") during the fiscal years ending December 31, 1995, 1994 and 1993. Although only principal capacities are listed, the compensation figures include all compensation received in any capacity, for services rendered during the fiscal years indicated. SUMMARY COMPENSATION TABLE
LONG TERM ANNUAL COMPENSATION COMPENSATION ------------------------------------------ ------------ AWARDS ------------ SECURITIES OTHER ANNUAL UNDERLYING ALL OTHER NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) COMPENSATION($) OPTIONS(#) COMPENSATION($) - --------------------------- ------- --------- -------- --------------- ------------ --------------- George C. Carpenter IV.. 1995(1) 146,249 -- -- 95,000 -- Chairman of the Board 1994(1) 112,028 -- 9,433(5) -- 1,541 of Directors and Chief 1993(1) 94,000 -- 89,547(6) -- 35,044(4) Executive Officer Craig C. Horton......... 1995(1) 136,342 -- -- 95,000 -- Director, President and 1994(1) 108,821 -- 7,718(5) -- 156 Chief Operating Officer 1993(1) 94,000 -- -- -- 34,619(4) William E. Nixon........ 1995 127,000 -- -- 56,750 -- Executive Vice 1994 82,271 6,000 -- -- -- President, Chief 1993 76,599 -- -- 5,750 -- Financial Officer, and Treasurer Alfred B. Lewis(2)...... 1995 31,250 -- -- -- 114,845(3) Chairman and President 1994 119,503 -- -- -- -- 1993 66,281 -- -- 50,000 --
- -------- (1) Prior to the March 1995 CMI/PRA Merger, Mr. Carpenter and Mr. Horton were officers and employees of Core Management, Inc. The compensation amounts for Mr. Carpenter and Mr. Horton in this table for the periods prior to the CMI/PRA Merger were paid by Core Management, Inc. (2) Mr. Lewis joined the Company as its President on May 17, 1993 and became Chairman of the Board of Directors on December 29, 1993. Mr. Lewis resigned as a director and as Chairman of the Board effective March 24, 1995. (3) Mr. Lewis received severance payments of $114,845 in 1995 pursuant to his employment contract with the Company. (4) Includes $33,333 of compensation income charged (but not paid) to the named executive officer as a result of a change in the accounting treatment of certain loans made by the named executive officer to CMI or its subsidiaries. (5) Represents interest paid to the named executive officer with respect to certain loans made by the named executive officer to CMI or its subsidiaries. (6) Represents payments of $68,449 for relocation expenses incurred as well as $21,098 paid to Mr. Carpenter to reimburse him for income taxes payable by him with respect to such relocation expenses. 36 OPTION GRANTS IN 1995 The following table presents information regarding 1995 grants of options to purchase shares of Common Stock for each of the Named Executive Officers:
INDIVIDUAL GRANTS ---------------------------------------------- POTENTIAL REALIZABLE VALUE NUMBER OF % OF AT ASSUMED ANNUAL SECURITIES TOTAL RATES OF STOCK UNDERLYING OPTIONS PRICE APPRECIATION OPTIONS GRANTED TO EXERCISE FOR OPTION TERM (3) GRANTED EMPLOYEES IN PRICE EXPIRATION -------------------- NAME (#) FISCAL YEAR(1) ($/SH) DATE 5%($) 10%($) ---- ---------- -------------- -------- ---------- --------- ---------- George C. Carpenter IV............. 95,000 14.1% $3.13 4/27/2000 82,152 181,535 Craig C. Horton.................... 95,000 14.1% $3.13 4/27/2000 82,152 181,535 William E. Nixon................... 50,000 7.4% $3.13 4/27/2000 43,238 95,545 1,000(2) * $2.94 12/31/96 240 486 5,750(2) * $2.94 5/17/99 3,643 7,846 Alfred B. Lewis.................... -- -- -- -- -- --
- -------- (1) The Company granted a total of 673,684 options to its employees and consultants in 1995 (including repricing of 18,250 options and excluding option grants to non-employee directors). See "Compensation of Non- Employee Directors" and "Certain Transactions." (2) Repricing of existing options. (3) Amounts represent hypothetical gains that could be achieved for the respective options if exercised at the end of the option term. These gains are based on assumed rates of stock price appreciation of 5% and 10% compounded annually from the date the respective options were granted to their expiration date. These assumptions are not intended to forecast future appreciation of the Company's stock price. The potential realizable value computation does not take into account federal or state income tax consequences of option exercises or sales of appreciated stock. This table does not take into account any appreciation in the price of the Common Stock to date. * Less than one (1%) percent. AGGREGATED OPTION EXERCISES IN 1995 AND YEAR-END OPTION VALUES The following table presents information regarding options exercised in 1995 and the value of options outstanding at December 31, 1995 for each of the Named Executive Officers:
NUMBER OF SECURITIES VALUE OF UNDERLYING UNEXERCISED UNEXERCISED IN-THE-MONEY OPTIONS AT OPTIONS AT YEAR END (#) YEAR END ($)(1) ------------- ----------------- SHARES ACQUIRED EXERCISABLE/ EXERCISABLE/ NAME ON EXERCISE(#) VALUE REALIZED($) UNEXERCISABLE UNEXERCISABLE ---- --------------- ----------------- ------------- ----------------- George C. Carpenter IV.......... 0 N/A 19,000/76,000 $102,030/$408,120 Craig C. Horton................. 0 N/A 19,000/76,000 $102,030/$408,120 William E. Nixon................ 0 N/A 28,600/28,650 $154,486/$154,544 Alfred B. Lewis................. 0 N/A 0/0
- -------- (1) Based upon the closing price of $8.50 per share for the Company's Common Stock as quoted by Nasdaq--National Market System on December 29, 1995. 37 COMPENSATION OF NON-EMPLOYEE DIRECTORS The Company's stockholders voted to amend the 1991 Stock Option Plan with respect to the compensation of non-employee directors at the March 1995 Special Stockholders Meeting. Effective in March 1995, each non-employee director is granted, at three-year intervals, 19,500 options to purchase Common Stock which vest quarterly, over three years, subject to continued service as a director. Effective in November 1995, the Company's Board of Directors voted to increase the number of options vesting quarterly over three years from 1,625 per quarter to 3,000 per quarter. Mr. Pappajohn and Dr. Egdahl also received options from the Company for other services rendered in 1995. See "Certain Transactions" below. EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE IN CONTROL ARRANGEMENTS The Company entered into an employment agreement with Alfred B. Lewis, effective as of May 17, 1993, pursuant to which the Company agreed to employ Mr. Lewis as the President of the Company. Under the terms of his employment agreement, Mr. Lewis was entitled to receive compensation and fringe benefits provided for thereunder for a period of one year should his employment be terminated by the Company following any change of control of the Company. Mr. Lewis' employment with the Company was terminated on March 27, 1995. Mr. Lewis received severance compensation, including certain fringe benefits, from the Company. The Company entered into an employment agreement with William E. Nixon, the Company's Executive Vice President and Chief Financial Officer, effective as of November 19, 1993, which has an initial one year term and is automatically renewed on an annual basis unless written notice of non-renewal is delivered prior to the scheduled renewal date. Pursuant to the agreement, Mr. Nixon is entitled to receive compensation and fringe benefits for a period of six months if his employment is terminated without cause by the Company, and for a period of nine months if his employment is terminated by the Company within one year of any change of control of the Company. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Leslie Alexandre, Stephen C. Caulfield and John Pappajohn were members of the Board of Directors' Compensation Committee in fiscal 1995. In 1994, Mr. Pappajohn provided additional security for certain loans made by a financial institution to a predecessor of the Company, Core Management, Inc., and in return was granted a warrant to purchase shares of such predecessor's common stock (now shares of the Company's Common Stock pursuant to the Company's merger with Core Management, Inc.). The Board of Directors also has granted Mr. Pappajohn an option to purchase 100,000 shares of the Company's common stock pursuant to a consulting arrangement between Mr. Pappajohn and the Company. See "Certain Transactions." 38 CERTAIN TRANSACTIONS In February 1994, John Pappajohn, formerly a director and shareholder of Core Management, Inc., ("CMI") and a current director and stockholder of the Company, provided a $200,000 letter of credit as additional collateral for CMI's obligations for loans to CMI by Silicon Valley Bank. In August 1994, Mr. Pappajohn provided an additional letter of credit in the amount of $250,000 as further collateral for such loans. In May 1994, Mr. Pappajohn agreed, upon CMI's written request, to contribute $300,000 to CMI in the form of an equity contribution or a subordinated loan. Mr. Pappajohn's obligation for this contribution terminated on March 24, 1995 (the effective date of the CMI/PRA Merger). In connection with a $500,000 line of credit extended by the Company to CMI pursuant to the CMI/PRA Merger, in December, 1994, the Company pledged $210,000 as collateral to Silicon Valley Bank, which replaced the $250,000 letter of credit previously provided to Silicon Valley Bank by Mr. Pappajohn, as described above. In exchange for these pledges and his financial commitment to CMI, the Board of Directors of CMI granted Mr. Pappajohn a warrant to purchase shares of common stock of CMI. Such warrant expires three years from the date of the grant. In connection with the CMI/PRA Merger, the warrant was converted to cover 26,800 shares of Common Stock at an exercise price of $3.36 per share. Pursuant to a consulting arrangement between Mr. Pappajohn and the Company, the Board of Directors granted Mr. Pappajohn an option to purchase 100,000 shares of the Common Stock in April 1995. This option was vested 50% at the date of grant, and became fully vested in April 1996, based upon Mr. Pappajohn's provision of consulting services to the Company during such one- year period. The option has a five-year term and an exercise price of $3.13 per share (the fair market value of the Common Stock as quoted on the Nasdaq National Market System on the date of grant). Prior to the CMI/PRA Merger, George Carpenter and Craig Horton loaned CMI a total of $200,000, which was used as security for CMI's line of credit with Silicon Valley Bank. The loans from Mr. Carpenter and Mr. Horton were made pursuant to unsecured promissory notes which bore interest at a rate of 10% per annum and were paid in full in April 1995. In April 1995, Richard H. Egdahl, a director of the Company, was granted an option for the purchase of 5,000 shares of the Common Stock for services to be rendered with respect to the Company's strategic planning committee. The option has a five-year term and an exercise price of $3.13 per share (the fair market value of the Common Stock as quoted on the Nasdaq National Market System on the date of grant). In March 1996, Stephen Caulfield and John Pappajohn, directors of the Company, were each granted an option to purchase 40,000 shares of the Common Stock for consulting services. The options have a five-year term and an exercise price of $12.25 per share (the fair market value of the Common Stock as quoted on the Nasdaq National Market System on the date of grant). 39 PRINCIPAL STOCKHOLDERS The following table sets forth information regarding the beneficial ownership of the Common Stock as of May 31, 1996 and as adjusted to reflect the sale of shares of Common Stock offered hereby by (i) each person who is known by the Company to own beneficially more than five percent of the Common Stock; (ii) each director of the Company; (iii) each Named Executive Officer; and (iv) all directors and executive officers of the Company as a group. Unless otherwise indicated, the address of the persons listed below is in care of CORE, INC., 18881 Von Karman Avenue, Suite 1750, Irvine, California 92715.
PERCENT OWNED -------------------- SHARES BEFORE THE AFTER THE NAME BENEFICIALLY OWNED (1) OFFERING OFFERING - ---- ---------------------- ---------- --------- Fiduciary Trust Company 545,500(2) 11.3% 8.0% International..................... Two World Trade Center New York, N.Y. 10048 John Pappajohn.................... 471,969(3) 9.4 6.7 Craig C. Horton................... 437,264(4) 8.8 6.3 George C. Carpenter IV............ 401,595(5) 8.1 5.7 James Franklin.................... 293,264 6.1 4.3 6 Downing Circle Downington, Pennsylvania 19335 Richard H. Egdahl, M.D............ 151,826(6) 3.1 2.2 Stephen C. Caulfield.............. 104,776(7) 2.2 1.5 William E. Nixon.................. 81,441(8) 1.7 1.2 Leslie Alexandre.................. 38,575(9) * * All directors and executive 1,792,836(10) 31.6 23.3 officers as a group (9 individuals)......................
- -------- * Less than one percent. (1) Except as otherwise indicated, represents sole voting and investment power. (2) Based on Schedule 13G, dated March 14, 1996. Includes 379,500 shares with shared voting power and 15,000 shares with shared disposition power. (3) Includes 70,200 shares owned by Mr. Pappajohn's wife, 40,200 shares owned by an entity owned by Mr. Pappajohn's wife (Mr. Pappajohn disclaims beneficial ownership of such 110,400 shares); also includes 26,800 shares issuable pursuant to a warrant held by Mr. Pappajohn and 178,575 shares issuable to Mr. Pappajohn pursuant to options (18,000 of which remain subject to future vesting). (4) Includes 1,000 shares held by Mr. Horton as custodian for Mr. Horton's son and 145,000 shares issuable to Mr. Horton pursuant to options (97,000 of which remain subject to future vesting). (5) Includes 145,000 shares issuable to Mr. Carpenter pursuant to options (97,000 of which remain subject to future vesting). (6) Includes 63,075 shares issuable to Dr. Egdahl pursuant to options (18,000 of which remain subject to future vesting). (7) Includes 15,000 shares owned by Mr. Caulfield's wife, 2,500 shares held in a trust for the benefit of Mr. Caulfield's son (Mr. Caulfield disclaims beneficial ownership of such 2,500 shares) and 72,275 shares issuable to Mr. Caulfield pursuant to options (18,000 of which remain subject to future vesting). (8) Includes 81,250 shares issuable to Mr. Nixon pursuant to options (39,200 of which remain subject to future vesting). (9) Includes 38,575 shares issuable to Dr. Alexandre pursuant to options (18,000 of which remain subject to future vesting). (10) Includes 849,550 shares issuable pursuant to a warrant and options (382,000 of which remain subject to future vesting). 40 DESCRIPTION OF CAPITAL STOCK The Company is authorized to issue 10,000,000 shares of Common Stock, par value $0.10 per share, and 500,000 shares of Preferred Stock, no par value. Common Stock. Each holder of Common Stock is entitled to one vote per share on all matters submitted to a vote of stockholders. The holders of Common Stock are entitled to share ratably in such dividends as may be declared by the Board of Directors out of funds legally available therefor, and upon dissolution or liquidation, to share ratably in the net assets available for distribution to stockholders, all subject to any rights of holders of Preferred Stock. Holders of Common Stock have no conversion, preemptive, cumulative voting or subscription rights, and shares of Common Stock are not subject to redemption. The shares of Common Stock presently issued and outstanding are, and the Common Stock to be issued in connection with this offering will be, fully paid and nonassessable. As of May 31, 1996, there were 4,842,271 shares of Common Stock outstanding, held of record by approximately 141 stockholders. Preferred Stock. The Board of Directors is authorized to issue Preferred Stock in one or more series and to designate the number of shares constituting any such series and the terms thereof, including dividend, conversion and voting rights, terms of redemption, liquidation preferences and sinking fund provisions. The purpose of authorizing the Board of Directors to issue Preferred Stock and to determine its rights, terms and preferences is to eliminate delays associated with a stockholder vote on specific issuances. The issuance of Preferred Stock, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from acquiring, a majority of the outstanding voting stock of the Company. No shares of the Company's Preferred Stock have been issued and the Company has no present intention to issue shares of Preferred Stock. Massachusetts Law and Charter and By-Laws Provisions. The Company is subject to the provisions of Chapter 110F of the Massachusetts General Law, an anti- takeover statute. In general, this statute prohibits a publicly-held Massachusetts corporation with sufficient ties to Massachusetts from engaging in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which the person becomes an interested stockholder, unless either (i) the interested stockholder obtains the approval of the Board of Directors prior to becoming an interested stockholder, (ii) the interested stockholder acquires 90% of the outstanding voting stock of the corporation (excluding shares held by certain affiliates of the corporation) at the time he or she becomes an interested stockholder, or (iii) the business combination is approved by both the Board of Directors and two-thirds of the outstanding voting stock of the corporation (excluding shares held by the interested stockholder). For purposes of the statute, an "interested stockholder" is a person who, together with affiliates and associates, owns (or at any time within the prior three years did own) 5% or more of the corporation's voting stock. A "business combination" includes mergers, stock and asset sales and other transactions resulting in a financial benefit to the stockholder. The Company is also subject to Massachusetts General Laws Chapter 110D, entitled "Regulation of Control Share Acquisitions" which provides, in general, that any stockholder of a corporation subject to this statute who acquires 20% or more of the outstanding voting stock of a corporation may not vote such stock unless the stockholders of the corporation so authorize. The Company's restated Articles of Organization provide for the Board to be divided into three classes, as nearly equal in number as possible, serving staggered three-year terms. Under the Company's By-laws, directors may be removed only for cause by a majority of directors or by a majority of shares of the Common Stock outstanding and entitled to vote pursuant to Massachusetts General Law Chapter 156B. Such provisions could 41 have the effect of discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of the Company and could increase the likelihood that incumbent directors will retain their positions. Limitation of Directors' Liability. The Company's Articles of Organization contain provisions limiting the liability of directors to the fullest extent permitted by Massachusetts law as currently or hereinafter in effect. Massachusetts law currently permits the elimination of personal liability of a director for monetary damages for breach of fiduciary duty as a director, notwithstanding any provision of law imposing such liability, except for (i) breach of the director's duty of loyalty to the corporation or its stockholders, (ii) acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) unauthorized distributions to stockholders or loans to insiders or (iv) any transaction from which the director derived an improper personal benefit. Indemnification of Directors and Officers. The Company's Articles of Organization also provide for the indemnification of its officers and directors to the extent legally permissible against all liabilities and expenses (including judgments, fines, penalties and attorneys' fees and, under certain circumstances, all amounts paid in compromise and settlement) reasonably incurred by any officer or director in connection with any action, suit or proceeding in which any such director or officer is a defendant or with which he or she may be threatened or otherwise involved, by reason of his or her being or having been a director or officer of the Company, except in relation to matters as to which such director or officer shall be finally adjudged, other than by consent, in such action, suit or proceeding not to have acted in the best interests of the corporation. Additionally, the Company has purchased a directors and officers insurance policy which, subject to a $250,000 deductible for certain claims, provides $5,000,000 of coverage. The Company has entered into separate indemnification agreements with each of its directors and executive officers providing for indemnification of such persons to the extent permitted by law. Transfer Agent; Registrar and Exchange Agent. The transfer agent and registrar for the Common Stock is State Street Bank and Trust Company, Boston, Massachusetts. SHARES ELIGIBLE FOR FUTURE SALE Future sales of substantial amounts of Common Stock could adversely affect market prices. Upon completion of this offering, the Company will have 6,842,271 shares of Common Stock outstanding. Of these shares, the 2,000,000 shares sold in this offering, the 1,150,000 shares sold in the Company's initial public offering of its Common Stock in 1991, the 1,980,105 shares issued in the CMI/PRA Merger, and 222,916 shares registered on Form S-8 under the Securities Act which were issued as of May 31, 1996, upon the exercise of stock options held by employees, directors or consultants, will be freely transferable without restriction, except for any shares purchased by an existing "affiliate" of the Company ("Affiliate"), as that term is defined in Rule 144 ("Rule 144") promulgated under the Securities Act or shares subject to the Lock-Up Agreement. An additional 314,284 shares of Common Stock have been registered on Form S- 8 under the Securities Act for future sale to employees, directors or consultants upon exercise of stock options. The officers and directors of the Company, collectively holding 959,774 shares of Common Stock, have agreed (the "Lock-Up Agreement") not to offer, sell or otherwise dispose of Common Stock during the 120-day period following the date of this Prospectus, without the prior written consent of Smith Barney Inc. In addition to the employee stock option shares which have been registered on Form S-8, there are 1,221,695 shares subject to outstanding employee or director stock options and warrants, which have not been registered under the Securities Act. Unless these shares are subsequently registered for resale under the Securities Act, they will, upon exercise of the related options, or warrants, be restricted securities within the meaning of Rule 144 ("Restricted Shares"). 42 Sales of shares held by Affiliates, regardless of whether they are Restricted Shares, must be made in compliance with the requirements of Rule 144. In general, under Rule 144 as currently in effect, a person (or persons whose shares are aggregated), who has beneficially owned Restricted Shares for at least two years is entitled to sell within any three-month period a number of shares that does not exceed the greater of: (i) 1% of the then outstanding shares of the Company's Common Stock (approximately 73,422 shares immediately after this offering); or (ii) the average weekly trading volume of the Company's Common Stock in the Nasdaq National Market during the four calendar weeks preceding the date on which notice of the sale is filed with the Commission, or if no notice is required, the date of receipt of the order to execute the transaction. Sales under Rule 144 are also subject to certain manner of sale provisions, notice requirements and the availability of current public information about the Company. Any person (or persons whose shares are aggregated) who is not deemed to be an Affiliate at any time during the 90 days preceding a sale, and who owns Restricted Shares that were purchased from the Company (or any Affiliate) at least three years previously, is entitled to sell such shares under Rule 144(k) (subject to the foregoing Lock-Up Agreement, if applicable) without regard to the volume limitations, manner of sale provisions, public information requirements or notice requirements. The Securities and Exchange Commission has recently proposed amendments to Rule 144 that would permit resales of Restricted Shares under Rule 144 after a one-year rather than a two-year holding period, subject to compliance with the other provisions of Rule 144, and would permit resale of Restricted Shares by non-Affiliates under Rule 144(k) after a two year, rather than a three year, holding period. Adoption of such amendments could result in resales of Restricted Shares sooner than would be the case under Rule 144 as currently in effect. Sales of substantial numbers of the Restricted Shares in the public market could adversely affect the prevailing market price of the Common Stock. 43 UNDERWRITING Under the terms and subject to the conditions contained in the Underwriting Agreement dated the date hereof, each Underwriter named below has severally agreed to purchase, and the Company has agreed to sell to such Underwriter, shares of Common Stock which equal the number of shares set forth opposite the name of such Underwriter named below:
NUMBER OF UNDERWRITER SHARES - ----------- --------- Smith Barney Inc. ............ 620,000 Cowen & Company............... 620,000 Bear, Stearns & Co. Inc. ..... 60,000 Branch, Cabell and Company.... 40,000 Alex. Brown & Sons Incorporat- ed........................... 60,000 The Chicago Corporation....... 40,000 Dain Bosworth Incorporated.... 40,000 Dean Witter Reynolds Inc. .... 60,000 Donaldson, Lufkin & Jenrette Securities Corporation....... 60,000
NUMBER OF UNDERWRITER SHARES - ----------- --------- Hambrecht & Quist LLC......... 60,000 McDonald & Company Securities, Inc. ........................ 40,000 Montgomery Securities......... 60,000 Needham & Company, Inc. ...... 40,000 Piper Jaffray Inc. ........... 40,000 Principal Financial Securi- ties, Inc. .................. 40,000 Raymond James & Associates, Inc. ........................ 40,000 The Robinson-Humphrey Company, Inc. ........................ 40,000 Vector Securities Internation- al, Inc. .................... 40,000 --------- Total....................... 2,000,000 =========
The Underwriters are obligated to take and pay for all shares of Common Stock offered hereby (other than those covered by the over-allotment option described below) if any such shares are taken. The Underwriters, for whom Smith Barney Inc. and Cowen & Company are acting as Representatives, propose initially to offer part of the shares of Common Stock directly to the public at the public offering price set forth on the cover page hereof and part to certain dealers at a price that represents a concession not in excess of $.28 per share under the public offering price. The Underwriters may allow, and such dealers may reallow, a concession not in excess of $.10 per share to other Underwriters or to certain other dealers. After the public offering, the public offering price and such concessions may be changed by the Underwriter. The Company has granted to the Underwriters an option, exercisable for 30 days from the date of this Prospectus, to purchase up to 300,000 additional shares of Common Stock (the "Additional Shares") at the public offering price set forth on the cover page hereof less underwriting discounts and commissions. The Underwriters may exercise such option solely for the purpose of covering over-allotments, if any, incurred in connection with the sale of the shares offered hereby. To the extent such option is exercised, each Underwriter will become obligated, subject to certain conditions, to purchase approximately the same percentage of such Additional Shares as the number of shares set forth next to such Underwriter's name in the preceding table bears to the total number of shares listed in such table. The Company and the Underwriters have agreed to indemnify each other against certain liabilities, including liabilities under the Securities Act. The Company and its directors and officers, holding in the aggregate 959,774 shares of Common Stock, have agreed that, for a period of 120 days after the date of this Prospectus, they will not, without the prior written consent of Smith Barney Inc., offer, sell, contract to sell or otherwise dispose of any shares of Common Stock or any securities convertible into or exercisable or exchangeable for any shares of Common Stock, except, in the case of the Company, in certain limited circumstances. 44 The Underwriters and certain selling group members that currently act as market makers for the Common Stock in accordance with Rule 10b-6A under the Securities Exchange Act of 1934, as amended (the "1934 Act"), may engage in "passive market making" in the Common Stock in accordance with Rule 10b-6A. Rule 10b-6A permits, upon the satisfaction of certain conditions, underwriters and selling group members participating in a distribution that are also market makers in the security being distributed to engage in limited market making transactions during the period when Rule 10b-6 under the Exchange Act would otherwise prohibit such activity. In general, under Rule 10b-6A, any Underwriter or selling group member engaged in passive market making in the Common Stock (i) may not effect transactions in, or display bids for, the Common Stock at a price that exceeds the highest bid for the Common Stock displayed by a market maker that is not participating in the distribution of the Common Stock, (ii) may not have net daily purchases of the Common Stock that exceed 30% of its average daily trading volume in such stock for the two full consecutive calendar months immediately preceding the filing date of the registration statement of which this Prospectus forms a part and (iii) must identify its bids as bids made by a passive market maker. LEGAL MATTERS The validity of the issuance of the shares of Common Stock offered hereby will be passed upon for the Company by Rich, May, Bilodeau & Flaherty, P.C., Boston, Massachusetts. Certain legal matters will be passed upon for the Underwriters by Dewey Ballantine, New York, New York. EXPERTS The consolidated financial statements of CORE, INC. at December 31, 1995 and 1994 and for each of the three years in the period ended December 31, 1995, appearing in this Prospectus and Registration Statement, have been audited by Ernst & Young LLP, independent auditors, as set forth in their report thereon appearing elsewhere herein, and are included in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. AVAILABLE INFORMATION The Company is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith files reports, proxy statements and other information with the Securities and Exchange Commission (the "Commission"). Reports, proxy statements and other information filed by the Company can be inspected and copied at the public reference facilities maintained by the Commission at its principal office at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the regional offices of the Commission: located at Seven World Trade Center, 13th Floor, New York, New York, 10048 and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of all or any part of such material may be obtained from the Public Reference Section of the Commission, Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 upon payment of prescribed fees. The Company's Common Stock is listed on the Nasdaq Stock Market's National Market, and material filed by the Company can be inspected at the offices of the National Association of Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C. 20006. 45 The Company has filed with the Commission a Registration Statement on Form S-1 (together with all amendments and exhibits thereto, the "Registration Statement") under the Securities Act of 1933, as amended, with respect to the Common Stock offered hereby. This Prospectus does not contain all of the information set forth in the Registration Statement, certain portions of which are omitted in accordance with the rules and regulations of the Commission. Statements contained in this Prospectus as to the contents of any contract or other document are not necessarily complete, and in each instance reference is made to the copy of such contract or other document filed or incorporated by reference as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference and the exhibits and the schedules thereto. For further information pertaining to the Company and the Common Stock offered hereby, reference is hereby made to the Registration Statement and the exhibits and schedules thereto which may be inspected without charge and copies thereof may be obtained at prescribed rates from, the Public Reference Branch of the Commission at 450 Fifth Street, N.W. Washington, D.C. 20549. The Company furnishes to its stockholders annual reports containing consolidated financial statements audited by its independent auditors and makes available copies of quarterly reports for the first three quarters of each fiscal year containing unaudited financial information. 46 INDEX TO FINANCIAL STATEMENTS
PAGE ---- FINANCIAL STATEMENTS OF CORE, INC. CORE AUDITED FINANCIAL STATEMENTS Report of Independent Auditors........................................... F-2 Consolidated Balance Sheets--December 31, 1994 and 1995.................. F-3 Consolidated Statements of Operations--Years ended December 31, 1993, 1994 and 1995........................................................... F-4 Consolidated Statements of Stockholders' Equity--Years ended December 31, 1993, 1994 and 1995..................................................... F-5 Consolidated Statements of Cash Flows--Years ended December 31, 1993, 1994 and 1995........................................................... F-6 Notes to Consolidated Financial Statements............................... F-7 CORE UNAUDITED FINANCIAL STATEMENTS Consolidated Condensed Balance Sheet--March 31, 1996..................... F-16 Consolidated Condensed Statements of Operations--Three month periods ended March 31, 1995 and 1996................................................................ F-17 Consolidated Condensed Statements of Cash Flows--Three month periods ended March 31, 1995 and 1996................................................................ F-18 Notes to Consolidated Condensed Financial Statements (unaudited)......... F-19
F-1 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, 1994 and 1995, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements 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, 1994 and 1995, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Boston, Massachusetts February 14, 1996, except for Note 16, as to which the date is July 24, 1996 F-2 CORE, INC. CONSOLIDATED BALANCE SHEETS
DECEMBER 31, -------------------------- 1994 1995 ------------ ------------ ASSETS Current assets: Cash and cash equivalents......................... $ 1,005,807 Cash pledged as collateral........................ $ 205,247 106,000 Customer advances................................. 173,764 286,550 Investments available-for-sale.................... 5,858,518 1,531,610 Accounts receivable, net of allowance for doubtful accounts of $181,629 in 1994 and $170,337 in 1995............................................. 2,082,217 2,987,356 Notes receivable from officers.................... 12,000 35,507 Claims receivable................................. 369,100 44,845 Prepaid expenses and other current assets......... 388,892 455,076 ------------ ------------ Total current assets.............................. 9,089,738 6,452,751 Property and equipment, net........................ 2,526,228 3,155,234 Cash pledged as collateral......................... 557,637 192,000 Deposits and other assets.......................... 142,927 178,402 Goodwill, net of accumulated amortization of $17,000 in 1995................................... 1,929,885 Non-compete contracts, net of accumulated amortiza- tion of $10,000 in 1995........................... 140,000 Customer contracts, net of accumulated amortization of $310,819 in 1994 and $331,063 in 1995.......... 149,181 128,937 Organization costs, net of accumulated amortization of $87,223 in 1994 and $107,563 in 1995........... 38,330 17,990 ------------ ------------ Total assets...................................... $ 12,504,041 $ 12,195,199 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Advances under revolving line of credit........... $ 1,200,000 Cash overdraft.................................... 301,367 Accounts payable.................................. 778,366 $ 846,156 Accrued expenses.................................. 691,777 822,694 Accrued payroll................................... 223,661 184,795 Accrued vacation.................................. 269,000 376,561 Accrued restructuring costs....................... 130,498 Deferred income taxes............................. 68,316 Claims payable.................................... 542,864 326,368 Notes payable to officers......................... 200,000 Current portion of notes payable.................. 184,082 155,994 Current portion of obligations to former shareholders..................................... 298,509 Current portion of capital lease obligations...... 86,479 91,159 ------------ ------------ Total current liabilities......................... 4,477,596 3,301,050 Long-term obligations to former shareholders, net of current portion................................ 645,106 Amounts due to former shareholders under non-com- pete agreements................................... 100,000 Capital lease obligations, net of current portion.. 120,601 71,969 Deferred rent, net of current portion.............. 353,151 279,317 Deferred income taxes.............................. 149,500 Commitments and contingencies Stockholders' equity: Preferred stock, no par value, authorized 500,000 shares; no shares issued and outstanding Common stock, $0.10 par value per share; authorized 10,000,000 shares; issued and outstanding 4,739,943 and 4,794,403 shares at December 31, 1994 and 1995, respectively......... 473,994 479,440 Additional paid-in capital........................ 17,902,519 18,052,547 Deferred compensation............................. (51,120) Cumulative unrealized gain (loss) on investments available-for-sale............................... (39,408) 30,975 Accumulated deficit............................... (10,784,412) (10,863,585) ------------ ------------ Total stockholders' equity........................ 7,552,693 7,648,257 ------------ ------------ Total liabilities and stockholders' equity........ $ 12,504,041 $ 12,195,199 ============ ============
See accompanying notes. F-3 CORE, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, ------------------------------------- 1993 1994 1995 ----------- ----------- ----------- Revenues................................ $16,316,016 $16,746,290 $20,768,521 Cost of services........................ 10,713,523 11,305,323 12,838,971 ----------- ----------- ----------- Gross profit............................ 5,602,493 5,440,967 7,929,550 Operating expenses: General and administrative............ 5,028,868 4,182,206 4,772,863 Sales and marketing................... 1,786,820 1,562,823 1,499,120 Restructuring costs................... 557,515 Merger costs and expenses............. 1,182,373 1,114,406 436,104 Provision for doubtful accounts....... 67,245 83,050 14,375 Depreciation and amortization......... 1,066,900 914,480 904,900 Corporate relocation.................. 163,340 Write-off of goodwill................. 2,294,150 ----------- ----------- ----------- Total operating expenses............ 9,295,546 10,151,115 8,184,877 Loss from operations.................... (3,693,053) (4,710,148) (255,327) Other income (expense): Interest income....................... 396,528 296,218 239,590 Interest expense...................... (108,336) (158,362) (83,410) Realized gain (loss) on sale of in- vestments available-for-sale......... (157,774) 9,123 Other income.......................... 29,284 30,480 10,851 ----------- ----------- ----------- 317,476 10,562 176,154 ----------- ----------- ----------- Net loss................................ $(3,375,577) $(4,699,586) $ (79,173) =========== =========== =========== Net loss per common share............... $ (.73) $ (1.01) $ (0.02) =========== =========== =========== Weighted average number of common shares outstanding............................ 4,611,000 4,668,000 4,755,000 =========== =========== ===========
See accompanying notes. F-4 CORE, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK ADDITIONAL DEFERRED STOCK UNREALIZED TOTAL ------------------- PAID-IN COMPEN- SUBSCRIPTIONS GAIN (LOSS) ACCUMULATED STOCKHOLDERS' SHARES AMOUNT CAPITAL SATION RECEIVABLE INVESTMENTS DEFICIT EQUITY --------- -------- ----------- -------- ------------- ----------- ------------ ------------- Balance at December 31, 1992................... 4,517,628 $451,763 $17,214,792 $(3,312,500) $ (2,709,249) $11,644,806 Exercise of stock options (net of dissenter's rights for 496 shares)........... 123,573 12,357 313,777 326,134 Stock subscription paid.................. 3,312,500 3,312,500 Payments to repurchase common stock.......... (556) (56) (1,196) (1,252) Stockholders' contribution.......... 330,000 330,000 Net loss............... (3,375,577) (3,375,577) --------- -------- ----------- -------- ----------- -------- ------------ ----------- Balance at December 31, 1993................... 4,640,645 464,064 17,857,373 (6,084,826) 12,236,611 Exercise of stock options............... 99,298 9,930 45,146 55,076 Unrealized loss on investments available- for-sale.............. $(39,408) (39,408) Net loss............... (4,699,586) (4,699,586) --------- -------- ----------- -------- ----------- -------- ------------ ----------- Balance at December 31, 1994................... 4,739,943 473,994 17,902,519 (39,408) (10,784,412) 7,552,693 Exercise of stock options............... 54,460 5,446 85,628 91,074 Deferred compensation related to stock options issued........ 64,400 $(64,400) Amortization of deferred compensation.......... 13,280 13,280 Unrealized gain on investments available- for-sale.............. 70,383 70,383 Net loss............... (79,173) (79,173) --------- -------- ----------- -------- ----------- -------- ------------ ----------- Balance at December 31, 1995................... 4,794,403 $479,440 $18,052,547 $(51,120) $ -- $ 30,975 $(10,863,585) $ 7,648,257 ========= ======== =========== ======== =========== ======== ============ ===========
See accompanying notes. F-5 CORE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, ------------------------------------- 1993 1994 1995 ----------- ----------- ----------- Operating activities: Net loss............................... $(3,375,577) $(4,699,586) $ (79,173) Adjustments to reconcile net loss to net cash provided by (used in) operat- ing activities: Depreciation and amortization........ 1,066,900 979,627 986,152 Write-off of goodwill................ 2,294,150 Provision for doubtful accounts...... 67,245 83,050 14,375 (Gain) loss on sale/disposal of equipment........................... 66,382 (29,174) Realized loss on permanent decline in fair market value of investments.... 157,774 Realized gain on sale of investments available-for-sale.................. (9,123) Compensation expense related to issu- ance of stock options............... 409,345 28,078 13,280 Changes in operating assets and lia- bilities: (Increase) decrease in accounts re- ceivable.......................... 400,033 (446,157) 258,269 (Increase) decrease in prepaid ex- penses and other current assets... 185,625 (72,045) 277,357 Increase in customer advances...... (47,764) (112,786) (Decrease) increase in cash over- draft............................. (101,384) 301,367 (301,367) Decrease in accounts payable and accrued expenses.................. (733,914) (514,692) (607,675) ----------- ----------- ----------- Net cash provided by (used in) operat- ing activities........................ (2,063,109) (1,917,608) 439,309 Investing activities: Additions to property and equipment... (2,257,260) (539,521) (1,278,720) Disposals of property and equipment... 6,400 2,432 4,688 Decrease (increase) in cash pledged as collateral........................... (466,069) (296,815) 464,884 Refunds of (additions to) deposits.... (43,439) 23,168 (19,056) Increase to notes receivable from of- ficers............................... (12,000) (23,507) Cash received upon business acquisi- tion, net of cash paid............... 279,713 Non-compete payments.................. (50,000) Purchase of Cost Review Services, Inc., net of cash acquired........... (1,510,024) Purchases of investments available- for-sale............................. (317,570) (248,204) (3,985,892) Sales of investments available-for- sale................................. 4,204,434 8,392,306 ----------- ----------- ----------- Net cash provided by (used in) invest- ing activities........................ 1,406,209 (1,070,940) 1,994,679 Financing activities: Net (repayments) borrowings under re- volving line of credit............... (1,210,654) 1,200,000 (1,200,000) Proceeds from issuance of officer's notes................................ 200,000 Payments on officer's notes........... (200,000) Issuance of notes payable............. 59,022 133,754 179,997 Payments on notes payable............. (59,022) (199,373) (208,085) Payments on capital lease obliga- tions................................ (69,038) (56,319) (91,167) Payments to repurchase stock.......... (1,252) Receipt of stock subscription......... 3,312,500 Exercise of dissenters' rights........ (1,043) Issuance of common stock upon exercise of stock options and warrants........ 262,177 26,998 91,074 ----------- ----------- ----------- Net cash (used in) provided by financ- ing activities........................ 2,292,690 1,305,060 (1,428,181) ----------- ----------- ----------- Net increase (decrease) in cash and cash equivalents...................... 1,635,790 (1,683,488) 1,005,807 Cash and cash equivalents at beginning of year............................... 47,698 1,683,488 -- ----------- ----------- ----------- Cash and cash equivalents at end of year.................................. $ 1,683,488 $ -- $ 1,005,807 =========== =========== =========== Supplemental disclosure of cash flow information: Interest paid.......................... $ 72,307 $ 147,543 $ 83,322 =========== =========== =========== Income taxes paid...................... $ 1,900 =========== Noncash investing activities: Capital lease obligation incurred...... $ 25,266 ===========
See accompanying notes. F-6 CORE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1995 (1) ORGANIZATION AND PURPOSE CORE, INC. ("CORE" or the "Company") is a national provider of disability and workers' compensation management services, physician-intensive health care cost containment and health care utilization management services and programs to large employers, commercial health and accident insurance companies, third- party administrators of health insurance programs, self-insured employers and other groups. On March 24, 1995, the Company issued approximately 1,928,000 shares of its common stock in exchange for all of the outstanding common stock of Core Management, Inc. ("CMI"). In addition, outstanding employee stock options to purchase CMI stock were converted into options to purchase approximately 160,000 shares of CORE. CMI is an independent provider of disability, medical and behavioral health services which are designed to help its clients monitor and control health care, workers' compensation and disability costs incurred both in the aggregate and on a case by case basis without sacrificing the quality of care or services available to patients. The merger has been accounted for as a pooling of interests and accordingly, the Company's consolidated financial statements have been restated to include the accounts and operations of CMI for all periods prior to the merger. In connection with the merger, the Company adopted a plan to restructure management to eliminate redundant positions and to abandon excess lease space. In connection with certain elements of the restructuring plan, the Company recorded a restructuring charge of $557,515 which included approximately $438,000 for severance costs and $120,000 for abandoned lease space. The restructuring charge was added to an existing accrual for severance costs of approximately $58,000 as of December 31, 1994. In accordance with Emerging Issues Task Force Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring), prior period financials were not restated. The restructuring plan eliminated 11 employees in the regional operations, general and administrative, sales and marketing and account management departments. During 1995, severance payments charged against the liability for 10 terminated employees amounted to approximately $424,000 and lease payments for abandoned lease space charged against the liability amounted to $120,000. Of the initial restructuring charges, approximately $72,000 of severance payments remained in accrued restructuring costs at December 31, 1995. Separate net sales, net income and related per share amounts of the merged entities are presented in the following table. In addition, the table includes pro forma net income and net income per share amounts which reflect the elimination of the nonrecurring merger costs and expenses in 1993, 1994 and 1995.
1993 1994 1995 ----------- ----------- ----------- Net sales: CORE............................. $ 7,627,283 $ 7,959,834 $10,401,801 CMI.............................. 8,688,733 8,786,456 10,366,720 ----------- ----------- ----------- Total net sales................ $16,316,016 $16,746,290 $20,768,521 =========== =========== =========== Net income (loss): CORE............................. $(1,080,759) $ (691,185) $ 1,046,258 CMI.............................. (1,112,445) (2,893,995) (131,812) ----------- ----------- ----------- Pro forma net income (loss)........ (2,193,204) (3,585,180) 914,446 Merger cost and expenses........... 1,182,373 1,114,406 993,619 ----------- ----------- ----------- Net loss as reported............... $(3,375,577) $(4,699,586) $ (79,173) =========== =========== =========== Net income (loss) per share Pro forma........................ $(0.48) $(0.77) $ 0.19 =========== =========== =========== As reported...................... $(0.73) $(1.01) $(0.02) =========== =========== ===========
F-7 CORE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) On October 2, 1995, the Company acquired all of the outstanding shares of Cost Review Services, Inc. ("CRS") for approximately $2,790,000 payable in cash plus contingent consideration. CRS provides workers' compensation medical cost containment and case management services and programs to commercial workers' compensation insurance companies and third-party administrators of workers' compensation programs. The acquisition was accounted for as a purchase and the acquisition cost consisted of the following: Cash paid to former CRS shareholders........ $1,640,000 Issuance of notes payable to former CRS shareholders............................... 1,150,000 Acquisition costs incurred.................. 200,000 ---------- $2,990,000 ==========
The contingent consideration of $1,150,000 is payable in cash and will be computed based on agreed upon net revenue targets from January 1996 through December 1998, and is subject to downward adjustment based on certain earnings before interest and taxes percentages. The contingent consideration will be payable beginning in March 1997. The contingent consideration is not included in the acquisition cost total above and will be accounted for as period expense when the future earnings requirements have been met. The purchase resulted in goodwill of approximately $1,950,000 which is being amortized on a straight-line basis over 27.5 years. Amortization of goodwill during 1995 amounted to $17,000. The notes due to the CRS shareholders include imputed interest and are payable on a monthly basis commencing in January 1996 and continue through 1998. The Company also agreed to pay the former CRS shareholders $150,000 in installments of $50,000 in 1995, 1997 and 1998 in exchange for covenants not-to-compete. These payments are being amortized over the three year term of the agreements. Acquisition costs include $100,000 pertaining to administrative costs and $100,000 pertaining to restructure costs. In connection with the purchase, the Company adopted a plan to restructure the accounting and administrative departments of CRS and consolidate the functions within the Company's Boston, Massachusetts office. In connection with certain elements of the restructuring plan, the Company adjusted its purchase price by $100,000 to reflect an accrual for facility consolidation costs of $25,000 and severance costs of $75,000. The restructuring plan eliminated 4 employees in the accounting and administrative departments. During 1995, severance payments charged against the liability for the employees amounted to approximately $42,000. Of the initial restructuring charges, $33,000 of severance payments and $25,000 for payments on abandoned lease space remained in accrued restructuring costs at December 31, 1995. The consolidated financial statements include the operating results of CRS from the date of acquisition. The following pro forma information has been prepared assuming that this acquisition had taken place at the beginning of 1994. The proforma information includes adjustments of $57,000 for interest expense that would have been incurred to finance the purchase, $92,000 to decrease interest income due to having fewer dollars to invest as a result of the purchase, $54,000 for the amortization of intangibles arising from the transaction and $138,000 to eliminate the provision for income taxes due to the filing of a consolidated tax return. Such pro forma amounts are not necessarily indicative of what the actual consolidated results of operations might have been if the acquisition had been effective at the beginning of fiscal 1994.
YEAR ENDED DECEMBER 31, ------------------------ 1994 1995 ----------- ----------- Net sales.................... $20,680,000 $24,847,000 Net earnings (loss).......... $(4,670,000) $ 338,000 Net earnings (loss) per common share................ $ (1.00) $ 0.07
F-8 CORE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (2) 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 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 trade receivables. 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 represents the investment of excess cash in treasury securities issued by the United States Government. The Company provides its services to companies throughout the United States in various industries, including, but not limited to the healthcare industry. Management does not believe significant credit risk exists at December 31, 1995. 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. INVESTMENTS Effective January 1, 1994, the Company adopted Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities." The adoption of Statement No. 115 had no material effect on the Company's financial position at January 1, 1994 as all investments at that date were recorded at cost which approximated market value. Under the new rules, 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 shareholder's equity. 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 Leasehold improvements are depreciated using the straight-line method. Computer equipment is depreciated using the 150% declining balance method. For office furniture and equipment placed in service prior to fiscal 1993, depreciation is computed using the 150% declining balance method. Effective January 1, 1993, the Company began depreciating newly-acquired office furniture and equipment using the straight-line method. The effect of the change was not material to the 1993 financial results. The estimated useful lives of the related assets are as follows: Computer and office equipment.............. 3-7 years Software................ 3-5 years Furniture and fixtures.. 7 years Leasehold improvements.. Shorter of lease term or estimated useful life
F-9 CORE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) SOFTWARE DEVELOPMENT COSTS Certain costs of software, developed for internal use, are capitalized subsequent to the favorable assessment of technological feasibility. Costs incurred for maintenance and customer support are charged to expense as incurred. The Company capitalized software development costs of $130,471 and $180,000 during the years ended December 31, 1994 and 1995 respectively. The software was placed in use during 1994 and 1995, and amortization in the amount of $65,147, and $81,252 is included in cost of services for the years ended December 31, 1994 and 1995, respectively. Software development costs are amortized using the straight-line method. GOODWILL, CUSTOMER CONTRACTS AND ORGANIZATION COSTS Customer contracts and organization costs are amortized using the straight line method over ten years and five years, respectively. 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. REVENUE RECOGNITION Revenue is recognized on a capitated (fixed per employee per month), hourly or per case basis, in accordance with the specific terms of each contract. Typically, revenue is recognized during the contract period as services are provided. Licensing fees are primarily based on use by the customer and are recognized as revenue when they are earned. Deferred revenue represents amounts received on contracts in advance of services being performed. The majority of the contracts with clients permit cancellation upon 60 to 90 days' notice. INCOME TAXES The Company provides for income taxes under the liability method prescribed by Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." 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. LOSS PER COMMON SHARE Loss per common share data are computed using the weighted average number of shares of common stock outstanding and dilutive common equivalent shares from stock options, using the treasury stock method. (3) CASH MANAGEMENT SYSTEM Daily, under the Company's cash management system, the bank notifies the Company of checks presented for payment against imprest operating accounts. The Company utilizes available funds and, if necessary, transfers funds from other sources, such as short-term investments or available lines of credit, to cover the checks presented for payment. At December 31, 1994, the Company reflects a book cash overdraft as a result of the checks outstanding. F-10 CORE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (4) INVESTMENTS At December 31, 1994 and 1995, the Company had no securities that qualified as trading or held-to- maturity. The following is a summary of available-for- sale securities at December 31, 1994 and 1995:
UNREALIZED REALIZED AMORTIZED GAIN GAIN ESTIMATED COST (LOSS) (LOSS) FAIR VALUE ---------- ---------- --------- ---------- December 31, 1994: Fund investing in U.S. Treasury Securities...... $6,055,700 $(39,408) $(157,774) $5,858,518 December 31, 1995: U.S. Treasury Securities maturing in 1 to 5 years.................... $1,500,635 $ 30,975 $ 9,123 $1,531,610
For the year ended December 31, 1994, no sales were made of available-for- sale securities. Subsequent to December 31, 1994, the Company sold available- for-sale securities with a fair value on the date of sale of $5,750,000. The realized loss of $157,774 on this sale has been recognized in the financial statements for the year ended December 31, 1994 as the decline in market value has been determined to be a permanent decline in value. The net unrealized loss on available-for-sale securities of $39,408 has been included as a separate component of stockholders' equity as of December 31, 1994. During 1994, the Company had purchases and maturities of held-to-maturity securities of approximately $10.1 million which were considered to be cash equivalents and thus excluded from the statement of cash flows for the year ended December 31, 1994. For the year ended December 31, 1995, the Company sold available-for-sale securities with a fair value on the date of sale of $8,392,306 (including securities with a fair market value of $5,750,000 discussed below). The cost of available-for-sale investments that were sold was based on specific identification in determining realized gains and losses. The realized gain of $9,123 on these sales has been recognized in the financial statements for the year ended December 31, 1995. The net unrealized gain on available-for-sale securities of $30,975 has been included as a separate component of stockholders' equity as of December 31, 1995. (5) CLAIMS RECEIVABLE AND CLAIMS PAYABLE Claims receivable and claims payable include claims processed by the Company but not yet billed to the Company's customers and estimated services provided by the Company's provider network for which claims have not yet been submitted to the Company or rebilled to the Company's customers. The Company has estimated provider service costs incurred based upon its provider service cost experience to date and current rate schedules negotiated with its provider network. At December 31, 1994, and 1995, the Company held customer advances of $173,764 and $286,550, respectively, representing monies received to pay provider claims on behalf of certain customers. (6) PROPERTY AND EQUIPMENT Property and equipment consist of the following at December 31:
1994 1995 ----------- ----------- Computer and office equipment................. $ 2,718,929 $ 3,353,569 Software...................................... 1,216,160 1,532,061 Furniture and fixtures........................ 538,986 932,619 Leasehold improvements........................ 905,883 1,109,122 ----------- ----------- 5,379,958 6,927,371 Less accumulated depreciation and amortiza- tion......................................... (2,853,730) (3,772,137) ----------- ----------- $ 2,526,228 $ 3,155,234 =========== ===========
F-11 CORE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (7) ADVANCES UNDER REVOLVING LINE OF CREDIT AND LETTERS OF CREDIT In November 1995, the Company obtained a $1,500,000 revolving line of credit with a bank, which expires on December 31, 1996. There was no outstanding balance as of December 31, 1995. Interest is payable at a rate of prime plus 1% (9.5% at December 31, 1995). In the first quarter of 1996, the Company's line of credit facility was increased to $2,500,000. In May 1995, the Company entered into an arrangement with a bank whereby the bank would issue letters of credit amounting to $283,000 on behalf of the Company. These letters of credit are to be maintained as security for payments under a furniture lease agreement and an office space lease agreement. (8) NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS
1994 1995 --------- ---------- Capital lease obligations, payable to various leasing companies, bearing interest rates ranging from 9% to 16.83%, including interest............................ $ 207,080 $ 163,128 Notes payable to officers, paid in full during 1995.... 200,000 Note payable to seller pursuant to an asset acquisi- tion, paid in full during 1995........................ 44,424 Notes payable to former shareholders................... 943,615 Other--insurance financing............................. 139,657 155,994 --------- ---------- 591,161 1,262,737 Less current maturities................................ (470,560) (545,662) --------- ---------- $ 120,601 $ 717,075 ========= ==========
The fair value of notes payable and capital lease obligations approximates the carrying value. Principal maturities of notes payable, capital lease obligations, and acquisition price payable are as follows:
1996.......................................................... $ 641,562 1997.......................................................... 438,006 1998.......................................................... 366,177 1999.......................................................... 4,963 ---------- 1,450,708 Less imputed interest......................................... (187,971) ---------- Present value of obligations.................................. $1,262,737 ==========
The Company has recorded the balance of the notes payable insurance financing of $110,290 and $155,994 at December 31, 1994 and 1995, respectively, as prepaid expenses; therefore, these amounts have been excluded from the operating and financing activities disclosed in the statement of cash flows for the year ended December 31, 1994 and 1995. (9) COMMON STOCK WARRANTS In connection with the Company's initial public offering in 1991, a warrant to purchase 11,500 shares of common stock was issued to the Company's underwriter with an exercise price of $12.60 per share and an expiration date of June 12, 1995. On June 12, 1995, the warrant expired. (10) STOCK OPTIONS PLANS The Company has reserved 737,500 shares of common stock for issuance under stock option plans established in 1986 and 1991. The Company has also granted 524,536 non-plan stock options (including grants for the converted CMI options discussed in Note 1) of which 58,000, 68,000 and 110,944 have been exercised as of December 31, 1993, 1994 and 1995, respectively. Other than the remaining 413,592 non-plan stock options F-12 CORE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) outstanding at December 31, 1995 no shares have been reserved for non-plan stock options. Plan and non-plan stock options granted to employees and directors are summarized as follows:
DECEMBER 31, ---------------------------------------- 1993 1994 1995 ------------ ------------ ------------ Outstanding at beginning of year..... 449,598 441,315 377,038 Granted............................ 143,086 68,552 1,004,509 Canceled........................... (27,300) (33,531) (59,234) Exercised.......................... (124,069) (99,298) (54,460) ------------ ------------ ------------ Outstanding at end of year........... 441,315 377,038 1,267,853 ============ ============ ============ Price range of outstanding options... $0.11-$15.24 $0.11-$15.24 $2.10-$12.08 ============ ============ ============ Price range of options exercised..... $0.11-$ 4.50 $0.11-$ 3.73 $0.11-$ 4.80 ============ ============ ============ Exercisable at end of year........... 368,565 307,938 594,925 ============ ============ ============ Available for grant at end of year... 246,248 232,348 -- ============ ============ ============
Stock options will expire on various dates through December 2001. (11) INCOME TAXES The approximate effect of temporary differences and carryforwards that give rise to deferred tax assets and liabilities as of December 31 are as follows:
1994 1995 ----------- ----------- Deferred tax assets: Bad debt reserve............................... $ 73,000 $ 69,000 Expense accruals............................... 217,000 264,000 Unrealized loss on investments................. 63,000 Net operating loss carryforwards............... 3,060,000 2,860,000 Valuation allowance............................ (3,294,000) (3,078,000) ----------- ----------- 119,000 115,000 Deferred tax liabilities: Change in accounting method from cash to accru- al............................................ (40,000) (204,000) Depreciation................................... (79,000) (129,000) ----------- ----------- (119,000) (333,000) ----------- ----------- Net deferred tax liability....................... $ -- $ (218,000) =========== ===========
At December 31, 1995, the Company has available for federal and state income tax purposes NOL carryforwards of approximately $9 million which expire through 2010. The amount of NOL carryforwards that can be utilized in any future year may be limited due to "equity structure shifts" and "owner shifts" 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 Code of 1986 and similar state provisions. During 1992, the Company changed from the cash receipts and disbursements method to the accrual method of accounting for federal income taxes. As such, the excess of accrual basis income over cash basis income earned in prior years of $400,000 was taxable over the four year period ended December 31, 1995. State excise taxes have been included in general and administrative expenses in the consolidated statements of operations. F-13 CORE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The following is a summary of the items which cause the effective federal tax expense to differ from the statutory federal tax expense:
YEAR ENDED DECEMBER 31, ----------------------------------- 1993 1994 1995 ----------- ----------- --------- Statutory federal tax (benefit)....... $(1,148,000) $(1,598,000) $ (27,000) State income taxes, net of federal benefit.............................. (212,000) (296,000) (3,000) Effect of nondeductible reorganization costs................................ 480,000 381,000 404,000 Effect of goodwill write-off.......... 780,000 Other................................. 23,000 (126,000) Effect (utilization) of net operating loss carryforward.................... 880,000 710,000 (248,000) ----------- ----------- --------- Effective federal tax................. $ -- $ -- $ -- =========== =========== =========
(12) LEASES The Company leases its facilities and certain office equipment under noncancelable operating leases which expire at various dates through December 2001. The terms of the lease agreements at the Boston location, scheduled to expire in May 2000, and the Irvine location, scheduled to expire in September 2000 include base rent increases over the term of the leases and an option 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, Burlington and Los Angeles 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, 1995, future minimum annual rental commitments under all of the lease agreements described above are as follows: 1996........................................ $1,475,480 1997........................................ 1,274,170 1998........................................ 1,089,953 1999........................................ 935,885 2000........................................ 644,703 Thereafter.................................. 278,712 ---------- $5,698,903 ==========
Total rent expense amounted to $1,119,963, $1,039,283 and $1,199,153 for the years ended December 31, 1993, 1994 and 1995, respectively. (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 funding for CORE's WorkAbility software was provided by Chrysler Corporation in exchange for a perpetual license to use such software and repayment of 140% of the development costs (approximately $2.8 million). The agreement states that repayment of such development costs is contingent upon CORE's collection of certain licensing fees. During 1994 and 1995, licensing fees of $156,000 and $37,000, respectively, were collected. No licensing fees were earned prior to 1994. Royalties of $7,720 are accrued and payable to Chrysler at December 31, 1995. No payments of royalties were made during 1994 or 1995. F-14 CORE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 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, 1993, 1994 and 1995 were $32,525, and $23,229 and $54,017, respectively, and are included in general and administrative expenses in the accompanying statements of operations. (14) RELATED PARTIES The notes receivable from officers are due in February and April, 1996 and accrue interest at current market rates. (15) SIGNIFICANT CUSTOMERS The Company has a contract with a major customer which accounted for approximately 13% and 12% of total revenues for the years ended December 31, 1993 and 1994, respectively. No other client represented 10% or more of revenue during these periods or the period ended December 31, 1995. (16) SUBSEQUENT EVENT In January 1996, CORE signed a letter of intent to acquire a majority of the assets of AmHealth, Inc. ("AmHealth"), a management services organization that manages nine occupational health clinics in Southern and Northern California with a net book value of approximately $1,750,000. The proposed transaction is subject to satisfactory completion of due diligence, negotiation of a definitive agreement, and satisfaction of other conditions. As part of the proposed transaction, CORE has agreed to guarantee or provide lines of credit to AmHealth totaling up to $1,000,000 for working capital purposes and additionally up to $500,000 for capital investment purposes. AmHealth's use of funds under this line of credit agreement is subject to CORE's approval. In connection with the guarantee of debt and the line of credit, AmHealth granted CORE acceptable security interests in AmHealth assets. To date, under this agreement CORE has provided $1,000,000 to AmHealth. Interest on this line accrues at prime plus 2%. There were no amounts outstanding under this agreement at December 31, 1995. On May 10, 1996, the Company entered into an Asset Purchase Agreement (the "AmHealth Agreement") to acquire substantially all of the assets (excluding accounts receivable) and operations of AmHealth. On July 24, 1996, the Company terminated the AmHealth Agreement. As a result of this termination, the Company expects to incur a charge to earnings during the three months ending September 30, 1996, which is preliminarily estimated to be between $500,000 and $1,000,000 in connection with transaction costs incurred subsequent to December 31, 1995. In addition, the Company intends to write-off, during the three months ending September 30, 1996, a $1,000,000 loan it made to AmHealth subsequent to December 31, 1995, because there is currently substantial doubt about AmHealth's ability to repay the loan. (17) FOURTH QUARTER ADJUSTMENTS (UNAUDITED) During the fourth quarters of 1993 and 1994, the Company recognized the following unusual or infrequently occurring items:
1993 1994 -------- -------- Reorganization costs..................................... $385,645 $335,423 Realized loss on permanent decline in fair market value of investments.......................................... 157,774 Severance accrual........................................ 57,130 Increase in allowance for doubtful accounts.............. 50,000 -------- -------- $385,645 $600,327 ======== ========
There were no unusual or infrequently occurring items during the fourth quarter of 1995. F-15 CORE, INC. CONSOLIDATED CONDENSED BALANCE SHEET (UNAUDITED)
MARCH 31, 1996 ------------ ASSETS Current assets: Cash and cash equivalents...................................... $ 18,332 Cash pledged as collateral..................................... 45,500 Customer advances.............................................. 286,550 Investments available-for-sale................................. 437,009 Accounts receivable, net of allowance for doubtful accounts of $170,337...................................................... 4,301,040 Notes receivable from officers................................. 36,169 Notes receivable from affiliates............................... 1,041,450 Prepaid expenses and other current assets...................... 495,743 ------------ Total current assets......................................... 6,661,793 Property and equipment, net...................................... 3,527,849 Cash pledged as collateral....................................... 192,000 Deposits and other assets........................................ 298,479 Goodwill, net of accumulated amortization of $34,600............. 1,918,780 Intangibles, net................................................. 266,781 ------------ Total assets................................................. $ 12,865,682 ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable............................................... $ 1,252,284 Accrued expenses............................................... 1,416,499 Accrued payroll................................................ 455,343 Accrued restructuring costs.................................... 59,698 Deferred income taxes.......................................... 68,316 Current portion of notes payable............................... 91,995 Current portion of obligations to former shareholders.......... 384,484 Current portion of capital lease obligations................... 82,894 ------------ Total current liabilities.................................... 3,811,513 Long-term obligations to former shareholders, net of current portion......................................................... 366,824 Capital lease obligations, net of current portion................ 59,889 Deferred rent, net of current portion............................ 264,622 Deferred income taxes............................................ 149,500 Stockholders' equity: Preferred stock, no par value, authorized 500,000 shares; no shares issued and outstanding................................. Common stock, $0.10 par value per share; authorized 10,000,000 shares; issued and outstanding 4,815,781 shares............... 481,578 Additional paid-in capital..................................... 18,104,718 Deferred compensation.......................................... (51,120) Cumulative unrealized gain on investments available-for-sale... 6,778 Accumulated deficit............................................ (10,328,620) ------------ Total stockholders' equity................................... 8,213,334 ------------ Total liabilities and stockholders' equity................... $ 12,865,682 ============
See accompanying notes. F-16 CORE, INC. CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, ----------------------- 1995 1996 ----------- ---------- Revenues.............................................. $ 4,728,653 $6,583,562 Cost of services...................................... 3,116,938 3,938,910 ----------- ---------- Gross profit.......................................... 1,611,715 2,644,652 Operating expenses: General and administrative.......................... 1,190,608 1,403,074 Sales and marketing................................. 382,033 470,234 Restructuring costs................................. 557,515 Merger costs and expenses........................... 427,950 Depreciation and amortization....................... 232,562 277,911 ----------- ---------- Total operating expenses.......................... 2,790,668 2,151,219 Income (loss) from operations......................... (1,178,953) 493,433 Other income (expense): Interest income..................................... 77,483 45,366 Interest expense.................................... (51,339) (18,451) Realized gain (loss) on sale of investments available-for-sale................................. (1,663) 14,617 Other income........................................ 2,760 ----------- ---------- 27,241 41,532 ----------- ---------- Net income (loss)..................................... $(1,151,712) $ 534,965 =========== ========== Net income (loss) per common share.................... $ (0.24) $ 0.10 =========== ========== Weighted average number of common shares outstanding.. 4,739,930 5,532,000 =========== ==========
See accompanying notes. F-17 CORE, INC. CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, ------------------------ 1995 1996 ----------- ----------- OPERATING ACTIVITIES Net income (loss)................................... $(1,151,712) $ 534,965 Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation and amortization..................... 250,963 300,006 Provision for doubtful accounts................... 15,000 Realized gain on sale of investments available- for-sale......................................... (14,617) Decrease in obligations to former shareholders.... (134,000) Changes in operating assets and liabilities: Increase in accounts receivable................. (187,085) (1,313,684) Decrease in prepaid expenses and other current assets......................................... 145,679 4,178 Decrease in cash overdraft...................... (301,367) Increase in accounts payable and accrued expenses....................................... 581,843 482,057 ----------- ----------- Net cash used in operating activities............... (646,679) (141,095) INVESTING ACTIVITIES Additions to property and equipment................. (186,719) (634,875) Additions to goodwill............................... (6,495) Decrease (increase) in cash pledged as collateral... (167,098) 60,500 Increase to notes receivable from officers.......... (662) Advances to affiliates.............................. (1,041,450) Increase in deposits and other assets............... (120,077) Purchases of investments available-for-sale......... (3,989,302) Sales of investments available-for-sale............. 7,879,679 1,085,021 ----------- ----------- Net cash provided by (used in) investing activities......................................... 3,536,560 (658,038) FINANCING ACTIVITIES Net repayments under revolving line of credit....... (1,200,000) Payments on officers' notes payable................. (200,000) Payments on notes payable........................... (92,454) (63,999) Payments on capital lease obligations............... (21,175) (20,345) Payments on obligations to former shareholders...... (158,307) Issuance of common stock upon exercise of stock options and warrants............................... 54,309 ----------- ----------- Net cash used in financing activities............... (1,513,629) (188,342) ----------- ----------- Net increase (decrease) in cash and cash equivalents........................................ 1,376,252 (987,475) Cash and cash equivalents at beginning of period.... -- 1,005,807 ----------- ----------- Cash and cash equivalents at end of period.......... $ 1,376,252 $ 18,332 =========== =========== Supplemental disclosure of cash flow information.... Interest paid....................................... $ 54,354 $ 45,603 =========== ===========
See accompanying notes. F-18 CORE, INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) MARCH 31, 1996 (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. 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 three-month period ended March 31, 1996 are not necessarily indicative of the results that may be expected for the year ended December 31, 1996. For further information, refer to the consolidated financial statements for the year ended December 31, 1995 contained in the Company's annual report filed on Form 10-K (File #0-19600) with the Securities and Exchange Commission on April 1, 1996. (2) INVESTMENTS At March 31, 1996, the Company had no securities that qualified as trading or held-to-maturity. The following is a summary of available-for-sale securities at March 31, 1996:
AMORTIZED UNREALIZED ESTIMATED COST GAIN FAIR VALUE --------- ---------- ---------- U.S. Treasury Securities $430,231 $6,778 $437,009
For the three months ended March 31, 1996, the Company sold available-for- sale securities with a fair value on the date of sale of $1,085,021. A realized gain of $14,617 on these sales was recognized in the three months ended March 31, 1996. The net unrealized gain of $6,778 on these securities has been included as a separate component of stockholders' equity as of March 31, 1996. (3) IMPAIRMENT OF LONG-LIVED ASSETS In accordance with FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets to be Disposed Of, the Company records impairment losses on long-lived assets used in operations when events and circumstances indicate that the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amounts of those assets. During the quarter ended March 31, 1996, events and circumstances indicated that approximately $120,000 of intangible assets related to the Integrated Behavioral Health division might be impaired. However, the Company's estimate of undiscounted cash flows indicated that such carrying amounts were expected to be recovered. Nonetheless, it is reasonably possible that the estimate of undiscounted cash flows may change in the near term resulting in the need to write-down those assets to fair value. F-19 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPEC- TUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE SHARES OF COMMON STOCK OFFERED HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SE- CURITIES OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAW- FUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICA- TION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF. ------------ TABLE OF CONTENTS
PAGE ---- Prospectus Summary....................................................... 3 Risk Factors............................................................. 6 The Company.............................................................. 10 Recent Developments...................................................... 11 Use of Proceeds.......................................................... 12 Price Range of Common Stock.............................................. 12 Dividend Policy.......................................................... 12 Capitalization........................................................... 13 Dilution................................................................. 14 Pro Forma Combined Condensed Statement of Operations (Unaudited)......... 15 Selected Consolidated Financial Data..................................... 17 Management's Discussion and Analysis of Financial Condition and Results of Operations........................................................... 18 Business................................................................. 24 Management............................................................... 34 Certain Transactions..................................................... 39 Principal Stockholders................................................... 40 Description of Capital Stock............................................. 41 Shares Eligible for Future Sale.......................................... 42 Underwriting............................................................. 44 Legal Matters............................................................ 45 Experts.................................................................. 45 Available Information.................................................... 45 Index to Financial Statements............................................ F-1
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2,000,000 SHARES [CORE DYNAMO LOGO] COMMON STOCK -------- PROSPECTUS August 5, 1996 -------- SMITH BARNEY INC. COWEN & COMPANY - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- -----END PRIVACY-ENHANCED MESSAGE-----