<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter ended September 30, 1998
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 O-19291
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 September 30, 1998 was 4,069,000 shares.
<PAGE> 2
CORVEL CORPORATION
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations -
Page 2 of 9
<PAGE> 3
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:
<TABLE>
<CAPTION>
Three months ended Sept. 30: 1997 1998
---------------------------- ---- ----
<S> <C> <C>
Revenues 100.0% 100.0%
Cost of services 81.4 82.3
Gross profit 18.6 17.7
----- -----
General and administrative 7.5 7.5
----- -----
Income from operations 11.1 10.2
----- -----
Income tax provision 4.2 3.9
----- -----
NET INCOME 6.9% 6.3%
===== =====
<CAPTION>
Six months ended Sept. 30: 1997 1998
-------------------------- ---- ----
<S> <C> <C>
Revenues 100.0% 100.0%
Cost of services 81.1 82.1
----- -----
Gross profit 18.9 17.9
----- -----
General and administrative 7.9 7.8
----- -----
Income from operations 11.0 10.1
----- -----
Income tax provision 4.2 3.8
----- -----
NET INCOME 6.8% 6.3%
===== =====
</TABLE>
Revenues for the three months ended September 30, 1998 increased by $5.8
million to $40.5 million, an increase of 17% over the $34.7 million
revenue for the comparable period in the prior fiscal year. The increase
in revenues is primarily attributable to a 21% increase in patient
management revenue along with a 11% increase in provider revenues. Case
management revenue grew to $23.7 million from $19.6 million in the prior
year, an increase of $4.1 million. The increase in patient management is
primarily due to a few national case management contracts, which the
company was awarded during the past year.
Revenues for the six months ended June 30, 1998 increased by $11.3
million to $80.0 million, an increase of 17% over the $68.7 million
revenue for the comparable period in the prior fiscal year. The increase
in revenues is primarily attributable to a 21% increase in patient
management revenue along with a 10% increase in provider revenues. Case
management revenue grew to $46.2 million from $38.1 million in the prior
year, an increase of $8.1 million. The increase in patient management is
primarily due to a few national case management contracts, which the
company was awarded during the past year.
Cost of revenues for the three months ended September 30, 1997 increased
from 81.4% of revenues to 82.3% of revenue for the three months ended
September 30, 1998. Cost of revenues for the six months ended September
30, 1997 increased from 81.1% of revenues to 82.1% of revenue for the
six months ended September 30, 1998.
Page 3 of 9
<PAGE> 4
Both of the cost of revenues percentage noted above increased primarily
due to a higher growth rate in the patient management business compared
to the growth in the provider programs business. The patient management
business has a greater cost of revenue percentage than that in the
provider program business. Additionally, both of the Company's
businesses were under greater pricing pressure than in prior years.
General and administrative expenses as a percentage of revenues
decreased from 7.9% for the six months ending September 30, 1997, to
7.8% for the six months ending September 30, 1998. This decline in this
percentage is due to the growth in the Company's revenue exceeded the
growth in general and administrative expenses. General and
administrative expenses as a percentage of revenue remained unchanged at
7.5% of revenue for the three months ended September 30, 1997 and 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations and capital expenditures primarily
from cash flow from operations. During the six months ending September
30, 1998, net working capital increased by $2.0 million, from $24.7
million at March 31, 1998 to $26.7 million at September 30, 1998. This
increase was primarily due to the increase in accounts receivable by
$6.3 million, from $22.3 million to $28.9 million. As of September 30,
1998, the Company had $5.2 million in cash, primarily in short-term
highly-liquid investments with maturities of 90 days or less. The
Company has historically required substantial capital to fund the growth
of its operations, particularly working capital to fund the growth in
accounts receivable. The Company believes, however, that the cash
balance at September 30, 1998 along with anticipated internally
generated funds will be sufficient to meet the Company's expected cash
requirements for at least the next twelve months. As of September 30,
1998, the Company had no interest bearing debt.
YEAR 2000 INFORMATION SYSTEMS ISSUES
Certain computer programs written with two digits rather than four to
define the applicable year may experience problems handling dates near
the end of and beyond the year 1999 (Year 2000 failure dates). This may
cause computer applications to fail or provide erroneous results unless
corrective action is taken. The Company has developed a plan to address
the Year 2000 issue and, in doing so, will incur internal staff costs as
well as external consulting and other expenses related to infrastructure
enhancements necessary to prepare its systems for the new century. A
strategy for achieving compliance for each system component has been
prepared. Costs of the Company's Year 2000 Project are estimated to be
approximately $2.4 million of which approximately $1 million has been
incurred through September 30, 1998. The cost of the Year 2000 Project
will be expensed as incurred.
With respect to Information Technology (IT) systems, our Year 2000 plan
encompasses computer application systems, including those for
client-server, minicomputer, and personal computer environments; and IT
infrastructure, including hardware, operating system software, network
technology, and voice and data communications.
Page 4 of 9
<PAGE> 5
All of the Company proprietary systems development methodologies assure
that core functions like date comparisons, date sorts, and elapsed-day
calculations are standardized in shared-code libraries and/or utilities.
This reduces the number of instances of redundant code to be reviewed
and certified for Year 2000 compliance. The Company is currently
conducting full system tests in a simulated post-2000 environment. It is
anticipated that the certified versions of these systems will be fully
implemented in all operating sites by June 30, 1999. Interoperability
tests with clients' systems, if needed, commenced in the third quarter
of 1998. Data formats used in EDI transmissions, unless specifically
requested by the client, are Year 2000 compliant.
Non-IT Systems
The Company's non-IT systems are primarily comprised of systems
typically found in commercial office buildings including, electrical,
fire alarm and suppression, security, HVAC and elevator systems. The
inventory phase for non-IT systems at the Company's major facilities in
is complete. The Company is currently at the beginning of the assessment
phase for its non-IT systems. As part of the assessment phase, the
Company is communicating with the owners/landlords of office spaces
which the Company leases to determine the Year 2000 readiness of such
office space. At this time, the Company has not received any notice of
non-compliance problems from landlords. The Company is also
communicating with its significant vendors to determine their Year 2000
readiness and, when possible, obtain written assurances that the Year
2000 problem will not materially adversely effect their ability to
continue to provide supplies or services to the Company.
Each of the foregoing IT and non-IT programs are being conducted in
phases, described as follows: INVENTORY or AWARENESS PHASE -- Identify
hardware, software, processes or devices that use or process date
information. ASSESSMENT PHASE -- Identify Year 2000 date processing
deficiencies and related implications. PLANNING and VALIDATION PHASE --
Determine for each deficiency an appropriate solution and budget.
Schedule resources and develop testing plans. Validate the recommended
solution with testing. IMPLEMENTATION PHASE -- Implement designed
solutions. Conduct systems testing. The plan also includes a control
element intended to ensure that changes to IT and non-IT systems do not
introduce Year 2000 issues.
The Company's bill review product for Windows is presently Year 2000
compatible as well as the case management software. The Company's bill
review software which runs on VMS is in the planning and validation
phase with implementation scheduled prior to the end of the June 1999
quarter.
The Company's software for its accounts receivable, accounts payable and
general ledger is presently Year 2000 compatible and the billing
software is in the planning and validation phase with implementation
scheduled prior to the end of the June 1999 quarter.
Page 5 of 9
<PAGE> 6
Review of the non-IT systems is in the assessment phase with
implementation scheduled prior to the end of the September 1999 quarter.
The plan as provides for contingency plans and related cost estimates,
as additional information becomes available. Our Year 2000 Plan is
subject to modification and is revised periodically as additional
information is developed. The Company currently believes that its Year
2000 Plan will be completed in all material respects prior to the
anticipated Year 2000 failure dates.
Successful completion of the Company's 2000 Project is affected by many
factors, including but not limited to Year 2000 readiness of the
Company's key vendors and customers. The information contained in this
statement is based on management's best estimates. However, there can be
no guarantee that these estimated will be achieved, and actual results
could differ materially from those anticipated based on factors such as
availability and cost of personnel trained in this area, the ability to
identify relevant computers codes, and the impact of the Company's
external relationships. The possible consequences of the Company or its
business partners not being fully Year 2000 compliant include temporary
disruption to the delivery of services. The Company will be using
contingency plans already in place related to the backing up of
information systems and disaster recovery procedures. The Company will
be developing additional and/or supplemental contingency plans where
necessary in an effort to be prepared should a Year 2000 issue arise.
CAUTIONARY STATEMENT REGARDING RISK FACTORS
Certain statements contained in the Company's Annual Report on
Form 10-K for the year ended March 31, 1998, Quarterly Report on Form
10-Q for the quarter ending September 30, 1998, as well as the Company's
Annual Report for the year ending March 31, 1998, 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,
1998.
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 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.
Page 6 of 9
<PAGE> 7
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.
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 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.
Page 7 of 9
<PAGE> 8
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.
During the past fiscal year, the Company has made efforts to
increase its presence and revenue in the group health market with
moderate success. Managed care in this market is more mature than
managed care in workers' compensation and has numerous large
competitors, primarily health maintenance organizations. The Company has
limited experience in the group health market. There is no assurance
that the Company will be successful in this market. 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.
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. In addition, the stock market has in the past
experienced price and volume fluctuations that have particularly
affected companies in the health care 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.
Page 8 of 9
<PAGE> 9
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
February 9, 1999
Page 9 of 9
