-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, PywKdMNOefroR4yLCY00QPZqeKc/d1MflxaqbNeaTAe8bT92ovjzlZiIPVFWrKGw XdtD31EN8mD0BCOW0+ZURg== 0000950159-95-000060.txt : 199506300000950159-95-000060.hdr.sgml : 19950630 ACCESSION NUMBER: 0000950159-95-000060 CONFORMED SUBMISSION TYPE: 10-K405/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19950331 FILED AS OF DATE: 19950628 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: DIAGNOSTEK INC CENTRAL INDEX KEY: 0000726606 STANDARD INDUSTRIAL CLASSIFICATION: HOSPITAL & MEDICAL SERVICE PLANS [6324] IRS NUMBER: 850312837 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-K405/A SEC ACT: SEC FILE NUMBER: 001-10610 FILM NUMBER: 95550393 BUSINESS ADDRESS: STREET 1: 4500 ALEXANDER BLVD NE CITY: ALBUQUERQUE STATE: NM ZIP: 87107 BUSINESS PHONE: 5053451000 10-K405/A 1 ============================================================================== SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 -------------------- FORM 10-K/A -------------------- [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) For the fiscal year ended March 31,1995 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE REPORT OF 1934 (NO FEE REQUIRED) For the transition period from _____________ to _____________ Commission file number 1-10610 ---------------------- DIAGNOSTEK, INC. -------------------------------------------------------- (Exact name of registrant as specified in its charter) DELAWARE 85-0312837 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 4500 Alexander Blvd. NE, 87107 Albuquerque, New Mexico (ZIP Code) (Address of principal executive offices) Registrant's telephone number, including area code: (505) 345-8080 ----------------------------------------------------------------- Securities registered pursuant to Section 12(b) of the Act: Common Stock, $.01 par value (Title of each class) Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES x NO ___ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K. __X__ The aggregate market value of the registrant's voting stock (based on the closing sale price of the registrant's Common Stock on the New York Stock Exchange, and for the purposes of this computation only, on the assumption that all of the registrant's directors and executive officers are affiliates) held by non-affiliates of the registrant was approximately $389,716,000 on June 5, 1995. The number of shares of Common Stock, $.01 par value, outstanding as of June 5, 1995 was 24,273,146. DOCUMENTS INCORPORATED BY REFERENCE None ============================================================================== Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Diagnostek's industry segments are described in Part I, Item 1 of this report. Financial highlights and industry segment data are displayed in the following table: Results of Operations Financial Highlights (dollars in millions, except per share amounts)
Years ended March 31, 1995 1994 1993 Integrated pharmacy service Revenues $540.1 $326.4 $240.5 Operating income 28.7 15.1 4.0 Managed care pharmacy service Revenues $125.6 $153.5 $132.9 Operating income (2.7) 9.2 6.5 Corporate and Other Revenues $5.1 $5.8 $7.6 Operating income (10.2) (8.8) (4.4) Total Diagnostek Revenues $670.8 $485.7 $381.0 Operating income 15.8 15.5 6.1 Net earnings 11.0 4.6 2.8 Net earnings per share $0.44 $0.19 $0.12
Consolidated Operations Fiscal year 1995 compared with fiscal year 1994 During the fiscal year ended March 31, 1995, the Company actively marketed its new RxChoice(c) product and entered new product niches including the providing of services to the Federal and state pharmacy benefit management programs. Lives covered under integrated pharmacy services increased to approximately 16 million from the 13 million reported at fiscal year end 1994. The early termination of its contracts with CIGNA, partly offset these sales gains. Volume increases were coupled with expansion of physical capabilities and operational reorganizations. Perform's Scottsdale, Arizona operations were consolidated at the Company's Albuquerque headquarters facility. Plant expansion of the Albuquerque headquarters was completed and Diagnostek's new "A-frame" robotic dispensing technology successfully installed. In addition, Diagnostek significantly expanded its clinical and customer service departments to ensure the Company's ability to provide the highest quality of service to its clients. Consolidated revenues totaled $670.8 million for fiscal year 1995, an increase of $185.1 million or 38% from fiscal 1994. The increase was attributable primarily to the expansion of the Company's integrated pharmacy service business ($213.7 million) due partly to the full year operations of the Company's retail operations (Note 3 to the Notes to the Consolidated Financial Statements related to the Perform acquisition in October 1993) and higher volume; offset partly by decreases ($27.9 million) in the Company's managed care pharmacy service business attributable mainly to the early termination of the Company's contracts with CIGNA Health Plan of Arizona, Inc. ("CIGNA"). Consolidated operating income totaled $15.8 million for fiscal 1995, an increase of $0.3 million or 2% from fiscal 1994. The increase in operating income was attributable primarily to higher product margins ($20.6 million) in the Company's integrated pharmacy service operations due mainly to lower pharmaceutical acquisition costs; offset by losses associated with the managed care business' New Jersey contract ($12.6 million, including estimated future losses over the three year contract term of $9.6 million, note 13 to Notes to Consolidated Financial Statements), and higher general and administrative expenses ($7.5 million) and selling/marketing expenses ($1.3 million) attributable mainly to the Company's expanded service capabilities and selling programs. Consolidated net earnings totaled $11.0 million, or $0.44 per share for fiscal 1995, an increase of $6.4 million (139%), or $0.25 per share. The increase in net earnings was attributable primarily to operating income improvement, offset by losses on the New Jersey contract ($12.6 million pretax or $0.31 per share after tax), and lack of counterpart to prior year shareholder litigation settlement costs ($12.0 million pretax or $0.31 per share after tax) incurred in fiscal 1994. Excluding non-recurring fiscal 1995 New Jersey contract losses and non-recurring fiscal 1994 shareholder litigation settlement costs, fiscal 1995 net earnings would have been $18.7 million or $0.75 per share compared with $12.5 million or $0.50 per share in fiscal 1994. Fiscal year 1994 compared with fiscal year 1993 During fiscal 1994, the Company diversified its product lines to position itself as a full-service, integrated supplier in the pharmacy benefit management industry. During May 1993, the Company introduced its RxChoice(c) integrated retail/mail pharmacy benefit product, marking its entry into the employer/organization sponsor market, and, during October 1993, acquired Perform Cost Management Services, Inc. to provide immediate access to its retail pharmacy network and claims pricing capabilities. Through acquisition of certain assets and contracts of Chronitech (Note 3 to Notes to Consolidated Financial Statements) during October 1993, the Company entered the specialty pharmacy markets targeting certain disease-state populations, including the HIV/AIDS community. Consolidated revenues totaled $485.7 million for fiscal year 1994, an increase of $104.7 million or 27% from fiscal 1993. The increase was attributable primarily to the expansion of the Company's integrated pharmacy service business ($85.9 million) related mainly to the acquisition of Perform and internal growth ($20.6 million) in the Company's managed care pharmacy service business. Consolidated operating income totaled $15.5 million for fiscal 1994, an increase of $9.4 million or 154% from fiscal 1993. The increase in operating income was attributable primarily to higher product margins ($10.1 million) in the Company's integrated pharmacy service operations due mainly to lower pharmaceutical acquisition costs and volume increases in the managed care business ($3.5 million) and lack of counterpart to higher than customary 1993 provisions for bad debts ($4.8 million); offset partly by increases in general and administrative expenses ($4.2 million) attributable to higher costs associated in part with the Company's 1993 acquisitions and higher selling and marketing expenses ($2.6 million) relating primarily to the introduction of the Company's RxChoice(c) and CapRx(c) products. Consolidated net earnings totaled $4.6 million, or $0.19 per share for fiscal 1994, an increase of $1.8 million (65%), or $0.07 per share. The increase in net earnings was attributable primarily to operating income improvement and lack of counterpart to prior year costs ($6.8 million pretax) associated with the aborted merger with Medco Containment Services Inc. (Note 12 to Notes to Consolidated Financial Statements) offset by shareholder settlement costs ($12.0 million pretax or $0.31 per share after tax) incurred in fiscal 1994. Excluding non-recurring merger and settlement costs in the current and prior fiscal years, net earnings would have been $12.5 million or $0.50 per share in fiscal 1994 compared with $6.8 million or $0.28 per share in fiscal 1993. Integrated Pharmacy Service Operations Fiscal year 1995 compared with fiscal 1994 Integrated pharmacy service revenues totaled $540.1 million for fiscal year 1995, an increase of $213.7 million or 65% from fiscal 1994. The increase was attributable primarily to the Company's entry into the retail pharmacy market with the acquisition of Perform during October 1993 and the growth of the number of benefit plan participants ("covered lives") under management. Approximately 12.9 million retail prescription claims were adjudicated during fiscal 1995, an increase of 8.9 million from fiscal 1994. Fiscal 1995 mail order prescription volume increased by 12% to 3,546,000 prescriptions due primarily to increases in number of eligible plan participants (12.0 million mail service covered lives at March 31, 1995 compared with 11.0 million at March 31, 1994). Integrated pharmacy service operating income totaled $28.7 million for fiscal 1995, an increase of $13.6 million or 90% from fiscal 1994. Operating income increase was attributable primarily to higher product margins ($20.6 million) attributable primarily to improved formulary agreements and contract pricing from pharmaceutical suppliers (offsetting drug cost inflation), and retail and mail service claim volume increases; offset partly by higher general and administrative ($5.8 million) and selling and marketing costs ($1.2 million) attributable mainly to expansion of physical plant and client-support services, respectively. In November 1994, the Company entered into a one year agreement (with two one year options) with the U.S. Department of Defense ("DOD") to provide mail pharmacy services to CHAMPUS beneficiaries. The DOD request for proposal stated that the respondent should assume that there would be approximately 2.0 million prescriptions filled annually under the contract and the Company used this figure to anticipate the revenues to be generated under the contract. The Company commenced providing services under the contract in November, 1994. The volume of prescriptions filled under this contract has to date grown to approximately 28,000 prescriptions per month. Because the prescription volume to date under the CHAMPUS contract is substantially lower than the assumed number provided by DOD in its request for proposal, the Company expects that the revenues under this contract will be substantially less than anticipated based on DOD's assumptions. Revenues under the CHAMPUS contract increased from less than $100,000 in November 1994 to approximately $1.0 million in May 1995 with total revenues of approximately $3.8 million for the first seven months of operations under the contract. Since it is not possible to predict the number of prescriptions that will be filled under the contract in the future, no assurance can be given as to the amount of revenues that will be realized by the Company under the CHAMPUS contract. Fiscal year 1994 compared with fiscal 1993 Integrated pharmacy service revenues totaled $326.4 million for fiscal year 1994, an increase of $85.9 million or 36% from fiscal 1993. The increase was attributable primarily to the Company's entry into the retail pharmacy market with the acquisition of Perform during October 1993. Perform processed approximately 4.0 million prescription claims from its acquisition to March 31, 1994. Mail order prescription volume increased by 2% to 3,164,000 prescriptions despite the loss of a major customer which represented approximately 13% of prior year volume. Volume increases were primarily attributable to increases in the number of eligible plan participants (11.0 million covered lives compared with 7.7 million at March 31, 1993). Price per prescription remained about equal with prior year levels as drug supplier price increases (approximately 7%) were offset by increased lower priced generic product substitutions which resulted mainly from client sponsor benefit plan design changes. Integrated pharmacy service operating income totaled $15.1 million for fiscal 1994, an increase of $11.1 million or 278% from fiscal 1993. The increase in operating income was attributable primarily to higher profit margins ($10.1 million) related to improved purchasing from pharmaceutical suppliers and volume increases, lack of counterpart to prior year bad debt provisions ($4.7 million) in excess of customary levels; offset partly by higher general and administrative costs ($1.8 million) related partly to the Perform acquisition and selling and marketing costs ($1.6 million) attributable mainly to the introduction of the RxChoice(c) product. Managed Care Pharmacy Service Operations Fiscal year 1995 compared with fiscal year 1994 Managed care pharmacy service revenues totaled $125.6 million for fiscal year 1995, a decrease of $27.9 million or 18% from fiscal 1994 primarily due to the early termination of the Company's CIGNA contracts ($37.4 million decrease from fiscal 1994) in September of 1994. Excluding this contract, revenue increased $17.3 million due to internal growth and new client contracts; offset partly by terminated or unrenewed contracts ($7.8 million). Managed care pharmacy service operating income totaled ($2.7) million for fiscal 1995, a decrease of $11.9 million or 129% from fiscal 1994. The decrease in operating income was attributable primarily to losses associated with the Company's unit dose dispensing contract with the State of New Jersey implemented February 1, 1995 ($12.6 million, including estimated future losses over the three year contract term of $9.6 million, Note 13 to Notes to Consolidated Financial Statements). Fiscal year 1994 compared with fiscal year 1993 Managed care pharmacy service revenues totaled $153.5 million for fiscal year 1994, an increase of $20.6 million or 16% from fiscal 1993 primarily due to increases ($20.2 million) from the CIGNA contract, which was implemented during mid-fiscal 1993. Excluding this contract, revenue decrease was attributable primarily to terminated or unrenewed contracts ($6.3 million) offset by internal growth and new client contracts ($4.2 million). Managed care pharmacy service operating income totaled $9.2 million for fiscal 1994, an increase of $2.7 million or 42% from fiscal 1993. The increase in operating income was attributable primarily to higher volume ($1.5 million) and improved profit margins ($2.0 million), offset partly by increased selling and marketing costs ($0.7 million). Impact of Suppliers and Inflation The Company, has contracts with over 51,000 retail pharmacies to provide point-of-service retail prescription dispensing in support of the Company's RxChoice (c) integrated product line. These contracts generally provide for reimbursement to the contracted retail pharmacy at prices specified as a discount to published average wholesale product cost. The Company also stocks over 4,500 brand name and generic medications at its mail pharmacy service dispensing facilities, in varying dosages and dosage forms. Prescription requests for unstocked items are obtained, as required, from wholesalers. Diagnostek purchases pharmaceuticals directly from manufacturers and wholesalers, generally in high volume and at a discount, resulting in lower costs than available to smaller purchasers. The Company is not dependent upon any one supplier. The Company receives a significant amount of rebates based on the purchase of pharmaceuticals from numerous suppliers. These rebates are generally contractually due the Company based on the purchase of specified volume levels of various name brand pharmaceuticals, changes in relative market share, or through the placement of certain pharmaceuticals on a drug formulary. At this time, rebate practices are being reviewed within the pharmaceutical industry as they relate to overall pricing strategies. The Company continues to aggressively negotiate rebate agreements and believes that any change in rebate practices would be part of changes in overall pharmaceutical pricing methods. Any such change could have a material adverse effect on the Company's operating margin. The Company, in certain of its managed care pharmacy contracts, purchases pharmaceutical products on behalf of its customers utilizing its customers purchase agreements with suppliers. Under the terms of its mail service contract with the Department of Defense ("DoD") in support of CHAMPUS benefit programs in six states, the Company also purchases pharmaceutical products for mail distribution to eligible beneficiaries utilizing Government contract prices. Availability and price of pharmaceuticals are subject to market conditions. Cost increases can affect the Company's cost of sales; however, increases in purchased drug costs are, in the case of certain managed care pharmacy contracts and for the vast majority of integrated pharmacy service contracts, recoverable from clients under periodic rate adjustment contractual clauses. To the extent that the Company has entered risk/reward ("capitated") contracts based on the Company's ability to control pharmaceutical dispensing patterns, operating results could be affected to a greater degree by drug cost inflation. Historically, inflation has not materially affected the Company. During fiscal 1996 and future periods, a significant number of patents protecting high volume brand medications are scheduled to expire which could result in the availability of lower cost generic equivalent products. The Company has not forecast the impact that might result from the introduction of these generic products, however, pharmaceutical costs might decrease in future periods. Financial resources and liquidity Diagnostek's working capital and liquidity requirements for its existing operations have been met mainly from cash flows generated from operations. Cash flows from operations for fiscal year 1995 totaled ($1.6) million, a decrease of $17.7 million from 1994. The decrease was attributable primarily to payment of shareholder litigation settlement costs accrued in fiscal 1994, increased receivables associated with higher claims volumes and higher inventories, offset partly by increased net earnings. At March 31, 1995, market value of marketable securities totaled $59.2 million. The Company intends to utilize these securities to fund working capital growth (including that associated with further expansion of Diagnostek's RxChoice(c) and CapRx(c) products), expand its existing operating facilities and equipment, and potentially to fund future acquisitions, or retire debt. There are currently no acquisitions pending. Under terms of its Agreement and Plan of Merger with Value Health, Inc. dated March 27, 1995, as amended on June 4, 1995, the Company shall not make any investments in non-investment grade securities exceeding $1,000,000 or sell at a loss of greater than $50,000 any debt securities held for investment purposes. Diagnostek's capital expenditures totaled $9.1 million for fiscal 1995, compared with $5.4 million and $2.0 million for 1994 and 1993, respectively. Expansion of the Albuquerque facility totaled $5.5 million, including $3.7 million which had been expended at March 31, 1994. The Company also utilizes leases and other third party financing to fund certain equipment acquisitions. The Company has a $30 million term loan, with outstanding principal balance of $12.0 million at March 31, 1995, from Metropolitan Life Insurance Company ("Metropolitan"), which bears interest at a fixed annual rate of 10.02%. Principal repayments of $6.0 million per year are payable each December. During fiscal year 1995, $6.0 million principal was repaid. The Company expects to make scheduled principal payments from operating cash flows. During December 1994 the Company established a $25.0 million revolving credit line with Bank of America Illinois NA. The agreement has a two year term, with two one year renewal periods and requires a 0.25% annual facility fee and requires interest payments on borrowings at the prime rate or 0.375% over LIBOR. Amounts outstanding under this agreement totaled $10.0 million at March 31, 1995. The Company has purchased insurance policies, customary in the retail pharmacy industry, including product liability coverage, of a type and amount which management deems adequate. The Company is not licensed to practice medicine and, as a result, is unable to obtain medical malpractice coverage. The Company requires all users (including radiologists, hospitals, or health care providers) of its owned medical imaging facility to both maintain adequate medical malpractice liability coverage and indemnify the Company against all claims that may arise from the use of its equipment. Diagnostek also maintains various forms of traditional business liability coverage. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Diagnostek, Inc. has duly caused this Amendment to be signed in its behalf by the undersigned, thereunto duly authorized, in the City of Albuquerque and State of New Mexico on the 28th day of June, 1995 DIAGNOSTEK, INC. \s\ Nunzio P. DeSantis Nunzio P. DeSantis Chairman of the Board of Directors, Chief Executive Officer and Director Pursuant to the requirements of the Securities Exchange Act of 1934, this Amendment has been signed below by the following persons on behalf of the registrant in the capacities on the 28th day of June, 1995: \s\ Julius Golden \s\ Nunzio P. DeSantis Julius Golden Nunzio P. DeSantis Director Chairman of the Board of Directors, Chief Executive Officer, and Director \s\ Miles M. Stuchin \s\ William A. Barron Miles M. Stuchin William A. Barron Director President, Chief Operating Officer \s\ E. Gerald Riesenbach E. Gerald Riesenbach Courtlandt G. Miller Director Executive Vice President General Counsel, Director and Secretary \s\ Andrew P. Masetti David G. Devereaux Andrew P. Masetti Director Executive Vice President, Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----