FOR IMMEDIATE RELEASE
Haltom
City, TX; November 5, 2004 -- PharmChem, Inc. (PCHM.PK) 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® 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 reelection
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.