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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K/A
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[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
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DIAGNOSTEK, INC.
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(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
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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
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<PAGE>
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)
<TABLE>
<CAPTION>
Years ended March 31,
1995 1994 1993
<S> <C> <C> <C>
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
</TABLE>
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.
<PAGE>
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
<PAGE>
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.
<PAGE>
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
<PAGE>
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.
<PAGE>
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
