PharmChem Reports Third Quarter 2002 Results


HALTOM CITY, Texas, Nov. 13, 2002 (PRIMEZONE) -- PharmChem, Inc. (Nasdaq:PCHM) announced that its net sales from continuing operations for the third quarter ended September 30, 2002 were $7,316,000, or 25.5% lower than 2001's third quarter net sales of $9,824,000.

The Company reported a net loss from continuing operations for the current quarter of $825,000, or $0.14 per share, versus a net loss from continuing operations of $1,917,000 or $0.33 per share, a year ago. Last year's results from continuing operations include $1,861,000 of nonrecurring costs related to the Company's relocation of its headquarters and laboratory to Haltom City, Texas. The prior year results also include $33,000 of goodwill amortization which, under SFAS No. 142, adopted by the Company effective January 1, 2002, is no longer required.

Excluding the nonrecurring costs and the amortization of goodwill, the net loss from continuing operations for 2001's third quarter, on a pro forma basis, would have been $23,000, or $0.00 per share.

For the nine months ended September 30, 2002, net sales from continuing operations were $22,858,000, a decrease of 19.8% from last year's net sales of $28,488,000. The Company reported a net loss from continuing operations for the first nine months of 2002 of $1,343,000, or $0.23 per share, versus a loss last year from continuing operations of $8,651,000, or $1.48 per share. Last year's results include $5,867,000 of nonrecurring costs related to the Company's relocation, a $1,029,000 restructuring charge and $97,000 of goodwill amortization. As previously reported, in connection with the closure of the Menlo Park, California facility, the Company recorded a restructuring charge of $1,029,000 in the second quarter of 2001 which included severance, clean up, remediation, repairs, legal and other estimated costs. As of September 30, 2002, $775,000 had been charged against this accrual.

Excluding these nonrecurring costs, the restructuring charge and the amortization of goodwill, the net loss from continuing operations in the first nine months of 2001, on a pro forma basis, would have been $1,658,000, or $0.28 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 third quarter of 2001 after the inclusion of income from discontinued operations of $245,000, or $0.04 per share, was $1,672,000, or $0.29 per share. There were no discontinued operations in the third quarter of 2002.

After including Medscreen's net income of $359,000 in 2002 (which represents three months of operations) versus $722,000 in 2001 (representing nine months of operations), and the net gain in 2002 on the sale of Medscreen of $4,277,000, the Company reported net income of $3,293,000, or $0.56 per share, for the first nine months of 2002, compared to a net loss of $7,929,000, or $1.36 per share, for the same period last year.

In this year's third quarter, laboratory specimen volume fell by nearly 33% from the same period a year ago. The third quarter has typically been one where specimen volumes from workplace customers accelerate in advance of hiring for the winter holidays. We believe that this did not occur in the current year's third quarter, primarily because of the economic downturn. Volume from criminal justice customers was negatively affected because certain of these customers have migrated from laboratory testing to less costly on-site testing devices sold by the Company's competitors.

Net sales of products and other non-laboratory services declined only 8% in this year's third quarter. These sales comprised 23% of net sales in the third quarter of 2002 versus 19% in 2001.

For the first nine months of 2002, cost of sales and operating expenses amounted to $23,846,000, versus, on a pro forma basis, $29,934,000 for the same period a year ago (excluding nonrecurring costs, the restructuring charge and amortization of goodwill). This represents a 20.3% reduction in expenses compared to a net sales decline of 19.8%.

Capital expenditures for the first nine months of 2002 were $1,183,000 versus $4,471,000 last year; depreciation and amortization expenses were $1,698,000 this year compared to $1,492,000 last year; and EBITDA was $840,000 (3.7% of net sales) in 2002 and negative $48,000 (0.2% of net sales) in 2001. EBITDA is before income from discontinued operations, the gain on the sale of Medscreen and, in 2001, $6,896,000 of nonrecurring costs related to the Company's relocation and the restructuring charge.

On September 19, 2002, the Company's attorneys received a letter from counsel for the landlord of the Company's former Menlo Park, California facility claiming damages in the amount of $4.7 million. This amount is based primarily on the landlord's claim for lost and reduced rent arising from the Company's alleged failure to vacate the Menlo Park premises timely under the terms of the lease. The Company and its counsel are currently reviewing the details of this claim and the Company will defend itself vigorously.

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

                          Three Months Ended     Nine Months Ended 
                             September 30,        September 30,
                            2002       2001       2002       2001
                          --------   --------   --------   --------

 Net sales                $  7,316   $  9,824     22,858     28,488
 Cost of sales               5,790      8,935(a)  17,707     25,863(a)
                          --------   --------   --------   --------
 Gross profit                1,526        889      5,151      2,625
                          --------   --------   --------   --------

 
 Operating expenses          2,193      2,699(a)   6,139      9,938(a)
 Amortization of goodwill        -         33         -          97
 Restructuring charge            -          -         -       1,029
                          --------   --------   --------   --------
                             2,193      2,732      6,139     11,064
                          --------   --------   --------   --------
 Loss from operations         (667)    (1,843)      (988)    (8,439)
                          --------   --------   --------   --------
 Interest expense              167        124        506        279
 Other income                    9          9         82         26
                          --------   --------   --------   --------
                               158        115        424        253
                          --------   --------   --------   --------
 Loss from continuing
  operations before
  income taxes                (825)    (1,958)    (1,412)    (8,692)
 Benefit from income taxes      -         (41)       (69)       (41)
                          --------   --------   --------   --------
 Loss from continuing
  operations                  (825)    (1,917)    (1,343)    (8,651)
                          --------   --------   --------   --------
 Discontinued operations:
  Income from operations of
  Medscreen, Ltd. (less
  income taxes of $115 for
  the three months ended
  September 30, 2001 and
  $184 and $365 for the nine
  months ended September 30,
  2002 and 2001,
  respectively)                 -         245        359        722
 Gain on sale of Medscreen
  (less income taxes
   of $1,116)                   -          -       4,277         -
                          --------   --------   --------   --------
 Net income (loss)        $   (825)  $ (1,672)  $  3,293   $ (7,929)
                          ========   ========   ========   ========
 Net income (loss)
  per common share:
   Continuing operations  $  (0.14)  $  (0.33)  $  (0.23)  $  (1.48)
   Discontinued operations      -        0.04       0.79       0.12
                          --------   --------   --------   --------
 Net income               $  (0.14)  $  (0.29)  $   0.56   $  (1.36)
                          ========   ========   ========   ========
 Weighted average shares
  outstanding:               5,853      5,853      5,853      5,850
                          ========   ========   ========   ========
 EBITDA:(b)
 Amount                   $    (46)  $    438   $    840   $    (48)
                          ========   ========   ========   ========
 Margin                      (0.6%)      4.5%       3.7%      (0.2%)
                          ========   ========   ========   ========

 (a) Includes $1,602 in the third quarter in cost of sales ($4,106
     for the nine month period) and $259 in the third quarter in
     operating expenses ($1,761 for the nine 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
                           (000's omitted)
                             (Unaudited)

                                   September 30,       December 31,
                                        2002              2001(c)
                                     ---------          ---------
                                   
 Cash and cash equivalents           $   4,155          $     197
 Other current assets                    6,398              8,992
                                     ---------          ---------
 Total current assets                   10,553              9,189
 Property and equipment, net            12,400             12,915
 Non-current assets                        768              3,105
                                     ---------          ---------
 Total                               $  23,721          $  25,209
                                     =========          =========
 Short-term debt                     $   6,103          $   7,212
 Other current liabilities               6,249              8,229
                                     ---------          ---------
 Total current liabilities              12,352             15,441
                                   
 Long-term debt                          1,059              3,030
 Stockholders' equity                   10,310              6,738
                                     ---------          ---------
 Total                               $  23,721          $  25,209
                                     =========          =========
                                   
 (c) 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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