-----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, GPC1Dhxj2XHhFZ7kztAtRboKUjK+A88JDT9WX4W8zgXcSTESSc9H0IpRgfTwUyfz C42ER4YD4l5ZdMhLTdzLMg== 0001047469-99-013329.txt : 19990403 0001047469-99-013329.hdr.sgml : 19990403 ACCESSION NUMBER: 0001047469-99-013329 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990401 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: 10-K SEC ACT: SEC FILE NUMBER: 000-19600 FILM NUMBER: 99586068 BUSINESS ADDRESS: STREET 1: 18881 VON KARMAN AVE STREET 2: STE 1750 CITY: IRVINE STATE: CA ZIP: 92612 BUSINESS PHONE: 6173226400 MAIL ADDRESS: STREET 1: 18881 VON KARMAN AVE STREET 2: SUITE 1750 CITY: IRVINE STATE: CA ZIP: 92612 FORMER COMPANY: FORMER CONFORMED NAME: PEER REVIEW ANALYSIS INC DATE OF NAME CHANGE: 19930328 10-K 1 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended DECEMBER 31, 1998 ----------------- Commission file number 0-19600 ------- CORE, INC. ---------- (Exact name of registrant as specified in its charter) MASSACHUSETTS 04-2828817 - --------------------------------------------------------- ------------------- (State of jurisdiction of incorporation or organization) (IRS employer identification no.) 18881 VON KARMAN AVENUE, SUITE 1750, IRVINE, CALIFORNIA 92612 --------------------------------------------------------------- (Address of principal executive offices) (zip code) Registrant's telephone number, including area code: (949) 442-2100 -------------- Securities registered pursuant to Section 12(b) of the Act: NONE ----- Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, PAR VALUE $0.10 PER SHARE --------------------------------------- (Title of class) Indicate by check "X" whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check "X" if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock held by non-affiliates of the Registrant as of March 22, 1999 was $54,771,047. On March 22, 1999, there were 7,891,577 shares of the Registrant's Common Stock outstanding. Documents incorporated by reference: INFORMATION CALLED FOR IN PART III OF THIS FORM 10-K IS INCORPORATED BY REFERENCE TO THE REGISTRANT'S DEFINITIVE PROXY STATEMENT WITH RESPECT TO THE 1999 ANNUAL MEETING OF STOCKHOLDERS, TO BE FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO REGULATION 14A. TABLE OF CONTENTS
Page ---- PART I Item 1 Business 3 Item 2 Properties 14 Item 3 Legal Proceedings 15 Item 4 Submission of Matters to a Vote of Security Holders 15 Executive Officers of the Registrant 16 PART II Item 5 Market for Registrant's Common Equity and Related Stockholder Matters 18 Item 6 Selected Financial Data 20 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 21 Item 7a Quantitative and Qualitative Disclosures About Market Risk 28 Item 8 Financial Statements and Supplementary Data 28 Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 28 PART III Item 10 Directors and Executive Officers of the Registrant 28 Item 11 Executive Compensation 28 Item 12 Security Ownership of Certain Beneficial Owners and Management 28 Item 13 Certain Relationships and Related Transactions 28 PART IV Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K 29 Index to Financial Statements F-1
2 PART I ITEM 1. BUSINESS. CORE, INC. ("CORE" or the "Company") is a national provider of employee absence management services to Fortune 500 companies and other self-insured employers, third-party administrators and insurance carriers. The Company's services include Integrated Disability Management (which consist of the Company's proprietary WorkAbility-Registered Trademark- Absence Management program, disability reinsurance management services, social security disability benefits advocacy, analytic consulting services, onsite job profiling and analysis and workplace risk management services, and licensing), Peer Review Analysis (which consist of specialty physician and behavioral health review services), and other services including Medicare coordination of benefits, health care benefits utilization review and case management services. CORE's services are designed to prevent absence, promote early return to work, improve productivity, and manage disabilities from "day one" through return to work or retirement, without compromising the quality of health care services provided to patients. CORE's Integrated Disability Management services include monitoring the appropriateness of absences and durations under short and long term disability plans, family medical leave and similar plans, and workers' compensation programs, in order to reduce unnecessary absenteeism and its related costs of wage replacement, hiring and training replacement personnel and lost productivity. These services are provided through CORE's WorkAbility program, which uses a proprietary software program developed and supported through the statistical analysis of disability utilization data collected over a 10 year period. CORE's WorkAbility program provides an objective, medically based method for recommending and monitoring employees' return-to-work status. The WorkAbility program is designed to obtain and analyze relevant medical and work-related information with the initial onset of the employee's absence and thus assure that the employee, attending physician and employer all have reasonable and consistent expectations as to the projected return-to-work date. CORE's reinsurance and group disability risk management services include providing marketing, underwriting advice, claims, actuarial and compliance services to its insurance company clients and risk management expertise for reinsurers in a reinsurance facility. The Company's social security disability benefits advocacy program provides assistance to disabled employees with obtaining their Social Security Disability Insurance benefits. CORE's Peer Review Analysis program provides pre-certification, concurrent, appellate, medical policy and quality independent specialty physician review services for use within utilization management programs of the Company's insurance company and self-insured corporate clients. The Company believes its more than 325 Board certified physician reviewers comprise the largest independent physician review service in the country. CORE's behavioral health review program provides comparable review service by psychiatric specialists in specialties such as general, child and adolescent and addiction psychiatry. This Annual Report on Form 10-K contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and the Company's actual results could differ materially from those contemplated by such statements. Such statements reflect management's current views, are based on many assumptions and are subject to risks and uncertainties. Some important factors the Company believes could cause such results to differ include the Company's reliance on its WorkAbility program, the Company's dependence on key clients, risks associated with the Company's growth strategy, increases or changes in government regulation and competition. The foregoing list of factors is not intended to represent a complete list of the general or specific risks that may affect the Company. It should be recognized that other risks may be significant, presently or in the future. HISTORY OF CORE The Company was incorporated in Massachusetts in April 1984 under the name Peer Review Analysis, Inc. ("PRA") to provide physician-intensive utilization management services to commercial insurance companies and self-insured employers. PRA became a publicly-held entity in December 1991 with the completion of an initial public offering. In March of 1995, PRA completed its merger (the "CMI/PRA Merger") involving Core Management, Inc., a Delaware corporation ("CMI"). CMI was incorporated in 1990 to acquire the health and disability cost management services business (including the WorkAbility program) of Health Data Institute, Inc., a subsidiary of Baxter International, Inc. The CMI/PRA Merger was treated as a pooling of interests for accounting purposes. In July 1995, the Company changed its name from Peer Review Analysis, Inc. to CORE, INC. The description herein of the business of the Company includes the operations of both PRA and CMI from the inception of both companies. 3 On October 2, 1995, CORE acquired all the capital stock of Cost Review Services, Inc. ("CRS"), a regional workers' compensation bill audit firm. In June 1997, CORE purchased certain of the assets of Social Security Disability Consultants and Disability Services, Inc. (collectively, "SSDC"), a disability management services firm which provides social security disability benefits advocacy and Medicare coordination of benefits. In July 1997, the Company purchased the assets and certain liabilities of Protocol Work Systems, Inc. ("PWS"), a provider of job analysis, employee physical agility testing and other loss prevention services to the workers' compensation market. In March 1998, a wholly-owned subsidiary of the Company, TCM Services, Inc. ("TCM"), acquired substantially all of the assets and certain liabilities of Transcend Case Management, Inc. ("Transcend"), a regional provider of workers' compensation case management services. In September 1998, the Company acquired all shares of stock of Disability Reinsurance Management Services, Inc. ("DRMS"), a full-service reinsurance intermediary manager. Effective October 31, 1998, the Company discontinued the operations of CRS. On December 23, 1998, TCM transferred substantially all its assets and certain liabilities to Transcend following the exercise by Transcend of its option to reacquire the assets, as described in the Asset Purchase Agreement dated March 17, 1998. The Company's executive offices are located at 18881 Von Karman Avenue, Suite 1750, Irvine, California 92612, and its telephone number at that address is (949) 442-2100. "WorkAbility," "Peer Review Analysis," "PRA" and "CORE" are registered trademarks of the Company. INDUSTRY OVERVIEW In recent years, large corporations have begun to recognize the magnitude of the annual cost of occupational and non-occupational injuries and illnesses, which according to several 1997 studies exceeded $2,200 per employee, or 8% of total payroll costs. These expenses present a significant challenge to corporate productivity. The Company estimates that total U.S. costs due to injury and illness-related workplace absence will grow to $340 billion by the year 2000, double what they were at the start of the decade. According to industry sources, disability costs including workers' compensation expenditures grew at an average annual rate of over 18% from 1990 through 1996, and the Company believes this growth is continuing. The Company estimates that workers' compensation costs were approximately $80 billion in 1998. Despite the general awareness of this high level of workers' compensation costs, expenditures for group disability (including short-term disability and long-term disability plans), sick pay and family leave represent a far larger share of total expenditures, estimated at 60%-75% of total disability costs. Two driving factors behind the increase in group disability and workers' compensation expenditures are workplace and legislative changes. Work-related changes that have contributed to rising benefits costs include the aging of the active workforce, increased volatility in hiring and layoffs (which often results in increased benefits utilization) and increased diagnoses of repetitive stress-related injuries. Also contributing to rising disability benefit costs and awareness are legislative changes such as the Family and Medical Leave Act and the Americans with Disabilities Act, which mandate accommodation for family circumstances and disabled workers, which both have a growing impact on accommodation and lost time issues. In response to these rising costs, a variety of insurance companies, managed care organizations and self-insured employers have used various cost reduction techniques, often borrowed from group health managed care, including securing pricing concessions from providers, using case management tools, and implementing "gatekeepers" as a means to control utilization. However, these managed care initiatives focus almost entirely on medical costs generated after a disability claim is received, not on the more significant productivity (lost time) impacts of employee ill health. Furthermore, work absence duration, and consequently disability payments, have traditionally been driven by the decision of the treating physician. While workers' compensation cases are typically attended by an occupational specialist, employees with non-occupational disabilities tend to utilize their own primary care physician who have little or no interaction with the employer and limited sensitivity to productivity (lost time) issues. As traditional managed care tools become standard industry-wide, they are generating diminishing marginal savings for employers, who must find more aggressive and sophisticated utilization review mechanisms to yield further savings. In addition, the new-found awareness of the additional costs associated with workplace absence has brought with it an increasing demand for cost saving strategies that address both health care expenditures and the productivity impact of an employee's ill health. Corporate downsizing and global competition have focused Corporate America on achieving real productivity gains. With the importance of each remaining job magnified, employers are actively looking for new tools to help control workplace absence. Until recently, recognition and management of these productivity 4 costs have been impaired by their difficulty in measurement, the fragmentation of responsibilities for disability programs within human resources and risk management departments of most corporations and the historical focus on group health managed care. While a small group of companies is emerging that are applying managed care principles to the workers' compensation industry, historically there have been few, if any, companies focusing on the provision of managed care techniques to the broader disabilities market. With the support of its analytic and physician services, CORE's products provide employers with an integrated and comprehensive approach to disability benefits management. SERVICES AND PRODUCTS CORE offers services and products designed to assist the Company's clients control and monitor disability, workers' compensation and health care costs without compromising the quality of care or services available to patients. The Company's service lines include: (1) Integrated Disability Management, (2) Peer Review Analysis, (3) Exiting/exited services, and (4) Other service lines. INTEGRATED DISABILITY MANAGEMENT Integrated Disability Management includes the following products and services: WorkAbility Absence Management Program Disability Reinsurance Management Services Social Security Advocacy CORE Analytic Protocol Work Systems Licensing WORKABILITY ABSENCE MANAGEMENT PROGRAM The Company estimates that total direct and indirect expenditures for medically-related workplace absence are approximately $260 billion annually, of which less than 25% are related to workers' compensation payments. The cost of absenteeism includes wage replacement, the costs of hiring and training replacement personnel and lost productivity. CORE's WorkAbility Absence Management Program provides for the monitoring of the 5 appropriateness of absences and their duration under short and long term disability plans, family medical leave and similar plans, and workers' compensation programs. The program is focused on reducing unnecessary absenteeism and the costs associated with such absences, thereby improving workplace productivity. The WorkAbility program is built on the foundation of a proprietary software system developed by the Company and maintained through the statistical and clinical analysis of disability utilization data. The WorkAbility program allows the Company to work with employee's physicians to establish expected absence duration using duration guidelines that are specific and objective. These guidelines are packaged in a software module called WorkAbility On-Line Medical Protocols (WOMP). WOMP is proprietary to CORE. The WorkAbility program, which contains WOMP, was developed along six key absence management concepts: DAY ONE INTERVENTION. Unlike retrospective disability review which is triggered only after an extended employee absence or after significant costs have been incurred, the WorkAbility program is designed to facilitate absence management from the first day of the absence (or sooner, in the case of planned absences such as elective surgery or childbirth). This proactive approach allows return-to-work expectations to be set early with the doctor, the patient and the workplace, and supports efforts to return patients to work on modified hours or with modified duties. PROPRIETARY TECHNOLOGY AND DATABASE. CORE began developing its WorkAbility program in 1986. The WOMP protocols are regularly updated using COREbase, a database of more than 650,000 disability and workers' compensation records collected by CORE over a period of 10 years. This database-driven updating process allows CORE to field absence duration guidelines that are based on actual return-to-work experience. The database continues to grow as CORE adds more clients, and as clients integrate across more lost time benefits. CLINICAL COLLEGIALITY AND CREDIBILITY. The WorkAbility program is based on conducting a clinically credible dialog with an employee's physician to reach agreement on an appropriate return-to-work plan. The clinical depth and complexity of the WOMP protocols support this activity by providing a foundation of clinical credibility. Our approach is focused on making this dialog a collegial interaction. CONCURRENT REVIEW. In addition to the initial recommendation of an appropriate return-to-work plan, the WorkAbility program includes ongoing review of the progress of the case. The information from these subsequent reviews add to the cumulative database driving the development of the protocol system, thereby ensuring that the guidelines serve both the initial review, as well as the sequential reviews over time as an illness or injury progresses toward return to work. COMPLETE WORKFORCE COVERAGE. The WorkAbility program is designed to cover all workplace absences, not only the longer term and more costly absences. The WOMP protocols cover over 10,000 clinical endpoints for medical conditions and surgical procedures. The breadth of the protocols ensures consistent return-to-work planning, regardless of whether the condition causing the absence is a result of workplace injury covered by workers' compensation or an injury occurring outside of the workplace covered by a disability plan. FLEXIBILITY. The system is designed to allow the Company to customize the product and services to meet client needs and culture. The guidelines are based on a statistical distribution so that a client can choose how to monitor and to manage durations. The system generates communications that are all customized to the client's benefit plan. In addition, depending on the technical capability of the client, other modalities such as e-mail, intranet and internet can be used to disseminate information on claim approvals and status. The WorkAbility software system is used by customer service representatives and registered nurse reviewers to assess each disability claim in the early stages of an employee's absence. Under the WorkAbility program, the employee contacts CORE and the employee's eligibility for the benefit is assessed using information previously supplied by the employer and loaded onto CORE's system. Once eligibility is determined, CORE's nurse reviewer contacts the employee's physician or office staff (depending on the severity of the case). The nurse reviewer enters information on the diagnosis and severity of the condition into CORE's proprietary WorkAbility system. The return-to-work plan is established by the nurse using the WorkAbility program's automated clinical protocols. The protocols consider such factors as the employee's age and general health, job requirements, symptoms and severity of the condition, diagnosis of the attending physician, treatment plan, medical procedure(s) performed, prognosis for recovery and comorbid 6 factors in establishing a recommended absence duration. To assure consistency, reviews are guided by program standards based on both statistical and clinical analysis and, in certain circumstances, are referred to physicians for further review. If CORE and the attending physician agree with respect to the anticipated absence duration, letters stating the expected return-to-work date are sent to the employee and physician on the date the review is completed. The employer is notified of the return-to-work date electronically. If the employee's physician disagrees with the suggested return-to-work plan (as occurs in less than 15% of the cases), the case is referred to a WorkAbility physician advisor who will discuss the case with the treating physician. In the event that they cannot reach agreement, the case is referred to the employer for consultation to determine whether or not an independent medical examination (IME) should be requested. IMEs are required in fewer than 2% of the cases. If the employee's condition or medical treatment changes during the absence or the employee is not ready to return to work on the expected date, a request for an extension of the absence is reviewed on a case-by-case basis using the WOMP duration guidelines with the additional information provided by the attending physician and/or patient. In general, CORE's WorkAbility services are advisory only. The attending physician and the patient remain responsible for determining the work-absence period and all other aspects of the plan of treatment. Generally, the employer or other payor is responsible for making all decisions with respect to the payment or denial of benefits under the applicable benefits plan. Certain clients, including Bell Atlantic Corporation, have delegated to CORE the authority to decide whether an employee is eligible for benefits under the client's plan. In addition to direct absence management activities, the WorkAbility program provides to clients reports that track utilization and cost trends and return-to-work plan performance. In addition to the standard report package, clients can obtain additional services, such as adding health care claims to provide a more complete picture of the clinical factors and costs associated with disability. Clients with integrated benefits often customize the reporting packages to present their utilization separately by plan (e.g. short-term disability, long term disability) as well as on a combined basis. DISABILITY REINSURANCE MANAGEMENT SERVICES DRMS, acquired by the Company in September 1998, is a reinsurance intermediary providing turnkey disability reinsurance and management services for insurance company clients marketing other forms of employee benefit products such as medical, dental, and group life insurance. DRMS provides a comprehensive array of services designed to increase its clients success at marketing disability products. These services include strategic planning, sales and marketing, product development, actuarial, underwriting, claims management and compliance services. DRMS' customer-focused team uses proprietary systems to provide creative solutions and day-to day decisions quicker and more efficiently than its competitors. As a reinsurance intermediary, DRMS does not assume insurance risk. Reinsurance risk protection to DRMS' clients is provided through the Disability Alliance for Reinsurance Treaties ("DART"). The lead reinsurer for DART assumes the risk from DRMS clients and passes on portions of it to a group of participating reinsurers. In addition to managing the reinsurance risk, DRMS provides accounting and administrative services to DART. The addition of DRMS to the CORE family provides a strategic opportunity to provide additional long-term disability services to CORE customers. Through DRMS, CORE can also provide an insurance option to CORE clients. Finally, DRMS' network of insurance contacts can provide possible opportunities for CORE to provide services to insurance carriers. SOCIAL SECURITY ADVOCACY The Company's social security disability benefits advocacy program includes claim file reviews, auditing, designing and implementing Social Security assistance programs, and representation and assistance with Social Security claims and appeals. The Company's model is unique in that it integrates all aspects of the Social Security process, producing a streamlined, efficient and effective service. CORE ANALYTIC In addition to the services provided to WorkAbility clients, CORE Analytic provides data analysis and consulting services directly to large corporate clients. These services include in-depth customized information concerning their disability and health care costs and utilization experience. Health care costs, disability costs and workers' compensation costs 7 are often under separate departments in a large employer (human resources, benefits and risk management), which has historically impaired corporations' ability to recognize the magnitude of, and to manage, these costs. The basic objectives of CORE's Analytic services are to help employers and insurers obtain better value for their disability, workers' compensation and health care expenditures with a company's specific goals in mind. CORE assists in identifying the best means to reduce the total costs of these benefits or slow the rate of increase, enhance the appropriateness and quality of care, predict future benefit costs and increase the return on investment from managed care programs. CORE's Analytic consulting services can coordinate and analyze information on a company-wide basis and use the client's information and CORE's proprietary disability and medical cost data analysis methodologies to simulate changes in a benefit plan's structure and the resulting impacts on overall benefit program cost. For example, CORE serves as a data partner to several Fortune 500 companies and provides quarterly "CORE Impact Reports" on integrated claims experience of the client covering disability, workers' compensation and group health benefits. PROTOCOL WORK SYSTEMS The JobSafe program of CORE's Protocol Work Systems division provides on-site job profiling and functionality assessments in a program that compares the physical agility of each worker with the actual demands of the job to create a safer working environment. The JobSafe program is tailored to each client's specific facility to help ensure compliance with the Americans with Disabilities Act, Occupational Safety Health Administration regulations and quality control requirements of ISO 9000. The program begins with an on-site tour of the client's facility. The tour is followed by a meeting with supervisors, interviews with employees, and the collection of measurement and weight statistics. Job descriptions then are created, videotapes are produced with descriptive commentary for each job, and finally, physical agility testing of each employee is conducted. The process culminates with a compilation of information for the client, along with instructions on how to operate the program. LICENSING In addition to the key role the WOMP protocols plays within the WorkAbility software system, the WOMP protocols have also been licensed by the Company to third parties as a separate product. These WorkAbility protocols are updated annually to, among other things, reflect recent advancements in medical technology and procedures, and to update the recommended disability durations using the collective experiential data collected by CORE through its services to clients. The Company is also considering licensing other software products, such as the family medical leave administration system to third parties. PEER REVIEW ANALYSIS Peer Review Analysis includes the following products and services: Physician Review Services Behavioral Health Review PHYSICIAN REVIEW SERVICES CORE's independent specialty physician review program, known commercially as Peer Review Analysis or PRA, provides pre-certification, concurrent, appellate, medical policy and quality physician review services for use with existing utilization management programs of clients, including insurance carriers that service the group health, disability and workers' compensation markets, and other managed care companies. The Company believes its more than 325 Board certified physician reviewers comprise the largest independent physician review organization in the country. The Company's consulting relationship with this large base of physicians has positioned the Company to offer an independent external appeal review service, which is mandated under several state laws and generally requires specialty-matched reviews. The Company believes that appellate review is one of the growing sectors of the otherwise mature health care utilization management industry. When a client's nurse reviewer determines that a case does not meet the client's established criteria, the nurse reviewer will forward a referral to CORE. The referral describes the principal diagnosis of the patient and the reason for referral for physician review. In most instances the reason for referral is based upon a question of medical necessity or therapeutic benefit of a proposed treatment plan. CORE's independent physician reviews the case information, which will 8 have been previously entered into CORE's data processing systems, and then telephones the attending physician to ascertain any additional clinical data, the attending physician's rationale for the proposed treatment plan or the proposed length of hospital stay. Based on discussions with the attending physician, including, when appropriate, discussions of possible alternative treatment plans, and using clinical judgment as well as criteria based on national norms, CORE's physician makes a recommendation concerning the appropriateness of the proposed or revised treatment plan. CORE then notifies its client of its recommendation regarding the medical necessity or appropriateness under the client's health care benefit plan of the proposed treatment plan, hospitalization or length of stay. If the proposed hospitalization is not certifiable as such under the plan, the payor typically denies or reduces the payment of benefits for the proposed hospitalization. The decision of the payor may be appealed by the patient or the attending physician. In such event a second CORE independent physician of the same specialty who was not involved in the original decision will review the case on the merits of the clinical criteria or any additional information. Reviews under the Company's specialty physician review program are managed from CORE's offices, and the majority of all review decisions are completed within 24 hours of referral. In most instances, CORE's physician review services are advisory in nature. Determinations as to the payment or denial of benefits are typically made by the third party payor, and the patient and the attending physician make decisions as to the patient's medical treatment. The Company is certified by the American Accreditation HealthCare Commission ("AAHC/URAC") to perform various utilization review functions. AAHC/URAC is a nationally recognized organization that has developed standards to encourage the availability of effective, efficient and consistent utilization review of health care services throughout the United States. One of AAHC/URAC's objectives is to establish standards for the procedures used to process appeals of utilization review determinations. Many of the Company's clients rely on CORE's specialty physician and behavioral health review services to comply with AAHC/URAC's appellate procedures. BEHAVIORAL HEALTH REVIEW CORE's behavioral health review program provides psychiatric review services similar to the Company's specialty physician review services by psychiatrists who are supported by a team of multi-specialty physicians. CORE's independent psychiatrists include specialists in various psychiatric specialties such as general psychiatry, child and adolescent psychiatry and addiction psychiatry. CORE believes that its multi-specialty psychiatrists and CORE's emphasis on intensive specialty review distinguish it from psychiatric review performed by other utilization management firms and better addresses the more subjective nature of many behavioral health reviews. 9 EXITING/EXITED SERVICES Exiting/exited services includes the following products and services: Regional workers' compensation field case management (CRS and TCM) Regional workers' compensation bill audit (CRS) Integrated Behavioral Health During 1998, the Company assessed the performance and outlook for each of its service lines and made a strategic decision to focus on building CORE's leadership position in employee absence management services and to exit certain businesses in which market leadership or minimum profit margins did not appear to be attainable. The following three product lines were identified as not satisfying the long-term goals of the Company: - Regional workers' compensation field case management services as delivered through CORE's subsidiaries, CRS and TCM. Both of these subsidiaries operated at a loss during 1998. Core believed that these subsidiaries could not operate at minimum profit margin targets. Accordingly, the Company exited CRS's and TCM's regional field case management services on October 31 and December 23, 1998, respectively. - Regional workers' compensation bill audit services were delivered by CRS. Again, it was determined that these services would not meet CORE's profit and market leadership goals, and as such, were exited as of October 31, 1998. - Integrated Behavioral Health, a California corporation ("IBH") is a wholly-owned subsidiary that provides mental health case management services. Because of the size of the operations, and the limited market share it enjoys, the Company does not believe that IBH is compatible, on a long-term basis, with CORE's profit margin and product leadership goals. The Company has granted an exclusive option to a non-affiliated party to purchase the assets of IBH and intends to exit the operations of this unit during 1999. See "Notes to Consolidated Financial Statements," Note 17, contained elsewhere within this report for additional information. OTHER SERVICE LINES Other service lines includes the following products and services: Utilization Review and Case Management Medicare Coordination of Benefits UTILIZATION REVIEW AND CASE MANAGEMENT The Company provides medical and behavioral health utilization review and case management services to Fortune 500 companies and other self-insured employers, third-party administrators ("TPAs") and an insurance carrier. The Company's services are designed to evaluate the medical necessity and appropriateness of health care services prescribed for participants in health care benefits plans, including hospital admissions, proposed length of hospital stay, use of outpatient facilities and other treatment alternatives. In cases of high cost diseases, conditions or catastrophic illnesses, CORE may also render case management services of individual cases in order to assure that cost-effective treatment alternatives are utilized. Clients may elect to contract for all of the services offered under the programs or, in the alternative, may elect to contract for only certain portions of services offered. CORE provides its utilization review services and case management services through a staff consisting primarily of registered nurses and physicians. Clients which utilize CORE's utilization review programs advise their participants of review requirements including the requirement to contact CORE within a specified period of time. From these contacts, CORE's medical and behavioral health review staff gathers the necessary personal and medical information and enters this information into CORE's review system. Based on this information and using CORE's review criteria, CORE conducts its review. 10 For cases requiring intensive case management, CORE assigns a nurse case manager to the case. These nurse reviewers work with providers and insurers to provide the appropriate health care benefits to patients facing catastrophic or chronic illness. The Company plans to continue to offer these services to support our existing clients, especially those who have integrated their medical and disability case management programs. Our ability to manage catastrophic cases with an absence management perspective continues to provide value to the Company by building relationships with providers and expanding our clinical credibility. MEDICARE COORDINATION OF BENEFITS Through its SSDC subsidiary, the Company provides services to help large employers identify those employees or retirees who should be receiving Medicare benefits. The Company then assists the client in establishing or documenting Medicare primacy, identifying the health care plan payments and costs that can be offset by Medicare, and implements an overpayment recovery program. Because this product is geared toward the large employer client, which is CORE's target market, the Company will continue to market and provide these services. CLIENTS AND MARKETING CORE has over 325 customers across the country, including numerous Fortune 500 companies. Revenues from Fortune 500 companies accounted for approximately 62% of total revenues in 1998. The following is a selected list of CORE's clients which, the Company believes, is representative of its overall client base: BELL ATLANTIC CORPORATION MOTOROLA CORPORATION DAIMLERCHRYSLER HUGHES ELECTRONICS CORPORATION RELIASTAR FINANCIAL CORP. CNA INSURANCE COMPANY FLEET FINANCIAL GROUP COMMONWEALTH OF VIRGINIA CHAMPION INTERNATIONAL CORPORATION DANA CORPORATION MEDICAL MUTUAL OF OHIO PCS HEALTH SYSTEMS, INC. LIBERTY MUTUAL INSURANCE COMPANY, INC. GENERAL ELECTRIC CORPORATION GTE COMMUNICATIONS SYSTEM CORPORATION CORE markets its services primarily to national, direct accounts, including self-insured employers, and through group health and disability insurance carriers and third party administrators. The Company also maintains a distribution agreement with Reliastar Financial Corp. to offer CORE's WorkAbility services to their customers. For providing WorkAbility services, the Company is paid fees by the insurance company. During 1997 and 1998, Bell Atlantic Corporation represented 23% and 21%, respectively, of total revenues. No other client represented more than 10% of total revenues. During the years ended December 31, 1997 and 1998, the Company's five largest clients represented 43% and 45%, respectively, of total revenue. CORE typically enters into service agreements with its clients. These agreements have automatically renewable successive terms of between one and three years, but are generally terminable upon 60 to 90 days notice. They do not generally provide for minimum payments and are usually non-exclusive. Subject to earlier termination provisions set forth therein, CORE's Bell Atlantic agreements range from three to ten years. Certain contracts include provisions that the fees payable to CORE can vary based upon CORE's performance and the savings achieved by the client under the contract. For many of its programs, CORE charges its clients a "capitated fee" (i.e. a fixed per employee per month ("PEPM") fee or a fixed per employee per quarter fee). The amount of this fee varies depending on the number and type of 11 review programs selected by the client and the size of the client. For other services, CORE charges fees on an hourly, per case, percentage of risk premium (for turn-key and reinsurance management services) or percentage of cost recovery (for social security advocacy and Medicare programs) basis rather than a capitated basis. Notwithstanding the outcome of CORE's review, decisions as to the payment or denial of benefits and eligibility or coverage under the benefit plan are typically made by the administrator of the participant's health care plan, not by CORE. The patient and the attending physician always make decisions as to the patient's medical treatment, not CORE. During 1998, several clients requested that CORE accept fiduciary responsibility for their disability benefit program. The Company's confidence in its clinical decisions permitted it to assume these responsibilities. CORE charges increased fees to those clients for which it serves as a plan fiduciary. During the second half of 1998, the Company bid on and was awarded several significant contracts, including contracts with the Commonwealth of Virginia and GTE. CORE's services to these clients are for an integrated disability management program, which further validated the Company's marketing strategy of offering a range of disability management services that operate in an integrated fashion. INFORMATION SYSTEMS CORE's key products and services are supported by administrative software that was developed and is maintained by in-house staff. Each of these software programs incorporates E-Mail and other external data exchange features for client and remote user communications. CORE's wide area network ("WAN") is designed to support the organization's rapid growth. A scalable architecture has provided flexibility, allowing for timely deployment of upgraded facilities in response to the business' needs. Additionally, CORE provides for alternative backup WAN capability that will assure continuous business operations during network outages. Another ongoing initiative within information systems development is the continual implementation of available information technology to significantly enhance the productivity of all CORE's key products and services. This includes, specifically, the integration of imaging, network fax computer integrated telephony, and Internet technologies into the workflow. Additionally, CORE's largest WorkAbility client has direct access to real-time information via an Extranet. This "self service" model application provides for both the initiation, as well as, the checking of status on claims on a near 24 hours by seven days per week basis. CORE plans to offer this service to other clients in 1999. The WorkAbility-Plus system, CORE's multi-tier, client/server technology based application, has provided for the ability to migrate rapidly into expanding business opportunities. CORE continues to expand its industry leading capabilities in regard to the burgeoning family medical leave ("FML") business. Totally integrated with other absence management capabilities, the FML module provides robust capabilities tailored to Federal guidelines as set forth in the Family and Medical Leave Act and other state sponsored legislation. This architecture is designed to allow for client server operation and rapid feature development. Additionally, CORE continues to evolve the system capabilities in regard to the management and payment of long-term disability claims. Integration with software developed by CORE's newest subsidiary, DRMS is near completion. The WorkAbility-Plus application utilizes software architecture that provides maximum flexibility in attaching industry-standard databases to support growth and varying client needs. The Company believes that this architecture will support the integration of additional absence management capabilities. Funding for the initial development of CORE's WorkAbility software (original version) was provided by Chrysler Motor Corporation ("Chrysler") in exchange for a perpetual, non-exclusive, non-transferable license to use such software. Ownership of the WorkAbility software has been retained by CORE, which has the exclusive right to market the software to others. 12 GOVERNMENT REGULATION; REIMBURSEMENT; HEALTH CARE REFORM A number of states, including several of those in which the Company transacts business, have extensive licensing and other requirements applicable to the Company's business. Additionally, the Company's clients, including insurance companies, are subject to regulations that indirectly affect the Company. The laws of many states regulate the provision of health care utilization management services. These regulations generally require the provider of utilization management services to be reasonably accessible by telephone to doctors and patients, to have adequately qualified personnel, to provide physicians and patients a procedure to appeal determinations of non-reimbursement, and to maintain the confidentiality of patient records. Other states regulate the provision of claims administration services and preferred provider organizations which may affect CORE. CORE believes it is in compliance with all applicable regulations governing the provision of managed health care services in the states where CORE is subject to such regulations, as currently in force and as currently interpreted. CORE's operations depend upon its continued good standing under applicable laws and regulations. To date, the cost of compliance has not been material. Such laws and regulations, however, are subject to amendment or new interpretation by authorities in each jurisdiction. If amended regulations or new interpretations of federal or state laws or regulations arise, CORE, may have difficulty complying without significant expense or changes in operations. The Company is unable to predict what additional government regulations, if any, directly or indirectly affecting its business may be promulgated. Although the Company believes that it is currently in compliance with applicable regulations in those states in which it is subject to regulation, the Company's business could be adversely affected by a revocation of or failure to obtain required licenses and governmental approvals, a failure to comply with applicable regulations or significant changes in regulations applicable to its clients. In addition to existing government health care regulation, there have been numerous initiatives at the federal and state levels, as well as by third-party payers, for comprehensive reforms affecting the payment for and availability of health care services. The Company believes that such initiatives will continue during the foreseeable future. The Company is unable to predict what, if any, reform initiatives may be adopted, or what effect, if any, their adoption may have on the Company. COMPETITION CORE presently competes in two different markets: (1) managed disability and workers' compensation and (2) health care utilization management. The managed disability and workers' compensation market is a developing market, which is highly competitive. Competitors include both new companies focused solely on the workers' compensation market and large established disability insurance carriers who have traditionally dealt with disability from an underwriting rather than an employee productivity perspective. Some of the competitors are significantly larger and have greater financial and marketing resources than CORE. CORE competes on the basis of quality and cost-effectiveness in this market, and the Company believes that its proprietary disability management protocols and database of clinically defined disability episodes give it a significant competitive advantage. The health care utilization management market is fragmented but is consolidating rapidly as national health care reform and other forces drive independent utilization review and cost management firms into niche markets or to consolidation with large insurance carriers and provider groups. The health care utilization management market is also highly competitive. Competitors include large established insurance carriers and large managed care organizations. Some of the competitors are significantly larger and have greater financial and marketing resources than CORE. CORE competes on the basis of quality, cost-effectiveness and service. 13 EMPLOYEES AND PHYSICIAN CONSULTANTS In addition to its available staff of over 325 physician consultants covering the major medical specialties, CORE has over 600 employees. Generally, CORE's physician consultants are paid by CORE on a per hour or per case review basis. Almost all of CORE's physicians are retained by the Company as independent contractors and also maintain active practices. The majority of the Company's physicians work between 5 and 20 hours per week for the Company. Compensation to CORE's reviewers is not related to any cost savings achieved by CORE's clients. ITEM 2. PROPERTIES. The Company occupies its executive headquarters in Irvine, California pursuant to leases for approximately 20,600 sq. feet, which expire in September 2000 and June 2003. The Company also leases facilities of approximately 18,000 sq. feet in Boston, Massachusetts under a lease that expires in May 2000, and approximately 22,500 sq. feet in Burlington, Massachusetts under leases that expire in December 2001 and April 2002. Additionally, the Company leases facilities of approximately 23,700 sq. feet in Los Angeles, California under lease agreements that expire in November 2001 and January 2002; approximately 18,000 sq. feet in Silver Spring, Maryland under a lease that expires in June 2001; approximately 12,000 sq. feet in Novi, Michigan under a lease that expires in August 2001; and approximately 6,500 sq. feet in Portland, Maine under a lease agreement that expires in August 1999. 14 ITEM 3. LEGAL PROCEEDINGS. Transcend Case Management, Inc. and Transcend Services, Inc. (collectively "Transcend") initiated an arbitration proceeding with the American Arbitration Association on December 16, 1998, in Atlanta, Georgia, against CORE and its wholly-owned subsidiary TCM Services, Inc. ("TCM") in connection with the sale to TCM and subsequent re-acquisition by Transcend of the certain assets. Upon a motion by the Company, the matter was transferred and the arbitration will occur in Orange County, California. Transcend seeks unspecified damages relating to TCM's obligations under an Asset Purchase Agreement (the "Agreement") dated March 17, 1998, pursuant to which TCM acquired substantially all of the assets relating to Transcend's workers' compensation case management business (the "Business"). In lieu of a payment at closing, the Agreement provided for a subsequent earn-out payment based on TCM's quarterly revenues in either 1999 or 2000. The Agreement also provided TCM with the opportunity to discontinue the operation of the Business if the Business incurred substantial losses, provided TCM first allowed Transcend the option to reacquire the assets of the Business prior to TCM's discontinuance of the Business (the "Option to Reacquire the Assets"). In October 1998, TCM notified Transcend that due to operating losses TCM intended to discontinue the Business. Transcend elected to exercise its Option to Reacquire the Assets of the Business. On December 23, 1998, TCM transferred substantially all of the assets relating to the Business to Transcend. In their Demand for Arbitration, Transcend maintains that notwithstanding Transcend's exercise of the Option to Reacquire the Assets, CORE and TCM are required to compensate Transcend for unspecified damages. CORE intends to vigorously defend against Transcend's claims in the arbitration and has asserted a counterclaim in the amount of $337,054.55 against Transcend based on a provision in the Agreement that sets forth a formula for establishing the book value of the assets TCM was required to transfer back to the Transcend upon Transcend's exercise of the Option to Reacquire the Assets. Generally, the review services provided by the Company are advisory in nature, and final determination as to payment or nonpayment of benefits is not made by the Company. Certain clients, including Bell Atlantic Corporation, have delegated to CORE the authority to decide whether an employee is eligible for benefits under the client's plan. Determinations as to the medical care provided to a patient are always made by the patient or the attending physician and are not made by CORE. However, due to the significant number of claims in the medical malpractice field in general, it is possible that a patient may assert claims against the Company for damages due to adverse medical consequences. New or existing legal theories by which patients or physicians may attempt to assert liability against the Company or other companies engaged in the industry are developing and are expected to continue to develop. Although the Company believes that its procedures result in reasonable and accurate determinations of coverage, there can be no assurance that claims will not be made or that the Company's procedures for limiting liability will be effective. The Company maintains professional liability insurance and such other coverages as the Company believes are reasonable in light of the Company's experience to date. However, there can be no assurance that such insurance will be sufficient to protect the Company from liability which might adversely affect the Company's business, operating results or financial condition or will continue to be available to the Company at reasonable cost or at all. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not applicable. 15 EXECUTIVE OFFICERS OF THE REGISTRANT The following is a list of CORE's executive officers:
NAME AGE POSITION ---- --- -------- George C. Carpenter IV 40 Chairman of the Board of Directors and Chief Executive Officer Craig C. Horton 44 President and Chief Operating Officer William E. Nixon 38 Executive Vice President, Chief Financial Officer, Treasurer and Clerk Nancy S. Moore 49 Senior Vice President, Operations Michael Darkoch 55 Senior Vice President, Client Development James T. Fallon 35 Managing Director, DRMS Lisa O. Hansen 36 Managing Director, DRMS Michael D. Lachance 44 Managing Director, DRMS
Executive officers of the Company are elected by the Board of Directors on an annual basis and serve at the discretion of the Board of Directors. George C. Carpenter IV was re-elected a Class III Director at the June 1997 Annual Stockholders Meeting, and was elected the Chairman of the Board of Directors and Chief Executive Officer of the Company effective with the Company's March 24, 1995 merger involving Core Management, Inc. (the "CMI/PRA Merger"). Mr. Carpenter served as the Chief Executive Officer and a Director of Core Management, Inc., a Delaware corporation ("CMI") and now wholly-owned subsidiary of the Company, since its formation in 1990. From 1988 to 1990, Mr. Carpenter served as a Vice President, Operations of The Health Data Institute, Inc., a provider of utilization review, case management and analytic services and a developer of related software, a subsidiary of Baxter International, Inc. Craig C. Horton was re-elected a Class III Director at the June 1997 Annual Stockholders Meeting and was elected the President and Chief Operating Officer of the Company on March 30, 1995. Mr. Horton served as the President and a Director of CMI from its formation in 1990, and also served as the acting Chief Financial Officer of CMI from 1994 to 1995. From 1988 to 1990, Mr. Horton was Vice President, Operations of The Health Data Institute, Inc., a subsidiary of Baxter International, Inc. William E. Nixon is the Executive Vice President, Chief Financial Officer, Treasurer and Clerk of the Company. Mr. Nixon joined the Company in December 1988 as Controller. In June 1989, Mr. Nixon became Assistant Treasurer; in September 1990, he was elected Vice President, Finance and Administration; in September 1991, he assumed his position as Treasurer. In December 1993, Mr. Nixon was elected Chief Financial Officer of the Company. In December 1994, Mr. Nixon was elected Executive Vice President and in March 1995, he was elected Clerk. Prior to his employment with the Company, from 1985 to 1988, Mr. Nixon served as a Senior Accountant at Gray, Gray and Gray, a public accounting firm. Nancy S. Moore was elected Senior Vice President, Operations in September 1997. Ms. Moore served as Vice President, Eastern Operations of the Company since the March 24, 1995 CMI/PRA merger. Ms. Moore joined the Company in July 1990 as Manager, Case Management. In November 1992 she became Director, Operations and was promoted to Vice President, Operations in May 1994. Prior to her employment with the Company, Ms. Moore served as Administrator, Behavioral Health Utilization Review Department of Blue Cross and Blue Shield of Massachusetts and Director of Nursing Services of Charles River Hospital, Community Care Systems, Inc. Michael Darkoch joined the Company in September 1997 and was elected Senior Vice President, Client Development in December 1997. Mr. Darkoch came to CORE from Caremark International, where he held senior management positions, including Vice President of Corporate Account Management and Vice President of Business Development. His background includes account management process design and sales development. Mr. Darkoch has over 23 years of experience in the health care industry. 16 James T. Fallon joined the Company with Ms. Hansen and Mr. Lachance in September 1998 upon the Company's acquisition of Disability Reinsurance Management Services, Inc. ("DRMS"). Mr. Fallon was a founder of DRMS and has served as a Managing Director of DRMS since its establishment in 1993. Previously, from 1985 through 1993, Mr. Fallon held various sales and marketing management positions with UNUM Life Insurance Company of America ("UNUM") and UNUM's reinsurance division (later Duncanson & Holt). Lisa O. Hansen joined the Company with Mr. Fallon and Mr. Lachance in September 1998 upon the Company's acquisition of DRMS. Ms. Hansen was a founder of DRMS and has served as a Managing Director of DRMS since its establishment in 1993. Ms. Hansen began her insurance career in Paul Revere Life Insurance Company's sales force in 1984, then joined UNUM in 1985 where she held several sales and marketing management positions within UNUM's reinsurance division (later Duncanson & Holt.) Michael D. Lachance joined the Company with Mr. Fallon and Ms. Hansen in September 1998 upon the Company's acquisition of DRMS. Mr. Lachance was a founder of DRMS and has served as a Managing Director of DRMS since its establishment in 1993. In 1983, Mr. Lachance joined UNUM where he spent over eleven years in a variety of Individual Disability and Group Reinsurance management positions. Mr. Lachance earned his Fellow Society of Actuaries ("FSA") designation in 1986. 17 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. PRICE RANGE OF COMMON STOCK The Company's Common Stock is traded on the Nasdaq National Market tier of The Nasdaq Stock Market ("Nasdaq - NNM") under the symbol: "CORE." The following table shows the range of high and low sales prices per share for the shares of Common Stock on the Nasdaq - NNM for the calendar quarters indicated as reported by Nasdaq. Over-the-counter market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and do not necessarily represent actual transactions.
HIGH LOW ---------- ---------- 1997 First quarter $ 9 5/8 $ 5 7/8 Second quarter 9 6 1/8 Third quarter 11 1/8 8 5/8 Fourth quarter 12 1/2 9 7/8 1998 First quarter $16 3/8 $11 1/4 Second quarter 16 7 3/4 Third quarter 10 1/16 3 3/4 Fourth quarter 8 1/2 5 1/2
On March 22, 1999, the closing sale price of the Company's Common Stock, as quoted on the Nasdaq - NNM, was $8.19 per share. As of March 22, 1999, there were approximately 152 record holders of the Company's Common Stock and over 1,000 beneficial owners. There are no outstanding shares of the Company's Preferred Stock and, accordingly, no market for said shares. DIVIDEND POLICY The Company has never paid a cash dividend. Inasmuch as the Company intends to retain earnings for the operation and expansion of its business, the Company does not intend to pay dividends on its Common Stock for the foreseeable future. The Company's Board of Directors will determine future dividend policy in light of the then prevailing financial condition of the Company and other relevant factors. 18 RECENT SALES OF UNREGISTERED SECURITIES During the quarter ended December 31, 1998, the Company sold the following shares of Common Stock, which were not registered under the Securities Act at the time of issuance. Except as otherwise noted, such shares were sold to a former investor upon the exercise of previously granted stock warrants.
NUMBER OF PURCHASE PRICE DATE SECURITY PURCHASER SHARES PER SHARE - ----------------- ------------------ --------------------------- -------------- --------------- 10/27/98 Common Stock Ventana Partnership III, L.P. 6,700 $3.73
These foregoing securities were not registered under the Securities Act at the time of sale and issuance, in reliance upon the exemption contained in Section 4(2) of the Securities Act for transactions by an issuer not involving any public offering. 19 ITEM 6. SELECTED FINANCIAL DATA. The data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," the consolidated financial statements and related notes, and other financial information included elsewhere herein.
Year ended December 31, ------------- ------------- --------------- -------------- ------------- 1994 1995 1996 1997 1998 ------------- ------------- --------------- -------------- ------------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) STATEMENT OF OPERATIONS DATA: Revenues $16,746 $20,769 $28,806 $38,507 $45,609 Cost of services 11,305 12,839 17,741 23,330 27,833 ------------- ------------- --------------- ------------- ------------- Gross profit 5,441 7,930 11,065 15,177 17,776 Operating expenses: General and administrative 4,265 4,787 6,285 7,940 9,740 Sales and marketing 1,563 1,499 1,744 2,483 3,649 Depreciation and amortization 915 905 1,338 1,955 2,503 Merger costs 1,114 994 - - - Non-recurring write-off of AmHealth acquisition - - 1,920 - - Write-off of goodwill 2,294 - - - 4,085 Arbitration costs - - - - 736 Charges in connection with disposal of subsidiaries - - - - 658 Other non-recurring charges - - - - 156 ------------- ------------- --------------- ------------- ------------- Total operating expenses 10,151 8,185 11,287 12,378 21,527 ------------- ------------- --------------- ------------- ------------- Income (loss) from operations (4,710) (255) (222) 2,799 (3,751) Other income (expense): Interest income 296 240 385 590 303 Interest expense (158) ( 83) (35) (27) (505) Other income (expense) (127) 19 16 - - ------------- ------------- --------------- ------------- ------------- 11 176 366 563 (202) ------------- ------------- --------------- ------------- ------------- Income (loss) before income taxes (4,699) (79) 144 3,362 (3,953) Income tax (provision) benefit - - - (610) 193 ------------- ------------- --------------- ------------- ------------- Net income (loss) $ (4,699) $ (79) $144 $2,752 $ (3,760) ============= ============= =============== ============= ============= Net income (loss) per common share: Basic $ (1.01) $ (0.02) $ 0.03 $ 0.38 $ (0.50) ============= ============= =============== ============= ============= Diluted $ (1.01) $ (0.02) $ 0.02 $ 0.35 $ (0.50) ============= ============= =============== ============= ============= Weighted average number of common shares and equivalents outstanding: Basic 4,668 4,755 5,713 7,246 7,489 ============= ============= =============== ============= ============= ============= ============= =============== ============= ============= Diluted 4,668 4,755 6,473 7,934 7,489 ============= ============= =============== ============= =============
December 31, ------------- ------------- --------------- ------------- ------------- 1994 1995 1996 1997 1998 ------------- ------------- --------------- ------------- ------------- (In thousands) BALANCE SHEET DATA: Cash and cash equivalents $ - $1,006 $4,282 $7,945 $2,226 Working capital 4,612 3,152 15,781 11,850 5,093 Total assets 12,504 11,869 27,844 32,815 48,732 Long-term debt and capital lease obligations 121 817 344 190 13,874 Stockholders' equity 7,553 7,648 24,456 27,659 26,827
20 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. OVERVIEW CORE, INC. is a national provider of employee absence management services to Fortune 500 companies and other self-insured employers, third-party administrators and insurance carriers. The Company's services include Integrated Disability Management (which consist of the Company's proprietary WorkAbility(R) Absence Management program, disability reinsurance management services, social security disability benefits advocacy, analytic consulting services, onsite job profiling and analysis and workplace risk management services, and licensing), Peer Review Analysis (which consist of specialty physician and behavioral health review services), and other services including Medicare coordination of benefits, health care benefits utilization review and case management services. CORE's services are designed to prevent absence, promote early return to work, improve productivity, and manage disabilities from "day one" through return to work or retirement, without compromising the quality of health care services provided to patients. The Company is typically compensated for these services either on a per employee per month ("PEPM"), per case, hourly, percentage of risk premium (for full service reinsurance management services) or percentage of cost recovery (for social security advocacy and Medicare benefits services) basis. The integrated disability management services line also includes a limited amount of revenue (1% for the year ended December 31, 1998) from licensing fees attributable to license grants by the Company of the medical protocol portion of the WorkAbility software program. CURRENT DEVELOPMENTS On March 17, 1998, a wholly-owned subsidiary of the Company, TCM Services, Inc. ("TCM") purchased the operating assets and certain liabilities of Transcend Case Management, Inc. ("Transcend"). Transcend, with offices based in Orlando, Florida is a provider of workers' compensation case management services to clients located principally in Florida, Texas and Georgia. On December 23, 1998, TCM transferred substantially all its assets and certain liabilities to Transcend following the exercise by Transcend of its option to reacquire the assets, as described in the Asset Purchase Agreement dated March 17, 1998. The Company recorded charges of $241,000 in connection with this transfer. On June 2, 1998, the Company entered into a settlement agreement with the former shareholders of Cost Review Services, Inc. ("CRS"). CORE acquired CRS in October 1995. The settlement agreement related to an arbitration dispute and included the immediate payment by CORE of $425,000 and the issuance by CORE of promissory notes in the amount of $190,000 payable in twelve monthly installments beginning January 1999. In addition, the Company incurred approximately $121,000 in other costs related to the arbitration (primarily legal and travel expenses). During June 1998, CRS was informed that its principal client (representing nearly 70% of CRS revenues) would not be renewing its contract in October 1998. This information combined with present operating losses incurred by CRS indicated that the net book value of the goodwill and intangibles related to the CRS operations, amounting to $1,935,000, was not recoverable and thus, was written-off. The Company also performed a review of other long-lived assets prior to the close of its results for the quarter ended June 30, 1998. The results of its review indicated that an impairment loss existed related to certain identifiable intangible contract values resulting from the acquisition of Social Security Disability Consultants and Disability Services, Inc. (collectively, "SSDC") in June 1997. The impairment loss primarily resulted from a significant decline in revenues realized under SSDC's Medicare coordination of benefits program. As it appeared that the decline in revenues would continue, intangibles in the amount of $2,150,000 were written off. On September 1, 1998, the Company acquired all shares of stock of Disability Reinsurance Management Services, Inc. ("DRMS"), a Delaware corporation, pursuant to a Capital Stock Purchase Agreement dated as of August 31, 1998 (the "Stock Purchase Agreement"). Pursuant to the Stock Purchase Agreement, all shares of stock of DRMS were acquired in exchange for a $20,000,000 cash payment, the issuance of 480,000 shares of the Company's common stock and the future issuance of up to an additional $7,000,000 of the Company's common stock after September 30, 2001, based upon the future performance of DRMS. The purchase price is subject to certain adjustments as set forth in the Stock Purchase Agreement. The excess of the purchase price over the estimated fair market value of the net assets acquired, representing goodwill and certain identifiable intangibles amounting to approximately $22,762,000, is being amortized on a straight-line basis over periods of three to thirty-five years. DRMS is a full service reinsurance intermediary manager providing marketing, underwriting advice, claims, actuarial and compliance services to its insurance company clients and risk management expertise for reinsurers in a reinsurance facility. Effective October 31, 1998, the Company discontinued the operations of CRS. In connection with this action, the Company recorded charges totaling $417,000. The major components of the charges were $157,000 of employee separation costs, $58,000 of non-cash charges to dispose of certain assets through abandonment and $75,000 to terminate lease and other contractual obligations. CRS provided regional bill audit and workers' compensation case management services to insurance companies and third-party administrators of workers' compensation programs. 21 RESULTS OF OPERATIONS The following table sets forth certain statement of operations data for the periods indicated expressed as a percentage of revenues:
YEAR ENDED DECEMBER 31, ---------- ------------ ----------- 1996 1997 1998 ---------- ------------ ----------- Revenue 100.0% 100.0% 100.0% Cost of services 61.6 60.6 61.0 Gross profit 38.4 39.4 39.0 General and administrative expense 21.8 20.6 21.4 Sales and marketing expense 6.1 6.4 8.0
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, ----------------------- ------------------------ ----------------------- 1996 1997 1998 ----------------------- ------------------------ ----------------------- AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT ----------- ----------- ------------ ----------- ----------- ----------- (Dollars in thousands) Integrated Disability Management $10,696 37% $18,514 48% $26,959 59% Peer Review Analysis 7,670 27% 8,415 22% 8,004 17% Exiting/exited services 4,454 15% 3,049 8% 3,558 8% Other service lines 5,986 21% 8,529 22% 7,088 16% ----------- ----------- ------------ ----------- ----------- ----------- $28,806 100% $38,507 100% $45,609 100% =========== =========== ============ =========== =========== ===========
YEARS ENDED DECEMBER 31, 1998 AND 1997 Revenues increased by $7,102,000 (18%) from $38,507,000 in 1997 to $45,609,000 in 1998. Growth in Integrated Disability Management contributed $8,445,000 (119%) of the Company's overall net increase in revenues. Revenues for this service line include revenues from DRMS acquired in September 1998 (which expanded CORE's programs to include disability reinsurance management services) and a full year of operations from SSDC and PWS, which were acquired in June and July 1997, respectively. CORE's WorkAbility Absence Management program contributed 52% of the revenue increase in Integrated Disability Management during 1998 due to the addition of new clients and the expansion of services to existing clients during the latter half of 1997 and throughout 1998. Revenues from DRMS contributed 36% of the increase in Integrated Disability Management revenues during 1998. A decrease in the volume of referrals in the behavioral health review services program resulted in an overall reduction of 5% in revenues realized from the Peer Review Analysis service line in 1998, as compared to 1997. Revenues from services that the Company exited in 1998 or expects to exit in 1999 increased overall by 17% during 1998, as compared to the prior year. These service lines consist of regional workers' compensation case management services (of both CRS and TCM), regional bill audit activities of CRS, and the behavioral health programs of the Company's wholly-owned subsidiary, Integrated Behavioral Health ("IBH"). The net increase in these services during 1998 related principally to the acquisition of TCM in March 1998. Specifically, TCM contributed $1,287,000 in new workers' compensation case management revenues, however TCM operations were exited in December 1998 due to poor net operating performance. The CRS operations were closed as of October 31, 1998 due to the loss of a significant portion of its customer base. The Company expects revenues in these service lines to decrease significantly in 1999 due to the exiting of the CRS and TCM operations together with its intent to exit the operations of IBH in 1999. Revenues from other service lines (which includes utilization review, Medicare coordination of benefits and other case management services), decreased 17% overall for 1998, as compared to 1997. This decrease was primarily attributable 22 to the utilization review program stemming from a decline in enrollment in our clients' indemnity plan based group health business. Although the Company expects revenues from utilization review and other case management services to further decline during 1999, these anticipated decreases may be partially offset by an increase in revenues from its Medicare coordination of benefits program, following the introduction of certain new products developed during 1998. For 1998, the Company's top five clients represented 45% of revenues compared to 43% during 1997. Bell Atlantic accounted for approximately 21% of revenue in 1998 and 23% of revenues for 1997. No other single client represented more than 10% of total revenues in 1998 or 1997. Cost of services for the Company include direct expenses associated with the delivery of its review and managed care services, including salaries for professional, clerical and license support staff, the cost of physician reviewer consultants and telephone expense. Cost of services increased $4,503,000 (19%) from $23,330,000 in 1997 to $27,833,000 in 1998. The increase is primarily the result of additional payroll costs associated with business acquisitions completed in 1998 and the summer of 1997 in addition to increased staffing levels required to service new and growing WorkAbility clients. Additionally, increased amortization expense was incurred as software enhancements to the Company's operating systems were placed into service. CORE's gross profit performance for 1998 remained unchanged compared to 1997 at 39%. Gross profit performance for each of the Company's principal lines of service for the years ended 1998 and 1997, respectively, are: 41% and 35% for Integrated Disability Management, 36% and 39% for Peer Review Analysis, 16% and 27% for exiting/exited services and 47% and 52% for other service lines. The increase in gross margins realized under Integrated Disability Management is primarily due to the addition of disability reinsurance management services now provided by the Company pursuant to the acquisition of DRMS. The decline in gross margins realized under Peer Review Analysis is due mostly to the decrease in revenues generated under the behavioral health program and an increase in expenses (mostly payroll) added in advance of expected program revenues with certain new Peer Review Analysis clients. The decline in gross margins realized under other service lines is primarily due to a decrease in revenues generated from the utilization review and Medicare coordination of benefits programs. General and administrative expenses include the cost of executive, administrative and information services personnel, rent and other overhead items. General and administrative expenses increased $1,800,000 (23%) from $7,940,000 in 1997 to $9,740,000 in 1998. Expenses increased due primarily to higher costs associated with additional staffing in the information services areas to support the growth of the Company. Higher costs in rent, insurance costs, equipment rental and other general and administrative expenses relate primarily to the Company's acquisitions during the summer of 1997 and March and September of 1998. The Company has also incurred additional costs associated with the maintenance of its computer network hardware and software as capacity has been expanded to accommodate growth. General and administrative expenses, as a percentage of revenues, remained unchanged in 1998, compared to 1997, at 21%. Sales and marketing expenses include, but are not limited to, salaries for sales and account management personnel and travel expenses. Sales and marketing expenses also include costs designed to increase exposure, such as participation in and attendance at industry trade shows and conferences. Sales and marketing expenses increased $1,166,000 (47%) from $2,483,000 in 1997 to $3,649,000 in 1998. The increase is primarily due to the Company's acquisitions during the summer of 1997 and March and September of 1998. The balance of the increase is primarily due to expanded staffing to support the sales and product development departments. The Company expects to continue to invest an increased amount of resources in sales and marketing in future periods. Depreciation and amortization expenses increased $548,000 (28%) from $1,955,000 in 1997 to $2,503,000 in 1998. The increase is mainly attributable to increased amortization on the goodwill acquired in the purchases of DRMS in September 1998 and of SSDC and PWS in June and July 1997, respectively. During 1998, the Company recorded write-offs of goodwill and intangibles totaling $4,085,000 pursuant to its review of long-lived assets. During June 1998, CRS was informed that its principal client (representing nearly 70% of CRS revenues) would not be renewing its contract in October 1998. This information combined with CRS's present operating losses indicated that the net book value of the goodwill and intangibles related to the CRS operations, amounting to $1,935,000, was not recoverable and thus, written-off effective as of June 30, 1998. The Company also determined that an impairment loss existed related to certain identifiable intangibles acquired from SSDC in June 1997. The impairment loss primarily resulted from a significant decline in revenues realized under SSDC's Medicare coordination of benefits program. As it appeared that the decline in revenues would continue, intangibles in the amount of $2,150,000 were written off as of June 30, 1998. 23 On June 2, 1998, the Company entered into a settlement agreement with the former shareholders of CRS. The settlement agreement related to an arbitration dispute and included the immediate payment by CORE of $425,000 and CORE's issuance of promissory notes in the amount of $190,000 payable in twelve monthly installments beginning January 1999. In addition, the Company incurred approximately $121,000 in other costs related to the arbitration (primarily legal and travel expenses). During 1998, the Company recorded $658,000 in charges relating to its termination of operations at two subsidiaries. Effective October 31, 1998, the Company discontinued the operations of CRS. In connection with this action, the Company recorded estimated charges totaling $417,000. CRS provided regional bill audit and workers' compensation case management services to insurance companies and third-party administrators of workers' compensation programs. On December 23, 1998, substantially all the assets and certain liabilities relating to TCM were reacquired by the original seller pursuant to terms set forth in the Asset Purchase Agreement dated March 17, 1998. The Company recorded charges of $241,000 in connection with this transfer. TCM provided regional worker's compensation case management services. During 1998, the Company recorded other non-recurring charges totaling $156,000. These costs primarily consisted of costs related to the Company's relocation of its accounting department from Boston, Massachusetts to its corporate offices in Irvine, California. Other income and expense, net, consists primarily of interest expense as offset by interest income. Interest expense represents amounts incurred related to outstanding borrowings under the Company's August 1998 Credit Agreement with Fleet National Bank. Interest income represents amounts earned by the Company's investments. Other income and expense, net, decreased $765,000 from a net other income of $563,000 in 1997 to a net other expense of $202,000 in 1998. The decrease is due to a decrease in funds available for investment and an increase in borrowings outstanding used to complete the acquisition of DRMS in September 1998. YEARS ENDED DECEMBER 31, 1997 AND 1996 Revenues increased by $9,701,000 (34%) from $28,806,000 in 1996 to $38,507,000 in 1997. Growth in Integrated Disability Management contributed $7,818,000 (81%) of the Company's increase in revenues which included revenues from the June and July 1997 acquisitions of SSDC and Protocol Work Systems, respectively. Approximately 50% of the total revenue increase for the year is attributable to revenues generated from Bell Atlantic Corporation. CORE continued to expand its services provided to Bell Atlantic Corporation during 1997, its first full year as a client. Each of the revenue components of Integrated Disability Management services grew during 1997, except for analytic consulting which had a slight decline of 2%. An increase in the volume of referrals resulted in increased revenues realized from Peer Review Analysis, growing 10% for the year ended 1997, as compared to the prior year. Revenues from service lines that the Company exited in 1998 or expects to exit in 1999 declined overall by 32% during 1997, as compared to 1996. The principal reason for the overall decline related to bill audit services, which recorded significantly lower revenues as a result of renegotiated client contracts. Revenues from other service lines increased 42% overall for 1997 as compared to 1996 despite a slight decline in enrollment in our clients' indemnity plan based group health business. The increase was primarily attributable to the June 1997 acquisition of SSDC (which expanded CORE's programs to include Medicare coordination of benefits services). The Company expects utilization review and case management revenues to decline in future periods, as compared to current year levels. For 1997, the Company's top five clients represented 43% of revenues compared to 36% during 1996. Bell Atlantic accounted for approximately 23% of revenue in 1997 and 13% of revenues for 1996. No other single client represented more than 10% of total revenues in 1997 or 1996. Cost of services increased $5,589,000 (32%) from $17,741,000 in 1996 to $23,330,000 in 1997. The increase is primarily the result of additional payroll costs associated with business acquisitions completed in June and July of 1997 and increased staffing levels required to service new and growing WorkAbility clients and growth in the Company's Peer Review Analysis services. Additionally, increased amortization expense was incurred as software enhancements to the Company's operating systems were placed into service. CORE's gross profit performance for 1997 improved slightly to 39% from 38% in 1996. Gross profit performance for each of the Company's principal service lines for the years ended 1997 and 1996, respectively, are: 35% and 41% for Integrated Disability Management, 39% and 39% for Peer Review Analysis, 27% and 42% for 24 exiting/exited services and 52% and 30% for other service lines. The decline in gross margins realized by Integrated Disability Management is largely attributable to costs of integrating the new programs pursuant to the June 1997 acquisition of SSDC (which added social security disability benefits advocacy services) and the July 1997 acquisition of PWS. The significant decline in overall gross margins realized for those service lines being exited in 1998 or expected to be exited in 1999 is mainly attributable to a 62% decrease in revenues generated from bill audit services during 1997. The increase in gross margins realized for other service lines is attributable to the addition of Medicare coordination of benefits services in June 1997. General and administrative expenses increased $1,655,000 (26%) from $6,285,000 in 1996 to $7,940,000 in 1997. Expenses increased due primarily to higher costs associated with additional staffing in the information services areas to support the growth of the Company. Higher costs in rent, insurance costs, equipment rental and other general and administrative expenses relate primarily to the Company's Silver Spring, Maryland operating center that opened in July 1996, the expansion of space in the Company's Burlington, Massachusetts facility in early 1997, and the acquisitions of SSDC and Protocol Work Systems in June and July 1997, respectively. General and administrative expenses, as a percentage of revenues, decreased from 22% for 1996 to 21% for 1997. This improvement is generally due to greater economies of scale related to higher revenues. Sales and marketing expenses increased $739,000 (42%) from $1,744,000 in 1996 to $2,483,000 in 1997. The increase is primarily due to increased staffing to support the sales and product development departments as well as additional travel costs and costs for participation in tradeshows. During 1997, the Company expanded its sales organization to focus its efforts on Fortune 500 company prospects. Additionally, a sales tracking system was implemented in 1997 to streamline prospective sales activities, centrally manage the Company's sales activities and assist in identifying cross-selling opportunities of the Company's products and services to take advantage of the acquisitions of SSDC and Protocol Work Systems. Depreciation and amortization expenses increased $617,000 (46%) from $1,338,000 in 1996 to $1,955,000 in 1997. The increase is largely attributable to increased depreciation expense on assets purchased for the operating center in Silver Spring, Maryland to service the Bell Atlantic Corporation contract as well as increased amortization expense on the goodwill acquired in the purchases of SSDC and Protocol Work Systems. Other income consists primarily of interest income, which represents amounts earned by the Company's investments as reduced by interest expense. Other income increased $196,000 (54%) from $366,000 in 1996 to $562,000 in 1997. The increase is due to an increase in funds available for investment following a public offering in August 1996 and a reduction in the use of the Company's line of credit. FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES On August 31, 1998, the Company entered into a revolving line of credit agreement (the "Credit Agreement") with Fleet National Bank ("Fleet"). Under the Credit Agreement, which was amended on December 31, 1998 and expires August 31, 2003, the Company may borrow up to specified amounts beginning at $17,000,000 at the prime base rate plus 0.50% or London Interbank Offered Rate ("LIBOR") plus 3.50%. The $17,000,000 credit availability is subject to mandatory commitment reductions each quarter in amounts ranging from $250,000 to $1,000,000. At December 31, 1998, the Company had outstanding borrowings of $16,500,000 under the Credit Agreement which were all tied to the prime base lending rate (7.75%) plus the applicable margin. The Credit Agreement is secured by substantially all of the Company's assets and requires the Company to meet certain financial covenants, including minimum ratios for interest, debt service and fixed charge coverage along with minimum net worth levels. Additionally, the Credit Agreement prohibits the payment of dividends by the Company without the Bank's written consent. The Company was in compliance with the financial covenants contained in the Credit Agreement at December 31, 1998. In connection with the Credit Agreement, the Company issued a Warrant to purchase shares of its Common Stock to Fleet. The Warrant entitles the holder to purchase up to 156,322 shares of the Company's Common Stock (subject to certain adjustments), at an exercise price of $6.92 per share. The Warrant is exercisable beginning August 31, 1999 and expires August 31, 2003. On January 15 1999, the Company entered into an interest rate protection arrangement with Fleet that limits the Company's exposure to significant increases in the base lending rate. The arrangement places an effective cap on the prime base lending rate at 9.75 % (or LIBOR at 6.75%) over the life of the Credit Agreement. 25 A Second Amendment to the Credit Agreement, dated February 19, 1999 revised the scheduled maximum commitment available from $16,000,000 as of the date of the second amendment to $17,000,000, subject to a revised schedule of mandatory commitment reductions. For the year ended December 31, 1998, the Company's cash and cash equivalents decreased by $5,719,000. For this period, operating activities provided $1,484,000 of cash despite net losses of $3,760,000 and a net increase in accounts receivable and other current assets of $3,343,000, as these were offset by depreciation and amortization of $3,332,000 and the write-off of goodwill and intangibles of $4,085,000. The increase in accounts receivable and other current assets is due primarily to the increase in revenues over 1997 and the contractual timing of certain client billings. The Company's investing activities used $22,618,000 of cash mostly to fund the acquisition of DRMS for $20,366,000 and additions to property and equipment (including software development) of $3,504,000. The Company's financing activities provided $15,416,000 of cash for this period due primarily to $16,500,000 in net borrowings under a new credit agreement dated August 31, 1998, as offset by $1,125,000 in payments made on an obligation related to a prior year acquisition. The Company leases its facilities and certain office equipment. Future lease commitments, which relate substantially to space rental, for the years ended December 31, 1999 and December 31, 2000 are approximately $2.4 million and $2.1 million, respectively. All obligations held by the Company under lease commitments expire on various dates through June 30, 2003 and total $6.1 million as of December 31, 1998. The Company has net operating loss carryforwards for income tax purposes of approximately $5.5 million as of December 31, 1998, which can be used to reduce future obligations for federal and state income taxes. The amount of net operating loss carryforwards that can be utilized in any future year are limited due to "equity structure shifts" in 1995 involving "5% shareholders" (as these terms are defined in Section 382 of the Internal Revenue Code), which resulted in a more than 50 percentage point change in ownership. The utilization of the net operating loss carryforwards may be subject to further limitation provided by the Internal Revenue Code of 1986 and similar state provisions. The Company has recently entered into certain client service agreements and is currently negotiating other client service agreements that may require the Company to expend working capital ahead of the contractual billing periods. To the extent that such working capital needs exceed currently available working capital, the Company believes that it can obtain such additional working capital from its present lender or others. The Company believes that this additional financing, along with future earnings from operations and other sources of available funds will be sufficient to meet its liquidity and funding requirements through at least the year 1999. YEAR 2000 SYSTEM COMPLIANCE The Year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year. As a result, the Company's computer programs or hardware that have date-sensitive software or embedded chips may not properly recognize a year that begins with "20" instead of the familiar "19." If not corrected, the Company is at risk of a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices, or engage in similar normal business activities. The Company's primary computer application platforms were essentially designed to process and store dates in a four-character format. The Company believes this substantially reduces the magnitude of the effort required to address the Year 2000 issue. The Company has completed an assessment of internal applications and licensed operating systems, software tools and utilities. Additionally, the Company has evaluated third party data feeds, primarily to and from clients information systems and will have to modify or replace portions of its software so that its computer systems will function properly with respect to dates in the year 2000 and thereafter. The Company presently believes that with modifications and replacement of existing software, the Year 2000 issue can be mitigated. However, if such modifications and replacements are not made, or are not completed timely, the Year 2000 issue could have an impact on the operations of the Company. The Company's plan to resolve the Year 2000 issue involves the following five phases: assessment, remediation, testing, implementation, and certification. To date the Company has fully completed its assessment of all systems that could be significantly affected by the year 2000. The completed assessment indicated that most of the Company's major systems are effectively Year 2000 compliant and will require only minor modifications. The Company believes that with modifications to existing software and conversions to new software, the Year 2000 issue will not pose significant operational problems for its computer systems. The Company has initiated formal communications with all of its significant vendors and large customers to determine the extent to which the Company's interface systems are vulnerable to those third parties' 26 failure to remediate their own Year 2000 issues. There is no guarantee that the systems of other companies on which the Company's systems rely will be timely converted and would not have an adverse effect on the Company's systems. For its internal applications and licensed operating systems, software tools and utilities exposures, to date the Company is approximately 80% complete on the remediation phase and expects to complete the software reprogramming and replacement no later than the second quarter of 1999. Once software is reprogrammed and replaced for a system, the Company begins testing and implementation. These phases run concurrently for different systems. To date, the Company has completed approximately 70% of its testing and has implemented approximately 80% of its remediated systems. The testing phase for all significant systems is expected to be completed in the second quarter of 1999, with all remediated systems fully tested and certified in the third quarter of 1999, which is prior to any anticipated impact on its operating systems. Also, during the third quarter of 1999, the Company plans to carry out a certification process to validate the whole information technology environment, once again, to ensure Year 2000 compliance. Because the results to date of the completed assessment have indicated that most of the Company's major systems are effectively Year 2000 compliant and will require only minor modifications, no contingency plans have been developed at this time. The Company will develop contingency plans as deemed necessary if a significant risk related to our Year 2000 compliance or a delay in the anticipated timeline for compliance occurs. These contingency plans may involve, among other actions, manual workarounds. The Company has queried its material clients that do not share information systems with the Company. To date, the Company is not aware of any external agent Year 2000 issue that would materially impact the Company's results of operations, liquidity, or capital resources. However, the Company has no means of ensuring that external agents will be Year 2000 issue compliant. The inability of external agents to resolve their Year 2000 issues in a timely manner could materially impact the Company. The effect of non-compliance by external agents is not determinable. The Company will utilize both internal and external resources to reprogram, or replace, test, and implement software for Year 2000 modifications. The total cost of the Year 2000 project is estimated at $800,000 and is being funded through operating cash flows. These costs include internal information systems resources redirected to the Company's Year 2000 program. To date, the costs incurred by the Company related to all phases of the Year 2000 project have been immaterial and have been expensed as incurred. Of the total remaining project costs, approximately $200,000 is attributable to the purchase of new software and operating equipment, which will be capitalized. The remaining $580,000 related to repair of hardware and software and will be expensed as incurred. The costs of the Year 2000 project and the date on which the Company believes it will complete the Year 2000 modifications are based on management's best estimates, which were derived utilizing numerous assumptions of future events, including the continued availability of certain resources, and other factors. Estimates on the status of completion and the expected completion dates are based on costs incurred to date compared to total expected costs. However, there can be no guarantee that these estimates will be achieved and actual results could differ materially from those anticipated. Specific factors that might cause such material differences include, but are not limited to, the availability and cost of personnel trained in this area, the ability to locate and correct all relevant computer codes, and similar uncertainties. Readers are cautioned that forward-looking statements contained in this discussion should be read in conjunction with our disclosure with regard to forward-looking statements, see "Item 1. Business." 27 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The Company entered into a revolving line of credit agreement with Fleet National Bank ("Fleet") on August 31, 1998 (the "Credit Agreement"). The Credit Agreement was entered into for purposes other than trading. The outstanding borrowings under the Credit Agreement bear interest at variable rates which reset as prevailing market conditions change. The Company also entered into a derivative financial instrument in January 1999 for purposes of managing its interest rate exposure. See "Notes to Consolidated Financial Statements," Notes 3 and 9 contained elsewhere within this report for additional information. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The financial statements and supplementary data of CORE called for by this item appear under the caption Index to Financial Statements (page F-1 hereof). Such information is included elsewhere herein. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not Applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. Pursuant to General Instruction G(3) to Form 10-K, information required under this item is incorporated by reference from the Registrant's definitive proxy statement with respect to the 1999 Annual Stockholders Meeting, to be filed with the Securities and Exchange Commission pursuant to Regulation 14A. Certain information as it pertains to executive officers, is included at the end of Part I of this Form 10-K. ITEM 11. EXECUTIVE COMPENSATION. Pursuant to General Instruction G(3) to Form 10-K, information required under this item is incorporated by reference from the Registrant's definitive proxy statement with respect to the 1999 Annual Stockholders Meeting, to be filed with the Securities and Exchange Commission pursuant to Regulation 14A. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. Pursuant to General Instruction G(3) to Form 10-K, information required under this item is incorporated by reference from the Registrant's definitive proxy statement with respect to the 1999 Annual Stockholders Meeting, to be filed with the Securities and Exchange Commission pursuant to Regulation 14A. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Pursuant to General Instruction G(3) to Form 10-K, information required under this item is incorporated by reference from the Registrant's definitive proxy statement with respect to the 1999 Annual Stockholders Meeting, to be filed with the Securities and Exchange Commission pursuant to Regulation 14A. 28 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULE, AND REPORTS ON FORM 8-K. (a) Financial Statements, Financial Statements Schedule and Exhibits. 1. FINANCIAL STATEMENTS. The information called for by this item appears under the caption Index to Financial Statements (page F-1 hereof). Such information is incorporated by reference herein. 2. FINANCIAL STATEMENTS SCHEDULE. The information called for by this item appears under the caption Index to Financial Statements (page F-1 hereof). Such information is incorporated by reference herein. 3. EXHIBITS.
Exhibit Number Description - ------- ----------- 2.1 Second Agreement and Plan or Reorganization by and between Core Management, Inc., Registrant and PRA Sub, Inc. dated as of December 19, 1994. Filed as Appendix I to Prospectus and Joint Proxy Statement in Amendment No. 5 to Registrant's Registration Statement on Form S-4 (Registration No. 33-73906), filed February 14, 1995, and incorporated herein by reference. 2.2 Capital Stock Purchase Agreement, by and between Registrant, Cost Review Services, Inc., Larry Bertrand Wallace and Leigh B. Goodwin, dated October 2, 1995 (without exhibits). Filed as exhibit 2.1 to Registrant's Current Report on Form 8-K, filed October 16, 1995, and incorporated herein by reference. 2.3 Asset Purchase Agreement dated June 14, 1997, by and among CORE, INC., SSDC Corp., Social Security Disability Consultants Limited Partnership, Disability Services, Inc., DSI Medicare Consultants, Inc., R. Gary Dolenga and Phylis M. Dolenga, including Amendment No. 1 to Asset Purchase Agreement, dated June 25, 1997, and Exhibit A - Performance Criteria (excluding other Exhibits and Schedules). Filed as exhibit 2.1 to Registrant's Current Report on Form 8-K, filed July 15, 1997, and incorporated herein by reference. 2.4 Asset Purchase Agreement dated March 17, 1998, by and among CORE, INC., TCM Services, Inc., Transcend Case Management, Inc. and Transcend Services, Inc. (excluding exhibits and schedules). Filed as exhibit 2.4 to Registrant's Annual Report on Form 10-K, filed April 1, 1998, and incorporated herein by reference. 2.5 Capital Stock Purchase Agreement, dated as of August 31, 1998, by and among CORE, INC., Disability Reinsurance Management Services, Inc., and the Stockholders of Disability Reinsurance Management Services, Inc., including Exhibit A-1 (excluding other Exhibits and Schedules). Filed as exhibit 2.1 to Registrant's Current Report on Form 8-K, filed September 17, 1998, and incorporated herein by reference. 3.1 Restated Articles of Organization of the Registrant, dated November 22, 1991, as further amended by Articles of Amendment, dated March 24, 1995, July 28, 1995 and October 28, 1996. Filed as exhibit no. 4.1 to Registrant's Quarterly Report on Form 10-Q, filed November 13, 1996, and incorporated herein by reference. 3.2 By-Laws of the Registrant, as amended. Filed as exhibit no. 3.2 to Registrant's Annual Report on Form 10-K, filed March 30, 1993, and incorporated herein by reference. 4.1 Specimen Common Stock certificate. Filed as exhibit no. 4.1 to Registrant's Annual Report on Form 10-K, filed April 1, 1996, and incorporated herein by reference. 4.2 Warrant Agreement, dated as of August 31, 1998, between CORE, INC. and Fleet National Bank (excluding Exhibits). Filed as exhibit 4.1 to Registrant's Current Report on Form 8-K, filed September 17, 1998, and incorporated herein by reference. 10.1 Software License Agreement, dated August 26, 1986, between Chrysler Corporation ("Chrysler") and The Health 29 Data Institute ("HDI"). Filed as exhibit no. 10.59 to the Registrant's Registration Statement on Form S-4 (Registration No. 33-73906), filed January 10, 1994, and incorporated herein by reference. 10.2 Amendment No. 1 to Software License Agreement, dated December 23, 1987, between Chrysler and HDI. Filed as exhibit no. 10.60 to the Registrant's Registration Statement on Form S-4 (Registration No. 33-73906), filed January 10, 1994, and incorporated herein by reference. 10.3 Services Agreement, dated as of August 1, 1996, between CORE, INC. and Bell Atlantic Corporation (without schedules and appendices). Filed as exhibit 10.1 to Registrant's Quarterly Report Form 10-Q, filed August 13, 1997, and incorporated herein by reference. 10.4 Credit Agreement, dated as of August 31, 1998, between CORE, INC. and Fleet National Bank, including Exhibit A (excluding Schedules and other Exhibits). Filed as exhibit 10.1 to Registrant's Current Report on Form 8-K, filed September 17, 1998, and incorporated herein by reference. 10.5* First Amendment to the Credit Agreement, dated as of December 31, 1998, betweeen CORE, INC. and Fleet National Bank. 10.6* Second Amendment to the Credit Agreement, dated as of February 19, 1999, between CORE, INC. and Fleet National Bank. 10.7 Registrant's Amended and Restated 1991 Stock Option Plan. Filed as exhibit no. 4.3 to the Registrant's Registration Statement on Form S-8 (Registration No. 333-15261), filed October 31, 1996, and incorporated herein by reference. 10.8 Form of Stock Option Agreement, dated as of May 17, 1993, between Registrant and William E. Nixon. Filed as exhibit no. 10.5 to Registrant's Quarterly Report on Form 10-Q, filed June 30, 1993, and incorporated herein by reference. 10.9 Form of Stock Option Agreement, granted March 23, 1995, to non-employee directors for services in 1994 and through March 23, 1995, including schedule of optionees. Filed as Exhibit No. 10.1 to Registrant's Quarterly Report on Form 10-Q, filed November 14, 1995, and incorporated herein by reference. 10.10 Form of Stock Option Agreement for 19,500 shares to vest quarterly over three years granted March 24, 1995, to non-employee directors, including schedule of optionees. Filed as Exhibit No. 10.2 to Registrant's Quarterly Report on Form 10-Q, filed November 14, 1995, and incorporated herein by reference. 10.11 Form of Stock Option Agreement for 4,875 shares, granted March 24, 1995 to non-employee directors, including schedule of optionees. Filed as Exhibit No. 10.3 to Registrant's Quarterly Report on Form 10-Q, filed November 14, 1995, and incorporated herein by reference. 10.12 Form of Stock Option Agreement, granted April 27, 1995, to executive officers, including schedule of executive officer optionees. Filed as Exhibit No. 10.4 to Registrant's Quarterly Report on Form 10-Q, filed November 14, 1995, and incorporated herein by reference. 10.13 Form of Stock Option Agreement, granted April 27, 1995, for consulting and other services, including schedule of optionees. Filed as Exhibit No. 10.5 to Registrant's Quarterly Report on Form 10-Q, filed November 14, 1995, and incorporated herein by reference. 10.14 Form of Stock Option Agreement for 12,375 shares of Registrant's common stock granted November 8, 1995 to four non-employee directors. Filed as exhibit no. 10.58 to the Registrant's Annual Report on Form 10-K, filed April 1, 1996, and incorporated herein by reference. 10.15 Form of Stock Option Agreement, granted March 29, 1996, to officers, including schedule of officer optionees. Filed as exhibit no. 10.31 to Registrant's Registration Statement on Form S-1 (Registration No. 333-03639), filed May 13, 1996, and incorporated herein by reference. 10.16 Form of Stock Option Agreement, granted March 29, 1996, for consulting services, including schedule of optionees. Filed as exhibit no. 10.32 to Registrant's Registration Statement on Form S-1 (Registration No. 333-03639), filed May 13, 1996, and incorporated herein by reference. 10.17 Core Management, Inc. Employee Stock Option Plan. Filed as exhibit no. 10.65 to the Company's Registration Statement on Form S-4 (Registration No. 33-73906), filed January 10, 1994, and incorporated herein by reference. 10.18 Forms of Stock Option Agreement under Core Management, Inc. Employee Stock Option Plan. Filed as exhibit no. 30 10.66 to the Registrant's Registration Statement on Form S-4 (Registration No. 33-73906), filed January 10, 1994, and incorporated herein by reference. 10.19 Form of Non-Employee Director Stock Option Agreement of Core Management, Inc. Filed as exhibit no. 10.67 to the Company's Registration Statement on Form S-4 (Registration No. 33-73906), filed January 10, 1994, and incorporated herein by reference. 10.20 Registration Rights Agreement, dated February 23, 1994, between CMI and Silicon Valley Bank. Filed as exhibit no. 10.81 to Amendment No. 1 to the Registrant's Registration Statement on Form S-4 (Registration No. 33-73906), filed June 8, 1994, and incorporated herein by reference. 10.21 Registration Rights Agreement, dated March 17, 1998, between CORE, INC. and Transcend Services, Inc. Filed as exhibit 10.22 to Registrant's Annual Report on Form 10-K, filed April 1, 1998, and incorporated herein by reference. 10.22 Registration Rights Agreement, dated as of August 31, 1998, between CORE, INC. and James T. Fallon, Lisa O. Hansen, Michael D. Lachance, David C. Mitchell and David K. Rich. Filed as exhibit 10.2 to Registrant's Current Report on Form 8-K, filed September 17, 1998, and incorporated herein by reference. 10.23 Registration Rights Agreement, dated as of August 31, 1998, between CORE, INC. and Fleet National Bank. Filed as exhibit 10.3 to Registrant's Current Report on Form 8-K, filed September 17, 1998, and incorporated herein by reference. 10.24 Option Agreement, dated June 14, 1997, by and between CORE, INC. and R. Gary Dolenga. Filed as exhibit 99.1 to Registrant's current Report on Form 8-K, filed July 15, 1997, and incorporated herein by reference. 10.25 CORE, INC. 1997 Stock Option Plan, including forms of stock option agreements. Filed as exhibit no. 10.1 to Registrant's Quarterly Report on Form 10-Q, filed November 14, 1997, and incorporated herein by reference. 10.26 Employment Agreement, dated November 19, 1993, between the Registrant and William E. Nixon. Filed as exhibit no. 10.49 to Registrant's Registration Statement on Form S-4 (Registration No. 33-73906), filed January 10, 1994, and incorporated herein by reference. 10.27 Employment Agreement, dated June 25, 1997, by and between SSDC Corp. and R. Gary Dolenga. Filed as exhibit 99.2 to Registrant's Current Report on Form 8-K, filed July 15, 1997, and incorporated herein by reference. 10.28 Employment Agreement by and between Disability Reinsurance Management Services, Inc. and James T. Fallon (excluding Attachments). Filed as exhibit 10.4 to Registrant's Current Report on Form 8-K, filed September 17, 1998, and incorporated herein by reference. 10.29 Employment Agreement by and between Disability Reinsurance Management Services, Inc. and Lisa O. Hansen (excluding Attachments). Filed as exhibit 10.5 to Registrant's Current Report on Form 8-K, filed September 17, 1998, and incorporated herein by reference. 10.30 Employment Agreement by and between Disability Reinsurance Management Services, Inc. and Michael D. Lachance (excluding Attachments). Filed as exhibit 10.6 to Registrant's Current Report on Form 8-K, filed September 17, 1998, and incorporated herein by reference. 10.31 401(k) Plan. Filed as exhibit no. 10.34 to the Registrant's Registration Statement on Form S-1 (Registration No. 33-43418), filed October 18, 1991, and incorporated herein by reference. 10.32 Form of Indemnification Agreement. Filed as exhibit no. 10.35 to the Registrant's Registration Statement on Form S-1 (Registration No. 33-43418), filed October 18, 1991, and incorporated herein by reference. 21.1* Subsidiaries of the Registrant. 23.1* Consent of Independent Auditors. 31 27.1* Financial Data Schedule for year ended December 31, 1998.
- -------------------------------- * Filed herewith (b) Reports on Form 8-K. On October 20, 1998, the Company filed a Form 8-K/A (Amendment No. 1) related to the acquisition of all shares of stock of Disability Reinsurance Management Services, Inc. ("DRMS") which included the audited balance sheet of DRMS as of June 30, 1998 and the related statements of income and accumulated deficit, and cash flows for the six months then ended; the audited balance sheet of DRMS as of December 31, 1997 and the related statements of income and accumulated deficit, and cash flows for the year then ended; the unaudited balance sheet of DRMS as of June 30, 1997 and the related statements of income and accumulated deficit, and cash flows for the six months then ended; and the audited balance sheets of Disability Reinsurance Management Services, Inc. as of December 31, 1996 and 1995 and the related statements of operations, accumulated deficit and cash flows for the years then ended. 32 CORE, INC. INDEX TO FINANCIAL STATEMENTS CORE, INC. audited financial statements Report of Independent Auditors F-2 Consolidated Balance Sheets - December 31, 1997 and 1998 F-3 Consolidated Statements of Operations - Years ended December 31, 1996, 1997 and 1998 F-5 Consolidated Statements of Stockholders' Equity - Years ended December 31, 1996, 1997 and 1998 F-6 Consolidated Statements of Cash Flows - Years ended December 31, 1996, 1997 and 1998 F-7 Notes to Consolidated Financial Statements F-9 FINANCIAL STATEMENTS SCHEDULE Schedule II - Valuation and Qualifying Accounts F-20 All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and, therefore, have been omitted.
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, 1997 and 1998, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1998. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of CORE, INC. at December 31, 1997 and 1998, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. /s/ ERNST & YOUNG LLP Orange County, California March 26, 1999 F-2 CORE, INC. CONSOLIDATED BALANCE SHEETS
DECEMBER 31, --------------------------------- 1997 1998 --------------- ---------------- ASSETS Current assets: Cash and cash equivalents $7,944,595 $ 2,226,020 Investments available-for-sale 1,188,037 -- Accounts receivable, net of allowance for doubtful accounts of $151,633 in 1997 and $405,013 in 1998 6,473,037 8,280,630 Unbilled receivables -- 1,395,500 Notes receivable from officers 106,388 90,462 Prepaid expenses and other current assets 815,100 1,080,993 --------------- ---------------- Total current assets 16,527,157 13,073,605 Property and equipment, net 6,444,803 7,931,150 Deposits and other assets 494,208 618,487 Goodwill and intangibles, net of accumulated amortization of $460,000 in 1997 and $863,077 in 1998 9,348,864 27,108,298 ---------------- ---------------- Total assets $32,815,032 $48,731,540 ================ ================
F-3 CORE, INC. CONSOLIDATED BALANCE SHEETS - CONTINUED
DECEMBER 31, ---------------------------------- 1997 1998 --------------- ----------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 833,898 $ 1,363,785 Accrued expenses 1,201,283 2,076,933 Accrued payroll 650,230 807,124 Accrued vacation 645,262 717,500 Advances under revolving credit agreement -- 2,750,000 Deferred income taxes 74,816 -- Notes payable 64,900 259,510 Obligation from acquisition 1,125,000 -- Current portion of obligations to former shareholders 50,000 -- Current portion of capital lease obligations 31,651 6,015 --------------- ----------------- Total current liabilities 4,677,040 7,980,867 Advances under revolving credit agreement, net of current portion -- 13,750,000 Note payable, net of current portion 185,049 123,633 Capital lease obligations, net of current portion 4,695 -- Deferred rent, net of current portion 146,592 50,410 Deferred income taxes 143,000 -- Commitments and contingencies Stockholders' equity: Preferred stock, no par value, authorized 500,000 shares; no shares outstanding -- -- Common stock, $0.10 par value per share; authorized 30,000,000 shares; issued and outstanding 7,303,079 and 7,824,512 at December 31, 1997 and 1998, respectively 730,308 782,451 Additional paid-in capital 34,909,579 37,778,640 Deferred compensation (13,392) (6,697) Accumulated deficit (7,967,839) (11,727,764) ---------------------------------- Total stockholders' equity 27,658,656 26,826,630 ---------------------------------- Total liabilities and stockholders' equity $32,815,032 $48,731,540 ==================================
See accompanying notes. F-4 CORE, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, ---------------- ----------------- ---------------- 1996 1997 1998 ---------------- ----------------- ---------------- Revenues $28,805,590 $38,506,563 $45,609,284 Cost of services 17,740,901 23,330,004 27,832,974 ---------------- ----------------- ---------------- Gross profit 11,064,689 15,176,559 17,776,310 Operating expenses: General and administrative 6,284,651 7,940,005 9,739,920 Sales and marketing 1,744,386 2,482,561 3,648,707 Depreciation and amortization 1,338,122 1,954,810 2,503,402 Write-off of AmHealth acquisition 1,919,871 -- -- Write-off of goodwill and intangibles -- -- 4,085,449 Arbitration costs -- -- 736,009 Charges in connection with disposal of subsidiaries -- -- 657,670 Other non-recurring charges -- -- 156,116 ---------------- ----------------- ---------------- Total operating expenses 11,287,030 12,377,376 21,527,273 Income (loss) from operations (222,341) 2,799,183 (3,750,963) Other income (expense): Interest income 385,394 589,853 302,784 Interest expense (35,512) (27,315) (504,746) Realized gain on sale of investments available-for-sale 16,003 -- -- Other income 481 -- -- ---------------- ----------------- ---------------- 366,366 562,538 (201,962) ---------------- ----------------- ---------------- Income (loss) before income taxes 144,025 3,361,721 (3,952,925) Income tax (provision) benefit -- (610,000) 193,000 ---------------- ----------------- ---------------- Net income (loss) $144,025 $2,751,721 $(3,759,925) ================ ================= ================ Net income (loss) per common share: Basic $0.03 $0.38 $(0.50) ================ ================= ================ Diluted $0.02 $0.35 $(0.50) ================ ================= ================ Weighted average number of common shares and equivalents outstanding: Basic 5,713,000 7,246,000 7,489,000 ================ ================= ================ Diluted 6,473,000 7,934,000 7,489,000 ================ ================= ================
See accompanying notes. F-5 CORE, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
ADDITIONAL COMMON STOCK PAID-IN DEFERRED SHARES AMOUNT CAPITAL COMPENSATION ------ ------ ------- ------------ BALANCE AT DECEMBER 31, 1995 4,794,403 $ 479,440 $18,052,547 $ (51,120) Exercise of stock options 129,508 12,951 349,416 - Issuance of common stock from public offering (net of offering costs) 2,248,800 224,880 16,063,183 - Amortization of deferred compensation - - - 12,480 Change in unrealized gain (loss) on investments available-for-sale - - - - Net income - - - - -------------------------------------------------- BALANCE AT DECEMBER 31, 1996 7,172,711 717,271 34,465,146 (38,640) Exercise of stock options 130,368 13,037 462,986 - Amortization of deferred compensation costs - - - 6,695 Reduction of deferred compensation costs due to extinguishment of unvested options - - (18,553) 18,553 Change in unrealized gain (loss) on investments available-for-sale - - - - Net income - - - - -------------------------------------------------- BALANCE AT DECEMBER 31, 1997 7,303,079 730,308 34,909,579 (13,392) Exercise of stock options 41,433 4,143 173,661 - Amortization of deferred compensation costs - - - 6,695 Compensation recognized under stock option plan - - 13,400 - Issuance of common stock pursuant to acquisition of Disability Reinsurance Management Services, Inc. 480,000 48,000 2,682,000 - Net loss - - - - -------------------------------------------------- BALANCE AT DECEMBER 31, 1998 7,824,512 $ 782,451 $37,778,640 $ (6,697) ================================================== ACCUMULATED OTHER TOTAL COMPREHENSIVE ACCUMULATED STOCKHOLDERS' COMPREHENSIVE INCOME DEFICIT EQUITY INCOME -------------- ------- ------ ------ BALANCE AT DECEMBER 31, 1995 $ 30,975 $(10,863,585) $ 7,648,257 Exercise of stock options - - 362,367 Issuance of common stock from public offering (net of offering costs) - - 16,288,063 Amortization of deferred compensation - - 12,480 Change in unrealized gain (loss) on investments available-for-sale 1,008 - 1,008 $ 1,008 Net income - 144,025 144,025 144,025 ----------------------------------------------------------------- BALANCE AT DECEMBER 31, 1996 31,983 (10,719,560) 24,456,200 $ 145,033 ============== Exercise of stock options - - 476,023 Amortization of deferred compensation costs - - 6,695 Reduction of deferred compensation costs due to extinguishment of unvested options - - - Change in unrealized gain (loss) on investments available-for-sale (31,983) - (31,983) $ (31,983) Net income - 2,751,721 2,751,721 2,751,721 ----------------------------------------------------------------- BALANCE AT DECEMBER 31, 1997 - (7,967,839) 27,658,656 $ 2,719,738 ============== Exercise of stock options - - 177,804 Amortization of deferred compensation costs - - 6,695 Compensation recognized under stock option plan - - 13,400 Issuance of common stock pursuant to acquisition of Disability Reinsurance Management Services, Inc. - - 2,730,000 Net loss - (3,759,925) (3,759,925) $(3,759,925) ----------------------------------------------------------------- BALANCE AT DECEMBER 31, 1998 $ - $ (11,727,764) $26,826,630 $(3,759,925) =================================================================
See accompanying notes. F-6 CORE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, --------------- -------------- ---------------- 1996 1997 1998 --------------- -------------- ---------------- OPERATING ACTIVITIES: Net income (loss) $144,025 $2,751,721 $(3,759,925) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation 1,189,488 1,651,110 2,195,378 Amortization 374,799 931,206 1,136,243 Write-off of goodwill and intangibles - - 4,085,449 Disposal of subsidiaries, net of cash payments and other charges - - 520,421 Provision for losses on accounts receivable - - 253,380 Arbitration costs, net of cash payments - - 239,605 Realized gain on sale of investments available-for-sale (16,003) - - Compensation expense related to issuance of stock options 12,480 6,695 20,095 Decrease in obligations to former shareholders (261,225) - - Changes in operating assets and liabilities: Increase in accounts receivable (1,558,382) (1,927,299) (1,258,378) Increase in unbilled receivables - - (1,395,500) Increase in prepaid expenses and other assets (1,000,060) (71,408) (688,900) Increase in accounts payable and accrued expenses 31,140 585,849 136,283 --------------- -------------- ---------------- Net cash provided by (used in) operating activities (1,083,738) 3,927,874 1,484,151 INVESTING ACTIVITIES: Net additions to property and equipment (4,589,839) (1,828,321) (3,504,240) Net additions to intangible assets (176,119) (391,307) - Decrease in cash pledged as collateral 106,000 192,000 - (Increase) decrease in deposits (69,268) 42,162 64,081 (Increase) decrease in notes receivable from officers (71,419) 538 - Payments for acquisitions, net of cash acquired - (5,434,612) (20,366,271) Payments on non-compete obligations to former shareholders - (50,000) - Purchases of investments available-for-sale (23,612,768) (44,647,453) (16,579,100) Sales of investments available-for-sale 16,725,858 51,862,964 17,767,137 --------------- -------------- ---------------- Net cash used in investing activities (11,687,555) (254,029) (22,618,393) FINANCING ACTIVITIES: Borrowings under credit agreement - - 17,000,000 Repayments under credit agreement - - (500,000) Payments on obligation from acquisition - (375,000) (1,125,000) Payments on obligations to former shareholders (682,390) - (50,000) Issuance of notes payable 328,518 - - Payments on notes payable (169,723) (64,840) (56,806) Payments on capital lease obligations (79,355) (47,427) (30,331) Proceeds from issuance of common stock, net of offering costs 16,288,063 - - Issuance of common stock upon exercise of stock options and warrants 362,367 476,023 177,804 --------------- -------------- ---------------- Net cash provided by (used in) financing activities 16,047,480 (11,244) 15,415,667 --------------- -------------- ---------------- Net increase (decrease) in cash and cash equivalents 3,276,187 3,662,601 (5,718,575) Cash and cash equivalents at beginning of year 1,005,807 4,281,994 7,944,595 --------------- -------------- ---------------- Cash and cash equivalents at end of year $4,281,994 $ 7,944,595 $ 2,226,020 =============== ============== ================
F-7 CORE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
YEAR ENDED DECEMBER 31, ----------------------------------------------- 1996 1997 1998 ----------------------------------------------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Interest paid $55,697 $23,492 $500,612 Income taxes paid - $221,393 $164,500 NON-CASH INVESTING AND FINANCING ACTIVITIES: Issuance of common stock in connection with acquisition - - $2,730,000 Increase in accrued expenses in connection with acquisition - - $618,286 Net decrease in intangibles pursuant to licensing agreement - - $200,000
See accompanying notes. F-8 CORE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998 1. ORGANIZATION AND PURPOSE CORE, INC. ("CORE" or the "Company") is a national provider of employee absence management services to Fortune 500 companies and other self-insured employers, third-party administrators and insurance carriers. The Company's services include Integrated Disability Management (which consist of the Company's proprietary WorkAbility Absence Management program, disability reinsurance management services, social security disability benefits advocacy, analytic consulting services, onsite job profiling and analysis and workplace risk management services, and licensing), Peer Review Analysis (which consist of specialty physician and behavioral health review services), and other services including Medicare coordination of benefits, health care benefits utilization review and case management services. 2. BUSINESS ACQUISITIONS On September 1, 1998, the Company acquired all shares of stock of Disability Reinsurance Management Services, Inc. ("DRMS"), a Delaware corporation, pursuant to a Capital Stock Purchase Agreement dated as of August 31, 1998 (the "Stock Purchase Agreement") in a transaction accounted for as a purchase. Pursuant to the Stock Purchase Agreement, all shares of stock of DRMS were acquired in exchange for a $20,000,000 cash payment, the issuance of 480,000 shares of the Company's common stock and the future issuance of up to an additional $7,000,000 of the Company's common stock after September 30, 2001, based upon the future performance of DRMS. The purchase price is subject to certain adjustments as set forth in the Stock Purchase Agreement. The excess of the purchase price over the estimated fair market value of the net assets acquired, representing goodwill and certain identifiable intangibles amounting to approximately $22,762,000, is being amortized on a straight-line basis over periods of three to thirty-five years. DRMS is a full service reinsurance intermediary manager providing marketing, underwriting advice, claims, actuarial and compliance services to its insurance company clients and risk management expertise for reinsurers in a reinsurance facility. On March 17, 1998, a wholly-owned subsidiary of the Company, TCM Services, Inc. ("TCM") purchased the operating assets and certain liabilities of Transcend Case Management, Inc. ("Transcend") pursuant to an Asset Purchase Agreement (the "Asset Purchase Agreement") in a transaction accounted for as a purchase. Transcend is a provider of workers' compensation case management services. Pursuant to the Asset Purchase Agreement, the assets of Transcend were acquired in exchange for the assumption of certain liabilities and a contingent issuance of shares of common stock of the Company, the number of which was to be equal to a valuation based upon the future performance of the acquired operations. On December 23, 1998, TCM transferred substantially all its assets and certain liabilities to Transcend following the exercise by Transcend of its option to reacquire the assets, as described in the Asset Purchase Agreement. See Note 7. On June 25, 1997, a wholly-owned subsidiary of the Company purchased certain assets and liabilities of Social Security Disability Consultants and Disability Services, Inc. (collectively, "SSDC") for an initial cash payment of $5,000,000, additional obligations of $1,500,000 (paid in quarterly installments through June 30, 1998), and additional performance related cash payments in a transaction accounted for as a purchase. Performance based payments of $139,000 have been made as of December 31, 1998 and up to an additional $320,000 is payable, based upon the future performance of SSDC. SSDC provides disability management services with two key areas of business: social security disability benefits advocacy and Medicare coordination of benefits. F-9 CORE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED 2. BUSINESS ACQUISITIONS (continued) The consolidated financial statements include the operating results of DRMS, TCM, and SSDC from the dates of acquisition. The following unaudited pro forma information has been prepared as if the acquisitions of DRMS and SSDC had occurred on January 1, 1997 and the TCM acquisition and subsequent disposition had not occurred at all. The pro forma financial information set forth below includes adjustments for amortization of intangibles arising from the transactions, interest expense incurred on funds borrowed to finance the transactions, reductions in interest income from the use of short-term investments to fund the transactions and for additional shares of common stock issued in the DRMS transaction.
Year ended December 31, 1997 1998 -------------------------------------------- Revenues $46,452,000 $48,145,000 Income (loss) before extraordinary item $3,018,000 $(3,640,000) -------------------------------------------- -------------------------------------------- Net income (loss) $4,122,000 $(3,640,000) -------------------------------------------- -------------------------------------------- Earnings (loss) per common share: Net income (loss) before extraordinary item: Basic $0.39 $ (0.47) -------------------------------------------- -------------------------------------------- Diluted $0.36 $ (0.47) -------------------------------------------- -------------------------------------------- Net income (loss): Basic $0.53 $ (0.47) -------------------------------------------- -------------------------------------------- Diluted $0.49 $ (0.47) -------------------------------------------- --------------------------------------------
The pro forma financial information is presented for informational purposes only and is not necessarily indicative of what the actual consolidated results of operations might have been had the transactions occurred on the date indicated. F-10 CORE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED 3. ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany transactions have been eliminated in consolidation. RISKS AND UNCERTAINTIES The Company provides its services to companies throughout the United States in various industries, including, but not limited to the healthcare and insurance industries. Management does not believe significant credit risk exists at December 31, 1998 as a result of the large and diverse nature of the Company's customer base. The Company maintains allowances for potential credit losses, and these losses have consistently been within management's expectations. SIGNIFICANT ESTIMATES AND ASSUMPTIONS The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. FINANCIAL INSTRUMENTS Financial instruments primarily consist of cash and cash equivalents, investments available-for-sale, receivables, payables and borrowings. The Company also entered into a derivative financial instrument in January 1999 for purposes of managing its interest rate exposure. The cost of the interest rate protection arrangement will be included in interest expense ratably over the life of the arrangement. Payments to be received as a result of the arrangement will be accrued, if applicable, as a reduction of interest expense. The unamortized cost of the arrangement will be included in other assets. CONCENTRATION OF CREDIT RISK Financial instruments, which potentially subject the Company to concentrations of credit risk, principally consist of cash and cash equivalents, investments available-for-sale and receivables. FAIR VALUES Cash, receivables, notes receivable, accounts payable, accrued expenses and notes payable are reflected in the financial statements at fair value because of the short-term maturity of those instruments. Outstanding borrowings under a revolving line of credit agreement are reflected in the financial statements at fair value because the variable borrowing rates accruing on the debt approximate the current rates offered for similar debt. INVESTMENTS Investments are accounted for in accordance with Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Under the SFAS 115, debt securities that the Company has both the positive intent and ability to hold to maturity are classified as held-to-maturity securities and are carried at amortized cost. Debt securities that the Company does not have the positive intent or ability to hold to maturity and equity securities are classified as available-for-sale and are carried at fair market value. Increases or declines in fair market value of available-for-sale securities judged to be other than temporary are recorded as a component of other income. Temporary declines are reported as a separate component of stockholders' equity. The Company considers all highly liquid investments with a maturity of three months or less at the date of purchase to be cash equivalents. Investments available-for-sale represent the investment of excess cash in commercial paper, corporate bonds and United States Government securities. PRECONTRACT COSTS Precontract costs incurred for a specific contract are deferred if the costs can be directly associated with the contract and the recoverability from the gross profits on the revenue generated by the contract is probable. The anticipated gross profit must be sufficient to absorb deferred precontract costs as well as future period costs. Precontract costs are amortized on a straight-line basis over the contract period, generally not longer than three years. F-11 CORE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED 3. ACCOUNTING POLICIES (continued) REVENUE RECOGNITION The Company engages principally in capitated (fixed per employee per month), hourly, or per case basis contracts. Revenue on these contracts is recognized using either the percentage-of-completion method or as services are performed based on contracted rates. The percentage-of-completion method measures revenue principally by comparing the cost of services performed to date with the total estimated cost of services required through completion applied to the entire estimated contract value. Management fees, representing a percentage of the premiums on disability policies of the Disability Alliance for Reinsurance Treaties ("DART") pool that are managed by the Company, are recorded monthly as earned. Profit commissions, representing a percentage of the overall profits on the pooled policies under management are not recognized until annual operating results of the DART are determinable. Licensing fees are primarily based on use by the customer and are recognized as revenue when earned. Unbilled receivables and revenues are recorded as costs are incurred on certain contracts, and will be billed as services are commenced under the specified contracts. Costs to complete estimates are reviewed periodically and revised as required. Provisions are made for the full amount of anticipated losses, if any, on all contracts in the period in which they are first determinable. PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Major additions and betterments are capitalized while repairs and maintenance expenditures, which do not improve or extend the life of the respective assets, are expensed when incurred. DEPRECIATION AND AMORTIZATION Property and equipment are depreciated using the straight-line method. The estimated useful lives of the related assets are as follows: Computer and office equipment 3-7 years Software and software development costs 3-5 years Furniture and fixtures 7 years Leasehold improvements Shorter of lease term or estimated useful life
SOFTWARE DEVELOPMENT COSTS Certain costs of software, developed for internal use, are capitalized during the application development stage. Costs incurred for maintenance and customer support are charged to expense as incurred. The Company capitalized software development costs of $718,589 and $1,780,161 during the years ended December 31, 1997 and 1998, respectively. Software development costs are amortized using the straight-line method. Amortization in the amount of $110,165, $262,956 and $360,580 is included in cost of services for the years ended December 31, 1996, 1997 and 1998, respectively. GOODWILL AND OTHER INTANGIBLES Goodwill and other intangibles, which include the cost of customer contracts, management agreements and license agreements are being amortized over three to thirty-five years, on a straight-line basis. Recoverability of all intangible assets, including goodwill arising from business acquisitions, is reviewed annually or sooner if events or changes in circumstances indicate that the carrying amount may exceed fair value. F-12 CORE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED 3. ACCOUNTING POLICIES (continued) INCOME TAXES The Company provides for income taxes under the liability method. Under this method, deferred income taxes are recognized for the future tax consequences of differences between the tax and financial accounting of assets and liabilities at each year-end. Deferred income taxes are based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to effect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. INCOME (LOSS) PER COMMON SHARE The Company accounts for income (loss) per share in accordance with SFAS No. 128, "Earnings per Share." Under SFAS No. 128, basic earnings per share excludes any dilutive effect of options, warrants and convertible securities. Diluted earnings per share is similar to fully diluted earnings per share. COMPREHENSIVE INCOME As of January 1, 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes new rules for the reporting and display of comprehensive income and its components; however, the adoption of this statement had no impact on the Company's net income or stockholders' equity. SFAS No. 130 requires unrealized gains or losses on the Company's available-for-sale securities, which prior to adoption were reported separately in stockholders' equity, to be included in other comprehensive income. SEGMENT REPORTING The Company adopted SFAS No. 131 "Disclosures about Segments of an Enterprise and Related Information," during 1998. SFAS No. 131 supercedes SFAS No. 14 "Financial Reporting for Segments of a Business Enterprise." SFAS No. 131 establishes standards for the way that public companies report information about operating segments and related disclosures about products and services, geographic areas and major customers in annual consolidated financial statements. The Company operates in a single industry segment: employee absence management services. The adoption of SFAS No. 131 did not affect the consolidated results of operations or financial position of the Company. STOCK-BASED COMPENSATION The Company applies Accounting Principles Board Opinion No. 25 and related interpretations in accounting for stock option grants to employees (and non-employees prior to January 1, 1996). Since January 1, 1996, the Company applies SFAS No. 123, "Accounting for Stock-Based Compensation" and related interpretations for accounting for stock option grants to non-employees. RECLASSIFICATIONS Certain reclassifications of 1996 and 1997 amounts have been made to permit comparison. NEW ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." The Company expects to adopt the new Statement effective January 1, 2000. SFAS No. 133 will require the Company to recognize all derivatives on the balance sheet at fair value. The Company does not anticipate that the adoption of this Statement will have a significant effect on its results of operations or financial position. 4. INVESTMENTS At December 31, 1997 the Company's investments consisted of mortgaged-backed securities with maturities due after three months through one year. The amortized cost and estimated fair value of the investments at December 31, 1997 were $1,188,037. For the years ended December 31, 1997 and 1998, the Company sold available-for-sale securities with a fair value on the date of sale of $51,862,964 and $17,767,137, respectively. There were no realized gains and losses on sales during 1997 and 1998. F-13 CORE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED 5. PROPERTY AND EQUIPMENT Property and equipment consist of the following at December 31:
1997 1998 -------------------------------- Computer and office equipment $6,315,821 $7,298,554 Software and software development costs 3,157,620 5,430,844 Furniture and fixtures 1,979,795 2,131,005 Leasehold improvements 1,963,954 2,001,217 -------------------------------- -------------------------------- 13,417,190 16,861,620 Accumulated depreciation (6,972,387) (8,930,470) -------------------------------- Property and equipment, net $6,444,803 $7,931,150 -------------------------------- --------------------------------
6. IMPAIRMENT LOSSES ON LONG LIVED ASSETS In accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and of Long-Lived Assets to be Disposed Of", the Company records impairment losses on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. During June 1998, the Company's wholly owned subsidiary, Cost Review Services, Inc. ("CRS") was informed that its principal client (representing nearly 70% of CRS revenues) would not be renewing its contract in October 1998. This information combined with present operating losses incurred by CRS indicated that the net book value of the goodwill and intangibles related to the CRS operations, amounting to $1,935,000, was not recoverable and thus, was written-off (see note 7). The Company also performed a review of other long-lived assets during 1998. The results of its review indicated that an impairment loss existed related to certain identifiable intangible contract values resulting from the acquisition of SSDC in June 1997. The impairment loss primarily resulted from a significant decline in revenues realized under SSDC's Medicare coordination of benefits program. As it appeared that the decline in revenues would continue, intangibles in the amount of $2,150,000 were written off during 1998. 7. DISPOSAL OF SUBSIDIARIES Effective October 31, 1998, the Company discontinued the operations of its subsidiary, CRS. In connection with this action, the Company recorded estimated charges totaling $417,000. The major components of the charges were $157,000 of employee separation costs, $58,000 of non-cash charges to dispose of certain assets through abandonment and $75,000 to terminate lease and other contractual obligations. CRS provided regional bill audit and workers' compensation case management services to insurance companies and third-party administrators of workers' compensation programs. On December 23, 1998, TCM transferred substantially all its assets and certain liabilities to Transcend following the exercise by Transcend of its option to reacquire the assets, as described in the Asset Purchase Agreement dated March 17, 1998 (see Note 2). The Company recorded charges of $241,000 in connection with this transfer. 8. ARBITRATION The Company incurred costs of $736,000 as a result of a settlement agreement entered into with the former shareholders of CRS on June 2, 1998. The settlement agreement related to an arbitration dispute and included the immediate payment of $425,000 and the issuance of promissory notes in the amount of $190,000 payable in twelve monthly installments beginning January 1999. In addition, the Company incurred $121,000 in other costs related to the arbitration. F-14 CORE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED 9. CREDIT AGREEMENT On August 31, 1998, the Company entered into a revolving line of credit agreement (the "Credit Agreement") with Fleet National Bank ("Fleet"). Under the Credit Agreement, which was amended on December 31, 1998 and expires August 31, 2003, the Company may borrow up to specified amounts beginning at $17,000,000 at the prime base rate plus 0.50% or London Interbank Offered Rate ("LIBOR") plus 3.50%. The $17,000,000 credit availability is subject to mandatory commitment reductions each quarter in amounts ranging from $250,000 to $1,000,000. At December 31, 1998, the Company had outstanding borrowings of $16,500,000 under the Credit Agreement which were all tied to the prime base lending rate (7.75%) plus the applicable margin. The Credit Agreement is secured by substantially all of the Company's assets and requires the Company to meet certain financial covenants, including minimum ratios for interest, debt service and fixed charge coverage along with minimum net worth levels. Additionally, the Credit Agreement prohibits the payment of dividends by the Company without the Bank's written consent. The Company was in compliance with the financial covenants contained in the Credit Agreement at December 31, 1998. In connection with the Credit Agreement, the Company issued a Warrant to purchase shares of its Common Stock to Fleet. The Warrant entitles the holder to purchase up to 156,322 shares of the Company's Common Stock (subject to certain adjustments), at an exercise price of $6.92 per share. The Warrant is exercisable beginning August 31, 1999 and expires August 31, 2003. On January 15 1999, the Company entered into an interest rate protection arrangement with Fleet that limits the Company's exposure to significant increases in the base lending rate. The arrangement places an effective cap on the prime base lending rate at 9.75 % (or LIBOR at 6.75%) over the life of the Credit Agreement. A Second Amendment to the Credit Agreement, dated February 19, 1999 revised the scheduled maximum commitment available from $16,000,000 as of the date of the second amendment to $17,000,000, subject to a revised schedule of mandatory commitment reductions. Scheduled mandatory commitment reductions, as amended, for the next five years are as follows: 1999 $2,750,000 2000 3,125,000 2001 3,625,000 2002 4,000,000 2003 3,000,000 ----------------- $16,500,000 ----------------- -----------------
F-15 CORE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED 10. STOCK OPTION PLANS The Company has elected to follow Accounting Principals Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related Interpretations in accounting for its employee stock options because, as discussed below, the alternative fair value accounting provided for under SFAS No. 123, "Accounting for Stock-Based Compensation," requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. On March 28, 1997, options for the purchase of 586,189 shares with exercise prices ranging between $7.46 and $12.25 were re-priced to $6.25. The re-pricing of these options did not affect the financial statements under APB 25; however, the affect of the re-pricing has been reflected in the SFAS 123 pro forma disclosures set forth below. Pro forma information regarding net income and earnings per share is required by SFAS No. 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions for 1996, 1997 and 1998, respectively: risk-free interest rates of 6.18%, 6.12% and 5.28%; volatility factors of the expected market price of the Company's common stock of 99%, 93%, and 90%; and a weighted average expected life of the options of 5 years. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. For purposes of pro-forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information for the years ended December 31, is as follows:
1996 1997 1998 --------------- --------------- --------------- Pro forma net income (loss) $(1,390,000) $181,000 $(7,212,000) =============== =============== =============== Pro forma net income (loss) per share $(0.24) $0.02 $(0.96) =============== =============== ===============
The Company has reserved 1,800,000 shares of common stock for issuance under stock option plans established in 1991 and 1997. The Company has also granted or assumed 1,124,082 non-plan stock options and warrants of which 223,904, 308,758 and 329,758 have been exercised as of December 31, 1996, 1997 and 1998, respectively. As of December 31, 1997 and 1998, respectively, 7,812 and 21,212 of these non-plan stock options have been cancelled. Other than the 773,112 non-plan stock options outstanding at December 31, 1998, no shares have been reserved for non-plan stock options. Plan and non-plan stock options activity and related information for the years ended December 31, is as follows:
------------------------------------------------------ 1996 1997 1998 ------------------------------------------------------ Outstanding at beginning of year 1,267,853 1,395,693 2,008,083 Granted 429,589 795,126 595,139 Canceled (172,241) (52,368) (91,597) Exercised (129,508) (130,368) (41,433) ------------------------------------------------------ Outstanding at end of year 1,395,693 2,008,083 2,470,192 ====================================================== Price range of outstanding options $2.50 - $13.38 $2.94 - $11.13 $2.94 - $13.75 ====================================================== Price range of options exercised $2.50 - $ 9.38 $2.50 - $8.75 $2.94 - $8.75 ====================================================== Exercisable at end of year 811,132 1,004,625 1,393,743 ====================================================== Available for grant at end of year 175,338 369,768 9,150 ======================================================
F-16 CORE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED 10. STOCK OPTION PLANS (continued) The weighted average exercise prices are as follows:
DECEMBER 31, --------------------------------------- 1996 1997 1998 --------------------------------------- Granted $11.10 $8.90 $8.76 Canceled $7.90 $6.92 $9.12 Exercised $3.40 $3.92 $4.89 Outstanding at end of year $6.25 $6.29 $6.80 Exercisable at end of year $5.50 $5.15 $5.96
The weighted average fair value of options granted during the years ended December 31, 1996, 1997 and 1998 are $8.80, $6.80 and $5.84, respectively. Stock options will expire on various dates through November 2003. The weighted average remaining contractual life of options outstanding at December 31, 1998 is 2.9 years. 11. INCOME TAXES The income tax provision (benefit) is comprised of the following:
YEAR ENDED DECEMBER 31, -------------------------------------- 1996 1997 1998 -------------------------------------- Current: Federal $ - $ (490,000) $ 116,000 State - (120,000) (141,000) -------------------------------------- - (610,000) (25,000) Deferred: Federal - - 218,000 -------------------------------------- $ - $ (610,000) $ 193,000 ======================================
The approximate effect of temporary differences and carryforwards that give rise to deferred tax assets and liabilities as of December 31 is as follows:
1997 1998 ----------------- ---------------- Deferred tax assets: Bad debt reserve $ 62,000 $ 136,000 Expense accruals 320,000 347,000 Goodwill amortization - 710,000 Net operating loss carryforwards 1,050,000 901,000 Valuation allowance (1,391,000) (1,987,000) ----------------- ---------------- 41,000 107,000 Deferred tax liabilities: Change in accounting method from cash to accrual (95,000) - Depreciation (164,000) (107,000) ----------------- ---------------- (259,000) (107,000) ----------------- ---------------- Net deferred tax liability $ (218,000) $ - ================= ================
F-17 CORE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED 11. INCOME TAXES (continued) The valuation allowance primarily relates to deferred tax assets for federal and state net operating loss carryforwards of approximately $2.0 million and $3.5 million, respectively. These unutilized net operating loss ("NOL") carryforwards, which expire through 2011, will be carried forward for reduction of future federal and state income taxes payable. The amount of net operating loss carryforwards that can be utilized in any future year are limited due to "equity structure shifts" in 1995 involving "5% shareholders" (as these terms are defined in Section 382 of the Internal Revenue Code), which resulted in a more than 50 percentage point change in ownership. The utilization of these NOL carryforwards may be subject to further limitation provided by the Internal Revenue Service Code of 1986 and similar state provisions. No benefit for these carryforwards has been recognized in the financial statements. Income tax expense for the years ended December 31, 1996, 1997 and 1998 is different than the amount computed by applying the U.S. federal income tax rate to income before income taxes. The reasons for these differences are as follows:
------------------------------------------------ 1996 1997 1998 ------------------------------------------------ Statutory federal tax (benefit) $ 49,000 $ 1,143,000 $ (1,344,000) State income taxes (benefit), net of federal benefit (16,000) 202,000 94,000 Utilization of net operating loss carryforwards (119,000) (978,000) (149,000) Goodwill amortization not deductible for tax purposes - - 1,467,000 Other 86,000 243,000 22,000 Resolution of prior years' tax exposures - - (283,000) ----------------------------------------------- Effective tax expense $ - $ 610,000 $ (193,000) ===============================================
12. LEASES The Company leases its facilities and certain office equipment under non-cancelable operating leases, which expire at various dates through June 2003. The terms of the lease agreements at the Boston, Massachusetts location, scheduled to expire in May 2000, and the Irvine, California location, scheduled to expire in September 2000 include base rent increases over the terms of the leases and options to renew for one five-year term at the then prevailing rental rate. The total amount of the base rent payments is being charged to expense on the straight-line method over the term of the lease. The Company has recorded a deferred credit to reflect the excess of rent expense over cash payments since inception of the lease. The Company received free rent concessions under terms of lease agreements at the Boston, Massachusetts, Burlington, Massachusetts and Los Angeles, California locations. Total lease payments under these agreements are amortized on a straight-line basis over the terms of the related leases. The excess of the expense incurred over the cash paid is included as deferred rent in the accompanying balance sheets. At December 31, 1998, future minimum annual rental commitments under all of the lease agreements described above are as follows: 1999 $2,431,000 2000 2,061,000 2001 1,161,000 2002 300,000 2003 127,000 ----------------- $6,080,000 =================
Total rent expense amounted to $1,432,851, $1,848,220 and $2,016,635 for the years ended December 31, 1996, 1997 and 1998, respectively. F-18 CORE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED 13. COMMITMENTS AND CONTINGENCIES Certain of the Company's service agreement contracts have provisions which allow clients to audit the Company's performance under the contracts. The Company has several 401(k) profit sharing plans covering all employees meeting certain service requirements. The Plans provide for discretionary contributions by the Company. Matching contributions for the years ended December 31, 1996, 1997 and 1998 were $131,948, $136,112 and $195,580, respectively, and are included in general and administrative expenses in the accompanying statements of operations. The Company is involved in various claims and legal proceedings arising in the ordinary course of business. While it is not feasible to predict or determine the outcome of these proceedings, management believes that they will not result in a materially adverse effect on the Company's financial position, results of operations or liquidity. 14. EARNINGS PER SHARE The following table sets forth the computation of earnings (loss) per share as of December 31:
1996 1997 1998 --------------------- ------------------- -------------------- Numerator: Net income (loss) $ 144,025 $ 2,751,721 $ (3,759,925) Denominator: Denominator for basic earnings (loss) per share weighted-average shares outstanding 5,713,000 7,246,000 7,489,000 Effect of dilutive stock options and warrants 760,000 688,000 - --------------------- ------------------- -------------------- Denominator for diluted earnings (loss) per share 6,473,000 7,934,000 7,489,000 ===================== =================== ==================== Basic earnings (loss) per share $0.03 $0.38 $(0.50) ===================== =================== ==================== Diluted earnings (loss) per share $0.02 $0.35 $(0.50) ===================== =================== ====================
15. RELATED PARTIES The notes receivable from officers are due in April 1999 and accrue interest at current market rates. 16. SIGNIFICANT CLIENTS The Company has service agreements with a major client, which accounted for approximately 13%, 23% and 21% of total revenues for the years ended December 31, 1996, 1997 and 1998, respectively. No other client represented 10% or more of revenue during these years. 17. SUBSEQUENT EVENT On January 7, 1999, the Company granted an exclusive option to sell the assets of one of its' operating subsidiaries, Integrated Behavioral Health, a California corporation ("IBH") to a non-affiliated party. This exclusive option was granted in exchange for consulting services. If the option is exercised, the sale of the assets of IBH is expected to close on or before July 15, 1999, however the closing of the exercise of the option and the sale of the assets of IBH is subject to a definitive agreement (the "Agreement"). The purchaser and IBH have not yet begun negotiations concerning or executed the Agreement. F-19 CORE, INC. SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT BEGINNING OF CHARGED TO COSTS DEDUCTIONS - BALANCE AT END OF DESCRIPTION PERIOD AND EXPENSES DESCRIBE PERIOD - ------------------------------------------------------------------------------------------------------------------------------- Year ended December 31, 1998: Allowance for doubtful accounts $151,633 $253,380(a) $ - $405,013 Year ended December 31, 1997: Allowance for doubtful accounts $221,925 $ - $ 70,292(b) $151,633 Year ended December 31, 1996: Allowance for doubtful accounts $170,337 $ 52,026(c) $ 438(b) $221,925
(a) The allowance for doubtful accounts was increased by a reserve against receivables which related to revenues recorded during previous years and thus, charged to expense during the current year. (b) The allowance for doubtful accounts was reduced by the actual write-off of receivables which had been reserved for in previous years and deemed uncollectible. (c) The allowance for doubtful accounts was increased by a reserve against receivables which related to revenues recorded during the current year and thus, charged directly against revenues during the current year. F-20 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. CORE, INC. Date: March 29, 1999 By: /s/ George C. Carpenter IV ------------------------------------ George C. Carpenter IV Chairman of the Board and Chief Executive Officer Date: March 29, 1999 By: /s/ William E. Nixon ------------------------------------ William E. Nixon Chief Financial Officer, Executive Vice President and Treasurer Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. /s/ George C. Carpenter IV Chairman of the Board of Directors and March 29, 1999 - -------------------------------- Chief Executive Officer George C. Carpenter IV /s/ Craig C. Horton Director, President and Chief March 29, 1999 - ------------------------------- Operating Officer Craig C. Horton /s/ William E. Nixon Chief Financial Officer, Executive March 29, 1999 - ------------------------------- Vice President and Treasurer William E. Nixon /s/ Bradley J. Timon Controller March 29, 1999 - ------------------------------- Bradley J. Timon /s/ Leslie M. Alexandre, Dr.P.H. Director March 29, 1999 - ------------------------------- Leslie M. Alexandre, Dr.P.H. /s/ Stephen C. Caulfield Director March 29, 1999 - ------------------------------- Stephen C. Caulfield /s/ Richard H. Egdahl, M.D. Director March 29, 1999 - ------------------------------- Richard H. Egdahl, M.D. /s/ David M. Tourangeau Director March 29, 1999 - ------------------------------- David M. Tourangeau /s/ Richard J. Towle Director March 29, 1999 - ------------------------------- Richard J. Towle
EX-10.5 2 EXHIBIT 10.5 FIRST AMENDMENT TO THE CREDIT AGREEMENT Dated as of December 31, 1998 This FIRST AMENDMENT dated as of December 31, 1998 (this "First Amendment") is between CORE, INC., a Massachusetts corporation (the "Borrower"), and FLEET NATIONAL BANK, a national banking association (the "Bank"). PRELIMINARY STATEMENTS. The Borrower and the Bank entered into a Credit Agreement dated as of August 31, 1998 (the "Credit Agreement"). The Borrower has requested the Bank to amend the Commitment reduction schedule and fix the date for entering into interest rate protection agreements and the Bank has agreed to such request. NOW, THEREFORE, for valuable consideration, receipt of which is hereby acknowledged, the Borrower and the Bank agree as follows: Section 1. AMENDMENTS TO THE CREDIT AGREEMENT. Effective as of the effective date hereof and subject to the satisfaction of the conditions precedent set forth in Section 2 hereof, the Credit Agreement is hereby amended as follows: (a) SUBSECTION (a) OF SECTION 2.5 (MANDATORY REDUCTION OF COMMITMENT) of the Credit Agreement is amended by decreasing to $500,000 the mandatory Commitment reduction required on December 31, 1998 and by adding the requirement for a $500,000 mandatory Commitment reduction on January 29, 1999. All other Commitment reduction amounts and dates shall remain unchanged. (b) SECTION 5.14 (INTEREST RATE PROTECTION) is deleted and replaced with the following: "On or before January 15, 1999, the Borrower shall enter into interest rate protection arrangements covering the amount of the Commitment, on terms and conditions satisfactory to the Bank." (c) SUBSECTION (c) OF SECTION 7.1 (EVENTS OF DEFAULT) is amended by adding "Section 5.14" to clause (i) thereof. -2- (d) SCHEDULE 4.4 TO THE CREDIT AGREEMENT is deleted and replaced with SCHEDULE 4.4 to the First Amendment to the Credit Agreement dated as of December 31, 1998 between the Borrower and the Bank. Section 2. CONDITIONS OF EFFECTIVENESS. This First Amendment shall become effective when, and only when, the Bank shall have received a counterpart of this First Amendment executed by the Borrower and an amendment fee of $5,000. Section 3. REPRESENTATIONS AND WARRANTIES OF THE BORROWER. The Borrower represents as follows: (a) The execution, delivery and performance by the Borrower of this First Amendment has been duly authorized by all necessary corporate action and does not and will not (a) require any consent or approval of its shareholders; (b) violate any provisions of its certificate of incorporation or by-laws; (c) violate any provision of or require any filing, registration, consent or approval under, any law, rule, regulation (including without limitation, Regulation U and X), order, writ, judgment, injunction, decree, determination or award presently in effect having applicability to and binding upon the Borrower or any Subsidiary; (d) result in a breach of or constitute a default or require any consent under any indenture, mortgage or loan or credit agreement or any other material agreement, lease or instrument to which the Borrower or any Subsidiary is a party or by which it or its Properties may be bound; or (e) result in, or require, the creation or imposition of any Lien upon or with respect to any of the Properties now owned or hereafter acquired by the Borrower. (b) The representations and warranties contained in Article 4 of the Credit Agreement, as amended by this First Amendment, are correct in all material respects on and as of the date hereof as though made on and as of the date hereof. (c) No Event of Default or Default has occurred and is continuing or would result from the signing of this First Amendment or the transactions contemplated hereby. (d) There has been no material adverse change in the financial condition, operations, Properties, business or business prospects of the Borrower and its Subsidiaries, if any, since the date of the last financial statements furnished to the Bank. (e) No actions, suits or proceedings or investigations are pending or, as far as the Borrower can reasonably foresee, threatened against or affecting the Borrower or any Subsidiary, or any Property of any of them before any court, governmental agency or arbitrator, which if determined adversely to the Borrower or any Subsidiary would in any one case or in the aggregate have a Materially Adverse Effect. -3- (f) No information, exhibit or report furnished in writing by or on behalf of the Borrower or any officer or director of the Borrower to the Bank in connection with the negotiation of, or pursuant to the terms of this First Amendment, contained when made any material misstatement of fact or omitted to state a material fact necessary to make the statements contained therein not misleading. Section 4. REFERENCE TO AND EFFECT ON THE CREDIT AGREEMENT. (a) Upon the effectiveness of this First Amendment, on and after the date hereof, each reference in the Credit Agreement to "this Credit Agreement", "hereunder", "hereof", "herein" or words of the like import shall mean and be a reference to the Credit Agreement as amended hereby. (b) Except as specifically amended above, the Credit Agreement shall remain in full force and effect and is hereby ratified and confirmed. (c) The execution, delivery and effectiveness of this First Amendment shall not, except as expressly provided herein, operate as a waiver of any right, power or remedy of the Bank under the Credit Agreement, nor constitute a waiver of any provision of the Credit Agreement. Section 5. COSTS, EXPENSES AND TAXES. The Borrower agrees to pay on demand all costs and expenses of the Bank in connection with the preparation, execution and delivery of this First Amendment including, without limitation, the reasonable fees and out-of-pocket expenses of counsel for the Bank with respect thereto. Section 6. EXECUTION IN COUNTERPARTS. This First Amendment may be executed in any number of counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which taken together shall constitute but one and the same instrument. Section 7. GOVERNING LAW. This First Amendment shall be governed by, and construed in accordance with, the laws of the State of Connecticut. Section 8. DEFINED TERMS. Capitalized terms used herein which are not expressly defined herein shall have the meanings ascribed to them in the Credit Agreement. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] S-1 IN WITNESS WHEREOF, the parties hereto have caused this First Amendment to be executed by their respective officers thereunto duly authorized, as of the date first above written. CORE, INC. By: /s/ William E. Nixon ----------------------------- Name: William E. Nixon Title: EVP & CFO FLEET NATIONAL BANK By: /s/ James H. Sterns ----------------------------- Name: James H. Sterns Title: SVP SCHEDULE 4.4 TO FIRST AMENDMENT TO CREDIT AGREEMENT DATED 12/31/98 BETWEEN CORE, INC. AND FLEET NATIONAL BANK The Litigation status of CORE, INC. and each of its subsidiaries: CORE, INC. See TCM Services, below CORE MANAGEMENT INC. (DELAWARE) None CORE MANAGEMENT, INC. (CALIFORNIA) None CORE SECURITIES CORP. None COST REVIEW SERVICES, INC. None INTEGRATED BEHAVIORAL HEALTH None PROTOCOL WORK SYSTEMS, INC. None SSDC CORP. None TCM SERVICES, INC. Arbitration has been initiated with American Arbitration Association ("AAA") in Atlanta, Georgia by Transcend Services, Inc. and Transcend Case Management, Inc. (collectively "Transcend") against CORE, INC. and its wholly-owned subsidiary TCM Services, Inc. Management of CORE, INC. believes it has meritorious defenses to the claims made by Transcend, intends to vigorously defend against such claims and intends to assert counterclaims against Transcend in the arbitration. A copy of Transcend's filing with the AAA has been supplied to Fleet Bank. DISABILITY REINSURANCE MANAGEMENT SERVICES, INC. None* *Notwithstanding the above, Disability Reinsurance Management Services, Inc. ("DRMS") has been notified of the following claims against DRMS clients which may impact DART results: 1. FORT DEARBORN - Claim for Fibromyalgia received 4/3/96. Claim denied 1/8/97 based on lack of any objective medical evidence to support the claim. Appealed 1/31/97 and denial upheld 6/24/97. Lawsuit filed against Fort Dearborn on 4/15/98. We are jointly trying to settle this lawsuit with claimant. DART liability $808/month with potential duration to 5/25/2002. 2. SHENANDOAH - Claim for Syncope (fainting) received 1/2/97. Five months of benefits paid to date. DART liability $719/month up to an additional 19 months. 3. PROTECTIVE LIFE INSURANCE COMPANY - While Protective has not yet been named in the suit, they have notified us that one of our joint claimants has filed suit against their employer contending that they violated the Americans with Disabilities Act (ADA). The Employer purchased a contract from Protective Life which limits benefits for Mental & Nervous conditions to 24 months while paying claims to age 65 for other types of disabilities. Claimant now contends that he has physical disabilities and has been awarded Social Security benefits based on these disabilities. EX-10.6 3 EXHIBIT 10.6 SECOND AMENDMENT TO THE CREDIT AGREEMENT Dated as of February 19, 1999 This SECOND AMENDMENT dated as of February 19, 1999 (this "Second Amendment") is between CORE, INC., a Massachusetts corporation (the "Borrower"), and FLEET NATIONAL BANK, a national banking association (the "Bank"). PRELIMINARY STATEMENTS. The Borrower and the Bank entered into a Credit Agreement dated as of August 31, 1998, which Credit Agreement was amended by a First Amendment to the Credit Agreement dated as of December 31, 1998 (as so amended, the "Credit Agreement"). The initial maximum Commitment under the Credit Agreement was $17,000,000 but has been reduced to $16,000,000 as a result of two scheduled Commitment reductions prior to the date hereof. The Borrower has now requested that the Bank amend the Credit Agreement to restore the maximum Commitment to $17,000,000, subject to a revised schedule of mandatory Commitment reductions. The Bank has agreed to such request upon certain terms and conditions. NOW, THEREFORE, for valuable consideration, receipt of which is hereby acknowledged, the Borrower and the Bank agree as follows: Section 1. AMENDMENTS TO THE CREDIT AGREEMENT. Effective as of the effective date hereof and subject to the satisfaction of the conditions precedent set forth in Section 2 hereof, the Credit Agreement shall be amended so that (a) the amount of the Commitment under the Credit Agreement shall be up to, but not exceeding in aggregate principal amount at any one time outstanding, the amount of $17,000,000 and (b) subsection (a) of Section 2.5 (Mandatory Reduction of Commitment) of the Credit Agreement shall be deleted and replaced with the following: (a) On each of the dates indicated below, commencing on March 31, 1999, the Commitment of the Bank shall be reduced automatically in the following amounts:
Mandatory Date Commitment Amount Available ---- Reduction After Reduction ---------- ---------------- March 31, 1999 $1,000,000 $16,000,000 May 19, 1999 $1,000,000 $15,000,000 -2- Mandatory Date Commitment Amount Available ---- Reduction After Reduction ---------- ---------------- June 30, 1999 $250,000 $14,750,000 September 30, 1999 $250,000 $14,500,000 December 31, 1999 $750,000 $13,750,000 March 31, 2000 $750,000 $13,000,000 June 30, 2000 $750,000 $12,250,000 September 30, 2000 $750,000 $11,500,000 December 31, 2000 $875,000 $10,625,000 March 31, 2001 $875,000 $9,750,000 June 30, 2001 $875,000 $8,875,000 September 30, 2001 $875,000 $8,000,000 December 31, 2001 $1,000,000 $7,000,000 March 31, 2002 $1,000,000 $6,000,000 June 30, 2002 $1,000,000 $5,000,000 September 30, 2002 $1,000,000 $4,000,000 December 31, 2002 $1,000,000 $3,000,000 March 31, 2003 $1,000,000 $2,000,000 June 30, 2003 $1,000,000 $1,000,000 August 31, 2003 $1,000,000 $0
Section 2. CONDITIONS OF EFFECTIVENESS. This Second Amendment shall become effective when, and only when, the Bank shall have received a counterpart of this Second Amendment executed by the Borrower and an amendment fee of $10,000. -3- Section 3. REPRESENTATIONS AND WARRANTIES OF THE BORROWER. The Borrower represents as follows: (a) The execution, delivery and performance by the Borrower of this Second Amendment has been duly authorized by all necessary corporate action and does not and will not (a) require any consent or approval of its shareholders; (b) violate any provisions of its certificate of incorporation or by-laws; (c) violate any provision of or require any filing, registration, consent or approval under, any law, rule, regulation (including without limitation, Regulation U and X), order, writ, judgment, injunction, decree, determination or award presently in effect having applicability to and binding upon the Borrower or any Subsidiary; (d) result in a breach of or constitute a default or require any consent under any indenture, mortgage or loan or credit agreement or any other material agreement, lease or instrument to which the Borrower or any Subsidiary is a party or by which it or its Properties may be bound; or (e) result in, or require, the creation or imposition of any Lien upon or with respect to any of the Properties now owned or hereafter acquired by the Borrower. (b) The representations and warranties contained in Article 4 of the Credit Agreement, as amended by this Second Amendment, are correct in all material respects on and as of the date hereof as though made on and as of the date hereof. (c) No Event of Default or Default has occurred and is continuing or would result from the signing of this Second Amendment or the transactions contemplated hereby. (d) There has been no material adverse change in the financial condition, operations, Properties, business or business prospects of the Borrower and its Subsidiaries, if any, since the date of the last financial statements furnished to the Bank. (e) No actions, suits or proceedings or investigations are pending or, as far as the Borrower can reasonably foresee, threatened against or affecting the Borrower or any Subsidiary, or any Property of any of them before any court, governmental agency or arbitrator, which if determined adversely to the Borrower or any Subsidiary would in any one case or in the aggregate have a Materially Adverse Effect. (f) No information, exhibit or report furnished in writing by or on behalf of the Borrower or any officer or director of the Borrower to the Bank in connection with the negotiation of, or pursuant to the terms of this Second Amendment, contained when made any material misstatement of fact or omitted to state a material fact necessary to make the statements contained therein not misleading. -4- Section 4. REFERENCE TO AND EFFECT ON THE CREDIT AGREEMENT. (a) Upon the effectiveness of this Second Amendment, on and after the date hereof, each reference in the Credit Agreement to "this Credit Agreement", "hereunder", "hereof", "herein" or words of the like import shall mean and be a reference to the Credit Agreement as amended hereby. (b) Except as specifically amended above, the Credit Agreement shall remain in full force and effect and is hereby ratified and confirmed. (c) The execution, delivery and effectiveness of this Second Amendment shall not, except as expressly provided herein, operate as a waiver of any right, power or remedy of the Bank under the Credit Agreement, nor constitute a waiver of any provision of the Credit Agreement. Section 5. COSTS, EXPENSES AND TAXES. The Borrower agrees to pay on demand all costs and expenses of the Bank in connection with the preparation, execution and delivery of this Second Amendment including, without limitation, the reasonable fees and out-of-pocket expenses of counsel for the Bank with respect thereto. Section 6. EXECUTION IN COUNTERPARTS. This Second Amendment may be executed in any number of counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which taken together shall constitute but one and the same instrument. Section 7. GOVERNING LAW. This Second Amendment shall be governed by, and construed in accordance with, the laws of the State of Connecticut. Section 8. DEFINED TERMS. Capitalized terms used herein which are not expressly defined herein shall have the meanings ascribed to them in the Credit Agreement. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] S-1 IN WITNESS WHEREOF, the parties hereto have caused this Second Amendment to be executed by their respective officers thereunto duly authorized, as of the date first above written. CORE, INC. By /s/ William E. Nixon ---------------------------- Name: WILLIAM E. NIXON Title: EVP & CFO FLEET NATIONAL BANK By /s/ Jeffrey A. Simpson ---------------------------- Name: JEFFREY A. SIMPSON TITLE: VICE PRESIDENT EX-21.1 4 EXHIBIT 21.1 EXHIBIT 21.1 CORE, INC. SUBSIDIARIES OF THE REGISTRANT The following corporations are wholly-owned subsidiaries of CORE, INC.: Core Management, Inc. (a Delaware corporation) Cost Review Services, Inc. (a Texas corporation) CORE Securities Corp. (a Massachusetts corporation) Disability Reinsurance Management Services, Inc. (a Delaware corporation) Protocol Work Systems, Inc. (a Delaware corporation) SSDC Corp. (a Delaware corporation) TCM Services, Inc. (a Delaware corporation) The following corporations are wholly-owned subsidiaries of Core Management, Inc. (a Delaware corporation): Integrated Behavioral Health (a California corporation) Core Management, Inc. (a California corporation) EX-23.1 5 EXHIBIT 23.1 Exhibit 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 33-59740) pertaining to the Amended and Restated 1986 Stock Option Plan, 1991 Stock Option Plan and Stock Option Plan for Directors of Peer Review Analysis, Inc., and in the Registration Statement (Form S-8 No. 333-00354) pertaining to the CORE, INC. 1991 Stock Option Plan, as amended, and in the Registration Statement (Form S-8 No. 333-4144) pertaining to the CORE, INC. 1991 Stock Option Plan, as amended, and in the Registration Statement (Form S-8 No. 333-15261) pertaining to the CORE, INC. 1991 Stock Option Plan, as amended, and in the Registration Statement (Form S-8 No. 333-16961) pertaining to the CORE, INC. 1991 Stock Option Plan, as amended, and in the Registration Statement (Form S-8 No. 333-52923) pertaining to the CORE, INC. 1991 Stock Option Plan, as amended, Core Management, Inc. Employee Stock Option Plan and other Stock Options, of our report dated March 26, 1999, to the consolidated financial statements and schedule of CORE, INC. included in the Annual Report (Form 10-K) for the year ended December 31, 1998. /s/ ERNST & YOUNG LLP Orange County, California March 26, 1999 EX-27 6 EXHIBIT 27
5 YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 2,226,020 0 10,081,143 405,013 0 13,073,605 16,861,620 (8,930,470) 48,731,540 7,980,867 0 0 0 782,451 26,044,179 48,731,540 0 45,609,284 0 27,832,974 21,527,273 253,380 504,746 (3,952,925) (193,000) (3,759,925) 0 0 0 (3,759,925) (0.50) (0.50)
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