<PAGE> 1
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
<TABLE>
<S> <C>
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the Commission
[X] Definitive Proxy Statement Only (as permitted by Rule 14a-6(e)(2))
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to sec. 240.14a-11(c) or sec. 240.14a-12
</TABLE>
CorVel Corporation
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
Registrant
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] Fee not required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(4) Date Filed:
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<PAGE> 2
[CorVel Logo]
July 3, 1997
Dear CorVel Stockholder:
We are pleased to invite you to our 1997 Annual Meeting which will be held
at the offices of the Company, 600 City Parkway West, Suite 200, Orange,
California, on Thursday, August 7, 1997, at 1:00 p.m. Pacific Daylight Time. The
Annual Meeting will begin with a report on the Company's progress, followed by a
discussion and stockholder questions. Voting on election of directors and other
matters is also scheduled. The items to be voted on are addressed in the
enclosed Notice of Annual Meeting of Stockholders and Proxy Statement.
Several significant milestones reached in fiscal 1997 deserve special
mention:
- CorVel reported record revenues of $121.7 million for the fiscal year
ended March 31, 1997, representing an increase of approximately 12% over
the $109.1 million in revenues in fiscal 1996.
- CorVel continued to add branch offices during the year and expand a
number of existing offices.
- CorVel expanded its line of bill review services by adding unique
capabilities for reviewing in-patient medical reimbursement.
- CorVel has been involved in the conversion of its existing software and
related systems to new systems which are "web-enabled" and expects this
effort to continue throughout fiscal 1998.
Your vote is important. Whether or not you plan to attend the Annual
Meeting, please complete and mail the enclosed proxy card to ensure that your
shares will be represented. A postage pre-paid envelope has been provided for
your convenience.
We look forward to seeing you at our meeting.
Sincerely,
[SIG]
V. GORDON CLEMONS
Chairman of the Board, Chief Executive
Officer
and President
<PAGE> 3
CORVEL CORPORATION
------------------------
NOTICE OF ANNUAL MEETING OF
STOCKHOLDERS
AUGUST 7, 1997
------------------------
To the Stockholders of CorVel Corporation:
Notice is hereby given that the 1997 Annual Meeting of Stockholders of
CorVel Corporation, will be held at the Company's offices, 600 City Parkway
West, Suite 200, Orange, California, on Thursday, August 7, 1997, at 1:00 p.m.
Pacific Time for the following purposes:
1. To elect five (5) directors to serve until the 1998 Annual Meeting.
2. To approve a series of amendments to the Company's Restated 1988
Executive Stock Option Plan (the "Option Plan") which will effect the
following changes: (i) increase by 200,000 shares the maximum number of
shares of Common Stock authorized for issuance over the term of the Option
Plan from 1,535,000 shares to 1,735,000 shares, (ii) render the
non-employee members of the Board of Directors (the "Board") eligible to
receive option grants under the Discretionary Option Grant Program in
effect under the Option Plan, (iii) allow unvested shares issued under the
Option Plan and subsequently repurchased by the Company at the option
exercise price paid per share to be reissued under the Option Plan, (iv)
remove certain restrictions on the eligibility of Board members to
administer the Option Plan and (v) effect a series of additional changes to
the provisions of the Option Plan (including the stockholder approval
requirements) in order to take advantage of the recent amendments to Rule
16b-3 of the Securities and Exchange Commission which exempts certain
officer and director transactions under the Option Plan from the
short-swing liability provisions of the federal securities laws.
3. To approve an amendment to the Company's 1991 Employee Stock
Purchase Plan (the "Purchase Plan") to increase the number of shares which
may be issued under the Purchase Plan from 150,000 to 250,000 shares.
4. To approve an amendment to the Company's Certificate of
Incorporation to (i) include a requirement that any stockholder action be
taken only at a meeting of the stockholders, (ii) provide that Bylaws may
be adopted, amended or repealed by stockholder action only with the
approval of the holders of at least sixty-six and two-thirds percent
(66 2/3%) of the outstanding shares of capital stock entitled to vote,
(iii) provide that the foregoing amendments to the Certificate of
Incorporation and this provision (iii) may be amended or repealed only with
the approval of the holders of at least sixty-six and two-thirds percent
(66 2/3%) of the outstanding shares of capital stock entitled to vote, and
(iv) include a provision pursuant to which the Company will be governed by
Section 203 of the General Corporation Law of the State of Delaware.
5. To approve the appointment of Ernst & Young LLP as independent
auditors of the Company for fiscal 1998.
6. To transact such other business as may properly come before the
Annual Meeting or any adjournment thereof.
The close of business on June 16, 1997 has been fixed as the record date
for the determination of stockholders entitled to notice of and to vote at the
Annual Meeting and any adjournment thereof. Only stockholders of record at such
time will be so entitled to vote.
You are cordially invited to attend the Annual Meeting in person. Even if
you plan to attend the Annual Meeting, please promptly complete, sign, date and
return the enclosed proxy card in the enclosed, self-addressed, postage pre-paid
envelope. It will assist us in keeping down the expenses of the Annual Meeting
if all stockholders return their signed proxies promptly, whether they own a few
shares or many shares.
<PAGE> 4
A MAJORITY OF THE OUTSTANDING SHARES OF COMMON STOCK MUST BE REPRESENTED AT
THE ANNUAL MEETING IN ORDER TO CONSTITUTE A QUORUM. PLEASE RETURN YOUR PROXY
CARD IN ORDER TO ENSURE THAT A QUORUM IS OBTAINED AND TO AVOID THE ADDITIONAL
COST TO THE COMPANY OF ADJOURNING THE ANNUAL MEETING AND RESOLICITING PROXIES.
YOUR VOTE IS IMPORTANT.
By Order of the Board of Directors
RICHARD J. SCHWEPPE
Secretary
Irvine, California
July 3, 1997
<PAGE> 5
CORVEL CORPORATION
------------------------
PROXY STATEMENT
------------------------
This Proxy Statement and the enclosed proxy card are furnished in
connection with the 1997 Annual Meeting of Stockholders (the "Annual Meeting")
of CorVel Corporation, a Delaware Corporation (the "Company"), which will be
held at the Company's offices located at 600 City Parkway West, Suite 200,
Orange, California, on Thursday, August 7, 1997, at 1:00 p.m. Pacific Time.
Stockholders of record at the close of business on June 16, 1997, are entitled
to notice of and to vote at the Annual Meeting and any adjournment or
postponement thereof.
On June 16, 1997, there were 4,232,209 shares of Common Stock, $.0001 par
value per share (the "Common Stock") outstanding. Each share of Common Stock is
entitled to one vote on all matters properly brought before the Annual Meeting.
A majority of the outstanding shares of Common Stock entitled to vote at
the Annual Meeting will constitute a quorum. The Company's inspector of
elections for the Annual Meeting will count abstentions and so-called "broker
non-votes" (i.e., shares held by a broker or other nominee having discretionary
power to vote on some matters but not others) for purposes of determining
whether a quorum exists for the transaction of business at the Annual Meeting.
Abstentions are also counted in tabulating the total number of votes cast on
matters voted on by the stockholders at the Annual Meeting. Broker non-votes are
not counted for purposes of determining either the number of votes cast on any
matter voted on by the stockholders or whether such matter has been approved.
The enclosed proxy is being solicited by the Company's Board of Directors
(the "Board") and is revocable at any time prior to its exercise. A proxy may be
revoked by delivery of a written revocation to the Secretary of the Company, by
presentation of a subsequent proxy, properly signed, or by attendance at the
Annual Meeting and voting in person.
This Proxy Statement, the enclosed proxy card and the Company's Annual
Report for the fiscal year ended March 31, 1997, are scheduled to be mailed
commencing on or about July 3, 1997 to stockholders of record on June 16, 1997.
The principal executive offices of the Company are located at 1920 Main
Street, Suite 1090, Irvine, California 92614. The Company's telephone number is
(714) 851-1473.
PROPOSAL 1
ELECTION OF DIRECTORS
A Board of five directors is to be elected at the Annual Meeting. The
Company's Certificate of Incorporation provides that each director will serve
for a term ending on the date of the Company's next annual meeting. The
foregoing notwithstanding, directors will serve until their successors have been
duly elected and qualified or until they resign, become disqualified or
disabled, or are otherwise removed.
The enclosed proxy will be voted, unless authority is withheld or the proxy
is revoked, only for the election of each of the nominees for election named
below to hold office until the date of the Company's 1998 Annual Meeting of
Stockholders or until his successor has been duly elected and qualified or until
he resigns, becomes disqualified or disabled, or is otherwise removed. Each such
nominee, other than Mr. Judd Jessup who is seeking election to the Board for the
first time, is currently serving as a director and has indicated his willingness
to continue to serve as a director if elected. In the unanticipated event that
any of the nominees becomes unable or declines to serve at the time of the
Annual Meeting, the proxies will be voted for a substitute person nominated by
the Board.
<PAGE> 6
DIRECTORS AND NOMINEES
The names and certain information about the nominees for director are set
forth below:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------ --- ---------------------------------------------
<S> <C> <C>
V. Gordon Clemons................... 53 Chairman of the Board, Chief Executive
Officer and President
Peter E. Flynn(1)................... 37 Director
Steven J. Hamerslag(1)(2)........... 41 Director
R. Judd Jessup...................... 49 --
Jeffrey J. Michael(2)............... 40 Director
</TABLE>
- ---------------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
Mr. Clemons joined the Company as President and Chief Executive Officer in
January 1988 and became Chairman of the Board in April 1991. Mr. Clemons was
President of Caremark, Inc. the then-largest home intravenous therapy company in
the United States, from May 1985 to September 1987, at which time the company
was purchased by Baxter International, Inc. From 1981 to 1985, Mr. Clemons was
President of INTRACORP, a subsidiary of CIGNA Corporation and the largest
managed care provider to the workers compensation market in the United States.
Mr. Clemons has 21 years of experience in the health care and insurance
industries. Mr. Clemons has served on the board of Omnicell Technologies, Inc.,
a provider of hospital supply and pharmaceutical systems, since December 1995
and Oasis Healthcare Systems, Inc., a company that sells community health
information systems and database repositories, since March 1996.
Mr. Flynn has served as a director of the Company since May 1991. Mr. Flynn
has been the Executive Vice President of ENStar, Inc., ("ENStar"), formerly a
wholly-owned subsidiary of North Star Universal, Inc. ("North Star") since
February 1997. In connection with certain transactions (collectively the
"Reorganization") consummated pursuant to a reorganization agreement, North Star
transferred to ENStar certain of its assets including its shares of the Company.
Pursuant to the Reorganization, ENStar ceased to be a subsidiary of North Star
and became a publicly traded company. From December 1990 to February 1997 Mr.
Flynn was Executive Vice President, Chief Financial Officer and Secretary of
North Star. In December 1992, Mr. Flynn also became the President and Chief
Operating Officer of Transition Engineering, Inc. an indirect, wholly-owned
subsidiary of North Star. From April 1989 to December 1990 Mr. Flynn was the
Treasurer of North Star. Mr. Flynn has been a director of North Star since July
1991.
Mr. Hamerslag has served as a director of the Company since May 1991. Mr.
Hamerslag has been the Vice-Chairman of MTI Technology Corporation, a
manufacturer of computer peripherals and network management software, since
April 1996. From 1987 to April 1996 Mr. Hamerslag was the President and Chief
Executive Officer of MTI.
Mr. Jessup will first become a director of the Company in August 1997 if
elected at the Annual Meeting. Mr. Jessup was President of the HMO Division of
FHP International Corporation ("FHP"), a diversified health care services
company, from 1994 to 1996. From 1987 to 1994, Mr. Jessup was President of
TakeCare, Inc., a publicly traded HMO operating in California, Colorado,
Illinois and Ohio, until it was acquired by FHP. Mr. Jessup has 25 years of
experience in the health care and managed care industries. Mr. Jessup has served
as President of the California Association of HMO's for two years and as a
director for four years. Mr. Jessup has been a director of Orange Coast Managed
Care Services, Inc., a physician practice management company, since January
1997.
Mr. Michael has served as a director of the Company since September 1990.
Mr. Michael has been the President and Chief Executive Officer of ENStar since
March 1996. Mr. Michael was an initial director and officer (serving as
President and Secretary) of ENStar at the time it was organized by North Star in
December 1995. Prior to the Reorganization, Mr. Michael served as President and
Chief Executive Officer of North Star since December 1990 and a director of
North Star since May 1987. From April 1989 to December 1990 Mr. Michael was the
Vice President -- Finance of North Star. Mr. Michael has been a director of
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<PAGE> 7
Michael Foods, Inc., a food processing and distribution company formerly
affiliated with North Star, since April 1990, and a director of Michael-Curry
Companies, Inc. since 1993.
BOARD MEETINGS AND COMMITTEES
During fiscal 1997, the Board held four meetings. Each of the present
directors standing for re-election at the Annual Meeting attended at least 75%
of the meetings of the Board and the committees of the Board of which they are
members.
The Committees of the Board include the Audit Committee and the
Compensation Committee. The Board does not have a nominating committee.
The Audit Committee is primarily responsible for approving the services
performed by the Company's independent auditors and reviewing the Company's
accounting practices and system of internal accounting controls. The Audit
Committee currently consists of Messrs. Thomas R. Brown, Peter E. Flynn and
Steven J. Hamerslag. The Audit Committee met once during fiscal 1997.
The Compensation Committee is responsible for recommending and reviewing
the compensation, including perquisites, of the Company's employees and for
administering the Company's Option Plan and Purchase Plan. The Compensation
Committee consists of Messrs. Brown, Hamerslag and Michael. The Compensation
Committee met four times during fiscal 1997.
Although Mr. Brown is currently serving on the Audit and Compensation
Committees, he is not standing for re-election to the Board. If Mr. Jessup is
elected to the Board at the Annual Meeting, the Board expects that Mr. Jessup
will serve on both the Audit and Compensation Committees.
COMPENSATION OF DIRECTORS
The Company pays each non-employee director an amount equal to $1,250 plus
travel expenses for each Board meeting attended. The directors do not receive
fees for telephonic meetings.
Each individual who first becomes a non-employee Board member at any time
on or after August 5, 1993 and who has not previously been in the employ of the
Company, will receive an automatic option grant for 5,000 shares of Common Stock
under the Company's Restated 1988 Executive Stock Option Plan, as amended. In
addition, each non-employee director who continues to serve as a non-employee
Board member after one or more annual stockholder meetings commencing with the
1993 Annual Meeting, will be granted at that meeting, whether or not such
individual has been in the prior employ of the Company, an option to purchase
1,500 shares of Common Stock, provided such individual has been a non-employee
member of the Board for at least six months. Accordingly, as a non-employee
director who was re-elected at the 1996 Annual Meeting of Stockholders each of
Messrs. Brown, Flynn, Hamerslag, and Michael received an option to purchase
1,500 shares of Common Stock on August 1, 1996 (the date of the 1996 Annual
Meeting) with an exercise price of $31.00. In addition, each of Messrs. Flynn,
Hamerslag and Michael will be granted an automatic option to purchase an
additional 1,500 shares of Common Stock and Mr. Jessup will be granted an
automatic option to purchase 5,000 shares of Common Stock on the date of the
1997 Annual Meeting at an exercise price equal to the fair market value of the
stock on such date, provided such individual is re-elected, or elected in the
case of Mr. Jessup, as a director at the time of the Annual Meeting. See
Proposal 2 for a description of the Automatic Option Grant Program.
STOCKHOLDER APPROVAL
The affirmative vote of the holders of a majority of the outstanding shares
of Common Stock present or represented at the Annual Meeting is required for
approval of the election of each of the nominees as a director of the Company.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR EACH OF THE NOMINEES NAMED
ABOVE OR HIS SUBSTITUTE AS DESCRIBED ABOVE.
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<PAGE> 8
PROPOSAL 2
AMENDMENTS TO RESTATED 1988 EXECUTIVE STOCK OPTION PLAN
The stockholders are being asked to approve a series of amendments to the
Company's Restated 1988 Executive Stock Option Plan (the "Option Plan") which
will effect the following changes: (i) increase by 200,000 shares the maximum
number of shares of Common Stock authorized for issuance over the term of the
Option Plan from 1,535,000 shares to 1,735,000 shares, (ii) render the
non-employee Board members eligible to receive option grants under the
Discretionary Option Grant Program in effect under the Option Plan, (iii) allow
unvested shares issued under the Option Plan and subsequently repurchased by the
Company at the option exercise price paid per share to be reissued under the
Option Plan, (iv) remove certain restrictions on the eligibility of Board
members to administer the Option Plan and (v) effect a series of additional
changes to the provisions of the Option Plan (including the stockholder approval
requirements) in order to take advantage of the recent amendments to Rule 16b-3
of the Securities and Exchange Commission which exempts certain officer and
director transactions under the Option Plan from the shortswing liability
provisions of the federal securities laws.
The Board of Directors believes it necessary to increase the number of
shares available for issuance under the Option Plan in order to allow the
Company to continue to use equity incentives to attract and retain the services
of key individuals essential to the Company's long-term success.
The Option Plan was adopted by the Board on August 1, 1988 and approved by
the Company's sole stockholder on the same date. It was subsequently amended and
restated on several occasions. Each amendment was subsequently approved by the
Company's stockholders. The amendments to the Option Plan for which stockholder
approval as sought under this Proposal was adopted by the Board on June 20, 1997
subject to stockholder approval at the 1997 Annual Meeting.
The following is a summary of the principal features of the Option Plan, as
amended. The summary, however, does not purport to be a complete description of
all the provisions of the Option Plan. Any stockholder who wishes to obtain a
copy of the actual plan document may do so by written request to the Corporate
Secretary at the Company's executive offices in Irvine, California.
STRUCTURE OF THE OPTION PLAN
The Option Plan is divided into two separate components: the Discretionary
Option Grant Program and the Automatic Option Grant Program. Under the
Discretionary Option Grant Program, options may be issued to key employees
(including officers and directors), consultants and independent contractors of
the Company (or its parent or subsidiary companies), and the non-employee Board
members who contribute to the management, growth and financial success of the
Company (or its parent or subsidiary companies). Under the Automatic Option
Grant Program, option grants will automatically be made to non-employee Board
members at periodic intervals.
The Discretionary Option Grant Program is administered by the Company's
Compensation Committee (the "Committee"). The Committee has complete discretion
(subject to the provisions of the Option Plan) to authorize option grants and
determine the terms of these options under the Option Plan.
Administration of the Automatic Option Grant Program is self-executing in
accordance with the terms of the Option Plan. The Committee has no discretionary
authority with respect to that program.
SHARES SUBJECT TO OPTION PLAN
Assuming stockholder approval of this Proposal 2, the total number of
shares of Common Stock issuable over the term of the Option Plan may not exceed
1,735,000 shares. However, not more than 468,166 shares of Common Stock may be
issued after June 1, 1997. Such shares will be made available either from
authorized but unissued Common Stock or from Common Stock reacquired by the
Company.
In no event may any one individual participating in the Option Plan be
granted stock options or separately-exercisable stock appreciation rights for
more than 800,000 shares of Common Stock in the
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aggregate over the term of the Option Plan. For purposes of such limitation, any
stock options or stock appreciation rights granted prior to January 1, 1994 will
not be taken into account.
In the event any change is made to the outstanding shares of Common Stock
by reason of any recapitalization, stock dividend, stock split, combination of
shares, exchange of shares or other change in corporate structure effected
without the Company's receipt of consideration, appropriate adjustments will be
made to the securities issuable (in the aggregate and to each participant) under
the Option Plan and to each outstanding option.
ELIGIBILITY
Officers and employees, and consultants and independent advisors in the
service of the Company or any parent or subsidiary corporation (whether now
existing or subsequently established) are eligible to participate in the
Discretionary Option Grant Program. Assuming stockholder approval of this
Proposal, the non-employee Board members will also be eligible to participate in
that program. Only non-employee Board members are be eligible to participate in
the Automatic Option Grant Program.
As of June 1, 1997, approximately 121 employees (including 4 executive
officers) were eligible to participate in the Discretionary Option Grant
Program. All of the 4 non-employee Board members are eligible to participate in
the Automatic Option Grant Program.
PRICE AND EXERCISABILITY
The exercise price per share for options issued under the Discretionary
Option Grant Program may not be less than 85% of the fair market value of the
Company's Common Stock on the grant date and no option may be outstanding for
more than a ten (10)-year term.
Upon cessation of service, the optionee will have a limited period of time
in which to exercise any outstanding option to the extent such option is
exercisable for vested shares. The Committee will have complete discretion to
extend the period following the optionee's cessation of service during which his
or her outstanding options may be exercised and/or to accelerate the
exercisability or vesting of such options in whole or in part. Such discretion
may be exercised at any time while the options remain outstanding, whether
before or after the optionee's actual cessation of service.
VALUATION
For purposes of establishing the option exercise price and for all other
valuation purposes under the Option Plan, the fair market value per share of
Common Stock on any relevant date will be the closing selling price per share on
such date, as quoted on the Nasdaq National Market. If there is no reported
selling price for such date, then the closing selling price for the last
previous date for which such quotation exists will be determinative of fair
market value. The closing selling price of the Common Stock on May 30, 1997 was
$27.00 per share.
ACCELERATION OF OPTIONS
In the event of an acquisition of the Company by merger or asset sale
("Corporate Transaction"), each option outstanding under the Discretionary
Option Grant Program at the time will automatically become exercisable as to all
of the option shares immediately prior to the effective date of the Corporate
Transaction. However, no acceleration will occur if and to the extent: (i) such
option is either to be assumed by the successor corporation or parent thereof or
replaced by a comparable option to purchase shares of the capital stock of the
successor corporation or parent thereof, (ii) such option is to be replaced with
a cash incentive program of the successor corporation designed to preserve the
option spread existing at the time of the Corporate Transaction and
incorporating the same vesting schedule applicable to the option or (iii)
acceleration of such option is subject to other applicable limitations imposed
by the Committee at the time of grant. Upon the consummation of any Corporate
Transaction, all outstanding options will, to the
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<PAGE> 10
extent not previously exercised by the optionees or assumed by the successor
corporation (or its parent company), terminate and cease to be outstanding.
The Committee will have the discretion, exercisable at any time, to provide
for the automatic acceleration of one or more assumed or replaced options which
are not otherwise accelerated in connection with the Corporate Transaction, or
to provide for automatic vesting of the optionee's interest in any cash
incentive program implemented in replacement of his or her options under the
Discretionary Option Grant Program, should the optionee's employment with the
successor entity terminate within a designated period following the Corporate
Transaction.
The acceleration of options in the event of a Corporate Transaction may be
seen as an anti-take-over provision and may have the effect of discouraging a
merger proposal, a take-over attempt or other efforts to gain control of the
Company.
STOCK APPRECIATION RIGHTS
At the Committee's discretion, options granted under the Discretionary
Option Grant Program may be granted with stock appreciation rights. Two types of
stock appreciation rights are authorized for issuance: (i) tandem rights which
require the option holder to elect between the exercise of the underlying option
for shares of Common Stock and the surrender of such option for an appreciation
distribution and (ii) limited rights which are automatically exercised upon the
occurrence of a hostile take-over of the Company.
Tandem stock appreciation rights provide the holders with the right to
surrender their option for an appreciation distribution from the Company equal
in amount to the excess of (i) the fair market value (on the date of exercise)
of the shares of Common Stock in which the optionee is at the time vested under
the surrendered option over (ii) the aggregate exercise price payable for such
shares. Such appreciation distribution may, at the Committee's discretion, be
made in shares of Common Stock valued at fair market value on the date of
exercise, in cash or in a combination of cash and Common Stock.
One or more officers of the Company subject to the short-swing profit
restrictions of the Federal securities laws may, in the Committee's discretion,
be granted a limited stock appreciation right as part of any stock option grant
made to such officers. Any option with such a limited stock appreciation right
will automatically be canceled upon the occurrence of a hostile take-over, to
the extent the option is at such time exercisable for vested shares. In return,
the optionee will be entitled to a cash distribution from the Company in an
amount equal to the excess of (i) the take-over price per share over (ii) the
aggregate exercise price payable for such shares.
Stockholder approval of this Proposal will constitute pre-approval of each
option subsequently granted with such an automatic cancellation provision and
the subsequent cancellation of that option in accordance with such provision.
Outstanding options granted to executive officers under the Option Plan
prior to June 15, 1992 provide such individuals with a different form of limited
stock appreciation right in the event of a hostile take-over of the Company.
Under this latter right, if the optionee is an officer of the Company at the
time of such a hostile take-over, such optionee will have a thirty (30)-day
period in which to surrender the underlying option in return for a cash
distribution from the Company equal to the excess of the take-over price of the
shares subject to the surrendered option over the exercise price payable for
such shares.
FINANCIAL ASSISTANCE
The Committee may assist any optionee (including an officer) in the
exercise of outstanding options under the Option Plan by (a) authorizing a loan
(with or without security or collateral) from the Company, (b) permitting the
optionee to pay the exercise price in installments over a period of years or (c)
authorizing a guarantee by the Company of a third-party loan to the optionee.
The terms and conditions of any such loan or installment payment will be
established by the Committee in its sole discretion, but in no event may the
maximum credit extended to the optionee exceed the aggregate exercise price
payable for the purchased
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shares (less the par value), plus any Federal and state income or employment
taxes incurred in connection with the purchase.
SPECIAL TAX WITHHOLDING ELECTION
The Committee may, in its discretion and upon such terms and conditions as
it may deem appropriate, provide one or more participants in the Discretionary
Option Grant Program with the election to have the Company withhold, from the
shares of Common Stock purchased under the Option Plan upon the exercise of
non-statutory options, that number of shares with an aggregate fair market value
equal to the designated percentage (any multiple of 5% as specified by the
participant) of the Federal and state income tax liability incurred by the
optionee in connection with the acquisition of such shares. Any election so made
will be subject to the approval of the Committee and no shares will be accepted
in satisfaction of such tax liability except to the extent the Committee
approves the election. One or more participants in the Discretionary Option
Grant Program may also be granted the alternative right, subject to Committee
approval, to deliver previously issued shares of Common Stock in satisfaction of
such tax liability. The withheld delivered shares will be valued at fair market
value on the determination date for the tax liability applicable to the shares
acquired under the Option Plan.
CANCELLATION AND NEW GRANT OF OPTIONS
The Committee has the authority to effect, at any time and from time to
time, with the consent of the affected optionees, the cancellation of any or all
options outstanding under the Discretionary Option Grant Program and to grant in
substitution therefor new options covering the same or a different number of
shares of Common Stock but having an exercise price per share not less than 85%
of the fair market value per share of the Company's Common Stock on the new
grant date, in the case of a grant of a non-statutory option and 100% of such
fair market value in the case of the grant of an Incentive Option. It is
anticipated that the exercise price in effect under the new grant will in all
instances be less than the exercise price in effect under the terminated option.
AUTOMATIC OPTION GRANT PROGRAM
Under the Automatic Option Grant Program, each individual who first becomes
a non-employee Board member on or after the date of the 1993 Annual Meeting,
whether through election by the Company's stockholders or appointment by the
Board, will receive, at the time of such initial election or appointment, an
automatic option grant for 5,000 shares of Common Stock, provided such
individual has not been in the prior employ of the Company. In addition, each
individual who continues to serve as a non-employee Board member after one or
more annual stockholder meetings, commencing with the 1993 Annual Meeting,
including individuals who joined the Board prior to such time, will
automatically be granted at each such stockholder meeting, whether or not he or
she has been in the prior employ of the Company, a stock option to purchase
1,500 shares of Common Stock. However, an individual will be eligible to receive
such an annual grant only if he or she has served as a non-employee Board member
for at least six (6) months prior to the date of such stockholder meeting. There
will be no limit on the number of such 1,500-share options any one non-employee
Board member may receive over his or her period of Board service.
Each option granted under the Automatic Option Grant Program will have an
exercise price per share equal to 100% of the fair market value of the option
shares on the automatic grant date and a maximum term of ten (10) years measured
from the grant date. Each automatic grant will become exercisable in a series of
four (4) equal and successive annual installments over the optionee's period of
Board service, with the first such installment to become exercisable twelve (12)
months after the automatic grant date.
The shares subject to each automatic option grant will immediately vest
upon the optionee's death or permanent disability and upon certain changes in
the ownership or control of the Company. In addition, upon the successful
completion of a hostile take-over of the Company, each automatic option grant
may be surrendered to the Company for a cash distribution per surrendered option
share in an amount equal to the excess of (a) the take-over price per share over
(b) the exercise price payable for such shares. Stockholder
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<PAGE> 12
approval of this Proposal will constitute pre-approval of each option
subsequently granted with such an option surrender right and the subsequent
surrender of that option in accordance with such provision.
AMENDMENT AND TERMINATION OF OPTION PLAN
The Board may amend or modify the Option Plan in any or all respects
whatsoever subject to any required stockholder approval.
The Board may terminate the Option Plan at any time, but the Option Plan
will in all events terminate on June 30, 2006 or (if earlier) on the date all
shares available for issuance under the Option Plan are issued or canceled
pursuant to the exercise or surrender of options granted under the Option Plan.
Any options outstanding at the time of termination of the Option Plan will
remain in force in accordance with the provisions of the instruments evidencing
such grants.
OPTIONS GRANTED
The table below shows, as to the Company's Chief Executive Officer and each
of the other executive officers named in the Summary Compensation Table under
"Summary of Cash and Certain Other Compensation" below and the other indicated
persons and groups, the number of shares of Common Stock subject to options
granted under the Option Plan during the period from April 1, 1996 to June 1,
1997.
<TABLE>
<CAPTION>
NUMBER OF
OPTION SHARES
GRANTED WEIGHTED AVERAGE
NAME AND POSITION 4/1/96-6/1/97 EXERCISE PRICE
- ----------------------------------------------------------------- -------------- ----------------
<S> <C> <C>
V. Gordon Clemons................................................ -0- $ 0.0
Chairman of the Board, Chief Executive Officer & President
Daniel H. Davis.................................................. 32,000 $27.69
V.P., Business Development
Richard J. Schweppe.............................................. 6,500 $27.82
Chief Financial Officer and Secretary
Louis E. Silverman............................................... 21,500 $27.80
V.P., Operations
Thomas R. Brown.................................................. 1,500 $31.00
Director
Peter E. Flynn................................................... 1,500 $31.00
Director
Steven J. Hamerslag.............................................. 1,500 $31.00
Director
Jeffrey J. Michael............................................... 1,500 $31.00
Director
All current executive officers as a group (4 persons)............ 60,000 $27.74
All current directors (other than executive officers) as a group
(4 persons).................................................... 6,000 $31.00
All other employees, including current officers who are not
executive officers, as a group (121 persons)................... 81,700 $27.90
</TABLE>
NEW PLAN BENEFITS
No options will be granted prior to the Annual Meeting on the basis of the
200,000-share increase to the Option Plan. However, on the date of the Annual
Meeting each of Messrs. Flynn, Hamerslag and Michael, if re-elected at the
Annual Meeting, will receive an additional grant of 1,500 shares of Common Stock
under the Automatic Option Grant Program at an exercise price equal to the fair
market value on such date. In addition, if Mr. Jessup is elected at the Annual
Meeting to become a member of the Board of Directors, he will receive a grant of
5,000 shares of Common Stock under the Automatic Grant Program at an exercise
price equal to the fair market value on such date.
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<PAGE> 13
FEDERAL INCOME TAX CONSEQUENCES
Option Grants. Options granted under the Option Plan may be either
Incentive Options which satisfy the requirements of Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code"), or non-statutory options which do
not satisfy such requirements. The Federal income tax treatment for the two
types of options differs as follows:
(i) Incentive Options. No taxable income is recognized by the optionee at
the time of the option grant, and no taxable income is generally recognized at
the time the option is exercised. However, the difference between the fair
market value of the purchased shares at the time of exercise and the exercise
price is generally included as alternative minimum taxable income for purposes
of the alternative minimum tax. The optionee will recognize taxable income in
the year in which the purchased shares are sold or otherwise made the subject of
disposition.
For Federal tax purposes, dispositions are divided into two categories: (A)
qualifying and (B) disqualifying. The optionee will make a qualifying
disposition of the purchased shares if the sale or other disposition of such
shares is made after the optionee has held the shares for more than two years
after the option grant date and more than one year after the exercise date. If
the optionee fails to satisfy either of these two holding periods prior to the
sale or other disposition of the purchased shares, then a disqualifying
disposition will result.
Upon a qualifying disposition of the shares, the optionee will recognize
long-term capital gain in an amount equal to the excess of (A) the amount
realized upon the sale or other disposition less (B) the exercise price paid for
the shares. If there is a disqualifying disposition of the shares, then the
excess of (A) the fair market value of those shares at the date of exercise less
(B) the exercise price paid therefor will be taxable as ordinary income. Any
additional gain recognized upon the disposition will be a capital gain.
If the optionee makes a disqualifying disposition of the purchased shares,
then the Company will be entitled to an income tax deduction for the taxable
year in which such disposition occurs equal to the amount by which the fair
market value of such shares on the date the option is exercised exceeds the
exercise price. In no other instance will the Company be allowed a deduction
with respect to the optionee's disposition of the purchased shares.
(ii) Non-Statutory Options. No taxable income is recognized by an optionee
upon the grant of a non-statutory option. The optionee will in general recognize
ordinary income in the year in which the option is exercised equal to (A) the
excess of the fair market value of the purchased shares at the date of exercise
over (B) the exercise price, and the optionee will be required to satisfy the
tax withholding requirements applicable to such income.
If the shares acquired upon exercise of the non-statutory option are
subject to repurchase by the Company at the original exercise price in the event
of the optionee's termination of employment or service prior to vesting, the
optionee will not recognize any taxable income at the time of exercise but will
have to report as ordinary income, as and when the Company's repurchase right
lapses, an amount equal to the difference between (1) the fair market value of
the shares on the date the Company's repurchase right lapses and (2) the
exercise price paid for the shares. The optionee may, however, elect under
Section 83(b) of the Code to include as ordinary income in the year of exercise
of the non-statutory option an amount equal to the difference between (1) the
fair market value of the purchased shares on the date of exercise (determined as
if the shares were not subject to the Company's repurchase right) and (2) the
exercise price paid for such shares. If the Section 83(b) election is made, the
optionee will not recognize any additional income as and when the Company's
repurchase right lapses.
The Company will be entitled to a business expense deduction equal to the
amount of ordinary income recognized by the optionee with respect to the
exercised non-statutory option. The deduction will in general be allowed for the
taxable year of the employer corporation in which ordinary income is recognized
by the optionee in connection with the exercise of the options.
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<PAGE> 14
Stock Appreciation Rights. An optionee who is granted a stock appreciation
right will recognize ordinary income in the year of exercise equal to the amount
of the appreciation distribution. The Company will be entitled to an income tax
deduction equal to the appreciation distribution for the taxable year in which
the ordinary income is recognized by the optionee.
DEDUCTIBILITY OF EXECUTIVE COMPENSATION
The Company anticipates that any compensation deemed paid by it in
connection with disqualifying dispositions of incentive stock option shares or
exercises of non-statutory options will qualify as performance-based
compensation for purposes of Code Section 162(m) and will not have to be taken
into account for purposes of the $1.0 million limitation per covered individual
on the deductibility of the compensation paid to certain executive officers of
the Company. Accordingly, all compensation deemed paid with respect to those
options will remain deductible by the Company without limitation under Code
Section 162(m). For a further explanation of Code Section 162(m), see "Executive
Compensation and Related Information -- Compliance with Internal Revenue Code
Section 162(m)."
ACCOUNTING TREATMENT
Option grants with exercise prices less than the fair market value of the
shares on the grant date will result in a compensation expense to the Company's
earnings equal to the difference between the exercise price and the fair market
value of the shares on the grant date. Such expense will be accruable by the
Company over the period that the option shares are to vest. Option grants at
100% of fair market value will not result in any charge to the Company's
earnings. However, whether or not granted at a discount, the Company will be
required to disclose in the notes to the Company's financial statements the fair
value of options granted under the Option Plan and the pro forma impact on the
Company's annual net income and earnings per share as though the computed fair
value of such options had been treated as compensation expense.
Should one or more optionees be granted stock appreciation rights which
have no conditions upon exercisability other than a service or employment
requirement, then such rights will result in a compensation expense to be
charged against the Company's earnings.
STOCKHOLDER APPROVAL
The affirmative vote of a majority of the outstanding voting shares of the
Company present or represented and entitled to vote at the 1997 Annual Meeting
is required for approval of the amendments to the Option Plan. Should such
stockholder approval not be obtained, then the 200,000-share increase to the
share reserve will not be implemented, and any options granted on the basis of
such 200,000-share increase to the Option Plan will immediately terminate
without becoming exercisable for the shares of Common Stock subject to those
options, and no additional options will be granted on the basis of such share
increase. In addition, the non-employee Board members will not become eligible
to participate in the Discretionary Option Grant Program, and any unvested
shares repurchased by the Company at the option exercise price paid per share
will not be added back to the share reserve for reissuance. The Option Plan will
terminate once the balance of the share reserve as last approved by the
stockholders has been issued pursuant to outstanding option grants under the
Option Plan or, if earlier, on June 20, 2006.
THE BOARD OF DIRECTORS BELIEVES THAT THE AMENDMENTS TO THE OPTION PLAN ARE
NECESSARY IN ORDER TO ASSURE THAT THE COMPANY WILL CONTINUE TO HAVE A SUFFICIENT
SHARE RESERVE FOR AN EXTENDED PERIOD OF TIME TO CONTINUE TO PROVIDE EQUITY
INCENTIVES TO ATTRACT AND RETAIN THE SERVICES OF KEY EMPLOYEES, CONSULTANTS AND
NON-EMPLOYEE BOARD MEMBERS. FOR THIS REASON, THE BOARD OF DIRECTORS RECOMMENDS A
VOTE FOR THE AMENDMENTS TO THE OPTION PLAN.
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<PAGE> 15
PROPOSAL 3
AMENDMENT TO 1991 EMPLOYEE STOCK PURCHASE PLAN
INTRODUCTION
The stockholders are also being asked to vote on a proposal to approve an
increase in the number of shares of Common Stock issuable under the Company's
1991 Employee Stock Purchase Plan (the "Purchase Plan") by 100,000 shares in
order to assure that the Purchase Plan will continue to have a sufficient share
reserve to provide employees with an opportunity to acquire an equity interest
in the Company. The proposed amendment to the Purchase Plan was approved by the
Board on June 20, 1997.
The Purchase Plan was initially adopted by the Board and approved by the
then sole stockholder of the Company on May 15, 1991. The Purchase Plan was
subsequently restated and amended effective October 1, 1992. The restatement was
approved by the stockholders on August 11, 1992. The most recent amendment to
the Purchase Plan was approved by the Board on May 4, 1994 and by the
stockholders on August 3, 1994.
The terms and provisions of the Purchase Plan are summarized below. This
summary, however, does not purport to be a complete description of the Purchase
Plan. Copies of the actual plan document may be obtained by any stockholder upon
written request to the Corporate Secretary at the Company's executive offices in
Irvine, California.
PURPOSE
The purpose of the Purchase Plan is to provide eligible employees of the
Company and its participating subsidiaries with the opportunity to acquire a
proprietary interest in the Company through participation in a plan intended to
qualify for the favorable tax benefits afforded employee stock purchase plans
under Section 423 of the Code.
ADMINISTRATION
The Purchase Plan is administered by the Company's Compensation Committee
which is appointed by the Board and is comprised of at least two members of the
Board. The Committee has full authority to adopt administrative rules and
procedures and to interpret the provisions of the Purchase Plan. All costs and
expenses incurred in administration of the Purchase Plan will be paid by the
Company without charge to participants.
SHARES SUBJECT TO THE PURCHASE PLAN
Assuming stockholder approval of Proposal 3, the maximum number of shares
which may be issued over the term of the Purchase Plan will be increased from
150,000 to 250,000 shares. However, not more than 135,859 shares of Common Stock
may be issued under the Purchase Plan after June 1, 1997. The Common Stock
purchasable under the Purchase Plan may be either shares newly-issued by the
Company or shares reacquired by the Company, including shares purchased on the
open market.
To prevent dilution or enlargement of participant rights under the Purchase
Plan, appropriate adjustments will be made to (i) the class and maximum number
of shares purchasable under the Purchase Plan, (ii) the class and maximum number
of shares purchasable per participant under any outstanding purchase right or
over the term of the Purchase Plan and (iii) the class and number of shares
purchasable and the price per share payable under any outstanding purchase
right, in the event that any change is made to the Company's outstanding Common
Stock (whether by reason of recapitalization, stock dividend, stock split,
combination of share, or other similar change in corporate structure effected
without receipt of consideration).
ELIGIBILITY AND PARTICIPATION
Any individual who is customarily employed by the Company or a
participating subsidiary for more than 20 hours per week and more than five
months per calendar year will be eligible to participate in the Purchase
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<PAGE> 16
Plan. However, employees of the Company who are deemed to be "Highly Compensated
Employees" under Internal Revenue Code Section 414(q) will not be eligible to
participate in the Purchase Plan for one or more purchase periods, if on the
first day of any such purchase period they hold unvested options under the
Option Plan to purchase more than 15,000 shares of Common Stock.
As of June 1, 1997, approximately 1,900 employees were eligible to
participate in the Purchase Plan.
PURCHASE PERIODS
Each purchase period under the Purchase Plan will be of a duration of six
calendar months. The initial purchase period began October 1, 1991, and
subsequent purchase periods will begin at successive six-month intervals from
and after that date. Each participant has a separate purchase right for each
purchase period in which he or she participates. The purchase right is granted
on the first day of the purchase period and will be automatically exercised on
the last business day of the purchase period.
PURCHASE PRICE
The purchase price of the Common Stock acquired at the end of each purchase
period is equal to the lesser of (i) 85% of the fair market value per share of
Common Stock on the date on which such purchase period begins or (ii) 85% of the
fair market value per share of Common Stock on the date on which the purchase
period ends.
The fair market value of the Common Stock on any relevant date will be the
closing selling price per share on such date as reported on the Nasdaq National
Market. The closing selling price per share of the Company's Common Stock on the
Nasdaq National Market on May 30, 1997 was $27.00 per share.
PURCHASE RIGHTS; STOCK PURCHASES
Each participant may authorize periodic payroll deductions in any multiple
of $10.00, up to a dollar maximum not in excess of 20% of his or her base pay
each purchase period to be applied toward the purchase of Common Stock under the
Purchase Plan. Base pay includes the participant's regular salary or wages, plus
the commissions received during the purchase period, plus any salary deferral
contributions made by such individual to the Company's 401(k) Plan, but excludes
overtime, bonuses and other incentive-type payments.
On the last business day of each purchase period, the payroll deductions of
each participant are automatically applied to the purchase of whole shares of
Common Stock at the purchase price in effect for that purchase period. Any
amount remaining in the Participant's account after purchasing whole shares
shall be refunded to the participant at the end of each purchase period.
SPECIAL LIMITATIONS
The Purchase Plan imposes certain limitations upon a participant's rights
to acquire Common Stock, including the following limitations:
(i) Purchase rights may not be granted to any individual who would,
immediately after the grant, own stock (including stock purchasable under
any outstanding purchase rights) or hold outstanding options or other
rights possessing 5% or more of the total combined voting power or value of
all classes of stock of the Company or any of its affiliates.
(ii) No participants may purchase more than 500 shares of Common Stock
during any one purchase period.
(iii) Purchase rights granted to a participant may not permit such
individual to purchase more than $25,000 of Common Stock (valued at the
time each purchase right is granted) during any one calendar year.
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<PAGE> 17
TERMINATION OF PURCHASE RIGHTS
The purchase right of a participant will terminate upon (i) the
participant's termination of employment or (ii) the participant's election to
withdraw from the Purchase Plan. Any payroll deductions which the participant
may have made with respect to the terminated purchase right will be refunded.
However, if the participant withdraws from the Purchase Plan while continuing in
employee status or ceases active employment during the purchase period by reason
of disability, death or leave of absence, the participant (or the personal
representative of his estate) may elect to have any payroll deductions already
made in that purchase period applied to the purchase of Common Stock at the end
of that purchase period.
STOCKHOLDER RIGHTS
No participant will have any stockholder rights with respect to the shares
covered by his or her purchase rights until the shares are actually purchased on
the participant's behalf. No adjustment will be made for dividends,
distributions or other rights for which the record date is prior to the date of
such purchase.
ASSIGNABILITY
No purchase right will be assignable or transferable by the participant,
except by will or by the laws of descent and distribution, and the purchase
rights will be exercisable only by the participant.
MERGER OR LIQUIDATION OF COMPANY
In event the Company or its stockholders enter into an agreement to dispose
of all or substantially all of the assets or outstanding capital stock of the
Company by means of a sale, merger or reorganization (other than a
reorganization effected primarily to change the state in which the Company is
incorporated) or in the event the Company is liquidated, all outstanding
purchase rights will automatically be exercised immediately prior to the
effective date of such sale, merger, reorganization or liquidation, by applying
all payroll deductions previously collected from participants during the
purchase period of such transaction toward the purchase of whole shares of
Common Stock (subject to the Special Limitations discussed above).
AMENDMENT AND TERMINATION
The Purchase Plan will terminate upon the earlier of (i) September 30, 2001
or (ii) the date on which all shares available for issuance thereunder are sold
pursuant to exercised purchase rights. However, the Board may from time to time
alter, amend, suspend or discontinue the provisions of the Purchase Plan so long
as outstanding purchase rights are not affected. The Board may not, without
stockholder approval, (i) materially increase the number of shares issuable
under the Purchase Plan, or the maximum number of shares which any participant
may purchase during a single purchase period except in connection with certain
changes in the Company's capital structure, (ii) alter the purchase price
formula so as to reduce the purchase price, (v) materially increase the benefits
accruing to participants or (iii) materially modify the requirements for
eligibility to participate in the Purchase Plan.
FEDERAL TAX CONSEQUENCES
The Purchase Plan is intended to be an "employee stock purchase plan"
within the meaning of Section 423 of the Code. Under a plan which so qualifies,
no taxable income will be reportable by the participant, and no deductions will
be allowable to the Company, by reason of the grant or exercise of the purchase
rights issued thereunder. The participant will, however, recognize taxable
income in the year in which the purchased shares are sold or otherwise made the
subject of disposition.
The participant's Federal income tax liability will depend on whether he or
she makes a qualifying or disqualifying disposition of the purchased shares. A
sale or other disposition of the purchased shares will be a disqualifying
disposition of the purchased shares if made within two years after the start of
the purchase period in which such shares were acquired.
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<PAGE> 18
The participant will generally realize ordinary income in the year of the
qualifying disposition equal to the lesser of (i) the amount by which the fair
market value of the shares on the date of the qualifying disposition exceeds the
purchase price or (ii) fifteen percent (15%) of the fair market value of the
shares on the date the purchase right is granted. The participant will realize
ordinary income in the year of the disqualifying disposition equal to the amount
by which the fair market value of the shares on the date of purchase exceeded
the purchase price. Any additional gain recognized upon the disposition of
shares will be a capital gain, which will be long-term if the shares have been
held for more than one year following the date of issuance under the Purchase
Plan.
If the participant makes a disqualifying disposition of the purchased
shares, then the Company will be entitled to an income tax deduction, for the
taxable year in which such disposition occurs, equal to the amount by which the
fair market value of such shares on the date of purchase exceeded the purchase
price, and the participant will be required to satisfy the employment and income
tax withholding requirements applicable to such income. In no other instance
will the Company be allowed a deduction with respect to the participant's
disposition of the purchased shares.
ACCOUNTING TREATMENT
Under present accounting principles, the issuance of Common Stock under the
Purchase Plan will not result in any charge to the Company's earnings. However,
the Company must disclose in pro-forma statements to the Company's financial
statements, the impact the purchase rights granted under the Purchase Plan would
have on the Company's reported earnings were the value of those purchase rights
treated as a compensation expense.
NEW PLAN BENEFITS
None of the executive officers named in the Summary Compensation Table
under "Summary of Cash and Certain Other Compensation" purchased shares under
the Purchase Plan during the period from April 1, 1996 to June 1, 1997. During
the same time period one executive officer participated in the Purchase Plan and
purchased a total of 700 shares of Common Stock under the Purchase Plan and all
employees as a group (including an executive officer -- 433 persons) purchased
23,039 shares of Common Stock under the Purchase Plan.
STOCKHOLDER APPROVAL
The affirmative vote of a majority of the holders of the Company's voting
stock represented and voting at the Annual Meeting is required for approval of
the amendment to the Purchase Plan. If such approval is not obtained, then the
share increase to the Purchase Plan will not become effective, and the Purchase
Plan will terminate once the balance of the share reserve as last approved by
the stockholders has been issued under the Purchase Plan.
RECOMMENDATION OF THE BOARD OF DIRECTORS
BECAUSE THE PURCHASE PLAN PROVIDES EMPLOYEES WITH A MEANINGFUL INCENTIVE TO
REMAIN WITH THE COMPANY AND AN INCENTIVE TO CONTRIBUTE TO THE GROWTH AND
LONG-TERM SUCCESS OF THE COMPANY BY OFFERING THEM AN OPPORTUNITY TO ACQUIRE A
PROPRIETARY INTEREST IN THE COMPANY, THE BOARD OF DIRECTORS RECOMMENDS A VOTE
FOR THE APPROVAL OF THE INCREASE IN THE NUMBER OF SHARES AVAILABLE FOR ISSUANCE
UNDER THE 1991 EMPLOYEE STOCK PURCHASE PLAN.
PROPOSAL 4
APPROVAL OF AMENDMENTS TO THE CERTIFICATE OF INCORPORATION
The Board has unanimously approved and is proposing amendments to the
Company's Certificate of Incorporation (the "Amendments") to help discourage
hostile takeover attempts to take control of the Company. Existing federal and
state laws provide some protection to stockholders in connection with attempts
to acquire control of a corporation. Federal securities laws and regulations
generally govern the disclosure required to be made to stockholders in the
process of a solicitation for proxies in a proxy contest as well as in
connection with other business combinations. The Company is incorporated under
Delaware law, which gives stockholders certain voting rights and certain notices
of meetings. Effective February 11, 1997, the Company
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<PAGE> 19
adopted a Stockholder Rights Agreement designed to deter unsolicited takeover
attempts. The Board also recently amended and restated the Bylaws to eliminate
the stockholders' ability to call special meetings in order to prevent a person
acquiring a majority of the outstanding voting shares of the Company from
calling a meeting for the purpose of removing directors or making other
proposals that could disrupt the continuity and stability of the Board or its
policies.
The Board believes that while the foregoing disclosure and procedural
requirements may help defend against hostile-takeover attempts, they may not
apply or be adequate in all cases. A third party that acquires a substantial
block of the Company's Common Stock might desire to gain control of the Company
or attempt to realize a profit in its investment without purchasing the
remainder of the Company's Common Stock through a tender offer or other means of
acquisition. Such a purchaser might attempt to force the Company to accept a
merger or restructuring, or offer to repurchase shares at a premium, or accept
other proposals, by launching a proxy contest to unseat the Company's Board. In
many takeover attempts, following a substantial accumulation of stock of the
target company, the purchaser has sought representation on the target company's
board of directors in order to increase the likelihood that its proposals will
be implemented by the company.
The Board believes that substantial inequities can result to remaining
stockholders of a company that has become the target of such tactics. The threat
of removal of the Company's Board in such a situation could severely curtail its
ability to negotiate effectively with a potential purchaser. The Board would be
deprived of the time and information necessary to evaluate a take-over proposal,
to study alternative proposals and to help maximize the price obtained for
stockholders in any transaction.
The Board believes that, to the extent a proxy contest is part of a plan to
acquire control of the Company, adoption of the Amendments will encourage the
purchaser to negotiate directly with the Board. Moreover, the Board believes
that stockholders are more likely to be treated fairly in a transaction
negotiated by directors than in one accomplished without the required approval
of such directors. The Board also believes that it is in a better position than
individual stockholders to negotiate effectively on behalf of all stockholders.
The proposed Amendments are permitted by Delaware law and are consistent
with the rules of the Nasdaq National Market on which the Company's Common Stock
is traded.
The Amendments are not being recommended in response to any specific effort
of which the Company is aware to accumulate the Company's Common Stock or to
obtain control of the Company or its Board of Directors by means of a
solicitation in opposition to management. Although the Board may review other
possible anti-takeover programs, the Board has no present intention of proposing
additional amendments to the Certificate of Incorporation or the Amended and
Restated Bylaws (the "Bylaws") that would affect the ability of a third party to
change control of the Company.
The Board has carefully considered the potential adverse effects of the
proposed Amendments and has concluded that such adverse effects are
substantially outweighed by the benefits the Amendments would afford the Company
and its stockholders.
PROPOSED AMENDMENTS
The following description is qualified in its entirety be reference to the
full text of the proposed Amendments included as Exhibit A attached hereto.
ELIMINATION OF ACTION BY WRITTEN CONSENT
Under Delaware law, stockholders may execute an action by written consent
in lieu of a stockholder meeting unless a corporation eliminates this power in
its charter documents. The Company's current Certificate of Incorporation
permits stockholder action by written consent if (i) the action to be approved
by such written consent has also been approved by the Board, or (ii) the Company
has received at least 20 days advance written notice of the matter to be voted
on by the stockholders in connection with such written consent. The proposed
amendment to the Certificate of Incorporation would eliminate this stockholder
right and provide that no change may be made to this provision without the
affirmative vote of the holders of at least two-thirds of the outstanding shares
entitled to vote thereon.
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<PAGE> 20
Elimination of such stockholders' right to act by written consent may
lengthen the amount of time required to take stockholder actions and thereby
deter hostile takeover attempts. Without the ability to act by written consent,
a holder or group of holders controlling a majority in interest of the Company's
Common Stock will not be able to amend the Bylaws or remove directors pursuant
to a written consent. Any such holder or group of holders would have to wait
until a stockholders' meeting was held to take any such action. The Board
believes this provision would enhance the Board's and stockholders' opportunity
to fully consider stockholder proposals at a meeting where all views can be
heard.
INCREASE STOCKHOLDER VOTE FOR ADOPTION, AMENDMENT OR REPEAL OF THE BYLAWS
Under the Company's current Certificate of Incorporation, a majority of the
outstanding shares may vote to adopt, amend or repeal the Bylaws. The proposed
amendment to the Certificate of Incorporation would provide that the Bylaws may
be adopted, amended or repealed by stockholder action only upon the affirmative
vote of the holders of not less than sixty-six and two-thirds percent (66 2/3%)
of the outstanding shares entitled to vote thereon. This proposal is designed to
limit stockholders' ability to change the provisions of the Bylaws without broad
support from the Company's other voting stockholders. The Board of Directors
believes that such an amendment will provide a degree of stability and
continuity and that it is in the best interests of the Company as it will be
more difficult for a significant stockholder to make changes to the Bylaws,
including changes designed to facilitate a business combination or the exercise
of control over the Company.
SUPER-MAJORITY VOTE REQUIREMENT TO AMEND OR REPEAL THE FOREGOING AMENDMENTS AND
THIS PROVISION
This proposed amendment to the Certificate of Incorporation would provide
that the foregoing amendments and this provision may be amended or repealed only
with the affirmative vote of not less than sixty-six and two-thirds percent
(66 2/3%) of the holders of outstanding voting shares. This proposal is designed
to prevent a stockholder with a simple majority of the voting power of the
Company from avoiding the requirements of the proposed Amendments by simply
repealing them. It will also have the effect of giving the holders of 33 2/3% or
more of the Company's outstanding voting shares a veto power over any changes in
the proposed Amendments, even if these changes are favored by a majority of the
stockholders or the Board.
ELECTION TO BE GOVERNED BY DELAWARE GENERAL CORPORATION LAW SECTION 203
The Board of Directors recommends the deletion of Article XIV of the
Company's Certificate of Incorporation pursuant to which the Company elected not
to be governed by Delaware General Corporation Law ("DGCL") Section 203.
DGCL Section 203 is a "business combination" statute. The effect of
deleting Article XIV of the Certificate of Incorporation and making the Company,
a publicly held Delaware corporation, subject to DGCL Section 203, is to
prohibit the Company from engaging in various "business combination"
transactions with any "interested stockholder" for a period of three years after
the date of the transaction in which such person became an "interested
stockholder," unless (i) the transaction is approved by the Board prior to the
date the "interested stockholder" obtained such status, (ii) upon consummation
of the transaction which resulted in the stockholder becoming an "interested
stockholder," the "interested stockholder" owned at least 85% of the voting
stock of the Company outstanding at the time the transaction commenced,
excluding for purposes of determining the number of shares outstanding those
shares owned by (a) persons who are directors and also officers and (b) employee
stock plans in which employee participants do not have the right to determine
confidentially whether shares held subject to the plan will be tendered in a
tender or exchange offer, or (iii) on or subsequent to the date of the
transaction in which the person became an "interested stockholder" the "business
combination" is approved by the Board and authorized at an annual or special
meeting of stockholders by the affirmative vote of the holders of at least
two-thirds of the outstanding voting stock which is not owned by the "interested
stockholder." A "business combination" includes mergers, asset sales and other
transactions resulting in financial benefit to a stockholder. An "interested
stockholder" is a person who, together with affiliates and associates, owns (or
within three years, did own) 15% or more of a corporation's voting stock.
16
<PAGE> 21
Application of DGCL Section 203 to the Company should encourage persons
interested in acquiring the Company to negotiate in advance with the Board of
Directors since the higher stockholder voting requirements imposed would not be
invoked if such person, prior to acquiring 15% of the Company's voting stock,
obtains the approval of the Board of Directors for such stock acquisition or for
the proposed business combination transaction (unless such person acquires 85%
or more of the Company's voting stock in such transaction excluding certain
shares as described above). In the event of a proposed acquisition of the
Company, the Board believes that the interests of the Company's stockholders
will be served by a transaction that results from negotiations based upon
careful consideration of the proposed terms, such as the availability of the
benefits of the transaction to all stockholders, the price to be paid to
stockholders (including minority stockholders), the form of consideration paid
and tax effects of the transaction.
In addition, DGCL Section 203 should tend to prevent certain of the
potential inequities of business combinations which are a part of a "two-tier"
transaction. Any merger, consolidation or similar transaction following a
partial tender offer not approved by the Board under DGCL Section 203 would have
to be approved by the holders of at least two-thirds of the remaining shares of
Common Stock unless, under DGCL Section 203, the acquiror obtained 85% or more
of the Company's voting stock in such partial tender offer.
STOCKHOLDER APPROVAL
The affirmative vote of the holders of a majority of the outstanding voting
shares of Common Stock present or represented at the Annual Meeting is required
for approval of the Amendments.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE ADOPTION OF THE
AMENDMENTS.
PROPOSAL 5
RATIFICATION OF APPOINTMENT OF AUDITORS
The accounting firm of Ernst & Young LLP served as the independent auditors
for the Company for the fiscal year ended March 31, 1997. The Board has selected
Ernst & Young LLP as the Company's independent auditors for the fiscal year
ending March 31, 1998 and has further directed that the selection of the
auditors be submitted for ratification by the stockholders at the Annual
Meeting.
Representatives of Ernst & Young LLP are expected to be present at the
Annual Meeting. They will have an opportunity to make statements and will be
available to respond to appropriate questions from stockholders.
Stockholder ratification of the appointment of Ernst & Young LLP as the
Company's independent auditors is not required by the Company's Bylaws or
otherwise. However, the Board is submitting the appointment of Ernst & Young LLP
to the stockholders for ratification as a matter of good corporate practice. If
the stockholders fail to ratify the appointment by an affirmative vote of the
holders of a majority of the Common Stock present or represented at the meeting
and entitled to vote thereat, the Audit Committee and the Board will reconsider
whether to retain that firm as the Company's independent auditors. Even if the
appointment is ratified, the Audit Committee and the Board in their discretion
may direct the appointment of a different independent accounting firm at any
time during the year if they determine that such a change would be in the best
interest of the Company and its stockholders.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE RATIFICATION OF THE
APPOINTMENT OF ERNST & YOUNG LLP AS THE COMPANY'S INDEPENDENT AUDITORS.
OTHER MATTERS
Management does not know of any other matters to be brought before the
Annual Meeting. If any other matter is properly presented for consideration at
the Annual Meeting, it is intended that the proxies will be voted by the persons
named therein in accordance with their judgment on such matters.
17
<PAGE> 22
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information known to the Company as
of May 31, 1997 with respect to beneficial ownership of the Company's Common
Stock by (i) each person (or group of affiliated persons) who is known by the
Company to own beneficially more than 5% of the Company's outstanding Common
Stock, (ii) each director and/or nominee for director, (iii) the Chief Executive
Officer and each other Named Executive Officer of CorVel (as such term is
defined below under the caption "Summary of Cash and Certain Other
Compensation"), and (iv) all current directors and executive officers as a
group, together with the approximate percentages of outstanding Common Stock
owned by each of them. The following table is based upon information supplied by
directors, executive officers and principal stockholders, and Schedule 13Gs
filed with the Securities and Exchange Commission. Except as otherwise noted,
the persons named in the following table have sole voting and investment power
with respect to all shares shown as beneficially owned by them, subject to
community property laws where applicable.
<TABLE>
<CAPTION>
AMOUNT OF COMMON PERCENTAGE OF COMMON
NAME AND ADDRESS OF BENEFICIAL OWNER STOCK BENEFICIALLY OWNED STOCK BENEFICIALLY OWNED(1)
- ------------------------------------------------ ------------------------ ---------------------------
<S> <C> <C>
ENSTAR INC...................................... 1,037,796(2) 24.43%
Jeffrey J. Michael
6479 City West Parkway
Eden Prairie, MN 55344
MELLON BANK CORPORATION......................... 473,000(3) 11.14%
MELLON BANK, N.A.
THE DREYFUS CORPORATION
One Mellon Bank Center
Pittsburgh, PA 15258
WASATCH ADVISORS, INC........................... 456,650(4) 10.76%
68 South Main Street, Suite 400
Salt Lake City, UT 84101
V. GORDON CLEMONS............................... 394,742(5) 9.17%
1920 Main Street, Suite 1090
Irvine, CA 92614
GEOCAPITAL CORPORATION.......................... 359,100(6) 8.46%
Irwin Lieber
767 Fifth Avenue
New York, NY 10153
WELLINGTON MANAGEMENT COMPANY, LLP.............. 290,800(7) 6.85%
75 State Street
Boston, MA 02109
DANIEL H. DAVIS................................. 88,291(8) 2.07%
1210 Northbrook Drive, Suite 410
Trevose, PA 19053
LOUIS E. SILVERMAN.............................. 33,313(9) *
1920 Main St., Suite 1090
Irvine, CA 92614
STEVEN J. HAMERSLAG............................. 9,750(10) *
4905 East LaPalma Avenue
Anaheim, CA 92807
PETER E. FLYNN.................................. 8,550(11) *
6479 City West Parkway
Eden Prairie, MN 55344
THOMAS R. BROWN................................. 8,250(12) *
1900 Alameda de las Pulgas
San Mateo, CA 94403
All executive officers and directors
as a group (8 individuals).................... 1,595,064(13) 36.47%
</TABLE>
- ---------------
* Less than 1%
18
<PAGE> 23
(1) Applicable percentage ownership is based on 4,245,255 shares of Common
Stock outstanding as of May 31, 1997. Any securities not outstanding but
which are subject to options exercisable within 60 days of May 31, 1997,
are deemed outstanding for the purpose of computing the percentage of
outstanding Common Stock beneficially owned by any person holding such
options but are not deemed outstanding for the purpose of computing the
percentage of Common Stock beneficially owned by any other person.
(2) Includes 1,025,000 shares owned by ENStar Inc. ("ENStar"), 10,546 shares
owned directly by Mr. Michael, a director of ENStar and the Company and
2,250 shares subject to options held by Mr. Michael that are exercisable
within 60 days of May 31, 1997. Excludes 3,750 shares subject to options
held by Mr. Michael that are exercisable after July 31, 1997. Also excludes
(i) 300 shares owned indirectly by Mr. Flynn, a director of ENStar and the
Company, as custodian for his children, (ii) 2,250 shares subject to
options held by Mr. Flynn that are exercisable within 60 days of May 31,
1997, and (iii) 3,750 options held by Mr. Flynn that are exercisable after
July 31, 1997. Mr. Michael is the President and Chief Executive Officer and
a stockholder of ENStar. In addition, Mr. Michael is the managing general
partner of the 3J2R Limited Partnership and both a general and limited
partner of the 4J2R1C Limited Partnership, both of which are a stockholder
of ENStar. Based on the foregoing, Mr. Michael may be deemed to share
beneficial ownership of the shares of the Company's Common Stock held by
ENStar. Mr. Michael disclaims such beneficial ownership except to the
extent of any indirect pecuniary interest therein. ENStar's common stock is
traded on the over-the-counter market under the symbol ENSR. ENStar files
periodic reports, proxy statements and other information with the
Securities and Exchange Commission under the Securities Exchange Act of
1934, as amended, relating to its business, financial condition and other
matters. Also excludes 3,000 shares issuable upon the exercise of options
to be granted to Messrs. Michael and Flynn at the Annual Meeting (provided
they are re-elected) as non-employee directors of the Company under the
Automatic Option Grant Program.
(3) According to the Schedule 13G of Mellon Bank Corporation, Mellon Bank,
N.A., and The Dreyfus Corporation dated February 7, 1997, these entities
hold all of these securities in their various fiduciary capacities. As
such, these entities have sole dispositive power with respect to some of
the shares and shared dispositive power with respect to the remaining
shares. These entities have sole voting power with respect to all of the
shares.
(4) According to the Schedule 13G of Wasatch Advisors, Inc. ("Wasatch") dated
February 14, 1997, Wasatch is an Investment Advisor registered under
Section 203 of the Investment Advisors Act of 1940 with sole investment
power with respect to the shares.
(5) Includes 333,742 shares owned by Mr. Clemons directly, 1,000 shares owned
indirectly by Mr. Clemons as custodian for his children, and 60,000 shares
subject to options that are currently exercisable with a nominal exercise
price.
(6) Includes 1,000 shares owned directly by Mr. Irwin Lieber, a principal
stockholder of GeoCapital Corporation ("GeoCapital"). According to the
Schedule 13G of GeoCapital dated February 15, 1997, GeoCapital is an
Investment Advisor registered under Section 203 of the Investment Advisors
Act of 1940 and shares investment power, along with its clients, with
respect to the shares. By reason of his principal ownership interest in
GeoCapital, Mr. Lieber may be deemed to share beneficial ownership of the
shares (excluding those he owns directly).
(7) According to the Schedule 13G of Wellington Management Company, LLP ("WMC")
dated January 24, 1997, WMC is an Investment Advisor registered under
Section 203 of the Investment Advisors Act of 1940, and shares investment
power, along with its clients, with respect to the shares.
(8) Includes 70,000 shares owned directly by Mr. Davis and 18,291 shares
subject to options that are exercisable within 60 days of May 31, 1997.
Excludes 34,209 shares issuable upon exercise of options exercisable after
July 31, 1997.
(9) Consists of 33,313 shares subject to options held by Mr. Silverman that are
exercisable within 60 days of May 31, 1997. Excludes 24,187 shares issuable
upon exercise of options exercisable after July 31, 1997.
19
<PAGE> 24
(10) Includes 7,500 shares owned directly by Mr. Hamerslag and 2,250 shares
subject to options that are exercisable within 60 days of May 31, 1997.
Excludes 3,750 shares issuable upon exercise of options exercisable after
July 31, 1997. Also excludes 1,500 shares issuable upon the exercise of
options to be granted to Mr. Hamerslag at the Annual Meeting (provided he
is re-elected) as a non-employee director of the Company under the
Automatic Option Grant Program.
(11) Includes 6,000 shares owned directly by Mr. Flynn, 300 shares owned
indirectly by Mr. Flynn as custodian for his children, and 2,250 shares
subject to options that are exercisable within 60 days of May 31, 1997.
Excludes 3,750 shares issuable upon exercise of options exercisable after
July 31, 1997. Also excludes 1,500 shares issuable upon the exercise of
options to be granted to Mr. Flynn at the Annual Meeting (provided he is
re-elected) as a non-employee director of the Company under the Automatic
Option Grant Program.
(12) Includes 6,000 shares owned directly by Mr. Brown and 2,250 shares subject
to options that are exercisable within 60 days of May 31, 1997. Excludes
3,750 shares issuable upon exercise of options exercisable after July 31,
1997.
(13) Includes 1,466,689 shares owned directly or indirectly and 128,375 shares
subject to options exercisable within 60 days of May 31, 1997 held by those
officers and directors referenced above in footnotes 5, 8, 9, 10, 11 and 12
and one additional officer not referenced above who is an executive officer
but not a Named Executive Officer. Excludes 81,175 shares issuable upon
exercise of options exercisable after July 31, 1997 held by all executive
officers and directors as a group.
EXECUTIVE OFFICERS OF THE COMPANY
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------- ---- -----------------------------------------
<S> <C> <C>
V. Gordon Clemons........................ 53 Chairman of the Board, Chief Executive
Officer and President
Daniel H. Davis.......................... 48 Vice President, Business Development
Richard J. Schweppe...................... 42 Chief Financial Officer and Secretary
Louis E. Silverman....................... 38 Vice President, Operations
</TABLE>
Information regarding Mr. Clemons is included under the heading "Directors
and Nominees."
Mr. Davis has been the Vice President, Business Development since January
1997. From April 1988 to January 1997 Mr. Davis was the Vice President,
Marketing and New Business Development for the Company. From October 1987 to
April 1988, Mr. Davis was the Senior Vice President, Sales and Employee Benefits
Group for INTRACORP. From May 1983 to October 1987, he was the Senior Vice
President, Marketing, for INTRACORP. Mr. Davis has 26 years of experience in the
health care and insurance industries.
Mr. Schweppe has been the Chief Financial Officer since April 1991 and
Secretary since June 1995. From March 1988 to April 1991, Mr. Schweppe was the
Director of Finance for the Company. From May 1983 to February 1988 Mr. Schweppe
was the Manager, Technical Accounting for Caremark, Inc.
Mr. Silverman became Vice President, Operations in June 1995. Mr. Silverman
was Vice President, Eastern and California Operations from April 1994 to May
1995. Mr. Silverman joined the Company in March 1993 as Vice President, Eastern
Operations. Prior to joining the Company, Mr. Silverman served as Vice President
of Corporate Development from 1986 to 1990 and Vice President of California
Operations from 1990 to 1993 of Office Specialists, a national temporary
employment company. Mr. Silverman has 13 years of experience in service sector
general management, including direct operating, acquisitions, and strategic
planning responsibilities.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended (the "1934
Act") requires the Company's officers and directors, and persons who own more
than 10% of a registered class of the Company's
20
<PAGE> 25
equity securities, to file reports of ownership and changes in ownership with
the Securities and Exchange Commission ("SEC") and the National Association of
Securities Dealers. Officers, directors and greater than 10% stockholders are
required by SEC regulations to furnish the Company with copies of all Section
16(a) forms they file.
Based solely on its review of the copies of such forms received by it, or
written representations from certain reporting persons that no Forms 5 were
required for those persons, the Company believes that, during fiscal year 1997,
all filing requirements applicable to its officers, directors and greater than
10% beneficial owners were complied with.
EXECUTIVE COMPENSATION AND RELATED INFORMATION
REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION*
The Compensation Committee administers the Company's executive compensation
programs. After consideration of the Compensation Committee's recommendations,
the full Board of Directors reviews and approves the salaries of all elected
officers, including those of the executive officers named in the Summary
Compensation Table which follows this report. The Compensation Committee is
responsible for administering all other elements of executive compensation,
including annual incentive awards and stock option grants under the Company's
Option Plan for executive officers and other key employees.
GENERAL COMPENSATION GOALS
The design and implementation of all executive compensation arrangements
are based on certain goals derived from Company values, business strategy and
management requirements. These goals may be summarized as follows:
- Pay competitive salaries to attract, retain and motivate a highly
competent executive team essential to the long-term success of the
Company;
- Tie an individual's total compensation to individual and profit center
performance and the financial success of the Company;
- Reward executives for long-term corporate success by facilitating their
ability to acquire an ownership interest in the Company; and
- Align executives' financial interests with stockholder value.
FACTORS
Several of the more important factors which were considered in establishing
the components of each executive officer's compensation package for the 1997
fiscal year are summarized below. Additional factors were also taken into
account, and the Compensation Committee may in its discretion apply entirely
different factors, particularly different measures of financial performance, in
setting executive compensation for future fiscal years. All compensation
decisions will be designed to further the general compensation goals indicated
above.
BASE SALARIES. Base salaries are targeted to be moderate yet competitive
in relation to salaries commanded by those in similar positions with other
companies in the same industry. The base salary for each executive officer is
reviewed annually and is set on the basis of personal performance, the relative
importance of the functions the officer performs, the scope of the officer's
ongoing responsibilities, the salary levels in effect for comparable positions
with the Company's principal competitors, and internal equity considerations.
The weight given to each of these factors varies from individual to individual.
- ---------------
* The material in this report is not "soliciting material," is not deemed filed
with the SEC and is not to be incorporated by reference in any filing of the
Company under the Securities Act of 1933, as amended (the "1993 Act"), or the
1934 Act.
21
<PAGE> 26
ANNUAL INCENTIVE AWARDS. Although the Company has a March 31 fiscal year
end, it has calendar year budgets and annual incentive plans which are based on
the calendar year. Annual bonuses are designed to reward personal contributions
to the success of the Company and are earned under a structured formula that
considers the following factors:
Company Profit Center Financial Performance
Each profit center of the Company submits a proposed annual operating
budget including annual profit goals for review of and approval by the
Chief Executive Officer of the Company in conjunction with ratification by
the Compensation Committee. At the end of the calendar year, the
Compensation Committee evaluates actual financial performance against these
targets. The resulting performance evaluation dictates whether an increase
or decrease in an executive's "normal" incentive compensation award is
granted. For executive officers with operations responsibilities, the
annual incentive award can range from zero to 30% of base salary depending
upon performance as compared to budget. For executive officers with
corporate staff responsibilities, such awards are based upon departmental
objectives.
Individual Performance
Each executive's personal performance is measured against individual
goals ("MBO's") established for that person on an annual basis. Leadership,
planning, management and innovation are considered in addition to goal
achievement and the weight assigned to each of these factors will vary from
individual to individual. The maximum amount that any executive may earn
based on the MBO element is 5% of base salary, with full achievement of
MBO's resulting in a 75% payout and increasing up to 100% payout for
achievement exceeding established MBO's. For executive officers with
operations responsibilities, this element comprises a lesser percentage of
the annual incentive award for the individual and for executive officers
with corporate staff responsibilities, it comprises a greater percentage of
the annual incentive award.
Discretionary Awards
The Compensation Committee also has the discretion under extraordinary
circumstances to award bonuses based on a percentage of base salary.
Incentive awards to the Chief Executive Officer and the other Named
Executive Officers are shown in the "Bonus" column of the Summary Compensation
Table, which follows this report.
STOCK OPTIONS. Stock option grants accomplish the third and fourth
compensation objectives: to motivate executive officers to manage the business,
to improve long-term Company performance and to align the interests of executive
officers with stockholder value. Customarily, option grants are made with
exercise prices equal to the fair market value of the shares on the grant date
and will be of no value unless the market price of the Company's outstanding
shares appreciates, thereby aligning a substantial part of the executive
officer's compensation package with the return realized by the stockholders. The
option generally vests over a period of four years, contingent upon the
executive officer's continued employment with the Company. Accordingly, the
option will provide a return to the executive officer only if the officer
remains employed by the Company and the market price of the underlying shares
appreciates over the option term. The size of the option grant is designed to
create a meaningful opportunity for stock ownership and is based upon the
individual's current position with the Company, internal comparability with
option grants made to other Company executives and the individual's potential
for future responsibility and promotion over the option term. The Compensation
Committee has established certain general guidelines in making option grants to
the executive officers in an attempt to target a fixed number of unvested option
shares based upon the individual's position with the Company and the officer's
existing holdings of unvested options. However, the Compensation Committee does
not adhere strictly to these guidelines and will occasionally vary the size of
the option grant made to each executive officer as circumstances warrant.
22
<PAGE> 27
COMPENSATION OF THE CHIEF EXECUTIVE OFFICER
The annual base salary for the Company's Chief Executive Officer, Mr.
Clemons, was established on January 26, 1988, when the Company and North Star
entered into an employment agreement with Mr. Clemons. The agreement became
effective on February 15, 1988 and has an indefinite term. The agreement
provides Mr. Clemons with an annual salary of $250,000, payable in semi-monthly
installments. Mr. Clemons may terminate the agreement at any time on four months
notice and the Company may terminate the agreement with or without cause. If Mr.
Clemons is terminated without cause, the Company is required to pay Mr. Clemons
his then-current salary for one year after such termination, less any other
employment compensation received by Mr. Clemons during such one year period.
COMPLIANCE WITH INTERNAL REVENUE CODE SECTION 162(M)
Section 162(m) of the Code generally disallows a tax deduction to publicly
held corporations for compensation exceeding $1.0 million paid to certain of the
corporation's executive officers. The limitation applies only to compensation
which is not considered to be performance-based. The non-performance based
compensation to be paid to the Company's executive officers for fiscal 1997 did
not exceed the $1.0 million limit per officer, nor is it expected that the
non-performance based compensation to be paid to the Company's executive
officers for fiscal 1998 will exceed that limit. The Company's Option Plan is
structured so that any compensation deemed paid to an executive officer in
connection with the exercise of option grants made under the Option Plan will
qualify as performance-based compensation which will not be subject to the $1.0
million limitation. Because it is very unlikely that the cash compensation
payable to any of the Company's executive officers in the foreseeable future
will approach the $1.0 million limit, the Committee has decided at this time not
to take any other action to limit or restructure the elements of cash
compensation payable to the Company's executive officers. The Committee will
reconsider this decision should the individual compensation of any executive
officer ever approach the $1.0 million level.
COMPENSATION COMMITTEE
Thomas R. Brown
Steven J. Hamerslag
Jeffrey J. Michael
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Mr. Michael, a member of the Compensation Committee, is the President and
Chief Executive Officer of ENStar, a beneficial owner of more than 10% of the
Company's outstanding Common Stock. No member of the Compensation Committee is a
former or current officer of the Company.
23
<PAGE> 28
STOCK PERFORMANCE GRAPH*
The graph depicted below shows the Company's stock price at March 31, 1992
assuming an initial investment of $100 and at March 31, 1993, 1994, 1995, 1996
and 1997, the Standard and Poor's 500 index ("S&P 500") and the Nasdaq Health
Services Index over the same period. The data depicted on the graph are as set
forth in the chart below the graph. An initial investment of $100 in the Company
group on March 31, 1992 would be $147.06 as of March 31, 1997.
<TABLE>
<CAPTION>
Measurement Period CorVel NASDAQ Health
(Fiscal Year Covered) Corporation S&P 500 Services Index
--------------------- ----------- ------- --------------
<S> <C> <C> <C>
Mar-92 100.00 100.00 100.00
Mar-93 79.41 111.88 98.27
Mar-94 135.29 110.42 128.99
Mar-95 166.18 124.04 148.78
Mar-96 205.88 159.90 179.83
Mar-97 147.06 187.55 161.60
</TABLE>
- ---------------
* The material in this report is not "soliciting material," is not deemed filed
with the SEC and is not to be incorporated by reference in any filing of the
Company under the 1993 Act or the 1934 Act.
24
<PAGE> 29
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
The following table sets forth the compensation earned by the Company's
Chief Executive Officer and each of the other executive officers whose total
cash salary and bonus for fiscal 1997 exceeded $100,000 (the "Named Executive
Officers") for the three fiscal years ended March 31, 1995, 1996 and 1997. No
other executive officer who would otherwise have been included in such table on
the basis of salary and bonus earned for the 1997 fiscal year resigned or
terminated employment during fiscal year 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------------------------
ANNUAL COMPENSATION SECURITIES
NAME OF INDIVIDUAL FISCAL --------------------- UNDERLYING ALL OTHER
AND PRINCIPAL POSITION YEAR SALARY(1) BONUS OPTIONS(2) COMPENSATION(3)
- ------------------------------------ ------ --------- ------- ---------- ---------------
<S> <C> <C> <C> <C> <C>
V. GORDON CLEMONS................... 1997 $ 250,000 $ -- -- $ 563
Chief Executive Officer 1996 $ 239,583 $ -- -- $ 466
and President 1995 $ 239,583 $ -- -- $ 869
DANIEL H. DAVIS..................... 1997 $ 163,020 $27,500 33,500 $ 445
Vice President, Business 1996 $ 160,000 $30,000 4,000 $ 442
Development 1995 $ 160,000 $50,000 7,500 $ 950
LOUIS E. SILVERMAN.................. 1997 $ 165,833 $15,000 19,500 $ 590
Vice President, 1996 $ 156,875 $50,000 3,000 $ 366
Operations 1995 $ 137,500 $56,841 5,000 $ 915
</TABLE>
- ---------------
(1) Includes employee contributions to the Company's 401(k) Plan.
(2) A portion of the options granted in 1997 were performance-based options: See
table under heading "Option Grants in Last Fiscal Year" below.
(3) "All Other Compensation" represents amounts contributed by the Company to
the Company's 401(k) Plan which match the Named Executive Officer's deferred
contribution to such Plan and annual premiums paid by the Company on behalf
of each Named Executive Officer for the purchase of group term life
insurance in an amount equal to such executive officer's annual salary as
follows:
<TABLE>
<CAPTION>
COMPANY-PAID
LIFE
401(k) INSURANCE
FISCAL YEAR CONTRIBUTIONS PREMIUMS
----------- ------------- ------------
<S> <C> <C> <C>
V. Gordon Clemons............................. 1997 $ 530 $ 33
1996 $ 74 $392
1995 $ 479 $390
Daniel H. Davis............................... 1997 $ 424 $ 21
1996 $ 192 $250
1995 $ 700 $250
Louis E. Silverman............................ 1997 $ 579 $ 11
1996 $ 115 $251
1995 $ 700 $215
</TABLE>
25
<PAGE> 30
STOCK OPTIONS
The following table provides information with respect to stock option
grants made during fiscal 1997 to the Named Executive Officers. No options were
granted during such fiscal year to the Chief Executive Officer. Except for the
limited stock appreciation rights described in footnote 1 below the table, no
stock appreciation rights were granted during such fiscal year to the Named
Executive Officers.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
PERCENT OF ANNUAL RATE
NUMBER OF TOTAL OPTIONS OF STOCK PRICE
SECURITIES GRANTED TO AVERAGE APPRECIATION FOR
UNDERLYING EMPLOYEES EXERCISE OR OPTION TERM
OPTIONS GRANT IN FISCAL BASE PRICE EXPIRATION --------------------------
NAME GRANTED(1) DATE YEAR(2) ($/SHARE)(3) DATE 5%(4) 10%(4)
- --------------------- ---------- -------- -------------- ------------ ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Daniel H. Davis...... 20,000* 12/17/96 16.60% $ 26.750 12/17/05 $294,960.00 $726,502.01
2,500 11/07/96 2.08% $ 28.500 11/07/01 $ 19,685.06 $ 43,498.84
2,500 07/25/96 2.08% $ 29.000 08/01/01 $ 20,117.03 $ 44,475.60
7,000 05/13/96 5.81% $ 29.625 05/13/01 $ 57,293.89 $126,604.51
Louis E. Silverman... 2,500 02/06/97 2.08% $ 27.500 02/06/02 $ 18,994.36 $ 41,972.56
2,000* 12/17/96 1.66% $ 26.750 12/17/05 $ 29,496.06 $ 72,650.20
2,500 11/07/96 2.08% $ 28.500 11/07/01 $ 19,685.06 $ 43,498.84
2,500 07/25/96 2.08% $ 29.000 08/01/01 $ 20,117.03 $ 44,475.60
7,000 05/13/96 5.81% $ 29.625 05/13/01 $ 57,293.89 $126,604.51
</TABLE>
- ---------------
(1) Each option (unless otherwise indicated with an *) will become exercisable
for 25% of the option shares one year from the grant date and thereafter the
remaining shares become exercisable in 36 equal monthly installments. An
asterisk indicates a performance-based option which becomes exercisable for
100% of the option shares upon the earlier to occur of the following: (i)
the attainment of pre-established revenue goals for the Galaxy Project or
(ii) eight years from the grant date of the option. To the extent not
already exercisable, the options generally become exercisable upon a sale of
assets, a merger or consolidation pursuant to which either (i) the Company
does not survive or (ii) ownership of more than 50% of the voting power of
the Company's stock is transferred, unless the option is assumed or replaced
with a comparable option by the successor corporation. The options are also
subject to "limited stock appreciation rights" pursuant to which the
options, to the extent exercisable and outstanding for at least six months
at the time of certain hostile tender offers in which more than 50% of the
shares acquired are acquired from parties other than directors and executive
officers of the Company, will automatically be canceled in return for a cash
payment to the optionee based upon the tender-offer price of the Common
Stock subject to that option. Each option has a maximum term of five years
(or nine years in the case of a performance-based option), subject to
earlier termination in the event of the optionee's cessation of employment
with the Company.
(2) The Company granted options to purchase a total of 120,450 shares of Common
Stock during fiscal 1997.
(3) The exercise price may be paid in cash, in shares of the Company's Common
Stock valued at fair market value on the exercise date or through a cashless
exercise procedure involving a same-day sale of the purchased shares. The
Company may also finance the option exercise by loaning the optionee
sufficient funds to pay the exercise price for the purchased shares and the
Federal and state income tax liability incurred by the optionee in
connection with such exercise. The Plan Administrator has the discretionary
authority to reprice outstanding options under the Option Plan through the
cancellation of those options and the grants of replacement options with an
exercise price equal to the lower fair market value of the option shares on
the regrant date.
(4) These gains are based on annual compounded rates of growth of stock price
mandated by the SEC of 5% and 10% per year from the date the option was
granted over the full option term. These rates do not represent the
Company's estimate or projection of future Common Stock prices. There is no
assurance that the values that may be realized by a Named Executive Officer
on exercise of his options or any other holder of the Company's Common Stock
will be at or near the value estimated in the foregoing table.
26
<PAGE> 31
STOCK OPTION EXERCISES AND HOLDINGS
The following table provides information with respect to the Named
Executive Officers concerning the exercise of options during the 1997 fiscal
year and unexercised options held as of the end of such fiscal year. No stock
appreciation rights were exercised during the 1997 fiscal year and except for
the limited stock appreciation rights described in footnote 1 to the table
above, no stock appreciation rights were outstanding at the end of such fiscal
year. Mr. Clemons and Silverman did not exercise any options during the 1997
fiscal year.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NET VALUE OF UNEXERCISED
IN-THE-MONEY OPTIONS AT
NUMBER OF SECURITIES FISCAL YEAR-END (MARKET
VALUE UNDERLYING PRICE OF SHARES AT FISCAL
SHARES REALIZED UNEXERCISED OPTIONS AT YEAR-END ($25.00) LESS
ACQUIRED (MARKET PRICE FISCAL YEAR-END 1997 EXERCISE PRICE)
ON EXERCISE AT EXERCISE LESS --------------------------- ---------------------------
NAME (#) EXERCISE PRICE) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------- ----------- ---------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
V. Gordon Clemons........ -- -- 60,000 0 $ 1,499,994 0
Daniel H. Davis.......... 10,000 $213,300 14,594 37,906 $ 91,373 $26,315
Louis E. Silverman....... -- -- 29,771 22,729 $ 249,987 $11,888
</TABLE>
EMPLOYMENT AGREEMENTS
On January 26, 1988, the Company and North Star entered into an employment
agreement with Mr. Clemons. The agreement became effective on February 15, 1988
and has an indefinite term. The agreement provides Mr. Clemons with an annual
salary of $250,000, payable in semi-monthly installments. Mr. Clemons may
terminate the agreement at any time on four months notice and the Company may
terminate the agreement with or without cause. If Mr. Clemons is terminated
without cause, the Company is required to pay Mr. Clemons his then current
salary for one year after such termination, less any other employment
compensation received by Mr. Clemons during such one year period.
NONQUALIFIED STOCK OPTION AGREEMENT
Mr. Clemons, the Company and North Star entered into a Nonqualified Stock
Option Agreement on January 26, 1988 which was amended on August 31, 1988, July
1, 1989, May 14, 1991 and May 16, 1991 (as amended, the "Option Agreement"). The
Option Agreement provided Mr. Clemons with the right to acquire 750,000 shares
of the Company's Common Stock at $.0001 per share. Mr. Clemons exercised this
option pursuant to the Option Agreement for 150,000 shares immediately following
the completion of the Company's initial public offering in July 1991, 25,000
shares in January 1992, 10,000 shares in May 1992, 100,000 shares in December
1992, 5,100 shares in December 1993, 10,000 shares in May 1994, 5,000 shares in
November 1994, 12,000 shares in December 1994, 10,000 shares in March 1995,
200,000 shares in May 1995, 39,900 shares in November 1995, and 123,000 shares
in January 1996. As of March 31, 1997, the entire 60,000 remaining shares
covered by the Option Agreement were currently exercisable.
27
<PAGE> 32
CERTAIN TRANSACTIONS
INDEMNIFICATION AGREEMENT
In connection with the Company's initial public offering of its Common
Stock, the Company agreed to indemnify North Star against certain liabilities in
connection with the offering, including liabilities under the 1933 Act.
REGISTRATION AGREEMENT
The Company, North Star and ENStar entered into a Registration Agreement as
of November 25, 1996 pursuant to which the Company agreed, among other things,
to register 200,000 shares of Common Stock held by ENStar on Form S-3 under the
1933 Act. In addition, under the terms of the Registration Agreement, the
Company agreed to indemnify and hold harmless ENStar and North Star, and ENStar
agreed to indemnify and hold the Company harmless against certain liabilities
under the 1933 Act that could arise in connection with the sale of the shares of
Common Stock. ENStar completed the sale of the shares in January 1997.
SHAREHOLDER RIGHTS AGREEMENT
In February 1997, the Company's Board adopted a Shareholder Rights Plan
similar to that adopted by numerous other public companies. Among other things,
the Plan provides for a divided distribution to the Company stockholders of one
preferred stock purchase "Right" for each outstanding share of Company common
stock. The Rights are designed to assure that all stockholders receive fair and
equal treatment in the event of a proposed takeover of the Company and to
encourage a potential acquirer to negotiate with the Board of Directors prior to
attempting a takeover. Each Right has an exercise price of $125.00 per Right,
subject to subsequent adjustment. The Rights were distributed to holders of the
Company's common stock of record as of February 28, 1997 as a dividend and will
expire, unless earlier redeemed, on February 10, 2007.
STOCK REPURCHASE PROGRAM
In August 1996, the Company's Board authorized the Company to begin a
repurchase program to acquire up to 100,000 shares annually of its Common Stock,
which represented approximately 2% of its outstanding shares. The shares are
purchased from time to time at prevailing market prices through open market or
unsolicited negotiated transactions, depending upon market conditions.
In January 1997, the Company repurchased 200,000 shares of its Common Stock
from ENStar. In March 1997, the Company's Board approved a 200,000 share
expansion increasing the total number of shares approved for repurchase under
the stock repurchase plan to 550,000 shares. Of that total, 74,100 shares remain
as approved for repurchase as of June 19, 1997.
ANNUAL REPORT AND STOCKHOLDER PROPOSALS FOR THE 1998 ANNUAL MEETING
A copy of the Annual Report of the Company for the fiscal year ended March
31, 1997 has been mailed concurrently with this Proxy Statement. The Annual
Report is not incorporated into this Proxy Statement, is not considered
"soliciting material", is not deemed filed with the SEC and is not incorporated
by reference in any filing of the Company under the 1933 Act or the 1934 Act.
A stockholder who intends to present a proposal at the Company's 1998
Annual Meeting of Stockholders must submit such proposal to the Company for
inclusion in the Company's 1998 Proxy Statement and proxy card relating to such
meeting not later than March 4, 1998. Stockholder proposals must be mailed to
the Company's principal office at 1920 Main Street, Suite 1090, Irvine,
California 92614, Attention: Secretary.
28
<PAGE> 33
COSTS OF SOLICITATION
Proxies will be solicited by mail and by telephone by regular employees of
the Company without additional remuneration. The Company will request banks,
brokerage houses and other institutions to forward the soliciting material to
persons for whom they hold shares and to obtain authorization for the execution
of proxies. The Company will reimburse banks, brokerage houses and other
institutions for their reasonable expenses in forwarding the Company's proxy
materials to beneficial owners of the Common Stock. All costs associated with
the solicitation of proxies will be borne by the Company. Proxies in the
accompanying form which are properly executed, duly returned to the Company's
management and not subsequently revoked will be voted as specified thereon.
ADDITIONAL INFORMATION AVAILABLE
THE COMPANY FILES AN ANNUAL REPORT ON FORM 10K WITH THE SECURITIES AND
EXCHANGE COMMISSION. STOCKHOLDERS MAY OBTAIN A COPY OF THIS REPORT, WITHOUT
CHARGE, BY WRITING TO THE COMPANY'S SECRETARY.
By Order of the Board of Directors
RICHARD J. SCHWEPPE
Secretary
July 3, 1997
Irvine, California
29
<PAGE> 34
EXHIBIT A
PROPOSED AMENDMENTS TO THE CERTIFICATE OF INCORPORATION
Article SIXTH of the Certificate of Incorporation is deleted in its
entirety and the following is adopted as a new Article SIXTH:
VI
In furtherance and not in limitation of the powers conferred by
statute, the Board of Directors is expressly authorized to make, repeal,
alter, amend and rescind from time to time any or all of the Bylaws of the
Corporation; provided, however, any Bylaw amendment adopted by the Board of
Directors increasing or reducing the authorized number of directors or
amending, repealing, altering or rescinding Article II, Section 4 or
Article III, Sections 6 and 7 of the Amended and Restated Bylaws of the
Corporation, shall require a resolution adopted by the affirmative vote of
all of the directors then in office. Notwithstanding anything contained in
this Certificate of Incorporation to the contrary, the affirmative vote of
the holders of at least sixty-six and two-thirds percent (66 2/3%) of the
outstanding shares entitled to vote, voting together as a single class,
shall be required to alter, amend or repeal any or all of the Amended and
Restated Bylaws (the "Bylaws") of the Corporation.
Article NINTH of the Certificate of Incorporation is deleted in its
entirety and the following is adopted as a new Article NINTH:
IX
Meetings of the stockholders may be held within or without the State
of Delaware as the Bylaws may provide. The books of the Corporation may be
kept (subject to any provision contained in the statutes) outside the State
of Delaware at such place or places as may be designated from time to time
by the Board of Directors or in the Bylaws of the Corporation. Stockholders
of the Corporation shall take action only by meetings held pursuant to this
Certificate of Incorporation and the Bylaws.
Article THIRTEENTH of the Company's Certificate of Incorporation is deleted
in its entirety and the following is adopted as a new Article THIRTEENTH:
XIII
The Corporation reserves the right to amend, alter, change or repeal
any provision contained in this Certificate of Incorporation, in the manner
now or hereafter prescribed by statute, and all rights conferred on
stockholders herein are granted subject to this reservation.
Notwithstanding anything contained in this Certificate of Incorporation to
the contrary, the affirmative vote of the holders of at least sixty-six and
two-thirds percent (66 2/3%) of the outstanding shares entitled to vote,
voting together as a single class, shall be required to alter, amend or
repeal Article VI, Article IX, this Article XIII or Article XV.
Article FOURTEENTH of the Certificate of Incorporation is deleted in its
entirety and the following is adopted as new Article FOURTEENTH:
XIV
RESERVED.
Article FIFTEENTH is amended by adding the following sentence as the last
sentence of Article FIFTEENTH:
XV
Notwithstanding anything to the contrary contained in this Certificate
of Incorporation, including in this Article XV, any supermajority vote of
either the directors or the stockholders called for by Article VI or
Article XIII hereof shall remain in full force and effect.
A-1
<PAGE> 35
CORVEL CORPORATION
RESTATED 1988 EXECUTIVE STOCK OPTION PLAN
AS RESTATED AND THROUGH AUGUST 7, 1997
<PAGE> 36
ARTICLE ONE
GENERAL
I. PURPOSES OF THE PLAN
A. This Restated 1988 Executive Stock Option Plan (the "Plan"), as restated
through August 7, 1997, is intended to promote the interests of CorVel
Corporation, a Delaware corporation (the "Company"),(1) by providing a method
whereby (i) key employees (including officers and directors) of the Company (or
its parent or subsidiary corporations) responsible for the management, growth
and financial success of the Company (or its parent or subsidiary corporations),
(ii) the non-employee members of the Company's Board of Directors (the "Board"),
and (iii) consultants and independent contractors who provide valuable services
to the Company (or its parent or subsidiary corporations) are to be offered
equity incentives and rewards intended to encourage such individuals to acquire
a proprietary interest, or otherwise increase their proprietary interest, in the
Company and to continue to render services to the Company or its parent or
subsidiary corporations.
B. For purposes of the Plan, the following definitions shall be in effect:
Common Stock: The Common Stock issuable under the Plan shall be
shares of the Company's common stock, $.0001 par value.
Employee: An individual shall be considered to be an Employee for so
long as such individual remains in the employ of the Company or one or more
of its parent or subsidiary corporations, subject to the control and
direction of the employer entity as to both the work to be performed and
the method and manner of performance.
Fair Market Value: The Fair Market Value per share of Common Stock on
any relevant date under the Plan shall be the closing selling price per
share of Common Stock on such date, as quoted by the National Association
of Securities Dealers through the Nasdaq National Market (or any successor
system). Should the Common Stock become traded on a national securities
exchange, then the Fair Market Value per share shall be the closing selling
price on such exchange on the date in question, as such price is quoted on
the composite tape of transactions on such exchange. If there is no closing
selling price of Common Stock on the Nasdaq National Market (or national
securities exchange) on the date in question, then the Fair Market Value
shall be the closing selling price on the last preceding date for which
such quotation exists.
Optionee: Any person to whom an option is granted under the
Discretionary Option Grant Program of Article Two or the Automatic Option
Grant Program of Article Three of this Plan.
Parent: A corporation shall be deemed to be a parent of the Company
if it is a corporation (other than the Company) in an unbroken chain of
corporations ending with the Company, provided each such corporation in the
unbroken chain (other than the Company) owns, at the time of the
determination, stock possessing fifty percent (50%) or more of the total
combined voting power of all classes of stock in one of the other
corporations in such chain.
Section 16(b) Insider: An individual shall be considered to be a
Section 16(b) Insider on any relevant date under the Plan if such
individual is at the time subject to the shortswing profit restrictions of
Section 16(b) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") by reason of his or her affiliation with the Company.
- ---------------
(1) The Company was previously known as FORTIS Corporation and assumed all
of the rights and responsibilities of FORTIS Corporation, a Minnesota
corporation ("FORTIS Minnesota"), with respect to the Plan pursuant to the
Agreement and Plan of Merger by and between the Company and FORTIS Minnesota,
effective May 16, 1991, under which FORTIS Minnesota changed its state of
incorporation from Minnesota to Delaware by merging with and into the Company
which was a wholly owned subsidiary of FORTIS Minnesota.
2
<PAGE> 37
Service Provider: An individual shall be deemed to be a Service
Provider for the Company for so long as such individual renders service on
a periodic basis to the Company or one or more of its parent or subsidiary
corporations as an Employee.
Subsidiary: A corporation shall be deemed to be a subsidiary of the
Company if it is one of the corporations (other than the Company) in an
unbroken chain of corporations beginning with the Company, provided each
such corporation (other than the last corporation in the unbroken chain)
owns, at the time of determination, stock possessing fifty percent (50%) or
more of the total combined voting power of all classes of stock in one of
the other corporations in such chain. For purposes of all non-statutory
option grants under the Plan and all Corporate Transaction provisions of
the Plan, the term "subsidiary" shall also include any partnership, joint
venture or other business entity of which the Company owns, directly or
indirectly through another subsidiary corporation, more than a fifty
percent (50%) interest in voting power, capital or profits.
C. Stock option grants made to any individual under the Discretionary
Option Grant Program of Article Two shall not in any way affect, limit or
restrict such individual's eligibility to participate in any other stock plan or
other compensation or benefit plan, arrangement or practice now or hereafter
maintained by the Company or any parent or subsidiary corporation.
II. STRUCTURE OF THE PLAN
A. Stock Programs. The Plan shall be divided into two separate
components: the Discretionary Option Grant Program specified in Article Two and
the Automatic Option Grant Program specified in Article Three. Under the
Discretionary Option Grant Program, eligible individuals may, at the discretion
of the Committee, be granted options to purchase shares of Common Stock in
accordance with the provisions of Article Two. Under the Automatic Option Grant
Program, non-employee members of the Board will receive at periodic intervals
special option grants to purchase shares of Common Stock in accordance with the
provisions of Article Three.
B. General Provisions. Unless the context clearly indicates otherwise,
the provisions of Articles One and Four shall apply to both the Discretionary
Option Grant Program and the Automatic Option Grant Program and shall
accordingly govern the interests of all individuals under the Plan.
III. ADMINISTRATION OF THE PLAN
A. The Plan shall be administered by the Company's Compensation Committee
(the "Committee") consisting of two (2) or more members of the Board appointed
by the Board. Members of the Committee shall serve for such period of time as
the Board may determine and shall be subject to removal by the Board at any
time.
B. Subject to the express provisions of the Plan, the Committee shall have
the sole and exclusive authority with respect to the Discretionary Option Grant
Program:
(i) to make option grants to any and all eligible individuals;
(ii) to interpret the Plan, to prescribe, amend and rescind rules and
regulations relating to it, and to make all other determinations deemed
necessary or advisable in administering the Discretionary Option Grant
Program; and
(iii) to change the terms and conditions of any outstanding option
grant under this Article Two, provided such action does not, without the
consent of the holder, adversely affect the rights and obligations such
individual may have under the outstanding grant.
C. Determinations of the Committee on all matters relating to the Plan and
any option grants or stock issuances made hereunder shall be final, binding and
conclusive on all persons having any interest in the Plan or any options granted
or shares issued under the Plan.
3
<PAGE> 38
D. Administration of the Automatic Option Grant Program shall be
self-executing in accordance with the express terms and conditions of Article
Three, and the Committee shall exercise no discretionary functions with respect
to option grants made pursuant to that program.
IV. ELIGIBILITY
A. The persons eligible to receive option grants under the Discretionary
Option Grant Program are as follows:
(i) key employees of the Company (or its parent or subsidiary
corporations) who are members of the management team and who render
services which contribute directly to the success and growth of the Company
(or its parent or subsidiary corporations) or which may reasonably be
anticipated to directly contribute to the future success and growth of the
Company (or its parent or subsidiary corporations);
(ii) non-employee members of the Board or of the board of directors of
any Parent or Subsidiary, and
(iii) those consultants or independent advisors who provide valuable
services to the Company (or its parent or subsidiary corporations).
V. STOCK SUBJECT TO THE PLAN
A. The Common Stock issuable under the Plan shall be made available either
from authorized but unissued shares of Common Stock or from shares of Common
Stock reacquired by the Company on the open market. The aggregate number of
shares of Common Stock issuable over the term of this Plan shall not exceed
1,735,000 shares, including an increase of 200,000 shares of Common Stock which
was authorized by the Board in June 1997, subject to stockholder approval at the
1997 Annual Meeting. Such share reserve is subject to adjustment from time to
time in accordance with paragraph V.C. below.
B. Should an option granted under this Plan expire or terminate for any
reason prior to exercise or surrender in full (including options cancelled in
accordance with the cancellation-regrant provisions of Section V of Article
Two), the shares subject to the portion of the option not so exercised or
surrendered shall be available for subsequent option grants under this Plan. In
addition, unvested shares issued under the Plan and subsequently cancelled or
repurchased by the Corporation, at the original option exercise price paid per
share, pursuant to the Corporation's repurchase rights under the Plan shall be
added back to the number of shares of Common Stock reserved for issuance under
the Plan and shall accordingly be available for reissuance through one or more
subsequent option grants under the Plan. However, shares subject to stock
appreciation rights exercised in accordance with the provisions of Section II of
Article Two and Section III of Article Three shall reduce on a share-for-share
basis the number of shares of Common Stock available for subsequent option
grants under this Plan. Should the exercise price of an outstanding option under
the Plan be paid with shares of Common Stock or should shares of Common Stock
otherwise issuable under the Plan be withheld by the Company in satisfaction of
the withholding taxes incurred in connection with the exercise of an outstanding
option under the Plan, then the number of shares of Common Stock available for
issuance under the Plan shall be reduced by the gross number of shares for which
the option is exercised, and not by the net number of shares of Common Stock
actually issued to the option holder.
C. In the event any change is made to the Common Stock issuable under the
Plan by reason of any stock dividend, stock split, combination of shares,
exchange of shares or other change affecting the outstanding Common Stock as a
class without the Company's receipt of consideration, then appropriate
adjustments shall be made by the Committee to (i) the aggregate number and/or
class of securities issuable under the Plan, to reflect the effect of such
change upon the Company's capital structure, (ii) the maximum number and/or
class of securities for which any one individual participating in the Plan may
be granted stock options and separately exercisable stock appreciation rights
over the term of the Plan, (iii) the number and/or class of securities for which
automatic option grants are to be subsequently made to non-employee Board
members under the Automatic Option Grant Program, (iv) the number and/or class
of securities and the exercise price per share of the stock subject to each
option outstanding under the Plan in order to preclude the dilution or
4
<PAGE> 39
enlargement of benefits thereunder and (v) the number and/or class of securities
and the exercise price per share in effect under each outstanding stock
appreciation right in order to preclude the dilution or enlargement of benefits
thereunder. All adjustments made by the Committee pursuant to this paragraph
V.C. shall be final, binding and conclusive.
D. In the event that (i) the Company is the surviving entity in any
Corporate Transaction which does not result in the termination of outstanding
options pursuant to the Corporate Transaction provisions of the Plan or (ii) the
outstanding options under the Plan are to be assumed in connection with such
Corporate Transaction, then each such continuing or assumed option shall,
immediately after such Corporate Transaction, be appropriately adjusted to apply
and pertain to the number and class of securities which would have been
issuable, in consummation of such Corporate Transaction, to an actual holder of
the same number of shares of Common Stock as are subject to such option
immediately prior to such Corporate Transaction. Appropriate adjustments shall
also be made to the exercise price payable per share, provided the aggregate
option price shall remain the same. In addition, the number and class of
securities which remain issuable under this Plan following the consummation of
the Corporate Transaction shall be appropriately adjusted.
E. From and after January 1, 1994, in no event may any one individual
participating in the Plan be granted stock options and separately exercisable
stock appreciation rights exceeding 800,000 shares in the aggregate over the
term of the Plan, subject to adjustment from time to time in accordance with the
provisions of Section V.C.
5
<PAGE> 40
ARTICLE TWO
DISCRETIONARY OPTION GRANT PROGRAM
I. TERMS AND CONDITIONS OF OPTIONS
A. The Committee shall have sole and exclusive authority (subject to the
express provisions of the Plan) to determine which eligible individuals are to
be granted options under the Discretionary Option Grant Program, the number of
shares to be covered by each such option, the status of the granted option as
either an incentive stock option which meets the requirements of Section 422 of
the Internal Revenue Code ("Incentive Option") or a non-statutory option not
intended to meet such requirements ("Non-Statutory Option"), the time or times
at which such option is to become exercisable and the maximum term for which the
option is to remain outstanding.
B. The granted options shall be evidenced by instruments in such form as
the Committee shall from time to time approve; provided, however, that each such
instrument shall comply with the terms and conditions specified below.
1. Option Price.
a. The option price per share shall be fixed by the Committee, but in no
event shall the option price per share be less than eighty-five percent (85%) of
the Fair Market Value per share of Common Stock on the date of the option grant.
b. The option price shall become immediately due upon exercise of the
option and shall, subject to the loan provisions of Section I of Article Four,
be payable in one of the alternative forms specified below:
1. full payment in cash or check payable to the Company's order; or
2. full payment in shares of Common Stock held by the Optionee for the
requisite period necessary to avoid a charge to the Company's reported
earnings (which in any event shall not be less than six (6) months) and
valued at Fair Market Value on the Exercise Date (as such term is defined
below); or
3. full payment in a combination of shares of Common Stock held by the
Optionee for the requisite period necessary to avoid a charge to the
Company's reported earnings (which in any event shall not be less than six
(6) months) and valued at Fair Market Value on the Exercise Date and cash
or check payable to the Company's order, equal in the aggregate to the
option price; or
4. full payment through a special sale and remittance procedure
pursuant to which the Optionee is to provide irrevocable written
instructions (i) to a designated brokerage firm to effect the immediate
sale of the purchased shares and remit to the Company, out of the sale
proceeds available on the settlement date, an amount sufficient to cover
the aggregate option price payable for the purchased shares plus all
applicable Federal and State income and employment taxes required to be
withheld by the Company by reason of such purchase and (ii) to the Company
to deliver the certificates for the purchased shares directly to such
brokerage firm in order to complete the sale transaction.
c. The Exercise Date shall be the date on which written notice of the
option exercise is delivered to the Company. Except to the extent the sale and
remittance procedure specified in clause 4 of subparagraph b. is utilized in
connection with the option exercise, payment of the option price for the
purchased shares must accompany such notice.
2. Term and Exercise of Options.
(i) Each option granted under the Discretionary Option Grant Program shall
be exercisable in one or more installments as shall be determined by the
Committee and set forth in the instrument evidencing such option; provided,
however, no such option shall have a maximum term in excess of ten (10) years.
(ii) During the lifetime of the Optionee, Incentive Options shall be
exercisable only by the Optionee and shall not be assignable or transferable
other than by will or by the laws of descent and distribution following the
Optionee's death. However, a Non-Statutory Option may, in connection with the
Optionee's estate plan,
6
<PAGE> 41
be assigned in whole or in part during the Optionee's lifetime to one or more
members of the Optionee's immediate family or to a trust established exclusively
for one or more such family members. The assigned portion may only be exercised
by the person or persons who acquire a proprietary interest in the option
pursuant to the assignment. The terms applicable to the assigned portion shall
be the same as those in effect for the option immediately prior to such
assignment and shall be set forth in such documents issued to the assignee as
the Plan Administrator may deem appropriate.
3. Termination of Service.
(i) Should an Optionee cease to be a Service Provider for any reason
including death or permanent disability as defined in Section 22(e)(3) of the
Internal Revenue Code (other than termination set forth in subparagraph (iii)
below) while the holder of one or more outstanding options under this Article
Two, then such options shall not be exercisable at any time after the earlier of
(i) the specified expiration date of the option term or (ii) the expiration of
the limited period of time (not to exceed twelve (12) months after the Optionee
ceases to be a Service Provider) specified by the Committee in the option
agreement. Each such option shall, during such twelve (12)-month or shorter
period following cessation of Service Provider status, be exercisable only to
the extent of the number of shares (if any) in which the Optionee is vested on
the date of such cessation of Service Provider status.
(ii) Any option granted to an Optionee under this Article Two and
outstanding in whole or in part on the date of the Optionee's death may be
subsequently exercised, but only to the extent of the number of shares (if any)
in which the Optionee is vested on the date the Optionee ceases to be a Service
Provider (less any of those shares subsequently purchased by the Optionee prior
to death), by the personal representative of the Optionee's estate or by the
person or persons to whom the option is transferred pursuant to the Optionee's
will or in accordance with the laws of descent and distribution. Any such
exercise must occur prior to the earlier of (i) the expiration date of the
option term or (ii) the first anniversary of the date of the Optionee's death.
(iii) If the Optionee's Service Provider status is terminated for any of
the following reasons, then all outstanding options granted the Optionee under
this Article Two shall immediately terminate and cease to be exercisable
immediately upon such termination:
(1) Optionee's intentional misconduct or continuing gross neglect of
duties which materially and adversely affects the business and operations
of the Company or any parent or subsidiary corporation employing Optionee;
(2) Optionee's unauthorized use or disclosure (or attempt thereat) of
confidential information or trade secrets of the Company or its parent or
subsidiary corporations; or
(3) Optionee's commission of an act involving embezzlement, theft,
fraud, falsification of records, destruction of property or commission of a
crime or other offense involving money or other property of the Company or
any parent or subsidiary corporation employing Optionee.
The reasons for termination of Optionee as a Service Provider set forth in
this subparagraph (iii) are not intended to be, and are not inclusive, of all
acts or omissions which the Company may deem to constitute misconduct or other
grounds for terminating the Optionee (or any other individual).
(iv) The Committee shall have complete discretion, exercisable either at
the time the option is granted or at any time while the option remains
outstanding, to permit one or more options held by the Optionee under this
Article Two to be exercised, during the limited period of exercisability
following cessation of Service Provider status, not only with respect to the
number of shares in which the Optionee is vested at the time of such cessation
of Service Provider status but also with respect to one or more subsequent
installments of purchasable shares in which the Optionee would otherwise have
vested had the Optionee continued as a Service Provider.
(v) If the option is granted to an individual who is not an Employee of the
Company, then the option agreement evidencing the granted option shall include
provisions comparable to those set forth in subparagraphs (i), (ii) and (iii)
above, and may include provisions comparable to subparagraph (iv) above, with
respect to the Optionee's termination of service with the Company or its parent
or subsidiary corporations.
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4. Stockholder Rights.
An option holder shall have none of the rights of a stockholder with
respect to any shares covered by the option until such individual shall have
exercised the option, paid the option price and satisfied all other conditions
precedent to the issuance of certificates for the purchased shares.
5. Repurchase Rights. The shares of Common Stock acquired upon the
exercise of any Article Two option grant may be subject to one or more
repurchase rights of the Company in accordance with the following provisions:
(i) The Committee shall have the discretion to authorize the issuance
of unvested shares of Common Stock under this Article Two. Should the
Optionee cease Service Provider status while holding such unvested shares,
the Company shall have the right to repurchase any or all of those unvested
shares at the option price paid per share. The terms and conditions upon
which such repurchase right shall be exercisable (including the period and
procedure for exercise and the appropriate vesting schedule for the
purchased shares) shall be established by the Committee and set forth in
the instrument evidencing such repurchase right.
(ii) All of the Company's outstanding repurchase rights shall
automatically terminate, and all shares subject to such terminated rights
shall immediately vest in full, upon the occurrence of any Corporate
Transaction under Section III of Article Two of this Plan, except to the
extent: (i) any such repurchase right is expressly assigned to the
successor corporation (or parent thereof) in connection with the Corporate
Transaction or (ii) such termination is precluded by other limitations
imposed by the Committee at the time the repurchase right is issued.
(iii) The Committee shall have the discretionary authority,
exercisable either before or after the Optionee's cessation of Service
Provider status, to cancel the Company's outstanding repurchase rights with
respect to one or more shares purchased or purchasable by the Optionee
under this Article Two and thereby accelerate the vesting of such shares in
whole or in part at any time.
II. STOCK APPRECIATION RIGHTS
A. The Committee shall have full power and authority, exercisable in its
sole discretion, to grant selected Optionees tandem stock appreciation rights
("Tandem Rights") and/or limited stock appreciation rights ("Limited Rights")
pertaining to all or part of the shares of Common Stock subject to one or more
of their option grants under this Article Two.
B. Tandem Rights may be granted at the same time the underlying option is
granted or any time thereafter while the option remains outstanding. The
Optionee may exercise such Tandem Right by surrendering the underlying option in
whole or in part to the Company, to the extent such option is at the time
exercisable for vested shares of Common Stock. In exchange for the surrendered
option, the Optionee shall receive a distribution from the Company in an amount
equal to the excess of (i) the Fair Market Value (on the option surrender date)
of the number of shares in which the Optionee is at the time vested under the
surrendered option (or surrendered portion) over (ii) the aggregate option price
payable for such vested shares. However, the exercise of the Tandem Right shall
be effective only if approved by the Committee. If so approved, the distribution
to which the Optionee shall accordingly become entitled with respect to the
surrendered option may be made in shares of Common Stock valued at Fair Market
Value on the option surrender date, in cash, or partly in shares and partly in
cash, as the Committee shall in its sole discretion deem appropriate.
C. If the surrender of an option is rejected by the Committee, then the
Optionee shall retain whatever rights the Optionee had under the surrendered
option (or surrendered portion) on the option surrender date and may exercise
such rights at any time prior to the later of (i) five (5) business days after
the receipt of the rejection notice or (ii) the last day on which the option is
otherwise exercisable in accordance with the terms of the instrument evidencing
such option, but in no event may such rights be exercised more than ten (10)
years after the date of the option grant.
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D. One or more Section 16(b) Insiders may, in the Committee's sole
discretion, be granted Limited Rights(2) in conjunction with their outstanding
options under this Article Two. Upon the occurrence of a Hostile Take-Over, each
outstanding option with such a Limited Right shall automatically be cancelled,
to the extent such option is at the time exercisable for fully-vested shares of
Common Stock. The Optionee shall in return be entitled to a cash distribution
from the Company in an amount equal to the excess of (i) the Take-Over Price of
the vested shares of Common Stock at the time subject to the cancelled option
(or cancelled portion of such option) over (ii) the aggregate exercise price
payable for such shares. The cash distribution payable upon such cancellation
shall be made within five (5) days following the consummation of the Hostile
Take-Over. The Committee shall pre-approve, at the time the limited right is
granted, the subsequent exercise of that right in accordance with its terms. No
additional approval of the Committee or the Board shall be required at the time
of the actual option cancellation and cash distribution. The balance of the
option (if any) shall continue to remain outstanding and exercisable in
accordance with the terms and conditions of the instrument evidencing such
option.
E. For purposes of subparagraph D. above, the following definitions shall
be in effect:
A HOSTILE TAKE-OVER shall be the acquisition, directly or indirectly,
by any person or related group of persons (other than the Company or a
person that directly or indirectly controls, is controlled by, or is under
common control with, the Company) of beneficial ownership (within the
meaning of Rule 13d-3 of the Exchange Act) of securities possessing more
than fifty percent (50%) of the total combined voting power of the
Company's outstanding securities pursuant to a tender or exchange offer
made directly to the Company's stockholders which the Board does not
recommend such stockholders to accept.
The TAKE-OVER PRICE per share shall be deemed to be equal to the
greater of (a) the Fair Market Value per share on the option cancellation
date or (b) the highest reported price per share paid by the acquiring
entity in effecting such Hostile Take-Over. However, if the cancelled
option is an Incentive Option, the Take-Over Price shall not exceed the
clause (a) price per share.
F. The shares of Common Stock subject to any option surrendered or
cancelled for an appreciation distribution pursuant to this Section II shall not
be available for subsequent option grant under the Plan.
III. CORPORATE TRANSACTION
A. Upon the occurrence of any of the following transactions (a "Corporate
Transaction") for which the approval of the Company's stockholders is obtained:
(i) a merger or acquisition in which the Company is not the surviving
entity, except for a transaction the principal purpose of which is to
change the State of the Company's incorporation,
(ii) the sale, transfer or other disposition of all or substantially
all of the assets of the Company to any entity other than a parent or
subsidiary of the Company, or
(iii) any reverse merger in which the Company is the surviving entity
but in which fifty percent (50%) or more of the Company's outstanding
voting stock is transferred to holders different from those who held such
fifty percent (50%) or greater interest immediately prior to such merger,
then the exercisability of each option outstanding under this Article
Two shall be automatically accelerated so that each such option shall,
immediately prior to the specified effective date for the Corporate
Transaction, become fully exercisable with respect to the total number of
shares of Common
- ---------------
(2) Options granted to Section 16(b) Insiders prior to the effective date
of the June 15, 1992 Restatement contain a different form of Limited Right. Such
right will provide each Section 16(b) Insider with a thirty (30)-day election
period, following the successful completion of a hostile tender offer for fifty
percent (50%) or more of the Company's outstanding voting securities, to
surrender the underlying option for a cash distribution from the Company in an
amount per share of Common Stock in which the Section 16(b) Insider is at the
time vested under the surrendered option equal to the excess of the highest
price per share paid in effecting such tender offer over the exercise price
payable per share under the surrendered option.
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<PAGE> 44
Stock at the time subject to such option and may be exercised for all or
any portion of such shares. However, an outstanding option under this
Article Two shall not be so accelerated if and to the extent: (i) such
option is, in connection with the Corporate Transaction, either to be
assumed by the successor corporation or parent thereof or to be replaced
with a comparable option to purchase shares of the capital stock of the
successor corporation or parent thereof, or (ii) such option is to be
replaced with a cash incentive program of the successor corporation
designed to preserve the option spread existing at the time of the
Corporate Transaction and incorporating the same vesting schedule
applicable to such option, or (iii) the acceleration of such option is
subject to other applicable limitations imposed by the Committee at the
time of grant. The determination of comparability under clause (i) above
shall be made by the Committee, and its determination shall be final,
binding and conclusive.
B. The Committee shall have the discretion, exercisable either in advance
of any actually-anticipated Corporate Transaction or at the time of an actual
Corporate Transaction, to provide (upon such terms and conditions as it may deem
appropriate) for either the automatic acceleration of one or more assumed or
replaced options which do not accelerate in connection with the Corporate
Transaction or for the automatic vesting of any cash incentive programs
implemented in replacement of such options, in the event the Optionee's
employment should subsequently terminate within a designated period following
the effective date of such Corporate Transaction.
C. The exercisability as incentive stock options under the Federal tax laws
of any options accelerated under this Section III in connection with a Corporate
Transaction shall remain subject to the applicable dollar limitation of Section
IV.A.(iii) of this Article Two below.
D. Upon the consummation of the Corporate Transaction, all outstanding
options under this Article Two shall, to the extent not previously exercised or
assumed by the successor corporation or its parent company, terminate and cease
to be outstanding.
E. The grant of options under this Article Two shall in no way affect the
right of the Company to adjust, reclassify, reorganize or otherwise change its
capital or business structure or to merge, consolidate, dissolve, liquidate or
sell or transfer all or any part of its business or assets.
IV. INCENTIVE OPTIONS
A. The terms and conditions specified below shall be applicable to all
Incentive Options granted under this Article Two. Options which are specifically
designated as "non-statutory" options when issued under this Article Two shall
not be subject to such terms and conditions.
(i) Option Price. The option price per share of the Common Stock subject
to an Incentive Option shall in no event be less than one hundred percent (100%)
of the Fair Market Value per share of Common Stock on the grant date.
(ii) 10% Stockholder. If any individual to whom an Incentive Option is to
be granted pursuant to the provisions of this Article Two is on the grant date
the owner of stock (as determined under Section 424(d) of the Internal Revenue
Code) possessing 10% or more of the total combined voting power of all classes
of stock of the Company or any one of its parent or subsidiary corporations
(such person to be herein referred to as a 10% Stockholder), then (i) the option
price per share shall not be less than one hundred and ten percent (110%) of the
Fair Market Value per share of Common Stock on the grant date and (ii) the
maximum term of the option shall not exceed five (5) years from the grant date.
(iii) Dollar Limitation. The aggregate fair market value (determined on
the basis of the Fair Market Value in effect on the respective date or dates of
grant) of the Common Stock for which one or more options granted to any Employee
under this Plan (or any other option plan of the Company or its parent or
subsidiary corporations) may for the first time become exercisable as incentive
stock options under the Federal tax laws during any one calendar year shall not
exceed the sum of One Hundred Thousand Dollars ($100,000). To the extent the
Employee holds two or more such options which become exercisable for the first
time in the same calendar year, the foregoing limitation on the exercisability
thereof as incentive stock options under the Federal tax laws shall be applied
on the basis of the order in which such options are granted.
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B. Except as modified by the preceding provisions of this Incentive Options
section, all the provisions of the Plan shall be applicable to the Incentive
Options granted hereunder.
V. CANCELLATION AND RE-GRANT OF OPTIONS
The Committee shall have the authority to effect, at any time and from time
to time, with the consent of the affected option holders, the cancellation of
any or all outstanding options under this Article Two and to grant in
substitution therefor new options under this Article Two covering the same or
different numbers of shares of Common Stock but having an option price per share
not less than (i) eighty-five percent (85%) of the Fair Market Value per share
of Common Stock on the new grant date, (ii) one hundred percent (100%) of such
Fair Market Value for an Incentive Option, or (iii) one hundred and ten percent
(110%) of such Fair Market Value in the case of a 10% Stockholder.
ARTICLE THREE
AUTOMATIC OPTION GRANT PROGRAM
I. ELIGIBILITY
A. Eligible Directors. The individuals eligible to receive automatic
option grants pursuant to the provisions of this Article Three program shall be
limited to (i) those individuals who are serving as non-employee Board members
on August 5, 1993, the effective date of this Automatic Option Grant Program
(the "Effective Date"), and (ii) those individuals who are first elected or
appointed as non-employee Board members on or after the Effective Date, whether
through appointment by the Board or election by the Company's stockholders. Any
non-employee Board member eligible to participate in the Automatic Option Grant
Program pursuant to the foregoing criteria shall be designated an Eligible
Director for purposes of this Plan.
B. Limitation. Except for the option grants to be made pursuant to the
provisions of this Automatic Option Grant Program, an Eligible Director serving
on the Committee shall not be eligible during such period of service to receive
any additional option grants or stock issuances under this Plan or any other
stock plan of the Company (or its parent or subsidiaries).
II. TERMS AND CONDITIONS OF AUTOMATIC OPTION GRANTS
A. Grant Dates. Option grants shall be made under this Article Three on
the dates specified below:
(i) Each Eligible Director who first becomes a non-employee Board
member on or after the Effective Date of this Automatic Option Grant
Program, whether through election by the Company's stockholders or
appointment by the Board and who has not at any time been in the prior
employ of the Company (or any parent or subsidiary corporation), shall
automatically be granted, at the time of such initial election or
appointment, a non-statutory stock option to purchase 5,000 shares of
Common Stock upon the terms and conditions of this Article Three.
(ii) On the date of each Annual Stockholders Meeting, commencing with
the 1993 Annual Stockholders Meeting, each individual who is at the time
serving as an Eligible Director shall automatically be granted at that
meeting, whether or not such individual is standing for re-election as a
Board member at that particular meeting and whether or not such individual
has at any time been in the prior employ of the Company (or any parent or
subsidiary corporation), a non-statutory stock option to purchase 1,500
shares of Common Stock upon the terms and conditions of this Article Three,
provided he or she has served as a non-employee Board member for at least
six (6) months prior to the date of such meeting. There shall be no limit
on the number of 1,500-share option grants any one Eligible Director may
receive over his or her period of Board service.
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The number of shares for which the automatic grants are to be made to each
newly-elected or continuing Eligible Director shall be subject to periodic
adjustment pursuant to the applicable provisions of Section V.C of Article One.
Stockholder approval of the restatement of the Plan at the 1997 Annual
Meeting shall constitute pre-approval of each option subsequently granted
pursuant to the express terms of this Automatic Option Grant Program and the
subsequent exercise of that option in accordance with its terms.
B. Exercise Price. The exercise price per share of Common Stock subject
to each automatic option grant made under this Article Three shall be equal to
one hundred percent (100%) of the Fair Market Value per share of Common Stock on
the automatic grant date.
C. Payment.
The exercise price shall be payable in one of the alternative forms
specified below:
(i) full payment in cash or check payable to the Company's order; or
(ii) full payment in shares of Common Stock held for the requisite
period necessary to avoid a charge to the Company's reported earnings
(which in any event shall not be less than six (6) months) and valued at
Fair Market Value on the Exercise Date (as such term is defined below); or
(iii) full payment in a combination of shares of Common Stock held for
the requisite period necessary to avoid a charge to the Company's reported
earnings (which in any event shall not be less than six (6) months) and
valued at Fair Market Value on the Exercise Date and cash or check payable
to the Company's order, equal in aggregate to the option price; or
(iv) full payment through a sale and remittance procedure pursuant to
which the non-employee Board member is to provide irrevocable written
instructions (I) to a designated brokerage firm to effect the immediate
sale of the purchased shares and remit to the Company, out of the sale
proceeds available on the settlement date, an amount sufficient to cover
the aggregate option price payable for the purchased shares and (II) to the
Company to deliver the certificates for the purchased shares directly to
such brokerage firm in order to complete the sale transaction.
The Exercise Date shall be the date on which written notice of the option
exercise is delivered to the Company. Except to the extent the sale and
remittance procedure specified in clause (iv) is utilized in connection with the
option exercise, payment of the option price for the purchased shares must
accompany such notice.
D. Option Term. Each automatic grant under this Article Three shall have
a maximum term of ten (10) years measured from the automatic grant date.
E. Exercisability. Each automatic grant shall become exercisable in a
series of four (4) equal and successive annual installments over the Optionee's
period of service on the Board, with the first such installment to become
exercisable twelve (12) months after the automatic grant date. The
exercisability of each automatic grant shall be subject to acceleration in
accordance with the provisions of Section II.G and Section III of this Article
Three.
F. Limited Transferability. During the lifetime of the Optionee, each
automatic option grant may, in connection with the Optionee's estate plan, be
assigned in whole or in part during the Optionee's lifetime to one or more
members of the Optionee's immediate family or to a trust established exclusively
for one or more such family members. The assigned portion may only be exercised
by the person or persons who acquire a proprietary interest in the option
pursuant to the assignment. The terms applicable to the assigned portion shall
be the same as those in effect for the option immediately prior to such
assignment and shall be set forth in such documents issued to the assignee as
the Plan Administrator may deem appropriate.
G. Termination of Board Service.
1. Should the Optionee's service as a Board member cease for any reason
(other than death or permanent disability) while holding one or more automatic
option grants under this Article Three, then such
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individual shall have a six (6)-month period following the date of such
cessation of Board service in which to exercise each such option for any or all
of the shares of Common Stock for which the option is exercisable at the time of
such cessation of Board service. However, each such option shall immediately
terminate and cease to be outstanding, at the time of such cessation of Board
service, with respect to any shares for which the option is not otherwise at
that time exercisable.
2. Should the Optionee die within six (6) months after cessation of Board
service, then each outstanding automatic option grant held by the Optionee at
the time of death may subsequently be exercised, for any or all of the shares of
Common Stock for which such option is exercisable at the time of the Optionee's
cessation of Board service (less any option shares subsequently purchased by the
Optionee prior to death), by the personal representative of the Optionee's
estate or by the person or persons to whom the option is transferred pursuant to
the Optionee's will or in accordance with the laws of descent and distribution.
Any such exercise must occur within twelve (12) months after the date of the
Optionee's death.
3. Should the Optionee die or become permanently disabled while serving as
a Board member, then each automatic option grant held by such Optionee under
this Article Three shall accelerate in full, and the Optionee (or the
representative of the Optionee's estate or the person or persons to whom the
option is transferred upon the Optionee's death) shall have a twelve (12)-month
period following the date of the Optionee's cessation of Board service in which
to exercise each such option for any or all of the shares of Common Stock
subject to that option at the time of such cessation of Board service.
4. In no event shall any automatic grant under this Article Three remain
exercisable after the specified expiration date of the ten (10)-year option
term. Upon the expiration of the applicable postservice exercise period under
subparagraph 1, 2 or 3 above or (if earlier) upon the expiration of the ten
(10)-year option term, the automatic grant shall terminate and cease to be
outstanding for any unexercised shares for which the option was otherwise
exercisable at the time of the Optionee's cessation of Board service.
H. Stockholder Rights. The holder of an automatic option grant under this
Article Three shall have none of the rights of a stockholder with respect to any
shares subject to such option until such individual shall have exercised the
option and paid the exercise price for the purchased shares.
I. Remaining Terms. The remaining terms and conditions of each automatic
option grant shall be as set forth in the prototype Non-Statutory Stock Option
Agreement attached as Exhibit A to the Plan.
III. CORPORATE TRANSACTION/CHANGE IN CONTROL/HOSTILE TAKE-OVER
A. In the event of any Corporate Transaction, each automatic option grant
at the time outstanding under this Article Three shall automatically accelerate
so that each such option shall, immediately prior to the specified effective
date for the Corporate Transaction, become fully exercisable with respect to the
total number of shares of Common Stock at the time subject to such option and
may be exercised for all or any portion of such shares. Upon the consummation of
the Corporate Transaction, all automatic option grants under this Article Three
shall terminate and cease to be outstanding.
B. In connection with any Change in Control of the Company, each automatic
option grant at the time outstanding under this Article Three shall
automatically accelerate so that each such option shall, immediately prior to
the specified effective date for the Change in Control, become fully exercisable
with respect to the total number of shares of Common Stock at the time subject
to such option and may be exercised for all or any portion of such shares. For
purposes of this Article Three, a Change in Control shall be deemed to occur in
the event:
(i) any person or related group of persons (other than the Company or
a person that directly or indirectly controls, is controlled by, or is
under common control with, the Company) directly or indirectly acquires
beneficial ownership (within the meaning of Rule 13d-3 of the Exchange Act)
of securities possessing more than fifty percent (50%) of the total
combined voting power of the Company's outstanding securities pursuant to a
tender or exchange offer which the Board does not recommend the Company's
stockholders to accept; or
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(ii) there is a change in the composition of the Board over a period
of twenty-four (24) consecutive months or less such that a majority of the
Board members (rounded up to the next whole number) cease, by reason of one
or more proxy contests for the election of Board members, to be comprised
of individuals who either (I) have been Board members continuously since
the beginning of such period or (II) have been elected or nominated for
election as Board members during such period by at least two-thirds of the
Board members described in clause (I) who were still in office at the time
such election or nomination was approved by the Board.
C. A Limited Right shall be granted with respect to each automatic option
granted under this Article Three. Upon the occurrence of a Hostile Take-Over,
each such option shall automatically be cancelled, to the extent such option is
at the time exercisable for fully-vested shares of Common Stock. The Optionee
shall in return be entitled to a cash distribution from the Company in an amount
equal to the excess of (i) the Take-Over Price of the vested shares of Common
Stock at the time subject to the cancelled option (or cancelled portion of such
option) over (ii) the aggregate exercise price payable for such shares. The cash
distribution payable upon such cancellation shall be paid within five (5) days
following the consummation of the Hostile Take-Over. The Committee shall
pre-approve, at the time the limited right is granted, the subsequent exercise
of that right in accordance with its terms. No additional approval of the
Committee or the Board shall be required at the time of the actual option
cancellation and cash distribution. The balance of the option (if any) shall
continue to remain outstanding and exercisable in accordance with the terms and
conditions of the instrument evidencing such option.
D. The shares of Common Stock subject to each option surrendered in
connection with the Hostile Take-Over shall not be available for subsequent
option grant under this Plan.
E. The automatic option grants outstanding under this Article Three shall
in no way affect the right of the Company to adjust, reclassify, reorganize or
otherwise change its capital or business structure or to merge, consolidate,
dissolve, liquidate or sell or transfer all or any part of its business or
assets.
ARTICLE FOUR
MISCELLANEOUS
I. LOANS OR GUARANTEE OF LOANS
The Committee may assist any Optionee (including any officer or director)
in the exercise of one or more outstanding options under the Discretionary
Option Grant Program by (a) authorizing the extension of a loan to such Optionee
from the Company, (b) permitting the Optionee to pay the option price for the
purchased Common Stock in installments over a period of years or (c) authorizing
a guarantee by the Company of a third-party loan to the Optionee. The terms of
any loan, installment method of payment or guarantee (including the interest
rate and terms of repayment) shall be established by the Committee in its sole
discretion. Loans, installment payments and guarantees may be granted without
security or collateral, but the maximum credit available to the Optionee shall
not exceed the sum of (i) the aggregate option price of the purchased shares
(less the par value) plus (ii) any Federal and State income and employment tax
liability incurred by the Optionee in connection with the exercise of the
option.
II. TAX WITHHOLDING
A. The Company's obligation to deliver shares or cash upon the exercise or
surrender of stock options or stock appreciation rights granted under the Plan
shall be subject to the satisfaction by the Optionee of all applicable Federal,
State and local income and employment tax withholding requirements.
B. The Committee may, in its discretion and upon such terms and conditions
as it may deem appropriate (including the applicable safe-harbor provisions of
Securities and Exchange Commission ("SEC") Rule 16b-3 or any successor rule or
regulation) provide any or all holders of outstanding option grants under the
Plan (other than automatic option grants made pursuant to the provisions of
Article Three) with the election to have the Company withhold, from the shares
of Common Stock otherwise issuable upon the exercise of
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<PAGE> 49
such options, a portion of such shares with an aggregate Fair Market Value equal
to the designated percentage (any multiple of five percent (5%) specified by the
Optionee) of the Federal and state income taxes ("Taxes") incurred in connection
with the acquisition of such shares. In lieu of such direct withholding, one or
more Optionees may also be granted the right to deliver pre-existing shares of
Common Stock to the Company in satisfaction of such Taxes. The withheld or
delivered shares shall be valued at the Fair Market Value on the applicable
determination date for such Taxes or such other date required by the applicable
safe-harbor provisions of SEC Rule 16b-3.
III. EXTENSION OF EXERCISE PERIOD
The Committee shall have full power and authority to extend the period of
time for which any option granted under the Discretionary Option Grant Program
is to remain exercisable following the Optionee's termination of service from
the twelve (12)-month or shorter period set forth in the option agreement to
such greater period of time as the Committee shall deem appropriate; provided,
however, that in no event shall such option be exercisable after the specified
expiration date of the option term.
IV. AMENDMENT OF THE PLAN
The Board shall have the complete and exclusive authority to amend or
modify the Plan in any or all respects whatsoever. However, (i) no such
amendment or modification shall, without the consent of the holders, adversely
affect rights and obligations with respect to any stock options or stock
appreciation rights at the time outstanding under the Plan and (ii) any
amendment made to the Automatic Option Grant Program (or to any options
outstanding thereunder) shall be in compliance with the limitation of Section IV
of Article Three. In addition, certain amendments may require stockholder
approval pursuant to applicable laws or regulations.
V. EFFECTIVE DATE AND TERM OF PLAN
A. The Plan was initially adopted by the Board and approved by the
Company's sole stockholder on August 1, 1988. The Board and sole stockholder
amended and restated the Plan effective May 15, 1991 to (i) increase the number
of shares issuable pursuant to the Plan, (ii) conform the provisions of the Plan
to the SEC rules under Section 16 of the Exchange Act applicable to certain
transactions effected under the Plan by Section 16(b) Insiders and (iii) provide
for the grant of Incentive Options. The Plan was further restated on June 15,
1992 (the "1992 Restatement") to (i) increase the number of shares of Common
Stock authorized for issuance under the Plan by an additional 200,000 shares,
(ii) bring the Plan into compliance with revisions to SEC Rule 16b-3 which
became effective on September 1, 1993 and exempts certain officer and director
transactions under the Plan from the shortswing liability provisions of the
federal securities laws and (iii) effect certain technical revisions to the
provisions of the Plan to facilitate plan administration and interpretation. The
1992 Restatement was approved by the Company's stockholders at the 1992 Annual
Meeting. The Plan was further restated and amended by the Board in June, 1993
(the "1993 Restatement") to add the Automatic Option Grant Program. The 1993
Restatement was approved by the Company's stockholders at the 1993 Annual
Meeting. On May 4, 1994, the Board approved an amendment to the Plan to (i)
increase the aggregate number of shares issuable over the term thereof by
200,000 shares to a total of 1,335,000 shares and (ii) impose a limitation of
800,000 shares on the maximum number of shares of Common Stock for which any one
participant may be granted stock options and separately exercisable stock
appreciation rights over the remaining term of the Plan. The amendment was
approved by the Company's stockholders at the 1994 Annual Meeting.
On June 21, 1996, the Board approved an amendment to the Plan to (i)
increase the aggregate number of shares issuable over the term thereof by
200,000 shares to 1,535,000 shares, and (ii) extend the expiration date of the
Plan to June 30, 2006. These amendments were approved by the Company's
stockholders at the 1996 Annual Meeting. In June 1997, the Board further amended
and restated the Plan (the "1997 Restatement") to effect the following
revisions: (i) increase the number of shares of Common Stock reserved for
issuance over the term of the Plan by an additional 100,000 shares to 1,635,000
shares, (ii) render the non-employee Board members eligible to receive option
grants under the Discretionary Option Grant Program, (iii) allow
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<PAGE> 50
unvested shares issued under the Plan and subsequently repurchased by the
Corporation at the option exercise price paid per share to be reissued under the
Plan, (iv) remove certain restrictions on the eligibility of non-employee Board
members to serve as Plan Administrator and (v) effect a series of additional
changes to the provisions of the Plan in order to take advantage of the recent
amendments to SEC Rule 16b-3.
The 1997 Restatement is subject to stockholder approval at the 1997 Annual
Meeting, and no option grants made on the basis of the 200,000-share increase
under the 1997 Restatement shall become exercisable in whole or in part unless
and until the 1997 Restatement is approved by the stockholders. Should such
stockholder approval not be obtained, then each option grant made pursuant to
the 200,000-share increase shall terminate and cease to remain outstanding
without ever becoming exercisable for those shares, and no additional option
grants shall be made on the basis of that share increase. Subject to the
foregoing limitations, the Plan Administrator may make option grants under the
Plan at any time before the date fixed herein for the termination of the Plan.
B. The provisions of the Restatements apply only to stock options and stock
appreciation rights granted under the Plan from and after the respective
effective dates of such Restatements. All stock options and stock appreciation
rights issued and outstanding under the Plan immediately prior to such effective
dates of the Restatements shall continue to be governed by the terms and
conditions of the Plan (and the instrument evidencing each such option or stock
appreciation right) as in effect on the date each such option or stock
appreciation was previously granted, and nothing in the Restatements shall be
deemed to affect or otherwise modify the rights or obligations of the holders of
such options or stock appreciation rights with respect to the acquisition of
shares of Common Stock thereunder or the exercise of their outstanding stock
appreciation rights.
C. The sale and remittance procedure authorized for the exercise of
outstanding options shall be available for all options granted under the Plan
from and after November 6, 1991 and for all Non-Statutory Options outstanding on
such date. The Committee may also allow such procedure to be utilized in
connection with one or more disqualifying dispositions of incentive stock option
shares effected on or after November 6, 1991, whether or not the option was
granted on or before such date.
D. The Plan shall in all events terminate upon the earlier of (i) June 30,
2006 or (ii) the date on which all shares available for issuance under the Plan
shall have been issued or cancelled pursuant to the exercise or surrender of
stock options and/or stock appreciation rights under the Plan. If the date of
termination is determined under clause (i) above, then any stock options and
stock appreciation rights at the time outstanding under the Plan shall continue
to have force and effect in accordance with the provisions of the instruments
evidencing such grants.
E. Options may be granted under the Discretionary Option Grant Program to
purchase shares of Common Stock in excess of the number of shares then available
for issuance under the Plan, provided (i) an amendment to increase the maximum
number of shares issuable under the Plan is adopted by the Board prior to the
initial grant of any such option and within one year thereafter such amendment
is approved by the Company's stockholders and (ii) each option granted is not to
become exercisable, in whole or in part, at any time prior to the obtaining of
such stockholder approval.
VI. MISCELLANEOUS
A. Any cash proceeds received by the Company from the issuance of shares
hereunder shall be used for general corporate purposes.
B. The implementation of the Plan, the granting of any stock option, and
the issuance of Common Stock hereunder, shall be subject to the Company's
procurement of all approvals and permits required by regulatory authorities
having jurisdiction over the Plan, and the stock options granted under it and
the Common Stock issued pursuant to it.
C. Neither the action of the Company in establishing the Plan, nor any
action taken by the Board or the Committee hereunder, nor any provision of the
Plan itself shall be construed so as to grant any individual the right to remain
in the employ or service of the Company or any of its parent or subsidiary
corporations for any
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<PAGE> 51
period of specific duration, and the Company (or any parent or subsidiary
retaining the services of such individual) may terminate such individual's
employment or service at any time and for any reason, with or without cause.
D. Nothing contained in the Plan shall be construed to limit the authority
of the Company to exercise its corporate rights and powers, including (without
limitation) the right of the Company (a) to grant options for proper corporate
purposes otherwise than under this Plan to any Employee or other person, firm or
company or association or (b) to grant options to, or assume the option of, any
person in connection with the acquisition (by purchase, lease, merger,
consolidation or otherwise) of the business and assets (in whole or in part) of
any person, firm, company or association.
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<PAGE> 52
CORVEL CORPORATION
1991 EMPLOYEE STOCK PURCHASE PLAN
AS RESTATED AND AMENDED THROUGH AUGUST 7, 1997
<PAGE> 53
CORVEL CORPORATION
1991 EMPLOYEE STOCK PURCHASE PLAN
I. PURPOSE
The CorVel Corporation 1991 Employee Stock Purchase Plan (the "Plan"), as
restated and amended through August 7, 1997, is intended to provide eligible
employees of the Company and one or more of its Corporate Affiliates with the
opportunity to acquire a proprietary interest in the Company through
participation in a plan designed to qualify as an employee stock purchase plan
under Section 423 of the Internal Revenue Code (the "Code").
II. DEFINITIONS
For purposes of administration of the Plan, the following terms shall have
the meanings indicated:
BASE SALARY means the regular base earnings paid to an Eligible Employee by
one or more Participating Companies during such individual's period of
participation in the Plan, plus (i) one hundred percent (100%) of the
commissions paid to the such individual during each purchase period in which he
or she participates in the Plan and (iii) any salary deferral contributions made
by such individual to the Company's Code Section 401(k) Plan during such period.
There shall be excluded from the calculation of Base Salary (i) all overtime
payments, bonuses, profit-sharing distributions and other incentive-type
payments and (ii) all contributions (other than Code Section 401(k)
contributions) made by the Company or its Corporate Affiliates for such
individual's benefit under any employee benefit or welfare plan now or hereafter
established.
BOARD means the Board of Directors of the Company.
COMPANY means CorVel Corporation, a Delaware corporation(1), and any
corporate successor to all or substantially all of the assets or voting stock of
the Company which shall by appropriate action adopt the Plan.
CORPORATE AFFILIATE means any company which is either the parent
corporation or a subsidiary corporation of the Company (as determined in
accordance with Section 424 of the Code), including any parent or subsidiary
corporation which becomes such after the Effective Date.
EFFECTIVE DATE means October 1, 1991; provided, however, that any Corporate
Affiliate which becomes a Participating Company in the Plan after October 1,
1991 shall designate a subsequent Effective Date with respect to its
employee-Participants; provided further, that this Plan shall not be effective
until such time as the Company becomes subject to the reporting requirements of
Section 12 of the Securities Exchange Act of 1934.
ELIGIBLE EMPLOYEE means any person who is regularly engaged, for a period
of more than twenty (20) hours per week and more than five (5) months per
calendar year, in the rendition of personal services to the Company or any other
Participating Company for earnings considered wages under Section 3121(a) of the
Code. However, employees of the Company who, at the start of any purchase period
under the Plan, (i) are deemed to be Highly Compensated Employees within the
meaning of Section 414(q) of the Code and (ii) hold unvested options to purchase
more than 15,000 shares of the Company's common stock under the Company's
Restated 1988 Executive Stock Option Plan shall not be treated as Eligible
Employees for that purchase period and shall accordingly be ineligible to
participate in the Plan for such period.
- ---------------
(1) The Company was previously known as FORTIS Corporation and assumed all
of the rights and responsibilities of FORTIS Corporation, a Minnesota
corporation ("FORTIS Minnesota"), with respect to the Plan pursuant to the
Agreement and Plan of Merger by and between the Company and FORTIS Minnesota,
effective May 16, 1991, under which FORTIS Minnesota changed its state of
incorporation from Minnesota to Delaware by merging with and into the Company
which was a wholly owned subsidiary of FORTIS Minnesota.
2
<PAGE> 54
PARTICIPANT means any Eligible Employee of a Participating Company who is
actively participating in the Plan.
PARTICIPATING COMPANY means the Company and such Corporate Affiliate or
Affiliates as may be authorized from time to time by the Board to extend the
benefits of the Plan to their Eligible Employees. The Participating Companies in
the Plan as of the purchase period to begin October 1, 1992 are listed in
attached Schedule A.
STOCK means shares of the common stock of the Company, par value $.0001 per
share.
III. ADMINISTRATION
A. The Plan shall be administered by a committee (the "Committee")
consisting of two (2) or more Board members appointed by the Board. Members of
the Committee shall serve for such period of time as the Board may determine and
shall be subject to removal by the Board at any time.
B. The Committee is hereby designated as the Plan Administrator and shall
have full authority to administer the Plan, including authority to interpret and
construe any provision of the Plan and to adopt such rules and regulations for
administering the Plan as it may deem necessary in order to comply with the
requirements of Section 423 of the Code. Decisions of the Plan Administrator
shall be final and binding on all parties who have an interest in the Plan.
IV. PURCHASE PERIODS
(a) Stock shall be offered for purchase under the Plan through a series of
successive purchase periods until such time as (i) the maximum number of shares
of Stock available for issuance under the Plan shall have been issued pursuant
to purchase rights granted under the Plan or (ii) the Plan shall have been
sooner terminated in accordance with Article IX.
(b) Each purchase period shall have a duration of six (6) months. The
initial purchase period will begin October 1, 1991, and subsequent purchase
periods will commence at successive six (6)-month intervals from and after that
date.
(c) The Participant shall be granted a separate purchase right for each
purchase period in which he or she participates. The purchase right shall be
granted on the first day of the purchase period and shall be automatically
exercised on the last business day of the purchase period.
(d) Under no circumstances shall any purchase rights granted under the Plan
be exercised, nor shall any shares of Stock be issued hereunder, until such time
as (i) the Plan shall have been approved by the Company's stockholders and (ii)
the Company shall have complied with all applicable requirements of the
Securities Act of 1933, as amended, all applicable listing requirements of any
securities exchange on which the Stock is listed and all other applicable
requirements established by law or regulation.
(e) The acquisition of Stock through participation in the Plan for any
purchase period shall neither limit nor require the acquisition of Stock by the
Participant in any subsequent purchase period.
V. ELIGIBILITY AND PARTICIPATION
(a) Each Eligible Employee of a Participating Company may begin
participation in the Plan on the first day of any purchase period following the
commencement of his or her employment with the Company or any other
Participating Company.
(b) In order to participate in the Plan for a particular purchase period,
an Eligible Employee must complete the enrollment forms prescribed by the Plan
Administrator (including a stock purchase agreement and a payroll deduction
authorization) and file such forms with the Plan Administrator (or its designee)
during the specified enrollment period for that purchase period.
(c) The payroll deduction authorized by a Participant for purposes of
acquiring Stock under the Plan may be any multiple of $10.00, up to a dollar
maximum not in excess of 20% of the Base Salary paid to the
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<PAGE> 55
Participant during the purchase period. The deduction rate so authorized shall
continue in effect for the entire purchase period, unless the Participant shall,
prior to the end of the purchase period for which the purchase right is in
effect, reduce the rate by filing the appropriate form with the Plan
Administrator (or its designee). The reduced rate shall become effective as soon
as practicable following the filing of such form. Payroll deductions, however,
will automatically cease upon the termination of the Participant's purchase
right in accordance with Section VII(d) or (e) below.
VI. STOCK SUBJECT TO PLAN
(a) The Stock purchasable by Participants under the Plan shall, solely in
the Board's discretion, be made available from either authorized but unissued
Stock or from reacquired Stock, including shares of Stock purchased on the open
market. The total number of shares which may be issued under the Plan shall not
exceed 250,000 shares, (subject to adjustment under subparagraph (b) below),
including the 100,000-share increase subject to stockholder approval at the 1997
Annual Stockholders Meeting.
(b) In the event any change is made to the Stock purchasable under the Plan
by reason of any stock dividend, stock split, combination of shares,
recapitalization or other change affecting the outstanding Stock as a class
without the Company's receipt of consideration, appropriate adjustments shall be
made by the Plan Administrator to (i) the class and maximum number of shares
issuable over the term of the Plan, (ii) the class and maximum number of shares
purchasable per Participant under any one purchase right, and (iii) the class
and number of shares and the price per share in effect under each purchase right
at the time outstanding under the Plan.
VII. PURCHASE RIGHTS
Each Eligible Employee who participates in the Plan for a particular
purchase period shall have the right to purchase Stock upon the terms and
conditions set forth below and shall execute a purchase agreement embodying such
terms and conditions and such other provisions (not inconsistent with the Plan)
as the Plan Administrator may deem advisable.
(a) Purchase Price. The purchase price per share shall be the lesser of
(i) 85% of the fair market value of a share of Stock on the date on which the
purchase right is granted or (ii) 85% of the fair market value of a share of
Stock on the date the purchase right is exercised. For purposes of determining
such fair market value (and for all other valuation purposes under the Plan),
the fair market value of a share of Stock on any date shall be the closing
selling price of such share on such date, as officially quoted on the principal
exchange on which the Stock is at the time traded or, if not traded on any
exchange, the closing selling price per share of the Stock on such date, as
reported on the Nasdaq National Market. If there are no sales of Stock on such
day, then the closing selling price for the Stock on the next preceding day for
which such closing selling price is quoted shall be determinative of fair market
value.
(b) Number of Purchasable Shares. The number of shares purchasable by a
Participant upon the exercise of an outstanding purchase right shall be the
number of whole shares obtained by dividing the amount collected from the
Participant through payroll deductions during the purchase period for which such
purchase right is outstanding, by the purchase price per share in effect for
that purchase period. However, the maximum number of shares purchasable by any
Participant during any one purchase period shall not exceed 500 shares (subject
to adjustment under Section VI(b)).
Under no circumstances shall purchase rights be granted under the Plan to
any Eligible Employee if such individual would, immediately after the grant, own
(within the meaning of Code Section 424(d)), or hold outstanding options or
other rights to purchase, stock possessing 5% or more of the total combined
voting power or value of all classes of stock of the Company or any Corporate
Affiliate.
(c) Payment. Payment for the Stock purchased under the Plan shall be
effected through the Participant's authorized payroll deductions. Such
deductions shall begin on the first pay day coincident with or immediately
following the commencement date of the purchase period and shall terminate with
the pay day ending with or immediately prior to the last day of such purchase
period. The amounts so collected shall be
4
<PAGE> 56
credited to the Participant's individual account under the Plan, but no interest
shall be paid on the balance from time to time outstanding in the account. The
collected amounts may be commingled with the Company's general assets and used
for general corporate purposes.
(d) Termination of Purchase Rights.
(i) A Participant may, on or before the last day of any purchase period,
terminate his or her outstanding purchase right under the Plan by filing the
prescribed notification form with the Plan Administrator (or its designee). No
further payroll deductions shall be collected from the Participant with respect
to the terminated purchase right, and the Participant shall have the following
election with respect to any payroll deductions made by such individual with
respect to the terminated purchase right: (A) have the Company refund those
payroll deductions or (B) have such payroll deductions held for the purchase of
shares at the end of the purchase period. If no such election is made, then such
payroll deductions shall automatically be refunded at the end of such purchase
period.
(ii) The termination shall be irrevocable with respect to the particular
purchase right to which it pertains, and the Participant may not subsequently
rejoin the purchase period covered by such terminated right.
(e) Termination of Service. If a Participant ceases to remain in Service
while his or her purchase right remains outstanding, then such purchase right
shall immediately terminate, and all sums previously collected from the
Participant during the purchase period in which such termination occurs shall be
refunded promptly to the Participant. However, should the Participant die or
become permanently disabled while in Service or should the Participant cease
active employment by reason of a leave of absence, then the Participant (or the
person or persons to whom the rights of the deceased Participant under the Plan
are transferred by will or by the laws of descent and distribution) shall have
the election, exercisable up until the end of the purchase period in which the
Participant dies or becomes permanently disabled or in which the leave of
absence commences, to (i) withdraw all the funds credited to the Participant's
account at the time of his or her cessation of Service or at the commencement of
such leave or (ii) have such funds held for the purchase of shares at the end of
such purchase period. If no such election is made, then such funds shall
automatically be held for the purchase of shares at the end of such purchase
period. In no event, however, shall any further payroll deductions be added to
the Participant's account following his or her cessation of Service or the
commencement of such leave. Should the Participant return to active Service
following a leave of absence, then his or her payroll deductions under the Plan
shall automatically resume at the rate in effect at the time the leave began,
provided such return to Service occurs prior to the expiration date of the
purchase period in which such leave began.
For purposes of the Plan: (a) the Participant shall be considered to remain
in Service for so long as such Participant remains in the active employ of the
Company or one or more other Participating Companies, and (b) the Participant
shall be deemed to be permanently disabled if he or she is unable to engage in
any substantial gainful employment, by reason of any medically-determinable
physical or mental impairment expected to result in death or to be of continuous
duration of at least twelve (12) months.
(f) Stock Purchase. The Stock subject to the purchase right of each
Participant (other than Participants whose payroll deductions have been refunded
in accordance with Section VII(d) or (e) above) shall be automatically purchased
on the Participant's behalf on the last business day of the purchase period. The
purchase shall be effected by applying the amount credited to each Participant's
account on the last date of the purchase period to the purchase of whole shares
of Stock (subject to the limitations on the maximum number of purchasable shares
set forth in Section VII(b)) at the purchase price in effect for such purchase
period. Any amount remaining in the Participant's account after such application
shall be refunded promptly.
(g) Proration of Purchase Rights. Should the total number of shares of
Stock which are to be purchased pursuant to outstanding purchase rights on any
particular date exceed the number of shares then available for issuance under
the Plan, the Plan Administrator shall make a pro-rata allocation of the
available shares on a uniform and nondiscriminatory basis, and any amounts
credited to the accounts of Participants shall, to the extent not applied to the
purchase of Stock, be refunded to the Participants.
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<PAGE> 57
(h) Rights as Stockholder. A Participant shall have no rights as a
stockholder of the Company with respect to shares covered by his or her
outstanding purchase right under the Plan until the shares are actually
purchased on the Participant's behalf in accordance with Section VII(f). No
adjustments shall be made for dividends, distributions or other rights for which
the record date is prior to the date of such purchase.
A Participant shall be issued, as soon as practicable after the date of
each purchase, a stock certificate for the number of shares purchased on the
Participant's behalf. Such certificate may, upon the Participant's request, be
issued in the names of the Participant and his or her spouse as community
property or as joint tenants with right of survivorship.
(i) Assignability. No purchase right granted under the Plan shall be
assignable or transferable by the Participant other than by will or by the laws
of descent and distribution following the Participant's death and during the
Participant's lifetime the purchase right shall be exercisable only by the
Participant.
(j) Merger or Liquidation of Company. In the event the Company or its
stockholders enter into an agreement to dispose of all or substantially all of
the assets or outstanding capital stock of the Company by means of a sale,
merger or reorganization (other than a reorganization effected primarily to
change the State in which the Company is incorporated) or in the event the
Company is liquidated, all outstanding purchase rights under the Plan shall
automatically be exercised immediately prior to the effective date of such sale,
merger, reorganization or liquidation by applying all sums previously collected
from Participants during the purchase period of such transaction to the purchase
of whole shares of Stock, subject, however, to the applicable limitations of
Section VII(b). Any amount not applied to the purchase of Stock by reason of the
Section VII(b) limitation on the maximum number of purchasable shares shall be
refunded promptly.
VIII. ACCRUAL LIMITATIONS
(a) No Participant shall be entitled to accrue rights to acquire Stock
pursuant to any purchase right outstanding under the Plan if and to the extent
such accrual, when aggregated with (i) rights to acquire Stock accrued under
other purchase rights granted to the Participant under this Plan and (ii)
similar rights accrued by the Participant under other employee stock purchase
plans (within the meaning of Code Section 423) of the Company or its Corporate
Affiliates, would otherwise permit such Participant to purchase more than
$25,000 worth of Stock of the Company or any Corporate Affiliate (determined on
the basis of the fair market value of such stock on the date or dates such
rights are granted to the Participant) for each calendar year such rights are at
any time outstanding.
(b) For purposes of applying the accrual limitations of Section VIII(a),
the right to acquire Stock pursuant to each purchase right granted under the
Plan shall accrue as follows:
(i) The right to acquire Stock under each such purchase right shall
accrue when the purchase right first becomes exercisable on the last
business day of the purchase period for which such right is granted.
(ii) No right to acquire Stock under any outstanding purchase right
shall accrue to the extent the Participant has already accrued in the same
calendar year the right to acquire $25,000 worth of Stock (determined on
the basis of the fair market value on the date or dates of grant) pursuant
to one or more other purchase rights granted to the Participant during such
calendar year.
(iii) To the extent the Participant's purchase right does not, by
reason of the Section VIII(a) limitations, accrue on the last business day
of the particular purchase period for which such right is granted, then the
payroll deductions which the Participant made during that purchase period
with respect to such purchase right shall be refunded promptly.
(c) In the event there is any conflict between the provisions of this
Article VIII and one or more provisions of the Plan or any instrument issued
thereunder, the provisions of this Article VIII shall be controlling.
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<PAGE> 58
IX. AMENDMENT AND TERMINATION
The Board may from time to time alter, amend, suspend or discontinue the
Plan; provided, however, that no such action shall adversely affect purchase
rights at the time outstanding under the Plan; and provided, further, that no
such action of the Board may, without the approval of the Company's
stockholders, materially increase the number of shares issuable under the Plan
or the maximum number of shares which any one Participant may purchase under the
Plan during a single purchase period (provided, however, the Plan Administrator
shall have the authority to effect adjustments pursuant to Section VI(b) without
stockholder approval), alter the purchase price formula so as to reduce the
purchase price specified in the Plan, otherwise materially increase the benefits
accruing to Participants under the Plan, or materially modify the requirements
for eligibility to participate in the Plan.
X. GENERAL PROVISIONS
(a) The Plan became effective on the Effective Date. On June 15, 1992 the
Board approved a restatement of the Plan, to be effective as of October 1, 1992.
The restatement was approved by the Company's stockholders at the 1992 Annual
Meeting. On May 4, 1994, the Board approved an amendment to the Plan to increase
the aggregate number of shares issuable over the term thereof from 100,000 to
150,000 shares. The amendment was approved by the Company's stockholders at the
1994 Annual Meeting. In June 1997, the Board approved another amendment to the
Plan to increase the aggregate number of shares issuable over the term thereof
from 150,000 to 250,000 shares, subject to stockholder approval at the 1997
Annual Meeting.
(b) The Plan shall terminate upon the earlier of (i) September 30, 2001, or
(ii) the date on which all shares available for issuance under the Plan shall
have been sold pursuant to purchase rights exercised under the Plan.
(c) All costs and expenses incurred in the administration of the Plan shall
be paid by the Company.
(d) Neither the action of the Company in establishing the Plan, nor any
action taken under the Plan by the Board or the Plan Administrator, nor any
provision of the Plan itself shall be construed so as to grant any person the
right to remain in the employ of the Company or any of its Corporate Affiliates
for any period of specific duration, and such person's employment may be
terminated at any time, with or without cause.
(e) The provisions of the Plan shall be governed by the laws of the State
of California.
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<PAGE> 59
SCHEDULE A
COMPANIES PARTICIPATING IN
1991 EMPLOYEE STOCK PURCHASE PLAN
AS OF JUNE 20, 1997
CorVel Corporation, a Delaware corporation
CorVel Healthcare Corporation, a California corporation
<PAGE> 60
CORVEL CORPORATION
PROXY
ANNUAL MEETING OF STOCKHOLDERS, AUGUST 7, 1997
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned revokes all previous proxies, acknowledges receipt of the
Notice of Annual Meeting of Stockholders to be held on August 7, 1997 and the
accompanying Proxy Statement, and appoints V. Gordon Clemons and Jeffrey J.
Michael, or either of them, the proxy of the undersigned, with full power of
substitution, to vote all shares of the Common Stock of CorVel Corporation (the
"Company") which the undersigned is entitled to vote, either on his or her own
behalf or on behalf of an entity or entities, at the Annual Meeting of
Stockholders of the Company to be held at 600 City Parkway West, Suite 200,
Orange, California, on Thursday, August 7, 1997 at 1:00 p.m. Pacific Daylight
Time, and at any adjournment or postponement thereof, with the same force and
effect as the undersigned might or could do if personally present thereat. The
shares represented by this proxy shall be voted in the following manner:
1. To elect the following directors to serve for a term of one year.
<TABLE>
<S> <C> <C>
V. Gordon Clemons FOR [ ] WITHHOLDING AUTHORITY [ ]
Peter E. Flynn FOR [ ] WITHHOLDING AUTHORITY [ ]
Steven J. Hamerslag FOR [ ] WITHHOLDING AUTHORITY [ ]
R. Judd Jessup FOR [ ] WITHHOLDING AUTHORITY [ ]
Jeffrey J. Michael FOR [ ] WITHHOLDING AUTHORITY [ ]
</TABLE>
2. To approve a series of amendments to the Company's Restated 1988 Executive
Stock Option Plan (the "Option Plan") which will effect the following changes:
(i) increase by 200,000 shares the maximum number of shares of Common Stock
authorized for issuance over the term of the Option Plan from 1,535,000 shares
to 1,735,000 shares, (ii) render the non-employee members of the Board of
Directors (the "Board") eligible to receive option grants under the
Discretionary Option Grant Program in effect under the Option Plan, (iii) allow
unvested shares issued under the Option Plan and subsequently repurchased by the
Company at the option exercise price paid per share to be reissued under the
Option Plan, (iv) remove certain restrictions on the eligibility of Board
members to administer the Option Plan and (v) effect a series of additional
changes to the provisions of the Option Plan (including the stockholder approval
requirements) in order to take advantage of the recent amendments to Rule 16b-3
of the Securities and Exchange Commission which exempts certain officer and
director transactions under the Option Plan from the short-swing liability
provisions of the federal securities laws.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
<PAGE> 61
3. To approve an amendment to the Company's 1991 Employee Stock Purchase Plan
(the "Purchase Plan") to increase the number of shares which may be issued under
the Purchase Plan from 150,000 to 250,000 shares.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
4. To approve an amendment to the Company's Certificate of Incorporation to (i)
include a requirement that any stockholder action be taken only at a meeting of
the stockholders, (ii) provide that Bylaws may be adopted, amended or repealed
by stockholder action only with the approval of the holders of at least
sixty-six and two-thirds percent (66 2/3%) of the outstanding shares of capital
stock entitled to vote, (iii) provide that the foregoing amendments to the
Certificate of Incorporation and this provision (iii) may be amended or repealed
only with the approval of the holders of at least sixty-six and two-thirds
percent (66 2/3%) of the outstanding shares of capital stock entitled to vote,
and (iv) include a provision pursuant to which the Company will be governed by
Section 203 of the General Corporation Law of the State of Delaware.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
5. To ratify the appointment of Ernst & Young LLP as the Company's independent
auditors for fiscal 1998.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR EACH OF THE PROPOSALS SET FORTH
ABOVE. THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED AS SPECIFIED ABOVE.
THIS PROXY WILL BE VOTED FOR THE NOMINEES LISTED ABOVE AND FOR PROPOSALS 2, 3, 4
AND 5 IF NO SPECIFICATION IS MADE.
Dated:
--------------------------
--------------------------
(Print name(s) as it
(they) appear(s) on
certificate)
--------------------------
(Authorized Signature(s))
Please print the name(s)
appearing on each share
certificate(s) over which
you have voting authority.
PLEASE RETURN YOUR EXECUTED PROXY TO U.S. STOCK TRANSFER CORPORATION IN THE
ENCLOSED SELF-ADDRESSED, POSTAGE PRE-PAID ENVELOPE.
