1
SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE
SECURITIES EXCHANGE ACT OF 1934
(AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only
(as permitted by Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material under Rule 14a-12
CORVEL CORPORATION
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
----------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
----------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
----------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
----------------------------------------------------------------------
(5) Total fee paid:
----------------------------------------------------------------------
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
----------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
----------------------------------------------------------------------
(3) Filing Party:
----------------------------------------------------------------------
(4) Date Filed:
----------------------------------------------------------------------
2
July 6, 2001
Dear CorVel Stockholder:
We are pleased to invite you to our 2001 Annual Meeting which will be held at
the offices of the Company, 2010 Main Street, Suite 1020, Irvine, California, on
Thursday, August 2, 2001, at 1:00 p.m. Pacific Daylight Time. The Annual Meeting
will begin with a report on the Company's progress, followed by a discussion and
stockholder questions. Voting on election of directors and other matters is also
scheduled. The items to be voted on are addressed in the enclosed Notice of
Annual Meeting of Stockholders and Proxy Statement.
Several significant milestones reached in fiscal 2001 deserve special mention:
- CorVel reported record revenues of $209.6 million for the fiscal
year ended March 31, 2001, representing an increase of
approximately 12% over the $186.8 million in revenues in fiscal
2000.
- CorVel continued development of MedCheck , its medical
reimbursement and PPO administration software, with the
initiation of the processing of electronically submitted medical
bills.
- CorVel continued the development and implementation of CareMC
(http://www.caremc.com), its business to business managed care
website.
Your vote is important. Whether or not you plan to attend the Annual Meeting,
please complete and mail the enclosed proxy card to ensure that your shares will
be represented. A postage pre-paid envelope has been provided for your
convenience.
We look forward to seeing you at our meeting.
Sincerely,
V. Gordon Clemons,
Chairman of the Board, Chief Executive
Officer and President
3
CORVEL CORPORATION
----------------------------------------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
AUGUST 2, 2001
----------------------------------------------------
To the Stockholders of CorVel Corporation:
Notice is hereby given that the 2001 Annual Meeting of Stockholders of CorVel
Corporation, a Delaware corporation, will be held at the Company's offices, at
2010 Main Street, Suite 1020, Irvine, California, on Thursday, August 2, 2001,
at 1:00 p.m. Pacific Daylight Time for the following purposes:
1. To elect five directors to serve until the 2002 Annual Meeting;
2. To approve a series of amendments to the Company's Restated 1988
Executive Stock Option Plan (the "Option Plan") to: (i) clarify
the group of employees who are eligible to participate in the
Option Plan and (ii) increase the maximum number of shares of
Common Stock authorized for issuance over the term of the Option
Plan by 500,000 shares.
3. To approve a series of amendments to the Company's 1991 Employee
Stock Purchase Plan (the "Purchase Plan") to: (i) modify the
type of amendments to the Purchase Plan that require stockholder
approval and (ii) extend the termination date of the Purchase
Plan by ten years to September 30, 2011.
4. To ratify the appointment of Grant Thornton LLP as independent
auditors of the Company for fiscal year ending March 31, 2002;
and
5. To transact such other business as may properly come before the
Annual Meeting or any adjournment or postponement thereof.
The close of business on June 15, 2001 has been fixed as the record date for the
determination of stockholders entitled to notice of and to vote at the Annual
Meeting and any adjournment thereof. Only stockholders of record at such time
will be entitled to vote.
You are cordially invited to attend the Annual Meeting in person. Even if you
plan to attend the Annual Meeting, PLEASE PROMPTLY COMPLETE, SIGN, DATE AND
RETURN THE ENCLOSED PROXY CARD in the enclosed, self-addressed, postage pre-paid
envelope. It will assist us in keeping down the expenses of the Annual Meeting
if all stockholders return their signed proxies promptly, whether they own a few
shares or many shares.
A MAJORITY OF THE OUTSTANDING SHARES OF COMMON STOCK MUST BE REPRESENTED AT THE
ANNUAL MEETING IN ORDER TO CONSTITUTE A QUORUM. PLEASE RETURN YOUR PROXY CARD IN
ORDER TO ENSURE THAT A QUORUM IS OBTAINED AND TO AVOID THE ADDITIONAL COST TO
THE COMPANY OF ADJOURNING THE ANNUAL MEETING UNTIL A LATER TIME AND RESOLICITING
PROXIES.
YOUR VOTE IS IMPORTANT.
By order of the Board of Directors,
RICHARD J. SCHWEPPE
Secretary
Irvine, California
July 6, 2001
4
CORVEL CORPORATION
----------------------
PROXY STATEMENT
--------------------------
This Proxy Statement and the enclosed proxy card are furnished in connection
with the 2001 Annual Meeting of Stockholders (the "Annual Meeting") of CorVel
Corporation (the "Company") which will be held at the Company's offices located
at 2010 Main Street, Suite 1020, Irvine, California, on Thursday, August 2,
2001, at 1:00 p.m. Pacific Daylight Time. Stockholders of record at the close of
business on June 15, 2001, are entitled to notice of and to vote at the Annual
Meeting and any adjournment or postponement of that meeting.
On June 15, 2001, there were 7,422,492 shares of Common Stock, $.0001 par value
per share (the "Common Stock"), outstanding. Each share of Common Stock is
entitled to one vote on all matters brought before the Annual Meeting.
A majority of the outstanding shares of Common Stock entitled to vote at the
Annual Meeting will constitute a quorum. The Company's inspector of elections
for the Annual Meeting will count abstentions and so-called "broker non-votes"
(i.e., shares held by a broker or other nominee having discretionary power to
vote on some matters but not others) as present for purposes of determining
whether a quorum exists for the transaction of business at the Annual Meeting.
Abstentions are also counted in tabulating the total number of votes cast on
matters voted on by the stockholders at the Annual Meeting. Broker non-votes are
not counted for purposes of determining either the number of votes cast on any
matter voted on by the stockholders or whether such matter has been approved.
If the enclosed proxy card is properly signed and returned, the shares
represented thereby will be voted at the Annual Meeting in accordance with the
instructions specified thereon. If the proxy card does not specify how the
shares represented thereby are to be voted, the proxy will be voted FOR the
election of the directors proposed by the Board unless the authority to vote for
the election of such directors is withheld and, if no contrary instructions are
given, the proxy will be voted FOR the approval of Proposals 2 and 3 and
ratification of Proposal 4 described in the accompanying Notice and this Proxy
Statement. In their discretion, the proxies named on the proxy card will be
authorized to vote upon any other matter that may properly come before the
Annual Meeting or any adjournment or postponement thereof.
Proxies are being solicited by the Company's Board of Directors (the "Board")
and are revocable at any time prior to exercise. A proxy may be revoked by
delivery of a written revocation or by presentation of another properly signed
proxy card to the Secretary of the Company, or by attendance at the Annual
Meeting and voting in person.
This Proxy Statement, the enclosed proxy card and the Company's Annual Report on
Form 10-K for the fiscal year ended March 31, 2001 should be mailed on or about
July 6, 2001 to stockholders of record on June 15, 2001.
The principal executive offices of the Company are located at 2010 Main Street,
Suite 1020, Irvine, California 92614. The Company's telephone number is (949)
851-1473.
1
5
PROPOSAL 1
ELECTION OF DIRECTORS
A board of five directors is to be elected at the Annual Meeting. The Company's
Certificate of Incorporation provides that each director will serve for a one
year term ending on the date of the Company's next annual meeting or until their
successors have been duly elected and qualified. Their term may be shorter if
they resign, become disqualified or disabled, or are otherwise removed.
The enclosed proxy will be voted, unless you withhold that authority or you
revoke the proxy, only for the election of each of the nominees for election
named below. Each such nominee is currently serving as a director and has
indicated his willingness to continue to serve as a director if elected. In the
unanticipated event that any such nominee becomes unable or declines to serve at
the time of the Annual Meeting, the proxies will be voted for a substitute
person nominated by the Board.
DIRECTORS AND NOMINEES
The names and certain information about the nominees for director are set forth
below:
NAME AGE POSITION
- ---- --- --------
V. Gordon Clemons 57 Chairman of the Board, Chief Executive Officer and President
Peter E. Flynn (1) 41 Director
Steven J. Hamerslag (1) (2) 45 Director
R. Judd Jessup (1) (2) 53 Director
Jeffrey J. Michael (2) 44 Director
- ----------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
Mr. Clemons joined the Company as President and Chief Executive Officer in
January 1988 and became Chairman of the Board in April 1991. Mr. Clemons was
President of Caremark, Inc., the then largest home intravenous therapy company
in the United States, from May 1985 to September 1987, at which time the company
was purchased by Baxter International, Inc. From 1981 to 1985, Mr. Clemons was
President of INTRACORP, a subsidiary of CIGNA Corporation. Mr. Clemons has 25
years of experience in the health care and insurance industries. Mr. Clemons has
served on the board of Omnicell Technologies, Inc., a provider of hospital
supply and pharmaceutical systems, since December 1995.
Mr. Flynn has served as a director of the Company since May 1991. Mr. Flynn has
been President of Americable, Inc. ("Americable"), a value-added manufacturer of
fiber optic and copper solutions serving the telecommunications industry, since
June 1997. Mr. Flynn served as the Executive Vice President and Secretary of
ENStar, Inc. ("ENStar"), a holding company owning businesses engaged in voice
and data connectivity and networking products and services, from February 1997
until December 1999, when ENStar merged with Americable, formerly a wholly-owned
subsidiary of ENStar, and then Americable, as the survivor, changed its name to
Corstar Holdings, Inc. In connection with certain transactions (collectively the
"Reorganization") consummated in January 1997 pursuant to a reorganization
agreement, North Star Universal, Inc. ("North Star"), transferred to ENStar
certain of its assets including its shares of the Company. Pursuant to the
Reorganization, ENStar ceased to be a subsidiary of North Star and became a
publicly traded company. From December 1990 to February 1997, Mr. Flynn was
Executive Vice President, Chief Financial Officer and Secretary of North Star.
From April 1989 to December 1990, Mr. Flynn was the Treasurer of North Star.
Mr. Hamerslag has served as a director of the Company since May 1991. Mr.
Hamerslag served as the President & Chief Executive Officer of J2Global
Communications from June 1999 until December 2000. Mr. Hamerslag served as the
Vice-Chairman of MTI Technology Corporation ("MTI"), a manufacturer of computer
peripherals
2
6
and network management software, from April 1996 to May 1998. Mr. Hamerslag was
also the President and Chief Executive Officer of MTI from 1987 to April 1996.
Mr. Jessup has served as a director of the Company since August 1997. Mr. Jessup
has been Chairman of Coast to Coast Wireless, a cellular phone business, since
1998. Mr. Jessup was President of the HMO Division of FHP International
Corporation ("FHP"), a diversified health care services company, from 1994 to
1996. From 1987 to 1994, Mr. Jessup was President of TakeCare, Inc., a publicly
traded HMO operating in California, Colorado, Illinois and Ohio, until it was
acquired by FHP. Mr. Jessup has 28 years of experience in the health care and
managed care industries. Mr. Jessup has been a director of ADESSO Specialty
Services, Inc., a specialist network management company, from April 1998 until
April 2001, and eBioCare.com (formerly Millennium Health, Inc.), a disease
management company, from May 1998 until April 2001. Mr. Jessup is also a
director of Pacific Dental Benefits, a dental HMO, since November 1997, a
director of US Laboratories, a pathology delivery company, since May 1998, and a
director of NovaMed Eyecare Services since August 1998.
Mr. Michael has served as a director of the Company since September 1990. Mr.
Michael has been the President, Chief Executive Officer and a director of
Corstar Holdings, Inc. (formerly ENStar) since March 1996. Mr. Michael was an
initial director and officer (serving as President and Secretary) of ENStar at
the time it was organized by North Star in December 1995. Prior to the
Reorganization, Mr. Michael served as President and Chief Executive Officer of
North Star from December 1990 until February 1997 and a director of North Star
from May 1987 until February 1997. From April 1989 to December 1990 Mr. Michael
was the Vice President-Finance of North Star. Mr. Michael has been a director of
Michael Foods, Inc., a food processing and distribution company formerly
affiliated with North Star, since April 1990, and a director of Michael-Curry
Companies, Inc. from January 1993 until December 1998. Mr. Michael served as a
director of Centuple Communications, Inc., a communications company, from August
1997 until August 2000.
BOARD MEETINGS AND COMMITTEES
During fiscal 2001, the Board held four meetings. Each of the present directors
standing for re-election at the Annual Meeting attended at least 75% of the
meetings of the Board and the committees of the Board of which they are members.
The committees of the Board include the Audit Committee and the Compensation
Committee. The Board does not have a nominating committee. Although there are no
formal procedures for stockholders to nominate persons for election as
directors, the Board will consider nominations from stockholders, which should
be addressed to Richard Schweppe, Secretary of the Company, at the Company's
address set forth above.
The Audit Committee is primarily responsible for approving the services
performed by the Company's independent accountants and reviewing the Company's
accounting practices and systems of internal accounting controls. The Audit
Committee currently consists of Messrs. Flynn, Hamerslag, and Jessup. The Audit
Committee met once during fiscal 2001. The Board of Directors has adopted and
approved a written charter for its Audit Committee, a copy of which is attached
hereto as Appendix A. The Board has determined that all members of the Audit
Committee are "independent" as that term is defined in Rule 4200 of the listing
standards of the National Association of Securities Dealers.
The Compensation Committee is responsible for recommending and reviewing the
compensation, including perquisites, of the Company's employees and for
administering the CorVel Corporation 1991 Employee Stock Purchase Plan (the
"Purchase Plan") and the CorVel Corporation Restated 1988 Executive Stock Option
Plan, as amended (the "Option Plan"). The Compensation Committee consists of
Messrs. Hamerslag, Jessup, and Michael. The Compensation Committee met four
times during fiscal 2001.
3
7
COMPENSATION OF DIRECTORS
The Company pays each non-employee director an amount equal to $2,000 plus
travel expenses for each Board meeting attended. The directors do not receive
fees for committee or telephonic meetings.
When an individual who has not previously been in the employ of the Company
first becomes a non-employee member of the Board, he or she will receive an
automatic option grant for 10,000 shares of Common Stock under the Option Plan.
In addition, on the date of each annual stockholders meeting, each non-employee
director who has served as a non-employee Board member for at least six months,
whether or not such individual has been in the prior employ of the Company, will
be granted an option to purchase 3,000 shares of Common Stock.
Accordingly, as a non-employee director who was re-elected at the 2000 Annual
Meeting each of Messrs. Flynn, Hamerslag, Jessup and Michael received an option
to purchase 3,000 shares of Common Stock on August 3, 2000 (the date of the 2000
Annual Meeting), with an exercise price of $27.50, the fair market value of the
Common Stock on such date. In addition, each of Messrs. Flynn, Hamerslag,
Jessup, and Michael, will be granted an option to purchase an additional 3,000
shares of Common Stock on August 2, 2001 (the date of the Annual Meeting) at an
exercise price equal to the fair market value of the Common Stock on such date,
provided such director is re-elected at the Annual Meeting.
Please see the description of the Automatic Option Grant Program under Proposal
Two for the other terms of these grants.
STOCKHOLDER APPROVAL
Directors are elected by a plurality of the votes present or represented at the
Annual Meeting. The five nominees receiving the highest number of affirmative
votes cast at the Annual Meeting will be the elected directors of the Company.
THE BOARD RECOMMENDS A VOTE FOR EACH OF THE NOMINEES NAMED ABOVE OR HIS
SUBSTITUTE AS DESCRIBED ABOVE.
4
8
PROPOSAL 2
AMENDMENTS TO RESTATED 1988 EXECUTIVE STOCK OPTION PLAN
The stockholders are being asked to approve a series of amendments to the Option
Plan that will effect the following changes: (i) clarify the group of employees
who are eligible to participate in the Option Plan, and (ii) increase the
maximum number of shares of Common Stock authorized for issuance over the term
of the Option Plan by 500,000 shares.
The Board of Directors believes it necessary to increase the number of shares
available for issuance under the Option Plan in order to allow the Company to
continue to use equity incentives to attract and retain the services of key
individuals essential to the Company's long-term success.
The Option Plan was adopted by the Board on August 1, 1988 and approved by the
Company's sole stockholder on the same date. It has been amended and restated on
several occasions. The amendments to the Option Plan for which stockholder
approval is sought under this Proposal were adopted by the Board on May 10,
2001.
The following is a summary of the principal features of the Option Plan,
including the amendments which will become effective upon stockholder approval
of this Proposal. The summary, however, does not purport to be a complete
description of all the provisions of the Option Plan. Any stockholder who wished
to obtain a copy of the actual plan document may do so by written request to the
Corporate Secretary at the Company's executive offices in Irvine, California.
STRUCTURE OF THE OPTION PLAN
The Option Plan is divided into two separate components: the Discretionary
Option Grant Program and the Automatic Option Grant Program. Under the
Discretionary Option Grant Program, options may be issued to employees
(including officers and directors), consultants, independent contractors and the
non-employee members of the boards of directors of the Company (or its parent or
subsidiary companies). Under the Automatic Option Grant Program, non-employee
Board members will receive automatic option grants.
The Discretionary Option Grant Program is administered by the Compensation
Committee. The Compensation Committee has complete discretion (subject to the
provisions of the Option Plan) to authorize option grants and determine the
terms of these options under the Option Plan. However, the Board may at any time
appoint a secondary committee of one or more Board members to have separate but
concurrent authority with the Compensation Committee to make option grants and
stock issuances to individuals other than executive officers and non-employee
Board members.
Administration of the Automatic Option Grant Program is self-executing in
accordance with the terms of the Option Plan. The Compensation Committee has no
discretionary authority with respect to that program.
SHARES SUBJECT TO OPTION PLAN
Assuming stockholder approval of this Proposal 2 is obtained, the total number
of shares of Common Stock issuable over the term of the Option Plan may not
exceed 3,970,000 shares. Such shares will be made available either from
authorized but unissued Common Stock or from Common Stock reacquired by the
Company. As of June 1, 2001, 747,951 shares of Common Stock were subject to
outstanding options under the Option Plan, 2,425,570 shares had been issued
under the Option Plan, and 296,479 shares remained available for future
issuance.
In no event may any one individual participating in the Option Plan be granted
stock options and/or separately-exercisable stock appreciation rights for more
than 1,600,000 shares of Common Stock in the aggregate over the term of the
Option Plan. For purposes of such limitation, any stock options or stock
appreciation rights granted prior to January 1, 1994 will not be taken into
account.
5
9
Shares subject to any outstanding options under the Option Plan which expire or
otherwise terminate prior to exercise will be available for subsequent issuance.
Unvested shares issued under the Option Plan that the Company subsequently
purchases, at the option exercise or direct issue price paid per share, pursuant
to the Company's purchase rights under the Option Plan will be added back to the
number of shares reserved for issuance under the Option Plan and will
accordingly be available for subsequent issuance. However, any shares subject to
stock appreciation rights that were exercised under the Option Plan will not be
available for reissuance.
In the event any change is made to the outstanding shares of Common Stock by
reason of any recapitalization, stock dividend, stock split, combination of
shares, exchange of shares or other change in corporate structure effected
without the Company's receipt of consideration, appropriate adjustments will be
made to the class and number of securities issuable (in the aggregate and to
each participant) under the Option Plan and to each outstanding option.
ELIGIBILITY
Officers, employees, consultants, independent advisors and board members in the
service of the Company or any parent or subsidiary corporation are eligible to
participate in the Discretionary Option Grant Program. Only non-employee Board
members are eligible to participate in the Automatic Option Grant Program.
As of June 1, 2001, approximately 250 employees (including two executives
officers and four non-employee Board members) were eligible to participate in
the Discretionary Option Grant Program. Four non-employee Board members are
eligible to participate in the Automatic Option Grant Program.
VALUATION
For purposes of establishing the option exercise price and for all other
valuation purposes under the Option Plan, the fair market value per share of
Common Stock on any relevant date will be the closing selling price per share on
such date, as quoted on the Nasdaq National Market and published in The Wall
Street Journal. If there is no reported closing selling price for such date,
then the closing selling price for the last previous date for which such
quotation exists will be used as its fair market value. The closing selling
price of the Common Stock on May 31, 2001 was $35.80 per share.
DISCRETIONARY OPTION GRANT PROGRAM
The Compensation Committee has complete discretion under the Discretionary
Option Grant Program to determine which eligible individuals are to receive
option grants, the time or times when those grants are to be made, the number of
shares subject to each such grant, the vesting schedule (if any) to be in effect
for the option grant and the maximum term for which any granted option is to
remain outstanding. In addition, the Compensation Committee will determine
whether options granted under the Discretionary Option Grant Program are
supposed to be incentive stock options under the federal tax laws or
non-statutory options. However, only employees of the Company are eligible to
receive incentive stock options.
PRICE AND EXERCISABILITY
The exercise price per share for options issued under the Discretionary Option
Grant Program may not be less than 85% of the fair market value of the Common
Stock on the grant date, and no option may be outstanding for more than ten
years. The shares subject to each option will generally vest in one or more
installments over a specified period of service measured from the grant date.
Upon cessation of service, the optionee will have a limited period of time in
which to exercise any outstanding option for the number of shares which were
vested at the time service terminated. The Compensation Committee will have
complete discretion to extend the period following the optionee's cessation of
service
6
10
during which his or her outstanding options may be exercised and/or accelerate
the exercisability or vesting of such options in whole or in part. Such
discretion may be exercised at any time while the options remain outstanding,
whether before or after the optionee's cessation of service.
ACCELERATION OF OPTIONS
In the event of an acquisition of the Company by merger or asset sale
("Corporate Transaction"), each option outstanding under the Discretionary
Option Grant Program at the time will automatically become exercisable as to all
of the option shares immediately prior to the effective date of the Corporate
Transaction. However, no acceleration will occur if and to the extent: (i) such
option is either to be assumed by the successor corporation or its parent or
replaced by a comparable option to purchase shares of the capital stock of the
successor corporation or its parent, (ii) such option is to be replaced with a
cash incentive program of the successor corporation designed to preserve the
difference between the exercise price and the fair market value of the Common
Stock at the time of the Corporate Transaction and incorporating the same
vesting schedule applicable to the option or (iii) acceleration of such option
is subject to other limitations imposed by the Compensation Committee at the
time of grant. Upon the consummation of any Corporate Transaction, all
outstanding options will, to the extent not previously exercised by the
optionees or assumed by the successor corporation (or its parent company),
terminate and cease to be outstanding.
The Compensation Committee will have the discretion to provide for the automatic
acceleration of one or more assumed or replaced options which are not otherwise
accelerated in connection with the Corporate Transaction, or to provide for
automatic vesting of the optionee's interest in any cash incentive program
implemented in replacement of his or her options under the Discretionary Option
Grant Program, should the optionee's employment with the successor entity
terminate within a designated period following the Corporate Transaction.
The acceleration of options in the event of a Corporate Transaction may be seen
as an anti-take-over provision and may have the effect of discouraging a merger
proposal, a take-over attempt or other efforts to gain control of the Company.
STOCK APPRECIATION RIGHTS
At the Compensation Committee's discretion, options granted under the
Discretionary Option Grant Program may be granted with stock appreciation
rights. Two types of stock appreciation rights are authorized for issuance: (i)
tandem rights which require the option holder to elect between the exercise of
the underlying option for shares of Common Stock and the surrender of such
option for a cash distribution and (ii) limited rights which are automatically
exercised upon the occurrence of a hostile take-over of the Company.
Tandem stock appreciation rights provide the holders with the right to surrender
their option for an appreciation distribution from the Company equal in amount
to the excess of (i) the fair market value (on the date of surrender) of the
shares of Common Stock in which the optionee is at the time vested under the
surrendered option over (ii) the aggregate exercise price payable for such
shares. Such appreciation distribution may, at the Compensation Committee's
discretion, be made in shares of Common Stock valued at fair market value on the
date of surrender, in cash or in a combination of cash and Common Stock.
One or more officers of the Company subject to the short-swing profit
restrictions of the Federal securities laws may, in the Compensation Committee's
discretion, be granted a limited stock appreciation right as part of any stock
option grant made to such officers. Any option with such a limited stock
appreciation right will automatically be canceled upon the occurrence of a
hostile take-over, to the extent the option is at such time exercisable for
vested shares. In return, the optionee will be entitled to a cash distribution
from the Company in an amount equal to the excess of (i) the take-over price per
share over (ii) the aggregate exercise price payable for such shares.
Outstanding options granted to executive officers under the Option Plan prior to
June 15, 1992 provide such individuals with a different form of limited stock
appreciation right in the event of a hostile take-over of the
7
11
Company. Under this latter right, if the optionee is an officer of the Company
at the time of such a hostile take-over, such optionee will have a thirty-day
period in which to surrender the underlying option in return for a cash
distribution from the Company equal to the excess for the take-over price of the
shares subject to the surrendered option over the exercise price payable for
such shares.
SPECIAL TAX WITHHOLDING ELECTION
The Compensation Committee may provide employees who hold options or unvested
share issuances with the right to have the Company withhold a portion of the
shares otherwise issuable to such individuals in satisfaction of the withholding
taxes to which such individuals become subject in connection with the exercise
of those options or the vesting of those shares. Alternatively, the Compensation
Committee may allow such individuals to deliver previously acquired shares of
Common Stock in payment of such withholding tax liability.
CANCELLATION AND NEW GRANT OF OPTIONS
The Compensation Committee has the authority to effect, with the consent of the
affected optionees, the cancellation of any or all options outstanding under the
Discretionary Option Grant Program and to grant in substitution new options
covering the same or a different number of shares of Common Stock but having an
exercise price per share not less than 85% of the fair market value per share of
Common Stock on the new grant date, in the case of a grant of a non-statutory
option and 100% of such fair market value in the case of the grant of an
Incentive Option. It is anticipated that the exercise price in effect under the
new grant will in all instances be less than the exercise price in effect under
the terminated option.
AUTOMATIC OPTION GRANT PROGRAM
Under the Automatic Option Grant Program, when an individual who has not been in
the prior employ of the Company first becomes a non-employee Board member,
whether through election by the Company's stockholders or appointment by the
Board, he or she will receive an automatic option grant for 10,000 shares of
Common Stock. In addition, on the date of each annual stockholders meeting, each
individual who has served as a non-employee Board member for at least six months
prior to the date of such stockholder meeting, whether or not he or she has been
in the prior employ of the Company, will automatically be granted a stock option
to purchase 3,000 shares of Common Stock. There will be no limit on the number
of such 3,000-share options any one non-employee Board member may receive over
his or her period of Board service.
Each option granted under the Automatic Option Grant Program will have an
exercise price per share equal to 100% of the fair market value of the option
shares on the automatic grant date and maximum term of ten years measured from
the grant date. Each automatic grant will become exercisable in a series of four
equal and successive annual installments over the optionee's period of Board
service, with the first such installment to become exercisable twelve months
after the grant date.
The shares subject to each automatic option grant will immediately vest upon the
optionee's death or permanent disability and upon certain changes in control of
the Company. In addition, upon the successful completion of a hostile take-over
of the Company, each automatic option grant may be surrendered to the Company
for a cash distribution per surrendered option share in an amount equal to the
excess of (a) the take-over price per share over (b) the exercise price payable
for such shares.
FINANCIAL ASSISTANCE
The Compensation Committee may assist any optionee in the exercise of
outstanding options under the Option Plan by (a) authorizing a full-recourse
interest bearing loan from the Company, (b) permitting the optionee to pay the
exercise price in installments over a period of years or (c) authorizing a
guarantee by the Company of a third-party loan to the optionee. The terms and
conditions of any such loan or installment payment will be established by the
Compensation Committee in its sole discretion, but in no event may the maximum
credit
8
12
extended to the optionee exceed the aggregate exercise price payable for the
purchased shares (less the par value), plus any Federal and state income or
employment taxes incurred in connection with the purchase.
AMENDMENT AND TERMINATION OF THE OPTION PLAN
The Board may amend or modify the Option Plan, subject to any required
stockholder approval. The Board may terminate the Option Plan at any time, but
the Option Plan will in all events terminate on June 30, 2006 or (if earlier) on
the date all shares available for issuance under the Option Plan are issued or
canceled pursuant to the exercise or surrender of options granted under the
Option Plan. Any options outstanding at the time of termination of the Option
Plan will remain in force in accordance with the provisions of the instruments
evidencing such grants.
OPTIONS GRANTED
The table below shows, as to the Named Executive Officers (as defined under
"Summary of Cash and Certain Other Compensation") and the other indicated
persons and groups, the number of shares of Common Stock subject to options
granted under the Option Plan during the period from April 1, 2000 to June 1,
2001, together with the weighted average exercise price per share.
NUMBER OF
OPTION SHARES WEIGHTED
GRANTED AVERAGE
NAME AND POSITION 4/1/00-6/1/01 EXERCISE PRICE
- ----------------- ------------- --------------
V. Gordon Clemons ................................................................... -0- $ 0.00
Chairman of the Board, Chief Executive Officer & President
Daniel H. Davis ..................................................................... -0- $ 0.00
formerly V.P. Marketing and Business Development
Richard Schweppe .................................................................... 6,200 $28.97
Chief Financial Officer
Louis E. Silverman .................................................................. 5,000 $26.75
formerly Chief Operations Officer
Peter E. Flynn ...................................................................... 3,000 $27.50
Nominee for Election as Director
Steven J. Hamerslag ................................................................. 3,000 $27.50
Nominee for Election as Director
R. Judd Jessup ...................................................................... 3,000 $27.50
Nominee for Election as Director
Jeffrey J. Michael .................................................................. 3,000 $27.50
Nominee for Election as Director
All current executive officers as a group (2 persons) ............................... 6,200 $28.97
All current directors (other than executive officers) as a group (4 persons) ........ 12,000 $27.50
All other employees, including current officers who are not
executive officers, as a group (121 persons) ........................................ 213,500 $21.31
NEW PLAN BENEFITS
No options will be granted prior to the Annual Meeting on the basis of the
500,000-share increase to the Option Plan. However, on the date of the Annual
Meeting each of Messrs. Flynn, Hamerslag, Jessup and Michael, if re-elected at
the Annual Meeting, will receive an additional grant of 3,000 shares of Common
Stock under the Automatic Option Grant Program at an exercise price equal to the
fair market value on such date.
9
13
FEDERAL INCOME TAX CONSEQUENCES
Option Grants. Options granted under the Option Plan may be either Incentive
Options which satisfy the requirement of Section 422 of the Internal Revenue
Code of 1986, as amended (the "Code"), or non-statutory options which do not
satisfy such requirements. The Federal income tax treatment for the two types of
options differs as follows:
Incentive Options. No taxable income is recognized by the optionee at the time
of the option grant, and no taxable income is generally recognized at the time
the option is exercised. However, the difference between the fair market value
of the purchased shares at the time of exercise and the exercise price is
generally included as alternative minimum taxable income for purposes of the
alternative minimum tax. The optionee will recognize taxable income in the year
in which the purchased shares are sold or otherwise disposed of in a taxable
transaction.
For Federal tax purposes, dispositions are divided into two categories: (A)
qualifying and (B) disqualifying. The optionee will make a qualifying
disposition if the sale or other dispositions of such shares is made after the
optionee has held the shares for more than two years after the option grant date
and more than one year after the exercise date. If the optionee fails to satisfy
both of these two holding periods prior to the sale of other disposition of the
purchase shares, then a disqualifying disposition will result.
Upon a qualifying disposition of the shares, the optionee will recognize
long-term capital gain in an amount equal to the difference between (A) the
amount realized upon the sale or other disposition and (B) the exercise price
paid for the shares. If there is a disqualifying disposition of the shares, then
an amount equal to the difference between (A) the fair market value of those
shares on the date of exercise or sale (whichever is less) and (B) the exercise
price paid will be taxable as ordinary income. Any additional gain or loss
recognized upon the disposition will be a capital gain or loss.
If the optionee makes a disqualifying disposition of the purchased shares, then
the Company will be entitled to an income tax deduction for the taxable year in
which such disposition occurs equal to the amount of ordinary income the
optionee recognized. In no other instance will the Company be allowed a
deduction with respect to the optionee's disposition of the purchased shares.
Non-Statutory Options. No taxable income is recognized by an optionee upon the
grant of a non-statutory option. In general, the optionee will recognize
ordinary income in the year in which the option is exercised in an amount equal
to the difference between (A) the fair market value of the purchased shares on
the date of exercise and (B) the exercise price, and the optionee will be
required to satisfy the tax withholding requirements applicable to such income.
If the shares acquired upon exercise of the non-statutory option are subject to
repurchase by the Company at the original exercise price in the event of the
optionee's termination of employment or service prior to vesting, then the
optionee will not recognize any taxable income at the time of exercise but will
have to report as ordinary income, as and when the Company's repurchase right
lapses, an amount equal to the difference between (1) the fair market value of
the shares on the date the Company's repurchase right lapses and (2) the
exercise price paid for the shares. The optionee may, however elect under Code
Section 83(b) to include as ordinary income in the year of exercise of the
non-statutory option an amount equal to the difference between (i) the fair
market value of the purchased shares on the date of exercise (determined as if
the shares were not subject to the Company's repurchase right) and (ii) the
exercise price paid for such shares. If the Section 83(b) election is made, the
optionee will not recognize any additional income as and when the Company's
repurchase right lapses.
The Company will be entitled to a deduction equal to the amount of ordinary
income recognized by the optionee with respect to the exercised non-statutory
option. The deduction will in general be allowed for the taxable year of the
Company in which ordinary income is recognized by the optionee.
10
14
STOCK APPRECIATION RIGHTS. No taxable income is recognized upon receipt of a
stock appreciation right. An optionee who is granted a stock appreciation right
will recognize ordinary income in the year of exercise equal to the amount of
the appreciation distribution. The Company will be entitled to an income tax
deduction equal to the appreciation distribution for its taxable year in which
the ordinary income is recognized by the optionee.
DEDUCTIBILITY OF EXECUTIVE COMPENSATION
The Company anticipates that any compensation deemed paid by it in connection
with disqualifying dispositions of incentive stock option shares or exercises of
non-statutory options will qualify as performance-based compensation for
purposes of Code Section 162(m) and will not have to be taken into account for
purposes of the one million dollar limitation per covered individual on the
deductibility of the compensation paid to certain executive officers of the
Company. Accordingly, all compensation deemed paid with respect to those options
will remain deductible by the Company without limitation under Code Section
162(m). For a further explanation of Code Section 162(m), see "Compensation
Committee Report -- Compliance with Internal Revenue Code Section 162(m)."
ACCOUNTING TREATMENT
Option grants or stock issuances to employees and non-employee directors with
exercise or issue prices less than the fair market value of the shares on the
grant date will result in a compensation expense to the Company's earnings equal
to the difference between the exercise or issue price and the fair market value
of the shares on the grant date. Such expense will be accruable by the Company
over the period that the option shares or issued shares are to vest. Option
grants at 100% of fair market value will not result in any charge to the
Company's earnings. However, the Company will be required to disclose in the
notes to the Company's financial statements the fair value of options granted
under the Option Plan and the pro forma impact on the Company's annual net
income and earnings per share as though the computed fair value of such options
had been treated as compensation expense.
Option grants made to consultants and independent advisors (but not non-employee
Board members) after December 15, 1998 will result in a direct charge to the
Company's reported earnings on the vesting date of each installment of the
underlying option shares. No charge will, however, be required for periods
before July 1, 2000.
STOCKHOLDER APPROVAL
The affirmative vote of a majority of the outstanding voting shares of the
Company present or represented and entitled to vote at the Annual Meeting is
required for approval of the amendments to the Option Plan. Should such
stockholder approval not be obtained, then the 500,000-share increase to the
share reserve will not be implemented, and no additional options will be granted
on the basis of such share increase. The Option Plan will, however, continue in
effect, and option grants and direct stock issuances may continue to be made
under the Option Plan until all the shares of Common Stock available for
issuance under the Option Plan, as in effect prior to the amendments which are
the subject of this Proposal, have been issued pursuant to such option grants
and direct stock issuances.
THE BOARD OF DIRECTORS BELIEVES THAT THE AMENDMENTS TO THE OPTION PLAN ARE
NECESSARY IN ORDER TO ASSURE THAT THE COMPANY WILL CONTINUE TO HAVE A SUFFICIENT
SHARE RESERVE FOR AN EXTENDED PERIOD OF TIME TO CONTINUE TO PROVIDE EQUITY
INCENTIVES TO ATTRACT AND RETAIN THE SERVICES OF EMPLOYEES, CONSULTANTS AND
NON-EMPLOYEE BOARD MEMBERS.
THE BOARD RECOMMENDS A VOTE FOR THE AMENDMENTS TO THE OPTION PLAN.
11
15
PROPOSAL 3
AMENDMENTS TO 1991 EMPLOYEE STOCK PURCHASE PLAN
INTRODUCTION
The stockholders are also being asked to vote on a series of amendments to the
Purchase Plan to: (i) modify the type of amendments to the Purchase Plan that
require stockholder approval, and (ii) to extend the termination date of the
Plan by ten years, to September 30, 2011, in order to assure that the Purchase
Plan will continue to provide employees with an opportunity to acquire an equity
interest in the Company.
The Purchase Plan became effective on October 1, 1991. It has been amended and
restated on several occasions. The amendments to the Purchase Plan for which
stockholder approval is sought under this Proposal were approved by the Board on
May 10, 2001.
The following is a summary of the terms and provisions of the Purchase Plan,
including the amendments which will become effective upon stockholder approval
of this Proposal. This summary, however, does not purport to be a complete
description of the Purchase Plan. Copies of the actual plan document may be
obtained by any stockholder upon written request to the Corporate Secretary at
the Company's executive offices in Irvine, California.
PURPOSE
The purpose of the Purchase Plan is to provide eligible employees of the Company
and its participating subsidiaries with the opportunity to acquire a proprietary
interest in the Company through participation in a plan intended to qualify for
the favorable tax benefits afforded employee stock purchase plans under Code
Section 423.
ADMINISTRATION
The Purchase Plan is administered by the Compensation Committee. The
Compensation Committee has full authority to adopt administrative rules and
procedures and to interpret the provisions of the Purchase Plan. All costs and
expenses incurred in the administration of the Purchase Plan will be paid by the
Company without charge to participants.
SHARES SUBJECT TO THE PURCHASE PLAN
The maximum number of shares that may be issued over the term of the Purchase
Plan is 500,000 shares. The Common Stock purchasable under the Purchase Plan may
be either shares newly-issued by the Company or shares reacquired by the
Company, including shares purchased on the open market. As of June 1, 2001,
368,622 shares of Common Stock have been issued under the Purchase Plan and
131,378 shares were available for issuance.
In the event any change is made to the Common Stock (whether by reason of
recapitalization, stock dividend, stock split, combination of share, or other
similar change in corporate structure effected without receipt of
consideration), appropriate adjustments will be made to (i) the class and
maximum number of shares issuable over the term of the Purchase Plan, (ii) the
class and maximum number of shares purchasable per participant under any
outstanding purchase right and (iii) the class and number of shares purchasable
and the price per outstanding purchase right.
12
16
ELIGIBILITY AND PARTICIPATION
Any individual who is customarily employed by the Company or a participating
subsidiary for more than 20 hours per week and more than five months per
calendar year will be eligible to participate in the Purchase Plan. However,
employees of the Company who are deemed to be "Highly Compensated Employees"
under Code Section 414(q) will not be eligible to participate in the Purchase
Plan for one or more purchase periods if, on the first day of any such purchase
period, they hold unvested options under the Option Plan to purchase more than
30,000 shares of Common Stock. An individual who is eligible to participate in
the Purchase Plan on the first day of a purchase period may join at that time.
As of June 1, 2001, approximately 2,600 employees, including one executive
officer, were eligible to participate in the Purchase Plan.
PURCHASE PERIODS
Each purchase period under the Purchase Plan will be six calendar months long.
Purchase periods begin on April 1st and October 1st each year. Each participant
has a separate purchase right for each purchase period in which he or she
participates. The purchase right is granted on the first business day of the
purchase period and will be automatically exercised on the last business day of
the purchase period.
PURCHASE PRICE
The purchase price of the Common Stock acquired at the end of each purchase
period is equal to the lesser of (i) 85% of the fair market value per share of
Common Stock on the date on which such purchase right is granted or (ii) 85% of
the fair market value per share of Common Stock on the date on which the
purchase right is exercised.
The fair market value of the Common Stock on any relevant date will be the
closing selling price per share on such date as reported on the Nasdaq National
Market and published in The Wall Street Journal. The closing selling price per
share of Common Stock on the Nasdaq National Market on May 31, 2001 was $35.80
per share.
PURCHASE RIGHTS; STOCK PURCHASES
Each participant may authorize periodic payroll deductions in any multiple of
$10.00, up to a dollar maximum not in excess of 20% of his or her base pay each
purchase period to be applied toward the purchase of shares of Common Stock
under the Purchase Plan. Base pay includes the participant's regular salary or
wages, plus the commissions received during the purchase period, plus any
pre-tax contributions made by such individual to the Company's Section 401(k)
Plan, but excludes overtime, bonuses and other incentive-type payments.
On the last business day of each purchase period, the payroll deductions of each
participant are automatically applied to the purchase of whole shares of Common
Stock at the purchase price in effect for that purchase period. Any amount
remaining in the Participant's account after purchasing whole shares shall be
refunded to the participant at the end of each purchase period.
SPECIAL LIMITATIONS
The Purchase Plan imposes certain limitations upon a participant's rights to
acquire Common Stock, including the following limitations:
- - Purchase rights may not be granted to any individual who would,
immediately after the grant, own stock (including stock purchasable
under any outstanding purchase rights) or hold outstanding options or
other rights possessing 5% or more of the total combined voting power or
value of all classes of stock of the Company or any parent or
subsidiary.
13
17
- - No participants may purchase more than 1,000 shares of Common Stock
during any one purchase period.
- - Purchase rights granted to a participant may not permit such individual
to purchase more than $25,000 worth of Common Stock (valued at the time
each purchase right is granted) during any one calendar year.
TERMINATION OF PURCHASE RIGHTS
The purchase right of a participant will terminate if the participant ceases to
be eligible to participate. Any payroll deductions which the participant may
have made with respect to the terminated purchase right will be refunded. If the
participant withdraws from the Purchase Plan or ceases active employment during
the purchase period by reason of disability, death or leave of absence, the
participant (or the personal representative of his estate) will be refunded any
payroll deductions already made in that purchase period or may have the right to
elect to have such payroll deductions applied to the purchase of Common Stock at
the end of that purchase period.
STOCKHOLDER RIGHTS
No participant will have any stockholder rights with respect to the shares
covered by his or her purchase rights until the shares are actually purchased on
the participant's behalf. No adjustment will be made for dividends,
distributions or other rights for which the record date is prior to the date of
such purchase.
ASSIGNABILITY
No purchase right will be assignable or transferable by the participant, except
by will or by the laws of descent and distribution, and the purchase rights will
be exercisable only by the participant.
MERGER OR LIQUIDATION OF COMPANY
In event the Company or its stockholders enter into an agreement to dispose of
all or substantially all of the assets or outstanding capital stock of the
Company by means of a sale, merger or reorganization (other than a
reorganization effected primarily to change the state in which the Company is
incorporated) or in the event the Company is liquidated, all outstanding
purchase rights will automatically be exercised immediately prior to the
effective date of such sale, merger, reorganization or liquidation, by applying
all payroll deductions previously collected from participants during the
purchase period of such transaction toward the purchase of whole shares of
Common Stock (subject to the Special Limitations discussed above).
AMENDMENT AND TERMINATION
The Board may from time to time alter, amend, suspend or discontinue the
provisions of the Purchase Plan provided such changes are effective following
the close of a purchase period. Currently, the Board may not, without
stockholder approval, (1) materially increase the number of shares issuable
under the Purchase Plan, or the maximum number of shares which any participant
may purchase during a single purchase period except in connection with certain
changes in the Company's capital structure, (2) alter the purchase price formula
so as to reduce the purchase price, (3) materially increase the benefits
accruing to participants or (4) materially modify the requirements for
eligibility to participate in the Purchase Plan. Assuming stockholder approval
of this Proposal is obtained, the Board will not be able to amend the Purchase
Plan to increase the number of shares issuable under the Purchase Plan or modify
the requirements for eligibility to participate in the Plan without first
obtaining the approval of the Company's stockholders.
14
18
The Purchase Plan will terminate upon the earliest of (a) September 30, 2011,
assuming this Proposal is approved by the Company's stockholders at the Annual
Meeting, or September 30, 2001, if such approval is not obtained, (b) the date
on which all shares available for issuance thereunder are sold pursuant to
exercised purchase rights, (c) the date on which all purchase rights are
exercised in connection with change in control, or (d) termination by the Board.
FEDERAL TAX CONSEQUENCES
The Purchase Plan is intended to be an "employee stock purchase plan" within the
meaning of Code Section 423. Under a plan which so qualifies, no taxable income
will be reportable by the participant, and no deductions will be allowable to
the Company, by reason of the grant or exercise of the purchase rights issued
under such a plan. The participant will, however, recognize taxable income in
the year in which the purchased shares are sold or otherwise disposed of in a
taxable transaction.
The participant's Federal income tax liability will depend on whether he or she
makes a "qualifying" or "disqualifying" disposition of the purchased shares.
A sale or other disposition of the purchased shares will be a "disqualifying"
disposition if made within two years after the start of the purchase period in
which such shares were acquired or within one year of purchase. The participant
will realize ordinary income in the year of the disqualifying disposition equal
to the amount by which the fair market value of the shares on the purchase date
exceeded the purchase price. Any additional gain recognized upon the disposition
of shares will be a capital gain, which will be long-term if the shares have
been held for more than one year following the purchase date. The Company will
be entitled to an income tax deduction, for the taxable year in which such
disposition occurs, equal to the amount by which the fair market value of such
shares on the date of purchase exceeded the purchase price, and the participant
will be required to satisfy the employment and income tax withholding
requirements applicable to such income.
The participant will generally realize ordinary income in the year of the
qualifying disposition equal to the lesser of (1) the amount by which the fair
market value of the shares on the date of the qualifying disposition exceeds the
purchase price or (2) 15% of the fair market value of the shares on the date the
purchase right is granted. Any additional gain will be taxed as a long-term
capital gain. The Company will not be entitled to an income tax deduction with
respect to such disposition.
ACCOUNTING TREATMENT
Under present accounting principles, the issuance of Common Stock under the
Purchase Plan will not result in any charge to the Company's earnings. However,
the Company must disclose in pro-forma statements to the Company's financial
statements, the impact the purchase rights granted under the Purchase Plan would
have on the Company's reported earnings were the value of those purchase rights
treated as a compensation expense.
PLAN BENEFITS
Richard Schweppe is the only Named Executive Officer who purchased shares of
Common Stock under the Purchase Plan during the period from April 1, 2000 to
March 30, 2001 (the most recent purchase date). During that time period, he
purchased 714 shares of Common Stock at an average weighted purchase price of
$22.84. During the same time period, all employees as a group (126 persons)
purchased 30,072 shares of Common Stock under the Purchase Plan with an average
weighted purchase price of $22.84.
15
19
STOCKHOLDER APPROVAL
The affirmative vote of a majority of the holders of the Company's voting stock
represented and voting at the Annual Meeting is required for approval of the
amendment to the Purchase Plan. If such approval is not obtained, then the term
extension to the Purchase Plan will not become effective, and the Purchase Plan
will terminate on September 30, 2001.
THE PURCHASE PLAN PROVIDES EMPLOYEES WITH A MEANINGFUL INCENTIVE TO REMAIN WITH
THE COMPANY AND AN INCENTIVE TO CONTRIBUTE TO THE GROWTH AND LONG-TERM SUCCESS
OF THE COMPANY BY OFFERING THEM AN OPPORTUNITY TO ACQUIRE A PROPRIETARY INTEREST
IN THE COMPANY.
THE BOARD RECOMMENDS A VOTE FOR THE AMENDMENTS TO THE PURCHASE PLAN.
16
20
PROPOSAL 4
RATIFICATION OF APPOINTMENT OF AUDITORS
The accounting firm of Ernst & Young LLP served as the independent auditors for
the Company during much of fiscal year 2001. On March 29, 2001, upon the
recommendation of the Audit Committee and with the approval of the Board, the
Company dismissed Ernst & Young LLP as the Company's independent auditors. The
reports of Ernst & Young on the Company's financial statements for each of the
past two fiscal years did not contain an adverse opinion or a disclaimer of
opinion, and were not qualified or modified as to uncertainty, audit scope, or
accounting principle. In connection with the audits performed by Ernst & Young
LLP of the Company's financial statements for each of the two fiscal years ended
March 31, 2000 and 1999, and in the subsequent interim period through March 29,
2001, there were no disagreements with Ernst & Young LLP on any matters of
accounting principles or practices, financial statement disclosure, or auditing
scope and procedures, which, if not resolved to the satisfaction of Ernst &
Young would have caused Ernst & Young to make reference to the matter in their
report.
On March 29, 2001, upon the recommendation of the Audit Committee and with the
approval of the Board, the Company selected Grant Thornton LLP as independent
auditors for the year ended March 31, 2001. The Board has directed that the
selection of the auditors be submitted for ratification by the stockholders at
the Annual Meeting. Neither Grant Thornton LLP nor any of its members has any
relationship with the Company or any of its affiliates except in the firm's
capacity as the Company's auditors. During the two most recent fiscal years and
the subsequent interim period through March 29, 2001, neither the Company nor
anyone on behalf of the Company consulted Grant Thornton LLP regarding the
application of accounting principles to a specified transaction, the type of
audit opinion that might be rendered on the Company's financial statements, or
any matter that was either the subject of a disagreement or a reportable event.
AUDIT FEES. Audit fees billed by Grant Thornton LLP for services rendered to the
Company in the audit of annual financial statements for the 2001 fiscal year
were approximately $75,000.
OTHER FEES. The Company did not engage Grant Thornton LLP for any non-audit
professional services for the most recent fiscal year.
FINANCIAL INFORMATION SYSTEMS DESIGN AND IMPLEMENTATION. The Company did not
engage Grant Thornton LLP to provide advice regarding financial information
systems design and implementation during the 2001 fiscal year.
The Audit Committee has determined that the provision of the above services,
other than the audit services, by Grant Thornton LLP was compatible with their
maintenance of accountant independence.
The representatives of Grant Thornton LLP will attend the Annual Meeting, will
have the opportunity to make a statement if they so desire and are expected to
be available to respond to appropriate questions posed by stockholders.
The affirmative vote of a majority of the shares of the Common Stock represented
and voted at the Annual Meeting is required for ratification of the appointment
of Grant Thornton LLP as the Company's independent auditors. Stockholder
ratification of the appointment of Grant Thornton LLP as the Company's
independent auditors is not required by the Company's Bylaws or otherwise.
However, the Board is submitting the appointment of Grant Thornton LLP to the
stockholders for ratification as a matter of good corporate practice. If the
stockholders fail to ratify the appointment by an affirmative vote of the
holders of a majority of the Common Stock present or represented at the meeting
and entitled to vote thereat, the Audit Committee and the Board will reconsider
whether to retain that firm as the Company's independent auditors. Even if the
appointment is ratified, the Audit Committee and the Board in their discretion
may direct the appointment of a different
17
21
independent accounting firm at any time during the year if they determine that
such a change would be in the best interest of the Company and its stockholders.
THE BOARD RECOMMENDS A VOTE FOR RATIFICATION OF THE APPOINTMENT OF GRANT
THORNTON LLP AS THE COMPANY'S INDEPENDENT AUDITORS FOR THE FISCAL YEAR ENDING
MARCH 31, 2002.
OTHER MATTERS
Management does not know of any other matters to be brought before the Annual
Meeting. If any other matter is properly presented for consideration at the
Annual Meeting, it is intended that the proxies will be voted by the persons
named therein in accordance with their judgment on such matters. Discretionary
authority with respect to such other matters is granted by the execution of the
enclosed proxy.
18
22
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information known to the Company as of
May 31, 2001 with respect to beneficial ownership of Common Stock by (i) each
person (or group of affiliated persons) who is known by the Company to own
beneficially more than 5% of the outstanding Common Stock, (ii) each director
and/or nominee for director, (iii) the Named Executive Officers, and (iv) all
current directors and executive officers as a group, together with the
approximate percentages of outstanding Common Stock owned by each of them. The
following table is based upon information supplied by directors, executive
officers and principal stockholders, and Schedule 13Gs filed with the Securities
and Exchange Commission. Except as otherwise noted, the persons named in the
following table have sole voting and investment power with respect to all shares
shown as beneficially owned by them, subject to community property laws where
applicable.
NAME AND ADDRESS OF AMOUNT OF COMMON PERCENTAGE OF COMMON
BENEFICIAL OWNER STOCK BENEFICIALLY OWNED STOCK BENEFICIALLY OWNED (1)
------------------- ------------------------ ----------------------------
CORSTAR HOLDINGS, INC. 1,987,592(2) 26.7%
JEFFREY J. MICHAEL
10851 Louisiana Avenue South
Bloomington, MN 55438
V. GORDON CLEMONS 765,119(3) 10.3%
2010 Main Street, Suite 1020
Irvine, CA 92614
FMR CORPORATION 796,540(4) 10.7%
82 Devonshire Street
Boston, MA 02109
KESTREL INVESTMENT MANAGEMENT CORP. 523,100(5) 7.0%
Abbott J. Keller, Daniel J. Steinman
411 Borel Avenue, Suite 403
San Mateo, CA 94402
WELLINGTON MANAGEMENT COMPANY, LLP 391,900(6) 5.3%
75 State Street
Boston, MA 02109
WASATCH ADVISORS, INC. 371,600(7) 4.9%
150 Social Hall Avenue
Salt Lake City, UT 84111
DANIEL H. DAVIS 51,813(8) *
R. JUDD JESSUP 49,750(9) *
RICHARD SCHWEPPE 34,351(10) *
STEVEN J. HAMERSLAG 33,500(11) *
PETER E. FLYNN 31,100(12) *
All executive officers and directors as
a group (6 individuals) 986,725(13) 13.3%
- ----------
* Less than 1%
19
23
(1) Applicable percentage ownership is based on 7,445,828 shares of Common Stock
outstanding as of May 31, 2001, which excludes a total of 2,869,940 shares
repurchased by the Company in accordance with the Stock Repurchase Program
described below under the caption "Certain Transactions" and held by the Company
in its treasury. Any securities not outstanding but which are subject to options
exercisable within 60 days of May 31, 2001, are deemed outstanding for the
purpose of computing the percentage of outstanding Common Stock beneficially
owned by any person holding such options but are not deemed outstanding for the
purpose of computing the percentage of Common Stock beneficially owned by any
other person.
(2) Includes 1,950,000 shares owned by Corstar, 21,092 shares owned directly by
Mr. Michael, a director of Corstar and the Company, and 16,500 shares subject to
options held by Mr. Michael that are exercisable within 60 days of May 31, 2001.
Mr. Michael is the President and Chief Executive Officer of Corstar. In
addition, Mr. Michael is the trustee of the Michael Family Grantor Trust
(formerly Michael Acquisition Corporation Trust), which is the sole shareholder
of Corstar. Based on the foregoing, Mr. Michael may be deemed to share
beneficial ownership of the shares of Common Stock held by Corstar. Mr. Michael
disclaims such beneficial ownership except to the extent of any indirect
pecuniary interest therein.
(3) Includes 763,069 shares owned by Mr. Clemons directly and 2,050 shares owned
indirectly by Mr. Clemons as custodian for his child who shares the same primary
residence.
(4) According to the Schedule 13G of Fidelity Management & Research Company
("Fidelity") dated February 14, 2001, Fidelity is a wholly-owned subsidiary of
FMR Corp. and is an Investment Advisor registered under Section 203 of the
Investment Advisors Act of 1940. Edward C. Johnson, FMR Corp., through its
control of Fidelity, and the funds each have sole power to dispose the shares,
while power to vote the shares resides in the Fund's Board of Trustees.
(5) According to the Schedule 13G of Kestrel Investment Management Corporation
("Kestrel") dated February 14, 2001, Abbott J. Keller and David J. Steinman are
the sole shareholders of Kestrel, which is an Investment Advisor registered
under Section 203 of the Investment Advisors Act of 1940 with sole investment
power with respect to the shares.
(6) According to Schedule 13G of Wellington Management Company ("Wellington")
dated February 14, 2001, Wellington is an Investment Advisor registered under
Rule 13d-1(b)(1)(ii)(E), and shares investment power, along with its clients,
with respect to the shares.
(7) According to the Schedule 13G of Wasatch Advisors, Inc. ("Wasatch") dated
February 14, 2001, Wasatch is an Investment Advisor registered under Section 203
of the Investment Advisors Act of 1940, with sole investment power with respect
to the shares.
(8) Includes 50,000 shares owned directly by Mr. Davis and 1,813 shares subject
to options that are exercisable within 60 days of May 31, 2001.
(9) Includes 40,000 shares owned directly by Mr. Jessup and 9,750 shares subject
to options that are exercisable within 60 days of May 31, 2001.
(10) Includes 11,523 shares owned directly by Mr. Schweppe and 22,828 shares
subject to options that are exercisable within 60 days of May 31, 2001.
(11) Includes 17,000 shares owned directly by Mr. Hamerslag and 16,500 shares
subject to options that are exercisable within 60 days of May 31, 2001.
(12) Includes 14,000 shares owned directly by Mr. Flynn, 600 shares owned
indirectly by Mr. Flynn as custodian for his children, and 16,500 shares subject
to options that are exercisable within 60 days of May 31, 2001.
(13) Includes 986,725 shares owned directly or indirectly and 83,891 shares
subject to options exercisable within 60 days of May 31, 2001 held by those
officers and directors referenced above in footnotes 2, 3, 8, 9, 10, 11 and 12.
20
24
EXECUTIVE OFFICERS OF THE COMPANY
NAME AGE POSITION
- ---- --- --------
V. Gordon Clemons 57 Chairman of the Board, Chief Executive Officer and President
Richard J. Schweppe 46 Chief Financial Officer and Secretary
Information regarding Mr. Clemons is included under the heading "Directors and
Nominees."
Mr. Schweppe has been the Chief Financial Officer since April 1991 and Secretary
since June 1995. From March 1988 to April 1991, Mr. Schweppe was the Director of
Finance for the Company. From May 1983 to February 1988, Mr. Schweppe was the
Manager, Technical Accounting for Caremark, Inc.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended (the "1934
Act"), requires the Company's executive officers and directors, and persons who
own more than 10% of a registered class of the Company's equity securities, to
file reports of ownership and changes in ownership with the Securities and
Exchange Commission ("SEC") and the National Association of Securities Dealers.
Officers, directors and greater than 10% stockholders are required by SEC
regulations to furnish the Company with copies of all Section 16(a) forms they
file.
Based solely on its review of the copies of such forms received by it, or
written representations from certain reporting persons that no Forms 5 were
required for those persons, the Company believes that, during fiscal year 2001,
all reporting requirements applicable to its officers, directors and greater
than 10% beneficial owners were met in a timely manner, with the exception of
one delinquent report filed for Mr. Hamerslag reflecting an additional 2,000
shares purchased by him.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Mr. Michael is a member of the Compensation Committee and is the President and
Chief Executive Officer of Corstar, a beneficial owner of more than 10% of the
outstanding Common Stock. No member of the Compensation Committee is a former or
current officer of the Company.
No current executive officer of the Company has ever served as a member of the
board of directors or compensation committee of any other entity that has or has
had one or more executive officer serving as a member of the Board of the
Compensation Committee.
21
25
COMPENSATION COMMITTEE REPORT*
The Compensation Committee administers the Company's executive compensation
programs. After consideration of the Compensation Committee's recommendations,
the full Board reviews and approves the salaries of all elected officers,
including those of the Named Executive Officers. The Compensation Committee is
responsible for administering all other elements of executive compensation,
including annual incentive awards and stock option grants under the Option Plan.
GENERAL COMPENSATION GOALS
The design and implementation of all executive compensation arrangements are
based on certain goals derived from Company values, business strategy and
management requirements. These goals may be summarized as follows:
- - Pay competitive salaries to attract, retain and motivate a highly
competent executive team essential to the long-term success of the
Company;
- - Tie an individual's total compensation to individual and profit center
performance and the financial success of the Company;
- - Reward executives for long-term corporate success by facilitating their
ability to acquire an ownership interest in the Company; and
- - Align executives' financial interests with stockholder value.
FACTORS
Several of the more important factors, which were considered in establishing the
components of each executive officer's compensation package for the 2001 fiscal
year are summarized below. Additional factors were also taken into account, and
the Compensation Committee may in its discretion apply entirely different
factors, particularly different measures of financial performance, in setting
executive compensation for future fiscal years. All compensation decisions will
be designed to further the general compensation goals indicated above.
BASE SALARIES
Base salaries are targeted to be moderate yet competitive in relation to
salaries commanded by those in similar positions with other companies in the
same industry. The base salary for each executive officer is reviewed annually
and is set on the basis of personal performance, the relative importance of the
functions the officer performs, the scope of the officer's ongoing
responsibilities, the salary levels in effect for comparable positions with the
Company's principal competitors, and internal equity considerations. The weight
given to each of these factors varies from individual to individual.
ANNUAL INCENTIVE AWARDS
Although the Company has a March 31 fiscal year end, it has calendar year
budgets and annual incentive plans which are based on the calendar year.
Incentive awards to the Chief Executive Officer and the other Named Executive
Officers are shown in the "Bonus" column of the Summary Compensation Table,
which follows this report. Annual bonuses are designed to reward personal
contributions to the success of the Company and are earned under a structured
formula that considers the following factors:
22
26
Company Profit Center Financial Performance
Each profit center of the Company submits a proposed annual operating budget
including annual profit goals for review of and approval by the Chief Executive
Officer of the Company in conjunction with ratification by the Compensation
Committee. At the end of the calendar year, the Compensation Committee evaluates
actual financial performance against these targets and actual revenue growth.
The resulting performance evaluation dictates whether an increase or decrease in
an executive's "normal" incentive compensation award is granted. For executive
officers with operations responsibilities, the annual incentive award can range
from zero to 70% of base salary depending upon performance as compared to
budget. For executive officers with corporate staff responsibilities, such
awards are based upon departmental objectives.
Individual Performance
Each executive has some portion of their annual bonus measured against
individual goals ("MBOs") established for that person. The maximum amount that
any executive may earn based on the MBO element is variable, with full
achievement of MBOs resulting in a minimum 75% payout and increasing up to 100%
payout for achievement exceeding established MBOs. For executive officers with
operations responsibilities, this element comprises a lesser percentage of the
annual incentive award for the individual and for executive officers with
corporate staff responsibilities, it comprises a greater percentage of the
annual incentive award.
Discretionary Awards
The Compensation Committee also has the discretion under extraordinary
circumstances to award bonuses based on a percentage of base salary.
STOCK OPTIONS
Stock option grants accomplish the third and fourth compensation objectives: to
motivate executive officers to manage the business, to improve long-term Company
performance and to align the interests of executive officers with stockholder
value. Customarily, option grants are made with exercise prices equal to the
fair market value of the shares on the grant date and will be of no value unless
the market price of the Company's outstanding shares appreciates, thereby
aligning a substantial part of the executive officer's compensation package with
the return realized by the stockholders. The option generally vests over a
period of four years, contingent upon the executive officer's continued
employment with the Company. Accordingly, the option will provide a return to
the executive officer only if the officer remains employed by the Company and
the market price of the underlying shares appreciates over the option term. The
size of the option grant is designed to create a meaningful opportunity for
stock ownership and is based upon the individual's current position with the
Company, internal comparability with option grants made to other Company
executives and the individual's potential for future responsibility and
promotion over the option term. The Committee has established certain general
guidelines in making option grants to the executive officers in an attempt to
target a fixed number of unvested option shares based upon the individual's
position with the Company and the officer's existing holdings of unvested
options. However, the Compensation Committee does not adhere strictly to these
guidelines and will occasionally vary the size of the option grant made to each
executive officer as circumstances warrant
COMPENSATION OF THE CHIEF EXECUTIVE OFFICER
The annual base salary for the Company's Chief Executive Officer, Mr. Clemons,
was established on January 26, 1988, when the Company and North Star entered
into an employment agreement with Mr. Clemons. The agreement became effective on
February 15, 1988 and has an indefinite term. The agreement provides Mr. Clemons
with an annual salary of $250,000, payable in semi-monthly installments. Mr.
Clemons may terminate the agreement at any time on four months notice and the
Company may terminate the agreement at any time with or without cause. If Mr.
Clemons is terminated without cause, the Company is required to pay Mr. Clemons
his then-current salary for one year after such termination, less any other
employment compensation received by Mr. Clemons during such one year period.
23
27
COMPLIANCE WITH INTERNAL REVENUE CODE SECTION 162(m)
Code Section 162(m) generally disallows a tax deduction to publicly-held
corporations for compensation paid to certain of the corporation's executive
officers to the extent that compensation exceeds $1.0 million for any such
officer in any one year. The limitation applies only to compensation, which is
not considered to be performance-based. The Option Plan is structured so that
any compensation deemed paid to an executive officer in connection with the
exercise of option grants made under the Option Plan will qualify as
performance-based compensation which will not be subject to the $1.0 million
limitation. The non-performance based compensation to be paid to the Company's
executive officers for fiscal 2001 did not exceed the $1.0 million limit per
officer, nor is it expected that the non-performance based compensation to be
paid to the Company's executive officers for fiscal 2002 will exceed that limit.
Because it is very unlikely that the cash compensation payable to any of the
Company's executive officers in the foreseeable future will approach the $1.0
million limit, the Compensation Committee has decided at this time not to take
any other action to limit or restructure the elements of cash compensation
payable to the Company's executive officers. The Compensation Committee will
reconsider this decision should the individual compensation of any executive
officer ever approach the $1.0 million level.
COMPENSATION COMMITTEE
Steven J. Hamerslag
R. Judd Jessup
Jeffrey J. Michael
24
28
AUDIT COMMITTEE REPORT*
The Audit Committee assists the Board in its oversight of the Company's
financial accounting reporting and controls. The Board, in its business
judgment, has determined that all members of the audit committee are
"independent" as required by applicable listing standards of the Nasdaq National
Market. The Audit Committee operates pursuant to a charter approved by the
Board, a copy of which is included as Appendix A to this Proxy Statement.
In performing its oversight role, the Audit Committee considered and discussed
the audited financial statements with management and the independent auditors.
The Audit Committee also discussed with the independent auditors the matters
required to be discussed by Statement on Auditing Standards No. 61,
Communication with Audit Committees. The Audit Committee received the written
disclosures and the letter from the independent auditors required by
Independence Standards Board Standard No. 1, Independence Discussions with Audit
Committees. The Audit Committee also considered whether the provision of
non-audit services by the independent auditors is compatible with maintaining
the auditors' independence and has discussed with the auditors the auditors'
independence.
Based on the reports and discussions described in this Report, and subject to
the limitations on the role and responsibilities of the Audit Committee referred
to below and in the audit committee charter, the Audit Committee recommended to
the Board (and the Board approved) that the audited financial statements be
included in the Annual Report on Form 10-K for the fiscal year ended March 31,
2001.
On March 29, 2001, upon the recommendation of the Audit Committee and with the
approval of the Board, the Company dismissed Ernst & Young LLP as the Company's
independent auditors. The Audit Committee then recommended and the Board
approved, subject to stockholder ratification, the selection of Grant Thornton
LLP as independent auditors for the year ending March 31, 2002.
AUDIT COMMITTEE
Peter E. Flynn
Steven J. Hamerslag
R. Judd Jessup
*The material in this report is not "soliciting material," is not deemed filed
with the SEC and is not to be incorporated by reference in any filing of the
Company under the 1933 Act or the 1934 Act.
25
29
STOCK PERFORMANCE GRAPH*
The graph depicted below shows the Company's stock price at March 31, 1996
assuming an initial investment of $100 and at March 31, 1997, 1998, 1999, 2000
and 2001, along with the U.S. Nasdaq and the Nasdaq Health Services Index over
the same period. The data depicted on the graph are as set forth in the chart
below the graph. An initial investment of $100.00 in the U.S. Nasdaq on March
31, 1996 would be $169.46 on March 31, 2001.
[GRAPHIC OMITTED]
March 31, March 31, March 31, March 31, March 31, March 31,
1996 1997 1998 1999 2000 2001
--------- --------- --------- -------- --------- ---------
CorVel Corporation 100.00 71.43 113.57 102.14 148.57 202.14
U.S. Nasdaq 100.00 111.15 168.47 227.62 423.37 169.46
Nasdaq 100.00 89.40 107.78 74.56 69.67 84.49
Health Services Index
*The material in this graph is not "soliciting material," is not deemed filed
with the SEC and is not to be incorporated by reference in any filing of the
Company under the 1933 Act or the 1934 Act.
26
30
EXECUTIVE COMPENSATION
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
The following table sets forth the compensation earned by the Company's Chief
Executive Officer and each of the other executive officers whose total salary
and bonus for fiscal year 2001 exceeded $100,000 for the three fiscal years
ended March 31, 1999, 2000 and 2001. In addition, Mr. Davis and Mr. Silverman
have also been included in the table because each would have been among the four
most highly compensated executive officers of the Company on the last day of the
2001 fiscal year had he not resigned or changed executive status earlier during
that year. The listed individuals shall be referred to in this Proxy Statement
as the "Named Executive Officers." No other executive officers who would
otherwise have been included in such table on the basis of salary and bonus
earned for the 2001 fiscal year has been excluded by reason of termination of
employment or change in executive status during fiscal year 2001.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG-TERM COMPENSATION
----------------------------------------- ---------------------------------------
NAME OF INDIVIDUAL FISCAL SECURITIES UNDERLYING ALL OTHER
AND PRINCIPAL POSITION YEAR SALARY(1) BONUS OPTIONS GRANTED COMPENSATION(2)
- ---------------------- ------ --------- ------- --------------------- ---------------
V. GORDON CLEMONS ........ 2001 $250,000 $ -- -- $1,532
Chief Executive Officer 2000 $250,000 $ -- -- $ 991
1999 $250,000 $ -- -- $ 890
DANIEL H. DAVIS .......... 2001** $171,250 $ -- -- $1,409
former V.P. Marketing & .. 2000 $178,333 $35,416 -- $1,273
Business Development (3) . 1999 $174,500 $40,020 3,000 $1,273
LOUIS E. SILVERMAN ....... 2001** $ 91,923 $ -- 5,000 $ 105
former Chief Operations 2000 $200,000 $92,787 18,000 $ 940
Officer (4) ............ 1999 $183,750 $66,065 21,000 $ 817
RICHARD J. SCHWEPPE ...... 2001 $103,500 $16,000 5,700 $ 515
Chief Financial Officer .. 2000 $ 98,333 $12,560(5) 2,000 $ 494
1999 $ 94,250 $11,152(6) 7,000 $ 494
- ----------
(1) Includes employee contributions to the Company's Section 401(k) Plan.
(2) "All Other Compensation" represents amounts contributed by the Company to
the Company's Section 401(k) Plan which match the Named Executive Officer's
contribution to such Plan and annual premiums paid by the Company on behalf of
each Named Executive Officer for the purchase of group term life insurance in an
amount equal to such executive officer's annual salary as follows:
COMPANY CONTRIBUTIONS TO COMPANY-PAID LIFE
FISCAL YEAR SECTION 401(k) PLAN INSURANCE PREMIUMS
----------- ------------------------ ------------------
V. GORDON CLEMONS 2001 $ 500 $1,032
2000 $ 601 $ 390
1999 $ 500 $ 390
DANIEL H. DAVIS 2001 $1,050 $ 359
2000 $1,000 $ 273
1999 $1,000 $ 273
LOUIS E. SILVERMAN 2001 $ -- $ 105
2000 $ 628 $ 312
1999 $ 528 $ 289
RICHARD J. SCHWEPPE 2001 $ 425 $ 101
2000 $ 404 $ 90
1999 $ 404 $ 90
(3) Mr. Davis served as Vice President, Marketing and Business Development until
June 15, 2000, at which time he resigned from this position.
(4) Mr. Silverman served as Chief Operations Officer until July 8, 2000 at which
time he left the Company.
(5) In fiscal year 2000, in lieu of a cash bonus, Mr. Schweppe was offered,
elected to receive and was granted an option to purchase 1,700 shares of Common
Stock at an exercise price of $26.75.
(6) In fiscal year 1999, in lieu of a cash bonus, Mr. Schweppe was offered,
elected to receive and was granted an option to purchase 2,000 shares of Common
Stock at an exercise price of $18.09.
27
31
STOCK OPTIONS
The following table provides information with respect to stock option grants
made during fiscal year 2001 to the Named Executive Officers. No options were
granted during such fiscal year to Mr. Clemons or Mr. Davis. Except for the
limited stock appreciation rights described in footnote 1 below the table, no
stock appreciation rights were granted during such fiscal year to the Named
Executive Officers.
OPTION GRANTS IN LAST FISCAL YEAR
NUMBER OF PERCENT OF POTENTIAL REALIZABLE
SECURITIES TOTAL OPTIONS VALUE AT ASSUMED
UNDERLYING GRANTED TO EXERCISE ANNUAL RATE OF STOCK PRICE
OPTIONS GRANT EMPLOYEES IN PRICE EXPIRATION APPRECIATION FOR OPTION TERM
NAME GRANTED (1) DATE FISCAL YEAR(2) ($/SHARE)(3) DATE 5% (4) 10% (4)
---- ----------- -------- -------------- ------------ ---------- ---------- ----------
LOUIS E
SILVERMAN 5,000 5/4/00 2.78% $ 26.75 5/4/05 $36,952.66 $81,655.71
RICHARD J
SCHWEPPE 500 5/4/00 0.28% $ 26.75 5/4/05 $ 3,695.27 $ 8,165.57
1,700(5) 5/4/00 0.95% $ 26.75 5/4/05 $12,563.90 $27,762.94
1,500 7/3/00 0.83% $ 26.25 7/3/05 $10,878.59 $24,038.83
1,000 11/10/00 0.56% $ 28.48 11/10/05 $ 7,869.60 $17,389.77
1,000 3/12/01 0.56% $ 34.75 3/12/06 $ 9,600.78 $21,215.22
(1) Each option will become exercisable for 25% of the option shares one year
from the grant date and thereafter the remaining shares become exercisable in 36
equal monthly installments. To the extent not already exercisable, the options
become exercisable upon (a) a sale of assets, (b) a merger in which the Company
does not survive or (c) a reverse merger in which the Company survives but
ownership of 50% or more of the voting power of the Company's stock is
transferred, unless the option is assumed or replaced with a comparable option
by the successor corporation. The options are also subject to "limited stock
appreciation rights" pursuant to which the options, to the extent exercisable at
the time a hostile tender offer occurs, will automatically be canceled in return
for a cash payment equal to the tender-offer price minus the exercise price
multiplied by the number of shares for which the option was exercisable. Each
option has a maximum term of five years subject to earlier termination in the
event of the optionee's cessation of employment with the Company.
(2) The Company granted options to purchase a total of 193,200 shares of Common
Stock during fiscal year 2001.
(3) The exercise price is equal to the fair market value of the Common Stock on
the grant date and may be paid in cash, in shares of Common Stock valued at fair
market value on the exercise date or through a cashless exercise procedure
involving a same-day sale of the purchased shares. The Company may also finance
the option exercise by loaning the optionee sufficient funds to pay the exercise
price for the purchased shares and the Federal and state income tax liability
incurred by the optionee in connection with such exercise. The Compensation
Committee has the discretionary authority to reprice outstanding options under
the Option Plan through the cancellation of those options and the grants of
replacement options with an exercise price equal to the lower fair market value
of the option shares on the regrant date.
(4) These gains are based on annual compounded rates of growth of the price of
Common Stock mandated by the SEC of 5% and 10% per year from the date the option
was granted over the full option term. These rates do not represent the
Company's estimate or projection of future Common Stock prices. There is no
assurance that the values that may be realized by a Named Executive Officer on
exercise of his options or any other holder of the Common Stock will be at or
near the value estimated in the foregoing table. Unless the market price of the
Common Stock appreciates over the option term, no value will be realized from
these grants.
(5) In lieu of a cash bonus earned for calendar 1999, Mr. Schweppe was offered
and elected to receive this option grant in May 2000.
28
32
STOCK OPTION EXERCISES AND HOLDINGS
The following table provides information with respect to the Named Executive
Officers concerning the exercise of options during the 2001 fiscal year and
unexercised options held as of the end of such fiscal year. No stock
appreciation rights were exercised during the 2001 fiscal year and except for
the limited stock appreciation rights described in footnote 1 to the table
above, no stock appreciation rights were held by any Named Executive Officer at
the end of such fiscal year. Mr. Clemons and Mr. Schweppe did not exercise any
options during the 2001 fiscal year nor did Mr. Clemons hold any unexercised
options as of the end of such fiscal year.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
VALUE NET VALUE OF UNEXERCISED
REALIZED IN-THE-MONEY OPTIONS AT FISCAL
(MARKET NUMBER OF SECURITIES YEAR-END
PRICE UNDERLYING UNEXERCISED (MARKET PRICE OF SHARES AT FISCAL
NO. OF AT EXERCISE OPTIONS AT FISCAL YEAR-END ($35.375) LESS
SHARES LESS YEAR-END 2001 EXERCISE PRICE)
ACQUIRED ON EXERCISE ------------------------------ -------------------------------
NAME EXERCISE PRICE) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ----------- ----------- ------------- ----------- -------------
DANIEL H. DAVIS 34,000 $533,125 1,563 31,437 $ 27,157 $684,968
LOUIS E. SILVERMAN 60,960 $714,020 0 0 $ 0 $ 0
RICHARD SCHWEPPE 0 $ 0 24,002 15,698 $461,434 $215,564
EMPLOYMENT AGREEMENTS, TERMINATION OF EMPLOYMENT AND CHANGE IN CONTROL
ARRANGEMENTS
On January 26, 1988, the Company and North Star entered into an employment
agreement with Mr. Clemons. The agreement became effective on February 15, 1988
and has an indefinite term. The agreement provides Mr. Clemons with an annual
salary of $250,000, payable in semi-monthly installments. Mr. Clemons may
terminate the agreement at any time on four months notice and the Company may
terminate the agreement at any time with or without cause. If Mr. Clemons is
terminated without cause, the Company is required to pay Mr. Clemons his salary
for one year after such termination, less any other employment compensation
received by Mr. Clemons during such one year period.
On June 15, 2000, the Company entered into an employment agreement with Mr.
Davis at which time he transitioned from marketing responsibilities to a
position dedicated to new business development for the Company. Mr. Davis is
currently paid $8,000 per month under this Agreement which expires on June 15,
2003.
The Company does not have any existing employment agreements with any other
Named Executive Officer.
In the event of a Corporate Transaction, each outstanding option granted under
the Discretionary Option Grant Program will automatically become exercisable as
to all of the option shares immediately prior to the effective date of the
Corporate Transaction. However, no acceleration will occur if and to the extent:
(a) such option is either to be assumed by the successor corporation or parent
thereof or replaced by a comparable option to purchase shares of the capital
stock of the successor corporation or parent thereof, (b) such option is to be
replaced with a cash incentive program of the successor corporation designed to
preserve the option spread existing at the time of the Corporate Transaction and
incorporating the same vesting schedule applicable to the option or (c)
acceleration of such option is subject to other applicable limitations imposed
by the Compensation Committee at the time of grant.
The Compensation Committee, as the administrator of the Option Plan, has the
authority to provide for accelerated vesting of the shares of Common Stock
subject to any outstanding options held by any of the Named
29
33
Executive Officers in connection with certain changes in control of the Company
or the subsequent termination of the officer's employment following a change in
control.
CERTAIN TRANSACTIONS
In fiscal year 2001, there was not, nor is there currently proposed, any
transaction or series of similar transactions to which the Company was or will
be a party in which the amount involved exceeded or will exceed $60,000 and in
which any director, executive officer, holder of more than 5% of the Common
Stock or any member of the immediate family of any of the foregoing persons had
or will have a direct or indirect material interest.
ANNUAL REPORT ON FORM 10-K AND STOCKHOLDER PROPOSALS
FOR THE 2002 ANNUAL MEETING
A copy of the Annual Report on Form 10-K of the Company for the fiscal year
ended March 31, 2001 has been mailed concurrently with this Proxy Statement. The
Annual Report is not incorporated into this Proxy Statement, is not considered
"soliciting material," is not deemed filed with the SEC and is not incorporated
by reference in any filing of the Company under the 1933 Act or the 1934 Act.
A stockholder who intends to present a proposal at the Company's 2002 Annual
Meeting of Stockholders must submit such proposal to the Company for inclusion
in the Company's 2002 Proxy Statement and proxy card relating to such meeting
not later than March 2, 2002. Stockholder proposals must be mailed to the
Company's principal office at 2010 Main Street, Suite 1020, Irvine, California
92614, Attention: Secretary.
COSTS OF SOLICITATION
Proxies will be solicited by mail and by telephone by regular employees of the
Company without additional remuneration. The Company will request banks,
brokerage houses and other institutions to forward the soliciting material to
persons for whom they hold shares and to obtain authorization for the execution
of proxies. The Company will reimburse banks, brokerage houses and other
institutions for their reasonable expenses in forwarding the Company's proxy
materials to beneficial owners of the Common Stock. All costs associated with
the solicitation of proxies will be borne by the Company.
By Order of the Board of Directors
Richard J. Schweppe
Secretary
July 6, 2001
Irvine, California
30
34
EXHIBIT A
CORVEL CORPORATION
AUDIT COMMITTEE CHARTER
ORGANIZATION
This charter governs the operations of the audit committee. The committee shall
review and reassess the charter at least annually and obtain the approval of the
board of directors. The committee shall be appointed by the board of directors
and shall comprise at least three directors, each of whom are independent of
management and the Company. Members of the committee shall be considered
independent if they have no relationship that may interfere with the exercise of
their independence from management and the Company. All committee members shall
be financially literate, (or shall become financially literate within a
reasonable period of time after appointment to the committee,) and at least one
member shall have accounting or related financial management expertise.
STATEMENT OF POLICY
The audit committee shall provide assistance to the board of directors in
fulfilling their oversight responsibility to the shareholders, potential
shareholders, the investment community, and other relating to the Company's
financial statements and the financial reporting process, the systems of
internal accounting and financial controls, the annual independent audit of the
Company's financial statements, and the legal compliance and ethics programs as
established by management and the board. In so doing, it is the responsibility
of the committee to maintain free and open communication between the committee,
independent auditors, and management of the Company. In discharging its
oversight role, the committee is empowered to investigate any matter brought to
its attention with full access to all books, records, facilities, and personnel
of the Company and the power to retain outside counsel, or other experts for
this purpose.
RESPONSIBILITIES AND PROCESSES
The primary responsibility of the audit committee is to oversee the Company's
financial reporting process on behalf of the board and report the results of
their activities to the board. Management is responsible for preparing the
Company's financial statements, and the independent auditors are responsible for
auditing those financial statements. The committee in carrying out its
responsibilities believes its policies and procedures should remain flexible, in
order to best react to changing conditions and circumstances. The committee
should take the appropriate actions to set the overall corporate "tone" for
quality financial reporting, sound business risk practices, and ethical
behavior.
31
35
EXHIBIT A
CORVEL CORPORATION
AUDIT COMMITTEE CHARTER
(CONTINUED)
The following shall be the principal recurring process of the audit committee in
carrying out its oversight responsibilities. The processes are set forth as a
guide with the understanding that the committee may supplement them as
appropriate.
1) The committee shall have a clear understanding with management
and the independent auditors that the independent auditors are
ultimately accountable to the board and the audit committee, as
representatives of the Company's shareholders. The committee
shall have the ultimate authority and responsibility to evaluate
and, where appropriate, replace the independent auditors. The
committee shall discuss with the auditors their independence
from management and the Company and the matters included in the
written disclosures required by the Independence Standards
Board. Annually, the committee shall review and recommend to the
board the selection of the Company's independent auditors,
subject to shareholders' approval.
2) The committee shall discuss with the independent auditors the
overall scope and plans for their audits. Also, the committee
shall discuss with management and the independent auditors, the
adequacy and effectiveness of the accounting and financial
controls, including the Company's system to monitor and manage
business risk, and legal and ethical compliance programs.
Further, the committee shall meet separately with the
independent auditors, with and without management present, to
discuss the results of their examinations.
3) The committee shall review the interim financial statements with
management and the independent auditors prior to the filing of
the Company's Quarterly Report on Form 10-Q. Also, the committee
shall discuss the results of the quarterly review and any other
matters required to be communicated to the committee by the
independent auditors under generally accepted auditing
standards. The chair of the committee may represent the entire
committee for the purposes of this review.
4) The committee shall review with management and the independent
auditors the financial statements to be included in the
Company's Annual Report on Form 10-K (or the annual report to
shareholders if distributed prior to the filing of Form 10-K),
including their judgment about the quality, not just
acceptability, of accounting principles, the reasonableness of
significant judgments, and the clarity of the disclosures in the
financial statements. Also, the committee shall discuss the
results of the annual audit and any other matters required to be
communicated to the committee by the independent auditors under
generally accepted auditing standards.
32
36
CORVEL CORPORATION
RESTATED 1988 EXECUTIVE STOCK OPTION PLAN
AS RESTATED AND AMENDED THROUGH MAY 10, 2001
ARTICLE ONE
GENERAL
I. GENERAL PROVISIONS.
A. The Plan is intended to promote the interests of the Company by
providing a method whereby (i) key employees (including officers and directors)
of the Company (or any Parent or Subsidiary) responsible for the management,
growth and financial success of the Company (or any Parent or Subsidiary), (ii)
the non-employee members of the Board or the board of directors of any Parent or
Subsidiary, and (iii) consultants and independent contractors who provide
valuable services to the Company (or any Parent or Subsidiary) are to be offered
equity incentives and rewards intended to encourage such individuals to acquire
a proprietary interest, or otherwise increase their proprietary interest, in the
Company and to continue to render services to the Company or any Parent or
Subsidiary.
B. For purposes of the Plan, the following definitions shall be in
effect:
BOARD: The Board of Directors of the Company.
CHANGE IN CONTROL: A Change in Control shall be deemed to occur in
the event that:
(i) any person or related group of persons (other than the
Company or a person that directly or indirectly controls, is controlled
by, or is under common control with, the Company) directly or indirectly
acquires beneficial ownership (within the meaning of Rule 13d-3 of the
Exchange Act) of securities possessing more than fifty percent (50%) of
the total combined voting power of the Company's outstanding securities
pursuant to a tender or exchange offer which the Board does not
recommend the Company's stockholders to accept; or
(ii) there is a change in the composition of the Board over a
period of twenty-four (24) consecutive months or less such that a
majority of the Board members (rounded up to the next whole number)
cease, by reason of one or more proxy contests for the election of Board
members, to be comprised of individuals who either (a) have been Board
members continuously since the beginning of such period or (b) have been
elected or nominated for election as Board members during such period by
at least two-thirds of the Board members described in clause (a) who
were still in office at the time such election or nomination was
approved by the Board.
37
CODE: The Internal Revenue Code of 1986, as amended.
COMMON STOCK: The Common Stock issuable under the Plan shall be
shares of the Company's common stock, $.0001 par value.
COMMITTEE: The Committee shall be a committee consisting of two (2)
or more members of the Board appointed by the Board. To obtain the
benefits of SEC Rule 16b-3, all of the members of the Committee must
satisfy the requirements of that provision. To be exempt from the
million dollar compensation deduction limitation of Code Section 162(m),
all of the members of the Committee must satisfy the requirements of
that provision.
COMPANY: The Company shall mean CorVel Corporation, a Delaware
corporation(1), or any corporate successor which shall assume the Plan.
CORPORATE TRANSACTION: A Corporate Transaction shall include any of
the following transactions for which the approval of the Company's
stockholders is obtained:
(i) a merger or acquisition in which the Company is not the
surviving entity, except for a transaction the principal purpose of
which is to change the state of the Company's incorporation,
(ii) the sale, transfer or other disposition of all or
substantially all of the assets of the Company to any entity other
than a parent or subsidiary of the Company, or
(iii) any reverse merger in which the Company is the surviving
entity but in which fifty percent (50%) or more of the Company's
outstanding voting stock is transferred to holders different from
those who held such fifty percent (50%) or greater interest
immediately prior to such merger.
EFFECTIVE DATE: August 5, 1993, the effective date of the Automatic
Option Grant Program.
ELIGIBLE DIRECTOR: An Eligible Director is defined in Section I.A.
of Article III.
- ----------------
(1) The Company was previously known as FORTIS Corporation and assumed
all of the rights and responsibilities of FORTIS Corporation, a Minnesota
corporation ("FORTIS Minnesota"), with respect to the Plan pursuant to the
Agreement and Plan of Merger by and between the Company and FORTIS Minnesota,
effective May 16, 1991, under which FORTIS Minnesota changed its state of
incorporation from Minnesota to Delaware by merging with and into the Company
which was a wholly owned subsidiary of FORTIS Minnesota.
2
38
EMPLOYEE: An individual shall be considered to be an Employee for so
long as the Company or one or more of its Parent or Subsidiaries reports
his or her earnings on a Form W-2.
EXCHANGE ACT: The Securities Exchange Act of 1934, as amended.
FAIR MARKET VALUE: The Fair Market Value per share of Common Stock
on any relevant date shall be determined in accordance with the
following provisions:
(i) If the Common Stock is at the time listed on the Nasdaq
National Market or the Nasdaq SmallCap Market, then the Fair Market
Value shall be the closing selling price per share of Common Stock
on the date in question, as such price is reported by the National
Association of Securities Dealers on the Nasdaq National Market or
the Nasdaq SmallCap Market and published in The Wall Street Journal.
(ii) If the Common Stock is at the time listed on any stock
exchange, then the Fair Market Value shall be the closing selling
price per share of Common Stock on the date in question on the stock
exchange determined by the Committee to be the primary market for
the Common Stock, as such price is officially quoted in the
composite tape of transactions on such exchange and published in The
Wall Street Journal.
(iii) If the Common Stock is not listed on the Nasdaq National
Market, Nasdaq SmallCap Market or a national securities exchange,
the Fair Market Value shall be the average of the closing bid and
ask prices of the Common Stock on that day as reported by the Nasdaq
bulletin board or any comparable system on that day.
(iv) If the Common Stock is not traded included in the Nasdaq
bulletin board or any comparable system, the Fair Market Value shall
be the average of the closing bid and ask prices on that day as
furnished by any member of the National Association of Securities
Dealers, Inc. selected from time to time by the Company for that
purpose.
(v) If the date in question is not a trading day, then the Fair
Market Value shall be determined based on prices for the trading day
prior to the date in question.
HOSTILE TAKE-OVER: A Hostile Take-Over shall be the acquisition,
directly or indirectly, by any person or related group of persons (other
than the Company or a person that directly or indirectly controls, is
controlled by, or is under common control with, the Company) of
beneficial ownership (within the meaning of Rule 13d-3 of the Exchange
Act) of securities possessing more than fifty percent (50%) of the total
combined voting power of the Company's outstanding securities pursuant
to a tender or exchange offer made directly to the Company's
stockholders which the Board does not recommend such stockholders to
accept.
3
39
INCENTIVE OPTION: An Incentive Option shall mean an option intended
to satisfy the requirements of Code Section 422.
NON-STATUTORY OPTION: A Non-Statutory Option shall mean an option
not intended to satisfy the requirements of Code Section 422.
OPTIONEE: Any person to whom an option is granted under the
Discretionary Option Grant Program of Article Two or the Automatic
Option Grant Program of Article Three of this Plan.
PARENT: A corporation shall be deemed to be a Parent of the Company
if it is a corporation (other than the Company) in an unbroken chain of
corporations ending with the Company, provided each such corporation in
the unbroken chain (other than the Company) owns, at the time of the
determination, stock possessing fifty percent (50%) or more of the total
combined voting power of all classes of stock in one of the other
corporations in such chain.
PERMANENT DISABILITY: A permanent disability shall have the meaning
assigned to it in Code Section 22(e)(3).
PLAN: The CorVel Corporation Restated 1988 Executive Stock Option
Plan, as amended and restated.
SEC: The SEC shall mean the Securities and Exchange Commission.
SECTION 16(b) INSIDER: An individual shall be considered to be a
Section 16(b) Insider on any relevant date under the Plan if such
individual is at the time subject to the short-swing profit restrictions
of Section 16(b) of the Exchange Act by reason of his or her affiliation
with the Company.
SERVICE PROVIDER: An individual shall be deemed to be a Service
Provider for so long as such individual renders service on a periodic
basis to the Company, its Parent and/or any of its Subsidiaries as an
Employee, a non-Employee member of the board of directors or a
consultant or independent advisor.
SUBSIDIARY: A corporation shall be deemed to be a Subsidiary of the
Company if it is one of the corporations (other than the Company) in an
unbroken chain of corporations beginning with the Company, provided each
such corporation (other than the last corporation in the unbroken chain)
owns, at the time of determination, stock possessing fifty percent (50%)
or more of the total combined voting power of all classes of stock in
one of the other corporations in such chain. For purposes of all
Non-Statutory Option grants under the Plan and all Corporate Transaction
provisions of the Plan, the term "Subsidiary" shall also include any
partnership, joint venture or other business entity of which the Company
owns, directly or indirectly through another entity, more than a fifty
percent (50%) interest in voting power, capital or profits.
4
40
TAKE-OVER PRICE: The Take-Over Price per share shall be deemed to be
equal to the GREATER of (a) the Fair Market Value per share on the
option cancellation date or (b) the highest reported price per share
paid by the acquiring entity in effecting such Hostile Take-Over.
However, if the cancelled option is an Incentive Option, the Take-Over
Price shall not exceed the clause (a) price per share.
10% STOCKHOLDER: A 10% Stockholder is the owner of stock possessing
10% or more of the total combined voting power of all classes of stock
of the Company or any Parent or Subsidiary.
(i) The individual is treated as owning any stock owned, directly or
indirectly, by:
(a) His or her brothers and sisters (whether by whole or
half-blood);
(b) His or her spouse; and
(c) His or her lineal descendants and/or ancestors.
(ii) Stock owned, directly or indirectly, by a corporation,
partnership, estate, or trust is treated as owned proportionately by or
for its stockholders, partners, or beneficiaries.
C. Stock option grants made to any individual under the Discretionary
Option Grant Program of Article Two shall not in any way affect, limit or
restrict such individual's eligibility to participate in any other stock plan or
other compensation or benefit plan, arrangement or practice now or hereafter
maintained by the Company or any Parent or Subsidiary.
D. Stock option grants outstanding under the Plan shall in no way affect
the right of the Company to adjust, reclassify, reorganize or otherwise change
its capital or business structure or to merge, consolidate, dissolve, liquidate
or sell or transfer all or any part of its business or assets.
II. STRUCTURE OF THE PLAN
A. Stock Programs. The Plan shall be divided into two separate
components: the Discretionary Option Grant Program specified in Article Two and
the Automatic Option Grant Program specified in Article Three. Under the
Discretionary Option Grant Program, eligible individuals may, at the discretion
of the Committee, be granted options to purchase shares of Common Stock in
accordance with the provisions of Article Two. Under the Automatic Option Grant
Program, non-Employee members of the Board will receive at periodic intervals
special option grants to purchase shares of Common Stock in accordance with the
provisions of Article Three.
5
41
B. General Provisions. Unless the context clearly indicates otherwise,
the provisions of Articles One and Four shall apply to both the Discretionary
Option Grant Program and the Automatic Option Grant Program and shall
accordingly govern the interests of all individuals under the Plan.
III. ADMINISTRATION OF THE PLAN
A. The Plan shall be administered by the Committee. The Committee may
delegate its responsibilities to others under such conditions and limitations as
it may determine, except that the Committee may not delegate its authority with
regard to the making of grants to Section 16(b) Insiders. However, if the grant
to a Section 16(b) Insider would not be exempt under SEC Rule 16b-3 if made by
the Committee, such grant may be made by the Board. On the other hand, if the
grant of an option is intended to be exempt from Code Section 162(m), it must be
made by a committee composed exclusively of outside directors, as that term is
defined in Code Section 162(m).
B. Subject to the express provisions of the Plan, the Committee shall
have the sole and exclusive authority with respect to the Discretionary Option
Grant Program:
(i) to make option grants to any and all eligible individuals;
(ii) to interpret the Plan, to prescribe, amend and rescind rules
and regulations relating to it, and to make all other determinations deemed
necessary or advisable in administering the Discretionary Option Grant Program;
and
(iii) to change the terms and conditions of any outstanding option
granted pursuant to Article Two, provided such action does not, without the
consent of the holder, adversely affect the rights and obligations such
individual may have under the outstanding grant.
C. Administration of the Automatic Option Grant Program shall be
self-executing in accordance with the express terms and conditions of Article
Three, and neither the Committee nor the Board shall exercise no discretionary
functions with respect to option grants made pursuant to that program.
D. Determinations of the Committee on all matters relating to the Plan
and any option grants or stock issuances made hereunder shall be final and
binding on all persons having any interest in the Plan or any options granted or
shares issued under the Plan.
E. To the maximum extent permitted by law, the Company shall indemnify
each member of the Committee and any secondary committee formed pursuant to
Section III.A. of this Article and every other member of the Board, as well as
any other employee with duties under the Plan, against all liabilities and
expenses (including any amount paid in settlement or in satisfaction of a
judgment) reasonably incurred by the individual in connection with any claims
against the individual by reason of the performance of the individual's duties
under the Plan. This indemnity shall not apply, however, if: (i) it is
determined in the action, lawsuit, or proceeding that the individual is guilty
of gross negligence or intentional misconduct in the performance of those
duties; or (ii) the individual fails to assist the Company in defending
6
42
against any such claim. The Company shall have the right to select counsel and
to control the prosecution or defense of the suit. The Company shall not be
obligated to indemnify any individual for any amount incurred through any
settlement or compromise of any action unless the Company consents in writing to
the settlement or compromise.
IV. ELIGIBILITY
A. The persons eligible to receive option grants under the Discretionary
Option Grant Program are as follows:
(i) Employees;
(ii) non-Employee members of the Board or of the board of directors
of any Parent or Subsidiary; and
(iii) consultants of or independent advisors to the Company (or any
Parent or Subsidiary).
V. STOCK SUBJECT TO THE PLAN
A. The Common Stock issuable under the Plan shall be made available
either from authorized but unissued shares of Common Stock or from shares of
Common Stock reacquired by the Company on the open market. The aggregate number
of shares of Common Stock issuable over the term of this Plan shall not exceed
3,970,000 shares, including an increase of 500,000 shares of Common Stock which
was authorized by the Board on May 10, 2001, which is subject to stockholder
approval at the 2001 Annual Meeting. Such share reserve is subject to adjustment
from time to time in accordance with Section V.C. of this Article.
B. Should an option granted under this Plan expire or terminate for any
reason prior to exercise or surrender in full (including options cancelled in
accordance with the cancellation-regrant provisions of Section V of Article
Two), the shares subject to the portion of the option not so exercised or
surrendered shall be available for subsequent option grants under this Plan. In
addition, unvested shares issued under the Plan and subsequently cancelled or
repurchased by the Company, at the original option exercise price paid per
share, pursuant to the Company's repurchase rights under the Plan shall be added
back to the number of shares of Common Stock reserved for issuance under the
Plan and shall accordingly be available for reissuance through one or more
subsequent option grants under the Plan. However, shares subject to stock
appreciation rights exercised in accordance with the provisions of Section II of
Article Two and Section III of Article Three shall reduce on a share-for-share
basis the number of shares of Common Stock available for subsequent option
grants under this Plan. Should the exercise price of an outstanding option under
the Plan be paid with shares of Common Stock or should shares of Common Stock
otherwise issuable under the Plan be withheld by the Company in satisfaction of
the withholding taxes incurred in connection with the exercise of an outstanding
option or the vesting of a stock issuance under the Plan, then the number of
shares of Common Stock available for issuance under the Plan shall be reduced by
the gross number of shares for which the option is exercised or which vest under
the stock issuance, and not by the net number of shares of Common Stock actually
issued to the option holder.
7
43
C. In the event any change is made to the Common Stock issuable under
the Plan by reason of any stock dividend, recapitalization, stock split, reverse
stock split, combination of shares, exchange of shares or other change affecting
the outstanding Common Stock as a class without the Company's receipt of
consideration, then appropriate adjustments shall be made by the Committee to
(i) the aggregate number and/or class of securities issuable under the Plan,
(ii) the maximum number and/or class of securities for which any one individual
participating in the Plan may be granted stock options and separately
exercisable stock appreciation rights over the term of the Plan, (iii) the
number and/or class of securities for which automatic option grants are to be
subsequently made to non-Employee Board members under the Automatic Option Grant
Program, (iv) the number and/or class of securities and the exercise price per
share of the stock subject to each option outstanding under the Plan and (v) the
number and/or class of securities and the exercise price per share in effect
under each outstanding stock appreciation right in order to preclude the
dilution or enlargement of benefits thereunder. All adjustments made by the
Committee pursuant to this paragraph V.C. shall be final and binding.
D. In the event that (i) the Company is the surviving entity in any
Corporate Transaction which does not result in the termination of outstanding
options pursuant to the Corporate Transaction provisions of the Plan or (ii) the
outstanding options under the Plan are to be assumed in connection with such
Corporate Transaction, then each such continuing or assumed option shall,
immediately after such Corporate Transaction, be appropriately adjusted to apply
and pertain to the number and class of securities which would have been
issuable, in consummation of such Corporate Transaction, to an actual holder of
the same number of shares of Common Stock as are subject to such option
immediately prior to such Corporate Transaction. Appropriate adjustments shall
also be made to the exercise price payable per share, provided the aggregate
option price shall remain the same. In addition, the number and class of
securities which remain issuable under this Plan following the consummation of
the Corporate Transaction shall be appropriately adjusted.
E. From and after January 1, 1994, in no event may any one individual
participating in the Plan be granted stock options and/or separately exercisable
stock appreciation rights exceeding 1,600,000 shares of Common Stock in the
aggregate over the term of the Plan, subject to adjustment from time to time in
accordance with the provisions of Section V.C. of this Article.
8
44
ARTICLE TWO
DISCRETIONARY OPTION GRANT PROGRAM
I. TERMS AND CONDITIONS OF OPTIONS
A. The Committee shall have sole and exclusive authority (subject to the
express provisions of the Plan) to determine which eligible individuals are to
be granted options under the Discretionary Option Grant Program, the number of
shares to be covered by each such option, the status of the granted option as
either an Incentive Option or a Non-Statutory Option, the time or times at which
such option is to become exercisable and the maximum term for which the option
is to remain outstanding.
B. The granted options shall be evidenced by instruments in such form as
the Committee shall from time to time approve; provided, however, that each such
instrument shall comply with the terms and conditions specified below.
1. Option Price.
a. The option price per share shall be fixed by the Committee,
but in no event shall the option price per share be less than (i) eighty-five
percent (85%) of the Fair Market Value per share of Common Stock on the date of
the option grant or (ii) one hundred percent (100%) of the Fair Market Value per
share of Common Stock on the date of the option grant if the Committee intends
that such grant (A) not subject the Company to any adverse accounting charges
and (B) be exempt from the million dollar compensation deduction limitation of
Code Section 162(m).
b. The option price shall become immediately due upon exercise
of the option and shall, subject to the loan provisions of Section I of Article
Four, be payable in one or more of the alternative forms specified below:
1. full payment in cash or check payable to the Company's
order; or
2. full payment in shares of Common Stock held by the
Optionee for the requisite period necessary to avoid a charge to the Company's
reported earnings (which in any event shall not be less than six (6) months) and
valued at Fair Market Value on the Exercise Date (as such term is defined
below); or
3. to the extent the option is exercised for vested shares,
full payment through a special sale and remittance procedure pursuant to which
the Optionee is to provide irrevocable written instructions (i) to a designated
brokerage firm to effect the immediate sale of the purchased shares and remit to
the Company, out of the sale proceeds available on the settlement date, an
amount sufficient to cover the aggregate option price payable for the purchased
shares plus all applicable Federal and state income and employment taxes
required to be withheld by the Company by reason of such purchase and (ii) to
the Company to deliver the certificates for the purchased shares directly to
such brokerage firm in order to complete the sale transaction; or
9
45
c. If payment of the exercise price is made by means of the
surrender of shares of Common Stock which are subject to certain restrictions,
the number of shares of Common Stock issued upon the exercise of the option
equal to the number of shares of restricted stock surrendered shall be subject
to the same restrictions as the restricted stock that was surrendered.
d. The Exercise Date shall be the date on which written notice
of the option exercise is delivered to the Company. Except to the extent the
sale and remittance procedure specified in clause 3 of subparagraph b. is
utilized in connection with the option exercise, payment of the option price for
the purchased shares must accompany such notice.
2. Term and Exercise of Options.
(i) Each option granted under the Discretionary Option Grant Program
shall be exercisable in one or more installments as shall be determined by the
Committee and set forth in the instrument evidencing such option; provided,
however, no such option shall have a maximum term in excess of ten (10) years
from the date it was granted to the Optionee.
(ii) During the lifetime of the Optionee, Incentive Options shall be
exercisable only by the Optionee and shall not be assignable or transferable
other than by will or by the laws of inheritance following the Optionee's death.
Non-Statutory Options shall be subject to the same restriction, except that a
Non-Statutory Option may be assigned in whole or in part during the Optionee's
lifetime to one or more members of the Optionee's immediate family or to a trust
established exclusively for one or more such family members or to the Optionee's
former spouse, to the extent such assignment is in connection with the
Optionee's estate plan or pursuant to a domestic relations order. This assigned
portion may only be exercised by the person or persons who acquire a proprietary
interest in the option pursuant to the assignment. The terms applicable to the
assigned portion shall be the same as those in effect for the option immediately
prior to such assignment and shall be set forth in such documents issued to the
assignee as the Committee may deem appropriate. Notwithstanding the foregoing,
the Optionee may also designate one or more persons as the beneficiary or
beneficiaries of his or her outstanding Incentive Options and Non-Statutory
Options under the Plan, and those options shall, in accordance with such
designation, automatically be transferred to such beneficiary or beneficiaries
upon the Optionee's death while holding those options. Such beneficiary or
beneficiaries shall take the transferred options subject to all the terms and
conditions of the applicable agreement evidencing each such transferred option,
including (without limitation) the limited time period during which the option
may be exercised following the Optionee's death.
3. Termination of Service.
(i) Should an Optionee cease to be a Service Provider for any reason
(including death or Permanent Disability) other than due to a termination for
the reasons set forth in subparagraph (iv) below, then such options shall not be
exercisable at any time after the EARLIER of (i) the specified expiration date
of the option term or (ii) the expiration of the limited period of time (not to
exceed twelve (12) months after the Optionee ceases to be a Service Provider)
specified by the Committee in the option agreement. Each such option shall,
10
46
during such twelve (12)-month or shorter period following cessation of Service
Provider status, be exercisable only to the extent of the number of shares (if
any) in which the Optionee is vested on the date of such cessation of Service
Provider status.
(ii) An Incentive Option held by an Optionee who ceases to be a
Service Provider for reasons other than death or Permanent Disability will lose
its status as an Incentive Option on the ninety-first (91st) day after the date
the Optionee ceases to be a Service Provider, and thereafter the option, if it
is exercisable at all, will be treated as a Non-Statutory Option. An Optionee
who, pursuant to the Company's leave of absence policy, is on a leave of absence
that exceeds ninety (90) days will be deemed to have ceased to be a Service
Provider on the ninety-first (91st) day of the leave of absence, unless the
Optionee's rights to reemployment are guaranteed by statute or contract. If an
Optionee switches from Employee to independent contractor status, the Optionee's
status as a Service Provider is not affected; however, this change will result
in an option losing its status as an Incentive Option on the ninety-first (91st)
day after the switch, and thereafter the option, if it is exercisable at all,
will be treated as a Non-Statutory Option.
(iii) Any option held by an Optionee under this Article Two at the
time of his or her death and exercisable in whole or in part at that time may be
subsequently exercised, but only to the extent of the number of shares (if any)
in which the Optionee is vested on the date the Optionee ceases to be a Service
Provider (less any of those shares subsequently purchased by the Optionee prior
to death), by the personal representative of the Optionee's estate, by the
person or persons to whom the option is transferred pursuant to the Optionee's
will or the laws of inheritance or by the Optionee's designated beneficiary or
beneficiaries of that option. Any such exercise must occur prior to the EARLIER
of (i) the expiration date of the option term or (ii) the first anniversary of
the date of the Optionee's death.
(iv) If an Optionee's Service Provider status is terminated for any
of the following reasons, then all outstanding options granted the Optionee
under this Article Two shall immediately terminate and cease to be exercisable
immediately upon such termination:
(1) the Optionee's intentional misconduct or continuing gross
neglect of duties which materially and adversely affects the business and
operations of the Company or any Parent or Subsidiary employing the Optionee;
(2) the Optionee's unauthorized use or disclosure (or attempt
thereat) of confidential information or trade secrets of the Company or any
Parent or Subsidiary; or
(3) the Optionee's commission of an act involving embezzlement,
theft, fraud, falsification of records, destruction of property or commission of
a crime or other offense involving money or other property of the Company or any
Parent or Subsidiary employing the Optionee.
The reasons for termination of an Optionee as a Service Provider set
forth in this subparagraph (iv) are not intended to be an exclusive list of all
acts or omissions which the Company may deem to constitute misconduct or other
grounds for terminating the Optionee (or any other individual).
11
47
(v) The Committee shall have complete discretion, exercisable either
at the time the option is granted or at any time while the option remains
outstanding, to permit one or more options held by the Optionee under this
Article Two to be exercised, during the limited period of exercisability
following cessation of Service Provider status, not only with respect to the
number of shares in which the Optionee is vested at the time of such cessation
of Service Provider status but also with respect to one or more subsequent
installments of purchasable shares in which the Optionee would otherwise have
vested had the Optionee continued as a Service Provider.
(vi) If the option is granted to an individual who is not an
Employee of the Company, then the option agreement evidencing the granted option
shall include provisions comparable to those set forth in subparagraphs (i),
(ii), (iii) and (iv) above, and may include provisions comparable to
subparagraph (v) above, with respect to the Optionee's termination of service
with the Company or any Parent or Subsidiary.
4. Stockholder Rights.
An option holder shall have none of the rights of a stockholder with
respect to any shares covered by the option until such individual shall have
exercised the option, paid the option price and satisfied all other conditions
precedent to the issuance of certificates for the purchased shares.
5. Repurchase Rights. The shares of Common Stock acquired upon the
exercise of any Article Two option grant may be subject to one or more
repurchase rights of the Company in accordance with the following provisions:
(i) The Committee shall have the discretion to authorize the
issuance of unvested shares of Common Stock under this Article Two. Should the
Optionee cease Service Provider status while holding such unvested shares, the
Company shall have the right to repurchase any or all of those unvested shares
at the option price paid per share. The terms and conditions upon which such
repurchase right shall be exercisable (including the period and procedure for
exercise and the appropriate vesting schedule for the purchased shares) shall be
established by the Committee and set forth in the instrument evidencing such
repurchase right.
(ii) All of the Company's outstanding repurchase rights shall
automatically terminate, and all shares subject to such terminated rights shall
immediately vest in full, upon the occurrence of any Corporate Transaction,
except to the extent: (i) any such repurchase right is expressly assigned to the
successor corporation (or parent thereof) in connection with the Corporate
Transaction or (ii) such termination is precluded by other limitations imposed
by the Committee at the time the repurchase right is issued.
(iii) The Committee shall have the discretionary authority,
exercisable either before or after the Optionee's cessation of Service Provider
status, to cancel the Company's outstanding repurchase rights with respect to
one or more shares purchased or purchasable by the Optionee under this Article
Two and thereby accelerate the vesting of such shares in whole or in part at any
time.
12
48
II. STOCK APPRECIATION RIGHTS
A. The Committee shall have full power and authority, exercisable in its
sole discretion, to grant selected Optionees tandem stock appreciation rights
("Tandem Rights") and/or limited stock appreciation rights ("Limited Rights")
pertaining to all or part of the shares of Common Stock subject to one or more
of their option grants under this Article Two.
B. Tandem Rights may be granted at the same time the underlying option
is granted or any time thereafter while the option remains outstanding. The
Optionee may exercise such Tandem Right by surrendering the underlying option in
whole or in part to the Company, to the extent such option is at the time
exercisable for vested shares of Common Stock. In exchange for the surrendered
option, the Optionee shall receive a distribution from the Company in an amount
equal to the excess of (i) the Fair Market Value (on the option surrender date)
of the number of shares in which the Optionee is at the time vested under the
surrendered option (or surrendered portion) over (ii) the aggregate option price
payable for such vested shares. However, the exercise of the Tandem Right shall
be effective only if approved by the Committee. If so approved, the distribution
to which the Optionee shall accordingly become entitled with respect to the
surrendered option may be made in shares of Common Stock valued at Fair Market
Value on the option surrender date, in cash, or partly in shares and partly in
cash, as the Committee shall in its sole discretion deem appropriate.
C. If the surrender of an option is rejected by the Committee, then the
Optionee shall retain whatever rights the Optionee had under the surrendered
option (or surrendered portion) on the option surrender date and may exercise
such rights at any time prior to the last day on which the option is otherwise
exercisable in accordance with the terms of the instrument evidencing such
option, but in no event may such rights be exercised more than ten (10) years
after the date of the option grant.
D. One or more Section 16(b) Insiders may, in the Committee's sole
discretion, be granted Limited Rights(2) in conjunction with their outstanding
options under this Article Two. Upon the occurrence of a Hostile Take-Over, each
outstanding option with such a Limited Right shall automatically be cancelled,
to the extent such option is at the time exercisable for fully-vested shares of
Common Stock. The Optionee shall in return be entitled to a cash distribution
from the Company in an amount equal to the excess of (i) the Take-Over Price of
the vested shares of Common Stock at the time subject to the cancelled option
(or cancelled portion of such option) over (ii) the aggregate exercise price
payable for such shares. The cash distribution payable upon such cancellation
shall be made within five (5) days following the consummation of the Hostile
Take-Over. The Committee shall pre-approve, at the time the limited right is
granted, the subsequent exercise of that right in accordance with the terms of
this subparagraph D. Accordingly, no further approval of the Committee or the
Board shall be required at the time of the actual option cancellation and cash
distribution. The balance of the option (if any) shall continue to remain
outstanding and exercisable in accordance with the terms and conditions of the
instrument evidencing such option.
- ------------------
(2) Options granted to Section 16(b) Insiders prior to the effective
date of the June 15, 1992 Restatement contain a different form of Limited Right.
Such right will provide each Section 16(b) Insider with a thirty (30)-day
election period, following the successful completion of a hostile tender offer
for fifty percent (50%) or more of the Company's outstanding voting securities,
to surrender the underlying option for a cash distribution from the Company in
an amount per share of Common Stock in which the Section 16(b) Insider is at the
time vested under the surrendered option equal to the excess of the highest
price per share paid in effecting such tender offer over the exercise price
payable per share under the surrendered option.
13
49
III. CORPORATE TRANSACTION
A. Upon the occurrence of a Corporate Transaction, the exercisability of
each option outstanding under this Article Two shall be automatically
accelerated so that each such option shall, immediately prior to the specified
effective date for the Corporate Transaction, become fully exercisable with
respect to the total number of shares of Common Stock at the time subject to
such option, whether or not vested, and may be exercised for all or any portion
of such shares. However, an outstanding option under this Article Two shall NOT
be so accelerated if and to the extent: (i) such option is, in connection with
the Corporate Transaction, either to be assumed by the successor corporation or
parent thereof or to be replaced with a comparable option to purchase shares of
the capital stock of the successor corporation or parent thereof, or (ii) such
option is to be replaced with a cash incentive program of the successor
corporation which preserves the spread existing at the time of the Corporate
Transaction on any shares for which the option is not otherwise at that time
exercisable and provides for subsequent payout in accordance with the same
exercise/vesting schedule applicable to those option shares, or (iii) the
acceleration of such option is subject to other applicable limitations imposed
by the Committee at the time of grant. The determination of comparability under
clause (i) above shall be made by the Committee, and its determination shall be
final and binding.
B. The Committee shall have the discretion, exercisable at any time, to
provide (upon such terms and conditions as it may deem appropriate) for either
the automatic acceleration of one or more assumed or replaced options which do
not accelerate in connection with the Corporate Transaction or for the automatic
vesting of any cash incentive programs implemented in replacement of such
options, in the event the Optionee's employment should subsequently terminate
within a designated period following the effective date of such Corporate
Transaction.
C. The exercisability as Incentive Options of any options accelerated
under this Section III in connection with a Corporate Transaction shall remain
subject to the applicable dollar limitation of Section IV.A.(iv) of this Article
Two below.
D. Upon the consummation of the Corporate Transaction, all outstanding
options under this Article Two shall, to the extent not previously exercised or
assumed by the successor corporation or its parent company, terminate and cease
to be outstanding.
14
50
IV. INCENTIVE OPTIONS
A. Terms. The terms and conditions specified below shall be applicable
to all Incentive Options granted under this Article Two. Options which are
specifically designated as Non-Statutory Options when issued under this Article
Two shall NOT be subject to such terms and conditions.
(i) Eligibility. Incentive Options may only be granted to Employees.
(ii) Option Price. The option price per share of the Common Stock
subject to an Incentive Option shall in no event be less than one hundred
percent (100%) of the Fair Market Value per share of Common Stock on the grant
date.
(iii) 10% Stockholder. If any individual to whom an Incentive Option
is to be granted pursuant to the provisions of this Article Two is, on the grant
date, a 10% Stockholder, then (i) the option price per share shall not be less
than one hundred and ten percent (110%) of the Fair Market Value per share of
Common Stock on the grant date and (ii) the maximum term of the option shall not
exceed five (5) years from the grant date.
(iv) Dollar Limitation. The aggregate Fair Market Value (determined
on the basis of the Fair Market Value in effect on the respective date or dates
of grant) of the Common Stock for which one or more Incentive Options granted to
any Employee under this Plan (or any other option plan of the Company or any
Parent or Subsidiary) may for the first time become exercisable during any one
calendar year shall not exceed the sum of One Hundred Thousand Dollars
($100,000). To the extent the Employee holds two or more such options which
become exercisable for the first time in the same calendar year, the foregoing
limitation on the exercisability thereof as Incentive Options shall be applied
on the basis of the order in which such options were granted.
(v) Other. Except as modified by the preceding provisions of this
section, all the provisions of the Plan shall be applicable to the Incentive
Options granted hereunder.
B. Notification to Company. An Optionee must notify the Company if the
Optionee disposes of stock acquired upon the exercise of an Incentive Option
prior to the expiration of the holding periods required to qualify for long-term
capital gains treatment on the sale proceeds.
C. Notification to Employees. Pursuant to Code Section 6039(a), the
Company shall provide a statement to Optionees no later than January 31 of the
calendar year following prior to the calendar year in which they purchase stock
pursuant to the exercise of an Incentive Option. This notice shall contain the
following items of information:
(i) The name, address, and employer identification number of the
corporation transferring the Common Stock;
(ii) The name, address, and identifying number of the Optionee to
whom the share or shares of Common Stock were transferred;
(iii) The name and address of the corporation the Common Stock of
which is the subject of the option (if other than the corporation transferring
the stock);
15
51
(iv) The date the option was granted;
(v) The date the shares of Common Stock were transferred to the
person exercising the option;
(vi) The Fair Market Value of the Common Stock at the time the
option was exercised;
(vii) The number of shares of Common Stock transferred pursuant to
the option;
(viii) The type of option under which the transferred shares were
acquired; and
(ix) The total cost of all the shares.
V. CANCELLATION AND RE-GRANT OF OPTIONS
The Committee shall have the authority to effect, at any time and from
time to time, with the consent of the affected option holders, the cancellation
of any or all outstanding options under this Article Two and to grant in
substitution therefor new options under this Article Two covering the same or
different numbers of shares of Common Stock but having an option price per share
not less than (i) eighty-five percent (85%) of the Fair Market Value per share
of Common Stock on the new grant date, (ii) one hundred percent (100%) of such
Fair Market Value for an Incentive Option, or (iii) one hundred and ten percent
(110%) of such Fair Market Value in the case of an Incentive Option granted to a
10% Stockholder.
16
52
ARTICLE THREE
AUTOMATIC OPTION GRANT PROGRAM
I. ELIGIBILITY
A. Eligible Directors. The individuals eligible to receive automatic
option grants pursuant to the provisions of this Article Three program shall be
limited to those individuals who first become non-Employee Board members on or
after the Effective Date, whether through appointment by the Board or election
by the Company's stockholders. Any non-Employee Board member eligible to
participate in the Automatic Option Grant Program pursuant to the foregoing
criteria shall be designated an "Eligible Director" for purposes of this Plan.
B. Limitation. Except for the option grants to be made pursuant to the
provisions of this Automatic Option Grant Program, an Eligible Director serving
on the Committee or any secondary committee established pursuant to Section
III.A. of Article One shall NOT be eligible during such period of service to
receive any additional option grants or stock issuances under this Plan or any
other stock plan of the Company (or any Parent or Subsidiary).
II. TERMS AND CONDITIONS OF AUTOMATIC OPTION GRANTS
A. Grant Dates. Option grants shall be made under this Article Three on
the dates specified below:
(i) Each Eligible Director who has not at any time been in the prior
employ of the Company (or any Parent or Subsidiary) shall automatically
be granted, at the time of such initial election or appointment, a
Non-Statutory Option to purchase 10,000 shares of Common Stock upon the
terms and conditions of this Article Three.
(ii) On the date of each Annual Stockholders Meeting, commencing
with the 1993 Annual Stockholders Meeting, each individual who is at the
time serving as an Eligible Director shall automatically be granted,
whether or not such individual is standing for re-election as a Board
member at that particular meeting and whether or not such individual has
at any time been in the prior employ of the Company (or any Parent or
Subsidiary), a Non-Statutory Option to purchase 3,000 shares of Common
Stock upon the terms and conditions of this Article Three, provided he
or she has served as a non-Employee Board member for at least six (6)
months prior to the date of such meeting. There shall be no limit on the
number of 3,000-share option grants any Eligible Director may receive
over his or her period of Board service.
The number of shares for which the automatic grants are to be made to
each newly elected or continuing Eligible Director shall be subject to periodic
adjustment pursuant to the applicable provisions of Section V.C. of Article One.
17
53
B. Exercise Price. The exercise price per share of Common Stock subject
to each automatic option grant made under this Article Three shall be equal to
one hundred percent (100%) of the Fair Market Value per share of Common Stock on
the automatic grant date.
C. Payment.
(i) The exercise price shall be payable in one or more of the
alternative forms specified below:
a. full payment in cash or check payable to the Company's order;
or
b. full payment in shares of Common Stock held for the requisite
period necessary to avoid a charge to the Company's reported
earnings (which in any event shall not be less than six (6) months)
and valued at Fair Market Value on the Exercise Date (as such term
is defined below); or
c. full payment through a sale and remittance procedure pursuant
to which the non-Employee Board member is to provide irrevocable
written instructions (1) to a designated brokerage firm to effect
the immediate sale of the purchased shares and remit to the Company,
out of the sale proceeds available on the settlement date, an amount
sufficient to cover the aggregate option price payable for the
purchased shares and (2) to the Company to deliver the certificates
for the purchased shares directly to such brokerage firm in order to
complete the sale transaction; or
d. delivery to the Company or its designated agent of an
executed written notice of exercise form together with irrevocable
instructions to a broker-dealer to sell or margin a sufficient
portion of the shares of Common Stock and to deliver the sale or
margin loan proceeds directly to the Company to pay all or a portion
of the exercise price of the Option and/or any income tax
withholding obligations, if, after giving due consideration to the
consequences under Rule 16b-3 and under the Code, the Committee
allows for such form of payment.
(ii) If payment is made by means of the surrender of shares of
Common Stock which are subject to certain restrictions, the number of shares of
Common Stock issued upon the exercise of the option equal to the number of
shares of restricted stock surrendered shall be subject to the same restrictions
as the restricted stock that was surrendered.
(iii) The Exercise Date shall be the date on which written notice of
the option exercise is delivered to the Company. Except to the extent the sale
and remittance or loan procedure specified in clause (c) or clause (d) is
utilized in connection with the option exercise, payment of the option price for
the purchased shares must accompany such notice.
D. Option Term. Each automatic grant under this Article Three shall have
a maximum term of ten (10) years measured from the automatic grant date.
18
54
E. Exercisability. Each automatic grant shall become exercisable in a
series of four (4) equal and successive annual installments over the Optionee's
period of service on the Board, with the first such installment to become
exercisable twelve (12) months after the automatic grant date. The
exercisability of each automatic grant shall be subject to acceleration in
accordance with the provisions of Section II.G and Section III of this Article
Three.
F. Limited Transferability. During the lifetime of the Optionee, each
automatic option grant may, in connection with the Optionee's estate plan, be
assigned in whole or in part during the Optionee's lifetime to one or more
members of the Optionee's immediate family or to a trust established exclusively
for one or more such family members or to the Optionee's former spouse, to the
extent such assignment is in connection with the Optionee's estate plan or
pursuant to a domestic relations order. The assigned portion may only be
exercised by the person or persons who acquire a proprietary interest in the
option pursuant to the assignment. The terms applicable to the assigned portion
shall be the same as those in effect for the option immediately prior to such
assignment and shall be set forth in such documents issued to the assignee as
the Committee may deem appropriate. Notwithstanding the foregoing, the Optionee
may also designate one or more persons as the beneficiary or beneficiaries of
his or her outstanding options under the Plan, and those options shall, in
accordance with such designation, automatically be transferred to such
beneficiary or beneficiaries upon the Optionee's death while holding those
options. Such beneficiary or beneficiaries shall take the transferred options
subject to all the terms and conditions of the applicable agreement evidencing
each such transferred option, including (without limitation) the limited time
period during which the option may be exercised following the Optionee's death.
G. Termination of Board Service.
1. Should the Optionee's service as a Board member cease for any
reason (other than death or Permanent Disability) while holding one or more
automatic option grants under this Article Three, then such individual shall
have a six (6)-month period following the date of such cessation of Board
service in which to exercise each such option for any or all of the shares of
Common Stock for which the option is exercisable at the time of such cessation
of Board service. However, each such option shall immediately terminate and
cease to be outstanding, at the time of such cessation of Board service, with
respect to any shares for which the option is not otherwise at that time
exercisable.
2. Should the Optionee die within six (6) months after cessation of
Board service, then each outstanding automatic option grant held by the Optionee
at the time of death may subsequently be exercised, for any or all of the shares
of Common Stock for which such option is exercisable at the time of the
Optionee's cessation of Board service (less any option shares subsequently
purchased by the Optionee prior to death), by the personal representative of the
Optionee's estate, by the person or persons to whom the option is transferred
pursuant to the Optionee's will or the laws of inheritance or by the Optionee's
designated beneficiary or beneficiaries of that option. Any such exercise must
occur with twelve (12) months after the date of the Optionee's death.
19
55
3. Should the Optionee die or become Permanently Disabled while
serving as a Board member, then each automatic option grant held at that time by
such Optionee under this Article Three shall accelerate in full, and the
Optionee (or the personal representative of the Optionee's estate, or the person
or persons to whom the option is transferred pursuant to the Optionee's will or
the laws of inheritance or the Optionee's designated beneficiary or
beneficiaries of that option) shall have a twelve (12) month period following
the date of the Optionee's cessation of Board service in which to exercise each
such option for any or all of the shares of Common Stock subject to that option
at the time of such cessation of Board service.
4. In no event shall any automatic grant under this Article Three
remain exercisable after the specified expiration date of the ten (10)-year
option term. Upon the expiration of the applicable post-service exercise period
under subparagraph 1, 2 or 3 above or (if earlier) upon the expiration of the
ten (10)-year option term, the automatic grant shall terminate and cease to be
outstanding for any unexercised shares for which the option was otherwise
exercisable at the time of the Optionee's cessation of Board service.
H. Remaining Terms. The remaining terms and conditions of each automatic
option grant shall be substantially the same as the terms in effect for option
grants made under the Discretionary Option Grant Program and shall be set forth
in a Stock Option Agreement.
III. CORPORATE TRANSACTION/CHANGE IN CONTROL/HOSTILE TAKE-OVER
A. In the event of any Corporate Transaction effected during the
Optionee's period of Board service, each automatic option grant at the time held
by such Optionee under this Article Three shall automatically accelerate so that
each such option shall, immediately prior to the specified effective date for
the Corporate Transaction, become exercisable for all of the shares of Common
Stock at the time subject to such option and may be exercised for all or any
portion of such shares. Upon the consummation of the Corporate Transaction, all
automatic option grants under this Article Three shall terminate and cease to be
outstanding.
B. In the event of any Change in Control effected during the Optionee's
period of Board service, each automatic option grant at the time held by such
Optionee under this Article Three shall automatically accelerate so that each
such option shall, immediately prior to the specified effective date for the
Change in Control, become exercisable for all of the shares of Common Stock at
the time subject to such option and may be exercised for all or any portion of
such shares.
C. A Limited Right shall be granted with respect to each automatic
option granted under this Article Three. Upon the occurrence of a Hostile
Take-Over during the Optionee's period of Board service, each such option held
by that Optionee shall automatically be cancelled. The Optionee shall in return
be entitled to a cash distribution from the Company in an amount equal to the
excess of (i) the Take-Over Price of the shares of Common Stock subject to the
cancelled option over (ii) the aggregate exercise price payable for such shares.
The cash distribution payable upon such cancellation shall be paid within five
(5) days following the consummation of the Hostile Take-Over. The subsequent
exercise of such Limited Right in accordance with the terms of this subparagraph
C is hereby pre-approved as part of the express provisions of this Plan, and no
approval of the Committee or the Board shall be required at the time of the
actual option cancellation and cash distribution.
20
56
ARTICLE FOUR
MISCELLANEOUS
I. LOANS OR GUARANTEE OF LOANS
The Committee may assist any Optionee (including any officer or
director) in the exercise of one or more outstanding options under the
Discretionary Option Grant Program by (a) authorizing the extension of a
full-recourse interest-bearing loan to such Optionee from the Company, (b)
permitting the Optionee to pay the option price for the purchased Common Stock
in installments over a period of years or (c) authorizing a guarantee by the
Company of a third-party loan to the Optionee. The terms of any loan,
installment method of payment or guarantee (including the interest rate and
terms of repayment) shall be established by the Committee in its sole
discretion. The maximum credit available to the Optionee shall not exceed the
sum of (i) the aggregate option price of the purchased shares (less the par
value) plus (ii) any Federal and state income and employment tax liability
incurred by the Optionee in connection with the exercise of the option.
II. TAX WITHHOLDING
A. The Company's obligation to deliver shares or cash upon the exercise
or surrender of stock options or stock appreciation rights granted under the
Plan shall be subject to the satisfaction by the Optionee of all applicable
Federal, state and local income and employment tax withholding requirements.
B. The Committee may, in its discretion and upon such terms and
conditions as it may deem appropriate (including the applicable safe-harbor
provisions of SEC Rule 16b-3 or any successor rule or regulation) provide any or
all holders of outstanding option grants under the Plan (other than grants made
to non-Employees) with the election to surrender previously acquired shares of
Common Stock or have shares withheld in satisfaction of the tax withholding
obligations. To the extent necessary to avoid adverse accounting treatment, the
number of shares that may be withheld for this purpose shall not exceed the
minimum number needed to satisfy the applicable income and employment tax
withholding rules. If Common Stock is used to satisfy the Company's tax
withholding obligations, the stock shall be valued at its Fair Market Value when
the tax withholding is required to be made.
III. EXTENSION OF EXERCISE PERIOD
The Committee shall have full power and authority to extend the period
of time for which any option granted under the Discretionary Option Grant
Program is to remain exercisable following the Optionee's termination of service
from the twelve (12)-month or shorter period set forth in the option agreement
to such greater period of time as the Committee shall deem appropriate;
provided, however, that in no event shall such option be exercisable after the
specified expiration date of the option term. Such a modification may have
adverse tax and/or accounting consequences.
21
57
IV. AMENDMENT OF THE PLAN
The Board shall have the complete and exclusive authority to amend,
modify or terminate the Plan. However, no amendment or modification shall,
without the consent of the holders, adversely affect rights and obligations with
respect to any stock options or stock appreciation rights at the time
outstanding under the Plan. In addition, certain amendments, including
increasing the number of shares issuable under the Plan or modifying the
requirements for eligibility, will require stockholder approval pursuant to
applicable laws or regulations.
V. EFFECTIVE DATE AND TERM OF PLAN
A. The Plan was initially adopted by the Board and approved by the
Company's sole stockholder on August 1, 1988.
B. The Board and sole stockholder amended and restated the Plan
effective May 15, 1991 to (i) increase the number of shares issuable pursuant to
the Plan, (ii) conform the provisions of the Plan to the SEC rules under Section
16 of the Exchange Act applicable to certain transactions effected under the
Plan by Section 16(b) Insiders and (iii) provide for the grant of Incentive
Options.
C. The Plan was further restated on June 15, 1992 (the "1992
Restatement") to (i) increase the number of shares of Common Stock authorized
for issuance under the Plan by an additional 400,000 shares, (ii) bring the Plan
into compliance with revisions to SEC Rule 16b-3 which became effective on
September 1, 1993 and exempts certain officer and director transactions under
the Plan from the short-swing liability provisions of the federal securities
laws and (iii) effect certain technical revisions to the provisions of the Plan
to facilitate plan administration and interpretation. The 1992 Restatement was
approved by the Company's stockholders at the 1992 Annual Meeting.
D. The Plan was further restated and amended by the Board in June 1993
(the "1993 Restatement") to add the Automatic Option Grant Program. The 1993
Restatement was approved by the Company's stockholders at the 1993 Annual
Meeting.
E. On May 4, 1994, the Board approved an amendment and restatement of
the Plan to (i) increase the aggregate number of shares issuable over the term
thereof by 400,000 shares to a total of 2,670,000 shares and (ii) impose a
limitation of 1,600,000 shares on the maximum number of shares of Common Stock
for which any one participant may be granted stock options and separately
exercisable stock appreciation rights over the remaining term of the Plan. These
amendments were approved by the Company's stockholders at the 1994 Annual
Meeting.
F. On June 21, 1996, the Board approved an amendment and restatement of
the Plan to (i) increase the aggregate number of shares issuable over the term
thereof by 400,000 shares to 3,070,000 shares, and (ii) extend the expiration
date of the Plan to June 30, 2006. These amendments were approved by the
Company's stockholders at the 1996 Annual Meeting.
G. In June 1997, the Board further amended and restated the Plan to
effect the following revisions: (i) increase the number of shares of Common
Stock reserved for issuance over the term of the Plan by an additional 400,000
shares to 3,470,000 shares, (ii) render the non-Employee Board members eligible
to receive option grants under the Discretionary Option Grant
22
58
Program, (iii) allow unvested shares issued under the Plan and subsequently
repurchased by the Company at the option exercise price paid per share to be
reissued under the Plan, (iv) remove certain restrictions on the eligibility of
non-Employee Board members to serve as members of the Committee and (v) effect a
series of additional changes to the provisions of the Plan in order to take
advantage of the recent amendments to SEC Rule 16b-3. These amendments were
approved by the Company's stockholders at the 1997 Annual Meeting.
H. In February 1999, the Board further amended and restated the Plan to
permit optionees under the Discretionary Option Grant and Automatic Option
Programs of the Plan to designate a beneficiary or beneficiaries to whom their
options may be transferred upon their death.
I. All share numbers in this restatement reflect the two-for-one split
of the Common Stock which was effected on June 14, 1999 through the payment of a
dividend of one additional share of Common Stock for every share of Common Stock
outstanding on June 4, 1999.
J. On May 10, 2001, the Board further amended and restated the Plan (the
"2001 Restatement") to (i) effect certain technical revisions to the provisions
of the Plan in order to facilitate the administration and interpretation of the
Plan, (ii) clarify the group of employees who are eligible to participate in the
Plan and (iii) increase the number of shares of Common Stock reserved for
issuance over the terms of the Plan by an additional 500,000 shares to 3,970,000
shares. The 2001 Restatement is subject to stockholder approval at the 2001
Annual Meeting. No option grants shall be made on the basis of the share
increase authorized by the Board unless and until the 2001 Restatement is
approved by the Company's stockholders.
K. The provisions of the Restatements apply only to stock options and
stock appreciation rights granted under the Plan from and after the respective
effective dates of such Restatements. All stock options and stock appreciation
rights issued and outstanding under the Plan immediately prior to such effective
dates of the Restatements shall continue to be governed by the terms and
conditions of the Plan (and the instrument evidencing each such option or stock
appreciation right) as in effect on the date each such option or stock
appreciation was previously granted, and nothing in the Restatements shall be
deemed to affect or otherwise modify the rights or obligations of the holders of
such options or stock appreciation rights with respect to the acquisition of
shares of Common Stock thereunder or the exercise of their outstanding stock
appreciation rights.
L. The sale and remittance procedure authorized for the exercise of
outstanding options shall be available for all options granted under the Plan
from and after November 6, 1991 and for all Non-Statutory Options outstanding on
such date. The Committee may also allow such procedure to be utilized in
connection with one or more disqualifying dispositions of incentive stock option
shares effected on or after November 6, 1991, whether or not the option was
granted on or before such date.
M. The Plan shall in all events terminate upon the EARLIEST of (i) June
30, 2006, (ii) the date on which all shares available for issuance under the
Plan shall have been issued or cancelled pursuant to the exercise or surrender
of stock options and/or stock
23
59
appreciation rights under the Plan, (iii) the termination of all outstanding
options in connection with a Corporate Transaction or (iv) termination by the
Board. If the date of termination is determined under clause (i) above, then any
stock options and stock appreciation rights at the time outstanding under the
Plan shall continue to have force and effect in accordance with the provisions
of the instruments evidencing such grants.
VI. MISCELLANEOUS MATTERS
A. Any cash proceeds received by the Company from the issuance of shares
hereunder shall be used for any corporate purpose.
B. The implementation of the Plan, the granting of any stock option, and
the issuance of Common Stock hereunder, shall be subject to the Company's
procurement of all approvals and permits required by regulatory authorities
having jurisdiction over the Plan, and the stock options granted under it and
the Common Stock issued pursuant to it. The inability of the Company to obtain
the requisite approvals shall relieve the Company of any liability with respect
to the non-issuance or sale of the Common Stock as to which such approvals shall
not have been obtained. The Company, however, shall attempt to obtain all
requisite approvals.
C. No shares of Common Stock or other assets shall be issued or
delivered under the Plan unless and until there shall have been compliance with
all applicable requirements of Federal and state securities laws, including the
filing and effectiveness of the Form S-8 registration statement for the shares
of Common Stock issuable under the Plan, and all applicable listing requirements
of any stock exchange (or the Nasdaq National Market, if applicable) on which
Common Stock is then listed for trading.
D. Neither the action of the Company in establishing the Plan, nor any
action taken by the Board or the Committee hereunder, nor any provision of the
Plan itself shall be construed so as to grant any individual the right to remain
in the employ or service of the Company or any Parent or Subsidiary for any
period of specific duration, and the Company (or any Parent or Subsidiary
retaining the services of such individual) may terminate such individual's
employment or service at any time and for any reason, with or without cause.
E. Nothing contained in the Plan shall be construed to limit the
authority of the Company to exercise its corporate rights and powers, including
(without limitation) the right of the Company (a) to grant options for corporate
purposes otherwise than under this Plan to any Employee or other person, firm or
company or association or (b) to grant options to, or assume the option of, any
person in connection with the acquisition (by purchase, lease, merger,
consolidation or otherwise) of the business and assets (in whole or in part) of
any person, firm, company or association.
24
60
CORVEL CORPORATION
1991 EMPLOYEE STOCK PURCHASE PLAN
AS RESTATED AND AMENDED EFFECTIVE OCTOBER 1, 2001
I. PURPOSE
The CorVel Corporation 1991 Employee Stock Purchase Plan, as restated
and amended effective October 1, 2001 (the "Plan"), is intended to provide
eligible employees of the Company and one or more of its Corporate Affiliates
with the opportunity to acquire a proprietary interest in the Company through
participation in a plan designed to qualify as an employee stock purchase plan
under Section 423 of the Internal Revenue Code (the "Code").
II. DEFINITIONS
For purposes of administration of the Plan, the following terms shall
have the meanings indicated:
BASE SALARY means the regular base earnings paid to a Participant by
one or more Participating Companies during such individual's period of
participation in the Plan, plus (i) one hundred percent (100%) of the
commissions paid to such individual during each purchase period in which he or
she participates in the Plan and (iii) any salary deferral contributions made by
such Participant to any Code Section 401(k) Plan of the Company or any Company
Affiliate during such period. There shall be excluded from the calculation of
Base Salary (i) all overtime payments, bonuses, profit-sharing distributions and
other incentive-type payments and (ii) all contributions (other than Code
Section 401(k) contributions) made by the Company or its Corporate Affiliates
for such individual's benefit under any employee benefit or welfare plan now or
hereafter established.
BOARD means the Board of Directors of the Company.
COMPANY means CorVel Corporation, a Delaware corporation(1), and any
corporate successor to all or substantially all of the assets or voting stock of
the Company that shall by appropriate action adopt the Plan.
- --------
(1) The Company was previously known as FORTIS Corporation and assumed all of
the rights and responsibilities of FORTIS Corporation, a Minnesota
corporation ("FORTIS Minnesota"), with respect to the Plan pursuant to the
Agreement and Plan of Merger by and between the Company and FORTIS
Minnesota, effective May 16, 1991, under which FORTIS Minnesota changed its
state of incorporation from Minnesota to Delaware by merging with and into
the Company, which was a wholly owned subsidiary of FORTIS Minnesota.
61
CORPORATE AFFILIATE means any company that is either the parent
corporation or a subsidiary corporation of the Company (as determined in
accordance with Section 424 of the Code), including any parent or subsidiary
corporation that becomes such after the Effective Date.
EFFECTIVE DATE means October 1, 1991; provided, however, that any
Corporate Affiliate that becomes a Participating Company in the Plan after
October 1, 1991, shall designate a subsequent Effective Date with respect to its
employee-Participants.
ELIGIBLE EMPLOYEE means any person who is regularly engaged, for a
period of more than twenty (20) hours per week and more than five (5) months per
calendar year, in the rendition of personal services to the Company or any other
Participating Company for earnings considered wages under Section 3121(a) of the
Code. However, employees of the Company who, at the start of any purchase period
under the Plan, (i) are deemed to be Highly Compensated Employees within the
meaning of Section 414(q) of the Code and (ii) hold unvested options to purchase
more than 30,000 shares(2) of Stock under the Company's Restated 1988 Executive
Stock Option Plan shall not be treated as Eligible Employees for that purchase
period and shall accordingly be ineligible to participate in the Plan for such
period. A person shall not continue to be an Eligible Employee because of the
payment of compensation following termination of employment whether as part of a
severance agreement with the Company or otherwise.
FAIR MARKET VALUE per share of Stock on any relevant date shall be
determined in accordance with the following provisions:
(i) If the Stock is at the time listed on the Nasdaq National
Market or the Nasdaq SmallCap Market, then the Fair Market Value shall
be the closing selling price per share of Stock on the date in question,
as such price is reported by the National Association of Securities
Dealers on the Nasdaq National Market or the Nasdaq SmallCap Market and
published in The Wall Street Journal.
(ii) If the Stock is at the time listed on any stock exchange,
then the Fair Market Value shall be the closing selling price per share
of Stock on the date in question on the stock exchange determined by the
Plan Administrator to be the primary market for the Stock, as such price
is officially quoted in the composite tape of transactions on such
exchange and published in The Wall Street Journal.
(iii) If the Stock is not listed on the Nasdaq National Market,
Nasdaq SmallCap Market or a national securities exchange, the Fair
Market Value shall be the average of the closing bid and ask prices of
the Stock on that day as reported by the Nasdaq bulletin board or any
comparable system on that day.
- -------------
(2) Except in the historical description in Section X(a) below, all share
numbers reflect the 2-for-1 stock split in the form of a 100% stock dividend
distributed on June 14, 1999, to stockholders of record as of May 31, 1999.
2
62
(iv) If the Stock is not traded included in the Nasdaq bulletin
board or any comparable system, the Fair Market Value shall be the
average of the closing bid and ask prices on that day as furnished by
any member of the National Association of Securities Dealers, Inc.
selected from time to time by the Company for that purpose.
(v) If the date in question is not a trading day, then the Fair
Market Value shall be determined based on prices for the trading day
prior to the date in question.
PARTICIPANT means any Eligible Employee of a Participating Company
who is actively participating in the Plan.
PARTICIPATING COMPANY means the Company and such Corporate Affiliate
or Affiliates as may be authorized from time to time by the Board to extend the
benefits of the Plan to their Eligible Employees. The Participating Companies in
the Plan are listed in attached Schedule A.
PERMANENT DISABILITY OR PERMANENTLY DISABLED shall mean the
inability of the Participant to engage in any substantial gainful activity by
reason of any medically determinable physical or mental impairment expected to
result in death or to be of continuous duration of twelve months or more.
STOCK means shares of the common stock of the Company, par value
$.0001 per share.
III. ADMINISTRATION
A. The Plan shall be administered by a committee (the "Committee")
consisting of one or more Board members appointed by the Board. Members of the
Committee shall serve for such period of time as the Board may determine and
shall be subject to removal by the Board at any time.
B. The Committee is hereby designated as the Plan Administrator and
shall have full authority to administer the Plan, including authority to
interpret and construe any provision of the Plan and to adopt such rules and
procedures for administering the Plan as it may deem necessary in order to
comply with the requirements of Section 423 of the Code. Decisions of the Plan
Administrator shall be final and binding on all parties who have an interest in
the Plan.
C. To the maximum extent permitted by law, the Company shall indemnify
each member of the Committee and every other member of the Board, as well as any
other employee with duties under the Plan, against all liabilities and expenses
(including any amount paid in settlement or in satisfaction of a judgment)
reasonably incurred by the individual in connection with any claims against the
individual by reason of the performance of the individual's duties under the
Plan. This indemnity shall not apply, however, if (i) it is determined
3
63
in the action, lawsuit, or proceeding that the individual is guilty of gross
negligence or intentional misconduct in the performance of those duties; or (ii)
the individual fails to assist the Company in defending against any such claim.
The Company shall have the right to select counsel and to control the
prosecution or defense of the suit. The Company shall not be obligated to
indemnify any individual for any amount incurred through any settlement or
compromise of any action unless the Company consents in writing to the
settlement or compromise.
IV. PURCHASE PERIODS
(a) Stock shall be offered for purchase under the Plan through a series
of successive purchase periods until such time as (i) the maximum number of
shares of Stock available for issuance under the Plan shall have been issued
pursuant to purchase rights granted under the Plan or (ii) the Plan shall have
been sooner terminated in accordance with Article IX.
(b) Each purchase period shall have a duration of six (6) months.
Purchase periods shall commence on the first day of April and October.
(c) The Participant shall be granted a separate purchase right for each
purchase period in which he or she participates. The purchase right shall be
granted on the first business day of the purchase period and shall be
automatically exercised on the last business day of the purchase period.
(d) Under no circumstances shall any shares of Stock be issued
hereunder, until such time as the Company shall have complied with all
applicable requirements of the Securities Act of 1933, as amended, all
applicable listing requirements of any securities exchange on which the Stock is
listed and all other applicable requirements established by law or regulation.
(e) The acquisition of Stock through participation in the Plan for any
purchase period shall neither limit nor require the acquisition of Stock by the
Participant in any subsequent purchase period.
V. ELIGIBILITY AND PARTICIPATION
(a) Each individual who is an Eligible Employee of a Participating
Company on the first day of any purchase period may begin participation in the
Plan on the first day of any purchase period following the commencement of his
or her employment with the Company or any other Participating Company.
(b) In order to participate in the Plan for a particular purchase
period, an Eligible Employee must complete the enrollment forms prescribed by
the Plan Administrator (including a stock purchase agreement and a payroll
deduction authorization) and file such forms with the Plan Administrator (or its
designee) during the specified enrollment period for that purchase period.
4
64
(c) The payroll deduction authorized by a Participant for purposes of
acquiring Stock under the Plan may be any multiple of $10.00, up to a dollar
maximum not in excess of 20% of the Base Salary paid to the Participant during
the purchase period. The deduction rate so authorized shall continue in effect
for the entire purchase period, unless the Participant shall, prior to the end
of the purchase period for which the purchase right is in effect, change the
rate by filing the appropriate form with the Plan Administrator (or its
designee). The changed rate shall become effective as soon as practicable
following the filing of such form. Payroll deductions, however, will
automatically cease upon the termination of the Participant's purchase right in
accordance with Section VII(d) or (e) below.
VI. STOCK SUBJECT TO PLAN
(a) The Stock purchasable by Participants under the Plan shall, solely
in the Board's discretion, be made available from either authorized but unissued
Stock or from reacquired Stock, including shares of Stock purchased on the open
market. The total number of shares that may be issued under the Plan shall not
exceed 500,000 shares (subject to adjustment under subparagraph (b) below). If
any outstanding purchase right is terminated for any reason prior to its
exercise, the shares allocable to the purchase right may again become subject to
purchase under the Plan.
(b) In the event any change is made to the Stock purchasable under the
Plan by reason of any stock dividend, recapitalization, stock split, reverse
stock split, combination of shares, recapitalization or other change affecting
the outstanding Stock as a class without the Company's receipt of consideration,
appropriate adjustments shall be made by the Plan Administrator to (i) the class
and maximum number of shares issuable over the term of the Plan, (ii) the class
and maximum number of shares purchasable per Participant under any one purchase
right, and (iii) the class and number of shares and the price per share in
effect under each purchase right at the time outstanding under the Plan.
VII. PURCHASE RIGHTS
Each Eligible Employee who participates in the Plan for a particular
purchase period shall have the right to purchase Stock upon the terms and
conditions set forth below and shall execute a purchase agreement embodying such
terms and conditions and such other provisions (not inconsistent with the Plan)
as the Plan Administrator may deem advisable.
(a) Purchase Price. The purchase price per share of Stock shall be
the LESSER of (i) 85% of the Fair Market Value of a share of Stock on the date
on which the purchase right is granted or (ii) 85% of the Fair Market Value of a
share of Stock on the date the purchase right is exercised.
(b) Number of Purchasable Shares.
(i) The number of shares of Stock purchasable by a Participant
upon the exercise of an outstanding purchase right shall be the
number of whole shares obtained by dividing the amount collected
from the Participant
5
65
through payroll deductions during the purchase period for which such
purchase right is outstanding, by the purchase price per share in
effect for that purchase period. However, the maximum number of
shares purchasable by any Participant during any one purchase period
shall not exceed 1,000 shares (subject to adjustment under Section
VI(b)). However, the Plan Administrator shall have the discretionary
authority, exercisable prior to the start of any purchase period
under the Plan, to increase or decrease the limitations to be in
effect for the number of shares of Stock purchasable per Participant
during that purchase period.
(ii) Under no circumstances shall purchase rights be granted
under the Plan to any Eligible Employee if such individual would,
immediately after the grant, own (within the meaning of Code Section
424(d)), or hold outstanding options or other rights to purchase,
stock possessing 5% or more of the total combined voting power or
value of all classes of stock of the Company or any Corporate
Affiliate. For this purpose an Eligible Employee's ownership
interest shall be determined in accordance with Code Section 424(d),
which rules are as follows:
(a) The Eligible Employee is treated as owning any stock
owned, directly or indirectly, by:
(1) Brothers and sisters (whether by whole or
half-blood);
(2) Spouse; and
(3) Lineal descendants and/or ancestors.
(b) Stock owned, directly or indirectly, by a corporation,
partnership, estate, or trust is treated as owned proportionately by
or for its stockholders, partners, or beneficiaries.
(c) Stock that can be acquired by the exercise of an option
is treated as being owned by the Eligible Employee for purposes of
determining the number of shares owned by the Eligible Employee, but
not for purposes of determining the total number of shares of Stock
outstanding. Options are taken into account for this purpose whether
or not they are currently exercisable.
(c) Payment. Payment for the Stock purchased under the Plan shall be
effected through the Participant's authorized payroll deductions. Such
deductions shall begin on the first pay day coincident with or immediately
following the commencement date of the purchase period and shall terminate with
the pay day ending with or immediately prior to the last business day of such
purchase period. The amounts so collected shall be credited to the Participant's
individual account under the Plan, but no interest shall be paid on the balance
from
6
66
time to time outstanding in the account. The collected amounts shall not be
required to be held in any segregated account or trust fund and may be
commingled with the Company's general assets and used for any corporate purpose.
(d) Termination of Purchase Rights.
(i) A Participant may terminate his or her outstanding purchase
right under the Plan by filing the prescribed notification form with
the Plan Administrator (or its designee) at least two business days
before the last business day of any purchase period. No further
payroll deductions shall be collected from the Participant with
respect to such purchase right, and the Participant shall have the
following election with respect to any payroll deductions made by
such individual with respect to such purchase right: (A) have the
Company refund those payroll deductions or (B) have such payroll
deductions held for the purchase of shares at the end of the
purchase period. If no such election is made, then such payroll
deductions shall automatically be refunded at the end of such
purchase period. Immediately following the refund or purchase of
shares, the purchase right shall terminate.
(ii) The request for termination shall be irrevocable with
respect to the particular purchase right to which it pertains, and
the Participant may not subsequently rejoin the purchase period
covered by such right.
(e) Termination of Service.
(i) Except as set forth in Paragraph VII(e)(ii) below, if a
Participant ceases to be an Eligible Employee while his or her
purchase right remains outstanding, then such purchase right shall
immediately terminate, and all sums previously collected from the
Participant during the purchase period in which such termination
occurs shall be refunded (without interest) to the Participant.
(ii) Should the Participant die or become Permanently Disabled
or should the Participant cease active employment by reason of a
leave of absence taken in accordance with the Company's leave of
absence policy, then the Participant (or the person or persons to
whom the rights of the deceased Participant under the Plan are
transferred by will or by the laws of descent and distribution)
shall have the election, exercisable up until the end of the
purchase period in which the Participant dies or becomes Permanently
Disabled or in which the leave of absence commences, to (i) withdraw
all the funds credited to the Participant's account at the time of
his or her cessation of employment or at the commencement of such
leave or (ii) have such funds held for the purchase of shares at the
end of such purchase period. If no such election is made, then such
funds shall automatically be held for the purchase of shares at the
end of such purchase period. In no event, however, shall any further
payroll deductions be
7
67
added to the Participant's account following his or her cessation of
employment or the commencement of such leave. Upon the Participant's
return to active employment of twenty (20) hours a week (x) within
ninety (90) days following the commencement of such leave or (y)
prior to the expiration of any longer period for which such
Participant's right to reemployment with the Company is guaranteed
by statute or contract, his or her payroll deductions under the Plan
shall automatically resume at the rate in effect at the time the
leave began, unless the Participant withdraws from the Plan prior to
his or her return. An individual who returns to active employment
following a leave of absence that exceeds in duration the applicable
(x) or (y) time period will no longer be an Eligible Employee for
purposes of subsequent participation in the Plan, will receive a
refund (without interest) of the payroll deductions that the
Participant made during that purchase period with respect to such
purchase right not previously exercised, and must accordingly
re-enroll in the Plan (by making a timely filing of the prescribed
enrollment forms) on or before the first day of the new purchase
period once he or she qualifies as an Eligible Employee.
(f) Stock Purchase. The Stock subject to the purchase right of each
Participant (other than Participants whose payroll deductions have been refunded
in accordance with Section VII(d) or (e) above) shall be automatically purchased
on the Participant's behalf on the last business day of the purchase period. The
purchase shall be effected by applying the amount credited to each Participant's
account on the last business day of the purchase period to the purchase of whole
shares of Stock (subject to the limitations on the maximum number of purchasable
shares set forth in Section VII(b)) at the purchase price in effect for such
purchase period. Any amount remaining in the Participant's account after such
application shall be refunded.
(g) Proration of Purchase Rights. Should the total number of shares
of Stock that are to be purchased pursuant to outstanding purchase rights on any
particular date exceed the number of shares then available for issuance under
the Plan, the Plan Administrator shall make a pro-rata allocation of the
available shares on a uniform and nondiscriminatory basis, and any amounts
credited to the accounts of Participants shall, to the extent not applied to the
purchase of Stock, be refunded to the Participants.
(h) Rights as Stockholder. A Participant shall have no rights as a
stockholder of the Company with respect to shares covered by his or her
outstanding purchase right under the Plan until the shares are actually
purchased on the Participant's behalf in accordance with Section VII(f). No
adjustments shall be made for dividends, distributions or other rights for which
the record date is prior to the date of such purchase.
(i) Assignability. No purchase right granted under the Plan shall be
assignable or transferable by the Participant other than by will or by the laws
of descent and distribution following the Participant's death, and during the
Participant's lifetime the purchase right shall be exercisable only by the
Participant.
8
68
(j) Notice of Disqualifying Disposition. A Participant must notify
the Company if the Participant disposes of stock acquired pursuant to the Plan
prior to the expiration of the holding periods required to qualify for long-term
capital gains treatment on the sale proceeds.
(k) Merger or Liquidation of Company. In the event the Company or
its stockholders enter into an agreement to dispose of all or substantially all
of the assets or outstanding capital stock of the Company by means of a sale,
merger, reorganization or similar transaction (other than a reorganization
effected primarily to change the State in which the Company is incorporated) or
in the event the Company is liquidated (a "Change in Control"), each outstanding
purchase right shall automatically be exercised, immediately prior to the
effective date of any Change in Control, by applying the payroll deductions of
each Participant for the purchase period in which such Change in Control occurs
to the purchase of whole shares of Stock at a purchase price per share equal to
eighty-five percent (85%) of the lower of (i) the Fair Market Value per share of
Stock on the first day of the purchase period in which such Change in Control
occurs or (ii) the Fair Market Value per share of Stock immediately prior to the
effective date of such Change in Control. However, the applicable limitation on
the number of shares of Stock purchasable per Participant shall continue to
apply to any such purchase. Any amount not applied to the purchase of Stock by
reason of the Section VII(b) limitation on the maximum number of purchasable
shares shall be refunded. The Company shall use its best efforts to provide at
least ten (10) days' prior written notice of the occurrence of any Change in
Control, and Participants shall, following the receipt of such notice, have the
right to terminate their outstanding purchase rights prior to the effective date
of the Change in Control.
VIII. ACCRUAL LIMITATIONS
(a) No Participant shall be entitled to accrue rights to acquire
Stock pursuant to any purchase right outstanding under the Plan if and to the
extent such accrual, when aggregated with (i) rights to acquire Stock accrued
under other purchase rights granted to the Participant under this Plan and (ii)
similar rights accrued by the Participant under other employee stock purchase
plans (within the meaning of Code Section 423) of the Company or its Corporate
Affiliates, would otherwise permit such Participant to purchase more than
$25,000 worth of Stock of the Company or any Corporate Affiliate (determined on
the basis of the Fair Market Value of such stock on the date or dates such
rights are granted to the Participant) for each calendar year such rights are at
any time outstanding.
(b) For purposes of applying the accrual limitations of Section
VIII(a), the right to acquire Stock pursuant to each purchase right granted
under the Plan shall accrue as follows:
(i) The right to acquire Stock under each such purchase right
shall accrue when the purchase right first becomes exercisable on
the last business day of the purchase period for which such right is
granted.
9
69
(ii) To the extent the Participant's purchase right does not, by
reason of the Section VIII(a) limitations, accrue on the last
business day of the particular purchase period for which such right
is granted, then the payroll deductions that the Participant made
during that purchase period with respect to such purchase right
shall be refunded.
(c) In the event there is any conflict between the provisions of
this Article VIII and one or more provisions of the Plan or any instrument
issued thereunder, the provisions of this Article VIII shall be controlling.
IX. AMENDMENT AND TERMINATION
The Board may from time to time alter, amend, suspend or discontinue the
Plan to become effective immediately following the close of a purchase period;
provided, however, the Plan may be amended or terminated immediately upon Board
action, if and to the extent necessary to assure that the Company will not
recognize, for financial reporting purposes, any compensation expense in
connection with the shares of Stock offered for purchase under the Plan, should
the financial accounting rules applicable to the Plan at the Effective Date be
subsequently revised so as to require the Company to recognize compensation
expense in the absence of such amendment or termination. The Board may not,
without the approval of the Company's stockholders, increase the number of
shares issuable under the Plan (provided, however, the Plan Administrator shall
have the authority to effect adjustments pursuant to Section VI(b) without
stockholder approval), or modify the requirements for eligibility to participate
in the Plan.
X. GENERAL PROVISIONS
(a) Effective Date. The Plan became effective on the Effective Date. On
June 15, 1992, the Board approved a restatement of the Plan, to be effective as
of October 1, 1992. The restatement was approved by the Company's stockholders
at the 1992 Annual Meeting. On May 4, 1994, the Board approved an amendment to
the Plan to increase the aggregate number of shares issuable over the term
thereof from 100,000 to 150,000 shares. The amendment was approved by the
Company's stockholders at the 1994 Annual Meeting. In June 1997, the Board
approved another amendment to the Plan to increase the aggregate number of
shares issuable over the term thereof from 150,000 to 250,000 shares. The
amendment was approved by the Company's stockholders at the 1997 Annual Meeting.
On June 14, 1999, the Company effected a 2-for-1 stock split in the form of a
100 percent stock dividend distributed to stockholders of record as of May 31,
1999. On May 20, 2001, the Board approved amendments to the Plan to (i) effect
certain technical revisions to the provisions of the Plan in order to facilitate
the administration and interpretation of the Plan, (ii) modify the type of
amendments to the Plan which require stockholder approval and (iii) extend the
termination date of the Plan by ten years to September 30, 2011, subject to
stockholder approval at the 2001 Annual Meeting.
(b) Termination. The Plan shall terminate upon the EARLIEST of (i)
September 30, 2011, if stockholder approval at the 2001 Annual Meeting is
obtained, or September 30, 2001, if stockholder approval at the 2001 Annual
Meeting is not obtained, (ii) the date on which all shares available for
issuance under the Plan shall have been sold pursuant to purchase rights
exercised under the Plan, (iii) the date on which all purchase rights are
exercised in connection with a Change in Control or (iv) termination by the
Board. No further purchase rights shall be granted or exercised, and no further
payroll deductions shall be collected under the Plan following such termination.
10
70
(c) Costs. All costs and expenses incurred in the administration of the
Plan shall be paid by the Company; however, each Plan Participant shall bear all
costs and expenses incurred by such individual in the sale or other disposition
of any shares purchased under the Plan.
(d) No Employment Rights. Neither the action of the Company in
establishing the Plan, nor any action taken under the Plan by the Board or the
Plan Administrator, nor any provision of the Plan itself shall be construed so
as to grant any person the right to remain in the employ of the Company or any
of its Corporate Affiliates for any period of specific duration, and such
person's employment may be terminated at any time, with or without cause.
(e) Governing Law. The provisions of the Plan shall be governed by the
laws of the State of California.
(f) Annual Statements. To the extent required, the Company shall provide
a statement containing the information required by Code Section 6039(a) to
Participants no later than January 31st of the calendar year following prior to
the calendar year in which they purchase Stock pursuant to the Plan. This notice
shall contain the following items of information:
(i) The name, address, and employer identification number of the
corporation transferring the Stock;
(ii) The name, address, and identifying number of the Participant to
whom the share or shares of Stock were transferred;
(iii) The name and address of the corporation the stock of which is
the subject of the option (if other than the corporation transferring
the stock);
(iv) The date the option was granted;
(v) The date the shares were transferred to the person exercising
the option;
(vi) The fair market value of the Stock at the time the option was
exercised;
(vii) The number of shares of Stock transferred pursuant to the
option;
(viii) The type of option under which the transferred shares were
acquired; and
(ix) The total cost of all the shares.
11
71
SCHEDULE A
PARTICIPATING COMPANIES
CorVel Corporation, a Delaware corporation
CorVel Healthcare Corporation, a California corporation
72
CORVEL CORPORATION
PROXY
ANNUAL MEETING OF STOCKHOLDERS, AUGUST 2, 2001
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned revokes all previous proxies, acknowledges receipt of the
Notice of Annual Meeting of Stockholders to be held on August 2, 2001 and the
accompanying Proxy Statement, and appoints V. Gordon Clemons and Jeffrey J.
Michael, or either of them, the proxy of the undersigned, with full power of
substitution, to vote all shares of the Common Stock of CorVel Corporation which
the undersigned is entitled to vote, either on his or her own behalf or on
behalf of an entity or entities, at the Annual Meeting of Stockholders of CorVel
Corporation to be held at 2010 Main Street, Suite 1020, Irvine, California, on
Thursday, August 2, 2001 at 1:00 p.m. Pacific Daylight Time, and at any
adjournment or postponement thereof, with the same force and effect as the
undersigned might or could do if personally present thereat. In their
discretion, the proxies are authorized to vote upon any other matter that may
properly come before the meeting or any adjournment or postponement thereof. The
shares represented by this proxy shall be voted in the following manner:
1. To elect the following directors to serve for a term of one year.
V. Gordon Clemons FOR [ ] WITHHOLDING AUTHORITY [ ]
Peter E. Flynn FOR [ ] WITHHOLDING AUTHORITY [ ]
Steven J. Hamerslag FOR [ ] WITHHOLDING AUTHORITY [ ]
R. Judd Jessup FOR [ ] WITHHOLDING AUTHORITY [ ]
Jeffrey J. Michael FOR [ ] WITHHOLDING AUTHORITY [ ]
2. To approve a series of amendments to the Company's Restated 1988 Executive
Stock Option Plan (the "Option Plan") to: (i) clarify the group of employees
who are eligible to participate in the Option Plan and (ii) increase the
maximum number of shares of Common Stock authorized for issuance over the
term of the Option Plan by 500,000 shares.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
73
3. To approve a series of amendments to the Company's 1991 Employee Stock
Purchase Plan (the "Purchase Plan") to: (i) modify the type of amendments
to the Purchase Plan that require stockholder approval and (ii) extend
the termination date of the Purchase Plan by ten years to September 30,
2011.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
4. To ratify the appointment of Grant Thornton LLP as the Company's independent
auditors for fiscal 2002.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR EACH OF THE NOMINEES AND THE
PROPOSALS SET FORTH ABOVE. THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED AS
SPECIFIED ABOVE. THIS PROXY WILL BE VOTED FOR THE NOMINEES LISTED ABOVE AND FOR
PROPOSAL 2 IF NO SPECIFICATION IS MADE.
Dated:
------------------------
------------------------
(Print name(s) as it
(they) appear(s) on
certificate)
------------------------
(Authorized
Signature(s))
Please print the name(s)
appearing on each share
certificate(s) over
which you have voting
authority.
PLEASE RETURN YOUR EXECUTED PROXY TO U.S. STOCK TRANSFER CORPORATION IN THE
ENCLOSED
SELF-ADDRESSED, POSTAGE PRE-PAID ENVELOPE.