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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________
COMMISSION FILE NUMBER 0-19291
CORVEL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 33-0282651
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
2010 MAIN STREET, SUITE 1020, IRVINE, CALIFORNIA 92614
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (949) 851-1473
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
As of May 31, 2000, there were 7,665,636 shares of Common Stock
outstanding.
The Registrant does not have different classes of Common Stock and as of
May 31, 2000, the aggregate market value of the Common Stock of the Registrant
held by non-affiliates was $132,680,000, based upon the closing sale price of
such stock on that date. For purposes of such calculation, only executive
officers, board members, and beneficial owners of more than 10% of the Company's
outstanding Common Stock are deemed to be affiliates.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Definitive Proxy Statement for the Annual
Meeting of Stockholders to be held on or about August 3, 2000, as filed with the
Commission pursuant to Regulation 14A, are incorporated by reference in Part III
of this Report.
Portions of the Registration Statement filed with the Commission on Form
S-1 (SEC File No. 33-40629), the Company's Annual Reports on Form 10-K for the
fiscal years ended March 31, 1995, March 31, 1994, March 31, 1993 and March 31,
1992, and the Company's filing on Form 8-K on February 28, 1997, are
incorporated by reference in Part IV of this Report.
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor for forward-looking statements. This Annual Report contains
forward-looking statements within the meaning of the Securities Act of 1933 and
the Securities Exchange Act of 1934. The Company's actual results could differ
materially from those projected in the forward-looking statements as a result of
the factors described under "Cautionary Statement Regarding Forward-Looking
Statements" and elsewhere in this Annual Report. Investors in the Company's
securities should consider these factors.
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CORVEL CORPORATION
2000 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I
<TABLE>
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Page
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Item 1. Business 1
Item 2. Properties 14
Item 3. Legal Proceedings 14
Item 4. Submission of Matters to a Vote of Security Holders 14
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters 15
Item 6. Selected Financial Data 15
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations 15
Item 7a. Quantitative and Qualitative Disclosures About Market Risk 15
Item 8. Financial Statements and Supplementary Data 16
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure 16
PART III
Item 10. Directors and Executive Officers of the Registrant 16
Item 11. Executive Compensation 16
Item 12. Security Ownership of Certain Beneficial Owners and Management 16
Item 13. Certain Relationships and Related Transactions 16
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 17
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This Annual Report on Form 10-K may contain forward-looking statements
that involve risks and uncertainties. These statements may differ materially
from actual future events and results of the Company. Please refer to the "Risk
Factors" section of Form 10-K which identify some important risk factors that
could cause actual results of the Company to differ from those contained in any
forward-looking statements.
PART I
ITEM 1. BUSINESS.
INTRODUCTION
CorVel Corporation ("CorVel" or the "Company") is an independent
nationwide provider of managed care services designed to address the medical
issues of healthcare benefits provided under workers' compensation, group health
and auto insurance policies. The Company's services include, but are not limited
to, automated medical fee auditing, national preferred provider network, early
intervention, utilization review, medical case management, vocational
rehabilitation services, telephonic case management and independent medical
examinations. Such services are provided to insurance companies, third-party
administrators ("TPAs"), public entities, and self-administered employers to
assist them in managing the medical issues and monitoring the quality of care
associated with health care claims.
The Company, which is a Delaware corporation, has its principal
executive offices located at 2010 Main Street, Suite 1020, Irvine, California,
92614. The Company's telephone number is 949-851-1473.
RECENT DEVELOPMENTS - INTRODUCTION OF CARE(MC)
In April 2000, the Company launched its Care(MC) marketsite
(http://www.caremc.com). Care(MC) serves the healthcare and claims needs of
insurers and employers managing employee absences and disability insurance
losses. Care(MC) includes a website which provides for direct access to CorVel
Corporation managed care services and is also designed to function as an
application service provider (ASP) through which other managed care providers,
will supply their services to major employers and insurers nationwide.
CareMC was developed in response to requests from major insurers to open
access for their various managed care vendors to CorVel's line of Application
Service Provider (ASP) services. Other features of the website include
electronic communications among providers, payors, employers, managed care
vendors and patients; service scheduling; purchase transactions; automated
provider reimbursement adjudication and vendor billing and collections.
Care(MC) offers a suite of online service and solutions that unite
multiple managed care professionals real-time, and on a single website, creating
a seamless, unified process for claims. The suite of solutions for managed
care professionals include:
Referral Basket: The Referral Basket provides access to multiple managed
care professionals, suppliers, and organizations. Claims professionals can
expedite case referrals and requests for service, eliminating paperwork through
the use of a single, on-going electronic file. Referrals are sent to the
preferred managed care provider and confirmed as received in real-time.
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Claims Center: The Claims Center helps claims professionals organize and
streamline their files. Using the power of the internet, claims professionals
can access comprehensive sets of information on open, closed or pending claims
from multiple managed care providers.
Bill Review: Care(MC) Bill Review assures accuracy, accountability and
timeliness by tracking costs from the time a claim begins until it is closed.
Care(MC) bill review is founded on proprietary software, artificial
intelligence, the integration of information from multiple resources, and
instant access to information. Bills being processed can be reviewed and
approved for payment on-line in real-time.
Reporting Center: The Reporting Center adds value by collecting a myriad
of critical details from multiple sources, then organizing and delivering that
information in real time. Care(MC) helps claims professionals by sorting,
simplifying and formatting comprehensive case data. Reports can be tailored to
highlight individual critical cases or summarized to highlight priority trends.
The Care(MC) suite of solutions for employers include:
Absence Manager: The Absence Manager offers employers a single worksite
for the reporting of all absences. Workers' compensation, short-term disability
and FMLA are all integrated in one patient management process. Care(MC)
documents up-to-the-minute analyses of employee absences, expedites compliance
with government and insurer reporting requirements, and can individualize case
management activities to follow a specified preference.
Disability Manager: The Disability Manager gives employers a
comprehensive overview of short-term disability and workers' compensation
exposures, as well as the details of each lost-time case. Through the Disability
Manager, employers can express their preferences regarding the administration of
their benefit program, and track the progress and status of disability claims.
Employment Services: Employment Services helps administer a wide range
of medical evaluation strategic to the employment process for work groups
susceptible to higher rates of injury or absence. Care(MC) expedites requests
for service and coordinates the scheduling of appointments using an efficient,
easy-to-use website. Employers can monitor the status of scheduled activities
online and in real-time using the services provided; they can reduce the cost
and complexity of conducting physicals, fitness for duty testing or other
evaluations.
Reporting Center: The Care(MC) Reporting Center provides real-time
access to the status of your company's benefit management program. There is no
need to wait for quarterly or even yearly reports; the employer can be informed
daily regarding summarized information, as well as trends and analytic
perspectives. Such information is especially useful in understanding the
underlying causes of medical issues and unexpected outcomes, so the employer can
react to emerging problems immediately.
RECENT DEVELOPMENT - BOARD AUTHORIZES INCREASE IN STOCK REPURCHASE PROGRAM
In May 2000, the Company announced that its Board of Directors had
approved a 1,000,000 share expansion to its existing stock repurchase plan.
Including this
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expansion, the total number of shares authorized to repurchase has now been
increased to 3,400,000 shares. Since commencing this program in the fall of
1996, the Company has repurchased approximately 2,460,000 common shares, equal
to 24% of its outstanding stock at a cost of approximately $43 million. These
repurchases were funded from the Company's operating earnings. These repurchases
have reduced CorVel's current common shares outstanding to 7,660,000 shares.
INDUSTRY OVERVIEW
Workers' compensation is a state-mandated, comprehensive insurance
program that requires employers to fund medical expenses, lost wages and other
costs resulting from work-related injuries and illnesses. Since their
introduction in the early 1900's, these programs have been expanded to all fifty
states and the District of Columbia. Each state is responsible for implementing
and regulating its own program. Consequently, workers' compensation benefits and
arrangements vary on a state-by-state basis and are often highly complex.
Workers' compensation plans generally require employers to fund all of
an employee's costs of medical treatment and a significant portion of lost
wages, legal fees and other associated costs. Typically, work-related injuries
are broadly defined, and injured or ill employees are entitled to extensive
benefits. Employers are required to provide first-dollar coverage with no
co-payment or deductible due from the injured or ill employee for medical
treatment and, in many states, there is no lifetime limit on expenses. However,
in exchange for providing this coverage for employees, employers are not subject
to litigation by employees for benefits in excess of those provided by the
relevant state statute. In most states, the benefits coverage (for both medical
costs and lost wages) is provided through the purchase of commercial insurance
from private insurance companies, participation in state-run insurance funds or
employer self-insurance.
Provider reimbursement methods vary on a state-by state basis. A
majority of states have adopted fee schedules pursuant to which all health care
providers are uniformly reimbursed. The fee schedules are set by each state and
generally prescribe the maximum amounts that may be reimbursed for a designated
procedure. In states without fee schedules, health care providers are reimbursed
based on usual customary and reasonable fees charged in the particular state in
which the services are provided.
Many states do not permit employers to restrict a claimant's choice of
provider, making it more difficult for employers to utilize managed care
approaches such as HMOs and Preferred Provider Organizations ("PPOs"). However,
in many states, employers have the right to direct employees to a specific
primary health care provider during the onset of a workers' compensation case,
subject to the right of the employee to change physicians after a specific
period. In addition, workers' compensation programs vary from state to state,
making it difficult for payors and multi-state employers to adopt uniform
policies to administer and manage the benefits. As a result, managing the
medical benefits of workers' compensation requires approaches, which are
tailored to the specified regulatory environment(s) in which the employer is
operating.
Managed care techniques are intended to monitor the appropriateness of
the cost and delivery of health care services and to measure the performance of
providers through intervention and on-going review of services proposed and
actually provided. Managed care techniques were originally developed to address
group medical care benefits. Historically, employers were slow to apply managed
care techniques to workers'
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compensation costs. However, in recent years, employers and insurance carriers
have been increasing their focus on applying managed care techniques to improve
the administration of their worker's compensation programs.
Since worker's compensation benefits are mandated by law and are subject
to extensive regulation, payors and employers do not have the same flexibility
to alter benefits as they have with other health benefits programs. In addition,
workers' compensation programs vary from state to state, making it difficult for
payors and multi-state employers to adopt uniform policies to administer and
manage benefits. As a result, workers' compensation managed care requires
approaches that are tailored to the specific state regulatory environment in
which the employer operates.
Many states do not permit employers to channel a claimant to a specific
health care provider(s) for treatment, making it difficult for employers to
utilize managed care approaches characteristic of the group health insurance
market. However, employers in some states currently have the right to direct
employees to a specific primary health care provider for varying amounts of time
during the episode of care.
An increasing number of states have adopted legislation encouraging the
use of workers' compensation managed care organizations ("MCO's") in an effort
to allow employers to improve their workers' compensation programs. MCO laws
generally provide employers an opportunity to help injured employees find
quality provider networks. In certain states, MCO laws require licensed MCO's to
offer certain specified services, such as utilization management, case
management, peer review and provider bill review. Most of the MCO laws adopted
to date establish a framework within which a company such as CorVel Corporation
can provide its customers a full range of managed care services.
BUSINESS
The Company offers services in two general categories, provider programs
and patient management services, to assist its customers in managing the medical
care in worker's compensation, group health and auto insurance claims.
PROVIDER PROGRAMS
The Company's provider program services are designed to assist the
company's clients in assuring that the medical services rendered in workers'
compensation cases are appropriate and effective. Medical management services
offered by the Company include automated medical fee auditing, preferred
provider network services, and both prospective and retrospective utilization
review.
Automated Medical Fee Auditing
Many states have adopted fee schedules, which regulate the maximum
allowable fees payable under workers' compensation and auto coverages for
procedures performed by a variety of health care providers. Such schedules may
also include fees for hospital treatment. In general, the purpose of a fee
schedule is to set maximum reimbursement levels for each covered service.
Certain other states permit payors to pay workers' compensation medical
costs at rates defined as usual and customary for the relevant community. This
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is also true for auto coverages and is the way most health claim provider
reimbursement is handled.
The Company provides automated medical fee auditing to assist the
Company's customers in verifying that the fees charged by health care providers
comply with applicable state fee schedules, or are consistent with usual and
customary charges.
The Company offers its fee schedule auditing through a computerized
medical bill review service called MedCheck, which combines automated data
reporting and transmission capabilities. MedCheck consists of an on-line
computer-based information system comprised of a proprietary software program
which stores and accesses state-mandated fee schedules and licensed usual and
customary charge information. MedCheck's capabilities include:
- Checking for provider charges which exceed charges allowable under
fee schedules or usual and customary charges, in accordance with the
requirements of the relevant jurisdiction
- Repricing provider bills to contractual PPO reimbursement levels
- Checking for duplicate billing
- Checking for billed services or procedures that are excessive,
unnecessary or unrelated to treating the particular medical problem
- Checking for "unbundled" billings where the medical services
performed are billed in components, resulting in higher total charges
than would be the case if the services were billed in the aggregate
- Engaging in on site processing of claims
- Sending claims data directly to carriers' databases, thereby reducing
costs due to repetitive or erroneous data entry
In addition to providing the MedCheck software suite, CorVel also
supports insurers and administrators with a full array of out-source
capabilities. The Company provides a proprietary national PPO, as well as
utilization management services. Currently, CorVel has its MedCheck software
installed in 70 offices nationwide. In addition, MedCheck services are performed
at approximately 75 client sites. The MedCheck system can be interfaced to
insurers thought the Company's wide area network (WAN) as well as through its
web-site and virtual private networks (VPN's). When installed at an insurer, the
MedCheck suite can accept electronic data interfaces (EDI) from CorVel and other
sources. In addition, MedCheck can send its own files on to the mainframe claims
administration systems of major insurers and other payors. The system is
designed for easy access by claims adjusters and includes functionality for such
part-time users within the claims payment environment.
MedCheck includes an artificial intelligence (AI) module (First Review)
which allows insurers to incorporate the latest in software intelligence.
MedCheck's "First Review" module can incorporate intelligence unique to specific
insurance programs. In addition to these AI features, MedCheck's development
reflects CorVel's experience as one of the leading managed care companies in the
country. CorVel has been providing medical bill review and PPO administration
services for the casualty insurance industry for ten years.
At March 31, 2000, the Company was providing its MedCheck services to
clients in approximately 44 states primarily through 70 branch offices. An
important element of the Company's business strategy is to introduce MedCheck to
additional existing branch offices and increase its use by current customers.
The Company plans to continue to invest in the expansion of its MedCheck medical
review software to better serve the
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claims processing needs of customers through automated interfacing with its
customers' computer systems.
MedCheck 2000
During fiscal 2000, the Company announced the release of its MedCheck
2000 suite of medical review software. This latest version of the Company's
MedCheck software designed to assist insurers with the automation, review and
payment of medical claims. The software is available for license and accessed
remotely on servers under CorVel's management. MedCheck 2000 includes CorVel's
latest release of "First Review", the Company's line of automated reviews
employing artificial intelligence tools. CorVel's MedCheck bill review software
has been a leading medical review product for ten years and is supported by
CorVel's national network of offices and managed care professionals.
The new software allows administrators to store benefit designs,
administrative parameters, managed care guidelines and fee schedules and "usual
and customary" databases. MedCheck 2000 is integrated with industry standard
applications in word processing and e-mail.
In addition to enabling the Company to compete in the leased software
market, the Company anticipates rolling out MedCheck 2000 to the Company's
offices during the next fiscal year.
Preferred Provider Services
PPOs are groups of hospitals, physicians and other health care providers
that offer services at pre-negotiated rates to employee groups. PPO networks
offer the employer an additional means of providing medical management by
reducing the per-unit price of medical services provided to employees. The
Company provides its customers with access to its PPO network, "CorCare". Bills
submitted from PPOs are identified through the MedCheck review process, and the
submitted charges are then audited against the PPO schedule and against any
applicable fee schedule or usual and customary charges.
In-Patient Bill Review
The Company expanded its line of bill review services by adding unique
capabilities for reviewing in-patient medical reimbursement. This service, named
MedCheck Select, provides a national database of hospital charges detailed by
line item in each hospital's individual billing system. By converting differing
hospital billing systems to a common database, the Company has created a
proprietary "usual and customary" data set for hospital expenses. Revenues for
this service expanded throughout the year, and add to the Company's line of
in-patient medical review and PPO activities.
Retrospective Utilization Review
The Company also offers manual fee auditing and retrospective
utilization review services, including hospital bill and chiropractic bill
auditing at a number of its branch offices. These services, performed primarily
by Company employed registered nurses, are designed to confirm that medical care
was delivered to the patient, the provider was authorized to perform the
rendered service, the care was appropriate and covered by
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workers' compensation, and the charges for the delivered service were usual and
customary.
PATIENT MANAGEMENT SERVICES
In addition to its provider program services, the Company offers a range
of patient management services, which involve working on a one-on-one basis with
injured or ill patients and their various health care professionals, employers
and insurance company adjusters. Patient management services are designed both
to assist in maximizing medical improvement and, where appropriate, to expedite
return to work. The services are designed to monitor the medical necessity and
appropriateness of health care services provided. The Company offers these
services on a stand-alone basis, or as an integrated component of its medical
management services. Managed care services offered by the Company include early
intervention ("Advocacy"), inpatient utilization review, medical case
management, independent medical examinations ("IMEs") and vocational
rehabilitation.
Advocacy
During fiscal 2000, the Company announced the release of version 4.8 of
its Advocacy suite of case management software. This version of Advocacy is
designed to assist employers, insurers, TPA's and case management companies with
the administration of managed care for disability patients. The software is
available for licensure and is supported by CorVel's national network of offices
and managed care professionals.
Advocacy software is CorVel's line of case management tools for the
managed care industry. The suite includes time management, utilization review,
outcomes reporting, administrative capabilities, word processing, and
integration with the internet as well as intranet communications. The new
disability module allows administrators to store benefit designs, payroll
information and absence management controls.
The software helps operators determine available indemnity payments from
the employer and coordinate case management information and issues. Protocols
regarding length of disability are incorporated to guide the management of
cases. Management and operations reports, electronic data interchange and
billing are additional features of the software.
Vocational Rehabilitation
In certain states, vocational rehabilitation is a legislated benefit of
workers' compensation, which assists the employee's return to former employment
or another job function with similar economic value. The Company offers
vocational services to manage workers' compensation benefits and expedite the
injured employee's return to work.
Vocational services include work capacity assessments, job analysis,
transferable skill analysis, job modification, vocational testing, job placement
assistance, labor market surveys and retraining. After an employee sustains an
injury, the Company performs an analysis of the employee's current job and other
potential jobs which could be performed for the employer, meets with the
treating physician to determine the diagnosis and prognosis for return to work,
presents job analyses to obtain a release to return to work,
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develops plans for employee training and generally monitors the employee's
return to work.
Medical Case Management
The Company offers medical case management services where the injury is
catastrophic or complex in nature, or where prolonged recovery is anticipated.
In these cases, the Company's case managers confer with the attending physician,
other providers, the patient and the patient's family to identify the
appropriate rehabilitative treatment and most cost-effective health care
alternatives, including transferring the patient from a hospital to an
alternative care facility. Case managers may coordinate the services or care
required and may arrange for special pricing of the required services.
Inpatient Utilization Review
The Company offers pre-certification and concurrent utilization review
services. The Company's pre-certification service is designed to be utilized
prior to the injured employee's admission to the hospital. Upon notification by
a claims manager or employer, a Company nurse reviews the appropriateness of the
proposed plan of care, the need for inpatient hospitalization, and the
appropriate length of stay. Under the Company's concurrent review service the
nurse reviewers monitor the medical necessity and appropriateness of the
patient's continued hospitalization through contact with the hospital and the
patient's physician and may identify cases that lend themselves to alternate
treatment settings or home care.
Independent Medical Examinations
The Company arranges for IMEs to assist customers in evaluating workers'
compensation and other casualty claims. A medical examination involves the
assessment of a person's condition often for use in determining the extent and
nature of an injury. In general, a physician examines the patient and prepares a
report that describes the nature and extent of injuries, as well as the future
medical requirements. The Company provides IMEs through a network of independent
physicians.
CUSTOMERS AND MARKETING
The Company's customers are principally insurers and, to a lesser
extent, TPA's and self-administered employers. Many claims management decisions
in workers' compensation are the responsibility of the local claims office of
national or regional insurers. The Company's national branch office network has
been established to enable the Company to market and offer its services at both
a local and national account level. The Company is placing increasing emphasis
on national account marketing. The marketing activities of the Company are
conducted by account executives located in key geographic areas, and by national
account executives from the corporate office. Most of the major workers'
compensation insurance carriers conduct business with the Company. None of the
Company's customers represented more than 10% of revenues in fiscal 1999 or
2000.
COMPETITION AND MARKET CONDITIONS
The managed health care services industry is highly fragmented and
competitive. The intensity of competition can be expected to increase. The
Company's primary competitors in the workers' compensation market are
subsidiaries of several large
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insurance carriers which offer one or more services similar to those offered by
the Company, several large insurance carriers themselves, HMOs and numerous
independent companies, typically on a local or regional basis. The Company also
competes with national and local firms specializing in utilization review and
with major insurance carriers and TPAs which have implemented their own internal
utilization review services. Many of the Company's competitors are significantly
larger and have greater financial and marketing resources than the Company.
There can be no assurance that the Company will continue to maintain its
existing performance, or be successful with any new products or in any new
geographical markets it may enter. Moreover, the Company's customers may
establish the in-house capability of performing services offered by the Company.
Legislative reforms in some states permit employers to designate health
plans such as HMOs and PPOs to cover workers' compensation claimants. Because
many health plans have the capacity to manage health care for workers'
compensation claimants, such legislation may intensify competition in the market
served by the Company. Within the past few years, several states have
experienced decreases in the number of workers' compensation claims and the
average cost per claim, which have been reflected in workers' compensation
insurance premium rate reductions in those states.
The Company believes that declines in workers' compensation costs in
these states are due principally to intensified efforts by payors to manage and
control claim costs, to improved risk management by employers and to legislative
reforms. If declines in workers' compensation costs occur in many states and
persist over the long-term, they may have an adverse impact on the Company's
business and results of operations.
The Company competes on the basis of its specialization in workers'
compensation, breadth of services, ability to offer local services on a
nationwide basis, information management systems and independence from insurance
carriers.
GOVERNMENT REGULATIONS
General
Managed health care programs for workers' compensation are subject to
various laws and regulations. Both the nature and degree of applicable
government regulation vary greatly depending upon the specific activities
involved. Generally, parties that actually provide or arrange for the provision
of health care services, assume financial risk related to the provision of those
services, or undertake direct responsibility for making payment or payment
decisions for those services, are subject to a number of complex regulatory
schemes that govern many aspects of their conduct and operations.
In contrast, the management and information services provided by the
Company to its customers typically have not been the subject of regulation by
the federal government or the states. Since the managed health care field is a
rapidly expanding and changing industry and the cost of providing health care
continues to increase, it is possible that the applicable state and federal
regulatory frameworks will expand to have a greater impact upon the conduct and
operation of the Company's business.
Under the current workers' compensation system, employer insurance or
self-funded coverage is governed by individual laws in each of the 50 states and
by certain federal laws. The management and information services that make up
the Company's managed care program serve markets that have developed largely in
response to needs of
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insurers, employers and large TPAs, and generally have not been mandated by
legislation or other government action. On the other hand, the vocational
rehabilitation case management marketplace within the workers' compensation
system has been dependent upon the laws and regulations within those states that
require the availability of specified rehabilitation services for injured
workers. Similarly, the Company's fee schedule auditing services address market
needs created by certain states' enactment of maximum permissible fee schedules
for workers' compensation services. Changes in individual state regulation of
workers' compensation may create a greater or lesser demand for some or all of
the Company's services, or require the Company to develop new or modified
services in order to meet the needs of the marketplace and compete effectively
in that marketplace.
Medical Management Legislation
Historically, governmental strategies to contain medical costs in the
workers' compensation field have been generally limited to legislation on a
state-by-state basis. For example, many states have implemented fee schedules
those list maximum reimbursement levels for health care procedures. In certain
states that have not authorized the use of a fee schedule, the Company adjusts
bills to the usual and customary levels authorized by the payor. Opportunities
for the Company's services could increase as more states legislate additional
management strategies. Conversely, the Company could be adversely affected if
states elect to reduce the extent of medical management strategies available to
insurance carriers and other payors, or adopt other strategies for management
that would not support a demand for the Company's services.
Healthcare Reform
There has been considerable discussion of healthcare reform at both the
federal level and in numerous state legislatures in recent years. Due to
uncertainties regarding the ultimate features of reform initiatives and the
timing of their enactment, the Company cannot predict which, if any, reforms
will be adopted, when they may be adopted, or what impact they may have on the
Company.
Vocational Rehabilitation Legislation
During the early 1970s, the case management marketplace within workers'
compensation was dominated by the provision of medical management services. Such
services were purchased at the option of insurance carriers with little or no
support from legislative efforts within any of the states. By the mid-1970s, it
became popular for states to legislate either supportive programs for vocational
rehabilitation or, in some cases, mandatory vocational rehabilitation statutes.
SHAREHOLDER RIGHTS PLAN
During fiscal 1997, the Company's Board of Directors approved the
adoption of a Shareholder Rights Plan. The Rights Plan, which is similar to
rights plans adopted by numerous other public companies, provides for a dividend
distribution to CorVel stockholders of one preferred stock purchase "Right" for
each outstanding share of CorVel's Common Stock. The Rights are designed to
assure that all stockholders receive fair and equal treatment in the event of
any proposed takeover of the Company and to encourage a potential acquirer to
negotiate with the Board of Directors prior to attempting a takeover. The rights
have an exercise price of $62.50 per right, adjusted for the two-for-one stock
split paid on June 14, 1999, subject to subsequent adjustment. Initially, the
10
<PAGE> 14
Rights will trade with the Company's common stock, and will not be exercisable
until the occurrence of certain takeover-related events.
Generally, the Rights Plan provides that if a person or group acquires
15% or more of the Company's Common Stock without the approval of the Board,
subject to certain exception, the holders of the rights, other than the
acquiring person or group, would, under certain circumstances, have the right to
purchase additional shares of the Company's Common Stock having a market value
equal to two times the then-current exercise price of the right.
In addition, if the Company is thereafter merged into another entity, of
if 50% or more of the Company's consolidated assets or earning power are sold,
then the Right will entitle its holder to buy common shares of the acquiring
entity having a market value equal to two times the then-current exercise price
of the Right. The Company's Board of Directors may exchange or redeem the Rights
under certain conditions.
EMPLOYEES
As of March 31, 2000, CorVel had approximately 2,750 employees,
including nurses, counselors and other employees. No employees are represented
by any collective bargaining unit. Management considers its relationship with
its employees to be good.
RISK FACTORS
Past financial performance is not necessarily a reliable indicator of
future performance, and investors in the Company's Common Stock should not use
historical performance to anticipate results or future period trends. The
Company's business and the market price of the Company's Common Stock are
subject to numerous risks and uncertainties. Some of those risks are described
below. Other risks are presented elsewhere in this Form 10-K. See, in
particular, "Management's Discussion and Analysis of Financial Condition and
Results of Operations".
POTENTIAL ADVERSE IMPACT OF GOVERNMENT REGULATION. Many states,
including a number of those in which the Company transacts business, have
licensing and other regulatory requirements applicable to the Company's
business. Approximately half of the states have enacted laws that require
licensing of businesses, which provide medical review services, such as the
Company. Some of these laws apply to medical review of care covered by workers'
compensation. These laws typically establish minimum standards for
qualifications of personnel, confidentiality, internal quality control and
dispute resolution procedures. These regulatory programs may result in increased
costs of operation for the Company, which may have an adverse impact upon the
Company's ability to compete with other available alternatives for health care
cost control. In addition, new laws regulating the operation of managed care
provider networks have been adopted by a number of states. To the extent the
Company is governed by these regulations, it may be subject to additional
licensing requirements, financial and operational oversight and procedural
standards for beneficiaries and providers.
Regulation in the health care and workers' compensation fields is
constantly evolving. The Company is unable to predict what additional government
regulations, if any affecting its business may be promulgated in the future. The
Company's business may be adversely affected by failure to comply with existing
laws and regulations, failure to obtain necessary licenses and government
approvals or failure to adapt to new or
11
<PAGE> 15
modified regulatory requirements. Proposals for health care legislative reforms
are regularly considered at the federal and state levels. To the extent that
such proposals affect workers' compensation, such proposals may adversely affect
the Company's business and results of operations.
In addition, changes in workers' compensation laws or regulations may
impact demand for the Company's services, require the Company to develop new or
modified services to meet the demands of the marketplace or modify the fees that
the Company may charge for its services. One of the proposals which has been
considered is 24-hour health coverage, in which the coverage of traditional
employer-sponsored health plans is combined with workers' compensation coverage
to provide a single insurance plan for work-related and non-work-related health
problems. Incorporating workers' compensation coverage into conventional health
plans may adversely affect the market for the Company's services.
POSSIBLE LITIGATION AND LEGAL LIABILITY. The Company, through its
utilization management services, makes recommendations concerning the
appropriateness of providers' medical treatment plans of patients throughout the
country, and as a result, could be exposed to claims for adverse medical
consequences. The Company does not grant or deny claims for payment of benefits
and the Company does not believe that it engages in the practice of medicine or
the delivery of medical services. There can be no assurance, however, that the
Company will not be subject to claims or litigation related to the grant or
denial of claims for payment of benefits or allegations that the Company engages
in the practice of medicine or the delivery of medical services.
In addition, there can be no assurance that the Company will not be
subject to other litigation that may adversely affect the Company's business or
results of operations. The Company maintains professional liability insurance
and such other coverages as the Company believes are reasonable in light of the
Company's experience to date. There can be no assurance; however, that such
insurance will be sufficient or available in the future at reasonable cost to
protect the Company from liability which might adversely affect the Company's
business or results of operations.
COMPETITION. The Company faces competition from HMOs, PPOs, TPAs and
other managed health care companies. The Company believes that, as managed care
techniques continue to gain acceptance in the marketplace, CorVel's competitors
will increasingly consist of nationally focused managed care service companies,
insurance companies, HMOs and other significant providers of managed care
products. Legislative reforms in some states permit employers to designate
health plans such as HMOs and PPOs to cover workers' compensation claimants.
Because many health plans have the ability to manage medical costs for workers'
compensation claimants, such legislation may intensify competition in the
markets served by the Company. Many of the Company's current and potential
competitors are significantly larger and have greater financial and marketing
resources than those of the Company, and there can be no assurance that the
Company will continue to maintain its existing clients or its past level of
operating performance or be successful with any new products or in any new
geographical markets it may enter.
CHANGES IN MARKET DYNAMICS. Within the past few years, several states
have experienced decreases in the number of workers' compensation claims and the
average cost per claim which have been reflected in workers' compensation
insurance premium rate reductions in those states. The Company believes that
declines in workers' compensation costs in these states are due principally to
intensified efforts by payors to m manage and control claim costs, to improved
risk management by employers and to
12
<PAGE> 16
legislative reforms. If declines in workers' compensation costs occur in many
states and persist over the long-term, they may have an adverse impact on the
Company's business and results of operations.
DEPENDENCE UPON KEY PERSONNEL. The Company is dependent to a substantial
extent upon the continuing efforts and abilities of certain key management
personnel. In addition, the Company faces competition for experienced employees
with professional expertise in the workers' compensation managed care area. The
loss of, or the inability to attract, qualified employees could have a material
adverse effect on the Company's business and results of operations.
RISKS RELATED TO GROWTH STRATEGY. The Company's strategy is to continue
its internal growth and, as strategic opportunities arise to consider
acquisitions of, or relationships with, other companies in related lines of
business. As a result, the Company is subject to certain growth-related risks,
including the risk that it will be unable to retain personnel or acquire the
resources necessary to service such growth adequately. Expenses arising from the
Company's efforts to increase its market penetration may have a negative impact
on operating results. In addition, there can be no assurance that any suitable
opportunities for strategic acquisitions or relationships will arise or, if they
do arise that the transactions contemplated thereby could be completed. If such
a transaction does occur, there can be no assurance that the Company will be
able to integrate effectively any acquired business into the Company. In
addition, any such transaction would be subject to various risks associated with
the acquisition of businesses, including the financial impact of expenses
associated with the integration of businesses.
During the past fiscal year, the Company has made efforts to increase
its presence and revenue in the group health market with moderate success.
Managed care in this market is more mature than managed care in workers'
compensation and has numerous large competitors, primarily HMOs. The Company has
limited experience in the group health market. There can be no assurance that
the Company will be successful in this market.
Certain aspects of the Company's business are dependent upon its ability
to store, retrieve, process and manage data and to maintain and upgrade its data
processing capabilities. Interruption of data processing capabilities for any
extended length of time, loss of stored data, programming errors or other
computer problems could have a material adverse effect on the Company's business
and results of operations. In addition, the company's results of operations are
highly dependent upon the ability of management to expeditiously retrieve and
analyze financial information from its nation-wide branch network. The company
is currently in the process of installing new company-wide management
information software and there can be no assurance that the installation of this
new system will proceed according to plan.
In addition, the Company expects that a considerable amount of its
future growth will depend on its ability to process and manage claims data more
efficiently and to provide more meaningful healthcare information to customers
and payors of healthcare. There can be no assurance that the Company's current
data processing capabilities will be adequate for its future growth, that it
will able to efficiently upgrade its systems to meet future demands, or that the
Company will be able to develop, license or otherwise acquire software to
address these market demands as well or as timely as its competitors.
POSSIBLE VOLATILITY OF STOCK PRICE. The market price of the Company's
Common Stock may be highly volatile. Factors such as variations in the Company's
revenues, earnings and cash flow, general market trends in the workers'
compensation managed care
13
<PAGE> 17
market, and announcements of innovations by the Company or its competitors could
cause the market price of the Common Stock to fluctuate substantially.
Specifically, the year-to-year percentage growth in operating results for the
Company's four most recently completed fiscal years was lower than the growth
rates historically experienced by the Company. The Company's slower growth rate
in those fiscal years was partially attributable to a reduction in the growth
rate of health care expenditures nationally, contributing to a reduction in the
growth of claims processed by the Company. There can be no assurance that the
Company's growth rate in the future, if any will be at or near historical
levels.
In addition, the stock market has in the past experienced price and
volume fluctuations that have particularly affected companies in the health care
and managed care markets resulting in changes in the market price of the stock
of many companies which may not have been directly related to the operating
performance of those companies.
IMPORTANCE OF INTELLECTUAL PROPERTY RIGHTS. The Company has made
significant investments in the development and maintenance of its proprietary
software systems and data. The Company relies largely on its own security
systems, confidentiality procedures and employee nondisclosure agreements to
maintain the confidentiality and security of its proprietary information.
Unauthorized access by third parties to the Company's information systems, the
existence of computer viruses in the Company's data or software and
misappropriation of the Company's proprietary information may have a material
adverse effect on the Company's business and results of operations.
ITEM 2. PROPERTIES.
The Company's principal executive office is located in Irvine,
California in approximately 3,500 square feet of leased space. The lease expires
in August 2002. The Company leases its branch offices, which range in size up to
approximately 11,000 square feet. The lease terms for the branch offices range
from monthly to seven years. The Company believes that its facilities are
adequate for its current needs and that suitable additional space will be
available as required.
ITEM 3. LEGAL PROCEEDINGS.
The Company is involved in litigation arising in the normal course of
business. The Company believes that resolution of these matters will not result
in any payments that, in the aggregate, would be material to the financial
position or financial operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted to a vote of stockholders during the
quarter ended March 31, 2000.
14
<PAGE> 18
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
MARKET INFORMATION
The Company's Common Stock is traded on the Nasdaq National Market under
the symbol CRVL. The quarterly high and low sales prices for the Company's
Common Stock for fiscal years 1999 and 2000 as reported by Nasdaq are set forth
below for the periods indicated as adjusted for the 2-for-1 stock split in the
form of a 100% dividend paid on June 14, 1999:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MARCH 31, 1999: High Low
<S> <C> <C>
Quarter Ended June 30, 1998: $ 20.00 $ 16.50
Quarter Ended September 30, 1998: 19.94 16.25
Quarter Ended December 31, 1998: 19.00 16.88
Quarter Ended March 31, 1999: 18.50 17.00
FISCAL YEAR ENDED MARCH 31, 2000:
Quarter Ended June 30, 1999: $ 21.63 $ 17.50
Quarter Ended September 30, 1999: 26.25 20.25
Quarter Ended December 31, 1999: 24.00 16.94
Quarter Ended March 31, 2000: 29.00 21.38
</TABLE>
The last sales price for the Company's Common Stock as reported by
NASDAQ on May 31, 2000 was $27.13. As of May 31, 2000, there were 2,350 holders
of record of the Company's Common Stock. The Company has never paid any cash
dividends on its Common Stock and has no current plans to do so.
ITEM 6. SELECTED FINANCIAL DATA.
The selected consolidated financial data of the Company appears in a
separate section of this Annual Report on Form 10-K on page 21.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Management's Discussion and Analysis of Financial Condition and Results
of Operations appears in a separate section of this Annual Report on Form 10-K
beginning on page 22.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Market risk generally represents the risk that losses may occur in the
values of financial instruments as a result of movements in interest rates,
foreign currency exchange rates and commodity prices. The Company has no market
risks in these areas.
15
<PAGE> 19
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Company's consolidated financial statements and schedule, as listed
under Item 14, appear in a separate section of this Annual Report on Form 10-K
beginning on page 26 and 42, respectively.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The sections titled "Directors and Nominees," "Executive Officers of the
Company," and "Compliance with Section 16(a) of the Exchange Act" appearing in
the Company's Definitive Proxy Statement for the 2000 Annual Meeting of
Stockholders are incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The section titled "Executive Compensation and Related Information",
except as stated therein, appearing in the Company's Definitive Proxy Statement
for the 2000 Annual Meeting of Stockholders is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The section titled "Principal Stockholders" appearing in the Company's
Definitive Proxy Statement for the 2000 Annual Meeting of Stockholders is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The section titled "Certain Transactions" appearing in the Company's
Definitive Proxy Statement for the 2000 Annual Meeting of Stockholders is
incorporated herein by reference.
16
<PAGE> 20
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a)(1) CONSOLIDATED FINANCIAL STATEMENTS:
The Company's consolidated financial statements appear in a separate
section of this Annual Report on Form 10-K beginning on the pages referenced
below:
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Auditors 25
Consolidated Statements of Income for the Years Ended
March 31, 1998, 1999, and 2000 26
Consolidated Balance Sheets as of March 31, 1998 and 2000 27
Consolidated Statements of Stockholders' Equity for the Years
Ended March 31, 1998, 1999, and 2000 28
Consolidated Statements of Cash Flows for the Years Ended
March 31, 1998, 1999, and 2000 30
Notes to Consolidated Financial Statements 31
</TABLE>
(2) FINANCIAL STATEMENT SCHEDULE:
The Company's financial statement schedule appears in a separate section
of this Annual Report on Form 10-K beginning on the page referenced below. All
other schedules have been omitted as they are not applicable, not required or
the information is included in the consolidated financial statements or the
notes thereto.
<TABLE>
Schedule Page
-------- ----
<S> <C>
II -- Valuation and Qualifying Accounts 41
</TABLE>
(3) EXHIBITS:
EXHIBIT
<TABLE>
<CAPTION>
NO. TITLE METHOD OF FILING
--- ----- ----------------
<S> <C> <C>
3.1 Certificate of Incorporation of Incorporated herein by reference to
the Company Exhibit 3.1 to the Company's Registration
Statement on Form S-1 Registration No.
33-40629.
3.2 Bylaws of the Company Incorporated herein by reference to
Exhibit 3.2 to the Company's Registration
Statement on Form S-1 Registration No.
33-40629.
</TABLE>
17
<PAGE> 21
EXHIBITS (CONTINUED)
<TABLE>
<CAPTION>
EXHIBIT
NO. TITLE METHOD OF FILING
--- ----- ----------------
<S> <C> <C>
10.1 Nonqualified Stock Option Incorporated herein by reference to
Agreement between V. Gordon Exhibit 10.6 to the Company's Registration
Clemons, the Company and North Statement on Form S-1 Registration No.
Star together with all amendments 33-40629.
and addendums thereto
10.2 Supplementary Agreement between Incorporated herein by reference to
V. Gordon Clemons, the Company and Exhibit 10.7 to the Company's Registration
North Star Statement on Form S-1 Registration No.
33-40629.
10.3 Amendment to Supplementary Incorporated herein by reference to
Agreement between Mr. Clemons, the Exhibit 10.5 to the Company's Annual
Company and North Star Report on Form 10-K for the fiscal year
ended March 31, 1992.
10.4 Restated 1988 Executive Stock Incorporated herein by reference to
Option Plan, as amended Exhibit 10.6 to the Company's Annual
Report on Form 10-K for the fiscal
year ended March 31, 1995.
10.5 Form of Notice of Grant of Stock Incorporated herein by reference to
Option Under the Restated 1988 Exhibit 10.7 to the Company's Annual
Executive Stock Option Report on Form 10-K for the fiscal year
ended March 31, 1994.
10.6 Form of Stock Option Agreement Incorporated herein by reference to
under the Restated 1988 Executive Exhibit 10.8 to the Company's Annual
Stock Option Plan Report on Form 10-K for the fiscal year
ended March 31, 1994.
10.7 Form of Notice of Exercise under Incorporated herein by reference to
the Restated 1988 Executive Stock Exhibit 10.9 to the Company's Annual
Option Plan Report on Form 10-K for the fiscal year
ended March 31, 1994.
10.8 Employment Agreement of V. Gordon Incorporated herein by reference to
Clemons Exhibit 10.12 to the Company's
Registration Statement on Form S-1
Registration No. 33-40629.
</TABLE>
18
<PAGE> 22
EXHIBITS (CONTINUED)
<TABLE>
<CAPTION>
EXHIBIT
NO. TITLE METHOD OF FILING
--- ----- ----------------
<S> <C> <C>
10.9 Restated 1991 Employee Stock Incorporated herein by reference to
Purchase Plan, as amended Exhibit 10.11 in the Company's
Annual Report on Form 10-K for the
fiscal year ended March 31, 1995.
10.10 Fidelity Master Plan for Savings Incorporated herein by reference to
and Investment, and amendments Exhibits 10.16 and 10.16A to the Company's
Registration Statement on Form S-1
Registration No. 33-40629.
10.11 Daniel Davis Severance Arrangement Incorporated herein by reference to
the Company's Annual Report on Form
10-K for the fiscal year ended
March 31, 1993.
10.15 Shareholder Rights Plan Incorporated herein by reference to the
Company's Form 8-K filed on
February 28, 1997.
21.1 Subsidiaries of the Company Attached.
23.1 Consent of Independent Auditors Attached.
27.1 Financial Data Schedule Attached.
</TABLE>
(b) REPORTS ON FORM 8-K
None.
19
<PAGE> 23
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
CORVEL CORPORATION
Date: June 28, 2000 By: /s/ V. GORDON CLEMONS
-----------------------
V. Gordon Clemons
Chairman and President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ V. Gordon Clemons Chairman and President June 28, 2000
---------------------
V. Gordon Clemons
/s/ Richard J. Schweppe Chief Financial Officer and June 28, 2000
----------------------- Accounting Officer
Richard J. Schweppe
/s/ Peter E. Flynn Director June 28, 2000
------------------
Peter E. Flynn
/s/ Steven J. Hamerslag Director June 28, 2000
-----------------------
Steven J. Hamerslag
/s/ Judd Jessup Director June 28, 2000
---------------
Judd Jessup
/s/ Jeffrey J. Michael Director June 28, 2000
----------------------
Jeffrey J. Michael
</TABLE>
20
<PAGE> 24
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected financial data for the five years ended March 31,
2000, have been derived from the Company's audited consolidated financial
statements. The following data should be read in conjunction with the Company's
Consolidated Financial Statements, the related notes thereto, and "Management's
Discussion and Analysis of Financial Condition and Results of Operations." The
following amounts are in thousands, except per share data.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
---------------------
XX 1996 1997 1998 1999 2000
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues $109,052 $121,704 $141,709 $165,457 $186,765
Costs and Expenses:
Cost of revenues 88,937 99,323 115,553 136,082 152,710
General and administrative 8,106 8,645 11,029 12,596 14,752
-------- -------- -------- -------- --------
97,043 107,968 126,582 148,678 167,462
-------- -------- -------- -------- --------
Income before income taxes 12,009 13,736 15,127 16,779 19,303
Income tax provision 4,684 5,220 5,670 6,376 7,336
-------- -------- -------- -------- --------
Net income $ 7,325 $ 8,516 $ 9,457 $ 10,403 $ 11,967
======== ======== ======== ======== ========
Net income per share:
Basic $ 0.83 $ 0.93 $ 1.13 $ 1.28 $ 1.49
======== ======== ======== ======== ========
Diluted $ 0.79 $ 0.91 $ 1.10 $ 1.26 $ 1.47
======== ======== ======== ======== ========
Shares used in computing net income per share:
Basic 8,870 9,170 8,386 8,155 8,021
Diluted 9,320 9,370 8,572 8,261 8,151
Return on beginning of year equity 20.5% 18.8% 20.5% 22.7% 22.5%
Return on beginning of year assets 16.7% 15.8% 16.1% 17.2% 17.4%
BALANCE SHEET DATA AS OF MARCH 31, 1996 1997 1998 1999 2000
-------- -------- -------- -------- --------
Cash and cash equivalents $ 17,113 $ 15,665 $ 8,430 $ 9,052 $ 5,643
Accounts receivable, net 18,394 22,294 25,633 31,562 35,874
Working capital 30,781 28,596 24,726 31,700 34,396
Total assets 53,984 58,824 60,491 68,737 71,187
Retained earnings 18,910 27,426 36,883 47,286 59,253
Treasury stock - 9,461 21,727 26,990 39,956
Total stockholders' equity 45,311 46,087 45,771 53,214 55,293
</TABLE>
21
<PAGE> 25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and
Results of Operations may include certain forward-looking statements, within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended, including (without
limitation) statements with respect to anticipated future operating and
financial performance, growth and acquisition opportunities and other similar
forecasts and statements of expectation. Words such as "expects," "anticipates,"
"intends," "plans," "believes," "seeks," "estimates" and "should" and variations
of these words and similar expressions, are intended to identify these forward-
looking statements. Forward-looking statements made by the Company and its
management are based on estimates, projections, beliefs and assumptions of
management at the time of such statements and are not guarantees of future
performance.
The Company disclaims any obligations to update or revise any
forward-looking statement based on the occurrence of future events, the receipt
of new information or otherwise. Actual future performance, outcomes and results
may differ materially from those expressed in forward-looking statements made by
the Company and its management as a result of a number of risks, uncertainties
and assumptions. Representative examples of these factors include (without
limitation) general industry and economic conditions; cost of capital and
capital requirements; competition from other managed care companies; the ability
to expand certain areas of the Company's business; shifts in customer demands;
the ability of the Company to produce market-competitive software; changes in
operating expenses including employee wages, benefits and medical inflation;
governmental and public policy changes; dependence on key personnel; possible
litigation and legal liability in the course of operations; and the continued
availability of financing in the amounts and at the terms necessary to support
the Company's future business.
The Company derives the majority of its revenues from providing patient
management and provider program services to payors of workers' compensation
benefits and health insurance benefits. Patient management services include
early intervention, utilization review, medical case management, vocational
rehabilitation, and independent medical examinations. Provider program revenues
include fee schedule auditing, hospital bill auditing, and preferred provider
referral services. The percentages of revenues attributable to patient
management and provider program services for the fiscal years ended March 31,
1998, 1999, and 2000 are as follows:
<TABLE>
<CAPTION>
1998 1999 2000
-------- -------- --------
<S> <C> <C> <C>
Patient management services 56.1% 58.5% 59.9%
Provider program services 43.9% 41.5% 40.1%
-------- -------- --------
100.0% 100.0% 100.0%
======== ======== ========
</TABLE>
22
<PAGE> 26
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the
percentage of revenues represented by certain items reflected in the Company's
consolidated statements of income. The Company's past operating results are not
necessarily indicative of future operating results.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
1998 1999 2000
------ ------ ------
<S> <C> <C> <C>
Revenues 100.0% 100.0% 100.0%
Cost of revenues 81.5 82.3 81.8
Gross profit 18.5 17.7 18.2
General and administrative 7.8 7.6 7.9
Income before income taxes 10.7 10.1 10.3
Net income 6.7 6.3 6.4
</TABLE>
Years Ended March 31, 1998, 1999 and 2000
Revenues for fiscal 1999 increased by 17% to $165 million from $142
million in fiscal 1998, an increase of $23 million. The majority of this growth
came from patient management services, which grew 23% from $79 million in fiscal
year 1998 to $97 million in fiscal 1999, primarily due to two new national
contracts to provide patient management services along with an increase in
referrals from existing customers. Provider program services increased by $7
million from $62 million in fiscal 1998 to $69 million in fiscal 1999, an
increase of 11%.
Revenues for fiscal 2000 increased by 13% to $187 million from $165
million in fiscal 1999, an increase of $22 million. The majority of this growth
came from patient management services, which grew 15% from $97 million in fiscal
year 1999 to $112 million in fiscal 2000, primarily due to new national
contracts to provide patient management services along with an increase in
referrals from existing customers. Provider program services increased by $6
million from $69 million in fiscal 1999 to $75 million in fiscal 2000, an
increase of 9%.
The Company's cost of revenues consists primarily of salaries, salary
related taxes and benefits, rent, telephone, and costs related to the Company's
computer operations, including depreciation and amortization. Costs of revenues
increased from $116 million in fiscal 1998 and $136 million in fiscal 1999, to
$153 million in fiscal 2000, primarily due to the increases in revenues as noted
above.
Cost of services as a percentage of revenues was 81.5% during fiscal
1998 and 82.3% in fiscal 1999, and decreased to 81.8% in fiscal 2000. During
fiscal year 2000, the cost of service percentage decreased primarily due to the
realization of economies of scale with its expanded branch operations. The
Company's gross profit percentage increased during fiscal 2000. However, there
is no guarantee the cost of service percentage will remain constant or increase,
should the Company pursue a strategy of reducing price in order to obtain
greater market share or if competition causes pricing pressure in the industry.
General and administrative expense increased from $11 million in fiscal
1998 and $13 million in fiscal 1999 to $15 million in fiscal 2000. This increase
was primarily due to increased MIS staff to support the Company's implementation
of a national wide area
23
<PAGE> 27
network and further electronic data interface capabilities as required by
customer needs. General and administrative expenses increased as a percentage of
revenue from 7.6% in fiscal 1999 to 7.9% in fiscal 2000. These percentage
increases were due to the growth in systems costs for the development and
marketing of Care(MC).
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations and capital expenditures primarily
from cash flow from operations. During fiscal 2000, net working capital
increased by $2 million from $32 million at March 31, 1999 to $34 million at
March 31, 2000. This increase is primarily due to the $12 million of net income
earned by the Company during fiscal 2000 offset by repurchase of the Company's
common stock. As of March 31, 2000, the Company had $6 million in cash and cash
equivalents, invested primarily in short-term, highly liquid investments with
maturities of 90 days or less. The Company has no interest-bearing short-term
debt.
The Company has historically required substantial capital to fund the
growth of its operations, particularly working capital to fund the growth in
accounts receivable and capital expenditures. The Company believes, however,
that the cash balance at March 31, 2000 along with anticipated internally
generated funds will be sufficient to meet the Company's expected cash
requirements for at least the next twelve months.
24
<PAGE> 28
REPORT OF INDEPENDENT AUDITORS
Stockholders and Board of Directors
CorVel Corporation
We have audited the accompanying consolidated balance sheets of CorVel
Corporation as of March 31, 1999 and 2000, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the three
years in the period ended March 31, 2000. Our audits also included the financial
statement schedule listed in the Index at Item 14(a). These financial statements
and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
CorVel Corporation at March 31, 1999 and 2000, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended March 31, 2000, in conformity with accounting principles generally
accepted in the United States. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
/s/ Ernst & Young LLP
Orange County, California
May 9, 2000
25
<PAGE> 29
CORVEL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
---------------------
1998 1999 2000
------------ ------------ ------------
<S> <C> <C> <C>
REVENUES $141,709,000 $165,457,000 $186,765,000
COSTS AND EXPENSES
Cost of revenues 115,553,000 136,082,000 152,710,000
General and administrative 11,029,000 12,596,000 14,752,000
------------ ------------ ------------
126,582,000 148,678,000 167,462,000
------------ ------------ ------------
Income before income taxes 15,127,000 16,779,000 19,303,000
Income tax provision 5,670,000 6,376,000 7,336,000
------------ ------------ ------------
NET INCOME $ 9,457,000 $ 10,403,000 $ 11,967,000
============ ============ ============
Net income per share:
Basic $ 1.13 $ 1.28 $ 1.49
============ ============ ============
Diluted $ 1.10 $ 1.26 $ 1.47
============ ============ ============
Shares used in computing net income per share:
Basic 8,386,000 8,155,000 8,021,000
Diluted 8,572,000 8,261,000 8,151,000
</TABLE>
See accompanying notes to consolidated financial statements
26
<PAGE> 30
CORVEL CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31,
---------
1999 2000
------------ ------------
ASSETS
<S> <C> <C>
Current Assets $ 9,052,000 $ 5,643,000
Cash and cash equivalents 31,562,000 35,874,000
Accounts receivable (less allowance for doubtful accounts of
$3,015,000 in 1999 and $3,395,000 in 2000) 856,000 1,931,000
Prepaid expenses and taxes 3,223,000 3,833,000
------------ ------------
Deferred income taxes 44,693,000 47,281,000
------------ ------------
Total current assets 17,145,000 16,631,000
Property and equipment, net 6,899,000 7,275,000
Other assets $ 68,737,000 $ 71,187,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts and taxes payable $ 6,468,000 $ 5,310,000
Accrued liabilities 6,525,000 7,575,000
------------ ------------
Total current liabilities 12,993,000 12,885,000
------------ ------------
Deferred income taxes 2,530,000 3,009,000
Commitments and Contingencies
Stockholders' Equity
Common Stock, $.0001 par value: 20,000,000 shares authorized;
9,885,576 and 10,079,001 shares issued and outstanding in
1999 and 2000, respectively 1,000 1,000
Paid-in Capital 32,917,000 35,995,000
Treasury Stock, at cost (1,747,280 shares in 1999, 2,333,340
shares in 2000) (26,990,000) (39,956,000)
Retained Earnings 47,286,000 59,253,000
53,214,000 55,293,000
------------ ------------
Total stockholders' equity $ 68,737,000 $ 71,187,000
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
27
<PAGE> 31
CORVEL CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED MARCH 31, 1998, 1999, AND 2000
<TABLE>
<CAPTION>
COMMON STOCK
COMMON COMMON AND PAID IN TREASURY
STOCK - SHARES STOCK - AMOUNT CAPITAL SHARES
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Balance - March 31, 1997 9,395,706 $ 1,000 $ 28,121,000 (714,000)
Stock issued under employee
stock purchase plan 41,040 -- 540,000 --
Stock issued and income tax
benefits under stock option
plan, net of shares repurchased 270,198 -- 1,953,000 --
Purchase of common stock -- -- -- (747,200)
Net income and comprehensive
income -- -- --
--------------- --------------- --------------- ---------------
Balance - March 31, 1998 9,706,944 1,000 30,614,000 (1,461,200)
--------------- --------------- --------------- ---------------
Stock issued under employee
stock purchase plan 34,428 -- 541,000 --
Stock issued and income tax
benefits under stock option
plan, net of shares repurchased 144,204 -- 1,762,000 --
Purchase of common stock -- -- -- (286,080)
Net income and comprehensive
income -- -- -- --
--------------- --------------- --------------- ---------------
Balance - March 31, 1999 9,885,576 1,000 32,917,000 (1,747,280)
--------------- --------------- --------------- ---------------
Stock issued under employee
stock purchase plan 34,800 -- 588,000 --
Stock issued and income tax
benefits under stock option
plan, net of shares repurchased 158,625 -- 2,490,000 --
Purchase of common stock -- -- -- (586,060)
Net income and comprehensive
income -- -- -- --
--------------- --------------- --------------- ---------------
Balance - March 31, 2000 10,079,001 $ 1,000 $ 35,995,000 (2,333,340)
=============== =============== =============== ===============
</TABLE>
See accompanying notes to consolidated financial statements.
28
<PAGE> 32
CORVEL CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED MARCH 31, 1998, 1999, AND 2000
<TABLE>
<CAPTION>
TOTAL
TREASURY RETAINED SHAREHOLDERS'
SHARES - COST EARNINGS EQUITY
-------------------------------------------------
<S> <C> <C> <C>
Balance - March 31, 1997 $ (9,461,000) $ 27,426,000 $ 46,087,000
Stock issued under employee stock
purchase plan -- -- 540,000
Stock issued and income tax
benefits under stock option plan,
net of shares repurchased -- -- 1,953,000
Purchase of common stock (12,266,000) -- (12,266,000)
Net income and comprehensive income -- 9,457,000 9,457,000
------------ ------------ ------------
Balance - March 31, 1998 (21,727,000) 36,883,000 45,771,000
------------ ------------ ------------
Stock issued under employee stock
purchase plan -- -- 541,000
Stock issued and income tax
benefits under stock option plan -- -- 1,762,000
Purchase of common stock (5,263,000) -- (5,263,000)
Net income and comprehensive income -- 10,403,000 10,403,000
------------ ------------ ------------
Balance - March 31, 1999 (26,990,000) 47,286,000 53,214,000
------------ ------------ ------------
Stock issued under employee stock
purchase plan -- -- 588,000
Stock issued and income tax
benefits under stock option plan,
net of shares repurchased -- -- 2,490,000
Purchase of common stock (12,966,000) -- (12,966,000)
Net income and comprehensive income -- 11,967,000 11,967,000
------------ ------------ ------------
Balance - March 31, 2000 $(39,956,000) $ 59,253,000 $ 55,293,000
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
29
<PAGE> 33
CORVEL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended March 31,
---------------------------------------------------
1998 1999 2000
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 9,457,000 $ 10,403,000 $ 11,967,000
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 5,349,000 6,344,000 6,965,000
Deferred income taxes 137,000 (588,000) (131,000)
Loss on write down and disposal of property and
equipment 124,000 37,000 192,000
Changes in operating assets and liabilities:
Accounts receivable (3,339,000) (5,929,000) (4,312,000)
Prepaid taxes and expenses (612,000) (120,000) (1,075,000)
Accounts and taxes payable (525,000) 390,000 (1,158,000)
Accrued liabilities 1,741,000 154,000 1,050,000
Other assets (1,069,000) (482,000) (779,000)
------------ ------------ ------------
Net cash provided by operating activities 11,263,000 10,209,000 12,719,000
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (8,725,000) (6,627,000) (6,240,000)
------------ ------------ ------------
Net cash used in investing activities (8,725,000) (6,627,000) (6,240,000)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds and tax benefits from exercise of stock
options 2,493,000 2,303,000 3,078,000
Purchase of common stock (12,266,000) (5,263,000) (12,966,000)
------------ ------------ ------------
Net cash used in financing activities (9,773,000) (2,960,000) (9,888,000)
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents (7,235,000) 622,000 (3,409,000)
Cash and cash equivalents at beginning of year 15,665,000 8,430,000 9,052,000
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 8,430,000 $ 9,052,000 $ 5,643,000
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
30
<PAGE> 34
CORVEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization: CorVel Corporation (CorVel or the Company) provides
services and programs nationwide that are designed to enable insurance carriers,
third party administrators and employers with self-insured programs to
administer, manage and control the cost of workers' compensation and other
healthcare benefits.
Basis of Presentation: The consolidated financial statements include the
accounts of CorVel and its subsidiaries. Significant intercompany accounts and
transactions have been eliminated in consolidation.
Use of Estimates: The preparation of financial statements in conformity
with accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amounts reported in
the accompanying financial statements. Actual results could differ from those
estimates.
Cash and Cash Equivalents: Cash and cash equivalents consists of
short-term highly-liquid investments with maturities of 90 days or less when
purchased. The carrying amounts of the Company's financial instruments
approximate their relative fair values at March 31, 1999 and 2000.
Revenue Recognition: The Company's revenues are recognized primarily as
services are rendered based on time and expenses incurred. A certain portion of
the Company's revenues are derived from fee schedule auditing which is based on
the number of provider charges audited and, to a limited extent, on a percentage
of savings achieved for the Company's clients. Accounts receivable includes
$1,979,000 and $2,486,000 of unbilled receivables at March 31, 1999 and 2000,
respectively. No one customer accounted for more than 10% of consolidated
revenues during the years ended March 31, 1998, 1999 and 2000.
Property and Equipment: Additions to property and equipment are recorded
at cost. Depreciation and amortization are provided using the straight-line and
accelerated methods over the estimated useful lives of the related assets which
range from three to seven years.
Long-Lived Assets: The carrying amount of all long-lived assets is
evaluated periodically to determine if adjustment to the depreciation and
amortization period or to the unamortized balance is warranted. Such evaluation
is based principally on the expected utilization of the long-lived assets and
the projected, undiscounted cash flows of the operations in which the long-lived
assets are deployed.
31
<PAGE> 35
CORVEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Other Assets: Other assets consists primarily of the excess of the
purchase price over the estimated fair value of the net assets of businesses
acquired (goodwill) and is being amortized using the straight-line method over
periods not exceeding 40 years. Goodwill amounted to $5,869,000 (net of
accumulated amortization of $1,237,000) at March 31, 1999 and 6,013,000 (net of
accumulated amortization of $1,736,000) at March 31, 2000.
Concentrations of Credit Risk: The Company performs periodic credit
evaluations of its customers' financial condition and does not require
collateral. One customer accounted for 13% of the Company's accounts receivable
balance at March 31, 1999. No one customer accounted for more than 10% of the
Company's accounts receivable balance at March 31, 2000. Receivables are
generally due within 60 days. Credit losses relating to customers in the
workers' compensation insurance industry consistently have been within
management's expectations.
Income Taxes: The consolidated financial statements reflect the
application of Statement of Financial Accounting Standards No. 109 - "Accounting
for Income Taxes."
Earnings Per Share: Earnings per common share-basic is based on the
weighted average number of common shares outstanding during the period. Earnings
per common shares-diluted is based on the weighted average number of common
shares outstanding during the period plus the assumed conversion of all dilutive
stock options. In calculating earnings per share, earnings are the same for the
basic and diluted calculations.
Stock Option Plans: The Company applies the disclosure-only provisions
of Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (SFAS No. 123) and accordingly, is continuing to
account for its stock-based compensation plans under Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" and related
interpretations.
Recent Accounting Pronouncements: In 1998, the Company adopted Statement
of Financial Accounting Standards No. 131, "Disclosures About Segments of an
Enterprise and Related Information" ("SFAS 131"). The Company has determined it
currently operates in one reportable segment as defined in SFAS No. 131. Each of
the Company's products and services have similar long-term financial performance
and have similar economic characteristics. All of the Company's products and
services relate to programs that provide the Company's customers with a single
source for all of their managed care needs, providing comprehensive,
cost-effective and innovative solutions.
32
<PAGE> 36
CORVEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In March 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of Position
98-1 ("SOP 98-1"), "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." SOP 98-1 provides guidance on an accounting for the
costs of computer software developed or obtained for internal use. Specifically,
certain internal payroll and payroll related costs should be capitalized during
the application development stage of a project and depreciated over the computer
software's useful life. The Company implemented SOP 98-1 as of April 1, 1999.
The implementation did not have a material impact on its financial statements.
In fiscal 1999, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes new rules for the reporting and
display of comprehensive income and its components; however, the adoption of
this statement had no impact on the Company's net income or stockholders'
equity. SFAS No. 130 requires unrealized gains or losses on the Company's
available-for-sale securities, which prior to adoption were reported separately
in stockholders' equity, to be included in other comprehensive income.
NOTE B - PROPERTY AND EQUIPMENT
Property and equipment consists of the following at March 31:
<TABLE>
<CAPTION>
1999 2000
----------- -----------
<S> <C> <C>
Office equipment and computers $29,618,000 $30,851,000
9,434,000 13,735,000
Computer software
Leasehold improvements 1,349,000 1,460,000
----------- -----------
40,401,000 46,046,000
Less: accumulated depreciation and amortization 23,256,000 29,415,000
----------- -----------
$17,145,000 $16,631,000
=========== ===========
</TABLE>
NOTE C - ACCRUED LIABILITIES
Accrued liabilities consists of the following at March 31:
<TABLE>
<CAPTION>
1999 2000
---------- ----------
<S> <C> <C>
Payroll and related benefits $4,630,000 $4,495,000
Self-insurance reserves 645,000 829,000
Other 1,250,000 2,251,000
---------- ----------
$6,525,000 $7,575,000
========== ==========
</TABLE>
33
<PAGE> 37
CORVEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
MARCH 31, 2000
NOTE D - INCOME TAXES
The income tax provision consists of the following for the three years
ended March 31:
<TABLE>
<CAPTION>
1998 1999 2000
----------- ----------- -----------
<S> <C> <C> <C>
Current - Federal $ 4,955,000 $ 6,337,000 $ 6,745,000
Current - State 346,000 627,000 722,000
----------- ----------- -----------
Subtotal 5,301,000 6,964,000 7,467,000
----------- ----------- -----------
Deferred - Federal 345,000 (537,000) (118,000)
Deferred - State 24,000 (51,000) (13,000)
----------- ----------- -----------
Subtotal 369,000 (588,000) (131,000)
----------- ----------- -----------
$ 5,670,000 $ 6,376,000 $ 7,336,000
=========== =========== ===========
</TABLE>
Income tax benefits associated with the exercise of stock options were
$1,212,000, $289,000 and $577,000 for fiscal 1998, 1999, and 2000, respectively.
The following is a reconciliation of the income tax provision from the
statutory federal income tax rate to the effective rate for the three years
ended March 31:
<TABLE>
<CAPTION>
1998 1999 2000
----------- ----------- -----------
<S> <C> <C> <C>
Income taxes at federal statutory rate $ 5,294,000 $ 5,873,000 $ 6,756,000
State income taxes, net of federal benefit 453,000 471,000 465,000
Permanent differences 42,000 45,000 115,000
Other (119,000) (13,000) --
----------- ----------- -----------
$ 5,670,000 $ 6,376,000 $ 7,336,000
=========== =========== ===========
</TABLE>
Income taxes paid totaled $5,690,000, $4,787,000 and $9,307,000 for the
years ended March 31, 1998, 1999, and 2000, respectively.
34
<PAGE> 38
CORVEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
NOTE D - INCOME TAXES (CONTINUED)
Deferred taxes at March 31, 1999 and 2000 are:
<TABLE>
<CAPTION>
1999 2000
----------- -----------
<S> <C> <C>
Deferred tax assets:
Accrued liabilities not currently deductible $ 1,756,000 $ 2,432,000
Allowance for doubtful accounts 1,371,000 1,207,000
Other 96,000 194,000
----------- -----------
Deferred assets 3,223,000 3,833,000
----------- -----------
Deferred tax liabilities:
Excess of tax under book basis of fixed assets (2,530,000) (2,619,000)
Other (390,000)
----------- -----------
Deferred liability (2,530,000) (3,009,000)
----------- -----------
Net deferred tax asset $ 693,000 $ 824,000
=========== ===========
</TABLE>
NOTE E - STOCK OPTION PLANS
The Company has elected to follow Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" (APB No. 25) and related
interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under SFAS
No. 123 requires use of option valuation models that were not developed for use
in valuing employee stock options. Under APB No. 25, because the exercise price
of the Company's employee stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is recognized.
Under the Company's Restated 1988 Executive Stock Option Plan, ("the
Plan") as amended, options for up to 3,470,000 shares of the Company's common
stock may be granted to key employees, nonemployee directors and consultants at
prices not less than 85% of the fair value of the stock at the date of grant as
determined by the Board. Options granted under the Plan may be either incentive
stock options or non-statutory stock options and are generally exercisable
beginning one year from the date of grant and vest monthly thereafter for three
years.
35
<PAGE> 39
CORVEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
NOTE E - STOCK OPTION PLANS (CONTINUED)
Summarized information for all stock options for the past three fiscal
years follows:
<TABLE>
<CAPTION>
1998 1999 2000
-------- -------- --------
<S> <C> <C> <C>
Options outstanding at the
Beginning of the year 911,664 761,932 796,406
Options granted 205,500 219,100 175,500
Options exercised (317,874) (149,554) (164,313)
Options cancelled (37,358) (35,072) (18,250)
-------- -------- --------
Options outstanding at the end
of the year 761,932 796,406 789,343
======== ======== ========
During the year, weighted average price of options:
Granted $ 16.16 $ 18.09 $ 21.13
Exercised $ 5.14 $ 10.55 $ 12.41
Cancelled $ 13.82 $ 15.20 $ 17.52
At the end of the year:
Price range of outstanding options $ 5.38- $ 8.50 - $ 8.50-
$ 18.88 $ 18.88 $ 23.63
Weighted average price per share $ 13.38 $ 15.13 $ 16.99
Options available for future grants 809,626 625,598 468,348
Exercisable options 335,790 333,764 339,889
</TABLE>
36
<PAGE> 40
CORVEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
NOTE E - STOCK OPTION PLANS (CONTINUED)
The following table summarizes the status of stock options outstanding
and exercisable at March 31, 2000:
<TABLE>
<CAPTION>
Outstanding Exercisable
Weighted Options- Exercisable Options -
Average Weighted Options - Weighted
Number of Remaining Average Number of Average
Range of Outstanding Contractual Exercise Exercisable Exercise
Exercise Prices Options Life Price Options Price
--------------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
$8.50 - $14.50 206,108 3.01 years $ 13.01 128,807 $ 12.78
14.81 - 17.81 225,752 2.89 years 16.33 142,668 15.99
18.00 - 18.75 190,234 4.01 years 18.18 46,679 18.22
18.88 - 23.63 167,249 4.52 years 21.44 21,735 18.88
------------ ------------ ------------ ------------ ------------
Total 789,343 3.53 years $ 16.99 339,889 $ 15.27
============ ============ ============ ============ ============
</TABLE>
The Company has adopted the disclosure-only provisions of SFAS No. 123.
Had compensation cost for the Company's stock option and stock purchase plans
been recorded consistent with the provisions of SFAS No. 123, net income, net
income per share-basic and net income per common share-diluted would have been
for the three fiscal years ended March 31, 2000:
<TABLE>
<CAPTION>
1998 1999 2000
-------------- -------------- --------------
<S> <C> <C> <C>
Net income - adjusted $ 9,185,000 $ 9,971,000 $ 11,406,000
Net income per share - basic $ 1.10 $ 1.22 $ 1.42
Net income per share - diluted $ 1.07 $ 1.21 $ 1.40
</TABLE>
The weighted average fair values at date of grant for options during
fiscal 1998, 1999, and 2000 were $4.65, $6.28, and $6.56, respectively.
The fair value of each plan is estimated on the date of grant using the
Black-Scholes option-pricing model. The following weighted average assumptions
were used for fiscal years ended March 31:
<TABLE>
<CAPTION>
1998 1999 2000
------- ------- -------
<S> <C> <C> <C>
Expected volatility .34 .28 .37
Risk free interest rate 5.5% 5.7% 6.6%
</TABLE>
The assumptions for all three years reflect no dividend yield and a
weighted average option life of 4.5 years.
37
<PAGE> 41
CORVEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
NOTE E - STOCK OPTION PLANS (CONTINUED)
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options, which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjecting assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options. The
aforementioned results are not likely to be representative of the effects of
applying SFAS No. 123 on reported net income for future years as these amounts
reflect the expense for only one to three years of vesting.
NOTE F - EMPLOYEE STOCK PURCHASE PLAN
The Company maintains an Employee Stock Purchase Plan which allows
employees of the Company and its subsidiaries to purchase shares of common stock
on the last day of two six-month purchase periods (i.e. March 31 and September
30) at a purchase price which is 85% of the closing sale price of shares as
quoted on NASDAQ on the first or last day of such purchase period, whichever is
lower. Employees are allowed to participate up to 20% of their gross pay. A
maximum of 500,000 shares has been authorized for issuance under the plan, as
amended. As of March 31, 2000, 339,000 shares had been issued pursuant to the
plan. Summarized plan information is as follows:
<TABLE>
<CAPTION>
1998 1999 2000
-------- -------- --------
<S> <C> <C> <C>
Employee contributions $540,000 $541,000 $588,000
Shares acquired 41,040 34,428 34,800
Average purchase price $ 13.16 $ 15.71 $ 16.90
</TABLE>
NOTE G - TREASURY STOCK
The Company's Board of Directors has approved a plan to repurchase up to
2,400,000 shares of the Company's outstanding common stock. Purchases may be
made from time to time depending on market conditions and other relevant
factors. The share repurchases for fiscal years ended March 31, 1998, 1999 and
2000 are as follows:
<TABLE>
<CAPTION>
1998 1999 2000
----------- ----------- -----------
<S> <C> <C> <C>
Shares repurchased 747,200 286,080 586,060
Cost $12,266,000 $ 5,263,000 $12,966,000
Average price $ 16.42 $ 18.40 $ 22.12
</TABLE>
The repurchased shares were recorded as treasury stock, at cost, and is
available for general corporate purposes. The repurchases were financed from
cash generated from operations.
38
<PAGE> 42
CORVEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
NOTE H - COMMITMENTS AND CONTINGENCIES
The Company leases office facilities under noncancelable operating
leases. Future minimum rental commitments under operating leases at March 31,
2000 are $6,015,000 in fiscal 2001, $5,247,000 in fiscal 2002, $3,587,000 in
fiscal 2003, $2,060,000 in fiscal 2004, $1,227,000 in fiscal 2005, and $484,000
thereafter. Total rental expense of $4,700,000, $6,100,000, and $7,100,000 was
charged to operations for the years ended March 31, 1998, 1999, and 2000,
respectively.
The Company is involved in litigation arising in the normal course of
business. The Company believes that resolution of these matters will not result
in any payment that, in the aggregate, would be material to the financial
position and results of the operations of the Company.
NOTE I - SAVINGS PLAN
The Company maintains a retirement savings plan for its employees, which
is a qualified plan under section 401(k) of the Internal Revenue Code. Full-time
employees that meet certain requirements are eligible to participate in the
plan. Contributions are made annually primarily at the discretion of the
Company's Board of Directors. Contributions of $143,000, $155,000, and $199,000,
were charged to operations for the years ended March 31, 1998, 1999 and 2000,
respectively.
NOTE J - SHAREHOLDER RIGHTS PLAN
During fiscal 1997, the Company's Board of Directors approved the
adoption of a Shareholder Rights Plan. The Rights Plan, which is similar to
rights plans adopted by numerous other public companies, provides for a dividend
distribution to CorVel stockholders of one preferred stock purchase "Right" for
each outstanding share of CorVel's common stock. The Rights are designed to
assure that all stockholders receive fair and equal treatment in the event of
any proposed takeover of the company and to encourage a potential acquirer to
negotiate with the Board of Directors prior to attempting a takeover. The Rights
have an exercise price of $62.50 per Right, as adjusted for the 2-for-1 stock
split in the form of a 100% stock dividend, paid on June 14, 1999, and subject
to subsequent adjustment. Initially, the Rights will trade with the Company's
common stock, and will not be exercisable until the occurrence of certain
takeover-related events. The issuance of the Rights has no dilutive effect on
the Company's earnings per share.
39
<PAGE> 43
CORVEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
NOTE K - QUARTERLY RESULTS
The following is a summary of unaudited results of operations for the
two years ended March 31, 1999 and 2000:
<TABLE>
<CAPTION>
Net income Net income
per basic per diluted
FISCAL YEAR ENDED Gross Net common common
MARCH 31, 1999: Revenues Margin income share share
--------------- -------- ------ ------ ----- -----
<S> <C> <C> <C> <C> <C>
First Quarter $39,552,000 $ 7,210,000 $ 2,501,000 $ .30 $ .30
Second Quarter 40,474,000 7,148,000 2,556,000 .32 .31
Third Quarter 42,030,000 7,354,000 2,624,000 .33 .32
Fourth Quarter 43,401,000 7,663,000 2,722,000 .33 .33
FISCAL YEAR
ENDED MARCH 31,
2000:
First Quarter $45,705,000 $ 8,251,000 $ 2,877,000 $ .35 $ .35
Second Quarter 45,865,000 8,406,000 2,970,000 .37 .36
Third Quarter 46,269,000 8,487,000 3,013,000 .38 .37
Fourth Quarter 48,926,000 8,911,000 3,107,000 .40 .39
</TABLE>
40
<PAGE> 44
Schedule II
CORVEL CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Additions
Balance at Charged to
Beginning Costs and Balance at
of Year Expenses Deductions End of Year
------- -------- ---------- -----------
<S> <C> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
Year Ended March 31, 1998: $ 1,686,000 $ 2,437,000 $(2,041,000) $ 2,082,000
Year Ended March 31, 1999: 2,082,000 2,085,000 (1,152,000) 3,015,000
Year Ended March 31, 2000: 3,015,000 2,982,000 (2,602,000) 3,395,000
</TABLE>
41
<PAGE> 45
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. TITLE - - METHOD OF FILING PAGE
--- -------------------------- ----
<S> <C> <C>
3.1 Certificate of Incorporation of the Company - - Incorporated
herein by reference to Exhibit 3.1 to the Company's Registration
Statement on Form S-1 Registration No. 33-40629.
3.2 Bylaws of the Company - - Incorporated herein by reference to
Exhibit 3.2 to the Company's Registration Statement on Form S-1
Registration No. 33-40629.
10.1 Nonqualified Stock Option Agreement between V. Gordon Clemons,
the Company and North Star together with all amendments and
addendums thereto - - Incorporated herein by reference to Exhibit
10.6 to the Company's Registration Statement on Form S-1
Registration No. 33-40629.
10.2 Supplementary Agreement between V. Gordon Clemons, the Company
and North Star - - Incorporated herein by reference to Exhibit
10.7 to the Company's Registration Statement on Form S-1
Registration No. 33-40629.
10.3 Amendment to Supplementary Agreement between Mr. Clemons, the Company
and North Star - - Incorporated herein by reference to Exhibit 10.5
to the Company's Annual Report on Form 10-K for the fiscal year ended
March 31, 1992.
10.4 Restated 1988 Executive Stock Option Plan, as amended - -
Incorporated herein by reference to Exhibit 10.5 to the Company's
Annual Report on Form 10-K for the fiscal year ended March 31, 1995.
10.5 Form of Notice of Grant of Stock Option Under the Restated 1988
Executive Stock Option Plan - - Incorporated herein by reference to
the Company's Annual Report on Form 10-K for the fiscal year ended
March 31, 1994.
10.6 Form of Stock Option Agreement under the Restated 1988 Executive
Stock Option Plan - - Incorporated herein by reference to the
Company's Annual Report on Form 10-K for the fiscal year ended March
31, 1994.
</TABLE>
42
<PAGE> 46
EXHIBIT INDEX (CONTINUED)
<TABLE>
<CAPTION>
EXHIBIT
NO. TITLE - - METHOD OF FILING PAGE
--- -------------------------- ----
<S> <C> <C>
10.7 Form of Notice of Exercise under the Restated 1988 Executive
Stock Option Plan - - Incorporated herein by reference to the
Company's Annual Report on Form 10-K for the fiscal year ended March
31, 1994.
10.8 Employment Agreement of V. Gordon Clemons - - Incorporated herein
by reference to Exhibit 10.12 to the Company's Registration
Statement on Form S-1 Registration No. 33-40629.
10.9 Restated 1991 Employee Stock Purchase Plan, as amended - -
Incorporated herein by reference to Exhibit 10.11 in the Company's
Annual Report on Form 10-K for the fiscal year ended March 31, 1995.
10.10 Fidelity Master Plan for Savings and Investments, and amendments - -
Incorporated herein by reference to Exhibit 10.16 and 10.16A to the
Company's Registration Statement on Form S-1 Registration No.
33-40629.
10.11 Daniel Davis Severance Arrangement - - Incorporated herein by
reference to the Company's Annual Report on Form 10-K for the fiscal
year ended March 31, 1993.
10.12 Shareholder Rights Plan - - Incorporated herein by reference to the
Company's 8-K filed on February 28, 1997.
21.1 Subsidiaries of the Company - - Attached.
23.1 Consent of Independent Auditors - - Attached
27.1 Financial Data Schedule - - Attached.
</TABLE>
43
