Edgar Filing: CORVEL CORP

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller Reporting Company

Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2012

¨	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)


Delaware		33-0282651
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

2010 Main Street, Suite 600 Irvine, CA		92614
(Address of principal executive office)		(zip code)

Registrant’s 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 ¨

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 þ No ¨

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)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ

The number of shares outstanding of the registrant’s Common Stock, $0.0001 par value per share, as of January 29, 2013 was 10,823,784.

CORVEL CORPORATION

FORM 10-Q

TABLE OF CONTENTS


		Page
PART I — FINANCIAL INFORMATION

Item 1.	Financial Statements

	Consolidated Balance Sheets — March 31, 2012 and December 31, 2012 (unaudited)		3

	Consolidated Income Statements (unaudited) — Three months ended December 31, 2011 and 2012		4

	Consolidated Income Statements (unaudited) — Nine months ended December 31, 2011 and 2012		5

	Consolidated Statements of Cash Flows (unaudited) — Nine months ended December 31, 2011 and 2012		6

	Notes to Consolidated Financial Statements (unaudited) — December 31, 2012		7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		20

Item 3.	Quantitative and Qualitative Disclosures About Market Risk		32

Item 4.	Controls and Procedures		32

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings		32

Item 1A.	Risk Factors		33

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		41

Item 3.	Defaults Upon Senior Securities		41

Item 4.	Mine Safety Disclosures		41

Item 5.	Other Information		41

Item 6.	Exhibits		41

	Signatures		42

Page 2

Part I — Financial Information

Item 1. Financial Statements

CORVEL CORPORATION

CONSOLIDATED BALANCE SHEETS


	March 31, 2012			December 31, 2012 (Unaudited)
Assets
Current Assets
Cash and cash equivalents (Note A)	$	6,597,000		$	20,769,000
Customer deposits		5,816,000			8,169,000
Accounts receivable, net		49,334,000			43,377,000
Prepaid taxes and expenses		12,263,000			7,815,000
Deferred income taxes		7,237,000			7,493,000

Total current assets		81,247,000			87,623,000
Property and equipment, net		47,364,000			44,675,000
Goodwill		36,814,000			36,814,000
Other intangibles, net (Note F)		6,146,000			5,781,000
Other assets		311,000			94,000

TOTAL ASSETS	$	171,882,000		$	174,987,000

Liabilities and Stockholders’ Equity
Current Liabilities
Accounts and taxes payable	$	12,773,000		$	13,785,000
Accrued liabilities		31,989,000			34,495,000

Total current liabilities		44,762,000			48,280,000
Deferred income taxes		16,738,000			16,738,000
Commitments and contingencies (Notes G and H)
Stockholders’ Equity
Common stock, $.0001 par value: 120,000,000 shares authorized at March 31, 2012 and December 31, 2012; 26,261,874 shares issued (11,308,773 shares outstanding, net of Treasury shares) and 26,372,978 shares issued (10,865,835 shares outstanding, net of Treasury shares) at March 31, 2012 and December 31, 2012, respectively		3,000			3,000
Paid-in capital		105,907,000			110,020,000
Treasury Stock (14,953,101 shares at March 31, 2012 and 15,507,143 shares at December 31, 2012)		(270,574,000	)		(294,250,000	)
Retained earnings		275,046,000			294,196,000

Total stockholders’ equity		110,382,000			109,969,000

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	171,882,000		$	174,987,000

See accompanying notes to consolidated financial statements.

Page 3

CORVEL CORPORATION

CONSOLIDATED INCOME STATEMENTS — UNAUDITED


	Three Months Ended December 31,
	2011		2012
REVENUES	$	101,381,000	$	107,287,000
Cost of revenues		80,155,000		85,553,000

Gross profit		21,226,000		21,734,000
General and administrative expenses		12,332,000		11,710,000

Income before income tax provision		8,894,000		10,024,000
Income tax provision		3,494,000		4,100,000

NET INCOME	$	5,400,000	$	5,924,000

Net income per common and common equivalent share
Basic	$	0.47	$	0.53

Diluted	$	0.47	$	0.53

Weighted average common and common equivalent shares
Basic		11,421,000		11,117,000
Diluted		11,574,000		11,213,000

See accompanying notes to consolidated financial statements.

Page 4

CORVEL CORPORATION

CONSOLIDATED INCOME STATEMENTS — UNAUDITED


	Nine Months Ended December 31,
	2011		2012
REVENUES	$	308,241,000	$	317,351,000
Cost of revenues		235,859,000		249,600,000

Gross profit		72,382,000		67,751,000
General and administrative expenses		37,218,000		35,866,000

Income before income tax provision		35,164,000		31,885,000
Income tax provision		13,685,000		12,735,000

NET INCOME	$	21,479,000	$	19,150,000

Net income per common and common equivalent share
Basic	$	1.86	$	1.70

Diluted	$	1.84	$	1.69

Weighted average common and common equivalent shares
Basic		11,521,000		11,233,000
Diluted		11,677,000		11,338,000

See accompanying notes to consolidated financial statements.

Page 5

CORVEL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS — UNAUDITED


	Nine Months Ended December 31,
	2011			2012
*Cash flows from Operating Activities*
NET INCOME	$	21,479,000		$	19,150,000
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		10,613,000			11,854,000
Loss on disposal of assets		158,000			406,000
Stock compensation expense		1,870,000			650,000
Write-off of uncollectible accounts		1,602,000			1,737,000
Deferred income tax		(673,000	)		(256,000	)
Changes in operating assets and liabilities
Accounts receivable		1,243,000			4,220,000
Customer deposits		608,000			(2,353,000	)
Prepaid taxes and expenses		(385,000	)		4,448,000
Other assets		(272,000	)		216,000
Accounts and taxes payable		(330,000	)		1,012,000
Accrued liabilities		(7,888,000	)		2,506,000

Net cash provided by operating activities		28,025,000			43,590,000

*Cash Flows from Investing Activities*
Acquisition, net of cash		(45,000	)		—
Purchase of property and equipment		(16,715,000	)		(9,206,000	)

Net cash (used in) investing activities		(16,760,000	)		(9,206,000	)

*Cash Flows from Financing Activities*
Purchase of treasury stock		(16,264,000	)		(23,676,000	)
Tax effect of stock option exercises		1,009,000			1,035,000
Exercise of common stock options		1,629,000			2,268,000
Exercise of employee stock purchase options		157,000			161,000

Net cash (used in) financing activities		(13,469,000	)		(20,212,000	)

*Increase (decrease) in cash and cash equivalents*		(2,204,000	)		14,172,000
Cash and cash equivalents at beginning of period		12,269,000			6,597,000

Cash and cash equivalents at end of period	$	10,065,000		$	20,769,000

Supplemental Cash Flow Information:
Income taxes paid	$	12,707,000		$	6,759,000
Accrual of legal settlement	$	2,800,000		$	—
Purchase of software license under finance agreement	$	861,000		$	—

See accompanying notes to consolidated financial statements.

Page 6

CORVEL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2012

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, 2012. Accordingly, footnote disclosures which would substantially duplicate the disclosures contained in the March 31, 2012 audited financial statements have been omitted from these interim financial statements.

The Company evaluated all subsequent events or transactions through the date of filing this report. During the period subsequent to December 31, 2012, the Company repurchased 51,710 shares for $2,279,000 for an average of $44.06 per share. These shares were repurchased under the Company’s ongoing share repurchase program described in Note C. In January, the Company entered into a three year agreement totaling $3.5 million for desktop software licenses; the license period begins April 1, 2013.

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 considered necessary for a fair presentation have been included. Operating results for the three and nine months ended December 31, 2012 are not necessarily indicative of the results that may be expected for the fiscal year ending March 31, 2013. For further information, refer to the consolidated financial statements and footnotes for the fiscal year ended March 31, 2012 included in the Company’s 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 in compliance 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 values assigned to intangible assets, capitalized software development, the allowance for doubtful accounts, accrual for income taxes, share-based payments related to performance based awards, loss contingencies, estimated claims for claims administration revenue recognition, estimates used in stock options valuations, and accrual for self-insurance reserves.

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 Company’s financial instruments approximate their fair values at March 31, 2012 and December 31, 2012.

Page 7

CORVEL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2012

Note A — Basis of Presentation and Summary of Significant Accounting Policies (continued)

Fair Value of Financial Instruments: The Company applies ASC 820, “Fair Value Measurements and Disclosures” which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements with respect to fair value measurements of (a) nonfinancial assets and liabilities that are recognized or disclosed at fair value in the Company’s Consolidated Financial Statements on a recurring basis (at least annually) and (b) all financial assets and liabilities. ASC 820 prioritizes the inputs used in measuring fair value into the following hierarchy:

Level 1 Quoted market prices in active markets for identical assets or liabilities;

Level 2 Observable inputs other than those included in Level 1 (for example, quoted prices for similar assets in active markets or quoted prices for identical assets in inactive markets); and

Level 3 Unobservable inputs reflecting management’s own assumptions about the inputs used in estimating the value of the asset.

The carrying amount of the Company’s financial instruments (i.e. cash, accounts receivable, accounts payable, etc.) are all Level 1 and approximate their fair values at March 31, 2012 and December 31, 2012. The Company has no Level 2 or Level 3 assets.

Goodwill: The Company accounts for its business combinations in accordance with the Financial Accounting Standards Board (“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.

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 Company’s services, as the Company’s 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 its revenue from the sale of Network Solutions and Patient Management services. Network Solutions and Patient Management services may be sold individually or combined. When a sale combines multiple elements, the Company accounts for multiple element arrangements in accordance with the guidance included in ASC 605-25.

Page 8

CORVEL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2012

Note A — Basis of Presentation and Summary of Significant Accounting Policies (continued)

Management evaluates agreements with customers in accordance with the provision of the revenue recognition topic that addresses multiple-deliverable revenue arrangements. The multiple-deliverable arrangements entered into consist of bundled managed care which included various units of accounting such as network solutions, and patient management which includes claims administration. Such elements are considered separate units of accounting due to each element having value to the customer on a stand-alone basis. The selling price for each unit of accounting is determined using contract price and management estimates. When the Company’s customers purchase several products the pricing of the products sold is generally the same as if the product were sold on an individual basis. Revenue is recognized as the work is performed in accordance with our customer contracts. Based upon the nature of the Company’s products, bundled managed care elements are generally delivered in the same accounting period. The Company recognizes revenue for patient management claims administration services over the life of the customer contract. The Company estimates, based upon prior experience in managing claims, the deferral amount from when the claim is received to when the customer contract expires.

Page 9

CORVEL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2012

Note A — Basis of Presentation and Summary of Significant Accounting Policies (continued)

Recent Accounting Pronouncements: In July 2012, the FASB issued guidance that revises the requirements regarding how entities test indefinite-lived intangible assets, other than goodwill, for impairment. The guidance allows companies to perform a qualitative assessment before calculating the fair value of the reporting unit. If entities determine, on the basis of qualitative factors, that the fair value of the indefinite-lived intangible asset is more likely than not greater than the carrying amount, a quantitative calculation would not be needed. The guidance becomes effective for the Company at the beginning of its first quarter of fiscal 2014. The adoption of this guidance does not have a material impact on the Company’s financial statements.

Accounts Receivable: The majority of the Company’s accounts receivable are due from companies in the property and casualty insurance industries, self-insured employers, and government entities. Accounts receivable are generally due within 30 days and are stated as amounts due from customers net of an allowance for doubtful accounts. Those 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 Company’s previous loss history, the customer’s 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, 2012 or December 31, 2012. No one customer accounted for 10% or more of revenue during either of the three and nine month periods ended December 31, 2011 or 2012.

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 one to seven years. 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 in accordance with provisions specified in ASC 740, “Accounting for Income Taxes”. 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 Company’s 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. The balance of the unrecognized tax benefits as of March 31, 2012 and December 31, 2012 was $983,000 and $1,238,000, respectively.

Page 10

CORVEL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2012

Note A — Basis of Presentation and Summary of Significant Accounting Policies (continued)

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 share-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 December 2012 quarter compared to the same quarter of the prior year primarily due to repurchase of shares under the Company’s share repurchase program. See also Note D.

Note B — Stock Based Compensation and Stock Options

Under the Company’s Restated Omnibus Incentive Plan (formerly the Restated 1988 Executive Stock Option Plan) (“the Plan”) as in effect at December 31, 2012, options for up to 9,682,500 shares of the Company’s common stock may be granted over the life of the Plan 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.

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 8.99% and 12.85% for the three months ended December 31, 2011 and 2012, 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 December 31, 2011 and 2012 using the Black-Scholes option-pricing model:


	Three Months Ended December 31,
	2011	2012
Risk-free interest rate	0.91%	0.73%
Expected volatility	47%	47%
Expected dividend yield	0.00%	0.00%
Expected forfeiture rate	8.99%	12.85%
Expected weighted average life of option in years	4.9 years	4.5 years

Page 11

CORVEL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2012

Note B — Stock Options and Stock-Based Compensation (continued)

All options granted in the nine months ended December 31, 2011 and 2012 were granted at fair market value and are non-statutory stock options.

The table below shows the amounts recognized in the financial statements for stock compensation expense for time based options and performance based options during the three and nine months ended December 31, 2011 and 2012, respectively.


	Three Months Ended
	December 31, 2011			December 31, 2012
Cost of revenues	$	121,000		$	115,000
General and administrative		420,000			148,000

Total cost of stock-based compensation included in income before income tax provision		541,000			263,000
Amount of income tax benefit recognized		(216,000	)		(107,000	)

Amount charged against net income	$	325,000		$	156,000

Effect on diluted net income per share	$	(0.03	)	$	(0.01	)


	Nine Months Ended
	December 31, 2011			December 31, 2012
Cost of revenues	$	371,000		$	343,000
General and administrative		1,499,000			307,000

Total cost of stock-based compensation included in income before income tax provision		1,870,000			650,000
Amount of income tax benefit recognized		(735,000	)		(266,000	)

Amount charged against income	$	1,135,000		$	384,000

Effect on diluted income per share	$	(0.10	)	$	(0.03	)

Page 12

CORVEL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2012

Note B — Stock Options and Stock-Based Compensation (continued)

Summarized information for all stock options for the three and nine months ended December 31, 2011 and 2012 follows:


	Three Months Ended December 31, 2011					Three Months Ended December 31, 2012
	Shares			Average Price		Shares			Average Price
Options outstanding, beginning		799,034		$	30.62		632,265		$	35.41
Options granted		95,050			52.76		16,650			43.22
Options exercised		(54,366	)		27.57		(28,938	)		24.90
Options cancelled		(159	)		29.41		(24,183	)		44.58

Options outstanding, ending		839,559		$	33.32		595,794		$	35.76


	Nine Months Ended December 31, 2011					Nine Months Ended December 31, 2012
	Shares			Average Price		Shares			Average Price
Options outstanding, beginning		813,970		$	29.26		751,023		$	34.19
Options granted		140,275			50.50		48,350			43.12
Options exercised		(109,339	)		25.36		(130,617	)		25.08
Options cancelled		(5,347	)		28.41		(72,962	)		43.58

Options outstanding, ending		839,559		$	33.32		595,794		$	35.76

Page 13

CORVEL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2012

Note B — Stock Options and Stock-Based Compensation (continued)

The following table summarizes the status of stock options outstanding and exercisable at December 31, 2012:


Range of Exercise Price	Number of Outstanding Options		Weighted Average Remaining Contractual Life		Outstanding Options – Weighted Average Exercise Price		Exercisable Options – Number of Exercisable Options		Exercisable Options – Weighted Average Exercise Price
$15.55 to $25.82		150,949		2.21	$	20.82		132,951	$	20.61
$25.83 to $35.20		132,452		2.39	$	29.83		93,757	$	29.83
$35.21 to $46.00		146,739		4.92	$	41.23		49,545	$	39.60
$46.01 to $52.76		165,654		3.36	$	49.28		26,355	$	47.57

Total		595,794		3.24	$	35.76		302,608	$	28.93

A summary of the status for all outstanding options at December 31, 2012, and changes during the three months then ended, is presented in the table below:


	Number of Options			Weighted Average Exercise Per Share		Weighted Average Remaining Contractual Life (Years)		Aggregate Intrinsic Value as of December 31, 2012
Options outstanding at October 1, 2012		632,265		$	35.41
Granted		16,650			43.22
Exercised		(28,938	)		24.90
Cancelled – forfeited		(23,583	)		44.93
Cancelled – expired		(600	)		31.20

Ending outstanding		595,794		$	35.76		3.24	$	6,146,835

Ending vested and expected to vest		536,324		$	34.52		3.14	$	6,050,455

Ending exercisable at December 31, 2012		302,608		$	28.93		2.63	$	4,888,979

The weighted-average grant-date fair value of options granted during the three months ended December 31, 2011 and 2012, was $21.80 and $17.05, respectively.

Included in the above-noted stock option grants and stock compensation expense are performance based stock options under which vesting occurs only upon the Company achieving certain revenue or earnings per shares targets as determined by the Company’s board of directors. These options were valued in the same manner as the time vesting options. However, the Company only recognizes stock compensation to the extent that the targets are determined to be achieved which allow the options to vest. The Company recognized $221,000 and $0 of stock compensation expense for the three months ended December 31, 2011 and 2012, respectively, for performance based stock options.

Page 14

CORVEL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2012

Note C — Treasury Stock and Subsequent Event

The Company’s Board of Directors initially approved the commencement of a share repurchase program in the fall of 1996. In February 2012, the Board approved a 1,000,000 share expansion of the repurchase program to 16,000,000 shares over the life of the share repurchase program. Since the commencement of the share repurchase program, the Company has spent $294 million to repurchase 15,507,143 shares of its common stock, equal to 59% of the outstanding common stock had there been no repurchases. The average price of these repurchases was $18.97 per share. These repurchases were funded primarily from the net earnings of the Company, along with the proceeds from the exercise of common stock options. During the three and nine months ended December 31, 2012, the Company repurchased 395,096 shares for $16.7 million and 554,042 shares for $23.7 million, respectively. The Company had 10,865,835 shares of common stock outstanding as of December 31, 2012, net of the 15,507,143 shares in treasury. Subsequent to the end of the quarter, through January 29, 2013, the Company repurchased 51,710 shares for $2,279,000 for an average of $44.06 per share.

Page 15

CORVEL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2012

Note D — Weighted Average Shares and Net Income Per Share

Weighted average basic common shares decreased from 11,421,000 for the quarter ended December 31, 2011 to 11,117,000 for the quarter ended December 31, 2012. Weighted average diluted common and common equivalent shares decreased from 11,574,000 for the quarter ended December 31, 2011 to 11,213,000 for the quarter ended December 31, 2012. 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 Company’s 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 and nine months ended December 31, 2011 and 2012, are as follows:


	Three Months Ended December 31,
	2011		2012
Net Income	$	5,400,000	$	5,924,000

Basic:
Weighted average common shares outstanding		11,421,000		11,117,000

Net Income per share	$	0.47	$	0.53

Diluted:
Weighted average common shares outstanding		11,421,000		11,117,000
Treasury stock impact of stock options		153,000		96,000

Total common and common equivalent shares		11,574,000		11,213,000

Net Income per share	$	0.47	$	0.53


	Nine Months Ended December 31,
	2011		2012
Net Income	$	21,479,000	$	19,150,000

Basic:
Weighted average common shares outstanding		11,521,000		11,233,000

Net Income per share	$	1.86	$	1.70

Diluted:
Weighted average common shares outstanding		11,521,000		11,233,000
Treasury stock impact of stock options		156,000		105,000

Total common and common equivalent shares		11,677,000		11,338,000

Net Income per share	$	1.84	$	1.69

Page 16

CORVEL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2012

Note E — Shareholder Rights Plan

During fiscal 1997, the Company’s 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 CorVel’s common stock under certain circumstances. In November 2008, the Company’s Board of Directors approved an amendment to the Shareholder Rights Plan to extend the expiration date of the rights to February 10, 2022.

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 Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s Board of Directors may exchange or redeem the rights under certain conditions.

Note F — Other Intangible Assets

Other intangible assets consist of the following at December 31, 2012:


Item	Life	Cost		Nine Months Ended December 31, 2012 Amortization Expense		Accumulated Amortization at December 31, 2012		Cost, Net of Accumulated Amortization at December 31, 2012
Covenants Not to Compete	5 Years	$	775,000	$	38,000	$	699,000	$	76,000
Customer Relationships	18-20 Years		7,922,000		317,000		2,348,000		5,574,000
TPA Licenses	15 Years		204,000		10,000		73,000		131,000

Total		$	8,901,000	$	365,000	$	3,120,000	$	5,781,000

Page 17

CORVEL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2012

Note G — Line of Credit

In September 2012, the Company renewed a line of credit agreement. 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 Company’s 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 2012 or the nine months ended December 31, 2012, or as of the date hereof, but letters of credit in the aggregate amount of $8.0 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 2013.

Note H — Contingencies and Legal Proceedings

On March 25, 2011, George Raymond Williams, MD. (“Williams”), as plaintiff, individually and on behalf of those similarly situated, filed a First Amended and Restated Petition for Damages and Class Certification in the 27th Judicial District Court, Parish of St. Landry, Louisiana, against CorVel Corporation (“CorVel”) and its insurance carriers, Homeland Insurance Company of New York and Executive Risk Specialty Insurance Company and several other unrelated parties. Williams alleges that CorVel violated Louisiana’s Any Willing Provider Act (the “AWPA”), which requires a payor accessing a preferred provider contract to give 30 days’ advance written notice or point of service notice in the form of a benefit card before the payor accesses the discounted rates in the contract to pay the provider for services rendered to an insured under that payor’s health benefit plan.

On March 31, 2011, CorVel entered into a Memorandum of Understanding with attorneys representing the plaintiffs and the class setting forth the terms of settlement of this class action lawsuit. The Memorandum of Understanding provides that subject to the execution of a mutually acceptable settlement agreement and final non-appealable approval of such settlement by the Louisiana state court, CorVel will pay $9 million to resolve claims for which CorVel recorded a $9 million pre-tax charge to earnings during the March 2011 quarter. In addition, CorVel will assign to the class certain rights it has to the proceeds of CorVel’s insurance policies relating to the claims asserted by the class. The class action arbitration filed with the American Arbitration Association against CorVel in December 2006 by Southwest Louisiana Hospital Association dba Lake Charles Memorial Hospital as previously disclosed by CorVel is encompassed within the settlement terms of the Memorandum of Understanding. Pursuant to the Memorandum of Understanding, the parties have also agreed to request that the appropriate courts stay all related proceedings in State and Federal Court, as well as the Louisiana Office of Workers Compensation and the arbitration proceeding before the American Arbitration Association in which the parties are named, until the settlement agreement is prepared, executed and receives final court approval. The settlement does not constitute an admission of liability.

On June 23, 2011, CorVel and class counsel executed a definitive settlement agreement. The settlement agreement contains the same terms and conditions as were set forth in the Memorandum of Understanding. Accordingly, CorVel made a $9 million cash payment into escrow on July 6, 2011. As set forth in the settlement agreement, certain contingencies such as preliminary court approval, resolutions of objections filed by class members challenging the fairness of the settlement, class members excluded from the settlement not exceeding a materiality threshold, and final court approval, must be satisfied before the settlement can become final.

Page 18

CORVEL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2012

Note H — Contingencies and Legal Proceedings (continued)

On June 23, 2011, the 27th Judicial District Court for the Parish of St. Landry, Louisiana granted preliminary approval of settlement and set a deadline of October 16, 2011 for parties to opt out of or object to the proposed settlement. Notice of the settlement was given to Class Members. The Court gave final approval of the settlement on November 4, 2011. No appeal was filed, so the judgment became final on January 17, 2012. CorVel is in the process of completing the dismissal of all claims covered by the settlement in state and federal court.

In exchange for the settlement payment by CorVel, class members released CorVel and all of its affiliates and clients for any claims relating in any way to re-pricing, payment for, or reimbursement of a workers’ compensation bill, including but not limited to claims under the AWPA. Plaintiffs have also agreed to a notice procedure that CorVel may follow in the future to comply with the AWPA.

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 sought unspecified damages based on the Company’s alleged failure to direct patients to medical providers who were members of the CorVel CorCare PPO network and also alleged that the Company used biased and arbitrary computer software to review medical providers’ bills. The Company denies that its conduct was improper in any way and denied all liability. On October 29, 2010, the Company entered into a settlement agreement providing for the payment of $2.1 million to class members and up to an additional $700,000 for attorneys’ fees and expenses, and as a result the Company accrued $2.8 million of estimated liability for this settlement agreement during the quarter ended September 30, 2010. In exchange for the settlement payment by the Company, class members consisting of Illinois medical providers (excluding hospitals) have released the Company and all of its affiliates for claims relating to any PPO or usual and customary reductions recommended by the Company on class members’ medical bills. On January 21, 2011, the Circuit Court gave final approval to the settlement and awarded class counsel $700,000 in attorneys’ fees and expenses. A modified final judgment approving the settlement and addressing certain class notice issues was approved on January 20, 2012; the modified judgment did not change the financial terms of the settlement or the release. Final payments were sent to class members on July 16, 2012 and the final report and accounting to the Court was completed in November 2012.

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 19

Item 2. MANAGEMENT’S 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,” “predicts,” “believes,” “seeks,” “estimates,” “potential,” “continue,” “strive,” “ongoing,” “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 and the Company’s ability to resolve such litigation; competition from other managed care companies; the ability to expand certain areas of the Company’s 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 Company’s 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 Company’s services are provided to insurance companies, third party administrators, (“TPA’s”), governmental entities, 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 Company’s 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 services also includes revenue from the Company’s directed care network, including imaging and physical therapy.

Patient Management 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.

Page 20

Organizational Structure

The Company’s management is structured geographically with regional vice-presidents who report to the Chief Executive Officer 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 Company’s services are delivered to its customers through its local offices in each region and financial information for the Company’s operations follows this service delivery model. All regions provide the Company’s 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 Company’s internal financial reporting is segmented geographically, as discussed above, and managed on a geographic rather than service line basis, with virtually all of the Company’s 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 $107.3 million for the quarter ended December 31, 2012, an increase of $5.9 million, or 5.8%, compared to revenues of $101.4 million for the quarter ended December 31, 2011. The increase in revenues was primarily due to an increase in patient management.

The Company’s cost of revenues increased by $5.4 million, from $80.2 million in the December 31, 2011 quarter to $85.6 million in the December 31, 2012 quarter, an increase of 6.7%. As the Company has experienced a shift in managed care services to lower margin services, cost of revenue has increased and gross margin has decreased. TPA services require additional labor. As we have added customers in this area, we have had to hire additional direct labor resources, causing the increase in cost of revenues. In addition, pharmacy costs have increased as the volume of prescription processing has increased.

The Company’s general and administrative expense decreased by $0.6 million, from $12.3 million in the December 31, 2011 quarter to $11.7 million in the December 31, 2012 quarter, a decrease of 5.0%. This decrease is primarily due to an increase in efforts to manage the Company’s non-information technology general and administrative costs.

The Company’s income tax expense increased by $0.9 million, or 17.3%, from $3.5 million, in the December 31, 2011 quarter to $4.1 million in the December 31, 2012 quarter. The increase in income tax expense was primarily due to the increase in income before income taxes.

Weighted diluted shares decreased from 11.6 million shares in the December 31, 2011 quarter to 11.2 million shares in the December 31, 2012 quarter, a decrease of 361,000 shares, or 3.1%. This decrease was due primarily to the repurchase of 554,042 shares of common stock in the June 2012, September 2012, and December 2012 quarters.

Diluted earnings per share increased from $0.47 in the December 31, 2011 quarter to $0.53 in the December 31, 2012 quarter, an increase of $0.06 per share, or 12.7%. The increase in diluted earnings per share was due to the increase in income before income taxes offset by a reduction in the number of shares outstanding due to the shares repurchased.

Page 21

Results of Operations for the three months ended December 31, 2011 and 2012

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 December 31, 2011 and December 31, 2012 are as follows:

Percentage of Revenues


	December 31, 2011			December 31, 2012
Patient management services		48.4	%		51.8	%
Network solutions services		51.6	%		48.2	%

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 Company’s consolidated income statements for the three months ended December 31, 2011 and December 31, 2012. The Company’s past operating results are not necessarily indicative of future operating results.


	Three Months Ended			Three Months Ended						Percentage
	December 31, 2011			December 31, 2012			Change			Change
Revenue	$	101,381,000		$	107,287,000		$	5,906,000			5.8	%
Cost of revenues		80,155,000			85,553,000			5,398,000			6.7	%

Gross profit		21,226,000			21,734,000			508,000			2.4	%

Gross profit as percentage of revenue		20.9	%		20.3	%
General and administrative		12,332,000			11,710,000			(622,000	)		(5.0	%)
General and administrative as percentage of revenue		12.2	%		10.9	%

Income before income tax provision		8,894,000			10,024,000			1,130,000			12.7	%

Income before income tax provision as percentage of revenue		8.8	%		9.3	%
Income tax provision		3,494,000			4,100,000			606,000			17.3	%

Net income	$	5,400,000		$	5,924,000		$	524,000			9.7	%

Weighted Shares
Basic		11,421,000			11,117,000			(304,000	)		(2.7	%)
Diluted		11,574,000			11,213,000			(361,000	)		(3.1	%)
Earnings Per Share
Basic	$	0.47		$	0.53		$	0.06			12.8	%
Diluted	$	0.47		$	0.53		$	0.06			12.8	%

Page 22

Revenues

Change in revenue from the quarter ended December 31, 2011 to the quarter ended December 31, 2012

Revenues increased from $101.4 million for the three months ended December 31, 2011 to $107.3 million for the three months ended December 31, 2012, an increase of $5.9 million, or 5.8%. The increase in revenues was primarily due to an increase in patient management which includes case management services that was consistent with the prior year’s increase, and all services sold to TPA customers which increased by 25% over the prior year. The 25% increase in TPA revenue was partially offset by a decrease in network solutions due to a decline in volume and the loss of a few customers which were not significant in size. The increase in patient management services was primarily due to an increase in the level of services provided to new TPA customers.

Cost of Revenues

The Company’s 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 Company’s 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 35% of the costs incurred in the field are costs which support both the patient management services and network solutions operations of the Company’s field offices, such as district managers, branch clerical, account executives, related payroll taxes and fringe benefits, rent, and telephone.

Change in cost of revenue from the quarter ended December 31, 2011 to the quarter ended December 31, 2012

The Company’s cost of revenues increased from $80.2 million in the three months ended December 31, 2011 to $85.6 million in the three months ended December 31, 2012, an increase of $5.4 million or 6.7%. As the Company has experienced a shift in managed care services to lower margin services, cost of revenue has increased and gross margin has decreased. TPA services require additional labor. The Company expects TPA revenue to continue growing and as a result, the Company expects continued decline in margins unless we are successful in improving operating efficiencies, increase prices, or growth in higher margin services. As we have added customers in this area, we have had to hire additional direct labor resources, causing the increase in cost of revenues. In addition, pharmacy costs have increased as the volume of prescription processing has increased.

General and Administrative Expense

For the quarter ended December 31, 2012, general and administrative expense consisted of approximately 60% of corporate systems costs which include corporate systems support, implementation and training, amortization of software development costs, depreciation of the hardware costs in the Company’s national systems, the Company’s national wide area network and other systems related costs. The remaining 40% 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.

Change in general and administrative expense from the quarter ended December 31, 2011 to the quarter ended December 31, 2012

General and administrative expense decreased from $12.3 million in the quarter ended December 31, 2011 to $11.7 million in the quarter ended December 31, 2012, a decrease of $0.6 million, or 5.0%. This decrease is primarily due to an increase in efforts to manage the Company’s general and administrative costs, reducing travel, and reducing head count during a period of slower revenue growth. Additionally, the Company has a decreased in stock compensation expense due to not meeting targets set for performance options.

Page 23

Income Tax Provision

Change in income tax expense from the quarter ended December 31, 2011 to the quarter ended December 31, 2012

The Company’s income tax expense increased by $0.6 million, or 17.3%, from $3.5 million for the quarter ended December 31, 2011 to $4.1 million for the quarter ended December 31, 2012 due to the increase in income before income taxes from $8.9 million to $10.0 million during the same periods. The income tax expense as a percentage of income before income taxes, also known as the effective tax rate, was 39.3% for the quarter ended December 31, 2011 and 40.9% for the quarter ended December 31, 2012. The income tax provision rates were based upon management’s review of the Company’s 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. Additionally, the state rate increased due to various tax law changes at the state level.

Results of Operations for the nine months ended December 31, 2011 and the nine months ended December 31, 2012

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 Company’s consolidated income statements for the nine months ended December 31, 2011 and December 31, 2012. The Company’s past operating results are not necessarily indicative of future operating results.


	Nine Months Ended			Nine Months Ended						Percentage
	December 31, 2011			December 31, 2012			Change			Change
Revenue	$	308,241,000		$	317,351,000		$	9,110,000			3.0	%
Cost of revenues		235,859,000			249,600,000			13,741,000			5.8	%

Gross profit		72,382,000			67,751,000			(4,631,000	)		(6.4	%)

Gross profit as percentage of revenue		23.5	%		21.3	%
General and administrative		37,218,000			35,866,000			(1,352,000	)		(3.6	%)
General and administrative as percentage of revenue		12.1	%		11.3	%

Income before income tax provision		35,164,000			31,885,000			(3,279,000	)		(9.3	%)

Income before income tax provision as percentage of revenue		11.4	%		10.0	%
Income tax provision		13,685,000			12,735,000			(950,000	)		(6.9	%)

Net income	$	21,479,000		$	19,150,000		$	(2,329,000	)		(10.8	%)

Weighted Shares
Basic		11,521,000			11,233,000			(288,000	)		(2.5	%)
Diluted		11,677,000			11,338,000			(339,000	)		(2.9	%)
Earnings Per Share
Basic	$	1.86		$	1.70		($	0.16	)		(8.6	%)
Diluted	$	1.84		$	1.69		($	0.15	)		(8.2	%)

Page 24

Revenues

Change in revenue from the nine months ended December 31, 2011 to the nine months ended December 31, 2012

Revenues increased from $308.2 million for the nine months ended December 31, 2011 to $317.4 million for the nine months ended December 31, 2012, an increase of $9.1 million, or 3.0%. The Company’s patient management revenues increased $15.8 million, or 11%, from $147 million in the nine months ended December 31, 2011 to $163 million in the nine months ended December 31, 2012. The increase in patient management services was primarily due to an increase in the level of services provided to new and existing TPA customers. The Company’s network solutions revenues decreased from $161 million in the nine months ended December 31, 2011 to $155 million in the nine months ended December 31, 2012, a decrease of $6.7 million, or 4%. The decrease in network solutions revenue was primarily due to a decrease in volume of higher priced services, such as bill review, offset by an increase in volume of lower priced services, such as pharmacy.

Cost of Revenues

Change in cost of revenue from the nine months ended December 31, 2011 to the nine months ended December 31, 2012

The Company’s cost of revenues increased from $235.9 million in the nine months ended December 31, 2011 to $249.6 million in the nine months ended December 31, 2012, an increase of $13.7 million, or 5.8%. This increase was partially due to the increase in the volume of services which generated the 3.0% revenue increase for the same periods. Additionally, the Company had an increase in volume, as previously discussed, of lower margin services offset by a decrease in higher margin services which resulted in a cost increase greater than the revenue increase. Direct salaries increased from $62 million for the nine months ended December 31, 2011 to $68 million for the nine months ended December 31, 2012. The increase in salaries is due to hiring adjusters and growth in our call center staff. Direct pharmacy costs increased from $31 million for the nine months ended December 31, 2011 to $37 million for the nine months ended December 31, 2012.

General and Administrative Expense

Change in general and administrative expense from the nine months ended December 31, 2011 to the nine months ended December 31, 2012

General and administrative expense decreased from $37.2 million in the nine months ended December 31, 2011 to $35.9 million in the nine months ended December 31, 2012, a decrease of $1.4 million, or 3.6%. This decrease is primarily due to the Company’s efforts to manage non-systems related general and administrative costs during a period of slower revenue growth. Almost half of this decrease occurred in the quarter ended December 31, 2012, which was primarily due to an increase in efforts to manage the Company’s general and administrative costs, reducing travel, and reducing head count during a period of slower revenue growth. Additionally, the Company has a decreased in stock compensation expense due to not meeting targets set for performance options.

Income Tax Provision

The Company’s income tax expense decreased by $1.0 million, or 6.9%, from $13.7 million for the nine months ended December 31, 2011 to $12.7 million for the nine months ended December 31, 2012 due to the decrease in income before income taxes from $35.2 million to $31.9 million. The income tax expense as a percentage of income before income taxes, also known as the effective tax rate, was 38.9% for the nine months ended December 31, 2011 and 39.9% for the nine months ended December 31, 2012. The income tax provision rates were based upon management’s review of the Company’s 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. Additionally, the state rate increased due to various tax law changes at the state level.

Page 25

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, proceeds from stock option exercises. Working capital increased $2.9 million, from $36.5 million as of March 31, 2012 to $39.3 million as of December 31, 2012, primarily due to an increase in cash from $6.6 million as of March 31, 2012 to $20.8 million as of December 31, 2012. Cash increased due to a decrease in days sales outstanding from 43 to 37 due to movement of customers to electronic payments and implementation of additional cash application automation, and no legal settlements during the current period.

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 Company’s 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 December 31, 2012, the Company had $20.8 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.

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 December 31, 2012 along with anticipated internally generated funds, will be sufficient to meet the Company’s expected cash requirements for at least the next twelve months.

Operating Cash Flows

Nine months ended December 31, 2011 compared to nine months ended December 31, 2012

Net cash provided by operating activities increased from $28.0 million in the nine months ended December 31, 2011 to $43.6 million in the nine months ended December 31, 2012, an increase of $15.6 million. The increase in cash flow from operating activities was primarily due to the fact that in the prior fiscal year the Company paid down accrued liabilities of $9 million due to a one-time payment of a legal settlement. The current fiscal year has not had any large litigation settlements.

Investing Activities

Nine months ended December 31, 2011 compared to nine months ended December 31, 2012

Net cash flow used in investing activities decreased from $16.8 million in the nine months ended December 31, 2011 to $9.2 million in the nine months ended December 31, 2012, a decrease of $7.6 million. The decrease in net cash used in investing activities is primarily due to a decrease in the software development activity and a decrease in remodeling and furnishing office space in the nine months ended December 31, 2012 compared to the same period in the prior fiscal year.

Page 26

Financing Activities

Nine months ended December 31, 2011 compared to nine months ended December 31, 2012

Net cash flow used in financing activities increased from $13.5 million for the nine months ended December 31, 2011 to $20.2 million for the nine months ended December 31, 2012, an increase of $6.7 million. The increase in cash flow used in financing activities was primarily due to an increase in the amount spent on treasury share repurchases from $16.3 million for the nine months ended December 31, 2011 to $23.7 million for the nine months ended December 31, 2012.

Contractual Obligations

The following table summarizes the Company’s contractual obligations outstanding as of December 31, 2012.


	Payments Due by Period
			Within One		Between One and		Between Three and		More than
	Total		Year		Three Years		Five Years		Five Years
Operating leases	$	46,510,000	$	12,983,000	$	20,911,000	$	10,617,000	$	1,999,000
Uncertain tax positions *		1,238,000		1,238,000		—		—		—

Total	$	47,748,000	$	14,221,000	$	20,911,000	$	10,617,000	$	1,999,000

*	See Note A to the Notes to Consolidated Financial Statements

Operating leases are rents paid for the Company’s physical locations.

Litigation

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On June 23, 2011, the 27th Judicial District Court for the Parish of St. Landry, Louisiana granted preliminary approval of settlement and set a deadline of October 16, 2011 for parties to opt out of or object to the proposed settlement. Notice of the settlement was given to Class Members. The Court gave final approval of the settlement on November 4, 2011. No appeal was filed so the judgment became final on January 17, 2012. CorVel is in the process of completing the dismissal of all claims covered by the settlement in state and federal court.

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 Company’s use of the applicable premises; and (iii) certain agreements with the Company’s 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.

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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 Company’s balance sheets for any of the periods presented.

Critical Accounting Policies

The SEC defines critical accounting policies as those that require application of management’s 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 management’s judgment in their application. There are also areas in which management’s 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.

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 Company’s services, as the Company’s 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 Accounting Standard Codification (“ASC”) 605-25.

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 Company’s 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.

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The Company must make significant judgments and estimates in determining contractual and bad debt allowances in any accounting period. One significant uncertainty inherent in the Company’s 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 Company’s services could affect the Company’s 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, 2012 or December 31, 2012.

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 annually and whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company’s impairment is conducted at a regional 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 Company’s cash flows, management considers industry growth rates and trends and cost structure changes. Based on the Company’s tests and reviews, no impairment of its goodwill, intangible assets or other long-lived assets existed at December 31, 2012. 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.

Accrual for Self-insurance Costs: The Company accrues for the group medical costs and workers’ compensation costs of its employees based on claims filed and an estimate of claims incurred but not reported as of each balance sheet date. The Company purchases stop loss insurance for large claims. The Company determines its estimated self-insurance reserves based upon historical trends along with outstanding claims information provided by its claims paying agents. However, it is possible that recorded accruals may not be adequate to cover the future payment of claims. Adjustments, if any, to estimated accruals resulting from ultimate claim payments will be reflected in earnings during the periods in which such adjustments are determined. The Company’s self-insured liabilities contain uncertainties because management is required to make assumptions and to apply judgment to estimate the ultimate cost to settle reported claims and claims incurred but not reported at the balance sheet date.

The Company does not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions used to calculate its self-insured liabilities. However, if actual results are not consistent with these estimates or assumptions, the Company may be exposed to losses or gains that could be material.

Accounting for Income Taxes: The Company records a tax provision for the anticipated tax consequences of the reported results of operations. The provision for income taxes is computed using the asset and liability method, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and for operating losses and tax credit carry-forwards. Deferred tax assets and liabilities are measured using the currently enacted tax rates that apply to taxable income in effect for the years in which those tax assets are expected to be realized or settled. The Company records a valuation allowance, if necessary, to reduce deferred tax assets to the amount that is believed more likely than not to be realized.

The Company recognizes tax benefits from uncertain tax positions only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement.

Management believes it is more likely than not that forecasted income, including income that may be generated as a result of certain tax planning strategies, together with future reversals of existing taxable temporary differences, will be sufficient to fully recover the deferred tax assets. In the event that the Company determines all or part of the net deferred tax assets are not realizable in the future, the Company will make an adjustment to the valuation allowance that would be charged to earnings in the period such determination is made. In addition, the

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calculation of tax liabilities involves significant judgment in estimating the impact of uncertainties in the application of GAAP and complex tax laws. Resolution of these uncertainties in a manner inconsistent with management’s expectations could have a material impact on the Company’s financial condition and operating results. The significant assumptions and estimates described above are important contributors to our ultimate effective tax rate in each year.

Legal and Other Contingencies: As discussed in Part II, Item 1 of this report under the heading “Legal Proceedings” and in Note H, “Contingencies and Legal Proceedings” in the Notes to Consolidated Financial Statements, the Company is subject to various legal proceedings and claims that arise in the ordinary course of business. The Company records a liability when it is probable that a loss has been incurred and the amount is reasonably estimable. There is significant judgment required in both the probability determination and as to whether an exposure can be reasonably estimated. In the opinion of management, there was not at least a reasonable possibility the Company may have incurred a material loss, or a material loss in excess of a recorded accrual, with respect to loss contingencies. However, the outcome of legal proceedings and claims brought against the Company are subject to significant uncertainty.

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 employee’s requisite service period (generally the vesting period of the equity grant). For the quarter ended December 31, 2012, the Company recorded share-based compensation expense of $263,000. Share-based compensation expense recognized 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 Company’s stock over the option’s expected term, the risk-free interest rate over the option’s term, and the Company’s expected annual dividend yield. The Company’s management believes that the valuation technique and the approach utilized to develop the underlying assumptions are appropriate in calculating the fair values of the Company’s stock options granted. Estimates of fair value are not intended to predict actual future events or the value ultimately realized by persons who receive equity awards.

The Company does not believe there is a reasonable likelihood there will be a material change in the future estimates or assumptions used to determine stock-based compensation expense. However, if actual results are not consistent with these estimates or assumptions, the Company may be exposed to changes in stock-based compensation expense that could be material.

Software Development Costs: Development costs incurred in the research and development of new software products and enhancements to existing software products for internal use are expensed as incurred until technological feasibility has been established. After technological feasibility is established, any additional external and internal software development costs are capitalized and amortized on a straight-line basis over the estimated economic life of the related product, which is typically five years. The Company performs an annual review of the estimated economic life and the recoverability of such capitalized software costs. If a determination is made that capitalized amounts are not recoverable based on the estimated cash flows to be generated from the applicable software, any remaining capitalized amounts are written off. Although the Company believes that its approach to estimates and judgments as described herein is reasonable, actual results could differ and the Company may be exposed to increases or decreases in revenue that could be material.

Recent Accounting Standards Update

In July 2012, the FASB issued guidance that revises the requirements around how entities test indefinite-lived intangible assets, other than goodwill, for impairment. The guidance allows companies to perform a qualitative assessment before calculating the fair value of the reporting unit. If entities determine, on the basis of qualitative factors, that the fair value of the indefinite-lived intangible asset is more likely than not greater than the carrying amount, a quantitative calculation would not be needed. The guidance becomes effective for us at the beginning of our first quarter of fiscal 2014. The adoption of this guidance does not have a material impact on our financial statements.

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Item 3 — Quantitative and Qualitative Disclosures About Market Risk

As of December 31, 2012, 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 December 31, 2012, 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 December 31, 2012, 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 December 31, 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II — OTHER INFORMATION

Item 1 — Legal Proceedings

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disclosed by CorVel is encompassed within the settlement terms of the Memorandum of Understanding. Pursuant to the Memorandum of Understanding, the parties have also agreed to request that the appropriate courts stay all related proceedings in State and Federal Court, as well as the Louisiana Office of Workers Compensation and the arbitration proceeding before the American Arbitration Association in which the parties are named, until the settlement agreement is prepared, executed and receives final court approval. The settlement does not constitute an admission of liability.

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.

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Legal

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.

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.

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There can be no assurance that we will not be subjected to additional litigation similar to the proceedings described above. Any such additional litigation could have a material adverse effect on our business, financial condition and results of operations.

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 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.

Regulatory

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

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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.

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.

Business Environment

Growth Oriented

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 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:

•

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;

•

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;

•

an acquisition may disrupt ongoing business, divert resources, increase expenses and distract management;

•

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

•

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.

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 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.

Our 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 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 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.

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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 period-to-period comparisons of our results of operations as an indication of our future performance.

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.

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.

Customers

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 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.

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.

Services

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.

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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 materially adversely affected.

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.

Systems

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.

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.

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

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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.

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 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.

Employment

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, President, and Chief Executive Officer, or the inability to attract, qualified employees, could have a material unfavorable effect on our business and results of operations.

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.

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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 Company’s common stock made by or on behalf of the Company in open-market transactions for the quarter ended December 31, 2012 pursuant to a publicly announced plan.


					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
October 1 to October 31, 2012		32,262	$	44.14		32,262		855,691
November 1 to November 30, 2012		126,289		42.48		126,289		729,402
December 1 to December 31, 2012		236,545		42.95		236,545		492,857

Total		395,096	$	43.24		395,096		492,857

In 1996, the Company’s Board of Directors authorized a stock repurchase program for up to 100,000 shares of the Company’s common stock. The Company’s Board of Directors has periodically increased the number of shares authorized for repurchase under the repurchase program. The most recent increase occurred in February 2012 and brought the number of shares authorized for repurchase over the life of the program to 16,000,000 shares. There is no expiration date for the repurchase program. As of December 31, 2012, the Company had repurchased 15,507,143 shares of its common stock.

Item 3 — Defaults Upon Senior Securities – None.

Item 4 — Mine Safety Disclosures – Not applicable.

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 Company’s Current Report on Form 8-K filed on August 10, 2011.

3.2		Amended and Restated Bylaws of the Company. Incorporated herein by reference to Exhibit 3.2 to the Company’s 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 Company’s Current Report on Form 8-K filed on November 24, 2008.

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

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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)

101.0		The following materials from the Company’s Quarterly Report on Form 10-Q for the period ended December 31, 2012, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets as of December 31, 2012 and March 31, 2012; (ii) Consolidated Statements of Income for the three and nine months ended December 31, 2012 and 2011; (iii) Consolidated Statements of Cash Flows for the nine months ended December 31, 2012 and 2011; and (iv) Notes to Consolidated Financial Statements. Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101.0 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

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:		/s/ V. Gordon Clemons,
		V. Gordon Clemons, Chairman of the Board, President, and Chief Executive Officer

By:		/s/ Scott R. McCloud
		Scott R. McCloud, Chief Financial Officer

February 7, 2013

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