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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(MARK ONE)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2004 OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number
Pharmacy Buying Association, Inc.
(Exact name of registrant as specified in its charter)
Missouri 43-1482785
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1575 N. Universal Ave., Suite 100, Kansas City, Missouri 64120
(Address of principal executive offices) (Zip Code)
(816) 245-5700
Registrant's telephone number, including area code
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No|_|
At March 31, 2004, 6,724 shares of common stock, $1.00 par value, of the
registrant were outstanding.
Total number of pages 20.
Pharmacy Buying Association, Inc.
INDEX FORM 10-Q
Part I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
Consolidated Balance Sheets as of March 31, 2004 (unaudited)
and December 31, 2003
Consolidated Statements of Operations for the three
months ended March 31, 2004 and 2003 (unaudited)
Consolidated Statements of Cash Flows for the three months ended
March 31, 2004 and 2003 (unaudited)
Notes to Consolidated Financial Statements (unaudited)
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
ITEM 4 - CONTROLS AND PROCEDURES
Part II - OTHER INFORMATION
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURES
CERTIFICATIONS
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
PHARMACY BUYING ASSOCIATION, INC. AND SUBSIDIARY
D/B/A TRUECARE PHARMACY
INDEX TO FINANCIAL STATEMENTS
Consolidated financial statements:
Consolidated balance sheets as of March 31, 2004 (unaudited) and
December 31, 2003
Consolidated statements of operations for the three months ended
March 31, 2004 and 2003 (unaudited)
Consolidated statements of cash flows for the three months ended
March 31, 2004 and 2003 (unaudited)
Notes to consolidated financial statements (unaudited)
PHARMACY BUYING ASSOCIATION, INC. AND SUBSIDIARY
D/B/A TRUECARE PHARMACY
CONSOLIDATED BALANCE SHEETS
ASSETS
(Unaudited) (Audited)
March 31, December 31,
2004 2003
---- ----
Current assets:
Cash in bank $ 2,294,010
Accounts receivable 7,286,768 $ 7,068,561
Inventories 8,969,554 10,220,377
Prepaid expenses 57,273 32,938
Deferred income taxes 79,000 79,000
----------- -----------
Total current assets 18,686,605 17,400,876
Investment 500,000 500,000
Property and equipment 289,701 333,746
Goodwill 229,144 229,144
Other assets 17,890 17,890
----------- -----------
$19,723,340 $18,481,656
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Checks written in excess of cash in bank $ 1,068,526
Accounts payable $12,666,315 10,474,830
Accrued payroll 157,825 115,618
Obligation to acquire stock in treasury 294,920 341,640
Deferred revenue 1,169,305 1,308,160
Income taxes payable 169,221 85,736
----------- -----------
Total current liabilities 14,457,586 13,394,510
----------- -----------
Deferred income taxes 12,000 12,000
----------- -----------
Commitments and contingencies
Stockholders' equity:
Common stock, $1 par; authorized 30,000 shares;
issued and outstanding 6,724 and 6,920 shares,
respectively 6,724 6,920
Retained earnings 5,247,030 5,068,226
----------- -----------
5,253,754 5,075,146
----------- -----------
$19,723,340 $18,481,656
=========== ===========
See notes to consolidated financial statements.
PHARMACY BUYING ASSOCIATION, INC. AND SUBSIDIARY
D/B/A TRUECARE PHARMACY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended March 31,
2004 2003
------------ ------------
Revenues:
Distribution center (including revenues generated
from businesses owned by members of the Board
of Directors of $4,542,545 and $3,814,968 for
the three months ended March 31, 2004 and 2003,
respectively $ 36,263,485 $ 36,694,049
Participation programs and fees 601,303 880,610
Activity rebates and charges 1,433,551 1,508,136
Third party 16,397 25,701
------------ ------------
38,314,736 39,108,496
------------ ------------
Cost of revenues:
Distribution center 35,254,977 35,467,171
Participation programs and fees 284,756 205,343
Activity rebates 984,492 1,327,988
------------ ------------
36,524,225 37,000,502
------------ ------------
Gross profit 1,790,511 2,107,994
General and administrative expenses 1,298,315 1,424,021
------------ ------------
Income from operations 492,196 683,973
------------ ------------
Other income (expense):
Investment income 5,925 3,922
Interest expense (1,389) (1,505)
------------ ------------
4,536 2,417
------------ ------------
Income before income taxes 496,732 686,390
Income taxes 203,660 280,590
------------ ------------
Net income $ 293,072 $ 405,800
============ ============
Earnings per common share:
Income available to common stockholders $ 293,072 $ 405,800
Weighted average shares outstanding,
basic and diluted 6,819 11,157
------------ ------------
Basic and diluted earnings per share $ 42.98 $ 36.37
============ ============
See notes to consolidated financial statements.
PHARMACY BUYING ASSOCIATION, INC. AND SUBSIDIARY
D/B/A TRUECARE PHARMACY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three months ended March 31,
----------------------------
2004 2003
---- ----
Cash flows from operating activities:
Net income $ 293,072 $ 405,800
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Depreciation 44,045 50,572
Changes in operating assets and liabilities:
Accounts receivable (218,207) 24,844
Inventories 1,250,823 (1,071,770)
Prepaid expenses (24,335) (24,381)
Checks written in excess of cash in bank (1,068,526) 246,058
Accounts payable 2,191,485 3,663,323
Accrued payroll 42,207 53,204
Deferred revenue (138,855) (62,124)
Income taxes payable 83,485 (101,040)
----------- -----------
Net cash provided (used) by operating activities 2,455,194 3,184,486
----------- -----------
Cash flows from investing activities, purchase of property
and equipment -- (17,788)
----------- -----------
Cash flows from financing activities:
Payments on bank line of credit (3,000,000)
Acquisition and cancellation of treasury stock (114,464) (166,698)
Reduction in obligation to acquire stock in treasury (46,720)
----------- -----------
Net cash used by financing activities (161,184) (3,166,698)
----------- -----------
Net increase in cash 2,294,010 --
Cash, beginning of period -- --
----------- -----------
Cash, end of period $ 2,294,010 ($--)
=========== ===========
Supplemental disclosures of cash flow information:
Cash transactions during the period for:
Interest paid $ 1,389 $ 1,505
=========== ===========
Income taxes paid $ 120,175 $ 381,630
=========== ===========
See notes to consolidated financial statements.
PHARMACY BUYING ASSOCIATION, INC. AND SUBSIDIARY
D/B/A TRUECARE PHARMACY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of presentation:
The accompanying interim financial statements have been prepared in
accordance with the rules and regulations of the Securities and Exchange
Commission for interim reporting and do not include certain disclosures
required by accounting principles generally accepted in the United States
of America. Accordingly, the statements should be read in conjunction with
the Pharmacy Buying Association, Inc., d/b/a TrueCare Pharmacy (the
Company) financial statements and notes thereto included in the Company's
Annual Report and Form 10-K filed with the Securities and Exchange
Commission under File No. 000-49785. Accounting policies utilized in the
preparation of financial information herein presented are the same as set
forth in our annual financial statements. Certain disclosures and
information normally included in financial statements have been condensed
or omitted. In the opinion of the management of the Company, these
financial statements contain all adjustments (consisting only of normal
recurring adjustments) necessary for a fair presentation of the interim
financial statements. Interim results of operations are not necessarily
indicative of the results of operations for the full year.
2. New accounting pronouncements:
Property and equipment:
During December 2003, the Securities and Exchange Commission ("SEC")
issued Staff Accounting Bulletin ("SAB") No. 104, Revenue Recognition,
which supersedes SAB No. 101, Revenue Recognition in Financial Statements.
This Bulletin's primary purpose is to rescind accounting guidance
contained in SAB No. 101 related to multiple element revenue arrangements,
superseded as a result of the issuance of EITF 00-21, Accounting for
Revenue Arrangements with Multiple Deliverables. While the wording of SAB
No. 104 has changed to reflect the issuance of EITF 00-21, the revenue
recognition principles of SAB No. 101 remain largely unchanged by the
issuance of SAB No. 104. The issuance of this Bulletin did not impact the
Company's accounting policy for revenue recognition.
During December 2003, the Financial Accounting Standards Board
("FASB") issued SFAS No. 132 (revised 2003), Employers' Disclosures about
Pensions and Other Postretirement Benefits--an amendment of FASB
Statements No. 87, 88, and 106. This Statement revises disclosure
requirements about pension plans and other postretirement benefit plans.
It does not change the measurement or recognition of those plans required
by SFAS No. 87, Employers' Accounting for Pensions, SFAS No. 88,
Employers' Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits, and SFAS No. 106, Employers'
Accounting for Postretirement Benefits Other Than Pensions. This Statement
requires additional disclosures about the assets, obligations, cash flows
and net periodic benefit cost of defined benefit pension plans and other
postretirement benefit plans. In addition, the various elements of pension
and other postretirement benefit costs must be disclosed on a quarterly
basis. The annual disclosure provisions of SFAS No. 132 (revised 2003)
generally are effective for fiscal years ending after December 15, 2003,
while the interim disclosure provisions are effective for interim periods
beginning after December 15, 2003. The adoption of SFAS No. 132 (revised
2003) did not have a material impact on the Company's financial condition
or results of operations.
PHARMACY BUYING ASSOCIATION, INC. AND SUBSIDIARY
D/B/A TRUECARE PHARMACY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
3. Accounts receivable:
March 31, December 31,
2004 2003
---- ----
Membership $ 1,149,231 $ 1,192,501
Distribution center 6,352,537 6,091,060
----------- -----------
7,501,768 7,283,561
Allowance for doubtful accounts (215,000) (215,000)
----------- -----------
$ 7,286,768 $ 7,068,561
=========== ===========
4. Property and equipment:
March 31, December 31,
2004 2003
---- ----
Furniture and fixtures $ 372,491 $ 372,491
Equipment 730,570 730,570
Software 402,809 402,809
----------- -----------
1,505,870 1,505,870
Accumulated depreciation (1,216,169) (1,172,124)
----------- -----------
$ 289,701 $ 333,746
=========== ===========
Depreciation expense, included in general and administrative expenses, was
$44,045 and $50,572 for the three-month periods ended March 31, 2004 and
2003, respectively.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of our financial condition and results of operations
should be read in conjunction with the financial statements and notes thereto
included elsewhere in this filing.
This discussion and analysis should be read in conjunction with management's
discussion and analysis included in the Company's 10-K for the year ended
December 31, 2003 and for the notes contained therein.
Overview
We derive revenues from the following four sources:
Distribution Center. We sell pharmaceutical-related products to our members
through our own distribution facility located in Riverside, Missouri.
Activity Rebates and Charges. We receive rebates from pharmaceutical
manufacturers based on member purchases of the manufacturer's product from our
distribution center. In addition, each of our wholesaler-partner contracts
provides that the wholesaler-partner will pay us a rebate based on a percentage,
which varies by wholesaler-partner, of the dollar value of products purchased by
our members from the wholesaler-partner. We also receive rebates and fees from
other vendors and manufacturers through various company programs, such as our
cash card and drug formularies. These rebates and fees are typically paid to us
on either a quarterly or monthly basis.
Participation Programs and Fees. Our members pay us a monthly membership fee in
accordance with our membership agreement. In addition, we receive administration
fees from manufacturers and wholesaler-partners for maintenance and facilitation
of contracts with us and with our members. Our vendors and members also pay a
fee to attend our annual conference each summer.
Third Party Revenues. Revenues from our third party segment, shown net of
expenses for all reporting periods, are generated from claims costs of goods,
claims processing fees per paid claim charged to plan sponsors, and rebate
administration fees. A major portion of the revenue includes the claims costs of
goods that are collected from the plan sponsors in order to pay the
participating network provider. After payout of claims and expenses, there is
usually little or no net income generated from this revenue.
Our expenses are categorized as follows:
Distribution Center. Operating expenses associated with distribution are
primarily composed of direct cost of goods sold.
Activity Rebates. Rebates are composed of monies paid to members on a quarterly
basis for purchases through the distribution center, purchases made under
contract with wholesaler-partners, cash card claims, and rebates attributable to
fluctuations in the market share of certain pharmaceuticals.
Participation Program and Fees. Program costs and expenses are primarily
composed of expenses associated with the programs and services that we offer to
our members, including the costs of developing and marketing those services. In
addition, costs associated with our annual shareholders conference are included.
General and Administrative Expenses. General and administrative expenses are
typical operating expenses primarily composed of such items as salaries and
wages, insurance, freight and postage, office rent, travel, and other
miscellaneous expenses.
Results of Operation
The following discussion is based on our historical results of operations for
the three months ending March 31, 2004 and 2003.
Comparison of Three Months ending March 31, 2004 and 2003
Revenues
Total Revenues. Total revenues for the three months ending March 31, 2004
decreased to $38.3 million from $39.1 million over the same period revenues in
2003. The decrease of $0.8 million is directly attributable to the loss of an
endorsed wholesale-partner in the latter part of 2003 and the administrative
fees and participation rebates associated with that wholesaler.
Distribution. Revenue from distribution held steady between 2003 and 2004 at
$36.7 million in 1st Quarter 2003 versus $36.3 million in 1st Quarter 2004.
Activity Rebates and Charges. Revenues due to rebates and charges declined from
$1.5 million for the three months ending March 31, 2003 to $1.4 million in the
corresponding period of 2004. The 7% decrease was attributable to the loss of an
endorsed wholesale-partner in the latter part of 2004 and the rebates that were
generated by our member purchases through that wholesaler.
Participation Programs and Fees. For the three months ending March 31, 2004
revenues from participation programs and fees decreased by $0.28 million from
the corresponding period in 2003. The decrease arose from the loss of an
endorsed wholesale-partner in the latter part of 2004 and the corresponding
administrative fees from that wholesaler.
Third Party. Revenues from third party operations, which are shown net of
expenses, decreased by approximately $9,000 for the three months ending March
31, 2004 from the same period in 2003. The decrease arose from an increase in
expenses associated with a renewed effort in the Managed Care market.
Cost of Revenues
Distribution Center. Costs of goods sold through the distribution center held
steady at $35.3 million for the three months ending March 31, 2004 versus $35.5
million in 2003.
Activity Rebates. Rebates decreased from $1.33 million in the first three months
of 2003 to $0.98 million in the corresponding period of 2004. The 26% decrease
in rebates stems from the loss of an endorsed wholesale-partner in the latter
part of 2003 and the corresponding loss of rebates payable to our members.
Participation Programs and Fees. Expenses associated with our programs increased
slightly for the three months ending March 31, 2004 compared to the same period
in 2003. The increase of $80,000 is due to costs associated with our 2003 Annual
Conference held in March of 2003.
General and Administrative. General and administrative expenses decreased by
$126,000 for the three months ending March 31, 2004 compared to the same period
in 2003. The decrease of 9% from $1.42 million to $1.29 million is mostly
attributable to a decrease in legal fees and salaries.
Income from Operations. Net income from operations decreased by $0.191 million
from $0.68 million for the three months ending March 31, 2003 to $0.49 million
for the same period in 2004. This 28% decrease is attributable to a decrease in
the overall revenue streams of the company. This decrease in revenues was
partially offset by a decrease in the level of general and administrative
expenses.
Income Taxes. Income tax expense for the three months ending March 31, 2003
decreased from $0.28 million to $0.20 million for the same period in 2004. The
decrease follows directly from a decrease in our taxable income and lower
profitability mentioned above.
Liquidity and Capital Resources
Our capital requirements relate primarily to working capital for day-to-day
operations, including general and administrative expenses, maintenance of
product inventory levels to fulfill our operating commitment to our members and
membership rebates, which are paid quarterly. Historically, we have financed our
cash requirements from three primary sources: on-going operations, credit
established with trade vendors, and borrowings under our line of credit.
For the three months ending March 31, 2004:
o Net cash provided by (used by) operations was $2.455 million,
compared to $3.184 million for the same period in 2003. The increase
in 2004 was primarily due to a substantial increase in accounts
payable to trade vendors and an increase in cash from inventory
liquidation. We anticipate that these trends will continue as we
work to finance additional inventory through increasing lines of
credit and credit terms with our vendor-partners.
o Net cash (used by) investing activities was $0 in 2004, compared to
($18,000) in the same period in 2003. The change was primarily
attributable to no new purchases of property and equipment in 2004
as opposed to 2003.
o Net cash provided by (used by) financing activities was ($0.16
million), compared to ($3.166 million) for the same period in 2003.
The significant decrease in cash usage in 2003 was primarily for the
repayment of a $3 million borrowing against our line of credit. In
addition we continued to repurchase our common stock.
We have a $5 million line of credit and a $2 million additional seasonal
extension from November 1 through February 1 (the "Credit Agreement") with Bank
of America, N.A. that expires on November 28, 2004. Borrowings under the Credit
Agreement bear interest at the lender's prime rate, which was 4.00% as of March
31, 2004. The Credit Agreement imposes certain requirements on us, including the
maintenance of a minimum tangible net worth. We accessed our line of credit from
time to time during the quarter ended March 31, 2004. No monies were outstanding
under the Credit Agreement as of March 31, 2004. We anticipate renewing the
credit agreement or obtaining a new bank line of credit upon expiration of our
current Credit Agreement.
Cash and cash equivalents as of March 31, 2004 were $2.3 million, up from $0 in
cash and equivalents with $1.07 million in outstanding checks, as of March 31,
2003. We believe that our cash equivalents as of March 31, 2004,
amounts available under the Credit Agreement, 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, ongoing
repurchases of our current common stock, 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.
Forward Looking Statements
This report contains forward-looking statements based on our current
expectations and assumptions regarding our business and our industry. Actual
results may differ materially from those described in the forward looking
statements and will be affected by a variety of known and unknown risks,
uncertainties and other factors.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We are exposed to market risks primarily from changes in U.S. interest rates. We
do not engage in financial transactions for trading or speculative purposes.
The interest payable on our Credit Agreement is based on variable interest rates
and is therefore affected by changes in market interest rates. While as of March
31, 2004, no amounts were outstanding under the Credit Agreement, to the extent
interest rates rise when we do borrow money under the Credit Agreement, our
interest expense will increase.
ITEM 4. CONTROLS AND PROCEDURES.
(a) Evaluation of Disclosure Controls and Procedures
The term "disclosure controls and procedures" is defined in Rules
13a-14(c) and 15d-14(c) of the Securities Exchange Act of 1934 (Exchange
Act). These rules refer to the controls and other procedures of a company
that are designed to ensure that information required to be disclosed by a
company in the reports that it files under the Exchange Act is recorded,
processed, summarized and reported within required time periods. Our Chief
Executive Officer and our Chief Financial Officer have evaluated the
effectiveness of our disclosure controls and procedures as of a date
within 90 days before the filing of this quarterly report (the Evaluation
Date), and they have concluded that, as of the Evaluation Date, such
controls and procedures were effective at ensuring that required
information will be disclosed on a timely basis in our reports filed under
the Exchange Act.
(b) Changes in Internal Controls
We maintain a system of internal accounting controls that are
designed to provide reasonable assurance that our books and records
accurately reflect our transactions and that our established policies and
procedures are followed. For the quarter ended September 30, 2002, there
were no significant changes to our internal controls or in other factors
that could significantly affect our internal controls.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
The following exhibits are filed as part of this report.
1. Certification Pursuant to 18 U.S.C. Section 1350, As Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, signed by
the Chief Executive Officer.
2. Certification Pursuant to 18 U.S.C. Section 1350, As Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, signed by
the Chief Financial Officer.
Exhibit numbers refer to the paragraph numbers under Item 601 of
Regulation S-K:
15.1. Letter from House Park & Dobratz, P.C. regarding unaudited
interim financial information. (Commission File No. 000-49785).
(b) Reports on Form 8-K
The Company did not file a report on Form 8-K during the quarter for
which this report is filed.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized.
Pharmacy Buying Association, Inc.
Date: May 17, 2004 By: /s/ Donald E. Raby II
---------------------------------------
Donald E. Raby II, CPA
Vice President, Chief Financial Officer