On June 21, 1999, CORE sold the assets of one of its operating subsidiaries, Integrated Behavioral Health, a California corporation ("IBH"), to a non-affiliated party for $50,000 in cash and a $463,000 promissory note. A net gain of $332,000 was realized from the sale of the assets. IBH provided mental health case management services.
CORE recorded a charge of $2,200,000 in 1999 for estimated costs in connection with the Interim Award. The major components of the charge includes $1,741,000 in CORE common stock issuable for the earn-out payment, $386,000 for legal fees and reimbursements and $73,000 in other associated costs.
The following table sets forth certain statement of operations data for the periods indicated expressed as a percentage of revenues:
CORE's revenues increased 41% during 1999, as compared to 1998. Growth in Integrated Disability Management contributed $20,623,000 (111%) of the overall net increase in revenues. CORE's WorkAbility Absence Management program contributed 63% of the revenue increase in Integrated Disability Management due to the addition of new clients over the course of 1998 and 1999 and the expansion of services to existing clients. During 1999, revenues for this service line include a full year of revenues from Disability Reinsurance Management Services, Inc. ("DRMS") which was acquired by CORE in September 1998. As a result, revenues from DRMS contributed 32% of the increase in Integrated Disability Management revenues during 1999.
The 14% increase in revenues from Peer Review Analysis in 1999, as compared to 1998, is primarily due to an increase in the volume of referrals for specialty physician review services. This increase in volume resulted from the addition of new clients and the expansion of services to existing clients.
Revenues from services that CORE exited decreased by 72% in 1999, as compared to 1998. During 1998, these service lines consisted of regional workers' compensation case management services of both Cost Review Services, Inc. ("CRS") and TCM, regional bill audit activities of CRS, and the behavioral health programs of IBH. The CRS operations, which contributed $548,000 to our revenues during 1998 was closed as of October 31, 1998. The operations of TCM, which was acquired on March 17, 1998 and contributed $1,287,000 of the revenues during 1998, was exited in December 1998. In 1999, IBH contributed all of the revenue in our exiting/exited services, amounting to $1,008,000, a decrease of $715,000 as compared to revenue of $1,723,000 from IBH in 1998. As a result of the sale of IBH's assets on June 21, 1999, operations within the exiting/exited services line ceased.
For 1999, CORE's top five clients represented 43% of revenues compared to 45% during 1998. Bell Atlantic accounted for approximately 19% of revenues in 1999 and 21% of revenues for 1998. No other single client represented more than 10% of total revenues in 1999 or 1998.
Cost of services for CORE 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 31% in 1999, as compared to 1998. The increase is primarily the result of increased staffing levels required to service new and growing WorkAbility Absence Management program clients in addition to the added cost of services associated with a full year of operations from DRMS.
CORE's revenues increased 18% during 1998, as compared to 1997. Growth in Integrated Disability Management contributed 119% of the overall net increase in revenues. Revenues for this service line include revenues from DRMS acquired in September 1998 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 other service lines declined 17% overall for 1998, as compared to 1997. This decrease was primarily attributable to the utilization review program stemming from a decline in enrollment in our clients' indemnity plan based group health business.
Sales and marketing expenses increased 47% in 1998, as compared to 1997, due primarily to CORE'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.
During 1998, CORE recorded write-offs of goodwill and intangibles totaling $4,085,000 pursuant to its review of long-lived assets. During June 1998, CRS was informed that its principal client (representing nearly 70% of CRS revenues) would not be renewing its contract in October 1998. This information combined with CRS's operating losses indicated that the net book value of the goodwill and intangibles related to the CRS operations, amounting to $1,935,000, was not recoverable and thus, written-off effective as of June 30, 1998. CORE also determined that an impairment loss existed related to certain identifiable intangibles acquired from SSDC in June 1997. The impairment loss primarily resulted from a significant decline in revenues realized under SSDC's Medicare coordination of benefits program. As it appeared that the decline in revenues would continue, intangibles in the amount of $2,150,000 were written off as of June 30, 1998.
On August 31, 1998, CORE entered into a revolving line of credit agreement (the "Credit Agreement") with Fleet National Bank ("Fleet"). Under the terms of the Third Amendment to the Credit Agreement dated April 28, 1999 (the "Third Amendment"), CORE may borrow up to specified amounts at either (i) the prime base rate plus 0.50%, or (ii) the London Interbank Offered Rate ("LIBOR") plus 3.50%. The maximum credit availability under the Third Amendment of $18,500,000 is subject to mandatory commitment reductions each quarter (beginning on March 31, 2000) in amounts ranging from $875,000 to $1,250,000. The Third Amendment extended the credit facility through June 30, 2004.
In connection with the Credit Agreement and related amendments, CORE has issued two Warrants to purchase shares of its Common Stock to Fleet. The original Warrant granted on August 31, 1998 entitles the holder to purchase up to 156,322 shares of CORE's Common Stock (subject to certain adjustments), at an exercise price of $6.92 per share. The original Warrant was exercisable beginning August 31, 1999 and expires August 31, 2003. The second Warrant granted in connection with the Third Amendment to the Credit Agreement, entitles the holder to purchase up to 187,000 shares of CORE's Common Stock (subject to certain adjustments), at an exercise price of $12.00 per share. The second Warrant was exercisable upon the April 1999 execution of the Third Amendment and expires June 30, 2004.
CORE leases its facilities and certain computer and office equipment. Future lease commitments (including certain facility leases executed in March 2000), which relate substantially to space rental, for the years ended December 31, 2000 and December 31, 2001 are approximately $3.2 million and $2.8 million, respectively.
CORE has net operating loss carryforwards for federal and state income tax purposes of approximately $2.0 million and $9.9 million, respectively, as of December 31, 1999, 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.
In reports for prior periods, CORE discussed the nature and progress of its plans to become Year 2000 ready. In late 1999, CORE completed its remediation and testing of systems. As a result of those planning and implementation efforts, CORE experienced no significant disruptions in mission critical information technology and non-information technology systems and believes those systems successfully responded to the Year 2000 date change.
CORE is not aware of any material problems resulting from Year 2000 issues, either with its internal systems or the products and services of third parties. CORE will continue to monitor its mission critical computer applications and those of its suppliers and vendors throughout the year 2000 to ensure that any latent Year 2000 matters that may arise are addressed promptly.
The financial statements and supplementary data of CORE called for by this item appear under the caption Index to Financial Statements (page hereof). Such information is included elsewhere herein.