UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(MARK ONE)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003 OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number
Pharmacy Buying Association, Inc.
(Exact name of registrant as specified in its charter)
Missouri 43-1482785
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1575 N. Universal Ave., Suite 100, Kansas City, Missouri 64120
(Address of principal executive offices) (Zip Code)
(816) 245-5700
Registrant's telephone number, including area code
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|_|
At March 31, 2003, 11,380 shares of common stock, $1.00 par value, of the
registrant were outstanding.
Total number of pages 20.
Pharmacy Buying Association, Inc.
INDEX FORM 10-Q
Part I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
Consolidated Balance Sheets as of March 31, 2003 (unaudited)
and December 31, 2002
Consolidated Statements of Operations for the three
months ended March 31, 2003 and 2002 (unaudited)
Consolidated Statements of Cash Flows for the three
months ended March 31, 2003 and 2002 (unaudited)
Notes to Consolidated Financial Statements (unaudited)
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
ITEM 4 - CONTROLS AND PROCEDURES
Part II - OTHER INFORMATION
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURES
CERTIFICATIONS
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
PHARMACY BUYING ASSOCIATION, INC. AND SUBSIDIARY
D/B/A TRUECARE PHARMACY
INDEX TO FINANCIAL STATEMENTS
Consolidated financial statements:
Consolidated balance sheets as of March 31, 2003 (unaudited)
and December 31, 2002
Consolidated statements of operations for the three
months ended March 31, 2003 and 2002 (unaudited)
Consolidated statements of cash flows for the three months ended
March 31, 2003 and 2002 (unaudited)
Notes to consolidated financial statements (unaudited)
PHARMACY BUYING ASSOCIATION, INC. AND SUBSIDIARY
D/B/A TRUECARE PHARMACY
CONSOLIDATED BALANCE SHEETS
ASSETS
(Unaudited)
March 31, December 31,
2003 2002
------------ ------------
Current assets:
Accounts receivable $ 8,114,025 $ 8,138,869
Inventories 9,257,655 8,185,885
Prepaid expenses 176,755 152,374
------------ ------------
Total current assets 17,548,435 16,477,128
Investment 500,000 500,000
Property and equipment 420,325 453,109
Goodwill 229,144 229,144
Other assets 17,890 17,890
------------ ------------
$ 18,715,794 $ 17,677,271
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Checks written in excess of cash in bank $ 567,444 $ 321,386
Bank line of credit 3,000,000
Accounts payable 10,746,965 7,083,642
Accrued payroll 135,182 81,978
Deferred revenue 220,076 282,200
Income taxes payable 58,316 159,356
Deferred income taxes 101,000 101,000
------------ ------------
Total current liabilities 11,828,983 11,029,562
------------ ------------
Deferred income taxes 7,000 7,000
------------ ------------
Commitments and contingencies
Stockholders' equity:
Common stock, $1 par; authorized 30,000
shares; issued 11,380 shares 11,380 11,380
Capital in excess of par value 1,468,255 1,468,255
Retained earnings 5,768,978 5,363,178
------------ ------------
7,248,613 6,842,813
Treasury stock (368,802) (202,104)
------------ ------------
6,879,811 6,640,709
------------ ------------
$ 18,715,794 $ 17,677,271
============ ============
See notes to consolidated financial statements.
PHARMACY BUYING ASSOCIATION, INC. AND SUBSIDIARY
D/B/A TRUECARE PHARMACY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended March 31,
-----------------------------
2003 2002
------------ ------------
Revenues:
Distribution center (including revenues generated
from businesses owned by members of the Board
of Directors of $3,814,968 and $3,896,352 for
the three months ended March 31, 2003 and 2002,
respectively $ 36,694,049 $ 24,062,194
Participation programs and fees 880,610 774,183
Activity rebates and charges 1,508,136 1,563,628
Third party 25,701 (17,705)
------------ ------------
39,108,496 26,382,300
------------ ------------
Cost of revenues:
Distribution center 35,467,171 23,458,309
Participation programs and fees 205,343 156,713
Activity rebates 1,327,988 973,853
------------ ------------
37,000,502 24,588,875
------------ ------------
Gross profit 2,107,994 1,793,425
General and administrative expenses 1,424,021 1,362,285
------------ ------------
Income from operations 683,973 431,140
------------ ------------
Other income (expense):
Investment income 3,922 3,964
Interest expense (1,505) (2,351)
------------ ------------
2,417 1,613
------------ ------------
Income before income taxes 686,390 432,753
Income taxes 280,590 172,567
------------ ------------
Net income $ 405,800 $ 260,186
============ ============
Earnings per common share:
Income available to common stockholders $ 405,800 $ 260,186
Weighted average shares outstanding,
basic and diluted 11,157 11,377
------------ ------------
Basic and diluted earnings per share $ 36.37 $ 22.87
============ ============
See notes to consolidated financial statements.
PHARMACY BUYING ASSOCIATION, INC. AND SUBSIDIARY
D/B/A TRUECARE PHARMACY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three months ended March 31,
----------------------------
2003 2002
----------- ------------
Cash flows from operating activities:
Net income $ 405,800 $ 260,186
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Depreciation 50,572 58,711
Changes in operating assets and liabilities:
Accounts receivable 24,844 (344,126)
Inventories (1,071,770) (637,742)
Prepaid expenses (24,381) 12,024
Checks written in excess of cash in bank 246,058
Accounts payable 3,663,323 869,374
Accrued payroll 53,204 28,804
Deferred revenue (62,124) (35,310)
Income taxes payable (101,040) (500,688)
----------- -----------
Net cash provided (used) by operating activities 3,184,486 (288,767)
----------- -----------
Cash flows from investing activities, purchase of property
and equipment (17,788) (31,482)
----------- -----------
Cash flows from financing activities:
Payments on bank line of credit (3,000,000)
Acquisition of common stock (166,698) (4,550)
Principal payments on long-term debt (12,084)
----------- -----------
Net cash used by financing activities (3,166,698) (16,634)
----------- -----------
Net decrease in cash -- (336,883)
Cash, beginning of period -- 614,519
----------- -----------
Cash, end of period $ (--) $ 277,636
=========== ===========
Supplemental disclosures of cash flow information:
Cash transactions during the period for:
Interest paid $ 1,505 $ 2,351
=========== ===========
Income taxes paid $ 381,630 $ 500,688
=========== ===========
See notes to consolidated financial statements.
PHARMACY BUYING ASSOCIATION, INC. AND SUBSIDIARY
D/B/A TRUECARE PHARMACY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of presentation:
The accompanying interim financial statements have been prepared in
accordance with the rules and regulations of the Securities and Exchange
Commission for interim reporting and do not include certain disclosures
required by accounting principles generally accepted in the United States
of America. Accordingly, the statements should be read in conjunction with
the Pharmacy Buying Association, Inc., d/b/a TrueCare Pharmacy (the
Company) financial statements and notes thereto included in the Company's
Annual Report and Form 10-K filed with the Securities and Exchange
Commission under File No. 000-49785. Accounting policies utilized in the
preparation of financial information herein presented are the same as set
forth in our annual financial statements. Certain disclosures and
information normally included in financial statements have been condensed
or omitted. In the opinion of the management of the Company, these
financial statements contain all adjustments (consisting only of normal
recurring adjustments) necessary for a fair presentation of the interim
financial statements. Interim results of operations are not necessarily
indicative of the results of operations for the full year.
Certain reclassifications have been made to the March 31, 2002 unaudited
interim financial statements to be consistent with the presentation at
March 31, 2003. These reclassifications had no impact on net income or
retained earnings.
2. New accounting standards:
Property and equipment:
In August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. SFAS No. 144 requires that
long-lived assets be measured at the lower of carrying amount or fair
value for long-lived assets to be held and used or fair value less cost to
sell for long-lived assets to be disposed of, whether reported in
continuing operations or in discontinued operations. The standard became
effective for the Company's fiscal year beginning January 1, 2002. The
adoption of this standard did not have a material effect on the Company's
financial position or results of operations.
PHARMACY BUYING ASSOCIATION, INC. AND SUBSIDIARY
D/B/A TRUECARE PHARMACY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
2. New accounting standards (continued):
Goodwill:
In June 2001, the Financial Accounting Standards Board issued SFAS No.
141, Business Combinations, and SFAS No. 142, Goodwill and Other
Intangibles. SFAS No. 141 requires the purchase method of accounting for
business combinations initiated after June 30, 2001, for which the date of
acquisition is July 1, 2001 or later, eliminates the pooling-of-interests
method, and identifies criteria for the establishment of identifiable
intangible assets separate from goodwill resulting from a business
combination. SFAS No. 142 requires companies to cease amortizing goodwill.
SFAS No. 142 also establishes a new method of testing goodwill and other
intangibles for impairment on an annual basis or on an interim basis if an
event occurs or circumstances change that would reduce the fair value of a
reporting unit below its carrying value. The standard became effective for
the Company's fiscal year beginning January 1, 2002. The adoption of these
standards did not have a material effect on the Company's financial
position or results of operations.
3. Accounts receivable:
March 31, December 31,
2003 2002
----------- -----------
Membership $ 1,598,882 $ 1,531,471
Distribution center 6,709,143 6,801,398
----------- -----------
8,308,025 8,332,869
Allowance for doubtful accounts (194,000) (194,000)
----------- -----------
$ 8,114,025 $ 8,138,869
=========== ===========
4. Property and equipment:
March 31, December 31,
2003 2002
----------- -----------
Furniture and fixtures $ 311,926 $ 298,809
Equipment 715,740 713,516
Software 402,809 400,362
----------- -----------
1,430,475 1,412,687
Accumulated depreciation (1,010,150) (959,578)
----------- -----------
$ 420,325 $ 453,109
=========== ===========
Depreciation expense, included in general and administrative expenses, was
$50,572 and $58,711 for the three-month periods ended March 31, 2003 and
2002, respectively.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of our financial condition and results of operations
should be read in conjunction with the financial statements and notes thereto
included elsewhere in this filing.
This discussion and analysis should be read in conjunction with management's
discussion and analysis included in the Company's 10-K for the year ended
December 31, 2002 and for the notes contained therein.
Overview
We derive revenues from the following four sources:
Distribution Center. We sell pharmaceutical-related products to our members
through our own distribution facility located in Riverside, Missouri.
Activity Rebates and Charges. We receive rebates from pharmaceutical
manufacturers based on member purchases of the manufacturer's product from our
distribution center. In addition, each of our wholesaler-partner contracts
provides that the wholesaler-partner will pay us a rebate based on a percentage,
which varies by wholesaler-partner, of the dollar value of products purchased by
our members from the wholesaler-partner. We also receive rebates and fees from
other vendors and manufacturers through various company programs, such as our
cash card and drug formularies. These rebates and fees are typically paid to us
on either a quarterly or monthly basis.
Participation Programs and Fees. Our members pay us a monthly membership fee in
accordance with our membership agreement. In addition, we receive administration
fees from manufacturers and wholesaler-partners for maintenance and facilitation
of contracts with us and with our members. Our vendors and members also pay a
fee to attend our annual conference each summer.
Third Party Revenues. Revenues from our third party segment, shown net of
expenses for all reporting periods, are generated from claims costs of goods,
claims processing fees per paid claim charged to plan sponsors, and rebate
administration fees. A major portion of the revenue includes the claims costs of
goods that are collected from the plan sponsors in order to pay the
participating network provider. After payout of claims and expenses, there is
usually little or no net income generated from this revenue.
Our expenses are categorized as follows:
Distribution Center. Operating expenses associated with distribution are
primarily composed of direct cost of goods sold.
Activity Rebates. Rebates are composed of monies paid to members on a quarterly
basis for purchases through the distribution center, purchases made under
contract with wholesaler-partners, cash card claims, and rebates attributable to
fluctuations in the market share of certain pharmaceuticals.
Participation Program and Fees. Program costs and expenses are primarily
composed of expenses associated with the programs and services that we offer to
our members, including the costs of developing and marketing those services. In
addition, costs associated with our annual shareholders conference are included.
General and Administrative Expenses. General and administrative expenses are
typical operating expenses primarily composed of such items as salaries and
wages, insurance, freight and postage, office rent, travel, and other
miscellaneous expenses.
Results of Operation
The following discussion is based on our historical results of operations for
the three months ending March 31, 2003 and 2002.
Comparison of Three Months ending March 31, 2003 and 2002
Revenues
Total Revenues. Total revenues for the three months ending March 31, 2003
increased to $39.1 million from $26.4 million over the same period revenues in
2002. The increase of $12.7 million is directly attributable to a corresponding
increase in the amount of sales through the distribution center.
Distribution. Revenue from distribution grew from $24.1 million to $36.7
million, representing a 52% increase over the same period in 2002. An increase
in product offering combined with rising usage of the distribution center by
member pharmacies led to the increase in distribution sales.
Activity Rebates and Charges. Revenues due to rebates and charges held steady at
$1.5 million for the three months ending March 31, 2003 compared to the same
period in 2002. The amounts held steady despite rising sales through the
distribution center due to the write-off of miscellaneous amounts of accrued
revenue applicable to 2002. Notwithstanding the adjustments to prior period
accruals, revenues applicable to rebates and charges grew by approximately 10%
in the 1st Quarter of 2003 against the same period in 2002.
Participation Programs and Fees. For the three months ending March 31, 2003
revenues from participation programs and fees increased by $0.10 million from
the corresponding period in 2002. Revenues of $110,000 realized from our 2003
Annual Conference, held in March of 2003, lead to the increase. The 2002 Annual
Conference was held in August of 2002.
Third Party. Revenues from third party operations, which are shown net of
expenses, increased by approximately $43,000 for the three months ending March
31, 2003 from the same period in 2002. The increase arose from increased
revenues from a renewed effort in the Managed Care market.
Cost of Revenues
Distribution Center. Costs of goods sold through the distribution center
increased from $23.5 million for the three months ending March 31, 2002 to $35.5
million in 2003. The 51% increase is directly attributable to the increase in
sales through the distribution center.
Activity Rebates. Rebates increased from $0.97 million in the first three months
of 2002 to $1.3 million in the corresponding period of 2003. The 36% increase in
rebates stems from an increase in purchases through our distribution center and
the corresponding rebates. In addition, slightly more aggressive rebate
incentives offered to our pharmacies resulted in higher rebate expense over 2002
figures.
Participation Programs and Fees. Expenses associated with our programs increased
slightly for the three months ending March 31, 2003 compared to the same period
in 2002. The increase of $47,000 is due to costs associated with our 2003 Annual
Conference held in March of this year as opposed to August of 2002.
General and Administrative. General and administrative expenses rose by $62,000
for the three months ending March 31, 2003 compared to the same period in 2002.
The increase of 5% from $1.36 million to $1.42 million is attributable to a
normal increase in expenses associated with an increase in revenues, including
an increase in warehouse costs and miscellaneous employee-related expenses.
Income from Operations. Net income from operations increased by $0.253 million
from $0.43 million for the three months ending September 30, 2002 to $0.68
million for the same period in 2003. This 59% increase is attributable to an
increase in the overall revenue streams of the company. As a percent of
revenues, income from operations increased from 1.63% of revenues for the first
three months of 2002 to 1.74% for the same period in 2003. This percentage
increase was a result of a decrease in the level of general and administrative
expenses as a percent of revenues, which more than offset increasing amounts of
revenues from lower margin sources.
Income Taxes. Income tax expense for the three months ending March 31, 2003
increased to $0.281 million from $0.173 million for the same period in 2002. The
increase follows directly from an increase in our taxable income and higher
profitability mentioned above.
Liquidity and Capital Resources
Our capital requirements relate primarily to working capital for day-to-day
operations, including general and administrative expenses, maintenance of
product inventory levels to fulfill our operating commitment to our members and
membership rebates, which are paid quarterly. Historically, we have financed our
cash requirements from three primary sources: on-going operations, credit
established with trade vendors, and borrowings under our line of credit.
For the three months ending March 31, 2003:
o Net cash provided by (used by) operations was $3.184 million,
compared to ($0.289 million) for the same period in 2002. The
increase in 2003 was primarily due to a substantial increase in
accounts payable to trade vendors, partially offset by an increase
in inventories. We anticipate that these trends will continue as we
work to finance additional inventory through increasing lines of
credit and credit terms with our vendor-partners.
o Net cash (used by) investing activities was ($18,000), compared to
($31,000) in the same period in 2002, primarily attributable to a
reduction in purchases of property and equipment.
o Net cash provided by (used by) financing activities was ($3.17
million), compared to ($16,000) for the same period in 2002. The
significant increase in cash usage was primarily for the repayment
of a $3 million borrowing against our line of credit in the 1st
Quarter of 2003 and for repurchase of common stock.
We have a $5 million line of credit and a $2 million additional seasonal
extension from November 1 through February 1 (the "Credit Agreement") with Bank
of America, N.A. that expires on June 30, 2003. Borrowings under the Credit
Agreement bear interest at the lender's prime rate, which was 4.50% as of March
31, 2003. The Credit Agreement imposes certain requirements on us, including the
maintenance of a minimum tangible net worth. We
accessed our line of credit from time to time during 2003. There were no amounts
outstanding under the Credit Agreement as of March 31, 2003. We anticipate
renewing the credit agreement or obtaining a new bank line of credit upon
expiration of our current Credit Agreement.
Cash and cash equivalents as of March 31, 2003 were $0, down from $0.28 million
as of March 31, 2002. We believe that our cash equivalents as of March 31, 2002,
amounts available under the Credit Agreement, investments, and operating cash
flows will be sufficient to meet our anticipated debt service requirements,
capital expenditures, and working capital needs at least through the next 12
months. Currently, our anticipated working capital expenditures are composed of
ongoing day-to-day operations, including normal general and administrative
expenses, maintenance of adequate inventory levels to satisfy our product orders
and income taxes. If sales through our distribution center continue to grow, we
will be using significant portions of our capital going forward to support
increased product inventory levels and shipping expenses. Except as set forth
above, we do not currently anticipate incurring any expenses or capital
expenditures outside the ordinary course of business.
Because we are registered under the Securities Exchange Act of 1934, our ability
to issue additional shares is more limited because certain securities exemptions
previously relied on by us are not available to issuers registered under the
Exchange Act. Accordingly, any further issuances of common stock may require
registration under the Securities Act of 1933, making it more costly and time
consuming to issue shares. To the extent we are unable to renew our existing
Credit Agreement or obtain a new bank line of credit or raise funds through the
sale of common stock, our ability to increase or maintain our current level of
operations, including product inventory levels, may be diminished. In addition,
we may not be able to obtain additional capital in adequate amounts or
acceptable terms to meet the demands of our business in the future. This would
have an adverse effect on our operations and financial condition.
Forward Looking Statements
This report contains forward-looking statements based on our current
expectations and assumptions regarding our business and our industry. Actual
results may differ materially from those described in the forward looking
statements and will be affected by a variety of known and unknown risks,
uncertainties and other factors.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We are exposed to market risks primarily from changes in U.S. interest rates. We
do not engage in financial transactions for trading or speculative purposes.
The interest payable on our Credit Agreement is based on variable interest rates
and is therefore affected by changes in market interest rates. While as of
September 30, 2002, no amounts were outstanding under the Credit Agreement, to
the extent interest rates rise when we do borrow money under the Credit
Agreement, our interest expense will increase.
ITEM 4. CONTROLS AND PROCEDURES.
(a) Evaluation of Disclosure Controls and Procedures
The term "disclosure controls and procedures" is defined in Rules
13a-14(c) and 15d-14(c) of the Securities Exchange Act of 1934 (Exchange
Act). These rules refer to the controls and other procedures of a company
that are designed to ensure that information required to be disclosed by a
company in the reports that it files under the Exchange Act is recorded,
processed, summarized and reported within required time periods. Our Chief
Executive Officer and our Chief Financial Officer have evaluated the
effectiveness of our disclosure controls and procedures as of a date
within 90 days before the filing of this quarterly report (the Evaluation
Date), and they have concluded that, as of the Evaluation Date, such
controls and procedures were effective at ensuring that required
information will be disclosed on a timely basis in our reports filed under
the Exchange Act.
(b) Changes in Internal Controls
We maintain a system of internal accounting controls that are
designed to provide reasonable assurance that our books and records
accurately reflect our transactions and that our established policies and
procedures are followed. For the quarter ended September 30, 2002, there
were no significant changes to our internal controls or in other factors
that could significantly affect our internal controls.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
The following exhibits are filed as part of this report.
1. Certification Pursuant to 18 U.S.C. Section 1350, As Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, signed by
the Chief Executive Officer.
2. Certification Pursuant to 18 U.S.C. Section 1350, As Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, signed by
the Chief Financial Officer.
Exhibit numbers refer to the paragraph numbers under Item 601 of
Regulation S-K:
15.1. Letter from House Park & Dobratz, P.C. regarding unaudited
interim financial information. (Commission File No. 000-49785).
(b) Reports on Form 8-K
The Company did not file a report on Form 8-K during the quarter for
which this report is filed.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized.
Pharmacy Buying Association, Inc.
Date: May 14, 2003 By: /s/ Donald E. Raby II
---------------------------------------
Donald E. Raby II, CPA
Vice President, Chief Financial Officer