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«Some ask if this is a Business or a Passion. A business it is, but business will not take our measure, for passion wills the endurance to find our ...»

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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, Segment Reporting, 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.

Because we believe we meet each of the criteria set forth above and each of our regions have similar economic characteristics, we aggregate our results of operations in one reportable operating segment, managed care.

Seasonality While we are not directly impacted by seasonal shifts, we are affected by the change in working days in a given quarter. There are generally fewer working days for our employees to generate revenue in the third fiscal quarter as we experience vacations, inclement weather and holidays.

Summary of Fiscal 2016 Annual Results The Company had record revenues of $504 million for fiscal year ended March 31, 2016, an increase of $11 million, or 2.2%, compared to $493 million for fiscal year ended March 31, 2015. The increase was primarily due to growth in the TPA services and network solutions offset by a decrease in CERiS and a nominal decrease in case management.

During fiscal 2016, the Company’s gross profit increased to $104.5 million from $100.0 million in fiscal 2015, an increase of $4.6 million, or 4.6%. This increase was primarily due to cost of revenues increasing at a lower rate than revenues, partially due to a decrease in headcount.

During fiscal 2016, the Company’s general and administrative expenses increased to $58.5 million from $54.4 million in fiscal 2015, an increase of $4.1 million, or 7.5%. The increase was primarily due to an increase in legal and IT expenses.

During fiscal 2016, the Company’s operating income increased to $46.1 million from $45.6 million in fiscal 2015, an increase of $0.5 million, or 1.1%. This increase was primarily due to the aforementioned increase in revenues and gross profit.

Income tax expense increased by $0.6 million, or 3.3%, from $17.0 million in fiscal 2015 to $17.5 million in fiscal 2016. This increase was primarily due to increase in pre-tax income.

Weighted diluted shares decreased from 20.9 million shares in fiscal 2015 to 20.0 million shares in fiscal 2016, a decrease of 886,000 shares, or 4.2%. This decrease was primarily due to the repurchase of 893,771 shares of common stock in fiscal 2016. In November 2015, the Company’s Board of Directors increased the number of shares authorized to be repurchased over the life of the plan to 35,000,000 shares. Since commencing this program in the fall of 1996, the Company has repurchased 33,886,259 shares of its common stock through March 31, 2016, at a cost of $392 million. These repurchases were funded primarily from the Company’s operating cash flows.

Diluted earnings per share increased from $1.37 in fiscal 2015 to $1.43 in fiscal 2016, an increase of $0.06 per share, or 4.4%. The increase in diluted earnings per share was primarily due to a reduction in the number of shares outstanding of 4.2% due to shares repurchases.

Results of Operations 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 percentages of total revenues attributable to patient management and network solutions services for the fiscal years ended March 31, 2014, 2015, and 2016 are listed below.

As noted in the table above, from fiscal 2014 to fiscal 2016, the mix of the Company’s revenues moved 3.2 percentage points from network solutions to patient management. This mix shift is primarily due to the Company’s increased focus in the sale of TPA services which are included with patient management services.





The Company expects to have more growth in the sale of TPA services than its other services because we are focusing more of our efforts in this area and because we believe the opportunities for growth in revenue and gross profits are better in this area.

The following table shows the consolidated income statements for the past three fiscal years and the dollar changes as well as the percentage changes for each fiscal year in thousands, except for per share information.

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As previously identified in the section titled “Risk Factors” in this report, the Company’s ability to maintain or grow revenues is subject to several risks including, but not limited to, changes in government regulations, exposure to litigation and the ability to add or retain customers. Any of these, or a combination of all of them, could have a material and adverse effect on the Company’s results of operations going forward.

The following table sets forth, for the periods indicated, the percentage of revenues represented by certain items reflected in the Company’s consolidated income statements. The Company’s past operating results are not necessarily indicative of future operating results.

The percentages for the three fiscal years ended March 31, 2014, 2015 and 2016 are as follows:

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Revenue 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 administration, utilization review, medical case management and vocational rehabilitation.

Network solutions revenues include fee schedule auditing, hospital bill auditing, independent medical examinations, diagnostic imaging review services, directed care services and preferred provider referral services.

Change in Revenue Fiscal 2016 Compared to Fiscal 2015 Revenues increased by 2.2%, to $504 million in fiscal 2016, from $493 million in fiscal 2015, an increase of $11 million. The increase was primarily due to growth in the TPA services within patient management due to an increase in customers. Patient management revenues, which include TPA services, increased by $8.6 million, or 3.2%, from $269 million in fiscal 2015 to $277 million in fiscal 2016. This increase in revenues from TPA services was due to a 7% increase in the number of customers, which contributed to a 7% increase in the total number of claims opened during the fiscal year. Network solutions services revenues increased by $2.3 million, or 1.0%, from $224 million in fiscal 2015 to $226 million in fiscal 2016.

Fiscal 2015 Compared to Fiscal 2014 Revenues increased by 2.9%, to $493 million in fiscal 2015, from $479 million in fiscal 2014, an increase of $14 million. The increase was primarily due to growth in the TPA services within patient management due to an increase in customers. Patient management revenues, which include TPA services, increased by $21 million, or 8.5%, from $248 million in fiscal 2014 to $269 million in fiscal 2015. This increase in revenues from TPA services was due to a 5% increase in the number of customers, which contributed to an 11% increase in the total number of claims opened during the fiscal year. Network solutions services revenues decreased by $6.0 million, or 2.6%, from $230 million in fiscal 2014 to $224 million in fiscal 2015, due to a 5% decrease in the number of bills processed slightly offset by a 2% increase in the revenue per bill.

Cost of Revenue 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 to support the operations in the field offices which generate the revenue. Direct costs are primarily case manager salaries, bill review analysts, related payroll taxes and fringe benefits, and costs for Independent Medical Examinations (IME), prescription drugs, 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, fringe benefits, office rent, and telephone expense. During fiscal 2015 and 2016, approximately 32% of the costs incurred in the field are field indirect costs which support both the patient management services and network solutions operations of the Company’s field operations.

Change in Cost of Revenue Fiscal 2016 Compared to Fiscal 2015 The Company’s cost of revenues increased from $393 million in fiscal 2015 to $399 million in fiscal 2016, an increase of 1.6%, or $6 million. The increase in cost of revenues was primarily due to the 2.2% increase in revenues noted above. The increase in cost of revenues also was due to an increase in lower margin patient management TPA services due to competitive pricing and a decrease in higher margin bill review services.

Pharmacy costs increased from $61 million to $64 million due to an increase in revenue in this line of business, which is due to an increase in volume. Additionally, our direct labor costs increased from $107 million to $113 million due to increased headcount in TPA services.

Fiscal 2015 Compared to Fiscal 2014 The Company’s cost of revenues increased from $370 million in fiscal 2014 to $393 million in fiscal 2015, an increase of 6.0%, or $22 million. The increase in cost of revenues was primarily due to the 2.9% increase in revenues noted above. The cost of revenues increased at a higher rate than revenue due to an increase in lower margin patient management TPA services and a decrease in higher margin bill review services. Pharmacy costs increased from $59 million to $61 million due to an increase in revenue in this line of business. Additionally, headcount increased which is reflected in our direct labor costs that increased from $99 million to $107 million due to increased services to TPA customers.

General and Administrative Expense During fiscal years 2014, 2015 and 2016, approximately 59%, 61%, and 60% respectively, of general and administrative costs consisted of corporate systems costs, which include the corporate systems support, implementation and training, rules engine development, national information technology (IT) strategy and planning, depreciation of the hardware costs in the Company’s corporate offices and backup data center, the Company’s national wide area network, and other systems related costs. The Company includes all IT related costs managed by the corporate office in general and administrative whereas the field IT related costs are included in the cost of revenues. The remaining general and administrative costs consist of national marketing, national sales support, corporate legal, corporate insurance, human resources, accounting, product management, new business development, and other general corporate expenses.

Change in General and Administrative Expense Fiscal 2016 Compared to Fiscal 2015 General and administrative expense increased 7.5%, from $54.4 million in fiscal 2015 to $58.5 million in fiscal 2016. Legal expenses increased $2.1 million due to the settlement of two lawsuits during the last quarter of fiscal 2016. IT expenses increased from $33 million in fiscal 2015 to $34 million in fiscal 2016 due to hardware and internally developed software depreciation.

Fiscal 2015 Compared to Fiscal 2014 General and administrative expense increased 4.7% from $52 million in fiscal 2014 to $54.4 million in fiscal 2015. In fiscal 2015, the Company increased IT expenses related to a new data center being brought online to increase system capacity. IT expenses increased from $31 million in fiscal 2014 to $33 million in fiscal 2015.

Income Tax Provision Fiscal 2016 Compared to Fiscal 2015 The Company’s income tax expense was $17.0 million for fiscal year 2015 and $17.5 million for fiscal year

2016. The income tax expense was calculated based on a 37.3% tax rate for fiscal year 2015 and 38.1% for fiscal year 2016. The increase of $0.5 million was primarily due to an increase in income before income taxes and a higher tax rate. 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.

Fiscal 2015 Compared to Fiscal 2014 The Company’s income tax expense was $22 million for fiscal year 2014 and $17 million for fiscal year

2015. The income tax expense was calculated based on a 39% tax rate for fiscal year 2014 and 37.3% for fiscal year 2015. The decrease of $5 million was primarily due to a decrease in income before income taxes.



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