HALTOM CITY, Texas, Nov. 5, 2004 (PRIMEZONE) -- PharmChem, Inc. (Pink Sheets:PCHM) has mailed to its stockholders notice of a special meeting to be held on November 16, 2004, at 10:00 a.m., local time, at the Company's offices at 2411 E. Loop 820 N., Fort Worth, TX 76118, primarily to consider the sale by the Company of certain of its significant assets and the dissolution and liquidation of the Company. Only stockholders of record at the close of business on October 15, 2004, are entitled to notice of and to vote at the special meeting.
By way of background, as previously reported, PharmChem's business has declined considerably beginning with the economic downturn commencing in late 2001. The expected benefits from relocating to Texas from California in 2001 could not be realized as decreased volume significantly drained cash resources, resulting in losses in 2001, 2002 (excluding the gain on the sale of Medscreen) and 2003.
The Company has lost a number of its large customers during the past year beginning in October 2003 with its largest customer, the Administrative Office of United States Courts (representing 27% of 2003 sales). This was followed by this year's loss of contracts with Sears, Roebuck & Company (representing 15% of 2003 sales), Lowes Companies (representing 12% of 2003 sales) and the U.S. Department of the Interior (representing 6% of 2003 sales).
The Company's principal lender reacted to the announcement of the loss of the AOUSC contract by insisting on the pay down of $650,000 of term debt and the doubling of monthly principal payments. Had the bank not imposed these requirements, management believes that the Company would have had sufficient cash resources to operate for an additional six to nine months.
In the fourth quarter of 2003, management decided to explore options to exit the business. The audit report on the 2003 financial statements questioned PharmChem's ability to continue operations as a "going concern." At the time that report was issued, the Company announced that it was seeking joint venture opportunities, the sale of all or a portion of its assets or a merger with another company. It also then disclosed that, should these efforts fail, it may be required to seek bankruptcy protection or commence a liquidation or other administrative proceeding.
PharmChem made numerous attempts to secure additional financing and/or sell some or all of its assets, including engagement of an investment banker and distribution of information packets to over 1,000 prospects. This resulted in little or no interest other than the offers described below which originated as a result of management contacts.
During the past three years, the Company has taken significant steps to reduce its cost structure, including layoffs of nearly 150 people through September 2004 (62% of the August 31, 2001 work force), a reduction in salaries of between 5% and 25% for its most highly compensated employees, including all of its current executive officers, a Company-wide wage and salary freeze and the reduction of legal, accounting and related expenses. These cost reductions were not enough to overcome the loss of laboratory volume.
The Company has entered into three separate agreements to sell certain of its trademarks and customer lists. Two of these transactions have been completed, one resulting in the sale to Kroll Laboratory Specialists, Inc. of the customer list and trademarks related to the onsite drug testing business (which generated $1.2 million in revenue in 2003) and the other resulting in the sale to First Advantage Enterprise Screening Corporation of the customer list related to the managed workplace lab based drug testing business (which generated $0.4 million in revenues in 2003). The Company received a cash payment of $300,000 at the closing of the Kroll transaction and is entitled to sales commissions from these transactions which, assuming that these customers remain with Kroll and First Advantage, respectively, and that current sales levels remain stable over the next 24 months, should result in total commissions ranging from approximately $439,000 to $585,000.
In September, the Company entered into another agreement with Kroll pursuant to which Kroll would acquire the customer list related to the non-managed lab based drug testing business (which generated revenue in 2003 of $5.4 million). The closing of this transaction is subject, among other conditions, to the approval of the sale by PharmChem's stockholders. The purchase price will consist of an initial cash payment of $100,000 plus a commission on sales over the 36 months after the closing which is expected to total between approximately $792,000 and $1,059,000 assuming that these customers will remain with Kroll and that current sales levels are maintained. In order to allow the Company to exit its laboratory operations in a timely fashion and to continue past levels of service to its customers, given its limited financial resources, pending the closing of this transaction, these customers' specimens are being processed by Kroll on PharmChem's behalf under a service agreement.
Once this last transaction has closed, the Company's only remaining business will be the PharmChek(r) sweat patch. This business generated revenue of $1.2 million in 2003. While a small group of employees will continue to handle this business for the time being, the Company's goal is to sell or otherwise dispose of it.
At the special meeting of stockholders, the Company will seek to obtain the approval of its stockholders for the sale to Kroll of the customer list relating to the non-managed lab based business, as well as the dissolution and liquidation of the Company. Its current intention is to file a Certificate of Dissolution with the Delaware Secretary of State following the closing of the asset sale, seek a buyer for the remaining business, collect the commissions payable under these agreements and other amounts owing the Company and take whatever other actions are necessary to wind up its affairs. Taking into account the expected commissions to be received and the amounts owed, it is unlikely that creditors (other than the bank which has a first lien on all of the Company's assets) will be fully repaid. As a result, there will be no assets available for distribution for stockholders.
The Company will also be presenting its current Board of Directors for re-election at the meeting to see the Company through the asset sale and dissolution and the beginning of the liquidation process.
The foregoing includes certain forward-looking statements which involve risks and uncertainties including, without limitation, competitive conditions, economic conditions, the possibility that contracts may be terminated or not renewed, the willingness of customers to do business with the Company, successors, and regulatory issues.