The Company occupies its executive headquarters in Irvine, California pursuant to leases for approximately 20,600 sq. feet, which expire in September 2000 and June 2003. 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 facilities of approximately 23,700 sq. feet in Los Angeles, California under lease agreements that expire in November 2001 and January 2002; 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 6,500 sq. feet in Portland, Maine under a lease agreement that expires in August 1999.
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.
The Company is typically compensated for these services either on a per employee per month ("PEPM"), per case, hourly, percentage of risk premium (for full service reinsurance management services) or percentage of cost recovery (for social security advocacy and Medicare benefits services) basis. The integrated disability management services line also includes a limited amount of revenue (1% for the year ended December 31, 1998) from licensing fees attributable to license grants by the Company of the medical protocol portion of the WorkAbility software program.
On March 17, 1998, a wholly-owned subsidiary of the Company, TCM Services, Inc. ("TCM") purchased the operating assets and certain liabilities of Transcend Case Management, Inc. ("Transcend"). Transcend, with offices based in Orlando, Florida is a provider of workers' compensation case management services to clients located principally in Florida, Texas and Georgia. On December 23, 1998, TCM transferred substantially all its assets and certain liabilities to Transcend following the exercise by Transcend of its option to reacquire the assets, as described in the Asset Purchase Agreement dated March 17, 1998. The Company recorded charges of $241,000 in connection with this transfer.
On September 1, 1998, the Company acquired all shares of stock of Disability Reinsurance Management Services, Inc. ("DRMS"), a Delaware corporation, pursuant to a Capital Stock Purchase Agreement dated as of August 31, 1998 (the "Stock Purchase Agreement"). Pursuant to the Stock Purchase Agreement, all shares of stock of DRMS were acquired in exchange for a $20,000,000 cash payment, the issuance of 480,000 shares of the Company's common stock and the future issuance of up to an additional $7,000,000 of the Company's common stock after September 30, 2001, based upon the future performance of DRMS. The purchase price is subject to certain adjustments as set forth in the Stock Purchase Agreement. The excess of the purchase price over the estimated fair market value of the net assets acquired, representing goodwill and certain identifiable intangibles amounting to approximately $22,762,000, is being amortized on a straight-line basis over periods of three to thirty-five years. DRMS is a full service reinsurance intermediary manager providing marketing, underwriting advice, claims, actuarial and compliance services to its insurance company clients and risk management expertise for reinsurers in a reinsurance facility.
Effective October 31, 1998, the Company discontinued the operations of CRS. In connection with this action, the Company recorded charges totaling $417,000. The major components of the charges were $157,000 of employee separation costs, $58,000 of non-cash charges to dispose of certain assets through abandonment and $75,000 to terminate lease and other contractual obligations. CRS provided regional bill audit and workers' compensation case management services to insurance companies and third-party administrators of workers' compensation programs.
Revenues increased by $7,102,000 (18%) from $38,507,000 in 1997 to $45,609,000 in 1998. Growth in Integrated Disability Management contributed $8,445,000 (119%) of the Company's overall net increase in revenues. Revenues for this service line include revenues from DRMS acquired in September 1998 (which expanded CORE's programs to include disability reinsurance management services) 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.
Revenues from other service lines (which includes utilization review, Medicare coordination of benefits and other case management services), decreased 17% overall for 1998, as compared to 1997. This decrease was primarily attributable
Cost of services for the Company 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 $4,503,000 (19%) from $23,330,000 in 1997 to $27,833,000 in 1998. The increase is primarily the result of additional payroll costs associated with business acquisitions completed in 1998 and the summer of 1997 in addition to increased staffing levels required to service new and growing WorkAbility clients. Additionally, increased amortization expense was incurred as software enhancements to the Company's operating systems were placed into service.
General and administrative expenses include the cost of executive, administrative and information services personnel, rent and other overhead items. General and administrative expenses increased $1,800,000 (23%) from $7,940,000 in 1997 to $9,740,000 in 1998. Expenses increased due primarily to higher costs associated with additional staffing in the information services areas to support the growth of the Company. Higher costs in rent, insurance costs, equipment rental and other general and administrative expenses relate primarily to the Company's acquisitions during the summer of 1997 and March and September of 1998. The Company has also incurred additional costs associated with the maintenance of its computer network hardware and software as capacity has been expanded to accommodate growth. General and administrative expenses, as a percentage of revenues, remained unchanged in 1998, compared to 1997, at 21%.
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 $1,166,000 (47%) from $2,483,000 in 1997 to $3,649,000 in 1998. The increase is primarily due to the Company'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. The Company expects to continue to invest an increased amount of resources in sales and marketing in future periods.
During 1998, the Company recorded other non-recurring charges totaling $156,000. These costs primarily consisted of costs related to the Company's relocation of its accounting department from Boston, Massachusetts to its corporate offices in Irvine, California.
Revenues from service lines that the Company exited in 1998 or expects to exit in 1999 declined overall by 32% during 1997, as compared to 1996. The principal reason for the overall decline related to bill audit services, which recorded significantly lower revenues as a result of renegotiated client contracts.
CORE's gross profit performance for 1997 improved slightly to 39% from 38% in 1996. Gross profit performance for each of the Company's principal service lines for the years ended 1997 and 1996, respectively, are: 35% and 41% for Integrated Disability Management, 39% and 39% for Peer Review Analysis, 27% and 42% for
exiting/exited services and 52% and 30% for other service lines. The decline in gross margins realized by Integrated Disability Management is largely attributable to costs of integrating the new programs pursuant to the June 1997 acquisition of SSDC (which added social security disability benefits advocacy services) and the July 1997 acquisition of PWS. The significant decline in overall gross margins realized for those service lines being exited in 1998 or expected to be exited in 1999 is mainly attributable to a 62% decrease in revenues generated from bill audit services during 1997. The increase in gross margins realized for other service lines is attributable to the addition of Medicare coordination of benefits services in June 1997.
On January 15 1999, the Company entered into an interest rate protection arrangement with Fleet that limits the Company'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%) over the life of the Credit Agreement.
For the year ended December 31, 1998, the Company's cash and cash equivalents decreased by $5,719,000. For this period, operating activities provided $1,484,000 of cash despite net losses of $3,760,000 and a net increase in accounts receivable and other current assets of $3,343,000, as these were offset by depreciation and amortization of $3,332,000 and the write-off of goodwill and intangibles of $4,085,000. The increase in accounts receivable and other current assets is due primarily to the increase in revenues over 1997 and the contractual timing of certain client billings. The Company's investing activities used $22,618,000 of cash mostly to fund the acquisition of DRMS for $20,366,000 and additions to property and equipment (including software development) of $3,504,000. The Company's financing activities provided $15,416,000 of cash for this period due primarily to $16,500,000 in net borrowings under a new credit agreement dated August 31, 1998, as offset by $1,125,000 in payments made on an obligation related to a prior year acquisition.
The Company leases its facilities and certain office equipment. Future lease commitments, which relate substantially to space rental, for the years ended December 31, 1999 and December 31, 2000 are approximately $2.4 million and $2.1 million, respectively. All obligations held by the Company under lease commitments expire on various dates through June 30, 2003 and total $6.1 million as of December 31, 1998.
The Company's primary computer application platforms were essentially designed to process and store dates in a four-character format. The Company believes this substantially reduces the magnitude of the effort required to address the Year 2000 issue. The Company has completed an assessment of internal applications and licensed operating systems, software tools and utilities. Additionally, the Company has evaluated third party data feeds, primarily to and from clients information systems and will have to modify or replace portions of its software so that its computer systems will function properly with respect to dates in the year 2000 and thereafter. The Company presently believes that with modifications and replacement of existing software, the Year 2000 issue can be mitigated. However, if such modifications and replacements are not made, or are not completed timely, the Year 2000 issue could have an impact on the operations of the Company.
failure to remediate their own Year 2000 issues. There is no guarantee that the systems of other companies on which the Company's systems rely will be timely converted and would not have an adverse effect on the Company's systems.
The Company has queried its material clients that do not share information systems with the Company. To date, the Company is not aware of any external agent Year 2000 issue that would materially impact the Company's results of operations, liquidity, or capital resources. However, the Company has no means of ensuring that external agents will be Year 2000 issue compliant. The inability of external agents to resolve their Year 2000 issues in a timely manner could materially impact the Company. The effect of non-compliance by external agents is not determinable.