e10vq

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2009


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 0-19291

CORVEL CORPORATION

(Exact name of registrant as specified in its charter)


Delaware		33-0282651

(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)


2010 Main Street, Suite 600 Irvine, CA		92614

(Address of principal executive office)		(zip code)

Registrant’s telephone number, including area code: (949) 851-1473

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (check one)


Large accelerated filer o	Accelerated filer þ	Non-accelerated filer o	Smaller Reporting Company o
		(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

The number of shares outstanding of the registrant’s Common Stock, $0.0001 par value per share, as of January 31, 2010 was 12,088,695.

Part I — Financial Information

Item 1. Financial Statements

CORVEL CORPORATION
CONSOLIDATED BALANCE SHEETS


				December 31, 2009
	March 31, 2009			(Unaudited)

Assets
Current Assets
Cash and cash equivalents (Note A)	$	14,681,000		$	7,864,000
Accounts receivable, net		41,249,000			44,419,000
Prepaid taxes and expenses		4,841,000			4,641,000
Deferred income taxes		4,531,000			4,869,000

Total current assets		65,302,000			61,793,000

Property and equipment, net		29,790,000			29,873,000
Goodwill		34,852,000			36,010,000
Other intangibles, net		7,495,000			7,055,000
Other assets		3,770,000			3,835,000


TOTAL ASSETS	$	141,209,000		$	138,566,000


Liabilities and Stockholders’ Equity
Current Liabilities
Accounts and taxes payable	$	18,553,000		$	16,931,000
Accrued liabilities		18,653,000			20,956,000

Total current liabilities		37,206,000			37,887,000

Deferred income taxes		7,706,000			7,673,000

Commitments and contingencies (Note G and H)

Stockholders’ Equity

Common stock, $.0001 par value: 60,000,000 shares authorized; 25,600,022 shares issued (12,917,279 shares outstanding, net of Treasury shares) and 25,747,156 shares issued (12,140,156 shares outstanding, net of Treasury shares) at March 31, 2009 and December 31, 2009, respectively		3,000			3,000

Paid-in capital		84,321,000			88,538,000

Treasury Stock (12,682,743 shares at March 31, 2009 and 13,607,000 shares at December 31, 2009)		(185,762,000	)		(212,749,000	)

Retained earnings		197,735,000			217,214,000

Total stockholders’ equity		96,297,000			93,006,000


TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	141,209,000		$	138,566,000

See accompanying notes to consolidated financial statements.

Page 3

CORVEL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS — UNAUDITED


	Nine Months Ended December 31,
	2008			2009
*Cash flows from Operating Activities*
NET INCOME	$	15,035,000		$	19,479,000

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization		8,852,000			8,771,000
Loss on disposal of assets		14,000			48,000
Stock compensation expense		915,000			1,560,000
Write-off of uncollectible accounts		1,878,000			2,277,000

Changes in operating assets and liabilities
Accounts receivable		(538,000	)		(5,447,000	)
Prepaid taxes and expenses		(906,000	)		200,000
Other assets		174,000			96,000
Accounts and taxes payable		(2,811,000	)		(1,622,000	)
Accrued liabilities		1,059,000			1,203,000
Deferred income tax		(58,000	)		(371,000	)

Net cash provided by operating activities		23,614,000			26,194,000


*Cash Flows from Investing Activities*
Acquisition earn out payment		(1,800,000	)		—
Purchase of property and equipment		(7,714,000	)		(8,681,000	)

Net cash (used in) investing activities		(9,514,000	)		(8,681,000	)


*Cash Flows from Financing Activities*
Purchase of treasury stock		(22,195,000	)		(26,987,000	)
Tax effect of stock option exercises		426,000			740,000
Exercise of common stock options		1,693,000			1,753,000
Exercise of employee stock purchase options		201,000			164,000

Net cash (used in) financing activities		(19,875,000	)		(24,330,000	)


*Decrease in cash and cash equivalents*		(5,775,000	)		(6,817,000	)
Cash and cash equivalents at beginning of period		17,911,000			14,681,000

Cash and cash equivalents at end of period	$	12,136,000		$	7,864,000



Supplemental Cash Flow Information:
Income taxes paid	$	10,879,000		$	11,830,000
Accrual of earn-out related to acquistion	$	800,000		$	1,100,000
Accrual of software license	$	864,000		$	0

See accompanying notes to consolidated financial statements.

Page 6

CORVEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009

Note A — Basis of Presentation and Summary of Significant Accounting Policies

The unaudited financial statements herein have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. The accompanying interim financial statements have been prepared under the presumption that users of the interim financial information have either read or have access to the audited financial statements for the latest fiscal year ended March 31, 2009. Accordingly, footnote disclosures which would substantially duplicate the disclosures contained in the March 31, 2009 audited financial statements have been omitted from these interim financial statements.

Beginning in the quarter ended June 30, 2009, the Company implemented Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 855-10-05 through 885-10-55, Subsequent Events. This standard establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued. In accordance with FASB ASC 855-10-05 through ASC 855-10-55, the Company evaluated all events or transactions that occurred after December 31, 2009 up through the date the Company issued these consolidated financial statements. During this period, the Company did not have any material subsequent events other than the repurchase of approximately 55,000 shares for $1.7 million or $31.38 per share. These shares were repurchased under the Company’s ongoing share repurchase program described in Note C.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended December 31, 2009 are not necessarily indicative of the results that may be expected for the fiscal year ending March 31, 2010. For further information, refer to the consolidated financial statements and footnotes for the fiscal year ended March 31, 2009 included in the Company’s Annual Report on Form 10-K.

Basis of Presentation: The consolidated financial statements include the accounts of CorVel and its subsidiaries. Significant intercompany accounts and transactions have been eliminated in consolidation.

Use of Estimates: The preparation of financial statements conforming with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the accompanying financial statements. Actual results could differ from those estimates. Significant estimates include the allowance for doubtful accounts, accrual for bonuses, earn-out accruals, accruals for self-insurance reserves, share-based payments related to performance based awards, and estimates used in stock option valuations.

Cash and Cash Equivalents: Cash and cash equivalents consist of short-term highly-liquid investment-grade interest-bearing securities with maturities of 90 days or less when purchased. The carrying amounts of the Company’s financial instruments approximate their fair values at March 31, 2009 and December 31, 2009. Cash at December 31, 2009 included $1.5 million of customer deposits held in bank checking accounts.

Page 7

CORVEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009

Note A — Basis of Presentation and Summary of Significant Accounting Policies (continued)

Goodwill: The Company accounts for its business combinations in accordance with FASB ASC 805-10 through ASC 805-50 Business Combinations which requires that the purchase method of accounting be applied to all business combinations and addresses the criteria for initial recognition of intangible assets and goodwill. In accordance with FASB ASC 350-10 through ASC 350-30, goodwill and other intangible assets with indefinite lives are not amortized but are tested for impairment annually, or more frequently if circumstances indicate the possibility of impairment. If the carrying value of goodwill or an intangible asset exceeds its fair value, an impairment loss shall be recognized. The Company’s goodwill impairment test is conducted company-wide and the fair value is compared to its carrying value. The measurement of fair value is based on an evaluation of market capitalization and is further tested using a multiple of earnings approach. For all periods presented, no impairment existed and, accordingly, no loss was recognized.

Revenue Recognition: The Company’s revenues are recognized primarily as services are rendered based on time and expenses incurred. A certain portion of the Company’s revenues are derived from fee schedule auditing which is based on the number of provider charges audited and on a percentage of savings achieved for the Company’s customers. The Company generally recognizes revenue when there is persuasive evidence of an arrangement, the services have been provided to the customer, the sales price is fixed or determinable, and collectability is reasonably assured. The Company reduces revenue for estimated contractual allowances and records any amounts invoiced to the customer in advance of service performance as deferred revenue.

Accounts Receivable: The majority of the Company’s accounts receivable are due from companies in the property and casualty insurance industries, self-insured employers, and government entities. Accounts receivable are due within 30 days and are stated as amounts due from customers net of an allowance for doubtful accounts. Accounts outstanding longer than the contractual payment terms are considered past due. The Company determines its allowance by considering a number of factors, including the length of time trade accounts receivable are past due, the Company’s previous loss history, the customer’s current ability to pay its obligation to the Company and the condition of the general economy and the industry as a whole. No one customer accounted for 10% or more of accounts receivable at either March 31, 2009 or December 31, 2009. No one customer accounted for 10% or more of revenue during either of the three and nine month periods ended December 31, 2008 or 2009.

Property and Equipment: Additions to property and equipment are recorded at cost. Depreciation and amortization are provided using the straight-line method over the estimated useful lives of the related assets, which range from three to seven years. The Company capitalizes software development costs intended for internal use. The Company accounts for internally developed software costs in accordance with FASB ASC 350-40, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use, which allows for the capitalization of software developed for internal use. These costs are included in computer software in property and equipment and are amortized over a period of five years.

Long-Lived Assets: The carrying amount of all long-lived assets is evaluated periodically to determine if adjustment to the depreciation and amortization period or to the unamortized balance is warranted. Such evaluation is based principally on the expected utilization of the long-lived assets and the projected, undiscounted cash flows of the operations in which the long-lived assets are deployed.

Page 8

CORVEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009

Note A — Basis of Presentation and Summary of Significant Accounting Policies (continued)

Income Taxes: The Company provides for income taxes under the liability method. Deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities as measured by the enacted tax rates which are expected to be in effect when these differences reverse. Income tax expense is the tax payable for the period and the change during the period in net deferred tax assets and liabilities. The Company adopted the provisions of FASB ASC 740-10-05 through ASC 740-10-55, Accounting for Uncertainty in Income Taxes, on April 1, 2007. As a result of the implementation, the Company recognized no material change in the liability for unrecognized income tax benefits during the December 2009 quarter. The balance of the unrecognized tax benefits as of March 31, 2009 and December 31, 2009 was $3,681,000. There were no additions or reductions in the unrecognized tax benefit during the quarter ended December 31, 2009.

Earnings Per Share: Earnings per common share-basic is based on the weighted average number of common shares outstanding during the period. Earnings per common shares-diluted is based on the weighted average number of common shares and common share equivalents outstanding during the period. In calculating earnings per share, earnings are the same for the basic and diluted calculations. Weighted average shares outstanding decreased in the December 2009 quarter compared to the same quarter of the prior year for diluted earnings per share due to shares repurchased under the Company’s share repurchase program.

Recent Accounting Standards Updates

The FASB issued ASC 105-10-05, Generally Accepted Accounting Principles, which establishes the Accounting Standards Codification (“Codification” or “ASC”) as the single source of authoritative U.S. generally accepted accounting principles (“GAAP”) recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under authority of federal securities laws are also sources of GAAP for SEC registrants. The Codification supersedes all existing non-SEC accounting and reporting standards.

GAAP is not intended to be changed as a result of the Codification, but the ASC does change the way the guidance is organized and presented. As a result, these changes have a significant impact on how companies reference GAAP in their financial statements and in their accounting policies for financial statements issued for interim and annual periods ending after September 15, 2009. The Company has included the references to the Codification, as appropriate, in these consolidated financial statements.

In September 2006, FASB issued ASC 820-10-20, Fair Value Measurements and Disclosures (“ASC 820-10-20”), which defines fair value to be the price that would be received when an asset is sold or paid when a liability is transferred in an orderly transaction between market participants at the measurement date and emphasizes that fair value is a market-based measurement, not an entity-specific measurement. It establishes a fair value hierarchy and expands disclosures about fair value measurements in both interim and annual periods. On April 1, 2008, the Company adopted ASC 820-10-20 for its financial assets and financial liabilities. The adoption of ASC 820-10-20 did not have a material impact on the Company’s financial position or results of operations.

Page 9

CORVEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009

Note A — Basis of Presentation and Summary of Significant Accounting Policies (continued)

In April 2009, FASB issued ASC 825-10-65, Transition Related to FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments (“ASC 825-10-65”), which requires disclosures about fair value of financial instruments for interim reporting periods as well as in interim financial statements ending after June 15, 2009. The Company adopted ASC 825-10-65 on June 30, 2009, and the adoption did not have a material impact on the Company’s financial position or results of operations.

In May 2009, FASB issued ASC 855-10-05 through ASC 855-10-55, Subsequent Events (“ASC 855-10”), which establishes principles and standards related to the accounting for and disclosure of events that occur after the balance sheet date but before the financial statements are issued. ASC 855-10-25, Recognition, requires an entity to recognize, in the financial statements, subsequent events that provide additional information regarding conditions that existed at the balance sheet date. Subsequent events that provide information about conditions that did not exist at the balance sheet date shall not be recognized in the financial statements under ASC 855-10. ASC 855-10 was effective for interim and annual reporting periods on or after June 15, 2009. The Company adopted ASC 855-10 on June 30, 2009, and the adoption did not have a material impact on the Company’s financial position or results of operations.

Page 10

CORVEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009

Note B — Stock Based Compensation and Stock Options

Under the Company’s Restated Omnibus Incentive Plan (Formerly The Restated 1988 Executive Stock Option Plan) (the “Plan”) as in effect at December 31, 2009, options for up to 9,682,500 shares of the Company’s common stock may be granted over the life of the Plan to employees, non-employee directors and consultants at exercise prices not less than the fair market value of the stock at the date of grant. Options granted under the Plan are non-statutory stock options and generally vest 25% one year from date of grant with the remaining 75% vesting ratably each month for the next 36 months thereafter. The options granted to employees generally expire at the end of five years from the date of grant and the options granted to non-employee members of the board of directors generally expire at the end of ten years from the date of grant.

In May 2006, the Company’s Board of Directors granted performance-based stock options for 149,000 shares of common stock at fair market value at the date of grant, which will only vest if the Company attains certain earnings per share targets, as established by the Company’s Board of Directors, for calendar years 2008, 2009, and 2010. Net of cancelations due to employee terminations, options for 136,050 shares remain outstanding under these performance-based stock options as of December 31, 2009. These options were granted with an exercise price of $15.76 per share, which was the fair market value at the date of grant, and have a valuation of $6.75 per share. The Company did not attain the targets for calendar years 2008 and 2009. Currently, management has determined that it is not probable that the Company will attain the earnings per share target for calendar year 2010 under these options and, accordingly, the Company has recognized no stock compensation expense for these options.

In February 2008, the Company’s Board of Directors granted performance-based stock options for 42,000 shares of common stock at fair market value at the date of grant, which will only vest if the Company attains certain revenue targets for TPA revenues and out-of-network bill review revenues, as established by the Company’s Board of Directors, for calendar years 2009, 2010, and 2011. The targets for the various options varied by the regions managed by these optionees and each region has different targets. Net of cancelations due to employee terminations, options for 38,000 shares remain outstanding under these performance-based stock options as of December 31, 2009. These options were granted with an exercise price of $25.10 per share, which was the fair market value at the date of grant, and have a valuation of $9.81 per share. Currently, management has determined that the optionees with 12,000 shares attained these the revenue targets for calendar year 2009, and, accordingly, the Company has recognized $25,000 during the December 2009 quarter and $39,000, cumulatively, since the date of the option grant. Currently, management has determined that it is not probable that the revenue targets for the remaining optionees will be attained and, accordingly, the Company has recognized no stock compensation expense for those options.

In February 2009, the Company’s Board of Directors granted performance-based stock options for 100,000 shares of common stock at fair market value at the date of grant, which will only vest if the Company attains certain earnings per share targets, as established by the Company’s Board of Directors, for calendar years 2009, 2010, and 2011. Net of cancelations due to employee terminations, options for 95,000 shares remain outstanding under these performance-based stock options as of December 31, 2009. These options were granted with an exercise price of $19.79 per share, which was the fair market value at the date of grant, and have a valuation of $8.21 per share. The Company attained these revenue targets for calendar 2009, and, accordingly, the Company has recognized stock compensation expense of $65,000 during the December 2009 quarter and $260,000, cumulatively, since the date of the option grants.

In February 2009, the Company’s Board of Directors granted performance-based stock options for 10,000 shares of common stock at fair market value at the date of grant to an employee, which will only vest if the Company attains certain revenue targets for third party administration (“TPA”) revenues and out-of-network bill review revenues, as established by the Company’s Board of Directors, for calendar years 2009, 2010, and 2011. These options were granted with an exercise price of $19.79 per share, which was the fair market value at the date of grant, and have a valuation of $8.45 per share. Currently, management has determined that it is not probable that the

Page 11

CORVEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009

Note B — Stock Based Compensation and Stock Options (continued)

Company will attain the revenue targets and, accordingly, the Company has recognized no stock compensation expense for this stock option grant.

Additionally, in November 2009, the Company’s Board of Directors granted performance-based stock options for 110,000 shares of common stock at fair market value at the date of grant to an employee, which will only vest if the Company attains certain earnings per share targets, as established by the Company’s Board of Directors, for calendar years 2010, 2011, and 2012. These options were granted with an exercise price of $28.92 per share, which was the fair market value at the date of grant, and have a valuation of $12.57 per share. Currently, management has determined that it is probable that the Company will attain the earnings per share targets for calendar year 2010 and, accordingly, the Company has recognized $73,000 of stock compensation expense for this stock option grant during the December 2009 quarter.

The tables below shows the amounts recognized in the financial statements for the three and nine months ended December 31, 2008 and 2009, respectively.


	Three Months Ended
	December 31, 2008			December 31, 2009
Cost of revenues	$	138,000		$	227,000
General and administrative		263,000			345,000


Total cost of stock-based compensation included in income before income tax provision		401,000			572,000

Amount of income tax benefit recognized		(156,000	)		(210,000	)

Amount charged against income	$	245,000		$	362,000

Effect on diluted income per share	$	(0.02	)	$	(0.03	)


	Nine Months Ended
	December 31, 2008			December 31, 2009
Cost of revenues	$	394,000		$	516,000
General and administrative		521,000			1,044,000


Total cost of stock-based compensation included in income before income tax provision		915,000			1,560,000

Amount of income tax benefit recognized		(357,000	)		(605,000	)

Amount charged against income	$	558,000		$	955,000

Effect on diluted income per share	$	(0.04	)	$	(0.07	)

Page 12

CORVEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009

Note B — Stock Based Compensation and Stock Options (continued)

The Company records compensation expense for employee stock options based on the estimated fair value of the options on the date of grant using the Black-Scholes option-pricing model with the assumptions included in the table below. The Company uses historical data among other factors to estimate the expected volatility, the expected option life, and the expected forfeiture rate. The risk-free rate is based on the interest rate paid on a U.S. Treasury issue with a term similar to the estimated life of the option. Based upon the historical experience of options cancellations, the Company has estimated an annualized forfeiture rate of 10.56% and 9.81% for the three months ended December 31, 2008 and 2009, respectively. Forfeiture rates will be adjusted over the requisite service period when actual forfeitures differ, or are expected to differ, from the estimate. The following assumptions were used to estimate the fair value of options granted during the three months ended December 31, 2008 and 2009 using the Black-Scholes option-pricing model:


	Three Months Ended December 31,
	2008			2009

Risk-free interest rate		2.71	%		2.34	%
Expected volatility		43	%		47	%
Expected dividend yield		0.00	%		0.00	%
Expected forfeiture rate		10.56	%		9.81	%
Expected weighted average life of option in years	4.8 years			4.8 years

All options granted in the nine months ended December 31, 2008 and 2009 were granted at fair market value and are non-statutory stock options.

Page 13

CORVEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009

Note B — Stock Based Compensation and Stock Options (continued)

Summarized information for all stock options for the three and nine months ended December 31, 2008 and 2009 follows:


	Three Months Ended December 31, 2008					Three Months Ended December 31, 2009
	Shares			Average Price		Shares			Average Price

Options outstanding, beginning		997,247		$	20.26		1,036,528		$	21.01
Options granted		26,150			25.82		122,500			29.13
Options exercised		(5,888	)		14.34		(52,682	)		14.76
Options cancelled		(3,868	)		24.94		(940	)		28.89

Options outstanding, ending		1,013,641		$	20.42		1,105,406		$	22.20


	Nine Months Ended December 31, 2008					Nine Months Ended December 31, 2009
	Shares			Average Price		Shares			Average Price

Options outstanding, beginning		1,030,458		$	19.24		1,115,171		$	20.31
Options granted		101,375			29.64		171,900			27.83
Options exercised		(99,399	)		17.48		(150,958	)		14.74
Options cancelled		(18,793	)		21.29		(30,707	)		21.81

Options outstanding, ending		1,013,641		$	20.42		1,105,406		$	22.20

The following table summarizes the status of stock options outstanding and exercisable at December 31, 2009:


			Weighted		Outstanding		Exercisable		Options-
			Average		Options-		Options-		Weighted
			Remaining		Weighted		Number of		Average
	Number of		Contractual		Average		Exercisable		Exercise
Range of Exercise Price	Outstanding Options		Life		Exercise Price		Options		Price

$11.00 to $15.76		315,383		1.55	$	14.91		165,779	$	14.20
$15.79 to $23.55		271,071		3.51	$	19.20		125,227	$	18.35
$23.56 to $27.15		230,290		3.98	$	25.75		74,592	$	26.11
$27.16 to $47.70		288,662		3.81	$	30.15		95,634	$	30.89

Total		1,105,406		3.13	$	22.20		461,232	$	20.71

Page 14

CORVEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009

Note B — Stock Based Compensation and Stock Options (continued)

A summary of the status for all outstanding options at December 31, 2009, and changes during the three months then ended, is presented in the table below:


						Weighted
						Average Remaining		Aggregate Intrinsic
				Weighted Average			Contractual Life		Value as of
	Number of Options			Exercise Per Share		(Years)		December 31, 2009

Options outstanding at October 1, 2009		1,036,528		$	21.01
Granted		122,500			29.13
Exercised		(52,682	)		14.76
Cancelled — forfeited		—			—
Cancelled — expired		(940.00	)		28.89

Ending outstanding		1,105,406		$	22.20		3.13	$	12,558,198

Ending vested and expected to vest		975,360		$	21.99		3.01	$	11,289,544

Ending exercisable at December 31, 2009		461,232		$	20.71		2.43	$	5,931,896

The weighted-average grant-date fair value of options granted during the three months ended December 31, 2008 and 2009, was $11.66 and $12.64, respectively.

Page 15

CORVEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009

Note C — Treasury Stock and Subsequent Event

The Company’s Board of Directors initially approved the commencement of a share repurchase program in the fall of 1996. In August 2009, the Board approved a 1,000,000 share expansion of the repurchase program to 14,150,000 shares over the life of the share repurchase program. Since the commencement of the share repurchase program, the Company has spent $213 million to repurchase 13,607,000 shares of its common stock, equal to 53% of the outstanding common stock had there been no repurchases. The average price of these repurchases is $15.64 per share. These purchases have been funded primarily from the net earnings of the Company, along with the proceeds from the exercise of common stock options. During the three months ended December 31, 2009, the Company repurchased 313,250 shares for $9.5 million. During the nine months ended December 31, 2009, the Company repurchased 924,257 shares for $27.0 million. The Company had 12,140,156 shares of common stock outstanding as of December 31, 2009, net of the 13,607,000 shares in treasury. Subsequent to the end of the quarter, through January 31, 2010, the Company repurchased 54,706 shares of common stock for $1.7 million or $31.38 a share.

Note D — Weighted Average Shares and Net Income Per Share

Weighted average basic common and common equivalent shares decreased from 13,316,000 for the quarter ended December 31, 2008 to 12,237,000 for the quarter ended December 31, 2009. Weighted average diluted common and common equivalent shares decreased from 13,439,000 for the quarter ended December 31, 2008 to 12,426,000 for the quarter ended December 31, 2009. The net decrease in both of these weighted share calculations is due to the repurchase of common stock as noted above, offset by an increase in shares outstanding due to the exercise of stock options under the Company’s employee stock option plan.

Net income per common and common equivalent shares was computed by dividing net income by the weighted average number of common and common stock equivalents outstanding during the quarter. The calculations of the basic and diluted weighted shares for the three months and nine months ended December 31, 2008 and 2009, are as follows:


	Three Months Ended December 31,
	2008		2009
Net Income	$	4,504,000	$	6,675,000


Basic:
Weighted average common shares outstanding		13,316,000		12,237,000

Net Income per share	$	0.34	$	0.55


Diluted:
Weighted average common shares outstanding		13,316,000		12,237,000
Treasury stock impact of stock options		123,000		189,000

Total common and common equivalent shares		13,439,000		12,426,000

Net Income per share	$	0.34	$	0.54

Page 16

CORVEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009

Note E — Shareholder Rights Plan

During fiscal 1997, the Company’s Board of Directors approved the adoption of a Shareholder Rights Plan. The Shareholder Rights Plan provides for a dividend distribution to CorVel stockholders of one preferred stock purchase right for each outstanding share of CorVel’s common stock under certain circumstances. In April 2002, the Company’s Board of Directors approved an amendment to the Shareholder Rights Plan to extend the expiration date of the rights to February 10, 2012, set the exercise price of each right at $118 and enable Fidelity Management & Research Company and its affiliates to purchase up to 18% of the shares of common stock of the Company without triggering the stockholder rights, with the limitations under the Shareholder Rights Plan remaining in effect for all other stockholders of the Company. In November 2008, the Company’s Board of Directors approved an amendment to the Shareholder Rights Plan to extend the expiration date of the rights to February 10, 2022, remove the ability of Fidelity Management & Research Company and its affiliates to purchase up to 18% of the shares of common stock of the Company without triggering the stockholder rights, substitute Computershare Trust Company, N.A. as the rights agent and effect certain technical changes to the Shareholder Rights Plan.

The rights are designed to assure that all shareholders receive fair and equal treatment in the event of any proposed takeover of the Company and to encourage a potential acquirer to negotiate with the Board of Directors prior to attempting a takeover. The rights have an exercise price of $118 per right, subject to subsequent adjustment. The rights trade with the Company’s common stock and will not be exercisable until the occurrence of certain takeover-related events.

Generally, the Shareholder Rights Plan provides that if a person or group acquires 15% or more of the Company’s common stock without the approval of the Board, subject to certain exceptions, the holders of the rights, other than the acquiring person or group, would, under certain circumstances, have the right to purchase additional shares of the Company’s common stock having a market value equal to two times the then-current exercise price of the right.

In addition, if the Company is thereafter merged into another entity, or if 50% or more of the Company’s consolidated assets or earning power are sold, then the right will entitle its holder to buy common shares of the acquiring entity having a market value equal to two times the then-current exercise price of the right. The Company’s Board of Directors may exchange or redeem the rights under certain conditions.

Page 18

CORVEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009

Note F — Other Intangible Assets

Other intangible assets consist of the following at December 31, 2009:


								Cost, Net of
				Nine Months Ended		Accumulated		Accumulated
				December 31, 2009		Amortization at		Amortization at
Item	Life	Cost		Amortization Expense		December 31, 2009		December 31, 2009

Covenants Not to Compete	5 Years	$	950,000	$	124,000	$	541,000	$	409,000
Customer Relationships	18-20 Years		7,571,000		304,000		1,096,000		6,475,000
TPA Licenses	15 Years		204,000		10,000		33,000		171,000

Total		$	8,725,000	$	438,000	$	1,670,000	$	7,055,000

Note G — Line of Credit

In May 2009, the Company entered into a credit agreement with a financial institution to provide a revolving credit facility with borrowing capacity of up to $10 million. Borrowings under this agreement bear interest, at the Company’s option, at a fixed LIBOR-based rate plus 1.50% or at a fluctuating rate determined by the financial institution to be 1.50% above the daily one-month LIBOR rate. The loan covenants require the Company to maintain the current assets to liabilities ratio of at least 1.25:1, debt to tangible net worth not greater than 1:1 and have positive net income. The Company is not authorized to use this line for stock repurchases. There are no outstanding revolving loans as of the date hereof, but letters of credit in the aggregate amount of $6.3 million have been issued under a letter of credit sub-limit that does not reduce the amount of borrowings available under the revolving credit facility. The credit agreement expires in May 2010.

Note H — Contingencies and Litigation

In February 2005, Kathleen Roche, D.C., as plaintiff, filed a putative class action in Circuit Court for the 20th Judicial District, St. Clair County, Illinois, against the Company. The case seeks unspecified damages based on the Company’s alleged failure to direct patients to medical providers who are members of the CorVel CorCare PPO network and also alleges that the Company used biased and arbitrary computer software to review medical providers’ bills. In December 2007, the trial court certified a class in this case of all Illinois health care providers with CorVel PPO agreements, excluding hospitals. In January 2008, CorVel filed with the Illinois Appellate Court a petition for interlocutory appeal of the trial court’s class certification order which was denied in April 2008. In May 2008, the Company appealed the appellate court’s denial of its petition for interlocutory appeal which appeal was also denied by the Illinois Supreme Court in September 2008. The Company intends to pursue all available legal remedies including vigorously defending this case. The Company is not able to estimate the amount of possible loss, if any, at this time.

The Company is involved in other litigation arising in the normal course of business. Management believes that resolution of these matters will not result in any payment that, in the aggregate, would be material to the financial position or results of the operations of the Company.

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This report may include certain forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including (without limitation) statements with respect to anticipated future operating and financial performance, growth and acquisition opportunities and other similar forecasts and statements of expectation. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates” and “should”, and variations of these words and similar expressions, are intended to identify these forward-looking statements. Forward-looking statements made by the Company and its management are based on estimates, projections, beliefs and assumptions of management at the time of such statements and are not guarantees of future performance.

The Company disclaims any obligations to update or revise any forward-looking statement based on the occurrence of future events, the receipt of new information or otherwise. Actual future performance, outcomes and results may differ materially from those expressed in forward-looking statements made by the Company and its management as a result of a number of risks, uncertainties and assumptions. Representative examples of these factors include (without limitation) general industry and economic conditions including a decreasing number of national claims due to decreasing number of injured workers; cost of capital and capital requirements; possible litigation and legal liability in the course of operations; competition from other managed care companies; the ability to expand certain areas of the Company’s business; shifts in customer demands; the ability of the Company to produce market-competitive software; changes in operating expenses including employee wages, benefits and medical inflation; governmental and public policy changes; dependence on key personnel; and the continued availability of financing in the amounts and at the terms necessary to support the Company’s future business.

Overview

CorVel Corporation is an independent nationwide provider of medical cost containment and managed care services designed to address the escalating medical costs of workers’ compensation and auto policies. The Company’s services are provided to insurance companies, TPA’s, and self-administered employers to assist them in managing the medical costs and monitoring the quality of care associated with healthcare claims.

Network Solutions Services

The Company’s network solutions services are designed to reduce the price paid by its customers for medical services rendered in workers’ compensation cases, auto policies and, to a lesser extent, group health policies. The network solutions offered by the Company include automated medical fee auditing, preferred provider services, retrospective utilization review, independent medical examinations, and inpatient bill review. Network solutions sevices also includes revenue from the Company’s directed care network (CareIQ), including imaging and physical therapy.

Patient Management Services

In addition to its network solutions services, the Company offers a range of patient management services, which involve working on a one-on-one basis with injured employees and their various healthcare professionals, employers and insurance company adjusters. The services are designed to monitor the medical necessity and appropriateness of healthcare services provided to workers’ compensation and other healthcare claimants and to expedite return to work. The Company offers these services on a stand-alone basis, or as an integrated component of its medical cost containment services. The Company expanded its patient management services to include the processing of claims for self-insured payors to property and casualty insurance with the January 2007 acquisition of the assets of Hazelrigg Risk Management Services, the June 2007 acquisition of the outstanding capital stock of The Schaffer Companies, Ltd. and the February 2009 acquisition of the outstanding capital stock of Eagle Claim Services, Inc.

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Organizational Structure

The Company’s management is structured geographically with regional vice-presidents who report to the President of the Company. Each of these regional vice-presidents is responsible for all services provided by the Company in his or her particular region and for the operating results of the Company in multiple states. These regional vice presidents have area and district managers who are also responsible for all services provided by the Company in their given area and district.

Business Enterprise Segments

The Company operates in one reportable operating segment, managed care. The Company’s services are delivered to its customers through its local offices in each region and financial information for the Company’s operations follows this service delivery model. All regions provide the Company’s patient management and network solutions services. FASB ASC 280-10 establishes standards for the way that public business enterprises report information about operating segments in annual and interim consolidated financial statements. The Company’s internal financial reporting is segmented geographically, as discussed above, and managed on a geographic rather than service line basis, with virtually all of the Company’s operating revenue generated within the United States.

Under FASB ASC 280-10, two or more operating segments may be aggregated into a single operating segment for financial reporting purposes if aggregation is consistent with the objective and basic principles, if the segments have similar economic characteristics, and if the segments are similar in each of the following areas: 1) the nature of products and services; 2) the nature of the production processes; 3) the type or class of customer for their products and services; and 4) the methods used to distribute their products or provide their services. The Company believes each of its regions meet these criteria as each provides similar services and products to similar customers using similar methods of productions and similar methods to distribute the services and products.

Summary of Quarterly Results

The Company generated revenues of $86.6 million for the quarter ended December 31, 2009, an increase of $9.7 million or 12.6% compared to revenues of $77.0 million for the quarter ended December 31, 2008. The increase in revenues was primarily due to an increase in patient management business. An improvement in customer utilization of the Company’s TPA services was the primary reason for the increase in patient management revenues. An increase in revenues from CareIQ services, which contributed to the increase in network solutions review. As the Company expands the TPA offering we have found the CareIQ services and our TPA offering to by synergistic.

The Company’s cost of revenues increased by $5.5 million, from $59.3 million in the December 2008 quarter to $64.8 million in the December 2009 quarter, an increase of 9.3%. This increase was primarily due to the costs associated with the increase in demand for the Company’s TPA services, and to a lesser extent, the CareIQ services, which are high-cost services.

The Company’s general and administrative expense increased by $0.4 million, from $10.3 million in the December 2008 quarter to $10.7 million in the December 2009 quarter, an increase of 4.1%. This increase is primarily due to an increase in the Company’s systems and data interface costs. Systems cost increased from $5.9 million to $6.2 million as the Company increased the number of employees and consultants in systems.

The Company’s income tax expense increased by $1.6 million, or 54.4%, from $2.9 million, in the December 2008 quarter to $4.4 million in the December 2009 quarter. The increase in income tax expense before income taxes was primarily due to the aforementioned increase in revenues. The effective income tax rate was 38.9% in the December 2008 quarter and 39.8% in the December 2009 quarter.

Weighted diluted shares decreased from 13.4 million shares in the December 2008 quarter to 12.4 million shares in the December 2009 quarter, a decrease of 1.0 million shares, or 7.5%. This decrease was due primarily to the repurchase of 581,000 shares of common stock during the September 2009 quarter and an additional 313,000 shares of common stock during the December 2009 quarter. The decrease was offset by the exercise of stock options during the December 2009 quarter.

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Diluted earnings per share increased from $0.34 in the December 2008 quarter to $0.54 in the December 2009 quarter, an increase of $0.20 per share, or 58.8%. The increase in diluted earnings per share was due to the increase in income before income taxes along with the reduction in the number of shares outstanding due to the shares repurchased.

Results of Operations for the three months ended December 31, 2008 and 2009

The Company derives its revenues from providing patient management and network solutions services to payors of workers’ compensation benefits, auto insurance claims and health insurance benefits. Patient management services include utilization review, medical case management, vocational rehabilitation, and claims processing. Network solutions revenues include fee schedule auditing, hospital bill auditing, independent medical examinations, diagnostic imaging review services and preferred provider referral services. The percentage of total revenues attributable to patient management and network solutions services for the quarters ended December 31, 2008 and December 31, 2009 are as follows:


	December 31, 2008			December 31, 2009
Patient management services		43.2	%		47.4	%
Network solutions services		56.8	%		52.6	%

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The following table sets forth, for the periods indicated, the dollar amounts, dollar and percent changes, share changes and the percentage of revenues represented by items reflected in the Company’s consolidated income statements for the quarters ended December 31, 2008 and December 31, 2009. The Company’s past operating results are not necessarily indicative of future operating results.


	Three Months Ended			Three Months Ended						Percentage
	December 31, 2008			December 31, 2009			Change			Change

Revenue	$	76,962,000		$	86,629,000		$	9,667,000			12.6	%
Cost of revenues		59,300,000			64,823,000			5,523,000			9.3	%

Gross profit		17,662,000			21,806,000			4,144,000			23.5	%

Gross profit as percentage of revenue		22.9	%		25.2	%

General and administrative		10,296,000			10,713,000			417,000			4.1	%
General and administrative as percentage of revenue		13.4	%		12.4	%


Income before income tax provision		7,366,000			11,093,000			3,727,000			50.6	%

Income before income tax provision as percentage of revenue		9.6	%		12.8	%

Income tax provision		2,862,000			4,418,000			1,556,000			54.4	%

Net income	$	4,504,000		$	6,675,000		$	2,171,000			48.2	%


Weighted Shares
Basic		13,316,000			12,237,000			(1,079,000	)		(8.1	%)
Diluted		13,439,000			12,426,000			(1,013,000	)		(7.5	%)

Earnings Per Share
Basic	$	0.34		$	0.55		$	0.21			61.8	%
Diluted	$	0.34		$	0.54		$	0.20			58.8	%

Revenues

Change in revenue from the quarter ended December 2008 to the quarter ended December 2009

Revenues increased from $77.0 million for the three months ended December 31, 2008 to $86.6 million for the three months ended December 31, 2009, an increase of $9.7 million or 12.6%. The increase was primarily due to an increase in the Company’s patient management revenues of $7.8 million or 22.7% from $33.3 million in the December 2008 quarter to $41.1 million in the December 2009 quarter. Improvements in customer utilization of the Company’s TPA services were the primary reason for the increase in patient management service revenues. This was complimented by an increase in network solutions revenue of $1.9 million or 4.3%, from $43.7 million in the December 2008 quarter to $45.6 million in the December 2009 quarter. This increase was primarily due to an increase in revenues from CareIQ services.

The Company believes that referral volume in patient management services and bill review volume in network solutions services may decrease or reflect nominal growth until there is growth in the number of work related injuries and workers’ compensation related claims.

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Cost of Revenues

The Company’s cost of revenues consist of direct expenses, costs directly attributable to the generation of revenue, and field indirect costs which are incurred in the field offices of the Company. Direct costs are primarily case manager salaries, bill review analysts, related payroll taxes and fringe benefits, and costs for independent medical examination (IME) and MRI providers. Most of the Company’s revenues are generated in offices which provide both patient management services and network solutions services. The largest of the field indirect costs are manager salaries and bonus, account executive base pay and commissions, administrative and clerical support, field systems personnel, PPO network developers, related payroll taxes and fringe benefits, office rent, and telephone expense. Approximately 42% of the costs incurred in the field are costs which support both the patient management services and network solutions operations of the Company’s field offices, such as district managers, account executives, rent, and telephone.

Change in cost of revenue from the quarter ended December 2008 to the quarter ended December 2009

The Company’s costs of revenues increased from $59.3 million in the quarter ended December 31, 2008 to $64.8 million in the quarter ended December 31, 2009, an increase of $5.5 million or 9.3%. This increase was primarily due to the costs associated with the increase in demand for the Company’s TPA services, and to a lesser extent, the CareIQ services, which are high-cost services. During the December 2009 quarter, software enhancements increased the Company’s gross margin in these services.

General and Administrative Expense

For the quarter ended December 31, 2009, general and administrative expense consisted of approximately 58% of corporate systems costs which include the corporate systems support, implementation and training, amortization of software development costs, depreciation of the hardware costs in the Company’s national systems, the Company’s national wide area network and other systems related costs. The remaining 42% of the general and administrative expense consisted of national marketing, national sales support, corporate legal, corporate insurance, human resources, accounting, product management, new business development and other general corporate matters.

Change in general and administrative expense from the quarter ended December 2008 to the quarter ended December 2009

General and administrative expense increased from $10.3 million in the quarter ended December 31, 2008 to $10.7 million in the quarter ended December 31, 2009, an increase of $0.4 million, or 4.1%. This increase is primarily due to an increase in the Company’s systems and data interface costs. Systems cost increased from $5.9 million to $6.2 million due to an increase in the number of employees and consultants.

Income Tax Provision

The Company’s income tax expense increased by $1.6 million, or 54.4%, from $2.9 million for the quarter ended December 31, 2008 to $4.4 million for the quarter ended December 31, 2009 due to the increase in income before income taxes from $7.4 million to $11.1 million. The income tax expense as a percentage of income before income taxes (i.e. effective tax rate) was 38.9% for the three months ended December 31, 2008 and 39.8% for the three months ended December 31, 2009. The income tax provision rates were based upon management’s review of the Company’s estimated annual income tax rate, including state taxes. This effective tax rate differed from the statutory federal tax rate of 35.0% primarily due to state income taxes and certain non-deductible expenses.

Results of Operations for the nine months ended December 2008 and the nine months ended December 2009

The following table sets forth, for the periods indicated, the dollar amounts, dollar and percent changes, share changes, and the percentage of revenues represented by certain items reflected in the Company’s consolidated income statements for the nine months ended December 31, 2008 and December 31, 2009. The Company’s past operating results are not necessarily indicative of future operating results.

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	Nine Months Ended			Nine Months Ended						Percentage
	December 31, 2008			December 31, 2009			Change			Change

Revenue	$	233,018,000		$	250,357,000		$	17,339,000			7.4	%
Cost of revenues		176,564,000			186,602,000			10,038,000			5.7	%

Gross profit		56,454,000			63,755,000			7,301,000			12.9	%

Gross profit as percentage of revenue		24.2	%		25.5	%

General and administrative		31,825,000			31,369,000			(456,000	)		(1.4	%)
General and administrative as percentage of revenue		13.7	%		12.5	%


Income before income tax provision		24,629,000			32,386,000			7,757,000			31.5	%

Income before income tax provision as percentage of revenue		10.6	%		12.9	%

Income tax provision		9,594,000			12,907,000			3,313,000			34.5	%

Net income	$	15,035,000		$	19,479,000		$	4,444,000			29.6	%


Weighted Shares
Basic		13,632,000			12,640,000			(992,000	)		(7.3	%)
Diluted		13,815,000			12,801,000			(1,014,000	)		(7.3	%)

Earnings Per Share
Basic	$	1.10		$	1.54		$	0.44			40.0	%
Diluted	$	1.09		$	1.52		$	0.43			39.4	%

Revenues

Change in revenue from the nine months ended December 2008 to the nine months ended December 2009

Revenues increased from $233.0 million for the nine months ended December 31, 2008 to $250.4 million for the nine months ended December 31, 2009, an increase of $17.3 million or 7.4%. The Company’s patient management revenues increased $11.5 million or 11.5% from $101.1 million in the nine months ended December 2008 to $112.6 million in the nine months ended December 2009. This increase was primarily due to improvements in customer utilization of the Company’s TPA services. The Company’s network solutions revenues increased from $132.0 million in the nine months ended December 2008 to $137.8 million in the nine months ended December 2009, an increase of $5.8 million or 4.4%. This increase was primarily due to an increase in customer utilization of the Company’s CorCareRx and CareIQ services.

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Cost of Revenues

Change in cost of revenue from the nine months ended December 2008 to the nine months ended December 2009

The Company’s costs of revenues increased from $176.6 million in the nine months ended December 31, 2008 to $186.6 million in the nine months ended December 31, 2009, an increase of $10.0 million or 5.7%. This increase was primarily due to the costs associated with the increase in demand for the Company’s TPA services, CareIQ and CorCareRx services, which are high-cost services. CorVel TPA service costs increased $9.7 million from the previous nine month period. CorCareRX cost of goods sold increased $2.3 million from the previous nine month period. Similarly, CareIQ costs increased $3.1 million from the previous nine month period.

General and Administrative Costs

Change in cost of general and administrative expense from the nine months ended December 2008 to the nine months ended December 2009

General and administrative expense decreased from $31.8 million in the nine months ended December 31, 2008 to $31.4 million in the nine months ended December 31, 2009, a decrease of $0.5 million, or 1.4%. This decrease is primarily due to a decrease in the Company’s systems and data interface costs. Systems cost decreased from $19.1 million to $18.0 million due to a reduction in employee headcount and consultants, offset by increases in other general and administrative costs. During the December 2009 quarter, software enhancements increased the Company’s gross margin in these services. Additionally, during the December 2009 quarter, the Company began increasing software development expenditures to further our TPA product. The Company expects to grow software development expenditures. Additionally, the Company’s legal expenses decreased in the nine months ended December 31, 2009 compared to the nine months ended December 31, 2008, due to a reduction in settlements and outside attorney expenses. This decrease was offset by an increase in sales and marketing primarily due to an increase in customer meetings and product management personnel.

Income Tax Provision

The Company’s income tax expense increased by $3.3 million, or 34.5%, from $9.6 million for the nine months ended December 31, 2008 to $12.9 million for the nine months ended December 31, 2009 due to the increase in income before income taxes from $24.6 million to $32.4 million. The income tax expense as a percentage of income before income taxes, also known as the effective tax rate, was 39.0% for the nine months ended December 31, 2008 and 39.9% for the nine months ended December 31, 2009. The income tax provision rates were based upon management’s review of the Company’s estimated annual income tax rate, including state taxes. This effective tax rate differed from the statutory federal tax rate of 35.0% primarily due to state income taxes and certain non-deductible expenses.

Liquidity and Capital Resources

The Company has historically funded its operations and capital expenditures primarily from cash flow from operations, and to a lesser extent, stock option exercises. Working capital decreased $4.2 million, or 15%, from $28.1 million as of March 31, 2009 to $23.9 million as of December 31, 2009, primarily due to a decrease in cash from $14.7 million as of March 31, 2009 to $7.9 million as of December 31, 2009. The decrease in cash was primarily due to the $27 million in share repurchases.

The Company believes that cash from operations and funds from exercises of stock options granted to employees are adequate to fund existing obligations, repurchase shares of the Company’s common stock under its current share repurchase program, introduce new services, and continue to develop healthcare related businesses for at least the next twelve months. The Company regularly evaluates cash requirements for current operations and commitments, and for capital acquisitions and other strategic transactions. The Company may elect to raise additional funds for these purposes, through debt or equity financings or otherwise, as appropriate. Additional equity or debt financing may not be available when needed, on terms favorable to us or at all.

As of December 31, 2009, excluding $1.5 million of customer deposits held in bank checking accounts, the Company had $6.4 million in cash and cash equivalents, invested primarily in short-term, interest-bearing, highly liquid investment-grade securities with maturities of 90 days or less in federally regulated banks.

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The Company has historically required substantial capital to fund the growth of its operations, particularly working capital to fund the growth in accounts receivable and capital expenditures. The Company believes, however, that the cash balance at December 31, 2009 along with anticipated internally generated funds, will be sufficient to meet the Company’s expected cash requirements for at least the next twelve months.

Operating Cash Flows

Nine months ended December 31, 2008 compared to nine months ended December 31, 2009

Net cash provided by operating activities increased from $23.6 million in the nine months ended December 31, 2008 to $26.2 million in the nine months ended December 31, 2009. The increase in cash flow from operating activities was primarily due to the increase in net income to $19.5 million for the nine months ended December 31, 2009 from $15.0 million for the nine months ended December 31, 2008, an increase of $4.5 million.

Investing Activities

Nine months ended December 31, 2008 compared to nine months ended December 31, 2009

Net cash flow used in investing activities decreased from $9.5 million in the nine months ended December 31, 2008 to $8.7 million in the nine months ended December 31, 2009, a decrease of $0.8 million. The decrease in net cash used in investing activities is primarily due to payments during the nine months ended December 31, 2008 related to the Company’s acquisition of The Schaffer Companies, Ltd. in June 2007. The Company had no acquisitions or acquisition related disbursements in the nine months ended December 31, 2009. Property additions increased from $7.7 million in the nine months ended December 31, 2008 to $8.7 million in the nine months ended December 31, 2009.

Financing Activities

Nine months ended December 31, 2008 compared to nine months ended December 31, 2009

Net cash flow used in financing activities increased from $19.9 million for the nine months ended December 31, 2008 to $24.3 million for the nine months ended December 31, 2009, an increase of $4.5 million. The increase in cash flow used in financing activities was primarily due to an increase in purchases under the Company’s share repurchase program, partially offset by an increase in the number of options exercised. During the nine months ended December 31, 2009, the Company spent $27.0 million to repurchase 924,000 shares of its common stock, including 200,000 shares which were repurchased from the Company’s Chairman of the Board in September 2009 for an average price of $30.00 per share During the nine months ended December 31, 2008, the Company spent $22.2 million to repurchase 923,000 shares of its common stock. The Company has historically used cash provided by operating activities and from the exercise of stock options to repurchase stock. The Company expects it may use some of the $7.9 million of cash on its balance sheet at December 31, 2009 to repurchase additional shares of stock.

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Contractual Obligations

The following table summarizes the Company’s contractual obligations outstanding as of December 31, 2009.


	Payments Due by Period
			Within One		Between Two and		Between Four and		More than
	Total		Year		Three Years		Five Years		Five Years

Operating leases	$	48,903,000	$	13,746,000	$	19,985,000	$	10,443,000	$	4,729,000

Total	$	48,903,000	$	13,746,000	$	19,985,000	$	10,443,000	$	4,729,000

Operating leases are rents paid for the Company’s physical locations.

Litigation

The Company is involved in other litigation arising in the normal course of business. Management believes that resolution of these other matters will not result in any payment that, in the aggregate, would be material to the financial position or results of the operations of the Company.

Inflation

The Company experiences pricing pressures in the form of competitive prices. The Company is also impacted by rising costs for certain inflation-sensitive operating expenses such as labor and employee benefits, and facility leases. However, the Company generally does not believe these impacts are material to its revenues or net income.

Off-Balance Sheet Arrangements

The Company is not a party to off-balance sheet arrangements as defined by the rules of the Securities and Exchange Commission. However, from time to time the Company enters into certain types of contracts that contingently require the Company to indemnify parties against third-party claims. The contracts primarily relate to: (i) certain contracts to perform services, under which the Company may provide customary indemnification to the purchases of such services; (ii) certain real estate leases, under which the Company may be required to indemnify property owners for environmental and other liabilities, and other claims arising from the Company’s use of the applicable premises; and (iii) certain agreements with the Company’s officers, directors and employees, under which the Company may be required to indemnify such persons for liabilities arising out of their relationship with the Company.

The terms of such obligations vary by contract and in most instances a specific or maximum dollar amount is not explicitly stated therein. Generally, amounts under these contracts cannot be reasonably estimated until a

Page 28

specific claim is asserted. Consequently, no liabilities have been recorded for these obligations on the Company’s balance sheets for any of the periods presented.

Critical Accounting Policies

The rules of the Securities and Exchange Commission define critical accounting policies as those that require application of management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods.

The following is not intended to be a comprehensive list of our accounting policies, but supplements the accounting policies described in Note A to the Consolidated Financial Statements. In many cases, the accounting treatment of a particular transaction is specifically dictated by accounting principles generally accepted in the United States of America, with no need for management’s judgment in their application. There are also areas in which management’s judgment in selecting an available alternative would not produce a materially different result.

The Company has identified the following accounting policies as critical to it: 1) revenue recognition, 2) cost of revenues, 3) allowance for uncollectible accounts, 4) goodwill and long-lived assets, 5) accrual for self-insured costs, 6) accounting for income taxes, and 7) share-based compensation.

Revenue Recognition: The Company’s revenues are recognized primarily as services are rendered based on time and expenses incurred. A certain portion of the Company’s revenues are derived from fee schedule auditing which is based on the number of provider charges audited and, to a lesser extent, on a percentage of savings achieved for the Company’s customers. The Company has generally recognize revenue when there is persuasive evidence of an arrangement, the services have been provided to the customer, the sales price is fixed or determinable, and collectability is reasonably assured. The Company reduces revenue for estimated contractual allowances and records any amounts invoiced to the customer in advance of service performance as deferred revenue.

Cost of revenues: Cost of services consists primarily of the compensation and fringe benefits of field personnel, including managers, medical bill analysts, field case managers, telephonic case managers, systems support, administrative support and account managers and account executives and related facility costs including rent, telephone and office supplies. Historically, the costs associated with these additional personnel and facilities have been the most significant factor driving increases in the Company’s cost of services. Locally managed and incurred IT costs are charged to cost of revenues whereas the costs incurred and managed at the corporate offices are charged to general and administrative expense.

Allowance for Uncollectible Accounts: The Company determines its allowance by considering a number of factors, including the length of time trade accounts receivable are past due, the Company’s previous loss history, the customers’ current ability to pay its obligation to the Company, and the condition of the general economy and the industry as a whole. The Company writes off accounts receivable when they become uncollectible.

The Company must make significant management judgments and estimates in determining contractual and bad debt allowances in any accounting period. One significant uncertainty inherent in the Company’s analysis is whether its past experience will be indicative of future periods. Although the Company considers future projections when estimating contractual and bad debt allowances, the Company ultimately makes its decisions based on the best information available to it at that time. Adverse changes in general economic conditions or trends in reimbursement amounts for the Company’s services could affect the Company’s contractual and bad debt allowance estimates, collection of accounts receivable, cash flows, and results of operations.

There has been no material change in the net reserve balance during the past three fiscal years. No one customer accounted for 10% or more of accounts receivable at March 31, 2009 or at December 31, 2009.

Goodwill and Long-Lived Assets: Goodwill arising from business combinations represents the excess of the purchase price over the estimated fair value of the net assets of the acquired business. Pursuant to FASB ASC 350-10 through ASC 350-30 goodwill is tested annually for impairment or more frequently if circumstances

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indicate the potential for impairment. Also, management tests for impairment of its intangible assets and long-lived assets on an ongoing basis and whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company’s impairment is conducted at a company-wide level. The measurement of fair value is based on an evaluation of market capitalization and is further tested using a multiple of earnings approach. In projecting the Company’s cash flows, management considers industry growth rates and trends and cost structure changes. Based on the Company’s tests and reviews, no impairment of its goodwill, intangible assets or other long-lived assets existed at March 31, 2009 or at December 31, 2009. However, future events or changes in current circumstances could affect the recoverability of the carrying value of goodwill and long-lived assets. Should an asset be deemed impaired, an impairment loss would be recognized to the extent the carrying value of the asset exceeded its estimated fair market value.

Accrual for Self-insurance Costs: The Company self-insures for the group medical costs and workers’ compensation costs of its employees. The Company purchases stop loss insurance for large claims. Management believes that the self-insurance reserves are appropriate; however, actual claims costs may differ from the original estimates requiring adjustments to the reserves. The Company determines its estimated self-insurance reserves based upon historical trends along with outstanding claims information provided by its claims paying agents.

Accounting for Income Taxes: The Company provides for income taxes in accordance with provisions specified in FASB ASC 740-10-05 through ASC 740-10-55, Accounting for Uncertainty in Income Taxes. Accordingly, deferred income tax assets and liabilities are computed for differences between the financial statement and tax bases of assets and liabilities. These differences will result in taxable or deductible amounts in the future, based on tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which temporary differences become deductible. In making an assessment regarding the probability of realizing a benefit from these deductible differences, management considers the Company’s current and past performance, the market environment in which the Company operates, tax planning strategies and the length of carry-forward periods for loss carry-forwards, if any. Valuation allowances are established when necessary to reduce deferred tax assets to amounts that are more likely than not to be realized. Further, the Company provides for income tax issues not yet resolved with federal, state and local tax authorities.

Share-Based Compensation: Effective April 1, 2006, the Company adopted the provisions of FASB ASC 718, on which establishes accounting for equity instruments exchanged for employee services. Under the provisions of FASB ASC 718, share-based compensation cost is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense over the employee’s requisite service period (generally the vesting period of the equity grant).

For the nine months ended December 31, 2009, the Company recorded share-based compensation expense of $1,560,000. Share-based compensation expense recognized in fiscal 2010 is based on awards ultimately expected to vest; therefore, it has been reduced for estimated forfeitures. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates

The Company estimates the fair value of stock options using the Black-Scholes valuation model. Key input assumptions used to estimate the fair value of stock options include the exercise price of the award, the expected option term, the expected volatility of the Company’s stock over the option’s expected term, the risk-free interest rate over the option’s term, and the Company’s expected annual dividend yield. The Company’s management believes that the valuation technique and the approach utilized to develop the underlying assumptions are appropriate in calculating the fair values of the Company’s stock options granted in fiscal 2010. Estimates of fair value are not intended to predict actual future events or the value ultimately realized by persons who receive equity awards.

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The key input assumptions that were utilized in the valuation of the stock options granted during the quarter ended December 31, 2009 are summarized in the table below.


Expected option term (1)	4.8 years
Expected volatility (2)		47	%
Risk-free interest rate (3)		2.34	%
Expected forfeiture rate		9.81	%
Expected annual dividend yield		0	%


(1)		The expected option term is based on historical exercise and post-vesting termination patterns, as well as our expectations regarding future trends.

(2)		Expected volatility represents a combination of historical stock price volatility and estimated future volatility.

(3)		The risk-free interest rate is based on the implied yield on five year United States Treasury Bill on the date of grant.

Recent Accounting Standards Update

In September 2006, FASB issued ASC 820-10-20, Fair Value Measurements and Disclosures (“ASC 820-10-20”), which defines fair value to be the price that would be received when an asset is sold or paid when a liability is transferred in an orderly transaction between market participants at the measurement date and emphasizes that fair value is a market-based measurement, not an entity-specific measurement. It establishes a fair value hierarchy and expands disclosures about fair value measurements in both interim and annual periods. On April 1, 2008, the Company adopted ASC 820-10-20 for its financial assets and financial liabilities, and on April 1, 2009, the Company adopted ASC 820-10-20 for its nonfinancial assets and nonfinancial liabilities. The adoption of ASC 820-10-20 did not have a material impact on the Company’s financial position or results of operations.

In April 2009, FASB issued ASC 825-10-65, Transition Related to FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments (“ASC 825-10-65”), which requires disclosures about fair value of financial instruments for interim reporting periods as well as in annual financial statements for interim reporting periods ending after June 15, 2009. The Company adopted ASC 825-10-65 on June 30, 2009, and the adoption did not have a material impact on the Company’s financial position or results of operations..

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balance sheet date but before the financial statements are issued. ASC 855-10-25, Recognition requires an entity to recognize, in the financial statements, subsequent events that provide additional information regarding conditions that existed at the balance sheet date. Subsequent events that provide information about conditions that did not exist at the balance sheet date shall not be recognized in the financial statements under ASC 855-10. ASC 855-10 was effective for interim and annual reporting periods on or after June 15, 2009. The Company adopted ASC 855-10 on June 30, 2009, and the adoption did not have a material impact on the Company’s financial position or results of operations.

Item 3 — Quantitative and Qualitative Disclosures About Market Risk

As of December 31, 2009, the Company held no market risk sensitive instruments for trading purposes, and the Company did not employ any derivative financial instruments, other financial instruments, or derivative commodity instruments to hedge any market risk. The Company had no debt outstanding as of December 31, 2009, and therefore, had no market risk related to debt.

Item 4 — Controls and Procedures

Our management has evaluated, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based upon that evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that, as of December 31, 2009, our disclosure controls and procedures were not effective in ensuring that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is (i) recorded, processed, summarized and reported, within the time periods specified in the rules and forms of the Securities and Exchange Commission and (ii) accumulated and communicated to our management, including our principal executive and principal accounting officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined under the Rules 13a — 15(f) and 15d-15(f) under the Securities Exchange Act of 1934. Internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of our financial reporting and preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. Internal control over financial reporting includes maintaining records that in reasonable detail accurately and fairly reflect our transactions; providing reasonable assurance that transactions are recorded as necessary for preparation of our financial statements in accordance with U.S. generally accepted accounting principles; providing reasonable assurance that our receipts and expenditures are made in accordance with authorizations of our management and directors; and providing reasonable assurance that unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements would be prevented or detected on a timely basis.

Our management assessed the effectiveness of our internal control over financial reporting as of March 31, 2009. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control — Integrated Framework (COSO). Based on this assessment, management concluded that our internal control over financial reporting was not effective as of March 31, 2009 to provide reasonable assurance regarding the reliability of financial reporting and preparation of financial statements for external reporting purposes in accordance with U.S. generally accepted accounting principles due to the following material weakness.

Financial close and reporting. We did not maintain adequate controls to support: (i) timely and thorough reconciliation of significant accounts, (ii) effective utilization of disclosure checklists during the preparation of Company filings, (iii) use of Excel for enterprise consolidation and general ledger reporting in our Corporate office, (iv) review of data used to compute financial statement disclosures, and (v) regional accounting personnel not reporting directly to the corporate accounting function.

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While we believe no single item listed above is a material weakness on its own, when the deficiencies are aggregated, we believe they represent a material weakness.

Changes in Internal Control over Financial Reporting

During the quarter ended December 31, 2009, there have been the following changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting: Management implemented consolidation capabilities in our accounting system which will eliminate the use of the Excel consolidation. The accounting system consolidation was completed in parallel with the Excel process in the December 2009 quarter. The financial statements for the quarter ended December 31, 2009 were generated from the accounting system produced consolidation. In addition, procedures were designed and implemented to help ensure the accuracy and propriety of consolidating entries and resulting consolidated balances.

Remediation Activities

During the fourth quarter of fiscal 2009, management made changes to the internal controls over financial close and reporting. These controls were implemented during the fourth quarter of fiscal 2009 and insufficient time had passed from the implementation of the controls through the completion of the annual audit for adequate evidence to be gathered that would enable us to conclude upon the effectiveness of these controls at the report date. In addition to continuing to use and rely upon the controls implemented in the fourth quarter of fiscal 2009, management will be implementing additional controls. What follows is a list of the deficiencies that we believe aggregated into a material weakness and the actions management has or is taking to remediate each deficiency.

(i) Timely and thorough reconciliation of significant accounts:

During the first, second, and third quarters of fiscal 2010, management implemented additional controls over the reconciliation process. These controls include additional review by senior accounting staff and the Chief Financial Officer. Management is also instituting internal audit procedures designed to ensure timely and thorough reconciliation of all significant accounts.

(ii) Effective utilization of disclosure checklists during the preparation of Company filings:

During the fourth quarter of fiscal 2009, management implemented the use of disclosure checklists for all annual and quarterly SEC filings. While this control was operating in the fourth quarter and disclosure checklists were used in the preparation of the Form 10-K there was insufficient time from the implementation of the control to the audit report date to gather sufficient evidence to determine the effectiveness of the control at the audit report date.

(iii) Use of Excel for enterprise consolidation and general ledger reporting in our Corporate office:

During the fourth quarter of fiscal 2009, management implemented a process and associated control that requires reperformance of the Excel consolidation. A comparison is made between the Excel consolidation and the reperformed copy and discrepancies, if any, are researched and resolved. Additionally, the reperformance process includes a review and approval of each journal entry posted to the consolidation. While this control was operating in the fourth quarter, there was insufficient time from the implementation of the control to the audit report date to gather sufficient evidence to determine the effectiveness of the control at the audit report date.

Management has implemented consolidation capabilities in the accounting software used by the Company. The consolidation was produced in parallel with the Excel consolidation as of December 31, 2009. Management reported results for the quarter ended December 31, 2009 from the accounting system consolidation.

(iv) Review of data used to compute financial statement disclosures:

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Management has expanded the review process to include all financial statement disclosers. The expanded review includes reviews by senior accounting staff and the CFO.

(v) Regional accounting personnel not reporting directly to the corporate accounting function:

Management has implemented a performance monitoring tool that enables tracking the performance of the regional accounting personal against key financial reporting related objectives.

Changes In Internal Control Over Financial Reporting. Other than as discussed in the preceding paragraphs, there have been no changes in our internal control over financial reporting that occurred during our last fiscal quarter that has materially affected or is reasonably likely to materially affect our internal control over financial reporting.

PART II — OTHER INFORMATION

Item 1 — Legal Proceedings

Item 1A. Risk Factors

A restated description of the risk factors associated with our business is set forth below. This description includes any and all changes (whether or not material) to, and supercedes, the description of the risk factors associated with our business previously disclosed in Part 1, Item 1A of our Annual Report on Form 10-K for the fiscal year ended March 31, 2009.

Past financial performance is not necessarily a reliable indicator of future performance, and investors in our common stock should not use historical performance to anticipate results or future period trends. Investing in our common stock involves a high degree of risk. Investors should consider carefully the following risk factors, as well as the other information in this report and our other filings with the Securities and Exchange Commission, including our consolidated financial statements and the related notes, before deciding whether to invest or maintain an investment in shares of our common stock. If any of the following risks actually occurs, our business, financial condition and results of operations would suffer. In this case, the trading price of our common stock would likely decline. The risks described below are not the only ones we face. Additional risks that we currently do not know about or that we currently believe to be immaterial also may impair our business operations.

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Changes in government regulations could increase our costs of operations and/or reduce the demand for our services.

Many states, including a number of those in which we transact business, have licensing and other regulatory requirements applicable to our business. Approximately half of the states have enacted laws that require licensing of businesses which provide medical review services such as ours. Some of these laws apply to medical review of care covered by workers’ compensation. These laws typically establish minimum standards for qualifications of personnel, confidentiality, internal quality control and dispute resolution procedures. These regulatory programs may result in increased costs of operation for us, which may have an adverse impact upon our ability to compete with other available alternatives for healthcare cost control. In addition, new laws regulating the operation of managed care provider networks have been adopted by a number of states. These laws may apply to managed care provider networks having contracts with us or to provider networks which we may organize. To the extent we are governed by these regulations, we may be subject to additional licensing requirements, financial and operational oversight and procedural standards for beneficiaries and providers.

Regulation in the healthcare and workers’ compensation fields is constantly evolving. We are unable to predict what additional government initiatives, if any, affecting our business may be promulgated in the future. Our business may be adversely affected by failure to comply with existing laws and regulations, failure to obtain necessary licenses and government approvals or failure to adapt to new or modified regulatory requirements. Proposals for healthcare legislative reforms are regularly considered at the federal and state levels. To the extent that such proposals affect workers’ compensation, such proposals may adversely affect our business, financial condition and results of operations.

In addition, changes in workers’ compensation, auto and managed health care laws or regulations may reduce demand for our services, require us to develop new or modified services to meet the demands of the marketplace or reduce the fees that we may charge for our services. One proposal which had been considered in the past, but not enacted by Congress or certain state legislatures, is 24-hour health coverage, in which the coverage of traditional employer-sponsored health plans is combined with workers’ compensation coverage to provide a single insurance plan for work-related and non-work-related health problems. Incorporating workers’ compensation coverage into conventional health plans may adversely affect the market for our services because some employers would purchase 24-hour coverage from group health plans, which would reduce the demand for CorVel’s workers’ compensation customers.

Exposure to possible litigation and legal liability may adversely affect our business, financial condition and results of operations.

We, through our utilization management services, make recommendations concerning the appropriateness of providers’ medical treatment plans of patients throughout the country, and as a result, could be exposed to claims for adverse medical consequences. We do not grant or deny claims for payment of benefits and we do not believe that we engage in the practice of medicine or the delivery of medical services. There can be no assurance, however, that we will not be subject to claims or litigation related to the authorization or denial of claims for payment of benefits or allegations that we engage in the practice of medicine or the delivery of medical services.

In addition, there can be no assurance that we will not be subject to other litigation that may adversely affect our business, financial condition or results of operations, including but not limited to being joined in litigation brought against our customers in the managed care industry. We maintain professional liability insurance and such other coverages as we believe are reasonable in light of our experience to date. If such insurance is insufficient or unavailable in the future at reasonable cost to protect us from liability, our business, financial condition or results of operations could be adversely affected.

In February 2005, Kathleen Roche, D.C., as plaintiff, filed a putative class action in Circuit Court for the 20th Judicial District, St. Clair County, Illinois, against us. The case seeks recovery of unspecified damages based on the Company’s alleged failure to steer patients to medical providers who are members of the CorVel CorCare

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PPO network and also alleges that we used biased and arbitrary computer software to review medical providers’ bills. An unfavorable outcome in this litigation could materially adversely affect our business, financial condition or results of operations.

Our quarterly sequential revenue may not increase and may decline. As a result, we may fail to meet or exceed the expectations of investors or analysts which could cause our common stock price to decline.

Our quarterly sequential revenue growth may not increase and may decline in the future as a result of a variety of factors, many of which are outside of our control. If changes in our quarterly sequential revenue fall below the expectations of investors or analysts, the price of our common stock could decline substantially. Fluctuations or declines in quarterly sequential revenue growth may be due to a number of factors, including, but not limited to, those listed below and identified throughout this “Risk Factors” section: the decline in manufacturing employment, the decline in workers’ compensation claims, the decline in healthcare expenditures, the considerable price competition in a flat-to-declining workers’ compensation market, litigation, the increase in competition, and the changes and the potential changes in state workers’ compensation and automobile managed care laws which can reduce demand for our services. These factors create an environment where revenue and margin growth is more difficult to attain and where revenue growth is less certain than historically experienced. Additionally, our technology and preferred provider network face competition from companies that have more resources available to them than we do. Also, some customers may handle their managed care services in-house and may reduce the amount of services which are outsourced to managed care companies such as CorVel. These factors could cause the market price of our common stock to fluctuate substantially. There can be no assurance that our growth rate in the future, if any, will be at or near historical levels.

In addition, the stock market has in the past experienced price and volume fluctuations that have particularly affected companies in the healthcare and managed care markets resulting in changes in the market price of the stock of many companies, which may not have been directly related to the operating performance of those companies.

Due to the foregoing factors, and the other risks discussed in this report, investors should not rely on quarter-to-quarter comparisons of our results of operations as an indication of our future performance.

If lawsuits against us are successful, we may incur significant liabilities.

We provide to insurers and other payors of health care costs managed care programs that utilize preferred provider organizations and computerized bill review programs. Health care providers have brought against us and our customers, individual and class action lawsuits challenging such programs. If such lawsuits are successful, we may incur significant liabilities.

We make recommendations about the appropriateness of providers’ proposed medical treatment plans for patients throughout the country. As a result, we could be subject to claims arising from any adverse medical consequences. Although plaintiffs have not to date subjected us to any claims or litigation relating to the grant or denial of claims for payment of benefits or allegations that we engage in the practice of medicine or the delivery of medical services, we cannot assure you that plaintiffs will not make such claims in future litigation. We also cannot assure you that our insurance will provide sufficient coverage or that insurance companies will make insurance available at a reasonable cost to protect us from significant future liability.

Our failure to compete successfully could make it difficult for us to add and retain customers and could reduce or impede the growth of our business.

We face competition from PPOs, TPAs and other managed healthcare companies. We believe that as managed care techniques continue to gain acceptance in the workers’ compensation marketplace, our competitors will increasingly consist of nationally-focused workers’ compensation managed care service companies, insurance companies, HMOs and other significant providers of managed care products. Legislative reform in some states has been considered, but not enacted to permit employers to designate health plans such as HMOs and PPOs to cover workers’ compensation claimants. Because many health plans have the ability to manage medical costs for workers’

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compensation claimants, such legislation may intensify competition in the markets served by us. Many of our current and potential competitors are significantly larger and have greater financial and marketing resources than we do, and there can be no assurance that we will continue to maintain our existing customers, our past level of operating performance or be successful with any new products or in any new geographical markets we may enter.

Declines in workers’ compensation claims may harm our results of operations.

Within the past few years, several states have experienced a decline in the number of workers’ compensation claims and the average cost per claim which have been reflected in workers’ compensation insurance premium rate reductions in those states. We believe that declines in workers’ compensation costs in these states are due principally to intensified efforts by payors to manage and control claim costs, and to a lesser extent, to improved risk management by employers and to legislative reforms. If declines in workers’ compensation costs occur in many states and persist over the long-term, it would have an adverse impact on our business, financial condition and results of operations.

We provide an outsource service to payors of workers’ compensation and auto healthcare benefits. These payors include insurance companies, TPAs, municipalities, state funds, and self-insured, self-administered employers. If these payors reduce the amount of work they outsource, our results of operations would be adversely affected.

If the average annual growth in nationwide employment does not offset declines in the frequency of workplace injuries and illnesses, then the size of our market may decline, which may adversely affect our ability to grow.

The rate of injuries that occur in the workplace has decreased over time. Although the overall number of people employed in the workplace has generally increased over time, this increase has only partially offset the declining rate of injuries and illnesses. Our business model is based, in part, on our ability to expand our relative share of the market for the treatment and review of claims for workplace injuries and illnesses. If nationwide employment does not increase or experiences periods of decline, or if workplace injuries and illnesses continue to decline at a greater rate than the increase in total employment, our ability to increase our revenue and earnings could be adversely impacted.

If the utilization by healthcare payors of early intervention services continues to increase, the revenue from our later-stage network and healthcare management services could be negatively affected.

The performance of early intervention services, including injury occupational healthcare, first notice of loss, and telephonic case management services, often result in a decrease in the average length of, and the total costs associated with, a healthcare claim. By successfully intervening at an early stage in a claim, the need for additional cost containment services for that claim often can be reduced or even eliminated. As healthcare payors continue to increase their utilization of early intervention services, the revenue from our later stage network and healthcare management services will decrease.

We face competition for staffing, which may increase our labor costs and reduce profitability.

We compete with other health-care providers in recruiting qualified management and staff personnel for the day-to-day operations of our business, including nurses and other case management professionals. In some markets, the scarcity of nurses and other medical support personnel has become a significant operating issue to health-care providers. This shortage may require us to enhance wages to recruit and retain qualified nurses and other health-care professionals. Our failure to recruit and retain qualified management, nurses and other health-care professionals, or to control labor costs could have a material adverse effect on profitability.

If competition increases, our growth and profits may decline.

The markets for our Network Services and Case Management Services services are also fragmented and competitive. Our competitors include national managed care providers, preferred provider networks, smaller

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independent providers and insurance companies. Companies that offer one or more workers’ compensation managed care services on a national basis are our primary competitors. We also compete with many smaller vendors who generally provide unbundled services on a local level, particularly companies with an established relationship with a local insurance company adjuster. In addition, several large workers’ compensation insurance carriers offer managed care services for their customers, either by performance of the services in-house or by outsourcing to organizations like ours. If these carriers increase their performance of these services in-house, our business may be adversely affected. In addition, consolidation in the industry may result in carriers performing more of such services in-house.

The failure to attract and retain qualified or key personnel may prevent us from effectively developing, marketing, selling, integrating and supporting our services.

We are dependent, to a substantial extent, upon the continuing efforts and abilities of certain key management personnel. In addition, we face competition for experienced employees with professional expertise in the workers’ compensation managed care area. The loss of key employees, especially V. Gordon Clemons, Chairman, and Dan Starck, President, Chief Executive Officer, and Chief Operating Officer, or the inability to attract qualified employees, could have a material unfavorable effect on our business and results of operations.

If we fail to grow our business internally or through strategic acquisitions we may be unable to execute our business plan, maintain high levels of service or adequately address competitive challenges.

Our strategy is to continue internal growth and, as strategic opportunities arise in the workers’ compensation managed care industry, to consider acquisitions of, or relationships with, other companies in related lines of business. As a result, we are subject to certain growth-related risks, including the risk that we will be unable to retain personnel or acquire other resources necessary to service such growth adequately. Expenses arising from our efforts to increase our market penetration may have a negative impact on operating results. In addition, there can be no assurance that any suitable opportunities for strategic acquisitions or relationships will arise or, if they do arise, that the transactions contemplated could be completed. If such a transaction does occur, there can be no assurance that we will be able to integrate effectively any acquired business. In addition, any such transaction would be subject to various risks associated with the acquisition of businesses, including, but not limited to, the following:

• an acquisition may negatively impact our results of operations because it may require incurring large one-time charges, substantial debt or liabilities; it may require the amortization or write down of amounts related to deferred compensation, goodwill and other intangible assets; or it may cause adverse tax consequences, substantial depreciation or deferred compensation charges;

• we may encounter difficulties in assimilating and integrating the business, technologies, products, services, personnel or operations of companies that are acquired, particularly if key personnel of the acquired company decide not to work for us;

• an acquisition may disrupt ongoing business, divert resources, increase expenses and distract management;

• the acquired businesses, products, services or technologies may not generate sufficient revenue to offset acquisition costs;

• we may have to issue equity or debt securities to complete an acquisition, which would dilute stockholders and could adversely affect the market price of our common stock; and

• acquisitions may involve the entry into a geographic or business market in which we have little or no prior experience.

There can be no assurance that we will be able to identify or consummate any future acquisitions or other strategic relationships on favorable terms, or at all, or that any future acquisition or other strategic relationship will

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not have an adverse impact on our business or results of operations. If suitable opportunities arise, we may finance such transactions, as well as internal growth, through debt or equity financing. There can be no assurance, however, that such debt or equity financing would be available to us on acceptable terms when, and if, suitable strategic opportunities arise.

Our Internet-based services are dependent on the development and maintenance of the Internet infrastructure.

We deploy our CareMC and, to a lesser extent, MedCheck services over the Internet. Our ability to deliver our Internet-based services is dependent on the development and maintenance of the infrastructure of the Internet by third parties. This includes maintenance of a reliable network backbone with the necessary speed, data capacity and security, as well as timely development of complementary products, such as high-speed modems, for providing reliable Internet access and services. The Internet has experienced, and is likely to continue to experience, significant growth in the number of users and the amount of traffic. If the Internet continues to experience increased usage, the Internet infrastructure may be unable to support the demands placed on it. In addition, the performance of the Internet may be harmed by increased usage.

The Internet has experienced a variety of outages and other delays as a result of damages to portions of its infrastructure, and it could face outages and delays in the future. These outages and delays could reduce the level of Internet usage, as well as the availability of the Internet to us for delivery of our Internet-based services. In addition, our customers who use our Web-based services depend on Internet service providers, online service providers and other Web site operators for access to our Web site. All of these providers have experienced significant outages in the past and could experience outages, delays and other difficulties in the future due to system failures unrelated to our systems. Any significant interruptions in our services or increases in response time could result in a loss of potential or existing users, and, if sustained or repeated, could reduce the attractiveness of our services.

An interruption in our ability to access critical data may cause customers to cancel their service and/or may reduce our ability to effectively compete.

Certain aspects of our business are dependent upon our ability to store, retrieve, process and manage data and to maintain and upgrade our data processing capabilities. Interruption of data processing capabilities for any extended length of time, loss of stored data, programming errors or other system failures could cause customers to cancel their service and could have a material adverse effect on our business and results of operations.

In addition, we expect that a considerable amount of our future growth will depend on our ability to process and manage claims data more efficiently and to provide more meaningful healthcare information to customers and payors of healthcare. There can be no assurance that our current data processing capabilities will be adequate for our future growth, that we will be able to efficiently upgrade our systems to meet future demands, or that we will be able to develop, license or otherwise acquire software to address these market demands as well or as timely as our competitors.

The introduction of software products incorporating new technologies and the emergence of new industry standards could render our existing software products less competitive, obsolete or unmarketable.

There can be no assurance that we will be successful in developing and marketing new software products that respond to technological changes or evolving industry standards. If we are unable, for technological or other reasons, to develop and introduce new software products cost-effectively, in a timely manner and in response to changing market conditions or customer requirements, our business, results of operations and financial condition may be adversely affected.

Developing or implementing new or updated software products and services may take longer and cost more than expected. We rely on a combination of internal development, strategic relationships, licensing and acquisitions to develop our software products and services. The cost of developing new healthcare information services and technology solutions is inherently difficult to estimate. Our development and implementation of proposed software products and services may take longer than originally expected, require more testing than

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originally anticipated and require the acquisition of additional personnel and other resources. If we are unable to develop new or updated software products and services cost-effectively on a timely basis and implement them without significant disruptions to the existing systems and processes of our customers, we may lose potential sales and harm our relationships with current or potential customers.

A breach of security may cause our customers to curtail or stop using our services.

We rely largely on our own security systems, confidentiality procedures and employee nondisclosure agreements to maintain the privacy and security of our and our customers proprietary information. Accidental or willful security breaches or other unauthorized access by third parties to our information systems, the existence of computer viruses in our data or software and misappropriation of our proprietary information could expose us to a risk of information loss, litigation and other possible liabilities which may have a material adverse effect on our business, financial condition and results of operations. If security measures are breached because of third-party action, employee error, malfeasance or otherwise, or if design flaws in our software are exposed and exploited, and, as a result, a third party obtains unauthorized access to any customer data, our relationships with our customers and our reputation will be damaged, our business may suffer and we could incur significant liability. Because techniques used to obtain unauthorized access or to sabotage systems change frequently and generally are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures.

If we are unable to increase our market share among national and regional insurance carriers and large, self-funded employers, our results may be adversely affected.

Our business strategy and future success depend in part on our ability to capture market share with our cost containment services as national and regional insurance carriers and large, self-funded employers look for ways to achieve cost savings. We cannot assure you that we will successfully market our services to these insurance carriers and employers or that they will not resort to other means to achieve cost savings. Additionally, our ability to capture additional market share may be adversely affected by the decision of potential customers to perform services internally instead of outsourcing the provision of such services to us. Furthermore, we may not be able to demonstrate sufficient cost savings to potential or current customers to induce them not to provide comparable services internally or to accelerate efforts to provide such services internally.

If we lose several customers in a short period, our results may be materially adversely affected.

Our results may decline if we lose several customers during a short period. Most of our customer contracts permit either party to terminate without cause. If several customers terminate, or do not renew or extend their contracts with us, our results could be materially adversely affected. Many organizations in the insurance industry have consolidated and this could result in the loss of one or more of our customers through a merger or acquisition. Additionally, we could lose customers due to competitive pricing pressures or other reasons.

We are subject to risks associated with acquisitions of intangible assets.

Our acquisition of other businesses may result in significant increases in our intangible assets and goodwill. We regularly evaluate whether events and circumstances have occurred indicating that any portion of our intangible assets and goodwill may not be recoverable. When factors indicate that intangible assets and goodwill should be evaluated for possible impairment, we may be required to reduce the carrying value of these assets. We cannot currently estimate the timing and amount of any such charges.

If we are unable to leverage our information systems to enhance our outcome-driven service model, our results may be adversely affected.

To leverage our knowledge of workplace injuries, treatment protocols, outcomes data, and complex regulatory provisions related to the workers’ compensation market, we must continue to implement and enhance information systems that can analyze our data related to the workers’ compensation industry. We frequently upgrade existing operating systems and are updating other information systems that we rely upon in providing our services

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and financial reporting. We have detailed implementation schedules for these projects that require extensive involvement from our operational, technological and financial personnel. Delays or other problems we might encounter in implementing these projects could adversely affect our ability to deliver streamlined patient care and outcome reporting to our customers.

The increased costs of professional and general liability insurance may have an adverse effect on our profitability.

The cost of commercial professional and general liability insurance coverage has risen significantly in the past several years, and this trend may continue. In addition, if we were to suffer a material loss, our costs may increase over and above the general increases in the industry. If the costs associated with insuring our business continue to increase, it may adversely affect our business. We believe our current level of insurance coverage is adequate for a company of our size engaged in our business.

The impact of seasonality has a negative effect on our revenue.

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

If the referrals for our patient management services continue to decline, our business, financial condition and results of operations would be materially adversely affected.

Although we experienced an increase in patient management revenue for the current quarter compared to the prior year, we have experienced a general decline over the past several years in the revenue and operating performance of patient management services We believe that the performance decline has been due to the following factors: the decrease of the number of workplace injuries that have become longer-term disability cases; increased regional and local competition from providers of managed care services; a possible reduction by insurers on the types of services provided by our patient management business; the closure of offices and continuing consolidation of our patient management operations; and employee turnover, including management personnel, in our patient management business. In the past, these factors have all contributed to the lowering of our long-term outlook for our patient management services. If some or all of these conditions continue, we believe that the performance of our patient management revenues could decrease.

Healthcare providers are becoming increasingly resistant to the application of certain healthcare cost containment techniques; this may cause revenue from our cost containment operations to decrease.

Healthcare providers have become more active in their efforts to minimize the use of certain cost containment techniques and are engaging in litigation to avoid application of certain cost containment practices. Recent litigation between healthcare providers and insurers has challenged certain insurers’ claims adjudication and reimbursement decisions. Although these lawsuits do not directly involve us or any services we provide, these cases may affect the use by insurers of certain cost containment services that we provide and may result in a decrease in revenue from our cost containment business.

Failure to achieve and maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act of 2002, and delays in completing our internal controls and financial audits, could have a material adverse effect on our business and stock price.

Our fiscal 2009 management assessment revealed material weaknesses in our internal controls over financial close and reporting processes. We have not yet completed remediation of these material weaknesses and there can be no assurance that such remediation will be successful. During the course of our continued testing, we also may identify other significant deficiencies or material weaknesses, in addition to the ones already identified, which we may not be able to remediate in a timely manner or at all. If we continue to fail to achieve and maintain effective internal controls, we will not be able to conclude that we have effective internal controls over financial

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reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002. Failure to achieve and maintain an effective internal control environment, and delays in completing our internal controls and financial audits, could cause investors to lose confidence in our reported financial information and us, which could result in a decline in the market price of our common stock, and cause us to fail to meet our reporting obligations in the future, which in turn could impact our ability to raise equity financing if needed in the future.

Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds

There were no sales of unregistered securities during the period covered by this report. The following table shows the repurchases of the Company’s common stock made by or on behalf of the Company in open-market transactions for the quarter ended December 31, 2009 pursuant to a publicly announced plan.


					Total Number of		Maximum Number of
					Shares Purchased as		Shares that may yet
	Total Number of		Average Price Paid		Part of Publicly		be Purchased Under
Period	Shares Purchased		Per Share		Announced Program		the Program

October 1 to October 31, 2009		128,400	$	29.41		13,422,142		727,858
November 1 to November 30, 2009		120,758		30.71		13,542,900		607,100
December 1 to December 31, 2009		64,100		32.06		13,607,000		543,000

Total		313,258	$	30.46		13,607,000		543,000

In 1996, the Company’s Board of Directors authorized a stock repurchase program for up to 100,000 shares of the Company’s common stock. The Company’s Board of Directors has periodically increased the number of shares authorized for repurchase under the repurchase program. The most recent increase occurred in August 2009 and brought the number of shares authorized for repurchase over the life of the program to 14,150,000 shares. There is no expiration date for the repurchase program.

Item 3 — Defaults Upon Senior Securities — None.

Item 4 — Submission of Matters to a Vote of Security Holders — None.

Item 5 — Other Information — None.

Item 6 — Exhibits

3.1 Amended and Restated Certificate of Incorporation of the Company. Incorporated herein by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2007 filed on August 9, 2007.

3.2 Amended and Restated Bylaws of the Company. Incorporated herein by reference to Exhibit 3.2 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2006 filed on August 14, 2006.

3.3 Certification of Designation Increasing the Number of Shares of Series A Junior Participating Preferred Stock. Incorporated herein by reference to Exhibit 3.1 to the company’s form 8-K filed on November 24, 2008.

10.1 Summary of Terms of Oral Agreement to Repurchase Shares of Common Stock held by V. Gordon Clemons.

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10.2† Stock Option Agreement granted November 2, 2009 by and between CorVel Corporation and Daniel J. Starck, providing for performance vesting. Incorporated herein by reference to Exhibit 10.1 to the Company’s form 8-K filed on November 6, 2009.

10.3† Stock Option Agreement granted November 2, 2009 by and between CorVel Corporation and Scott R. McCloud, providing for performance vesting. Incorporated herein by reference to Exhibit 10.2 to the Company’s form 8-K filed on November 6, 2009.

10.4† Stock Option Agreement granted November 2, 2009 by and between CorVel Corporation and Donald C. McFarlane, providing for performance vesting. Incorporated herein by reference to Exhibit 10.3 to the Company’s form 8-K filed on November 6, 2009.

10.5† Stock Option Agreement granted November 2, 2009 by and between CorVel Corporation and Diane J. Blaha, providing for performance vesting. Incorporated herein by reference to Exhibit 10.4 to the Company’s form 8-K filed on November 6, 2009.

31.1 Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2 Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1 Certification of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith)

32.2 Certification of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith)


†		Confidential treatment previously has been requested for certain confidential portions of this exhibit pursuant to Rule 24b-2 under the Securities Exchange Act of 1934. In accordance with Rule 24b-2, these confidential portions were omitted from this exhibit and filed separately with the Securities and Exchange Commission.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.


	CORVEL CORPORATION
	By:	Daniel J. Starck
		Daniel J. Starck, President,
		Chief Executive Officer, and Chief Operating Officer


	By:	Scott R. McCloud
		Scott R. McCloud,
		Chief Financial Officer

February 5, 2010

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	Page
PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

Condensed Consolidated Balance Sheets — March 31, 2009 and December 31, 2009 (unaudited)		3

Consolidated Income Statements (unaudited) — Three months ended December 31, 2008 and 2009		4

Consolidated Income Statements (unaudited) — Nine months ended December 31, 2008 and 2009		5

Consolidated Statements of Cash Flows (unaudited) — Nine months ended December 31, 2008 and 2009		6

Notes to Consolidated Financial Statements (unaudited) — December 31, 2009		7

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		20

Item 3. Quantitative and Qualitative Disclosures About Market Risk		32

Item 4. Controls and Procedures		32


PART II. OTHER INFORMATION

Item 1. Legal Proceedings		34

Item 1A. Risk Factors		34

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		42

Item 3. Defaults Upon Senior Securities		42

Item 4. Submission of Matters to a Vote of Security Holders		42

Item 5. Other Information		42

Item 6. Exhibits		42

Signatures		43
EX-10.1
EX-31.1
EX-31.2
EX-32.1
EX-32.2