CORE anticipates that the transaction can be completed in approximately three months from the signing of the Merger Agreement, subject to customary closing conditions, including the approval of the holders of two-thirds of the outstanding shares of CORE's common stock.
In September 2000, CORE established a new operation from its disability reinsurance management services and WorkAbility businesses concerning integrated disability management for small, mid-market and existing large clients. This reorganized unit is focussing on the refinement and marketing of CORE's optimized integrated disability management ("IDM") product called WorkAbility IDM, designed for mid-market employers.
On June 12, 2000, an arbitrator issued a Final Award pertaining to a dispute over matters involving an Asset Purchase Agreement dated March 17, 1998 between CORE and its wholly owned subsidiary, TCM Services, Inc. ("TCM") and Transcend Services, Inc. and Transcend Case Management, Inc. (collectively "Transcend"). Under the terms of the Final Award, the parties agreed that CORE and TCM have entirely fulfilled their obligations to Transcend with respect to all of the matters in the proceeding.
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 with Fleet National Bank, as agent. 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 modifications 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. See "Notes to Consolidated Financial Statements, Note 8" and "Financial Condition, Liquidity and Capital Resources" contained elsewhere in this report for additional information.
CORE's overall revenues decreased by $150,000 or 0.2% during 2000, as compared to 1999. Revenues for Integrated Disability Management decreased $583,000 or 1% during 2000, as compared to 1999. Overall, the decrease was primarily due to reductions in services and fees from our largest WorkAbility client as offset by a 29% increase in revenues from Disability RMS. The increase in revenues from Disability RMS was mainly attributable to higher management fees earned on expanded underwriting of policies by participating reinsurers in the DART facilities.
The 18% increase in revenues from Peer Review Analysis in 2000, as compared to 1999, 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 an increase in services to existing clients over the past year.
Revenues from services that CORE exited in 1999 contained the behavioral health programs of Integrated Behavioral Health ("IBH"). As a result of the sale of IBH's assets on June 21, 1999, operations within the exiting/exited service line ceased.
Revenue from other service lines (which includes utilization review, Medicare coordination of benefits and other case management services), decreased 4% overall for 2000, as compared to 1999.
General and administrative expenses include the cost of executive, administrative and information services personnel, rent and other overhead items. General and administrative expenses increased 7% in 2000, as compared to 1999. During 2000, CORE incurred $495,000 in consulting expenses related to a special one-time project initiated to improve efficiencies with the WorkAbility Absence Management program. This project has resulted in the streamlining of operations, leading to an expected annualized reduction in payroll of approximately $2,900,000 and the development of an optimized integrated disability management product appropriate for the middle market. In addition, an increase in the levels of general and administrative personnel and increased maintenance expenses for our computer network hardware and software associated with supporting CORE's anticipated growth in operations in 2000 also contributed to the increase in expenses as compared to 1999. As a result of the increased activities, general and administrative expenses, as a percentage of revenues, increased to 22% in 2000 from 21% in 1999.
Depreciation and amortization expenses increased 18% during 2000, as compared to the prior year. The increase is primarily related to the development of internal use software and purchases of network hardware that CORE has invested in over the past year.
As discussed under Current Developments contained elsewhere in this report, 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 related to workforce reductions in the WorkAbility program and costs to relocate the WorkAbility data center from the East Coast to the West Coast.
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 service to existing clients. During 1999, revenues for this service line include a full year of revenues from Disability RMS which was acquired by CORE in September 1998. As a result, revenues from Disability RMS contributed 32% of the increase in Integrated Disability Management revenues during 1999.
Revenues from other service lines (which includes utilization review, Medicare coordination of benefits and other case management services), decreased 10% overall for 1999, as compared to 1998. 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. However, the overall decline was partially offset by an increase in revenues from CORE's Medicare coordination of benefits services.
CORE's 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 in 1999 by the growth in CORE's WorkAbility Absence Management program which provided for greater efficiencies in providing services to a larger client base. Disability RMS also increased the gross profit performance within Integrated Disability Management during 1999, as compared to the prior year. The slight increase in gross margins 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.
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 also incurred additional costs associated with the maintenance of our computer network hardware and software as capacity was expanded to accommodate growth. General and administrative expenses, as a percentage of revenues, decreased to 20.7% in 1999 from 21.4% in 1998. This improvement is generally due to greater economies of scale related to higher revenues.
Sales, marketing and product development expenses increased 35% in 1999, as compared to 1998. The increase was primarily due to expanded staffing to support the sales and product development activities.
Depreciation and amortization expense increased 47% during 1999, as compared to the prior year, due mainly to increased amortization on the goodwill and intangibles acquired in the purchase of Disability RMS in September 1998. Increased depreciation expense also resulted following the addition of new equipment during 1999, which was necessary to accommodate the growth in revenues from new and existing clients. Amortization of internally developed software and related equipment also increased due to CORE's continuing investment in web-based technologies and enhancements to our operating systems.
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.
In 1999, total other expense also included a gain of $332,000 recognized on the June 21, 1999 sale of IBH assets, net of transaction costs. Interest expense represents amounts incurred related to outstanding borrowings under CORE's August 1998 Credit Agreement, as later amended and restated, with Fleet National Bank. Interest income represents amounts earned by CORE's investments. The 90% decrease in interest income and the concurrent 212% rise in interest expense are primarily due to a decrease in funds available for investment and an increase in outstanding borrowings following the acquisition of Disability RMS.
CORE leases its facilities and certain computer and office equipment. Future lease commitments which relate substantially to space rental, for the years ended December 31, 2001 and December 31, 2002 are approximately $4.2 million and $3.3 million, respectively.
CORE has net operating loss carryforwards for federal and state income tax purposes of approximately $6.4 million and $15.8 million, respectively, as of December 31, 2000, 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.