PharmChem Reports First Quarter 2004 Results


HALTOM CITY, Texas, May 14, 2004 (PRIMEZONE) -- PharmChem, Inc. (Pink Sheets:PCHM) announced that its net sales for the first quarter ended March 31, 2004 were $5,606,000, a decrease of 11.5% from first quarter 2003 net sales of $6,335,000. The Company reported a loss for the current quarter of $628,000, or $0.11 per share, versus a loss of $733,000, or $0.13 per share, a year ago.

In this year's first quarter, laboratory specimen volume fell by 24.0%. Workplace volume increased nearly 36% in the quarter which, while coming from a small base last year, indicates an improvement in pre-employment testing. This was more than offset by criminal justice volume declines due to budgetary constraints and lower volumes of specimen testing by AOUSC which is described in more detail below.

Net sales of products and other non-laboratory services were $1.5 million this year versus $1.3 million in last year's first quarter, an increase of 15.2%. These sales comprised 26.3% of net sales in the current quarter versus 20.2% last year.

Capital expenditures for the current quarter were $2,000 versus $156,000 in last year's first quarter; and depreciation and amortization expenses were $468,000 this year compared to $560,000 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 all testing by AOUSC ceased as of 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 as well as its liquidity. In the first quarter of 2004, sales to AOUSC for laboratory testing were $162,000 versus $725,197 for the same period last year. In 2003, the Company was servicing AOUSC on a national basis while, in 2004, only one of three regions was being serviced. Also, AOUSC has reduced its testing considerably due to budgetary constraints. For the full year of 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 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.

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 is no longer required to file reports with the SEC or 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.

The Board of Directors has set the date for the Annual Meeting of Stockholders for August 17, 2004.

The foregoing includes certain forward-looking statements, which involve risks and uncertainties including, without limitation, competitive conditions, economic conditions, credit availability, customer concentration, the possibility that contracts may be terminated or not renewed, and regulatory issues.

PharmChem is a leading independent laboratory providing integrated drug testing services 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 Ended March 31,
                                      ---------------------------
                                        2004                2003
                                      --------           --------

 Net sales                             $ 5,606            $ 6,335
 Cost of sales                           4,516              5,125
                                      --------           --------
 Gross profit                            1,090              1,210

 Operating expenses                      1,635              1,798
                                      --------           --------

 Loss from operations                     (545)              (588)

 Interest expense                           83                160
 Other expense (income)                      -                (15)
                                      --------           --------

                                            83                145
                                      --------           --------
 Loss before income taxes                 (628)              (733)
 Income taxes                                -                  -
                                      --------           --------
 Net loss                               $ (628)            $ (733)
                                      --------           --------

 Net loss per common share             $ (0.11)           $ (0.13)
                                      ========           ========
 Weighted average
  shares outstanding*                    5,853              5,853
                                      ========           ========
 * Per share earnings and weighted average shares are on a diluted
 basis.


             Condensed Consolidated Balance Sheets
                       (000's omitted)
                        (Unaudited)

                                          March 31,     December 31,
                                            2004            2003
                                       -----------      -----------


 Cash and cash
   equivalents                            $    626       $   1,693
 Other current assets                        4,317           4,590
                                         ---------       ---------
 Total current assets                        4,943           6,283
 Property and equipment, net                 9,873          10,340
 Non-current assets                             39              39
                                         ---------       ---------
 Total                                    $ 14,855        $ 16,662
                                         =========       =========

 Line of credit                           $  1,941        $  2,495
 Current portion of
  long-term debt                               829           1,878
 Other current liabilities                   4,406           3,929
                                         ---------       ---------
 Total current liabilities                   7,176           8,302

 Long-term debt                                 54             107
 Stockholders' equity                        7,625           8,253
                                          ---------      ---------

 Total                                     $ 14,855       $ 16,662
                                          =========      =========

            

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