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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
|X| Annual Report Pursuant to Section 13 or 15(d)
Of the Securities Exchange Act of 1934
For the Fiscal Year Ended December 31, 2002
OR
| | Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Commission Registrant, State of Incorporation IRS Employer
File Number Address and Telephone Number Identification No.
Pharmacy Buying Association, Inc. 43-1482785
(a Missouri Corporation)
1575 N. Universal Avenue, Ste 100
Kansas City, MO 64120
(816) 245-5700
Securities Registered Pursuant to Section 12(b) of the Act: Pharmacy Buying
Association, Inc.: None
Securities Registered Pursuant to Section 12(g) of the Act: Pharmacy Buying
Association, Inc.: Common Stock $1.00 par value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or Section 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 the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. | |
Non-affiliates of Pharmacy Buying Association, Inc., as of February 28,
2003 held 9,949 shares of voting stock. The registrant's voting stock is not
traded on any public exchange. The aggregate market value of the registrant's
voting stock held by non-affiliates of the registrant (based upon the stated
value at February 28, 2003 and the assumption for this computation only that the
directors and executive officers of the registrant are affiliates) was
$5,641,083.
The number of shares of common stock of Pharmacy Buying Association, Inc.
outstanding as of December 31, 2002 was 11,380.
TABLE OF CONTENTS
PART I
ITEM PAGE
- ---- ----
1. Business .................................................................................. 3
2. Properties ................................................................................ 13
3. Legal Proceedings ......................................................................... 13
4. Submission of Matters to a Vote of Security Holders ....................................... 13
PART II
5. Market for Registrant's Common Equity and Related Stockholder Matters ..................... 14
6. Selected Financial Data ................................................................... 14
7. Management's Discussion and Analysis of Financial Condition and Results of Operations ..... 17
7A. Quantitative and Qualitative Disclosures about Market Risks ............................... 22
8. Consolidated Financial Statements and Supplementary Data .................................. 23
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ...... 41
PART III
10. Directors and Executive Officers of the Registrant ........................................ 41
11. Executive Compensation .................................................................... 43
12. Security Ownership of Certain Beneficial Owners and Management ............................ 45
13. Certain Relationships and Related Transactions ............................................ 45
PART IV
14. Controls and Procedures ................................................................... 46
15. Exhibits, Financial Statement Schedules and Reports on Form 8-K ........................... 46
Signatures
2
ITEM 1. BUSINESS.
Overview
The registrant was formed in 1983 by a group of independent pharmacists
for the purpose of helping independent pharmacies compete with larger chain
pharmacies. Our basic philosophy and practice is to function as an
interdependent chain of independent pharmacies. To help us accomplish our goal,
we offer a variety of programs and services to assist independent pharmacists in
their practice.
We are a membership-based organization. Our operations are similar to a
cooperative in that our customers are our members and we pay rebates to members
based on each member's purchases and compliance with our programs. In order to
benefit from our products and services, all members must sign a membership
agreement with us and pay a monthly membership fee. In addition, members must
have an account established with one of our endorsed wholesaler-partners or
purchase a minimum amount from our distribution center. Our membership agreement
may be terminated at any time by us or the member. Members are not required to
purchase shares of our common stock in order to join or maintain membership with
us. As of December 31, 2002, approximately 52% of our members owned at least one
share of our common stock.
We have experienced substantial growth in revenues during the past several
years, primarily as a result of an increase in the amount of distribution sales
to our members and through the addition of new members. In 2002, we had revenues
of approximately $137.0 million and net income from operations of $2.5 million,
compared to revenues of $3.9 million and net income of $44,882 in 1997. During
this same period, our membership increased by approximately 500 independent
pharmacy members to approximately 1,200 members at the end of 2002. Our members
are located in 16 states, primarily in the midwestern United States, with
approximately 95% of our members' stores in Arkansas, Illinois, Iowa, Kansas,
Missouri, Nebraska, Oklahoma and Texas.
Our revenues have come from the following four sources:
Year ended December 31,
------------------------------------------------
2002 2001 2000 1999
------ ------ ------ ------
Distribution Center ............... 92.66% 90.03% 79.08% 52.10%
Participation programs and fees ... 2.34% 3.75% 7.66% 22.67%
Activity rebates and charges ...... 4.92% 6.17% 12.56% 24.76%
Third party ....................... 0.08% 0.05% 0.70% 0.47%
------ ------ ------ ------
100.00% 100.00% 100.00% 100.00%
====== ====== ====== ======
No member/customer represented more than 7% of our total revenues during
the past fiscal year.
Pharmaceutical Industry
As a whole, the pharmaceutical industry, comprised of retail outlets,
wholesale distributors and drug manufacturers, has experienced substantial
growth over the past several years. For the foreseeable future, we anticipate
the entire pharmaceutical industry to continue to experience strong growth in
the aggregate due to the following principal reasons:
Aging of the population. According to the United States Census Bureau, the
number of individuals over the age of 50 in the United States is projected to
continue to grow. Current projections for the year 2020 are that there will be
approximately 115 million people over 50 living in the United States versus the
estimate of 76 million in 2000. This represents an increase from 27% of the
population in 2000 to 35% of the population in 2020. Based on our experience,
this demographic group represents
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the largest percentage of new prescriptions filled and obtains more
prescriptions per capita annually than any other age group.
Increased reliance on drugs and outpatient therapies. In response to
rising heath care costs, governmental and private payors have adopted
cost-containment measures that encourage the use of efficient drug therapies to
prevent or treat diseases. While a large amount of attention has been focused on
the overall increase in aggregate health care costs, we believe that drug
therapy has had a beneficial impact on overall health care costs by reducing
expensive surgeries and prolonged hospital stays.
Rising pharmaceutical costs. We believe that price increases for branded
pharmaceutical products by manufacturers will continue to equal or exceed the
overall increases in the Consumer Price Index. We further believe that the
primary reason for the sustained pace of the increase is due to the relatively
inelastic demand for branded pharmaceuticals in the face of higher prices
charged for patented drugs as manufacturers attempt to recoup costs associated
with the development, clinical testing and government approval of new products.
Introduction of new pharmaceutical products. Traditional research and
development, as well as the advent of new production and delivery methods,
continue to generate new efficiencies in drug therapies and treatments. As the
demand for more of these types of innovations grows and as patents for these
drugs expire, drug manufacturers will continue to expend significant amounts of
capital in research, development and marketing of new drugs. We believe this
will contribute to the continued expansion of the industry.
Wholesale Pharmaceutical Industry
We expect wholesale distribution companies to increase their sales for the
foreseeable future. Based on our experience, the wholesale pharmaceutical
distribution industry continues to undergo substantial consolidation and the
number of our wholesalers have decreased in recent years. While the
pharmaceutical industry as a whole has undergone rapid expansion, the wholesale
distribution segment of the industry is seeing fewer, but larger players. This
decrease in wholesale outlets translates into fewer wholesale distributors
controlling larger segments of the wholesale distribution channel.
Independent Retail Pharmacy Industry
The retail pharmacy industry is comprised primarily of independent
pharmacies and chain pharmacies, including pharmacy departments of mass
merchandisers and supermarkets. Independent pharmacies are generally defined as
single-store pharmacies, independent chains or pharmacist-owned franchises. The
size of the independent retail pharmacy market in terms of prescriptions is
estimated to be $53 billion on a volume of 1.32 billion prescriptions filled for
2001. According to the National Community Pharmacists Association, there were
approximately 24,600 independent pharmacies in the United States in 2001, or
approximately 44% of the nation's total number of pharmacies. While the number
of independent pharmacies has held relatively steady since 2000, the number of
independent pharmacies decreased by an average of 1,884 stores per year between
1990 and 1993, 1,407 stores per year between 1994 and 1996 and 451 stores per
year between 1997 and 1999.
The retail pharmacy industry is intensely competitive. Both independent
and chain pharmacies compete on the basis of price, variety of product
offerings, attractive surroundings, quality of service and insurance coverage.
Independent pharmacies face intense competition with national chain drug stores,
pharmacy departments of mass merchandisers, supermarkets and discount stores and
mail order pharmacies. These competitors have financial and other resources,
including national or regional advertising, brand recognition, more purchasing
power and corporate backing, which are not typically enjoyed by independent
pharmacies. Because of the volume of products purchased and sold through chain
pharmacies, chain pharmacies have greater leverage to bargain with wholesalers
and manufacturers
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and to negotiate more favorable pricing and delivery terms. Independent retail
pharmacies do not have the leverage, acting alone, to obtain the same pricing
accommodations and service levels as larger chains.
In addition to competition with other pharmacies, the entire retail
pharmacy industry faces several other issues which affect our members,
including:
Changes in third-party reimbursement. Pharmaceutical sales (sales of
prescription medications) represent a growing percentage of sales for retail
pharmacies. Pharmaceutical sales typically have lower margins than non-pharmacy
sales and also are subject to increasing margin pressure, as managed care
organizations, state Medicaid programs, insurance companies, employers and other
third-party payors become more prevalent and continue to seek cost containment.
If Medicare is reformed to include prescription benefits, pharmacies may be
reimbursed for some prescription drugs at prices lower than current retail
prices. If third-party payors - especially state Medicaid programs - reduce
their reimbursement levels or if Medicare covers prescription drugs at
reimbursement levels lower than current retail prices, margins on these sales
would be further reduced, and the profitability of the retail pharmacy industry
could be adversely affected.
Limited supply of pharmacists. Our members believe there is a nationwide
shortage of licensed pharmacists. Our members must compete with chain store
pharmacies to attract licensed pharmacists. Chain store pharmacies generally
offer better compensation packages, training programs and other benefits to
attract, hire, and retain qualified pharmacists.
Consolidation in the wholesale distribution industry. Since the number of
our pharmaceutical wholesalers have decreased in recent years, our member
pharmacies do not have as many options for filling their product and service
needs, and therefore reduced leverage in negotiating with wholesalers. We expect
this trend to continue in the future.
Compliance with federal laws. Our members' activities subject them to
federal and state laws and regulations governing the collection, dissemination,
use, security and confidentiality of patient-identifiable health information,
including the Federal Health Insurance Portability and Accountability Act of
1996, or HIPAA, and related rules and regulations. The costs and time associated
with their efforts to comply with these privacy laws could be substantial and
could have a material effect on their operations.
Strategy
Our business strategy is to be an "interdependent chain of independent
pharmacies" by providing our members with efficiencies and economies of scale
that they otherwise would not enjoy on their own. We bring value to our members
by:
- offering an assortment of pharmaceutical products and services that
assist our members in maximizing their margins;
- negotiating and managing various contracts on our members' behalf;
- development of a strategic alliance with an in-store computer
software manufacturer to leverage common information systems among
our members;
- providing superior levels of customer service; and
- marketing a brand identity that projects a "chain-like" image to our
members and our members' customers without members losing their
independent pharmacy identity.
We believe this strategy allows our pharmacy members to achieve greater
efficiencies and economies of scale, thereby reducing their expenses and
increasing their revenue and profitability. Further, we believe
5
this strategy helps close the gap between our members and national chain
pharmacies by enabling our members to become more competitive.
Acquisitions. In January 2001, we acquired substantially all of the assets
and business of Texas Pharmacy Co-op, Inc. ("TPC"), a pharmacy buying
association located in Texas, in exchange for 832 shares of our common stock and
the assumption of certain TPC liabilities by our wholly-owned subsidiary. As
part of the transaction, TPC distributed the 832 shares of common stock to its
shareholders (independent pharmacies) as part of a plan of liquidation. As a
result of the transaction with TPC, we added approximately 500 new members
located in Texas, and 288 new shareholders. We believe the transaction with TPC
has increased our negotiating leverage with vendors. We continue to seek new
acquisitions and other relationships that will bring strength to us, our
members, and our shareholders.
Management Information Systems. We have invested heavily in management
information systems to maximize efficiencies and provide our members with a more
efficient method of doing business. We have continually invested in advanced
management information systems and automated technology. Our management
information systems provide for, among other things, tracking of member
purchases, sales and invoicing. As a result, our cost of receiving and
processing orders has not increased as rapidly as our sales volume. Our
customized systems strengthen member relationships by allowing members to lower
their operating costs and by providing the basis for a number of the value-added
services we provide to our members, including marketing data, inventory
replenishment and computer price updates.
Sales and Marketing. We employ Business Development Managers ("BDM") who
manage assigned geographic regions. The BDM is responsible for calling on our
membership base as well as any prospective pharmacy members within their
territory. Our BDMs receive thorough sales training as well as certain
incentives to focus on areas of selling that will increase our bottom-line as a
company. Our BDMs, who are trained to act as a consultant-partner with our
members, have a responsibility to educate our members on the programs and
services that we offer and how to implement those programs and services for
maximum return to the member. We emphasize frequent personal interaction between
our BDMs and members to maximize the business relationship with any one member.
We believe that our decentralized focus allows us to better manage and
facilitate growth within our membership organization. The BDMs are all educated
on current affairs and are quite knowledgeable about industry trends and
pharmacy practice.
Our Services
Distribution. Utilizing the chain-store model, in 1998 we opened our own
distribution center for the purpose of serving a portion of our members' product
needs. We buy and carry a limited selection of pharmaceutical products,
short-dated items, generic brand drugs, over-the-counter drugs and other related
products from several manufacturers and other vendors and distributors. We stock
these products in a 24,000 square foot warehouse we operate in Riverside,
Missouri. Products are sold to members and vendors pursuant to telephonic,
facsimile and internet orders and then delivered via third party carriers. We
take advantage of promotional programs offered by manufacturers and other
vendors, such as short-dated products, overstock specials and other
miscellaneous opportunities. These programs are of value to our members because
we can pass the savings on to our members. We must maintain a significant
quantity of inventory, however, to assure that members can obtain the products
we supply on a timely basis.
Purchasing Agent. We act as a group purchasing agent for our member
pharmacies. We negotiate on our members' behalf with vendors and our
wholesaler-partners for the purchase of pharmaceutical products. We currently
deal with four different wholesaler-partners and several vendors. We enter into
agreements with our wholesaler-partners to secure specified pricing for various
items carried by the wholesaler-partner. We believe we can obtain more
competitive product prices for our members by negotiating on behalf of our
entire membership base than if each member were to negotiate
6
with such wholesalers on its own. We believe this area of our business will
become increasingly important to our members as consolidation in the
pharmaceutical industry continues.
Third Party. Third-party payors, including pharmacy benefit managers,
insurance companies and claims processors, are an integral part of our members'
business because they affect the amount of reimbursement our members receive for
prescription drugs provided to their customers. As part of our ongoing service
to members, we review and enter into contracts with third-party payors on behalf
of our members. Members electing to become part of our third party network must
accept the endorsed third party payors' plans. We generally do not earn any
income on third party reimbursement arrangements.
Managed Care. Managed Care encompasses a wide variety of services and
activities. It is typically defined as an economic system of medical care
delivery that ensures the best use of all available resources to deliver quality
medical care to the patient. We have developed, using state-of-the-art
technology, a managed care program for our members focusing on negotiating with
self-funded clients access to a claims processing system that is available 24
hours a day, 7 days a week. In addition to our efforts with claims processing,
we have developed a comprehensive disease state management program called
Today's Care(R). This program can be implemented by any of our stores that
choose to participate and encompasses the treatment of diseases such as asthma,
diabetes, and high cholesterol.
Store Identity. We have developed a store identity program called
"TrueCare Pharmacy" to support our members. This program is designed to create a
"chain-like" image to customers yet allow our members to retain their own
independent identity. Signage and other advertising is available to all members.
Private Label. We have created a private label line of "TrueCare" products
comprised primarily of generic over-the-counter products and vitamins. Our line
of products is available only to our independent pharmacy members. Our private
label lines are sold through our distribution center and through our endorsed
wholesaler-partners.
Other Value Added Programs. Various other programs and services are
available to members through their affiliation with us. These programs and
services include:
- Calendar programs
- Cash Card Program
- Credit card processing
- General merchandise and greeting card programs
- Group health insurance
- Inventory services
- Innovative care involving disease management programs, such as
diabetes and asthma care and treatment
- Junior partnership with pharmacy students
- Recruitment and Placement services
- Switching services
- Worker's compensation program
Rebates to Members
Member rebates are typically accrued monthly each quarter and paid the
following quarter. We pay quarterly rebates to our members based on the dollar
volume of each member's purchases of products supplied by us and/or our endorsed
wholesaler-partners. Rebate percentages vary among products and
wholesaler-partners. We receive rebates and administration fees from our
wholesaler-partners and other vendors that we allocate to our members after
reservation of amounts required to sustain operations. Members are not required
to own shares of our common stock in order to receive rebates.
7
Competition
There are numerous pharmacy buying groups operating in overlapping
geographic regions. Most of these competitors offer a similar range of products
and services at prices often comparable to ours. We seek to distinguish TrueCare
from our competitors by offering a chain-like atmosphere, including common
information systems and a distribution center, a higher level of customer
service and a broader range of services than our competitors, as well as a more
competitive pricing structure and more lucrative rebates.
In addition to competing for members with other buying groups, we face
potential competition from wholesalers that offer similar services to our
services. The wholesale distribution of pharmaceuticals is highly competitive
and dominated by national and regional distributors. Competitive factors include
price, delivery service, credit terms, breadth of product line, customer
support, merchandising and marketing programs.
Our members compete directly with national pharmacy chains including Osco
Drug, Eckerd Drug and Walgreen Co., and pharmacy departments of mass
merchandisers and supermarkets such as Wal-Mart and Target. While this
competition increases the need and benefit of the registrant and other buying
groups like The registrant, our sales and membership will be adversely affected
to the extent our members are not able to compete effectively against these
larger chain pharmacies.
Regulatory Matters
We are subject to regulation by the Drug Enforcement Agency and various
state boards of pharmacy with respect to all pharmaceutical products and
controlled substances maintained at or distributed from our distribution center.
As a distributor of pharmaceuticals, we are required to register for and
maintain permits and to meet various security and operating standards of the
Drug Enforcement Agency and of each state in which we ship pharmaceuticals
products. We have received all necessary regulatory approvals and believe that
we are in substantial compliance with all applicable federal and state
distribution and storage requirements.
Health Information Practices
The Health Information Portability and Accountability Act of 1996
("HIPAA") and the regulations promulgated thereunder by the U.S. Department of
Health and Human Services set forth health information standards in order to
protect security and privacy in the exchange of individually identifiable health
information. Significant criminal and civil penalties may be imposed for
violation of these standards. We are in the process of implementing a HIPAA
compliance program. We expect to be compliant in time to meet the deadlines set
forth in the HIPAA Regulations.
Employees
As of December 31, 2002, we had 51 full-time and 3 part-time employees,
including our four executive officers, 13 employees involved in sales and
marketing, 12 involved with distribution and 4 administrative employees. We are
not subject to any collective bargaining agreements and have not experienced any
work stoppages. We consider our relations with our employees to be good.
Risk Factors
Our business and financial condition involve numerous risks and
uncertainties, including the risks described below and elsewhere in this
registration statement.
8
We depend exclusively on the independent pharmacy market.
Our business depends entirely on the purchases of our independent retail
pharmacy members. This market is subject to intense competition from larger
chain pharmacies, including pharmacy departments of mass merchandisers,
supermarkets, discount stores, and mail order pharmacies. Most of these chain
pharmacies have substantially greater financial and other resources than our
members and our company as a whole. Future consolidation in the retail pharmacy
industry, increased competition from larger chain pharmacies, changes in
third-party reimbursement or other events impacting independent pharmacies could
adversely affect demand for our products and services. Much of our recent growth
in revenues has occurred as a result of increased sales to our members, the
addition of new members through our field BDMs, and the addition of new members
through the acquisition of another buying association. To the extent we are not
able to access new markets and offer competitive prices and services to our
current members, our ability to expand and maintain our business and customer
base may be limited. Additionally, if our members and other independent
pharmacies are unable to effectively compete against chain pharmacies, our
existing membership, as well as the number of potential new members, will
decline.
We face substantial competition in our industry.
The drug purchasing and distribution business is highly competitive and we
expect such competition to remain intense. We compete primarily on the basis of
breadth of service and products, pricing and quality of services. We believe our
primary competitors among pharmacy buying groups are other buying associations
such as IPC, Pace, Servall and United. Many of these competitors are either
currently competing in or expanding into our primary markets in the midwestern
United States. In the drug distribution business we compete against regional and
national wholesalers, such as Cardinal Health, Inc., McKesson Corporation and
ANDA. Many of these existing competitors, as well as potential competitors, have
larger marketing and sales organizations and product offerings, as well as
greater financial resources than we do. Our competitors may offer services or
products that are superior to or more price competitive than our services and
products. Our future success also depends on our ability to enhance our existing
services and to introduce new services and products that will meet the
requirements of our members in a changing marketplace. Our present or future
services may not satisfy the needs of our member pharmacies. If we are unable to
anticipate or respond adequately to our members' needs, we may lose business and
members. In addition, these competitive pressures or the cost of providing
increased services could cause a decline in our profit margins and the amount of
rebates we are able to distribute in the future.
A disruption in our relationship with our endorsed wholesaler-partners would
have a negative effect on our ability to attract and retain members.
In addition to supporting members through our distribution center, we
currently have agreements with four wholesaler-partners to support our members'
product needs. Wholesalers play an integral part of our members' business and
competitiveness because they directly affect the availability of product
inventory and profitability at each pharmacy store. Many members have
long-standing relationships with various wholesalers depending on their
geographic location. The wholesaler-partners we endorse serve a vast majority of
our members' product needs and, therefore, our relationship with these
wholesaler-partners is important to us. Our contracts with these
wholesaler-partners terminate in either 2003, 2004 or 2005. Although these
contracts automatically renew, they may be terminated at the election of either
party and there is always the possibility that either of us may elect not to
extend a contract. Certain of these contracts may be terminated prior to their
expiration date, at the election of the wholesaler-partner, either without cause
or if certain members of our management, including Mr. Smock, leave our
employment. Any significant disruptions in our relationships with one or more of
our wholesaler-partners could make it difficult for us to serve and retain
members, resulting in loss of business that would have a material adverse effect
on our results of operations and financial condition. If a wholesaler-partner
should terminate its relationship with us, our distribution center or other
wholesaler-partners may not be able to
9
make up any product shortfalls resulting from such termination. Our members may
also continue their relationship with that wholesaler, either directly or
through another buying association.
Failure to manage growth could impair our business.
Our business has grown rapidly over the last five years. During that
period, we have significantly expanded our operations and increased our
membership by approximately 500 pharmacies. It is difficult to manage this rapid
growth, and our future success depends on our ability to implement and maintain:
sales and marketing programs;
customer support programs;
technological support;
recruitment and training of new personnel; and
operation and financial control systems.
If our business continues to grow at a rapid pace, we will need to
continue to improve our financial and managerial controls, reporting systems and
procedures and to expand the training of our work force. In particular, because
of our growth, we need to incur borrowings to finance our increase in accounts
receivable and to purchase greater amounts of inventory. In some instances our
payables are due before our inventory is sold and the accounts receivable are
collected. Our Company will require additional quality employees to maintain our
business, in particular to manage the flow of processing the sale of inventory
from our warehouse and distribution operations. Our inability or failure to
manage our growth effectively could decrease our profitability and strain our
resources, which would have a material adverse effect on our business.
We depend on our management team and the loss of their services could have a
material adverse effect on our business.
Our ability to successfully implement our business plan in a rapidly
evolving market requires an effective planning and management process. Our
future success depends to a significant extent on the skills, experience, and
efforts of key members of our management team. The loss of any or all of these
individuals could damage our business. We own and are the beneficiary of a life
insurance policy on the life of Mr. Nick Smock, our president and CEO, in the
amount of $1 million. We have an employment agreement with Mr. Smock that
terminates on December 31, 2005 and an employment agreement with Mr. Don Raby,
our vice president and CFO, that terminates on December 31, 2003; however,
either Messrs. Smock or Raby may terminate their agreements prior to that date
upon 60 days' written notice. We do not have employment agreements with any
other employees, but all employees are subject to confidentiality,
non-competition, and non-solicitation agreements throughout the duration of
their employment.
Our members may terminate their membership at any time.
As is standard in our industry, our members can terminate their membership
agreements with us at any time. Accordingly, the number of pharmacies purchasing
products from or through us could decrease significantly at any time. If a large
number of our members withdraw from membership, this could have a material
adverse effect on our financial performance by reducing our sales and decreasing
our efficiencies and economies of scale.
10
Our primary mission is to improve the profitability and competitiveness of our
members and our actions or decisions may not always have a positive result on
our book value.
Our activities are intended to further the competitiveness of our pharmacy
members. Not all of our activities will have an immediately positive impact on
the book value of our common stock. In fact, some of our activities may cause
our book value to decline. Since not all of our members are shareholders and not
all of our shareholders are members, there may be a divergence in interests
between our shareholders and members. For example, we distribute a significant
portion of our profits to members in the form of rebates. While we believe the
distribution of rebates assists our members and provides an increased incentive
to maintain membership with us, the distribution of rebates lowers the book
value of our common stock and provides no direct benefit to non-member
shareholders. Distributing rebates also decreases the amount of cash available
for working capital.
Our operations may suffer if governmental regulations regarding pharmaceuticals
change.
The health care and pharmaceutical industry is highly regulated at the
local, state and federal level. Consequently, we are subject to the risk of
changes in various laws and regulations, which include the operating and
security standards of the United States Drug Enforcement Administration, various
state boards of pharmacy, and comparable agencies. These changes may affect our
operations, including how we distribute and store pharmaceutical products and
how our pharmacy members operate.
The changing healthcare environment may impact our revenue and income.
Our current services and products are intended to function within the
structure of the healthcare financing, reimbursement and rebate system currently
existing in the United States. In recent years, the healthcare industry has
undergone significant changes in an effort to reduce costs and government
spending. These changes include an increased reliance on managed care, cuts in
Medicare and state Medicaid funding, consolidation of competitors, suppliers and
customers. We expect the healthcare industry to continue to change significantly
in the future. Some of these potential changes, such as a reduction in
governmental support of healthcare services or adverse changes in legislation or
regulations governing prescription drug pricing, healthcare services or mandated
benefits, may cause healthcare industry participants to alter their behavior,
potentially negatively impacting our services and products. Changes in
pharmaceutical manufacturers' pricing or distribution policies could also
negatively impact our company.
We may engage in acquisition or merger transactions, which entail risks that
could harm our financial performance or book value.
As part of our business strategy, we may make acquisitions or merge with
other similar companies in the industry. Any future acquisitions or mergers
would be accompanied by the risks commonly encountered in these types of
transactions. These risks include:
the difficulty associated with integrating the personnel, members
and operations of an acquired company;
risks and liabilities associated with inadequate due diligence of,
or inaccurate representations and warranties by, an acquired
company;
the potential disruption of our existing business; and
adverse effects on our financial statements, including the
assumption of liabilities of acquired businesses.
11
If we make acquisitions or enter into mergers and any of these or other problems
materialize, these transactions could adversely affect our operations and
financial condition.
We rely on strategic relationships to generate revenue and create better
programs for our members.
We establish and maintain strategic relationships with drug manufacturers,
wholesalers and other companies. We believe these relationships are important to
our success and the success of our members because they enable us to
extend the reach of our services and products to various
participants in the independent retail pharmacy industry;
ensure a sufficient flow of products to our members at competitive
prices; and
better control the security and confidentiality of our members'
information.
Our ability to bring value to our members is affected by our ability to develop
strategic relationships and to compete effectively in an industry that is
dominated by such relationships. Our business may be adversely affected if we
cannot establish or maintain those relationships. Examples of strategic
alliances include market share and similar programs which entitle us and our
members to receive rebates and direct purchasing accounts which permit us to
purchase inventory and goods directly from manufacturers. Many of these programs
are short term incentives from our wholesalers and manufacturers to encourage
the purchase of various products while other relationships are more permanent in
nature, such as direct purchasing accounts.
Performance or security problems with our systems could damage our business.
Our customer satisfaction and our business could be harmed if we or our
suppliers experience any system delays, failures or loss of data. We currently
process all of our customer transactions and data at our principal office in
Kansas City, Missouri, and do not utilize any other back up systems or duplicate
systems at a different location. Although we have safeguards for emergencies,
the occurrence of a major catastrophic event or other system failure at our
Kansas City, Missouri facility could interrupt data processing or result in a
loss of stored data. This could result in the loss or delays of information,
products or services to our members. Currently, we are considering various ways
of mitigating this risk and anticipate taking some type action in 2003.
There is no trading market for our common stock and our bylaws impose
substantial limitations on shareholders' ability to transfer our common stock.
There is no trading market for our common stock, and no such market is
expected to develop. Shares may only be transferred to us, to our pharmacy
members or licensed pharmacists who own or are employed by a pharmacy member, or
to our employees. We do not have any obligation to repurchase our shares except
upon the death, incompetency or bankruptcy of a shareholder. The price we will
pay to repurchase our shares is set by our board of directors based on our book
value per share as of the end of each fiscal year. The board may adjust the
price based on more current financial information if it deems advisable. Shares
may not be pledged as security for any loan. As a result of these restrictions,
our shares are highly illiquid and shareholders may not be able to sell our
shares for their fair market value if they need to liquidate their investment in
our common stock.
In addition, we have registered under the Securities Exchange Act of 1934
and are placed under additional restrictions regarding selling shares of stock
to those who meet the requirements of share ownership. For SEC purposes, we have
an effective registration statement under the Securities Exchange Act of 1933.
However, additional restrictions of such sales are that we are required to
register the Company as a broker-dealer in certain states and we are required to
have an agent of registration to act as a sales broker in certain states. Mr.
Raby, our Vice President and CFO, is currently registering as our agent in all
jurisdictions. To the extent that he is unable to obtain proper registrations in
certain
12
jurisdictions, leaves the employment of the Company or is no longer an executive
officer of the Company, we will be unable to sell stock for at least a period of
time or the costs of selling shares will greatly increase.
It is unlikely we will pay dividends.
We have never declared or paid any cash dividends on our common stock. We
intend to distribute future earnings, if any, that may be generated from our
operations, after reserving amounts required to finance our operations and
expansion, to our members based on the amount of their purchases from us and
endorsed wholesaler-partners and their participation in our programs, regardless
of whether members own any common stock or the number of shares they may own.
Currently, we do not plan to pay dividends to holders of our common stock. We
believe that we need to pay rebates from our profits to maintain and attract new
members. However, we are monitoring current debate on the federal level to
reduce or eliminate the tax on corporate distributions in the form of dividends
and we reserve the right to amend our practices accordingly.
Our shareholders have limited voting rights.
Pursuant to our bylaws, shareholders have one vote regardless of the number of
shares held by them. As such, a majority of our shareholders have the power to
elect directors and approve any other matters submitted for a shareholder vote
whether or not they own a majority of the shares outstanding. Because each
shareholder has the right to one vote regardless of the number of shares owned,
a shareholder having a significant amount of stock and having a significant
amount of equity in the company will have the same voting rights as a
shareholder with one share of stock and very little equity in the company. As a
result, shareholders who may different economic risks and objectives as a result
of the ownership of a different number of shares will have the same voting
rights.
ITEM 2. PROPERTIES.
We lease approximately 8,700 square feet for our executive office at
1575 N. Universal Avenue, Suite 100, Kansas City, Missouri, from an unaffiliated
third party. The term of the lease expires on December 31, 2006 and our annual
rental obligation for 2003 is projected to be approximately $96,000. We also
lease approximately 1,200 square feet of office space at 2955 Dawn Drive,
Georgetown, Texas, from an unaffiliated third-party. The term of the lease in
Texas terminates on November 14, 2004 and our annual rental obligation is
approximately $17,500.
We lease approximately 24,000 square feet for our distribution facility
in Riverside, Missouri, from an unaffiliated third party. The warehouse lease
expires on August 31, 2004, and our annual rental obligation is approximately
$193,000. We believe our current available space will be sufficient for the next
12 months.
ITEM 3. LEGAL PROCEEDINGS.
There currently are no pending legal proceedings against us which, if
determined adversely, would have a material effect on our business or financial
condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted to a vote of security holders for the
quarter ended December 31, 2002.
13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
No Trading Market
Our common stock does not trade on any securities exchange or automated
quotation system, and there is no firm which makes a market in our common stock.
Pursuant to our bylaws, a shareholder may not sell or otherwise transfer his or
her common stock except to us, to one of our members (or a licensed pharmacist
employed by a member) or to one of our employees. While our bylaws permit our
board of directors to authorize persons other than the foregoing to own our
common stock, this has occurred only when a shareholder has retired or otherwise
voluntarily terminated membership and retained his or her shares. In that event,
we have a right to repurchase those shares.
In light of these restrictions and the lack of any market for our common
stock, shareholders are required to hold our common stock indefinitely and must
consider our shares an illiquid investment. We will not have any obligation to
purchase a shareholder's shares unless the shareholder's membership is
terminated due to death, incompetency or bankruptcy. In addition, we have a
right of first refusal to purchase any shares that a shareholder proposes to
transfer and a right of set-off against the shareholder's shares for any debts
owed by the shareholder to us.
Any shares purchased by us are purchased at the value set by our board of
directors, which is based on our per-share book value at the end of the previous
calendar year, or as of a more recent date if the board deems advisable.
Beginning in 2002, the board began setting the price of our stock based upon the
latest, independently reviewed or audited, financial statements available at the
date of the regularly scheduled board meeting following the release of the
audited or reviewed financial statements. This allows for more timely updates of
the stock price. We expect that the board will continue this practice in 2003.
In 2002, our stock ranged from a low of $445.50 per share (given effect
for a 1 for 1 stock split in the form of a dividend in July 2002) at the
beginning of the year to $567.00 per share at the end of the year.
Shareholders
As of December 31, 2002, we had 664 shareholders of record.
Dividend Policy
We have not declared or paid any cash dividends on our shares of common
stock. We intend to distribute future earnings, if any, that may be generated
from our operations, after reserving amounts required to finance our operations
and expansion, to our members based on the amount of their purchases from us and
endorsed-wholesaler partners and their participation in our programs, regardless
of whether members own any common stock or the number of shares they may own.
Currently, we do not plan to pay dividends to holders of our common stock. We
believe that we need to pay rebates from our profits to maintain and attract new
members. However, we are monitoring current debate on the federal level to
reduce or eliminate the tax on corporate distributions in the form of dividends
and we reserve the right to regularly review our practices and amend them
accordingly.
Equity Compensation Plan
As of December 31, 2002 we have no stock option or equity compensation
plan in place.
14
ITEM 6. SELECTED FINANCIAL DATA.
Selected Financial Data
The following selected financial data is qualified by reference to and
should be read in conjunction with our financial statements and the related
notes and other financial information included elsewhere in this Annual Report
and in the Managements' Discussion and Analysis of Financial Condition and
Results of Operations section of this report. The selected financial data have
been derived from our financial statements, which have been audited by
independent public accountants, as of the years ended December 31, 2002, 2001,
2000, 1999, and 1998. Our historical results are not necessarily indicative of
future operating results.
PHARMACY BUYING ASSOCIATION, INC.
d/b/a TrueCare Pharmacy
Year ended
December 31,
-----------------------------------------------------------------------
2002 2001 2000 1999 1998
----------- ---------- ---------- --------- ---------
Revenues ................................................ 136,997,447 90,414,670 22,005,359 9,367,882 4,352,293
Operating expenses ...................................... 134,477,271 88,361,272 20,563,626 8,574,071 3,907,345
Operating income ........................................ 2,520,176 2,053,398 1,441,733 793,811 444,948
Net income .............................................. 1,541,664 1,310,328 987,371 494,727 275,698
Net income (loss) per share -
assuming full dilution ................................ 136.92 115.14 95.37 49.12 27.67
Weighted average common shares
outstanding - assuming full dilution(a)(b) ........... 11,260 11,380 10,353 10,071 9,961
Balance Sheet: As of December 31
-----------------------------------------------------------------------
2002 2001 2000 1999 1998
----------- ---------- ---------- --------- ---------
Cash .................................................... -- 614,519 1,697,442 259,616 353,978
Accounts receivable, net ................................ 8,138,869 6,380,342 2,462,881 2,587,786 2,025,897
Inventories ............................................. 8,185,885 4,672,273 3,418,236 1,196,862 99,769
Other assets ............................................ 899,408 378,858 182,043 140,909 205,163
Property and equipment, net ............................. 453,109 597,722 414,123 213,424 178,840
----------- ---------- ---------- --------- ---------
Total assets ............................................ 17,677,271 12,643,714 8,174,725 4,398,597 2,863,647
Accounts payable ........................................ 7,083,642 6,196,385 3,342,898 1,422,119 847,753
Other liabilities ....................................... 3,952,920 1,127,844 1,386,829 858,246 503,676
Long-term debt, less current portion .................... -- 18,336 25,457 12,459
Stockholders' equity .................................... 6,640,709 5,301,149 3,419,541 2,105,773 1,512,218
----------- ---------- ---------- --------- ---------
Total liabilities and stockholders' equity .............. 17,677,271 12,643,714 8,174,725 4,398,597 2,863,647
(a) Share and per share amounts prior to 2002 have been adjusted for the
two-for-one stock split effected July 19, 2002.
(b) Share and per share amounts prior to 2001 have been adjusted for the
two-for-one stock split effected January 1, 2001.
15
Critical Accounting Policies
We view our critical accounting policies to be those policies which are
very important to the portrayal of our financial condition and results of
operations, and require management's most difficult, complex or subjective
judgments. The circumstances that make these judgments difficult or complex
relate to the need for management to make estimates about the effect of matters
that are inherently uncertain. We believe our critical accounting policies are
as follows:
Allowance for doubtful accounts. We are required to estimate the level of
accounts receivable recorded on our balance sheet which will ultimately
not be paid. Among other things, this assessment requires analysis of the
financial strength of our customers, which can be highly subjective,
particularly in the recent difficult general economic environment. Our
policy is to estimate bad debt expense based on prior experience
supplemented by a periodic customer specific review when needed. In 2002,
we increased / (reduced) the allowance for doubtful accounts by $0. We
will continue to record bad debt expense based on prior experience
supplemented by a periodic customer specific review. If we over or under
estimate the level of accounts receivable that will not be paid, there may
be a material impact to our financial statements.
Accounts Receivable, Rebates Payable and Sales. We receive volume and
incentive rebates from vendors and pay volume rebates to our customers. We
also receive contractual price reductions from certain vendors, and
certain other sales related adjustments on a regular basis. The exact
level of these adjustments is not always immediately known and thus we
must record an estimate. Our estimates are based on historical experience
with similar programs and upon current data and reports that may be
available at the time, and since we have a relatively small customer base,
customer specific historical experience is often useful in determining the
estimated level of adjustments expected. If we over or under estimate the
level of accounts receivable, rebates payable or sales deductions, there
may be a material impact to our financial statements.
Inventory obsolescence. Our private label products have shelf lives
ranging from 18 to 36 months. We must estimate the amount of inventory
recorded on our balance sheet that will not be sold prior to expiration.
This estimate requires analysis of forecasted demand for our products, our
promotional focus, amounts of our products currently held by our customers
and the impact on our products of competing products. If we over or under
estimate the amount of inventory that will not be sold prior to
expiration, there may be a material impact to our financial statements.
Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard ("SFAS") No. 141 "Business Combinations". SFAS No.
141 eliminates the pooling-of-interest method of accounting for business
combinations. SFAS No. 141 is effective for any business combination completed
after June 30, 2001. The adoption of SFAS No. 141 on January 1, 2002 did not
have a material impact on our financial condition or results of operations.
In July 2001, the Financial Accounting Standards Board issued SFAS No. 142
"Goodwill and Other Intangible Assets". Under SFAS No. 142, goodwill and
indefinite lived intangible assets are no longer amortized. Separate intangible
assets that are not deemed to have an indefinite life will continue to be
amortized over their useful lives. SFAS No. 142 also establishes a new method of
testing goodwill and other intangible assets for impairment on an annual basis
or on an interim basis if an event occurs or
16
circumstances change that would reduce the fair value of that goodwill or other
intangible asset below its carrying value. The adoption of SFAS No. 142 on
January 1, 2002 did not have a material impact on our financial condition or
results of operations.
In August 2001, the Financial Accounting Standards Board issued SFAS No.
144, "Accounting for the Impairment or Disposal of Long Lived Assets." SFAS No.
144 addresses the financial accounting and reporting for the impairment or
disposal of long-lived assets and is effective for financial periods after
January 1, 2002. The adoption of SFAS No. 144 on January 1, 2002 did not have a
material impact on our financial condition or results of operations.
In April 2002, the FASB issued SFAS No. 145, "Revision of FAS Nos. 4, 44
and 64, Amendment of FASB 13 and Technical Corrections." SFAS No. 145 rescinds,
amends or makes various technical corrections to certain existing authoritative
pronouncements and is effective for fiscal years beginning after May 2002 for
the rescission of FAS No. 4 and FAS No. 13, and all other provisions are
effective for financial statements issued on or after May 15, 2002. Early
adoption is encouraged. We do not believe the adoption of SFAS No. 145 will have
a material impact on our financial condition or results of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 requires recording
costs associated with exit or disposal activities at their fair values when a
liability has been incurred. Under previous guidance, certain exit costs were
accrued upon management's commitment to an exit plan, which is generally before
an actual liability has been incurred. The provisions of SFAS No. 146 are
effective for exit or disposal activities that are initiated after December 31,
2002 with early adoption encouraged. We are evaluating the impact the adoption
of SFAS No. 146 will have on our financial condition or results of operations.
We do not believe the adoption of SFAS No. 146 will have a material impact on
our financial condition or results of operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock
Based Compensation--Transition and Disclosure--an amendment of FASB Statement
No. 123." SFAS No. 148 amends SFAS 123 to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, SFAS No. 148 amends the
disclosure requirements of SFAS No. 123 to require more prominent disclosure in
both annual and interim financial statements. The transition guidance and
disclosure provisions of SFAS No. 148 are effective for fiscal years ending
after December 15, 2002. The interim disclosure provisions are effective for
financial reports containing financial statements for interim periods beginning
after December 15, 2002. The adoption of SFAS No. 148 will not have a material
impact on our financial condition or results of operations as of December 31,
2002 as we have no stock option or equity compensation plan in place.
Inflation
We have experienced only moderate price increases under our agreements
with third-party vendors as a result of raw material and labor price increases.
We have generally passed these price increases along to our customers.
17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
The following discussion should be read in conjunction with the
Consolidated Financial Statements and Notes thereto of the Company included in
this Annual Report on Form 10-K. The forward-looking statements included in this
discussion and elsewhere in this Form 10-K involve risks and uncertainties,
including anticipated financial performance, business prospects, industry
trends, shareholder returns and other matters, which reflect management's best
judgment based on factors currently known. Actual results and experience could
differ materially from the anticipated results and other expectations expressed
in the Company's forward-looking statements as a result of a number of factors,
including but not limited to those discussed in this Item and in Item 1
"Business - Risk Factors".
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.
18
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 years ending December 31, 2002, 2001, and 2000.
Comparison of Fiscal Years 2002 and 2001
Revenues
Total Revenues. For 2002, total revenues increased to $137.0 million from
$90.4 million in 2001, representing a 52% increase. The increase is primarily
attributable to an increase in the purchases made through our distribution
center by members gained through the acquisition of TPC and through the general
addition of new members. In addition, the average size and quantity of
individual distribution center orders increased by over 25% each.
Distribution. Revenues from our distribution center increased to $126.9
million in 2002 compared to $81.4 million in 2001. This increase was primarily
due to a substantial increase in our membership utilization of the distribution
center and additional product offerings.
Activity Rebates and Charges. Revenues from rebates and other charges
increased to $6.7 million in 2002 from $5.6 million in 2001. The increase is
attributable to an increase in purchases through our distribution center and the
corresponding increase in manufacturer rebates.
Participation Programs and Fees. Revenues from participation and fee
programs held relatively steady from $3.4 million in 2001 to $3.2 million in
2002.
Third Party. Revenues, shown net of expenses, from third party activities
increased in 2002 to $101,000 from $46,000 in 2001. This minor increase is
attributable to a slow resurgence in managed care activities. This is a reversal
of an earlier decision to phase out our managed care business. We anticipate
increases in these types of activities in the future.
Cost of Revenues
Distribution Center. Costs of goods sold through the distribution center
increased from $79.3 million in 2001 to $123.4 million in 2002. The 56% increase
is directly due to the increase in distribution sales.
Activity Rebates. Costs of rebates to members increased by 56% from 2002
to 2001. In 2002 our costs of rebate activity was $4.9 million compared to $3.1
million in 2001. The increase is directly applicable to an increase in purchases
through our distribution center and to member purchases on contract with our
endorsed wholesaler-partners.
19
Participation Programs and Fees. Costs associated with member programs and
services were $0.7 million in 2002 and $0.7 million in 2001. This directly
follows the relatively flat revenue growth over the same period.
General and Administrative. General and administrative expenses increased
slightly to $5.5 million in 2002 from $5.2 million in 2001. The increase
primarily resulted from costs associated with our public registration. As a
percentage of revenues, general and administrative expenses decreased to 4.0% in
2002 from 5.7% in 2001.
Income from Operations. Income from operations increased to $2.5 million
compared to $2.1 million for the previous fiscal year. As a percentage of total
revenues, income from operations decreased from 2.3% in 2001 to 1.8% in 2002.
The decrease in rate is attributable to a larger portion of our revenues arising
from the sale of pharmaceutical products, which have lower margins than our
other sources of revenue, and to an increase in rebates paid to our members.
Income Taxes. Income taxes increased by 34% in 2002 over 2001. Income tax
expense for 2002 was $1.0 million versus $0.78 million in 2001. The increase
corresponds to an increase in pre-tax income in 2002 over 2001 of 24% and a
higher portion of revenues falling in a higher tax bracket.
Comparison of Fiscal Years 2001 and 2000
Revenues
Total Revenues. For 2001, total revenues increased to $90.4 million from
$22.0 million in 2000, representing a 311% increase. The increase is primarily
attributable to an increase in our membership from 748 members at the end of
2000 to 1,207 members at the end of 2001, and additional revenue generated from
distribution activities.
Distribution. Revenues from our distribution center increased to $81.4
million in 2001 compared to $17.4 million in 2000. This increase was primarily
due to a substantial increase in our membership base and product offerings.
Activity Rebates and Charges. Revenues from rebates and other charges
increased to $5.6 million in 2001 from $2.8 million in 2000. The increase is
attributable to an increase in purchases through our distribution center and to
a general increase in our membership base primarily from the TPC acquisition.
Participation Programs and Fees. Revenues from participation and fee
programs increased to $3.4 million in 2001 from $1.7 million in 2000. Roughly
half of the increase was attributable to the addition of 500 participating
members as a result of the TPC acquisition. Also contributing to the increase
was the increase in our membership base and the corresponding increase in fees
collected for membership.
Third Party. Revenues, shown net of expenses, from third party
activities decreased in 2001 to $46,000 from $156,000 in 2000. A significant
portion of the decrease is attributable to a general increase in third party
expenses due to an increase in the number of members from the TPC acquisition.
Also contributing to the decrease was the company's prior decision to phase out
managed care operations.
20
Cost of Revenues
Distribution Center. Costs of goods sold through the distribution center
increased from $16.0 million in 2000 to $79.4 million in 2001. The 400% increase
is due to the increase in distribution sales.
Activity Rebates. Costs of rebates to members increased by 157% from 2000
to 2001. In 2001 our costs of rebate activity was $3.14 million compared to
$1.22 million in 2000. The increase is directly applicable to an increase in
purchases through our distribution center and to member purchases on contract
with our endorsed wholesaler-partners.
Participation Programs and Fees. Costs associated with member programs and
services were $0.7 million in 2001 compared to $0.4 million in 2000. The 66%
increase corresponds to an increase in our membership base, mainly from the TPC
acquisition, and an increase in member utilization of our programs.
General and Administrative. General and administrative expenses increased
to $5.1 million for 2001 from $2.9 million in 2000. The increase primarily
resulted from increased salary and wages, rent expense, bad-debt expense and an
allowance for our investment in Data Rx. General and administrative expenses as
a percentage of revenue decreased to 5.7% in 2001 from 13.0% in 2000.
Income from Operations. Income from operations increased to $2.1 million
compared to $1.4 million for the previous fiscal year. As a percentage of total
revenues, income from operations was 2.3% in 2001 compared to 6.6% in 2000. The
decrease in rate is attributable to a larger portion of our revenues arising
from the sale of pharmaceutical products, which have lower margins than our
other sources of revenue.
Income Taxes. Income taxes increased by 42% in 2001 over 2000. Income tax
expense for 2001 was $0.78 million versus $0.55 million in 2000. The increase
corresponds to an increase in pre-tax income in 2001 over 2000 of 36%.
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. 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. However, we have not been
able to sell stock since January of 2001 due to restrictions placed on us by the
SEC and state securities agencies. Despite these restrictions, we have still
been able to adequately fund the companies capital requirements through cash
from on-going operations and occasional borrowings under our line of credit. We
believe that we have adequately satisfied requirements placed upon us by the SEC
and state regulatory agencies so that we anticipate selling stock sometime in
the 2nd quarter of 2003.
During fiscal 2002:
Net cash provided by (used by) operations was ($2.79 million),
compared to ($0.74) million for fiscal 2001, primarily due to a
substantial increase in accounts receivable, partially offset by an
increase in accounts payable. A substantial increase in inventories
at the end of the year to meet member requirements and income taxes
also contributed to the net consumption of cash by operations.
21
Net cash provided by (used by) investing activities of ($0.59
million), compared to ($0.35 million) in 2001, was primarily
attributable to the purchase of property and equipment and to cash
invested by the company in tax-free, state of Missouri backed,
higher education bonds.
Net cash provided by (used by) financing activities was $2.77
million, compared to ($0.034 million) in 2001, primarily as a result
of our year-end borrowing of $3 million against our line of credit
to fund the substantial increase in inventory. The positive cash
flow was partially offset by repurchases of our common stock into
the treasury.
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
December 31, 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 2002. $3 million was outstanding under the
Credit Agreement as of December 31, 2002. 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 December 31, 2002 were $0, notwithstanding
$3 million borrowed against our line of credit, down from $0.6 million as of
December 31, 2001. We believe that our cash equivalents as of December 31, 2002,
amounts available under the Credit Agreement, amounts that will be raised
through the sale of our common stock, investments, and operating cash flows will
be sufficient to meet our anticipated debt service requirements, capital
expenditure, 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. Except as set forth above, we do not currently
anticipate incurring any expenses or capital expenditures outside the ordinary
course of business.
Because we registered our common stock under the Securities Exchange Act
of 1934 and we are currently registering ourselves as an issuer, broker-dealer
with certain states, 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. To the extent we are
unable to appropriately register and sell our shares of common stock within the
next 12 months, 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 demands of our business in the future. This would have
an adverse effect on our operations and financial condition.
ITEM 7A. 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. As of December
31, 2002, $3,000,000 was outstanding under the Credit Agreement. To the extent
interest rates rise when we borrow money under the Credit Agreement, our
interest expense will increase.
22
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
23
PHARMACY BUYING ASSOCIATION, INC.
AND SUBSIDIARY
D/B/A TRUECARE PHARMACY
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
24
PHARMACY BUYING ASSOCIATION, INC. AND SUBSIDIARY
D/B/A TRUECARE PHARMACY
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
CONTENTS
Independent auditors' report
Consolidated financial statements:
Consolidated balance sheets
Consolidated statements of income
Consolidated statements of changes in stockholders' equity
Consolidated statements of cash flows
Notes to consolidated financial statements
All schedules have been omitted because of the absence of conditions under
which they are required or because the required information is given in the
above-listed financial statements or notes thereto.
25
Independent Auditors' Report
Board of Directors
Pharmacy Buying Association, Inc. and Subsidiary
d/b/a TrueCare Pharmacy
Kansas City, Missouri
We have audited the accompanying consolidated balance sheets of Pharmacy Buying
Association, Inc. and subsidiary, d/b/a TrueCare Pharmacy, as of December 31,
2002 and 2001 and the related consolidated statements of income, changes in
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 2002. 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 U.S. generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated 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 that 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 Pharmacy Buying
Association, Inc. and subsidiary, d/b/a TrueCare Pharmacy, as of December 31,
2002 and 2001, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 2002 in conformity with U.S.
generally accepted accounting principles.
/s/ HOUSE PARK & DOBRATZ, P.C.
Kansas City, Missouri
February 25, 2003
26
PHARMACY BUYING ASSOCIATION, INC. AND SUBSIDIARY
D/B/A TRUECARE PHARMACY
CONSOLIDATED BALANCE SHEETS - DECEMBER 31, 2002 AND 2001
ASSETS (Note 6)
2002 2001
----------- -----------
Current assets:
Cash ........................................... $ -- $ 614,519
Accounts receivable (Note 3) ................... 8,138,869 6,380,342
Inventories .................................... 8,185,885 4,672,273
Prepaid expenses ............................... 152,374 133,284
----------- -----------
Total current assets ............ 16,477,128 11,800,418
Investment ........................................ 500,000
Property and equipment (Notes 4 and 7) ............ 453,109 597,722
Goodwill (Note 2) ................................. 229,144 229,144
Security deposit .................................. 17,890 16,430
----------- -----------
$17,677,271 $12,643,714
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Checks written in excess of cash in bank ....... $ 321,386
Bank line of credit (Note 6) ................... 3,000,000
Current portion of long-term debt (Note 7) ..... $ 7,417
Accounts payable ............................... 7,083,642 6,196,385
Accrued payroll ................................ 81,978 186,822
Deferred revenue ............................... 282,200 201,600
Income taxes payable ........................... 159,356 532,005
Deferred income taxes (Note 10) ................ 101,000 18,000
----------- -----------
Total current liabilities ....... 11,029,562 7,142,229
----------- -----------
Long-term debt, less current portion (Note 7) ..... 18,336
Deferred income taxes (Note 10) ................... 7,000 182,000
----------- -----------
Commitments (Notes 8 and 11)
Stockholders' equity:
Common stock, $1 par; authorized 30,000 shares;
issued and outstanding 11,380 and 5,690 shares,
respectively (Note 14) ........................ 11,380 5,690
Capital in excess of par value ................. 1,468,255 1,468,255
Retained earnings .............................. 5,363,178 3,827,204
----------- -----------
6,842,813 5,301,149
Less 358 shares of common stock held in
treasury at cost .............................. (202,104)
----------- -----------
6,640,709 5,301,149
----------- -----------
$17,677,271 $12,643,714
=========== ===========
See notes to financial statements.
27
PHARMACY BUYING ASSOCIATION, INC. AND SUBSIDIARY
D/B/A TRUECARE PHARMACY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
2002 2001 2000
------------ ----------- -----------
Revenues:
Distribution center(1) ............................. $126,947,341 $81,395,657 $17,401,434
Participation programs and fees .................... 3,203,705 3,394,742 1,684,820
Member activity rebates ............................ 6,744,860 5,578,007 2,763,261
Third party ........................................ 101,541 46,264 155,844
------------ ----------- -----------
136,997,447 90,414,670 22,005,359
------------ ----------- -----------
Cost of revenues:
Distribution center ................................ 123,407,285 79,368,172 16,045,105
Participation programs and fees .................... 695,709 693,992 419,166
Rebates to members ................................. 4,891,967 3,143,745 1,221,302
------------ ----------- -----------
128,994,961 83,205,909 17,685,573
------------ ----------- -----------
Gross profit .......................................... 8,002,486 7,208,761 4,319,786
General and administrative expenses
(Notes 4, 5, 8 and 9) ................................ 5,482,310 5,155,363 2,878,053
------------ ----------- -----------
Income from operations ................................ 2,520,176 2,053,398 1,441,733
------------ ----------- -----------
Other income (expense):
Investment income .................................. 20,628 51,940 95,433
Recovery of bad debt ............................... 65,000
Gain on disposal of property and equipment ......... 4,786
Interest expense (Notes 6 and 7) ................... (27,182) (8,444) (1,066)
------------ ----------- -----------
63,232 33,496 94,367
------------ ----------- -----------
Income before income taxes ............................ 2,583,408 2,086,894 1,536,100
Income taxes (Note 10) ................................ 1,041,744 776,566 548,729
------------ ----------- -----------
Net income ............................................ $ 1,541,664 $ 1,310,328 $ 987,371
============ =========== ===========
Earnings per common share:
Income available to common stockholders ............ $ 1,541,664 $ 1,310,328 $ 987,371
Weighted average shares outstanding ................ 11,260 11,380 10,353
------------ ----------- -----------
Basic earnings per share ........................... $ 136.92 $ 115.14 $ 95.37
============ =========== ===========
(1) (including revenues generated from businesses owned by members of the
Board of Directors of $17,378,723, $11,614,995 and $3,870,628,
respectively)
See notes to financial statements.
28
PHARMACY BUYING ASSOCIATION, INC. AND SUBSIDIARY
D/B/A TRUECARE PHARMACY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
Capital
Common stock in excess Retained Treasury stock
Shares Amount of par value earnings Shares Amount
------ ------- ------------ ---------- ------ ------
Balances, December 31, 1999 ........... 2,020 $ 2,020 $ 571,819 $1,531,934 -- --
Acquisition and cancellation of
common stock ......................... (33) (33) (30,467)
Sale of common stock .................. 442 442 356,455
Net income for the year ............... 987,371
------ ------- ---------- ---------- --- --------
Balances, December 31, 2000 ........... 2,429 2,429 897,807 2,519,305 -- --
Stock split in the form of a
stock dividend ....................... 2,429 2,429 (2,429)
Acquisition of entity (Note 2) ........ 832 832 584,896
Stock registration fees ............... (14,448)
Net income for the year ............... 1,310,328
------ ------- ---------- ---------- --- --------
Balances, December 31, 2001 ........... 5,690 5,690 1,468,255 3,827,204
Stock split in the form of a
stock dividend ....................... 5,690 5,690 (5,690)
Acquisition of common stock ........... 358 $202,104
Net income for the year ............... 1,541,664
------ ------- ---------- ---------- --- --------
Balances, December 31, 2002 ........... 11,380 $11,380 $1,468,255 $5,363,178 358 $202,104
====== ======= ========== ========== === ========
See notes to financial statements.
29
PHARMACY BUYING ASSOCIATION, INC. AND SUBSIDIARY
D/B/A TRUECARE PHARMACY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
2002 2001 2000
----------- ----------- -----------
Cash flows from operating activities:
Net income ................................................ $ 1,541,664 $ 1,310,328 $ 987,371
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Depreciation ............................................ 241,318 193,535 143,014
Deferred income tax ..................................... (92,000) (285,000) (252,000)
Gain on disposal of property and equipment .............. (4,786)
Loss on investment in affiliate ......................... 100,000
Changes in operating assets and liabilities:
Accounts receivable ................................... (1,758,527) (3,471,837) 124,905
Inventories ........................................... (3,513,612) (1,254,037)
Refundable income taxes ............................... 12,639
Prepaid expenses ...................................... (19,090) (10,580) 46,227
Security deposit ...................................... (1,460) (14,091)
Checks written in excess of cash in bank .............. 321,386
Accounts payable ...................................... 887,257 2,700,130 1,920,779
Accrued payroll ....................................... (104,844) 46,265 80,248
Deferred revenue ...................................... 80,600 199,350 (9,450)
Income taxes payable .................................. (372,649) (253,756) 705,720
----------- ----------- -----------
Net cash provided (used) by
operating activities ...................... (2,794,743) (739,693) 1,538,079
----------- ----------- -----------
Cash flows from investing activities:
Proceeds from disposal of property and equipment .......... 10,300
Purchase of property and equipment ........................ (102,219) (350,051) (343,713)
Purchase of investment .................................... (500,000) (100,000)
----------- ----------- -----------
Net cash used by investing activities ...... (591,919) (350,051) (443,713)
----------- ----------- -----------
Cash flows from financing activities:
Advance against bank line of credit ....................... 3,000,000
Acquisition of common stock ............................... (202,104) (10,500)
Sale of common stock, less offering costs
of $7,103 ................................................ 356,897
Offering costs ............................................ (14,448)
Principal payments on long-term debt ...................... (25,753) (20,107) (2,937)
----------- ----------- -----------
Net cash provided (used) by
financing activities ...................... 2,772,143 (34,555) 343,460
----------- ----------- -----------
(continued)
30
PHARMACY BUYING ASSOCIATION, INC. AND SUBSIDIARY
D/B/A TRUECARE PHARMACY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
2002 2001 2000
---------- ---------- ----------
Net increase (decrease) in cash .................. (614,519) (1,124,299) 1,437,826
Cash, beginning of year .......................... 614,519 1,697,442 259,616
Business acquisition ............................. 41,376
---------- ---------- ----------
Cash, end of year ................................ $ -- $ 614,519 $1,697,442
========== ========== ==========
Supplemental disclosures of cash flow information:
Cash transactions during the year for:
Interest paid ............................... $ 16,026 $ 18,444 $ 1,066
========== ========== ==========
Income taxes paid ........................... $1,610,557 $1,207,882 $ 48,968
========== ========== ==========
Income tax refunds received ................. $ 104,164 $ 2,860 $ 12,639
========== ========== ==========
Non-cash transactions:
During 2002, the Company issued a $5,690 stock split in the form of a
dividend.
During 2001, the Company purchased another company with 832 shares of
common stock valued at $585,728 (Note 2).
During 2000, the Company issued a $20,000 promissory note to acquire 20
shares of common stock.
See notes to financial statements.
31
PHARMACY BUYING ASSOCIATION, INC. AND SUBSIDIARY
D/B/A TRUECARE PHARMACY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
1. Organization and summary of significant accounting policies:
Organization:
Pharmacy Buying Association, Inc., d/b/a TrueCare Pharmacy (TrueCare), was
incorporated in Missouri on May 16, 1988.
Nature of operations and consolidation:
The financial statements have been prepared on the accrual basis of
accounting and include the accounts of Pharmacy Buying Association, Inc.,
d/b/a TrueCare Pharmacy, and its wholly-owned subsidiary, Pharmacy
Consolidation Associates, Inc. (Note 2) (the Company). All material
intercompany transactions and account balances have been eliminated.
The Company, on behalf of its members, negotiates generic and other
pharmaceutical pricing with pharmaceutical manufacturers and wholesalers.
These agreements provide for rebates to be paid based on Company member
purchases. Rebates are paid quarterly to members based on their purchases
from the Company's distribution center and their purchases from
pharmaceutical manufacturers. The Company's Pharmacist Rebate Network
(PRN) tracks the purchases of the Company's members from pharmaceutical
manufacturers and wholesalers to calculate the rebates due to members.
TrueCare formerly administered non-risk managed care contracts with its
clients, for which it received transaction based fees under the managed
care agreements. During 2000, TrueCare contracted all of its managed care
activities to a third-party administrator. During 2001, TrueCare
administered managed care contracts for its wholly-owned subsidiary;
however, as of December 31, 2001, TrueCare contracted its subsidiary's
managed care activities to a third-party administrator as well.
Stockholders and per capita voting:
Only licensed pharmacists or entities who own an independent
pharmaceutical store and Company officers, directors and employees may be
stockholders of the Company. Each stockholder is entitled to one vote
regardless of the number of shares owned. There is no trading market for
the common stock.
Concentration of credit risk:
The Company's customers are primarily located in the midwestern and south
central United States. The Company performs ongoing credit evaluations of
its customers' financial condition and, generally, requires no collateral
from its customers.
TrueCare maintains its bank accounts with a single financial institution.
The bank balances frequently exceed FDIC insured amounts.
32
PHARMACY BUYING ASSOCIATION, INC. AND SUBSIDIARY
D/B/A TRUECARE PHARMACY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
1. Organization and summary of significant accounting policies (continued):
Estimates and assumptions:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Inventories:
Inventories are stated at the lower of cost (first-in, first-out method)
or market and consist of pharmaceuticals and related pharmacy supplies.
Investment:
The Company purchased a $500,000 Missouri Higher Education Bond during
2002 at its face value. This marketable debt security is classified as
available for sale and is carried in the financial statements at cost
which approximates fair value. The bond matures in 2031.
Property and equipment and depreciation:
Property and equipment are stated at cost. Depreciation is provided by
both accelerated and straight-line methods over the estimated useful lives
of the related assets of three to seven years.
Maintenance and repairs are charged to expense as incurred; major renewals
and betterments are capitalized.
Goodwill:
Goodwill that arose in connection with the business acquisition on January
2, 2001 (Note 2) is amortizable over forty years. In accordance with
Statement of Financial Accounting Standards No. 142, amortization of this
goodwill ceased in 2001 and the Company will evaluate the goodwill on an
annual basis for potential impairment. Goodwill was not considered
impaired in 2002; therefore, no impairment loss was recognized.
Deferred revenue:
Deferred revenue results from the advance collection of registration fees
related to the TrueCare annual stockholder meeting held each year. Such
deferred revenue is recognized as income when the stockholder meeting
occurs.
The Company offers its members the opportunity to pay their yearly dues in
advance at a reduced rate. These unearned dues are also included in
deferred revenue and are recognized as income ratably in the following
year.
33
PHARMACY BUYING ASSOCIATION, INC. AND SUBSIDIARY
D/B/A TRUECARE PHARMACY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
1. Organization and summary of significant accounting policies (continued):
Revenue recognition:
"Distribution center" sales are recognized when shipped. "Participation
programs and fees" include administrative fees from vendors and membership
fees, both of which are recognized monthly. "Member activity rebates" are
recognized as earned. "Third party" revenues include transaction fees only
and are recognized as claims are processed.
Income taxes:
Income taxes are provided for the tax effects of transactions reported in
the financial statements and consist of current taxes due plus deferred
taxes related to temporary differences between the recognition of income
and expenses for financial and income tax reporting. The deferred taxes
represent the future tax return consequences of those differences, which
will either be deductible or taxable when the assets and liabilities are
recovered or settled.
Keyman life insurance:
The Company owns a $1,000,000 term life insurance policy on the Chief
Executive Officer.
Reclassifications:
Certain prior year accounts have been reclassified to conform with current
year classifications.
2. Business acquisition:
Effective January 2, 2001, Pharmacy Consolidation Associates, Inc. (PCA),
a wholly-owned subsidiary of TrueCare, acquired substantially all the net
assets of Texas Pharmacy Co-op, Inc., d/b/a Legend Pharmacies (Legend).
Legend, a Texas Corporation, was a pharmaceutical buying group comprising
independent pharmacies located in Texas. Pursuant to the agreement and
plan of reorganization, TrueCare issued 832 common shares to Legend and
Legend subsequently dissolved and distributed to its shareholders one
TrueCare common share for each outstanding common share of Legend. The
acquisition was accounted for under the purchase method of accounting.
34
PHARMACY BUYING ASSOCIATION, INC. AND SUBSIDIARY
D/B/A TRUECARE PHARMACY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
2. Business acquisition (continued):
The purchase price was allocated as follows:
Assets acquired:
Cash ................................ $ 41,376
Accounts receivable ................. 445,624
Property and equipment, net ......... 27,083
Prepaid expenses .................... 43,000
--------
557,083
--------
Liabilities assumed:
Accounts payable .................... 153,357
Income taxes payable ................ 34,000
Capital lease obligation ............ 13,142
--------
200,499
--------
Net assets acquired ........................ 356,584
Goodwill ................................... 229,144
Purchase price ............................. $585,728
The purchase price was determined based on the book value per common share
of Pharmacy Buying Association, Inc. determined December 31, 2000 as
adjusted for the January 4, 2001 stock split (832 shares x $704 per common
share).
The accompanying consolidated financial statements include the operations
of Legend for 2002 and 2001. Legend's pro forma information for 2000 is as
follows:
Unaudited
----------
Revenues ........................... $7,065,367
==========
Net income ......................... $ 6,246
==========
Earnings per share ................. $ 7.51
==========
3. Accounts receivable:
2002 2001
----------- -----------
Membership ................................... $ 1,531,471 $ 637,519
Distribution center .......................... 6,801,398 5,934,364
Program and third-party administration ....... 2,459
----------- -----------
8,332,869 6,574,342
Allowance for doubtful accounts .............. (194,000) (194,000)
----------- -----------
$8,138,869 $6,380,342
========== ==========
35
PHARMACY BUYING ASSOCIATION, INC. AND SUBSIDIARY
D/B/A TRUECARE PHARMACY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
3. Accounts receivable (continued):
2002 2001 2000
-------- --------- --------
Allowance for doubtful accounts:
Balance at beginning of year ........... $194,000 $ 43,632 $ 61,818
Charges to costs and expenses .......... 80,343 327,713 5,526
Bad debts written off .................. (15,343) (177,345)
Recoveries ............................. (65,000) (23,712)
-------- --------- --------
Balance at end of year ................. $194,000 $ 194,000 $ 43,632
======== ========= ========
4. Property and equipment:
2002 2001
---------- ----------
Furniture and fixtures .................. $ 298,809 $ 299,708
Equipment ............................... 713,516 642,662
Software ................................ 400,362 386,001
---------- ----------
1,412,687 1,328,371
Accumulated depreciation ................ (959,578) (730,649)
---------- ----------
$ 453,109 $ 597,722
========== ==========
Depreciation expense, included in general and administrative expenses, was
$241,318, $193,535 and $143,014 for the years ended December 31, 2002, 2001
and 2000, respectively.
5. Investment in and advances to affiliate:
The Company owned 41.6% and 49.1% of DataRx Management, Incorporated
(DataRx) as of December 31, 2002 and 2001, respectively, as a result of its
direct investment in DataRx (in 2000) and its acquisition of Legend (in
2001) (Note 2). DataRx performs the technological functions of capturing
and switching pharmaceutical claim data for its pharmacy clients.
The Company is not involved in the management of DataRx, has no
representation on the DataRx Board of Directors, is not a guarantor of any
DataRx obligations, has no additional funding commitments, and has agreed
not to acquire additional stock above 50% of the outstanding stock of
DataRx. The Company accounts for its investment in DataRx on the equity
method.
The unaudited results of operations of DataRx for 2002 and 2001 reported a
net loss of approximately $100,000 each year. The Company fully reserved
its investment in ($100,000 in 2000) and advances to ($180,000 in 2001)
DataRx by a charge to general and administrative expense of $280,000 in
2001.
36
PHARMACY BUYING ASSOCIATION, INC. AND SUBSIDIARY
D/B/A TRUECARE PHARMACY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
6. Bank line of credit:
The Company has a $7,000,000 bank line of credit. Interest is computed on
outstanding balances at prime (4.75% at December 31, 2002). At December
31, 2002, $3,000,000 was outstanding on this line. At December 31, 2001,
there were no amounts outstanding against this line. The line is secured
by substantially all the assets of the Company.
As of February 2, 2003, the maximum amount available on this bank line of
credit was reduced to $5,000,000. The line matures on June 30, 2003.
7. Long-term debt:
2002 2001
---- ----
Bank note, collateralized by an automobile,
interest at 8.1%, payable in monthly
installments of $364 including interest,
due April, 2004. This note was paid in full
during 2002 ............................................ $ 9,549
Promissory note for acquisition of common
stock, unsecured, interest at 9.5%,
payable in quarterly installments of $1,268
including interest, due October 1, 2005. This
note was paid in full during 2002 ...................... 16,204
-------
25,753
Less current portion ................................... 7,417
-------
$ -- $18,336
======= =======
All interest costs have been expensed.
8. Leases:
The Company leases warehouse space, office space and equipment under
non-cancelable operating leases with terms ranging from two to five years.
The warehouse and office leases require the Company to pay taxes,
insurance and maintenance. Rent expense, included in general and
administrative expenses, for 2002, 2001 and 2000 was as follows:
2002 2001 2000
-------- -------- --------
Warehouse .................. $193,573 $ 59,839 $ 37,097
Office ..................... 134,899 119,981 64,360
Equipment .................. 6,305 6,725 765
-------- -------- --------
$334,777 $186,545 $102,222
======== ======== ========
37
PHARMACY BUYING ASSOCIATION, INC. AND SUBSIDIARY
D/B/A TRUECARE PHARMACY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
8. Leases (continued):
Future minimum payments for operating leases having terms of one year or
more are as follows:
Year ending
December 31, Amount
------------- ---------
2003 ................. $ 312,241
2004 ................. 323,645
2005 ................. 113,630
2006 ................. 111,540
9. Profit sharing plan:
The Company has a profit sharing plan available to all employees who meet
the minimum service requirements. The Plan includes salary deferral
features described in Section 401(k) of the Internal Revenue Code.
All administrative costs of the Plan, except investment fees, are paid by
the Company. Non-matching employer contributions are determined annually
and are at the discretion of the Board of Directors. Mandatory employer
matching contributions are 16% of employee contributions up to 8% of the
individual participant's compensation. Employer contributions to the Plan
for 2002, 2001 and 2000, included in general and administrative expenses,
were $20,979, $14,358 and $9,349, respectively.
10. Income taxes:
The provision for income taxes consists of:
2002 2001 2000
---------- ---------- ---------
Current:
Federal ................... $ 918,368 $ 879,811 $ 648,631
State and city ............ 215,376 181,755 152,098
---------- ---------- ---------
1,133,744 1,061,566 800,729
Deferred (credit) ............ (92,000) (285,000) (252,000)
---------- ---------- ---------
Income tax expense ........... $1,041,744 $ 776,566 $ 548,729
========== ========== =========
38
PHARMACY BUYING ASSOCIATION, INC. AND SUBSIDIARY
D/B/A TRUECARE PHARMACY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
10. Income taxes (continued):
The effective income tax rate differed from the statutory federal income
tax rate primarily due to the following:
2002 2001 2000
---- ---- ----
Statutory federal income tax rate ............ 34.0% 34.0% 34.0%
Tax effect of:
State income taxes, net of federal benefit 5.0 5.0 5.0
Change in accounting method used for tax
from cash to accrual .................... (1.0) (1.6) (2.6)
Other temporary differences .............. 2.3 (.2) (.7)
---- ---- ----
Effective income tax rate .................... 40.3% 37.2% 35.7%
==== ==== ====
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities are as follows:
2002 2001
-------- --------
Deferred tax assets:
Current:
Payroll liabilities not paid within 2 1/2 months
of year-end .................................... $ 45,500
Allowance for uncollectible accounts ............ 73,500
Investment in and advances to affiliate ......... $ 74,000 38,000
-------- --------
Total gross deferred tax assets ................. 74,000 157,000
Valuation allowance ............................. -- --
-------- --------
74,000 157,000
-------- --------
Deferred tax liabilities:
Current:
Section 481 adjustment resulting from
cash to accrual method change of
accounting for tax purposes ................... 175,000 175,000
-------- --------
Net current deferred tax liability .............. $101,000 $ 18,000
======== ========
Long-term:
Tax depreciation in excess of financial reporting $ 7,000 $ 7,000
Section 481 adjustment resulting from cash to
accrual method change of
accounting for tax purposes
175,000
-------- --------
Non-current deferred tax liability .............. $ 7,000 $182,000
======== ========
39
PHARMACY BUYING ASSOCIATION, INC. AND SUBSIDIARY
D/B/A TRUECARE PHARMACY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
11. Commitment:
As consideration for the endorsement of an industry trade group, TrueCare
pays the trade group 1% of all TrueCare member contract purchases. The
agreement automatically renews at the same terms unless canceled within
180 days of expiration by either party. Trade group endorsement fees,
included in operating costs, were $152,000, $163,043 and $138,054 for the
years ended December 31, 2002, 2001 and 2000, respectively.
12. Advertising costs:
The Company expenses advertising costs as incurred. Advertising expense,
included in operating costs, was $55,704, $100,722 and $56,685 for the
years ended December 31, 2002, 2001 and 2000, respectively.
13. Quarterly results of operations (unaudited):
The quarterly results of operations (unaudited) for 2002, 2001 and 2000
are as follows:
Quarter ended,
------------------------------------------------------
March 31 June 30 September 30 December 31
----------- ----------- ------------ -----------
2002:
Revenues ......................... $26,400,494 $33,699,291 $38,980,051 $37,917,611
Gross profit ..................... 1,793,426 2,312,190 2,083,527 1,813,343
Net income ....................... 260,186 709,179 304,812 267,487
Basic earnings per share ......... 23.12 62.99 27.05 23.76
2001:
Revenues ......................... $14,916,803 $20,008,284 $28,394,499 $27,095,084
Gross profit ..................... 1,730,243 1,775,960 1,742,721 1,959,837
Net income ....................... 466,052 462,035 180,007 202,234
Basic earnings per share ......... 40.95 40.60 15.82 17.77
2000:
Revenues ......................... $ 3,183,539 $ 4,288,629 $ 5,791,316 $ 8,741,875
Gross profit ..................... 975,364 1,229,228 1,532,903 582,291
Net income (loss) ................ 171,901 380,969 512,636 (78,135)
Basic earnings (loss) per share .. 16.60 36.80 49.52 (7.55)
14. Subsequent event:
In January 2003, the Board of Directors approved an amendment to the
articles of incorporation to increase the authorized shares of common
stock to 3,000,000 shares with a par value of $.01. A shareholder vote to
approve this amendment will be taken in accordance with the articles of
incorporation and Missouri law.
40
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS.
Our board of directors currently consists of 10 members, all of whom are
pharmacists. Our directors own or operate member pharmacies and are elected by
the shareholders. None of our directors are employees of TrueCare, although each
of the directors transacts business with us as an owner of one or more member
pharmacies. See "Item 7. Certain Relationships and Related Transactions."
Directors are divided into three classes. The appropriate class is elected
at each annual meeting of the shareholders. As a result of our transaction with
TPC, the size of our board was increased to 17 members in January 2001. During
2001, our board decided to reduce the size of the board to 12 members and
therefore no directors were elected to fill the five vacancies at the 2001
annual meeting of shareholders. Tammy Gray resigned from the board in May 2002.
The board has decided to further reduce the size of the board to 11 members, and
therefore Ms. Gray's position has not been filled. The board intends to review
this issue in 2003. Nick Smock, our President, had been appointed to the Board
by the directors in 1999 pursuant to our bylaws, but he resigned as a director
in September 2002. Since he was appointed due to his position as President, he
will not be replaced as a director.
In order to preserve the division of directors into three classes, the
board moved three directors into a third class, which directors were nominated
and elected for a two-year term at the 2002 annual meeting of shareholders, in
addition to the election of three directors for a three-year term. Our executive
officers are appointed by and serve at the discretion of our board of directors.
There are no family relationships between any of our directors and/or any
executive officers.
Set forth below is the name, age, position, term of office and a brief
account of the business experience, including principal occupation or position,
of each person who is a director or executive officer of the registrant.
Name Age Present Position Term Expires
---- --- ---------------- ------------
Michael Burns .............. 36 Chairman, Director 2003
Nick Smock ................. 44 President, CEO Not Applicable
Donald Raby ................ 34 Vice President Finance/Human Resources, CFO, Not Applicable
Treasurer, Secretary
Gene Forrester ............. 51 Director, Assistant Treasurer 2003
Steve Erickson ............. 52 Director 2003
Charles M. Miller .......... 50 Director 2004
John Raniero ............... 45 Director 2004
Phillip Rozell ............. 51 Director 2003
Gary Foster ................ 57 Director 2004
Steve Stephenson ........... 53 Vice Chairman, Director 2005
Carlos Solis ............... 43 Director 2005
David Dubose ............... 52 Director, Assistant Secretary 2005
Clark Balcom ............... 36 Vice President, IT and Distribution Operations Not Applicable
Robert Breaman ............. 42 Vice President, Sales and Marketing Not Applicable
41
Michael Burns has served on our board and as Chairman since 1997. Mr.
Burns owns and operates Burns Pharmacy, Inc., which operates seven retail
pharmacies in Missouri and Kansas. Mr. Burns received his Bachelor of Science in
Pharmacy from the University of Kansas in 1989.
Nick Smock has served as our President since 1998 and as a director from
1999 to 2002, and as CFO and CEO from 1998 to 2002. Mr. Smock has been with
TrueCare since 1994 and prior to 1998 served as our Vice President and Director
of Contracts. He spent several years as a practicing pharmacist prior to coming
to TrueCare. Mr. Smock received his Bachelor of Science in Pharmacy from the
University of Missouri in 1983, his Masters of Business Administration in
Finance from the University of Missouri-Kansas City in 1990, and his Doctor of
Pharmacy from the University of Missouri-Kansas City in 2002.
Donald Raby became Vice President, Finance and Human Resources, Chief
Financial Officer (CFO), Treasurer and Secretary of the Company in September
2002. Mr. Raby received his Bachelors of Science in Accounting from William
Jewell College in 1996. He is a Certified Public Accountant (CPA) in the State
of Missouri, a member of the American Institute of Certified Public Accountants
(AICPA), and has worked in public accounting, tax, and litigation consulting, as
well as retail pharmacy and wholesale distribution environments.
Gene Forrester served on our board from 1989 to 1994 and was re-elected to
the board in 1997. Mr. Forrester served as Treasurer of the board from 1997 to
September 2002, when he became Assistant Treasurer of the Company. Mr. Forrester
is the owner of D&H Drug Stores located in Columbia, Missouri. Mr. Forrester
received his Bachelor of Science in Pharmacy from St. Louis College of Pharmacy
in 1974.
James (Steve) Erickson has served on our board since 1997. Mr. Erickson is
President of KCJSE d/b/a The Drug Store and Director of Pharmacy at the Cameron
Community Hospital, each located in Cameron Missouri. Mr. Erickson received his
Bachelor's of Science in Pharmacy from the University of Missouri-Kansas City in
1975.
Charles (Mike) Miller has served on our board since 1999. Mr. Miller is a
staff pharmacist and CEO of Miller Professional Pharmacy located in Platte City,
Missouri. Mr. Miller received his Bachelor of Science in Pharmacy from the
University of Missouri - Kansas City in 1975.
John Raniero has served on our board since 1999. Mr. Raniero is the vice
president of Goldsmith Pharmacy, located in St. Louis, Missouri. Mr. Raniero
received his Bachelor of Science in Pharmacy from the St. Louis College of
Pharmacy in 1980.
Phillip Rozell has served on our board since 2000. Mr. Rozell is president
and sole owner of R & R Medical, Inc., which owns one pharmacy in Missouri under
the name Family Pharmacy of Neosho and one pharmacy in Arkansas under the name
Southgate Pharmacy. Mr. Rozell received his Bachelor of Science in Pharmacy from
the University of Arkansas in 1974.
Gary Foster has served on our board since January 2001 and previously
served on the board of directors of Texas Pharmacy Co-op, Inc. Mr. Foster is a
pharmacist at Foster Drug Co. located in Pittsburg, Texas.
Quincy (Steve) Stephenson has served on our board since January 2001 and
previously served on the board of directors of Texas Pharmacy Co-op, Inc. Mr.
Stephenson is a pharmacist at S & R Pharmacy located in Kirbyville, Texas.
Carlos Solis has served on our board since January 2001 and previously
served on the board of directors of Texas Pharmacy Co-op, Inc. Mr. Solis is
President and sole owner of Ridgepoint Medical
Medical
42
Pharmacy, LLC, d/b/a Ridgepoint Pharmacy located in McAllen, Texas.
David Dubose has served on our board since January 2001 and previously
served on the board of directors of Texas Pharmacy Co-op, Inc. Mr. Dubose also
served as Secretary of the board from January 2001 to September 2002, when he
became Assistant Treasurer of the Company. Mr. Dubose is a pharmacist and owner
of Sholars Drug, located in Orange, Texas.
Clark Balcom has served as our Vice President - Information Technology &
Distribution Operations since February 1996. Prior to joining TrueCare, Mr.
Balcom served as a Senior Manager of Business and Technology Integration for
Andersen Consulting (now Accenture) and worked in the consumer products,
transportation, healthcare and financial services industries. Mr. Balcom
received his Bachelors of Science in Finance from Iowa State University in 1989.
Robert Breaman has served as our Vice President - Sales and Marketing
since March 1999. From August 1997 to March 1999, Mr. Breaman served as Director
of Sales for D & K Healthcare, a regional pharmaceutical wholesaler located in
St. Louis, Missouri.
Except as described above, each of the directors and executive officers
has served in the principal occupation or position indicated above for at least
the past five years.
Board Committees
The board has two committees, a Compensation Committee and an Audit
Committee. The Compensation Committee makes recommendations to the entire board
concerning salaries and compensation for our officers and employees and is
comprised of Mike Burns, Steve Stephenson and John Raniero. The Audit Committee
monitors our financial reporting process, reviews and appraises the efforts of
our outside auditor and provides a direct link between the board, senior
management and our auditors. The Audit Committee is comprised of Mike Burns,
Mike Miller and Gene Forrester.
ITEM 11. EXECUTIVE COMPENSATION.
Director Compensation
Non-employee directors receive a fee of $400 per day for each board meeting
attended. In addition, Mike Burns receives an additional fee of $500 per month
for his services as board chairman and an additional $100 per day per meeting.
Directors also are reimbursed for their expenses, including meeting-related
travel and lodging at the meeting location.
Executive Officer Compensation
The following table provides certain historical, summary information
concerning compensation paid by us to our President and each additional
executive officer whose salary and bonus exceeded an aggregate of $100,000 in
the year ended December 31, 2002.
Summary Compensation Table
Annual Compensation
------------------------------------------------
All other
Name and Principal Position Year Salary Bonus Compensation(1)
--------------------------- ---- ------ ----- ---------------
Nick Smock 2002 $182,280 $30,000 $ 863
President/CEO 2001 $180,900 $30,000 $1,680
2000 $144,842 $ 7,500(2) $1,680
Clark Balcom 2002 $154,333 $26,000 $1,441
Vice President - Information 2001 $150,850 $26,000 $1,680
Technology 2000 $121,591 $10,000 $1,680
Harvey Rogers(3) 2002 $75,226 $25,000 $1,002
Vice President - Managed 2000 $108,808 $13,781(4) $1,246
Care/Third Party
Robert Breaman 2002 $123,809 $15,000 $ 639
Vice President - Sales 2001 $100,355 $ 8,000 -0-
2000 $ 88,076 $ 6,200 -0-
- -----------
(1) Consists of contributions made on behalf of the named executive officer to
The registrant's 401(k) Plan.
(2) Consists of 10 shares of common stock issued to Mr. Smock with an assigned
value at the time of issuance of $7,500.
(3) Harvey Rogers resigned from his position as Vice President - Managed
Care/Third Party on June 13, 2002
(4) Includes 9 shares of common stock issued to Mr. Rogers with an assigned
value at the time of issuance of $6,750.
Employment Agreement
We have an employment agreement with Nick Smock pursuant to which Mr.
Smock acts as our President/CEO. The agreement expires on December 31, 2005, but
the board and Mr. Smock may renew or extend the term of the agreement for one or
more years. We can terminate the agreement prior to March 31, 2004 for cause,
upon vote of at least 75% of the directors on our board and payment of 120 days'
salary to Mr. Smock. Mr. Smock also may terminate the agreement prior to
December 31, 2005 upon 60 days' written notice. During the period of his
employment, Mr. Smock will receive an annual salary of $180,000, as adjusted for
inflation based on the Consumer Price Index.
We also have an employment agreement with Don Raby pursuant to which Mr.
Raby acts as our Vice President, Finance and Human Resources and our Chief
Financial Officer. The agreement expires on December 31, 2003, but the board and
Mr. Raby may renew or extend the term of agreement for one or more years. We can
terminate the agreement prior to December 31, 2003 for cause upon vote of at
least 75% of the directors on our board and payment of 120 days' salary to Mr.
Raby. Mr. Raby also may terminate the agreement prior to December 31, 2003 upon
60 days' written notice.
44
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth information regarding beneficial ownership
of our common stock as of December 31, 2002 by:
each of our directors;
each of our named executive officers; and
all of our directors and executive officers as a group.
No shareholder owns more than 5% of our outstanding common stock. We have no
options or warrants outstanding. Except as otherwise indicated, the shareholders
listed in the table have sole voting and investment powers with respect to the
shares indicated.
Number of
Shares of
Common Stock Percent of
Beneficially Common Stock
Name and Address of Beneficial Owner(1) Owned Outstanding
- ---------------------------------------- ------------ ------------
Michael Burns ................................... 204 1.8%
Nick Smock ...................................... 1 *
Donald Raby ..................................... 6 *
Gene Forrester .................................. 88 *
James Erickson .................................. 432 3.8%
Charles Miller .................................. 28 *
John Raniero .................................... 64 *
Phil Rozell ..................................... 48 *
Gary Foster ..................................... 6 *
Quincy Stephenson ............................... 20 *
Carlos Solis .................................... 4 *
David Dubose .................................... 20 *
Clark Balcom .................................... 120 1.2%
Robert Breaman .................................. 32 *
All of our directors and executive officers
as a group (14 persons) ......................... 1,073 9.4%
- -------------
* Less than 1%.
(1) The address for each of these shareholders is c/o Pharmacy Buying
Association, Inc., 1575 N. Universal Avenue, Suite 100, Kansas City,
Missouri 64120.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The directors or the independent pharmacies with which they are
affiliated, acting in their capacity as members of our buying association, have
purchased products and services from us on the same terms and conditions as
every other member, and can be expected to do so in the future.
Messrs. Foster, Stephenson, Solis and Dubose previously served on the
board of directors of
45
TPC, and were elected to our board in January 2001 as part of the transaction
between the registrant and TPC.
PART IV
ITEM 14. 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 (the "Senior Reporting Officers") have evaluated the
effectiveness of our disclosure controls and procedures as of a date within 90
days before the filing of this annual 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 year ended December 31, 2002, there were no significant changes to our
internal controls or in other factors that could significantly affect our
internal controls.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Exhibits:
Exhibit
Number Description of Document
------- -----------------------
2.1 Agreement and Plan of Reorganization among the registrant, Texas
Pharmacy Co-op, Inc. and Pharmacy Consolidation Corp. dated
November 3, 2000(1)
3.1 Articles of Incorporation of the registrant(1)
3.2 Amendment to Articles of Incorporation of the registrant(1)
3.3 Second Amended and Restated Bylaws of the registrant(1)
4.1 Specimen Common Stock Certificate of the registrant(1)
46
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)(1)
10.1 Employment Agreements between the registrant and Nick Smock and
Don Raby dated November 29, 2000 and September 12, 2002,
respectively(1)
10.2 Net Lease dated May 18, 2001 between the registrant and Bob
Campbell d/b/a Shady Properties(1)
10.3 Lease Agreement dated July 7, 1999 between the registrant and
Enterprise Properties, L.L.C.(1)
10.4 First Amendment to Lease dated April 4, 2000 between registrant
and Enterprise Properties, L.L.C.(1)
10.5 Improved Property Commercial Lease dated August 1, 2000 between
Texas Pharmacy Co-op, Inc. and Carl A. Parker(1)
21.1 List of subsidiaries of the registrant(1)
23.1 Report of Independent Auditors, House Park & Dobratz, P.C.
(included in Item 8 above)(2)
23.2 Consent of House Park & Dobratz, P.C.(2)
99.1 Certification of CEO and CFO relating to Periodic Report
containing Financial Statements(2)
(1) Previously filed as an exhibit to the Form 10 Registration Statement filed
on April 30, 2002 (Commission File No. 000-49785).
(2) Filed herewith.
47
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of Kansas
City, State of Missouri, on March 28, 2003.
Pharmacy Buying Association, Inc.
By: /s/ Donald E. Raby II
--------------------------------
Donald E. Raby II
Vice President
Chief Financial Officer
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the following persons in the capacities and on the dates
indicated.
Signature Capacity Date
- --------- -------- ------
/s/ Mike Burns Chairman, Director March 28, 2003
- ------------------------
Michael Burns
/s/ Nick Smock President, CEO March 28, 2003
- ------------------------
Nick Smock
/s/ Don Raby Vice President, CFO March 28, 2003
- ------------------------
Donald Raby
/s/ Gene Forrester Director March 28, 2003
- ------------------------
Gene Forrester
/s/ Steve Erickson Director March 28, 2003
- ------------------------
Steve Erickson
/s/ Mike Miller Director March 28, 2003
- ------------------------
Mike Miller
/s/ John Raniero Director March 28, 2003
- ------------------------
John Raniero
/s/ Phil Rozell Director March 28, 2003
- ------------------------
Phil Rozell
/s/ Gary Foster Director March 28, 2003
- ------------------------
Gary Foster
/s/ Steve Stephenson Vice Chairman, Director March 28, 2003
- ------------------------
Steve Stephenson
48
/s/ Carlos Solis Director March 28, 2003
- ------------------------
Carlos Solis
/s/ David Dubose Director March 28, 2003
- ------------------------
David Dubose
49