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 September 30, 2002 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 000-49785
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 September 30, 2002, 11,380 shares of common stock, $1.00 par value, of the
registrant were outstanding.
Total number of pages 22.
PHARMACY BUYING ASSOCIATION, INC.
INDEX FORM 10-Q
Page No.
--------
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
Consolidated Balance Sheets as of September 30, 2002 (unaudited)
and December 31, 2001 2
Consolidated Statements of Operations for the three and nine
months ended September 30, 2002 and 2001(unaudited) 3
Consolidated Statements of Cash Flows for the nine
months ended September 30, 2002 and 2001 (unaudited) 4 - 5
Notes to Consolidated Financial Statements (unaudited) 6 - 8
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION 9 - 13
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK 14
ITEM 4 - CONTROLS AND PROCEDURES 14
PART II - OTHER INFORMATION
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS 15
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K 16 - 17
SIGNATURES 18
CERTIFICATIONS 19 - 22
1
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
PHARMACY BUYING ASSOCIATION, INC. AND SUBSIDIARY
D/B/A TRUECARE PHARMACY
CONSOLIDATED BALANCE SHEETS
ASSETS
September 30,
2002 December 31,
(Unaudited) 2001
----------- ----
Current assets:
Cash $ 293,781 $ 614,519
Accounts receivable 8,611,845 6,380,342
Inventories 5,860,948 4,672,273
Prepaid expenses 64,607 133,284
------------ ------------
Total current assets 14,831,181 11,800,418
Property and equipment 481,823 597,722
Goodwill 229,144 229,144
Other assets 38,744 16,430
------------ ------------
$ 15,580,892 $ 12,643,714
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 7,417
Accounts payable $ 8,459,121 6,196,385
Accrued payroll 99,686 186,822
Deferred revenue 63,777 201,600
Income taxes payable 388,706 532,005
Deferred income taxes 18,000 18,000
------------ ------------
Total current liabilities 9,029,290 7,142,229
------------ ------------
Long-term debt, less current portion 18,336
------------
Deferred income taxes 94,000 182,000
------------ ------------
Commitments and contingencies
Stockholders' equity:
Common stock, $1 par; authorized 30,000
shares; issued 11,380 and 5,690 shares as of
September 30, 2002 and December 31, 2001,
respectively 11,380 5,690
Capital in excess of par value 1,468,255 1,468,255
Retained earnings 5,095,690 3,827,204
------------ ------------
6,575,325 5,301,149
Treasury stock (117,723)
------------ ------------
6,457,602 5,301,149
------------ ------------
$ 15,580,892 $ 12,643,714
============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
2
PHARMACY BUYING ASSOCIATION, INC. AND SUBSIDIARY
D/B/A TRUECARE PHARMACY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended Nine months ended
September 30, September 30,
------------- -------------
2002 2001 2002 2001
---- ---- ---- ----
Revenues:
Distribution center(1) $ 36,820,388 $ 26,262,805 $ 92,853,169 $ 57,506,971
Participation programs and fees 275,749 741,399 653,879 2,165,003
Activity rebates and charges 1,828,417 1,382,736 5,505,333 3,640,865
Third party 55,497 7,559 67,455 6,748
-------------- -------------- --------------- ---------------
38,980,051 28,394,499 99,079,836 63,319,587
-------------- -------------- --------------- ---------------
Cost of revenues:
Distribution center 35,365,087 25,615,515 88,909,308 55,866,529
Participation programs and fees 208,918 194,270 520,327 530,458
Activity rebates 1,322,519 841,993 3,461,059 1,673,674
-------------- -------------- --------------- ---------------
36,896,524 26,651,778 92,890,694 58,070,661
-------------- -------------- --------------- ---------------
Gross profit 2,083,527 1,742,721 6,189,142 5,248,926
General and administrative expenses 1,347,481 1,343,508 3,956,661 3,499,100
-------------- -------------- --------------- ---------------
Income from operations 736,046 399,213 2,232,481 1,749,826
-------------- -------------- --------------- ---------------
Other income (expense):
Investment income 3,779 10,048 14,421 48,075
Interest expense ( 7,686) ( 2,616) ( 14,196) ( 11,889)
Gain on sale of property and equipment 4,786
-------------- -------------- --------------- ---------------
( 3,907) 7,432 5,011 36,186
-------------- -------------- --------------- ---------------
Income before income taxes 732,139 406,645 2,237,492 1,786,012
Income taxes 427,327 226,638 963,316 677,918
-------------- -------------- --------------- ---------------
Net income $ 304,812 $ 180,007 $ 1,274,176 $ 1,108,094
============== ============== =============== ===============
Earnings per common share:
Income available to common
stockholders $ 304,812 $ 180,007 $ 1,274,176 $ 1,108,094
Weighted average shares outstanding,
basic and diluted 11,268 11,380 11,337 11,380
-------------- -------------- --------------- ---------------
Basic and diluted earnings per share $ 27.05 $ 15.82 $ 112.39 $ 97.37
============== ============== =============== ===============
(1) including revenues generated from businesses owned by members of the Board
of Directors of $4,535,272 and $3,258,606 for the three months ended
September 30, 2002 and 2001, respectively, and $12,881,128 and $7,985,352
for the nine months ended September 30, 2002 and 2001, respectively
The accompanying notes are an integral part of the consolidated financial
statements.
3
PHARMACY BUYING ASSOCIATION, INC. AND SUBSIDIARY
D/B/A TRUECARE PHARMACY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine months ended September 30,
2002 2001
---- ----
Cash flows from operating activities:
Net income $ 1,274,176 $ 1,108,094
Adjustments to reconcile net income to net
cash used by operating activities:
Depreciation 175,677 158,111
Deferred income taxes ( 88,000)
Gain on sale of property and equipment ( 4,786)
Changes in operating assets and liabilities:
Accounts receivable ( 2,231,503) ( 3,379,100)
Inventories ( 1,188,675) ( 1,294,035)
Prepaid expenses 68,677 21,694
Other assets ( 22,314) ( 380)
Accounts payable 2,262,736 2,804,212
Accrued payroll ( 87,136) ( 14,768)
Deferred revenue ( 137,823) ( 2,250)
Income taxes payable ( 143,299) ( 643,894)
---------------- --------------
Net cash used by operating activities ( 122,270) ( 1,242,316)
---------------- --------------
Cash flows from investing activities:
Purchase of property and equipment ( 65,292) ( 110,923)
Proceeds from sale of property and equipment 10,300
Investments in and advances to affiliate 100,000
---------------- --------------
Net cash used by investing activities ( 54,992) ( 10,923)
---------------- --------------
Cash flows from financing activities:
Acquisition of common stock ( 117,723)
Offering costs ( 14,448)
Principal payments on long-term debt ( 25,753) ( 18,794)
----------------- --------------
Net cash used by financing activities ( 143,476) ( 33,242)
---------------- --------------
(continued)
4
PHARMACY BUYING ASSOCIATION, INC. AND SUBSIDIARY
D/B/A TRUECARE PHARMACY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Unaudited)
Nine months ended September 30,
2002 2001
---- ----
Net decrease in cash ( 320,738) ( 1,286,481)
Cash, beginning of period 614,519 1,738,818
----------- -----------
Cash, end of period $ 293,781 $ 452,337
=========== ===========
Supplemental disclosures of cash flow information:
Cash transactions during the period for:
Interest paid $ 14,196 $ 11,889
=========== ===========
Income taxes paid $ 1,194,615 $ 1,287,812
=========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
5
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 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 September 30, 2001
unaudited interim financial statements to be consistent with the
presentation at September 30, 2002. 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.
6
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 September 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.
Costs associated with exit or disposal activities:
In July 2002, the FASB issued SFAS No. 146, Costs Associated with Exit
or Disposal Activities (effective January 1, 2003). SFAS No. 146
replaces current accounting literature and requires the recognition of
costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or
disposal plan. The Company does not anticipate that the adoption of
this statement will have a material effect on the Company's financial
statements.
3. ACCOUNTS RECEIVABLE:
September 30, December 31,
2002 2001
---- ----
Membership $ 832,975 $ 637,519
Distribution center 7,968,915 5,934,364
Program and third-party administration 3,955 2,459
------------- -------------
8,805,845 6,574,342
Allowance for doubtful accounts ( 194,000) ( 194,000)
------------- -------------
$ 8,611,845 $ 6,380,342
============= =============
Allowance for doubtful accounts:
Balance at beginning of period $ 194,000 $ 43,632
Charges to costs and expenses 15,342 327,713
Bad debts written off ( 15,342) ( 177,345)
------------- -------------
Balance at end of period $ 194,000 $ 194,000
============= =============
7
PHARMACY BUYING ASSOCIATION, INC. AND SUBSIDIARY
D/B/A TRUECARE PHARMACY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
4. PROPERTY AND EQUIPMENT:
September 30, December 31,
2002 2001
---- ----
Furniture and fixtures $ 288,659 $ 299,708
Equipment 697,587 642,662
Software 389,514 386,001
--------------- --------------
1,375,760 1,328,371
Accumulated depreciation ( 893,937) ( 730,649)
--------------- --------------
$ 481,823 $ 597,722
=============== ==============
Depreciation expense, included in general and administrative expenses, was
$175,677 and $158,111 for the nine-month periods ended September 30, 2002 and
2001, respectively.
8
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 Form 10 for the year ended
December 31, 2001 and for the second quarter ended June 30, 2002 also 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.
9
RESULTS OF OPERATION
The following discussion is based on our historical results of operations for
the nine months ending September 30, 2002 and 2001.
COMPARISON OF NINE MONTHS ENDING SEPTEMBER 30, 2002 AND 2001
REVENUES
Total Revenues. Total revenues for the nine months ending September 30, 2002
increased to $99.1 million from $63.3 million over the same period revenues in
2001. The increase of $35.8 million is directly attributable to a corresponding
increase in the amount of sales through the distribution center.
Distribution. Revenue from distribution grew from $57.5 million to $92.8
million, representing a 61% increase over the same period in 2001. An increase
in product offering combined with a 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 grew from $3.6
million for the nine months ending September 30, 2001 to $5.5 million for the
same period in 2002. The 53% growth in rebate revenue is from increases in
purchases through the distribution center, reflected in distribution sales, and
from an increase in enrollees and monies paid under our Cash Card program.
Participation Programs and Fees. For the nine months ending September 30, 2002,
revenues from participation programs and fees decreased by $1.51 million from
the corresponding period in 2001. A continued changing and restructuring of our
programs following the Legend acquisition precipitated a portion of the
decrease. Also contributing to the decrease was the gradual termination of
several programs that were not deemed to be effective uses of funds.
Third Party. Revenues from third party operations, which are shown net of
expenses, increased by approximately $61,000 for the nine months ending
September 30, 2002 from the same period in 2001. The increase arose from a
decrease in expenses in third party programs and 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 $55.9 million for the nine months ending September 30, 2001 to
$88.9 million in 2002. The 60% increase is directly attributable to the increase
in sales through the distribution center.
Activity Rebates. Rebates increased from $1.67 million in the first nine months
of 2001 to $3.5 million in the corresponding period of 2002. The 107% 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.
Participation Programs and Fees. Expenses associated with our programs held
steady for the nine months ending September 30, 2002 compared to the same period
in 2001. The lack of a change in expenses while we experience a decrease in the
corresponding revenues is because we have to maintain the necessary
infrastructure to support the programs during the transitional time frame.
GENERAL AND ADMINISTRATIVE. General and administrative expenses rose by $0.45
million for the nine months ending September 30, 2002 compared to the same
period in 2001. The increase of 21% from $3.5 million to $3.95 million is
attributable to a normal increase in expenses associated with an increase in
revenues, including an increase in
10
warehouse costs, salaries and wages, and other employee-related expenses.
Expenses associated with our public registration also contributed to the
increase.
INCOME FROM OPERATIONS. Net income from operations increased by $0.482 million
from $1.75 million for the nine months ending September 30, 2001 to $2.2 million
for the same period in 2002. This 27% increase is attributable to an increase in
the overall revenue streams of the company. As a percent of revenues, income
from operations fell from 2.76% of revenues for the first nine months of 2001 to
2.25% for the same period in 2002. This percentage decrease was a result of an
increasing portion of revenues being derived from lower margin sources, such as
distribution sales.
INCOME TAXES. Income tax expense for the nine months ending September 30, 2002
increased to $0.963 million from $0.678 million for the same period in 2001. The
$285,000 increase follows directly from an increase in our taxable income and
higher profitability.
COMPARISON OF THREE MONTHS ENDING SEPTEMBER 30, 2002 AND 2001
REVENUES
Total Revenues. 3rd Quarter 2002 saw total revenues increase to $39.0 million
from $28.4 million over the same period revenues in 2001. The increase of $10.6
million is attributable to a corresponding increase in the amount of sales
through the distribution center.
Distribution. For 3rd Quarter 2002, revenues grew to $36.8 million from $26.3
million in the 3rd Quarter 2001, representing a 40% increase. An increase in
product offering combined with a 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 grew from $1.4
million in the 3rd Quarter of 2001 to $1.8 million in the 3rd Quarter 2002. The
32% growth in rebate revenue is directly correspondent to increases in purchases
through the distribution center and to additional revenues from our Cash Card
program, which showed significant improvement in the 3rd Quarter.
Participation Programs and Fees. For 3rd Quarter 2002, revenues from
participation programs and fees decreased by $0.46 million from the
corresponding period in 2001. An ongoing changing and restructuring of our
programs following the Legend acquisition has precipitated this decrease. Also
contributing to the decrease was the continued phase-out of several programs.
This was partially offset by a 3rd Quarter increase in fees collected due to our
annual conference.
Third Party. Revenues from third party operations, which are shown net of
expenses, increased by approximately $48,000 from the 3rd Quarter 2001 to the
3rd Quarter 2002. The increase arises primarily from an increase in Managed Care
activity.
COST OF REVENUES
Distribution Center. Costs of goods sold through the distribution center
increased from $25.6 million in the 3rd Quarter of 2001 to $35.4 million in the
3rd Quarter of 2002. The 38% increase is directly attributable to the increase
in sales through the distribution center.
Activity Rebates. Rebates increased from $0.84 million in the 3rd Quarter of
2001 to $1.3 million in the corresponding period of 2002. The 57% increase in
rebates stems from an increase in purchases through our distribution center.
11
Participation Programs and Fees. Expenses associated with our programs increased
by $15,000 in the 3rd Quarter of 2002 compared to the 3rd Quarter of 2001. The
8% increase in expenses is due to a combination of savings from the
discontinuance of certain programs countered by significant expenses associated
with our annual conference in August.
GENERAL AND ADMINISTRATIVE. General and administrative expenses held steady at
$1.3 million in the 3rd Quarter of 2002 compared to the 3rd Quarter of 2001. The
expenses held steady despite a substantial increase in revenues due to mild
cost-saving measures in various areas.
INCOME FROM OPERATIONS. Income from operations increased by $0.34 million from
3rd Quarter 2001 to 3rd Quarter 2002. This 84.5% increase is attributable to an
increase in distribution sales and other profit centers, while general and
administrative expenses held relatively steady.
INCOME TAXES. 3rd Quarter 2002 income tax expense increased by $0.20 million
compared to 3rd Quarter 2001. The increase is directly attributable to an
increase in taxable income of approximately $0.33 million for the comparative
periods.
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, sales of our
common stock, and borrowings under our line of credit.
For the nine months ending September 30, 2002:
*Net cash provided by (used by) operations was ($0.12 million), compared to
($1.24 million) for the same period in 2001. The decrease in 2002 was
primarily due to a substantial increase in inventories, partially
offset by an increase in accounts payable. An increase in accounts
receivable and income taxes also contributed to the net consumption of
cash by operations. The decrease for the first nine months of 2001 was
attributable to significant increases in accounts receivable,
inventories, and income taxes. A net inflow of cash from decreasing
accounts receivable through incentives plans offset a large portion of
the outflow. We anticipate that these trends will continue as sales
continue to increase.
*Net cash (used by) investing activities was ($55,000), compared to
($11,000) in the same period in 2001, primarily attributable to the
purchase of property and equipment.
*Net cash provided by (used by) financing activities was ($143,000),
compared to ($33,000) for the same period in 2001. The usage of cash
was primarily for the purchase of common stock. Also contributing to
the usage of cash were payments on long-term debt. We anticipate the
selling of stock sometime in the 4th Quarter of 2002.
We have a $3 million line of credit (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 4.75% as of
September 30, 2002. 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 the first nine months of 2002, but no amounts
were outstanding under the Credit Agreement as of September 30, 2002. We are
renegotiating our line of credit with the same institution and anticipate that
the line will be increased to $5 million with a seasonal extension of an
additional $2 million that can be borrowed between November 1st and February
1st.
12
Cash and cash equivalents as of September 30, 2002 were down by $0.32 million
from the beginning of the year to $0.29 million. This is also lower than the
cash and cash equivalents balance as of September 30, 2001, which was $0.45
million. We believe that our cash equivalents as of September 30, 2002, amounts
available under the Credit Agreement, amounts raised through the sale of our
common stock and operating cash flows will be sufficient to meet our anticipated
capital expenditure requirements and operating expenses at least through the
next 12 months. Currently, our anticipated 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 the
product inventory levels required for the higher sales volume. 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.
13
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.
14
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The regular meeting of the Shareholders of the Company was held on August 17,
2002. The following two items were voted on by the shareholders.
1) The individuals named below were elected at the meeting as directors
of the Company.
Votes Term of Class of
Director Votes Against Years(s) Director
-------- ----- ------- -------- --------
For Abstain*
--- --------
Charles M. Miller 423 0 Two years II
25*
John Raniero 423 0 Two years II
25*
Gary Foster 423 0 Two years II
25*
Steve Stephenson 423 0 Three years III
25*
Carlos Solis 423 0 Three years III
25*
David Dubose 423 0 Three years III
25*
2) House Park & Dobratz, P.C. was ratified as our independent auditors
for the fiscal year beginning January 1, 2003. There were 423 votes in
favor of said resolution, 0 votes against it, and 27 abstentions.
15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
The following exhibits are filed as part of this report.
1. Quarterly Certification Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002, signed by the Chief Executive
Officer.
2. Quarterly Certification Pursuant to Section 302 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:
2.1. Agreement and Plan of Reorganization among the registrant,
Texas Pharmacy Co-op, Inc. and Pharmacy Consolidation Corp. dated
November 3, 2000 (incorporated by reference to Form 10
Registration Statement filed April 30, 2002 with the Securities
and Exchange Commission by Pharmacy Buying Association, Inc.
(Commission File No. 000-49785)).
3.1. Articles of Incorporation of the registrant (incorporated by
reference to Form 10 Registration Statement filed April 30, 2002
with the Securities and Exchange Commission by Pharmacy Buying
Association, Inc. (Commission File No. 000-49785)).
3.2. Amendment to Articles of Incorporation of the registrant
(incorporated by reference to Form 10 Registration Statement
filed April 30, 2002 with the Securities and Exchange Commission
by Pharmacy Buying Association, Inc. (Commission File No.
000-49785)).
3.3. Second Amended and Restated Bylaws of the registrant
(incorporated by reference to Form 10 Registration Statement
filed April 30, 2002 with the Securities and Exchange Commission
by Pharmacy Buying Association, Inc. (Commission File No.
000-49785)).
4.1. Specimen Common Stock Certificate of the registrant
(incorporated by reference to Form 10 Registration Statement
filed April 30, 2002 with the Securities and Exchange Commission
by Pharmacy Buying Association, Inc. (Commission File No.
000-49785)).
4.2. Article VIII of the Second Amended and Restated Bylaws of
the registrant, which defines the rights of holders of the
securities being registered (included in Exhibit 3.3 above).
10.1. Employment Agreement between the registrant and Nick Smock
dated November 29, 2000 (incorporated by reference to Form 10
Registration Statement filed April 30, 2002 with the Securities
and Exchange Commission by Pharmacy Buying Association, Inc.
(Commission File No. 000-49785)).
10.2. Net Lease dated May 18, 2001 between the registrant and Bob
Campbell d/b/a Shady Properties (incorporated by reference to
Form 10 Registration Statement filed April 30, 2002 with the
Securities and Exchange Commission by Pharmacy Buying
Association, Inc. (Commission File No. 000-49785)).
10.3. Lease Agreement dated July 7, 1999 between the registrant
and Enterprise Properties, L.L.C. (incorporated by reference to
Form 10 Registration Statement filed April 30, 2002 with
16
the Securities and Exchange Commission by Pharmacy Buying
Association, Inc. (Commission File No. 000-49785)).
10.4. First Amendment to Lease dated April 4, 2000 between
registrant and Enterprise Properties, L.L.C. (incorporated by
reference to Form 10 Registration Statement filed April 30, 2002
with the Securities and Exchange Commission by Pharmacy Buying
Association, Inc. (Commission File No. 000-49785)).
10.5. Improved Property Commercial Lease dated August 1, 2000
between Texas Pharmacy Co-op, Inc. and Carl A. Parker
(incorporated by reference to Form 10 Registration Statement
filed April 30, 2002 with the Securities and Exchange Commission
by Pharmacy Buying Association, Inc. (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.
17
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: November 14, 2002 By: /s/ Nick Smock
-----------------------------
Nick Smock, President, Chief
Executive Officer
18
EXHIBIT 1
QUARTERLY CERTIFICATION
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Nickolas R. Smock, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Pharmacy Buying
Association, Inc;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect
19
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: November 14, 2002
/s/ Nick Smock
-------------------------------------
Nickolas R. Smock
Chief Executive Officer
20
EXHIBIT 2
QUARTERLY CERTIFICATION
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Donald E. Raby II, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Pharmacy Buying
Association, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect
21
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: November 14, 2002
/s/ Don Raby
---------------------------------
Donald E. Raby II
Chief Financial Officer
22