e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2010
or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 0-19291
CORVEL CORPORATION
(Exact name of registrant as specified in its charter)
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Delaware
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33-0282651 |
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(State or other jurisdiction
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(IRS Employer Identification No.) |
of incorporation or organization) |
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2010 Main Street, Suite 600 |
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Irvine, CA
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92614 |
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(Address of principal executive office)
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(zip code) |
Registrants telephone number, including area code: (949) 851-1473
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports) and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes
o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer, and smaller reporting company in Rule 12b-2 of the
Exchange Act. (check one)
Large accelerated filer o |
Accelerated filer þ |
Non-accelerated filer o (Do not check if a smaller reporting company) |
Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes
o No þ
The number of shares outstanding of the registrants Common Stock, $0.0001 par value per
share, as of August 5, 2010 was 11,872,804.
CORVEL CORPORATION
FORM 10-Q
TABLE OF CONTENTS
Page 2
Part I Financial Information
Item 1. Financial Statements
CORVEL CORPORATION
CONSOLIDATED BALANCE SHEETS
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March 31, 2010 |
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June 30, 2010 |
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(Unaudited) |
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Assets |
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Current Assets |
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Cash and cash equivalents (Note A) |
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$ |
11,933,000 |
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$ |
13,681,000 |
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Accounts receivable, net |
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43,930,000 |
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45,373,000 |
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Prepaid taxes and expenses |
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6,419,000 |
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3,960,000 |
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Deferred income taxes |
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4,864,000 |
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5,088,000 |
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Total current assets |
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67,146,000 |
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68,102,000 |
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Property and equipment, net |
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30,026,000 |
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33,958,000 |
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Goodwill |
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35,988,000 |
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35,988,000 |
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Other intangibles, net (Note F) |
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6,909,000 |
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6,705,000 |
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Other assets |
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299,000 |
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147,000 |
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TOTAL ASSETS |
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$ |
140,368,000 |
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$ |
144,900,000 |
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Liabilities and Stockholders Equity |
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Current Liabilities |
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Accounts and taxes payable |
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$ |
14,495,000 |
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$ |
16,934,000 |
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Accrued liabilities |
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25,455,000 |
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23,826,000 |
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Total current liabilities |
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39,950,000 |
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40,760,000 |
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Deferred income taxes |
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4,690,000 |
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4,691,000 |
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Commitments and contingencies (Note G and H) |
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Stockholders Equity |
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Common stock, $.0001 par value: 60,000,000 shares
authorized; 25,801,690 shares issued (12,026,502 shares
outstanding, net of Treasury shares) and 25,835,901
shares issued (11,907,426 shares outstanding, net of
Treasury shares) at March 31, 2010 and June 30, 2010,
respectively |
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3,000 |
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3,000 |
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Paid-in capital |
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90,217,000 |
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91,647,000 |
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Treasury Stock (13,775,188 shares at March 31, 2010 and
13,928,475 shares at June 30, 2010) |
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(218,323,000 |
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(223,792,000 |
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Retained earnings |
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223,831,000 |
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231,591,000 |
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Total stockholders equity |
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95,728,000 |
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99,449,000 |
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TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |
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$ |
140,368,000 |
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$ |
144,900,000 |
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See accompanying notes to consolidated financial statements.
Page 3
CORVEL CORPORATION
CONSOLIDATED INCOME STATEMENTS UNAUDITED
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Three Months Ended June 30, |
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2009 |
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2010 |
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REVENUES |
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$ |
81,312,000 |
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$ |
91,503,000 |
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Cost of revenues |
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60,170,000 |
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67,700,000 |
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Gross profit |
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21,142,000 |
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23,803,000 |
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General and administrative expenses |
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10,450,000 |
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11,486,000 |
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Income before income tax provision |
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10,692,000 |
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12,317,000 |
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Income tax provision |
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4,288,000 |
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4,557,000 |
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NET INCOME |
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$ |
6,404,000 |
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$ |
7,760,000 |
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Net income per common and common equivalent share |
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Basic |
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$ |
0.50 |
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$ |
0.65 |
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Diluted |
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$ |
0.49 |
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$ |
0.64 |
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Weighted average common and common equivalent |
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Basic |
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12,925,000 |
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11,957,000 |
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Diluted |
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13,056,000 |
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12,187,000 |
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See accompanying notes to consolidated financial statements.
Page 4
CORVEL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS UNAUDITED
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Three Months Ended June 30, |
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2009 |
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2010 |
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Cash flows from Operating Activities |
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NET INCOME |
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$ |
6,404,000 |
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$ |
7,760,000 |
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Adjustments to reconcile net income to net cash provided by
operating activities: |
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Depreciation and amortization |
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2,944,000 |
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2,861,000 |
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Loss on disposal of assets |
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19,000 |
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141,000 |
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Stock compensation expense |
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499,000 |
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590,000 |
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Write-off of uncollectible accounts |
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953,000 |
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730,000 |
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Changes in operating assets and liabilities |
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Accounts receivable |
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(2,695,000 |
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(2,173,000 |
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Prepaid taxes and expenses |
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1,529,000 |
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2,459,000 |
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Other assets |
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93,000 |
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212,000 |
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Accounts and taxes payable |
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(1,535,000 |
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739,000 |
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Accrued liabilities |
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(1,119,000 |
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(1,629,000 |
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Deferred income tax |
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684,000 |
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(223,000 |
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Net cash provided by operating activities |
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7,776,000 |
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11,467,000 |
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Cash Flows from Investing Activities |
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Purchase of property and equipment |
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(1,856,000 |
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(5,090,000 |
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Net cash (used in) investing activities |
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(1,856,000 |
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(5,090,000 |
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Cash Flows from Financing Activities |
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Purchase of treasury stock |
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(647,000 |
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(5,469,000 |
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Tax effect of stock option exercises |
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15,000 |
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248,000 |
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Exercise of common stock options |
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271,000 |
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592,000 |
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Net cash (used in) financing activities |
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(361,000 |
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(4,629,000 |
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Increase in cash and cash equivalents |
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5,559,000 |
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1,748,000 |
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Cash and cash equivalents at beginning of period |
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14,681,000 |
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11,933,000 |
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Cash and cash equivalents at end of period |
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$ |
20,240,000 |
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$ |
13,681,000 |
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Supplemental Cash Flow Information: |
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Income taxes paid |
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$ |
645,000 |
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$ |
827,000 |
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Purchase of software license under finance agreement |
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$ |
0 |
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$ |
1,700,000 |
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See accompanying notes to consolidated financial statements.
Page 5
CORVEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2010
Note A Basis of Presentation and Summary of Significant Accounting Policies
The unaudited financial statements herein have been prepared by the Company pursuant to the
rules and regulations of the Securities and Exchange Commission. The accompanying interim
financial statements have been prepared under the presumption that users of the interim financial
information have either read or have access to the audited financial statements for the latest
fiscal year ended March 31, 2010. Accordingly, footnote disclosures which would substantially
duplicate the disclosures contained in the March 31, 2010 audited financial statements have been
omitted from these interim financial statements.
The Company evaluated all
subsequent events or transactions. During the period subsequent to June 30, 2010 the Company
repurchased 55,685 shares for $2.05 million or approximately $36.88 per share. These shares were
repurchased under the Companys ongoing share repurchase program described in Note C.
Additionally, at the 2010 Annual Meeting of the stockholders of CorVel Corporation (the Company)
held on August 5, 2010, the Companys stockholders approved an amendment and restatement of the
CorVel Corporation 1991 Employee Stock Purchase Plan (the Plan) to (i) remove the requirement for
stockholder approval for modifying eligibility requirements and (ii) extend the termination date of
the Plan by ten years from September 30, 2011 to September 30, 2021. Subsequently on August 5,
2010, the Companys Board of Directors approved a further amendment and restatement of the Plan to
(i) modify the eligibility requirements with respect to Highly Compensated Employees and (ii)
modify the annual statement requirements, all to conform to recent changes in law.
Certain information and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the United States of
America have been condensed or omitted pursuant to such rules and regulations. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. Operating results for the three months ended June 30, 2010
are not necessarily indicative of the results that may be expected for the fiscal year ending March
31, 2011. For further information, refer to the consolidated financial statements and footnotes
for the fiscal year ended March 31, 2010 included in the Companys Annual Report on Form 10-K.
Basis of Presentation: The consolidated financial statements include the accounts of CorVel
and its subsidiaries. Significant intercompany accounts and transactions have been eliminated in
consolidation.
Use of Estimates: The preparation of financial statements conforming with accounting
principles generally accepted in the United States of America requires management to make estimates
and assumptions that affect the amounts reported in the accompanying financial statements. Actual
results could differ from those estimates. Significant estimates include the allowance for doubtful
accounts, accrual for bonuses, earn-out accruals, accruals for self-insurance reserves, share-based
payments related to performance based awards, estimated claims for claims administration revenue
recognition, and estimates used in stock option valuations.
Cash and Cash Equivalents: Cash and cash equivalents consist of short-term highly-liquid
investment-grade interest-bearing securities with maturities of 90 days or less when purchased. The
carrying amounts of the Companys financial instruments approximate their fair values at March 31,
2010 and June 30, 2010. Cash at June 30, 2010 included $2.2 million of customer deposits held in
bank checking accounts.
Page 6
CORVEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2010
Note A Basis of Presentation and Summary of Significant Accounting Policies (continued)
Goodwill: The Company accounts for its business combinations in accordance with FASB ASC
805-10 through ASC 805-50 Business Combinations which requires that the purchase method of
accounting be applied to all business combinations and addresses the criteria for initial
recognition of intangible assets and goodwill. In accordance with FASB ASC 350-10 through ASC
350-30, goodwill and other intangible assets with indefinite lives are not amortized but are tested
for impairment annually, or more frequently if circumstances indicate the possibility of
impairment. If the carrying value of goodwill or an intangible asset exceeds its fair value, an
impairment loss shall be recognized. The Companys goodwill impairment test is conducted
company-wide and the fair value is compared to its carrying value. The measurement of fair value is
based on an evaluation of market capitalization and is further tested using a multiple of earnings
approach. For all periods presented, no material impairment existed and, accordingly, no loss was
recognized.
Revenue Recognition: The Company recognizes revenue when there is persuasive evidence of an
arrangement, the services have been provided to the customer, the sales price is fixed or
determinable, and collectability is reasonably assured. For the Companys services, as the
Companys professional staff performs work, they are contractually permitted to bill for fees
earned in fraction of an hour increments worked or by units of production. The Company recognizes
revenue as the time is worked or as units of production are completed, which is when the revenue is
earned and realized. Labor costs are recognized as the costs are incurred. The Company derives the
majority of its revenue from the sale of Network Solutions and Patient Management services.
Network Solutions and Patient Management services may be sold individually or combined with any of
the services the Company provides. When a sale combines multiple elements, the Company accounts
for multiple element arrangements in accordance with the guidance included in ASC 605-25.
In accordance with ASC 605-25, the Company allocates revenue for transactions or
collaborations that include multiple elements to each unit of accounting based on its relative fair
value, and recognizes revenue for each unit of accounting when the revenue recognition criteria
have been met. The price charged when the element is sold separately generally determines fair
value. When our customers purchase several products from CorVel, the pricing of the products sold
is generally the same as if the product were sold on an individual basis. As a result, the fair
value of each product sold in a multiple element arrangement is almost always determinable. In the
absence of fair value of a delivered element, the Company would allocate revenue first to the fair
value of the undelivered elements and the residual revenue to the delivered elements. The Company
recognizes revenue for delivered elements when the delivered elements have standalone value and the
Company has objective and reliable evidence of fair value for each undelivered element. If the
fair value of any undelivered element included in a multiple element arrangement cannot be
objectively determined, revenue is deferred until all elements are delivered and services have been
performed, or until fair value can objectively be determined for any remaining undelivered
elements. Based upon the nature of our products, bundled products are generally delivered in the
same accounting period.
In October 2009, the FASB issued Accounting Standards Update No. 2009-13, Multiple Deliverable
Revenue Arrangementsa consensus of FASB Emerging Issues Task Force (ASU 2009-13). ASU 2009-13
provides for less restrictive separation criteria that must be met for a deliverable to be
considered a separate unit of accounting. Additionally, under this Standard, there is a hierarchy
for determining the selling price of a unit of accounting and consideration must be allocated using
a relative-selling price method. ASU 2009-13 will be effective for CorVel Corporation on April 1,
2011; however, early adoption is permitted. We are currently reviewing the requirements of ASU
2009-13 and has not yet determined the impact on its financial position or results of operations.
Accounts Receivable: The majority of the Companys accounts receivable are due from companies
in the property and casualty insurance industries, self-insured employers, and government entities.
Accounts receivable are due within 30 days and are stated as amounts due from customers net of an
allowance for doubtful accounts. Accounts outstanding longer than the contractual payment terms are
considered past due. The Company determines its allowance by considering a number of factors, including the length of time trade accounts
receivable are past due, the Companys previous loss history, the customers current ability to pay
its obligation to the Company and the condition of the general economy and the industry as a whole.
No one customer accounted for 10% or more of accounts receivable at either March 31, 2010 or June
30, 2010. No one customer accounted for 10% or more of revenue during either of the three month
periods ended June 30, 2009 or 2010.
Page 7
CORVEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2010
Note A Basis of Presentation and Summary of Significant Accounting Policies (continued)
Property and Equipment: Additions to property and equipment are recorded at cost. Depreciation
and amortization are provided using the straight-line method over the estimated useful lives of the
related assets, which range from three to seven years. The Company capitalizes software development
costs intended for internal use. The Company accounts for internally developed software costs in
accordance with FASB ASC 350-40, Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use, which allows for the capitalization of software developed for internal
use. These costs are included in computer software in property and equipment and are amortized
over a period of five years.
Long-Lived Assets: The carrying amount of all long-lived assets is evaluated periodically to
determine if adjustment to the depreciation and amortization period or to the unamortized balance
is warranted. Such evaluation is based principally on the expected utilization of the long-lived
assets and the projected, undiscounted cash flows of the operations in which the long-lived assets
are deployed.
Income Taxes: The Company provides for income taxes under the liability method. Deferred tax
assets and liabilities are determined based on differences between financial reporting and tax
bases of assets and liabilities as measured by the enacted tax rates which are expected to be in
effect when these differences reverse. Income tax expense is the tax payable for the period and the
change during the period in net deferred tax assets and liabilities. The Company adopted the
provisions of Financial Accounting Standards Board (FASB) Interpretation No. 48, Accounting for
Uncertainty in Income Taxes an Interpretation of FASB Statement No. 109 (FIN 48) on April 1,
2007, and the Company recorded a cumulative effect of a change in accounting principle in the
amount of $2,657,000. The balance of the unrecognized tax benefits as of March 31, 2010 and June
30, 2010 were $3,170,000 and $3,180,000, respectively.
Earnings Per Share: Earnings per common share-basic is based on the weighted average number of
common shares outstanding during the period. Earnings per common shares-diluted is based on the
weighted average number of common shares and common share equivalents outstanding during the
period. In calculating earnings per share, earnings are the same for the basic and diluted
calculations. Weighted average shares outstanding decreased in the June 2010 quarter compared to
the same quarter of the prior year primarily due to repurchase of shares under the Companys share
repurchase program.
Page 8
CORVEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2010
Note B Stock Based Compensation and Stock Options
Under the Companys Restated Omnibus Incentive Plan (Formerly The Restated 1988 Executive
Stock Option Plan) (the Plan) as in effect at June 30, 2010, options for up to 9,682,500 shares
of the Companys common stock may be granted to key employees, non-employee directors and
consultants at exercise prices not less than the fair market value of the stock at the date of
grant. Options granted under the Plan are non-statutory stock options and generally vest 25% one
year from date of grant and the remaining 75% vesting ratably each month for the next 36 months.
The options granted to employees and the board of directors expire at the end of five years and ten
years from date of grant, respectively.
In May 2006, the Companys Board of Directors granted performance-based stock options for
149,000 shares of common stock at fair market value at the date of grant, which will only vest if
the Company attains certain earnings per share targets, as established by the Companys Board of
Directors, for calendar years 2008, 2009, and 2010. Net of cancelations due to employee
terminations, options for 136,050 shares remain outstanding under these performance-based stock
options as of June 30, 2010. These options were granted with an exercise price of $15.76 per share,
which was the fair market value at the date of grant, and have a current valuation of $6.75 per
share. The Company did not attain the targets for calendar years 2008 and 2009. Currently,
management has determined that it is probable that the Company will attain the earnings
per share target for calendar year 2010 under these
options and, accordingly, the Company recognized $46,000 during the June 2010 quarter and $92,000,
cumulatively since the date of these option grants.
Page 9
CORVEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2010
Note B Stock Options and Stock-Based Compensation (continued)
In February 2008, the Companys Board of Directors granted performance-based stock options for
42,000 shares of common stock at fair market value at the date of grant, which will only vest if
the Company attains certain revenue targets for all services sold to claims administration clients
and out-of-network bill review revenues, as established by the Companys Board of Directors, for
calendar years 2009, 2010, and 2011. The targets for the various options varied by the regions and
each region has a different target. Net of cancelations due to employee terminations, options for
38,000 shares remain outstanding under these performance-based stock options as of June 30, 2010.
These options were granted with an exercise price of $25.10 per share, which was the fair market
value at the date of grant, and have a current valuation of $9.81 per share. Currently, management
has determined that optionees with 12,000 shares attained the revenue targets for calendar years
2009 and 2010, and, accordingly, the Company has recognized $10,000 during the June 2010 quarter
and $59,000, cumulatively, since the date of the option grant. Currently, management has determined
that it is not probable that the revenue targets for the remaining optionees will be attained and,
accordingly, the Company has recognized no stock compensation expense for those options.
In February 2009, the Companys Board of Directors granted performance-based stock options for
100,000 shares of common stock at fair market value at the date of grant, which will only vest if
the Company attains certain earnings per share targets, as established by the Companys Board of
Directors, for calendar years 2009, 2010, and 2011. Net of cancelations due to employee
terminations, options for 95,000 shares remain outstanding under these performance-based stock
options as of June 30, 2010. These options were granted with an exercise price of $19.79 per share,
which was the fair market value at the date of grant, and have a current valuation of $8.21 per
share. The Company attained these targets for calendar 2009 and expect to achieve the targets for
calendar year 2010, and, accordingly, the Company has recognized stock compensation expense of
$65,000 during the June 2010 quarter and $390,000, cumulatively, since the date of the option
grants.
In February 2009, the Companys Board of Directors granted performance-based stock options for
10,000 shares of common stock at fair market value at the date of grant, which will only vest if
the Company attains certain revenue targets for all services sold to claims administration clients
and out-of-network bill review revenues, as established by the Companys Board of Directors, for
calendar years 2009, 2010, and 2011. These options were granted with an exercise price of $20.37
per share, which was the fair market value at the date of grant, and have a current valuation of
$8.45 per share. The Company did not achieve the revenue target for calendar year 2009. Currently,
management has determined that it is not probable that the Company will attain the revenue targets
for 2010 and 2011, and, accordingly, the Company has recognized no stock compensation expense for
this stock option grant.
Finally, in November 2009, the Companys Board of Directors granted performance-based stock
options for 110,000 shares of common stock at fair market value at the date of grant, which will
only vest if the Company attains certain earnings per share targets, as established by the
Companys Board of Directors, for calendar years 2010, 2011, and 2012. These options were granted
with an exercise price of $28.92 per share, which was the fair market value at the date of grant,
and have a current valuation of $12.57 per share. Currently, management has determined that it is
probable that the Company will attain the earnings per share targets for calendar year 2010 and,
accordingly, the Company recognized $109,000 of stock compensation expense for this stock option
grant during the June 2010 quarter, and $291,000, cumulatively, since the date of the option grant.
Page 10
CORVEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2010
Note B Stock Options and Stock-Based Compensation (continued)
The table below shows the amounts recognized in the financial statements for stock
compensation expense for time based options and performance based options the three months ended
June 30, 2009 and 2010, respectively. Included in the three months ended June 30, 2010 stock
compensation expense is $230,000 for the expense related to the performance based options.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
June 30, 2009 |
|
|
June 30, 2010 |
|
Cost of revenues |
|
$ |
122,000 |
|
|
$ |
134,000 |
|
General and administrative |
|
|
377,000 |
|
|
|
456,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of stock-based compensation included in
income before income tax provision |
|
|
499,000 |
|
|
|
590,000 |
|
Amount of income tax benefit recognized |
|
|
(200,000 |
) |
|
|
(218,000 |
) |
|
|
|
|
|
|
|
Amount charged against net income |
|
$ |
299,000 |
|
|
$ |
372,000 |
|
|
|
|
|
|
|
|
Effect on diluted net income per share |
|
$ |
(0.02 |
) |
|
$ |
(0.03 |
) |
|
|
|
|
|
|
|
Summarized information for all stock options for the three months ended June 30, 2009 and
2010 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2009 |
|
Three Months Ended June 30, 2010 |
|
|
Shares |
|
Average Price |
|
Shares |
|
Average Price |
|
|
|
Options outstanding, beginning |
|
|
1,115,171 |
|
|
$ |
20.31 |
|
|
|
1,065,403 |
|
|
$ |
22.57 |
|
Options granted |
|
|
10,800 |
|
|
|
21.76 |
|
|
|
48,000 |
|
|
|
36.55 |
|
Options exercised |
|
|
(34,462 |
) |
|
|
14.18 |
|
|
|
(34,221 |
) |
|
|
17.31 |
|
Options cancelled |
|
|
(25,667 |
) |
|
|
20.69 |
|
|
|
(160 |
) |
|
|
28.28 |
|
|
|
|
Options outstanding, ending |
|
|
1,065,842 |
|
|
$ |
20.51 |
|
|
|
1,079,022 |
|
|
$ |
23.35 |
|
|
|
|
The following table summarizes the status of stock options outstanding and exercisable
at June 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable |
|
|
|
|
|
|
Weighted |
|
Outstanding |
|
Exercisable |
|
Options- |
|
|
|
|
|
|
Average |
|
Options- |
|
Options- |
|
Weighted |
|
|
|
|
|
|
Remaining |
|
Weighted |
|
Number of |
|
Average |
|
|
Number of |
|
Contractual |
|
Average |
|
Exercisable |
|
Exercise |
Range of Exercise Price |
|
Outstanding Options |
|
Life |
|
Exercise Price |
|
Options |
|
Price |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$11.00 to $15.79 |
|
|
276,874 |
|
|
|
1.16 |
|
|
$ |
15.24 |
|
|
|
141,724 |
|
|
$ |
14.74 |
|
$16.67 to $24.75 |
|
|
256,733 |
|
|
|
3.25 |
|
|
$ |
19.86 |
|
|
|
146,268 |
|
|
$ |
19.54 |
|
$24.76 to $28.92 |
|
|
312,233 |
|
|
|
3.81 |
|
|
$ |
26.92 |
|
|
|
76,845 |
|
|
$ |
26.24 |
|
$28.93 to $47.70 |
|
|
233,182 |
|
|
|
3.22 |
|
|
$ |
32.06 |
|
|
|
111,612 |
|
|
$ |
30.91 |
|
|
|
|
Total |
|
|
1,079,022 |
|
|
|
2.87 |
|
|
$ |
23.35 |
|
|
|
476,449 |
|
|
$ |
21.86 |
|
|
|
|
Page 11
CORVEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2010
Note
B Stock Based Compensation and Stock Options
(continued)
A summary of the status for all outstanding options at June 30, 2010, and changes during the
three months then ended, is presented in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
Aggregate |
|
|
|
|
|
|
Weighted Average |
|
Remaining Contractual |
|
Intrinsic Value as |
|
|
Number of Options |
|
Exercise Per Share |
|
Life (Years) |
|
of June 30, 2010 |
|
|
|
Options outstanding at March 31, 2010 |
|
|
1,065,403 |
|
|
$ |
22.57 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
48,000 |
|
|
|
36.55 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(34,221 |
) |
|
|
17.31 |
|
|
|
|
|
|
|
|
|
Cancelled forfeited |
|
|
(160 |
) |
|
|
28.28 |
|
|
|
|
|
|
|
|
|
Cancelled expired |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending outstanding |
|
|
1,079,022 |
|
|
$ |
23.35 |
|
|
|
2.87 |
|
|
$ |
11,411,123 |
|
|
|
|
Ending vested and expected to vest |
|
|
985,783 |
|
|
$ |
23.12 |
|
|
|
2.78 |
|
|
$ |
10,649,964 |
|
|
|
|
Ending exercisable at June 30, 2010 |
|
|
476,449 |
|
|
$ |
21.86 |
|
|
|
2.23 |
|
|
$ |
5,700,841 |
|
|
|
|
The weighted-average grant-date fair value of options granted during the three months
ended June 30, 2009 and 2010, was $9.09 and $15.27, respectively.
The Company records compensation expense for employee stock options based on the estimated
fair value of the options on the date of grant using the Black-Scholes option-pricing model with
the assumptions included in the table below. The Company uses historical data among other factors
to estimate the expected volatility, the expected option life, and the expected forfeiture rate.
The risk-free rate is based on the interest rate paid on a U.S. Treasury issue with a term similar
to the estimated life of the option. Based upon the historical experience of options cancellations,
the Company has estimated an annualized forfeiture rate of 10.71% and 9.05% for the three months
ended June 30, 2009 and 2010, respectively. Forfeiture rates will be adjusted over the requisite
service period when actual forfeitures differ, or are expected to differ, from the estimate. The
following assumptions were used to estimate the fair value of options granted during the three
months ended June 30, 2009 and 2010 using the Black-Scholes option-pricing model:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
2009 |
|
2010 |
|
|
|
Risk-free interest rate |
|
|
1.97 |
% |
|
|
2.15 |
% |
Expected volatility |
|
|
46 |
% |
|
|
46 |
% |
Expected dividend yield |
|
|
0.00 |
% |
|
|
0.00 |
% |
Expected forfeiture rate |
|
|
10.71 |
% |
|
|
9.05 |
% |
Expected weighted average life of option in years |
|
4.8 years |
|
4.8 years |
All options granted in the three months ended June 30, 2009 and 2010 were
granted at fair market value and are non-statutory stock options.
Page 12
CORVEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2010
Note C Treasury Stock and Subsequent Event
The Companys Board of Directors initially approved the commencement of a share repurchase
program in the fall of 1996. In June 2010, the Board approved an 850,000 share expansion of the
repurchase program to 15,000,000 shares over the life of the share repurchase program. Since the
commencement of the share repurchase program, the Company has spent $224 million to repurchase
13,928,475 shares of its common stock, equal to 54% of the outstanding common stock had there been
no repurchases. The average price of these repurchases is $16.07 per share. These purchases have
been funded primarily from the net earnings of the Company, along with the proceeds from the
exercise of common stock options. During the three months ended June 30, 2010, the Company
repurchased 153,287 shares for $5.5 million. The Company had 11,907,426 shares of common stock
outstanding as of June 30, 2010, net of the 13,928,475 shares in treasury. Subsequent to the end
of the quarter, through July 31, 2010, the Company repurchased 55,685 shares of common stock for
$2.05 million or $36.88 a share.
Note D Weighted Average Shares and Net Income Per Share
Weighted average basic common and common equivalent shares decreased from 12,925,000 for the
quarter ended June 30, 2009 to 11,957,000 for the quarter ended June 30, 2010. Weighted average
diluted common and common equivalent shares decreased from 13,056,000 for the quarter ended June
30, 2009 to 12,187,000 for the quarter ended June 30, 2010. The net decrease in both of these
weighted share calculations is due to the repurchase of common stock as noted above, offset by an
increase in shares outstanding due to the exercise of stock options under the Companys employee
stock option plan.
Net income per common and common equivalent shares was computed by dividing net income by the
weighted average number of common and common stock equivalents outstanding during the quarter.
The calculations of the basic and diluted weighted shares for the three months ended June 30, 2009
and 2010, are as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
|
2009 |
|
|
2010 |
|
Net Income |
|
$ |
6,404,000 |
|
|
$ |
7,760,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic: |
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
|
12,925,000 |
|
|
|
11,957,000 |
|
|
|
|
|
|
|
|
Net Income per share |
|
$ |
0.50 |
|
|
$ |
0.65 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted: |
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
|
12,925,000 |
|
|
|
11,957,000 |
|
Treasury stock impact of stock options |
|
|
131,000 |
|
|
|
230,000 |
|
|
|
|
|
|
|
|
Total common and common equivalent shares |
|
|
13,056,000 |
|
|
|
12,187,000 |
|
|
|
|
|
|
|
|
Net Income per share |
|
$ |
0.49 |
|
|
$ |
0.64 |
|
|
|
|
|
|
|
|
Page 13
CORVEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2010
Note E Shareholder Rights Plan
During fiscal 1997, the Companys Board of Directors approved the adoption of a
Shareholder Rights Plan. The Shareholder Rights Plan provides for a dividend distribution to CorVel
stockholders of one preferred stock purchase right for each outstanding share of CorVels common
stock under certain circumstances. In November 2008, the Companys Board of Directors approved an
amendment to the Shareholder Rights Plan to extend the expiration date of the rights to February
10, 2022, and set the exercise price of each right at $118.
The rights are designed to assure that all shareholders receive fair and equal treatment in
the event of any proposed takeover of the Company and to encourage a potential acquirer to
negotiate with the Board of Directors prior to attempting a takeover. The rights have an exercise
price of $118 per right, subject to subsequent adjustment. The rights trade with the Companys
common stock and will not be exercisable until the occurrence of certain takeover-related events.
Generally, the Shareholder Rights Plan provides that if a person or group acquires 15% or more
of the Companys common stock without the approval of the Board, subject to certain exceptions, the
holders of the rights, other than the acquiring person or group, would, under certain
circumstances, have the right to purchase additional shares of the Companys common stock having a
market value equal to two times the then-current exercise price of the right.
In addition, if the Company is thereafter merged into another entity, or if 50% or more of the
Companys consolidated assets or earning power are sold, then the right will entitle its holder to
buy common shares of the acquiring entity having a market value equal to two times the then-current
exercise price of the right. The Companys Board of Directors may exchange or redeem the rights
under certain conditions.
Page 14
CORVEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2010
Note F Other Intangible Assets
Other intangible assets consist of the following at June 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost, Net of |
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Accumulated |
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
June 30, 2010 |
|
Amortization at |
|
Amortization at |
Item |
|
Life |
|
Cost |
|
Amortization Expense |
|
June 30, 2010 |
|
June 30, 2010 |
|
Covenants Not to
Compete |
|
5 Years |
|
$ |
675,000 |
|
|
$ |
101,000 |
|
|
$ |
409,000 |
|
|
$ |
266,000 |
|
Customer Relationships |
|
18-20 Years |
|
|
7,571,000 |
|
|
|
100,000 |
|
|
|
1,297,000 |
|
|
|
6,274,000 |
|
TPA Licenses |
|
15 Years |
|
|
204,000 |
|
|
|
3,000 |
|
|
|
39,000 |
|
|
|
165,000 |
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
$ |
8,450,000 |
|
|
$ |
204,000 |
|
|
$ |
1,745,000 |
|
|
$ |
6,705,000 |
|
|
|
|
|
|
|
|
Note G Line of Credit
In June 2010, the Company renewed a credit agreement that had been in place throughout fiscal
2010. The line is with a financial institution to provide a revolving credit facility with
borrowing capacity of up to $10 million. Borrowings under this agreement, as amended, bear
interest, at the Companys option, at a fixed LIBOR-based rate plus 1.50% or at a fluctuating rate
determined by the financial institution to be 1.50% above the daily one-month LIBOR rate. The loan
covenants require the Company to maintain the current assets to liabilities ratio of at least
1.25:1, debt to tangible net worth not greater than 1.25:1 and have positive net income. There
were no outstanding revolving loans at any time during fiscal 2010 or the quarter ended June 30,
2010, or as of the date hereof, but letters of credit in the aggregate amount of $6.3 million have
been issued separate from the line of credit and therefore do not reduce the amount of borrowings
available under the revolving credit facility. The renewed credit agreement expires in September
2011.
Note H Contingencies and Litigation
In February 2005, Kathleen Roche, D.C., as plaintiff, filed a putative class action in Circuit
Court for the 20th Judicial District, St. Clair County, Illinois, against the Company. The case
seeks unspecified damages based on the Companys alleged failure to direct patients to medical
providers who are members of the CorVel CorCare PPO network and also alleges that the Company used
biased and arbitrary computer software to review medical providers bills. In December 2007, the
trial court certified a class in this case of all Illinois health care providers with CorVel PPO
agreements, excluding hospitals. In January 2008, CorVel filed with the Illinois Appellate Court a
petition for interlocutory appeal of the trial courts class certification order which was denied
in April 2008. In May 2008, the Company appealed the appellate courts denial of its petition for
interlocutory appeal which appeal was also denied by the Illinois Supreme Court in September 2008.
The Company intends to pursue all available legal remedies including vigorously defending this
case. The Company is not able to estimate the amount of possible loss, if any, at this time.
The Company is involved in other litigation arising in the normal course of business.
Management believes that resolution of these matters will not result in any payment that, in the
aggregate, would be material to the financial position or results of the operations of the Company.
Page 15
Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This report may include certain forward-looking statements, within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended, including (without limitation) statements with respect to anticipated future operating
and financial performance, growth and acquisition opportunities and other similar forecasts and
statements of expectation. Words such as expects, anticipates, intends, plans, believes,
seeks, estimates may, will, would, could and should, and variations of these words
and similar expressions, are intended to identify these forward-looking statements. Forward-looking
statements made by the Company and its management are based on estimates, projections, beliefs and
assumptions of management at the time of such statements and are not guarantees of future
performance.
The Company disclaims any obligations to update or revise any forward-looking statement based
on the occurrence of future events, the receipt of new information or otherwise, except as required
by law. Actual future performance, outcomes and results may differ materially from those expressed
in forward-looking statements made by the Company and its management as a result of a number of
risks, uncertainties and assumptions. Representative examples of these factors include (without
limitation) general industry and economic conditions including a decreasing number of national
claims due to decreasing number of injured workers; cost of capital and capital requirements;
existing and possible litigation and legal liability in the course of operations; competition from
other managed care companies; the ability to expand certain areas of the Companys business; shifts
in customer demands; the ability of the Company to produce market-competitive software; changes in
operating expenses including employee wages, benefits and medical inflation; governmental and
public policy changes; dependence on key personnel; and the continued availability of financing in
the amounts and at the terms necessary to support the Companys future business.
Overview
CorVel Corporation is an independent nationwide provider of medical cost containment and
managed care services designed to address the escalating medical costs of workers compensation and
auto policies. The Companys services are provided to insurance companies, TPAs, and
self-administered employers to assist them in managing the medical costs and monitoring the quality
of care associated with healthcare claims.
Network Solutions Services
The Companys network solutions services are designed to reduce the price paid by its
customers for medical services rendered in workers compensation cases, auto policies and, to a
lesser extent, group health policies. The network solutions offered by the Company include
automated medical fee auditing, preferred provider services, retrospective utilization review,
independent medical examinations, and inpatient bill review. Network solutions sevices also
includes revenue from the Companys directed care network, including imaging and physical therapy.
Patient Management Services
In addition to its network solutions services, the Company offers a range of patient
management services, which involve working on a one-on-one basis with injured employees and their
various healthcare professionals, employers and insurance company adjusters. The services are
designed to monitor the medical necessity and appropriateness of healthcare services provided to
workers compensation and other healthcare claimants and to expedite return to work. The Company
offers these services on a stand-alone basis, or as an integrated component of its medical cost
containment services. The Company expanded its patient management services to include the
processing of claims for self-insured payors to property and casualty insurance with the February
2009 acquisition of the outstanding capital stock of Eagle Claims Services, Inc.
Page 16
Organizational Structure
The Companys management is structured geographically with regional vice-presidents who report
to the President of the Company. Each of these regional vice-presidents is responsible for all
services provided by the Company in his or her particular region and for the operating results of
the Company in multiple states. These regional vice presidents have area and district managers who
are also responsible for all services provided by the Company in their given area and district.
Business Enterprise Segments
The Company operates in one reportable operating segment, managed care. The Companys services
are delivered to its customers through its local offices in each region and financial information
for the Companys operations follows this service delivery model. All regions provide the Companys
patient management and network solutions services. FASB ASC 280-10 establishes standards for the
way that public business enterprises report information about operating segments in annual and
interim consolidated financial statements. The Companys internal financial reporting is segmented
geographically, as discussed above, and managed on a geographic rather than service line basis,
with virtually all of the Companys operating revenue generated within the United States.
Under FASB ASC 280-10, two or more operating segments may be aggregated into a single
operating segment for financial reporting purposes if aggregation is consistent with the objective
and basic principles, if the segments have similar economic characteristics, and if the segments
are similar in each of the following areas: 1) the nature of products and services; 2) the nature
of the production processes; 3) the type or class of customer for their products and services; and
4) the methods used to distribute their products or provide their services. The Company believes
each of its regions meet these criteria as each provides similar services and products to similar
customers using similar methods of productions and similar methods to distribute the services and
products.
Summary of Quarterly Results
The Company generated revenues of $91.5 million for the quarter ended June 30, 2010, an
increase of $10.2 million or 12.5% compared to revenues of $81.3 million for the quarter ended June
30, 2009. The increase in revenues was primarily due to an increase in patient management business.
An improvement in customer utilization of the Companys TPA services was the primary reason for the
increase in patient management revenues. An increase in revenues from directed care services was
the primary contributor to the increase in network solutions. As the Company expands the TPA
offering the Company has found the directed care services and the TPA offering to be synergistic.
The Companys cost of revenues increased by $7.5 million, from $60.2 million in the June 2009
quarter to $67.7 million in the June 2010 quarter, an increase of 12.5%. This increase was
primarily due to the costs associated with the increase in demand for the Companys Directed care
services, and, to a lesser extent, the TPA services, which are high-cost services relative to the
Companys network solution services. The percentage increase in costs roughly approximated the
percentage increase in revenues.
The Companys general and administrative expense increased by $1.0 million, from $10.5 million
in the June 2009 quarter to $11.5 million in the June 2010 quarter, an increase of 9.9%. This
increase is primarily due to an increase in the Companys systems and legal costs. Systems cost
increased from $5.9 million to $6.3 million as the Company increased the programming capabilities
of its proprietary systems. Legal costs increased due to an increase
in litigation. With the exception of the Roche case discussed in Note
H, management
does not believe that any outcomes will result in material losses to the Company.
The Companys income tax expense increased by $0.3 million, or 6.3%, from $4.3 million, in the
June 2009 quarter to $4.6 million in the June 2010 quarter. The increase in income tax expense
before income taxes was primarily due to the aforementioned increase in revenues. The effective
income tax rate was 40.1% in the June 2009 quarter and 37.0% in the June 2010 quarter. The
decrease in the income tax rate was due to an increase in tax credits.
Page 17
Weighted diluted shares decreased from 13.1 million shares in the June 2009 quarter to 12.2
million shares in the June 2010 quarter, a decrease of 869,000 shares, or 6.7%. This decrease was
due primarily to the repurchase
of 1.2 million shares of stock in the September 2009, December 2009, March 2010 and June 2010
quarters. The decrease was slightly offset by the exercise of stock options throughout the
intervening quarters.
Diluted earnings per share increased from $0.49 in the June 2009 quarter to $0.64 in the June
2010 quarter, an increase of $0.15 per share, or 30.6%. The increase in diluted earnings per share
was due to the increase in income before income taxes along with the reduction in the number of
shares outstanding due to the shares repurchased.
Results of Operations for the three months ended June 30, 2009 and 2010
The Company derives its revenues from providing patient management and network solutions
services to payors of workers compensation benefits, auto insurance claims and health insurance
benefits. Patient management services include claims management, case management, 24/7 nurse
triage, utilization management, vocational rehabilitation and life care planning. Network solutions
services include medical bill review, PPO management, enhanced bill review, provider reimbursement,
professional review, pharmacy services, directed care services, Medicare solutions and
clearinghouse services. The percentage of total revenues attributable to patient management and
network solutions services for the quarters ended June 30, 2009 and June 30, 2010 are as follows:
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009 |
|
June 30, 2010 |
Patient management services |
|
|
42.1 |
% |
|
|
47.4 |
% |
Network solutions services |
|
|
57.9 |
% |
|
|
52.6 |
% |
The following table sets forth, for the periods indicated, the dollar amounts, dollar and
percent changes, share changes, and the percentage of revenues represented by certain items
reflected in the Companys consolidated income statements for the three months ended June 30, 2009
and June 30, 2010. The Companys past operating results are not necessarily indicative of future
operating results.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Three Months Ended |
|
|
|
|
|
Percentage |
|
|
June 30, 2009 |
|
June 30, 2010 |
|
Change |
|
Change |
Revenue |
|
$ |
81,312,000 |
|
|
$ |
91,503,000 |
|
|
$ |
10,191,000 |
|
|
|
12.5 |
% |
Cost of revenues |
|
|
60,170,000 |
|
|
|
67,700,000 |
|
|
|
7,530,000 |
|
|
|
12.5 |
% |
|
|
|
|
|
|
|
Gross profit |
|
|
21,142,000 |
|
|
|
23,803,000 |
|
|
|
2,661,000 |
|
|
|
12.6 |
% |
|
|
|
|
|
|
|
Gross profit as percentage of revenue |
|
|
26.0 |
% |
|
|
26.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative |
|
|
10,450,000 |
|
|
|
11,486,000 |
|
|
|
1,036,000 |
|
|
|
9.9 |
% |
General and administrative as percentage of revenue |
|
|
12.9 |
% |
|
|
12.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax provision |
|
|
10,692,000 |
|
|
|
12,317,000 |
|
|
|
1,625,000 |
|
|
|
15.2 |
% |
|
|
|
|
|
|
|
Income before income tax provision as percentage
of revenue |
|
|
13.1 |
% |
|
|
13.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax provision |
|
|
4,288,000 |
|
|
|
4,557,000 |
|
|
|
269,000 |
|
|
|
6.3 |
% |
|
|
|
|
|
|
|
Net income |
|
$ |
6,404,000 |
|
|
$ |
7,760,000 |
|
|
$ |
1,356,000 |
|
|
|
21.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
12,925,000 |
|
|
|
11,957,000 |
|
|
|
(968,000 |
) |
|
|
(7.5 |
%) |
Diluted |
|
|
13,056,000 |
|
|
|
12,187,000 |
|
|
|
(869,000 |
) |
|
|
(6.7 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings Per Share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.50 |
|
|
$ |
0.65 |
|
|
$ |
0.15 |
|
|
|
30.0 |
% |
Diluted |
|
$ |
0.49 |
|
|
$ |
0.64 |
|
|
$ |
0.15 |
|
|
|
30.6 |
% |
Page 18
Revenues
Change in revenue from the three months ended June 30, 2009 to the three months ended June 30, 2010
Revenues increased from $81.3 million for the three months ended June 30, 2009 to $91.5
million for the three months ended June 30, 2010, an increase of $10.2 million or 12.5%. The
Companys patient management revenues increased $9.1 million or 26.6% from $34.2 million in the
three months ended June 2009 to $43.3 million in the three months ended June 2010. This increase
was primarily due to improvements in customer utilization of the Companys TPA services. The
Companys network solutions revenues increased slightly from $47.1 million in the three months
ended June 2009 to $48.2 million in the three months ended June 2010, an increase of $1.1 million
or 2.3%.
Cost of Revenues
The Companys cost of revenues consist of direct expenses, costs directly attributable to the
generation of revenue, and field indirect costs which are incurred in the field offices of the
Company. Direct costs are primarily case manager salaries, bill review analysts, related payroll
taxes and fringe benefits, and costs for independent medical examination (IME) and diagnostic
imaging providers. Most of the Companys revenues are generated in offices which provide both
patient management services and network solutions services. The largest of the field indirect costs
are manager salaries and bonus, account executive base pay and commissions, administrative and
clerical support, field systems personnel, prescription drug costs, PPO network developers, related
payroll taxes and fringe benefits, office rent, and telephone expense. Approximately 41% of the
costs incurred in the field are costs which support both the patient management services and
network solutions operations of the Companys field offices, such as district managers, account
executives, rent, and telephone.
Change in cost of revenue from the three months ended June 30, 2009 to the three months ended June 30, 2010
The Companys cost of revenues increased from $60.2 million in the three months ended June 30,
2009 to $67.7 million in the three months ended June 30, 2010, an increase of $7.5 million or
12.5%. This increase was primarily due to the costs associated with the increase in demand for the
Companys TPA services, pharmacy and directed care services, which are high-cost services. CorVel
TPA service costs increased $2.3 million from the previous three month period. Pharmacy cost of
goods sold increased $2.3 million from the previous three month period on a revenue increase of
$3.5 million. Similarly, directed care costs increased $2.2 million from the prior year three month
period on a revenue increase of $3.0 million. The increase in cost of revenues roughly approximated
the increase in revenues. These cost increases were offset partially by other cost decreases.
General and Administrative Expense
For the quarter ended June 30, 2010, general and administrative expense consisted of
approximately 57% of corporate systems costs which include the corporate systems support,
implementation and training, amortization of software development costs, depreciation of the
hardware costs in the Companys national systems, the Companys national wide area network and other systems related costs. The remaining 43% of the general
and administrative expense consisted of national marketing, national sales support, corporate
legal, corporate insurance, human resources, accounting, product management, new business
development and other general corporate matters. Legal costs increased due to an increase in
litigation.
Change in cost of general and administrative expense from the three months ended June 30, 2009 to
the three months ended June 30, 2010
General and administrative expense increased from $10.5 million in the three months ended June
30, 2009 to $11.5 million in the three months ended June 30, 2010, an increase of $1.0 million, or
9.9%. This increase is primarily due to an increase in the Companys systems and legal costs.
Systems cost increased from $5.9 million to $6.3 million due to improvements to the companys
proprietary claims systems and an increase in ongoing support and maintenance. From the December
2009 quarter through June 2010 quarters, software enhancements increased the Companys gross margin
in patient management services. Additionally, during the December 2009 quarter, the Company began
increasing software development expenditures to further the TPA product. The Company expects to
continue to grow software development expenditures. Legal costs increased due to an increase in
litigation related to claims administration, which is more litigious than the managed care market.
With the exception of the Roche case discussed in Note H,
management does not believe that any outcomes will result in material
losses to the company.
Page 19
Income Tax Provision
The Companys income tax expense increased by $0.3 million, or 6.3%, from $4.3 million for the
three months ended June 30, 2009 to $4.6 million for the three months ended June 30, 2010 due to
the increase in income before income taxes from $10.7 million to $12.3 million. The income tax
expense as a percentage of income before income taxes, also known as the effective tax rate, was
40.1% for the three months ended June 30, 2009 and 37.0% for the three months ended June 30, 2010.
The decrease in the income tax rate was primarily due to an increase in tax credits realized by the
Company. The income tax provision rates were based upon managements review of the Companys
estimated annual income tax rate, including state taxes. This effective tax rate differed from the
statutory federal tax rate of 35.0% primarily due to state income taxes and certain non-deductible
expenses offset by tax credits.
Liquidity and Capital Resources
The Company has historically funded its operations and capital expenditures primarily from
cash flow from operations, and to a lesser extent, stock option exercises. Working capital
increased $0.1 million, or 1%, from $27.2 million as of March 31, 2010 to $27.3 million as of June
30, 2010, primarily due to an increase in cash from $11.9 million as of March 31, 2010 to $13.7
million as of June 30, 2010. This increase in cash was offset by a decrease in prepaid income
taxes in the June 2010 quarter.
The Company believes that cash from operations and funds from exercises of stock options
granted to employees are adequate to fund existing obligations, repurchase shares of the Companys
common stock under its current share repurchase program, introduce new services, and continue to
develop healthcare related businesses for at least the next twelve months. The Company regularly
evaluates cash requirements for current operations and commitments, and for capital acquisitions
and other strategic transactions. The Company may elect to raise additional funds for these
purposes, through debt or equity financings or otherwise, as appropriate. Additional equity or
debt financing may not be available when needed, on terms favorable to the Company or at all.
As of June 30, 2010, including $2.2 million of customer deposits held in bank checking
accounts, the Company had $13.7 million in cash and cash equivalents, invested primarily in
short-term, interest-bearing, highly liquid investment-grade securities with maturities of 90 days
or less in federally regulated banks.
In June 2010, the Company renewed a credit agreement that had been in place throughout fiscal
2010. The line is with a financial institution to provide a revolving credit facility with
borrowing capacity of up to $10 million. Borrowings under this agreement, as amended, bear
interest, at the Companys option, at a fixed LIBOR-based rate plus 1.50% or at a fluctuating rate
determined by the financial institution to be 1.50% above the daily one-month LIBOR rate. The loan
covenants require the Company to maintain the current assets to liabilities ratio of at least
1.25:1, debt to tangible net worth not greater than 1.25:1 and have positive net income.
There were no outstanding revolving loans at any time during fiscal 2010 or the quarter ended June
30, 2010, or as of the date hereof, but letters of credit in the aggregate amount of $6.3 million
have been issued separate from the line of credit and therefore do not reduce the amount of
borrowings available under the revolving credit facility. The renewed credit agreement expires in
September 2011.
The Company has historically required substantial capital to fund the growth of its
operations, particularly working capital to fund the growth in accounts receivable and capital
expenditures. The Company believes, however, that the cash balance at June 30, 2010 along with
anticipated internally generated funds, will be sufficient to meet the Companys expected cash
requirements for at least the next twelve months.
Page 20
Operating Cash Flows
Three months ended June 30, 2009 compared to three months ended June 30, 2010
Net cash provided by operating activities increased from $7.8 million in the three months
ended June 30, 2009 to $11.5 million in the three months ended June 30, 2010. The increase in
cash flow from operating activities was primarily due to the increase in net income to $7.8 million
for the three months ended June 30, 2010 from $6.4 million for the three months ended June 30,
2009, an increase of $1.3 million. Additionally, accounts payable increased due to the vendor
costs related to the increased in directed care services.
Investing Activities
Three months ended June 30, 2009 compared to three months ended June 30, 2010
Net cash flow used in investing activities increased from $1.9 million in the three months
ended June 30, 2009 to $5.1 million in the three months ended June 30, 2010, an increase of $3.2
million. The increase in net cash used in investing activities is primarily due to an increase in
the office furniture, application software licenses, and the amount of software capitalized in the
three months ended June 30, 2010.
Financing Activities
Three months ended June 30, 2009 compared to three months ended June 30, 2010
Net cash flow used in financing activities increased from $0.4 million for the three months
ended June 30, 2009 to $4.6 million for the three months ended June 30, 2010, an increase of $4.2
million. The increase in cash flow used in financing activities was primarily due to an increase
in purchases under the Companys share repurchase program, partially offset by an increase in the
number and amount of stock options exercised by employees. During the three months ended June 30,
2010, the Company spent $5.5 million to repurchase 153,000 shares of its common stock. During the
three months ended June 30, 2009, the Company spent $0.6 million to repurchase 30,000 shares of its
common stock. The Company has historically used cash provided by operating activities and from the
exercise of stock options to repurchase stock. The Company expects it may use some of the $13.7
million of cash on its balance sheet at June 30, 2010 to repurchase additional shares of stock.
Contractual Obligations
The following table summarizes the Companys contractual obligations outstanding as of June
30, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period |
|
|
|
|
|
|
Within One |
|
Between One and |
|
Between Three and |
|
More than |
|
|
Total |
|
Year |
|
Three Years |
|
Five Years |
|
Five Years |
|
Operating leases |
|
$ |
49,954,000 |
|
|
$ |
14,128,000 |
|
|
$ |
19,638,000 |
|
|
$ |
11,426,000 |
|
|
$ |
4,762,000 |
|
Uncertain tax positions |
|
|
3,170,000 |
|
|
|
3,170,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Software licenses |
|
|
1,700,000 |
|
|
|
850,000 |
|
|
|
850,000 |
|
|
|
|
|
|
|
|
|
Earn out obligation |
|
|
500,000 |
|
|
|
500,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
55,324,000 |
|
|
$ |
18,648,000 |
|
|
$ |
20,488,000 |
|
|
$ |
11,426,000 |
|
|
$ |
4,762,000 |
|
|
Operating leases are rents paid for the Companys physical locations.
Litigation
In February 2005, Kathleen Roche, D.C., as plaintiff, filed a putative class action in Circuit
Court for the 20th Judicial District, St. Clair County, Illinois, against the Company. The case
seeks unspecified damages based on the Companys alleged failure to direct patients to medical
providers who are members of the CorVel CorCare PPO
Page 21
network and also alleges that the Company used
biased and arbitrary computer software to review medical providers bills. In December 2007, the
trial court certified a class in this case of all Illinois health care providers with CorVel PPO
agreements, excluding hospitals. In January 2008, CorVel filed with the Illinois Appellate Court a
petition for interlocutory appeal of the trial courts class certification order which was denied
in April 2008. In May 2008, the Company appealed the appellate courts denial of its petition for
interlocutory appeal which appeal was also denied by the Illinois Supreme Court in September 2008.
The Company intends to pursue all available legal remedies including vigorously defending this
case. The Company is not able to estimate the amount of possible loss, if any, at this time.
The Company is involved in other litigation arising in the normal course of business.
Management believes that resolution of these other matters will not result in any payment that, in
the aggregate, would be material to the financial position or results of the operations of the
Company.
Inflation
The Company experiences pricing pressures in the form of competitive prices. The Company is
also impacted by rising costs for certain inflation-sensitive operating expenses such as labor and
employee benefits, and facility leases. However, the Company generally does not believe these
impacts are material to its revenues or net income.
Off-Balance Sheet Arrangements
The Company is not a party to off-balance sheet arrangements as defined by the rules of the
Securities and Exchange Commission. However, from time to time the Company enters into certain
types of contracts that contingently require the Company to indemnify parties against third-party
claims. The contracts primarily relate to: (i) certain contracts to perform services, under which
the Company may provide customary indemnification to the purchases of such services; (ii) certain
real estate leases, under which the Company may be required to indemnify property owners for
environmental and other liabilities, and other claims arising from the Companys use of the
applicable premises; and (iii) certain agreements with the Companys officers, directors and
employees, under which the Company may be required to indemnify such persons for liabilities
arising out of their relationship with the Company.
The terms of such obligations vary by contract and in most instances a specific or maximum
dollar amount is not explicitly stated therein. Generally, amounts under these contracts cannot be
reasonably estimated until a specific claim is asserted. Consequently, no liabilities have been
recorded for these obligations on the Companys balance sheets for any of the periods presented.
Critical Accounting Policies
The SEC defines critical accounting policies as those that require application of managements
most difficult, subjective or complex judgments, often as a result of the need to make estimates
about the effect of matters that are inherently uncertain and may change in subsequent periods.
The following is not intended to be a comprehensive list of our accounting policies. Our
significant accounting policies are more fully described in Note A to the Consolidated Financial
Statements. In many cases, the accounting treatment of a particular transaction is specifically
dictated by accounting principles generally accepted in the United States of America, with no need
for managements judgment in their application. There are also areas in which managements judgment
in selecting an available alternative would not produce a materially different result.
We have identified the following accounting policies as critical to us: 1) revenue
recognition, 2) cost of revenues, 3) allowance for uncollectible accounts, 4) goodwill and
long-lived assets, 5) accrual for self-insured costs, 6) accounting for income taxes, and 7)
share-based compensation.
Page 22
Revenue Recognition: The Company recognizes revenue when there is persuasive evidence of an
arrangement, the services have been provided to the customer, the sales price is fixed or
determinable, and collectability is reasonably assured. For the Companys services, as the
Companys professional staff performs work, they are contractually permitted to bill for fees
earned in fraction of an hour increments worked or by units of production. The Company recognizes
revenue as the time is worked or as units of production are completed, which is when the revenue is
earned and realized. Labor costs are recognized as the costs are incurred. The Company derives the
majority of its revenue from the sale of Network Solutions and Patient Management services.
Network Solutions and Patient Management services may be sold individually or combined with any of
the services the Company provides. When a sale combines multiple elements, the Company accounts
for multiple element arrangements in accordance with the guidance included in ASC 605-25.
In accordance with ASC 605-25, the Company allocates revenue for transactions or
collaborations that include multiple elements to each unit of accounting based on its relative fair
value, and recognizes revenue for each unit of accounting when the revenue recognition criteria
have been met. The price charged when the element is sold separately generally determines fair
value. When our customers purchase several products from CorVel, the pricing of the products sold
is generally the same as if the product were sold on an individual basis. As a result, the fair
value of each product sold in a multiple element arrangement is almost always determinable. In the
absence of fair value of a delivered element, the Company would allocate revenue first to the fair
value of the undelivered elements and the residual revenue to the delivered elements. The Company
recognizes revenue for delivered elements when the delivered elements have standalone value and the
Company has objective and reliable evidence of fair value for each undelivered element. If the
fair value of any undelivered element included in a multiple element arrangement cannot be
objectively determined, revenue is deferred until all elements are delivered and services have been
performed, or until fair value can objectively be determined for any remaining undelivered
elements. Based upon the nature of our products, bundled products are generally delivered in the
same accounting period.
Cost of revenues: Cost of services consists primarily of the compensation and fringe benefits
of field personnel, including managers, medical bill analysts, field case managers, telephonic case
managers, systems support, administrative support and account managers and account executives and
related facility costs including rent, telephone and office supplies. Historically, the costs
associated with these additional personnel and facilities have been the most significant factor
driving increases in the Companys cost of services. Locally managed and incurred IT costs are
charged to cost of revenues whereas the costs incurred and managed at the corporate offices are
charged to general and administrative expense.
Allowance for Uncollectible Accounts: The Company determines its allowance by considering a
number of factors, including the length of time trade accounts receivable are past due, the
Companys previous loss history, the customers current ability to pay its obligation to the
Company, and the condition of the general economy and the industry as a whole. The Company writes
off accounts receivable when they become uncollectible.
The Company must make significant management judgments and estimates in determining
contractual and bad debt allowances in any accounting period. One significant uncertainty inherent
in the Companys analysis is whether its past experience will be indicative of future periods.
Although the Company considers future projections when estimating contractual and bad debt
allowances, the Company ultimately makes its decisions based on the best information available to
it at that time. Adverse changes in general economic conditions or trends in reimbursement amounts
for the Companys services could affect the Companys contractual and bad debt allowance estimates,
collection of accounts receivable, cash flows, and results of operations. No one customer accounted
for 10% or more of accounts receivable at March 31, 2010 or June 30, 2010.
Goodwill and Long-Lived Assets: Goodwill arising from business combinations represents the
excess of the purchase price over the estimated fair value of the net assets of the acquired
business. Pursuant to ASC 350-10 through ASC 350-30, Goodwill and Other Intangible Assets,
goodwill is tested annually for impairment or more frequently if circumstances indicate the
potential for impairment. Also, management tests for impairment of its amortizable intangible
assets and long-lived assets and whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. The Companys impairment is conducted at a
company-wide level. The measurement of fair value is based on an evaluation of market
capitalization and is further tested using a multiple of earnings approach. In projecting the
Companys cash flows, management considers industry growth rates and trends and cost structure
changes. No changes or events occurred which indicated a need to test impairment during the
quarter. However, future events or changes in current circumstances could affect the
recoverability of the carrying value of goodwill and long-lived assets. Should an asset be deemed
impaired, an impairment loss would be recognized to the extent the carrying value of the asset
exceeded its estimated fair market value.
Page 23
Accrual for Self-insurance Costs: The Company self-insures for the group medical costs and
workers compensation costs of its employees. The Company purchases stop loss insurance for large
claims. Management believes that the self-insurance reserves are appropriate; however, actual
claims costs may differ from the original estimates requiring adjustments to the reserves. The
Company determines its estimated self-insurance reserves based upon historical trends along with
outstanding claims information provided by its claims paying agents.
Accounting for Income Taxes: The Company provides for income taxes in accordance with
provisions specified in ASC 740, Accounting for Income Taxes, which is based upon managements
judgments and estimations of various tax rates. Accordingly, deferred income tax assets and
liabilities are computed for differences between the financial statement and tax bases of assets
and liabilities. These differences will result in taxable or deductible amounts in the future,
based on tax laws and rates applicable to the periods in which the differences are expected to
affect taxable income. The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which temporary differences become
deductible. In making an assessment regarding the probability of realizing a benefit from these
deductible differences, management considers the Companys current and past performance, the market
environment in which the Company operates, tax-planning strategies and the length of carry-forward
periods for loss carry-forwards, if any. Valuation allowances are established when necessary to
reduce deferred tax assets to amounts that are more likely than not to be realized. Further, the
Company provides for income tax issues not yet resolved with federal, state and local tax
authorities.
Share-Based Compensation: The Company accounts for share based compensation in accordance with
the provisions of ASC Topic 718 Compensation Stock Compensation. Under ASC 718, share-based
compensation cost is measured at the grant date, based on the calculated fair value of the award,
and is recognized as an expense over the employees requisite service period (generally the vesting
period of the equity grant). Some of the stock options are performance based and the stock
compensation expense is recorded based upon the actual results compared to the option targets. For
the quarter ended June 30, 2010, the Company recorded share-based compensation expense of
$590,000. Share-based compensation expense recognized in fiscal 2011 is based on awards ultimately
expected to vest; therefore, it has been reduced for estimated forfeitures. ASC Topic 718 requires
forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods
if actual forfeitures differ from those estimates.
The Company estimates the fair value of stock options using the Black-Scholes valuation model.
Key input assumptions used to estimate the fair value of stock options include the exercise price
of the award, the expected option term, the expected volatility of the Companys stock over the
options expected term, the risk-free interest rate
over the options term, and the Companys expected annual dividend yield. The Companys
management believes that the valuation technique and the approach utilized to develop the
underlying assumptions are appropriate in calculating the fair values of the Companys stock
options granted in fiscal 2011. Estimates of fair value are not intended to predict actual future
events or the value ultimately realized by persons who receive equity awards.
Page 24
The key input assumptions that were utilized in the valuation of the stock options granted
during the quarter ended June 30, 2010 are summarized in the table below.
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Expected option term (1) |
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4.8 years |
Expected volatility (2) |
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46 |
% |
Risk-free interestrate (3) |
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2.15 |
% |
Expected for feiturerate |
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9.05 |
% |
Expected annual dividend yield |
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0 |
% |
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(1) |
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The expected option term is based on historical exercise and post-vesting termination patterns,
as well as our expectations regarding future trends. |
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(2) |
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Expected volatility represents a combination of historical stock price volatility and estimated
future volatility. |
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(3) |
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The risk-free interest rate is based on the implied yield on five year United States Treasury
Bill on the date of grant. |
Recent Accounting Standards Update
In October 2009, the FASB issued Accounting Standards Update No. 2009-13, Multiple Deliverable
Revenue Arrangementsa consensus of FASB Emerging Issues Task Force (ASU 2009-13). ASU 2009-13
provides for less restrictive separation criteria that must be met for a deliverable to be
considered a separate unit of accounting. Additionally, under this Standard, there is a hierarchy
for determining the selling price of a unit of accounting and consideration must be allocated using
a relative-selling price method. ASU 2009-13 will be effective for CorVel Corporation on April 1,
2011; however, early adoption is permitted. We are currently reviewing the requirements of ASU
2009-13 and has not yet determined the impact on its financial position or results of operations.
Item 3 Quantitative and Qualitative Disclosures About Market Risk
As of June 30, 2010, the Company held no market risk sensitive instruments for trading
purposes, and the Company did not employ any derivative financial instruments, other financial
instruments, or derivative commodity instruments to hedge any market risk. The Company had no debt
outstanding as of June 30, 2010, and therefore, had no market risk related to debt.
Item 4 Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management has evaluated, under the supervision and with the participation of our Chief
Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934)
as of the end of the period covered by this report. Based upon that evaluation, our Chief Executive
Officer and our Chief Financial Officer have concluded that, as of June 30, 2010, our disclosure
controls and procedures were effective in ensuring that information required to be disclosed by us
in the reports that we file or submit under the Securities Exchange Act of 1934 is (i) recorded,
processed, summarized and reported, within the time periods specified in the rules and forms of the
Securities and Exchange Commission and (ii) accumulated and communicated to our management,
including our principal executive and principal accounting officers, or persons performing similar
functions, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal controls over financial reporting (as defined in
Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) during the three months
ended June 30, 2010 that have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.
Page 25
PART II OTHER INFORMATION
Item 1 Legal Proceedings
In February 2005, Kathleen Roche, D.C., as plaintiff, filed a putative class action in Circuit
Court for the 20th Judicial District, St. Clair County, Illinois, against the Company. The case
seeks unspecified damages based on the Companys alleged failure to direct patients to medical
providers who are members of the CorVel CorCare PPO network and also alleges that the Company used
biased and arbitrary computer software to review medical providers bills. In December 2007, the
trial court certified a class in this case of all Illinois health care providers with CorVel PPO
agreements, excluding hospitals. In January 2008, CorVel filed with the Illinois Appellate Court a
petition for interlocutory appeal of the trial courts class certification order which was denied
in April 2008. In May 2008, the Company appealed the appellate courts denial of its petition for
interlocutory appeal which appeal was also denied by the Illinois Supreme Court in September 2008.
The Company intends to pursue all available legal remedies including vigorously defending this
case. The Company is not able to estimate the amount of possible loss, if any, at this time.
The Company is involved in other litigation arising in the normal course of business.
Management believes that resolution of these matters will not result in any payment that, in the
aggregate, would be material to the financial position or results of the operations of the Company.
Item 1A. Risk Factors
Past financial performance is not necessarily a reliable indicator of future performance, and
investors in our common stock should not use historical performance to anticipate results or future
period trends. Investing in our common stock involves a high degree of risk. Investors should
consider carefully the following risk factors, as well as the other information in this report and
our other filings with the Securities and Exchange Commission, including our consolidated financial
statements and the related notes, before deciding whether to invest or maintain an investment in
shares of our common stock. If any of the following risks actually occurs, our business, financial
condition and results of operations would suffer. In this case, the trading price of our common
stock would likely decline. The risks described below are not the only ones we face. Additional
risks that we currently do not know about or that we currently believe to be immaterial also may
impair our business operations.
Changes in government regulations could increase our costs of operations and/or reduce the
demand for our services.
Many states, including a number of those in which we transact business, have licensing and
other regulatory requirements applicable to our business. Approximately half of the states have
enacted laws that require licensing of businesses which provide medical review services such as
ours. Some of these laws apply to medical review of care covered by workers compensation. These
laws typically establish minimum standards for qualifications of personnel, confidentiality,
internal quality control and dispute resolution procedures. These regulatory programs may result in
increased costs of operation for us, which may have an adverse impact upon our ability to compete
with other available alternatives for healthcare cost control. In addition, new laws regulating the
operation of managed care provider networks have been adopted by a number of states. These laws may
apply to managed care provider networks having contracts with us or to provider networks which we
may organize. To the extent we are governed by these regulations, we may be subject to additional
licensing requirements, financial and operational oversight and procedural standards for
beneficiaries and providers.
Page 26
Regulation in the healthcare and workers compensation fields is constantly evolving. We are
unable to predict what additional government initiatives, if any, affecting our business may be
promulgated in the future. Our business may be adversely affected by failure to comply with
existing laws and regulations, failure to obtain necessary licenses and government approvals or
failure to adapt to new or modified regulatory requirements. Proposals for healthcare legislative
reforms are regularly considered at the federal and state levels. To the extent that such proposals
affect workers compensation, such proposals may adversely affect our business, financial condition
and results of operations.
In addition, changes in workers compensation, auto and managed health care laws or
regulations may reduce demand for our services, require us to develop new or modified services to
meet the demands of the marketplace or reduce the fees that we may charge for our services. One
proposal which had been considered in the past, but not enacted by Congress or certain state
legislatures, is 24-hour health coverage, in which the coverage of traditional employer-sponsored
health plans is combined with workers compensation coverage to provide a single insurance plan for
work-related and non-work-related health problems.
Our annual sequential revenue may not increase and may decline. As a result, we may fail to
meet or exceed the expectations of investors or analysts which could cause our common stock price
to decline.
Our annual sequential revenue growth may not increase and may decline in the future as a
result of a variety of factors, many of which are outside of our control. If changes in our annual
sequential revenue fall below the expectations of investors or analysts, the price of our common
stock could decline substantially. Fluctuations or declines in sequential revenue growth may be due
to a number of factors, including, but not limited to, those listed below and identified throughout
this Risk Factors section: the decline in manufacturing employment, the decline in workers
compensation claims, the decline in healthcare expenditures, the considerable price competition in
a flat-to-declining workers compensation market, litigation, the increase in competition, and the
changes and the potential changes in state workers compensation and automobile managed care laws
which can reduce demand for our services. These factors create an environment where revenue and
margin growth is more difficult to attain and where revenue growth is less certain than
historically experienced. Additionally, our technology and preferred provider network face
competition from companies that have more resources available to them than we do. Also, some
customers may handle their managed care services in-house and may reduce the amount of services
which are outsourced to managed care companies such as CorVel. These factors could cause the market
price of our common stock to fluctuate substantially. There can be no assurance that our growth
rate in the future, if any, will be at or near historical levels.
In addition, the stock market has in the past experienced price and volume fluctuations that
have particularly affected companies in the healthcare and managed care markets resulting in
changes in the market price of the stock of many companies, which may not have been directly
related to the operating performance of those companies.
Due to the foregoing factors, and the other risks discussed in this report, investors should
not rely on annual comparisons of our results of operations as an indication of our future
performance.
Exposure to possible litigation and legal liability may adversely affect our business,
financial condition and results of operations.
We, through our utilization management services, make recommendations concerning the
appropriateness of providers medical treatment plans of patients throughout the country, and as a
result, could be exposed to claims for adverse medical consequences. We do not grant or deny claims
for payment of benefits and we do not believe that we engage in the practice of medicine or the
delivery of medical services. There can be no assurance, however, that we will not be subject to
claims or litigation related to the authorization or denial of claims for payment of benefits or
allegations that we engage in the practice of medicine or the delivery of medical services.
Page 27
In addition, there can be no assurance that we will not be subject to other litigation that
may adversely affect our business, financial condition or results of operations, including but not
limited to being joined in litigation brought against our customers in the managed care industry.
We maintain professional liability insurance and such other coverages as we believe are reasonable
in light of our experience to date. If such insurance is insufficient or unavailable in the future
at reasonable cost to protect us from liability, our business, financial condition or results of
operations could be adversely affected.
In February 2005, Kathleen Roche, D.C., as plaintiff, filed a putative class action in Circuit
Court for the 20th Judicial District, St. Clair County, Illinois, against us. The case seeks
recovery of unspecified damages based on the Companys alleged failure to direct patients to
medical providers who are members of the CorVel CorCare PPO network and also alleges that the
Company used biased and arbitrary computer software to review medical providers bills. An
unfavorable outcome in this litigation could materially and adversely affect our business,
financial condition, or results of operations.
If lawsuits against us are successful, we may incur significant liabilities.
We provide to insurers and other payors of healthcare costs managed care programs that utilize
preferred provider organizations and computerized bill review programs. Health care providers have
brought, against us and our customers, individual and class action lawsuits challenging such
programs. If such lawsuits are successful, we may incur significant liabilities.
We make recommendations about the appropriateness of providers proposed medical treatment
plans for patients throughout the country. As a result, we could be subject to claims arising from
any adverse medical consequences. Although plaintiffs have not to date subjected us to any claims
or litigation relating to the granting or denial of claims for payment of benefits or allegations
that we engage in the practice of medicine or the delivery of medical services, we cannot assure
you that plaintiffs will not make such claims in future litigation. We also cannot assure you that
our insurance will provide sufficient coverage or that insurance companies will make insurance
available at a reasonable cost to protect us from significant future liability.
Our failure to compete successfully could make it difficult for us to add and retain customers
and could reduce or impede the growth of our business.
We face competition from PPOs, TPAs and other managed healthcare companies. We believe that as
managed care techniques continue to gain acceptance in the workers compensation marketplace, our
competitors will increasingly consist of nationally-focused workers compensation managed care
service companies, insurance companies, HMOs and other significant providers of managed care
products. Legislative reform in some states has been considered, but not enacted to permit
employers to designate health plans such as HMOs and PPOs to cover workers compensation claimants.
Because many health plans have the ability to manage medical costs for workers compensation
claimants, such legislation may intensify competition in the markets served by us. Many of our
current and potential competitors are significantly larger and have greater financial and marketing
resources than we do, and there can be no assurance that we will continue to maintain our existing
customers, our past level of operating performance or be successful with any new products or in any
new geographical markets we may enter.
Declines in workers compensation claims may harm our results of operations.
Within the past few years, the economy has performed below historical averages which leads to
fewer workers on a national level and could lead to fewer work related injuries. If declines in
workers compensation costs occur in many states and persist over the long-term, it would have an
adverse impact on our business, financial condition and results of operations.
We provide an outsource service to payors of workers compensation and auto healthcare
benefits. These payors include insurance companies, TPAs, municipalities, state funds, and
self-insured, self-administered employers. If these payors reduce the
amount of work they outsource, our results of operations would be
adversely affected.
Page 28
If the utilization by healthcare payors of early intervention services continues to increase,
the revenue from our later-stage network and healthcare management services could be negatively
affected.
The performance of early intervention services, including injury occupational healthcare,
first notice of loss, and telephonic case management services, often result in a decrease in the
average length of, and the total costs associated with, a healthcare claim. By successfully
intervening at an early stage in a claim, the need for additional cost containment services for
that claim often can be reduced or even eliminated. As healthcare payors continue to increase their
utilization of early intervention services, the revenue from our later stage network and healthcare
management services will decrease.
We face competition for staffing, which may increase our labor costs and reduce profitability.
We compete with other healthcare providers in recruiting qualified management and staff
personnel for the day-to-day operations of our business, including nurses and other case management
professionals. In some markets, the scarcity of nurses and other medical support personnel has
become a significant operating issue to healthcare providers. This shortage may require us to
enhance wages to recruit and retain qualified nurses and other healthcare professionals. Our
failure to recruit and retain qualified management, nurses and other healthcare professionals, or
to control labor costs could have a material adverse effect on profitability.
If competition increases, our growth and profits may decline.
The markets for our Network Services and Patient Management Services are also fragmented and
competitive. Our competitors include national managed care providers, preferred provider networks,
smaller independent providers and insurance companies. Companies that offer one or more workers
compensation managed care services on a national basis are our primary competitors. We also compete
with many smaller vendors who generally provide unbundled services on a local level, particularly
companies with an established relationship with a local insurance company adjuster. In addition,
several large workers compensation insurance carriers offer managed care services for their
customers, either by performance of the services in-house or by outsourcing to organizations like
ours. If these carriers increase their performance of these services in-house, our business may be
adversely affected. In addition, consolidation in the industry may result in carriers performing
more of such services in-house.
The failure to attract and retain qualified or key personnel may prevent us from effectively
developing, marketing, selling, integrating and supporting our services.
We are dependent, to a substantial extent, upon the continuing efforts and abilities of
certain key management personnel. In addition, we face competition for experienced employees with
professional expertise in the workers compensation managed care area. The loss of key personnel,
especially V. Gordon Clemons, Chairman, and Dan Starck, President, Chief Executive Officer, and
Chief Operating Officer, or the inability to attract, qualified employees, could have a material
unfavorable effect on our business and results of operations.
If we fail to grow our business internally or through strategic acquisitions we may be unable
to execute our business plan, maintain high levels of service or adequately address competitive
challenges.
Our strategy is to continue internal growth and, as strategic opportunities arise in the
workers compensation managed care industry, to consider acquisitions of, or relationships with,
other companies in related lines of business. As a result, we are subject to certain growth-related
risks, including the risk that we will be unable to retain personnel or acquire other resources
necessary to service such growth adequately. Expenses arising from our efforts to increase our
market penetration may have a negative impact on operating results. In addition, there can be no
assurance that any suitable opportunities for strategic acquisitions or relationships will arise
or, if they do arise, that the transactions contemplated could be completed. If such a transaction
does occur, there can be no
Page 29
assurance that we will be able to integrate effectively any acquired
business. In addition, any such transaction would be subject to various risks associated with the
acquisition of businesses, including, but not limited to, the following:
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an acquisition may negatively impact our results of operations because it may require
incurring large one-time charges, substantial debt or liabilities; it may require the
amortization or write down of amounts related to deferred compensation, goodwill and other
intangible assets; or it may cause adverse tax consequences, substantial depreciation or
deferred compensation charges; |
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we may encounter difficulties in assimilating and integrating the business,
technologies, products, services, personnel or operations of companies that are acquired,
particularly if key personnel of the acquired company decide not to work for us; |
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an acquisition may disrupt ongoing business, divert resources, increase expenses and
distract management; |
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the acquired businesses, products, services or technologies may not generate
sufficient revenue to offset acquisition costs; |
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we may have to issue equity or debt securities to complete an acquisition, which would
dilute the position of stockholders and could adversely affect the market price of our common
stock; and |
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acquisitions may involve the entry into a geographic or business market in which we
have little or no prior experience. |
There can be no assurance that we will be able to identify or consummate any future
acquisitions or other strategic relationships on favorable terms, or at all, or that any future
acquisition or other strategic relationship will not have an adverse impact on our business or
results of operations. If suitable opportunities arise, we may finance such transactions, as well
as internal growth, through debt or equity financing. There can be no assurance, however, that such
debt or equity financing would be available to us on acceptable terms when, and if, suitable
strategic opportunities arise.
Our Internet-based services are dependent on the development and maintenance of the Internet
infrastructure.
The Internet has experienced a variety of outages and other delays as a result of damages to
portions of its infrastructure, and it could face outages and delays in the future. These outages
and delays could reduce the level of Internet usage, as well as the availability of the Internet to
us for delivery of our Internet-based services. In addition, our customers who use our Web-based
services depend on Internet service providers, online service providers and other Web site
operators for access to our Web site. All of these providers have experienced significant outages
in the past and could experience outages, delays and other difficulties in the future due to system
failures unrelated to our systems. Any significant interruptions in our services or increases in
response time could result in a loss of potential or existing users, and, if sustained or repeated,
could reduce the attractiveness of our services.
An interruption in our ability to access critical data may cause customers to cancel their
service and/or may reduce our ability to effectively compete.
Certain aspects of our business are dependent upon our ability to store, retrieve, process and
manage data and to maintain and upgrade our data processing capabilities. Interruption of data
processing capabilities for any extended length of time, loss of stored data, programming errors or
other system failures could cause customers to cancel their service and could have a material
adverse effect on our business and results of operations.
In addition, we expect that a considerable amount of our future growth will depend on our
ability to process and manage claims data more efficiently and to provide more meaningful
healthcare information to customers and payors of healthcare. There can be no assurance that our
current data processing capabilities will be adequate for our future growth, that we will be able
to efficiently upgrade our systems to meet future demands, or that we
will be able to develop, license or otherwise acquire software to
address these market demands as well or as timely as our competitors.
Page 30
The introduction of software products incorporating new technologies and the emergence of new
industry standards could render our existing software products less competitive, obsolete or
unmarketable.
There can be no assurance that we will be successful in developing and marketing new software
products that respond to technological changes or evolving industry standards. If we are unable,
for technological or other reasons, to develop and introduce new software products
cost-effectively, in a timely manner and in response to changing market conditions or customer
requirements, our business, results of operations and financial condition may be adversely
affected.
Developing or implementing new or updated software products and services may take longer and
cost more than expected. We rely on a combination of internal development, strategic relationships,
licensing and acquisitions to develop our software products and services. The cost of developing
new healthcare information services and technology solutions is inherently difficult to estimate.
Our development and implementation of proposed software products and services may take longer than
originally expected, require more testing than originally anticipated and require the acquisition
of additional personnel and other resources. If we are unable to develop new or updated software
products and services cost-effectively on a timely basis and implement them without significant
disruptions to the existing systems and processes of our customers, we may lose potential sales and
harm our relationships with current or potential customers.
A breach of security may cause our customers to curtail or stop using our services.
We rely largely on our own security systems, confidentiality procedures and employee
nondisclosure agreements to maintain the privacy and security of our and our customers proprietary
information. Accidental or willful security breaches or other unauthorized access by third parties
to our information systems, the existence of computer viruses in our data or software and
misappropriation of our proprietary information could expose us to a risk of information loss,
litigation and other possible liabilities which may have a material adverse effect on our business,
financial condition and results of operations. If security measures are breached because of
third-party action, employee error, malfeasance or otherwise, or if design flaws in our software
are exposed and exploited, and, as a result, a third party obtains unauthorized access to any
customer data, our relationships with our customers and our reputation will be damaged, our
business may suffer and we could incur significant liability. Because techniques used to obtain
unauthorized access or to sabotage systems change frequently and generally are not recognized until
launched against a target, we may be unable to anticipate these techniques or to implement adequate
preventative measures.
If we are unable to increase our market share among national and regional insurance carriers
and large, self-funded employers, our results may be adversely affected.
Our business strategy and future success depend in part on our ability to capture market share
with our cost containment services as national and regional insurance carriers and large,
self-funded employers look for ways to achieve cost savings. We cannot assure you that we will
successfully market our services to these insurance carriers and employers or that they will not
resort to other means to achieve cost savings. Additionally, our ability to capture additional
market share may be adversely affected by the decision of potential customers to perform services
internally instead of outsourcing the provision of such services to us. Furthermore, we may
not be able to demonstrate sufficient cost savings to potential or current customers to induce them
not to provide comparable services internally or to accelerate efforts to provide such services
internally.
If we lose several customers in a short period, our results may be materially adversely
affected.
Our results may decline if we lose several customers during a short period. Most of our
customer contracts permit either party to terminate without cause. If several customers terminate,
or do not renew or extend their contracts with us, our results could be materially and adversely
affected. Many organizations in the insurance
Page 31
industry have consolidated and this could result in
the loss of one or more of our customers through a merger or acquisition. Additionally, we could
lose customers due to competitive pricing pressures or other reasons.
We are subject to risks associated with acquisitions of intangible assets.
Our acquisition of other businesses may result in significant increases in our intangible
assets and goodwill. We regularly evaluate whether events and circumstances have occurred
indicating that any portion of our intangible assets and goodwill may not be recoverable. When
factors indicate that intangible assets and goodwill should be evaluated for possible impairment,
we may be required to reduce the carrying value of these assets. We cannot currently estimate the
timing and amount of any such charges.
If we are unable to leverage our information systems to enhance our outcome-driven service
model, our results may be adversely affected.
To leverage our knowledge of workplace injuries, treatment protocols, outcomes data, and
complex regulatory provisions related to the workers compensation market, we must continue to
implement and enhance information systems that can analyze our data related to the workers
compensation industry. We frequently upgrade existing operating systems and are updating other
information systems that we rely upon in providing our services and financial reporting. We have
detailed implementation schedules for these projects that require extensive involvement from our
operational, technological and financial personnel. Delays or other problems we might encounter in
implementing these projects could adversely affect our ability to deliver streamlined patient care
and outcome reporting to our customers.
The increased costs of professional and general liability insurance may have an adverse effect
on our profitability.
The cost of commercial professional and general liability insurance coverage has risen
significantly in the past several years, and this trend may continue. In addition, if we were to
suffer a material loss, our costs may increase over and above the general increases in the
industry. If the costs associated with insuring our business continue to increase, it may
adversely affect our business. We believe our current level of insurance coverage is adequate for a
company of our size engaged in our business.
If the referrals for our patient management services decline, our business, financial
condition and results of operations would be materially adversely affected.
In some years, we have experienced a general decline in the revenue and operating performance
of patient management services. We believe that the performance decline has been due to the
following factors: the decrease of the number of workplace injuries that have become longer-term
disability cases; increased regional and local competition from providers of managed care services;
a possible reduction by insurers on the types of services provided by our patient management
business; the closure of offices and continuing consolidation of our patient management operations;
and employee turnover, including management personnel, in our patient management business. In the
past, these factors have all contributed to the lowering of our long-term outlook for our patient
management services. If some or all of these conditions continue, we believe that the performance
of our patient management revenues could decrease.
Healthcare providers are becoming increasingly resistant to the application of certain
healthcare cost containment techniques; this may cause revenue from our cost containment operations
to decrease.
Healthcare providers have become more active in their efforts to minimize the use of certain
cost containment techniques and are engaging in litigation to avoid application of certain cost
containment practices. Recent litigation between healthcare providers and insurers has challenged
certain insurers claims adjudication and reimbursement decisions. Although these lawsuits do not
directly involve us or any services we provide, these cases may affect the use by insurers of
certain cost containment services that we provide and may result in a decrease in revenue from our
cost containment business.
Page 32
If material weaknesses in our internal controls are identified by us or our independent
registered public accountants, it could have a material adverse effect on our business and stock
price.
Any material weaknesses identified in our internal controls as part of the ongoing evaluation
being undertaken by us and our independent registered public accountants pursuant to Section 404 of
the Sarbanes-Oxley Act of 2002 could cause investors to lose confidence in our reported financial
information and us, which could result in a decline in the market price of our common stock, and
cause us to fail to meet our reporting obligations in the future, which in turn could impact our
ability to raise equity financing if needed in the future. The effectiveness of our controls and
procedures could be limited by errors or faulty judgments. In addition, if we expand, through
either organic growth or through acquisitions (or both), the challenges involved in implementing
appropriate controls will increase and may require that we evolve some or all of our internal
control processes.
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds
There were no sales of unregistered securities during the period covered by this report. The
following table shows the repurchases of the Companys common stock made by or on behalf of the
Company in open-market transactions for the quarter ended June 30, 2010 pursuant to a publicly
announced plan.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of |
|
|
|
|
|
|
|
|
|
|
|
|
Shares Purchased |
|
Maximum Number |
|
|
|
|
|
|
|
|
|
|
as Part of Publicly |
|
of Shares that may |
|
|
Total Number of |
|
Average Price Paid |
|
Announced |
|
yet be Purchased |
Period |
|
Shares Purchased |
|
Per Share |
|
Program |
|
Under the Program |
|
|
|
April 1 to April 30, 2010 |
|
|
56,530 |
|
|
$ |
36.17 |
|
|
|
56,530 |
|
|
|
1,168,282 |
|
May 1 to May 31, 2010 |
|
|
55,846 |
|
|
|
35.24 |
|
|
|
55,846 |
|
|
|
1,112,436 |
|
June 1 to June 30, 2010 |
|
|
40,911 |
|
|
|
35.59 |
|
|
|
40,911 |
|
|
|
1,071,525 |
|
|
|
|
Total |
|
|
153,287 |
|
|
$ |
35.68 |
|
|
|
153,287 |
|
|
|
1,071,525 |
|
|
|
|
In 1996, the Companys Board of Directors authorized a stock repurchase program for up to
100,000 shares of the Companys common stock. The Companys Board of Directors has periodically
increased the number of shares authorized for repurchase under the repurchase program. The most
recent increase occurred in May 2010 and brought the number of shares authorized for repurchase
over the life of the program to 15,000,000 shares. There is no expiration date for the repurchase
program. As of June 30, 2010, the Company had repurchased 13,928,475 shares of its common stock.
Item 3 Defaults Upon Senior Securities None.
Item 4 (Removed and Reserved)
Item 5 Other Information None.
Item 6 Exhibits
3.1 |
|
Amended and Restated Certificate of Incorporation of the Company. Incorporated herein by
reference to Exhibit 3.1 to the Companys Quarterly Report on Form 10-Q for the quarterly period
ended June 30, 2007 filed on August 9, 2007. |
Page 33
3.2 |
|
Amended and Restated Bylaws of the Company. Incorporated herein by reference to Exhibit 3.2 to
the Companys Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2006 filed on
August 14, 2006. |
|
3.3 |
|
Certification of Designation Increasing the Number of Shares of Series A Junior Participating
Preferred Stock. Incorporated herein by reference to Exhibit 3.1 to the Companys Current Report
on Form 8-K filed on November 24, 2008. |
|
10.1 |
|
First Amendment to Credit Agreement dated June 2, 2010 by and between CorVel Corporation and
Wells Fargo Bank, National Association. Incorporated herein by reference to Exhibit 10.1 to the
Companys Current Report on Form 8-K filed on June 7, 2010. |
|
10.2 |
|
Revolving Line of Credit Note dated June 2, 2010 by CorVel Corporation in favor of Wells Fargo
Bank, National Association. Incorporated herein by reference to Exhibit 10.2 to the Companys
Current Report on Form 8-K filed on June 7, 2010. |
|
10.3 |
|
Restated Omnibus Incentive Plan (Formerly The Restated 1988 Executive Stock Option Plan).
Incorporated herein by reference to Exhibit 10.4 to the Companys Annual Report on Form 10-K for
the fiscal year ended March 31, 2010 filed on June 11, 2010. |
|
31.1 |
|
Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002 |
|
31.2 |
|
Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002 |
|
32.1 |
|
Certification of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith) |
|
32.2 |
|
Certification of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith) |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned hereunto duly authorized.
|
|
|
|
|
|
CORVEL CORPORATION
|
|
|
By: |
Daniel J. Starck
|
|
|
|
Daniel J. Starck, President, |
|
|
|
Chief Executive Officer, and
Chief Operating Officer |
|
|
|
|
|
|
By: |
Scott R. McCloud
|
|
|
|
Scott R. McCloud, |
|
|
|
Chief Financial Officer |
|
|
August 6, 2010
Page 34