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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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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>1
PART I
Item 1. Business
General
Diagnostek, Inc., a holding company incorporated under the laws of Delaware
on August 3, 1983, together with its subsidiaries (collectively, "Diagnostek" or
the "Company"), is a leading provider of integrated pharmacy management services
designed to contain the costs of dispensing pharmaceuticals. The Company
dispenses prescription drugs, primarily by mail and retail channels, to
beneficiaries of health benefit plans and provides contract pharmacy management
services to hospitals, managed care providers, and other institutions.
On March 27, 1995, the Company entered into a definitive Agreement and Plan
of Merger (the "Merger Agreement") with Value Health, Inc. ("VHI"), a New York
Stock Exchange company that provides specialized managed care programs including
pharmacy benefit management services, and VHI Merger-Sub. Corp., a wholly-owned
subsidiary of VHI, pursuant to which the Company will become a wholly-owned
subsidiary of VHI (the "Merger"). It is intended that the Merger will qualify as
a pooling of interests for accounting purposes and will constitute a tax-free
reorganization for federal income tax purposes. In accordance with the terms and
conditions of the Merger Agreement, as amended on June 4, 1995, each share of
the Company's common stock (and outstanding common stock options) will be
converted into common stock (and common stock options) of VHI at an exchange
ratio of 0.4975. Consummation of the Merger is subject to satisfaction of
certain conditions, including approval by shareholders of each of the companies
and treatment as a pooling of interest for accounting purposes.
Industry Segments
Integrated Pharmacy Services. Diagnostek, through its contracted retail
network and its controlled mail pharmacy dispensing centers, markets
point-of-service integrated pharmacy benefit management programs through its
RxChoice(c) product line to corporations, labor unions, government entities and
other benefit plan sponsors, including health maintenance and preferred provider
organizations ("HMO's" and "PPO's"). The RxChoice(c) product, introduced by the
Company during May 1993, is designed to provide patient freedom-of-choice while
achieving a high quality of therapeutic care in a cost-effective manner.
RxChoice(c) integrates the mail/retail distribution of pharmaceuticals with
clinical services provided by the Company's dedicated clinical pharmacy
professionals.
Diagnostek manages its integrated pharmacy service segment through its
wholly-owned subsidiary Health Care Services, Inc. ("HCS"). With the Company's
acquisition of Perform Cost Management Inc. ("Perform") in October 1993 (which
was subsequently merged into HCS), HCS became an industry leader in the
processing of prescription claims and maintains a nationwide network of over
51,000 retail pharmacies to adjudicate the dispensing of acute care medications.
HCS's state-of-the-art proprietary software and electronic network help control
benefit plan administrator pharmaceutical costs through on-line verification of
patient eligibility, drug formulary compliance, drug utilization review and
pricing edits. During fiscal 1995, HCS processed approximately 12.9 million
retail prescription claims on behalf of health benefit plan sponsors covering
about 4.2 million eligible beneficiaries. Beneficiaries enrolled in the
integrated RxChoice(c) plan are given health benefit plan cards which are
presented to pharmacists at the time of prescription submission. In a process
that takes approximately 30 seconds, the pharmacist inputs the patient's
RxChoice(c) card number through the pharmacy computer, which verifies plan
eligibility, cost formulary restrictions and other clinical criteria applicable
to the specific patient via electronic connection to the HCS system database.
The HCS system electronically sends an "approval" or alternative message to the
pharmacist, who then fills the prescription if an approval is received. The
beneficiary pays the pharmacy a previously contracted co-payment amount at the
time of prescription receipt while beneficiaries of unfunded or paper-claim
matching benefit programs pay the contracted benefit plan retail price and
submit the prescription receipt at a later date to their health benefit
administrator or HCS for reimbursement.
HCS generally is compensated for its retail claim processing activities by
benefit plan sponsors on a charge per prescription basis based on a rate
discounted from the average wholesale price ("AWP") as determined weekly by an
industry database service company, plus a claim processing fee and a fee for
specific clinical services provided, such as formulary management.
HCS is also one of the nations largest for-profit providers of prescription
drugs by mail; primarily dispensing long-term maintenance medications (i.e.;
those pharmaceuticals that must be taken by patients
<PAGE>2
on an ongoing basis for treatment of chronic disorders). During the fiscal year
ended March 31, 1995, HCS dispensed approximately 3.5 million prescriptions on
behalf of approximately 1,400 benefit plan sponsors covering about 12.0 million
eligible beneficiaries. Diagnostek estimates that its mail pharmacy services
generally provide benefit plan sponsors with savings of 5% to 35% compared with
prescription drug plans which rely principally on retail pharmacy dispensing
programs, through the use of economies of scale, computerized high-speed
automated dispensing systems, and lower dispensing costs/fees arising from the
practice of dispensing pharmaceuticals in a greater number of day's supply than
is common in the retail pharmacy environment. HCS's ability to track the
remaining day's supply from a previously-filled prescription also limits
potential misuse or abuse of dispensed pharmaceuticals by plan participants. The
Company also administers plans which generate additional client savings through
the substitution of lower-cost generic drugs for higher-priced brand-name drugs
(as authorized by prescribing physicians, law, and plan agreements) as well as
pharmacy benefit programs which exclude certain medications or restrict the
frequency of refills.
HCS generally is compensated by health benefit plan sponsors for its mail
pharmacy services on a charge per prescription basis at a rate discounted from
AWP , plus a dispensing fee, less a co-payment and/or deductible due from plan
participants. The Company bills its customers on a periodic basis, ranging from
weekly to monthly, and generally collects co-payment and/or deductible amounts
from plan participants in advance of dispensing prescriptions. Certain of the
Company's administered plans are contracted with organizations, associations, or
other membership groups which do not underwrite the cost of pharmacy benefit
programs to their members ("Unfunded Plans"). Unfunded Plans, which account for
less than 1% of HCS's Mail Service Pharmacy segment revenues, provide for
collection of prescription billing directly from participating plan members.
Managed Care Pharmacy Service. Diagnostek's Managed Care segment provides
contract pharmacy management services to health care provider organizations
through the Company's HPI Health Care Services, Inc. ("HPI") subsidiary and
specialty pharmacy services primarily to individual customers through its
Diagnostek Pharmacy, Inc. ("DPI") subsidiary.
HPI, acquired by the Company during August 1989, has been a leading
provider of contract pharmacy services to hospitals, HMO's, long-term care
facilities, and other health provider institutions since 1967. HPI, through its
CapRx(c) product line, relieves hospital administrators of daily responsibility
for pharmacy operations and provides customers with a more efficient process for
dispensing, administering, and controlling pharmaceuticals, while complying with
applicable regulations and standards. As of March 31, 1995, HPI had
approximately 130 health care institutions, with about 20,500 beds, under
contract.
Diagnostek estimates that its contract pharmacy management programs enable
health care institutions to operate in-house pharmacy operations at lower costs
through HPI's ability to contain medication costs by generic and therapeutic
substitution, volume pharmaceutical purchasing, and its ability to attract,
train, and retain qualified professional pharmacists. The Company also markets a
variety of specialized services including pharmacy staffing, inventory
management, therapeutic administration, pharmaceutical and therapeutic education
courses for physicians and nurses, and drug utilization evaluation and review
studies.
Diagnostek is compensated for its contract pharmacy management services
under three different pricing methods. "Service charge" methods provide for
billing to HPI clients at a stipulated rate for each medication or pharmacy
service provided. "Revenue sharing" methods provide for billing to HPI clients
at rates equivalent to a stipulated percentage of an HPI client's charge to
patients for medication or pharmacy-related service. "Capitated" methods provide
for billing to HPI clients at rates pre-determined under a formula which
specifies a "cap" or ceiling cost to clients based on a per-patient-day or
diagnosis rate or on a formula for certain patient types (i.e., Medicare,
Medicaid, Blue Cross), with HPI bearing the risk/benefit to the extent that
pharmacy service costs vary from the contractual pricing formula.
On February 1, 1995, HPI began performing under a three year contract with
the State of New Jersey to provide 24 hour supply unit dose medications to
approximately 8,000 patients located in 18 separate State facilities. The
medication, approximately 80,000 doses per day, is dispensed by HPI personnel
from a leased central fill pharmacy located in Trenton, New Jersey. HPI
experienced significant operational difficulties in the start-up phase of the
contract, including incomplete inventory supply, missing or incomplete patient
profiles, telecommunication and software problems, delivery and scheduling
complications and personnel shortages. The start-up phase required the Company
to rotate a large number of non-Trenton based pharmacists and technicians into
and out of the Trenton facility and at the same time to utilize a large number
of temporary personnel. The resulting payroll costs, transportation and lodging
expenses caused the Company to incur a loss of $3.0 million for the quarter
ended March 31, 1995.
<PAGE>3
While the start-up problems have been largely resolved and HPI is in
substantial compliance with the terms of the contract, the Company determined
that the number of pharmacists, technicians and related personnel needed to
comply with the terms of the contract will be substantially greater than that
planned and budgeted by the Company. Accordingly, also in the quarter ended
March 31, 1995, the Company established a reserve of $9.6 million for
anticipated additional losses which the Company believes will be incurred for
the balance of the term of the contract.
During October 1993 the Company, through its DPI subsidiary, acquired
substantially all of the assets and contract rights of Chronitech Health
Services Inc. ("Chronitech"). DPI, through this acquisition, provides specialty
pharmacy, home care medication and infusion services to the chronic and disease
state market, including the HIV and AIDS population.
Medical Imaging. The Company's original medical imaging business provided
magnetic imaging and diagnostic equipment to hospitals on a per-procedure rental
basis and includes operations of a stand-alone out-patient medical diagnostic
imaging center. The medical imaging segment now accounts for less than 1% of the
Company's consolidated revenues. Financial results for this segment are included
in "Corporate and Other" in Item 7 - "Management's Discussion and Analysis of
Financial Condition and Results of Operations". At March 31, 1995, the Company
had closed or terminated all its medical lease agreements and operated only its
stand-alone diagnostic center at Springfield, Pennsylvania. No new medical
imaging operations centers are currently under development and the Company does
not intend to expand this business segment.
During 1995, the Company purchased substantially all of the remaining
outside ownership (72 partnership units or about 62%) of Springfield Diagnostek
Imaging Center ("SDIC") from approximately 50 individuals in exchange for 43,200
shares (about $662,000) of Company common stock. SDIC is part of the Company's
original medical imaging business. The transaction was accounted for as a
purchase and resulted in $662,000 of goodwill which is being amortized over a
period of 22 years.
Financial Information about Industry Segments. Financial information
related to the Company's segments for each of the years in the three year period
ended March 31,1995, is contained in Part II of this report. Diagnostek operates
throughout the United States and is not geographically dependent on any one
area.
Dependence on Clients
Although no one integrated pharmacy service client accounted for 10% or
more of the Company's consolidated revenues for the fiscal year ended March 31,
1995, the Company's five and ten largest integrated pharmacy service clients
accounted for 28% and 40%, respectively, of the integrated pharmacy service
segment revenues during the year ended March 31, 1995. At March 31, 1995, the
five largest contracts included approximately 1.2 million plan participants
(representing 8% of total "funded" eligible plan participants). Only nominal
amounts of integrated pharmacy service revenues are currently dependent on
Government entitlement program reimbursement (i.e., Medicare or Medicaid).
For the fiscal years ended March 31, 1995 and 1994, the Company's managed
care segment revenues included revenues from its contracts with CIGNA Health
Plan of Arizona, Inc. and its subsidiary, Lovelace Medical Center ("CIGNA"),
totaling $43.4 million and $80.7 million, respectively, or 6% and 17%,
respectively of consolidated revenues. The Company's contracts with CIGNA were
terminated in advance of previously contracted dates effective September 1994.
Excluding the CIGNA contracts, Diagnostek's five and ten largest managed care
pharmacy management service clients accounted for 25% and 33%, respectively, of
the managed care pharmacy service segment revenues during fiscal year 1995.
Renewal Rate of Contracts
The Company's integrated pharmacy service contracts typically have initial
terms of one to three years. Historically, the Company has experienced a
reasonably high contract renewal rate, however, there can be no assurance that
any particular contract will be renewed.
Contracts with the Company's five largest integrated pharmacy service
customers at March 31, 1995 will be subject to renewal at various times between
July 1995 and April 1996, although certain contracts provide for early
termination upon advance notice from customers. Depending upon the magnitude of
the client, loss of any of these clients could have a material adverse effect
upon Diagnostek's integrated pharmacy service segment's revenue and operating
income and, possibly, on the Company's consolidated revenues and operating
income.
Diagnostek's managed care pharmacy management service contracts typically
have initial terms of three years. Historically, the Company has experienced a
reasonably high contract renewal rate (about
<PAGE>4
75%), however, there can be no assurance that any one contract will be renewed.
Contracts with the five largest managed care pharmacy service customers at March
31, 1995 will be subject to renewal at various times between June 1995 and July
1997. Although the Company recognizes that potential non-renewal of a contract
might have a material adverse effect on the segment's or the Company's
consolidated revenues and operating income, the Company's experience has been
that, with the exception of the CIGNA contracts noted above, new and renewed
contracts more than offset the historical non-renewal operating impacts.
Marketing and Sales
During May 1993, Diagnostek commenced marketing its new RxChoice (c)
product which provides benefit plan sponsors with integrated pharmacy benefit
management services. Under the RxChoice (c) program, plan participants may elect
to fill prescriptions using the traditional mail pharmacy service method, or
with participating network pharmacies under contract with HCS, or with
non-network pharmacies on a per-claim, indemnity reimbursement method. In
management's opinion, Diagnostek's RxChoice(c) product offers benefits to plan
administrators and sponsors in providing plan participants with a choice of
prescription benefit delivery method while streamlining pharmacy benefit
administrative activities.
Diagnostek's in-house sales, telemarketing, and marketing staff markets
integrated pharmacy services directly to benefit plan administrators of
corporations, labor unions, retirement systems, health and welfare trusts,
government agencies or other plan administrators. In certain circumstances, the
Company may market directly with benefit plan sponsors or respond to Requests
for Proposals ("RFP's") issued to Diagnostek and/or its competitors by third
party benefit consultants engaged by many of the larger benefit plan sponsors.
The Company also has agreements with a number of independent contractors, as
well as a number of suppliers of comprehensive medical benefit plans, to market
its integrated pharmacy products and services under commission and/or
subcontract arrangements. In addition, the Company actively promotes the
utilization of HCS mail pharmacy services with eligible plan participants
through periodic mailings and telemarketing.
Diagnostek's in-house sales and telemarketing groups market managed care
pharmacy services, under the trademark of CapRx(c) , to hospitals, nursing
homes, HMO's and PPO's, and other managed care facilities based on a
pre-screened determination of need for outside pharmacy management, generally
derived from an analysis of hospital census data, telemarketing, and other
techniques.
Seasonality
The Company's Managed Care Pharmacy Service segment, and to some extent its
retail operations, are affected by seasonal factors which concentrate a greater
proportion of managed care revenues and operating income in the fall and winter
months, when more patients historically prefer to undergo elective medical
procedures and are afflicted by seasonal illnesses. Diagnostek's mail pharmacy
and imaging operations historically have not been impacted significantly by
seasonal factors.
Competition
The Company's Integrated Pharmacy Service segment competes directly with a
number of integrated pharmacy benefit management companies as well as with
companies which serve only the mail or retail markets. The Company's largest
competitors include Medco Containment Services, Inc. (a subsidiary of Merck &
Co., Inc.), Caremark (Prescription Services), Inc., Express Pharmacy Services (a
division of Thrift Drug, a subsidiary of J.C. Penney & Co.), PCS (a subsidiary
of Eli Lilly Corp.), and ValueRx (a subsidiary of VHI) and a number of smaller
firms. The Company also competes with other prescription drug benefit programs,
including unfunded and not-for-profit programs administered by groups such as
the U.S. Veterans Administration and the American Association of Retired
Persons.
Diagnostek's managed care pharmacy segment competes with service companies
on a national and regional basis and with independently-owned pharmacy service
firms, including Owen Health Care, Inc.
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>5
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 is subject to different pricing mechanisms from suppliers due
to Federal regulations which prohibit the diversion of pharmaceuticals sold for
in-patient hospital use to out-patient pharmacies.
Under certain contracts, the Company purchases pharmaceutical products on
behalf of its customers utilizing its customer's 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.
The Company receives a significant amount of rebates based on the purchase
of pharmaceuticals from numerous suppliers. These rebates are generally
contractually due to 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. A
varying but significant portion of rebates received from these manufacturers is
typically passed on to the Company's customers. 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.
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.
Insurance
Diagnostek 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.
Diagnostek also maintains various forms of traditional business liability
coverage.
Government Regulation
There are extensive state and federal regulations applicable to the
practice of pharmacy and, since sanctions may be imposed for violations,
compliance is a significant operational requirement for the Company. Management
believes that the Company and its subsidiaries are in substantial compliance
with all existing statutes and regulations materially affecting the conduct of
its business, except to the extent discussed below.
Federal statutes and regulations establish standards for all pharmacies and
pharmacists concerning the labeling, packaging, advertising, and adulteration of
prescription drugs and the dispensing of "controlled" substances.
Each state has laws and regulations governing the dispensing of
prescription drugs, including such matters as who may write and dispense
prescriptions, how prescriptions must be filled, how prescription drugs and
controlled substances must be stored and safeguarded, after what period of time
certain drugs must be disposed of, record retention, and generic substitution.
State regulations and requirements are issued by an administrative body in each
state (typically a pharmacy board) which is empowered to impose sanctions,
including license revocation, for non-compliance. In addition, each pharmacy and
pharmacist is bound by standards of professional practice.
Diagnostek's mail pharmacy service business is conducted from pharmacies
located in New Mexico and Pennsylvania. Each of these pharmacies, and their
pharmacist employees, are governed by pharmacy law and regulations of the
respective state in which it is located. Several states have enacted statutes
requiring registration of mail service firms delivering pharmaceuticals within
state boundaries to register with state pharmacy boards and comply with certain
procedures and to make certain disclosures.
<PAGE>6
These statutes generally permit the mail pharmacy service to operate in
accordance with laws of the state in which it is located. The Company has
submitted to such registration, when applicable.
The Company is aware that various national and state pharmacy associations
and some boards of pharmacy are attempting to promote laws and regulations
directed at restricting the activities of mail service pharmacies. To the extent
that such laws or regulations are enacted or promulgated and are found to be
applicable to HCS operations, HCS would be required to comply therewith. In
addition, a number of other states have laws or regulations which, if
successfully enforced, would effectively limit some of the financial incentives
available to traditional third party programs that offer mail service
prescription programs. In some instances, the U.S. Department of Labor has
commented that such laws and regulations are pre-empted by the Employee
Retirement Income Security Act of 1974. The Attorney General in one state has
reached a similar conclusion and raised additional constitutional issues.
Finally, the Federal Trade Commission, by its Bureau of Competition, has
concluded that such laws and regulations may be anti-competitive and not in the
best interests of consumers. To date, there have been no formal administrative
or judicial efforts to enforce any such laws against Diagnostek; however, to the
extent that such laws or regulations prohibit or restrict the operation of mail
service pharmacies and are found to be applicable to the Company, there is no
assurance that the Company could comply with all such laws or regulations and
non-compliance could have a material adverse effect on the Company's mail
pharmacy service operations.
During fiscal 1995, the Federal government considered and continues to
consider various health care legislation designed to control health care cost
increases. Several bills have been introduced, however, due to the varying terms
and complex nature of the proposals, and the complexity of the legislative
process, it is not possible to predict the effect an enacted bill might have on
the Company's business. However, a number of the proposed bills include
extension of insurance coverage to currently uninsured individuals and/or
include coverage of pharmaceutical costs. The Company believes the passage of a
bill which includes expansion of pharmaceutical coverage would create new
opportunities for the Company to expand its existing business. However,
proposals which legislate pharmaceutical benefit price ceilings could negatively
impact the Company's operating margins on a long-term basis.
Employees
The Company had approximately 1,400 full-time equivalent employees as of
March 31, 1995, including approximately 800 full or part time pharmacy
professionals. Approximately 170 HCS employees are subject to collective
bargaining agreements negotiated with the Service Employees International Union
(Local 36), which expire in February 1998 and the United Food and Commercial
Workers (Local 1564), which expires in July 1996. HCS has recently negotiated
with the United Food and Commercial Workers (Local 1564) a new labor contract
covering certain recently organized professional pharmacists at its Albuquerque
facility, which expires in September 1997. In addition, certain union
organizations are seeking to organize employee groups at the Company's Trenton
facility. The Company believes its relations with employees to be satisfactory.
Item 2. Properties
Diagnostek owns and occupies a 110,000 square foot building, erected during
August 1989 and expanded during fiscal 1995, at 4500 Alexander Blvd. NE,
Albuquerque, New Mexico. The Albuquerque facility houses the Company's executive
offices, a 65,000 square foot HCS dispensing facility, and discount retail store
counter. HCS also operates a mail pharmacy service facility of about 37,500
square feet from a leased facility located in Bensalem, Pennsylvania. The lease
agreement, which expires during June 1999, gives HCS the option to renew the
lease for five years. HCS also leases the former Perform headquarters; a 23,000
square feet of office space in Scottsdale, Arizona, which was sublet to an
unrelated party during fiscal year 1995. The lease and sublease agreements
expire during 1997.
HPI and DPI lease facilities in connection with their operations at eight
locations, including 24,000 square feet at its new unit-dose central-fill
facility at Trenton, New Jersey. Various other sales and administrative offices,
none of which are material, are also leased by the Company throughout the United
States. No difficulty is anticipated in negotiating any of the Company's lease
renewals.
Further information concerning the Company's obligation under lease
agreements is contained in Note 13 of the Notes to Consolidated Financial
Statements included in Part II of this report.
<PAGE>7
Item 3. Legal Proceedings
On July 11, 1994, a purported shareholder class action was filed in the
United States District Court for the District of New Mexico against Diagnostek,
its Chairman and Chief Executive Officer; General Counsel, Secretary and
Director; President; and a Vice President. The plaintiffs have named two class
representatives: Irwin Bash (allegedly owning 200 shares of Diagnostek Common
Stock) and Leykin, Hyman and Bash Associates (allegedly owning 1,000 shares of
Diagnostek Common Stock).
On July 7, 1994, Diagnostek announced that it had agreed with CIGNA that
Diagnostek's pharmacy service contracts in support of the CIGNA managed health
care plans in New Mexico and Arizona would be terminated. The agreement was
reached after Diagnostek received correspondence dated June 30, 1994 from CIGNA
giving notice of termination of the CIGNA contracts. The notice of termination
stated that the contracts were being terminated because of certain instances of
inappropriate purchases by Diagnostek of drugs (under the CIGNA contracts) from
three manufacturers, which were ultimately used for other Diagnostek customers.
These contracts, which had been awarded to Diagnostek during 1991 and 1992, had
originally been scheduled to expire at various times commencing in July 1995.
Diagnostek's revenues from the CIGNA contracts for the fiscal year ended March
31, 1994 were $80.7 million.
In their original Complaint, the plaintiffs have alleged that the named
defendants pursued a "scheme and course of conduct" to inflate Diagnostek's
reported earnings through the concealment of specific facts underlying the
termination of the CIGNA contracts. On December 30, 1994, the plaintiffs filed
their First Amended Complaint which set forth additional alleged facts in
support of the claims in the original Complaint. The defendants in their Answer
to Plaintiffs' First Amended Complaint asserted that they had taken appropriate
remedial steps to rectify the situation, believed in good faith that the matter
would be resolved and did not foresee that the contract would be terminated
since at no time during the period that Diagnostek was effecting remedial steps
did CIGNA communicate its intention to terminate the contracts. The defendants
have raised in their Answer the general defenses that they did not at any time,
deceive, manipulate or defraud the plaintiffs or any other person regarding the
CIGNA contract and that all disclosures required by law pertaining to these
contracts were made at all appropriate times by the defendants. The defendants
have also asserted, among other things, that the plaintiffs did not rely upon
any statement, act or omission of the defendants in purchasing Diagnostek Common
Stock, and that any changes in the market price of Diagnostek Common Stock were
due to factors other than the misrepresentations allegedly made by the
defendants.
On April 11, 1995, the plaintiffs filed a Second Amended Complaint alleging
that the defendants made further misrepresentations in a press release and
certain filings with the SEC regarding the anticipated annual revenues to be
received in connection with a Department of Defense CHAMPUS contract awarded in
July 1994. The Second Amended Complaint also extended the requested class period
from July 6, 1994 to March 24, 1995.
The Second Amended Complaint asserts that the defendants violated federal
securities laws (including Section 10(b) of the Securities Exchange Act of 1934,
as amended and Rule 10(b)(5) promulgated thereunder, and prohibitions on insider
trading), and that the defendants' actions constitute common law fraud and/or
negligent misrepresentation. The plaintiffs seek monetary damages for the losses
suffered as a result of the alleged misrepresentations, disgorgement of alleged
insider trading profits and an award of costs and expenses incurred in the
filing of their actions, including attorneys' fees, accountants' fees and
experts' fees.
On May 18, 1995, the defendants filed a Motion to Dismiss Plaintiffs'
Second Amended Complaint asserting that the plaintiffs' allegations regarding
the CHAMPUS contract are wholly speculative, without a factual basis and that
the additional claims were filed purely for harassment purposes. In the event
that the defendants' Motion to Dismiss Plaintiffs' Second Amended Complaint is
not successful, the defendants expect to file an Answer raising the same general
defenses that were raised in response to the First Amended Complaint.
On May 26, 1995, the plaintiffs filed a motion seeking certification of a
class consisting of all persons who purchased or otherwise acquired Diagnostek
Common Stock during the period from April 28, 1994 through March 24, 1995, but
excluding defendants and certain others associated with defendants. Defendants
are seeking discovery in order to determine whether to oppose the motion for
class certification.
Diagnostek has denied any liability and is vigorously defending the
litigation. Diagnostek has not established a reserve with respect to such
litigation. There can be no assurance that the outcome of this litigation will
not have a materially adverse effect on the Company.
<PAGE>8
Promptly after the announcement of the execution of the Merger Agreement,
11 stockholder class action lawsuits were filed in the Court of Chancery in the
State of Delaware against Diagnostek and its directors asserting that the value
of the consideration to be received by Diagnostek stockholders is unfair and
grossly inadequate and that the directors of Diagnostek breached their fiduciary
duties to Diagnostek stockholders by failing to take steps to maximize
stockholder value. The suits seek, among other things, to enjoin the Merger, to
compel the directors of Diagnostek to reconsider the Exchange Ratio and to
recover unspecified damages. Diagnostek and the individual defendants intend to
vigorously defend these claims based upon their belief that the actions of
Diagnostek and its directors in connection with the Merger Agreement were
appropriately taken under applicable law and that the Merger is fair to and in
the best interest of Diagnostek's stockholders. VHI has been named as a
defendant in certain of these actions for allegedly aiding and abetting in the
alleged breaches of fiduciary duty by the Diagnostek directors. The plaintiffs
have served a document production request upon the defendants, to which the
defendants will respond. Diagnostek has filed an Answer denying the principal
allegations of the Complaint. As of June 5, 1995, no further action has been
taken by either the plaintiffs or the defendants, although counsel representing
the plaintiff have suggested that the actions be consolidated and captioned "In
Re: Diagnostek, Inc. Shareholders Litigation".
In addition, the Commission is conducting a formal investigation into the
adequacy of Diagnostek's financial disclosures, books and records, and internal
accounting controls, particularly with respect to Diagnostek's financial
statements for the quarter ended June 30, 1992, the fiscal year ended March 31,
1992, and the fiscal year ended March 31, 1990. Diagnostek has cooperated fully
in connection with this investigation. At this time, Diagnostek is unable to
assess what the outcome of this investigation will be.
Diagnostek and its subsidiaries are subject to various claims and lawsuits
in the ordinary business, none of which is material.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
<PAGE>9
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Diagnostek's common stock has been listed on the New York Stock Exchange
under the symbol "DXK" since September 20, 1990. The price range of the common
stock over the last three years is shown in the table below:
<TABLE>
<CAPTION>
Calendar year basis
First Second Third Fourth
Quarter Quarter Quarter Quarter
<S> <C> <C> <C> <C>
1995(a):
Stock price high $21.375 $21.625 n/a n/a
Stock price low $14.500 $16.875 n/a n/a
1994:
Stock price high $22.250 $25.250 $25.750 $20.175
Stock price low $16.375 $13.875 $17.500 $12.625
1993:
Stock price high $8.375 $9.750 $16.250 $19.875
Stock price low $6.000 $6.250 $8.750 $13.875
<FN>
(a) - Second Quarter through June 5,1995
</FN>
</TABLE>
Item 6. Selected Financial Information
The following information should be read in conjunction with the
consolidated financial statements, and the accompanying notes thereto, included
elsewhere herein.
<TABLE>
<CAPTION>
(fiscal year) 1995 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
(in thousands except share data)
Income statement data:
Revenues $670,791 $485,735 $381,040 $307,509 $236,262
Operating income $ 15,764 $ 15,467 $ 6,141 $ 21,347 $ 14,585
Net earnings $ 10,984 $ 4,637 $ 2,805 $ 13,092 $ 6,885
Earnings per common share $ 0.44 $ 0.19 $ 0.12 $ 0.61 $ 0.35
Avg. number of shares outstanding 25,030 24,725 24,151 21,637 19,830
Balance sheet data:
Current assets $110,993 $ 89,805 $ 76,410 $ 72,196 $ 57,864
Total assets $266,450 $ 241,403 $ 217,462 $ 217,290 $ 117,942
Current liabilities $ 69,382 $ 58,639 $ 34,743 $ 32,148 $ 21,112
Long-term debt $ 12,000 $ 12,085 $ 18,143 $ 24,295 $ 37,179
Total liabilities $ 82,402 $ 73,769 $ 57,347 $ 59,558 $ 61,103
Stockholder's equity $ 184,048 $ 167,634 $ 160,115 $ 157,342 $ 56,302
Book value per common share $ 7.59 $ 7.01 $ 6.83 $ 6.75 $ 2.97
Financial statement ratios:
Current assets:current liabilities 1.60:1.00 1.53:1.00 2.20:1.00 2.25:1.00 2.74:1.00
LT debt: stockholders' equity 0.07:1.00 0.07:1.00 0.11:1.00 0.15:1.00 0.66:1.00
Market price per common share $ 20.38 $ 17.50 $ 7.25 $ 22.13 $ 18.63
Return on avg. common equity 6.2% 2.8% 1.81% 12.31% 13.9%
</TABLE>
The Company has not declared or paid dividends since its inception.
Note: Operations of EPIC Health Group, Inc. included from date of acquisition
(July 30, 1990)
Note: Operation of a subsidiary of Rite Aid Corporation included from date of
acquisition (September 18, 1990)
Note: Operations of Perform Cost Management Services, Inc. and Chronitech Health
Services, Inc. included from dates of acquisition (October 26 and 29, 1993,
respectively).
<PAGE>10
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>11
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>12
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.
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>13
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>14
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.
Item 8. Financial Statements and Supplementary Data
<TABLE>
<CAPTION>
Page
<S> <C>
Independent Auditors' Report 15
Consolidated Statement of Earnings for years ended March 31,
1995, 1994 and 1993 16
Consolidated Statement of Financial Position as of March 31,
1995 and 1994 17
Consolidated Statement of Cash Flows for years ended March 31,
1995, 1994 and 1993 18
Consolidated Statement of Changes in Stockholders' Equity for
years ended March 31, 1995, 1994 and 1993 19
Notes to Consolidated Financial Statements 20
</TABLE>
<PAGE>15
Independent Auditors' Report
To Stockholders and the Board of Directors
Diagnostek, Inc.
We have audited the accompanying Consolidated Statement of Financial
Position of Diagnostek, Inc. and subsidiaries as of March 31, 1995 and 1994 and
the related Consolidated Statements of Earnings, Cash Flows, and Changes in
Stockholders' Equity for each of the years in the three year period ended March
31, 1995. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Diagnostek,
Inc. and subsidiaries as of March 31, 1995 and 1994 and the results of their
operations and their cash flows for each of the years in the three year period
ended March 31, 1995 in conformity with generally accepted accounting
principles.
As discussed in note 12 to the consolidated financial statements, the
Company is a defendant in shareholder litigation alleging disclosure violations.
The ultimate outcome of the litigation cannot presently be determined.
Accordingly, no provision for any liability that may result upon adjudication
has been recognized in the accompanying consolidated financial statements.
KPMG Peat Marwick LLP
Albuquerque, New Mexico
June 5, 1995
<PAGE>16
Diagnostek, Inc. and Consolidated Subsidiaries
CONSOLIDATED STATEMENT OF EARNINGS
<TABLE>
<CAPTION>
For the years ended March 31 (in thousands) 1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Revenues (note 17) $670,791 $485,735 $381,040
Costs and expenses:
Cost of sales (note 13) 610,267 434,315 341,551
Selling and marketing 9,893 8,576 5,631
General and administrative 34,867 27,377 27,717
------- ------ ------
Total costs and expenses 655,027 470,268 374,899
------- ------- -------
Operating income 15,764 15,467 6,141
Other income (expense)
Interest income 4,198 4,605 5,282
Interest expense (2,195) (2,291) (3,069)
Merger, litigation and settlement costs (note 12) - (12,022) (6,752)
Other (note 14) 455 2,777 2,855
---- ----- -----
Earnings before minority interest and income taxes 18,222 8,536 4,457
Minority interest in (earnings) losses of partnerships - (36) 153
-------- ---- ---
Earnings before income taxes 18,222 8,500 4,610
Provision for income taxes (note 11) 7,238 3,863 1,805
------- ----- -----
Net earnings $10,984 $4,637 $2,805
======= ====== ======
Share data (in dollars or thousands of shares):
Weighted average common and common equivalent
shares outstanding 25,030 24,725 24,151
Net earnings per share $0.44 $0.19 $0.12
</TABLE>
Notes to the consolidated financial statements are an integral part of this
statement.
<PAGE>17
Diagnostek, Inc. and Consolidated Subsidiaries
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
<TABLE>
<CAPTION>
As of March 31 (in thousands, except for share amounts) 1995 1994
---- ----
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 4,149 $ 8,012
Trade receivables - net (note 4) 55,984 42,577
Other receivables 13,593 6,604
Inventories 28,966 24,687
Deferred income taxes (note 11) 6,514 7,123
Other assets - current 1,787 802
----- ---
Total current assets 110,993 89,805
Property, plant and equipment - net (note 5) 22,951 17,750
Goodwill - net (note 6) 62,299 62,197
Other intangible assets - net (note 6) 1,843 2,228
Marketable securities - net (note 7) 59,176 59,428
Deferred income taxes (note 11) 3,263 4,824
Other assets - not current (note 8) 5,925 5,171
----- -----
Total assets $266,450 $241,403
======== ========
Liabilities and stockholders' equity Current Liabilities:
Current portion of long-term debt (note 9) $10,337 $6,564
Accounts payable 42,616 31,705
Employee compensation and benefits 3,673 3,441
Income taxes payable (note 11) 47 84
Accrued contract losses (note 13) 9,621 -
Accrued litigation settlement (note 12) - 11,000
Other liabilities - current 3,088 5,845
----- -----
Total current liabilities 69,382 58,639
Long-term debt, excluding current portion (note 9) 12,000 12,085
Other liabilities - not current 1,020 3,045
----- -----
Total liabilities 82,402 73,769
------ ------
Stockholders' equity (notes 2, 7 and 10):
Preferred stock, $1.00 par value authorized 5,000,000
shares. None issued or outstanding - -
Common stock, $.01 par value, authorized 45,000,000 shares, with
issued shares of 24,389,942 at March 31, 1995
and 24,065,917 at March 31, 1994 244 241
Paid-in capital in excess of par value 137,742 132,346
Less: Treasury stock at cost, 132,196 shares at March 31, 1995
and 168,726 at March 31, 1994 (1,297) (1,592)
Unrealized gain (loss) on marketable securities
net of deferred income taxes (benefit) of ($1,570)
at March 31, 1995 and ($1,395) at March 31, 1994 (2,358) (2,094)
Retained earnings 49,717 38,733
------ ------
Total stockholders' equity 184,048 167,634
------- -------
Total liabilities and stockholders' equity $266,450 $241,403
======== ========
Commitments and contingencies (notes 12 and 13)
</TABLE>
Notes to the consolidated financial statements are an integral part of this
statement.
<PAGE>18
Diagnostek, Inc. and Consolidated Subsidiaries
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
For the years ended March 31 (in thousands) 1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $10,984 $4,637 $2,805
Adjustments to reconcile net earnings to cash provided by
operating activities:
Depreciation and amortization 5,594 4,310 4,889
Provision for doubtful accounts 1,865 1,575 6,137
(Gain) loss on sales of securities (416) (2,565) (2,611)
Deferred income taxes 1,479 (4,034) (2,324)
Decrease (increase) in trade receivables (15,273) (2,697) (2,048)
Decrease (increase) in inventories (4,279) 587 (6,751)
Decrease (increase) in other assets - current (7,974) (1,946) 4,322
Decrease (increase) in other assets - not current (1,284) (158) (310)
Increase (decrease) in accounts payable 10,911 5,332 (1,796)
Increase (decrease) in employee compensation and benefits 232 478 1,019
Increase (decrease) in income taxes payable (37) 3,666 (1,704)
Increase (decrease) in other liabilities - current (1,290) 7,792 4,887
Increase (decrease) in other liabilities - not current (1,857) (895) 861
Other operating activities (286) - (390)
------- ------ -----
Cash provided (used) by operating activities (1,631) 16,082 6,986
------- ------ -----
Cash flows from investing activities:
Purchase of marketable securities (6,996) (158,982) (242,675)
Proceeds from sales of marketable securities 7,975 182,606 246,022
Additions to property, plant, and equipment (9,086) (5,425) (1,976)
Acquisitions accounted for as purchases - (29,474) -
All other investing activities - - 1,690
------- ------ -----
Cash provided (used) by investing activities (8,107) (11,275) 3,061
------ ------- -----
Cash flows from financing activities:
Proceeds from issuance of common stock 2,032 1,606 653
Purchase of treasury stock - - (1,592)
Proceeds from debt 22,000 - -
Repayments of debt (18,157) (6,764) (6,914)
------- ------ ------
Cash provided (used) by financing activities 5,875 (5,158) (7,853)
----- ------ ------
Increase (decrease) in cash and equivalents during year (3,863) (351) 2,194
Cash and equivalents at beginning of year 8,012 8,363 6,169
----- ----- -----
Cash and equivalents at end of year $4,149 $8,012 $8,363
====== ====== ======
Supplemental disclosure of cash flow information:
Cash paid during year for interest $2,351 $2,498 $3,188
Cash paid during year for income taxes $5,651 $4,660 $5,668
Non cash financing and investing activities:
Common stock issued in litigation settlement (note 12) $3,000 - -
Common stock issued in acquisitions (note 3) $ 662 $2,037 -
Summary of assets and liabilities acquired through
acquisition (note 3):
Cash $1,079
Trade accounts receivable, net 8,219
Equipment and leasehold improvements 1,712
Goodwill 28,300
Deferred tax asset 5,769
Other assets 315
Accounts payable (8,661)
Long-term debt (499)
Other liabilities (4,815)
------
Net assets (liabilities) acquired $31,419
=======
</TABLE>
Notes to the consolidated financial statements are an integral part of this
statement.
<PAGE>19
Diagnostek, Inc. and Consolidated Subsidiaries
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY For
the years ended March 31, 1995, 1994, and 1993 (in thousands)
<TABLE>
<CAPTION>
Paid- in Unrealized
capital gain(loss) on
Common Stock in excess Treasury marketable Retained
Shares Amount of par stock securities earnings Total
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1992 23,301 $233 $126,238 $- $(420) $31,291 $157,342
Issuance of common stock:
Warrants 90 1 269 - - - 270
Options (including income tax
benefits of $362 resulting
from exercise of certain
options) 51 - 745 - - - 745
Purchase of treasury stock - - - (1,592) - - (1,592)
Allowance for unrealized gains
(losses) on marketable
securities - - - - 545 - 545
Net earnings - - - - - 2,805 2,805
------ ---- -------- ------- ------- ------- --------
Balance at March 31, 1993 23,442 234 127,252 (1,592) 125 34,096 160,115
Issuance of common stock:
In acquisition 133 2 2,035 - - - 2,037
Options (including income tax
benefits of $1,458 resulting
from exercise of certain
options) 491 5 3,059 - - - 3,064
Allowance for unrealized gains
(losses) on marketable
securities - - - - (2,219) - (2,219)
Net earnings - - - - - 4,637 4,637
------ ---- -------- ------- ------ ------- --------
Balance at March 31, 1994 24,066 241 132,346 (1,592) (2,094) 38,733 167,634
Issuance of common stock:
In acquisition of Springfield
Diagnostek Imaging Center
(note 3) - - 267 395 - - 662
In litigation settlement
(note 14) 138 1 2,999 - - - 3,000
Options (including income tax
benefits of $942 resulting
from exercise of certain
options) 186 2 2,130 - - - 2,132
Purchase of treasury stock - - - (100) - - (100)
Allowance for unrealized gains
(losses) on marketable
securities - - - - (264) - (264)
Net earnings - - - - - 10,984 10,984
------ ---- -------- ------- ------- ------- --------
Balance at March 31, 1995 24,390 $244 $137,742 $(1,297) $(2,358) $49,717 $184,048
====== ==== ======== ======= ======= ======= ========
</TABLE>
Notes to the consolidated financial statements are an integral part of this
statement.
<PAGE>20
Diagnostek, Inc. and Consolidated Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 Summary of Significant Accounting Policies
Consolidation
The consolidated financial statements represent the adding together of all
companies of which Diagnostek, Inc. (the "Company" or "Diagnostek"), directly or
indirectly has majority ownership. Significant intercompany accounts and
transactions have been eliminated.
The Company's consolidated financial statements include the accounts of its
wholly-owned subsidiaries, Health Care Services, Inc. ("HCS"), HPI Health Care
Services, Inc. ("HPI"), and Diagnostek Pharmacy, Inc. ("DPI"), together with
their subsidiaries, and other controlled affiliates.
The Company participates in the pharmacy benefit management industry with
principal business activities being the providing of prescription drugs through
mail and retail pharmacy service plans, providing contract pharmacy management
services to acute care hospitals and HMO's, and operating, managing, and
providing medical imaging and diagnostic equipment.
Reclassifications
Certain prior period amounts have been reclassified to conform with the
1995 basis of presentation. Amounts reclassified had no impact on consolidated
or segment operating income or earnings.
Revenue and cost of sales
Sales of goods and services are recorded on medication dispensing or
passage of title to customers in accordance with contractual terms. Cost of
sales are recorded based on the cost of pharmaceuticals dispensed, net of
related rebates and discounts, and related direct costs. In addition, the
Company accrues costs associated with its risk/reward contracts which it
estimates will not be recovered through projected revenues.
Cash and cash equivalents
Money market accounts and temporary investments with original maturities of
ninety days or less are included in cash and cash equivalents.
Inventories
Inventories, consisting primarily of prescription medications purchased for
resale, are stated at the lower of cost, on a first-in, first-out basis, or
market.
Property, plant, and equipment
Property, plant, and equipment are stated at cost. Provisions for
depreciation are recorded using both straight-line and accelerated methods over
the useful lives of the respective assets. Leasehold improvements are amortized
on a straight-line basis over the shorter of economic life or terms of the
respective leases.
Intangible assets
Goodwill is amortized using the straight-line method, over fifteen to forty
years. Other intangible assets consist primarily of acquired contract rights and
covenants not to compete and are amortized on a straight-line basis over periods
ranging from three to twelve years.
The Company evaluates the recoverability of goodwill based on estimated
undiscounted operating income over the goodwill amortization periods, giving
consideration to sales and cost benefits expected to be realized by the
consolidated group from the acquisition of the acquired company. The Company
also evaluates industry trends and historical trends of the acquired companies,
the potential impact of pending and proposed regulations and the effect of
competition.
Marketable securities
The Company accounts for marketable securities utilizing Financial
Accounting Standards Board Statement of Financial Accounting Standards No. 115
"Accounting for Certain Investments in Debt and Equity Securities". All
marketable securities at March 31, 1995 and 1994 were deemed by management to be
available for sale and therefore are reported at fair value with net unrealized
gains(losses) reported in stockholders' equity.
<PAGE>21
Income taxes
Diagnostek utilizes the asset and liability method for recording deferred
income taxes, which provides for establishment of deferred tax asset or
liability accounts based on the difference between tax and financial reporting
bases of certain assets and liabilities.
Treasury stock
Treasury stock is carried at acquisition cost (market price at acquisition
date).
Earnings per common and common equivalent share
Earnings per common and common equivalent share is computed on the weighted
average number of common shares, less treasury stock, and, if dilutive, common
equivalent shares (common shares assuming exercise of all options and warrants)
outstanding during the period. For the years ended March 31, 1995, 1994 and
1993, approximately 0.9 million, 1.1 million, and 0.8 million common equivalent
shares, respectively, were included in the computation of weighted average
shares. Fully diluted earnings per share is not materially different than
primary earnings per share and has not been presented.
Note 2 Merger
On March 27, 1995, the Company entered into a definitive Agreement and Plan
of Merger (the "Merger Agreement") with Value Health, Inc. ("VHI"), a New York
Stock Exchange company that provides specialized managed care programs including
pharmacy benefit management services, and VHI Merger-Sub. Corp., a wholly-owned
subsidiary of VHI pursuant to which the Company will become a wholly-owned
subsidiary of VHI (the "Merger"). It is intended that the Merger will qualify as
a pooling of interests for accounting purposes and will constitute a tax-free
reorganization for federal income tax purposes. In accordance with the terms and
conditions of the Merger Agreement, as amended, each share of the Company's
common stock (and outstanding common stock options) will be converted into
common stock (and common stock options) of VHI at an exchange ratio of 0.4975.
In connection with the Merger Agreement, the Company's Chairman of the Board and
Chief Executive Officer has entered into a five year consulting agreement and a
ten year agreement not to compete with VHI and the Company, effective only upon
the consummation of the Merger. At March 31, 1995, approximately $0.5 million of
costs associated with the Merger had been deferred.
Consummation of the Merger is subject to satisfaction of certain
conditions, including approval by shareholders of each of the companies and
treatment as a pooling of interests for accounting purposes. In the event of
termination under specified conditions, VHI may be entitled to receive a fee of
$15 million from the Company.
As a result of the announcement of the execution of the Merger Agreement, a
number of shareholder lawsuits were filed against the Company, its directors and
VHI (note 12).
Note 3 Acquisitions
During 1995 the Company purchased substantially all of the remaining
outside ownership (72 partnership units or approximately 62%) of Springfield
Diagnostek Imaging Center ("SDIC") from approximately 50 individuals in exchange
for 43,200 shares (valued at approximately $662,000) of Company common stock
held by the Company as treasury stock. SDIC is part of the Company's original
medical imaging business. The transaction was accounted for using the purchase
method of accounting and resulted in goodwill of approximately $662,000 which is
being amortized over a period of 22 years. The proforma results of operations
for 1995 and 1994 reflecting the acquisition of SDIC would be substantiality the
same as the Company's historical results.
On October 29, 1993, Diagnostek acquired Perform Cost Management Services,
Inc., ("Perform"), a processor of prescription drug claims and provider of
prescription drug benefit management programs through the purchase of all
outstanding voting, non-voting and preferred shares of Perform. The purchase
price for all outstanding shares and shares issued under stock option agreements
was approximately $19.8 million, including $1.0 million placed in escrow for a
two-year period as the sellers' guarantee of specified representations and
warranties. In addition, the Company purchased a note payable to an affiliate of
the seller for $6.0 million and entered into a non-compete agreement with the
sellers for $0.5 million. The acquisition was recorded using the purchase method
of accounting with resulting goodwill of approximately $23.0 million which is
being amortized over a period of 40 years.
<PAGE>22
On October 26, 1993, Diagnostek acquired by assignment the prescription
drug and supply contracts held by Chronitech Health Services, Inc. and its
subsidiaries ("Chronitech"), a provider of specialty pharmacy, home care
medication and infusion services to the HIV and AIDS market, together with
certain assets related thereto, including accounts receivable, inventory,
equipment, leases, trade names and symbols along with approximately $350,000 of
liabilities. The purchase price was $3.2 million in cash and 132,500 shares of
common stock, valued at $2,037,000. The acquisition was accounted for using the
purchase method of accounting with resulting goodwill of approximately $5.3
million which is being amortized over a period of 15 years.
Note 4 Trade receivables
Trade receivables are summarized by business segment as follows:
<TABLE>
<CAPTION>
As of March 31,
(in thousands) 1995 1994
---- ----
<S> <C> <C>
Integrated pharmacy service $47,105 $32,343
Managed care pharmacy service 11,507 12,622
Medical imaging 859 886
-------- -------
Total 59,471 45,851
Less: allowance for uncollectible accounts (3,487) (3,274)
-------- --------
Total $55,984 $42,577
======= =======
</TABLE>
Note 5 Property, plant, and equipment
Property, plant, and equipment are summarized as follows:
<TABLE>
<CAPTION>
As of March 31,
(in thousands) 1995 1994
---- ----
<S> <C> <C>
Land $ 1,871 $ 1,963
Buildings 6,471 5,858
Equipment 19,858 14,383
Furniture and fixtures 2,553 1,343
Leasehold improvements 5,268 4,828
------ --------
36,021 28,375
Less: accumulated depreciation and amortization (13,070) (10,625)
--------- --------
Total $ 22,951 $17,750
======== =======
</TABLE>
Note 6 Goodwill and other intangible assets
Goodwill and other intangible assets are summarized as follows:
<TABLE>
<CAPTION>
As of March 31,
(in thousands) 1995 1994
---- ----
<S> <C> <C>
Goodwill $ 68,292 $66,333
Less: accumulated amortization (5,993) (4,136)
--------- -------
Total $ 62,299 $62,197
======== =======
Other intangible assets $ 4,356 $ 4,371
Less: accumulated amortization (2,513) (2,143)
--------- -------
Total $ 1,843 $ 2,228
========= =======
</TABLE>
<PAGE>23
Note 7 Marketable securities
Marketable securities are summarized as follows:
<TABLE>
<CAPTION>
As of March 31, 1995 As of March 31, 1994
-------------------- --------------------
Cost Market Cost Market
(in thousands) Basis Value Basis Value
<S> <C> <C> <C> <C>
Equity securities:
Mutual funds $ 361 $ 354 $ 383 $ 379
Other 1,300 1,050 - -
Debt securities:
Corporate bonds 28,449 26,528 27,786 25,883
U.S. government and government
agency securities 23,123 21,702 21,512 20,385
Municipal securities 9,871 9,542 13,236 12,781
-------- ------- ------- ------
Total 63,104 $59,176 62,917 $59,428
======= =======
Allowance for unrealized gains (losses) (3,928) (3,489)
-------- --------
Total $59,176 $59,428
======= =======
</TABLE>
At March 31, 1995, scheduled maturities of marketable debt securities are
as follows: one to five years, $28,622,000; five to ten years, $25,709,000; ten
to fifteen years, $5,597,000; and over fifteen years, $1,516,000.
Unrealized gains and losses by security classification are as follows:
<TABLE>
<CAPTION>
As of March 31, 1995 As of March 31, 1994
-------------------- --------------------
Unrealized Unrealized
(in thousands) Gains Losses Net Gains Losses Net
<S> <C> <C> <C> <C> <C> <C>
Equity securities:
Mutual funds $ - $ 7 $ (7) $ - $ 4 $ (4)
Other - 250 (250) - - -
Debt Securities:
Corporate bonds - 1,921 (1,921) - 1,903 (1,903)
U.S. Government and
government agency
securities - 1,421 (1,421) - 1,127 (1,127)
Municipal securities - 329 (329) - 455 ( 455)
------ ------ ------ ------ ------ ------
Total $ - $3,928 ($3,928) $ - $3,489 ($3,489)
===== ====== ======= ======== ====== =======
</TABLE>
Note 8 Other assets - not current
Other assets - not current include notes receivable from officers and
directors of approximately $2.9 million and $3.0 million at March 31, 1995 and
1994, respectively. Of such notes $0.7 million bear 7.5% interest, payable
annually, with principal amounts due during 2000. A note for $2.2 million is
payable in monthly installments, including interest at 7.5%, with final payments
due during December 2021.
<PAGE>24
Note 9 Debt
Debt is summarized as follows:
<TABLE>
<CAPTION>
As of March 31,
(in thousands) 1995 1994
---- ----
<S> <C> <C>
Note payable to insurance company in annual
installments of $6,000 from December 1992
through December 1996, at interest rate of 10.02%. $12,000 $18,000
Bank line of credit 10,000 -
Interest payable on debt 337 492
Other - 157
-------- --------
Total 22,337 18,649
Less: current portion (10,337) (6,564)
-------- --------
Long term debt, excluding current portion $ 12,000 $12,085
======== =======
</TABLE>
Interest on the note payable is due semi-annually. The note payable to the
insurance company contains various restrictive provisions and covenants
including the maintenance of certain minimum financial ratios and restrictions
related to the payment of dividends. The Company was in compliance with or
obtained waivers on restrictive covenants at March 31, 1995.
A $25 million revolving credit line with Bank of America Illinois NA was
established by the Company in December 1994. The agreement has a two year term,
with two one year renewal periods and requires a 0.25% annual facility fee as
well as compliance with certain financial covenants, all of which the Company
complied with at March 31, 1995. Borrowings under the agreement require interest
at rates equal to the prime rate or 0.375% over LIBOR, at the Company's option.
$6.0 million of borrowings under the line of credit have been classified as
non-current liabilities at March 31, 1995.
Scheduled maturities of the Company's debt are as follows (in thousands):
<TABLE>
<CAPTION>
Year ended March 31 Amount
------------------- ------
<S> <C>
1996 $ 10,337
1997 12,000
---------
Total $22,337
=======
</TABLE>
Note 10 Stockholders' Equity
The Company has stock option plans under which both incentive and
non-qualified options have been granted. The terminated 1983 Plan allowed for
the purchase of up to 2,000,000 shares of which substantially all options have
been granted. The 1991 Plan, as amended during 1994, permits the granting of
options for the purchase of up to 1,950,000 shares. Exercise prices for
non-qualified options may be less than market price.
All stock options have been granted to employees and non-employees at
exercise prices equal to market value on the date of each grant.
Information concerning the Company's stock options is as follows:
<TABLE>
<CAPTION>
Stock options Year ended March 31,
------------- -------------------------------------
(in thousands, except exercise prices) 1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Options outstanding:
Number 2,627 2,357 2,361
Exercise price $1.25-$24.75 $1.25-$24.75 $1.00-$24.75
Options exercisable 1,859 1,845 1,555
Options exercised:
Number 186 491 51
Exercise price $1.25-$16.00 $1.00-$ 8.25 $1.85-$13.63
</TABLE>
<PAGE>25
On December 31, 1992, the Board of Directors declared a dividend
distribution of one preferred share purchase right ("Rights") for each
outstanding share of the Company's common stock. Rights are exercisable ten days
after a person, or group of affiliated persons, acquire, or initiate a tender
offer for 20% or more of the outstanding common stock of the Company, or the
Board of Directors of the Company determine that a person or group of affiliated
persons are an Adverse Person as defined in the Rights Agreement. Upon exercise,
the issued shares will have a market value equal to twice the exercise price. If
the Company is involved in a merger or other business combination at any time
after the Rights become exercisable, the Rights will be modified so as to
entitle a holder to buy a number of shares of common stock of the surviving
company having a market value of twice the exercise price of each Right. The
Rights expire on December 31, 2002, unless redeemed by the Company at a price of
$.01 per Right, according to the terms and definitions of the Rights Agreement.
Until exercised, the Rights do not entitle the holder to any rights as a
shareholder including the right to vote or receive dividends.
Note 11 Income taxes
Elements of income tax expense (benefit), are as follows:
<TABLE>
<CAPTION>
Fiscal year ended March 31,
(in thousands) 1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Current:
Federal $4,556 $6,164 $3,275
State 1,203 1,733 854
------- ------- -------
5,759 7,897 4,129
------- ------- -------
Deferred:
Federal 1,052 (2,972) (1,839)
State 427 (1,062) (485)
------- ------- -------
1,479 (4,034) (2,324)
------- ------- -------
Total $7,238 $3,863 $1,805
====== ====== ======
</TABLE>
Reconciliation of the Company's actual tax rate to the U.S. Federal
statutory rate is as follows:
<TABLE>
<CAPTION>
Fiscal year ended March 31,
(Rates in percents) 1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Statutory U.S. Federal rate 35.0% 34.0% 34.0%
Litigation settlement - 6.0 -
State taxes, net of federal benefit 5.9 5.2 5.0
Other - net (1.2) 0.2 0.2
------- ------- -------
39.7% 45.4% 39.2%
===== ===== =====
</TABLE>
Elements of deferred income tax assets (liabilities) are as follows:
<TABLE>
<CAPTION>
As of March 31,
(in thousands) 1995 1994
---- ----
<S> <C> <C>
Depreciation and amortization ($3,743) ($3,536)
Allowance for uncollectible accounts 1,788 1,925
Accrued expenses 912 5,072
Accrued contract losses 3,752 -
Benefit of net operating loss carryforwards 4,363 5,821
Unrealized (gains) losses on marketable securities 1,570 1,395
Start up costs 298 525
Other items 837 745
------- --------
Total $ 9,777 $11,947
======== =======
</TABLE>
Deferred tax assets include benefits estimated to be realized from the
utilization of net operating loss carryforwards of $12.5 million, which expire
in 2008. Tax benefits from the tax loss carryforwards, which were obtained in
the acquisition of Perform (note 3) have been recorded as a reduction of
goodwill. Management believes that it is more likely than not that the results
of future operations will generate sufficient taxable income to realize the
deferred tax assets.
<PAGE>26
Note 12 Legal proceedings and settlement costs
The Securities and Exchange Commission notified the Company in 1993 that it
was conducting a formal inquiry into the adequacy of the Company's financial
disclosures and internal accounting controls. Diagnostek continues to cooperate
fully in connection with this inquiry.
On July 15,1994, the Company became aware of a lawsuit against it and
several officers seeking Class Action status by two purported shareholders of
the Company. The complaint and its subsequent amendments alleges disclosure
violations in connection with the early termination of the Company's largest
pharmacy management service contracts, purported concealed purchasing practices
which allegedly allowed the Company to report lower costs and higher profits,
and allegations related to the Company's mail service contract with the
Department of Defense. Plaintiffs purport to represent a class of persons who
purchased or otherwise acquired the Company's common stock from April 28, 1994
to March 24, 1995. The Company has denied any liability and intends to
vigorously defend the action, although the ultimate outcome of the litigation
cannot presently be determined.
In late March 1995, eleven purported class action lawsuits were filed
against the Company, its Directors and VHI seeking to enjoin the Company from
consummating its previously announced merger with VHI (note 2). The lawsuits
allege breach of fiduciary responsibility by the Company's Directors in
approving the merger and other damages. The Company believes there is no merit
to the suits and will vigorously defend the action.
During August 1992, Diagnostek entered into a definitive merger agreement
with Medco Containment Services, Inc. ("Medco"). On November 12, 1992, Medco
terminated the merger agreement, and the Company initiated litigation. Medco
filed a counterclaim, alleging generally that the Company had breached certain
representations and warranties in the merger agreement giving rise to Medco's
termination of the agreement. On March 29, 1993, Diagnostek and Medco agreed to
settle the pending litigation, with neither party admitting to asserted
allegations, in exchange for a payment to Medco from the Company of $3.0
million. The Company's decision to pay the settlement amount was in part based
upon the Company's assessment of the likely ongoing costs and expenses
associated with protracted litigation, its belief that ongoing litigation would
have diverted management's full attention from the Company's daily operations
and the concern that the litigation would have been disruptive to the Company's
customer relationships.
In addition during fiscal 1993, thirteen lawsuits were initiated against
the Company, certain current and former officers, and certain directors on
behalf of a class of purchasers of the Company's common stock, asserting damages
resulting from an alleged inflation of the Company's stock price. In March 1994,
the Company entered into a Stipulation of Settlement, pursuant to which it
agreed to settle the thirteen consolidated shareholder class action lawsuits.
The settlement consisted of the payment of $8.0 million by the Company, which
was funded into an escrow account in May 1994, the payment of $5.0 million by
the insurance company which provides directors and officers liability insurance
to the Company and its officers and directors, and the issuance of $3.0 million
of the Company's common stock (137,510 shares). The settlement did not
constitute an admission by the Company and its officers and directors of any
fault, liability or wrongdoing. Such amounts were recorded as accrued litigation
settlement in the Company's statement of financial condition at March 31, 1994.
Costs related to the proposed Medco merger, resultant litigation, and
settlement are as follows:
<TABLE>
<CAPTION>
Fiscal years ended March 31
(in thousands) 1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Shareholder settlement $ - $11 ,000 $ -
Medco settlement - - 3,000
Litigation costs - 1,022 3,752
------- ------ ------
Total $ - $12,022 $6,752
======= ======= ======
</TABLE>
There are extensive state and Federal regulations applicable to the
practice of pharmacy and, since sanctions may be imposed for violations,
compliance is a significant operational requirement for the Company. Management
believes that the Company and its subsidiaries are in substantial compliance
with all existing statutes and regulations materially affecting the conduct of
its business. Various federal and state pharmacy associations and some boards of
pharmacy have attempted to promote laws or regulations directed at restricting
the activities of mail service pharmacies, to the economic benefit of retail
pharmacies. In addition, a number of states have laws or regulations which, if
successfully enforced, would effectively limit some of the financial incentives
available to third-party payors that offer managed care prescription drug
programs. To the extent such laws or regulations are found to be applicable to
the
<PAGE>27
Company, there is no assurance the Company could comply, and noncompliance could
adversely affect the Company's integrated pharmacy service programs.
Diagnostek and its subsidiaries are subject to various claims and lawsuits
in the ordinary course of business, none of which is material.
Note 13 Commitments and contingencies
Loss contract
On February 1, 1995, the Company's HPI subsidiary began performing under a
contract with the State of New Jersey to provide unit dose medications to the
state's hospital system. The Company has estimated that it will incur losses
over the three year term of the contract and, in addition to losses incurred
through March 31, 1995, has accrued $9,621,000 at March 31, 1995 and included
such amounts in cost of sales in its Consolidated Statement of Earnings.
Rent, operating leases, and related contingent income
Diagnostek utilizes leased facilities and equipment under non-cancelable
operating leases expiring at various dates through 2002. Certain leases contain
renewal and or escalation clauses. Leased medical diagnostic equipment was
subleased to third parties on a fee per procedure remuneration basis. All such
sublease agreements had expired at March 31, 1995.
Total rent expense for operating leases, sublease and rental income, and
contingent rental income are summarized as follows:
<TABLE>
<CAPTION>
Fiscal years ended March 31,
(in thousands) 1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Rent expense $4,461 $3,707 $4,544
Sublease and rental income 667 1,305 3,304
Contingent rental income - 644 2,643
</TABLE>
Lease commitments for the next five years (in thousands) are summarized as
follows:
<TABLE>
<CAPTION>
Years ended March 31: Amount
<S> <C>
1996 $2,869
1997 2,498
1998 2,074
1999 1,547
2000 641
Thereafter 489
</TABLE>
Retirement savings plan
Substantially all of the Company's employees are covered by a defined
contribution plan. In addition, certain union member employees are covered under
both multi-employer defined benefit and multi-employer defined contribution
plans. Contributions by Diagnostek to these plans are not material.
Note 14 Other income
Other income includes realized gains and losses arising from marketable
securities transactions calculated on a first-in first-out basis and other
miscellaneous non-operating events as follows:
<TABLE>
<CAPTION>
Fiscal years ended March 31,
(in thousands) 1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Gains on marketable securities $ 550 $3,077 $3,823
Losses on marketable securities (134) (512) (1,212)
Other 39 212 244
------- ------- -------
Total $ 455 $2,777 $2,855
====== ====== ======
</TABLE>
<PAGE>28
Note 15 - Related party transactions
During fiscal 1994, the Company sold 54,000 shares of CAPX Corporation, a
company whose founder, principal stockholders and officers had previously
included the Chairman and Chief Executive Officer and the Executive Vice
President and General Counsel of the Company. The sale resulted in a net gain of
approximately $252,000.
The Company utilizes the legal services of firms whose partners include a
director of the Company. Legal fees to the firms totaled approximately $952,000,
$687,000 and $2,193,000 during the years ended March 31, 1995, 1994 and 1993,
respectively.
Note 16 - Financial instruments
The carrying amount of cash and cash equivalents, accounts receivables,
accounts payable and borrowings under line of credit approximate fair value due
to the short maturity periods of these instruments, as do notes receivable from
officers and directors. The fair value of marketable securities is based on
quoted market prices (note 7).
The fair value of the Company's debt with an insurance company (note 9) is
based on the present value of the cash flows from that debt, assuming interest
rates of 8.65% and 7.75% at March 31, 1995 and 1994, respectively. Fair market
value of this debt was approximately $12,176,000 and $18,620,000 at March 31,
1995 and 1994, respectively.
Note 17 Business segment information
Financial information related to the Company's business segments and
significant customers for the years ended March 31, 1995, 1994, and 1993, are
summarized (in thousands) as follows.
<TABLE>
<CAPTION>
Depreciation Property,
and plant and
Operating Operating amortization equipment Identifiable
Segment revenues income expense additions assets
<S> <C> <C> <C> <C> <C>
1995:
Integrated pharmacy services $540,070 $28,677 $3,346 $2,371 $138,976
Managed care pharmacy
services 125,649 (2,691) 1,435 3,188 37,498
Corporate and other 5,072 (10,222) 813 3,698 89,976
-------- ------- -------- ------- -------
$670,791 $15,764 $5,594 $9,257 $266,450
======== ======= ====== ====== ========
1994:
Integrated pharmacy services $326,420 $15,073 $2,848 $1,090 $119,846
Managed care pharmacy
services 153,461 9,248 977 571 30,489
Corporate and other 5,854 (8,854) 485 3,764 91,068
-------- ------- -------- ------- -------
$485,735 $15,467 $4,310 $5,425 $241,403
======== ======= ====== ====== ========
1993:
Integrated pharmacy services $240,502 $4,033 $2,365 $ 668 $ 84,471
Managed care pharmacy
services 132,862 6,535 1,665 964 25,310
Corporate and other 7,676 (4,427) 859 344 107,681
-------- ------- -------- ------- -------
$381,040 $6,141 $4,889 $1,976 $217,462
======== ====== ====== ====== ========
</TABLE>
Total revenues from contracts with two affiliated customers (contracts
terminated during September 1994) represented 6%, 17%, and 16% of the Company's
consolidated revenues during fiscal 1995, 1994 and 1993, respectively.
<PAGE>29
Note 18 Quarterly Operating results (Unaudited)
Financial information related to quarterly earnings of Diagnostek for the
last two fiscal years ended March 31 is summarized below (in thousands):
<TABLE>
<CAPTION>
First Second Third Fourth
quarter quarter quarter quarter
<S> <C> <C> <C> <C>
1995:
Revenues $166,527 $169,424 $158,547 $176,293
Operating income 6,582 6,567 7,225 (4,610)
Net earnings 4,187 4,472 5,005 (2,680)
Earnings per share $0.17 $0.18 $0.20 ($0.11)
1994:
Revenues $96,121 $97,875 $130,886 $160,853
Operating income 3,273 2,844 3,781 5,569
Net earnings 2,517 2,905 2,979 (3,764)
Earnings per share (1) $0.11 $ 0.12 $ 0.12 ($0.15)
<FN>
(1)Earnings per share for four quarters does not agree to fiscal year earnings due to rounding
</FN>
</TABLE>
<PAGE>30
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant
Directors
The Company's Board of Directors is divided into three classes serving
staggered three-year terms, the term of one class of directors to expire each
year upon the Company's annual meeting and election of directors. The directors'
terms of office, together with certain information about them, are as follows:
<TABLE>
<CAPTION>
Has Been A
Director Term Present Position
Name Age Since Expires With the Company
<S> <C> <C> <C> <C>
Class I Directors
Miles M. Stuchin 41 1984 1995 Director
E. Gerald Riesenbach 56 1990 1995 Director
Class II Directors
Julius Golden 66 1983 1996 Director
David G. Devereaux 51 1993 1996 Director
Class III Directors
Nunzio P. DeSantis 44 1983 1997 Chief Executive Officer
and Chairman of the Board
Courtlandt G. Miller 43 1985 1997 Director, Executive Vice
President, General Counsel and
Secretary
</TABLE>
Set forth below is a biographical description of each director of the
Company:
Miles M. Stuchin has been the President of The Charter Capital Group, a
private investment firm engaged in venture capital and real estate investment,
and the President of Access Capital, Inc., a commercial finance company, for
more than the past five years.
E. Gerald Riesenbach has been a partner of Cozen and O'Connor, the
Company's general counsel, since February 1995 and for more than five years
prior thereto was a partner of Wolf, Block, Schorr and Solis-Cohen, which, prior
to February 1995 was the Company's general counsel. Mr. Riesenbach is a director
of Kleinert's, Inc., an infants' and children's apparel company and Scott Mills,
Inc., a textile manufacturer.
Julius Golden has been the President of Group West Advertising Public
Relations, Inc. for more than the past five years.
David G. Devereaux has been a Senior Vice President for MetraHealth since
March 1995. From November 1993 to March 1995 he was President of Devereaux &
Associates, a health care consulting company. Prior thereto Mr. Devereaux served
more than 30 years in a variety of positions with CIGNA Corp., last serving as
President of the Western Region for CIGNA Healthcare.
<PAGE>31
Nunzio P. DeSantis, the Company's founder, has been Chief Executive Officer
of the Company since its inception in 1983, and Chairman of the Board since
March 1985. Mr. DeSantis also served as President from May 1989 to January 1994.
Mr. DeSantis is a founder and, from May 1989 to June 1994, served as Chairman of
the Board of CAPX Corporation, a financial services company. Mr. DeSantis also
served as Chairman of the Board of Health Image Media, Inc., a development stage
company, from March 1992 to June 1994. Mr. DeSantis is a Board Certified Nuclear
Pharmacist and a member of the American Pharmaceutical Association and the
Society of Nuclear Medicine.
Courtlandt G. Miller has been General Counsel and Secretary of the Company
since 1987 and an Executive Vice President since February 1988. Mr. Miller is a
co-founder, and from May 1989 to July 1994, served as Director, Secretary and
Treasurer of CAPX Corporation. He has served as Secretary and a director of
Health Image Media, Inc. since March 1992 and as its Treasurer since June 1993.
Executive Officers of the Company
The executive officers of the Company are:
<TABLE>
<CAPTION>
Name Age Position with the Company
<S> <C> <C>
Nunzio P. DeSantis 44 Chief Executive Officer and
Chairman of the Board
William A. Barron 46 President and Chief Operating Officer
Andrew P. Masetti 38 Executive Vice President and
Chief Financial Officer
Courtlandt G. Miller 43 Executive Vice President,
General Counsel and Secretary
Arthur C. Solomon 48 Executive Vice President and
Managed Care Officer
</TABLE>
Diagnostek's officers are elected by the Board and serve at its discretion.
Set forth below is biographical information for those executive officers
who are not also members of the Board of Directors.
William A. Barron has served as President and Chief Operating Officer of
Diagnostek since May 1994 and served as Executive Vice President and Chief
Financial Officer from March 1993 to May 1994. For 23 years prior thereto, he
served in various capacities with General Electric Company and its subsidiaries,
last serving as Manager-Finance, GE Installation and Service Engineering from
March 1989 until March 1993.
Andrew P. Masetti has served as Executive Vice President and Chief
Financial Officer since July 1994. For 14 years prior thereto, he served in
various capacities with General Electric Company, last serving as Manager -
Finance, Sourcing Department at GE Aerospace and subsequently served in the same
position with Martin Marietta Corp. after its acquisition of this division in
April 1993.
Arthur C. Solomon has served as Executive Vice President and Managed Care
Officer since January 1994. From February 1988 to January 1994, he served as
President of Health Care Services, Inc., the Company's integrated pharmacy
services subsidiary. Mr. Solomon has been an employee of Diagnostek since its
founding in 1983.
Securities Ownership Reports
All of the Company's directors, executive officers and 10% shareholders
have complied with all reporting requirements established by Section 16(a) of
the Securities Exchange Act of 1934.
<PAGE>32
Item 11. Executive Compensation
Compensation of Executive Officers
The following table sets forth information concerning the annual and
long-term compensation paid or accrued during the last three fiscal years to the
Company's Chief Executive Officer and the Company's other four most highly
compensated executive officers who served as executive officers at the end of
fiscal 1995 as well as one individual who served as an executive officer during
fiscal 1995.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long-Term
Other Compensation
Name/Principal Annual (1) Awards All Other(3)
Position/Fiscal Year Salary Bonus Compensation Options(2) Compensation
$ $ $ # $
------ ----- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Nunzio P. DeSantis
Chief Executive Officer
- 1995 489,406 486,695 50,871 100,000 328,667
- 1994 464,420 290,290 70,684 - 66,669
- 1993 404,490 250,000 - 795,000 567,505
Courtlandt G. Miller
Executive Vice President
and General Counsel
- 1995 285,828 49,413 - 25,000 90,290
- 1994 301,717 9,748 - - 33,869
- 1993 252,004 85,000 - 345,000 158,294
William A. Barron (4)
President and
Chief Operating Officer
- 1995 196,387 64,763 - 90,000 16,979
- 1994 127,905 52,429 - - 9,032
- 1993 - - - 60,000 50,000
Andrew P. Masetti (4)
Executive Vice President
and Chief Financial Officer
- 1995 91,183 28,953 - 65,000 70,456
- 1994 - - - - -
- 1993 - - - - -
Arthur C. Solomon
Executive Vice President
and Managed Care Officer
- 1995 153,797 23,953 - 25,000 6,218
- 1994 141,953 3,581 28,760 - 6,218
- 1993 103,632 5,447 - 100,000 6,218
Robert W. Field (4)
Executive Vice President
and Sales Officer
- 1995 161,901 - - - 266,453
- 1994 69,967 55,000 - 100,000 -
- 1993 - - - - -
-------------------
Notes on following page
<PAGE>33
<FN>
(1) Except as reflected in the table, the dollar value did not exceed, for each
named officer, the lesser of $50,000 or ten percent of such officer's total
annual salary and bonus for any fiscal year. Mr. DeSantis' compensation for
fiscal 1995 and 1994 included $36,000 for an automobile allowance. Mr.
Solomon's compensation for fiscal 1994 included an expense allowance of
$26,250.
(2) Mr. DeSantis's 1993 amount includes options to purchase 300,000 shares
which were terminated by agreement in connection with negotiation of a
subsequently aborted merger and options to purchase 195,000 shares granted
in prior fiscal years and repriced in 1993. Mr. Miller's 1993 amount
includes options to purchase 100,000 shares which were terminated by
agreement in connection with negotiation of a subsequently aborted merger
and options to purchase 145,000 shares granted in prior fiscal years and
repriced in 1993. Mr. Solomon's 1993 amount includes options to purchase
85,000 shares which were terminated by agreement in connection with
negotiation of a subsequently aborted merger and options to purchase 15,000
shares granted in prior fiscal years and repriced in 1993.
(3) Fiscal 1995 amounts include a relocation allowance for Mr. Masetti
($65,000) and a severance payment for Mr. Field ($250,000). Fiscal 1993
amounts for Mr. Barron consisted of a relocation allowance. Remaining
fiscal 1995, 1994 and 1993 amounts consist primarily of premiums paid for
split dollar life insurance policies, which will be refunded to the Company
on policy termination.
(4) Mr. Barron joined the Company in March 1993 and Mr. Masetti joined the
Company in July 1994. Mr. Field resigned from the Company in December 1994.
</FN>
</TABLE>
Option Grants In Fiscal 1995
The following table sets forth certain information with respect to stock
options granted during the last fiscal year to the executive officers named in
the Summary Compensation Table.
<TABLE>
<CAPTION>
Percent of Potential Realizable
Total Options Value at Assumed
Granted to Annual Rates of Stock
Employees Exercise Price Appreciation for
Options in Fiscal Price Expiration Option Term (2)
Name Granted(1) Year ($/share) Date 5% 10%
---- ---------- ---- --------- ---- -- ---
<S> <C> <C> <C> <C> <C> <C>
Nunzio P. DeSantis 100,000 14.5% 15.25 1/05/05 959,073 2,430,393
Courtlandt G. Miller 25,000 3.6% 15.25 1/05/05 239,768 607,598
William A. Barron 40,000 5.8% 19.25 5/06/04 484,253 1,227,149
William A. Barron 50,000 7.2% 15.25 1/05/05 479,536 1,215,196
Andrew P. Masetti 40,000 5.8% 23.25 6/14/04 584,877 1,482,141
Andrew P. Masetti 25,000 3.6% 15.25 1/05/05 239,768 607,598
Arthur C. Solomon 25,000 3.6% 15.25 1/05/05 239,768 607,598
----------------------
<FN>
(1) The Company has not granted any stock appreciation rights. Option grants
vest one-third on each anniversary except for Mr. Barron's option grant of
40,000 Common Shares, which vest immediately, and Mr. Masetti's option
grant of 40,000 Common Shares, which vest one-fourth on each anniversary.
2) Dollar amounts used in these columns are the results of calculations
required by the Securities and Exchange Commission and are not intended to
forecast possible future appreciation, if any, of the stock price. All
amounts are reported net of option exercise price before any taxes
associated with exercise.
</FN>
</TABLE>
<PAGE>34
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year End Option
Values
The following table sets forth the number of shares for which stock options
were exercised by the executive officers named in the Summary Compensation Table
during the last fiscal year, the value realized, the number of shares for which
options were outstanding and the value of those options as of the fiscal year
end.
<TABLE>
<CAPTION>
Dollar value of
Unexercised
Number in-the-money
Options at Options at
Fiscal Year End Fiscal Year End
Shares Acquired Value Exercisable / Exercisable /
Name on Exercise (#) Realized(1)($) Unexercisable(#) Unexercisable (2)($)
<S> <C> <C> <C> <C>
Nunzio P. DeSantis 19,205 252,066 804,160/100,000 12,324,560/ 512,500
Courtlandt G. Miller - - 345,000/ 25,000 5,103,125/ 128,125
William A. Barron - - 76,000/ 74,000 526,500/ 577,250
Andrew P. Masetti - - - / 65,000 - / 128,125
Arthur C. Solomon - - 15,000/ 25,000 196,875/ 128,125
Robert W. Field - - 60,000/ - 262,500/ -
-----------------------------------
<FN>
(1) Calculated by subtracting the exercise price from the closing market price
of the shares on the date of exercise.
(2) Calculated by subtracting the exercise price from fair market value of
shares at March 31, 1995.
</FN>
</TABLE>
Employment Agreements
Nunzio P. DeSantis - In October 1990, the Company and Mr. DeSantis entered
into a revised employment agreement (the "DeSantis Agreement"). The term of the
DeSantis Agreement began October 1, 1990 and expires on March 31, 1996. Under
the DeSantis Agreement, for his services as the Chairman of the Board and Chief
Executive Officer of the Company, Mr. DeSantis receives a base annual salary of
$400,000, which base amount is increased annually to reflect cost of living
increases. In addition, beginning with the fiscal year ended March 31, 1992, Mr.
DeSantis became entitled to receive an annual incentive bonus (the "Incentive
Bonus") equal to 10% of the amount, if any, by which the "Annual Income" of the
Company (as defined below) in the year for which the bonus is being paid exceeds
125% of the prior year Base Income (as defined below). As used in the DeSantis
Agreement and the other Employment Agreements described below, the term "Annual
Income" means the consolidated income of the Company, after deduction of state
and Federal income taxes but without giving effect to any non-recurring gains or
losses. In the DeSantis Agreement, "Base Income" for each year is equal to 125%
of the preceding year Base Income, with the initial Base Income for the
agreement being equal to the Annual Income of the Company for fiscal 1991.
Notwithstanding the foregoing, Mr. DeSantis will be paid an annual minimum
Incentive Bonus of $250,000 and in no event will the Incentive Bonus paid to him
exceed $1,500,000 in any fiscal year. Pursuant to the Incentive Bonus formula,
Mr. DeSantis received an Incentive Bonus of $250,000 for services rendered in
fiscal 1995, 1994 and 1993. In the event of employment termination without
cause, the DeSantis Agreement provides for a lump sum severance payment
approximately equal to three times base salary. The DeSantis Agreement provides
that during its term and for a period of two years after termination for any
reason whatsoever, Mr. DeSantis cannot compete with respect to any business
activities carried on by the Company.
Mr. DeSantis has entered into a Consulting Agreement dated as of March 27,
1995, as amended on June 4, 1995, (the "Consulting Agreement") to provide
consulting services to Diagnostek and its affiliates, effective only upon
consummation of the Merger. Under the Consulting Agreement, Mr. DeSantis will
provide consulting services for a five year term commencing on the effective
date of the Merger in return for a $120,000 per year consulting fee and the
continued payment of premiums for certain split dollar life insurance policies
at the levels that Diagnostek had previously been funding, but not to exceed
$327,000 per year. Diagnostek has the right to receive from the proceeds of such
policies the full amount of the premiums paid by Diagnostek. In the event that
the Merger is consummated, Mr. DeSantis will also receive an option to purchase
up to 350,000 shares of VHI Common Stock with an exercise price equal to the
closing price of the VHI Common Stock on the New York Stock Exchange on the
effective date of the Merger. The option will vest and become exercisable in
five equal annual installments commencing on January 1, 1996.
<PAGE>35
Value Health and Diagnostek also entered into an Agreement Not to Compete
with Mr. DeSantis, dated as of March 27, 1995, as amended on June 4, 1995, (the
'"Agreement Not to Compete") effective only upon consummation of the Merger.
Under the Agreement Not to Compete, Mr. DeSantis has, for a ten-year period
commencing on the effective date of the Merger, agreed, among other things, (i)
not to compete with any of the businesses engaged in by VHI or Diagnostek as of
the date of the Merger Agreement and (ii) that he will not solicit, or otherwise
intentionally interfere with, VHI's or Diagnostek's employees or customers.
Diagnostek will pay Mr. DeSantis $3.5 million in return for his covenants
payable on January 1, 1996.
The Consulting Agreement provides that if Mr. DeSantis is required to pay
any excise taxes, an additional payment would be made to Mr. DeSantis such that
the amount he receives after payment of such excise taxes plus any interest or
penalties thereon (and any excise and income tax payable in respect of such
additional amount) would equal the amount he was to have received under the
Consulting Agreement, the Agreement Not to Complete and his existing employment
agreement before the imposition of the excise tax.
Courtlandt G. Miller - In December 1994, the Company and Mr. Miller entered
into an employment agreement (the "Miller Agreement"). The term of the Miller
Agreement began September 1, 1994 and expires on September 1, 1999. Under the
Miller Agreement, for his services as Executive Vice President and General
Counsel of the Company, Mr. Miller receives a base annual salary of $300,000,
which base amount is increased annually by 4%. Beginning with the fiscal year
ended March 31, 1995, Mr. Miller is entitled to receive an annual incentive
bonus equal to 30% of his current base salary, if the Annual Income of the
Company exceeds 135% of the Base Income (defined below) for the immediately
preceding year. "Base Income" for each year is equal to 135% of the preceding
year Base Income with the initial Base Income equal to Annual Income of the
Company for fiscal 1994. Notwithstanding the foregoing, Mr. Miller will be paid
an annual minimum incentive bonus of $30,000. Pursuant to the Incentive Bonus
formula, Mr. Miller received an Incentive Bonus of $30,000 for services rendered
in fiscal 1995. In the event of employment termination by the Company without
cause or by Mr. Miller in the event of a Termination Event (defined in the
agreement as relating to a change in control of the Company), the Miller
Agreement provides for a lump sum severance payment equal to two years'
compensation. In addition, the Company is to fully fund certain life insurance
policies of Mr. Miller and his spouse. The Miller Agreement provides that during
its term and for a period of two years after termination for any reason
whatsoever, Mr. Miller cannot compete with respect to any business activities
carried on by the Company.
William A. Barron - In March 1993, the Company and Mr. Barron entered into
an employment agreement (the "Barron Agreement"). The term of the Barron
Agreement began March 15, 1993 and expires on March 15, 1998. Under the Barron
Agreement, for his services as Executive Vice President and Chief Financial
Officer of the Company, Mr. Barron received a base annual salary of $125,000,
which base amount is increased annually by 4%. In connection with Mr. Barron
being named President and Chief Operating Officer in May 1994, and as
subsequently amended in December 1994, his base annual salary was increased to
$180,000. Beginning with the fiscal year ended March 31, 1994, Mr. Barron became
entitled to receive an annual incentive bonus equal to 30% of his current base
salary, if the Annual Income of the Company exceeds 135% of the Base Income for
the immediately preceding year, with the Base Income for fiscal 1994 being equal
to Annual Income for Fiscal 1993, the Base Income for fiscal 1995 being equal to
Annual Income for fiscal 1994, and Base Income for all subsequent years being
equal to 135% of each preceding year's Base Income. Notwithstanding the
foregoing, Mr. Barron will be paid an annual minimum incentive bonus of $20,000.
Pursuant to the Incentive Bonus formula, Mr. Barron received an Incentive Bonus
of $20,000 and $39,000 for services rendered in fiscal 1995 and 1994,
respectively. In the event of employment termination by the Company without
cause or by Mr. Barron in the event of a Termination Event (defined in the
agreement as relating to a change in control of the Company), the Barron
Agreement provides for a lump sum severance payment equal to two years'
compensation. The Barron Agreement provides that during its term and for a
period of two years after termination for any reason whatsoever, Mr. Barron
cannot compete with respect to any business activities carried on by the
Company.
Andrew P. Masetti - In July 1994, the Company and Mr. Masetti entered into
an employment agreement (the "Masetti Agreement") which was subsequently amended
in December 1994. The term of the Masetti Agreement began June 30, 1994 and
expires on June 30, 1999. Under the Masetti
<PAGE>36
Agreement, for his services as Executive Vice President and Chief Financial
Officer of the Company, Mr. Masetti receives a base annual salary of $125,000,
which base amount is increased annually by 4%. Beginning with the fiscal year
ended March 31, 1995, Mr. Masetti is entitled to receive an annual incentive
bonus equal to 30% of his current base salary, if the Annual Income of the
Company exceeds 135% of the Base Income (defined above - See Miller Agreement)
for the immediately preceding year. Notwithstanding the foregoing, Mr. Masetti
will be paid an annual minimum incentive bonus of $20,000. Pursuant to the
Incentive Bonus formula, Mr. Masetti received an Incentive Bonus of $20,000 for
services rendered in fiscal 1995. In the event of employment termination by the
Company without cause or by Mr. Masetti in the event of a Termination Event
(defined in the agreement as relating to a change in control of the Company),
the Masetti Agreement provides for a lump sum severance payment equal to one
years' compensation. The Masetti Agreement provides that during its term and for
a period of one year after termination for any reason whatsoever, Mr. Masetti
cannot compete with respect to any business activities carried on by the
Company.
Arthur C. Solomon - In December 1994, the Company and Mr. Solomon entered
into an employment agreement (the "Solomon Agreement"). The term of the Solomon
Agreement began December 1, 1994 and expires on December 1, 1999. Under the
Solomon Agreement, for his services as Executive Vice President of the Company,
Mr. Solomon receives a base annual salary of $135,000, which base amount is
increased annually, beginning January 1, 1995, by 4%. Beginning with the fiscal
year ended March 31, 1995, Mr. Solomon is entitled to receive an annual
incentive bonus equal to 30% of his current base salary, if the Annual Income of
the Company exceeds 135% of the Base Income (defined above - see Miller
Agreement) for the immediately preceding year. Notwithstanding the foregoing,
Mr. Solomon will be paid an annual minimum incentive bonus of $15,000. Pursuant
to the Incentive Bonus formula, Mr. Solomon received an Incentive Bonus of
$15,000 for services rendered in fiscal 1995. In the event of employment
termination by the Company without cause or by Mr. Solomon in the event of a
Termination Event (defined in the agreement as relating to a change in control
of the Company), the Solomon Agreement provides for a lump sum severance payment
equal to two years' compensation. The Solomon Agreement provides that during its
term and for a period of two years after termination for any reason whatsoever,
Mr. Solomon cannot compete with respect to any business activities carried on by
the Company.
Savings Plan
The Company sponsors an Employee's Savings Plan ("Savings Plan") which is
designed to comply with Section 401(k) of the Internal Revenue Code ("Code").
The Savings Plan provides retirement and other benefits for the Company's
employees who have been employed for at least six months with 1,000 hours of
accredited service and who are at least 21 years of age. Under the Savings Plan,
each employee who participates may contribute up to the lesser of 20% of his or
her cash compensation or the maximum amount that may be contributed under Code
rules ($9,240 for 1994). As a savings incentive, the Savings Plan further
provides that the Company may make a matching contribution equal to a certain
percentage of amounts contributed by an employee, which percentage is set and
determined on a yearly basis by the trustees of the Savings Plan, Messrs.
DeSantis and Miller. Under the Savings Plan, amounts contributed by employees
are at all times fully vested and nonforfeitable, and matching contributions
fully vest over a five year period based upon the participant's years of service
to the Company.
No amounts were contributed by the Company to the Savings Plan during the
fiscal year ended March 31, 1995.
Compensation of Directors
The Company pays to each of its directors $2,500 for each meeting attended.
In addition, in accordance with automatic formula provisions applicable to
members of the Stock Option Committee under the Company's 1991 Stock Option
Plan, options to purchase 20,000 shares of Common Stock, at an exercise price of
$15.50 (fair market value on the grant date), were granted to each of Messrs.
Stuchin and Riesenbach during Fiscal 1995.
Compensation Committee Interlocks and Insider Participation
Mr. Riesenbach, a director of the Company, was a partner of the law firm of
Cozen & O'Connor since February 1, 1995, and prior thereto, a partner of the law
firm of Wolf, Block, Schorr and Solis-Cohen, each of which provides legal
services to the Company.
<PAGE>37
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth, as of June 5, 1995 information regarding
the beneficial ownership of the Common Stock (i) by each person who is known by
the Company to own beneficially more than five percent of the outstanding Common
Stock, (ii) by each director of the Company, (iii) by each executive officer
named in the Summary Compensation Table elsewhere in this statement, and (iv) by
all directors and executive officers as a group.
<TABLE>
<CAPTION>
Amount and
Nature of
Beneficial Percentage of
Name of Beneficial Owner Ownership (1) Common Stock
------------------------ ------------- ------------
<S> <C> <C>
Nunzio P. DeSantis (2).................................... 1,577,213 6.3%
Julius Golden (3)......................................... 149,776 *
Courtlandt G. Miller (4) ................................. 461,318 1.9%
Miles M. Stuchin (5)...................................... 284,841 1.2%
E. Gerald Riesenbach (6).................................. 85,000 *
David G. Devereaux (7).................................... 12,500 *
William A. Barron (8).................................... 76,000 *
Andrew P. Masetti (9)..................................... 10,400 *
Arthur C. Solomon (10).................................... 54,455 *
Robert W. Field (11)...................................... 60,000 *
Snyder Capital Management, Inc (12)....................... 1,215,650 5.0%
Dietche & Field Advisers, Inc. (13)....................... 1,564,300 6.4%
Roxbury Capital Management (14)........................... 1,373,425 5.7%
All directors and executive officers as a group
(9 persons) (2)(3)(4)(5)(6)(7)(8)(9)(10)(15)..... 2,711,503 10.5%
----------------------------------------
<FN>
* less than one percent
(1) Except as otherwise noted, each person listed has sole voting and
investment power with regard to shares set forth opposite such person's
name.
(2) Mr. DeSantis' address is c/o 4500 Alexander Blvd. N.E., Albuquerque, NM
87107. Includes 725,000 shares held in a family trust as to which Mr.
DeSantis and his wife are co-trustees and 804,160 shares issuable upon the
exercise of options which are currently exercisable or exercisable within
60 days.
(3) Includes 100,000 shares issuable upon the exercise of options which are
currently exercisable or exercisable within 60 days.
(4) Includes 116,000 shares held in joint tenancy with Mr. Miller's wife and
345,000 shares issuable upon the exercise of options currently exercisable
or exercisable within 60 days.
(5) Includes 9,266 shares held in joint tenancy with Mr. Stuchin's wife and
85,000 shares issuable upon the exercise of options currently exercisable
or exercisable within 60 days. Does not include 90,000 shares held by Mr.
Stuchin's wife, as to which he disclaims beneficial ownership.
(6) Represents 85,000 shares issuable upon the exercise of options currently
exercisable or exercisable within 60 days.
(7) Represents 12,500 shares issuable upon the exercise of options currently
exercisable or exercisable within 60 days.
(8) Represents 76,000 shares issuable upon the exercise of options currently
exercisable or exercisable within 60 days. Does not include 1,250 shares
held by Mr. Barron's immediate family, as to which he disclaims beneficial
ownership.
<PAGE>38
(9) Includes 10,000 shares issuable upon the exercise of options currently
exercisable or exercisable within 60 days.
(10) Includes 15,000 shares issuable upon the exercise of options currently
exercisable or exercisable within 60 days.
(11) Mr. Field resigned as an officer of the Company in December 1994. Includes
60,000 shares issuable upon the exercise of options currently exercisable
or exercisable within 60 days.
(12) Based upon information filed on Schedule 13G as of December 31, 1994.
Snyder Capital Management, Inc.'s address is 350 California Street, Suite
1460, San Francisco, California, 94104.
(13) Based upon information filed on Schedule 13G as of December 31, 1994.
Dietche & Field Advisers, Inc.'s address is 437 Madison Avenue, New York,
New York 10017.
(14) Based upon information filed on Schedule 13G as of December 31, 1994.
Roxbury Capital Management's address is P.O. Box 2213, Santa Monica,
California 90407-1436
(15) In the event the Merger is approved, all options granted under the 1991
Stock Option Plan will become vested, which will result in options held by
executive officers held as a group for an additional 331,500 shares
becoming exercisable.
</FN>
</TABLE>
Item 13. Certain Relationships and Related Transactions
In connection with the construction of a new residence, Mr. DeSantis
borrowed funds from the Company. The largest aggregate amount of Mr. DeSantis'
indebtedness, including interest during the fiscal year ended March 31, 1995 was
$2,244,678. As of June 5, 1995, Mr. DeSantis' indebtedness to the Company
totaled $2,225,207. The indebtedness, which is evidenced by a promissory note
and mortgage, bears interest at the rate of 7.5% per annum and is repayable over
30 years ending December 1, 2021. The disinterested members of the Board
approved such loan.
In connection with the purchase of a residence, Mr. Miller borrowed funds
from the Company during 1990. The largest aggregate amount of Mr. Miller's
indebtedness, including interest during the fiscal year ended March 31, 1995 was
$384,934. As of June 5, 1994, Mr. Miller's indebtedness to the Company totaled
$334,685. The indebtedness, which is evidenced by a promissory note, bears
interest at the rate of 7.5% per annum and is repayable in 1998. The
disinterested members of the Board approved such loan.
In connection with the purchase of personal investments, Mr. Duke
Rodriguez, the Company's former President and Chief Operating Officer, borrowed
funds from the Company during March 1993. The largest aggregate amount of Mr.
Rodriguez's indebtedness, including interest during the fiscal year ended March
31, 1995 was $93,677. Mr. Rodriguez repaid this indebtedness, including interest
in June 1994. The indebtedness, which was evidenced by a promissory note,
required interest at the rate of 7.5% per annum.
<PAGE>39
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) 1. Financial Statements of Diagnostek, Inc. and its subsidiaries are
included in Part II, Item 8 of this report, and include:
- Independent Auditors' Report
- Consolidated Statement of Earnings for years ended March 31, 1995,
1994, and 1993
- Consolidated Statement of Financial Position as of March 31, 1995 and
1994
- Consolidated Statement of Cash Flows for years ended March 31, 1995,
1994 and 1993
- Consolidated Statement of Changes in Stockholders' Equity for years
ended March 31, 1995, 1994, and 1993
- Notes to Consolidated Financial Statements
2. Consolidated Financial information for the years ended March 31, 1995,
1994, and 1993 as follows, together with the independent auditors'
report thereon:
- Schedule II: Valuation and Qualifying accounts
All other schedules are omitted because they are inapplicable, not
required, or the information is included elsewhere in the financial
statements or notes thereto.
3. Exhibits:
Number Contents
3.1 Diagnostek, Inc. Certificate of Incorporation as Amended (incorporated
herein by reference to previously filed exhibit to Annual Report on Form
10-K for the year ended March 31, 1991)
3.2 Diagnostek, Inc. By-Laws (incorporated herein by reference to previously
filed exhibit to Registration Statement on Form S-1 or amendments
thereto (Registration No. 2-86210))
*10.1 Diagnostek 1983 Non-qualified and Incentive Stock Option Plan and Form
of Incentive Stock Option (incorporated herein by reference to
previously filed exhibit to Registration Statement on Form S-1 or
amendments thereto (Registration No. 2-86210))
10.2 Note Agreement with Metropolitan Life Insurance Company dated December
28, 1989. (incorporated herein by reference to previously filed exhibit
to Annual Report on Form 10-K for the year ended March 31, 1991)
10.3 Revolving Credit and Term Loan Agreement with Bank of America Illinois
NA dated December 22, 1994. (incorporated herein by reference to
previously filed exhibit to Quarterly Report on Form 10-Q for the period
ended December 31, 1994)
10.4 Agreement dated September 7, 1990 by and among Diagnostek, Inc., Health
Care Services Inc., Rite Aid Corporation, RxChoice, Inc., and Rx USA,
Inc. (incorporated herein by reference to previously filed exhibit to
Current Report on Form 8-K dated October 1, 1990).
*10.5 Employment agreement dated October 1, 1990 between Nunzio P. DeSantis
and the Registrant (incorporated herein by reference to previously filed
exhibit to Annual Report on Form 10-K dated for the year ended March 31,
1991)
*10.6 Diagnostek, Inc. 1991 Stock Option Plan, as amended (incorporated herein
by reference to previously filed exhibit to Registration Statement on
Form S-8 (Registration No. 33-85700)
<PAGE>40
10.7 Rights agreement dated December 31, 1992 between Diagnostek, Inc. and
American Stock Transfer and Trust Company (incorporated herein by
reference to previously filed exhibit to Current Report on Form 8-K
filed December 31, 1992).
10.8 Agreement dated October 25, 1993 by and among Diagnostek, Inc.,
Diagnostek Pharmacy, Inc., Chronitech Health Services, Inc., Calmora
Pharmacies, Inc. and stockholders of Chronitech Health Services, Inc.
(incorporated herein by reference to previously filed exhibit to Current
Report on Form 8-K dated November 8, 1993).
10.9 Agreement dated October 29, 1993 by and among Diagnostek, Inc., Jefasa
Investments, Inc., and Heritage Investments Co., Ltd. (incorporated
herein by reference to previously filed exhibit to Current Report on
Form 8-K dated November 8, 1993).
10.10 Release and termination agreement dated June 1, 1994 among Diagnostek,
Inc., Diagnostek Pharmacy, Inc., Calmora Corporation (formerly known as
Chronitech Health Services, Inc.), Calmora Pharmacies, Inc., Paul
Morabito and Gloria Morabito (incorporated herein by reference to
previously filed exhibit to Current Report on Form 8-K dated June 9,
1994).
*10.11 Employment agreement dated December 1, 1994 between Courtlandt G. Miller
and the Registrant
*10.12 Employment agreement dated December 1, 1994 between William A. Barron
and the Registrant
*10.13 Employment agreement dated December 1, 1994 between Andrew P. Masetti
and the Registrant
*10.14 Employment agreement dated December 1, 1994 between Arthur C. Solomon
and the Registrant
10.15 Agreement and Plan of Merger dated as of March 27, 1995 among Value
Health, Inc., VHI Merger-Sub. Corporation, and Diagnostek, Inc.
(incorporated herein by reference to previously filed exhibit to Current
Report on Form 8-K dated March 27, 1995).
*10.16 Consulting Agreement dated as of March 27, 1995 among Value Health,
Inc., Diagnostek, Inc. and Nunzio P. DeSantis (incorporated herein by
reference to previously filed exhibit to Current Report on Form 8-K
dated March 27, 1995).
*10.17 Agreement not to Compete dated as of March 27, 1995 among Value Health,
Inc., Diagnostek, Inc. and Nunzio P. DeSantis (incorporated herein by
reference to previously filed exhibit to Current Report on Form 8-K
dated March 27, 1995).
10.18 First Amendment to Agreement and Plan of Merger, dated as of June 4,
1995, by and among VHI, VHI Sub and the Registrant (incorporated herein
by reference to previously filed exhibit to Current Report on Form 8-K
dated June 8, 1995).
10.19 Letter dated June 4, 1995 from VHI to the Registrant (incorporated
herein by reference to previously filed exhibit to Current Report on
Form 8-K dated June 8, 1995).
*10.20 Letter dated June 4, 1995 from Registrant to Nunzio P. DeSantis
(incorporated herein by reference to previously filed exhibit to Current
Report on Form 8-K dated June 8, 1995).
11.1 Statement on computation of primary and fully diluted earnings per share
21.1 Subsidiaries of Registrant
23.1 Independent Auditors' Consent
27.1 Financial Data Schedule
<PAGE>41
* Management Contract or Compensatory Plan or Arrangement Required
to be filed as an Exhibit to this Form pursuant to Item 14(c) of
this report.
Registrant will furnish to any stockholder, upon written request, any
exhibit listed in Section (a) 3 above upon payment by such stockholder of
registrant's reasonable expenses in furnishing any such exhibit.
(b) The Company filed the following current reports on Form 8-K under the
Securities Exchange Act of 1934 during the quarter ended March 31,
1995.
Current Report on Form 8-K dated March 27, 1995 to announce the
Agreement and Plan of Merger dated as of March 27, 1995 among
Value Health, Inc., VHI Merger-Sub. Corp., and Diagnostek, Inc.
Current Report on Form 8-K dated June 8, 1995 to announce the
Amendment to Agreement and Plan of Merger dated as of March 27,
1995 among Value Health, Inc., VHI Merger-Sub. Corp., and
Diagnostek, Inc.
<PAGE>42
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Diagnostek, Inc. has duly caused this Report to be signed
in its behalf by the undersigned, thereunto duly authorized, in the City of
Albuquerque and State of New Mexico on the 12th 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 report
has been signed below by the following persons on behalf of the registrant in
the capacities on the 12th 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 \s\ Courtlandt G. Miller
E. Gerald Riesenbach Courtlandt G. Miller
Director Executive Vice President
General Counsel, Director and Secretary
\s\ David G. Devereaux \s\ Andrew P. Masetti
David G. Devereaux Andrew P. Masetti
Director Executive Vice President,
Chief Financial Officer
<PAGE>43
DIAGNOSTEK, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
FINANCIAL STATEMENTS AND RELATED INFORMATION
The following financial statements of Diagnostek, Inc. and its subsidiaries are
included in Part II, Item 8, pages 15 through 29 of this report, and include:
- Report of Independent Auditors
- Consolidated Statement of Earnings for years ended March 31, 1995, 1994,
and 1993
- Consolidated Statement of Financial Position as of March 31, 1995 and
1994
- Consolidated Statement of Cash Flows for years ended March 31, 1995,
1994 and 1993
- Consolidated Statement of Changes in Stockholders' Equity for years
ended March 31, 1995, 1994, and 1993
- Notes to Consolidated Financial Statements
The following supplemental schedule and related information for the years
ended March 31, 1995, 1994, and 1993 together with the independent auditors'
report thereon, are included on pages 44 and 45 of this report:
- Schedule II: Valuation and Qualifying accounts
<PAGE>44
Independent Auditors' Report
To Stockholders and the Board of Directors
Diagnostek, Inc.
Under date of June 5, 1995, we reported on the Consolidated Statement of
Financial Condition of Diagnostek, Inc. and subsidiaries as of March 31, 1995
and 1994, and the related Consolidated Statements of Earnings, Changes in
Stockholders' Equity, and Cash Flows for each of the years in the three-year
period ended March 31, 1995, as contained in Part II, Item 8 of Diagnostek,
Inc.'s March 31, 1995 Form 10-K. In connection with our audits of the
aforementioned consolidated financial statements, we have also audited the
related supplementary financial statement Schedule II. This supplementary
financial statement schedule is the responsibility of the Company's management.
Our responsibility is to express an opinion on this supplementary financial
statement schedule based on our audits.
In our opinion, such supplementary financial statement schedule, when considered
in relation to the consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
KPMG Peat Marwick LLP
Albuquerque, New Mexico
June 5, 1995
<PAGE>45
Schedule II
DIAGNOSTEK, INC. AND SUBSIDIARIES
Valuation and Qualifying Accounts
Years ended March 31, 1995, 1994, and 1993
<TABLE>
<CAPTION>
(Amounts in thousands)
Balance Charged Charged Deduction End of
at beginning to costs to other (amounts period
of period & expenses accounts written off) balance
<S> <C> <C> <C> <C> <C>
Allowance for Uncollectible
Accounts Receivable
March 31, 1995 $ 3,274 $ 1,865 $ - $ 1,652 $ 3,487
March 31, 1994 $ 2,879 $ 1,575 $ 238 (1) $ 1,418 $ 3,274
March 31, 1993 $ 1,093 $ 6,137 $ - $ 4,351 $ 2,879
Allowance for Uncollectible
Other Accounts Receivable (2)
March 31, 1995 $ 1,478 $ (162) $ - $ 367 $ 949
March 31, 1994 $ 980 $ 1,278 $ - $ 780 $ 1,478
March 31, 1993 $ - $ 980 $ - $ - $ 980
<FN>
(1) Balances at acquisition
(2) Included in Other Receivables (net) in Statement of Financial Position
</FN>
</TABLE>
<PAGE>46
EXHIBIT INDEX
10.11 Employment agreement dated December 1, 1994 between Courtlandt G. Miller
and the Registrant
10.12 Employment agreement dated December 1, 1994 between William A. Barron
and the Registrant
10.13 Employment agreement dated December 1, 1994 between Andrew P. Masetti
and the Registrant
10.14 Employment agreement dated December 1, 1994 between Arthur C. Solomon
and the Registrant
11.1 Statement on computation of primary and fully diluted earnings per share
21.1 Subsidiaries of Registrant
23.1 Independent Auditors' Consent
27.1 Financial Data Schedule
Exhibit 10.11
EMPLOYMENT AGREEMENT
THIS AGREEMENT, made as of this 1st day of December 1994, by and between
DIAGNOSTEK, INC., a Delaware corporation (hereinafter called "Company"), and
COURTLANDT G. MILLER, an individual (hereinafter called "Employee").
W I T N E S S E T H:
Company wishes to employ Employee and Employee wishes to enter into the
employ of Company on the terms and conditions contained in this Agreement.
NOW, THEREFORE, in consideration of the facts, mutual promises and
covenants contained herein and intending to be legally bound hereby, Company and
Employee agree as follows:
1. Employment. Company hereby employs Employee and Employee hereby accepts
employment by Company for the period and upon the terms and conditions contained
in this Agreement.
2. Office and Duties.
(a) Employee shall serve Company as its Executive Vice President and
General Counsel and shall have such authority and responsibilities as typically
accorded such an employee, subject to such further duties and responsibilities
granted and reasonable restrictions (considered in light of the duties and
responsibilities accorded) imposed by Company's Chief Executive Officer to whom
Employee shall report. Employee may also serve as an officer and/or director of
the Company's subsidiaries for no additional compensation.
<PAGE>2
(b) Throughout the term of this Agreement, Employee shall devote his
entire working time, energy, skill and best efforts to the performance of his
duties hereunder in a manner which will faithfully and diligently further the
business and interests of Company and its subsidiaries. Notwithstanding the
foregoing, Employee may engage in other activities so long as such activities do
not conflict with the performance of his duties on behalf of the Company in
accordance with this Agreement and Employee receives prior approval from
Company's Board of Directors, which approval shall not unreasonably be withheld.
3. Term. This Agreement shall be for an original term of five (5) years
(the "Original Term"), commencing on September 1, 1994 and ending on the fifth
anniversary thereof, unless sooner terminated as hereinafter provided. Unless
either party elects to terminate this Agreement at the end of the Original Term
or any Renewal Term, as defined herein, by giving the other party notice of such
election at least sixty (60) days before the expiration of the then current
term, this Agreement shall be deemed to have been renewed for an additional term
of one (1) year (a "Renewal Term") commencing on the day after the expiration of
the then current term.
4. Compensation.
(a) For all of the services rendered by Employee to Company, Employee
shall receive an annual base salary of Three Hundred Thousand Dollars
($300,000), payable in reasonable periodic installments in accordance with
Company's regular payroll practices in effect from time to time, but in no event
less frequently than monthly. Commencing on the first anniversary and on each
anniversary thereof,
<PAGE>3
Employee's annual base salary shall be increased by an amount equal to one
hundred four percent (104%) of the then applicable base salary. Such initial
base salary and base salary as adjusted shall hereafter be referred to as "Base
Salary."
(b) Beginning with the fiscal year ending March 31, 1995, Employee
shall be entitled to receive an incentive bonus paid within ninety (90) days
after the end of each fiscal year during the term of this Agreement (the
"Incentive Bonus") which, for each fiscal year, shall be payable if the
Company's annual income, after deduction of state and federal income taxes
determined on a consolidated basis by the Company's regularly employed certified
public accountants, in accordance with generally accepted accounting principles,
but without giving effect to any non-recurring gains or losses ("Annual Income")
exceeds 135% of the Company's Annual Income for the fiscal year ended March 31,
1994 and, for each fiscal year thereafter, exceeds 135% of the prior fiscal
year's base ("Base").
By way of example:
the 1995 Base shall be 135% of Annual Income for the fiscal year ended
March 31, 1994;
the 1996 Base shall be 135% of the 1995 Base;
the 1997 Base shall be 135% of the 1996 Base;
the 1998 Base shall be 135% of the 1997 Base;
the 1999 Base shall be 135% of the 1998 Base.
The Incentive Bonus shall equal thirty percent (30%) of an amount
equal to the Base Salary then being paid to Employee on the last day of the
<PAGE>4
fiscal year for which the Incentive Bonus is payable.
Notwithstanding the foregoing, beginning in the fiscal year ended
March 31, 1995, Employee shall be paid an annual minimum Incentive Bonus of
$30,000.
(c) Throughout the term of this Agreement and as long as they are kept
in force by Company, Employee shall be entitled to participate in and receive
the benefits of any profit sharing or retirement plans and any health, life,
accident or disability insurance plan or programs made available to other
similarly situated officers of Company.
(d) Employee shall be entitled to four (4) weeks paid vacation during
each year of the term of this Agreement.
(e) All references herein to compensation to be paid to Employee are
to the gross amounts thereof which are due hereunder. The Company shall have the
right to deduct therefrom all taxes which may be required to be deducted or
withheld under any provision of the law (including, but not limited to, social
security payments, income tax withholding and any other deduction required by
law) now in effect or which may become effective at any time during the term of
this agreement.
(f) Throughout the term of this Agreement, Company will furnish
Employee with $600 per month for an automobile.
(g) Throughout the term of this Agreement, the Company will pay the
insurance premiums on certain split dollar insurance premiums (aggregating Six
Million Two Hundred Fifty Thousand Dollars in face amount) on the lives of
<PAGE>5
Employee and his spouse.
5. Expenses. Company will reimburse Employee for all reasonable expenses
incurred by Employee in connection with the performance of Employee's duties
hereunder upon receipt of vouchers therefore and in accordance with Company's
regular reimbursement procedures and practices in effect from time to time.
6. Authority to Bind Company.Subject to contrary instruction from the Board
of Directors of Company, Employee shall be authorized to make such disbursements
and purchases and to incur such liabilities on behalf of Company and to
otherwise obligate Company in a manner consistent with the duties and
responsibilities generally accorded a chief operating officer.
7. Disability.
(a) If Employee becomes unable to perform his duties hereunder due to
partial or total disability or incapacity resulting from a mental or physical
illness, injury or any other cause, Company will continue the payments and
benefits described in paragraph 4 hereof for a period of twenty-four (24) months
following the date Employee is first unable to perform his duties due to such
disability or incapacity and shall pay Employee the Incentive Bonus for the year
in which Employee is first unable to perform his duties. Thereafter, Company
shall have no obligation for base salary or other compensation payments to
Employee during the continuance of such disability or incapacity.
(b) If Employee is unable to perform his duties hereunder
<PAGE>6
due to partial or total disability or incapacity resulting from a mental or
physical illness, injury or any other cause for a period of twelve (12)
consecutive months during any twenty-four-month period, Company shall have the
right to terminate this Agreement thereafter, in which event Company shall have
no further obligations or liabilities hereunder after the date of such
termination, except for payments required under paragraph 7(a).
8. Termination.
(a) In the event of Employee's death during the term of this
Agreement, all payments of Base Salary shall terminate as of the end of the
thirteenth month following the date of death, provided, however, that the
Incentive Bonus provided for herein shall be paid to the estate of Employee for
the fiscal year in which his death occurred. The Company shall have no other
obligations to Employee's estate or legal representative hereunder.
(b) Company may discharge employee at any time for criminal conduct
constituting a felony offense, alcohol or drug abuse which impairs Employee's
performance of his duties hereunder, continuing misconduct or dereliction of
duty, gross negligence or incompetence, any willful violation of any material
express direction or any reasonable material rule or regulation established by
the Company's Board of Directors from time to time regarding the conduct of its
business, misrepresentation made in this Agreement, or any material violation by
Employee of the terms and conditions of this Agreement, in which event Company
shall have no further obligations or liabilities hereunder after the date of
such termination.
<PAGE>7
(c) If employment is terminated
(i) by the Company for any reason other than breach of this
Agreement by Employee or the reasons set forth in Paragraphs 7(b), 8(a) or (b)
hereof; or
(ii) by Employee after the occurrence of a Termination Event (as
hereinafter defined), the Company shall pay Employee, as severance pay, in a
lump sum, in cash, ("Termination Compensation") on the fifth day following such
termination, an amount equal to two times the payments and benefits described in
paragraph 4 hereof, and the balance of such premium payments under paragraph
4(g) such that such policies are self-funded and no additional premium payments
are required to be paid. The Termination Compensation section shall be in lieu
of any severance payment to which Employee may be entitled under any other
provisions of this Agreement other than payments under a pension, profit-sharing
or other plan that is "qualified" as such term in used in Section 401 of the
Code.
(d) For the purposes of this Paragraph 8, the term "Termination Event"
shall mean the occurrence of any of the following events:
(i) an attempt shall be made to materially and adversely change
the nature of Employee's engagement with the Company, including, without
limitation, material restrictions of Employee's functions; or
(ii) any requirement that Employee perform services primarily at
a location other than in New York , New York or West Palm Beach, Florida.
<PAGE>8
(iii) the occurrence of either of the following events during the
term hereof: (1) a majority of the Company's then outstanding capital stock, or
property, business or assets are sold or otherwise transferred or the Company is
consolidated with or merged into or with any other entity on a basis whereby the
Company is not the surviving entity of such combination; or (2) a majority of
the Board of Directors of the Company shall be replaced by individuals who were
not directors of the Company on the date hereof and the new Board takes hostile
action against Employee.
9. Company Property.All written research, advertising, sales,
manufacturers' and other written materials or articles or information, including
without limitation data processing reports, written customer sale analyses,
invoices, price lists or written information, samples, or any other written
materials or data of any kind furnished to Employee by Company or any subsidiary
thereof or predecessor of either or developed by Employee on behalf of Company
or any subsidiary thereof or predecessor of either or at Company's, or such
subsidiary's or predecessor's direction or for any of their respective use or
otherwise in connection with Employee's employment hereunder and, in each case,
related to Company's, subsidiary's or predecessor's business, are and shall
remain the sole and confidential property of Company; provided, however, that
the foregoing shall not apply to any material in the public domain other than by
reason of a breach of this Paragraph 9. If Company requests the return of such
materials at any time during or at or after the termination of Employee's
employment, Employee shall immediately deliver the same to Company. Employee
shall
<PAGE>9
make full disclosure to Company of all such writings and materials and shall do
everything necessary or desirable to vest the absolute title thereto in Company.
Employee shall not be entitled to any additional or special compensation or
reimbursement regarding any and all such writings and materials.
10. Non-Competition, Trade Secrets, Etc.
(a) During the term of this Agreement and, if termination of
employment occurs during the Original or Renewal Term for whatever reason, for a
period equal two (2) years from the date of termination of employment, Employee
shall not, directly or indirectly, induce or attempt to influence any employee
of Company or any subsidiary to terminate his employment with Company or any
subsidiary and shall not engage in (as a principal, partner, director, officer,
agent, employee, consultant or otherwise) or be financially interested in any
business which is engaged in such businesses as the Company or any of its
subsidiaries is then currently engaged (collectively, "Restricted Business
Activity"). However, nothing contained in this Paragraph 10 shall prevent
Employee from (i) holding for investment no more than five percent (5%) of any
class of equity securities of a company whose securities are traded on a
national securities exchange; (ii) engaging in any activity which is not deemed
a Restricted Business Activity; or (iii) engaging in an activity which
previously was considered a Restricted Business Activity but has no longer been
pursued, whether or not actively, by the Company for a consecutive period of
twelve (12) months prior to the termination date of this Agreement.
(b) During the term of this Agreement and for a period end-
<PAGE>10
ing concurrently with the termination of the restriction under subparagraph
10(a) hereof, Employee shall not use for his personal benefit, or disclose,
communicate or divulge to, or use for the direct or indirect benefit of any
person, firm, association or company other than the Company, any material
referred to in Paragraph 9 above or any information regarding the business
methods, business policies, procedures, techniques, research or development
projects or results, trade secrets, or other knowledge or processes of or
developed by the Company or any subsidiary thereof or any predecessor of either,
or any names and addresses of customers or clients or any data on or relating to
past, present or prospective customers or clients or any other confidential
information relating to or dealing with the business operations or activities of
Company or any subsidiary thereof or any predecessor or either, made known to
Employee or learned or acquired by Employee while in the employ of Company;
provided, however, that notwithstanding anything herein to the contrary, if any
of the foregoing is reasonably deemed to be proprietary to the Company or is
protected by law as proprietary to the Company (by copyright, patent, trademark
or otherwise), this covenant shall be deemed to run indefinitely with respect to
such proprietary matter. Nothing contained herein shall preclude Employee from
employing any of the foregoing methods, policies, procedures, etc. in an
activity which is not a Restricted Business Activity so long as such methods,
policies, procedures, etc. are not proprietary or treated as confidential by
Company.
(c) Employee acknowledges that the restrictions contained in the
foregoing subparagraphs (a) and (b), in view of the nature of the business in
which
<PAGE>11
Company is engaged, are reasonable and necessary in order to protect the
legitimate interests of Company and that any violation thereof would result in
irreparable injuries to Company, and Employee therefore acknowledges that, in
the event of his violation of any of these restrictions, Company shall be
entitled to obtain from any court of competent jurisdiction preliminary and
permanent injunctive relief in addition to any other rights or remedies to which
Company may be entitled.
(d) If the period of time, the area specified or the scope of activity
restricted in subparagraph (a) above should be adjudged unreasonable in any
proceeding, then the period of time shall be reduced by such number of months or
the area shall be reduced by the elimination of such portion thereof or the
scope of restricted activity shall be modified, or any or all of the foregoing
so that such restrictions may be enforced in such area and for such time as is
adjudged to be reasonable. If Employee violates any of the restrictions
contained in the foregoing subparagraph (a), the restrictive period shall not
run in favor of Employee from the time of the commencement of any such violation
until such time as such violation shall be cured by Employee to the satisfaction
of Company.
11. Prior Agreements.Employee represents to Company and Company represents
to Employee (a) that there are no restrictions, agreements or understandings
whatsoever to which the representing party is a party which would prevent or
make unlawful such party's execution of this Agreement or Employee's employment
hereunder, (b) that the representing party's execution of this Agreement and
Employee's employment hereunder shall not constitute a breach of any contract,
agree-
<PAGE>12
ment or understanding, oral or written, to which to representing party is a
party or by which such party is bound and (c) that the representing party is
free and able to execute this Agreement and, in the case of Employee, to enter
into employment by Company.
12. Miscellaneous.
(a) Indulgences, Etc.Neither the failure nor any delay on the part of
either party to exercise any right, remedy, power or privilege under this
Agreement shall operate as a waiver thereof, nor shall any single or partial
exercise of any right, remedy, power or privilege preclude any other or further
exercise of the same or of any other right, remedy, power or privilege, nor
shall any waiver of any right, remedy, power or privilege with respect to any
occurrence be construed as a waiver of such right, remedy, power or privilege
with respect to any other occurrence.
(b) Controlling Law. This Agreement and all questions relating to its
validity, interpretation, performance and enforcement (including, without
limitation, provisions concerning limitations of actions), shall be governed by
and construed in accordance with the laws of the State of New Mexico,
notwithstanding any conflict-of-laws doctrines of such state or other
jurisdiction to the contrary, and without the aid of any canon, custom or rule
of law requiring construction against the draftsman.
(c) Notices.All notices, requests, demands and other communications
required or permitted under this Agreement shall be in writing and shall be
deemed to have been duly given, made and received only when delivered
<PAGE>13
(personally, by courier service such as Federal Express, or by other messenger)
or when deposited in the United States mails, registered or certified mail,
postage prepaid, return receipt requested, addressed as set forth below:
(i) If to Employee:
Courtlandt Miller
Diagnostek, Inc.
405 Park Avenue
New York, New York 10022
(ii) If to Company:
Diagnostek, Inc.
4500 Alexander Boulevard, N.E.
Albuquerque, New Mexico 87107
Attention: Chairman
with a copy, given in the
manner prescribed above, to:
Courtlandt G. Miller, Esquire
Diagnostek, Inc.
405 Park Avenue, 16th Floor
New York, New York 10022
In addition, notice by mail shall be by air mail if posted
outside of the continental United States.
Any party may alter the address to which communications or
copies are to be sent by giving notice of such change of address in conformity
with the provisions of this paragraph for the giving of notice.
<PAGE>14
(d) Binding Nature of Agreement. This Agreement shall be binding upon
and inure to the benefit of Company and its successors and assigns and shall be
binding upon Employee, his heirs and legal representatives.
(e) Execution in Counterparts. This Agreement may be executed in any
number of counterparts, each of which shall be deemed to be an original as
against any party whose signature appears thereon, and all of which shall
together constitute one and the same instrument. The Agreement shall become
binding when one or more counterparts hereof, individually or taken together,
shall bear the signatures of all of the parties reflected hereon as the
signatories.
(f) Provisions Separable. The provisions of this Agreement are
independent of and separable from each other, and no provision shall be affected
or rendered invalid or unenforceable by virtue of the fact that for any reason
any other or others of them may be invalid or unenforceable in whole or in part.
(g) Entire Agreement.This Agreement contains the entire understanding
among the parties hereto with respect to the subject matter hereof, and
supersedes all prior and contemporaneous agreements and understandings,
inducements or conditions, express or implied, oral or written, except as herein
contained. The express terms hereof control and supersede any course of
performance and/or usage of the trade inconsistent with any of the terms hereof.
This Agreement may not be modified or amended other than by an agreement in
writing.
(h) Paragraph Headings. The paragraph headings in this Agreement are
for convenience only; they form no part of this Agreement and shall
<PAGE>15
not affect its interpretation.
(i) Gender, Etc. Words used herein, regardless of the number and
gender specifically used, shall be deemed and construed to include any other
number, singular or plural, and any other gender, masculine, feminine or neuter,
as the context indicates is appropriate.
(j) Number of Days. In computing the number of days for purposes of
this Agreement, all days shall be counted, including Saturdays, Sundays and
holidays; provided, however, that if the final day of any time period falls on a
Saturday, Sunday or holiday on which federal banks are or may elect to be
closed, then the final day shall be deemed to be the next day which is not a
Saturday, Sunday or such holiday.
<PAGE>16
IN WITNESS WHEREOF, the parties have executed and delivered this Agreement
on the date first above written.
DIAGNOSTEK, INC.
By: ---------------------------------
William A. Barron
President and
Chief Operating Officer
---------------------------------
Courtlandt G. Miller, Employee
EXHIBIT 10.12
AMENDED AND RESTATED
EMPLOYMENT AGREEMENT
THIS AGREEMENT, made effective as of this 1st day of December 1994, by and
between DIAGNOSTEK, INC., a Delaware corporation (hereinafter called "Company"),
and WILLIAM A. BARRON, an individual (hereinafter called "Employee"). This
Agreement amends and restates in its entirety the Employment Agreement dated the
15th day of March 1993, as amended the 6th day of May 1994.
W I T N E S S E T H:
Company wishes to employ Employee and Employee wishes to enter into the
employ of Company on the terms and conditions contained in this Agreement.
NOW, THEREFORE, in consideration of the facts, mutual promises and
covenants contained herein and intending to be legally bound hereby, Company and
Employee agree as follows:
1. Employment. Company hereby employs Employee and Employee hereby accepts
employment by Company for the period and upon the terms and conditions contained
in this Agreement.
2. Office and Duties.
(a) Employee shall serve Company as its President and Chief Operating
Officer and shall have such authority and responsibilities as typically accorded
a chief operating officer, subject to such further duties and responsibili-
<PAGE>2
ties granted and reasonable restrictions (considered in light of the duties and
responsibilities accorded) imposed by Company's Chief Executive Officer to whom
Employee shall report. Employee may also serve as an officer and/or director of
the Company's subsidiaries for no additional compensation. Employee shall be
based in Albuquerque, New Mexico.
(b) Throughout the term of this Agreement, Employee shall devote his
entire working time, energy, skill and best efforts to the performance of his
duties hereunder in a manner which will faithfully and diligently further the
business and interests of Company and its subsidiaries. Notwithstanding the
foregoing, Employee may engage in other activities so long as such activities do
not conflict with the performance of his duties on behalf of the Company in
accordance with this Agreement and Employee receives prior approval from
Company's Board of Directors, which approval shall not unreasonably be withheld.
3. Term. This Agreement shall be for an original term of five (5) years
(the "Original Term"), commencing on March 15, 1993 and ending on the fifth
anniversary thereof, unless sooner terminated as hereinafter provided. Unless
either party elects to terminate this Agreement at the end of the Original Term
or any Renewal Term, as defined herein, by giving the other party notice of such
election at least sixty (60) days before the expiration of the then current
term, this Agreement shall be deemed to have been renewed for an additional term
of one (1) year (a "Renewal Term") commencing on the day after the expiration of
the then current term.
4. Compensation.
(a) For all of the services rendered by Employee to Compa-
<PAGE>3
ny, Employee shall receive an annual base salary of One Hundred Eighty Thousand
Dollars ($180,000), payable in reasonable periodic installments in accordance
with Company's regular payroll practices in effect from time to time, but in no
event less frequently than monthly. Commencing on the first anniversary and on
each anniversary thereof, Employee's annual base salary shall be increased by an
amount equal to one hundred four percent (104%) of the then applicable base
salary. Such initial base salary and base salary as adjusted shall hereafter be
referred to as "Base Salary."
(b) Beginning with the fiscal year ending March 31, 1994, Employee
shall be entitled to receive an incentive bonus paid within ninety (90) days
after the end of each fiscal year during the term of this Agreement (the
"Incentive Bonus") which, for each fiscal year, shall be payable if the
Company's annual income, after deduction of state and federal income taxes
determined on a consolidated basis by the Company's regularly employed certified
public accountants, in accordance with generally accepted accounting principles,
but without giving effect to any non-recurring gains or losses ("Annual Income")
exceeds 135% of the Company's Annual Income for the fiscal year ended March 31,
1994 and, for each fiscal year thereafter, exceeds 135% of the prior fiscal
year's base ("Base").
By way of example:
the 1995 Base shall be 135% of Annual Income for the fiscal year ended
March 31, 1994;
the 1996 Base shall be 135% of the 1995 Base;
the 1997 Base shall be 135% of the 1996 Base;
<PAGE>4
the 1998 Base shall be 135% of the 1997 Base;
the 1999 Base shall be 135% of the 1998 Base.
The Incentive Bonus shall equal thirty percent (30%) of an amount
equal to the Base Salary then being paid to Employee on the last day of the
fiscal year for which the Incentive Bonus is payable.
Notwithstanding the foregoing, beginning in the fiscal year ended
March 31, 1994, Employee shall be paid an annual minimum Incentive Bonus of
$20,000.
(c) Throughout the term of this Agreement and as long as they are kept
in force by Company, Employee shall be entitled to participate in and receive
the benefits of any profit sharing or retirement plans and any health, life,
accident or disability insurance plan or programs made available to other
similarly situated officers of Company.
(d) Employee shall be entitled to four (4) weeks paid vacation during
each year of the term of this Agreement.
(e) All references herein to compensation to be paid to Employee are
to the gross amounts thereof which are due hereunder. The Company shall have the
right to deduct therefrom all taxes which may be required to be deducted or
withheld under any provision of the law (including, but not limited to, social
security payments, income tax withholding and any other deduction required by
law) now in effect or which may become effective at any time during the term of
this agreement.
(f) Throughout the term of this Agreement, Company will
<PAGE>5
furnish Employee with $600 per month for an automobile.
5. Expenses. Company will reimburse Employee for all reasonable expenses
incurred by Employee in connection with the performance of Employee's duties
hereunder upon receipt of vouchers therefore and in accordance with Company's
regular reimbursement procedures and practices in effect from time to time.
6. Authority to Bind Company.Subject to contrary instruction from the Board
of Directors of Company, Employee shall be authorized to make such disbursements
and purchases and to incur such liabilities on behalf of Company and to
otherwise obligate Company in a manner consistent with the duties and
responsibilities generally accorded a chief operating officer.
7. Disability.
(a) If Employee becomes unable to perform his duties hereunder due to
partial or total disability or incapacity resulting from a mental or physical
illness, injury or any other cause, Company will continue the payments and
benefits described in paragraph 4 hereof for a period of twenty-four (24) months
following the date Employee is first unable to perform his duties due to such
disability or incapacity and shall pay Employee the Incentive Bonus for the year
in which Employee is first unable to perform his duties. Thereafter, Company
shall have no obligation for base salary or other compensation payments to
Employee during the continuance of such disability or incapacity.
(b) If Employee is unable to perform his duties hereunder
<PAGE>6
due to partial or total disability or incapacity resulting from a mental or
physical illness, injury or any other cause for a period of twelve (12)
consecutive months during any twenty-four-month period, Company shall have the
right to terminate this Agreement thereafter, in which event Company shall have
no further obligations or liabilities hereunder after the date of such
termination, except for payments required under paragraph 7(a).
8. Termination.
(a) In the event of Employee's death during the term of this
Agreement, all payments of Base Salary shall terminate as of the end of the
thirteenth month following the date of death, provided, however, that the
Incentive Bonus provided for herein shall be paid to the estate of Employee for
the fiscal year in which his death occurred. The Company shall have no other
obligations to Employee's estate or legal representative hereunder.
(b) Company may discharge employee at any time for criminal conduct
constituting a felony offense, alcohol or drug abuse which impairs Employee's
performance of his duties hereunder, continuing misconduct or dereliction of
duty, gross negligence or incompetence, any willful violation of any material
express direction or any reasonable material rule or regulation established by
the Company's Board of Directors from time to time regarding the conduct of its
business, misrepresentation made in this Agreement, or any material violation by
Employee of the terms and conditions of this Agreement, in which event Company
shall have no further obligations or liabilities hereunder after the date of
such termination.
<PAGE>7
(c) If employment is terminated
(i) by the Company for any reason other than breach of this
Agreement by Employee or the reasons set forth in Paragraphs 7(b), 8(a) or (b)
hereof; or
(ii) by Employee after the occurrence of a Termination Event (as
hereinafter defined), the Company shall pay Employee, as severance pay, in a
lump sum, in cash, ("Termination Compensation") on the fifth day following such
termination, an amount equal to two times the payments and benefits described in
paragraph 4 hereof. The Termination Compensation section shall be in lieu of any
severance payment to which Employee may be entitled under any other provisions
of this Agreement other than payments under a pension, profit-sharing or other
plan that is "qualified" as such term in used in Section 401 of the Code.
(iii) employee shall be entitled to exercise those number of
stock options that have vested to him, under the terms of the applicable stock
option agreement and stock option plan, through the date of termination.
Employee shall have ninety (90) days from the date of termination to exercise
such vested options after which period any unexercised vested options shall be
null and void.
(d) For the purposes of this Paragraph 8, the term "Termination Event"
shall mean the occurrence of any of the following events:
(i) an attempt shall be made to materially and adversely change
the nature of Employee's engagement with the Company, including, without
limitation, material restrictions of Employee's functions; or
<PAGE>8
(ii) any requirement that Employee perform services primarily at
a location other than in Albuquerque, New Mexico.
(iii) the occurrence of either of the following events during the
term hereof: (1) a majority of the Company's then outstanding capital stock, or
property, business or assets are sold or otherwise transferred or the Company is
consolidated with or merged into or with any other entity on a basis whereby the
Company is not the surviving entity of such combination; or (2) a majority of
the Board of Directors of the Company shall be replaced by individuals who were
not directors of the Company on the date hereof and the new Board takes hostile
action against Employee.
9. Company Property.All written research, advertising, sales,
manufacturers' and other written materials or articles or information, including
without limitation data processing reports, written customer sale analyses,
invoices, price lists or written information, samples, or any other written
materials or data of any kind furnished to Employee by Company or any subsidiary
thereof or predecessor of either or developed by Employee on behalf of Company
or any subsidiary thereof or predecessor of either or at Company's, or such
subsidiary's or predecessor's direction or for any of their respective use or
otherwise in connection with Employee's employment hereunder and, in each case,
related to Company's, subsidiary's or predecessor's business, are and shall
remain the sole and confidential property of Company; provided, however, that
the foregoing shall not apply to any material in the public domain other than by
reason of a breach of this Paragraph 9. If Company requests the return of
<PAGE>9
such materials at any time during or at or after the termination of Employee's
employment, Employee shall immediately deliver the same to Company. Employee
shall make full disclosure to Company of all such writings and materials and
shall do everything necessary or desirable to vest the absolute title thereto in
Company. Employee shall not be entitled to any additional or special
compensation or reimbursement regarding any and all such writings and materials.
10. Non-Competition, Trade Secrets, Etc.
(a) During the term of this Agreement and, if termination of
employment occurs during the Original or Renewal Term for whatever reason, for a
period equal two (2) years from the date of termination of employment, Employee
shall not, directly or indirectly, induce or attempt to influence any employee
of Company or any subsidiary to terminate his employment with Company or any
subsidiary and shall not engage in (as a principal, partner, director, officer,
agent, employee, consultant or otherwise) or be financially interested in any
business which is engaged in such businesses as the Company or any of its
subsidiaries is then currently engaged (collectively, "Restricted Business
Activity"). However, nothing contained in this Paragraph 10 shall prevent
Employee from (i) holding for investment no more than five percent (5%) of any
class of equity securities of a company whose securities are traded on a
national securities exchange; (ii) engaging in any activity which is not deemed
a Restricted Business Activity; or (iii) engaging in an activity which
previously was considered a Restricted Business Activity but has no longer been
pursued, whether or not actively, by the Company for a consecutive period of
twelve (12)
<PAGE>10
months prior to the termination date of this Agreement.
(b) During the term of this Agreement and for a period ending
concurrently with the termination of the restriction under subparagraph 10(a)
hereof, Employee shall not use for his personal benefit, or disclose,
communicate or divulge to, or use for the direct or indirect benefit of any
person, firm, association or company other than the Company, any material
referred to in Paragraph 9 above or any information regarding the business
methods, business policies, procedures, techniques, research or development
projects or results, trade secrets, or other knowledge or processes of or
developed by the Company or any subsidiary thereof or any predecessor of either,
or any names and addresses of customers or clients or any data on or relating to
past, present or prospective customers or clients or any other confidential
information relating to or dealing with the business operations or activities of
Company or any subsidiary thereof or any predecessor or either, made known to
Employee or learned or acquired by Employee while in the employ of Company;
provided, however, that notwithstanding anything herein to the contrary, if any
of the foregoing is reasonably deemed to be proprietary to the Company or is
protected by law as proprietary to the Company (by copyright, patent, trademark
or otherwise), this covenant shall be deemed to run indefinitely with respect to
such proprietary matter. Nothing contained herein shall preclude Employee from
employing any of the foregoing methods, policies, procedures, etc. in an
activity which is not a Restricted Business Activity so long as such methods,
policies, procedures, etc. are not proprietary or treated as confidential by
Company.
<PAGE>11
(c) Employee acknowledges that the restrictions contained in the
foregoing subparagraphs (a) and (b), in view of the nature of the business in
which Company is engaged, are reasonable and necessary in order to protect the
legitimate interests of Company and that any violation thereof would result in
irreparable injuries to Company, and Employee therefore acknowledges that, in
the event of his violation of any of these restrictions, Company shall be
entitled to obtain from any court of competent jurisdiction preliminary and
permanent injunctive relief in addition to any other rights or remedies to which
Company may be entitled.
(d) If the period of time, the area specified or the scope of activity
restricted in subparagraph (a) above should be adjudged unreasonable in any
proceeding, then the period of time shall be reduced by such number of months or
the area shall be reduced by the elimination of such portion thereof or the
scope of restricted activity shall be modified, or any or all of the foregoing
so that such restrictions may be enforced in such area and for such time as is
adjudged to be reasonable. If Employee violates any of the restrictions
contained in the foregoing subparagraph (a), the restrictive period shall not
run in favor of Employee from the time of the commencement of any such violation
until such time as such violation shall be cured by Employee to the satisfaction
of Company.
11. Prior Agreements.Employee represents to Company and Company represents
to Employee (a) that there are no restrictions, agreements or understandings
whatsoever to which the representing party is a party which would prevent or
make unlawful such party's execution of this Agreement or Employee's em-
<PAGE>12
ployment hereunder, (b) that the representing party's execution of this
Agreement and Employee's employment hereunder shall not constitute a breach of
any contract, agreement or understanding, oral or written, to which to
representing party is a party or by which such party is bound and (c) that the
representing party is free and able to execute this Agreement and, in the case
of Employee, to enter into employment by Company.
12. Miscellaneous.
(a) Indulgences, Etc.Neither the failure nor any delay on the part of
either party to exercise any right, remedy, power or privilege under this
Agreement shall operate as a waiver thereof, nor shall any single or partial
exercise of any right, remedy, power or privilege preclude any other or further
exercise of the same or of any other right, remedy, power or privilege, nor
shall any waiver of any right, remedy, power or privilege with respect to any
occurrence be construed as a waiver of such right, remedy, power or privilege
with respect to any other occurrence.
(b) Controlling Law. This Agreement and all questions relating to its
validity, interpretation, performance and enforcement (including, without
limitation, provisions concerning limitations of actions), shall be governed by
and construed in accordance with the laws of the State of New Mexico,
notwithstanding any conflict-of-laws doctrines of such state or other
jurisdiction to the contrary, and without the aid of any canon, custom or rule
of law requiring construction against the draftsman.
(c) Notices.All notices, requests, demands and other
<PAGE>13
communications required or permitted under this Agreement shall be in writing
and shall be deemed to have been duly given, made and received only when
delivered (personally, by courier service such as Federal Express, or by other
messenger) or when deposited in the United States mails, registered or certified
mail, postage prepaid, return receipt requested, addressed as set forth below:
(i) If to Employee:
William A. Barron
2824 Tramway Cr., N.E.
Albuquerque, New Mexico 87122
(ii) If to Company:
Diagnostek, Inc.
4500 Alexander Boulevard, N.E.
Albuquerque, New Mexico 87107
Attention: Chairman
with a copy, given in the manner
prescribed above, to:
Courtlandt G. Miller, Esquire
Diagnostek, Inc.
405 Park Avenue, 16th Floor
New York, New York 10022
In addition, notice by mail shall be by air mail if posted
outside of the continental United States.
<PAGE>14
Any party may alter the address to which communications or
copies are to be sent by giving notice of such change of address in conformity
with the provisions of this paragraph for the giving of notice.
(d) Binding Nature of Agreement. This Agreement shall be binding
upon and inure to the benefit of Company and its successors and assigns and
shall be binding upon Employee, his heirs and legal representatives.
(e) Execution in Counterparts. This Agreement may be executed in
any number of counterparts, each of which shall be deemed to be an original as
against any party whose signature appears thereon, and all of which shall
together constitute one and the same instrument. The Agreement shall become
binding when one or more counterparts hereof, individually or taken together,
shall bear the signatures of all of the parties reflected hereon as the
signatories.
(f) Provisions Separable. The provisions of this Agreement are
independent of and separable from each other, and no provision shall be affected
or rendered invalid or unenforceable by virtue of the fact that for any reason
any other or others of them may be invalid or unenforceable in whole or in part.
(g) Entire Agreement.This Agreement contains the entire
understanding among the parties hereto with respect to the subject matter
hereof, and supersedes all prior and contemporaneous agreements and
understandings, inducements or conditions, express or implied, oral or written,
except as herein contained. The express terms hereof control and supersede any
course of performance and/or usage of the trade inconsistent with any of the
terms hereof. This Agreement may not be modi-
<PAGE>15
fied or amended other than by an agreement in writing.
(h) Paragraph Headings. The paragraph headings in this Agreement
are for convenience only; they form no part of this Agreement and shall not
affect its interpretation.
(i) Gender, Etc. Words used herein, regardless of the number and
gender specifically used, shall be deemed and construed to include any other
number, singular or plural, and any other gender, masculine, feminine or neuter,
as the context indicates is appropriate.
(j) Number of Days. In computing the number of days for purposes
of this Agreement, all days shall be counted, including Saturdays, Sundays and
holidays; provided, however, that if the final day of any time period falls on a
Saturday, Sunday or holiday on which federal banks are or may elect to be
closed, then the final day shall be deemed to be the next day which is not a
Saturday, Sunday or such holiday.
<PAGE>16
IN WITNESS WHEREOF, the parties have executed and delivered this Agreement
on the date first above written.
DIAGNOSTEK, INC.
By: Courtlandt G. Miller
Executive Vice President
and General Counsel
William A. Barron, Employee
EXHIBIT 10.13
AMENDED AND RESTATED
EMPLOYMENT AGREEMENT
THIS AGREEMENT, made as of this 1st day of December 1994, by and between
DIAGNOSTEK, INC., a Delaware corporation (hereinafter called "Company"), and
ANDREW P. MASETTI, an individual (hereinafter called "Employee"). This Agreement
amends and restates in its entirety the Employment Agreement entered into in
June 1994.
W I T N E S S E T H:
Company wishes to employ Employee and Employee wishes to enter into the
employ of Company on the terms and conditions contained in this Agreement.
NOW, THEREFORE, in consideration of the facts, mutual promises and
covenants contained herein and intending to be legally bound hereby, Company and
Employee agree as follows:
1. Employment. Company hereby employs Employee and Employee hereby accepts
employment by Company for the period and upon the terms and conditions contained
in this Agreement.
2. Office and Duties.
(a) Employee shall serve Company as its Executive Vice President and
Chief Financial Officer and shall have such authority and responsibilities as
typically accorded a chief financial officer, subject to such further duties and
responsibilities granted and reasonable restrictions (considered in light of the
duties and responsibilities accorded) imposed by Company's Chief Operating
Officer to whom
<PAGE>2
Employee shall report. Employee may also serve as an officer and/or director of
the Company's subsidiaries for no additional compensation. Employee shall be
based in Albuquerque, New Mexico.
(b) Throughout the term of this Agreement, Employee shall devote his
entire working time, energy, skill and best efforts to the performance of his
duties hereunder in a manner which will faithfully and diligently further the
business and interests of Company and its subsidiaries. Notwithstanding the
foregoing, Employee may engage in other activities so long as such activities do
not conflict with the performance of his duties on behalf of the Company in
accordance with this Agreement and Employee receives prior approval from
Company's Board of Directors, which approval shall not unreasonably be withheld.
3. Term. This Agreement shall be for an original term of five (5) years
(the "Original Term"), commencing on June 30, 1994 and ending on the fifth
anniversary thereof, unless sooner terminated as hereinafter provided. Unless
either party elects to terminate this Agreement at the end of the Original Term
or any Renewal Term, as defined herein, by giving the other party notice of such
election at least sixty (60) days before the expiration of the then current
term, this Agreement shall be deemed to have been renewed for an additional term
of one (1) year (a "Renewal Term") commencing on the day after the expiration of
the then current term.
4. Compensation.
(a) For all of the services rendered by Employee to Company, Employee
shall receive an annual base salary of One Hundred Twenty-Five Thousand Dollars
($125,000), payable in reasonable periodic installments in accordance
<PAGE>3
with Company's regular payroll practices in effect from time to time, but in no
event less frequently than monthly. Commencing on the first anniversary and on
each anniversary thereof, Employee's annual base salary shall be increased by an
amount equal to one hundred four percent (104%) of the then applicable base
salary. Such initial base salary and base salary as adjusted shall hereafter be
referred to as "Base Salary."
(b) Beginning with the fiscal year ending March 31, 1995, Employee
shall be entitled to receive an incentive bonus paid within ninety (90) days
after the end of each fiscal year during the term of this Agreement (the
"Incentive Bonus") which, for each fiscal year, shall be payable if the
Company's annual income, after deduction of state and federal income taxes
determined on a consolidated basis by the Company's regularly employed certified
public accountants, in accordance with generally accepted accounting principles,
but without giving effect to any non-recurring gains or losses ("Annual Income")
exceeds 135% of the Company's Annual Income for the fiscal year ended March 31,
1994 and, for each fiscal year thereafter, exceeds 135% of the prior fiscal
year's base ("Base").
By way of example:
the 1995 Base shall be 135% of Annual Income for the fiscal year ended
March 31, 1994;
the 1996 Base shall be 135% of the 1995 Base;
the 1997 Base shall be 135% of the 1996 Base;
the 1998 Base shall be 135% of the 1997 Base;
the 1999 Base shall be 135% of the 1998 Base.
<PAGE>4
The Incentive Bonus shall equal thirty percent (30%) of an amount
equal to the Base Salary then being paid to Employee on the last day of the
fiscal year for which the Incentive Bonus is payable.
Notwithstanding the foregoing, beginning in the fiscal year ended
March 31, 1995, Employee shall be paid an annual minimum Incentive Bonus of
$20,000.
(c) Throughout the term of this Agreement and as long as they are kept
in force by Company, Employee shall be entitled to participate in and receive
the benefits of any profit sharing or retirement plans and any health, life,
accident or disability insurance plan or programs made available to other
similarly situated officers of Company.
(d) Employee shall be entitled to four (4) weeks paid vacation during
each year of the term of this Agreement.
(e) All references herein to compensation to be paid to Employee are
to the gross amounts thereof which are due hereunder. The Company shall have the
right to deduct therefrom all taxes which may be required to be deducted or
withheld under any provision of the law (including, but not limited to, social
security payments, income tax withholding and any other deduction required by
law) now in effect or which may become effective at any time during the term of
this agreement.
(f) Throughout the term of this Agreement, Company will furnish
Employee with $600 per month for an automobile.
5. Expenses. Company will reimburse Employee for all reason-
<PAGE>5
able expenses incurred by Employee in connection with the performance of
Employee's duties hereunder upon receipt of vouchers therefore and in accordance
with Company's regular reimbursement procedures and practices in effect from
time to time.
6. Authority to Bind Company.Subject to contrary instruction from the Board
of Directors of Company, Employee shall be authorized to make such disbursements
and purchases and to incur such liabilities on behalf of Company and to
otherwise obligate Company in a manner consistent with the duties and
responsibilities generally accorded a chief finance officer.
7. Disability.
(a) If Employee becomes unable to perform his duties hereunder due to
partial or total disability or incapacity resulting from a mental or physical
illness, injury or any other cause, Company will continue the payments and
benefits described in paragraph 4 hereof for a period of twenty-four (24) months
following the date Employee is first unable to perform his duties due to such
disability or incapacity and shall pay Employee the Incentive Bonus for the year
in which Employee is first unable to perform his duties. Thereafter, Company
shall have no obligation for base salary or other compensation payments to
Employee during the continuance of such disability or incapacity.
(b) If Employee is unable to perform his duties hereunder due to
partial or total disability or incapacity resulting from a mental or physical
illness, injury or any other cause for a period of twelve (12) consecutive
<PAGE>6
months during any twenty-four-month period, Company shall have the right to
terminate this Agreement thereafter, in which event Company shall have no
further obligations or liabilities hereunder after the date of such termination,
except for payments required under paragraph 7(a).
8 Termination.
(a) In the event of Employee's death during the term of this
Agreement, all payments of Base Salary shall terminate as of the end of the
thirteenth month following the date of death, provided, however, that the
Incentive Bonus provided for herein shall be paid to the estate of Employee for
the fiscal year in which his death occurred. The Company shall have no other
obligations to Employee's estate or legal representative hereunder.
(b) Company may discharge employee at any time for criminal conduct
constituting a felony offense, alcohol or drug abuse which impairs Employee's
performance of his duties hereunder, continuing misconduct or dereliction of
duty, gross negligence or incompetence, any willful violation of any material
express direction or any reasonable material rule or regulation established by
the Company's Board of Directors from time to time regarding the conduct of its
business, misrepresentation made in this Agreement, or any material violation by
Employee of the terms and conditions of this Agreement, in which event Company
shall have no further obligations or liabilities hereunder after the date of
such termination.
(c) If employment is terminated
(i) by the Company for any reason other than breach
<PAGE>7
of this Agreement by Employee or the reasons set forth in Paragraphs 7(b), 8(a)
or (b) hereof; or
(ii) by Employee after the occurrence of a Termination Event (as
hereinafter defined), the Company shall pay Employee, as severance pay, in a
lump sum, in cash, ("Termination Compensation") on the fifth day following such
termination, an amount equal to one times the payments and benefits described in
paragraph 4 hereof. The Termination Compensation section shall be in lieu of any
severance payment to which Employee may be entitled under any other provisions
of this Agreement other than payments under a pension, profit-sharing or other
plan that is "qualified" as such term in used in Section 401 of the Code.
(iii) employee shall be entitled to exercise those number of
stock options that have vested to him, under the terms of the applicable stock
option agreement and stock option plan, through the date of termination.
Employee shall have ninety (90) days from the date of termination to exercise
such vested options after which period any unexercised vested options shall be
null and void.
(d) For the purposes of this Paragraph 8, the term "Termination Event"
shall mean the occurrence of any of the following events:
(i) an attempt shall be made to materially and adversely change
the nature of Employee's engagement with the Company, including, without
limitation, material restrictions of Employee's functions; or
(ii) any requirement that Employee perform services primarily at
a location other than in Albuquerque, New Mexico.
<PAGE>8
(iii) the occurrence of either of the following events during the
term hereof: (1) a majority of the Company's then outstanding capital stock, or
property, business or assets are sold or otherwise transferred or the Company is
consolidated with or merged into or with any other entity on a basis whereby the
Company is not the surviving entity of such combination; or (2) a majority of
the Board of Directors of the Company shall be replaced by individuals who were
not directors of the Company on the date hereof and the new Board takes hostile
action against Employee.
9. Company Property.All written research, advertising, sales,
manufacturers' and other written materials or articles or information, including
without limitation data processing reports, written customer sale analyses,
invoices, price lists or written information, samples, or any other written
materials or data of any kind furnished to Employee by Company or any subsidiary
thereof or predecessor of either or developed by Employee on behalf of Company
or any subsidiary thereof or predecessor of either or at Company's, or such
subsidiary's or predecessor's direction or for any of their respective use or
otherwise in connection with Employee's employment hereunder and, in each case,
related to Company's, subsidiary's or predecessor's business, are and shall
remain the sole and confidential property of Company; provided, however, that
the foregoing shall not apply to any material in the public domain other than by
reason of a breach of this Paragraph 9. If Company requests the return of such
materials at any time during or at or after the termination of Employee's
employment, Employee shall immediately deliver the same to Company. Employee
shall
<PAGE>9
make full disclosure to Company of all such writings and materials and shall do
everything necessary or desirable to vest the absolute title thereto in Company.
Employee shall not be entitled to any additional or special compensation or
reimbursement regarding any and all such writings and materials.
10. Non-Competition, Trade Secrets, Etc.
(a) During the term of this Agreement and, if termination of
employment occurs during the Original or Renewal Term for whatever reason, for a
period equal one (1) year from the date of termination of employment, Employee
shall not, directly or indirectly, induce or attempt to influence any employee
of Company or any subsidiary to terminate his employment with Company or any
subsidiary and shall not engage in (as a principal, partner, director, officer,
agent, employee, consultant or otherwise) or be financially interested in any
business which is engaged in such businesses as the Company or any of its
subsidiaries is then currently engaged (collectively, "Restricted Business
Activity"). However, nothing contained in this Paragraph 10 shall prevent
Employee from (i) holding for investment no more than five percent (5%) of any
class of equity securities of a company whose securities are traded on a
national securities exchange; (ii) engaging in any activity which is not deemed
a Restricted Business Activity; or (iii) engaging in an activity which
previously was considered a Restricted Business Activity but has no longer been
pursued, whether or not actively, by the Company for a consecutive period of
twelve (12) months prior to the termination date of this Agreement.
(b) During the term of this Agreement and for a period end-
<PAGE>10
ing concurrently with the termination of the restriction under subparagraph
10(a) hereof, Employee shall not use for his personal benefit, or disclose,
communicate or divulge to, or use for the direct or indirect benefit of any
person, firm, association or company other than the Company, any material
referred to in Paragraph 9 above or any information regarding the business
methods, business policies, procedures, techniques, research or development
projects or results, trade secrets, or other knowledge or processes of or
developed by the Company or any subsidiary thereof or any predecessor of either,
or any names and addresses of customers or clients or any data on or relating to
past, present or prospective customers or clients or any other confidential
information relating to or dealing with the business operations or activities of
Company or any subsidiary thereof or any predecessor or either, made known to
Employee or learned or acquired by Employee while in the employ of Company;
provided, however, that notwithstanding anything herein to the contrary, if any
of the foregoing is reasonably deemed to be proprietary to the Company or is
protected by law as proprietary to the Company (by copyright, patent, trademark
or otherwise), this covenant shall be deemed to run indefinitely with respect to
such proprietary matter. Nothing contained herein shall preclude Employee from
employing any of the foregoing methods, policies, procedures, etc. in an
activity which is not a Restricted Business Activity so long as such methods,
policies, procedures, etc. are not proprietary or treated as confidential by
Company.
(c) Employee acknowledges that the restrictions contained in the
foregoing subparagraphs (a) and (b), in view of the nature of the business in
which
<PAGE>11
Company is engaged, are reasonable and necessary in order to protect the
legitimate interests of Company and that any violation thereof would result in
irreparable injuries to Company, and Employee therefore acknowledges that, in
the event of his violation of any of these restrictions, Company shall be
entitled to obtain from any court of competent jurisdiction preliminary and
permanent injunctive relief in addition to any other rights or remedies to which
Company may be entitled.
(d) If the period of time, the area specified or the scope of activity
restricted in subparagraph (a) above should be adjudged unreasonable in any
proceeding, then the period of time shall be reduced by such number of months or
the area shall be reduced by the elimination of such portion thereof or the
scope of restricted activity shall be modified, or any or all of the foregoing
so that such restrictions may be enforced in such area and for such time as is
adjudged to be reasonable. If Employee violates any of the restrictions
contained in the foregoing subparagraph (a), the restrictive period shall not
run in favor of Employee from the time of the commencement of any such violation
until such time as such violation shall be cured by Employee to the satisfaction
of Company.
11. Prior Agreements.Employee represents to Company and Company represents
to Employee (a) that there are no restrictions, agreements or understandings
whatsoever to which the representing party is a party which would prevent or
make unlawful such party's execution of this Agreement or Employee's employment
hereunder, (b) that the representing party's execution of this Agreement and
Employee's employment hereunder shall not constitute a breach of any contract,
agree-
<PAGE>12
ment or understanding, oral or written, to which to representing party is a
party or by which such party is bound and (c) that the representing party is
free and able to execute this Agreement and, in the case of Employee, to enter
into employment by Company.
12. Miscellaneous.
(a) Indulgences, Etc.Neither the failure nor any delay on the part of
either party to exercise any right, remedy, power or privilege under this
Agreement shall operate as a waiver thereof, nor shall any single or partial
exercise of any right, remedy, power or privilege preclude any other or further
exercise of the same or of any other right, remedy, power or privilege, nor
shall any waiver of any right, remedy, power or privilege with respect to any
occurrence be construed as a waiver of such right, remedy, power or privilege
with respect to any other occurrence.
(b) Controlling Law. This Agreement and all questions relating to its
validity, interpretation, performance and enforcement (including, without
limitation, provisions concerning limitations of actions), shall be governed by
and construed in accordance with the laws of the State of New Mexico,
notwithstanding any conflict-of-laws doctrines of such state or other
jurisdiction to the contrary, and without the aid of any canon, custom or rule
of law requiring construction against the draftsman.
(c) Notices.All notices, requests, demands and other communications
required or permitted under this Agreement shall be in writing and shall be
deemed to have been duly given, made and received only when delivered
<PAGE>13
(personally, by courier service such as Federal Express, or by other messenger)
or when deposited in the United States mails, registered or certified mail,
postage prepaid, return receipt requested, addressed as set forth below:
(i) If to Employee:
Andrew P. Masetti
1675 Tierra Del Rio
Albuquerque, New Mexico 87107
(ii) If to Company:
Diagnostek, Inc.
4500 Alexander Boulevard, N.E.
Albuquerque, New Mexico 87107
Attention: Chairman
with a copy, given in the manner
prescribed above, to:
Courtlandt G. Miller, Esquire
Diagnostek, Inc.
405 Park Avenue, 16th Floor
New York, New York 10022
In addition, notice by mail shall be by air mail if posted
outside of the continental United States.
Any party may alter the address to which communications or
copies are to be sent by giving notice of such change of address in conformity
with the provisions of this paragraph for the giving of notice.
<PAGE>14
(d) Binding Nature of Agreement. This Agreement shall be binding upon
and inure to the benefit of Company and its successors and assigns and shall be
binding upon Employee, his heirs and legal representatives.
(e) Execution in Counterparts. This Agreement may be executed in any
number of counterparts, each of which shall be deemed to be an original as
against any party whose signature appears thereon, and all of which shall
together constitute one and the same instrument. The Agreement shall become
binding when one or more counterparts hereof, individually or taken together,
shall bear the signatures of all of the parties reflected hereon as the
signatories.
(f) Provisions Separable. The provisions of this Agreement are
independent of and separable from each other, and no provision shall be affected
or rendered invalid or unenforceable by virtue of the fact that for any reason
any other or others of them may be invalid or unenforceable in whole or in part.
(g) Entire Agreement.This Agreement contains the entire understanding
among the parties hereto with respect to the subject matter hereof, and
supersedes all prior and contemporaneous agreements and understandings,
inducements or conditions, express or implied, oral or written, except as herein
contained. The express terms hereof control and supersede any course of
performance and/or usage of the trade inconsistent with any of the terms hereof.
This Agreement may not be modified or amended other than by an agreement in
writing.
(h) Paragraph Headings. The paragraph headings in this Agreement are
for convenience only; they form no part of this Agreement and shall
<PAGE>15
not affect its interpretation.
(i) Gender, Etc. Words used herein, regardless of the number and
gender specifically used, shall be deemed and construed to include any other
number, singular or plural, and any other gender, masculine, feminine or neuter,
as the context indicates is appropriate.
(j) Number of Days. In computing the number of days for purposes of
this Agreement, all days shall be counted, including Saturdays, Sundays and
holidays; provided, however, that if the final day of any time period falls on a
Saturday, Sunday or holiday on which federal banks are or may elect to be
closed, then the final day shall be deemed to be the next day which is not a
Saturday, Sunday or such holiday.
<PAGE>16
IN WITNESS WHEREOF, the parties have executed and delivered this Agreement
on the date first above written.
DIAGNOSTEK, INC.
By:
William A. Barron
President and
Chief Operating Officer
Andrew P. Masetti, Employee
EXHIBIT 10.14
EMPLOYMENT AGREEMENT
THIS AGREEMENT, made as of this 1st day of December 1994, by and between
DIAGNOSTEK, INC., a Delaware corporation (hereinafter called "Company"), and
ARTHUR C. SOLOMON, an individual (hereinafter called "Employee").
W I T N E S S E T H:
Company wishes to employ Employee and Employee wishes to enter into the
employ of Company on the terms and conditions contained in this Agreement.
NOW, THEREFORE, in consideration of the facts, mutual promises and
covenants contained herein and intending to be legally bound hereby, Company and
Employee agree as follows:
1. Employment. Company hereby employs Employee and Employee hereby accepts
employment by Company for the period and upon the terms and conditions contained
in this Agreement.
2. Office and Duties.
(a) Employee shall serve Company as its Executive Vice President and
shall have such authority and responsibilities as typically accorded such an
employee, subject to such further duties and responsibilities granted and
reasonable restrictions (considered in light of the duties and responsibilities
accorded) imposed by Company's Chief Operating Officer to whom Employee shall
report. Employee may also serve as an officer and/or director of the Company's
subsidiaries for no additional compensation. Employee shall be based in
Albuquerque, New Mexico.
<PAGE>2
(b) Throughout the term of this Agreement, Employee shall devote his
entire working time, energy, skill and best efforts to the performance of his
duties hereunder in a manner which will faithfully and diligently further the
business and interests of Company and its subsidiaries. Notwithstanding the
foregoing, Employee may engage in other activities so long as such activities do
not conflict with the performance of his duties on behalf of the Company in
accordance with this Agreement and Employee receives prior approval from
Company's Board of Directors, which approval shall not unreasonably be withheld.
3. Term. This Agreement shall be for an original term of five (5) years
(the "Original Term"), commencing on December 1, 1994 and ending on the fifth
anniversary thereof, unless sooner terminated as hereinafter provided. Unless
either party elects to terminate this Agreement at the end of the Original Term
or any Renewal Term, as defined herein, by giving the other party notice of such
election at least sixty (60) days before the expiration of the then current
term, this Agreement shall be deemed to have been renewed for an additional term
of one (1) year (a "Renewal Term") commencing on the day after the expiration of
the then current term.
4. Compensation.
(a) For all of the services rendered by Employee to Company, Employee
shall receive an annual base salary of One Hundred Thirty-Five Thousand Dollars
($135,000), payable in reasonable periodic installments in accordance with
Company's regular payroll practices in effect from time to time, but in no event
less frequently than monthly. Commencing on January 1, 1995 and on each anni-
<PAGE>3
versary thereof, Employee's annual base salary shall be increased by an amount
equal to one hundred four percent (104%) of the then applicable base salary.
Such initial base salary and base salary as adjusted shall hereafter be referred
to as "Base Salary."
(b) Beginning with the fiscal year ending March 31, 1995, Employee
shall be entitled to receive an incentive bonus paid within ninety (90) days
after the end of each fiscal year during the term of this Agreement (the
"Incentive Bonus") which, for each fiscal year, shall be payable if the
Company's annual income, after deduction of state and federal income taxes
determined on a consolidated basis by the Company's regularly employed certified
public accountants, in accordance with generally accepted accounting principles,
but without giving effect to any non-recurring gains or losses ("Annual Income")
exceeds 135% of the Company's Annual Income for the fiscal year ended March 31,
1994 and, for each fiscal year thereafter, exceeds 135% of the prior fiscal
year's base ("Base").
By way of example:
the 1995 Base shall be 135% of Annual Income for the fiscal year ended
March 31, 1994;
the 1996 Base shall be 135% of the 1995 Base;
the 1997 Base shall be 135% of the 1996 Base;
the 1998 Base shall be 135% of the 1997 Base;
the 1999 Base shall be 135% of the 1998 Base.
The Incentive Bonus shall equal thirty percent (30%) of an amount
equal to the Base Salary then being paid to Employee on the last day of the
<PAGE>4
fiscal year for which the Incentive Bonus is payable.
Notwithstanding the foregoing, beginning in the fiscal year ended
March 31, 1995, Employee shall be paid an annual minimum Incentive Bonus of
$15,000.
(c) Throughout the term of this Agreement and as long as they are kept
in force by Company, Employee shall be entitled to participate in and receive
the benefits of any profit sharing or retirement plans and any health, life,
accident or disability insurance plan or programs made available to other
similarly situated officers of Company.
(d) Employee shall be entitled to four (4) weeks paid vacation during
each year of the term of this Agreement.
(e) All references herein to compensation to be paid to Employee are
to the gross amounts thereof which are due hereunder. The Company shall have the
right to deduct therefrom all taxes which may be required to be deducted or
withheld under any provision of the law (including, but not limited to, social
security payments, income tax withholding and any other deduction required by
law) now in effect or which may become effective at any time during the term of
this agreement.
(f) Throughout the term of this Agreement, Company will furnish
Employee with $600 per month for an automobile.
5. Expenses. Company will reimburse Employee for all reasonable expenses
incurred by Employee in connection with the performance of Employee's duties
hereunder upon receipt of vouchers therefore and in accordance
<PAGE>5
with Company's regular reimbursement procedures and practices in effect from
time to time.
6. Authority to Bind Company.Subject to contrary instruction from the Board
of Directors of Company, Employee shall be authorized to make such disbursements
and purchases and to incur such liabilities on behalf of Company and to
otherwise obligate Company in a manner consistent with the duties and
responsibilities generally accorded a chief operating officer.
7. Disability.
(a) If Employee becomes unable to perform his duties hereunder due to
partial or total disability or incapacity resulting from a mental or physical
illness, injury or any other cause, Company will continue the payments and
benefits described in paragraph 4 hereof for a period of twenty-four (24) months
following the date Employee is first unable to perform his duties due to such
disability or incapacity and shall pay Employee the Incentive Bonus for the year
in which Employee is first unable to perform his duties. Thereafter, Company
shall have no obligation for base salary or other compensation payments to
Employee during the continuance of such disability or incapacity.
(b) If Employee is unable to perform his duties hereunder due to
partial or total disability or incapacity resulting from a mental or physical
illness, injury or any other cause for a period of twelve (12) consecutive
months during any twenty-four-month period, Company shall have the right to
terminate this Agreement thereafter, in which event Company shall have no
further obligations or liabilities
<PAGE>6
hereunder after the date of such termination, except for payments required under
paragraph 7(a).
8 Termination.
(a) In the event of Employee's death during the term of this
Agreement, all payments of Base Salary shall terminate as of the end of the
thirteenth month following the date of death, provided, however, that the
Incentive Bonus provided for herein shall be paid to the estate of Employee for
the fiscal year in which his death occurred. The Company shall have no other
obligations to Employee's estate or legal representative hereunder.
(b) Company may discharge employee at any time for criminal conduct
constituting a felony offense, alcohol or drug abuse which impairs Employee's
performance of his duties hereunder, continuing misconduct or dereliction of
duty, gross negligence or incompetence, any willful violation of any material
express direction or any reasonable material rule or regulation established by
the Company's Board of Directors from time to time regarding the conduct of its
business, misrepresentation made in this Agreement, or any material violation by
Employee of the terms and conditions of this Agreement, in which event Company
shall have no further obligations or liabilities hereunder after the date of
such termination.
(c) If employment is terminated
(i) by the Company for any reason other than breach of this
Agreement by Employee or the reasons set forth in Paragraphs 7(b), 8(a) or (b)
hereof; or
<PAGE>7
(ii) by Employee after the occurrence of a Termination Event (as
hereinafter defined), the Company shall pay Employee, as severance pay, in a
lump sum, in cash, ("Termination Compensation") on the fifth day following such
termination, an amount equal to two times the payments and benefits described in
paragraph 4 hereof. The Termination Compensation section shall be in lieu of any
severance payment to which Employee may be entitled under any other provisions
of this Agreement other than payments under a pension, profit-sharing or other
plan that is "qualified" as such term in used in Section 401 of the Code.
(d) For the purposes of this Paragraph 8, the term "Termination Event"
shall mean the occurrence of any of the following events:
(i) an attempt shall be made to materially and adversely change
the nature of Employee's engagement with the Company, including, without
limitation, material restrictions of Employee's functions; or
(ii) any requirement that Employee perform services primarily at
a location other than in Albuquerque, New Mexico.
(iii) the occurrence of either of the following events during the
term hereof: (1) a majority of the Company's then outstanding capital stock, or
property, business or assets are sold or otherwise transferred or the Company is
consolidated with or merged into or with any other entity on a basis whereby the
Company is not the surviving entity of such combination; or (2) a majority of
the Board of Directors of the Company shall be replaced by individuals who were
not directors of the Company on the date hereof and the new Board takes hostile
action
<PAGE>8
against Employee.
9. Company Property.All written research, advertising, sales,
manufacturers' and other written materials or articles or information, including
without limitation data processing reports, written customer sale analyses,
invoices, price lists or written information, samples, or any other written
materials or data of any kind furnished to Employee by Company or any subsidiary
thereof or predecessor of either or developed by Employee on behalf of Company
or any subsidiary thereof or predecessor of either or at Company's, or such
subsidiary's or predecessor's direction or for any of their respective use or
otherwise in connection with Employee's employment hereunder and, in each case,
related to Company's, subsidiary's or predecessor's business, are and shall
remain the sole and confidential property of Company; provided, however, that
the foregoing shall not apply to any material in the public domain other than by
reason of a breach of this Paragraph 9. If Company requests the return of such
materials at any time during or at or after the termination of Employee's
employment, Employee shall immediately deliver the same to Company. Employee
shall make full disclosure to Company of all such writings and materials and
shall do everything necessary or desirable to vest the absolute title thereto in
Company. Employee shall not be entitled to any additional or special
compensation or reimbursement regarding any and all such writings and materials.
10. Non-Competition, Trade Secrets, Etc.
(a) During the term of this Agreement and, if termination of
employment occurs during the Original or Renewal Term for whatever reason, for a
<PAGE>9
period equal two (2) years from the date of termination of employment, Employee
shall not, directly or indirectly, induce or attempt to influence any employee
of Company or any subsidiary to terminate his employment with Company or any
subsidiary and shall not engage in (as a principal, partner, director, officer,
agent, employee, consultant or otherwise) or be financially interested in any
business which is engaged in such businesses as the Company or any of its
subsidiaries is then currently engaged (collectively, "Restricted Business
Activity"). However, nothing contained in this Paragraph 10 shall prevent
Employee from (i) holding for investment no more than five percent (5%) of any
class of equity securities of a company whose securities are traded on a
national securities exchange; (ii) engaging in any activity which is not deemed
a Restricted Business Activity; or (iii) engaging in an activity which
previously was considered a Restricted Business Activity but has no longer been
pursued, whether or not actively, by the Company for a consecutive period of
twelve (12) months prior to the termination date of this Agreement.
(b) During the term of this Agreement and for a period ending
concurrently with the termination of the restriction under subparagraph 10(a)
hereof, Employee shall not use for his personal benefit, or disclose,
communicate or divulge to, or use for the direct or indirect benefit of any
person, firm, association or company other than the Company, any material
referred to in Paragraph 9 above or any information regarding the business
methods, business policies, procedures, techniques, research or development
projects or results, trade secrets, or other knowledge or processes of or
developed by the Company or any subsidiary thereof or any prede-
<PAGE>10
cessor of either, or any names and addresses of customers or clients or any data
on or relating to past, present or prospective customers or clients or any other
confidential information relating to or dealing with the business operations or
activities of Company or any subsidiary thereof or any predecessor or either,
made known to Employee or learned or acquired by Employee while in the employ of
Company; provided, however, that notwithstanding anything herein to the
contrary, if any of the foregoing is reasonably deemed to be proprietary to the
Company or is protected by law as proprietary to the Company (by copyright,
patent, trademark or otherwise), this covenant shall be deemed to run
indefinitely with respect to such proprietary matter. Nothing contained herein
shall preclude Employee from employing any of the foregoing methods, policies,
procedures, etc. in an activity which is not a Restricted Business Activity so
long as such methods, policies, procedures, etc. are not proprietary or treated
as confidential by Company.
(c) Employee acknowledges that the restrictions contained in the
foregoing subparagraphs (a) and (b), in view of the nature of the business in
which Company is engaged, are reasonable and necessary in order to protect the
legitimate interests of Company and that any violation thereof would result in
irreparable injuries to Company, and Employee therefore acknowledges that, in
the event of his violation of any of these restrictions, Company shall be
entitled to obtain from any court of competent jurisdiction preliminary and
permanent injunctive relief in addition to any other rights or remedies to which
Company may be entitled.
(d) If the period of time, the area specified or the scope of
<PAGE>11
activity restricted in subparagraph (a) above should be adjudged unreasonable in
any proceeding, then the period of time shall be reduced by such number of
months or the area shall be reduced by the elimination of such portion thereof
or the scope of restricted activity shall be modified, or any or all of the
foregoing so that such restrictions may be enforced in such area and for such
time as is adjudged to be reasonable. If Employee violates any of the
restrictions contained in the foregoing subparagraph (a), the restrictive period
shall not run in favor of Employee from the time of the commencement of any such
violation until such time as such violation shall be cured by Employee to the
satisfaction of Company.
11. Prior Agreements.Employee represents to Company and Company represents
to Employee (a) that there are no restrictions, agreements or understandings
whatsoever to which the representing party is a party which would prevent or
make unlawful such party's execution of this Agreement or Employee's employment
hereunder, (b) that the representing party's execution of this Agreement and
Employee's employment hereunder shall not constitute a breach of any contract,
agreement or understanding, oral or written, to which to representing party is a
party or by which such party is bound and (c) that the representing party is
free and able to execute this Agreement and, in the case of Employee, to enter
into employment by Company.
12. Miscellaneous.
(a) Indulgences, Etc.Neither the failure nor any delay on the part of
either party to exercise any right, remedy, power or privilege under this
<PAGE>12
Agreement shall operate as a waiver thereof, nor shall any single or partial
exercise of any right, remedy, power or privilege preclude any other or further
exercise of the same or of any other right, remedy, power or privilege, nor
shall any waiver of any right, remedy, power or privilege with respect to any
occurrence be construed as a waiver of such right, remedy, power or privilege
with respect to any other occurrence.
(b) Controlling Law. This Agreement and all questions relating to its
validity, interpretation, performance and enforcement (including, without
limitation, provisions concerning limitations of actions), shall be governed by
and construed in accordance with the laws of the State of New Mexico,
notwithstanding any conflict-of-laws doctrines of such state or other
jurisdiction to the contrary, and without the aid of any canon, custom or rule
of law requiring construction against the draftsman.
(c) Notices.All notices, requests, demands and other communications
required or permitted under this Agreement shall be in writing and shall be
deemed to have been duly given, made and received only when delivered
(personally, by courier service such as Federal Express, or by other messenger)
or when deposited in the United States mails, registered or certified mail,
postage prepaid, return receipt requested, addressed as set forth below:
(i) If to Employee:
Arthur C. Solomon
1504 Catron Ave., S.E..
Albuquerque, New Mexico 87123
<PAGE>13
(ii) If to Company:
Diagnostek, Inc.
4500 Alexander Boulevard, N.E.
Albuquerque, New Mexico 87107
Attention: Chairman
with a copy, given in the manner
prescribed above, to:
Courtlandt G. Miller, Esquire
Diagnostek, Inc.
405 Park Avenue, 16th Floor
New York, New York 10022
In addition, notice by mail shall be by air mail if posted
outside of the continental United States.
Any party may alter the address to which communications or copies
are to be sent by giving notice of such change of address in conformity with the
provisions of this paragraph for the giving of notice.
(d) Binding Nature of Agreement. This Agreement shall be binding upon
and inure to the benefit of Company and its successors and assigns and shall be
binding upon Employee, his heirs and legal representatives.
(e) Execution in Counterparts. This Agreement may be executed in any
number of counterparts, each of which shall be deemed to be an original as
against any party whose signature appears thereon, and all of which shall
together constitute one and the same instrument. The Agreement shall become
binding when one or more counterparts hereof, individually or taken together,
shall bear the
<PAGE>14
signatures of all of the parties reflected hereon as the signatories.
(f) Provisions Separable. The provisions of this Agreement are
independent of and separable from each other, and no provision shall be affected
or rendered invalid or unenforceable by virtue of the fact that for any reason
any other or others of them may be invalid or unenforceable in whole or in part.
(g) Entire Agreement.This Agreement contains the entire understanding
among the parties hereto with respect to the subject matter hereof, and
supersedes all prior and contemporaneous agreements and understandings,
inducements or conditions, express or implied, oral or written, except as herein
contained. The express terms hereof control and supersede any course of
performance and/or usage of the trade inconsistent with any of the terms hereof.
This Agreement may not be modified or amended other than by an agreement in
writing.
(h) Paragraph Headings. The paragraph headings in this Agreement are
for convenience only; they form no part of this Agreement and shall not affect
its interpretation.
(i) Gender, Etc. Words used herein, regardless of the number and
gender specifically used, shall be deemed and construed to include any other
number, singular or plural, and any other gender, masculine, feminine or neuter,
as the context indicates is appropriate.
(j) Number of Days. In computing the number of days for purposes of
this Agreement, all days shall be counted, including Saturdays, Sundays and
holidays; provided, however, that if the final day of any time period falls on
<PAGE>15
a Saturday, Sunday or holiday on which federal banks are or may elect to be
closed, then the final day shall be deemed to be the next day which is not a
Saturday, Sunday or such holiday.
<PAGE>16
IN WITNESS WHEREOF, the parties have executed and delivered this Agreement
on the date first above written.
DIAGNOSTEK, INC.
By:
William A. Barron
President and
Chief Operating Officer
Arthur C. Solomon, Employee
Exhibit 11.1
Statement re Computation of Primary and Fully
Diluted Earnings per Share
Weighted average number of common and common equivalent shares outstanding for
the purpose of calculating primary and fully diluted earnings per share is
computed as follows:
<TABLE>
<CAPTION>
Fully
Primary Diluted
<S> <C> <C>
Year ended March 31, 1995
Weighted average number of common shares outstanding 24,087,430 24,087,430
Weighted average number of dilutive common stock
options and warrants 942,419 1,356,790
----------- ----------
Weighted average common and common equivalent shares 25,029,849 25,444,220
========== ==========
Year ended March 31, 1994
Weighted average number of common shares outstanding 23,581,855 23,581,855
Weighted average number of dilutive common stock
options and warrants 1,142,870 1,411,631
---------- ----------
Weighted average common and common equivalent shares 24,724,725 24,993,486
========== ==========
Year ended March 31, 1993
Weighted average number of common shares outstanding 23,333,749 23,333,749
Weighted average number of dilutive common stock
options and warrants 817,654 996,597
---------- ----------
Weighted average common and common equivalent shares 24,151,403 24,330,346
========== ==========
</TABLE>
Exhibit 21.1
DIAGNOSTEK, INC. AND SUBSIDIARIES
Subsidiaries of Registrant
Year ended March 31, 1995
Registrant: Diagnostek, Inc.
Subsidiaries:
Diagnostek Pharmacy Services, Inc.
Health Care Services, Inc.
Microwave Scalpel, Inc.
Diagnostek of Springfield, Inc.
HPI Health Care Services, Inc.
HPI Hospital Systems Management, Inc.
Diagnostek Pharmacy, Inc.
Exhibit 23.1
Independent Auditors' Consent
The Board of Directors
Diagnostek, Inc.
We consent to the incorporation by reference in the Registration Statement (No.
33-73402) on Form S-3 and Registration Statement (33-85700 and 33-04091) on Form
S-8 of Diagnostek, Inc. of our reports dated June 5, 1995 relating to the
Consolidated Statement of Financial Position of Diagnostek, Inc. and
subsidiaries as of March 31, 1995 and 1994 and the related Consolidated
Statements of Earnings, Cash Flows, and Changes in Stockholders' Equity and
related schedule for each of the years in the three-year period ended March 31,
1995, which reports appear in the March 31, 1995 Form 10-K of Diagnostek, Inc.
Our report dated June 5, 1995, contains an explanatory paragraph that states the
Company is a defendant in shareholder litigation alleging disclosure violations,
the ultimate outcome of which cannot presently be determined. The consolidated
financial statements do not include any adjustment that might result from the
outcome of that uncertainty.
KPMG Peat Marwick LLP
Albuquerque, New Mexico
June 12, 1995
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000726606
<NAME> DIAGNOSTEK, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1995
<PERIOD-END> MAR-31-1995
<CASH> 4,149
<SECURITIES> 0
<RECEIVABLES> 59,471
<ALLOWANCES> 3,487
<INVENTORY> 28,966
<CURRENT-ASSETS> 110,993
<PP&E> 36,021
<DEPRECIATION> 13,070
<TOTAL-ASSETS> 266,450
<CURRENT-LIABILITIES> 69,382
<BONDS> 12,000
<COMMON> 244
0
0
<OTHER-SE> 187,459
<TOTAL-LIABILITY-AND-EQUITY> 266,450
<SALES> 670,791
<TOTAL-REVENUES> 670,791
<CGS> 610,267
<TOTAL-COSTS> 610,267
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,865
<INTEREST-EXPENSE> 2,195
<INCOME-PRETAX> 18,222
<INCOME-TAX> 7,238
<INCOME-CONTINUING> 10,984
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,984
<EPS-PRIMARY> 0.44
<EPS-DILUTED> 0.44
</TABLE>
