PharmChem Reports 2003 Results


HALTOM CITY, Texas, April 1, 2004 (PRIMEZONE) -- PharmChem, Inc. (Pink Sheets:PCHM) today reported net sales from continuing operations of $6,064,000 for the fourth quarter ended December 31, 2003, a decrease of 16.1% from 2002 net sales of $7,227,000. The Company's net loss in the quarter was $1,108,000, or $0.19 per share, compared to net income last year of $49,000, or $0.01 per share. The results for the 2003 fourth quarter include a goodwill impairment write-off amounting to $729,000, or $0.12 per share. Excluding this item, the net loss in the fourth quarter would have been $379,000, or $0.07 per share.

Net sales for 2003 were $26,455,000, a decrease of 12.1% from last year's net sales of $30,085,000. The Company reported a net loss of $2,147,000, or $0.37 per share, for the year versus a loss last year from continuing operations of $1,294,000, or $0.22 per share. This year's net loss includes the gain on payoff of subordinated debt of $665,000 or $0.11 per share and the write-off of goodwill of $729,000, or $0.12 per share. Excluding these items, the net loss for 2003 would have been $2,083,000, or $0.36 per share.

Last year's results exclude the operations of Medscreen which was sold in March 2002, and are being reported as discontinued operations. After including Medscreen's net income of $359,000 in 2002 and the net gain on the sale of Medscreen of $4,277,000, the Company reported net income of $3,342,000, or $0.57 per share, for 2002.

The Company's auditors have notified the Company and the Audit Committee of the Board of Directors that their independent auditor's report will include language raising substantial doubt about the Company's ability to continue as a going concern. This action results from the losses incurred by the Company the past three years, the loss in 2003 of a major customer which comprised 27% of that year's sales, and the Company's lender requiring a significant payment on the term debt, as more fully discussed below.

Specimen volume was lower by 17.7% in the fourth quarter this year versus the same period last year. Volume declines were experienced in the criminal justice customer class in the fourth quarter and the full year as a result of budgetary constraints together with lower specimens tested by AOUSC which is described in more detail below. Workplace volume increased 9.6% in the fourth quarter although this category was down 9.7% for the full year.

Net sales of products and other non-laboratory services in the U.S. decreased 23.4% in the fourth quarter and, for the year, by 7.2%. Sales of products and other non-laboratory services were 22.9% of net sales in 2003 compared to 21.7% in 2002.

Capital expenditures for 2003 were $323,000 versus $1,415,000 last year, and depreciation and amortization expenses were $2,048,000 this year compared to $2,251,000 last year.

As previously reported, the Administrative Office of U.S. Courts ("AOUSC") notified the Company that its laboratory drug testing program had been awarded to three other laboratories. While the Company filed a protest with the Government Accounting Office, the GAO ruled against the Company and it is expected that all testing by AOUSC will cease by April 30, 2004. The award of testing to other laboratories does not affect the Company's sales of PharmScreen(r), PharmView(r) and PharmChek(r) products to AOUSC. The loss of this customer will result in a significant adverse effect on the Company's operations even after the implementation of significant cost reduction measures, including sizable layoffs. In 2003, sales to AOUSC for laboratory testing comprised nearly $7.2 million, or 27% of the Company's sales. It is unlikely the Company will be able to replace this business in the near future.

On December 15, 2003, the Company's common stock was delisted from the Nasdaq SmallCap Market as a result of failing to comply with the $1.00 minimum bid price rule. Its common stock is currently trading on the Pink Sheets under the symbol PCHM (or PCHM.PK on some internet-based quotation services).

On January 2, 2004, the Company announced that it had reached an agreement with its principal lender to amend the current loan agreement between the Company and the lender. As a result of this amendment, the Company made a one-time principal payment of $650,000. In addition, monthly principal payments increased from $41,667 to $83,334 beginning in January 2004 which will result in the term loan being fully amortized by July 2004. The interest rate on the revolving line of credit is now prime plus 2%. Once the term loan is fully paid, this interest rate will return to prime plus 1%. Further, the financial covenants were restructured so that the three original covenants in place when the loan agreement was initially executed have been replaced with a monthly minimum tangible net worth covenant.

The Company believes that the lender required these modifications because of the loss of the AOUSC drug testing contract as described above. The $650,000 payment and the increase in the monthly principal payments has heightened the liquidity issues the Company is facing.

The Company continues to take steps to address this issue including significant cost cutting measures. In the five-month period from September 2003 through February 2004, the Company laid off an additional 30 people. Further, the salaries of officers and highly compensated employees were reduced by 5% to 25% and their merit increases were suspended. These actions will reduce costs by over $990,000 on an annualized basis.

On March 26, 2004, the Company filed a Form 15 with the Securities and Exchange Commission (the "SEC") thereby terminating its registration under the Securities Exchange Act of 1934. As a result of this action, the Company will no longer be required to file reports with the SEC and comply with certain provisions of the Sarbanes-Oxley Act, resulting in considerable cost savings. The Company expects to continue to issue press releases, quarterly financial statements and audited annual financial statements which will be available on its web site. In addition, the Board of Directors has set the date for the Annual Meeting of Stockholders at August 10, 2004.

The foregoing includes certain forward-looking statements which involve risks and uncertainties including, without limitation, competitive conditions, economic conditions, credit availability, the possibility that contracts may be terminated or not renewed (including the effect of the loss of the AOUSC contract as described above), customer acceptance of new products and regulatory issues.

PharmChem is a leading independent laboratory providing integrated drug testing services on a national basis to corporate and governmental clients seeking to detect and deter the use of illegal drugs. PharmChem operates a certified forensic drug-testing laboratory in Haltom City, Texas.


                             PHARMCHEM, INC.
            Condensed Consolidated Statements of Operations
       (000's omitted except per share amounts and percentages)
                              (unaudited)

                                     Three Months     Twelve Months
                                        Ended             Ended
                                     December 31       December 31
                                    2003     2002     2003     2002
                                  -------  -------   -------  -------
 Net sales                        $ 6,064  $ 7,227   $26,455  $30,085
 Cost of sales                      4,645    5,306    20,593   23,013
                                  -------  -------   -------  -------
 Gross profit                       1,419    1,921     5,862    7,072
                                  -------  -------   -------  -------

 Operating expenses                 1,673    1,716     7,439    7,855
 Impairment of goodwill               729       --       729       --
                                  -------  -------   -------  -------
                                    2,402    1,716     8,168    7,855
                                  -------  -------   -------  -------
 Income (loss) from operations       (983)     205    (2,306)    (783)
                                  -------  -------   -------  -------

 Gain on early payoff
  of subordinated debt                 --       --       665       --
 Interest expense                     (94)    (145)     (497)    (651)
 Other income (expense)               (31)     (11)       (9)      71
                                  -------  -------   -------  -------
                                     (125)    (156)      159     (580)
                                  -------  -------   -------  -------

 Income (loss) from continuing
  operations before income taxes   (1,108)      49    (2,147)  (1,363)
 Benefit from income taxes             --       --        --       69
                                  -------  -------   -------  -------
   Income (loss) from
    continuing operations          (1,108)      49    (2,147)  (1,294)
                                  -------  -------   -------  -------

 Discontinued operations:
  Income from operations of
   Medscreen, Ltd. (less income
    taxes of $193)                     --       --        --      359
  Gain on sale of Medscreen
   (less income taxes of $1,116)       --       --        --    4,277
                                  -------  -------   -------  -------
 Net income (loss)                $(1,108) $    49   $(2,147) $ 3,342
                                  =======  =======   =======  =======

 Net income (loss) per
  common share:
   Continuing operations          $ (0.19) $  0.01   $ (0.37) $ (0.22)
   Discontinued operations             --       --        --     0.79
                                  -------  -------   -------  -------
      Net income (loss)           $ (0.19) $  0.01   $ (0.37) $  0.57
                                  =======  =======   =======  =======
 Weighted average shares
  outstanding                       5,853    5,853     5,853    5,853
                                  =======  =======   =======  =======

                            PHARMCHEM, INC.
                 Condensed Consolidated Balance Sheets
                            (000's omitted)
                              (Unaudited)

                                December 31, 2003    December 31, 2002
                                    -----------          ------------
 Cash and cash equivalents            $  1,693              $  4,213
 Other current assets                    4,590                 5,611
                                    -----------          ------------
 Total current assets                    6,283                 9,824
 Property and equipment, net            10,340                12,074
 Non-current assets                         39                   769
                                    -----------          ------------
 Total                                $ 16,662              $ 22,667
                                    ===========          ============

 Line of credit                        $ 2,495               $ 3,334
 Current portion of long-term debt       1,878                 2,388
 Other current liabilities               3,929                 5,772
                                    -----------          ------------
 Total current liabilities               8,302                11,494

 Long-term debt                            107                   814
 Stockholders' equity                    8,253                10,359
                                    -----------          ------------
 Total                                $ 16,662              $ 22,667
                                    ===========          ============

            

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