CORE occupies its executive headquarters in Irvine, California pursuant to leases for approximately 20,600 sq. feet, which expire in September 2000 and June 2003. CORE also leases facilities of approximately 18,000 sq. feet in Boston, Massachusetts under a lease that expires in May 2000 (a facility lease was recently entered into effective June 2000 for 25,000 sq. feet at a different site in Boston that expires in September 2010), and approximately 21,000 sq. feet in Burlington, Massachusetts under leases that expire in December 2000 and April 2002. Additionally, CORE leases facilities of approximately 35,500 sq. feet in Los Angeles, California under lease agreements that expire in November 2001 and January 2002 and February 2004; 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 10,400 sq. feet in Portland, Maine under a lease agreement that expires in March 2004.
On February 10, 2000, an arbitrator issued an Interim Award in which he concluded that CORE and its wholly-owned subsidiary, TCM Services, Inc. ("TCM") breached an Asset Purchase Agreement dated March 17, 1998 with Transcend Services, Inc. and Transcend Case Management, Inc. (collectively "Transcend"). See "Legal Proceedings," above.
Gross profit performance for each of CORE's principal lines of service for the years ended 1999 and 1998, respectively, are: 44% and 41% for Integrated Disability Management, 38% and 36% for Peer Review Analysis, 23% and 16% for exiting/exited services and 49% and 47% for other service lines. The gross profit performance realized under Integrated Disability Management was significantly enhanced by the growth in CORE's WorkAbility Absence Management program which provided for greater efficiencies in providing services to a larger client base. The addition of disability reinsurance management services now provided by CORE pursuant to the DRMS acquisition also increased the gross profit performance within Integrated Disability Management during 1999, as compared to the prior year. The slight 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.
General and administrative expenses include the cost of executive, administrative and information services personnel, rent and other overhead items. Higher personnel and other costs associated with supporting CORE's expanded growth in operations primarily contributed to the increase in general and administrative expenses of 36% in 1999, as compared to 1998. During 1999, CORE added a new facility in Los Angeles in order to meet the service needs of a significant new client. CORE has also incurred additional costs associated with the maintenance of our computer network hardware and software as capacity has been expanded to accommodate growth. General and administrative expenses, as a percentage of revenues, decreased to 20% in 1999 from 21% in 1998. This improvement is generally due to greater economies of scale related to higher revenues.
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 35% in 1999, as compared to 1998. The increase is primarily due to expanded staffing to support the sales and product development departments.
A provision for doubtful accounts in the amount of $415,000 was recorded in 1999 as compared to $253,000 in 1998. The 1999 provision primarily relates to the termination of an uncompleted project within the onsite job profiling analysis and workplace risk management service's unit.
As discussed under Current Developments, above, CORE recorded a charge of $2,200,000 in 1999 for estimated costs in connection with an arbitration award. The major components of the charge includes $1,741,000 of CORE common stock issuable for the earn-out payment, $386,000 for legal fees and reimbursements and $73,000 in other associated costs.
Revenues from services that CORE exited in 1998 or expected to exit in 1999 increased overall by 17% during 1998, as compared to the prior year. The net increase in these services during 1998 related principally to the acquisition of TCM in March 1998. 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.
CORE's gross profit performance for 1998 remained unchanged compared to 1997 at 39%. Gross profit performance for each of CORE'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 CORE 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 increased 19% in 1998, as compared to 1997, due primarily to higher costs associated with additional staffing in the information services areas to support the growth of operations. Higher costs in rent, insurance costs, equipment rental and other general and administrative expenses relate primarily to CORE's acquisitions during the summer of 1997 and March and September of 1998. CORE also incurred additional costs associated with the maintenance of its computer network hardware and software as capacity was expanded to accommodate growth. General and administrative expenses, as a percentage of revenues, remained unchanged in 1998, compared to 1997, at 21%.
Depreciation and amortization expense increased 28% in 1998, as compared to 1997. The increase is mainly attributable to increased amortization on the goodwill and intangibles acquired in the purchases of DRMS in September 1998 and of SSDC and PWS in June and July 1997, respectively.
On June 2, 1998, CORE 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 1999. In addition, CORE incurred approximately $121,000 in other costs related to the arbitration (primarily legal and travel expenses).
During 1998, CORE recorded $658,000 in charges relating to its termination of operations at two subsidiaries. Effective October 31, 1998, CORE discontinued the operations of CRS. In connection with this action, CORE recorded estimated charges totaling $417,000. 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. CORE recorded charges of $241,000 in connection with this transfer.
During 1998, CORE recorded other non-recurring charges totaling $156,000. These costs primarily consisted of costs related to the CORE'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 CORE's August 1998 Credit Agreement with Fleet National Bank. Interest income represents amounts earned by the CORE's investments. Other income and expense, net, decreased $765,000 to a net other expense of $202,000 in 1998 from a net other income of $563,000 in 1997. The decrease in 1998 versus 1997 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.
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 over the life of the Credit Agreement.
During 1999, CORE used all of its available cash to reduce the levels of outstanding borrowings under the Credit Agreement which accounted for the significant reduction to cash and cash equivalents compared to the prior year. For the year ended 1999, operating activities provided $3,151,000 of cash. This increase in cash was greater than the net income reported for the period of $1,740,000 due primarily to the net effect of certain non-cash activities including depreciation and amortization and charges in connection with the TCM arbitration, as offset by increases in accounts and unbilled receivables. The increase in receivables was primarily attributable to the contractual timing of certain client billings. CORE's investing activities used $3,151,000 of cash mostly to fund additions to property and equipment (including software development) during 1999. CORE's financing activities used $2,227,000 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.
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 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 2000.