PharmChem Reports Second Quarter 2002 Results


HALTOM CITY, Texas, Aug. 14, 2002 (PRIMEZONE) -- PharmChem, Inc. (Nasdaq:PCHM) announced that its net sales from continuing operations for the second quarter ended June 30, 2002 were $8,066,000, or 10.7% lower than 2001's second quarter net sales of $9,030,000.

The Company reported a net loss from continuing operations for the current quarter of $208,000, or $0.04 per share, versus a net loss from continuing operations of $5,742,000, or $0.98 per share, a year ago. Last year's results from continuing operations include $3,445,000 of nonrecurring costs related to the Company's relocation of its headquarters and laboratory to Haltom City, Texas and a restructuring charge of $1,029,000 to provide for costs associated with closing its Northern California facility. The prior year results also include $32,000 of goodwill amortization which, under SFAS No. 142, adopted by the Company effective January 1, 2002, is no longer required.

Excluding the nonrecurring costs, the restructuring charge, and the amortization of goodwill, the net loss from continuing operations for 2001's second quarter, on a pro forma basis, would have been $1,236,000, or $0.21 per share, as compared to this year's loss of $208,000, or $0.04 per share.

For the six months ended June 30, 2002, net sales from continuing operations were $15,542,000, a decrease of 16.7% from last year's net sales of $18,664,000. The Company reported a net loss from continuing operations for the first six months of 2002 of $518,000, or $0.09 per share versus a loss last year from continuing operations of $6,734,000, or $1.15 per share. Last year's results include $4,006,000 of nonrecurring costs related to the Company's relocation, the $1,029,000 restructuring charge and $64,000 of goodwill amortization.

Excluding these nonrecurring costs, the restructuring charge and the amortization of goodwill, the net loss from continuing operations in the first half of 2001, on a pro forma basis, would have been $1,635,000, or $0.28 per share, as compared to this year's loss of $518,000, or $0.09 per share.

These amounts exclude the results of Medscreen, which, as previously reported, was sold in March of this year and are being reported as discontinued operations.

The net loss in the second quarter of 2001 after the inclusion of income from discontinued operations of $185,000, or $0.03 per share, was $5,557,000, or $0.95 per share. There were no discontinued operations in the second quarter of 2002.

After including Medscreen's net income of $359,000 in 2002 (which represents three months of operations) versus $477,000 in 2001 (representing six months of operations), and the net gain in 2002 on the sale of Medscreen of $4,277,000, the Company reported net income of $4,118,000, or $0.70 per share, for the first six months of 2002, compared to a net loss of $6,257,000, or $1.07 per share, for the same period last year.

In this year's second quarter, laboratory specimen volume in the U.S. fell by nearly 14% from the same period a year ago (compared to a 27% drop in the first quarter of 2002 versus the same period a year ago) as the overall weakness in workplace drug testing which began in mid-2001 continues.

The impact of the lower specimen revenues versus last year, while significant, was mitigated by the Company's successful cost reduction program which began in September 2001. The cost structure and operating efficiencies of the new Texas facility have taken hold as the loss from operations amounted to $116,000 in the second quarter of this year versus an operating loss of $205,000 in the first quarter of this year. We expect that these factors will continue to be positive influences in the future. For the first six months of 2002, cost of sales and operating expenses amounted to $15,863,000, versus, on a pro forma basis, $20,161,000 for the same period a year ago (excluding nonrecurring costs, the restructuring charge and amortization of goodwill). This represents a 21.3% reduction in the expenses compared to a net sales decline of 16.7%.

Net sales of products and other non-laboratory services were not impacted as severely as specimen testing, and declined only 8.8% in this year's second quarter. These sales comprised 21% of net sales in both the second quarter of 2002 and 2001.

Capital expenditures for the first six months of 2002 were $836,000 versus $2,717,000 last year; depreciation and amortization expenses were $1,121,000 this year compared to $1,075,000 last year; and EBITDA was $800,000 (5.1% of sales) in 2002 and negative $486,000 (2.6% of sales) in 2001. EBITDA is before income from discontinued operations, the gain on the sale of Medscreen and, in 2001, $5,035,000 of nonrecurring costs related to the Company's relocation and the restructuring charge.

On July 31, 2002, the Company entered into a Second Amended and Restated Loan and Security Agreement with its principal lender whereby the existing agreement was renewed through June 30, 2003, the interest rate was reduced to prime plus 1/2% and the annual facility fee remains at 0.10% on the $4,250,000 credit line. The Agreement permits borrowing at 85% of eligible receivables, requires the Company to maintain certain financial ratios and achieve profitability levels, provides a limitation on capital expenditures and requires a restricted cash balance of $500,000.

On May 23, 2002, the Company was notified by the Nasdaq Stock Market, Inc. that its application to list its common stock on the Nasdaq SmallCap Market had been approved effective May 28, 2002. The Company does not currently meet the $1.00 minimum bid price as required for listing on the Nasdaq SmallCap Market. However, the Company has been granted a grace period until October 9, 2002 and, assuming that it continues to meet the other listing criteria, could be granted a second grace period until April 7, 2003, to comply with the minimum bid price rule.

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, customer acceptance of new products and regulatory issues. These and other factors affecting operating results are included in the Company's Form 10-K for the year ended December 31, 2001.

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
        (000s omitted except per share amounts and percentages)
                              (unaudited)

                            Three Months Ended    Six Months Ended 
                                 June 30,             June 30,
                              2002     2001        2002      2001
                             ------   -------     -------   -------
 
 Net sales                   $8,066   $ 9,030     $15,542   $18,664
 Cost of sales                6,249     9,214(a)   11,917    16,928(a)
                             ------   -------     -------   -------
 Gross profit (loss)          1,817      (184)      3,625     1,736
                             ------   -------     -------   -------
 Operating expenses           1,933     4,415(a)    3,946     7,239(a)
 Amortization of goodwill      --          32        --          64
 Restructuring charge          --       1,029        --       1,029
                             ------   -------     -------   -------
                              1,933     5,476       3,946     8,332
                             ------   -------     -------   -------
 Loss from operations          (116)   (5,660)       (321)   (6,596)
                             ------   -------     -------   -------
 Interest expense               134        86         253       155
 Other expense (income)         (55)       (4)         13       (17)
                             ------   -------     -------   -------
                                 79        82         266       138
                             ------   -------     -------   -------
 Loss from continuing
  operations before
  income taxes                 (195)   (5,742)       (587)   (6,734)
 Provision for
  (benefit from)
  income taxes                   13      --           (69)     --
                             ------   -------     -------   -------
 Loss from continuing
  operations                   (208)   (5,742)       (518)   (6,734)
                             ------   -------     -------   -------
 Discontinued operations:
  Income from operations of
   Medscreen, Ltd. (less
   income taxes of $103 for
   the three months ended
   June 30, 2001 and $184
   and $250 for the six
   months ended June 30,
   2002 and 2001,
   respectively)               --         185         359       477

 Gain on sale of
  Medscreen (less income
  taxes of $1,116)             --        --         4,277      --
                             ------   -------     -------   -------
 Net income (loss)           $ (208)  $(5,557)    $ 4,118   $(6,257)
                             ======   =======     =======   =======
 Net income (loss) per
  common share:
   Continuing operations     $(0.04)  $ (0.98)    $ (0.09)  $ (1.15)
   Discontinued operations     --        0.03        0.79      0.08
                             ------   -------     -------   -------
 Net income                  $(0.04)  $ (0.95)    $  0.70   $ (1.07)
                             ======   =======     =======   =======

 Weighted average shares
  outstanding:                5,853     5,851       5,853     5,849
                             ======   =======     =======   =======
 EBITDA:(b)
  Amount                     $  465   $  (612)    $   800   $  (486)
                             ======   =======     =======   =======
  Margin                        5.8%     (6.8%)       5.1%     (2.6%)
                             ======   =======     =======   =======

 (a) Includes $2,028 in the second quarter in cost of sales ($2,504
     for the six month period) and $1,417 in the second quarter
     operating expenses ($1,502 for the six month period) of
     nonrecurring costs associated with relocating to Texas.

 (b) Earnings from continuing operations before taxes, interest, other
     expense (income), depreciation and amortization, and, for 2001,
     before nonrecurring costs and restructuring provision.



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

                                       June 30,     December 31,
                                        2002           2001(a)
                                       -------        -------
 Cash                                  $ 5,085        $   197
 Other current assets                    6,842          8,992
                                       -------        -------
 Total current assets                   11,927          9,189
 Property and equipment, net            12,630         12,915
 Non-current assets                        768          3,105
                                       -------        -------
 Total                                 $25,325        $25,209
                                       =======        =======

 Short-term debt                       $ 5,064        $ 7,212
 Other current liabilities               6,519          8,229
                                       -------        -------
 Total current liabilities              11,583         15,441

 Long-term debt                          2,607          3,030
 Stockholders' equity                   11,135          6,738
                                       -------        -------
 Total                                 $25,325        $25,209
                                       =======        =======

     (a)  The December 31, 2001 balance sheet has been reclassified to
          include Medscreen's excess of net current ($526) and
          non-current ($1,613) assets over liabilities in "other
          current assets" and "non-current assets" above.

            

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