1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter ended June 30, 2001
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For this transition period from ___________________ to ___________________
Commission file number 0-19291
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CORVEL CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 33-0282651
- --------------------------------- ---------------------------------
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
2010 Main Street, Suite 1020
Irvine, CA 92614
- --------------------------------------- ---------
(Address of principal executive office) (zip code)
Registrant's telephone number, including 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 [X] NO [ ]
The number of shares outstanding of the registrant's Common Stock, $0.0001 Par
Value, as of June 30, 2001 was approximately 11,112,000 shares as adjusted for
the 3-for-2 common stock split in the form of a 50% stock dividend announced on
August 6, 2001 with a record date of August 17, 2001 and a payment date of
August 31, 2001.
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CORVEL CORPORATION
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Balance Sheets - March 31, 2001 (audited) and June 30, 2001
(unaudited)- Page 3 of 11
Consolidated Statements of Income -- Three months ended June 30, 2000 and 2001
(both unaudited) - Page 4 of 11
Consolidated Statements of Cash Flows -- Three months ended June 30, 2000 and
2001 (both unaudited) - Page 5 of 11
Notes to Consolidated Financial Statements (unaudited) --June 30, 2001 - Page 6
and 7 of 11
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations - Pages 7 through 11 of 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings - Page 11 of 11
Item 2. Changes in Securities - Page 11 of 11
Item 3. Defaults upon Senior Securities - Page 11 of 11
Item 4. Submission of Matters to a Vote of Security Holders - Pages 11 of 11
Item 5. Other Information - Page 11 of 11
Item 6. Exhibits and Reports on Form 8-K - page 11 of 11
Page 2 of 11
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Part I - Financial Information
Item 1. Financial Statements
CORVEL CORPORATION
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2001 AND JUNE 30, 2001
March 31, 2001 June 30, 2001
-------------- -------------
(audited) (unaudited)
ASSETS
Current Assets
Cash and cash equivalents $ 9,457,000 $ 9,507,000
Accounts receivable, net 34,316,000 34,675,000
Prepaid taxes and expenses 2,465,000 1,012,000
Deferred income taxes 4,130,000 4,130,000
------------ ------------
Total current assets 50,368,000 49,324,000
------------ ------------
Property and Equipment, Net 20,071,000 20,230,000
Other Assets 7,126,000 6,985,000
------------ ------------
TOTAL ASSETS $ 77,565,000 $ 76,539,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 3,006,000 $ 4,667,000
Accrued liabilities 12,232,000 9,386,000
------------ ------------
Total current liabilities 15,238,000 14,053,000
------------ ------------
Deferred income taxes 3,609,000 3,659,000
Stockholders' Equity
Common stock 1,000 1,000
Paid-in-capital 40,145,000 40,472,000
Treasury Stock, (4,211,910 shares at March 31, 2001 and
4,368,780 shares at June 30, 2001) (53,903,000) (57,714,000)
Retained earnings 72,475,000 76,068,000
------------ ------------
Total stockholders' equity 58,718,000 58,827,000
------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 77,565,000 $ 76,539,000
============ ============
See accompanying notes to consolidated financial statements.
Page 3 of 11
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CORVEL CORPORATION
INCOME STATEMENT - UNAUDITED
THREE MONTHS ENDED JUNE 30, 2000 AND 2001
Three months ended June 30,
------------------------------
2000 2001
----------- -----------
REVENUES $50,557,000 $58,001,000
Cost of Revenues 41,229,000 47,637,000
----------- -----------
Gross profit 9,328,000 10,364,000
General and administrative expenses 4,123,000 4,569,000
----------- -----------
Income before income taxes 5,205,000 5,795,000
Income tax provision 1,978,000 2,202,000
----------- -----------
NET INCOME $ 3,227,000 $ 3,593,000
=========== ===========
Net income per common and common equivalent share
Basic $ .28 $ .32
=========== ===========
Diluted $ .27 $ .31
=========== ===========
Weighted average common and common equivalent shares
Basic 11,537,000 11,180,000
Diluted 11,807,000 11,477,000
See accompanying notes to consolidated financial statements.
Page 4 of 11
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CORVEL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
THREE MONTHS ENDED JUNE 30, 2000, AND 2001
Three months ended June 30,
-------------------------------
2000 2001
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
NET INCOME $ 3,227,000 $ 3,593,000
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,641,000 1,913,000
Changes in operating assets and liabilities
Accounts receivable 194,000 (359,000)
Prepaid taxes and expenses 707,000 1,453,000
Accounts payable 688,000 1,661,000
Accrued liabilities 648,000 (2,846,000)
Deferred income taxes and income taxes payable (105,000) 50,000
Other assets (183,000) 141,000
----------- -----------
Net cash provided by operating activities 6,817,000 5,606,000
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property and equipment (1,852,000) (2,072,000)
----------- -----------
Net cash used in investing activities (1,852,000) (2,072,000)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Purchase of Treasury Stock (3,581,000) (3,811,000)
Sale of common and exercise of stock options and
related tax benefits 513,000 327,000
----------- -----------
Net cash used in financing activities (3,068,000) (3,484,000)
----------- -----------
INCREASE IN CASH: 1,897,000 50,000
Cash and cash equivalents at beginning 5,643,000 9,457,000
----------- -----------
Cash and cash equivalents at end $ 7,540,000 $ 9,507,000
=========== ===========
See accompanying notes to consolidated financial statements.
Page 5 of 11
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CORVEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001 (UNAUDITED)
A. Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles
generally accepted in the United States for interim financial information
and the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all information and footnotes required by
generally accepted accounting principles generally accepted in the United
States for complete financial statements. 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, 2001 are not necessarily indicative of the results
that may be expected for the year ended March 31, 2002. For further
information, refer to the consolidated financial statements and footnotes
thereto for the year ended March 31, 2001 included in the Company's annual
report on Form 10-K.
B. Earnings per Share and Subsequent Event
Earnings per common and common equivalent shares were computed by dividing
net income by the weighted average number of shares of common stock and
common stock equivalents outstanding during the quarter. The weighted
average shares have been adjusted to reflect the 3-for-2 common stock split
in the form of a 50% stock dividend announced on August 6, 2001, with a
record date of August 17, 2001 and a payable date of August 31, 2001.
Historical common shares amounts, per share amounts and repurchased shares
for each period presented have been restated to reflect this change in the
Company's capital structure. The calculation of the common and common
equivalent shares is as follows:
BASIC EARNINGS PER SHARE Three months ended June 30,
------------------------------
2000 2001
----------- -----------
Weighted average common shares outstanding 11,537,000 11,180,000
=========== ===========
Net Income $ 3,227,000 $ 3,593,000
=========== ===========
Earnings per common and common equivalent share
$ .28 $ .32
=========== ===========
DILUTED EARNINGS PER SHARE Three months ended June 30,
------------------------------
2000 2001
----------- -----------
Weighted average common shares outstanding 11,537,000 11,180,000
Net effect of dilutive common stock options 270,000 297,000
----------- -----------
Total common and common equivalent shares 11,807,000 11,477,000
=========== ===========
Net Income $ 3,227,000 $ 3,593,000
=========== ===========
Earnings per common and common equivalent share
$ .27 $ .31
=========== ===========
Page 6 of 11
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C. Recent Accounting Pronouncements
On July 20, 2001 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 141, "Business Combinations," and SFAS
No. 142, "Goodwill and Other Intangible Assets." These statements make
significant changes to the accounting for business combinations, goodwill, and
intangible assets.
SFAS No. 141 establishes new standards for accounting and reporting requirements
for business combinations and will require that the purchase method of
accounting be used for all business combinations initiated after June 30, 2001.
Use of the pooling-of-interests method will be prohibited.
SFAS No. 142 establishes new standards for goodwill acquired in a business
combination and eliminates amortization of goodwill and instead sets forth
methods to periodically evaluate goodwill for impairment. Intangible assets with
a determinable useful life will be continue to be amortized over that period.
The Company expects to adopt these statements during the first quarter of fiscal
2003. Management is in the process of evaluating the requirements of SFAS No.
142. The final determination of the impact of these statements has not been
completed.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS
The following table contains certain financial data as a percentage of revenues:
Three months ended June 30: 2000 2001
--------------------------- ------ ------
Revenues 100.0% 100.0%
Cost of services 81.5 82.1
------ ------
Gross profit 18.5 17.9
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General and administrative 8.2 7.9
------ ------
Income from operations 10.3 10.0
------ ------
Income tax provision 3.9 3.9
------ ------
NET INCOME 6.4% 6.2%
====== ======
Revenues for the three months ended June 30, 2001 increased by $7.4 million to
$58.0 million, an increase of 15% over the $50.6 million revenues for the
comparable period in the prior fiscal year. The increase in revenues is
primarily attributable to a 27% increase in provider program revenues along with
a 7% increase in patient management revenue along. The increase in provider
program revenue is primarily attributable to the growth in the Company's
preferred provider network and an increase in the volume of bills processed. The
increase in patient management revenues is primarily attributable to a nominal
increase in referrals.
Cost of revenues for the three months ended June 30, 2001 increased to 81.5%
from 82.1 % for the three months ended June 30, 2000. The decrease in the gross
profit margin from the first quarter of fiscal 2001 to the first quarter of
fiscal 2002 is primarily attributable to a decrease in the gross margins in the
case management business due to an increase in the cost of case manager salaries
exceeding this increases in prices charges to the Company's customers.
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General and administrative expenses as a percentage of revenues decreased from
8.2% for the quarter ended June 30, 2000, to 7.9% for the quarter ended June 30,
2001. This decrease is due to the growth of the Company's revenues exceeding the
growth of the general and administrative expenses. General and administrative
expenses were $4.1 million for the three months ended June 30, 2000 compared to
$4.6 million for the three months ended June 30, 2001.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations and capital expenditures primarily from
cash flows from operations. During the quarter ended June 30, 2001, net working
capital increased by $0.1 million, from $35.1 million at March 31, 2001 to $35.2
million at June 30, 2001. Cash increased from $9.46 million at March 31, 2001 to
$9.51 million at June 30, 2001, an increase of $50,000. This increase in cash is
primarily due to the $3.6 million in net income generated by operations offset
by stock repurchases in the quarter.
During the quarter ended June 30, 2001, the Company repurchased approximately
157,000 shares of it common stock for $3.8 million. Since the repurchase program
was enacted in the fall of 1996, the Company has repurchased approximately 4.4
million shares for $57.7 million. These repurchases were paid from cash
generated by the operations of the Company. (These repurchased have been
adjusted for the 3-for-2 common stock split in the form of a 50% stock dividend
announced on August 6, 2001, with a record date of August 17, 2001 and a payment
date of August 31, 2001.) 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 property. The Company believes,
however, that the cash balance at June 30, 2001 along with anticipated
internally generated funds and capacity to borrow will be sufficient to meet the
Company's expected cash requirements for at least the next twelve months.
CAUTIONARY STATEMENT REGARDING RISK FACTORS
Certain statements contained in the Company's Annual Report on Form 10-K for the
year ended March 31, 2001, Quarterly Report on Form 10-Q for the quarter ending
June 30, 2001, as well as the Company's Annual Report for the year ended March
31, 2001, such as statements concerning the development of new services,
possible legislative changes, and other statements contained herein regarding
matters that are not historical facts, are forward-looking statements (as such
term is defined in the Securities Act of 1933, as amended). Because such
statements involve risks and uncertainties, actual results may differ materially
from those expressed or implied by such forward-looking statements.
Past financial performance is not necessarily a reliable indicator of future
performance, and investors should not use historical performance to anticipate
results or future period trends. Factors that could cause actual results to
differ materially include, but are not limited to, those discussed below. In
addition, reference is made to the Company's most recent annual report for the
fiscal year ending March 31, 2001.
POTENTIAL ADVERSE IMPACT OF GOVERNMENT REGULATION. Many states, including a
number of those in which the Company transacts business, have licensing and
other regulatory requirements applicable to the Company's business.
Approximately half of the states have enacted laws that require licensing of
businesses which provide medical review services. Some of these laws apply
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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 the Company, which may
have an adverse impact upon the Company's ability to compete with other
available alternatives for health care 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 the Company or to provider networks which the Company may
organize. To the extent the Company is governed by these regulations, it may be
subject to additional licensing requirements, financial oversight and procedural
standards for beneficiaries and providers.
Regulation in the health care and workers' compensation fields is constantly
evolving. The Company is unable to predict what additional government
regulations, if any, affecting its business may be promulgated in the future.
The Company's 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 health care 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 the Company's
business and results of operations. In addition, changes in workers'
compensation laws or regulations may impact demand for the Company's services,
require the Company to develop new or modified services to meet the demands of
the marketplace or modify the fees that the Company may charge for its services.
One of the proposals which has been considered 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. Incorporating workers'
compensation coverage into conventional health plans may adversely affect the
market for the Company's services.
POSSIBLE LITIGATION AND LEGAL LIABILITY. The Company, through its utilization
management services, makes recommendations concerning the appropriateness of
providers' medical treatment plans of patients throughout the country, and it
could share in potential liabilities for adverse medical consequences. The
Company does not grant or deny claims for payment of benefits and the Company
does not believe that it engages in the practice of medicine or the delivery of
medical services. There can be no assurance, however, that the Company will not
be subject to claims or litigation related to the grant or denial of claims for
payment of benefits or allegations that the Company engages in the practice of
medicine or the delivery of medical services. In addition, there can be no
assurance that the Company will not be subject to other litigation that may
adversely affect the Company's business or results of operations. The Company
maintains professional liability insurance and such other coverages as the
Company believes are reasonable in light of the Company's experience to date.
There can be no assurance, however, that such insurance will be sufficient or
available in the future at reasonable cost to protect the Company from liability
which might adversely affect the Company's business or results of operations.
COMPETITION. The Company faces competition from large insurers, health
maintenance organizations ("HMOs"), preferred provider organizations ("PPOs"),
third party administrators and other managed health care companies. The Company
believes that, as managed care techniques continue to gain acceptance in the
workers' compensation marketplace, CorVel's 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 reforms in some states 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
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competition in the market served by the Company. Many of the Company's current
and potential competitors are significantly larger and have greater financial
and marketing resources than those of the Company, and there can be no assurance
that the Company will continue to maintain its existing performance or be
successful with any new products or in any new geographical markets it may
enter.
CHANGES IN MARKET DYNAMICS. Legislative reforms in some states permit employers
to designate health plans such as HMOs and PPOs to cover workers' compensation
claimants. Because many health plans have the capacity to manage health care for
workers' compensation claimants, such legislation may intensify competition in
the market served by the Company. Within the past few years, several states have
experienced decreases in the number of workers' compensation claims and the
average cost per claim which have been reflected in workers' compensation
insurance premium rate reductions in those states. The Company believes that
declines in workers' compensation costs in these states are due principally to
intensified efforts by payors to manage and control claim costs, to improved
risk management by employers and to legislative reforms. If declines in workers'
compensation costs occur in many states and persist over the long-term, they may
have an adverse impact on the Company's business and results of operations.
DEPENDENCE UPON KEY PERSONNEL. The Company is dependent to a substantial extent
upon the continuing efforts and abilities of certain key management personnel.
In addition, the Company faces competition for experienced employees with
professional expertise in the workers' compensation managed care area. The loss
of, or the inability to attract, qualified employees could have a material
adverse effect on the Company's business and results of operations.
RISKS RELATED TO GROWTH STRATEGY. The Company's strategy is to continue its
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,
the Company is subject to certain growth-related risks, including the risk that
it will be unable to retain personnel or acquire other resources necessary to
service such growth adequately. Expenses arising from the Company's efforts to
increase its 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 thereby could be completed. If such a transaction
does occur, there can no assurance that the Company will be able to integrate
effectively any acquired business into the Company. In addition, any such
transaction would be subject to various risks associated with the acquisition of
businesses, including the financial impact of expenses associated with the
integration of businesses.
There can be no assurance that any future acquisition or other strategic
relationship will not have an adverse impact on the Company's business or
results of operations. If suitable opportunities arise, the Company anticipates
that it would finance such transactions, as well as its internal growth, through
working capital or, in certain instances, through debt or equity financing.
There can be no assurance, however, that such debt or equity financing would be
available to the Company on acceptable terms when, and if, suitable strategic
opportunities arise.
The Company expects that a considerable amount of its future growth will depend
on its ability to process and manage claims data more efficiently and to provide
more meaningful healthcare information to customers and payors of healthcare.
There is no assurance that the Company will be able to develop, license or
otherwise acquire software to address these market demands as well or as timely
as its competitors
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POSSIBLE VOLATILITY OF STOCK PRICE. The market price of the Company's Common
Stock following this offering may be highly volatile. Factors such as variations
in the Company's revenues, earnings and cash flow, general market trends in the
workers' compensation managed care market, and announcements of innovations by
the Company or its competitors could cause the market price of the Common Stock
to fluctuate substantially. Specifically, the quarter to quarter percentage
growth in operating results for the Company's most recently completed fiscal
years was lower than the growth rates historically experienced by the Company.
The Company's slower growth rate in those quarters was partially attributable to
a reduction in the growth rate of health care expenditures nationally,
contributing to a reduction in the growth of claims processed by the Company.
There can be no assurance that the Company's growth rate in the future, if any,
will be at or near historical levels.
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS - The Company is involved in litigation arising in
the normal course of business. The Company believes that resolution of these
matters will not result in any payment that, in the aggregate, would be material
to the financial position or financial operations of the Company.
ITEM 2 - CHANGES IN SECURITIES - None.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES - None.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - None.
ITEM 5 - OTHER INFORMATION - On August 6, 2001, the Company announced that the
board of directors had approved a 3-for-2 common stock split in the form of a
50% stock dividend, with a record date of August 17, 2001 and a payable date of
August 31, 2001.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K - None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned
hereunto duly authorized.
CORVEL CORPORATION
By: V. Gordon Clemons
-----------------------------
V. Gordon Clemons, Chairman
of the Board, Chief Executive
Officer, and President
By: Richard J. Schweppe
-----------------------------
Richard J. Schweppe,
Chief Financial Officer
August 14, 2001
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