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, 2003, approximately 54% 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 2003, we had revenues of approximately $154.8 million and net income from operations of $1.5 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 1,100 members at the end of 2003. 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:
No member/customer represented more than 8% 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. According to Health and Human Services Department estimates for 2003, total retail outlet sales of prescription drugs is expected to be around $184.1 billion and $207.9 billion for 2004, compared to $162.4 billion in 2002. In general we expect prescription drug spending growth to decelerate from 2003 to 2005 but to still be the fastest growing health sector. Drug spending growth seems to have peeked in 1999 at 19.7% and has since slowed to 15.3% in 2002. We believe that much of the deceleration in total spending over the next few years will be precipitated by an unusually large number of blockbuster drugs losing their patent protection in 2004 and 2005.
In 2002, the overall, average estimated retail prescription cost was $53.10 according to the National Association of Chain Drug Stores. Branded drugs averaged $76.29 in 2002 versus $71.18 in 2001, and generic drugs averaged $22.79 versus $21.96 over the same periods. Of the average prescription cost of $53.10, approximately 80% goes to the manufacturer with the remaining 20% split between the retail pharmacy and the wholesale outlet.
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 the largest percentage of new prescriptions filled and obtains more prescriptions per capita annually than any other age group. According to Health and Human Services Department estimates, the percent of Gross Domestic Product (GDP) expected to be spent on national healthcare in general will be 15.3% in 2003. This percent is expected to rise to 18.4% by 2013. Much of this additional spending will be experienced as a result of the increasing median age of the U.S. population.
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. However, two factors mitigating the high inflationary tendencies of branded drugs over the next few years are: 1) fewer new drug introductions; and 2) less direct-to-consumer advertising. These two factors, partially behind drug price increases, have begun to grow at much slower rates. We expect this to continue for the next two to three years.
Introduction of new pharmaceutical products. While over the next few years an unusually large number of blockbuster drugs will lose their patent protection, over the longer term we believe that traditional research and development, as well as the advent of new production and delivery methods, will 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 that over the long term 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 $60.0 billion on a volume of 1.3 billion prescriptions, or 41% of the total retail prescription marketplace in 2002. According to the National Community Pharmacists Association (NCPA), there were approximately 23,552 independent pharmacies in the United States in 2002, or approximately 43% 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. Approximately 29% of independent store owner own more than one location.
Independent pharmacies are renown for their breadth and depth of services offered and service levels rendered to their patient-consumers. For 2002, approximately 88% of independent community pharmacies offer home delivery, 87% allow their customers to charge prescriptions, 82% offer some kind of drug compounding capabilities, 74% have dietary and nutritional assistance available, 68% offer access to certain durable medical equipment, and 37% offer health screening services.
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 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 the current Medicare reform remains virtually unchanged till full implementation in 2006, pharmacies will likely 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. Between 2002 and 2005 this situation will exacerbate as the number of pharmacists is projected to increase by less than 4%, while the number of prescriptions filled is expected to increase by 26% over that time period.
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.
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:
o offering an assortment of pharmaceutical products and services that assist our members in maximizing their margins;
o negotiating and managing various contracts on our members' behalf;
o development of a strategic alliance with an in-store computer software manufacturer to leverage common information systems among our members;
o providing superior levels of customer service; and
o 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 this strategy helps close the gap between our members and national chain pharmacies by enabling our members to become more competitive.
Over the past year we have been developing a new platform for our marketplace offering emphasizing a rewards and incentive-based model. The new platform rewards our members based on our members' participation in the strategic initiatives of the Company. The member who largely participates in our programs and more closely aligns with the long-term strategy of the Company will enjoy lower fees and higher rewards. We believe that this model, as opposed to a straight fee-for-service based model, propels and more closely mirrors our vision of being an "interdependent chain of independent pharmacies." Our offering is called TrueSTAR where the "STAR" is an acrostic that stands for "Stewardship, Teamwork, Accountability, and Rewards." We believe that the flexibility inherent in the TrueSTAR initiative will allow it to be our platform for delivering various programs and services for the foreseeable future.
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 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:
o Calendar programs o Cash Card Program o Credit card processing o General merchandise and greeting card programs o Inventory services o Innovative care involving disease management programs, such as diabetes and asthma care and treatment o Junior partnership with pharmacy students o Recruitment and Placement services o Switching services o Worker's compensation program
Rebates to Members
Member rebates are typically accrued monthly each quarter and paid at the end of the 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.
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. We believe that we offer superior services and programs to our competitors due to our creative and innovative approach to driving new and better solutions to the various issues and challenges facing independent pharmacy.
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. In apparent attempts to reduce the need for organizations such
as ours, wholesalers in general have followed our lead by entering into market offerings and areas of service that have traditionally been exclusively the domain of companies such as ours. In recent years certain wholesalers have started offering third party contracting, disease state management programs, and innovative, technology-oriented ordering interfaces between themselves and pharmacy software ordering system.
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 Company and other buying groups like the Company, 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.
Employees
As of December 31, 2003, we had 47 full-time and two 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 report.
We depend exclusively on the independent pharmacy market.
Our business depends entirely on the participation and 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 McKesson Corporation, Morris & Dickson Ltd., D & K Healthcare, 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 2004, 2005, 2007 or 2009. Although these contracts automatically renew, 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, for an uncured, material breach of the contract. 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 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:
o sales and marketing programs;
o customer support programs;
o technological support and appropriate levels of redundancy;
o retention and recruitment of new personnel; and
o operational 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, 2004; however, either Messrs. Smock or Raby may terminate their agreements prior to that date upon 60 days' written notice. 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.
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:
o the possibility that our market-leading programs and services may be adversely affected by less competitive and less aggressive offerings of the target company;
o the difficulty associated with integrating the personnel, members and operations of an acquired company;
o risks and liabilities associated with inadequate due diligence of, or inaccurate representations and warranties by, an acquired company;
o the potential disruption of our existing business; and
o adverse effects on our financial statements, including the assumption of liabilities of acquired businesses.
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
o extend the reach of our services and products to various participants in the independent retail pharmacy industry;
o ensure a sufficient flow of products to our members at competitive prices; and
o 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 from manufacturers. Many of these programs are short-term incentives from our various 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.
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 choose to forego adjustments or 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 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.
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, our 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.
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.
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 2004 is projected to be approximately $108,000.
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 are currently contemplating renewing this lease subject to certain amendments. We believe our current available space will be sufficient for the next 12 months.
ITEM 3.
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.
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, 2003.
PART II
ITEM 5.
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.
In 2003, our stock ranged from a low of $567.00 per share at the beginning of the year to $584.00 per share at the end of the year.
Shareholders
As of December 31, 2003, we had 556 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.
Equity Compensation Plan
As of December 31, 2003 we have no stock option or equity compensation plan in place.
ITEM 6.
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, 2003, 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
(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.
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 2003, we reduced the allowance for doubtful accounts by $20,000. 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 January 2003, the FASB issued FIN No. 46 "Consolidation of Variable Interest Entities--an Interpretation of Accounting Research Bulletin No. 51". FIN No. 46 addresses consolidation by business enterprises where equity investors do not bear the residual economic risks and rewards. The underlying principle behind FIN No. 46 is that if a business enterprise has the majority financial interest in an entity, which is defined in FIN No. 46 as a variable interest entity, the assets, liabilities and results of the activities of the variable interest entity should be included in consolidated financial statements with those of the business enterprise. In December 2003, the FASB issued Revised FIN No. 46 to clarify certain aspects of FIN No. 46 including the determination of who is the primary beneficiary of a variable interest entity. The Revised FIN No. 46 postponed the effective date as to when companies are required to apply the provisions of FIN No. 46 prospectively for all variable interest entities in existence prior to January 31, 2003 until the first financial reporting period that ends after March 15, 2004. However, for entities that are considered to be special purpose entities, the effective date of FIN No. 46 is financial reporting periods after December 15, 2003. The adoption of the provisions of FIN No. 46 did not have a material effect on our financial position or results of operations.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." SFAS No. 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS 133. In particular, this Statement clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative and when a derivative contains a financing component that warrants special reporting in the statement of cash flows. This statement is effective for contracts entered into or modified after June 30, 2003 and its adoption did not have a material impact on our financial condition or results of operations.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." SFAS 150 establishes how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. This statement is effective for instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. As a result of concerns over implementation and measurement issues, the FASB unanimously decided on October 29, 2003 to defer the application of SFAS No. 150 to certain non-controlling interests of limited-life entities that are consolidated in the financial statements. The adoption of SFAS No. 150 did not have a material impact on our financial condition or results of operations.
On December 17, 2003, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 104, "Revenue Recognition" (SAB 104). SAB 104 supersedes SAB 101, "Revenue Recognition in Financial Statements." SAB 104's primary purpose is to rescind accounting guidance contained in SAB 101 related to multiple element revenue arrangements. The adoption of SAB No. 104 did not have a material impact on our consolidated financial position or results of operations.
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.
ITEM 7.
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.
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, 2003, 2002, and 2001.
Comparison of Fiscal Years 2003 and 2002
Revenues
Total Revenues. For 2003, total revenues increased to $154.8 million from $137.0 million in 2002, representing a 13% increase. The increase is primarily attributable to an increase in the purchases made through our distribution center by members. In addition, while the total number of orders through our distribution center increased slightly, the average size of individual distribution center orders increased by over 12%.
Distribution. Revenues from our distribution center increased to $146.2 million in 2003 compared to $126.9 million in 2002. This increase was primarily due to a mild increase in our membership utilization of the distribution center and additional product offerings leading to larger dollars per individual order.
Activity Rebates and Charges. Revenues from rebates and other charges decreased to $5.9 million in 2003 from $6.7 million in 2002. The decrease is partially attributable to a decrease in revenues generated by our cash card and principally due to the loss of an endorsed wholesaler-partner half way through the year.
Participation Programs and Fees. Revenues from participation and fee programs dropped off by 23% in 2003 versus 2002. The drop from $3.2 million in 2002 to $2.6 million in 2003 followed the loss of an endorsed wholesaler-partner half way through the year and the corresponding revenues from joint programs and administrative fees.
Third Party. Revenues, shown net of expenses, from third party activities held steady in 2003 at $117,000 versus $101,000 in 2002 reflecting relatively few overall changes. However, we anticipate making minor marketplace moves in 2004 back into the managed care environment. This should precipitate higher revenues in the coming year.
Cost of Revenues
Distribution Center. Costs of goods sold through the distribution center increased from $123.4 million in 2002 to $142.2 million in 2003. The increase is directly and proportionately due to the increase in distribution sales.
Activity Rebates. Costs of rebates to members decreased by 15% from 2003 to 2002. In 2003 our costs of rebate activity was $4.2 million compared to $4.9 million in 2002. The decrease is directly attributable to the loss of an endorsed wholesaler-partner and the corresponding decline in monies paid out to our membership pursuant to agreements with the former endorsed wholesaler.
Participation Programs and Fees. Costs associated with member programs and services were $0.7 million in 2002 and $1.0 million in 2003. The increase is a result of higher processing fees on our cash card claims as substantially more claims were submitted under this program.
General and Administrative. General and administrative expenses increased slightly to $6.0 million in 2003 from $5.5 million in 2002. The increase principally resulted from ongoing costs associated with our registration as a public company, higher total freight expense, expenses associated with an office expansion, and common area maintenance charges. As a percentage of revenues, general and administrative expenses decreased slightly to 3.9% in 2003 from 4.0% in 2002. We anticipate lower general and administrative expenses in 2004 and 2005 due to various streamlining measures enacted in 2003 and the closing of our Austin, Texas regional office late in the year.
Income from Operations. Income from operations decreased to $1.4 million compared to $2.5 million for the previous fiscal year. As a percentage of total revenues, income from operations decreased from 1.8% in 2002 to 0.9% in 2003. The decrease in rate is attributable to a larger portion of our revenues arising from the sale of lower margin pharmaceutical products, stiffer competition in our geographic region leading to slight reductions in sales margins, and relatively steady operating expenses in light of lower gross profit margins.
Income Taxes. Income taxes decreased by 44% in 2003 over 2002. Income tax expense for 2003 was $0.6 million versus $1.0 million in 2002. The decrease corresponds to a decrease in pre-tax income in 2003 versus 2002 of 45%.
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.
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.
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.
During fiscal 2003:
o Net cash provided by (used by) operations was $5.14 million, compared to ($2.79) million for fiscal 2002, primarily due to a $2.7 million increase in cash from accounts receivable and a $1.5 million increase in cash from inventory changes and $4.2 million provided by additional accounts payable.
o Net cash provided by (used by) investing activities of ($0.09 million), compared to ($0.59 million) in 2002, was primarily attributable to some minor purchases of property and equipment during the year.
o Net cash provided by (used by) financing activities was ($5.0 million), compared to $2.77 million in 2002, primarily as a result of the repayment of our year-end 2002 borrowing of $3 million against our line of credit. In addition the repurchase of our common stock into the treasury accounted for an addition $2 million use of cash.
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 December 31, 2003. The Credit Agreement imposes certain requirements on us, including the maintenance of a minimum tangible net worth. We accessed our line of credit from time to time during 2003. No monies were outstanding under the Credit Agreement as of December 31, 2003. We anticipate renewing the credit agreement or obtaining a new bank line of credit upon expiration of our current Credit Agreement.
Cash and cash equivalents as of December 31, 2003 were $0, with $1.1 million in checks outstanding, down from $0.3 million in outstanding checks and $3.0 million borrowed against our line of credit, as of December 31, 2002. We believe that our cash equivalents as of December 31, 2003, 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.
ITEM 7A.
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, 2003, we did not have any monies outstanding under the Credit Agreement. To the extent interest rates rise when we borrow money under the Credit Agreement, our interest expense will increase.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PHARMACY BUYING ASSOCIATION, INC. AND SUBSIDIARY D/B/A TRUECARE PHARMACY
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
PHARMACY BUYING ASSOCIATION, INC. AND SUBSIDIARY D/B/A TRUECARE PHARMACY
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
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
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, 2003 and 2002 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, 2003. 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, 2003 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2003 in conformity with U.S. generally accepted accounting principles.
HOUSE PARK & DOBRATZ, P.C. Kansas City, Missouri March 1, 2004
PHARMACY BUYING ASSOCIATION, INC. AND SUBSIDIARY D/B/A TRUECARE PHARMACY
CONSOLIDATED BALANCE SHEETS - DECEMBER 31, 2003 and 2002
ASSETS (Note 6)
See notes to financial statements.
PHARMACY BUYING ASSOCIATION, INC. AND SUBSIDIARY D/B/A TRUECARE PHARMACY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(1) (including revenues generated from businesses owned by members of the Board of Directors of $18,367,605, $17,378,723 and $11,614,995, respectively)
See notes to financial statements.
PHARMACY BUYING ASSOCIATION, INC. AND SUBSIDIARY D/B/A TRUECARE PHARMACY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
See notes to financial statements.
PHARMACY BUYING ASSOCIATION, INC. AND SUBSIDIARY D/B/A TRUECARE PHARMACY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(continued)
PHARMACY BUYING ASSOCIATION, INC. AND SUBSIDIARY D/B/A TRUECARE PHARMACY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
Non-cash transactions:
During 2003, the Company called 2,960 shares of common stock at $584 per share from stockholders who no longer met eligibility requirements, as set forth in the Restated Articles of Incorporation. Of the called shares, 2,375 were tendered and purchased for $1,387,000. The remaining 585 called shares have been recorded as an "obligation to acquire stock in treasury" in the amount of $341,640. In addition, the Company acquired 1,142 shares of common stock in 2003 for $661,879. Subsequent to recording the obligation to acquire stock in treasury, the Company cancelled all treasury shares.
During 2002, the Company declared a stock split in the form of a dividend on 5,690 common shares.
During 2001, the Company purchased another company with 832 shares of common stock valued at $585,728 (Note 2).
See notes to financial statements.
PHARMACY BUYING ASSOCIATION, INC. AND SUBSIDIARY D/B/A TRUECARE PHARMACY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
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 that 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.
PHARMACY BUYING ASSOCIATION, INC. AND SUBSIDIARY D/B/A TRUECARE PHARMACY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
1. Organization and summary of significant accounting policies (continued):
Estimates and assumptions:
The preparation of financial statements in conformity with U.S. 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) was initially amortizable over forty years. In accordance with Statement of Financial Accounting Standards No. 142, amortization of this goodwill ceased in 2001 and the Company began evaluating the goodwill for potential impairment on an annual basis. Goodwill was not considered impaired in 2003 or 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.
PHARMACY BUYING ASSOCIATION, INC. AND SUBSIDIARY D/B/A TRUECARE PHARMACY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
1. Organization and summary of significant accounting policies (continued):
Deferred revenue (continued):
During 2003, the Company signed a two-year agreement with a national wholesale pharmaceutical supplier (supplier). The Company agreed to designate the supplier as a preferred supplier for the Company's members. The supplier paid the Company a $1,000,000 administrative fee as part of this agreement. If a certain number of Company members do not begin using the supplier as their primary wholesaler during the term of the agreement, the Company must repay a portion of the administrative fee. No Company members converted to the supplier in 2003; therefore, the entire $1,000,000 administrative fee is included in deferred revenue as of December 31, 2003.
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.
PHARMACY BUYING ASSOCIATION, INC. AND SUBSIDIARY D/B/A TRUECARE PHARMACY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
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, which was considered the fair 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).
3. Accounts receivable:
2003 2002 ---- ----
Membership $ 1,192,501 $ 1,531,471 Distribution center 6,091,060 6,801,398 --------------- -------------- 7,283,561 8,332,869 Allowance for doubtful accounts (215,000) (194,000) --------------- --------------
$ 7,068,561 $ 8,138,869 =============== ==============
PHARMACY BUYING ASSOCIATION, INC. AND SUBSIDIARY D/B/A TRUECARE PHARMACY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
4. Property and equipment: 2003 2002 ---- ---- Furniture and fixtures $ 372,491 $ 298,809 Equipment 730,570 713,516 Software 402,809 400,362 --------------- -------------- 1,505,870 1,412,687 Accumulated depreciation (1,172,124) (959,578) --------------- --------------
$ 333,746 $ 453,109 =============== ==============
Depreciation expense, included in general and administrative expenses, was $212,546, $241,318 and $193,535 for the years ended December 31, 2003, 2002 and 2001, respectively.
5. Investment in and advances to affiliate:
The Company owned 42.0% and 41.6% of DataRx Management, Incorporated (DataRx) as of December 31, 2003 and 2002, 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 2003 and 2002 reported net income of approximately $120,000 in 2003 and a net loss of approximately $100,000 in 2002. 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.
6. Bank line of credit:
The Company has a $7,000,000 bank line of credit. Interest is computed on outstanding balances at prime (4.0% at December 31, 2003). There was no amount outstanding at December 31, 2003; at December 31, 2002, $3,000,000 was outstanding on this line. The line is secured by substantially all the assets of the Company.
As of February 2, 2004, the maximum amount available on this bank line of credit was reduced to $5,000,000. The line matures on November 28, 2004.
All interest costs have been expensed.
PHARMACY BUYING ASSOCIATION, INC. AND SUBSIDIARY D/B/A TRUECARE PHARMACY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
7. 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 2003, 2002 and 2001 was as follows:
Future minimum payments for operating leases having terms of one year or more are as follows:
Year ending December 31, Amount ------------ ------
2004 $ 304,134 2005 111,540 2006 111,540 -----------
$ 527,214 ===========
8. Profit sharing plan:
The Company has a profit sharing plan (the 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. The Plan provides for elective participant contributions of up to 16% of annual compensation and mandatory employer matching contributions of 50% of participant contributions, up to 8% of annual compensation. Employer contributions to the Plan for 2003, 2002 and 2001, included in general and administrative expenses, were $25,868, $20,979 and $14,358, respectively. All contributions, employer and employee, are 100% vested.
PHARMACY BUYING ASSOCIATION, INC. AND SUBSIDIARY D/B/A TRUECARE PHARMACY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
9. Income taxes:
The provision for income taxes consists of:
The effective income tax rate differed from the statutory federal income tax rate primarily due to the following:
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities are as follows:
2003 2002 ---- ---- Deferred tax assets: Current: Allowance for uncollectible accounts $ 82,000 $ 74,000
Valuation allowance -- -- ---------- ---------- 82,000 74,000 ---------- ----------
Deferred tax liabilities: Current: Section 481 adjustment resulting from cash to accrual method change of accounting for tax purposes 175,000
Section 481 adjustment resulting from requirement to capitalize certain expenses for tax purposes 3,000 ---------- ----------
Net current deferred tax asset (liability) $ 79,000 $ (101,000) ========== ==========
Long-term: Tax depreciation in excess of financial reporting $ 7,000 ==========
Tax amortization in excess of financial reporting $ 12,000 ==========
PHARMACY BUYING ASSOCIATION, INC. AND SUBSIDIARY D/B/A TRUECARE PHARMACY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
10. Commitments and contingencies:
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 $149,763, $152,000 and $163,043 for the years ended December 31, 2003, 2002 and 2001, respectively.
The Company has employment contracts with certain executives, which provide for certain levels of severance in the event of termination without cause or for certain change of control events, as defined.
The Company is involved with a routine legal proceeding incident to the ordinary course of business. The proceeding is not expected to have a material adverse effect on the consolidated financial statements.
11. Advertising costs:
The Company expenses advertising costs as incurred. Advertising expense, included in operating costs, was $26,566, $55,704 and $100,722 for the years ended December 31, 2003, 2002 and 2001, respectively.
12. Quarterly results of operations (unaudited):
The quarterly results of operations (unaudited) for 2003, 2002 and 2001 are as follows:
PHARMACY BUYING ASSOCIATION, INC. AND SUBSIDIARY D/B/A TRUECARE PHARMACY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
13. Subsequent event:
The Company intends to submit to its stockholders a proposal to amend the Company's Restated Articles of Incorporation, to effect a recapitalization and reorganization of the Company involving:
(a) the conversion of common stock, $1.00 par value, into a newly-authorized class of non-voting preferred stock, $10 par value, at a ratio of five shares of common stock for one share of preferred stock, and to provide for a cash payment in lieu of the issuance of any fractional shares of preferred stock that would otherwise result from the conversion, and
(b) the authorization of a new class of common stock, par value $0.01 per share, designated "Membership Common", ownership of which will be incident to being a Member of the Company. A Member may only be a natural person or an independent pharmacy, as defined. Membership carries the right to buy goods and services from the Company. Members may only buy one share of "Membership Common" at a price to be determined by the Board of Directors.
The primary purposes behind the reorganization are to (i) align the economic interests of the shareholders and members of the Company which will allow the Board and management of the Company to fulfill their fiduciary duties to the shareholders and members, (ii) eliminate the costs associated with filing documents under the Exchange Act with the U.S. Securities and Exchange Commission ("SEC"), (iii) transfer control of the Company from the current shareholders to the Members of the Company, (iv) reduce the costs of administering shareholder accounts and responding to shareholder requests, (v) provide liquidity to shareholders holding less than five (5) Pre-Conversion Shares of Common Stock, (vi) provide liquidity to shareholders who own more than five (5) Pre-Conversion Shares of Common Stock with regard to any fractional shares that would otherwise result from the Conversion, and (vii) provide greater flexibility in the management of the Company.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS.
Our board of directors currently consists of 12 members, all of whom are pharmacists or pharmacy owners. 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. At that time, the board decided to further reduce the size of the board to 11 members, and therefore Ms. Gray's position was not been filled. Nick Smock, our President/CEO, 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 was not 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.
In early 2003 the board decided to increase the size of the board to 13. Nominations were requested from the membership of the company pursuant to the by-laws and 3 nominees were added to the proxy ballot for the 2003 annual meeting of the shareholders and duly approved by the shareholders, those directors being Messrs. Scott Hartwig, Brian Bates, and Mike Bellesine. In November 2003 Mr. Gary Foster resigned from the board at which time the board decided to reduce the number of directors to 12, therefore Mr. Foster's position was not replaced on the board.
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.
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.
Clark Balcom has served as our Vice President - Information Technology & Operations since February 1996. In addition he was appointed Chief Operating Officer in 2003. 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.
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.
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 Pharmacy, LLC, d/b/a Ridgepoint Medical 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 Secretary of the Company. Mr. Dubose is a pharmacist and owner of Sholars Drug, located in Orange, Texas.
Brian Bates is the owner/pharmacist of Matthewson Drug Co., Inc. in Marshall, Texas. Mr. Bates has served on the TrueCare Advisory Council since 2001. He received his Bachelor of Science in Pharmacy from the University of Texas - Austin in 1990.
Mike Bellesine is President of Eldorado TrueCare Pharmacy in Eldorado, Kansas. Mr. Bellesine received his Bachelor of Science in Pharmacy from the University of Kansas in 1978. Mr. Bellesine has served on the TrueCare Advisory Council since 2000.
Scott Hartwig is COO and CFO of Red Cross Pharmacy, Inc., a closely-held family business which owns and operates nine retail pharmacies and a durable medical equipment company in Missouri. Mr. Hartwig has served on the TrueCare Advisory Council since 1999. He received his Bachelor of Science in Business Administration from Central Missouri State University.
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.
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, 2003.
Summary Compensation Table
- ---------- (1) Consists of contributions made on behalf of the named executive officer to The registrant's 401(k) Plan.
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 expiration 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, 2004, 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, 2004 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, 2004 upon 60 days' written notice.
ITEM 12.
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, 2003 by:
o each of our directors;
o each of our named executive officers; and
o all of our directors and executive officers as a group.
No shareholder owns more than 7% 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.
- ---------- * 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.
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. Stephenson, Solis and Dubose previously served on the board of directors of TPC, and were elected to our board in January 2001 as part of the transaction between the registrant and TPC.
PART IV
ITEM 14.
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, 2003, there were no significant changes to our internal controls or in other factors that could significantly affect our internal controls.
ITEM 15.
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)
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 10.1 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)
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.
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 30, 2004.
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.