CorVel
Annual Report 2009

Plain-text annual report

2009 Annual Report and Form 10K CorVel Corporation  The Year in Review The past year has brought about dramatic economic changes that have affected everyone from Wall Street to Main Street. While it has been a challenging time, CorVel continues to make progress in its strategic business initiatives. CorVel’s strategy of owning its proprietary assets and conservative fiscal management has proven to be advantageous. In Fiscal 2009, we continued to build upon the Company’s successful managed care foundation; improving our customer’s savings, growing our directed care networks and continuing the expansion of our new claims management solutions. We are proud of what has been accomplished and look forward to continued progress this year. Claim volume and cost trends have continued to move in opposite directions. The volume of Workers’ Compensation claims has continued to decline to historic lows, while associated medical and indemnity costs continued to increase to record highs. The economic downturn suggests that claim volumes will continue to have downward pressure, however, changes in the economy have historically not offset cost increases and healthcare inflation. As the industry and marketplace continue to evolve, CorVel remains committed to the vision of realizing a significantly more efficient process across the disability management continuum. CorVel has developed a unique approach to claims management, one that capitalizes on our technology foundation to help payors reduce these escalating costs. In the past, through the utilization of technological developments and workflow automation, CorVel successfully changed its approach to medical bill review processing. These changes lead to dramatic gains in quality and overall performance. By employing those tools again, we are delivering a new and innovative solution to claims management. By bringing together all of the information needed to ensure that an injured worker receives the right care at the right time, we believe that our approach can positively impact the ever continuing rise in Workers’ Compensation claims costs. Through our acquisitions, infrastructure enhancements and software development, we have made significant progress this past year. Regulatory change continues to be introduced in to the market place. This past year, the Federal government has introduced legislation that will require regulatory reporting compliance to the Centers for Medicare & Medicaid Services. This legislation has created a significant impact within our industry as compliance for a large number of our customers will be required. At a state level, legislation continues to move healthcare towards e-commerce such as mandated electronic billing between payors and providers. Acting as an Agent on behalf of our customers in both instances, CorVel is actively involved in electronic records transmission services with the government and our clients. As we think about the future, we expect to see a continued move toward the automation of the healthcare transaction, and our goal is to be on the forefront of this movement. In closing, we would like to say thank you to our customers and our associates. It is our pleasure to have the opportunity to partner with our customers to deliver cost savings programs in this difficult economic time. We are excited by the prospects for our future and committed to the ongoing investments necessary to ongoing innovation. We look forward to the challenges and opportunities of the coming year and the continued execution of our strategy. Gordon Clemons Chairman Daniel Starck President UNITEDSTATESSECURITIESANDEXCHANGECOMMISSIONWashington,D.C.20549Form10-KFORANNUALANDTRANSITIONREPORTSPURSUANTTOSECTIONS13OR15(d)OFTHESECURITIESEXCHANGEACTOF1934¥ANNUALREPORTPURSUANTTOSECTION13OR15(d)OFTHESECURITIESEXCHANGEACTOF1934ForthefiscalyearendedMarch31,2009ORnTRANSITIONREPORTPURSUANTTOSECTION13OR15(d)OFTHESECURITIESEXCHANGEACTOF1934ForthetransitionperiodfromtoCommissionFileNumber0-19291CorVelCorporation(Exactnameofregistrantasspecifiedinitscharter)Delaware33-0282651(Stateorotherjurisdictionof(I.R.S.Employerincorporationororganization)IdentificationNumber)2010MainStreet,Suite600,92614Irvine,California(ZipCode)(Addressofprincipalexecutiveoffices)Registrant’stelephonenumber,includingareacode:(949)851-1473SecuritiesregisteredpursuanttoSection12(b)oftheAct:TitleofEachClass:NameofEachExchangeonWhichRegistered:CommonStockTheNASDAQGlobalSelectMarket,LLCSecuritiesregisteredpursuanttoSection12(g)oftheAct:NoneIndicatebycheckmarkiftheRegistrantisawell-knownseasonedissuer,asdefinedinRule405oftheSecuritiesActYesnNo¥IndicatebycheckmarkiftheRegistrantisnotrequiredtofilereportspursuanttoSection13orSection15(d)oftheActYesnNo¥Indicatebycheckmarkwhethertheregistrant(1)hasfiledallreportsrequiredtobefiledbySection13or15(d)oftheSecuritiesExchangeActof1934duringthepreceding12months(orforsuchshorterperiodthattheregistrantwasrequiredtofilesuchreports)and(2)hasbeensubjecttosuchfilingrequirementsforthepast90days.Yes¥NonIndicatebycheckmarkwhethertheregistranthassubmittedelectronicallyandpostedonitscorporateWebsite,ifany,everyInteractiveDataFilerequiredtobesubmittedandpostedpursuanttoRule405ofRegulationS-T(§232.405ofthischapter)duringthepreceding12months(orforsuchshorterperiodthattheregistrantwasrequiredtosubmitandpostsuchfiles).YesnNonIndicatebycheckmarkifdisclosureofdelinquentfilerspursuanttoItem405ofRegulationS-Kisnotcontainedherein,andwillnotbecontained,tothebestofregistrant’sknowledge,indefinitiveproxyorinformationstatementsincorporatedbyreferenceinPartIIIofthisForm10-KoranyamendmenttothisForm10-K.¥Indicatebycheckmarkwhethertheregistrantisalargeacceleratedfiler,anacceleratedfiler,anon-acceleratedfiler,orasmallerreportingcompany.Seethedefinitionsof“largeacceleratedfiler,”“acceleratedfiler”and“smallerreportingcompany”inRule12b-2oftheExchangeAct.(Checkone):LargeacceleratedfilernAcceleratedfiler¥Non-acceleratedfilernSmallerreportingcompanyn(Donotcheckifasmallerreportingcompany)IndicatebycheckmarkwhethertheRegistrantisashellcompany(asdefinedinRule12b-2oftheExchangeAct).YesnNo¥Statetheaggregatemarketvalueofthevotingandnon-votingcommonequityheldbynon-affiliatescomputedbyreferencetothepriceatwhichthecommonequitywaslastsold,ortheaveragebidandaskedpriceofsuchcommonequity,asofthelastbusinessdayoftheRegistrant’smostrecentlycompletedsecondfiscalquarter:AsofSeptember30,2008,theaggregatemarketvalueoftheRegistrant’svotingandnon-votingcommonequityheldbynon-affiliatesoftheRegistrantwasapproximately$237,000,000basedontheclosingpricepershareof$28.61fortheRegistrant’scommonstockasreportedontheNasdaqGlobalSelectMarketonsuchdatemultipliedby8,287,429shares(totaloutstandingsharesof13,733,939less5,446,510sharesheldbyaffiliates)oftheRegistrant’scommonstockwhichwereoutstandingonsuchdate.Forthepurposesoftheforegoingcalculationonly,alloftheRegistrant’sdirectors,executiveofficersandpersonsknowntotheRegistranttoholdtenpercentorgreateroftheRegistrant’soutstandingcommonstockhavebeenexcludedinthatsuchpersonsmaybedeemedtobeaffiliates.Thisdeterminationofaffiliatestatusisnotnecessarilyaconclusivedeterminationforotherpurposes.IndicatethenumberofsharesoutstandingofeachoftheRegistrant’sclassesofcommonstock,asofthelatestpracticabledate:AsofJune1,2009,therewere12,931,425sharesoftheRegistrant’scommonstock,parvalue$0.0001pershare,outstanding.DOCUMENTSINCORPORATEDBYREFERENCEInformationrequiredbyItems10through14ofPartIIIofthisForm10-K,totheextentnotsetforthherein,isincorporatedhereinbyreferencetoportionsoftheRegistrant’sdefinitiveproxystatementfortheRegistrant’s2009AnnualMeetingofStockholders,whichwillbefiledwiththeSecuritiesandExchangeCommissionnotlaterthan120daysaftertheendofthefiscalyearendedMarch31,2009.ExceptwithrespecttotheinformationspecificallyincorporatedbyreferenceinthisForm10-K,theRegistrant’sdefinitiveproxystatementisnotdeemedtobefiledasapartofthisForm10-K.CORVELCORPORATION2009FORM10-KANNUALREPORTTABLEOFCONTENTSPagePARTIItem1.Business...............................................................2Item1A.RiskFactors............................................................14Item1B.UnresolvedStaffComments.................................................21Item2.Properties..............................................................21Item3.LegalProceedings........................................................21Item4.SubmissionofMatterstoaVoteofSecurityHolders..............................21PARTIIItem5.MarketforRegistrant’sCommonEquity,RelatedStockholderMattersandIssuerPurchasesofEquitySecurities.......................................................22Item6.SelectedFinancialData....................................................24Item7.Management’sDiscussionandAnalysisofFinancialConditionandResultsofOperations...24Item7A.QuantitativeandQualitativeDisclosuresAboutMarketRisk.........................24Item8.FinancialStatementsandSupplementaryData...................................24Item9.ChangesinandDisagreementswithAccountantsonAccountingandFinancialDisclosure...24Item9A.ControlsandProcedures...................................................24Item9B.OtherInformation........................................................26PARTIIIItem10.Directors,ExecutiveOfficersandCorporateGovernance............................26Item11.ExecutiveCompensation...................................................26Item12.SecurityOwnershipofCertainBeneficialOwnersandManagementandRelatedStockholderMatters................................................................26Item13.CertainRelationshipsandRelatedTransactions,andDirectorIndependence.............27Item14.PrincipalAccountingFeesandServices........................................27PARTIVItem15.Exhibits,FinancialStatementSchedules........................................27Signatures..............................................................32iInthisreport,theterms“CorVel”,“Company”,“we”,“us”,and“our”refertoCorVelCorporationanditssubsidiaries.CAUTIONARYSTATEMENTREGARDINGFORWARD-LOOKINGSTATEMENTSThisreportcontainsforward-lookingstatementswithinthemeaningoftheSecuritiesActof1933,asamended,andtheSecuritiesExchangeActof1934,asamended,including,butnotlimitedto,thestatementsaboutourplans,strategiesandprospectsundertheheadings“Business”and“Management’sDiscussionandAnalysisofFinancialConditionandResultsofOperations”andelsewhereinthisreport.Wordssuchas“anticipates”,“expects”,“intends”,“plans”,“predicts”,“believes”,“seeks”,“estimates”,“may”,“will”,“should”,“would”,“could”,“potential”,“continue”,“ongoing”andvariationsofthesewordsorsimilarexpressionsareintendedtoidentifyforward-lookingstatements.Theseforward-lookingstatementsarebasedonmanagement’scurrentexpectations,estimatesandprojectionsaboutourindustry,management’sbeliefs,andcertainassumptionsmadebymanagement,andwecangivenoassurancethatwewillachieveourplans,intentionsorexpectations.Certainimportantfactorscouldcauseactualresultstodiffermateriallyfromtheforward-lookingstatementswemakeinthisreport.Representativeexamplesofthesefactorsinclude(withoutlimitation):(cid:129)Generalindustryandeconomicconditions;(cid:129)Costofcapitalandcapitalrequirements;(cid:129)Competitionfromothermanagedcarecompanies;(cid:129)TheCompany’sabilitytorenewand/ormaintaincontractswithitscustomersonfavorabletermsoratall;(cid:129)TheabilitytoexpandcertainareasoftheCompany’sbusiness;(cid:129)Shiftsincustomerdemands;(cid:129)TheabilityoftheCompanytoproducemarket-competitivesoftware;(cid:129)Increasesinoperatingexpenses,includingemployeewagesandbenefits;(cid:129)Changesinregulationsaffectingtheworkers’compensation,insuranceandhealthcareindustriesingeneral;(cid:129)Theabilitytoattractandretainkeypersonnel;(cid:129)Delaysincompletingfinancialandinternalcontrolaudits;(cid:129)Possiblelitigationandlegalliabilityinthecourseofoperations;and(cid:129)Theavailabilityoffinancingintheamounts,atthetimes,andonthetermsnecessarytosupporttheCompany’sfuturebusiness.Thesectionentitled“RiskFactors”setforthinthisreportdiscussestheseandotherimportantriskfactorsthatmayaffectourbusiness,resultsofoperationsandfinancialcondition.Thefactorslistedaboveandthefactorsdescribedundertheheading“RiskFactors”andsimilardiscussionsinourotherfilingswiththeSecuritiesandExchangeCommissionarenotnecessarilyalloftheimportantfactorsthatcouldcauseactualresultstodiffermateriallyfromthoseexpressedinanyofourforward-lookingstatements.Otherunknownorunpredictablefactorsalsocouldhavematerialadverseeffectsonourfutureresults.Investorsshouldconsiderthesefactorsbeforedecidingtomakeormaintainaninvestmentinoursecurities.Theforward-lookingstatementsincludedinthisannualreportonForm10-Karebasedoninformationavailabletousasofthedateofthisannualreport.Weexpresslydisclaimanyintentorobligationtoupdateanyforward-lookingstatementstoreflectsubsequenteventsorcircumstances.1PARTIItem1.Business.INTRODUCTIONCorVelisanindependentnationwideproviderofmedicalcostcontainmentandmanagedcareservicesdesignedtomanagethemedicalcostsofworkers’compensationandotherhealthcarebenefits,primarilyforcoverageundergrouphealthandautoinsurancepolicies.TheCompany’sservicesaresoldasseparateservicesdirectedtowardmanagingclaims,care,networks,reimbursementsandsettlements.Theyincludeautomatedmedicalfeeauditing,preferredprovidernetworks,out-of-network/line-itembillnegotiationandrepricing,utili-zationreviewandmanagement,medicalcasemanagement,vocationalrehabilitationservices,earlyintervention,Medicareset-asidesandlife-careplanning,andavarietyofdirectedcareservicesincludingindependentmedicalexaminations,diagnosticimaging,transportationandtranslation,anddurablemedicalequipment.Somecustomerspurchasejustoneservice,whileothercustomerspurchasemorethanoneservice.CustomersoftheCompanythatdonotpurchasemanagedcareservicesgenerallyeitherpurchasesuchservicesfromothervendors,performsuchservicesusingtheirownresourcesorelectnottoutilizesuchservicesformanagingtheircosts.Suchservicesareprovidedtoinsurancecompanies,third-partyadministrators(TPAs),andself-administeredemployerstoassisttheminmanagingthemedicalcostsandmonitoringthequalityofcareassociatedwithhealthcareclaims.TheCompanywasincorporatedinDelawarein1987,anditsprincipalexecutiveofficesarelocatedat2010MainStreet,Suite600,Irvine,California,92614.TheCompany’stelephonenumberis949-851-1473.INDUSTRYOVERVIEWWorkers’compensationisafederallymandated,state-legislated,comprehensiveinsuranceprogramthatrequiresemployerstofundmedicalexpenses,lostwagesandothercostsresultingfromwork-relatedinjuriesandillnesses.Workers’compensationbenefitsandarrangementsvaryextensivelyonastate-by-statebasisandareoftenhighlycomplex.Statestatutesandcourtdecisionscontrolmanyaspectsofthecompensationprocess,includingclaimshandling,impairmentordisabilityevaluation,disputesettlement,benefitamountguidelinesandcost-controlstrategies.Workers’compensationplansgenerallyrequireemployerstofundallofanemployee’scostsofmedicaltreatmentandasignificantportionoflostwages,legalfeesandotherassociatedcosts.Incertainjurisdictions,provisionofvocationalrehabilitationisalsomandatory.Typically,work-relatedinjuriesarebroadlydefinedandinjuredorillemployeesareentitledtoextensivebenefits.Employersgenerallyarerequiredtoprovidefirst-dollarcoveragewithnoco-paymentordeductibleduefromtheinjuredorillemployeeformedicalcoverageforemployees,andarenotsubjecttolitigationbyemployeesforbenefitsinexcessofthoseprovidedbytherelevantstatestatute.Inmoststates,theextensivebenefitscoverage(forbothmedicalcostsandlostwages)isprovidedtoemployeesthroughtheemployer’spurchaseofcommercialinsurancefromprivateinsurancecompanies,partic-ipationinstate-runinsurancefundsorself-insurance.Healthcareproviderreimbursementmethodsvaryonastate-by-statebasis.AsofMarch31,2009,thevastmajorityofthestateshaveadoptedfeeschedulespursuanttowhichallhealthcareprovidersareuniformlyreimbursed.Thefeeschedulesaresetindividuallybyeachstateandgenerallyprescribethemaximumamountsthatmaybereimbursedforadesignatedprocedure.Instateswithoutfeeschedules,healthcareprovidersgenerallyarereimbursedbasedonusual,customaryandreasonablefeeschargedintheparticularstateinwhichservicesareprovided.Manystatesdonotpermitemployerstorestrictaclaimant’schoiceofprovider,makingitmoredifficultforemployerstoutilizemanagedcareapproachessuchashealthmaintenanceorganizations(HMOs)andpreferredproviderorganizations(PPOs).However,inmanyotherstates,employershavetherighttodirectemployeestoaspecificprimaryhealthcareproviderduringtheonsetofaworkers’compensationcase,subjecttotherightoftheemployeetochangephysiciansafteraspecificperiod.Inaddition,workers’compensationprogramsvaryfromstatetostate,makingitdifficultforpayorsandmulti-stateemployerstoadoptuniformpoliciestoadminister,manage2andcontrolthecostsofbenefits.Asaresult,theCompanybelievesthatmanagingthecostofworkers’compensationrequiresapproacheswhicharetailoredtothespecifiedregulatoryenvironmentinwhichtheemployerisoperating.Becauseworkers’compensationbenefitsaremandatedbylawandaresubjecttoextensiveregulation,theCompanybelievesthatpayorsandemployersdonothavethesameflexibilitytoalterbenefitsastheymighthavewithotherhealthbenefitsprograms.Managedcaretechniquesareintendedtocontrolthecostofhealthcareservicesandtomeasuretheperformanceofprovidersthroughinterventionandongoingreviewofservicesproposedandthoseactuallyprovided.Managedcaretechniqueswereoriginallydevelopedtostemtherisingcostsofgroupmedicalcare.Historically,employerswereslowtoapplymanagedcaretechniquestoworkers’compensationcostsprimarilybecausetheaggregatecostsarerelativelysmallcomparedtocostsassociatedwithgrouphealthbenefitsandbecausestate-by-stateregulationsrelatedtoworkers’compensationarefarmorecomplexthanthoserelatedtogrouphealth.However,inrecentyears,theCompanybelievesthatemployersandinsurancecarriershavebeenincreasingtheirfocusonapplyingmanagedcaretechniquestocontroltheirworkers’compensationcostsasthecostsperclaimhaveincreasedandcompaniesareattemptingreducecostswherevertheycan.Anincreasingnumberofstateshaveadoptedlegislationencouragingtheuseofworkers’compensationmanagedcareorganizations(MCOs)inanefforttoallowemployerstocontroltheirworker’scompensationcosts.MCOlawsgenerallyprovideemployersanopportunitytochannelinjuredemployeesintoprovidernetworks.Incertainstates,MCOlawsrequirelicensedMCOstooffercertainspecifiedservices,suchasutilizationmanagement,casemanagement,peerreviewandproviderbillreview.TheCompanybelievesthatmostoftheMCOlawsadoptedtodateestablishaframeworkwithinwhichacompanysuchasCorVelcanprovideitscustomersafullrangeofmanagedcareservicesforgreatercostcontrol.FISCAL2009DEVELOPMENTSAcquisitionofEagleClaimsServices,Inc.InFebruary2009,theCompany’swhollyownedsubsidiary,CorVelEnterpriseComp,Inc.,acquired100%ofthestockofEagleClaimServices,Inc.(“Eagle”)for$1.1millionincash.Eagleisathird-partyadministratorheadquarteredinthestateofNewYork.TheacquisitionisexpectedtoallowtheCompanytoexpanditsservicecapabilitiesasathird-partyadministratorandprovideclaimsprocessingservicesalongwithpatientmanagementservicesandnetworksolutionsservicestoanincreasedcustomerbase.ThesellersofEaglehavethepotentialtoreceiveuptoanadditional$1.1millioncashearn-out,basedupontherevenuecollectedbytheEaglebusinessduringtheduringcalendaryears2009and2010.Theexactamountoftheearn-out,ifany,hasnotyetbeendetermined,buttheCompanywillreviewtheresultsofthebusinesseachquarterduringtheearn-outperiodtoestimatetheamountoftheearn-outexpectedtobeearnedbythesellers.TheresultsofEaglehavebeenincludedintheCompany’sresultsfromthedateoftheacquisitionthroughMarch31,2009.ForthefiscalyearendedMarch31,2009,theresultsoftheacquiredbusinessincreasedtheCompany’srevenuesbyapproximately$200,000orlessthan0.1%ofCorVel’srevenuesforthecurrentfiscalyear.CompanyStockRepurchaseProgramDuringfiscal2009,theCompanycontinuedtorepurchasesharesofitscommonstockunderaplanoriginallyapprovedbytheCompany’sBoardofDirectorsin1996.InSeptember2008,theCompany’sBoardofDirectorsincreasedthenumberofsharesauthorizedtoberepurchasedoverthelifeoftheplanto13,150,000shares.Duringfiscal2009,theCompanyspent$23.5milliontorepurchase995,129sharesofitscommonstock.Sincecom-mencingthisprograminthefallof1996,theCompanyhasrepurchased12.7millionsharesofitscommonstockthroughMarch31,2009,atacostof$186million.TheserepurchaseswerefundedprimarilyfromtheCompany’soperatingcashflows.BUSINESS—PRODUCTSTheCompanyoffersservicesintwogeneralcategories,networksolutionsandpatientmanagementservices,toassistitscustomersinmanagingtheincreasingmedicalcostsofworkers’compensation,grouphealthandautoinsurance,andmonitoringthequalityofcareprovidedtoclaimants.3NetworkSolutionsTheCompany’sNetworkSolutionsservicesareacombinationofmedicalbillreview,enhancedbillreviewandPreferredProviderOrganization(PPO).Thisprogramisdesignedtoprovideadditionalassurancethatcustomersareonlychargedandpayforservicesactuallydelivered.Billsareevaluated,profiledanddirectedfortheappropriateservicebasedonstateregulation,billtypeandopportunityforsavingsforthepayer.ProprietaryBillReviewSystemManystateshaveadoptedfeeschedules,whichregulatethemaximumallowablefeespayableunderworkers’compensation,forproceduresperformedbyavarietyofhealthtreatmentproviders.Suchschedulesmayalsoincludefeesforhospitaltreatment.Thepurposeofafeescheduleistostandardizethebillingprocessbyusinguniformproceduredescriptionsandtosetmaximumreimbursementlevelsforeachcoveredservice.Certainotherstatespermitpayorstopayworkers’compensationmedicalcostslimitedtousualandcustomarychargesfortherelevantcommunity.TheCompanyprovidesautomatedmedicalfeeauditingtoassistitscustomersinverifyingthatthefeeschargedbyworkers’compensationhealthcareproviderscomplywithstatefeeschedules,orareconsistentwithusualandcustomarycharges.TheCompanyoffersitsfeescheduleauditingthroughanautomatedmedicalbillreviewservicecalledMedCheck,whichcombinesautomateddatareportingandtransmissioncapabilities.MedCheckconsistsofanonlinecomputer-basedinformationsystemcomprisedofaproprietarysoftwareprogramwhichstoresandaccessesstate-mandatedfeeschedulesandusualandcustomarychargeinformation.MedCheckisalsobeingutilizedforthereviewofmedicalchargesundercertainnon-workers’compensationinsurancecoverages.TheMedCheckserviceprovidesthefollowingcapabilities:(cid:129)checkingforproviderchargeswhichexceedchargesallowableunderfeeschedulesorusualandcustomarycharges,inaccordancewiththerequirementsoftherelevantjurisdiction;(cid:129)repricingproviderbillstocontractualPPOreimbursementlevels;(cid:129)checkingforbilledservicesorproceduresthatareexcessive,unnecessaryorunrelatedtotreatingtheparticularmedicalproblem,andduplicatebilling;(cid:129)checkingfor“unbundled”billingswherethemedicalservicesperformedarebilledincomponents,thatresultinhighertotalchargesthanwouldbethecaseiftheserviceswerebilledintheaggregate;(cid:129)engaginginon-siteprocessingofclaimsandInternet-basedreportingtools;(cid:129)sendingclaimsdatadirectlytocarriers’databases,therebyreducingcostsduetorepetitiveorerroneousdataentry;(cid:129)PPOmanagement;and(cid:129)pharmacyreview.TheMedChecksystemcanbeaccessedbyinsurersunderanASPagreementthroughtheCompany’seCommerceWebsite,CareMC,andVirtualPrivateNetworks(VPNs).TheMedChecksuitecanacceptelectronicbillsandbillimages,andpublishElectronicDataInterfaces(EDIs)tocustomerclaimspaymentsystems.Thissystemintegratesintotheclient’sownworkflow,automatesthereimbursementofproviders,allowsfortheapplicationofallMedCheckfeestotheindividualclaimfileandeliminatestheneedformanualredundantdataentryofMedCheckresultsbythecarriers’claimspersonnel.Thesystemisdesignedforeasyaccessbyclaimsadjustersandincludesfunctionalityforsuchpart-timeuserswithintheclaimspaymentenvironment.PreferredProviderOrganizationPPOsaregroupsofhospitals,physiciansandotherhealthcareprovidersthatofferservicesatpre-negotiatedratestoemployeegroups.TheCompanybelievesthatPPOnetworksoffertheemployeranadditionalmeansofmanaginghealthcarecostsbyreducingtheper-unitpriceofmedicalservicesprovidedtoemployees.TheCompany4launcheditsCorCarenetworkin1992andprovidesitscustomerswithaccesstoitsPPOnetwork,includingmorethan400,000healthcareprovidersnationwide.PPOprovidersareselectedbasedoncriteriasuchasquality,rangeofservices,priceandlocation.Eachoneisevaluatedandcredentialed,andthenre-credentialedbi-annuallybytheCompany.Throughoutthisevaluationprocess,theCorCarenetworksareabletoprovidehospital,physicianandspecialancillarymedicaldiscountswhilemaintainingqualitycare.CorVelhasalong-termstrategyofnetworkdevelopment,providingcomprehensivenetworkstoourcustomersandcustomizationofnetworkstomeetthespecificneedsofourcustomers.TheCompanybelievesthatthecombinationofitsnationalPPOdirector’sstrengthandpresenceandthelocalPPOdevelopers’commitmentandcommunityinvolvementenablesCorVeltobuild,supportandstrengthenitsPPOinsize,quality,depthofdiscount,andcommitmenttoservice.Over80%oftheprovidersinournetworkaredirectlycontracted.CorVeldoesmaintainsomeleasednetworkaccessagreementsonlytotheextenttowhichtheyprovidebroadernetworkaccesscapabilities,suchassize,demographicsanddiscounts,andtotheextentthattheyenableCorVeltoprovidepromptresponsetonetworkexpansionrequestswhilemaintainingqualityassurancecontrols.Intotal,theCompanyhasmorethan220national,regionalandlocalpersonnelsupportingtheCorCarenetwork.ThisnumberincludesournationalPPOdirector,nationalPPOcontractingmanagerandcontractingstaff,inadditionto70locallybasedPPOdeveloperswhoareresponsibleforlocalrecruitment,contractnegotiations,credentialingandre-credentialingofproviders,andworkingwithcustomerstodevelopcustomerspecificprovidernetworks.Eachbillreviewunithasproviderrelationssupportstafftoaddressprovidergrievancesandotherbillingissues.BillssubmittedfrompreferredprovidersareidentifiedthroughtheMedCheckbillreviewprocess,andthesubmittedchargesarethenauditedagainstthePPOscheduleandagainstanyapplicablefeescheduleorusualandcustomarycharges.Thefeeapprovedforpaymentisthelowerofthesubmittedchargesorthelowestallowablefeeidentified.SomeofthefeaturesoftheCompany’sPPOnetworkservicesinclude:nationalnetworksforallcoverages,boardcertifiedphysicians,automatedprovidercredentialing,patientchanneling,onlineproviderlook-upandprintabledirectories.TheCompanyoffersonlineproviderlook-uponitsWebsitewhereuserscanlocateprovidersintheirarea,seeamap,getdoor-to-doordrivingdirectionsorprintadirectory.EnhancedBillReview—RetrospectiveUtilizationReviewTheCompanyoffersafulllineofretrospectiveutilizationservicesforallmedicalbillsincludingPPOmanagement,medicalbillrepricing,line-itembillreview,professionalnursereview,DiagnosisRelatedGroup(DRG)validationandexpertfeenegotiation.Theservice,namedMedCheckSelect,isdesignedtomaximizesavingsopportunitiesandincreaseefficienciesforcustomers.CorVelofferscostcontainmentbyexaminingmedicalbillstoverifythatpayorsareonlychargedforservicesactuallydeliveredandthatchargesreflectcurrentbillinglevelsforcomparableservice.CorVelusesacombinationofindustrystandardusualandcustomarydatabases,aswellasaproprietarynationwidedatabaseofusualandcustomarychargesforinpatientcare.Theinpatientdatabaseprovidesusualandcustomarychargesfordetailedcharges,whicharespecifiedontheitemizedhospitalbill.MedCheckSelectserviceisdesignedto:(cid:129)assurethatbilledchargesareusualandcustomary;(cid:129)confirmservicesweremedicallynecessary;(cid:129)reduceclaimcoststhroughnegotiatedagreements;(cid:129)substantiate,byreport,chargesoverusualandcustomary;(cid:129)supportthepayorandpatientinallappeals;5(cid:129)providereviewofout-of-networkbills;(cid:129)provideaproprietaryhospitalusualandcustomarydatabase;(cid:129)providereviewbyprofessionalnurses;(cid:129)provideexpertfeenegotiations;and(cid:129)validatediagnosisrelatedgroupsProviderReimbursementThroughMedCheck,theCompanyhasthecapabilitytoprovidecheckwritingorproviderreimbursementservicesforitscustomers.Theproviderpaymentcheckcanbeaddedtothebillanalysistoproduceonecombineddocument,whichismailedtotheprovider.MedCheckreviewsbillsandprovidersarereimburseddirectlyuponcompletionofcustomerapprovaloftheexplanationofreview(“EOR”).Thisserviceisdesignedtohelpcustomersexpediteclaimsclosure.PharmacyProgram—CorCareRXCorCareRXistheCompany’snationalworkers’compensationpharmacymanagementsystem.TheCorCar-eRXAverageWholesalePrice(AWP)modelprovidescustomerstheamountofsavingstheywillreceivebelowthecostofprescriptionsassociatedwithaworkers’compensationclaim.CorCareRXhasbeenspecificallydesignedto:(cid:129)manageclaimants’prescriptionexpenses;(cid:129)monitorappropriateutilization;and(cid:129)ensureprescriptionsarerelatedtoinjury.TheCorCareRXprogramoffersapatientidentificationcardthatlimitsdispensingofdrugstothosespecificallyauthorizedbythephysicianforaspecificworkers’compensationinjury.Theprogramwasdesignedtoensurethatthemedicationaninjuredemployeereceivesisappropriatefortheinjuryandisdispensedintheappropriatequantity.CorCareRXutilizesanidentificationsystemthatcreatesauniquenumberthatisspecifictotheparticularclaim.TheuseoftheCorCareRXprogrameliminatesthehandlingofpharmacybillsbytheemployeecompletely.Alltheprocessingandrepricingoccurselectronically,sothatthepayorneedonlytoapprovethepayment.TheCompany’sreportingsystemallowstheclaimspayortomanageandtrackprescriptiondrugcostsfromtheonsetoftheinjury.DirectedCareNetworks—CareIQCorVelhasexpandeditsnetworksolutionswithadirectedcarenetwork.CareIQ,CorVel’sdirectedcareserviceline,offersanautomatedserviceorderingandstatusmanagementsystemonline.TheCompany’snetworkserviceofferstimelyappointmentsandpreferredpricing.Ordersarefulfilledusinglocal,preferredprovidersandbillingandreimbursementforeachtransactionisautomaticallyprocessed.Servicesalsoincludeweb-basedrequestforservice,acallcenter,andonlinereporting.CareIQhasarelationshipwithover50%ofthenation’scredentialedfacilities,offeringthemostextensivenetworkofdirectedcareservicesinthenation.TheCompany’snetworkscoverdirectedcareneedsfor:IndependentMedicalEvaluations(IME),MedicalImaging(MRI,EMG,CTandBoneScan)DurableMedicalEquipment(DME),physicaltherapy,chiropractics,andtransportationandtranslationservices.ePPOSalesTheCompanyhadgrowthintheePPOproductlinestemmingprimarilyfromgrowthwithexistinglargecarriercustomers,newmanagedcareorganizationsandemployercustomers.ePPOistheelectronicsolutiontoCorVel’sPPOnetworkandprovidestheelectronicintakeandtransmissionofproviderbillsaswellasautomatedpricingtotheCorCarePPONetwork.ePPOcustomersprocessproviderbillsagainststatemandatedfeeschedulesorusual6andcustomaryrates.OurePPOcustomersleaseaccesstogainadditionaldiscountsaffordedbyPPOcontracts.TheCompany’stechnologicalcapabilitiesallowforelectronicclaimrepricingsolutionsthatwebelieveareattractivetobuyersofmanagedcareservicesandcanbeintegratedwiththeirexistingeCommerceproducts.ePPOprovidesaccesstoCorVel’sPPOnetworkofmorethan400,000qualityhealthcareprovidersthroughelectronicinterfacesolutions.BillsreviewedthroughpayorsystemscanbeelectronicallyinterfacedtotheCorCarePPOdatabase,andautomaticallyadjustedtoreflectcurrentPPOpricing.Inaddition,CorCarecanreimburseprovidersautomatically,significantlyreducingtheexpenseofgeneratingtheEOR,paymenttoprovidersandyear-endtaxfilings.MedCheckEnhancementsWiththeCompany’sfrequentinvestmentintechnology,developmentofMedCheck,theCompany’sproprietybillreviewsoftware,isongoing.NewenhancementsincludetheExpertReviewMatrix(ERM),MedCheckOperationsDashboard(MOD),increasedlook-upfunctionalityandthecreationofacomprehensivedatawarehouse.ThedevelopmentoftheERMbillsearchfunctioncapitalizesonadvancesinimageprocessingandArtificialIntelligence(AI)tooptimizeanticipatedmedicalreviewsavings.ERMprocessingtechniquesallowspecialistsineachdiagnosiscategory,regulatoryjurisdiction,orbenefitcategorytoaccessbillsacrossthecountrythroughMedCheck’ssecureserver.WebelievethisaccesspermitsCorVelspecialiststoutilizetheirknowledgeandprovideoptimumreviewforeachbill.TheMODisaninternalMedCheckapplicationusedtoprovidekeymetricsonbehalfofCorVel’scustomerstohelpfacilitatetimelybillreview.Thesereportscanbeorganizedintheformofcharts,graphs,andspreadsheets.Currently,theMODisindevelopmentfordirectaccesstocustomersthroughtheCareMCWebportal.TheCompanyoffersapreferredproviderlook-upontwoWebsites:corvel.comandcaremc.com.Duringthepastfiscalyear,theCompanyincreasedthefunctionalityofthelook-upwithapplicationenhancements.Customerscancreateanddevelopcustomized,networkspecificpanelsanddirectoriesinreal-time.TheCompanyhascontinuedthedevelopmentanddesignofitsdatawarehousesystemscapabilities.ThedatawarehousewasdesignedtoassisttheCompanyandcustomerswithexpeditedaccesstoanalyticaldataandreports.ThedatawarehouseisupdatedonanightlybasisandisaccessibleviatheCareMCWebsite.TheCompanyintendstocontinuetoinvestinthistechnologyinthecomingyearswithafocusonthetimelinessofinformationfortheCompany’scustomers.PatientManagementServicesInadditiontoitsnetworksolutions,theCompanyoffersCorCase,arangeofpatientmanagementservices,whichinvolveworkingonaone-on-onebasiswithinjuredemployeesandtheirvarioushealthcareprofessionals,employersandinsurancecompanyclaimsprofessionals.Patientmanagementservicesaredesignedtomonitorthemedicalnecessityandappropriatenessofhealthcareservicesprovidedtoworkers’compensationclaimantsandtoexpeditetheirreturn-to-work.CorCaseoffersearlyintervention,utilizationmanagementandvocationalrehabil-itationthroughlocalbranchofficesandcasemanagersinlocalcommunities.TheCompany’scasemanagersworkside-by-sidewithpatientstoassistthemthroughtheirepisodeofcareandreturn-to-work.TheCompanyofferstheseservicesonastand-alonebasisorasanintegratedcomponentofitsmedicalcostcontainmentservices.Theseservicesareperformedwithagoalofmaximizingresultsandminimizingcosts.CorCaseservicesareprovidedbytrainedandcertifiedprofessionalsinnursingandvocationalcounseling.ThecentralfocusofCorCaseistoleveragequalitycareinordertomanageclaimcosts.Withtheuseofearlyintervention,nursesareabletogatherandanalyzemedicaltreatmentinformationanddiscusswiththeemployerthecurrentjobrequirementsoftheinjuredworkerandaccommodationsformodifiedwork,andtogatheranyfurtherinformationwhichmayassistincaringfortheinjuredworker.Thisservicepositivelyimpactspatientcasesbyutilizingproactivemeasuresthroughouttheepisodeofcare.CorCaseutilizesCorVel’sproprietaryCareMCsoftwaretohelpdetermineavailableindemnitypaymentsfromtheemployerandcoordinatecasemanagementinformationandissues.Protocolsregardinglengthofdisabilityare7incorporatedtoguidethemanagementofcases.Managementandoperationsreports,electronicdatainterchangeandbillingareadditionalfeaturesofthesoftware.MedicalCaseManagementTheCompanyoffersmedicalcasemanagementserviceswheretheinjuryiscatastrophicorcomplexinnatureorwhereprolongedrecoveryisanticipated.ThemedicalmanagementcomponentsofCorVel’sprogramfocusonmedicalintervention,managementandappropriateness.Inthesecases,theCompany’scasemanagersconferwiththeattendingphysician,otherproviders,thepatientandthepatient’sfamilytoidentifytheappropriaterehabilitativetreatmentandmostcost-effectivehealthcarealternatives.Theprogramisdesignedtooffertheinjuredpartypromptaccesstoappropriatemedicalproviderswhowillprovidequalitycost-effectivemedicalcare.Casemanagersmaycoordinatetheservicesorcarerequiredandmayarrangeforspecialpricingoftherequiredservices.EarlyInterventionTheCompanybelievesthattheearlieritbecomesinvolvedinanepisodeofcare,thegreatertheimpactonthehealthcareoutcome.TheCompany’searlyinterventionprogrambeginsaseriesofstepsthataredesignedtopromoteanemployee’stimelyreturn-to-workincludingimmediatetelephonicassessmenttoensurethatanappropriatecourseoftreatmentisestablishedandadheredtothroughtheentireepisodeofcare.CorVel’searlyinterventionprogramfeaturesautomatedandimmediatenotification,immediatepatientassessment,clinicalprotocolsandguidelines,channelingtopreferredproviders,privatelabelingoptionsandtelephoniccasemanagement.TelephonicCaseManagementTelephoniccasemanagementisdesignedtofacilitateandpromotepatientcareandpatientprogressionthroughthehealthcaresystem.Thecasemanager,throughtelephoniccontactwiththepatientand/orfamily,facilitatescommunicationbetweenthepatient,insurerandhealthcareprovidersinordertoacceleratereturn-to-work.ClaimsAdministrationSinceJanuary2007,theCompanyhasbeenaTPAofferingacomprehensiveintegratedplatformofworkers’compensationandliabilityclaimsmanagementandmedicalmanagementservices.Throughthisservice,theCompanyservesclientsintheself-insuredorcommerciallyinsuredmarketthroughalternativelossfundingmethods,andprovidesthemwithacompleterangeofservices,includingclaimsadministration,casemanagement,andmedicalbillreview.Inadditiontothefieldinvestigationandevaluationofclaims,theCompanyalsomayprovideinitiallossreportingservicesforclaims,lossmitigationservicessuchasmedicalbillreviewandvocationalrehabilitation,administrationoftrustfundsestablishedtopayclaimsandriskmanagementinformationservices.UtilizationManagementUtilizationManagementprogramsreviewproposedambulatorycaretodetermineappropriateness,frequency,durationandsetting.Theseprogramsutilizeexperiencedregisterednurses,proprietarymedicaltreatmentprotocolsandcomputersystemstechnologyinanefforttoavoidunnecessarytreatmentsandassociatedcosts.ProcessesinUtilizationManagementinclude:injuryreview,diagnosisandtreatmentplanning;contactingandnegotiatingprovidertreatmentrequirements;certifyingappropriatenessoftreatmentparameters,andrespondingtoproviderrequestsforadditionaltreatment.Pre-certificationofHospitalizationThepre-admissioncertificationprogramverifiesthemedicalnecessityofproposedhospitaladmissionsanddeterminestheappropriatelengthofstay.TheCorVelstaffofnursesandreviewers,assistedbyanautomatedmedicalrules/protocolssystemandbackedupbyphysicianconsultants,individuallyevaluateseveryhospitaladmissionsrequest.Pre-certificationobjectivesincludethefollowing:determiningappropriatenessofproposedoremergenthospitalization;determiningthemedicalnecessityforhospitaladmission/inpatientcare;exploringalternativestoinpatienttreatment;ifinpatientcareisrequired,determiningtheappropriatelengthofstayand8monitoringthepatient’sconditionthroughoutthehospitalizationtopreventunnecessaryinpatientdays;channelingthepatienttoaCorVelPPOprovider/facility;anddevelopingandimplementingatimelydischargeplan.InpatientUtilizationReviewTheCompanyofferspre-certificationandconcurrentutilizationreviewservices.TheCompany’spre-certi-ficationserviceisdesignedtobeutilizedpriortotheinjuredemployee’sadmissiontothehospital.Uponnotificationbyaclaimsmanageroremployer,aCompanynursereviewstheappropriatenessoftheproposedplanofcare,theneedforinpatienthospitalization,andtheappropriatelengthofstay.UndertheCompany’sconcurrentreviewservice,thenursereviewersmonitorthemedicalnecessityandappropriatenessofthepatient’scontinuedhospitalizationthroughregularcontactwiththehospitalandthepatient’sphysicianandmayidentifycasesthatlendthemselvestoalternatetreatmentsettingsorhomecare.VocationalRehabilitationIncertainstates,vocationalrehabilitationisalegislatedbenefitofworkers’compensation,whichassiststheemployee’sreturntoformeremploymentoranotherjobfunctionwithsimilareconomicvalue.TheCompanyoffersvocational-relatedservicestoreduceworkers’compensationcostsandexpeditetheinjuredemployee’sreturn-to-work.CorVeloffersvocational-relatedservicestoevaluatetheclaimant’seducation,trainingandexperience.Vocational-relatedservicesincludeworkcapacityassessments,jobanalysis,transferableskillanalysis,jobmodification,vocationaltesting,jobplacementassistance,labormarketsurveysandretraining.Byworkingwiththeemployer,theCompany’scasemanagerscanprovidejobmodificationorlight-dutyalternativesuntilthephysicianliftstheclaimant’sphysicalrestrictions.Inaddition,CorVelcanevaluatepartialpaymentclaimsiftheclaimantreturnstoworkinanewposition,workingforlessthantheirpre-injurywage.ServicesincludedbytheCompany’svocationalcasemanagersinclude:(cid:129)ergonomicassessments;(cid:129)rehabilitationplans;(cid:129)transferableskillsanalysis;(cid:129)labormarketsurvey;(cid:129)jobseekingskillstraining;(cid:129)resumedevelopment;(cid:129)vocationalassessment;(cid:129)jobanalysis,developmentandplacement;(cid:129)experttestimony;and(cid:129)ADAcompliance.LifeCarePlanningLifeCarePlanningisatoolusedtoprojectlong-termfutureneeds,servicesandrelatedcostsassociatedwithcatastrophicinjury.CorVel’sLifeCarePlanssummarizeextensiveamountsofmedicaldataandcompileitintoacomprehensivereportforfuturecarerequirements,inordertoattemptproduceimprovedoutcomesandtimelyresolutionofclaims.MedicareSet-AsidesAMedicareSet-AsideAllocation(MSA)isaprocessusedtodemonstratetoMedicarethatadequatefundsareavailabletocoverthecostoffuturemedicalcareandMedicarewillnotbeassignedastheprimarypayer.9CorVelworkswithemployersindraftingaproposedsetasideamountandassistswiththesubmissionoftheset-asideproposalwiththeappropriateMedicareagency.Additionally,CorVeloffersadministrationservicesforinjuredpartieswhodonotwanttoadministertheirset-asidefundsthemselves.CriticalStressIncidentDebriefCrisisCounselingisusedtominimizetheeffectsofstressonemployeesfollowingatraumaticeventandmaintainemployeesontheirjobsfollowingacriticallystressfulincident.Examplesofsucheventsincludeexperiencingorwitnessingaphysicalassault,observingorsufferingacatastrophicinjury,andviolenceintheworkplace.SYSTEMSANDTECHNOLOGYInfrastructureChangesTheCompanyhasimplementedaTierIII-ratedDataCenterasitsprimaryprocessingsite.Redundancyisprovidedatmanylevelsinpower,cooling,andcomputingresources,ensuringmaximumuptimeandsystemavailabilityfortheCompany’sproductionsystems.TheCompanyhasalsobeguntomakeoptimumuseofservervirtualizationandconsolidationtechniquestopushfault-toleranceofsystemsevenfurther.TheCompanyisseeingthebenefitfromtheincreasedspeed-to-productionandscalabilitythatthesetechnologiesbring.AdoptionofImagingTechnologiesandPaperlessWorkflowUtilizingscanningandautomateddatacaptureprocessesallowstheCompanytoprocessincomingpaperandelectronicclaimsdocuments,includingmedicalbills,withlessmanualhandlingandhasimprovedtheCompany’sworkflowprocesses.ThishasbenefittedboththeCompany,intermsofcost-savings,andtheCompany’scustomers,inimprovedsavingsresults.ThroughtheCompany’sinternetportal,www.CareMC.com,customerscanreviewthebillsassoonastheyareprocessedandapproveabillforpayment,streamliningthecustomer’sownworkflowsandexpeditingthepaymentprocess.RedundancyCenterTheCompany’snationaldatacenterislocatednearPortland,Oregon.TheCompanyalsohasaredundancycenterlocatedinFt.Worth,Texas.TheredundancycenteristheCompany’sbackupprocessingsiteintheeventthatthePortlanddatacentersufferscatastrophicloss.Currently,theCompany’sdataiscontinuallyreplicatedtoFt.Worthinnear-realtime,sothatintheeventthePortlanddatacenterisoffline,theredundancycentercanbeactivatedwithcurrentinformationquickly.TheFt.WorthdatacenteralsohostsduplicatesoftheCompany’sWebsites.TheFt.WorthsystemsaremaintainedandexercisedonacontinuousbasisastheyhostDemonstrationandPilotenvironmentsthatmirrorproduction,thusensuringtheirongoingreadiness.CareMCCareMC(www.caremc.com)hasbecometheapplicationplatformforalloftheCompany’sprimaryservicelinesanddeliversimmediateaccesstocustomers.CareMCofferscustomersdirectaccesstotheCompany’sprimaryservices.CareMCallowsforelectroniccommunicationandreportingbetweenproviders,payers,employersandpatients.Featuresofthewebsiteinclude:requestforservice,FNOL(firstnoticeofloss),appointmentscheduling,onlinebillreview,claimsinformationmanagement,treatmentcalendar,medicalbilladjudicationandautomatedproviderreimbursement.ThroughtheCareMCWebsite,userscan:(cid:129)requestservicesonline;(cid:129)managefilesthroughoutthelifeoftheclaim;(cid:129)receiveandrelaycasenotesfromcasemanagers;and(cid:129)integrateinformationfrommultipleclaimsmanagementsourcesintoonedatabase.10TheCareMCWebsitefacilitateshealthcaretransactionprocessing.Usingartificialintelligencetechniques,thewebsiteprovidessituationalertsandeventtriggers,tofacilitatepromptandeffectivedecisions.UsersofCareMCcanquicklyseewhereeventoutliersareoccurringwithintheclaimsmanagementprocess.Ifcostsexceedpre-determinedthresholdsoractivitiesfalloutsideexpectedtimelines,decision-makerscanbequicklynotified.Largeamountsofinformationareconsolidatedandsummarizedtohelpcustomersfocusonthecriticalissues.ScanningServicesThecompanycontinuestoleverageourscanningtechnologieswhichincludescanning,opticalcharacterrecognitionanddocumentmanagementservices.WecontinuetoexpandtheCompany’sexistingofficeautomationservicelineandallofficesaresellingscanninganddocumentmanagement.TheCompanyhasaddedscanningoperationstomostoftheCompany’slargerofficesaroundthecountry,designatingthem“CaptureCenters.”OurscanningservicealsooffersaWebinterface(www.onlinedocumentcenter.com)providingimmediateaccesstodocumentsanddatacalledtheOnlineDocumentCenter(ODC).Securedocumentreview,approval,transactionworkflowandarchivalstorageareavailableatsubscription-basedpricing.ClaimsProcessingWecontinuetodevelopourClaimsSystemcapabilitieswhichfitwellwiththeCompany’spreferenceforowningandmaintainingourownsoftwareassets.Integrationprojects,somealreadycompleted,areunderwaytopresentmoreofthisClaims-centricinformationavailablethroughtheCareMCwebportal.TheCompany’sgoalistomodernizeuserinterfaces,andtostreamlinethedeliveryofthisinformationtoourcustomers,givingmorerapidfeedbackandputtingreal-timeinformationinthehandsofourclients.INDUSTRY,CUSTOMERSANDMARKETINGTheCompanyfocusesonfourmajorindustriesaroundthecountry:workers’compensation,autoinsurance,grouphealthandmunicipalities.TheCompany’scustomersprimarilyareworkers’compensationinsurersand,toalesserextent,TPAsandself-administeredemployers.NosinglecustomeroftheCompanyrepresentedmorethan10%ofrevenuesinfiscal2007,2008or2009.Manyclaimsmanagementdecisionsinworkers’compensationaretheresponsibilityofthelocalclaimsofficeofnationalorregionalinsurers.TheCompany’snationalbranchofficenetworkhasbeenestablishedtoenabletheCompanytomarketandofferitsservicesatbothalocalandnationalaccountlevel.TheCompanyisplacingincreasingemphasisonnationalaccountmarketing.ThemarketingactivitiesoftheCompanyareconductedprimarilybyaccountexecutiveslocatedinkeygeographicareas.COMPETITIONANDMARKETCONDITIONSThehealthcarecostcontainmentindustryishighlyfragmentedandcompetitiveandissubjecttoshiftingcustomerrequirements,frequentintroductionsofnewproductsandservices,increasedmarketingactivitiesofotherindustryparticipants,andlegislativereforms.TheCompanyexpectstheintensityofcompetitiontoincreaseinthefutureasexistingcompetitorscontinuetodeveloptheirproductsandservicesandasnewcompaniesentertheCompany’smarket.TheCompany’sprimarycompetitorsintheworkers’compensationmarketincludesomelargeinsurancecarrierswhichofferoneormoreservicessimilartothoseofferedbytheCompany,HMOsandnumerousindependentcompanies,typicallyonalocalorregionalbasis.TheCompanyalsocompeteswithnationalandlocalfirmsspecializinginutilizationreview,andwithmajorinsurancecarriersandTPAswhichhaveimplementedtheirowninternalutilizationreviewservices.ManyoftheCompany’scompetitorsaresignificantlylargerandhavegreaterfinancialandmarketingresourcesthantheCompany.Moreover,theCompany’scustomersmayestablishthein-housecapabilityofperformingservicesofferedbytheCompany.IftheCompanyisunabletocompeteeffectively,itwillbedifficultfortheCompanytoaddandretaincustomers,andtheCompany’sbusiness,financialconditionandresultsofoperationswillbemateriallyandadverselyaffected.11LegislativereformsinsomestatespermitemployerstodesignatehealthplanssuchasHMOsandPPOstocoverworkers’compensationclaimants.Becausemanyhealthplanshavethecapacitytomanagehealthcareforworkers’compensationclaimants,suchlegislationmayintensifycompetitioninthemarketservedbytheCompany.TheCompanybelievesthatdeclinesinworkers’compensationcostsinthesestatesaredueprincipallytointensifiedeffortsbypayorstomanageandcontrolclaimcosts,toimprovedriskmanagementbyemployersandtolegislativereforms.Ifdeclinesinworkers’compensationcostsoccurinmanystatesandpersistoverthelong-term,theymayhaveamaterialadverseeffectontheCompany’sbusiness,financialconditionandresultsofoperations.TheCompanybelievestheprincipalfactorsthatgenerallydetermineacompany’scompetitiveadvantageintheCompany’smarketincludethefollowing:specializationinworkers’compensation,breadthofservices,abilitytoofferlocalservicesonanationwidebasis,informationmanagementsystemsandindependencefrominsurancecarriers.TherecanbenoassurancethattheCompanywillbesuccessfulinalloranyoftheseareasthattheCompanybelievescontributetocompetitiveadvantage,thattheCompanywillbeabletocompetesuccessfullyagainstcurrentorpotentialcompetitors,orthatcompetitionwillnothaveamaterialadverseeffectontheCompany’sbusiness,financialconditionandresultsofoperations.GOVERNMENTREGULATIONSGeneralManagedhealthcareprogramsforworkers’compensationaresubjecttovariouslawsandregulations.Boththenatureanddegreeofapplicablegovernmentregulationvarygreatlydependinguponthespecificactivitiesinvolved.Generally,partiesthatactuallyprovideorarrangefortheprovisionofhealthcareservices,assumefinancialriskrelatedtotheprovisionofthoseservicesorundertakedirectresponsibilityformakingpaymentorpaymentdecisionsforthoseservices.Thesepartiesaresubjecttoanumberofcomplexregulatoryrequirementsthatgovernmanyaspectsoftheirconductandoperations.Incontrast,themanagementandinformationservicesprovidedbytheCompanytoitscustomerstypicallyhavenotbeenthesubjectofregulationbythefederalgovernmentorthestates.Sincethemanagedhealthcarefieldisarapidlyexpandingandchangingindustryandthecostofprovidinghealthcarecontinuestoincrease,itispossiblethattheapplicablestateandfederalregulatoryframeworkswillexpandtohaveagreaterimpactupontheconductandoperationoftheCompany’sbusiness.Underthecurrentworkers’compensationsystem,employerinsuranceorself-fundedcoverageisgovernedbyindividuallawsineachofthe50statesandbycertainfederallaws.ThemanagementandinformationservicesthatmakeuptheCompany’smanagedcareprogramservemarketsthathavedevelopedlargelyinresponsetoneedsofinsurers,employersandlargeTPAs,andgenerallyhavenotbeenmandatedbylegislationorothergovernmentaction.Ontheotherhand,thevocationalrehabilitationcasemanagementmarketplacewithintheworkers’compensationsystemhasbeendependentuponthelawsandregulationswithinthosestatesthatrequiretheavailabilityofspecifiedrehabilitationservicesforinjuredworkers.Similarly,theCompany’sfeescheduleauditingservicesaddressmarketneedscreatedbycertainstates’enactmentofmaximumpermissiblefeeschedulesforworkers’compensationservices.Changesinindividualstateregulationofworkers’compensationmaycreateagreaterorlesserdemandforsomeoralloftheCompany’sservicesorrequiretheCompanytodevelopnewormodifiedservicesinordertomeettheneedsofthemarketplaceandcompeteeffectivelyinthatmarketplace.MedicalCostContainmentsLegislationHistorically,governmentalstrategiestocontainmedicalcostsintheworkers’compensationfieldhavebeengenerallylimitedtolegislationonastate-by-statebasis.Forexample,manystateshaveimplementedfeeschedulesthatlistmaximumreimbursementlevelsforhealthcareprocedures.Incertainstatesthathavenotauthorizedtheuseofafeeschedule,theCompanyadjustsbillstotheusualandcustomarylevelsauthorizedbythepayor.OpportunitiesfortheCompany’sservicescouldincreaseifmorestateslegislateadditionalcostcontainmentstrategies.Conversely,theCompanywouldbemateriallyandadverselyaffectedifstateselecttoreducetheextentofmedicalcostcontainmentstrategiesavailabletoinsurancecarriersandotherpayors,oradoptotherstrategiesforcostcontainmentthatwouldnotsupportademandfortheCompany’sservices.12HealthcareReformTherehasbeenconsiderablediscussionofhealthcarereformatboththefederallevelandinnumerousstatelegislaturesinrecentyears.Duetouncertaintiesregardingtheultimatefeaturesofreforminitiativesandthetimingoftheirenactment,theCompanycannotpredictwhich,ifany,reformswillbeadopted,whentheymaybeadopted,orwhatimpacttheymayhaveontheCompany.SHAREHOLDERRIGHTSPLANDuringfiscal1997,theCompany’sBoardofDirectorsapprovedtheadoptionofaShareholderRightsPlan.TheShareholderRightsPlanprovidesforadividenddistributiontoCorVelstockholdersofonepreferredstockpurchaserightforeachoutstandingshareofCorVel’scommonstockundercertaincircumstances.InApril2002,theBoardofDirectorsofCorVelapprovedanamendmenttotheShareholderRightsPlantoextendtheexpirationdateoftherightstoFebruary10,2012,tosettheexercisepriceofeachrightto$118(adjustedforthethree-for-twostocksplitintheformofa50%stockdividendduringfiscal2007asnotedabove)andenableFidelityManagement&ResearchCompanyanditsaffiliatestopurchaseupto18%ofthesharesofcommonstockoftheCompanywithouttriggeringthestockholderrights,withthelimitationsundertheShareholderRightsPlanremainingineffectforallotherstockholdersoftheCompany.InNovember2008,theCompany’sBoardofDirectorsapprovedanamendmenttotheShareholderRightsPlantoextendtheexpirationdateoftherightstoFebruary10,2022,removetheabilityofFidelityManagement&ResearchCompanyanditsaffiliatestopurchaseupto18%ofthesharesofcommonstockoftheCompanywithouttriggeringthestockholderrights,substituteComputershareTrustCompany,N.A.astherightsagentandeffectcertaintechnicalchangestotheShareholderRightsPlan.TherightsaredesignedtoassurethatallshareholdersreceivefairandequaltreatmentintheeventofanyproposedtakeoveroftheCompanyandtoencourageapotentialacquirertonegotiatewiththeBoardofDirectorspriortoattemptingatakeover.Therightshaveanexercisepriceof$118perright,subjecttosubsequentadjustment.TherightstradewiththeCompany’scommonstockandwillnotbeexercisableuntiltheoccurrenceofcertaintakeover-relatedevents.Generally,theShareholderRightsPlanprovidesthatifapersonorgroupacquires15%ormoreoftheCompany’scommonstockwithouttheapprovaloftheBoard,subjecttocertainexception,theholdersoftherights,otherthantheacquiringpersonorgroup,would,undercertaincircumstances,havetherighttopurchaseadditionalsharesoftheCompany’scommonstockhavingamarketvalueequaltotwotimesthethen-currentexercisepriceoftheright.Inaddition,iftheCompanyisthereaftermergedintoanotherentity,orif50%ormoreoftheCompany’sconsolidatedassetsorearningpoweraresold,thentherightwillentitleitsholdertobuycommonsharesoftheacquiringentityhavingamarketvalueequaltotwotimesthethen-currentexercisepriceoftheright.TheCompany’sBoardofDirectorsmayexchangeorredeemtherightsundercertainconditions.EMPLOYEESAsofMarch31,2009,CorVelhadapproximately2,700employees,includingnurses,therapists,counselorsandotheremployees.Noemployeesarerepresentedbyanycollectivebargainingunit.ManagementbelievestheCompany’srelationshipwithitsemployeestobegood.AVAILABLEINFORMATIONCopiesofourAnnualReportsonForm10-K,QuarterlyReportsonForm10-Q,CurrentReportsonForm8-K,andamendmentstothosereportsfiledorfurnishedpursuanttoSections13(a)or15(d)oftheSecuritiesExchangeActof1934,andotherfilingsmadewiththeSecuritiesandExchangeCommission,areavailablefreeofchargethroughourWebsite(http://www.corvel.com,undertheInvestorRelationssection)assoonasreasonablypracticableaftersuchreportsareelectronicallyfiledwith,orfurnishedto,theSecuritiesandExchangeCommis-sion.TheinclusionofourWebsiteaddressandtheaddressofanyofourportals,suchaswww.caremc.comandwww.onlinedocumentcenter.com,inthisreportdoesnotincludeorincorporatebyreferenceintothisreportanyinformationcontainedon,oraccessiblethrough,suchWebsites.13Item1A.RiskFactors.RiskFactorsPastfinancialperformanceisnotnecessarilyareliableindicatoroffutureperformance,andinvestorsinourcommonstockshouldnotusehistoricalperformancetoanticipateresultsorfutureperiodtrends.Investinginourcommonstockinvolvesahighdegreeofrisk.Investorsshouldconsidercarefullythefollowingriskfactors,aswellastheotherinformationinthisreportandourotherfilingswiththeSecuritiesandExchangeCommission,includingourconsolidatedfinancialstatementsandtherelatednotes,beforedecidingwhethertoinvestormaintainaninvestmentinsharesofourcommonstock.Ifanyofthefollowingrisksactuallyoccurs,ourbusiness,financialconditionandresultsofoperationswouldsuffer.Inthiscase,thetradingpriceofourcommonstockwouldlikelydecline.Therisksdescribedbelowarenottheonlyonesweface.Additionalrisksthatwecurrentlydonotknowaboutorthatwecurrentlybelievetobeimmaterialalsomayimpairourbusinessoperations.Changesingovernmentregulationscouldincreaseourcostsofoperationsand/orreducethedemandforourservices.Manystates,includinganumberofthoseinwhichwetransactbusiness,havelicensingandotherregulatoryrequirementsapplicabletoourbusiness.Approximatelyhalfofthestateshaveenactedlawsthatrequirelicensingofbusinesseswhichprovidemedicalreviewservicessuchasours.Someoftheselawsapplytomedicalreviewofcarecoveredbyworkers’compensation.Theselawstypicallyestablishminimumstandardsforqualificationsofpersonnel,confidentiality,internalqualitycontrolanddisputeresolutionprocedures.Theseregulatoryprogramsmayresultinincreasedcostsofoperationforus,whichmayhaveanadverseimpactuponourabilitytocompetewithotheravailablealternativesforhealthcarecostcontrol.Inaddition,newlawsregulatingtheoperationofmanagedcareprovidernetworkshavebeenadoptedbyanumberofstates.Theselawsmayapplytomanagedcareprovidernetworkshavingcontractswithusortoprovidernetworkswhichwemayorganize.Totheextentwearegovernedbytheseregulations,wemaybesubjecttoadditionallicensingrequirements,financialandoperationaloversightandproceduralstandardsforbeneficiariesandproviders.Regulationinthehealthcareandworkers’compensationfieldsisconstantlyevolving.Weareunabletopredictwhatadditionalgovernmentinitiatives,ifany,affectingourbusinessmaybepromulgatedinthefuture.Ourbusinessmaybeadverselyaffectedbyfailuretocomplywithexistinglawsandregulations,failuretoobtainnecessarylicensesandgovernmentapprovalsorfailuretoadapttonewormodifiedregulatoryrequirements.Proposalsforhealthcarelegislativereformsareregularlyconsideredatthefederalandstatelevels.Totheextentthatsuchproposalsaffectworkers’compensation,suchproposalsmayadverselyaffectourbusiness,financialconditionandresultsofoperations.Inaddition,changesinworkers’compensation,autoandmanagedhealthcarelawsorregulationsmayreducedemandforourservices,requireustodevelopnewormodifiedservicestomeetthedemandsofthemarketplaceorreducethefeesthatwemaychargeforourservices.Oneproposalwhichhadbeenconsideredinthepast,butnotenactedbyCongressorcertainstatelegislatures,is24-hourhealthcoverage,inwhichthecoverageoftraditionalemployer-sponsoredhealthplansiscombinedwithworkers’compensationcoveragetoprovideasingleinsuranceplanforwork-relatedandnon-work-relatedhealthproblems.Incorporatingworkers’compensationcoverageintoconventionalhealthplansmayadverselyaffectthemarketforourservicesbecausesomeemployerswouldpurchase24-hourcoveragefromgrouphealthplans,whichwouldreducethedemandforCorVel’sworkers’compensationcustomers.Ourquarterlyandannualsequentialrevenuemaynotincreaseandmaydecline.Asaresult,wemayfailtomeetorexceedtheexpectationsofinvestorsoranalystswhichcouldcauseourcommonstockpricetodecline.Ourquarterlyandannualsequentialrevenuegrowthmaynotincreaseandmaydeclineinthefutureasaresultofavarietyoffactors,manyofwhichareoutsideofourcontrol.Ifchangesinourquarterlysequentialrevenuefallbelowtheexpectationsofinvestorsoranalysts,thepriceofourcommonstockcoulddeclinesubstantially.Fluctuationsordeclinesinquarterlysequentialrevenuegrowthmaybeduetoanumberoffactors,including,butnotlimitedto,thoselistedbelowandidentifiedthroughoutthis“RiskFactors”section:thedeclineinmanufacturing14employment,thedeclineinworkers’compensationclaims,thedeclineinhealthcareexpenditures,theconsiderablepricecompetitioninaflat-to-decliningworkers’compensationmarket,litigation,theincreaseincompetition,andthechangesandthepotentialchangesinstateworkers’compensationandautomobilemanagedcarelawswhichcanreducedemandforourservices.Thesefactorscreateanenvironmentwhererevenueandmargingrowthismoredifficulttoattainandwhererevenuegrowthislesscertainthanhistoricallyexperienced.Additionally,ourtechnologyandpreferredprovidernetworkfacecompetitionfromcompaniesthathavemoreresourcesavailabletothemthanwedo.Also,somecustomersmayhandletheirmanagedcareservicesin-houseandmayreducetheamountofserviceswhichareoutsourcedtomanagedcarecompaniessuchasCorVel.Thesefactorscouldcausethemarketpriceofourcommonstocktofluctuatesubstantially.Therecanbenoassurancethatourgrowthrateinthefuture,ifany,willbeatornearhistoricallevels.Inaddition,thestockmarkethasinthepastexperiencedpriceandvolumefluctuationsthathaveparticularlyaffectedcompaniesinthehealthcareandmanagedcaremarketsresultinginchangesinthemarketpriceofthestockofmanycompanies,whichmaynothavebeendirectlyrelatedtotheoperatingperformanceofthosecompanies.Duetotheforegoingfactors,andtheotherrisksdiscussedinthisreport,investorsshouldnotrelyonquarter-to-quartercomparisonsofourresultsofoperationsasanindicationofourfutureperformance.Exposuretopossiblelitigationandlegalliabilitymayadverselyaffectourbusiness,financialconditionandresultsofoperations.We,throughourutilizationmanagementservices,makerecommendationsconcerningtheappropriatenessofproviders’medicaltreatmentplansofpatientsthroughoutthecountry,andasaresult,couldbeexposedtoclaimsforadversemedicalconsequences.Wedonotgrantordenyclaimsforpaymentofbenefitsandwedonotbelievethatweengageinthepracticeofmedicineorthedeliveryofmedicalservices.Therecanbenoassurance,however,thatwewillnotbesubjecttoclaimsorlitigationrelatedtotheauthorizationordenialofclaimsforpaymentofbenefitsorallegationsthatweengageinthepracticeofmedicineorthedeliveryofmedicalservices.Inaddition,therecanbenoassurancethatwewillnotbesubjecttootherlitigationthatmayadverselyaffectourbusiness,financialconditionorresultsofoperations,includingbutnotlimitedtobeingjoinedinlitigationbroughtagainstourcustomersinthemanagedcareindustry.Wemaintainprofessionalliabilityinsuranceandsuchothercoveragesaswebelievearereasonableinlightofourexperiencetodate.Ifsuchinsuranceisinsufficientorunavailableinthefutureatreasonablecosttoprotectusfromliability,ourbusiness,financialconditionorresultsofoperationscouldbeadverselyaffected.InFebruary2005,KathleenRoche,D.C.,asplaintiff,filedaputativeclassactioninCircuitCourtforthe20thJudicialDistrict,St.ClairCounty,Illinois,againsttheCompany.ThecaseseeksunspecifieddamagesbasedontheCompany’sallegedfailuretosteerpatientstomedicalproviderswhoaremembersoftheCorVelCorCarePPOnetworkandalsoallegesthatweusedbiasedandarbitrarycomputersoftwaretoreviewmedicalproviders’bills.InDecember2007,thetrialcourtcertifiedaclassinthiscaseofallIllinoishealthcareproviderswithCorVelPPOagreements,excludinghospitals.InJanuary2008,wefiledwiththeIllinoisAppellateCourtapetitionforinterlocutoryappealofthetrialcourt’sclasscertificationorderwhichwasdeniedinApril2008.InMay2008,weappealedtheappellatecourt’sdenialofitspetitionforinterlocutoryappealwhichappealwasalsodeniedbytheIllinoisSupremeCourtinSeptember2008.Weintendtopursueallavailablelegalremediesincludingvigorouslydefendingthiscase.Anunfavorableoutcomeinthislitigationwouldmateriallyandadverselyaffectourbusiness,financialconditionorresultsofoperations.Iflawsuitsagainstusaresuccessful,wemayincursignificantliabilities.Weprovidetoinsurersandotherpayorsofhealthcarecostsmanagedcareprogramsthatutilizepreferredproviderorganizationsandcomputerizedbillreviewprograms.Healthcareprovidershavebroughtagainstusandourcustomersindividualandclassactionlawsuitschallengingsuchprograms.Ifsuchlawsuitsaresuccessful,wemayincursignificantliabilities.Wemakerecommendationsabouttheappropriatenessofproviders’proposedmedicaltreatmentplansforpatientsthroughoutthecountry.Asaresult,wecouldbesubjecttoclaimsarisingfromanyadversemedical15consequences.Althoughplaintiffshavenottodatesubjectedustoanyclaimsorlitigationrelatingtothegrantordenialofclaimsforpaymentofbenefitsorallegationsthatweengageinthepracticeofmedicineorthedeliveryofmedicalservices,wecannotassureyouthatplaintiffswillnotmakesuchclaimsinfuturelitigation.Wealsocannotassureyouthatourinsurancewillprovidesufficientcoverageorthatinsurancecompanieswillmakeinsuranceavailableatareasonablecosttoprotectusfromsignificantfutureliability.Ourfailuretocompetesuccessfullycouldmakeitdifficultforustoaddandretaincustomersandcouldreduceorimpedethegrowthofourbusiness.WefacecompetitionfromPPOs,TPAsandothermanagedhealthcarecompanies.Webelievethatasmanagedcaretechniquescontinuetogainacceptanceintheworkers’compensationmarketplace,ourcompetitorswillincreasinglyconsistofnationally-focusedworkers’compensationmanagedcareservicecompanies,insurancecompanies,HMOsandothersignificantprovidersofmanagedcareproducts.Legislativereforminsomestateshasbeenconsidered,butnotenactedtopermitemployerstodesignatehealthplanssuchasHMOsandPPOstocoverworkers’compensationclaimants.Becausemanyhealthplanshavetheabilitytomanagemedicalcostsforworkers’compensationclaimants,suchlegislationmayintensifycompetitioninthemarketsservedbyus.Manyofourcurrentandpotentialcompetitorsaresignificantlylargerandhavegreaterfinancialandmarketingresourcesthanwedo,andtherecanbenoassurancethatwewillcontinuetomaintainourexistingcustomers,ourpastlevelofoperatingperformanceorbesuccessfulwithanynewproductsorinanynewgeographicalmarketswemayenter.Declinesinworkers’compensationclaimsmayharmourresultsofoperations.Withinthepastfewyears,severalstateshaveexperiencedadeclineinthenumberofworkers’compensationclaimsandtheaveragecostperclaimwhichhavebeenreflectedinworkers’compensationinsurancepremiumratereductionsinthosestates.Webelievethatdeclinesinworkers’compensationcostsinthesestatesaredueprincipallytointensifiedeffortsbypayorstomanageandcontrolclaimcosts,andtoalesserextent,toimprovedriskmanagementbyemployersandtolegislativereforms.Ifdeclinesinworkers’compensationcostsoccurinmanystatesandpersistoverthelong-term,itwouldhaveanadverseimpactonourbusiness,financialconditionandresultsofoperations.Weprovideanoutsourceservicetopayorsofworkers’compensationandautohealthcarebenefits.Thesepayorsincludeinsurancecompanies,TPAs,municipalities,statefunds,andself-insured,self-administeredemployers.Ifthesepayorsreducetheamountofworktheyoutsource,ourresultsofoperationswouldbeadverselyaffected.Iftheaverageannualgrowthinnationwideemploymentdoesnotoffsetdeclinesinthefrequencyofworkplaceinjuriesandillnesses,thenthesizeofourmarketmaydecline,whichmayadverselyaffectourabilitytogrow.Therateofinjuriesthatoccurintheworkplacehasdecreasedovertime.Althoughtheoverallnumberofpeopleemployedintheworkplacehasgenerallyincreasedovertime,thisincreasehasonlypartiallyoffsetthedecliningrateofinjuriesandillnesses.Ourbusinessmodelisbased,inpart,onourabilitytoexpandourrelativeshareofthemarketforthetreatmentandreviewofclaimsforworkplaceinjuriesandillnesses.Ifnationwideemploymentdoesnotincreaseorexperiencesperiodsofdecline,orifworkplaceinjuriesandillnessescontinuetodeclineatagreaterratethantheincreaseintotalemployment,ourabilitytoincreaseourrevenueandearningscouldbeadverselyimpacted.Iftheutilizationbyhealthcarepayorsofearlyinterventionservicescontinuestoincrease,therevenuefromourlater-stagenetworkandhealthcaremanagementservicescouldbenegativelyaffected.Theperformanceofearlyinterventionservices,includinginjuryoccupationalhealthcare,firstnoticeofloss,andtelephoniccasemanagementservices,oftenresultinadecreaseintheaveragelengthof,andthetotalcostsassociatedwith,ahealthcareclaim.Bysuccessfullyinterveningatanearlystageinaclaim,theneedforadditionalcostcontainmentservicesforthatclaimoftencanbereducedoreveneliminated.Ashealthcarepayorscontinueto16increasetheirutilizationofearlyinterventionservices,therevenuefromourlaterstagenetworkandhealthcaremanagementserviceswilldecrease.Wefacecompetitionforstaffing,whichmayincreaseourlaborcostsandreduceprofitability.Wecompetewithotherhealth-careprovidersinrecruitingqualifiedmanagementandstaffpersonnelfortheday-to-dayoperationsofourbusiness,includingnursesandothercasemanagementprofessionals.Insomemarkets,thescarcityofnursesandothermedicalsupportpersonnelhasbecomeasignificantoperatingissuetohealth-careproviders.Thisshortagemayrequireustoenhancewagestorecruitandretainqualifiednursesandotherhealth-careprofessionals.Ourfailuretorecruitandretainqualifiedmanagement,nursesandotherhealth-careprofessionals,ortocontrollaborcostscouldhaveamaterialadverseeffectonprofitability.Ifcompetitionincreases,ourgrowthandprofitsmaydecline.ThemarketsforourNetworkServicesandPatientManagementServicesarealsofragmentedandcompetitive.Ourcompetitorsincludenationalmanagedcareproviders,preferredprovidernetworks,smallerindependentprovidersandinsurancecompanies.Companiesthatofferoneormoreworkers’compensationmanagedcareservicesonanationalbasisareourprimarycompetitors.Wealsocompetewithmanysmallervendorswhogenerallyprovideunbundledservicesonalocallevel,particularlycompanieswithanestablishedrelationshipwithalocalinsurancecompanyadjuster.Inaddition,severallargeworkers’compensationinsurancecarriersoffermanagedcareservicesfortheircustomers,eitherbyperformanceoftheservicesin-houseorbyoutsourcingtoorganizationslikeours.Ifthesecarriersincreasetheirperformanceoftheseservicesin-house,ourbusinessmaybeadverselyaffected.Inaddition,consolidationintheindustrymayresultincarriersperformingmoreofsuchservicesin-house.Thefailuretoattractandretainqualifiedorkeypersonnelmaypreventusfromeffectivelydeveloping,marketing,selling,integratingandsupportingourservices.Wearedependent,toasubstantialextent,uponthecontinuingeffortsandabilitiesofcertainkeymanagementpersonnel.Inaddition,wefacecompetitionforexperiencedemployeeswithprofessionalexpertiseintheworkers’compensationmanagedcarearea.Thelossofkeypersonnel,especiallyV.GordonClemons,Chairman,andDanStarck,President,ChiefExecutiveOfficer,andChiefOperatingOfficer,ortheinabilitytoattract,qualifiedemployees,couldhaveamaterialunfavorableeffectonourbusinessandresultsofoperations.Ifwefailtogrowourbusinessinternallyorthroughstrategicacquisitionswemaybeunabletoexecuteourbusinessplan,maintainhighlevelsofserviceoradequatelyaddresscompetitivechallenges.Ourstrategyistocontinueinternalgrowthand,asstrategicopportunitiesariseintheworkers’compensationmanagedcareindustry,toconsideracquisitionsof,orrelationshipswith,othercompaniesinrelatedlinesofbusiness.Asaresult,wearesubjecttocertaingrowth-relatedrisks,includingtheriskthatwewillbeunabletoretainpersonneloracquireotherresourcesnecessarytoservicesuchgrowthadequately.Expensesarisingfromoureffortstoincreaseourmarketpenetrationmayhaveanegativeimpactonoperatingresults.Inaddition,therecanbenoassurancethatanysuitableopportunitiesforstrategicacquisitionsorrelationshipswillariseor,iftheydoarise,thatthetransactionscontemplatedcouldbecompleted.Ifsuchatransactiondoesoccur,therecanbenoassurancethatwewillbeabletointegrateeffectivelyanyacquiredbusiness.Inaddition,anysuchtransactionwouldbesubjecttovariousrisksassociatedwiththeacquisitionofbusinesses,including,butnotlimitedto,thefollowing:(cid:129)anacquisitionmaynegativelyimpactourresultsofoperationsbecauseitmayrequireincurringlargeone-timecharges,substantialdebtorliabilities;itmayrequiretheamortizationorwritedownofamountsrelatedtodeferredcompensation,goodwillandotherintangibleassets;oritmaycauseadversetaxconsequences,substantialdepreciationordeferredcompensationcharges;(cid:129)wemayencounterdifficultiesinassimilatingandintegratingthebusiness,technologies,products,services,personneloroperationsofcompaniesthatareacquired,particularlyifkeypersonneloftheacquiredcompanydecidenottoworkforus;17(cid:129)anacquisitionmaydisruptongoingbusiness,divertresources,increaseexpensesanddistractmanagement;(cid:129)theacquiredbusinesses,products,servicesortechnologiesmaynotgeneratesufficientrevenuetooffsetacquisitioncosts;(cid:129)wemayhavetoissueequityordebtsecuritiestocompleteanacquisition,whichwoulddilutestockholdersandcouldadverselyaffectthemarketpriceofourcommonstock;and(cid:129)acquisitionsmayinvolvetheentryintoageographicorbusinessmarketinwhichwehavelittleornopriorexperience.Therecanbenoassurancethatwewillbeabletoidentifyorconsummateanyfutureacquisitionsorotherstrategicrelationshipsonfavorableterms,oratall,orthatanyfutureacquisitionorotherstrategicrelationshipwillnothaveanadverseimpactonourbusinessorresultsofoperations.Ifsuitableopportunitiesarise,wemayfinancesuchtransactions,aswellasinternalgrowth,throughdebtorequityfinancing.Therecanbenoassurance,however,thatsuchdebtorequityfinancingwouldbeavailabletousonacceptabletermswhen,andif,suitablestrategicopportunitiesarise.OurInternet-basedservicesaredependentonthedevelopmentandmaintenanceoftheInternetinfrastructure.WedeployourCareMCand,toalesserextent,MedCheckservicesovertheInternet.OurabilitytodeliverourInternet-basedservicesisdependentonthedevelopmentandmaintenanceoftheinfrastructureoftheInternetbythirdparties.Thisincludesmaintenanceofareliablenetworkbackbonewiththenecessaryspeed,datacapacityandsecurity,aswellastimelydevelopmentofcomplementaryproducts,suchashigh-speedmodems,forprovidingreliableInternetaccessandservices.TheInternethasexperienced,andislikelytocontinuetoexperience,significantgrowthinthenumberofusersandtheamountoftraffic.IftheInternetcontinuestoexperienceincreasedusage,theInternetinfrastructuremaybeunabletosupportthedemandsplacedonit.Inaddition,theperformanceoftheInternetmaybeharmedbyincreasedusage.TheInternethasexperiencedavarietyofoutagesandotherdelaysasaresultofdamagestoportionsofitsinfrastructure,anditcouldfaceoutagesanddelaysinthefuture.TheseoutagesanddelayscouldreducethelevelofInternetusage,aswellastheavailabilityoftheInternettousfordeliveryofourInternet-basedservices.Inaddition,ourcustomerswhouseourWeb-basedservicesdependonInternetserviceproviders,onlineserviceprovidersandotherWebsiteoperatorsforaccesstoourWebsite.Alloftheseprovidershaveexperiencedsignificantoutagesinthepastandcouldexperienceoutages,delaysandotherdifficultiesinthefutureduetosystemfailuresunrelatedtooursystems.Anysignificantinterruptionsinourservicesorincreasesinresponsetimecouldresultinalossofpotentialorexistingusers,and,ifsustainedorrepeated,couldreducetheattractivenessofourservices.Aninterruptioninourabilitytoaccesscriticaldatamaycausecustomerstocanceltheirserviceand/ormayreduceourabilitytoeffectivelycompete.Certainaspectsofourbusinessaredependentuponourabilitytostore,retrieve,processandmanagedataandtomaintainandupgradeourdataprocessingcapabilities.Interruptionofdataprocessingcapabilitiesforanyextendedlengthoftime,lossofstoreddata,programmingerrorsorothersystemfailurescouldcausecustomerstocanceltheirserviceandcouldhaveamaterialadverseeffectonourbusinessandresultsofoperations.Inaddition,weexpectthataconsiderableamountofourfuturegrowthwilldependonourabilitytoprocessandmanageclaimsdatamoreefficientlyandtoprovidemoremeaningfulhealthcareinformationtocustomersandpayorsofhealthcare.Therecanbenoassurancethatourcurrentdataprocessingcapabilitieswillbeadequateforourfuturegrowth,thatwewillbeabletoefficientlyupgradeoursystemstomeetfuturedemands,orthatwewillbeabletodevelop,licenseorotherwiseacquiresoftwaretoaddressthesemarketdemandsaswellorastimelyasourcompetitors.18Theintroductionofsoftwareproductsincorporatingnewtechnologiesandtheemergenceofnewindustrystandardscouldrenderourexistingsoftwareproductslesscompetitive,obsoleteorunmarketable.Therecanbenoassurancethatwewillbesuccessfulindevelopingandmarketingnewsoftwareproductsthatrespondtotechnologicalchangesorevolvingindustrystandards.Ifweareunable,fortechnologicalorotherreasons,todevelopandintroducenewsoftwareproductscost-effectively,inatimelymannerandinresponsetochangingmarketconditionsorcustomerrequirements,ourbusiness,resultsofoperationsandfinancialconditionmaybeadverselyaffected.Developingorimplementingneworupdatedsoftwareproductsandservicesmaytakelongerandcostmorethanexpected.Werelyonacombinationofinternaldevelopment,strategicrelationships,licensingandacquisitionstodevelopoursoftwareproductsandservices.Thecostofdevelopingnewhealthcareinformationservicesandtechnologysolutionsisinherentlydifficulttoestimate.Ourdevelopmentandimplementationofproposedsoftwareproductsandservicesmaytakelongerthanoriginallyexpected,requiremoretestingthanoriginallyanticipatedandrequiretheacquisitionofadditionalpersonnelandotherresources.Ifweareunabletodevelopneworupdatedsoftwareproductsandservicescost-effectivelyonatimelybasisandimplementthemwithoutsignificantdisruptionstotheexistingsystemsandprocessesofourcustomers,wemaylosepotentialsalesandharmourrelationshipswithcurrentorpotentialcustomers.Abreachofsecuritymaycauseourcustomerstocurtailorstopusingourservices.Werelylargelyonourownsecuritysystems,confidentialityproceduresandemployeenondisclosureagreementstomaintaintheprivacyandsecurityofourandourcustomersproprietaryinformation.Accidentalorwillfulsecuritybreachesorotherunauthorizedaccessbythirdpartiestoourinformationsystems,theexistenceofcomputervirusesinourdataorsoftwareandmisappropriationofourproprietaryinformationcouldexposeustoariskofinformationloss,litigationandotherpossibleliabilitieswhichmayhaveamaterialadverseeffectonourbusiness,financialconditionandresultsofoperations.Ifsecuritymeasuresarebreachedbecauseofthird-partyaction,employeeerror,malfeasanceorotherwise,orifdesignflawsinoursoftwareareexposedandexploited,and,asaresult,athirdpartyobtainsunauthorizedaccesstoanycustomerdata,ourrelationshipswithourcustomersandourreputationwillbedamaged,ourbusinessmaysufferandwecouldincursignificantliability.Becausetechniquesusedtoobtainunauthorizedaccessortosabotagesystemschangefrequentlyandgenerallyarenotrecognizeduntillaunchedagainstatarget,wemaybeunabletoanticipatethesetechniquesortoimplementadequatepreventativemeasures.Ifweareunabletoincreaseourmarketshareamongnationalandregionalinsurancecarriersandlarge,self-fundedemployers,ourresultsmaybeadverselyaffected.Ourbusinessstrategyandfuturesuccessdependinpartonourabilitytocapturemarketsharewithourcostcontainmentservicesasnationalandregionalinsurancecarriersandlarge,self-fundedemployerslookforwaystoachievecostsavings.Wecannotassureyouthatwewillsuccessfullymarketourservicestotheseinsurancecarriersandemployersorthattheywillnotresorttoothermeanstoachievecostsavings.Additionally,ourabilitytocaptureadditionalmarketsharemaybeadverselyaffectedbythedecisionofpotentialcustomerstoperformservicesinternallyinsteadofoutsourcingtheprovisionofsuchservicestous.Furthermore,wemaynotbeabletodemonstratesufficientcostsavingstopotentialorcurrentcustomerstoinducethemnottoprovidecomparableservicesinternallyortoaccelerateeffortstoprovidesuchservicesinternally.Ifweloseseveralcustomersinashortperiod,ourresultsmaybeadverselyaffected.Ourresultsmaydeclineifweloseseveralcustomersduringashortperiod.Mostofourcustomercontractspermiteitherpartytoterminatewithoutcause.Ifseveralcustomersterminate,ordonotreneworextendtheircontractswithus,ourresultscouldbemateriallyandadverselyaffected.Manyorganizationsintheinsuranceindustryhaveconsolidatedandthiscouldresultinthelossofoneormoreofourcustomersthroughamergeroracquisition.Additionally,wecouldlosecustomersduetocompetitivepricingpressuresorotherreasons.19Wearesubjecttorisksassociatedwithacquisitionsofintangibleassets.Ouracquisitionofotherbusinessesmayresultinsignificantincreasesinourintangibleassetsandgoodwill.Weregularlyevaluatewhethereventsandcircumstanceshaveoccurredindicatingthatanyportionofourintangibleassetsandgoodwillmaynotberecoverable.Whenfactorsindicatethatintangibleassetsandgoodwillshouldbeevaluatedforpossibleimpairment,wemayberequiredtoreducethecarryingvalueoftheseassets.Wecannotcurrentlyestimatethetimingandamountofanysuchcharges.Ifweareunabletoleverageourinformationsystemstoenhanceouroutcome-drivenservicemodel,ourresultsmaybeadverselyaffected.Toleverageourknowledgeofworkplaceinjuries,treatmentprotocols,outcomesdata,andcomplexregulatoryprovisionsrelatedtotheworkers’compensationmarket,wemustcontinuetoimplementandenhanceinformationsystemsthatcananalyzeourdatarelatedtotheworkers’compensationindustry.Wefrequentlyupgradeexistingoperatingsystemsandareupdatingotherinformationsystemsthatwerelyuponinprovidingourservicesandfinancialreporting.Wehavedetailedimplementationschedulesfortheseprojectsthatrequireextensiveinvolve-mentfromouroperational,technologicalandfinancialpersonnel.Delaysorotherproblemswemightencounterinimplementingtheseprojectscouldadverselyaffectourabilitytodeliverstreamlinedpatientcareandoutcomereportingtoourcustomers.Theincreasedcostsofprofessionalandgeneralliabilityinsurancemayhaveanadverseeffectonourprofitability.Thecostofcommercialprofessionalandgeneralliabilityinsurancecoveragehasrisensignificantlyinthepastseveralyears,andthistrendmaycontinue.Inaddition,ifweweretosufferamaterialloss,ourcostsmayincreaseoverandabovethegeneralincreasesintheindustry.Ifthecostsassociatedwithinsuringourbusinesscontinuetoincrease,itmayadverselyaffectourbusiness.Webelieveourcurrentlevelofinsurancecoverageisadequateforacompanyofoursizeengagedinourbusiness.Theimpactofseasonalityhasanegativeeffectonourrevenue.Whilewearenotdirectlyimpactedbyseasonalshifts,weareaffectedbythechangeinworkingdaysinagivenquarter.Therearegenerallyfewerworkingdaysforouremployeestogeneraterevenueinthethirdfiscalquarterasweexperiencevacations,inclementweatherandholidays.Ifthereferralsforourpatientmanagementservicescontinuetodecline,ourbusiness,financialconditionandresultsofoperationswouldbemateriallyadverselyaffected.Wehaveexperiencedageneraldeclineintherevenueandoperatingperformanceofpatientmanagementservices.Webelievethattheperformancedeclinehasbeenduetothefollowingfactors:thedecreaseofthenumberofworkplaceinjuriesthathavebecomelonger-termdisabilitycases;increasedregionalandlocalcompetitionfromprovidersofmanagedcareservices;apossiblereductionbyinsurersonthetypesofservicesprovidedbyourpatientmanagementbusiness;theclosureofofficesandcontinuingconsolidationofourpatientmanagementoperations;andemployeeturnover,includingmanagementpersonnel,inourpatientmanagementbusiness.Inthepast,thesefactorshaveallcontributedtotheloweringofourlong-termoutlookforourpatientmanagementservices.Ifsomeoralloftheseconditionscontinue,webelievethattheperformanceofourpatientmanagementrevenuescoulddecrease.Healthcareprovidersarebecomingincreasinglyresistanttotheapplicationofcertainhealthcarecostcontainmenttechniques;thismaycauserevenuefromourcostcontainmentoperationstodecrease.Healthcareprovidershavebecomemoreactiveintheireffortstominimizetheuseofcertaincostcontainmenttechniquesandareengaginginlitigationtoavoidapplicationofcertaincostcontainmentpractices.Recentlitigationbetweenhealthcareprovidersandinsurershaschallengedcertaininsurers’claimsadjudicationandreimbursementdecisions.Althoughtheselawsuitsdonotdirectlyinvolveusoranyservicesweprovide,thesecases20mayaffecttheusebyinsurersofcertaincostcontainmentservicesthatweprovideandmayresultinadecreaseinrevenuefromourcostcontainmentbusiness.FailuretoachieveandmaintaineffectiveinternalcontrolsinaccordancewithSection404oftheSarbanes-OxleyActof2002,anddelaysincompletingourinternalcontrolsandfinancialaudits,couldhaveamaterialadverseeffectonourbusinessandstockprice.Ourfiscal2009managementassessmentrevealedmaterialweaknessesinourinternalcontrolsoverfinancialcloseandreportingprocesses.Weareattemptingtocurethesematerialweaknesses,butwehavenotyetcompletedremediationandtherecanbenoassurancethatsuchremediationwillbesuccessful.Duringthecourseofourcontinuedtesting,wealsomayidentifyothersignificantdeficienciesormaterialweaknesses,inadditiontotheonesalreadyidentified,whichwemaynotbeabletoremediateinatimelymanneroratall.Ifwecontinuetofailtoachieveandmaintaineffectiveinternalcontrols,wewillnotbeabletoconcludethatwehaveeffectiveinternalcontrolsoverfinancialreportinginaccordancewithSection404oftheSarbanes-OxleyActof2002.Failuretoachieveandmaintainaneffectiveinternalcontrolenvironment,anddelaysincompletingourinternalcontrolsandfinancialaudits,couldcauseinvestorstoloseconfidenceinourreportedfinancialinformationandus,whichcouldresultinadeclineinthemarketpriceofourcommonstock,andcauseustofailtomeetourreportingobligationsinthefuture,whichinturncouldimpactourabilitytoraiseequityfinancingifneededinthefuture.Item1B.UnresolvedStaffComments.None.Item2.Properties.TheCompany’sprincipalexecutiveofficeislocatedinIrvine,Californiainapproximately12,000squarefeetofleasedspace.TheleaseexpiresinMarch2013.TheCompanyleases118branchofficesin45states,whichrangeinsizefrom500squarefeetupto24,000squarefeet.Theleasetermsforthebranchofficesrangefrommonthlytotenyearsandexpirethrough2019.TheCompanybelievesthatitsfacilitiesareadequateforitscurrentneedsandthatsuitableadditionalspacewillbeavailableasrequired.Item3.LegalProceedings.InFebruary2005,KathleenRoche,D.C.,asplaintiff,filedaputativeclassactioninCircuitCourtforthe20thJudicialDistrict,St.ClairCounty,Illinois,againsttheCompany.ThecaseseeksunspecifieddamagesbasedontheCompany’sallegedfailuretodirectpatientstomedicalproviderswhoaremembersoftheCorVelCorCarePPOnetworkandalsoallegesthattheCompanyusedbiasedandarbitrarycomputersoftwaretoreviewmedicalproviders’bills.InDecember2007,thetrialcourtcertifiedaclassinthiscaseofallIllinoishealthcareproviderswithCorVelPPOagreements,excludinghospitals.InJanuary2008,CorVelfiledwiththeIllinoisAppellateCourtapetitionforinterlocutoryappealofthetrialcourt’sclasscertificationorderwhichwasdeniedinApril2008.InMay2008,theCompanyappealedtheappellatecourt’sdenialofitspetitionforinterlocutoryappealwhichappealwasalsodeniedbytheIllinoisSupremeCourtinSeptember2008.TheCompanyintendstopursueallavailablelegalremediesincludingvigorouslydefendingthiscase.TheCompanyisnotabletoestimatetheamountofpossibleloss,ifany,atthistime.TheCompanyisinvolvedinotherlitigationarisinginthenormalcourseofbusiness.Managementbelievesthatresolutionofthesematterswillnotresultinanypaymentthat,intheaggregate,wouldbematerialtothefinancialpositionorresultsoftheoperationsoftheCompany.Item4.SubmissionofMatterstoaVoteofSecurityHolders.TherewerenomatterssubmittedtoavoteofstockholdersduringthequarterendedMarch31,2009.21PARTIIItem5.MarketforRegistrant’sCommonEquity,RelatedStockholderMattersandIssuerPurchasesofEquitySecurities.MarketInformationTheCompany’scommonstockistradedontheNASDAQGlobalSelectMarketunderthesymbolCRVL.ThequarterlyhighandlowpersharesalespricesfortheCompany’scommonstockforfiscalyears2008and2009asreportedbyNASDAQaresetforthbelowfortheperiodsindicated.Thesepricesrepresentpricesamongdealers,donotincluderetailmarkups,markdownsorcommissions,andmaynotrepresentactualtransactions.HighLowFiscalYearEndedMarch31,2008:QuarterEndedJune30,2007:.......................................$30.73$23.14QuarterEndedSeptember30,2007:..................................28.7522.43QuarterEndedDecember31,2007:...................................27.0421.38QuarterEndedMarch31,2008:.....................................33.5622.32FiscalYearEndedMarch31,2009:QuarterEndedJune30,2008:.......................................$37.92$30.03QuarterEndedSeptember30,2008:..................................35.9824.72QuarterEndedDecember31,2008:...................................30.2515.78QuarterEndedMarch31,2009:.....................................24.1315.87Holders.AsofJune1,2009,therewereapproximately1,905holdersofrecordoftheCompany’scommonstockaccordingtotheinformationprovidedbytheCompany’stransferagent.Dividends.TheCompanyhasneverpaidanycashdividendsonitscommonstockandhasnocurrentplanstodosointheforeseeablefuture.TheCompanyintendstoretainfutureearnings,ifany,foruseintheCompany’sbusiness.ThepaymentofanyfuturedividendsonitscommonstockwillbedeterminedbytheBoardofDirectorsinlightofconditionsthenexisting,includingtheCompany’searnings,financialconditionandrequirements,restrictionsinfinancingagreements,businessconditionsandotherfactors.UnregisteredSalesofEquitySecurities.None.IssuerPurchasesofEquitySecurities:ThefollowingtablesummarizespurchasesoftheCompany’scommonstockmadebyoronbehalfoftheCompanyforthequarterendedMarch31,2009pursuanttoapubliclyannouncedplan.PeriodTotalNumberofSharesPurchasedAveragePricePaidperShareTotalNumberofSharesPurchasedasPartofPubliclyAnnouncedProgramMaximumNumberofSharesThatMayYetbePurchasedUndertheProgramJanuary1toJanuary31,2009......36,401$18.4012,646,934503,066February1toFebruary29,2009....8,31319.3212,655,247494,753March1toMarch31,2009........27,49617.9412,682,743467,257Total.........................72,210$18.3312,682,743467,257In1996,theCompany’sBoardofDirectorsauthorizedastockrepurchaseprograminitiallyforupto100,000sharesoftheCompany’scommonstock.TheCompany’sBoardofDirectorshasperiodicallyincreasedthenumberofsharesauthorizedforrepurchaseundertheprogram.ThemostrecentincreaseoccurredinSeptember2008andbroughtthenumberofsharesauthorizedforrepurchaseoverthelifeoftheprogramto13,150,000shares.Thereisnoexpirationdatefortheplan.22STOCKPERFORMANCEGRAPHThegraphdepictedbelowshowsacomparisonofcumulativetotalstockholderreturnsfortheCompany,theNasdaqandtheNasdaqHealthServicesIndexoverafiveyearperiodbeginningonMarch31,2004.Thedatadepictedonthegraphareassetforthinthechartbelowthegraph.Thegraphassumesthat$100wasinvestedintheCompany’sCommonStockonMarch31,2004,andineachindex,andthatalldividendswerereinvested.NocashdividendshavebeenpaidordeclaredontheCommonStock.Stockholderreturnsovertheindicatedperiodshouldnotbeconsideredindicativeoffuturestockholderreturns.CORVELSTOCKPERFORMANCECHART200920082007200620052004DOLLARSCorVel CorporationU.S. NasdaqU.S. Nasdaq Healthcare Services050100150200250200420052006200720082009CorVelCorporation100.0058.9060.8383.5684.5055.86U.S.Nasdaq100.00100.68118.72123.15114.8662.23U.S.NasdaqHealthcareServices100.00123.54163.42163.66170.77126.42NotwithstandinganythingtothecontrarysetforthinanyofourpreviousfilingsmadeundertheSecuritiesActof1933,asamended,ortheSecuritiesExchangeActof1934,asamended,thatmightincorporatefuturefilingsmadebyusunderthosestatutes,neithertheprecedingStockPerformanceGraph,northeinformationrelatingtoit,is“solicitingmaterial”oris“filed”oristobeincorporatedbyreferenceintoanysuchpriorfilings,norshallsuchgraphorinformationbeincorporatedbyreferenceintoanyfuturefilingsmadebyusunderthosestatutes.23Item6.SelectedFinancialData.TheselectedconsolidatedfinancialdataoftheCompanyappearsinaseparatesectionofthisAnnualReportonForm10-Konpage35andisincorporatedhereinbythisreference.Item7.Management’sDiscussionandAnalysisofFinancialConditionandResultsofOperations.Management’sDiscussionandAnalysisofFinancialConditionandResultsofOperationsappearsinaseparatesectionofthisAnnualReportonForm10-Kbeginningonpage36andisincorporatedhereinbythisreference.Item7A.QuantitativeandQualitativeDisclosuresAboutMarketRisk.AsofMarch31,2009,theCompanyheldnomarketrisksensitiveinstrumentsfortradingpurposesandtheCompanydidnotemployanyderivativefinancialinstruments,otherfinancialinstruments,orderivativecommodityinstrumentstohedgeanymarketrisk.TheCompanyhadnodebtoutstandingasofMarch31,2009,andtherefore,hadnomarketriskrelatedtodebt.Item8.FinancialStatementsandSupplementaryData.TheCompany’sconsolidatedfinancialstatements,aslistedunderItem15,appearinaseparatesectionofthisAnnualReportonForm10-Kbeginningonpage53andareincorporatedhereinbythisreference.ThefinancialstatementscheduleisincludedbelowunderItem15(a)(2).Item9.ChangesinandDisagreementswithAccountantsonAccountingandFinancialDisclosure.None.Item9A.ControlsandProcedures.EvaluationofDisclosureControlsandProceduresOurmanagementhasevaluated,underthesupervisionandwiththeparticipationofourChiefExecutiveOfficerandChiefFinancialOfficer,theeffectivenessofourdisclosurecontrolsandprocedures(asdefinedinRules13a-15(e)and15d-15(e)undertheSecuritiesExchangeActof1934)asoftheendoftheperiodcoveredbythisreport.Baseduponthatevaluation,ourChiefExecutiveOfficerandourChiefFinancialOfficerhaveconcludedthat,asofMarch31,2009,ourdisclosurecontrolsandprocedureswerenoteffectiveinensuringthatinformationrequiredtobedisclosedbyusinthereportsthatwefileorsubmitundertheSecuritiesExchangeActof1934is(i)recorded,processed,summarizedandreported,withinthetimeperiodsspecifiedintherulesandformsoftheSecuritiesandExchangeCommissionand(ii)accumulatedandcommunicatedtoourmanagement,includingourprincipalexecutiveandprincipalaccountingofficers,orpersonsperformingsimilarfunctions,asappropriatetoallowtimelydecisionsregardingrequireddisclosure.ReportofManagementonInternalControloverFinancialReportingOurmanagementisresponsibleforestablishingandmaintainingadequateinternalcontroloverfinancialreportingasdefinedundertheRules13a—15(f)and15d-15(f)undertheSecuritiesExchangeActof1934.InternalcontroloverfinancialreportingisdesignedtoprovidereasonableassuranceregardingthereliabilityofourfinancialreportingandpreparationoffinancialstatementsforexternalpurposesinaccordancewithU.S.generallyacceptedaccountingprinciples.Internalcontroloverfinancialreportingincludesmaintainingrecordsthatinreasonabledetailaccuratelyandfairlyreflectourtransactions;providingreasonableassurancethattransactionsarerecordedasnecessaryforpreparationofourfinancialstatementsinaccordancewithU.S.generallyacceptedaccountingprinciples;providingreasonableassurancethatourreceiptsandexpendituresaremadeinaccordancewithauthorizationsofourmanagementanddirectors;andprovidingreasonableassurancethatunauthorizedacquisition,useordispositionofourassetsthatcouldhaveamaterialeffectonourfinancialstatementswouldbepreventedordetectedonatimelybasis.24OurmanagementassessedtheeffectivenessofourinternalcontroloverfinancialreportingasofMarch31,2009.Inmakingthisassessment,managementusedthecriteriasetforthbytheCommitteeofSponsoringOrganizationsoftheTreadwayCommissioninInternalControl—IntegratedFramework(COSO).Basedonthisassessment,managementconcludedthatourinternalcontroloverfinancialreportingwasnoteffectiveasofMarch31,2009toprovidereasonableassuranceregardingthereliabilityoffinancialreportingandpreparationoffinancialstatementsforexternalreportingpurposesinaccordancewithU.S.generallyacceptedaccountingprinciplesduetothefollowingmaterialweakness.Financialcloseandreporting.Wedidnotmaintainadequatecontrolstosupport:(i)timelyandthoroughreconciliationofsignificantaccounts,(ii)effectiveutilizationofdisclosurechecklistsduringthepreparationofcompanyfilings,(iii)useofExcelforenterpriseconsolidationandgeneralledgerreportinginourCorporateoffice,(iv)reviewofdatausedtocomputefinancialstatementdisclosures,and(v)regionalaccountingpersonnelnotreportingdirectlytothecorporateaccountingfunction.Whilenosingleitemlistedaboveisamaterialweaknessonitsown,whenthedeficienciesareaggregated,theyrepresentamaterialweakness.Ourindependentregisteredpublicaccountingfirm,Haskell&WhiteLLP,hasissuedanauditreportontheeffectivenessofourinternalcontroloverfinancialreportingasofMarch31,2009,whichisincludedinPartII,Item8ofthisAnnualReportonForm10-K.ChangestoInternalControloverFinancialReportingDuringthemostrecentcompletedfiscalquartercoveredbythisreport,therehavebeenchangesinourinternalcontroloverfinancialreporting(asdefinedinRules13a-15(f)and15d-15(f)undertheSecuritiesExchangeActof1934)thathasmateriallyaffected,orisreasonablylikelytomateriallyaffect,ourinternalcontroloverfinancialreporting.Managementhasimplementedadditionalcontrolsoverthefinancialcloseandreportingprocess.Thesecontrolsaredesignedtoremediatethematerialweaknessoverfinancialcloseandreporting.ThefollowingisalistofthetwosignificantchangesmadetotheCompany’sinternalcontrolsduringthequarter:1.UtilizationofappropriatedisclosurechecklistsduringthepreparationoftheCompany’sMarch31,2009Form10-K.ImplementationofcontrolsrequiringtheuseofappropriatedisclosurechecklistsforallForm10-KandForm10-Qfilingsonagoforwardbasis.2.ReviewandreperformanceoftheCompany’sExcelbasedconsolidationfortheperiodendedMarch31,2009.Implementationofcontrolsrequiringthereperformanceoftheconsolidationquarterlyonagoforwardbasis.Additionally,thereperformanceprocessincludesareviewandapprovalofeachjournalentrypostedtotheconsolidation.RemediationActivitiesDuringthefourthquarter,managementmadechangestotheinternalcontrolsoverfinancialcloseandreporting.Thesecontrolswereimplementedduringthefourthquarterandinsufficienttimehadpassedfromtheimplementationofthecontrolsthroughthecompletionoftheannualauditforadequateevidencetobegatheredthatwouldenableustoconcludeupontheeffectivenessofthesecontrolsatthereportdate.Inadditiontocontinuingtouseandrelyuponthecontrolsimplementedinthefourthquarter,managementwillbeimplementingadditionalcontrols.Whatfollowsisalistofthedeficienciesthataggregatedintoamaterialweaknessandtheactionsmanagementhasoristakingtoremediateeachdeficiency.(i)Timelyandthoroughreconciliationofsignificantaccounts,DuringthefirstandsecondquartersofFY2010,managementwillimplementadditionalcontrolsoverthereconciliationprocess.ThesecontrolswillincludeadditionalreviewbysenioraccountingstaffandtheCFO.Managementisalsoinstitutinginternalauditproceduresdesignedtoensuretimelyandthoroughreconciliationofallsignificantaccounts.25(ii)EffectiveutilizationofdisclosurechecklistsduringthepreparationofCompanyfilings,DuringthefourthquarterofFY2009,managementimplementedtheuseofdisclosurechecklistsforallannualandquarterlySECfilings.WhilethiscontrolwasoperatinginthefourthquarteranddisclosurechecklistswereusedinthepreparationoftheForm10-Ktherewasinsufficienttimefromtheimplementationofthecontroltotheauditreportdatetogathersufficientevidencetodeterminetheeffectivenessofthecontrolattheauditreportdate.(iii)UseofExcelforenterpriseconsolidationandgeneralledgerreportinginourCorporateoffice,DuringthefourthquarterofFY2009,managementimplementedaprocessandassociatedcontrolthatrequiresreperformanceoftheExcelconsolidation.AcomparisonismadebetweentheExcelconsolidationandthereperformedcopyanddiscrepancies,ifany,areresearchedandresolved.Additionally,thereperformanceprocessincludesareviewandapprovalofeachjournalentrypostedtotheconsolidation.Whilethiscontrolwasoperatinginthefourthquarter,therewasinsufficienttimefromtheimplementationofthecontroltotheauditreportdatetogathersufficientevidencetodeterminetheeffectivenessofthecontrolattheauditreportdate.(iv)Reviewofdatausedtocomputefinancialstatementdisclosures,Managementisworkingtoidentifyadditionalcontrolsthatwillbeimplementedtoensureadequatereviewofdatausedtocomputefinancialstatementdisclosures.(v)Regionalaccountingpersonnelnotreportingdirectlytothecorporateaccountingfunction.Managementisworkingtoidentifyadditionalcontrolsthatwillbeimplementedtoensureadequatereviewofdatausedtocomputefinancialstatementdisclosures.Item9B.OtherInformation.None.PARTIIIItem10.Directors,ExecutiveOfficersandCorporateGovernance.Theinformationinthesectionstitled“ProposalOne:ElectionofDirectors,”“CorporateGovernance,BoardCompositionandBoardCommittees,”“ExecutiveOfficersofCorVel,”and“Section16(a)BeneficialOwnershipReportingCompliance”appearingintheCompany’sDefinitiveProxyStatementforthe2009AnnualMeetingofStockholdersisincorporatedhereinbyreference.TheBoardofDirectorshasadoptedacodeofethicsandbusinessconductthatappliestoalloftheCompany’semployees,officersanddirectors.ThefulltextoftheCompany’scodeofethicsandbusinessconductispostedontheCompany’swebsiteatwww.corvel.comunderthe“InvestorRelations”section.TheCompanyintendstodisclosefutureamendmentstocertainprovisionsoftheCompany’scodeofethicsandbusinessconduct,orwaiversofsuchprovisions,applicabletotheCompany’sdirectorsandexecutiveofficers,atthesamelocationontheCompany’swebsiteidentifiedabove.TheinclusionoftheCompany’swebsiteaddressinthisreportdoesnotincludeorincorporatebyreferencetheinformationontheCompany’swebsiteintothisreport.Item11.ExecutiveCompensation.Theinformationinthesectionstitled“ExecutiveCompensation,”“CompensationDiscussionandAnalysis,”“CompensationCommitteeInterlocksandInsiderParticipation,”“CompensationCommitteeReport,”and“Com-pensationofDirectors,”appearingintheCompany’sDefinitiveProxyStatementforthe2009AnnualMeetingofStockholdersisincorporatedhereinbyreference.26Item12.SecurityOwnershipofCertainBeneficialOwnersandManagementandRelatedStockholderMatters.Theinformationinthesectionstitled“SecurityOwnershipofCertainBeneficialOwnersandManagementandRelatedStockholderMatter”and“EquityCompensationPlanInformation”appearingintheCompany’sDefinitiveProxyStatementforthe2009AnnualMeetingofStockholdersisincorporatedhereinbyreference.Item13.CertainRelationshipsandRelatedPartyTransactions,andDirectorIndependence.Theinformationinthesectionstitled“CertainRelationshipsandRelatedPersonTransactions,”“ProposalOne:ElectionofDirectors,”and“CorporateGovernance,BoardCompositionandBoardCommittees”appearingintheCompany’sDefinitiveProxyStatementforthe2009AnnualMeetingofStockholdersisincorporatedhereinbyreference.Item14.PrincipalAccountingFeesandServices.Theinformationunderthecaptions“PrincipalAccountantFeesandServices”,“AuditCommitteePre-ApprovalofAuditandPermissibleNon-AuditServicesofIndependentAuditors”and“RatificationofAppointmentofIndependentAuditors”appearingintheCompany’sDefinitiveProxyStatementforthe2009AnnualMeetingofStockholdersisincorporatedhereinbyreference.PARTIVItem15.Exhibits,FinancialStatementSchedules.(a)(1)FinancialStatements:TheCompany’sfinancialstatementsappearinaseparatesectionofthisAnnualReportonForm10-Kbeginningonthepagesreferencedbelow:PageReportofIndependentRegisteredPublicAccountingFirm...................................48ConsolidatedStatementsofIncomefortheFiscalYearsEndedMarch31,2007,2008,and2009......50ConsolidatedBalanceSheetsasofMarch31,2008and2009.................................51ConsolidatedStatementsofStockholders’EquityfortheFiscalYearsEndedMarch31,2007,2008,and2009.........................................................................52ConsolidatedStatementsofCashFlowsfortheFiscalYearsEndedMarch31,2007,2008,and2009...53NotestoConsolidatedFinancialStatements..............................................54(2)FinancialStatementSchedule:TheCompany’sconsolidatedfinancialstatements,aslistedunderItem15(a)(1),appearinaseparatesectionofthisAnnualReportonForm10-Kbeginningonpage53.TheCompany’sfinancialstatementscheduleisasfollows:ScheduleII—ValuationandQualifyingAccountsBalanceatBeginningofYearAdditionsChargedtoCostandExpensesDeductionsBalanceatEndofYearAllowancefordoubtfulaccounts:FiscalYearEndedMarch31,2009:.............$2,888,000$2,434,000$(2,951,000)$2,371,000FiscalYearEndedMarch31,2008:.............3,510,0002,464,000(3,086,000)2,888,000FiscalYearEndedMarch31,2007:.............3,487,0002,462,000(2,439,000)3,510,00027(3)Exhibits:EXHIBITSExhibitNo.TitleMethodofFiling2.1†AssetPurchaseAgreementdatedDecember15,2006byandamongtheCompany’ssubsidiary,CorVelEnterpriseComp,Inc.,andHazelriggRiskManagementServices,Inc.,CompCare,Inc.,MedicalAuditingServices,Inc.,andArleneHazelrigg.IncorporatedhereinbyreferencetoExhibit2.1totheCompany’sForm8-KfiledonFebruary6,2007.2.2†StockPurchaseAgreementdatedMay31,2007byandamongtheCompany’ssubsidiary,CorVelEnterpriseComp,Inc.,TheSchafferCompanies,Ltd.,andDawnColwell,ChristopherSchaffer,JohnColwellandKellyRibeirodeSa.IncorporatedhereinbyreferencetoExhibit2.1totheCompany’sForm8-KfiledonJune6,2007.3.1AmendedandRestatedCertificateofIncorporationoftheCompanyIncorporatedhereinbyreferencetoExhibit3.1totheCompany’sQuarterlyReportonForm10-QforthequarterlyperiodendedJune30,2007filedonAugust9,2007.3.2AmendedandRestatedBylawsoftheCompanyIncorporatedhereinbyreferencetoExhibit3.2totheCompany’sQuarterlyReportonForm10-QforthequarterlyperiodendedJune30,2006filedonAugust14,2006.3.3CertificateofDesignationIncreasingtheNumberofSharesofSeriesAJuniorParticipatingPreferredStockIncorporatedhereinbyreferencetoExhibit3.1totheCompany’sForm8-KfiledonNovember24,2008.4.1SecondAmendedandRestatedPreferredSharesRightsAgreement,datedasofNovember17,2008,byandbetweenCorVelCorporationandComputershareTrustCompany,N.A.,includingtheoriginalCertificateofDesignation,theCertificateofDesignationIncreasingtheNumberofShares,theformofRightCertificate(asamended)andtheSummaryofRights(asamended)attachedtheretoasExhibitsA-1,A-2,A-3,BandC,respectivelyIncorporatedhereinbyreferencetoExhibit4.1totheCompany’sForm8-KfiledonNovember24,2008.10.1*NonqualifiedStockOptionAgreementbetweenV.GordonClemons,theCompanyandNorthStartogetherwithallamendmentsandaddendumstheretoIncorporatedhereinbyreferencetoExhibit10.6totheCompany’sRegistrationStatementonFormS-1RegistrationNo.33-40629initiallyfiledonMay16,1991.10.2*SupplementaryAgreementbetweenV.GordonClemons,theCompanyandNorthStarIncorporatedhereinbyreferencetoExhibit10.7totheCompany’sRegistrationStatementonFormS-1RegistrationNo.33-40629initiallyfiledonMay16,1991.10.3*AmendmenttoSupplementaryAgreementbetweenMr.Clemons,theCompanyandNorthStarIncorporatedhereinbyreferencetoExhibit10.5totheCompany’sAnnualReportonForm10-KforthefiscalyearendedMarch31,1992filedonJune29,1992.10.4*RestatedOmnibusIncentivePlan(FormerlyTheRestated1988ExecutiveStockOptionPlan)Filedherewith.28ExhibitNo.TitleMethodofFiling10.5*FormsofNoticeofGrantofStockOption,StockOptionAgreementandNoticeofExerciseUndertheRestatedOmnibusIncentivePlan(FormerlyTheRestated1988ExecutiveStockOption)IncorporatedhereinbyreferencetoExhibit10.2totheCompany’sQuarterlyReportonForm10-QforthequarterlyperiodendedSeptember30,2006filedonNovember9,2006,Exhibits10.7,10.8and10.9totheCompany’sAnnualReportonForm10-KforthefiscalyearendedMarch31,1994filedonJune29,1994,Exhibits99.2,99.3,99.4,99.5,99.6,99.7and99.8totheCompany’sRegistrationStatementonFormS-8(FileNo.333-94440)filedonJuly10,1995,andExhibits99.3and99.5totheCompany’sRegistrationStatementonFormS-8(FileNo.333-58455)filedonJuly2,1998.10.6*EmploymentAgreementofV.GordonClemonsIncorporatedhereinbyreferencetoExhibit10.12totheCompany’sRegistrationStatementonFormS-1RegistrationNo.33-40629initiallyfiledonMay16,1991.10.7*Restated1991EmployeeStockPurchasePlan,asamendedIncorporatedhereinbyreferencetoExhibit99.1totheCompany’sRegistrationStatementonFormS-8(FileNo.333-128739)filedonSeptember30,2005.10.8FidelityMasterPlanforSavingsandInvestment,andamendmentsIncorporatedhereinbyreferencetoExhibits10.16and10.16AtotheCompany’sRegistrationStatementonFormS-1RegistrationNo.33-40629initiallyfiledonMay16,1991.10.9SecondAmendedandRestatedPreferredSharesRightsAgreement,datedasofNovember17,2009,byandbetweenCorVelCorporationandComputerTrustCompany,N.A.,includingtheoriginalCertificateofDetermination,theCertificateofDesignationIncreasingtheNumberofShares,theformofRightsCertificate(asamended)andtheSummaryofRights(asamended)attachedtheretoasExhibitsA-1,A-2,A-3,BandC,respectivelyIncorporatedhereinbyreferencetoExhibit4.1totheCompany’sForm8-KfiledonNovember24,2008.10.10*EmploymentAgreementeffectiveMay26,2006byandbetweenCorVelCorporationandDanStarckIncorporatedhereinbyreferencetoExhibit10.1intheCompany’sForm8-KfiledonMay30,2006.10.11*StockOptionAgreementandAccelerationAddendumdatedMay26,2006byandbetweenCorVelCorporationandDanStarck,providingfortimevestingIncorporatedhereinbyreferencetoExhibit10.2intheCompany’sForm8-KfiledonMay30,2006.10.12†StockOptionAgreementandAccelerationAddendumdatedMay26,2006byandbetweenCorVelCorporationandDanStarck,providingforperformancevesting.IncorporatedhereinbyreferencetoExhibit10.3totheCompany’sCurrentReportonForm8-KfiledonMay30,2006.10.13†StockOptionAgreementdatedMay26,2006byandbetweenCorVelCorporationandScottMcCloud,providingforperformancevesting.IncorporatedhereinbyreferencetoExhibit10.1totheCompany’sCurrentReportonForm8-KfiledonJune2,2006.29ExhibitNo.TitleMethodofFiling10.14*†StockOptionAgreementdatedMay26,2006byandbetweenCorVelCorporationandDonMcFarlane,providingforperformancevesting.IncorporatedhereinbyreferencetoExhibit10.15totheCompany’sAnnualReportonForm10-K/AfiledonJuly6,2007.10.15CreditAgreementdatedMay28,2009byandbetweenCorVelCorporationandWellsFargoBank,NationalAssociation.IncorporatedhereinbyreferencetoExhibit10.16totheCompany’sCurrentReportonForm8-KfiledonJune4,2009.10.16RevolvingLineofCreditNotedatedMay28,2009byCorVelCorporationinfavorofWellsFargoBank,NationalAssociation.IncorporatedhereinbyreferencetoExhibit10.17totheCompany’sCurrentReportonForm8-KfiledonJune4,2009.10.17FormofPartialWaiverofAutomaticOptionGrantexecutedbyDirectorsIncorporatedhereinbyreferencetoExhibit10.18totheCompany’sQuarterlyReportonForm10-QforthequarterlyperiodendedSeptember30,2007filedonNovember8,2007.10.18*†StockOptionAgreementandAccelerationAddendumdatedFebruary4,2008byandbetweenCorVelCorporationandDanStarck,providingforperformancevesting.IncorporatedhereinbyreferencetoExhibit10.19totheCompany’sAnnualReportonForm10-KforthefiscalyearendedMarch31,2008filedonJune16,2008.10.19*†StockOptionAgreementdatedFebruary4,2008byandbetweenCorVelCorporationandScottMcCloud,providingforperformancevesting.IncorporatedhereinbyreferencetoExhibit10.19totheCompany’sAnnualReportonForm10-KforthefiscalyearendedMarch31,2008filedonJune16,2008.10.20*†StockOptionAgreementdatedFebruary4,2008byandbetweenCorVelCorporationandDonMcFarlane,providingforperformancevesting.IncorporatedhereinbyreferencetoExhibit10.19totheCompany’sAnnualReportonForm10-KforthefiscalyearendedMarch31,2008filedonJune16,2008.10.21PartialWaiverofAutomaticOptionGrantbyJeanMacinodatedFebruary8,2008IncorporatedhereinbyreferencetoExhibit10.19totheCompany’sAnnualReportonForm10-KforthefiscalyearendedMarch31,2008filedonJune16,2008.10.22*†StockOptionAgreementdatedFebruary24,2009byandbetweenCorVelCorporationandDanielJ.Starck,providingforperformancevestingIncorporatedhereinbyreferencetoExhibit10.1totheCompany’sForm8-KfiledonMarch2,2009.10.23*†StockOptionAgreementdatedFebruary24,2009byandbetweenCorVelCorporationandScottR.McCloud,providingforperformancevestingIncorporatedhereinbyreferencetoExhibit10.2totheCompany’sForm8-KfiledonMarch2,2009.10.24*†StockOptionAgreementdatedFebruary24,2009byandbetweenCorVelCorporationandDonaldC.McFarlane,providingforperformancevestingIncorporatedhereinbyreferencetoExhibit10.3totheCompany’sForm8-KfiledonMarch2,2009.10.25*†StockOptionAgreementdatedFebruary5,2009byandbetweenCorVelCorporationandDianeJ.Blaha,providingforperformancevestingFiledherewith.10.26*†StockOptionAgreementdatedFebruary24,2009byandbetweenCorVelCorporationandDianeJ.Blaha,providingforperformancevestingFiledherewith.21.1SubsidiariesoftheCompanyFiledherewith.23.1ConsentofIndependentRegisteredPublicAccountingFirm,Haskell&WhiteLLPFiledherewith.31.1CertificationoftheChiefExecutiveOfficerPursuanttoSection302oftheSarbanes-OxleyActof2002.Filedherewith.30ExhibitNo.TitleMethodofFiling31.2CertificationoftheChiefFinancialOfficerPursuanttoSection302oftheSarbanes-OxleyActof2002.Filedherewith.32.1CertificationoftheChiefExecutiveOfficerPursuantto18U.S.C.Section1350,asAdoptedPursuanttoSection906oftheSarbanes-OxleyActof2002.Furnishedherewith.32.2CertificationoftheChiefFinancialOfficerPursuantto18U.S.C.Section1350,asAdoptedPursuanttoSection906oftheSarbanes-OxleyActof2002.Furnishedherewith.*—Denotesmanagementcontractorcompensatoryplanorarrangement.†—ConfidentialtreatmenthasbeenrequestedforcertainconfidentialportionsofthisexhibitpursuanttoRule24b-2undertheSecuritiesExchangeActof1934.InaccordancewithRule24b-2,theseconfidentialportionshavebeenomittedfromthisexhibitandfiledseparatelywiththeSecuritiesandExchangeCommission.(b)ExhibitsTheexhibitsfiledaspartofthisreportarelistedunderItem15(a)(3)ofthisAnnualReportonForm10-K.(c)FinancialStatementScheduleTheFinancialStatementSchedulesrequiredbyRegulationS-XandItem8ofForm10-KarelistedunderItem15(a)(2)ofthisAnnualReportonForm10-K.31SIGNATURESPursuanttotherequirementsofSection13or15(d)oftheSecuritiesExchangeActof1934,theRegistranthasdulycausedthisreporttobesignedonitsbehalfbytheundersignedthereuntodulyauthorized.CORVELCORPORATIONBy:/s/DANIELJ.STARCKDanielJ.StarckPresident,ChiefExecutiveOfficer,andChiefOperatingOfficerDate:June12,2009PursuanttotherequirementsoftheSecuritiesExchangeActof1934,thisreporthasbeensignedbelowbythefollowingpersonsonbehalfoftheRegistrantandinthecapacitiesindicatedonJune12,2009.SignatureTitle/s/V.GORDONCLEMONSV.GordonClemonsChairmanoftheBoard/s/DANIELJ.STARCKDanielJ.StarckPresident,ChiefExecutiveOfficer,andChiefOperatingOfficer(PrincipalExecutiveOfficer)/s/SCOTTR.MCCLOUDScottR.McCloudChiefFinancialOfficer(PrincipalFinancialandAccountingOfficer)/s/ALANHOOPSAlanHoopsDirector/s/STEVENJ.HAMERSLAGStevenJ.HamerslagDirector/s/JUDDJESSUPJuddJessupDirector/s/JEANMACINOJeanMacinoDirector/s/JEFFREYJ.MICHAELJeffreyJ.MichaelDirector32SELECTEDCONSOLIDATEDFINANCIALDATAThefollowingselectedfinancialdataforeachofthefiscalyearsforthefivefiscalyearsendedMarch31,2009,havebeenderivedfromtheCompany’sauditedconsolidatedfinancialstatements.ThefollowingdatashouldbereadinconjunctionwiththeCompany’sConsolidatedFinancialStatements,therelatednotesthereto,and“Management’sDiscussionandAnalysisofFinancialConditionandResultsofOperations.”Thefollowingamountsareinthousands,exceptpersharedata.20052006200720082009FiscalYearEndedMarch31,StatementofIncomeData:Revenues.............................$291,000$266,504$274,581$301,894$310,076Costofrevenues........................246,341221,060208,746223,829236,334Grossprofit...........................44,65945,44465,83578,06573,742Generalandadministrative................28,14429,59035,38339,72042,133Incomebeforeincometaxes...............16,51515,85430,45238,34531,609Incometaxprovision....................6,3586,10111,87614,96112,332Netincome...........................$10,157$9,753$18,576$23,384$19,277Netincomepershare:Basic................................$0.65$0.67$1.32$1.69$1.43Diluted...............................$0.64$0.67$1.30$1.67$1.42Sharesusedincomputingnetincomepershare:Basic................................15,62914,53414,07013,85613,458Diluted...............................15,78014,59214,26814,03613,620Returnonbeginningofyearequity..........13.2%13.3%27.3%29.5%20.0%Returnonbeginningofyearassets..........9.5%9.2%18.6%20.6%13.7%20052006200720082009BalanceSheetDataasofMarch31,Cashandcashequivalents..............$8,945$14,206$15,020$17,911$14,681Accountsreceivable,net...............45,61139,52141,02739,16441,249Workingcapital.....................38,59934,59735,01829,44528,096Totalassets........................105,698100,098113,768140,575141,209Retainedearnings....................129,402139,155157,731178,458197,735Treasurystock......................(113,481)(132,205)(154,091)(162,302)(185,762)Totalstockholders’equity..............73,59368,03679,19796,37896,29733MANAGEMENT’SDISCUSSIONANDANALYSISOFFINANCIALCONDITIONANDRESULTSOFOPERATIONSThisManagement’sDiscussionandAnalysisofFinancialConditionandResultsofOperationsmayincludecertainforward-lookingstatements,withinthemeaningofSection27AoftheSecuritiesActof1933,asamended,andSection21EoftheSecuritiesExchangeActof1934,asamended,including(withoutlimitation)statementswithrespecttoanticipatedfutureoperatingandfinancialperformance,growthandacquisitionopportunitiesandothersimilarforecastsandstatementsofexpectation.Wordssuchas“expects,”“anticipates,”“intends,”“plans,”“believes,”“seeks,”“estimates,”“anticipate,”“continue,”“may,”“will,”and“should”andvariationsofthesewordsandsimilarexpressions,areintendedtoidentifytheseforward-lookingstatements.Forward-lookingstatementsmadebytheCompanyanditsmanagementarebasedonestimates,projections,beliefsandassumptionsofmanagementatthetimeofsuchstatementsandarenotguaranteesoffutureperformance.TheCompanydisclaimsanyobligationstoupdateorreviseanyforward-lookingstatementbasedontheoccurrenceoffutureevents,thereceiptofnewinformationorotherwise.Actualfutureperformance,outcomesandresultsmaydiffermateriallyfromthoseexpressedinforward-lookingstatementsmadebytheCompanyanditsmanagementasaresultofanumberofrisks,uncertaintiesandassumptions.Representativeexamplesofthesefactorsinclude(withoutlimitation)generalindustryandeconomicconditions;possiblelitigationandlegalliabilityinthecourseofoperations;costofcapitalandcapitalrequirements;competitionfromothermanagedcarecompanies;theabilitytoexpandcertainareasoftheCompany’sbusiness;shiftsincustomerdemands;theabilityoftheCompanytoproducemarket-competitivesoftware;changesinoperatingexpensesincludingemployeewages,benefitsandmedicalinflation;governmentalandpublicpolicychanges,includingbutnotlimitedtolegislativeandadministrativelawandruleimplementationorchange;dependenceonkeypersonnel;thecontinuedavailabilityoffinancingintheamountsandatthetermsnecessarytosupporttheCompany’sfuturebusiness;andtheotherrisksidentifiedundertheheading“RiskFactors”appearingelsewhereinthereport.OverviewCorVelCorporationisanindependentnationwideproviderofmedicalcostcontainmentandmanagedcareservicesdesignedtoaddresstheescalatingmedicalcostsofworkers’compensationandautoclaims.TheCompany’sservicesareprovidedtoinsurancecompanies,third-partyadministrators(“TPA’s”),andself-admin-isteredemployerstoassisttheminmanagingthemedicalcostsandmonitoringthequalityofcareassociatedwithhealthcareclaims.NetworkSolutionsServicesTheCompany’snetworksolutionsservicesaredesignedtoreducethepricepaidbyitscustomersformedicalservicesrenderedinworkers’compensationcases,autopoliciesand,toalesserextent,grouphealthpolicies.ThenetworksolutionsofferedbytheCompanyincludeautomatedmedicalfeeauditing,preferredproviderservices,retrospectiveutilizationreview,independentmedicalexaminations,MRIexaminations,andinpatientbillreview.PatientManagementServicesInadditiontoitsnetworksolutionsservices,theCompanyoffersarangeofpatientmanagementservices,whichinvolveworkingonaone-on-onebasiswithinjuredemployeesandtheirvarioushealthcareprofessionals,employersandinsurancecompanyadjusters.Theservicesaredesignedtomonitorthemedicalnecessityandappropriatenessofhealthcareservicesprovidedtoworkers’compensationandotherhealthcareclaimantsandtoexpeditereturntowork.TheCompanyofferstheseservicesonastand-alonebasis,orasanintegratedcomponentofitsmedicalcostcontainmentservices.TheCompanyexpandeditspatientmanagementservicestoincludetheprocessingofclaimsforself-insuredpayorstopropertyandcasualtyinsurancewiththeJanuary2007acquisitionoftheassetsofHazelriggRiskManagementServicesandtheJune2007acquisitionoftheoutstandingcapitalstockofTheSchafferCompanies,LtdandtheFebruary2009acquisitionoftheoutstandingcapitalstockofEagleClaimsServices,Inc.34OrganizationalStructureTheCompany’smanagementisstructuredgeographicallywithregionalvice-presidentswhoreporttothePresidentoftheCompany.Eachoftheseregionalvice-presidentsisresponsibleforallservicesprovidedbytheCompanyinhisorherparticularregionandresponsiblefortheoperatingresultsoftheCompanyinmultiplestates.TheseregionalvicepresidentshaveareaanddistrictmanagerswhoarealsoresponsibleforallservicesprovidedbytheCompanyintheirgivenareaanddistrict.BusinessEnterpriseSegmentsWeoperateinonereportableoperatingsegment,managedcare.TheCompany’sservicesaredeliveredtoitscustomersthroughitslocalofficesineachregionandfinancialinformationfortheCompany’soperationsfollowsthisservicedeliverymodel.AllregionsprovidetheCompany’spatientmanagementandnetworksolutionsservices.StatementofFinancialAccountingStandards,orSFASNo.131,“DisclosuresaboutSegmentsofanEnterpriseandRelatedInformation,”establishesstandardsforthewaythatpublicbusinessenterprisesreportinformationaboutoperatingsegmentsinannualconsolidatedfinancialstatements.TheCompany’sinternalfinancialreportingissegmentedgeographically,asdiscussedabove,andmanagedonageographicratherthanservice-linebasis,withvirtuallyalloftheCompany’soperatingrevenuegeneratedwithintheUnitedStates.UnderSFAS131,twoormoreoperatingsegmentsmaybeaggregatedintoasingleoperatingsegmentforfinancialreportingpurposesifaggregationisconsistentwiththeobjectiveandbasicprinciplesofSFAS131,ifthesegmentshavesimilareconomiccharacteristics,andifthesegmentsaresimilarineachofthefollowingareas:1)thenatureofproductsandservices;2)thenatureoftheproductionprocesses;3)thetypeorclassofcustomerfortheirproductsandservices;and4)themethodsusedtodistributetheirproductsorprovidetheirservices.WebelieveeachoftheCompany’sregionsmeetthesecriteriaastheyprovidesimilarservicestosimilarcustomersusingsimilarmethodsofproductionandsimilarmethodstodistributetheirservices.Becausewebelievewemeeteachofthecriteriasetforthaboveandeachofourregionshavesimilareconomiccharacteristics,weaggregateourresultsofoperationsinonereportableoperatingsegment,managedcare.SeasonalityWhilewearenotdirectlyimpactedbyseasonalshifts,weareaffectedbythechangeinworkingdaysinagivenquarter.Therearegenerallyfewerworkingdaysforouremployeestogeneraterevenueinthethirdfiscalquarterasweexperiencevacations,inclementweatherandholidays.SummaryofFiscal2009AnnualResultsTheCompanyhadrevenuesof$310millionforfiscalyearendedMarch31,2009,anincreaseof$8million,or3%,comparedto$302millionforfiscalyearendedMarch31,2008.InthequarterendedMarch31,2009,theCompanyhadrevenuesof$77.1million,anincreaseinrevenueof$0.1million,or0.1%overthe$77.0millionreportedinthepreviousquarterendedDecember31,2008.Duringthepastsixfiscalquarters,theCompanyhasgenerated$77or$78millioninrevenueeachquarter.TheCompanywasabletomaintainitslevelofbusinessinspiteofthedecreaseinthecountry’seconomy.Thecontinueddecreaseinthenumberofjobsinthemanufacturingsectoranditscorrespondingeffectonthenumberofworkplaceinjuriesthathavebecomelonger-termdisabilitycases,theconsiderablepricecompetitiongiventheflat-to-decliningoverallworkerscompensationmarket,theincreaseincompetitionfromlocalandregionalcompanies,changesandthepotentialchangesinstateworkers’compensationandautomanagedcarelaws,whichcanreducedemandfortheCompany’sservices,havecreatedanenvironmentwhererevenueandmargingrowthismoredifficulttoattainandwhererevenuegrowthisuncertain.Additionally,theCompany’stechnologyandpreferredprovidernetworkcompetesagainstothercompanies,someofwhichhavegreaterresourcesavailable.Also,somecustomersmayhandletheirmanagedcareservicesin-houseandmayreducetheamountofserviceswhichareoutsourcedtomanagedcarecompaniessuchasCorVelCorporation.Thesefactorsareexpectedtocontinuetolimitourrevenuegrowthinthenearfuture.35UnderSFAS123R,theCompanybegantorecordthevestedportionofthefairvalueofstockoptionsasstockcompensationexpenseontheincomestatementbeginningApril1,2006forthefiscalyearendedMarch31,2007.Priortofiscal2007,theCompanyreportedthestockcompensationexpense,after-tax,onlyinaproformacalculationinthefootnotestothefinancialstatements.DuringthefiscalyearendedMarch31,2009,theCompanyrecordedastockcompensationexpenseof$1,332,000beforeincometaxes,and$813,000afterincometaxexpense.Thestockcompensationchargereduceddilutedearningspershareby$0.06.InFebruary2009,theCompany’swhollyownedsubsidiary,CorVelEnterpriseComp,Inc.,acquired100%ofthestockofEagleClaimServices,Inc.(“Eagle”)for$1.1millionincash.Eagleisathird-partyadministratorheadquarteredinthestateofNewYork.TheacquisitionisexpectedtoallowtheCompanytoexpanditsservicecapabilitiesasathird-partyadministratorandprovideclaimsprocessingservicesalongwithpatientmanagementservicesandnetworksolutionsservicestoanincreasedcustomerbase.ThesellersofEaglehavethepotentialtoreceiveuptoanadditional$1.1millioncashearn-out,basedupontherevenuecollectedbytheEaglebusinessduringthecalendaryears2009and2010.Theexactamountoftheearn-out,ifany,hasnotyetbeendeterminedbuttheCompanywillreviewtheresultsofthebusinesseachquarterduringtheearn-outperiodtoestimatetheamountoftheearnoutexpectedtobeearnedbythesellers.TheresultsofEaglehavebeenincludedintheCompany’sresultsfromthedateoftheacquisitionthroughMarch31,2009.ForthefiscalyearendedMarch31,2009,theresultsoftheacquiredbusinessincreasedtheCompany’srevenuesbyapproximately$200,000orlessthan0.1%oftheCompany’sInJune2007,theCompany’swhollyownedsubsidiary,CorVelEnterpriseComp,Inc.,acquired100%ofthestockofTheSchafferCompaniesLtd.(“Schaffer”)for$12.6millionincash.SchafferisaTPAheadquarteredinMaryland.TheacquisitionisexpectedtoallowtheCompanytoexpanditsservicecapabilitiesasathird-partyadministratorandprovideclaimsprocessingservicesalongwithpatientmanagementservicesandnetworksolutionsservicestoanincreasedcustomerbase.Duringfiscal2009thesellersofSchafferreceivedacashearn-outof$2.6millionbasedupontherevenuecollectedbytheSchafferbusinessduringtheone-yearperiodaftercompletionoftheacquisition.ResultsofOperationsRevenueTheCompanyderivesitsrevenuesfromprovidingpatientmanagementandnetworksolutionsservicestopayorsofworkers’compensationbenefits,autoinsuranceclaimsandhealthinsurancebenefits.Patientmanage-mentservicesincludeutilizationreview,medicalcasemanagement,vocationalrehabilitation,andclaimspro-cessing.Networksolutionsrevenuesincludefeescheduleauditing,hospitalbillauditing,independentmedicalexaminations,diagnosticimagingreviewservicesandpreferredproviderreferralservices.ThepercentagesoftotalrevenuesattributabletopatientmanagementandnetworksolutionsservicesforthefiscalyearsendedMarch31,2007,2008,and2009arelistedbelow.200720082009Patientmangementservices...................................39.1%42.4%43.2%Networksolutionsservices....................................60.9%57.6%56.8%100.0%100.0%100.0%Asnotedinthetableabove,fromfiscal2008tofiscal2009themixoftheCompany’srevenuesmoved0.8percentagepointsfromnetworksolutionsservicestopatientmanagementservices.ThismixshiftisprimarilyduetotheincreaseinrevenuefromtheCompany’sclaimsadministrationservices,whichisincludedinpatientmanagementservices.36Thefollowingtableshowstheincomestatementsforthepastthreefiscalyearsandthedollarchangesaswellasthepercentagechangesforeachfiscalyear.Fiscal2007Fiscal2008Fiscal2009AmountChangefromFiscal2007to2008AmountChangefromFiscal2008to2009PercentChangefromFiscal2007to2008PercentChangefromFiscal2008to2009Revenues............$274,581$301,894$310,076$27,313$8,1829.9%2.7%Costofrevenues.......208,746223,829236,33415,08312,5057.25.6Grossprofit..........65,83578,06573,74212,230(4,323)18.6(5.5)Generalandadministrative.......35,38339,72042,1334,3372,41312.36.1Incomebeforeincometaxes.............30,45238,34531,6097,893(6,736)25.9(17.6)Incometaxprovision....11,87614,96112,3323,085(2,629)26.0(17.6)Netincome..........$18,576$23,384$19,277$4,808$(4,107)25.9%(17.6)%Netincomepershare:Basic.............$1.32$1.69$1.43$0.37$(0.26)28.0%(15.4)%Diluted............$1.30$1.67$1.42$0.37$(0.25)28.5%(15.0)%Sharesusedinnetincomepershare:Basic.............14,07013,85613,458(214)(398)(1.5)%(2.9)%Diluted............14,26814,03613,620(232)(416)(1.6)%(3.0%)Aspreviouslyidentifiedinthesectiontitled“RiskFactors”inthisreport,theCompany’sabilitytomaintainorgrowrevenuesissubjecttoseveralrisksincluding,butnotlimitedto,changesingovernmentregulations,exposuretolitigationandtheabilitytoaddorretaincustomers.Anyofthese,oracombinationofallofthem,couldhaveamaterialandadverseeffectontheCompany’sresultsofoperationsgoingforward.Thefollowingtablesetsforth,fortheperiodsindicated,thepercentageofrevenuesrepresentedbycertainitemsreflectedintheCompany’sconsolidatedstatementsofincome.TheCompany’spastoperatingresultsarenotnecessarilyindicativeoffutureoperatingresults.ThepercentagesforthethreefiscalyearsendedMarch31,2007,2008and2009areasfollows:200720082009Revenues.................................................100.0%100.0%100.0%Costofrevenues............................................76.0%74.0%76.2%Grossprofit...............................................24.0%26.0%23.8%Generalandadministrative....................................12.9%13.2%13.6%Incomebeforeincometaxes...................................11.1%12.8%10.2%Incometaxprovision........................................4.3%5.0%4.0%NetIncome...............................................6.8%7.8%6.2%RevenueTheCompanyderivesitsrevenuesfromprovidingpatientmanagementandnetworksolutionsservicestopayorsofworkers’compensationbenefits,autoinsuranceclaimsandhealthinsurancebenefits.Patientmanage-mentservicesincludeclaimsadministration,utilizationreview,medicalcasemanagementandvocationalreha-bilitation.Networksolutionsrevenuesincludefeescheduleauditing,hospitalbillauditing,independentmedicalexaminations,diagnosticimagingreviewservicesandpreferredproviderreferralservices.37ChangeinRevenueFiscal2009ComparedtoFiscal2008Revenuesincreasedby3%,to$310millioninfiscal2009,from$302millioninfiscal2008,anincreaseof$8million.TheincreasewasprimarilyduetoanincreaseinrevenuefortheCompany’sEnterpriseCompandCareIQservices.Patientmanagementrevenues,whichencompassEnterpriseCompservices,increased$6million,or4.6%,to$134millioninfiscal2009.TheCompany’snetworksolutionsservicesrevenue,whichincludeCareIQservices,increased$2million,or1.3%,to$176millioninfiscal2009.TheCompany’slimitedrevenueincreasereflectsthechallengingmarketconditionstheCompanyhasexperiencedduringthepastfewyears.Thedecreaseinthenation’smanufacturingemploymentlevels,whichhashelpedleadtoadeclineinnationalworkers’compensationclaims,considerablepricecompetitioninaflat-to-decliningoverallmarket,anincreaseincompetitionfrombothlargerandsmallercompetitors,changesandthepotentialchangesinstateworkers’compensationandautomanagedcarelawswhichcanreducedemandfortheCompany’sservices,havecreatedanenvironmentwhererevenueandmargingrowthismoredifficulttoattainandwhererevenuegrowthisuncertain.Additionally,theCompany’stechnologyandpreferredprovidernetworkcompetesagainstothercompanies,someofwhichhavegreaterresourcesavailable.Also,somecustomersmayhandletheirmanagedcareservicesin-houseandmayreducetheamountofserviceswhichareoutsourcedtomanagedcarecompaniessuchasCorVel.Thecontinuedsoftnessinthenationallabormarket,especiallythemanufacturingsectoroftheeconomy,hascausedareductionintheoverallclaimsvolumeandareductionincasemanagementandbillreviewvolume.TheCompanybelievesthatreferralvolumeinpatientmanagementservicesandbillreviewvolumeinnetworksolutionswillcontinuetoreflectjustnominalgrowthuntilthereisgrowthinthenumberofworkrelatedinjuriesandworkers’compensationrelatedclaims.Fiscal2008ComparedtoFiscal2007Revenuesincreasedby10%to$302millioninfiscal2008,from$275millioninfiscal2007,anincreaseof$27million.TheincreasewasprimarilyduetotheacquisitionoftheassetsofHazelriggRiskManagementServicesinJanuary2007andtheacquisitionofthestockofSchafferinJune2007,asdescribedintheNotestoourConsolidatedFinancialStatements.Thesebusinessesbothprovideclaimsprocessingservicestothepropertyandcasualtyindustry.TheseacquisitionsweretheprimarysourceofgrowthintheCompany’spatientmanagementservices.ExcludingtheseacquisitionsofHazelriggandSchaffer,theCompany’srevenueswouldhaveonlyincreasedbyapproximately1%infiscal2008comparedtofiscal2007.Patientmanagementrevenuesincreased$21million,or19.3%,to$128millioninfiscal2008.TheCompany’snetworksolutionsservicesrevenueincreased$7million,or3.9%,to$174millioninfiscal2008.Thisincreasewasprimarilyduetoanincreaseinthevolumeofout-of-networkbillsreviewedwhichgenerategreaterrevenueperbillandanincreaseinrevenueperproviderbillreviewedduetoincreasedsavingsperbillfortheCompany’scustomers.CostofRevenueTheCompany’scostofrevenuesconsistofdirectexpenses,costsdirectlyattributabletothegenerationofrevenue,andfieldindirectcostswhichareincurredinthefieldtosupporttheoperationsinthefieldofficeswhichgeneratetherevenue.Directcostsareprimarilycasemanagersalaries,billreviewanalysts,relatedpayrolltaxesandfringebenefits,andcostsforIndependentMedicalExaminations(IME),prescriptiondrugs,andMRIproviders.MostoftheCompany’srevenuesaregeneratedinofficeswhichprovidebothpatientmanagementservicesandnetworksolutionsservices.Thelargestofthefieldindirectcostsaremanagersalariesandbonus,accountexecutivebasepayandcommissions,administrativeandclericalsupport,fieldsystemspersonnel,PPOnetworkdevelopers,relatedpayrolltaxes,fringebenefits,officerent,andtelephoneexpense.Approximately44%ofthecostsincurredinthefieldarefieldindirectcostswhichsupportboththepatientmanagementservicesandnetworksolutionsoperationsoftheCompany’sfieldoperations.38ChangeinCostofRevenueFiscal2009ComparedtoFiscal2008TheCompany’scostofrevenuesincreasedfrom$224millioninfiscal2008to$236millioninfiscal2009,anincreaseof5.6%or$13million.TheincreaseincostofrevenueswasduetothecostsassociatedwiththeincreaseinrevenueintheEnterpriseCompandCareIQservices.TheseservicesoperateatalowermarginthantheCompany’sotherservices.Duetoamixshifttotheselessprofitableservices,theincreaseinrevenuewasimpactedbyagreaterincreaseinthecostofrevenues.Therefore,theCompany’soperatingproductivitydeclinedprimarilyduetocostsassociatedwithoperatingtheseservices.Asaresult,thecostofrevenuesasapercentageofrevenuesincreasedfrom74%infiscal2008to76%infiscal2009.Additionally,thepotentialincreaseincoststoattractandretainqualifiedemployeesmaycauseamaterialincreaseincostofrevenuesinthefuture.Fiscal2008ComparedtoFiscal2007TheCompany’scostofrevenuesincreasedfrom$209millioninfiscal2007to$224millioninfiscal2008,aincreaseof7.2%or$15million.TheincreaseincostofrevenueswasduetotheJanuaryandJune2007acquisitionsofHazelriggandSchafferandtherelatedrevenuesgeneratedbytheseentities.ThiswaspartiallyoffsetbytheCompanyimprovingitsoperatingproductivityinbothitspatientmanagementandnetworksolutionslinesofbusinessthroughimprovementsintechnologyandprocesses.Excludingtheacquisitions,theCompany’scostofrevenueswouldhavedecreasedbyapproximately2%infiscal2008comparedtofiscal2007.TheCompanyimproveditsoperatingproductivityinthenetworksolutionslinesofbusinessprimarilyduetoenhancementsintheCompany’sbillreviewsoftware,whichallowedtheCompanytoprocessbillsmoreefficientlyandlesscostly.Asaresult,thecostofrevenuesasapercentageofrevenuesdecreasedfrom76%infiscal2007to74%infiscal2008.However,thepotentialincreaseincoststoattractandretainqualifiedemployeesmaycauseamaterialincreaseincostofrevenuesinthefuture.GeneralandAdministrativeExpenseDuringfiscalsyear2007,2008and2009,approximately62%,63%,and61%,respectively,ofgeneralandadministrativecostsconsistedofcorporatesystemscosts,whichincludethecorporatesystemssupport,imple-mentationandtraining,rulesenginedevelopment,nationalinformationtechnology(IT)strategyandplanning,depreciationofthehardwarecostsintheCompany’scorporateofficesandbackupdatacenter,theCompany’snationalwideareanetwork,andothersystemsrelatedcosts.TheCompanyincludesallITrelatedcostsmanagedbythecorporateofficeingeneralandadministrativewhereasthefieldITrelatedcostsareincludedinthecostofrevenues.Theremaininggeneralandadministrativecostsconsistofnationalmarketing,nationalsalessupport,corporatelegal,corporateinsurance,humanresources,accounting,productmanagement,newbusinessdevelop-ment,andothergeneralcorporateexpenses.ChangeinGeneralandAdministrativeExpenseFiscal2009ComparedtoFiscal2008Generalandadministrativeexpenseincreased$2million,or6.1%,from$40millioninfiscal2008to$42millioninfiscal2009.Generalandadministrativeexpenseincreasedasapercentageofrevenueby0.4%from13.2%ofrevenueinfiscal2008to13.6%ofrevenueinfiscal2009.TheCompany’ssystemsexpensesincreased$1million,or4.0%,fromfiscal2008tofiscal2009.TheincreasewasprimarilyrelatedtoincreasedexpendituresinnationalITplanning,development,programmingandmanagementcosts.GiventheimportancetheCompanyplacesonitsproprietarysoftware,thesecostsmaycontinuetoincrease.TheincreaseincostduetothedevelopmentandmaintenanceofsoftwareproductsandtheimplementationandincorporationofnewtechnologiestoremaincompetitivecouldhaveamaterialadverseeffectontheCompany’sresultsofoperationsinthefuture.Likewise,theCompany’sexposuretolitigationandincreasingcostsofinsurancecouldhaveamaterialadverseeffectontheCompany’sresultsofoperationsaswell.39Fiscal2008ComparedtoFiscal2007Generalandadministrativeexpenseincreased$4millionfrom$35millioninfiscal2007to$40millioninfiscal2008,or12.3%Generalandadministrativeexpenseincreasedasapercentageofrevenueby0.3%from12.9%ofrevenueinfiscal2007to13.2%ofrevenueinfiscal2008.TheCompany’ssystemsexpensesincreased$3million,or12.1%,fromfiscal2007tofiscal2008.TheincreasewasprimarilyrelatedtoincreasedexpendituresinnationalITinfrastructure,planning,development,andprogrammingcosts.GiventheimportancetheCompanyplacesonitsproprietarysoftware,thesecostsmaycontinuetoincrease.IncomeTaxProvisionFiscal2009ComparedtoFiscal2008TheCompany’sincometaxexpenseforfiscalyears2008and2009was$15millionand$12million,respectively.TheCompany’sincometaxexpenseinfiscal2009decreasedduetothedecreaseinpre-taxincomefrom$38millioninfiscal2008to$32millioninfiscal2009.Theeffectiveincometaxratesforfiscalyears2008and2009were39%and39%respectively.Theseratesdifferedfromthestatutoryfederaltaxrateof35%primarilyduetostateincometaxesandcertainnon-deductibleexpenses.Fiscal2008ComparedtoFiscal2007TheCompany’sincometaxexpenseforfiscalyears2007and2008,was$12millionand$15million,respectively.TheCompany’sincometaxexpenseinfiscal2008increasedduetotheincreaseinpre-taxincomefrom$30millioninfiscal2007to$38millioninfiscal2008.Theeffectiveincometaxratesforfiscalyears2007and2008were39%and39%respectively.Theseratesdifferedfromthestatutoryfederaltaxrateof35%primarilyduetostateincometaxesandcertainnon-deductibleexpenses.NetIncomeFiscal2009ComparedtoFiscal2008TheCompany’snetincomeforfiscalyears2008and2009was$23millionand$19million,respectively.TheCompany’snetincomeinfiscal2009decreasedduetotheincreaseincostsintheCompany’sfieldoperationsasnotedabove.Revenuesincreased$8millionwhilefieldcostsincreased$13millionthusdecreasinggrossmarginfrom26%infiscal2008to24%infiscal2009.Fiscal2008ComparedtoFiscal2007TheCompany’snetincomeforfiscalyears2007and2008was$19millionand$23million,respectively.TheCompany’snetincomeinfiscal2008increasedduetotheincreaseinproductivityintheCompany’sfieldoperationsasnotedabove.Revenuesincreased$27millionwhilefieldcostsincreasedjust$15millionthusincreasinggrossmarginfrom24%infiscal2007to26%infiscal2008.EarningsperShareFiscal2009ComparedtoFiscal2008TheCompany’sdilutedearningspershareforfiscalyears2008and2009were$1.67and$1.42,respectively.TheCompany’searningspershareinfiscal2009decreasedduetothedecreaseinnetincomeasnotedabove,offsetbythedecreaseindilutedsharesfrom14.0millionto13.6millionduetorepurchasesundertheCompany’sstockrepurchaseprogram.Fiscal2008ComparedtoFiscal2007TheCompany’sdilutedearningspershareforfiscalyears2007and2008were$1.30and$1.67,respectively.TheCompany’searningspershareinfiscal2008decreasedduetotheincreaseinnetincomeasnotedabovealongwiththedecreaseindilutedsharesfrom14.3millionto14.0millionduetorepurchasesundertheCompany’sstockrepurchaseprogram.40LiquidityandCapitalResourcesTheCompanyhashistoricallyfundeditsoperationsandcapitalexpendituresprimarilyfromcashflowfromoperations,andtoalesserextent,stockoptionexercises.TheCompany’snetaccountsreceivableshavehistoricallyaveragedbelow50daysofaveragesalesforthepasttwofiscalyears.Property,netofaccumulateddepreciation,hashistoricallyaveragedapproximately10%orlessofannualrevenue.ThesehistoricalratiosofinvestmentsinassetsusedinthebusinesshasallowedtheCompanytogeneratesufficientcashflowtorepurchase$186millionofitscommonstockduringthepastthirteenfiscalyears,withoutincurringdebt,oncumulativenetearningsof$198million.Workingcapitaldecreasedfrom$29millionto$27millionfromMarch31,2008toMarch31,2009primarilyduetothedecreaseincashfrom$18millionto$15millionforthesameperiods,respectively.TheCompanybelievesthatcashfromoperations,availablefundsunderitslineofcredit,andfundsfromexerciseofstockoptionsgrantedtoemployeesareadequatetofundexistingobligations,repurchasesharesoftheCompany’scommonstockunderitscurrentsharerepurchaseprogram,introducenewservices,andcontinuetodevelophealthcarerelatedbusinessesforatleastthenexttwelvemonths.TheCompanyregularlyevaluatescashrequirementsforcurrentoperationsandcommitments,andforcapitalacquisitionsandotherstrategictransactions.TheCompanymayelecttoraiseadditionalfundsforthesepurposes,eitherthroughdebtoradditionalequityfinancings,asappropriate.Additionalequityordebtfinancingmaynotbeavailableintheamounts,atthetimesorontermsfavorabletous,oratall.AsofMarch31,2009,theCompanyhad$15millionincashandcashequivalents,investedprimarilyinshort-term,interest-bearinghighlyliquidinvestment-gradesecuritieswithmaturitiesof90daysorless.InMay2009,theCompanyreneweditscreditagreementwithafinancialinstitutiontoprovidearevolvingcreditfacilitywithborrowingcapacityofupto$10millionBorrowingsunderthisagreementbearinterest,attheCompany’soption,atafixedLIBOR-basedrateplus1.50%oratafluctuatingratedeterminedbythefinancialinstitutiontobe1.50%abovethedailyone-monthLIBORrate.TheloancovenantsrequiretheCompanytomaintainthecurrentassetstoliabilitiesratioofatleast1.25:1,debttotangiblenetworthnotgreaterthan1:1andhavepositivenetincome.TheCompanyisnotauthorizedtousethislineforstockrepurchases.Therearenooutstandingrevolvingloansasofthedatehereof,butlettersofcreditintheaggregateamountof$6.3millionhavebeenissuedunderaletterofcreditsub-limitthatdoesnotreducetheamountofborrowingsavailableundertherevolvingcreditfacility.ThecreditagreementexpiresinMay2010.TheCompanyhashistoricallyrequiredsubstantialcapitaltofundthegrowthofitsoperations,particularlyworkingcapitaltofundgrowthinaccountsreceivableandcapitalexpenditures.TheCompanybelieves,however,thatthecashbalanceatMarch31,2009alongwithanticipatedinternallygeneratedfunds,thecreditfacilitywouldbesufficienttomeettheCompany’sexpectedcashrequirementsforatleastthenexttwelvemonths.OperatingCashFlowsFiscal2009ComparedtoFiscal2008Netcashprovidedbyoperatingactivitiesdecreasedfrom$37millioninfiscal2008to$31millioninfiscal2009.Thedecreaseincashprovidedbyoperationswasprimarilyduetoadecreaseinnetincomefrom$23millionatMarch31,2008to$19millionatMarch31,2009.Fiscal2008ComparedtoFiscal2007Netcashprovidedbyoperatingactivitiesincreasedfrom$30millioninfiscal2007to$37millioninfiscal2008.Theincreaseincashprovidedbyoperationswasprimarilyduetoanincreaseinnetincomefrom$19millionatMarch31,2007to$23millionatMarch31,2008.Additionally,accountsreceivabledecreasedbyapproximately$1millionfromfiscal2007tofiscal2008,whilefromfiscal2006tofiscal2007,accountsreceivableincreasedby$3million.41InvestingActivitiesFiscal2009ComparedtoFiscal2008Netcashflowusedininvestingactivitiesdecreasedfrom$29millioninfiscal2007to$14millioninfiscal2009.Thisdecreaseininvestingactivitywasprimarilyduetoadecreaseinacquisitionsfrom$15millionto$3million.Furthermore,investingactivityincapitaladditionsdecreasedfrom$15millionto$10million.TheCompanyexpectsfutureexpendituresforpropertyandequipmenttoincreaseifrevenuesincrease.Fiscal2008ComparedtoFiscal2007Netcashflowusedininvestingactivitiesincreasedfrom$21millioninfiscal2006to$29millioninfiscal2008.Thisincreaseininvestingactivitywasprimarilyduetoanincreaseincapitaladditionsfrom$9millionto$15millionforcomputerhardwareandsoftwareandfortheCompany’snewdatacenterinPortland.TheCompanyexpectsfutureexpendituresforpropertyandequipmenttoincreaseifrevenuesincrease.Duringfiscal2008,theCompanyspent$12millionfortheSchafferacquisitionandpaid$2millionfortheearn-outrelatedtotheHazelriggacquisition.FinancingActivitiesFiscal2009ComparedtoFiscal2008Netcashflowusedinfinancingactivitiesincreasedfrom$5millioninfiscal2008to$21millioninfiscal2009.TheincreaseincashflowusedinfinancingactivitieswasduetoanincreaseinthepurchaseofcommonstockundertheCompany’sstockrepurchaseprogram.Duringfiscal2008,theCompanyspent$8milliontorepurchase328,217sharesofitscommonstock(atanaveragepriceof$25.02pershare).Duringfiscal2009,theCompanyspent$23milliontorepurchase995,129sharesofitscommonstock(atanaveragepriceof$23.57pershare).IftheCompanycontinuestogeneratecashflowfromoperatingactivities,theCompanymaycontinuetorepurchasesharesofitscommonstockontheopenmarket,ifauthorizedbytheCompany’sBoardofDirectors,orseektoidentifyotherbusinessestoacquire.InSeptember2008,theBoardofDirectorsincreasedthenumberofsharesauthorizedtoberepurchasedoverthelifeofthestockrepurchaseprogrambyanadditional1,000,000sharesto13,150,000shares.TheCompanyhashistoricallyusedcashprovidedbyoperatingactivitiesandfromtheexerciseofstockoptionstorepurchasestock.TheCompanyexpectsthatitmayusesomeofthecashonthebalancesheetatMarch31,2009torepurchaseadditionalsharesofitscommonstockinthefuture.Fiscal2008ComparedtoFiscal2007Netcashflowusedinfinancingactivitiesdecreasedfrom$9millioninfiscal2007to$5millioninfiscal2008.ThedecreaseincashflowusedinfinancingactivitieswasduetoadecreaseinthepurchaseofcommonstockundertheCompany’sstockrepurchaseprogram.Duringfiscal2007,theCompanyspent$22milliontorepurchase708,667sharesofitscommonstock(atanaveragepriceof$30.88pershare).Duringfiscal2008,theCompanyspent$8milliontorepurchase328,217sharesofitscommonstock(atanaveragepriceof$25.02pershare).ContractualObligationsThefollowingtablesetforthourcontractualobligationsatMarch31,2009,whichareprimarilyfutureminimumleasepaymentsdueundernon-cancelableoperatingleases:Total20102011-20122013-2014After2014FortheFiscalYearsEndedMarch31:Operatingleases.............$48,287,000$12,504,000$19,636,000$10,604,000$5,543,000FIN48—taxliability.........3,681,0003,681,000———Softwarelicense.............864,000864,000———Total......................$52,832,000$17,049,000$19,636,000$10,604,000$5,543,00042Litigation.InFebruary2005,KathleenRoche,D.C.,asplaintiff,filedaputativeclassactioninCircuitCourtforthe20thJudicialDistrict,St.ClairCounty,Illinois,againsttheCompany.ThecaseseeksunspecifieddamagesbasedontheCompany’sallegedfailuretosteerpatientstomedicalproviderswhoaremembersoftheCorVelCorCarePPOnetworkandalsoallegesthatweusedbiasedandarbitrarycomputersoftwaretoreviewmedicalproviders’bills.InDecember2007,thetrialcourtcertifiedaclassinthiscaseofallIllinoishealthcareproviderswithCorVelPPOagreements,excludinghospitals.InJanuary2008,wefiledwiththeIllinoisAppellateCourtapetitionforinterlocutoryappealofthetrialcourt’sclasscertificationorderwhichwasdeniedinApril2008.InMay2008,weappealedtheappellatecourt’sdenialofitspetitionforinterlocutoryappealwhichappealwasalsodeniedbytheIllinoisSupremeCourtinSeptember2008.Weintendtopursueallavailablelegalremediesincludingvigorouslydefendingthiscase.Anunfavorableoutcomeinthislitigationwouldmateriallyandadverselyaffectourbusiness,financialconditionorresultsofoperations.Inflation.TheCompanyexperiencespricingpressuresintheformofcompetitiveprices.TheCompanyisalsoimpactedbyrisingcostsforcertaininflation-sensitiveoperatingexpensessuchaslaborandemployeebenefits,andfacilityleases.However,theCompanygenerallydoesnotbelievetheseimpactsarematerialtoitsrevenuesornetincome.Off-BalanceSheetArrangementsTheCompanyisnotapartytooff-balancesheetarrangementsasdefinedbytheSecuritiesandExchangeCommission.However,fromtimetotimetheCompanyentersintocertaintypesofcontractsthatcontingentlyrequiretheCompanytoindemnifypartiesagainstthird-partyclaims.Thecontractsprimarilyrelateto:(i)certaincontractstoperformservices,underwhichtheCompanymayprovidecustomaryindemnificationtothepurchasesofsuchservices;(ii)certainrealestateleases,underwhichtheCompanymayberequiredtoindemnifypropertyownersforenvironmentalandotherliabilities,andotherclaimsarisingfromtheCompany’suseoftheapplicablepremises;and(iii)certainagreementswiththeCompany’sofficers,directorsandemployees,underwhichtheCompanymayberequiredtoindemnifysuchpersonsforliabilitiesarisingoutoftheirrelationshipwiththeCompany.Thetermsofsuchobligationsvarybycontractandinmostinstancesaspecificormaximumdollaramountisnotexplicitlystatedtherein.Generally,amountsunderthesecontractscannotbereasonablyestimateduntilaspecificclaimisasserted.Consequently,noliabilitieshavebeenrecordedfortheseobligationsontheCompany’sbalancesheetsforanyoftheperiodspresented.CriticalAccountingPoliciesTheSECdefinescriticalaccountingpoliciesasthosethatrequireapplicationofmanagement’smostdifficult,subjectiveorcomplexjudgments,oftenasaresultoftheneedtomakeestimatesabouttheeffectofmattersthatareinherentlyuncertainandmaychangeinsubsequentperiods.Thefollowingisnotintendedtobeacomprehensivelistofouraccountingpolicies.OursignificantaccountingpoliciesaremorefullydescribedinNoteAtotheConsolidatedFinancialStatements.Inmanycases,theaccountingtreatmentofaparticulartransactionisspecificallydictatedbyaccountingprinciplesgenerallyacceptedintheUnitedStatesofAmerica,withnoneedformanagement’sjudgmentintheirapplication.Therearealsoareasinwhichmanagement’sjudgmentinselectinganavailablealternativewouldnotproduceamateriallydifferentresult.Wehaveidentifiedthefollowingaccountingpoliciesascriticaltous:1)revenuerecognition,2)costofrevenues,3)allowanceforuncollectibleaccounts,4)goodwillandlong-livedassets,5)accrualforself-insuredcosts,6)accountingforincometaxes,and7)share-basedcompensation.RevenueRecognition:TheCompany’srevenuesarerecognizedprimarilyasservicesarerenderedbasedontimeandexpensesincurred.AcertainportionoftheCompany’srevenuesarederivedfromfeescheduleauditingwhichisbasedonthenumberofproviderchargesauditedand,toalesserextent,onapercentageofsavingsachievedfortheCompany’scustomers.Wegenerallyrecognizerevenuewhenthereispersuasiveevidenceofanarrange-ment,theserviceshavebeenprovidedtothecustomer,thesalespriceisfixedordeterminable,andcollectabilityisreasonablyassured.Wereducerevenueforestimatedcontractualallowancesandrecordanyamountsinvoicedtothecustomerinadvanceofserviceperformanceasdeferredrevenue.43Costofrevenues:Costofservicesconsistsprimarilyofthecompensationandfringebenefitsoffieldpersonnel,includingmanagers,medicalbillanalysts,fieldcasemanagers,telephoniccasemanagers,systemssupport,administrativesupportandaccountmanagersandaccountexecutivesandrelatedfacilitycostsincludingrent,telephoneandofficesupplies.Historically,thecostsassociatedwiththeseadditionalpersonnelandfacilitieshavebeenthemostsignificantfactordrivingincreasesintheCompany’scostofservices.LocallymanagedandincurredITcostsarechargedtocostofrevenueswhereasthecostsincurredandmanagedatthecorporateofficesarechargedtogeneralandadministrativeexpense.AllowanceforUncollectibleAccounts:TheCompanydeterminesitsallowancebyconsideringanumberoffactors,includingthelengthoftimetradeaccountsreceivablearepastdue,theCompany’spreviouslosshistory,thecustomers’currentabilitytopayitsobligationtotheCompany,andtheconditionofthegeneraleconomyandtheindustryasawhole.TheCompanywritesoffaccountsreceivablewhentheybecomeuncollectible.Wemustmakesignificantmanagementjudgmentsandestimatesindeterminingcontractualandbaddebtallowancesinanyaccountingperiod.Onesignificantuncertaintyinherentinouranalysisiswhetherourpastexperiencewillbeindicativeoffutureperiods.Althoughweconsiderfutureprojectionswhenestimatingcontractualandbaddebtallowances,weultimatelymakeourdecisionsbasedonthebestinformationavailabletousatthattime.Adversechangesingeneraleconomicconditionsortrendsinreimbursementamountsforourservicescouldaffectourcontractualandbaddebtallowanceestimates,collectionofaccountsreceivable,cashflows,andresultsofoperations.Noonecustomeraccountedfor10%ormoreofaccountsreceivableatMarch31,2008,and2009.GoodwillandLong-LivedAssets:Goodwillarisingfrombusinesscombinationsrepresentstheexcessofthepurchasepriceovertheestimatedfairvalueofthenetassetsoftheacquiredbusiness.PursuanttoSFASNo.142,“GoodwillandOtherIntangibleAssets,”goodwillistestedannuallyforimpairmentormorefrequentlyifcircumstancesindicatethepotentialforimpairment.Also,managementtestsforimpairmentofitsintangibleassetsandlong-livedassetsonanongoingbasisandwhenevereventsorchangesincircumstancesindicatethatthecarryingamountofanassetmaynotberecoverable.TheCompany’simpairmentisconductedatacompany-widelevel.Themeasurementoffairvalueisbasedonanevaluationofmarketcapitalizationandisfurthertestedusingamultipleofearningsapproach.InprojectingtheCompany’scashflows,managementconsidersindustrygrowthratesandtrendsandcoststructurechanges.BasedontheCompany’stestsandreviews,noimpairmentofitsgoodwill,intangibleassetsorotherlong-livedassetsexistedatMarch31,2009.However,futureeventsorchangesincurrentcircumstancescouldaffecttherecoverabilityofthecarryingvalueofgoodwillandlong-livedassets.Shouldanassetbedeemedimpaired,animpairmentlosswouldberecognizedtotheextentthecarryingvalueoftheassetexceededitsestimatedfairmarketvalue.AccrualforSelf-insuranceCosts:TheCompanyself-insuresforthegroupmedicalcostsandworkers’compensationcostsofitsemployees.TheCompanypurchasesstoplossinsuranceforlargeclaims.Managementbelievesthattheself-insurancereservesareappropriate;however,actualclaimscostsmaydifferfromtheoriginalestimatesrequiringadjustmentstothereserves.TheCompanydeterminesitsestimatedself-insurancereservesbaseduponhistoricaltrendsalongwithoutstandingclaimsinformationprovidedbyitsclaimspayingagents.AccountingforIncomeTaxes:TheCompanyprovidesforincometaxesinaccordancewithprovisionsspecifiedinSFASNo.109,“AccountingforIncomeTaxes.”Accordingly,deferredincometaxassetsandliabilitiesarecomputedfordifferencesbetweenthefinancialstatementandtaxbasesofassetsandliabilities.Thesedifferenceswillresultintaxableordeductibleamountsinthefuture,basedontaxlawsandratesapplicabletotheperiodsinwhichthedifferencesareexpectedtoaffecttaxableincome.Theultimaterealizationofdeferredtaxassetsisdependentuponthegenerationoffuturetaxableincomeduringtheperiodsinwhichtemporarydifferencesbecomedeductible.Inmakinganassessmentregardingtheprobabilityofrealizingabenefitfromthesedeductibledifferences,managementconsiderstheCompany’scurrentandpastperformance,themarketenvironmentinwhichtheCompanyoperates,taxplanningstrategiesandthelengthofcarry-forwardperiodsforlosscarry-forwards,ifany.Valuationallowancesareestablishedwhennecessarytoreducedeferredtaxassetstoamountsthataremorelikelythannottoberealized.Further,theCompanyprovidesforincometaxissuesnotyetresolvedwithfederal,stateandlocaltaxauthorities.Share-BasedCompensation:EffectiveApril1,2006,theCompanyadoptedtheprovisionsofSFASNo.123R,“Share-BasedPayment,”whichestablishesaccountingforequityinstrumentsexchangedforemployeeservices.44UndertheprovisionsofSFASNo.123R,share-basedcompensationcostismeasuredatthegrantdate,basedonthecalculatedfairvalueoftheaward,andisrecognizedasanexpenseovertheemployee’srequisiteserviceperiod(generallythevestingperiodoftheequitygrant).PriortoApril1,2006,theCompanyaccountedforshare-basedcompensationtoemployeesinaccordancewithAPBNo.25,“AccountingforStockIssuedtoEmployees,”andrelatedinterpretations.TheCompanyalsofollowedthedisclosurerequirementsofSFASNo.123,“AccountingforStock-BasedCompensation,”asamendedbySFASNo.148,“AccountingforStock-BasedCompensation—TransitionandDisclosure.”TheCompanyelectedtoemploythemodifiedprospectivetransitionmethodasprovidedbySFASNo.123R.ForthefiscalyearendedMarch31,2009,theCompanyrecordedshare-basedcompensationexpenseof$1,332,000.Share-basedcompensationexpenserecognizedinfiscal2009isbasedonawardsultimatelyexpectedtovest;therefore,ithasbeenreducedforestimatedforfeitures.SFASNo.123Rrequiresforfeiturestobeestimatedatthetimeofgrantandrevised,ifnecessary,insubsequentperiodsifactualforfeituresdifferfromthoseestimates.TheCompanyestimatesthefairvalueofstockoptionsusingtheBlack-Scholesvaluationmodel.Keyinputassumptionsusedtoestimatethefairvalueofstockoptionsincludetheexercisepriceoftheaward,theexpectedoptionterm,theexpectedvolatilityoftheCompany’sstockovertheoption’sexpectedterm,therisk-freeinterestrateovertheoption’sterm,andtheCompany’sexpectedannualdividendyield.TheCompany’smanagementbelievesthatthevaluationtechniqueandtheapproachutilizedtodeveloptheunderlyingassumptionsareappropriateincalculatingthefairvaluesoftheCompany’sstockoptionsgrantedinfiscal2009.Estimatesoffairvaluearenotintendedtopredictactualfutureeventsorthevalueultimatelyrealizedbypersonswhoreceiveequityawards.ThekeyinputassumptionsthatwereutilizedinthevaluationofthestockoptionsgrantedduringthefiscalyearendedMarch31,2009aresummarizedinthetablebelow.Weightedaverageoptionlife(1)......................................4.7to5.0yearsExpectedvolatility(2)..............................................40%to45%Riskfreeinterestrate(3)...........................................1.9%to3.2%Dividendyield...................................................0%(1)Theexpectedoptiontermisbasedonhistoricalexerciseandpost-vestingterminationpatterns.(2)Expectedvolatilityrepresentsacombinationofhistoricalstockpricevolatilityandestimatedfuturevolatility.(3)Therisk-freeinterestrateisbasedontheimpliedyieldonfiveyearUnitedStatesTreasuryBillonthedateofgrant.RecentlyIssuedAccountingStandardsBusinessCombinationsInDecember2007,theFASBissuedSFASNo.141(revised2007),“BusinessCombinations”(“SFAS141(R)”).ThisstatementreplacesSFASNo.141,“BusinessCombinations”(“SFAS141”)andestablishestheprinciplesandrequirementsforhowtheacquirerinabusinesscombination:(a)measuresandrecognizestheidentifiableassetsacquired,liabilitiesassumed,andanynoncontrollinginterestsintheacquiredentity,(b)measuresandrecognizespositivegoodwillacquiredoragainfrombargainpurchase(negativegoodwill),and(c)determinesthedisclosureinformationthatisdecision-usefultousersoffinancialstatementsinevaluatingthenatureandfinancialeffectsofthebusinesscombination.SomeofthesignificantchangestotheexistingaccountingguidanceonbusinesscombinationsmadebySFAS141(R)includethefollowing:(cid:129)Mostoftheidentifiableassetsacquired,liabilitiesassumedandanynoncontrollinginterestintheacquireeshallbemeasuredattheiracquisition-datefairvaluesinaccordancewithSFAS157fairvalueratherthanSFAS141’srequirementbasedonestimatedfairvalues;(cid:129)Acquisition-relatedcostsincurredbytheacquirershallbeexpensedintheperiodsinwhichthecostsareincurredratherthanincludedinthecostoftheacquiredentity;45(cid:129)Goodwillshallbemeasuredastheexcessoftheconsiderationtransferred,includingthefairvalueofanycontingentconsideration,plusthefairvalueofanynoncontrollinginterestintheacquiree,overthefairvaluesoftheacquiredidentifiablenetassets,ratherthanmeasuredastheexcessofthecostoftheacquiredentityovertheestimatedfairvaluesoftheacquiredidentifiablenetassets;(cid:129)Contractualpre-acquisitioncontingenciesaretoberecognizedattheiracquisitiondatefairvaluesandnoncontractualpre-acquisitioncontingenciesaretoberecognizedattheiracquisitiondatefairvaluesonlyifitismorelikelythannotthatthecontingencygivesrisetoanassetorliability,whereasSFAS141generallypermitsthedeferredrecognitionofpre-acquisitioncontingenciesuntiltherecognitioncriteriaofSFASNo.5,“AccountingforContingencies”aremet;and(cid:129)Contingentconsiderationshallberecognizedattheacquisitiondateratherthanwhenthecontingencyisresolvedandconsiderationisissuedorbecomesissuable.SFAS141(R)iseffectiveforandshallbeappliedprospectivelytobusinesscombinationsforwhichtheacquisitiondateisonorafterthebeginningofthefirstannualreportingperiodbeginningonorafterDecember15,2008,withearlieradoptionprohibited.AssetsandliabilitiesthatarosefrombusinesscombinationswithacquisitiondatespriortotheSFAS141(R)effectivedateshallnotbeadjusteduponadoptionofSFAS141(R)withcertainexceptionsforacquireddeferredtaxassetsandacquiredincometaxpositions.TheadoptionofSFAS141(R)onApril1,2009,isnotexpectedtohaveamaterialeffectontheCompany’sconsolidatedfinancialstatements.DeterminationoftheUsefulLifeofIntangibleAssetsInApril2008,theFASBissuedFSPNo.FAS142-3,“DeterminationoftheUsefulLifeofIntangibleAssets”(“FSPFAS142-3”).FSPFAS142-3amendsthefactorsthatshouldbeconsideredindevelopingrenewalorextensionassumptionsusedtodeterminetheusefullifeofarecognizedintangibleassetunderSFAS142.FSPFAS142-3amendsparagraph11(d)ofSFAS142torequireanentitytouseitsownassumptionsaboutrenewalorextensionofanarrangement,adjustedfortheentity-specificfactorsinparagraph11ofSFAS142,evenwhenthereislikelytobesubstantialcostormaterialmodifications.FSPFAS142-3iseffectiveforfinancialstatementsissuedforfiscalyearsbeginningafterDecember15,2008,andinterimperiodswithinthosefiscalyears,withearlyadoptionprohibited.TheprovisionsofFSPFAS142-3aretobeappliedprospectivelytointangibleassetsacquiredafterApril1,2009,fortheCompany,althoughthedisclosureprovisionsarerequiredforallintangibleassetsrecognizedasoforsubsequenttoApril1,2009.TheadoptionofFSPFAS142-3onApril1,2009,isnotexpectedtohaveamaterialeffectontheCompany’sconsolidatedfinancialstatements.FairValueMeasurementsIn2006,theFASBissuedSFASNo.157,“FairValueMeasurements,”whichprovidesenhancedguidanceforusingfairvaluetomeasureassetsandliabilities.SFAS157alsorespondstoinvestors’requestsforexpandedinformationabouttheextenttowhichentitiesmeasureassetsandliabilitiesatfairvalue,theinformationusedtomeasurefairvalue,andtheeffectoffairvaluemeasurementsonearnings.SFAS157applieswheneverotherstandardsrequireorpermitassetsorliabilitiestobemeasuredatfairvaluebutdoesnotexpandtheuseoffairvalueinanynewcircumstances.UnderSFAS157,fairvaluereferstothepricethatwouldbereceivedfromthesaleofanassetorpaidtotransferaliabilityinanorderlytransactionbetweenmarketparticipantsinthemarketinwhichthereportingentitytransactsbusiness.SFAS157clarifiestheprinciplethatfairvalueshouldbebasedontheassumptionsmarketparticipantswouldusewhenpricingtheassetorliability.Insupportofthisprinciple,thestandardestablishesafairvaluehierarchythatprioritizestheinformationusedtodevelopthoseassumptions.Thefairvaluehierarchygivesthehighestprioritytoquotedpricesinactivemarketsandthelowestprioritytounobservabledata,forexample,thereportingentity’sowndata.Fairvaluemeasurementsarerequiredtobeseparatelydisclosedbylevelwithinthefairvaluehierarchy.SFAS157waseffectiveforfinancialstatementsissuedforfiscalyearsbeginningafterNovember15,2007andforallinterimperiodswithinthosefiscalyears.TheadoptionofSFAS157didnothaveanyimpactontheamountsreportedforfinancialassetsandliabilitiesintheCompany’s2009consolidatedfinancialstatements.46InFebruary2008,theFASBissuedStaffPositionFAS157-2,whichdelaystheeffectivedateofSFASNo.157fornonfinancialassetsandnonfinancialliabilities,exceptforitemsthatarerecognizedordisclosedatfairvalueinthefinancialstatementsonarecurringbasis(atleastannually).ThedelayisintendedtoallowtheFASBandconstituentsadditionaltimetoconsidertheeffectofvariousimplementationissuesthathavearisen,orthatmayarise,fromtheapplicationofSFASNo.157.Examplesofitemstowhichthedeferralappliesincludethefollowing:(cid:129)Nonfinancialassetsandnonfinancialliabilitiesinitiallymeasuredatfairvalueinabusinesscombinationorothernewbasisevent,butnotmeasuredatfairvalueinsubsequentperiods(nonrecurringfairvaluemeasurements).(cid:129)Reportingunitsmeasuredatfairvalueinthefirststepofagoodwillimpairmenttest(measuredatfairvalueonarecurringbasis,butnotnecessarilyrecognizedordisclosedinthefinancialstatementsatfairvalue).(cid:129)Nonfinancialassetsandnonfinancialliabilitiesmeasuredatfairvalueinthesecondstepofagoodwillimpairmenttest(measuredatfairvalueonanonrecurringbasistodeterminetheamountofgoodwillimpairment,butnotnecessarilyrecognizedordisclosedinthefinancialstatementsatfairvalue).(cid:129)Nonfinanciallong-livedassets(assetgroups)measuredatfairvalueforanimpairmentassessment(non-recurringfairvaluemeasurements).(cid:129)Nonfinancialliabilitiesforexitordisposalactivitiesinitiallymeasuredatfairvalue(nonrecurringfairvaluemeasurements).TheCompanyelectedtodelaytheadoptionofSFASNo.157relatedtoitsnonfinancialassetsandnonfinancialliabilitiesdisclosedhereinanddoesnotexpectSFASNo.157tohaveamaterialandadverseimpactontheCompany’sfinancialstatements.FairValueOptionIn2007,theFASBissuedSFASNo.159,“TheFairValueOptionforFinancialAssetsandFinancialLiabilities,”whichprovidescompanieswithanoptiontoreportselectedfinancialassetsandliabilitiesatfairvalue.TheobjectiveofSFAS159istoreduceboththecomplexityinaccountingforfinancialinstrumentsandthevolatilityinearningscausedbymeasuringrelatedassetsandliabilitiesdifferently.DifferentmeasurementattributeshavebeenrequiredunderGAAPfordifferentassetsandliabilitiesthatcancreateartificialvolatilityinearnings.SFAS159helpstomitigatethistypeofaccounting-inducedvolatilitybyenablingcompaniestoreportrelatedassetsandliabilitiesatfairvalue.SFAS159alsoestablishespresentationanddisclosurerequirementsdesignedtofacilitatecomparisonsbetweencompaniesthatchoosedifferentmeasurementattributesforsimilartypesofassetsandliabilities.SFAS159requiresacompanytoprovideadditionalinformationthatwillhelpinvestorsandotherusersoffinancialstatementstomoreeasilyunderstandtheeffectofthecompany’schoicetousefairvalueonitsearnings.SFAS159alsorequiresentitiestodisplaythefairvalueofthoseassetsandliabilitiesforwhichthecompanyhaschosentousefairvalueonthefaceofthebalancesheet.SFAS159doesnoteliminatedisclosurerequirementsincludedinotheraccountingstandards,includingrequirementsfordisclosuresaboutfairvaluemeasurementsincludedinSFAS157andSFAS107,“DisclosuresaboutFairValueofFinancialInstruments.”SFAS159waseffectiveasofthebeginningofanentity’sfirstfiscalyearbeginningafterNovember15,2007.TheCompanyelectednottoreportanyfinancialassetsorliabilitiesatfairvalueunderSFAS159inits2009financialstatements.47REPORTOFINDEPENDENTREGISTEREDPUBLICACCOUNTINGFIRMTotheBoardofDirectorsandStockholdersofCorVelCorporationWehaveauditedtheaccompanyingconsolidatedbalancesheetsofCorVelCorporation(the“Company”)asofMarch31,2009and2008,andtherelatedstatementsofincome,stockholders’equity,andcashflowsforeachoftheyearsendedMarch31,2009,2008and2007.Inconnectionwithourauditsoftheconsolidatedfinancialstatements,wehavealsoauditedthefinancialstatementscheduleforeachoftheyearsendedMarch31,2009,2008,and2007.WealsohaveauditedCorVelCorporation’sinternalcontroloverfinancialreportingasofMarch31,2009,basedoncriteriaestablishedinInternalControl—IntegratedFrameworkissuedbytheCommitteeofSponsoringOrga-nizationsoftheTreadwayCommission(COSO).TheCompany’smanagementisresponsibleforthesefinancialstatements,formaintainingeffectiveinternalcontroloverfinancialreporting,andforitsassessmentoftheeffectivenessofinternalcontroloverfinancialreporting,includedinReportofManagementonInternalControloverFinancialReporting.OurresponsibilityistoexpressanopiniononthesefinancialstatementsandanopinionontheCompany’sinternalcontroloverfinancialreportingbasedonouraudits.WeconductedourauditsinaccordancewiththestandardsofthePublicCompanyAccountingOversightBoard(UnitedStates).Thosestandardsrequirethatweplanandperformtheauditstoobtainreasonableassuranceaboutwhetherthefinancialstatementsarefreeofmaterialmisstatementandwhethereffectiveinternalcontroloverfinancialreportingwasmaintainedinallmaterialrespects.Ourauditsofthefinancialstatementsincludedexamining,onatestbasis,evidencesupportingtheamountsanddisclosuresinthefinancialstatements,assessingtheaccountingprinciplesusedandsignificantestimatesmadebymanagement,andevaluatingtheoverallfinancialstatementpresentation.Ourauditofinternalcontroloverfinancialreportingincludedobtaininganunderstandingofinternalcontroloverfinancialreporting,assessingtheriskthatamaterialweaknessexists,andtestingandevaluatingthedesignandoperatingeffectivenessofinternalcontrolbasedontheassessedrisk.Ourauditsalsoincludedperformingsuchotherproceduresasweconsiderednecessaryinthecircumstances.Webelievethatourauditsprovideareasonablebasisforouropinions.Acompany’sinternalcontroloverfinancialreportingisaprocessdesignedtoprovidereasonableassuranceregardingthereliabilityoffinancialreportingandthepreparationoffinancialstatementsforexternalpurposesinaccordancewithgenerallyacceptedaccountingprinciples.Acompany’sinternalcontroloverfinancialreportingincludesthosepoliciesandproceduresthat(1)pertaintothemaintenanceofrecordsthat,inreasonabledetail,accuratelyandfairlyreflectthetransactionsanddispositionsoftheassetsofthecompany;(2)providereasonableassurancethattransactionsarerecordedasnecessarytopermitpreparationoffinancialstatementsinaccordancewithgenerallyacceptedaccountingprinciples,andthatreceiptsandexpendituresofthecompanyarebeingmadeonlyinaccordancewithauthorizationsofmanagementanddirectorsofthecompany;and(3)providereasonableassuranceregardingpreventionortimelydetectionofunauthorizedacquisition,use,ordispositionofthecompany’sassetsthatcouldhaveamaterialeffectonthefinancialstatements.Becauseofitsinherentlimitations,internalcontroloverfinancialreportingmaynotpreventordetectmisstatements.Also,projectionsofanyevaluationofeffectivenesstofutureperiodsaresubjecttotheriskthatcontrolsmaybecomeinadequatebecauseofchangesinconditions,orthatthedegreeofcompliancewiththepoliciesorproceduresmaydeteriorate.Amaterialweaknessisadeficiency,oracombinationofdeficiencies,ininternalcontroloverfinancialreporting,suchthatthereisareasonablepossibilitythatamaterialmisstatementoftheCompany’sannualorinterimfinancialstatementswillnotbepreventedordetectedonatimelybasis.ManagementhasidentifiedamaterialweaknessovertheCompany’sPeriod-endFinancialReportingProcessbecausetheCompanydidnotmaintainadequatecontrolstosupport:(i)effectiveandtimelyreconciliationanalysesforcertainsignificantaccounts,(ii)completeandaccuratefinancialstatementdisclosures,and(iii)restrictedaccesstocertainfinancialsystemsandfilesnecessarytomaintaintheintegrityofjournalentryreviews,accountreconciliations,andfinancialreports.Additionally,indirectlinesofresponsibilitieswithintheCompany’saccountingandreportingfunctiondidnotprovidedirectoversightandaccountabilitytoallowfortimelyandaccuratefinancialreporting.Thismaterialweaknesshasbeenidentifiedandisincludedinmanagement’sassessment.Thematerialweaknesswasconsidered48indeterminingthenature,timing,andextentofaudittestsappliedinourauditoftheCompany’s2009consolidatedfinancialstatementsanddoesnotaffectourreportonsuchfinancialstatements.Inouropinion,thefinancialstatementsreferredtoabovepresentfairly,inallmaterialrespects,theconsolidatedfinancialpositionoftheCompanyasofMarch31,2009and2008,andtheconsolidatedresultsofitsoperationsanditscashflowsforeachoftheyearsendedMarch31,2009,2008,and2007,inconformitywithaccountingprinciplesgenerallyacceptedintheUnitedStatesofAmerica.Also,inouropinion,thefinancialstatementscheduleforeachoftheyearsendedMarch31,2009,2008,and2007,whenconsideredinrelationtothebasicconsolidatedfinancialstatementstakenasawhole,presentsfairly,inallmaterialrespects,theinformationsetforththerein.Also,inouropinion,theCompanydidnotmaintain,inallmaterialrespects,effectiveinternalcontroloverfinancialreportingasofMarch31,2009,basedoncriteriaestablishedinInternalControl—IntegratedFrameworkissuedbytheCommitteeofSponsoringOrganizationsoftheTreadwayCommission(COSO).AsdiscussedinNoteFtotheconsolidatedfinancialstatements,effectiveApril1,2007,theCompanyadoptedFinancialAccountingStandardsBoardInterpretationNo.48,“AccountingforUncertainTaxPositions”,whichchangedthemannerinwhichtheCompanyaccountsforthefinancialstatementrecognitionandmeasurementofuncertaintaxpositions./s/HASKELL&WHITELLPIrvine,CaliforniaJune12,200949CORVELCORPORATIONCONSOLIDATEDSTATEMENTSOFINCOME200720082009FiscalYearsEndedMarch31,Revenues.......................................$274,581,000$301,894,000$310,076,000Costofrevenues.................................208,746,000223,829,000236,334,000Grossprofit.....................................65,835,00078,065,00073,742,000Generalandadministrative..........................35,383,00039,720,00042,133,000Incomebeforeincometaxes.........................30,452,00038,345,00031,609,000Incometaxprovision..............................11,876,00014,961,00012,332,000Netincome.....................................$18,576,000$23,384,000$19,277,000Netincomepershare:Basic..........................................$1.32$1.69$1.43Diluted........................................$1.30$1.67$1.42Weightedaveragesharesoutstanding:Basic..........................................14,070,00013,856,00013,458,000Diluted........................................14,268,00014,036,00013,620,000Seeaccompanyingnotestoconsolidatedfinancialstatements.50CORVELCORPORATIONCONSOLIDATEDBALANCESHEETS20082009March31,ASSETSCurrentAssetsCashandcashequivalents......................................$17,911,000$14,681,000Accountsreceivable(lessallowancefordoubtfulaccountsof$2,888,000in2008and$2,371,000in2009)................................39,164,00041,249,000Prepaidexpensesandtaxes....................................5,242,0004,841,000Deferredincometaxes........................................4,076,0004,531,000Totalcurrentassets...........................................66,393,00065,302,000Propertyandequipment,net....................................30,569,00029,790,000Goodwill..................................................31,875,00034,852,000Otherintangibleassets,net.....................................7,789,0007,495,000Non-currentdeferredincometaxesandotherassets...................3,949,0003,770,000$140,575,000$141,209,000LIABILITIESANDSTOCKHOLDERS’EQUITYCurrentLiabilitiesAccountsandtaxespayable....................................$20,475,000$18,553,000Accruedliabilities............................................16,473,00018,653,000Totalcurrentliabilities........................................36,948,00037,206,000Deferredincometaxes........................................7,249,0007,706,000Totalliabilities..............................................44,197,00044,912,000Commitmentsandcontingencies(NotesI,J,andM)Stockholders’EquityCommonstock,$.0001parvalue:60,000,000sharesauthorizedatMarch31,2008and2009;25,480,315sharesissued(13,792,701sharesoutstanding,netofTreasuryshares)and25,600,022sharesissued(12,917,279sharesoutstanding,netofTreasuryshares)atMarch31,2008andMarch31,2009,respectively..........................3,0003,000Paid-in-capital..............................................80,219,00084,321,000TreasuryStock,atcost(11,687,614sharesin2008and12,682,743sharesin2009)...................................................(162,302,000)(185,762,000)Retainedearnings............................................178,458,000197,735,000Totalstockholders’equity......................................96,378,00096,297,000$140,575,000$141,209,000Seeaccompanyingnotestoconsolidatedfinancialstatements.51CORVELCORPORATIONCONSOLIDATEDSTATEMENTSOFSTOCKHOLDERS’EQUITYFiscalYearsEndedMarch31,2007,2008,and2009CommonSharesStockAmountPaid-In-CapitalTreasurySharesTreasuryStockRetainedEarningsTotalShareholders’EquityBalance—March31,2006........24,776,081$2,000$61,084,000(10,650,730)$(132,205,000)$139,155,000$68,036,000StockSplitintheformof50%stockdividend....................—1,000(1,000)————Stockissuedunderemployeestockpurchaseplan................14,896—371,000———371,000Stockissuedunderstockoptionplan,netofsharesrepurchased........529,112—9,250,000———9,250,000Stock-basedcompensationexpense...——1,258,000———1,258,000Incometaxbenefitsfromstockoptionexercises...................——3,592,000———3,592,000Purchaseoftreasurystock.........———(708,667)(21,886,000)—(21,886,000)Netincome...................—————18,576,00018,576,000Balance—March31,2007........25,320,0893,00075,554,000(11,359,397)(154,091,000)157,731,00079,197,000CumulativeeffectadjustmentpursuanttoadoptionofFIN48..........—————(2,657,000)(2,657,000)Stockissuedunderemployeestockpurchaseplan................14,424—364,000———364,000Stockissuedunderstockoptionplan,netofsharesrepurchased........145,802—2,474,000———2,474,000Stock-basedcompensationexpense...——1,487,000———1,487,000Incometaxbenefitsfromstockoptionexercises...................——340,000———340,000Purchaseoftreasurystock.........———(328,217)(8,211,000)—(8,211,000)Netincome...................—————23,384,00023,384,000Balance—March31,2008........25,480,3153,00080,219,000(11,687,614)(162,302,000)178,458,00096,378,000Stockissuedunderemployeestockpurchaseplan................16,390—374,000———374,000Stockissuedunderstockoptionplan,netofsharesrepurchased........103,317—1,766,000———1,766,000Stock-basedcompensationexpense...——1,332,000———1,332,000Incometaxbenefitsfromstockoptionexercises...................——630,000———630,000Purchaseoftreasurystock.........———(995,129)(23,460,000)—(23,460,000)Netincome...................—————19,277,00019,277,000Balance—March31,2009........25,600,022$3,000$84,321,000(12,682,743)$(185,762,000)$197,735,000$96,297,000Seeaccompanyingnotestoconsolidatedfinancialstatements.52CORVELCORPORATIONCONSOLIDATEDSTATEMENTSOFCASHFLOWS200720082009FiscalYearsEndedMarch31,CASHFLOWSFROMOPERATINGACTIVITIESNetincome......................................$18,576,000$23,384,000$19,277,000Adjustmentstoreconcilenetincometonetcashprovidedbyoperatingactivities:Depreciationandamortization........................10,122,00011,768,00011,778,000Lossonwritedownordisposalofpropertyorcapitalizedsoftware......................................382,000130,000107,000Stock-basedcompensationexpense....................1,258,0001,487,0001,332,000Provisionfordoubtfulaccounts.......................2,462,0002,464,0002,434,000Provision(benefit)fordeferredincometaxes.............(1,517,000)(2,226,000)2,000Changesinoperatingassetsandliabilities:Accountsreceivable................................(2,868,000)761,000(4,388,000)Prepaidexpensesandtaxes..........................(869,000)(2,152,000)401,000Otherassets......................................397,000170,000236,000Accountsandtaxespayable..........................(294,000)2,654,000(1,939,000)Accruedliabilities.................................2,343,000(1,173,000)2,067,000Netcashprovidedbyoperatingactivities................29,992,00037,267,00031,307,000CASHFLOWSFROMINVESTINGACTIVITIESAcquisitionofbusiness,netofcashacquired.............(11,972,000)(14,586,000)(3,365,000)Purchasesofpropertyandequipment...................(8,533,000)(14,757,000)(10,482,000)Netcashusedininvestingactivities....................(20,505,000)(29,343,000)(13,847,000)CASHFLOWSFROMFINANCINGACTIVITIESExerciseofemployeestockpurchaseoption..............371,000364,000374,000Exerciseofexerciseofcommonstockoptions............9,250,0002,474,0001,766,000Taxbenefitsfromstockoptions.......................3,592,000340,000630,000Purchaseoftreasurystock...........................(21,886,000)(8,211,000)(23,460,000)Netcashusedinfinancingactivities....................(8,673,000)(5,033,000)(20,690,000)Netincrease(decrease)incashandcashequivalents........814,0002,891,000(3,230,000)Cashandcashequivalentsatbeginningofyear...........14,206,00015,020,00017,911,000CASHANDCASHEQUIVALENTSATENDOFYEAR..$15,020,000$17,911,000$14,681,000Non-cashitems:Incometaxespaid.................................$9,736,000$16,329,000$11,456,000Interestexpense...................................$—$—$—Accrualofsoftwarelicensepurchase...................$—$1,746,000$—Acquisitionearnout................................$—$500,000$—Seeaccompanyingnotestoconsolidatedfinancialstatements.53CORVELCORPORATIONNOTESTOCONSOLIDATEDFINANCIALSTATEMENTSMarch31,2008and2009NoteA—SummaryofSignificantAccountingPoliciesOrganization:CorVelCorporation(CorVelortheCompany),incorporatedinDelawarein1987,providesservicesandprogramsnationwidethataredesignedtoenableinsurancecarriers,thirdpartyadministratorsandemployerswithself-insuredprogramstoadminister,manageandcontrolthecostofworkers’compensationandotherhealthcarebenefits.TheCompanyprovidescasemanagement,claimsadministration,andmedicalbillreviewservicestothesepayors.BasisofPresentation:TheconsolidatedfinancialstatementsincludetheaccountsofCorVelanditswholly-ownedsubsidiaries.Significantintercompanyaccountsandtransactionshavebeeneliminatedinconsolidation.UseofEstimates:ThepreparationoffinancialstatementsincompliancewithaccountingprinciplesgenerallyacceptedintheUnitedStatesofAmericarequiresmanagementtomakeestimatesandassumptionsthataffecttheamountsreportedintheaccompanyingfinancialstatements.Actualresultscoulddifferfromthoseestimates.Significantestimatesincludethevaluesassignedtointangibleassets,capitalizedsoftwaredevelopment,theallowancefordoubtfulaccounts,accrualforincometaxes,purchasepriceallocationforacquisitions,andaccrualforself-insurancereserves.CashandCashEquivalents:Cashandcashequivalentsconsistofshort-term,interest-bearinghighly-liquidinvestment-gradesecuritieswithmaturitiesof90daysorlesswhenpurchased.FairValueofFinancialInstruments:ThecarryingamountsoftheCompany’sfinancialinstruments(i.e.cash,accountsreceivable,accountspayable,etc.)approximatetheirfairvaluesatMarch31,2008and2009.RevenueRecognition:TheCompany’srevenuesarerecognizedprimarilyasservicesarerenderedbasedontimeandexpensesincurred.AcertainportionoftheCompany’srevenuesarederivedfromfeescheduleauditingwhichisbasedonthenumberofproviderchargesauditedandonapercentageofsavingsachievedfortheCompany’scustomers.TheCompanygenerallyrecognizesrevenuewhenthereispersuasiveevidenceofanarrangement,theserviceshavebeenprovidedtothecustomer,thesalespriceisfixedordeterminable,andcollectabilityisreasonablyassured.TheCompanyreducesrevenueforestimatedcontractualallowancesandrecordanyamountsinvoicedtothecustomerinadvanceofserviceperformanceasdeferredrevenue.EmergingIssuesTaskForce(“EITF”)Topic00-21,RevenueArrangementswithMultipleDeliverables,addressestheaccountingforrevenuesinwhichmultipleproductsand/orservicesaredeliveredatdifferenttimesunderonearrangementwithacustomer,andprovidesguidanceindeterminingwhethermultipledeliverablesshouldbeconsideredasseparateunitsofaccounting.TheCompanymayprovidepatientmanagementandnetworksolutionsservicestothesamecustomerfromthesameCorVeloffice.TheCompanyrevieweditsrevenuerecognitionpolicywithrespecttoEITF00-21anddeterminedthattheCompanyisproperlyrecognizingrevenueaseachserviceisperformedforthecustomer.AccountsReceivable:ThemajorityoftheCompany’saccountsreceivableisduefromcompaniesinthepropertyandcasualtyinsuranceindustries.Creditisextendedbasedonevaluationofacustomer’sfinancialconditionand,generally,collateralisnotrequired.Accountsreceivableareduewithin30daysandarestatedatamountsduefromcustomersnetofanallowancefordoubtfulaccounts.Accountsoutstandinglongerthanthecontractualpaymenttermsareconsideredpastdue.TheCompanydeterminesitsallowancebyconsideringanumberoffactors,includingthelengthoftimetradeaccountsreceivablearepastdue,theCompany’spreviouslosshistory,thecustomer’scurrentabilitytopayitsobligationtotheCompanyandtheconditionofthegeneraleconomyandtheindustryasawhole.TheCompanywritesoffaccountsreceivable,alongwithsalesadjustments,tocostofrevenueswhentheybecomeuncollectible.Accountsreceivableincludes$2,149,000and$2,902,000ofunbilledreceivablesatMarch31,2008and2009,respectively.Unbilledreceivablesrepresenttherevenuefortheworkperformedwhichhasnotyetbeeninvoicedtothecustomer.Unbilledreceivablesaregenerallyinvoicedwithinthefollowingmonth.54ConcentrationsofCreditRisk:SubstantiallyalloftheCompany’scustomersarepayorsofworkers’compensationexpenseandpropertyandcasualtyinsurance,whichincludeinsurancecompanies,thirdpartyadministrators,self-insuredemployersandgovernmententities.Receivablesaregenerallyduewithin30days.Creditlossesrelatingtocustomersintheworkers’compensationinsuranceindustryconsistentlyhavebeenwithinmanagement’sexpectations.VirtuallyalloftheCompany’scashisinvestedatfinancialinstitutionsinamountswhichexceedtheFDICinsurancelevels.Nocustomeraccountedfor10%ormoreofeitherrevenueforfiscal2007,2008,or2009andnocustomeraccountedfor10%ormoreofaccountsreceivableateitherMarch31,2008or2009.PropertyandEquipment:Additionstopropertyandequipmentarerecordedatcost.TheCompanyprovidesfordepreciationonpropertyandequipmentusingthestraight-linemethodbychargestooperationsinamountsthatallocatethecostofdepreciableassetsovertheirestimatedlivesasfollows:AssetClassificationEstimatedUsefulLifeLeaseholdImprovements..................TheshorteroffiveyearsorthelifeofleaseFurnitureandEquipment..................FivetosevenyearsComputerHardware......................ThreetofiveyearsComputerSoftware......................ThreetofiveyearsTheCompanycapitalizessoftwaredevelopmentcostsintendedforinternaluse.TheCompanyaccountsforinternallydevelopedsoftwarecostsinaccordancewithSOP98-1,“AccountingfortheCostsofComputerSoftwareDevelopedorObtainedforInternalUse”.Capitalizedsoftwaredevelopmentcosts,intendedforinternaluse,totaled$6,293,000(netof$28,771,000inaccumulatedamortization)and$7,485,000,(netof$31,574,000inaccumulatedamortization)asofMarch31,2008and2009,respectively.Thesecostsareincludedincomputersoftwareinpropertyandequipmentandareamortizedoveraperiodoffiveyears.Long-LivedAssets:Thecarryingamountofalllong-livedassetsisevaluatedperiodicallytodetermineifadjustmenttothedepreciationandamortizationperiodortotheunamortizedbalanceiswarranted.Suchevaluationisbasedprincipallyontheexpectedutilizationofthelong-livedassetsandtheprojected,undiscountedcashflowsoftheoperationsinwhichthelong-livedassetsaredeployed.Goodwill:TheCompanyaccountsforitsbusinesscombinationsinaccordancewithStatementofFinancialAccountingStandards(“SFAS”)No.141,“BusinessCombinations,”whichrequiresthatthepurchasemethodofaccountingbeappliedtoallbusinesscombinationsandaddressesthecriteriaforinitialrecognitionofintangibleassetsandgoodwill.InaccordancewithSFASNo.142,“GoodwillandOtherIntangibles”,goodwillandotherintangibleassetswithindefinitelivesarenotamortizedbutaretestedforimpairmentannually,ormorefrequentlyifcircumstancesindicatethepossibilityofimpairment.Ifthecarryingvalueofgoodwilloranintangibleassetexceedsitsfairvalue,animpairmentlossshallberecognized.TheCompany’sgoodwillimpairmenttestisconductedcompany-wideandthefairvalueiscomparedtoitscarryingvalue.Themeasurementoffairvalueisbasedonanevaluationofmarketcapitalizationandisfurthertestedusingamultipleofearningsapproach.Forallyearspresented,theCompany’stestsindicatedthatnoimpairmentexistedand,accordingly,nolosshasbeenrecognized.Goodwillamountedto$31,875,000,(netofaccumulatedamortizationof$2,069,000)atMarch31,2008and$34,852,000,(netofaccumulatedamortizationof$2,069,000)atMarch31,2009.Costofrevenues:Costofservicesconsistsprimarilyofthecompensationandfringebenefitsoffieldpersonnel,includingmanagers,medicalbillanalysts,fieldcasemanagers,telephoniccasemanagers,systemssupport,administrativesupportandaccountmanagersandaccountexecutivesandrelatedfacilitycostsincludingrent,telephoneandofficesupplies.Historically,thecostsassociatedwiththeseadditionalpersonnelandfacilitieshavebeenthemostsignificantfactordrivingincreasesintheCompany’scostofservices.IncomeTaxes:IncometaxesareprovidedforinaccordancewiththeprovisionsofSFASNo.109,“Account-ingforIncomeTaxes.”Accordingly,deferredincometaxassetsandliabilitiesarecomputedfordifferencesbetweenthecarryingamountsofassetsandliabilitiesforfinancialstatementandtaxpurposes.Deferredincometaxassets55CORVELCORPORATIONNOTESTOCONSOLIDATEDFINANCIALSTATEMENTS—(Continued)arerequiredtobereducedbyavaluationallowancewhenitisdeterminedthatitismorelikelythannotthatalloraportionofadeferredtaxassetwillnotberealized.Indeterminingthenecessityandamountofavaluationallowance,managementconsiderscurrentandpastperformance,theoperatingmarketenvironment,taxplanningstrategiesandthelengthoftaxbenefitcarryforwardperiods.AsofApril1,2007,FinancialAccountingStandardsBoard(“FASB”)InterpretationNo.48,“AccountingforUncertaintyinIncomeTaxes”(“FIN48”),aninterpretationofSFASNo.109wasadopted.PriortoApril1,2007,taxcontingencieswereaccountedforundertheprinciplesofSFASNo.5,“AccountingforContingencies”.TheimpactresultingfromtheadoptionofFIN48hasbeenaccountedforasacumulativeeffectadjustmentrecordedtotheApril1,2007retainedearningsbalance.AccrualforSelf-insuranceCosts:TheCompanyself-insuresforthegroupmedicalcostsandworkers’compensationcostsofitsemployees.TheCompanypurchasesstoplossinsuranceforlargeclaims.Managementbelievesthattheself-insurancereservesareappropriate;however,actualclaimscostsmaydifferfromtheoriginalestimatesrequiringadjustmentstothereserves.TheCompanydeterminesitsestimatedself-insurancereservesbaseduponhistoricaltrendsalongwithoutstandingclaimsinformationprovidedbyitsclaimspayingagents.Share-BasedCompensation:Priortofiscal2007,theCompanyaccountedforitsstock-basedcompensationplansundertherecognitionandmeasurementprinciplesofAccountingPrinciplesBoard(“APB”)OpinionNo.25,“AccountingforStockIssuedtoEmployees,”andrelatedinterpretations.TheCompanyadoptedtheprovisionsofSFASNo.123R,“Share-BasedPayment”onApril1,2006.TheCompanyelectedtoemploythemodifiedprospectivetransitionmethodand,accordingly,financialstatementamountsforpriorperiodspresentedwerenotrestatedtoreflectthefairvaluemethodofexpensingshare-basedcompensation.EarningsPerShare:Earningspercommonshare-basicisbasedontheweightedaveragenumberofcommonsharesoutstandingduringtheperiod.Earningspercommonshares-dilutedisbasedontheweightedaveragenumberofcommonsharesandcommonshareequivalentsoutstandingduringtheperiod.Incalculatingearningspershare,earningsarethesameforthebasicanddilutedcalculations.Weightedaveragesharesoutstandingincreasedfordilutedearningspershareduetotheeffectofstockoptions.ThedifferencebetweenthebasicsharesandthedilutedsharesforeachofthethreefiscalyearsendedMarch31,2007,2008,and2009isasfollows:Fiscal2007Fiscal2008Fiscal2009Basicweightedshares...........................14,070,00013,856,00013,458,000Treasurystockimpactofstockoptions...............198,000180,000162,000Dilutedweightedshares..........................14,268,00014,036,00013,620,000RecentlyIssuedAccountingStandardsBusinessCombinationsInDecember2007,theFASBissuedSFASNo.141(revised2007),“BusinessCombinations”(“SFAS141(R)”).ThisstatementreplacesSFASNo.141,“BusinessCombinations”(“SFAS141”)andestablishestheprinciplesandrequirementsforhowtheacquirerinabusinesscombination:(a)measuresandrecognizestheidentifiableassetsacquired,liabilitiesassumed,andanynoncontrollinginterestsintheacquiredentity,(b)measuresandrecognizespositivegoodwillacquiredoragainfrombargainpurchase(negativegoodwill),and(c)determinesthedisclosureinformationthatisdecision-usefultousersoffinancialstatementsinevaluatingthenatureandfinancialeffectsofthebusinesscombination.SomeofthesignificantchangestotheexistingaccountingguidanceonbusinesscombinationsmadebySFAS141(R)includethefollowing:(cid:129)Mostoftheidentifiableassetsacquired,liabilitiesassumedandanynoncontrollinginterestintheacquireeshallbemeasuredattheiracquisition-datefairvaluesinaccordancewithSFAS157fairvalueratherthanSFAS141’srequirementbasedonestimatedfairvalues;56CORVELCORPORATIONNOTESTOCONSOLIDATEDFINANCIALSTATEMENTS—(Continued)(cid:129)Acquisition-relatedcostsincurredbytheacquirershallbeexpensedintheperiodsinwhichthecostsareincurredratherthanincludedinthecostoftheacquiredentity;(cid:129)Goodwillshallbemeasuredastheexcessoftheconsiderationtransferred,includingthefairvalueofanycontingentconsideration,plusthefairvalueofanynoncontrollinginterestintheacquiree,overthefairvaluesoftheacquiredidentifiablenetassets,ratherthanmeasuredastheexcessofthecostoftheacquiredentityovertheestimatedfairvaluesoftheacquiredidentifiablenetassets;(cid:129)Contractualpre-acquisitioncontingenciesaretoberecognizedattheiracquisitiondatefairvaluesandnoncontractualpre-acquisitioncontingenciesaretoberecognizedattheiracquisitiondatefairvaluesonlyifitismorelikelythannotthatthecontingencygivesrisetoanassetorliability,whereasSFAS141generallypermitsthedeferredrecognitionofpre-acquisitioncontingenciesuntiltherecognitioncriteriaofSFASNo.5,“AccountingforContingencies”aremet;and(cid:129)Contingentconsiderationshallberecognizedattheacquisitiondateratherthanwhenthecontingencyisresolvedandconsiderationisissuedorbecomesissuable.SFAS141(R)iseffectiveforandshallbeappliedprospectivelytobusinesscombinationsforwhichtheacquisitiondateisonorafterthebeginningofthefirstannualreportingperiodbeginningonorafterDecember15,2008,withearlieradoptionprohibited.AssetsandliabilitiesthatarosefrombusinesscombinationswithacquisitiondatespriortotheSFAS141(R)effectivedateshallnotbeadjusteduponadoptionofSFAS141(R)withcertainexceptionsforacquireddeferredtaxassetsandacquiredincometaxpositions.TheadoptionofSFAS141(R)onApril1,2009,isnotexpectedtohaveamaterialeffectontheCompany’sconsolidatedfinancialstatements.DeterminationoftheUsefulLifeofIntangibleAssetsInApril2008,theFASBissuedFSPNo.FAS142-3,“DeterminationoftheUsefulLifeofIntangibleAssets”(“FSPFAS142-3”).FSPFAS142-3amendsthefactorsthatshouldbeconsideredindevelopingrenewalorextensionassumptionsusedtodeterminetheusefullifeofarecognizedintangibleassetunderSFAS142.FSPFAS142-3amendsparagraph11(d)ofSFAS142torequireanentitytouseitsownassumptionsaboutrenewalorextensionofanarrangement,adjustedfortheentity-specificfactorsinparagraph11ofSFAS142,evenwhenthereislikelytobesubstantialcostormaterialmodifications.FSPFAS142-3iseffectiveforfinancialstatementsissuedforfiscalyearsbeginningafterDecember15,2008,andinterimperiodswithinthosefiscalyears,withearlyadoptionprohibited.TheprovisionsofFSPFAS142-3aretobeappliedprospectivelytointangibleassetsacquiredafterApril1,2009,fortheCompany,althoughthedisclosureprovisionsarerequiredforallintangibleassetsrecognizedasoforsubsequenttoApril1,2009.TheadoptionofFSPFAS142-3onApril1,2009,isnotexpectedtohaveamaterialeffectontheCompany’sconsolidatedfinancialstatements.FairValueMeasurementsIn2006,theFASBissuedSFASNo.157,“FairValueMeasurements,”whichprovidesenhancedguidanceforusingfairvaluetomeasureassetsandliabilities.SFAS157alsorespondstoinvestors’requestsforexpandedinformationabouttheextenttowhichentitiesmeasureassetsandliabilitiesatfairvalue,theinformationusedtomeasurefairvalue,andtheeffectoffairvaluemeasurementsonearnings.SFAS157applieswheneverotherstandardsrequireorpermitassetsorliabilitiestobemeasuredatfairvaluebutdoesnotexpandtheuseoffairvalueinanynewcircumstances.UnderSFAS157,fairvaluereferstothepricethatwouldbereceivedfromthesaleofanassetorpaidtotransferaliabilityinanorderlytransactionbetweenmarketparticipantsinthemarketinwhichthereportingentitytransactsbusiness.SFAS157clarifiestheprinciplethatfairvalueshouldbebasedontheassumptionsmarketparticipantswouldusewhenpricingtheassetorliability.Insupportofthisprinciple,thestandardestablishesafairvaluehierarchythatprioritizestheinformationusedtodevelopthoseassumptions.Thefairvaluehierarchygivesthehighestprioritytoquotedpricesinactivemarketsandthelowestprioritytounobservabledata,forexample,the57CORVELCORPORATIONNOTESTOCONSOLIDATEDFINANCIALSTATEMENTS—(Continued)reportingentity’sowndata.Fairvaluemeasurementsarerequiredtobeseparatelydisclosedbylevelwithinthefairvaluehierarchy.SFAS157waseffectiveforfinancialstatementsissuedforfiscalyearsbeginningafterNovember15,2007andforallinterimperiodswithinthosefiscalyears.TheadoptionofSFAS157didnothaveanyimpactontheamountsreportedforfinancialassetsandliabilitiesintheCompany’s2009consolidatedfinancialstatements.InFebruary2008,theFASBissuedStaffPositionFAS157-2,whichdelaystheeffectivedateofSFASNo.157fornonfinancialassetsandnonfinancialliabilities,exceptforitemsthatarerecognizedordisclosedatfairvalueinthefinancialstatementsonarecurringbasis(atleastannually).ThedelayisintendedtoallowtheFASBandconstituentsadditionaltimetoconsidertheeffectofvariousimplementationissuesthathavearisen,orthatmayarise,fromtheapplicationofSFASNo.157.Examplesofitemstowhichthedeferralappliesincludethefollowing:(cid:129)Nonfinancialassetsandnonfinancialliabilitiesinitiallymeasuredatfairvalueinabusinesscombinationorothernewbasisevent,butnotmeasuredatfairvalueinsubsequentperiods(nonrecurringfairvaluemeasurements).(cid:129)Reportingunitsmeasuredatfairvalueinthefirststepofagoodwillimpairmenttest(measuredatfairvalueonarecurringbasis,butnotnecessarilyrecognizedordisclosedinthefinancialstatementsatfairvalue).(cid:129)Nonfinancialassetsandnonfinancialliabilitiesmeasuredatfairvalueinthesecondstepofagoodwillimpairmenttest(measuredatfairvalueonanonrecurringbasistodeterminetheamountofgoodwillimpairment,butnotnecessarilyrecognizedordisclosedinthefinancialstatementsatfairvalue).(cid:129)Nonfinanciallong-livedassets(assetgroups)measuredatfairvalueforanimpairmentassessment(non-recurringfairvaluemeasurements).(cid:129)Nonfinancialliabilitiesforexitordisposalactivitiesinitiallymeasuredatfairvalue(nonrecurringfairvaluemeasurements).TheCompanyelectedtodelaytheadoptionofSFASNo.157relatedtoitsnonfinancialassetsandnonfinancialliabilitiesdisclosedhereinanddoesnotexpectSFASNo.157tomateriallyaffecttheCompany’sconsolidatedfinancialstatements.FairValueOptionIn2007,theFASBissuedSFASNo.159,“TheFairValueOptionforFinancialAssetsandFinancialLiabilities,”whichprovidescompanieswithanoptiontoreportselectedfinancialassetsandliabilitiesatfairvalue.TheobjectiveofSFAS159istoreduceboththecomplexityinaccountingforfinancialinstrumentsandthevolatilityinearningscausedbymeasuringrelatedassetsandliabilitiesdifferently.DifferentmeasurementattributeshavebeenrequiredunderGAAPfordifferentassetsandliabilitiesthatcancreateartificialvolatilityinearnings.SFAS159helpstomitigatethistypeofaccounting-inducedvolatilitybyenablingcompaniestoreportrelatedassetsandliabilitiesatfairvalue.SFAS159alsoestablishespresentationanddisclosurerequirementsdesignedtofacilitatecomparisonsbetweencompaniesthatchoosedifferentmeasurementattributesforsimilartypesofassetsandliabilities.SFAS159requiresacompanytoprovideadditionalinformationthatwillhelpinvestorsandotherusersoffinancialstatementstomoreeasilyunderstandtheeffectofthecompany’schoicetousefairvalueonitsearnings.SFAS159alsorequiresentitiestodisplaythefairvalueofthoseassetsandliabilitiesforwhichthecompanyhaschosentousefairvalueonthefaceofthebalancesheet.SFAS159doesnoteliminatedisclosurerequirementsincludedinotheraccountingstandards,includingrequirementsfordisclosuresaboutfairvaluemeasurementsincludedinSFAS157andSFAS107,“DisclosuresaboutFairValueofFinancialInstruments.”58CORVELCORPORATIONNOTESTOCONSOLIDATEDFINANCIALSTATEMENTS—(Continued)SFAS159waseffectiveasofthebeginningofanentity’sfirstfiscalyearbeginningafterNovember15,2007.TheCompanyelectednottoreportanyfinancialassetsorliabilitiesatfairvalueunderSFAS159inits2009financialstatements.NoncontrollingInterestsinConsolidatedFinancialStatementsInDecember2007,theFASBissuedSFAS160,“NoncontrollingInterestsinConsolidatedFinancialState-ments,anamendmentofARBNo.51”(“SFAS160”).SFAS160revisestheclassificationofnoncontrollinginterestsinconsolidatedstatementsoffinancialpositionandtheaccountingforandreportingoftransactionsbetweenthereportingentityandholdersofsuchnoncontrollinginterests.Underthenewstandard,noncontrollinginterestswillbeconsideredequityandthepracticeofclassifyingminorityinterestswithinamezzaninesectionofthebalancesheetwillbeeliminated.Netincomewillencompassthetotalincomeofallconsolidatedsubsidiariesandtherewillbeseparatedisclosureonthefaceoftheincomestatementoftheattributionofthatincomebetweenthecontrollingandnoncontrollinginterests.Increasesanddecreasesinthenoncontrollingownershipinterestamountwillbeaccountedforasequitytransactions.Anissuanceofnoncontrollingintereststhatcausesthecontrollinginteresttolosecontrolanddeconsolidateasubsidiarywillbeaccountedforbyfullgainorlossrecognition.SFAS160iseffectiveforfiscalyearsbeginningonorafterDecember15,2008andearlyadoptionisnotpermitted.TheCompanydoesnotexpectedthispronouncementtohaveanyimpactonitsfinancialstatements.NoteB—Paid-in-capitalInAugust2007,theshareholdersofCorVelCorporationapprovedanamendmenttotheCompany’scertificateofincorporationtoincreasethenumberofauthorizedsharesfrom30,000,000to60,000,000.NoteC—StockOptionsandStockBasedCompensationUndertheCompany’sRestatedOmnibusIncentivePlan(FormerlyTheRestated1988ExecutiveStockOptionPlan)(“thePlan”)asineffectatMarch31,2009,optionsforupto9,682,500sharesoftheCompany’scommonstockmaybegrantedtokeyemployees,non-employeedirectorsandconsultantsatexercisepricesnotlessthanthefairmarketvalueofthestockatthedateofgrant.OptionsgrantedunderthePlanarenon-statutorystockoptionsandgenerallyvest25%oneyearfromdateofgrantandtheremaining75%vestingratablyeachmonthforthenext36months.Theoptionsgrantedtoemployeesandtheboardofdirectorsexpireattheendoffiveyearsandtenyearsfromdateofgrant,respectively.Priortofiscalyear2007,theCompanyhadnotgrantedanyperformance-basedstockoptionsunderthePlan.Duringfiscal2007,theCompanygrantedoptionsfor149,000sharesofcommonstockwhichvestonlyiftheCompanyachievespre-determinedearningspersharetargetsforcalendaryears2008,2009,and2010asestablishedbytheCompany’sboardofdirectors.TheearningspersharetargetsforallcalendaryearsaregreaterthantheCompany’scurrentearningspershareandtheCompanyhasnotyetrecognizedanyaggregatestockcompensationexpensefortheoptionswithinthesetranches.TheCompanywillrecognizetheseexpenseswhenmanagementbelievesthatit’sprobablethatthetargetswillbeachieved.Duringfiscal2008and2009,theCompanygrantedoptionsfor42,000and10,000shares,respectively,ofcommonstockwhichvestonlyiftheCompanyachievescertainpre-determinedrevenuetargetsforcertainservicesforeachregionincalendaryears2009,2010and2011asestablishedbytheCompany’sboardofdirectors.ThesetargetsaregreaterthantheCompany’spresentrevenuestreamsintheseservicesandtheCompanyhasnotrecognizedanystockcompensationexpensefortheseoptions.TheCompanywillrecognizetheseexpenseswhenmanagementbelievesthatit’sprobablethatthetargetswillbeachieved.Duringfiscal2009,theCompanygrantedoptionsfor100,000sharesofcommonstockwhichvestonlyiftheCompanyachievescertainpre-determinedearningspersharetargetsincalendaryears2009,2010and2011asestablishedbytheCompany’sboardofdirectors.ThesetargetsaregreaterthantheCompany’spresentearningsper59CORVELCORPORATIONNOTESTOCONSOLIDATEDFINANCIALSTATEMENTS—(Continued)shareandtheCompanyhasnotrecognizedanystockcompensationexpensefortheseoptions.TheCompanywillrecognizetheseexpenseswhenmanagementbelievesthatit’sprobablethatthetargetswillbeachieved.AlloptionsgrantedinthethreefiscalyearsendedMarch31,2007,2008,and2009weregrantedatfairmarketvalueandarenon-statutorystockoptions.Summarizedinformationforallstockoptionsforthepastthreefiscalyearfollows:200720082009Optionsoutstanding—beginningoftheyear......1,269,7231,021,1411,030,858Optionsgranted...........................495,175186,350230,775Optionsexercised..........................(543,614)(148,878)(107,640)Optionscancelled/forfeited...................(200,143)(27,755)(38,822)Optionsoutstanding—endofyear.............1,021,1411,030,8581,115,171Duringtheyear,weightedaverageexercisepriceof:Optionsgranted...........................$20.07$25.84$24.19Optionsexercised..........................$18.31$17.94$17.23Optionsforfeited...........................$18.53$19.05$23.54AttheendoftheyearPricerangeofoutstandingoptions..............$6.81-$47.70$8.08-$47.70$9.89-$47.70Weightedaverageexercisepricepershare........$17.84$19.24$20.31Optionsavailableforfuturegrants..............1,347,0231,188,428996,475Exercisableoptions.........................315,713404,479477,561EffectiveApril1,2006,theCompanyadoptedtheprovisionsofSFASNo.123R,“Share-BasedPayment,”whichestablishesaccountingforshare-basedinstrumentsexchangedforemployeeservices.UndertheprovisionsofSFASNo.123R,share-basedcompensationcostismeasuredatthegrantdate,basedonthecalculatedfairvalueoftheaward,andisrecognizedasanexpenseovertheemployee’srequisiteserviceperiod(generallythevestingperiodoftheequitygrant).FortheyearsendedMarch31,2007,2008and2009,theCompanyrecordedshare-basedcompensationexpenseof$1,258,000,$1,487,000,and$1,332,000,respectively.ThetablebelowshowstheamountsrecognizedinthefinancialstatementsforthefiscalyearsendedMarch31,2007,2008and2009.Fiscal2007Fiscal2008Fiscal2009Costofrevenue................................$657,000$638,000$539,000Generalandadministrative........................601,000849,000793,000Totalcostofstock-basedcompensationincludedinincomebeforeincometax.....................1,258,0001,487,0001,332,000Amountofincometaxbenefitrecognized.............490,000580,000519,000Amountchargedtonetincome.....................$768,000$907,000$813,000Effectonbasicearningspershare...................$0.05$0.06$0.06Effectondilutedearningspershare.................$0.05$0.06$0.06Share-basedcompensationisbasedonawardsultimatelyexpectedtovest;therefore,ithasbeenreducedforestimatedforfeitures.SFASNo.123Rrequiresforfeiturestobeestimatedatthetimeofgrantandrevised,ifnecessary,insubsequentperiodsifactualforfeituresdifferfromthoseestimates.60CORVELCORPORATIONNOTESTOCONSOLIDATEDFINANCIALSTATEMENTS—(Continued)TheCompanyrecordscompensationexpenseforemployeestockoptionsbasedontheestimatedfairvalueoftheoptionsonthedateofgrantusingtheBlack-Scholesoption-pricingmodelwiththeassumptionsincludedinthetablebelow.TheCompanyuseshistoricaldataamongotherfactorstoestimatetheexpectedvolatility,theexpectedoptionlife,andtheexpectedforfeiturerate.Therisk-freerateisbasedontheinterestratepaidonaU.S.Treasuryissuewithatermsimilartotheestimatedlifeoftheoption.Duringfiscal2009,baseduponthehistoricalexperienceofoptioncancellations,theCompanyusedestimatedforfeitureratesrangingfrom10.1%to10.3%.Forfeiturerateswillbeadjustedovertherequisiteserviceperiodwhenactualforfeituresdiffer,orareexpectedtodiffer,fromtheestimate.ThefairvalueofeachgrantisestimatedonthedateofgrantusingtheBlack-Scholesoption-pricingmodel.ThefollowingweightedaverageassumptionswereusedforfiscalyearsendedMarch31,2007,2008and2009:Fiscal2007Fiscal2008Fiscal2009Expectedvolatility....................38%to40%39%to40%40%to45%Riskfreeinterestrate..................4.6%to4.9%2.8%to4.6%1.9%to3.2%Dividendyield.......................0.0%0.0%0.0%Weightedaverageoptionlife............4.8to5.0years4.7to4.8years4.7to5.0yearsThefollowingtablesummarizesthestatusofstockoptionsoutstandingandexercisableatMarch31,2009:RangeofExercisePricesNumberofOutstandingOptionsWeightedAverageRemainingContractualLifeOutstandingOptions–WeightedAverageExercisePriceExercisableOptions–NumberofExercisableOptionsExercisableOptions–WeightedAverageExercisePrice$9.89to$15.55...............207,4202.00$13.19168,043$13.08$15.56to$18.09..............367,2172.3816.30171,56016.60$18.10to$25.30..............273,4704.4622.2155,40922.96$25.31to$47.70..............267,0643.9529.4182,54929.57Total.....................1,115,1713.19$20.31477,561$18.34AsummaryofthestatusforalloutstandingoptionsatMarch31,2009,andchangesduringthefiscalyearthenendedispresentedinthetablebelow:NumberofOptionsWeightedAverageExercisePriceperShareWeightedAverageRemainingContractualLife(Years)AggregateIntrinsicValueasofMarch31,2009Optionsoutstanding,March31,2008....1,030,858$19.24Granted........................230,77524.19Exercised.......................(107,640)17.23Cancelled—forfeited..............(18,758)21.27Cancelled—expired...............(20,064)25.70Optionsoutstanding,March31,2009....1,115,171$20.313.19$2,946,124Optionsvestedandexpectedtovest.....989,129$20.183.09$2,776,466Endingexercisable..................477,561$18.342.49$1,827,404Theweightedaveragefairvalueofoptionsgrantedduringfiscal2007,2008,and2009was$8.38,$10.31,and$9.70,respectively.Thetotalintrinsicvalueofoptionsexercisedduringfiscalyears2007,2008,and2009were$7,565,000,$1,322,000,and$1,560,000respectively.61CORVELCORPORATIONNOTESTOCONSOLIDATEDFINANCIALSTATEMENTS—(Continued)TheCompanyreceived$9,250,000,$2,474,000,and$1,766,000ofcashreceiptsfromtheexerciseofstockoptionsduringfiscal2007,2008,and2009,respectively.VestedoptionsatMarch31,2009were477,561.UnvestedoptionsatMarch31,2009were637,610.NoteD—PropertyandEquipmentPropertyandequipment,netconsistsofthefollowingatMarch31,2008and2009:20082009Officeequipmentandcomputers...........................$50,915,000$49,834,000Computersoftware.....................................45,435,00049,348,000Leaseholdimprovements.................................4,280,0004,715,000100,630,000103,897,000Less:accumulateddepreciationandamortization...............(70,061,000)(74,107,000)$30,569,000$29,790,000NoteE—AccountsandTaxesPayableandAccruedLiabilitiesAccountsandtaxespayableconsistofthefollowingatMarch31,2008and2009:20082009Accountspayable........................................$14,068,000$12,747,000Incometaxespayable.....................................6,407,0005,806,000$20,475,000$18,553,000AccruedliabilitiesconsistofthefollowingatMarch31,2008and2009:20082009Payrolltaxesandemployeebenefits..........................$7,843,000$9,212,000Self-insuranceaccruals....................................4,735,0004,276,000Deferredrevenue........................................2,082,0004,079,000Accruedrent...........................................891,000981,000Other.................................................922,000105,000$16,473,000$18,653,00062CORVELCORPORATIONNOTESTOCONSOLIDATEDFINANCIALSTATEMENTS—(Continued)NoteF—IncomeTaxesTheincometaxprovisionconsistsofthefollowingforthethreefiscalyearsendedMarch31,2007,2008and2009:200720082009Current—Federal...........................$12,260,000$12,970,000$9,808,000Current—State.............................1,133,0002,166,0002,273,000Subtotal.................................13,393,00015,136,00012,081,000Deferred—Federal..........................(1,379,000)11,000461,000Deferred—State............................(138,000)(186,000)(210,000)Subtotal.................................(1,517,000)(175,000)251,000$11,876,000$14,961,000$12,332,000ThefollowingisareconciliationoftheincometaxprovisionfromthestatutoryfederalincometaxratetotheeffectiverateforthethreefiscalyearsendedMarch31,2007,2008and2009:200720082009Incometaxesatfederalstatutoryrate(35%)........$10,659,000$13,433,000$11,063,000Stateincometaxes,netoffederalbenefit..........646,0001,287,0001,439,000Other.....................................571,000241,000(170,000)$11,876,000$14,961,000$12,332,000Incometaxespaidtotaled$9,736,000,$16,329,000,and$11,456,000forthefiscalyearsendedMarch31,2007,2008,and2009,respectively.DeferredtaxassetsandliabilitiesatMarch31,2008and2009are:20082009Deferredincometaxassets:Accruedliabilitiesnotcurrentlydeductible......................$3,107,000$3,979,000Allowancefordoubtfulaccounts.............................1,169,000938,000FIN48incometaxbenefits.................................1,969,0001,780,000Stockcompensation.......................................936,0001,226,000Other.................................................801,000265,000Deferredassets..........................................7,982,0008,188,000Deferredincometaxliabilities:Excessofbookovertaxbasisoffixedassets....................(3,931,000)(4,678,000)Intangibleassets.........................................(2,902,000)(1,879,000)Other.................................................(416,000)(1,149,000)Deferredliabilities........................................(7,249,000)(7,706,000)Netdeferredtax(liability)asset..............................$733,000$482,000Prepaidexpensesandtaxesinclude$2,611,000and$1,805,000atMarch31,2008and2009,respectively,forincometaxesdueinthefirstquarterofthesucceedingfiscalyear.63CORVELCORPORATIONNOTESTOCONSOLIDATEDFINANCIALSTATEMENTS—(Continued)TheCompanyadoptedtheprovisionsofFIN48onApril1,2007.AsaresultoftheimplementationofFIN48,theCompanyrecognized$2,657,000inadditionalliabilityforuncertaintiesinvolvingfilingpositionsinvariousjurisdictions.Thisuncertaintyissubjecttoreviewbystatetaxingagencies.Areconciliationofthebeginningandendingamountofunrecognizedtaxbenefitsisasfollows:BalanceasofMarch31,2008..........................................$4,480,000Additionsbasedontaxpositionsrelatedtothecurrentyear.....................20,000Additionsfortaxpositionsofprioryears..................................533,000Reductionsfortaxpositionsofprioryears.................................(1,352,000)BalanceasofMarch31,2009..........................................$3,681,000TheCompanyrecognizesinterestandpenaltiesrelatedtouncertaintaxpositionsinincometaxexpense.DuringthefiscalyearsendedMarch31,2008and2009,theCompanyrecognizedapproximately$88,000and$87,000ininterestandpenalties.AsoftheFIN48adoptiondateofApril1,2007andasofMarch31,2009,accruedinterestandpenaltiesrelatedtouncertaintaxpositionswas$1,785,000and$1,747,000,respectively.TheCompanybelievestherewillbeamaterialreductioninitsunrecognizedtaxbenefitswithinthenext12monthsduetosettlementswithvarioustaxjurisdictions.Thetaxfiscalyears2006-2008remainopentoexaminationbythemajortaxingjurisdictionstowhichtheCompanyissubject.NoteG—EmployeeStockPurchasePlanTheCompanymaintainsanEmployeeStockPurchasePlan(“ESPP”)whichwasamendedbyapprovaloftheCompany’sstockholdersinSeptember2005toallowemployeesoftheCompanyanditssubsidiariestopurchasesharesofcommonstockonthelastdayoftwosix-monthpurchaseperiods(i.e.March31andSeptember30)atapurchasepricewhichis95%oftheclosingsalepriceofsharesasquotedonNASDAQonthelastdayofsuchpurchaseperiod.Employeesareallowedtocontributeupto20%oftheirgrosspay.Amaximumof1,425,000shareshasbeenauthorizedforissuanceundertheESPP,asamended.AsofMarch31,2009,1,161,471shareshadbeenissuedpursuanttotheESPP.SummarizedESPPinformationisasfollows:200720082009Employeecontributions..............................$371,000$364,000$374,000Sharesacquired....................................14,89614,42416,390Averagepurchaseprice...............................$24.91$25.24$22.82NoteH—TreasuryStockDuringeachofthethreefiscalyearsintheperiodendedMarch31,2009,theCompanycontinuedtorepurchasesharesofitscommonstockunderaplanoriginallyapprovedbytheCompany’sBoardofDirectorsin1996.IncludinganexpansionauthorizedinSeptember2008,thetotalnumberofsharesauthorizedtoberepurchasedis13,150,000shares.Purchasesmaybemadefromtimetotimedependingonmarketconditionsandotherrelevantfactors.ThesharerepurchasesforfiscalyearsendedMarch31,2007,2008and2009andcumulativesinceinceptionoftheauthorizationareasfollows:200720082009CumulativeSharesrepurchased...............708,667328,217995,12912,682,743Cost..........................$21,886,000$8,211,000$23,460,000$185,762,000Averageprice...................$30.88$25.02$23.57$14.6564CORVELCORPORATIONNOTESTOCONSOLIDATEDFINANCIALSTATEMENTS—(Continued)Therepurchasedshareswererecordedastreasurystock,atcost,andareavailableforgeneralcorporatepurposes.Therepurchaseswereprimarilyfinancedfromcashgeneratedfromoperationsandfromthecashproceedsandincometaxbenefitsfromtheexerciseofstockoptions.NoteI—Commitments,ContingenciesandLegalProceedingsTheCompanyleasesofficefacilitiesundernoncancelableoperatingleases.Someoftheseleasescontainescalationclauses.FutureminimumrentalcommitmentsunderoperatingleasesatMarch31,2009are$12,504,000infiscal2010,$10,866,000infiscal2011,$8,770,000infiscal2012,$6,446,000infiscal2013,$4,157,000infiscal2014,$5,544,000thereafter,and$48,287,000intheaggregate.Totalrentalexpenseof$12,177,000,$14,338,000,and$15,094,000waschargedtooperationsfortheyearsendedMarch31,2007,2008,and2009,respectively.InFebruary2005,KathleenRoche,D.C.,asplaintiff,filedaputativeclassactioninCircuitCourtforthe20thJudicialDistrict,St.ClairCounty,Illinois,againsttheCompany.ThecaseseeksunspecifieddamagesbasedontheCompany’sallegedfailuretosteerpatientstomedicalproviderswhoaremembersoftheCorVelCorCarePPOnetworkandalsoallegesthattheCompanyusedbiasedandarbitrarycomputersoftwaretoreviewmedicalproviders’bills.InDecember2007,thetrialcourtcertifiedaclassinthiscaseofallIllinoishealthcareproviderswithCorVelPPOagreements,excludinghospitals.InJanuary2008,CorVelfiledwiththeIllinoisAppellateCourtapetitionforinterlocutoryappealofthetrialcourt’sclasscertificationorderwhichwasdeniedinApril2008.InMay2008,theCompanyappealedtheappellatecourt’sdenialofitspetitionforinterlocutoryappealwhichappealwasalsodeniedbytheIllinoisSupremeCourtinSeptember2008.TheCompanyintendstopursueallavailablelegalremediesincludingvigorouslydefendingthiscase.TheCompanyisnotabletoestimatetheamountofpossibleloss,ifany,atthistime.TheCompanyisinvolvedinotherlitigationarisinginthenormalcourseofbusiness.Managementbelievesthatresolutionofthesematterswillnotresultinanypaymentthat,intheaggregate,wouldbematerialtothefinancialpositionorresultsoftheoperationsoftheCompany.NoteJ—RetirementSavingsPlanTheCompanymaintainsaretirementsavingsplanforitsemployees,whichisaqualifiedplanunderSection401(k)oftheInternalRevenueCode.Full-timeemployeesthatmeetcertainrequirementsareeligibletoparticipateintheplan.Employercontributionsaremadeannually,primarilyatthediscretionoftheCompany’sBoardofDirectors.Contributionsof$151,000,$161,000and$256,000werechargedtooperationsforthefiscalyearsendedMarch31,2007,2008,and2009,respectively.NoteK—ShareholderRightsPlanDuringfiscal1997,theCompany’sBoardofDirectorsapprovedtheadoptionofaShareholderRightsPlan.TheShareholderRightsPlanprovidesforadividenddistributiontoCorVelstockholdersofonepreferredstockpurchaserightforeachoutstandingshareofCorVel’scommonstockundercertaincircumstances.InApril2002,theBoardofDirectorsofCorVelapprovedanamendmenttotheShareholderRightsPlantoextendtheexpirationdateoftherightstoFebruary10,2012,settheexercisepriceofeachrightat$118,andenableFidelityManagement&ResearchCompanyanditsaffiliatestopurchaseupto18%ofthesharesofcommonstockoftheCompanywithouttriggeringthestockholderrights,withthelimitationsundertheShareholderRightsPlanremainingineffectforallotherstockholdersoftheCompany.InNovember2008,theCompany’sBoardofDirectorsapprovedanamendmenttotheShareholderRightsPlantoextendtheexpirationdateoftherightstoFebruary10,2022,removetheabilityofFidelityManagement&ResearchCompanyanditsaffiliatestopurchaseupto18%ofthesharesofcommonstockoftheCompanywithouttriggeringthestockholderrights,substituteComputershareTrustCompany,N.A.astherightsagentandeffectcertaintechnicalchangestotheShareholderRightsPlan.65CORVELCORPORATIONNOTESTOCONSOLIDATEDFINANCIALSTATEMENTS—(Continued)Generally,theShareholderRightsPlanprovidesthatifapersonorgroupacquires15%ormoreoftheCompany’scommonstockwithouttheapprovaloftheBoard,subjecttocertainexceptions,theholdersoftherights,otherthantheacquiringpersonorgroup,would,undercertaincircumstances,havetherighttopurchaseadditionalsharesoftheCompany’scommonstockhavingamarketvalueequaltotwotimesthethen-currentexercisepriceoftheright.Inaddition,iftheCompanyisthereaftermergedintoanotherentity,orif50%ormoreoftheCompany’sconsolidatedassetsorearningpoweraresold,thentherightwillentitleitsholdertobuycommonsharesoftheacquiringentityhavingamarketvalueequaltotwotimesthethen-currentexercisepriceoftheright.TheCompany’sBoardofDirectorsmayexchangeorredeemtherightsundercertainconditions.NoteL—AcquisitionsInDecember2006,theCompany’swholly-ownedsubsidiary,CorVelEnterpriseComp,Inc.,enteredintoanAssetPurchaseAgreementwithHazelriggRiskManagementServices,Inc.anditsaffiliatedcompanies(“Hazel-rigg”)toacquirecertainassetsandliabilitiesofHazelrigg,foraninitialcashpaymentof$12million.TheCompanycompletedtheacquisitiononJanuary31,2007andpaidtheinitialcashpaymentonthatdate.HazelriggisaCaliforniabasedproviderofintegratedmedicalmanagement,claimsprocessingandtechnologyservicesforworkers’compensationclients.TheacquisitionrepresentedanexpansionofCorVel’sEnterpriseCompserviceofferingintheSouthernCaliforniamarketplace.ThesellersofHazelriggalsoreceivedanadditional$2.5million,netofworkingcapitaladjustments,inacashearn-outbasedupontherevenuecollectedbythebusinessduringtheone-yearperiodafterconsummationoftheacquisition.ThefollowingtablesummarizestherecordedvalueoftheHazelriggassetsacquiredandliabilitiesassumedatthedateofacquisition:LifeAmountAccountsreceivable,net.....................................$1,100,000Propertyandequipment,net..................................321,000Covenantnottocompete.....................................5Years250,000Customerrelationships......................................18Years4,446,000TPAlicense..............................................15Years26,000Goodwill................................................9,487,000Subtotal...............................................15,630,000Less:Accountspayableanddeferredrevenue......................1,348,000Total..................................................$14,282,000InJune2007,theCompany’swhollyownedsubsidiary,CorVelEnterpriseComp,Inc.,acquired100%ofthestockofTheSchafferCompaniesLtd.(“Schaffer”)for$12.3millionincash.Schafferisathird-partyadministratorheadquarteredinMaryland.TheacquisitionallowstheCompanytoexpanditsservicecapabilitiesasathird-partyadministratorandprovideclaimsprocessingservicesalongwithpatientmanagementservicesandnetworksolutionsservicestoanincreasedcustomerbase.ThesellersofSchafferreceivedanadditional$2.6millionincashbasedupontherevenuecollectedbytheSchafferbusinessduringtheone-yearperiodaftercompletionoftheacquisition.66CORVELCORPORATIONNOTESTOCONSOLIDATEDFINANCIALSTATEMENTS—(Continued)ThefollowingtablesummarizesthefairvalueoftheSchafferassetsacquiredandliabilitiesassumedatthedateofacquisition:LifeAmountAccountsreceivable,net.....................................$1,362,000Propertyandequipment,net..................................586,000Otherassets..............................................104,000Covenantnottocompete.....................................5Years500,000Customerrelationships......................................20Years2,962,000TPAlicenses..............................................15Years152,000Software.................................................5Years50,000Goodwill................................................12,154,000Subtotal...............................................17,870,000Less:Accountspayableanddeferredrevenue......................2,636,000Total..................................................$15,234,000InFebruary2009,theCompany’swhollyownedsubsidiary,CorVelEnterpriseComp,Inc.,acquired100%ofthestockofEagleClaimServices,Inc.(“Eagle”)for$1.1millionincash.Eagleisathird-partyadministratorheadquarteredinthestateofNewYork.TheacquisitionisexpectedtoallowtheCompanytoexpanditsservicecapabilitiesasathird-partyadministratorandprovideclaimsprocessingservicesalongwithpatientmanagementservicesandnetworksolutionsservicestoanincreasedcustomerbase.ThesellersofEaglehavethepotentialtoreceiveuptoanadditional$1.1millioninacashearn-outbasedupontherevenuecollectedbytheEaglebusinessduringcalendaryears2009and2010.Theexactamountoftheearn-out,ifany,hasnotyetbeendeterminedbuttheCompanywillreviewtheresultsofthebusinesseachquarterduringtheearn-outperiodtoestimatetheamountoftheearn-outexpectedtobeearnedbythesellers.TheresultsofEaglehavebeenincludedintheCompany’sresultsfromthedateoftheacquisitionthroughMarch31,2009.ForthefiscalyearendedMarch31,2009,theresultsoftheacquiredbusinessincreasedtheCompany’srevenuesbyapproximately$200,000orlessthan1⁄10of1%.ThefollowingsupplementalunauditedproformainformationpresentsthecombinedoperatingresultsoftheCompanyandtheacquiredbusinessduringfiscalyears2007,2008and2009,asiftheacquisitionshadoccurredatthebeginningofeachoftheperiodspresented.TheproformainformationisbasedonthehistoricalfinancialstatementsoftheCompanyandthatoftheacquiredbusinesses.Amountsarenotnecessarilyindicativeoftheresultsthatmayhavebeenattainedhadthecombinationsbeenineffectatthebeginningoftheperiodspresentedorthatmaybeachievedinthefuture.Fiscal2007Fiscal2008Fiscal2009Proformarevenue.........................$300,119,000$305,113,000$311,476,000Proformaincomebeforeincometaxes.........$31,494,000$38,502,000$31,609,000Proformanetincome......................$19,212,000$23,483,000$19,277,000Proformabasicearningspershare............$1.37$1.69$1.43Proformadilutedearningspershare...........$1.35$1.67$1.42NoteM—LineofCreditandSubsequentEventInMay2009,theCompanyreneweditscreditagreementwithafinancialinstitutiontoprovidearevolvingcreditfacilitywithborrowingcapacityofupto$10millionBorrowingsunderthisagreementbearinterest,attheCompany’soption,atafixedLIBOR-basedrateplus1.50%oratafluctuatingratedeterminedbythefinancialinstitutiontobe1.50%abovethedailyone-monthLIBORrate.TheloancovenantsrequiretheCompanyto67CORVELCORPORATIONNOTESTOCONSOLIDATEDFINANCIALSTATEMENTS—(Continued)maintainthecurrentassetstoliabilitiesratioofatleast1.25:1,debttotangiblenetworthnotgreaterthan1:1andhavepositivenetincome.TheCompanyisnotauthorizedtousethislineforstockrepurchases.Therearenooutstandingrevolvingloansasofthedatehereof,butlettersofcreditintheaggregateamountof$6.3millionhavebeenissuedunderaletterofcreditsub-limitthatdoesnotreducetheamountofborrowingsavailableundertherevolvingcreditfacility.ThecreditagreementexpiresinMay2010.NoteN—QuarterlyResults(Unaudited)ThefollowingisasummaryofunauditedquarterlyresultsofoperationsforeachofthequartersinthetwofiscalyearsendedMarch31,2008and2009:RevenuesGrossProfitNetIncomeNetIncomeperBasicCommonShareNetIncomeperDilutedCommonShareFiscalYearEndedMarch31,2008:FirstQuarter....................$74,337,000$18,181,000$5,561,000$0.40$0.39SecondQuarter..................73,510,00018,654,0005,632,0000.410.40ThirdQuarter...................76,679,00020,400,0005,987,0000.430.43FourthQuarter..................77,368,00020,830,0006,204,0000.450.44FiscalYearEndedMarch31,2009:FirstQuarter....................$78,201,000$19,933,000$5,567,000$0.40$0.40SecondQuarter..................77,855,00018,859,0004,964,0000.360.36ThirdQuarter...................76,962,00017,662,0004,504,0000.340.34FourthQuarter..................77,058,00017,288,0004,242,0000.330.33NoteO—SegmentReportingTheCompanyderivesthemajorityofitsrevenuesfromprovidingpatientmanagementandnetworksolutionsservicestopayorsofworkers’compensationbenefits,automobileinsuranceclaimsandhealthinsurancebenefits.Patientmanagementservicesincludeclaimsadministration,utilizationreview,medicalcasemanagement,andvocationalrehabilitation.Networksolutionsrevenuesincludefeescheduleauditing,hospitalbillauditing,coor-dinationofindependentmedicalexaminations,diagnosticimagingreviewservicesandpreferredproviderreferralservices.ThepercentagesofrevenuesattributabletopatientmanagementandnetworksolutionsservicesforthefiscalyearsendedMarch31,2007,2008,and2009arelistedbelow.200720082009Patientmangementservices...................................39.1%42.4%43.2%Networksolutionsservices....................................60.9%57.6%56.8%100.0%100.0%100.0%UnderSFAS131,twoormoreoperatingsegmentsmaybeaggregatedintoasingleoperatingsegmentforfinancialreportingpurposesifaggregationisconsistentwiththeobjectiveandbasicprinciplesofSFAS131,ifthesegmentshavesimilareconomiccharacteristics,andifthesegmentsaresimilarineachofthefollowingareas:1)thenatureofproductsandservices;2)thenatureoftheproductionprocesses;3)thetypeorclassofcustomerfortheirproductsandservices;and4)themethodsusedtodistributetheirproductsorprovidetheirservices.TheCompanybelieveseachoftheCompany’sregionsmeetthesecriteriaastheyprovidesimilarmanagedcareservicestosimilarcustomersusingsimilarmethodsofproductionsandsimilarmethodstodistributetheirservices.AlloftheCompany’sregionsperformbothpatientmanagementandnetworksolutionsservices.68CORVELCORPORATIONNOTESTOCONSOLIDATEDFINANCIALSTATEMENTS—(Continued)BecausetheCompanybelievesitmeetseachofthecriteriasetforthaboveandeachofourregionshavesimilareconomiccharacteristics,theCompanyaggregatesitsresultsofoperationsinonereportableoperatingsegment.NoteP—OtherIntangibleAssetsOtherintangibleassetsconsistofthefollowingatMarch31,2008:ItemLifeCostFiscal2008AmortizationExpenseAccumulatedAmortizationatMarch31,2008Cost,NetofAccumulatedAmortizationatMarch31,2008Covenantnottocompete......5years$750,000$133,000$142,000$608,000Customerrelationships........18-20years7,408,000370,000395,0007,013,000TPAlicenses...............15years178,00010,00010,000168,000Total.....................$8,336,000$513,000$547,000$7,789,000OtherintangibleassetsconsistofthefollowingatMarch31,2009:ItemLifeCostFiscal2009AmortizationExpenseAccumulatedAmortizationatMarch31,2009Cost,NetofAccumulatedAmortizationatMarch31,2009CovenantNottoCompete5Years$950,000$275,000$417,000$533,000CustomerRelationships.......18-20Years7,571,000198,000791,0006,780,000TPALicenses..............15Years204,00012,00022,000182,000Total.....................$8,725,000$485,000$1,230,000$7,495,000Amortizationexpenseforthenextfivefiscalyearsisexpectedtobe$593,000infiscal2010,$593,000infiscal2011,$584,000infiscal2012,$451,000infiscal2013,$432,000infiscal2014,and$4,842,000thereafter.69CORVELCORPORATIONNOTESTOCONSOLIDATEDFINANCIALSTATEMENTS—(Continued)Revenue (in millions) Annual Revenue Per Q4 Weighted Shares Earnings Per Share (in dollars) $310 305 302 291 283 275 267 236 210 187 $23.85 21.57 19.23 18.85 18.83 18.54 17.14 13.92 12.10 10.38 $0 00 01 02 03 04 05 06 07 08 09 $0 00 01 02 03 04 05 06 07 08 09 Cash (in millions) Return on Equity (%) $1.67 1.42 1.30 1.00 0.99 0.87 0.76 0.68 0.65 $0 18.0 17.3 17.0 16.5 16.2 15.5 14.4 14.3 14.0 13.0 00 01 02 03 04 05 06 07 08 09 Q4 Weighted Shares (in millions) 29.6% 27.3 27.2 25.2 23.9 23.8 22.5 20.0 13.2 12.7 $17.9 15.0 14.7 14.2 12.6 9.5 8.9 5.7 5.6 $0 00 01 02 03 04 05 06 07 08 09 0% 00 01 02 03 04 05 06 07 08 09 0 00 01 02 03 04 05 06 07 08 09 Independent Auditors Haskell & White LLP Irvine, CA Stock Symbol The common stock of CorVel Corporation is traded on the NASDAQ Global Select Market under the stock symbol CRVL. Corporate Address CorVel Corporation 2010 Main Street Suite 600 Irvine, California 92614 Telephone: 888.7.CORVEL Transfer Agent and Registrar Computershare Trust Company, N.A. Denver, Colorado Counsel Dorsey & Whitney, LLP Irvine, California Form 10K CorVel Corporation Annual Report on Form 10K filed with the Securities and Exchange Commission may be obtained without charge by contacting: Investor Relations CorVel Corporation 2010 Main Street Suite 600 Irvine, California 92614 Telephone: 888.7.CORVEL www.corvel.com/ar2009 investor_relations@corvel.com ® www.corvel.com 

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