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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 1996
[ ] 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
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(Exact name of Registrant as specified in its charter)
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DELAWARE 33-0282651
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(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
1920 MAIN STREET, SUITE 1090, IRVINE, CALIFORNIA 92714
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(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (714) 851-1473
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
As of June 3, 1996 there were 4,644,973 shares of Common Stock
outstanding.
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The Registrant does not have different classes of Common Stock and as
of June 3, 1996, the aggregate market value of the Common Stock of the
Registrant held by non-affiliates was $92,295,000, based upon the closing sale
price of such stock on that date. For purposes of such calculation, only
executive officers, board members, and beneficial owners of more than 10% of
the Company's outstanding Common Stock are deemed to be affiliates.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Definitive Proxy Statement for the Annual
Meeting of Stockholders to be held on or about August 1, 1996, as filed with
the Commission pursuant to Regulation 14A, are incorporated by reference in
Part III of this Report.
Portions of the Registration Statement filed with the Commission on
Form S-1 (SEC File No. 33-40629), and the Company's Annual Reports on Form 10-K
for the fiscal years ended March 31, 1995, March 31, 1994, March 31, 1993 and
March 31, 1992 are incorporated by reference in Part IV of this Report.
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor for forward-looking statements. This Annual Report contains
forward-looking statements within the meaning of the Securities Act of 1933 and
the Securities Exchange Act of 1934. The Company's actual results could differ
materially from those projected in the forward-looking statements as a result
of the factors described under "Cautionary Statement Regarding Forward-Looking
Statements" and elsewhere in this Annual Report. These factors should be
considered by investors in the Company's securities.
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CORVEL CORPORATION
1996 FORM 10-K ANNUAL REPORT
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TABLE OF CONTENTS
PART I
<TABLE>
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Page
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ITEM 1. BUSINESS 1
ITEM 2. PROPERTIES 12
ITEM 3. LEGAL PROCEEDINGS 12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 13
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS 13
ITEM 6. SELECTED FINANCIAL DATA 13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 14
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 14
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE 14
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS 14
ITEM 11. EXECUTIVE COMPENSATION 14
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT 15
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 15
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K 16
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PART I
ITEM 1. BUSINESS.
INTRODUCTION
CorVel Corporation ("the Company") is an independent nationwide
provider of medical cost containment and managed care services designed to
address the escalating medical costs of workers' compensation. The Company's
services include automated medical fee auditing, early intervention,
utilization review, medical case management, vocational rehabilitation
services, and independent medical examinations. Such services are provided to
insurance companies, third party administrators ("TPAs") and self-administered
employers to assist them in managing the medical costs and monitoring the
quality of care associated with workers' compensation claims.
Workers' compensation regulations vary by state, and the industry is
highly fragmented. The Company's specialization in workers' compensation,
breadth of services, information management systems and ability to offer local
services on a nationwide basis enhance its ability to compete in the workers'
compensation market. The Company believes that payors and employers impacted
by the increasing medical costs of workers' compensation will increasingly
require services and programs to manage such costs. The Company's business
strategy is to continue to expand its range of services, branch office network
and information management capabilities to respond to this need on both a local
and national level.
INDUSTRY OVERVIEW
Workers' compensation is a statutorily defined employee benefit which
varies on a state-by-state basis. Workers' compensation laws generally require
employers to fully pay for employees' costs of medical treatment, lost wages,
legal fees and other costs associated with work-related injuries and
disabilities and, in certain jurisdictions, mandatory vocational
rehabilitation. Companies provide such coverage to their employees through
either the purchase of commercial insurance from private insurance companies,
participation in state-run funds or through self-insurance. Due to several
factors, including a general rise in the cost of health care and the fact that
the employer is required to pay all compensible medical costs of the employee
without cost sharing by the employee, both the volume and dollar amount of
workers' compensation claims have increased in recent years, resulting in
escalating costs to employers.
While the group health insurance industry and employers have adopted
cost containment strategies such as utilization review and the use of Health
Maintenance Organizations ("HMOs") to stem the rising costs of non-workers'
compensation medical care, the workers' compensation industry has been slower
to respond to the problem of escalating medical costs. However, managed care
in workers' compensation has been gaining acceptance during the past several
years. Since workers' compensation benefits are mandated by law and are
subject to extensive regulation, payors and employers do not have the same
flexibility to alter benefits as they have with other health benefit programs.
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Many states do not permit employers to restrict a claimant's choice of
provider, making it more difficult for employers to utilize managed care
approaches such as HMOs and Preferred Provider Organizations ("PPOs").
However, in many states, employers have the right to direct employees to a
specific primary health care provider during the onset of a workers'
compensation case, subject to the right of the employee to change physicians
after a specific period. In addition, workers' compensation programs vary from
state to state, making it difficult for payors and multi-state employers to
adopt uniform policies to administer, manage and control the costs of benefits.
As a result, managing the cost of workers' compensation requires approaches
which are tailored to the specified regulatory environment(s) in which the
employer is operating.
BUSINESS
The Company offers services in two general categories, provider
programs and patient management services, to assist its customers in managing
the increasing medical costs of workers' compensation and monitoring the
quality of care provided to workers' compensation claimants.
PROVIDER PROGRAMS
The Company's provider program services are designed to reduce the
price paid by its customers for medical services rendered in workers'
compensation cases. Medical cost containment services offered by the Company
include automated medical fee auditing, preferred provider services and
retrospective utilization review.
Automated Medical Fee Auditing
Many states have adopted fee schedules which regulate the maximum
allowable fees payable under workers' compensation for procedures performed by
a variety of health treatment providers. Such schedules may also include fees
for hospital treatment. The purpose of a fee schedule is to standardize the
billing process by using uniform procedure descriptions and to set maximum
reimbursement levels for each covered service. Certain other states permit
payors to pay workers' compensation medical costs limited to usual and
customary charges for the relevant community. The Company provides automated
medical fee auditing to assist the Company's customers in verifying that the
fees charged by workers' compensation health care providers comply with state
fee schedules, or are consistent with usual and customary charges.
The Company offers its fee schedule auditing through a computerized
medical bill review service called MedCheck, which combines automated data
reporting and transmission capabilities. MedCheck consists of an on-line
computer-based information system comprised of a proprietary software program
which stores and accesses state-mandated fee schedules and licensed usual and
customary charge information. MedCheck is also being utilized for the review
of medical charges under certain non-workers'
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compensation insurance coverages. With the MedCheck service, the Company is
capable of:
o Checking for provider charges which exceed charges allowable under
fee schedules or usual and customary charges, in accordance with
the requirements of the relevant jurisdiction
o Repricing provider bills to contractual PPO reimbursement levels
o Checking for duplicate billing
o Checking for billed services or procedures that are excessive,
unnecessary or unrelated to treating the particular medical problem
o Checking for "unbundled" billings where the medical services
performed are billed in components, resulting in higher total
charges than would be the case if the services were billed in the
aggregate
o Engaging in on-site processing of claims
o Sending claims data directly to carriers' databases, thereby
reducing costs due to repetitive or erroneous data entry
At March 31, 1996, the Company was providing its MedCheck services
to clients in approximately 34 states primarily through 48 branch offices. An
important element of the Company's business strategy is to introduce MedCheck
to additional existing branch offices and increase its use by current
customers. The Company plans to continue to invest in the expansion of its
MedCheck medical review software to better serve the claims processing needs of
customers through automated interfacing with its customers' computer systems.
Preferred Provider Services
PPOs are groups of hospitals, physicians and other health care
providers that offer services at pre-negotiated rates to employee groups. PPO
networks offer the employer an additional means of managing workers'
compensation costs by reducing the per-unit price of medical services provided
to employees. The Company provides its customers with access to PPO networks
by contracting with existing networks organized by others and by working with
networks chosen by its customers which meet the Company's criteria for provider
selection. Bills submitted from PPOs are identified through the MedCheck
review process, and the submitted charges are then audited against the PPO
schedule and against any applicable fee schedule or usual and customary
charges. The fee approved for payment is the lower of the submitted charges or
the lowest allowable fee identified.
Retrospective Utilization Review
The Company also offers manual fee auditing and retrospective
utilization review services, including hospital bill and chiropractic bill
auditing at a number of its branch offices. These services, performed
primarily by Company-employed registered nurses, are designed to confirm that
medical care was delivered to the patient, the provider was authorized to
perform the rendered service, the care was appropriate and covered by workers'
compensation, and the charges for the delivered service were usual and
customary.
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PATIENT MANAGEMENT SERVICES
In addition to its provider program services, the Company offers a
range of services designed to monitor the medical necessity and appropriateness
of health care services provided to workers' compensation claimants and to
expedite their return to work. The Company offers these services on a
stand-alone basis, or as an integrated component of its medical cost
containment services. Managed care services offered by the Company include
early intervention (Advocacy), inpatient utilization review, medical case
management, IMEs (independent medical examinations) and vocational
rehabilitation.
Advocacy
Advocacy is the brand name for the Company's integrated patient
management services designed to assess and monitor a patient's diagnosis,
treatment, and return to work. During 1996, the Company continued its
roll-out of Advocacy, which creates a continuum of services networking
patients, providers and payors. Delivering provider and patient profiles,
healthcare episode reports and claims status reviews to adjustors is an
important feature of Advocacy and its integration with MedCheck. The ability
to deliver medical management information to customer sites and to guide
medical decision-making are important strengths of the system.
Inpatient Utilization Review
The Company offers pre-certification and concurrent utilization review
services. The Company's pre-certification service is designed to be utilized
prior to the injured employee's admission to the hospital. Upon notification
by a claims manager or employer, a Company nurse reviews the appropriateness of
the proposed plan of care, the need for inpatient hospitalization, and the
appropriate length of stay. Under the Company's concurrent review service, the
nurse reviewers monitor the medical necessity and appropriateness of the
patient's continued hospitalization through regular contact with the hospital
and the patient's physician and may identify cases that lend themselves to
alternate treatment settings or home care.
Medical Case Management
The Company offers medical case management services where the injury
is catastrophic or complex in nature, or where prolonged recovery is
anticipated. In these cases, the Company's case managers confer with the
attending physician, other providers, the patient and the patient's family to
identify the appropriate rehabilitative treatment and most cost-effective
health care alternatives, including transferring the patient from a hospital to
an alternative care facility. Case managers may coordinate the services or
care required and may arrange for special pricing of the required services.
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Independent Medical Examinations
The Company arranges for IMEs to assist customers in evaluating
workers' compensation and other casualty claims. A medical examination
involves the assessment of a person's condition often for use in determining
the extent and nature of an injury. In general, a physician examines the
patient and prepares a report that describes the nature and extent of injuries,
as well as the future medical requirements. The Company provides IMEs
through a network of independent physicians. As of March 31, 1996, the Company
was providing IMEs through branch offices in eight states.
Vocational Rehabilitation
In certain states, vocational rehabilitation is a legislated benefit
of workers' compensation which assists the employee's return to former
employment or another job function with similar economic value. The Company
offers vocational services to reduce workers' compensation costs and expedite
the injured employee's return to work.
Vocational services include work capacity assessments, job analysis,
transferable skill analysis, job modification, vocational testing, job
placement assistance, labor market surveys and retraining. After an employee
sustains an injury, the Company performs an analysis of the employee's current
job and other potential jobs which could be performed for the employer, meets
with the treating physician to determine the diagnosis and prognosis for return
to work, presents job analyses to obtain a release to return to work, develops
plans for employee training and generally monitors the employee's return to
work.
CUSTOMERS AND MARKETING
The Company's customers are workers' compensation insurers and, to a
lesser extent, TPAs and self-administered employers. Many claims management
decisions in workers' compensation are the responsibility of the local claims
office of national or regional insurers. The Company's national branch office
network has been established to enable the Company to market and offer its
services at both a local and national account level. The Company is placing
increasing emphasis on national account marketing. The marketing activities of
the Company are conducted by account executives located in key geographic
areas, and by national account executives from the corporate office. Most of
the major workers' compensation insurance carriers conduct business with the
Company. None of the Company's customers represented more than 10% of
revenues in fiscal 1996.
COMPETITION AND MARKET CONDITIONS
The health care cost containment industry is highly fragmented and
competitive. The intensity of competition can be expected to increase. The
Company's primary competitors in the workers' compensation market are several
large insurance carriers which offer one or more services similar to those
offered by the Company, health
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maintenance organizations ("HMO's") and numerous independent companies,
typically on a local or regional basis. The Company also competes with
national and local firms specializing in utilization review and with major
insurance carriers and TPAs which have implemented their own internal
utilization review services. Many of the Company's competitors are
significantly larger and have greater financial and marketing resources than
the Company. There can be no assurance that the Company will continue to
maintain its existing performance, or be successful with any new products or in
any new geographical markets it may enter. Moreover, the Company's customers
may establish the in-house capability of performing services offered by the
Company.
Legislative reforms in some states permit employers to designate
health plans such as HMOs and PPOs to cover workers' compensation claimants.
Because many health plans have the capacity to manage health care for workers'
compensation claimants, such legislation may intensify competition in the
market served by the Company. Within the past few years, several states have
experienced decreases in the number of workers compensation claims and the
average cost per claim which have been reflected in workers compensation
insurance premium rate reductions in those states. The Company believes that
declines in workers' compensation costs in these states are due principally to
intensified efforts by payors to manage and control claim costs, to improved
risk management by employers and to legislative reforms. If declines in
workers compensation costs occur in many states and persist over the long-term,
they may have an adverse impact on the Company's business and results of
operations.
The Company competes on the basis of its specialization in workers'
compensation, breadth of services, ability to offer local services on a
nationwide basis, information management systems and independence from
insurance carriers.
GOVERNMENT REGULATION
General
Managed health care programs for workers compensation are subject to
various laws and regulations. Both the nature and degree of applicable
government regulation vary greatly depending upon the specific activities
involved. Generally, parties that actually provide or arrange for the
provision of health care services, assume financial risk related to the
provision of those services, or undertake direct responsibility for making
payment or payment decisions for those services, are subject to a number of
complex regulatory schemes that govern many aspects of their conduct and
operations.
In contrast, the management and information services provided by the
Company to its customers typically have not been the subject of regulation by
the federal government or the states. Since the managed health care field is a
rapidly expanding and changing industry and the cost of providing health care
continues to increase, it is possible that the applicable state and federal
regulatory frameworks will expand to have a greater impact upon the conduct and
operation of the Company's business.
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Under the current workers compensation system, employer insurance or
self-funded coverage is governed by individual laws in each of the 50 states
and by certain federal laws. The management and information services that make
up the Company's managed care program serve markets that have developed largely
in response to needs of insurers, employers and large TPAs, and generally have
not been mandated by legislation or other government action. On the other
hand, the vocational rehabilitation case management marketplace within the
workers compensation system has been dependent upon the laws and regulations
within those states that require the availability of specified rehabilitation
services for injured workers. Similarly, the Company's fee schedule auditing
services address market needs created by certain states' enactment of maximum
permissible fee schedules for workers compensation services. Changes in
individual state regulation of workers compensation may create a greater or
lesser demand for some or all of the Company's services, or require the Company
to develop new or modified services in order to meet the needs of the
marketplace and compete effectively in that marketplace.
Medical Cost Containment Legislation
Historically, governmental strategies to contain medical costs in the
workers' compensation field have been generally limited to legislation on a
state-by-state basis. For example, many states have implemented fee schedules
that list maximum reimbursement levels for health care procedures. In certain
states that have not authorized the use of a fee schedule, the Company adjusts
bills to the usual and customary levels authorized by the payor. Opportunities
for the Company's services could increase as more states legislate additional
cost containment strategies. Conversely, the Company could be adversely
affected if states elect to reduce the extent of medical cost containment
strategies available to insurance carriers and other payors, or adopt other
strategies for cost containment that would not support a demand for the
Company's services.
Healthcare Reform
There has been considerable discussion of healthcare reform at both
the federal level and in numerous state legislatures. Due to uncertainties
regarding the ultimate features of reform initiatives and the timing of their
enactment, the Company cannot predict which, if any, reforms will be adopted,
when they may be adopted, or what impact they may have on the Company.
Vocational Rehabilitation Legislation
During the early 1970's, the case management marketplace within
workers' compensation was dominated by the provision of medical management
services. Such services were purchased at the option of insurance carriers
with little or no support from legislative efforts within any of the states.
By the mid-1970's, it became popular for states to legislate either supportive
programs for vocational rehabilitation or, in some cases, mandatory vocational
rehabilitation statutes.
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NAME CHANGE
In October, 1991, the Company entered into an agreement with AMEV/VSB
1990 NV, a Netherlands corporation, ("AMEV"), for the sale of the Company's
interests in its former name, "FORTIS". In consideration for such sale, AMEV
paid to the Company a non-refundable, non-conditional payment of $4.0 million.
Under the terms of the agreement, however, the Company had until September 30,
1992 to cease all uses of its former name in order to provide the Company with
an "orderly phase out" period to terminate its uses of the name and to minimize
any likelihood of confusion regarding ownership thereof among customers of the
Company or AMEV.
The Company completed its preparations for the name change by late
July 1992, and on July 24, 1992, formally changed its corporate name from
"FORTIS" to "CorVel". During the quarter ended September 30, 1992, the Company
recognized a gain of $3.3 million from the AMEV payment, which was net of
$700,000 in costs to effect the name change. Prior to this time, the Company
felt that it was inappropriate to recognize any gain from the AMEV payment as
the Company had no basis upon which to reasonably estimate the cost of
performing the tasks necessary to conduct business under a different name and
thereby determine the actual gain.
MANAGED CARE RECONFIGURATION CHARGE
During the fiscal year ended March 31, 1993, the Company embarked upon
a reconfiguration of its services and the information systems to support such
services to respond to the increasing influence of state-legislated managed
care on the health care industry and because of advances in computer technology
by the Company's sole hardware vendor which obsoleted existing systems. In
this regard, the Company wrote down the net book value of its oldest Digital
Equipment Corporation VAX computers, an aggregate net book value of
approximately $1.3 million, in order to replace such equipment with DEC's new
generation computers based on the ALPHA operating platform. Such upgrading of
the Company's computer system to 64 byte processing capabilities also caused
the obsolescence of approximately $1.0 million of then unamortized software,
which the Company also wrote off.
Also during the fiscal year ended March 31, 1993, the Company recorded
a charge of $1.0 million related to a provision to modify and upgrade
management and reimbursement systems and technology involved in the patient
management portion or the Company's managed care program. Without such
charges, the Company was unable to direct patients to preferred providers, a
requirement to obtain volume discounts from such providers. In addition, the
Company's branches incurred expenses resulting from managed care legislation
which obsoleted older service delivery methods. All but an insignificant
portion of these expenditures were incurred by the end of fiscal 1993.
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EMPLOYEES
As of March 31, 1996, CorVel had approximately 1,875 employees,
including nurses, therapists, counselors and other employees. No employees are
represented by any collective bargaining unit. Management considers its
relationship with its employees to be good.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this Annual Report on Form 10-K in
this "Business" section and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" as well as the Company's annual report for
the year ending March 31, 1996, such as statements concerning the development
of new services, possible legislative changes, and other statements contained
herein regarding matters that are not historical facts, are forward-looking
statements (as such term is defined in the Securities Act of 1933, as amended).
Because such statements involve risks and uncertainties, actual results may
differ materially from those expressed or implied by such forward-looking
statements.
Past financial performance is not necessarily a reliable indicator of
future performance, and investors should not use historical performance to
anticipate results or future period trends. Factors that could cause actual
results to differ materially include, but are not limited to, those discussed
below. In addition, reference is made to the Company's most recent annual
report for the fiscal year ending March 31, 1996.
POTENTIAL ADVERSE IMPACT OF GOVERNMENT REGULATION. Many states,
including a number of those in which the Company transacts business, have
licensing and other regulatory requirements applicable to the Company's
business. Approximately half of the states have enacted laws that require
licensing of businesses which provide medical review services, such as the
Company. Some of these laws apply to medical review of care covered by
workers' compensation. These laws typically establish minimum standards for
qualifications of personnel, confidentiality, internal quality control, and
dispute resolution procedures. These regulatory programs may result in
increased costs of operation for the Company, which may have an adverse impact
upon the Company's ability to compete with other available alternatives for
health care cost control. In addition, new laws regulating the operation of
managed care provider networks have been adopted by a number of states. These
laws may apply to managed care provider networks having contracts with the
Company or to provider networks which the Company may organize. To the extent
the Company is governed by these regulations, it may be subject to additional
licensing requirements, financial oversight and procedural standards for
beneficiaries and providers.
Regulation in the health care and workers' compensation fields is
constantly evolving. The Company is unable to predict what additional
government regulations, if any, affecting its business may be promulgated in
the future. The Company's business may be adversely affected by failure to
comply with existing laws and regulations, failure to obtain necessary licenses
and government approvals or failure to adapt to new or modified
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regulatory requirements. Proposals for health care legislative reforms are
regularly considered at the federal and state levels. To the extent that such
proposals affect workers' compensation, such proposals may adversely affect the
Company's business and results of operations. In addition, changes in workers'
compensation laws or regulations may impact demand for the Company's services,
require the Company to develop new or modified services to meet the demands of
the marketplace or modify the fees that the Company may charge for its
services. One of the proposals which has been considered is 24-hour health
coverage, in which the coverage of traditional employer-sponsored health plans
is combined with workers' compensation coverage to provide a single insurance
plan for work-related and non-work-related health problems. Incorporating
workers' compensation coverage into conventional health plans may adversely
affect the market for the Company's services.
POSSIBLE LITIGATION AND LEGAL LIABILITY. The Company, through its
utilization management services, makes recommendations concerning the
appropriateness of providers' medical treatment plans of patients throughout
the country, and it could share in potential liabilities for adverse medical
consequences. The Company does not grant or deny claims for payment of
benefits and the Company does not believe that it engages in the practice of
medicine or the delivery of medical services. There can be no assurance,
however, that the Company will not be subject to claims or litigation related
to the grant or denial of claims for payment of benefits or allegations that
the Company engages in the practice of medicine or the delivery of medical
services.
In addition, there can be no assurance that the Company will not be
subject to other litigation that may adversely affect the Company's business or
results of operations. The Company maintains professional liability insurance
and such other coverages as the Company believes are reasonable in light of the
Company's experience to date. There can be no assurance, however, that such
insurance will be sufficient or available in the future at reasonable cost to
protect the Company from liability which might adversely affect the Company's
business or results of operations.
COMPETITION. The Company faces competition from large insurers, health
maintenance organizations ("HMOs"), preferred provider organizations ("PPOs"),
third party administrators and other managed health care companies. The
Company believes that, as managed care techniques continue to gain acceptance
in the workers' compensation marketplace, CorVel's competitors will
increasingly consist of nationally focused workers' compensation managed care
service companies, insurance companies, HMOs and other significant providers of
managed care products. Legislative reforms in some states permit employers to
designate health plans such as HMOs and PPOs to cover workers' compensation
claimants. Because many health plans have the ability to manage medical costs
for workers' compensation claimants, such legislation may intensify competition
in the market served by the Company. Many of the Company's current and
potential competitors are significantly larger and have greater financial and
marketing resources than those of the Company, and there can be no assurance
that the Company will continue to maintain its existing performance or be
successful with any new products or in any new geographical markets it may
enter.
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CHANGES IN MARKET DYNAMICS. Legislative reforms in some states permit
employers to designate health plans such as HMOs and PPOs to cover workers'
compensation claimants. Because many health plans have the capacity to manage
health care for workers' compensation claimants, such legislation may intensify
competition in the market served by the Company. Within the past few years,
several states have experienced decreases in the number of workers'
compensation claims and the average cost per claim which have been reflected in
workers' compensation insurance premium rate reductions in those states. The
Company believes that declines in workers' compensation costs in these states
are due principally to intensified efforts by payors to manage and control
claim costs, to improved risk management by employers and to legislative
reforms. If declines in workers' compensation costs occur in many states and
persist over the long-term, they may have an adverse impact on the Company's
business and results of operations.
DEPENDENCE UPON KEY PERSONNEL. The Company is dependent to a
substantial extent upon the continuing efforts and abilities of certain key
management personnel including its Chief Executive Officer, V. Gordon Clemons.
In addition, the Company faces competition for experienced employees with
professional expertise in the workers' compensation managed care area. The
loss of, or the inability to attract, qualified employees could have a material
adverse effect on the Company's business and results of operations.
RISKS RELATED TO GROWTH STRATEGY. The Company's strategy is to
continue its internal growth and, as strategic opportunities arise in the
workers' compensation managed care industry, to consider acquisitions of, or
relationships with, other companies in related lines of business. As a result,
the Company is subject to certain growth-related risks, including the risk that
it will be unable to retain personnel or acquire other resources necessary to
service such growth adequately. Expenses arising from the Company's efforts to
increase its market penetration may have a negative impact on operating
results. In addition, there can be no assurance that any suitable
opportunities for strategic acquisitions or relationships will arise or, if
they do arise, that the transactions contemplated thereby could be completed.
If such a transaction does occur, there can no assurance that the Company will
be able to integrate effectively any acquired business into the Company. In
addition, any such transaction would be subject to various risks associated
with the acquisition of businesses, including the financial impact of expenses
associated with the integration of businesses.
There can be no assurance that any future acquisition or other
strategic relationship will not have an adverse impact on the Company's
business or results of operations. If suitable opportunities arise, the
Company anticipates that it would finance such transactions, as well as its
internal growth, through working capital or, in certain instances, through debt
or equity financing. There can be no assurance, however, that such debt or
equity financing would be available to the Company on acceptable terms when,
and if, suitable strategic opportunities arise.
During the past fiscal year, the Company has made efforts to increase
its presence and revenue in the group health market with moderate success.
Managed care in this
11
<PAGE> 15
market is more mature than managed care in workers' compensation and has
numerous large competitors, primarily health maintenance organizations. The
Company has limited experience in the group health market. There is no
assurance that the Company will be successful in this market.
The Company expects that a considerable amount of its future growth
will depend on its ability to process and manage claims data more efficiently
and to provide more meaningful healthcare information to customers and payors
of healthcare. There is no assurance that the Company will be able to develop,
license or otherwise acquire software to address these market demands as well
or as timely as its competitors
POSSIBLE VOLATILITY OF STOCK PRICE. The market price of the Company's
Common Stock following this offering may be highly volatile. Factors such as
variations in the Company's revenues, earnings and cash flow, general market
trends in the workers' compensation managed care market, and announcements of
innovations by the Company or its competitors could cause the market price of
the Common Stock to fluctuate substantially. Specifically, the quarter to
quarter percentage growth in operating results for the Company's three most
recently completed fiscal quarters was lower than the growth rates historically
experienced by the Company. The Company's slower growth rate in those two
fiscal quarters was partially attributable to a reduction in the growth rate of
health care expenditures nationally, contributing to a reduction in the growth
of claims processed by the Company. There can be no assurance that the
Company's growth rate in the future, if any, will be at or near historical
levels.
In addition, the stock market has in the past experienced price and
volume fluctuations that have particularly affected companies in the health
care and managed care markets resulting in changes in the market price of the
stock of many companies which may not have been directly related to the
operating performance of those companies. Such broad market fluctuations may
adversely affect the market price of the Shares following this offering.
ITEM 2. PROPERTIES.
The Company's principal executive office is located in Irvine,
California in approximately 2,300 square feet of leased space. The lease
expires in August 1997. The Company leases its branch offices, which range in
size up to approximately 9,000 square feet. The lease terms for the branch
offices range from monthly to five years. The Company believes that its
facilities are adequate for its current needs and that suitable additional
space will be available as required.
12
<PAGE> 16
ITEM 3. LEGAL PROCEEDINGS.
The Company is involved in litigation arising in the normal course of
business. The Company believes that resolution of these matters will not
result in any payment that, in the aggregate, would be material to the
financial position or financial operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted to a vote of stockholders during the
quarter ended March 31, 1996.
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
MARKET INFORMATION
The Company's Common Stock is traded on the Nasdaq National Market
under the symbol CRVL. The last reported quarterly high and low sales prices
for the Company's Common Stock for fiscal years 1995 and 1996 as reported by
Nasdaq are set forth below for the periods indicated.
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
FISCAL YEAR ENDED MARCH 31, 1995:
Quarter Ended June 30, 1994 : $25 3/4 $20 1/2
Quarter Ended September 30, 1994: 24 16 3/4
Quarter Ended December 31, 1994: 28 19 1/2
Quarter Ended March 31, 1995: 28 3/4 25 3/4
FISCAL YEAR ENDED MARCH 31, 1996:
Quarter Ended June 30, 1995: $28 1/2 $19 7/8
Quarter Ended September 30, 1995: 32 21
Quarter Ended December 31, 1995: 38 1/8 29 1/4
Quarter Ended March 31, 1996: 38 27 1/2
</TABLE>
The high and low sales price for the Company's Common Stock as
reported by NASDAQ on June 3, 1996 were $33 and $32.00, respectively.
As of June 3, 1996 there were 380 holders of record of the Company's
Common Stock. The Company has never paid any cash dividends on its Common
Stock and has no current plans to do so.
13
<PAGE> 17
ITEM 6. SELECTED FINANCIAL DATA.
The selected consolidated financial data of the Company appears in a
separate section of this Annual Report on Form 10-K on page F-1.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Management's Discussion and Analysis of Financial Condition and
Results of Operations appears in a separate section of this Annual Report on
Form 10-K beginning on page F-2.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Company's consolidated financial statements and schedule, as
listed under Item 14, appear in a separate section of this Annual Report on
Form 10-K beginning on page F-5 and S-1, respectively.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS.
The sections titled "Directors and Nominees," "Executive Officers of
the Company," and "Compliance with Section 16(a) of the Exchange Act" appearing
in the Company's Definitive Proxy Statement for the 1996 Annual Meeting of
Stockholders are incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The section titled "Executive Compensation and Related Information",
except as stated therein, appearing in the Company's Definitive Proxy Statement
for the 1996 Annual Meeting of Stockholders is incorporated herein by
reference.
14
<PAGE> 18
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The section titled "Principal Stockholders" appearing in the Company's
Definitive Proxy Statement for the 1996 Annual Meeting of Stockholders is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The section, if any, titled "Certain Transactions" appearing in the
Company's Definitive Proxy Statement for the 1996 Annual Meeting of
Stockholders is incorporated herein by reference.
15
<PAGE> 19
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a)(1) FINANCIAL STATEMENTS:
The Company's consolidated financial statements appear in a separate
section of this Annual Report on Form 10-K beginning on the pages referenced
below:
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Auditors F-5
Consolidated Statements of Income for the Fiscal Years Ended
March 31, 1994, 1995, and 1996 F-6
Consolidated Balance Sheets as of March 31, 1995 and 1996 F-7
Consolidated Statements of Stockholders' Equity for the Fiscal Years
Ended March 31, 1994, 1995, and 1996 F-8
Consolidated Statements of Cash Flows for the Fiscal Years Ended
March 31, 1994, 1995, and 1996 F-9
Notes to Consolidated Financial Statements F-10
</TABLE>
(2) FINANCIAL STATEMENT SCHEDULE:
The Company's financial statement schedule appears in a separate
section of this Annual Report on Form 10-K beginning on the page referenced
below. All other schedules have been omitted as they are not applicable, not
required or the information is included in the consolidated financial
statements or the notes thereto.
Schedule Page
-------- ----
II -- Valuation and Qualifying Accounts S-1
(3) EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT
NO. TITLE METHOD OF FILING
- ------- ----- ----------------
<S> <C> <C>
3.1 Certificate of Incorporation of the Incorporated herein by reference to Exhibit 3.1
Company to the Company's Registration Statement on Form
S-1 Registration No. 33-40629.
3.2 Bylaws of the Company Incorporated herein by reference to Exhibit 3.2
to the Company's Registration Statement on Form
S-1 Registration No. 33-40629.
</TABLE>
16
<PAGE> 20
EXHIBITS (CONTINUED)
<TABLE>
<CAPTION>
EXHIBIT
NO. TITLE METHOD OF FILING
- ------- ----- ----------------
<S> <C> <C>
10.1 Lease Agreement of the Company's Incorporated herein by reference to Exhibit 10.1
executive office in Irvine, California to the Company's Annual Report on Form 10-K for
the fiscal year ended March 31, 1993.
10.2 Lease Agreement of the Company's office Incorporated herein by reference to Exhibit 10.5
in Richmond, Virginia to the Company's Registration Statement on Form
S-1 Registration No. 33-40629.
10.3 Nonqualified Stock Option Agreement Incorporated herein by reference to Exhibit 10.6
between V. Gordon Clemons, the Company to the Company's Registration Statement on Form
and North Star together with all S-1 Registration No. 33-40629.
amendments and addendums thereto
10.4 Supplementary Agreement between Incorporated herein by reference to Exhibit 10.7
V. Gordon Clemons, the Company and to the Company's Registration Statement on Form
North Star S-1 Registration No. 33-40629.
10.5 Amendment to Supplementary Agreement Incorporated herein by reference to Exhibit
between Mr. Clemons, the Company and 10.5 to the Company's Annual Report on Form 10-K
North Star for the fiscal year ended March 31, 1992.
10.6 Restated 1988 Executive Stock Option Incorporated herein by reference to Exhibit 10.6
Plan, as amended to the Company's Annual Report on Form 10-K for
the fiscal year ended March 31, 1995
10.7 Form of Notice of Grant of Stock Option Incorporated herein by reference to Exhibit 10.7
Under the Restated 1988 Executive Stock to the Company's Annual Report on Form 10-K for
Option the fiscal year ended March 31, 1994.
10.8 Form of Stock Option Agreement under Incorporated herein by reference to Exhibit 10.8
the Restated 1988 Executive Stock to the Company's Annual Report on Form 10-K for
Option Plan the fiscal year ended March 31, 1994.
</TABLE>
17
<PAGE> 21
EXHIBITS (CONTINUED)
<TABLE>
<CAPTION>
EXHIBIT
NO. TITLE METHOD OF FILING
- ------- ----- ----------------
<S> <C> <C>
10.9 Form of Notice of Exercise under the Incorporated herein by reference to Exhibit 10.9
Restated 1988 Executive Stock Option to the Company's Annual Report on Form 10-K for
Plan the fiscal year ended March 31, 1994.
10.10 Employment Agreement of V. Gordon Incorporated herein by reference to Exhibit 10.12
Clemons to the Company's Registration Statement on Form
S-1 Registration No. 33-40629.
10.11 Restated 1991 Employee Stock Purchase Incorporated herein by reference to Exhibit 10.11
Plan, as amended in the Company's Annual Report on Form 10-K for
the fiscal year ended March 31, 1995.
10.12 Registration Rights Agreement Incorporated herein by reference to Exhibit 10.17
to the Company's Registration on Form S-1
Registration No. 33-40629.
10.13 Form of Indemnification Agreement Incorporated herein by reference to Exhibit 10.19
to the Company's Registration Statement on Form
S-1 Registration No. 33-40629.
10.14 Fidelity Master Plan for Savings and Incorporated herein by reference to Exhibits
Investment, and amendments 10.16 and 10.16A to the Company's Registration
Statement on Form S-1 Registration No. 33-40629.
10.15 Stock Purchase and Subsidiary Transfer Incorporated herein by reference to Exhibit 10.18
Agreement to the Company's Registration Statement on Form
S-1 Registration No. 33-40629.
10.16 North Star Indemnification Agreement Incorporated herein by reference to Exhibit 10.20
to the Company's Registration Statement on Form
S-1 Registration No. 33-40629.
</TABLE>
18
<PAGE> 22
EXHIBITS (CONTINUED)
<TABLE>
<CAPTION>
EXHIBIT
NO. TITLE METHOD OF FILING
- ------- ----- ----------------
<S> <C> <C>
10.17 Agreement between the Company and Incorporated herein by reference to Exhibit
AMEV/VSB 1990 NV 10.19 to the Company's Annual Report on Form
10-K for the fiscal year ended March 31, 1992.
10.18 Note and Stock Pledge Agreement between Incorporated herein by reference to the
the Company and Mr. Daniel H. Davis, Company's Annual Report on Form 10-K for the
Vice President Marketing and New fiscal year ended March 31, 1993.
Business Development
10.19 Daniel Davis Severance Arrangement Incorporated herein by reference to the
Company's Annual Report on Form 10-K for the
fiscal year ended March 31, 1993
10.20 Form S-3 Registration Agreement with Attached.
North Star Universal, Inc.
11. Computation of earnings per share Attached.
21. Subsidiaries of the Company Attached.
23. Consent of Independent Auditors Attached.
</TABLE>
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter ended March 31,
1996.
19
<PAGE> 23
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
CORVEL CORPORATION
Date: June 27, 1996 By: /s/ V. GORDON CLEMONS
----------------------------
V. Gordon Clemons
Chairman and President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ V. GORDON CLEMONS Chairman and President June 27, 1996
- -------------------------
V. Gordon Clemons
/s/ RICHARD J. SCHWEPPE Chief Financial Officer and June 27, 1996
- ------------------------- Accounting Officer
Richard J. Schweppe
/s/ THOMAS R. BROWN Director June 27, 1996
- -------------------------
Thomas R. Brown
/s/ PETER E. FLYNN Director June 27, 1996
- -------------------------
Peter E. Flynn
/s/ STEVEN J. HAMERSLAG Director June 27, 1996
- -------------------------
Steven J. Hamerslag
/s/ JEFFREY J. MICHAEL Director June 27, 1996
- -------------------------
Jeffrey J. Michael
</TABLE>
20
<PAGE> 24
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data for the five years
ended March 31, 1996, have been derived from the consolidated financial
statements of the Company, which have been audited by Ernst & Young,
independent auditors. The following data should be read in conjunction with
the Company's Consolidated Financial Statements, the related notes thereto, and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." The following amounts are in thousands, except per share data.
<TABLE>
<CAPTION>
Year Ended March 31,
-------------------------------------------------------------
1992 1993 1994 1995 1996
------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues $46,886 $61,846 $80,619 $95,783 $109,052
Costs and Expenses:
Cost of revenues 39,902 52,788 67,331 78,950 88,937
General and administrative expenses 4,338 4,899 6,057 7,186 8,106
Net gain from sale of name 3,300
Managed care reconfiguration charge (3,300)
------- ------- ------- ------- -------
44,240 57,687 73,388 86,136 97,043
------- ------- ------- ------- -------
Income before income taxes 2,646 4,159 7,231 9,647 12,009
Income tax provision 1,045 1,625 2,821 3,762 4,684
------- ------- ------- ------- -------
Net income $ 1,601 $ 2,534 $ 4,410 $ 5,885 $ 7,325
======= ======= ======= ======= =======
Net income per common and common
equivalent share $ .43 $ .61 $ 1.01 $ 1.30 $ 1.57
======= ======= ======= ======= =======
Weighted average common and common
equivalent shares outstanding 3,751 4,128 4,369 4,542 4,674
</TABLE>
<TABLE>
<CAPTION>
BALANCE SHEET DATA AS OF MARCH 31, 1992 1993 1994 1995 1996
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents $ 5,908 $ 3,471 $ 8,393 $13,211 $17,113
Accounts receivable, net 8,453 11,235 13,211 15,868 18,394
Working capital 8,938 11,667 17,579 24,085 30,781
Total assets 23,676 25,314 34,624 43,965 53,984
Retained earnings (deficit) (1,244) 1,290 5,700 11,585 18,910
Total shareholders' equity 16,317 20,357 27,325 35,754 45,311
</TABLE>
F-1
<PAGE> 25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company derives the majority of its revenues from providing
patient management and provider program services to payors of workers'
compensation benefits and health insurance benefits. Patient management
services include early intervention, utilization review, medical case
management, vocational rehabilitation and independent medical examinations.
Provider program revenues include fee schedule auditing (MedCheck), hospital
bill auditing and preferred provider referral services. The percentages of
revenues attributable to patient management and provider program services for
the fiscal years ended March 31, 1994, 1995, and 1996 are as follows:
<TABLE>
<CAPTION>
1994 1995 1996
------ ------ ------
<S> <C> <C> <C>
Patient management services 54.5% 53.9% 52.0%
Provider program services 45.5% 46.1% 48.0%
------ ------ ------
100.0% 100.0% 100.0%
====== ====== ======
</TABLE>
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated the
percentage of revenues represented by certain items reflected in the Company's
consolidated statements of income. The Company's past operating results are
not necessarily indicative of future operating results.
<TABLE>
<CAPTION>
Year Ended March 31,
-------------------------------
1994 1995 1996
------ ------ ------
<S> <C> <C> <C>
Revenues 100.0% 100.0% 100.0%
Cost of revenues 83.5 82.4 81.6
General and administrative 7.5 7.5 7.4
Income before income taxes 9.0 10.1 11.0
Net income 5.5 6.1 6.7
</TABLE>
Years Ended March 31, 1994, 1995 and 1996
Revenues for fiscal 1995 increased by 19% to $95.8 million from $80.6
million in fiscal 1994, an increase of $15.2 million. This growth was
attributable to similar increases in both patient management revenues and
provider program revenues. Provider program revenues increased by more than 20%
from fiscal 1994 to fiscal 1995 and represented 46% of the Company's revenue
during fiscal 1995. This growth is primarily due to the continued expansion of
the Company's PPO services, which is included in the provider program revenues.
Patient management revenues increased 18% from fiscal 1994 to fiscal 1995.
F-2
<PAGE> 26
Revenues for fiscal 1996 increased by 14% to $109.1 million from $95.8
million in fiscal 1995, an increase of $13.3 million. Most of this growth
came from provider program services, which grew 19% from fiscal year 1995 to
fiscal 1996, due both to growth in the number of service sites along with
growth in PPO revenues. Patient management revenues grew at a lesser rate
primarily due to nominal growth in the Company's growth in the Company's
operations in the western portion of the United States.
The Company's cost of services consists primarily of salaries and
related benefits, rent, telephone expenses and costs related to the Company's
computer operations including depreciation and amortization. Costs of services
increased to $88.9 million in fiscal 1996, from $67.3 million in fiscal 1994
and $79.0 million in fiscal 1995. Cost of services as a percentage of revenues
decreased from 83.5% in fiscal 1994 and 82.4% in fiscal 1995 to 81.6% in fiscal
1996.
Part of this decline in cost of revenues as a percentage of revenues
is due to the change in the Company's revenue mix towards provider program
revenues, primarily PPO revenues, where the cost of services is less than that
associated with its more labor intensive patient management business.
Additionally, while the Company continued to add personnel to support its
revenue growth, it realized greater economies of scale with its expanded branch
operations. The Company's gross profit percentage has increased during the
past two years. However, there is no guarantee that this trend will continue
should the Company pursue a strategy of reducing price in order to obtain
greater market share or if competition causes pricing pressure in the industry.
General and administrative expense increased from $6.1 million in
fiscal 1994 and $7.2 million in fiscal 1995 to $8.1 million in fiscal 1996
primarily due to increased MIS staff and national marketing staff. However,
general and administrative expenses declined as a percentage of revenues from
7.5% in fiscal 1994 and 1995 to 7.4% in fiscal 1996, as the Company was able to
support greater revenue growth without a proportionate increase in general and
administrative expenses.
In fiscal 1993, the Company recognized a gain of $3.3 million, net of
associated costs, from the sale to a third party of its rights to its former
name, "FORTIS". The Company deferred recognition of the gain until the Company
could reasonably estimate the cost of performing the changes necessary to
conduct business under a different name. During fiscal 1993, the Company
provided for a $3.3 million managed care reconfiguration charge. This charge
included approximately $1.0 million to modify and upgrade management and
reimbursement systems and technology involved in the patient management portion
of the Company's managed care program and $2.3 million to replace obsolete
hardware and software systems. Substantially all of these costs were incurred
prior to the end of fiscal 1993. The effect of these costs enabled the Company
to compete effectively in the managed care market despite changes mandated by
state legislation and technological changes in computer hardware and software
systems.
F-3
<PAGE> 27
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations and capital expenditures
primarily from the proceeds of its initial public offering in June, 1991, cash
flow from operations, and the sale of its rights to the name "FORTIS" in fiscal
1993. During fiscal 1996, net working capital increased by $6.7 million, from
$24.1 million at March 31, 1995 to $30.8 million at March 31, 1996. As of
March 31, 1996, the Company had $17.1 million in cash, invested primarily in
short-term highly-liquid investments with maturities of 90 days or less.
The Company has historically required substantial capital to fund the
growth of its operations, particularly working capital to fund the growth in
accounts receivable. The Company believes, however, that the cash balance at
March 31, 1996 along with anticipated internally generated funds will be
sufficient to meet the Company's expected cash requirements for at least the
next twelve months.
F-4
<PAGE> 28
REPORT OF INDEPENDENT AUDITORS
Stockholders and Board of Directors
CorVel Corporation
We have audited the accompanying consolidated balance sheets of CorVel
Corporation as of March 31, 1995 and 1996, and the related consolidated
statements of income, stockholders' equity and cash flows for each of the three
years in the period ended March 31, 1996. Our audits also included the
financial statement schedule listed in the Index at Item 14(a). These
financial statements and this schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of CorVel Corporation at March 31, 1995 and 1996, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended March 31, 1996, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedules
when considered in relationship to the basic financial statements taken as a
whole, present fairly in all material respects the information set forth
therein.
ERNST & YOUNG LLP
May 8, 1996
Orange County, California
F-5
<PAGE> 29
CORVEL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended March 31
------------------------------------------------
1994 1995 1996
----------- ----------- ------------
<S> <C> <C> <C>
REVENUES $80,619,000 $95,783,000 $109,052,000
COSTS AND EXPENSES
Cost of revenues 67,331,000 78,950,000 88,937,000
General and administrative 6,057,000 7,186,000 8,106,000
----------- ----------- ------------
73,388,000 86,136,000 97,043,000
----------- ----------- ------------
Income before income taxes 7,231,000 9,647,000 12,009,000
Income tax provision 2,821,000 3,762,000 4,684,000
----------- ----------- ------------
NET INCOME $ 4,410,00 $ 5,885,000 $ 7,325,000
=========== =========== ============
Net income per common and common
equivalent share $ 1.01 $ 1.30 $ 1.57
=========== =========== ============
Weighted average shares outstanding 4,369,000 4,542,000 4,674,000
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 30
CORVEL CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31
---------------------------
1995 1996
----------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $13,211,000 $17,113,000
Accounts receivable (less allowance for
doubtful accounts of $825,000 in 1995 and
$1,268,000 in 1996) 15,868,000 18,394,000
Prepaid taxes and expenses 182,000 545,000
Deferred income taxes 1,809,000 2,032,000
----------- -----------
Total current assets 31,070,000 38,084,000
----------- -----------
PROPERTY AND EQUIPMENT, NET 8,872,000 11,468,000
OTHER ASSETS 4,023,000 4,432,000
----------- -----------
$43,965,000 $53,984,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts and taxes payable $ 2,357,000 $ 3,057,000
Accrued liabilities 4,628,000 4,246,000
----------- -----------
Total current liabilities 6,985,000 7,303,000
----------- -----------
Deferred income taxes 1,226,000 1,370,000
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
COMMON STOCK, $.0001 par value: 20,000,000 shares
authorized; 4,238,250 and 4,593,675 shares issued
and outstanding at March 31, 1995 and 1996,
respectively
PAID IN CAPITAL 24,169,000 26,401,000
RETAINED EARNINGS 11,585,000 18,910,000
----------- -----------
Total stockholders' equity 35,754,000 45,311,000
----------- -----------
$43,965,000 $53,984,000
=========== ===========
</TABLE>
See accompanying notes to the consolidated financial statements.
F-7
<PAGE> 31
CORVEL CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
AND TOTAL
COMMON STOCK - PAID IN RETAINED SHAREHOLDERS'
SHARES CAPITAL EARNINGS EQUITY
------------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
Balance - March 31, 1993 3,706,649 $19,067,000 $ 1,290,000 $20,357,000
Stock issued under employee stock
purchase plan 20,448 295,000 295,000
Stock issued under employee stock
option plan and related income tax
benefits 344,098 2,263,000 2,263,000
Net income 4,410,000 4,410,000
---------- ----------- ----------- -----------
Balance - March 31, 1994 4,071,195 21,625,000 5,700,000 27,325,000
Stock issued under employee
stock purchase plan 19,634 374,000 374,000
Stock issued under employee stock
option plan and related income tax
benefits 147,421 2,170,000 2,170,000
Net income 5,885,000 5,885,000
---------- ----------- ----------- -----------
Balance - March 31, 1995 4,238,250 24,169,000 11,585,000 35,754,000
---------- ----------- ----------- -----------
Stock issued under employee stock
purchase plan 18,384 444,000 444,000
Stock issued under employee stock
option plan and related income tax
benefits, net of shares repurchased
upon exercise 337,041 1,788,000 1,788,000
Net income 7,325,000 7,325,000
---------- ----------- ----------- -----------
Balance - March 31, 1996 4,593,675 $26,401,000 $18,910,000 $45,311,000
========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE> 32
CORVEL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended March 31
------------------------------------------
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 4,410,000 $ 5,885,000 $ 7,325,000
Adjustments to reconcile net income
to net cash provided by operating activities
Depreciation and amortization 2,363,000 2,335,000 3,048,000
Deferred income taxes 546,000 (44,000) (79,000)
Loss on write down and disposal of property and equipment 75,000 39,000 23,000
Changes in operating assets and liabilities
Accounts receivable (1,976,000) (2,657,000) (2,526,000)
Prepaid income taxes and expenses (144,000) 795,000 (363,000)
Accounts and taxes payable 378,000 27,000 700,000
Accrued liabilities 1,085,000 538,000 (382,000)
Other assets 33,000 (425,000) (511,000)
----------- ----------- -----------
Net cash provided by operating activities 6,770,000 6,493,000 7,235,000
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (4,406,000) (4,219,000) (5,565,000)
----------- ----------- -----------
Net cash used in investing activities
(4,406,000) (4,219,000) (5,565,000)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds and tax benefits from exercise of stock options 2,558,000 2,544,000 2,232,000
----------- ----------- -----------
Net cash provided by financing activities 2,558,000 2,544,000 2,232,000
----------- ----------- -----------
Increase in cash and cash equivalents 4,922,000 4,818,000 3,902,000
Cash and cash equivalents at beginning of year 3,471,000 8,393,000 13,211,000
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 8,393,000 $13,211,000 $17,113,000
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-9
<PAGE> 33
CORVEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization: CorVel Corporation (the Company) provides services and
programs nationwide that are designed to enable insurance carriers, third party
administrators and employers with self-insured programs to administer, manage
and control the cost of workers compensation benefits.
Basis of Presentation: The consolidated financial statements include
the accounts of CorVel Corporation and its subsidiaries. Significant
intercompany accounts and transactions have been eliminated in consolidation.
The consolidated financial statements are presented on the accrual
basis of accounting in accordance with generally accepted accounting principles
which requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities as of March 31, 1995 and 1996 and
revenues and expenses for the three years ending March 31, 1996. Estimates
made by the Company relate primarily to the valuation of accounts receivable
and estimation of accrued liabilities. Actual results could differ from those
estimates.
Cash and Cash Equivalents: Cash and cash equivalents consists of
short-term highly-liquid investments with maturities of 90 days or less when
purchased. The carrying amounts of the Company's financial instruments
approximate their relative fair values at March 31, 1995 and 1996.
Concentrations of Credit Risk: The Company performs periodic credit
evaluations of its customers' financial condition and does not require
collateral. No customer represented 10% of accounts receivable at March 31,
1995 and 1996. Receivables generally are due within 60 days. Credit losses
relating to customers in the workers compensation insurance industry
consistently have been within management's expectations.
Property and Equipment: Property and equipment is stated at cost.
Depreciation and amortization is provided using the straight-line and
accelerated methods over the estimated useful lives of the assets which range
from three to seven years.
Long-Lived Assets: The Company elected the early adoption of SFAS No.
121, "Accounting for the Impairement of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of" (Statement No. 121). In accordance with Statement
No. 121, long-lived assets and certain identifiable intangibles held and used
by the Company will be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable.
F-10
<PAGE> 34
CORVEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Other Assets: Other assets consists primarily of the excess of the
purchase price over the estimated fair value of the net assets of businesses
acquired (goodwill) and is being amortized on a straight-line basis over
periods not exceeding 40 years. Goodwill amounted to $3,344,000 (net of
accumulated amortization of $652,000) at March 31, 1995 and $3,636,000 (net of
accumulated amortization of $754,000) at March 31, 1996.
Revenue Recognition: The Company's revenues are recognized primarily
as services are rendered based on time and expenses incurred. A certain
portion of the Company's revenues are derived from fee schedule auditing which
is based on the number of provider charges audited and, to a limited extent, on
a percentage of savings achieved for the Company's clients. Accounts
receivable includes $1,318,000 and $1,527,000 of unbilled receivables at March
31, 1995 and 1996, respectively. No one customer accounted for more than 10%
of consolidated revenues during the years ended March 31, 1994, 1995 and 1996.
Income Taxes: The consolidated financial statements reflect the
application of Statement of Financial Accounting Standards No. 109 -
"Accounting for Income Taxes".
Income Per Share: Income per share is computed by dividing net
income by the weighted average number of common and common equivalent shares
outstanding during the year.
Stock Options: The Company follows Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its employee stock options. The Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123) in October
1995. SFAS No. 123 establishes financial accounting and reporting standards
for stock-based compensation plans and for transactions in which an entity
issues its equity instruments to acquire goods and services from nonemployees.
The new accounting standards prescribed by SFAS No. 123 are optional, and the
Company may continue to account for its plans under previous standards. The
Company does not expect to adopt the new accounting standards, consequently,
SFAS No. 123 will not have an impact on the Company's consolidated results of
operations or financial position. However, proforma disclosures of net
earnings and earnings per share will made in fiscal 1997, as if the SFAS No.
123 accounting standards had been adopted.
F-11
<PAGE> 35
CORVEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE B -- PROPERTY AND EQUIPMENT
Property and equipment consists of the following at March 31:
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Office equipment and computers $11,074,000 $15,542,000
Computer software 3,490,000 4,207,000
Leasehold improvements 356,000 613,000
----------- -----------
14,920,000 20,362,000
Less: accumulated depreciation and amortization 6,048,000 8,894,000
----------- -----------
$ 8,872,000 $11,468,000
=========== ===========
</TABLE>
NOTE C -- ACCRUED LIABILITIES
Accrued liabilities consists of the following at March 31:
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
Payroll and related benefits $2,327,000 $2,366,000
Self insurance reserves 1,017,000 737,000
Other 1,284,000 1,143,000
---------- ----------
$4,628,000 $4,246,000
========== ==========
</TABLE>
NOTE D -- INCOME TAXES
The income tax provision consists of the following for the three
years ended March 31:
<TABLE>
<CAPTION>
1994 1995 1996
----------- ---------- -----------
<S> <C> <C> <C>
Current - Federal $ 1,903,000 $3,172,000 $ 3,670,000
Current - State 372,000 634,000 693,000
Tax benefits from option exercises (1,403,000) (991,000) (4,245,000)
Utilization of net operating loss (538,000)
----------- ---------- -----------
Subtotal 872,000 2,277,000 518,000
----------- ---------- -----------
Deferred - Federal 460,000 (37,000) (102,000)
Deferred - State 86,000 (7,000) 23,000
----------- ---------- -----------
Subtotal 546,000 (44,000) (79,000)
----------- ---------- -----------
Charge in lieu of income taxes
attributable to tax benefits from
stock option exercises and utilization
of net operating loss carryovers 1,403,000 1,529,000 4,245,000
----------- ---------- -----------
$ 2,821,000 $3,762,000 $ 4,684,000
=========== ========== ===========
</TABLE>
F-12
<PAGE> 36
CORVEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE D -- INCOME TAXES (CONTINUED)
The following is a reconciliation of the income tax provision from the
statutory federal income tax rate to the effective rate for the three years
ended March 31 (35% for the three fiscal years ended March 31, 1996):
<TABLE>
<CAPTION>
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
Federal statutory income tax rate $2,531,000 $3,377,000 $4,203,000
State income taxes, net of federal
benefit 300,000 399,000 446,000
Goodwill amortization 35,000 35,000 37,000
Other (45,000) (49,000) (2,000)
---------- ---------- ----------
$2,821,000 $3,762,000 $4,684,000
========== ========== ==========
</TABLE>
Income taxes paid totaled $925,000, $1,100,000 and $1,193,000 for the
years ended March 31, 1994, 1995, and 1996, respectively. At March 31, 1994,
the Company had net operating loss (NOL's) carryforwards of $1,600,000 for
income tax purposes, expiring in 2007 for financial reporting purposes. A
valuation allowance of $538,000 was recorded in 1994 to offset the deferred tax
assets related to the NOL's. This $538,000 valuation allowance was applied to
additional paid in capital in 1995 since the related NOL's were principally
attributable to deductions for the exercise of non qualified stock options in
1994.
Deferred taxes at March 31, 1995 and 1996 are:
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Deferred tax assets:
Accrued liabilities not currently deductible $ 1,525,000 $ 1,681,000
Allowance for doubtful accounts 284,000 495,000
Other 0 227,000
----------- -----------
Deferred assets 1,809,000 2,032,000
Deferred tax liabilities:
Excess of tax under book basis of fixed assets (1,226,000) (1,370,000)
----------- -----------
Deferred liability (1,226,000) (1,370,000)
----------- -----------
Net deferred tax asset $ 583,000 $ 662,000
=========== ===========
</TABLE>
F-13
<PAGE> 37
CORVEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE E -- STOCK OPTION PLAN
Under the Company's Restated 1988 Executive Stock Option Plan, as
amended, options for up to 1,335,000 shares of the Company's common stock may
be granted to key employees, nonemployee directors and consultants at prices
not less than 85% of the fair value of the stock at the date of grant as
determined by the Board. Options granted under the Plan may be either
incentive stock options or non-statutory stock options and are generally
exercisable beginning one year from the date of grant and vest monthly
thereafter for three years. Summarized information for this Plan follows:
<TABLE>
<CAPTION>
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Options outstanding at the
beginning of the year 687,980 444,040 404,539
Options granted 111,635 88,850 81,300
Options exercised 338,998 110,421 105,672
Options canceled 16,577 17,930 16,756
------- ------- -------
Options outstanding at the end
of the year 444,040 404,539 363,411
======= ======= =======
At the end of the year:
Prices of outstanding options $.01-$22.75 $.33-$26.50 $8.67-$31.50
Average price per share $11.36 $15.11 $18.33
Exercisable options 182,920 199,484 182,575
Options available for future grants 137,908 266,988 202,444
</TABLE>
In addition to options granted under the Plan, the Company's President
was issued an option to purchase 750,000 shares of common stock at an exercise
price of $.0001 per share in January 1988. Options to purchase 5,100, 37,000,
and 362,900 shares of common stock were exercised in fiscal 1994, 1995 and
1996, respectively. As of March 31, 1996, options to purchase 60,000 shares of
common stock were outstanding, all of which were exercisable at a nominal
price.
F-14
<PAGE> 38
CORVEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE F -- EMPLOYEE STOCK PURCHASE PLAN
In fiscal 1992, the Company's Board of Directors approved the 1991
Employee Stock Purchase Plan, as amended, that provides for the issuance of up
to 150,000 shares of the Company's common stock. Under the plan,
participating employees are granted nontransferable, six-month options on
October 1 and April 1 of each year. These options entitle employees to
purchase the number of whole shares that their individual payroll deduction
authorizations indicate can be purchased at the end of the six-month period at
85% of the fair market value of the Company's common stock at the date of grant
or on the last day of the six-month period, whichever is less. Employees are
allowed to participate up to 20% of their gross pay. Summarized plan
information is as follows:
<TABLE>
<CAPTION>
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
Employee contributions $295,000 $374,000 $444,000
Shares acquired 20,448 19,634 18,384
Average purchase price $14.43 $19.02 $24.15
</TABLE>
NOTE G -- COMMITMENTS AND CONTINGENCIES
The Company leases office facilities under noncancelable operating
leases. Future minimum rental commitments under operating leases at March 31,
1996 are $3,576,000 in fiscal 1997, $2,491,000 in fiscal 1998, $1,375,000 in
fiscal 1999, $793,000 in fiscal 2000, $256,000 in fiscal 2001, and none
thereafter. Total rental expense of $3,080,000, $3,559,000, and $3,901,000
was charged to operations for the years ended March 31, 1994, 1995, and 1996,
respectively.
The Company is involved in litigation arising in the normal course of
business. The Company believes that resolution of these matters will not
result in any payment that, in the aggregate, would be material to the
financial position and results of the operations of the Company.
NOTE H -- SAVINGS PLAN
The Company maintains a retirement savings plan for its employees
which is a qualified plan under section 401(k) of the Internal Revenue Code.
Full time employees that meet certain requirements are eligible to participate
in the plan. Contributions are made annually primarily at the discretion of
the Company's Board of Directors. Contributions of $133,000, $157,000, and
$50,000, were charged to operations for the years ended March 31, 1994, 1995,
and 1996, respectively.
F-15
<PAGE> 39
CORVEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE I -- QUARTERLY RESULTS
The following is a summary of unaudited results of operations for the
two years ended March 31, 1995 and 1996:
<TABLE>
<CAPTION>
Net income per
Net common and common
Revenues Gross Profit income equivalent share
----------- ------------ ---------- -----------------
<S> <C> <C> <C> <C>
FISCAL YEAR ENDED MARCH 31, 1995:
First Quarter $22,071,000 $3,844,000 $1,344,000 $.30
Second Quarter 22,921,000 4,008,000 1,402,000 .31
Third Quarter 24,701,000 4,313,000 1,507,000 .33
Fourth Quarter 26,090,000 4,668,000 1,632,000 .35
FISCAL YEAR ENDED MARCH 31, 1996:
First Quarter $26,779,000 $4,856,000 $1,701,000 $.37
Second Quarter 26,863,000 4,989,000 1,818,000 .39
Third Quarter 27,082,000 5,127,000 1,887,000 .40
Fourth Quarter 28,328,000 5,143,000 1,919,000 .41
</TABLE>
F-16
<PAGE> 40
Schedule II
CORVEL CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Additions
-----------------------
Balance at Charged to Charged to Balance at
Beginning Costs and Other End of
of Period Expenses Accounts Deductions Period
--------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
Year Ended March 31, 1996: $825,000 $500,000 $ - $57,000 $1,268,000
Year Ended March 31, 1995: 725,000 100,000 - - 825,000
Year Ended March 31, 1994: 485,000 240,000 - - 725,000
</TABLE>
S-1
<PAGE> 41
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. TITLE - - METHOD OF FILING PAGE
- ------- -------------------------- ----
<S> <C> <C>
3.1 Certificate of Incorporation of the Company - - Incorporated herein by
reference to Exhibit 3.1 to the Company's Registration Statement on Form S-1
Registration No. 33-40629.
3.2 Bylaws of the Company - - Incorporated herein by reference to Exhibit 3.2 to
the Company's Registration Statement on Form S-1 Registration No. 33-40629.
10.1 Lease Agreement of the Company's executive office in Irvine,
California - - Incorporated herein by reference to the Company's Annual
Report on Form 10-K for the fiscal year ended March 31, 1993.
10.2 Lease Agreement of the Company's office in Richmond, Virginia - -
Incorporated herein by reference to Exhibit 10.5 to the Company's
Registration Statement on Form S-1 Registration No. 33-40629.
10.3 Nonqualified Stock Option Agreement between V. Gordon Clemons, the Company
and North Star together with all amendments and addendums thereto - -
Incorporated herein by reference to Exhibit 10.6 to the Company's
Registration Statement on Form S-1 Registration No. 33-40629.
10.4 Supplementary Agreement between V. Gordon Clemons, the Company and North
Star - - Incorporated herein by reference to Exhibit 10.7 to the Company's
Registration Statement on Form S-1 Registration No. 33-40629.
10.5 Amendment to Supplementary Agreement between Mr. Clemons, the Company and
North Star - - Incorporated herein by reference to Exhibit 10.5 to the
Company's Annual Report on Form 10-K for the fiscal year ended March 31,
1992.
10.6 Restated 1988 Executive Stock Option Plan, as amended - - Incorporated
herein by reference to Exhibit 10.5 to the Company's Annual Report on Form
10-K for the fiscal year ended March 31, 1995.
</TABLE>
<PAGE> 42
EXHIBIT INDEX (CONTINUED)
<TABLE>
<CAPTION>
EXHIBIT
NO. TITLE - - METHOD OF FILING PAGE
- ------- -------------------------- ----
<S> <C> <C>
10.7 Form of Notice of Grant of Stock Option Under the Restated 1988 Executive
Stock Option Plan - - Incorporated herein by reference to the Company's
Annual Report on Form 10-K for the fiscal year ended March 31, 1994.
10.8 Form of Stock Option Agreement under the Restated 1988 Executive Stock
Option Plan - - Incorporated herein by reference to the Company's Annual
Report on Form 10-K for the fiscal year ended March 31, 1994.
10.9 Form of Notice of Exercise under the Restated 1988 Executive Stock Option
Plan - - Incorporated herein by reference to the Company's Annual Report on
Form 10-K for the fiscal year ended March 31, 1994.
10.10 Employment Agreement of V. Gordon Clemons - - Incorporated herein by
reference to Exhibit 10.12 to the Company's Registration Statement on Form
S-1 Registration No. 33-40629.
10.11 Restated 1991 Employee Stock Purchase Plan, as amended - - Attached.
10.12 Registration Rights Agreement - - Incorporated herein by reference to
Exhibit 10.17 to the Company's Registration Statement on Form S-1
Registration No. 33-40629.
10.13 Form of Indemnification Agreement - - Incorporated herein by reference to
Exhibit 10.19 to the Company's Registration Statement on Form S-1
Registration No. 33-40629.
10.14 Fidelity Master Plan for Savings and Investments, and amendments - -
Incorporated herein by reference to Exhibit 10.16 and 10.16A to the
Company's Registration Statement on Form S-1 Registration No. 33-40629.
10.15 Stock Purchase and Subsidiary Transfer Agreement - - Incorporated herein by
reference to Exhibit 10.18 to the Company's Registration Statement on Form
S-1 Registration No. 33-40629.
</TABLE>
<PAGE> 43
EXHIBIT INDEX (CONTINUED)
<TABLE>
<CAPTION>
EXHIBIT
NO. TITLE - - METHOD OF FILING PAGE
- ------- -------------------------- ----
<S> <C> <C>
10.16 North Star Indemnification Agreement - - Incorporated herein by reference to
Exhibit 10.20 to the Company's Registration Statement on Form S-1
Registration No. 33-40629.
10.17 Agreement between the Company and AMEV/VSB 1990 NV - - Incorporated herein
by reference to the Company Annual Report on Form 10-K for the fiscal year
ended March 31, 1992.
10.18 Note and Stock Pledge Agreement between the Company and Mr. Daniel H. Davis,
Vice President of Marketing and New Business Development - - Incorporated
herein by reference to the Company's Annual Report on Form 10-K for the
fiscal year ended March 31, 1993.
10.19 Daniel Davis Severance Arrangement - - Incorporated herein by reference to
the Company's Annual Report on Form 10-K for the fiscal year ended March 31,
1993.
10.20 Form S-3 Registration Agreement with North Star Universal, Inc. - Attached.
11 Computation of earnings per share - - Attached.
21 Subsidiaries of the Company - - Attached.
23 Consent of Independent Auditors - - Attached.
</TABLE>
<PAGE> 1
EXHIBIT 10.20
FORM S-3 REGISTRATION AGREEMENT
THIS FORM S-3 REGISTRATION AGREEMENT (the "Agreement") is made
and entered into on January 3, 1996 by and between CORVEL CORPORATION, a
Delaware corporation (the "Company"), and NORTH STAR UNIVERSAL, INC., a
Minnesota corporation (the "Selling Stockholder"), in connection with the
preparation and filing by the Company of a Form S-3 Registration Statement (the
"Registration Statement") with the Securities and Exchange Commission (the
"SEC") for the offering from time to time of up to 350,000 shares (the
"Shares") of Common Stock, $.0001 par value, of the Company (the "Common
Stock") to be sold by the Selling Stockholder.
Section 1. Selling Stockholder Representations. The Selling
Stockholder hereby certifies to the Company, for the purpose of the
registration of the Shares to be registered for the Selling Stockholder's
account, that the statements made below are true and correct.
(a) The Selling Stockholder is the beneficial owner, as
defined in Rule 13d-3 of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), as of the date hereof, of the Shares as set forth under the
caption "Selling Stockholder" in the prospectus filed as part of the effective
Registration Statement (the "Prospectus").
(b) The Selling Stockholder has reviewed the statements
contained under the headings "Selling Stockholder" and "Sale of the Shares" in
the Prospectus and in the second paragraph on page 1 of the Prospectus and
hereby confirms that such statements with respect to the Selling Stockholder
are true and correct as of the date hereof.
(c) The Selling Stockholder understands that the Selling
Stockholder will be required to deliver a copy of the final Prospectus provided
by the Company in connection with each sale that the Selling Stockholder may
make of registered Shares.
(d) During such time as the Selling Stockholder may be
attempting to sell the registered Shares, the Selling Stockholder will not bid
for or purchase any of the Company's outstanding securities or attempt to
induce any person to purchase such securities, other than as permitted under
the Exchange Act, and rules promulgated thereunder, or engage in any
"stabilization" activity in connection with the Company's outstanding
securities.
(e) The Selling Stockholder will not offer or sell the
Shares in any state unless the Selling Stockholder has been notified by counsel
for the Company that the Shares have been registered or qualified for offer or
sale in such state or unless the offer or sale of the Shares is exempt from
registration or qualification in such state.
(f) The Selling Stockholder understands that the Selling
Stockholder, and any other person who participates with the Selling Stockholder
in the sale of the registered Shares, may be deemed to be an "underwriter" as
defined in the Securities Act of 1933, as amended (the "Securities Act").
(g) The Selling Stockholder will not make any
representation concerning the Company, or deliver any written materials to any
buyer of the registered Shares other than the prospectus provided by the
Company.
(h) The Selling Stockholder will promptly notify the
Company if there is any change in any of the foregoing statements prior to the
time all of the registered Shares have been sold.
-1-
<PAGE> 2
Section 2. Registration Expenses. The Selling Stockholder
shall, whether or not the Registration Statement is declared effective, pay all
of the costs and expenses of the Company (in addition to all Selling
Stockholder's costs) incident to the preparation and filing of the Registration
Statement, including, but not limited to the fees and expenses of the Company's
counsel, the fees and expenses of the Company's accountants, and all other
costs and expenses incident to the preparation, printing and filing under the
Securities Act of the Registration Statement, and the costs incurred in
connection with the qualification of the Shares under the laws of various
jurisdictions.
Section 3. Period of Effectiveness; Notice of Developments. The
Company shall keep the Registration Statement effective for 120 days after the
date of its effectiveness. The Company shall notify the Selling Stockholder
promptly, and (if requested) confirm such notice in writing, (i) when the
Prospectus or any prospectus supplement or post-effective amendment has been
filed, and, with respect to the Registration Statement or any post-effective
amendment, when the same has become effective, (ii) of any request by the SEC
or any other Federal or state governmental authority during the period of
effectiveness of the Registration Statement for amendments or supplements to
the Registration Statement or related Prospectus or for additional information,
(iii) of the issuance by the SEC or any other Federal or state governmental
authority of any stop order suspending the effectiveness of the Registration
Statement or the initiation of any proceedings for that purpose, (iv) of the
receipt by the Company of any notification with respect to the suspension of
the qualification or exemption from qualification of any of the Shares for sale
in any jurisdiction or the initiation or threatening of any proceeding for such
purpose, (v) of the happening of any event which makes any statement made in
the Registration Statement or related Prospectus or any document incorporated
or deemed to be incorporated therein by reference untrue in any material
respect or which requires the making of any changes in such Registration
Statement, Prospectus or documents so that, in the case of the Registration
Statement, it will not contain any untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary to make
the statements therein not misleading, and that in the case of the Prospectus,
it will not contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, and (vi) of the Company's reasonable determination that a
post-effective amendment to the Registration Statement would be appropriate.
The Selling Stockholder agrees that, upon receipt of any notice from the
Company of the happening of any event of the kind described in clause (ii),
(iii), (iv), (v) or (vi) above, the Selling Stockholder will forthwith
discontinue disposition of the Shares covered by the applicable Registration
Statement or Prospectus until the Selling Stockholder's receipt of the copies
of the supplemented or amended Prospectus, or until it is advised in writing by
the Company that the use of the applicable Prospectus may be resumed, and has
received copies of any additional or supplemental filings that are incorporated
or deemed to be incorporated by reference in such Prospectus.
Section 4. Indemnification.
(a) The Company shall indemnify and hold harmless the
Selling Stockholder, each of its directors, each of its officers and each
person, if any, who controls the Selling Stockholder within the meaning of the
Securities Act, against any losses, claims, damages or liabilities (or actions
in respect thereof) (collectively, "Losses"), to which the Selling Stockholder,
director, officer or controlling person may become subject, under the
Securities Act or otherwise, insofar as such Losses are caused by any untrue
statement or alleged untrue statement of any material fact contained in the
Registration Statement, the Prospectus contained therein, or any amendment or
supplement thereto, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, and will reimburse any
legal or other expenses reasonably incurred by the Selling Stockholder in
connection with investigating or defending any such Losses; provided, however,
that the Company will not be liable in any such case to the Selling Stockholder
to the extent that any such Losses arise out of or are based upon an untrue
statement or alleged untrue statement or omission or alleged omission so made
in conformity with written information furnished by the Selling Stockholder
specifically for use in the preparation thereof.
(b) Further, the Company shall not be liable to the Selling
Stockholder to the extent that
-2-
<PAGE> 3
any such Losses arise out of or are based upon an untrue statement or alleged
untrue statement or omission or alleged omission made in any preliminary
prospectus if either (A) (i) the Selling Stockholder failed to send or deliver
a copy of the Prospectus with or prior to the delivery of written confirmation
of the sale by the Selling Stockholder of any Shares to the person asserting
the claim from which such Losses arise and (ii) the Prospectus would have
completely corrected such untrue statement or alleged untrue statement or such
omission or alleged omission; or (B) (x) such untrue statement or alleged
untrue statement, omission or alleged omission is completely corrected in an
amendment or supplement to the Prospectus and (y) having previously been
furnished by or on behalf of the Company with copies of the Prospectus as so
amended or supplemented, the Selling Stockholder thereafter fails to deliver
such Prospectus as so amended or supplemented, prior to or concurrently with
the sale of any Shares to the person asserting the claim from which such Losses
arise.
(c) The Selling Stockholder shall indemnify and hold
harmless the Company, each of its directors, each of its officers who have
signed the Registration Statement, and each person, if any, who controls the
Company, within the meaning of the Securities Act, against any Losses to which
the Company, or any such director, officer or controlling person may become
subject under the Securities Act or otherwise, insofar as such Losses are
caused by any untrue or alleged untrue statement of any material fact contained
in the Registration Statement, the Prospectus contained therein or amendment or
amendments or supplement thereto, or arise out of or are based upon the
omission or the alleged omission to state therein a material fact required to
be stated therein or necessary to make the statements therein not misleading,
and will reimburse any legal or other expenses reasonably incurred by the
Company or any such director, officer or controlling person in connection with
investigating or defending any such Losses; in each case to the extent, but
only to the extent, that such untrue statement or alleged untrue statement or
omission or alleged omission was so made in reliance upon and in conformity
with written information furnished by the Selling Stockholder for use in the
preparation thereof (including without limitation the information referred to
in Section 1(b) above).
(d) Promptly after receipt by an indemnified party
pursuant hereto of notice of any claim to which indemnity would apply or the
commencement of any action, such indemnified party will, if a claim thereof is
to be made against the indemnifying party pursuant hereto, notify the
indemnifying party of the commencement thereof; but the omission to so notify
the indemnifying party will not relieve it from any liability which it may have
to any indemnified party otherwise than hereunder. In case such action is
brought against any indemnified party, and it notifies the indemnifying party
of the commencement thereof, the indemnifying party will be entitled to
participate in, and, to the extent that it may wish, jointly with any other
indemnifying party similarly notified, assume the defense thereof, with counsel
satisfactory to such indemnified party.
Section 5. Intercompany Matters Release. Each of the Selling
Stockholder and the Company hereby release and forever discharge the other from
any and all known and unknown liabilities, claims, demands and causes of
action, which have arisen or may arise out of or are in any way connected with
the intercompany arrangements between the Selling Stockholder and the Company
concerning insurance, taxes and cash management services. It is the intention
of the parties that this Agreement shall be effective as a full and final
accord and satisfactory release of the matters described in this Section 5 (the
"Matters"). In furtherance of this intention, the parties acknowledge that
each is familiar with Section 1542 of the Civil Code of the State of California
("Section 1542"), which provides as follows:
"A general release does not extend to claims which the creditor does
not know or suspect to exist in his favor at the time of executing the
release, which if known by him must have materially affected his
settlement with the debtor."
The parties hereto waive and relinquish any rights and benefits which
they may have under Section 1542 with regard to the Matters. The parties
acknowledge that they may hereafter discover facts in addition to or different
from those which they now know or believe to be true with respect to the
Matters, but it is their intention to fully and finally and forever settle and
release any and all matters, and differences known or unknown, suspected or
unsuspected, which do now exist, may exist or heretofore have existed between
them in connection
-3-
<PAGE> 4
with the Matters. In furtherance of this intention, the releases herein shall
be and remain in effect as full and complete general releases relating to the
Matters notwithstanding the discovery or existence of any such additional or
different facts.
Section 6. Notices. All notices, requests, demands and other
communications pertaining to the subject matter of this Agreement shall be in
writing and shall be deemed to be duly rendered upon personal delivery, one (1)
day after delivery to a reputable overnight courier, or five (5) days after
deposit in the United States mail, postage prepaid, registered or certified
mail with return receipt requested and addressed as follows, or as the other
party may hereafter designate to the other in writing:
To Company: CorVel Corporation
1920 Main Street, Suite 1090
Irvine, California 92714
Attention: V. Gordon Clemons
To Shareholder: North Star Universal, Inc.
5353 Wayzata Boulevard
Minneapolis, Minnesota 55416
Attention: Peter E. Flynn
Section 7. Attorneys' Fees. In the event of any dispute or
litigation arising out of or relating to the meaning, interpretation or breach
of this Agreement or, compliance or non-compliance with the terms of this
Agreement, the prevailing party shall be entitled to reasonable attorneys' fees
and costs.
Section 8. Successors and Assigns. This Agreement shall be
binding upon and shall inure to the benefit of the successors, assigns, heirs,
executors and legal representatives of each of the parties hereto, but shall
not be assigned or delegated without the prior written consent of the other
party.
Section 9. Counterparts. This Agreement may be executed in one
or more counterparts, and all so executed shall constitute one agreement,
notwithstanding that each of the parties hereto are not signatory to the
original of the same counterpart of this Agreement.
Section 10. Governing Law. This Agreement has been executed and
shall be governed by and construed in accordance with the laws of the State of
Delaware.
Section 11. Severability. If any term, provision, covenant or
restriction of this Agreement is held by a court of competent jurisdiction to
be invalid, void or unenforceable, the remainder of the terms, provisions,
covenants and restrictions of this Agreement shall remain in full force and
effect and shall in not way be affected, impaired or invalidated, and the
parties shall negotiate in good faith to modify this Agreement and to preserve
each party's anticipated benefits under this Agreement.
Section 12. Entire Agreement. This Agreement constitutes the
entire agreement between the parties hereto, and supersedes all other prior
agreements and undertakings, both written and oral, between the parties, with
respect to the subject matter hereof.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
THE COMPANY:
CORVEL CORPORATION
-4-
<PAGE> 5
By: V. Gordon Clemons
---------------------------------
Title: Chairman and President
------------------------------
SELLING STOCKHOLDER:
NORTH STAR UNIVERSAL, INC.
By: Peter Flynn
-------------------------------
Title: Executive Vice President
-------------------------------
-5-
<PAGE> 1
EXHIBIT 11 - - STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31
-----------------------------------------
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Average shares outstanding 3,882,000 4,140,000 4,437,000
Net effect of dilutive stock options -- based on
the treasury stock method using the treasury
stock method 487,000 402,000 237,000
---------- ---------- ----------
TOTAL 4,369,000 4,542,000 4,674,000
========== ========== ==========
NET INCOME $4,410,000 $5,885,000 $7,325,000
========== ========== ==========
EARNINGS PER COMMON SHARE AND COMMON
EQUIVALENT SHARE $ 1.01 $ 1.30 $ 1.57
========== ========== ==========
</TABLE>
<PAGE> 1
EXHIBIT 21 -- SUBSIDIARY OF THE REGISTRANT
<TABLE>
<CAPTION>
Name of Subsidiary State of Incorporation Relationship to Registrant
- ------------------ ----------------------- --------------------------
<S> <C> <C>
CorVel Healthcare Organization California wholly-owned subsidiary
CorVel Health Care Corporation California wholly-owned subsidiary
</TABLE>
<PAGE> 1
EXHIBIT 23 -- CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration
Statement (Form S-8 Nos. 33-42554, 33-48186 and 33-42424) pertaining to the
Employee Stock Option and Employee Stock Purchase Plans of CorVel Corporation
of our report dated May 8, 1996 with respect to the consolidated financial
statements and schedules of CorVel Corporation included in the annual report on
Form 10-K for the year ended March 31, 1996.
ERNST & YOUNG LLP
Orange County, California
June 26, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-START> APR-01-1995
<PERIOD-END> MAR-31-1996
<CASH> 17,113,000
<SECURITIES> 0
<RECEIVABLES> 19,662,000
<ALLOWANCES> 1,268,000
<INVENTORY> 0
<CURRENT-ASSETS> 38,084,000
<PP&E> 20,362,000
<DEPRECIATION> 8,894,000
<TOTAL-ASSETS> 53,984,000
<CURRENT-LIABILITIES> 7,303,000
<BONDS> 0
0
0
<COMMON> 26,401,000
<OTHER-SE> 18,910,000
<TOTAL-LIABILITY-AND-EQUITY> 53,984,000
<SALES> 0
<TOTAL-REVENUES> 109,052,000
<CGS> 0
<TOTAL-COSTS> 97,043,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 12,009,000
<INCOME-TAX> 4,684,000
<INCOME-CONTINUING> 7,325,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,325,000
<EPS-PRIMARY> 1.57
<EPS-DILUTED> 1.57
</TABLE>
