The Company occupies its executive headquarters in Irvine, California pursuant to a lease for approximately 14,000 sq. feet which expires in September 2000. The Company also leases facilities of approximately 18,000 sq. feet in Boston, Massachusetts under a lease that expires in May 2000, and approximately 22,500 sq. feet in Burlington, Massachusetts under leases that expire in December 2001 and April 2002. Additionally, the Company leases a facility of approximately 16,000 sq. feet in Los Angeles, California under a lease that expires in June 1998, as well as approximately 18,000 sq. feet in Silver Spring, Maryland under a lease that expires in June 2001, approximately 1,300 sq. feet in Chicago, Illinois under a lease that expires in May 1998, approximately 7,400 sq. feet in Austin, Texas under a lease that expires in September 1999 and approximately 2,400 sq. feet in Forth Worth, Texas under a lease that expires in July 1998.
The following selected financial data are derived from the consolidated financial statements of the Company. The financial statements for the years ended December 31, 1992, 1993, 1994, 1995 and 1996 have been audited by Ernst & Young LLP, independent auditors. 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.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS - -------------------------------------------------------------------------------- OF OPERATIONS. --------------
CORE is a national provider of managed disability and health care benefits management services. The Company was incorporated in 1984 under the name Peer Review Analysis, Inc. ("PRA") to provide physician-intensive utilization management services to commercial insurance companies and self-insured employers. PRA became a publicly-held entity in December 1991 with the completion of an initial public offering. In March 1995, PRA completed the CMI/PRA Merger with Core Management, Inc. ("CMI"). CMI provides managed disability services, including benefits analysis and consulting services and health care benefits utilization review and case management services. CMI's utilization review and case management services with respect to mental health and substance abuse cases were acquired in an acquisition in March 1993. The CMI/PRA Merger has been accounted for as pooling of interests, and consequently the financial statements of the Company have been retroactively restated to include the financial position and results of operations of CMI for all periods presented. In July 1995, the Company changed its name to CORE, INC. and in October 1995, the Company acquired Cost Review Services, Inc. ("CRS"), a provider of bill audit and case management services in the workers' compensation market.
The Company provides managed disability services (which consist of the Company's WorkAbility program as well as its bill audit and analytic consulting services), specialty physician and behavioral health review services and health care benefits utilization review and case management services. These services are provided principally to self-insured employers, third-party administrators and insurance carriers, and the Company is typically compensated for these services either on a per review (i.e., per case), hourly or per enrollee basis. In a limited number of cases, the Company's compensation varies with cost savings realized by the client as a result of the Company's services. Also included in managed disability services revenue is a limited amount (2% for the year ended December 31, 1996) of licensing revenue attributable to license grants by the Company of the medical protocol portion of the WorkAbility software program.
Revenues increased by $8,037,000 (39%) from $20,769,000 in 1995 to $28,806,000 in 1996. Approximately $7,056,000 (88%) of the Company's increase in revenues came from growth in managed disability services. Approximately 47% of the revenue increase for the year is attributable to revenues generated from Bell Atlantic Corporation, to whom the Company began providing managed disability services effective August 1, 1996. Additionally, with the acquisition of CRS in October 1995, the year 1996 represented CORE's first full year of servicing the workers' compensation market with bill audit services. The balance of the increase in revenues can be largely attributed to the number of referrals processed in each of the Company's principal service lines which increased over the prior year comparative period
For 1996, the Company's top five clients represented 36% of revenues compared to 30% during 1995. Bell Atlantic accounted for approximately 13% of revenues for 1996. No other single client represented more than 10% of total revenues in 1996 or 1995.
General and administrative expenses include the cost of executive, administrative and information services personnel, rent and other overhead items. General and administrative expenses increased $1,497,000 (31%) from $4,787,000 in 1995 to $6,284,000 in 1996. Expenses increased due primarily to higher costs associated with additional staffing in the information services areas to support the growth of the Company. Additionally, rent and other general and administrative expenses have increased due to the opening of the Silver Spring, Maryland operating center in July, 1996. General and administrative expenses, as a percentage of revenues, decreased from 23% for 1995 to 22% for 1996. This improvement is generally due to greater economies of scale related to higher revenues.
General and administrative expenses increased $522,000 (12%), from $4,265,000 for 1994 to $4,787,000 for 1995, due principally to higher costs associated with additional staffing in the information services area to support the growth of the Company. General and administrative expenses as a percentage of revenue decreased from 25% in 1994 to 23% in 1995. This improvement is generally due to efficiencies obtained as the result of the CMI/PRA Merger, which included a consolidation of facilities and management staff, a consolidation of the previously separate companies' benefit plans and greater economies of scale related to higher revenues.
Sales and marketing expenses decreased $64,000 (4%), from $1,563,000 in 1994 to $1,499,000 in 1995. This decrease was due to the net effect of a reduction in the Company's sales staff and associated expenses during 1995 as a result of the CMI/PRA Merger and increased marketing related expenditures such as hosting and co-hosting a number of
conferences across the country that addressed various market-specific issues that the Company's clients and prospective clients are facing.
Restructuring costs of $558,000 consist of charges for the Company's plan of termination and exit plan. In conjunction with the CMI/PRA Merger completed on March 24, 1995, the Company reduced its workforce where overlapping functions existed. The Company also reduced its sales and marketing workforce to better address the marketing strategy of the Company. The termination of employees as a result of these actions caused the recognition of severance and outplacement costs for the quarter ended March 31, 1995. The Company also abandoned excess leased space at its Burlington, Massachusetts location, and a charge was recorded for the costs of future rental expense on the abandoned space.
The Company leases its facilities and certain office equipment. Lease commitments, which relate substantially to space rental, for the years ended December 31, 1997 and December 31, 1998 are approximately $1.9 million and $1.7 million, respectively. All obligations held by the Company under lease commitments expire on various dates through April 2002 and total $6.6 million as of December 31, 1996.
The Company plans to finance its operations and working capital requirements with the proceeds of the August, 1996 offering, earnings from operations, investments on hand and other sources of available. The Company presently believes that these resources will be sufficient to meet its liquidity and funding requirements through at least the year 1997.