Organizational Structure
The Company's management is structured geographically with regional vice-presidents who report to the President of the Company. Each of these regional vice-presidents is responsible for all services provided by the Company in his or her particular region and for the operating results of the Company in multiple states. These regional vice presidents have area and district managers who are also responsible for all services provided by the Company in their given area and district.
Business Enterprise Segments
The Company operates in one reportable operating segment, managed care. The 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 $82.4 million for the quarter ended September 30, 2009, an increase of $4.5 million or 5.9% compared to revenues of $77.9 million for the quarter ended September 30, 2008. The increase in revenues was primarily due to an increase in patient management business, with an increase in network solutions business as well. An improvement in customer utilization of the Company's Enterprise Comp services was the primary reason for the increase in patient management revenues. Similarly, the increase in network solutions revenue was due to an improvement in the Company's customer utilization of CorCareRx services.
The Company's cost of revenues increased by $2.6 million, from $59.0 million in the September 2008 quarter to $61.6 million in the September 2009 quarter, an increase of 4.4%. This increase was primarily due to the costs associated with the increase in demand for the Company's CareIQ and CorCareRx services, which are high-cost services. CorCareRX cost of goods sold increased $1.4 million, while CareIQ costs increased $1.0 million.
The Company's general and administrative expense decreased by $0.5 million, from $10.7 million in the September 2008 quarter to $10.2 million in the September 2009 quarter, a decrease of 4.7%. This decrease is primarily due to a decrease in the Company's systems and data interface costs. Systems cost decreased from $6.4 million to $5.9 million as the Company reduced the number of employees and consultants in systems.
The Company's income tax expense increased by $1.0 million, or 31.3%, from $3.2 million, in the September 2008 quarter to $4.2 million in the September 2009 quarter. The increase in income before income taxes was primarily due to the aforementioned increase in revenues. The effective income tax rate was 39% in the September 2008 quarter and 39.7% in the September 2009 quarter.
Weighted diluted shares decreased from 14.0 million shares in the September 2008 quarter to 12.9 million shares in the September 2009 quarter, a decrease of 1.1 million shares, or 7.9%. This decrease was due to the repurchase of 581,000 shares of common stock during the September 2009 quarter. The decrease was offset by the exercise of stock options during the quarter.

Diluted earnings per share increased from $0.36 in the September 2008 quarter to $0.50 in the September 2009 quarter, an increase of $0.14 per share, or 38.9%. The increase in diluted earnings per share was due to the increase in income before income taxes along with the reduction in the number of shares outstanding because of the shares repurchased.
Results of Operations for the three months ended September 30, 2008 and 2009 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 utilization review, medical case management, vocational rehabilitation, and claims processing. Network solutions revenues include fee schedule auditing, hospital bill auditing, independent medical examinations, diagnostic imaging review services and preferred provider referral services. The percentage of total revenues attributable to patient management and network solutions services for the quarters ended September 30, 2008 and September 30, 2009 are as follows:

                                      September 30, 2008     September 30, 2009
       Patient management services               44.2 %                 45.2 %
       Network solutions services                55.8 %                 54.8 %

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 items reflected in the Company's consolidated income statements for the quarters ended September 30, 2008 and September 30, 2009. The Company's past operating results are not necessarily indicative of future operating results.

                                                Three Months Ended         Three Months Ended                               Percentage
                                                September 30, 2008         September 30, 2009             Change              Change
Revenue                                         $      77,855,000          $      82,416,000          $  4,561,000               5.9 %
Cost of revenues                                       58,996,000                 61,609,000             2,613,000               4.4 %

Gross profit                                           18,859,000                 20,807,000             1,948,000              10.3 %

Gross profit as percentage of revenue                        24.2 %                     25.2 %

General and administrative                             10,722,000                 10,206,000              (516,000 )            (4.8 %)
General and administrative as percentage
of revenue                                                   13.8 %                     12.4 %


Income before income tax provision                      8,137,000                 10,601,000             2,464,000              30.3 %

Income before income tax provision as
percentage of revenue                                        10.5 %                     12.9 %

Income tax provision                                    3,173,000                  4,201,000             1,028,000              32.4 %

Net income                                      $       4,964,000          $       6,400,000          $  1,436,000              28.9 %


Weighted Shares
Basic                                                  13,764,000                 12,758,000            (1,006,000 )            (7.3 %)
Diluted                                                13,960,000                 12,920,000            (1,040,000 )            (7.4 %)

Earnings Per Share
Basic                                           $            0.36          $            0.50          $       0.14              38.9 %
Diluted                                         $            0.36          $            0.50          $       0.14              38.9 %

Revenues
Change in revenue from the quarter ended September 2008 to the quarter ended September 2009
Revenues increased from $77.9 million for the three months ended September 30, 2008 to $82.4 million for the three months ended September 30, 2009, an increase of $4.5 million or 5.9%. The increase was primarily due to an increase in the Company's patient management revenues of $2.9 million or 8.4% from $34.4 million in the September 2008 quarter to $37.2 million in the September 2009 quarter. Improvements in customer utilization of the Company's Enterprise Comp services were the primary reason for the increase in patient management service revenues. Similarly, network solutions revenue increased $1.7 million or 3.9%, from $43.5 million in the September 2008 quarter to $45.2 million in the September 2009 quarter. This increase was due to an improvement in the Company's customer utilization of CorCareRx services.
The decrease in the nation's manufacturing employment levels, which has helped lead to a decline in national workers' compensation claims, considerable price competition in a flat-to-declining overall market, an increase in competition from both larger and smaller competitors, changes and the potential changes in state workers' compensation and auto managed care laws which can reduce demand for the Company's services, have created an environment where revenue and margin growth is more difficult to attain and where revenue growth is uncertain. Additionally, the Company's technology and preferred provider network competes against other companies, some of which have greater resources available. 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.

The Company believes that referral volume in patient management services and bill review volume in network solutions services may decrease or reflect nominal growth until there is growth in the number of work related injuries and workers' compensation related claims.
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 MRI 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, PPO network developers, related payroll taxes and fringe benefits, office rent, and telephone expense. Approximately 42% 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, account executives, rent, and telephone.
Change in cost of revenue from the quarter ended September 2008 to the quarter ended September 2009
The Company's costs of revenues increased from $59.0 million in the quarter ended September 30, 2008 to $61.6 million in the quarter ended September 30, 2009, an increase of $2.6 million or 4.4%. This increase was primarily due to the costs associated with the increase in demand for the Company's CareIQ and CorCareRx services, which are high-cost services. CorCareRX cost of goods sold increased $1.4 million, while CareIQ costs increased $1.0 million with $0.2 million of expenses for other costs. General and Administrative Expense
Change in general and administrative expense from the quarter ended September 2008 to the quarter ended September 2009 For the quarter ended September 30, 2009, general and administrative expense consisted of approximately 58% of corporate systems costs which include the corporate systems support, implementation and training, amortization of software development costs, depreciation of the hardware costs in the Company's national systems, the Company's national wide area network and other systems related costs. The remaining 42% 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.
General and administrative expense decreased from $10.7 million in the quarter ended September 30, 2008 to $10.2 million in the quarter ended September 30, 2009, a decrease of $0.5 million, or 4.8%. This decrease is primarily due to a decrease in the Company's systems and data interface costs. Systems cost decreased from $6.4 million to $5.9 million due to a reduction of employees and consultants.
Income Tax Provision
The Company's income tax expense increased by $1.0 million, or 32.4%, from $3.2 million for the quarter ended September 30, 2008 to $4.2 million for the quarter ended September 30, 2009 due to the increase in income before income taxes from $8.1 million to $10.6 million. The income tax expense as a percentage of income before income taxes (i.e. effective tax rate) was 39% for the three months ended September 30, 2008 and 39.7% for the three months ended September 30, 2009. 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.

Results of Operations for the Six Months Ended September 30, 2008 and
September 30, 2009
   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 six months ended September 30, 2008 and September 30,
2009. The Company's past operating results are not necessarily indicative of
future operating results.

                                                 Six Months Ended           Six Months Ended                                Percentage
                                                September 30, 2008         September 30, 2009             Change              Change
Revenue                                          $    156,056,000           $    163,728,000          $  7,672,000               4.9 %
Cost of revenues                                      117,264,000                121,779,000             4,515,000               3.9 %

Gross profit                                           38,792,000                 41,949,000             3,157,000               8.1 %

Gross profit as percentage of revenue                        24.9 %                     25.6 %

General and administrative                             21,529,000                 20,656,000              (873,000 )            (4.1 %)
General and administrative as percentage
of revenue                                                   13.8 %                     12.6 %


Income before income tax provision                     17,263,000                 21,293,000             4,030,000              23.3 %

Income before income tax provision as
percentage of revenue                                        11.1 %                     13.0 %

Income tax provision                                    6,732,000                  8,489,000             1,757,000              26.1 %

Net income                                       $     10,531,000           $     12,804,000          $  2,273,000              21.6 %


Weighted Shares
Basic                                                  13,790,000                 12,842,000              (948,000 )            (6.9 %)
Diluted                                                14,003,000                 12,988,000            (1,015,000 )            (7.2 %)

Earnings Per Share
Basic                                            $           0.76           $           1.00          $       0.24              31.6 %
Diluted                                          $           0.75           $           0.99          $       0.24              32.0 %

Revenues
Change in revenue from the six months ended September 2008 to the six months ended September 2009
Revenues increased from $156.1 million for the six months ended September 30, 2008 to $163.7 million for the six months ended September 30, 2009, an increase of $7.6 million or 4.9%. The Company's patient management revenues increased $3.7 million or 5.4% from $67.8 million in the six months ended September 2008 to $71.5 million in the six months ended September 2009. This increase was primarily due to improvements in customer utilization of the Company's Enterprise Comp services. The Company's network solutions revenues increased from $88.3 million in the six months ended September 2008 to $92.2 million in the six months ended September 2009, an increase of $3.9 million or 4.4%. This increase was primarily due to an increase in customer utilization of the Company's CorCareRx services.

Cost of Revenues
Change in cost of revenue from the six months ended September 2008 to the six months ended September 2009
The Company's costs of revenues increased from $117.3 million in the six months ended September 30, 2008 to $121.8 million in the six months ended September 30, 2009, an increase of $4.5 million or 3.9%. This increase was primarily due to the costs associated with the increase in demand for the Company's CareIQ and CorCareRx services, which are high-cost services. CorCareRX cost of goods sold increased $1.9 million from the previous six month period. Similarly, CareIQ costs increased $1.6 million from the previous six month period
General and Administrative Costs
Change in cost of general and administrative expense from the six months ended September 2008 to the six months ended September 2009 General and administrative expense decreased from $21.5 million in the six months ended September 30, 2008 to $20.6 million in the six months ended September 30, 2009, a decrease of $0.9 million, or 4.1%. This decrease is primarily due to a decrease in the Company's systems and data interface costs. Systems cost decreased from $13.1 million to $11.8 million due to a reduction in employee headcount and consultants, offset by increases in other general and administrative costs.
Income Tax Provision
The Company's income tax expense increased by $1.8 million, or 26.1%, from $6.7 million for the six months ended September 30, 2008 to $8.5 million for the six months ended September 30, 2009 due to the increase in income before income taxes from $17.3 million to $21.3 million. The income tax expense as a percentage of income before income taxes, also known as the effective tax rate was 39.0% for the six months ended September 30, 2008 and 39.7% for the six months ended September 30, 2009. 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.
Liquidity and Capital Resources
The Company has historically funded its operations and capital expenditures primarily from cash flow from operations, and to a lesser extent, stock option exercises. Working capital decreased $1.9 million, or 7%, from $28.1 million as of March 31, 2009 to $26.2 million as of September 30, 2009, primarily due to a decrease in cash from $14.7 million as of March 31, 2009 to $12.0 million as of September 30, 2009. The decrease in cash was primarily due to the $17 million in share repurchases.
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 us or at all.
As of September 30, 2009, excluding $1.6 million of customer deposits held in bank checking accounts, the Company had $10.4 million in cash and cash equivalents, invested primarily in short-term, interest-bearing, highly liquid investment-grade securities with maturities of 90 days or less in federally regulated banks.
In May 2009, the Company entered into a credit agreement with a financial institution to provide a revolving credit facility with borrowing capacity of up to $10 million. Borrowings under this agreement 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 1:1 and have positive net income. The Company is not authorized to use this line for stock repurchases. There are no outstanding revolving loans as of the date hereof, but letters of credit in the aggregate amount of $6.3 million have been issued under a letter of credit sub-limit that does not reduce the amount of borrowings available under the revolving credit facility. The credit agreement expires in May 2010.
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 September 30, 2009 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
Six months ended September 30, 2008 compared to six months ended September 30, 2009
Net cash provided by operating activities increased from $14.7 million in the six months ended September 30, 2008 to $18.5 million in the six months ended September 30, 2009. The increase in cash flow from operating activities was . . .