CORE occupies its executive headquarters in Irvine, California pursuant to leases for approximately 21,000 sq. feet, which expire in June 2003 and September 2005. CORE also leases facilities of approximately 26,000 sq. feet in Boston, Massachusetts under a lease that expires in November 2010, and approximately 21,000 sq. feet in Burlington, Massachusetts under leases that expire in December 2005 and April 2002. Additionally, CORE leases facilities of approximately 32,000 sq. feet in Los Angeles, California under lease agreements that expire in November 2001, January 2002 and March 2004; approximately 18,000 sq. feet in Silver Spring, Maryland under a lease that expires in June 2001; approximately 14,000 sq. feet in Novi, Michigan under a lease that expires in August 2001; and approximately 24,000 sq. feet in Portland, Maine under lease agreements that expire in March 2004.
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 in this report.
On March 29, 2001, CORE signed an Agreement and Plan of Merger (the "Merger Agreement") with Fortis, Inc. ("Fortis"), under which Fortis will acquire all of the shares of CORE for approximately $4.92 in cash per share, or $45,000,000 in the aggregate. Fortis will also assume all of CORE's obligations, including the outstanding borrowings under the terms of the Third Amendment to the Amended and Restated Credit Agreement dated March 23, 2001 with Fleet National Bank (see Note 8).
On March 31, 2000, CORE issued 248,703 shares of its common stock to Transcend and reimbursed Transcend $183,270 for associated attorney fees and costs. The charges associated with the stock issuance and cost reimbursement to Transcend were recorded in December 1999. See "Notes to Consolidated Financial Statements, Note 6" contained elsewhere in this report for additional information.
CORE recorded non-recurring charges of $2,601,000 during 2000, as a result of realignment activities within its service lines and administrative functions. The charges primarily relate to workforce reductions in the WorkAbility program in the first and third quarters of 2000 and costs to relocate the WorkAbility data center from the East Coast to the West Coast.
Severance and other separation costs relating to reductions in the overall workforce amounted to $1,706,000 for the twelve months ended December 31, 2000. Approximately 70 positions have been eliminated in connection with these realignment activities. Other non-recurring costs, including $397,000 for the data center move, were incurred as a result of related service line realignment activities to further streamline CORE's operations.
On April 1, 2000, CORE issued 375,000 shares of its Common Stock to the former stockholders of Disability Reinsurance Management Services, Inc. ("Disability RMS"). CORE had acquired all of the shares of stock of Disability RMS pursuant to a Capital Stock Purchase Agreement dated as of August 31, 1998 in a transaction accounted for as a purchase. The purchase price was subject to certain adjustments as set forth in the Capital Stock Purchase Agreement. The issuance of Common Stock represented the remaining consideration pursuant to an Agreement and Amended Capital Stock Purchase Agreement effective April 1, 2000 between CORE, Disability RMS and the former stockholders of Disability RMS. The stock issuance, representing additional goodwill and intangibles valued at $2,039,000, is being amortized on a straight-line basis over an average remaining life of 24.5 years.
The following table sets forth the contribution to total revenues of each of CORE's principal service lines for the periods indicated:
For 2000, CORE's top five clients represented 41% of revenues compared to 47% during 1999. Verizon (including Bell Atlantic Corporation, GTE Communications System Corporation and Verizon Wireless) accounted for approximately 19% of revenues for 2000 and 24% of revenues for 1999. No other single client represented more than 10% of total revenues in 2000 or 1999.
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 decreased 7% in 2000, as compared to 1999. The decrease is primarily the result of decreased staffing levels required to service CORE's WorkAbility Absence Management program clients in addition to the elimination of expenses associated with the IBH operations in June 1999.
Gross profit performance for each of CORE's principal lines of service for the years ended 2000 and 1999, respectively, are: 47% and 44% for Integrated Disability Management, 43% and 38% for Peer Review Analysis, and 53% and 49% for other service lines. The improvement in gross profit performance realized under Integrated Disability Management was primarily the result of the decreased staffing levels in the WorkAbility Absence Management program. The increase in gross margin realized under Peer Review Analysis is due to efficiencies realized in servicing an expanded client base. The increase in gross margins realized under other service lines is primarily due to an increased share of revenue generated from the Medicare coordination of benefits program.
Sales, marketing and product development expenses include, but are not limited to, salaries for sales, client services and product management personnel. Sales, marketing and product development expenses also include travel and other costs designed to increase exposure, such as participation in and attendance at industry trade shows and conferences. Sales, marketing and product development expenses increased 64% in 2000, as compared to 1999. The increase is primarily due to expanded staffing to support the sales and product development activities.
For 1999, CORE's top five clients represented 47% of revenues compared to 45% during 1998. Verizon accounted for approximately 24% of revenues in 1999 and 22% of revenues for 1998. No other single client represented more than 10% of total revenues in 1999 or 1998.
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 Disability RMS.
On August 31, 1998, CORE first entered into a credit agreement (the "Initial Credit Agreement") with Fleet National Bank ("Fleet") which was later amended and restated. Effective as of December 31, 2000, the total remaining credit facility under the terms of the Third Amendment to the Amended and Restated Credit Agreement dated March 23, 2001 (as amended, the "Restated Credit Agreement") is $18,000,000 and is comprised of a $13,000,000 Term Loan and an available commitment of up to $5,000,000 in Revolving Loans. The Term Loan is subject to principal payments of $2,750,000 in March 2001 (consisting of a $2,000,000 prepayment in connection with the third amendment and a $750,000 scheduled payment) and each month thereafter in amounts ranging from $250,000 to $333,000. CORE can elect that the outstanding borrowings under all or portions of the Term Loan and the Revolving Loans be at either (i) the prime base rate plus 0.50%, or (ii) the London Interbank Offered Rate ("LIBOR") plus 3.50%. The Restated Credit Agreement is scheduled to expire on December 31, 2004.
At December 31, 2000 and 1999, CORE had outstanding borrowings of $13,000,000 and $14,300,000, respectively, under the credit facility which were all tied to the prime base lending rate (9.5% at December 31, 2000) plus the applicable margin.
The Restated Credit Agreement is secured by substantially all of CORE's assets and requires CORE to meet certain financial covenants, including minimum ratios for interest, debt service and fixed charge coverage along with minimum net worth, minimum earnings and maximum capital expenditure levels. Additionally, the Restated Credit Agreement prohibits the payment of dividends by CORE without Fleet's written consent.
For the quarters ended September 30, 2000 and December 31, 2000, CORE did not satisfy certain financial covenants set forth in the Restated Credit Agreement. Specific covenants that were out of compliance consisted of the minimum interest coverage, minimum debt service coverage, minimum fixed charge coverage and the minimum earnings requirement. Two waivers, the first effective as of September 30, 2000 and the second effective as of December 31, 2000 were granted by Fleet with respect to these unsatisfied covenants, in exchange for certain modifications outlined in the second and third amendments to the Restated Credit Agreement. These modifications primarily consist of revisions to certain financial covenants for the quarters ending March 31, 2001 and June 30, 2001, a reduction in the amount of the available commitment for the Revolving Loans, a mandatory prepayment of the Term Loan in the principal amount of $2,000,000 during March 2001 and restrictions on allowable capital expenditure levels. In addition, a fee of $200,000 will be payable by CORE if the credit facility is not terminated and all outstanding borrowings repaid by July 31, 2001. An additional fee of $400,000 will be incurred if the credit facility is not terminated and all outstanding borrowings repaid by August 31, 2001. Beginning on October 1, 2001 and each month thereafter, a fee of $100,000 will be incurred if the credit facility is not terminated and all outstanding borrowings repaid as of the first business day of the month.
CORE has entered into an interest rate protection arrangement with Fleet that limits CORE's exposure to significant increases in the base lending rate. The arrangement places an effective cap on the prime base lending rate at 9.75% (or LIBOR at 6.75%) for a substantial portion of the outstanding borrowings through August 29, 2003.
In connection with the Initial 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 and expires August 31, 2003. The second Warrant granted in connection with the Third Amendment to the Initial Credit Agreement, dated April 27, 1999, 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 and expires June 30, 2004.
During 2000, CORE's cash and cash equivalents increased by $329,000 from a balance of zero at December 31, 1999. CORE typically uses all available cash and cash equivalents to reduce the revolving line of credit. For the year ended 2000, operating activities provided $6,360,000 of cash despite the net loss reported for the period of $723,000. This was due primarily to the net effect of certain non-cash activities including depreciation and amortization of $4,572,000, along with a decrease of $2,498,000 in unbilled receivables. CORE's investing activities used $5,416,000 of cash mostly to fund additions to property and equipment (including software development) during 2000. CORE's financing activities used $615,000 of cash during this period, mainly to repay outstanding borrowings on the credit facility. CORE expects to continue using all of its available cash to repay outstanding borrowings during future periods.
CORE plans to finance its operations and working capital requirements primarily with future earnings from operations. To the extent that working capital needs exceed currently available working capital, CORE has the flexibility to borrow additional funds up to the maximum commitment available under the Restated Credit Agreement. CORE believes that this available financing, along with future earnings from operations and other sources of available funds will be sufficient to meet its liquidity and funding requirements through at least the year 2001.
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 2001 to ensure that any latent Year 2000 matters that may arise are addressed promptly.