PHARMCHEM INC - 10-Q Quarterly Report

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such report(s), and (2) has been subject to such filing requirements for the past 90 days. Yes ü No

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act.) Yes No ü

As of October 31, 2003, the registrant had outstanding 5,852,593 shares of Common Stock, $0.001 par value.


		Page

Part I.	Financial Information
Item 1.	Condensed Consolidated Financial Statements		3
	Condensed Consolidated Balance Sheets (unaudited) at September 30, 2003 and December 31, 2002		4
	Condensed Consolidated Statements of Operations (unaudited) for the Three and Nine Months ended September 30, 2003 and 2002		5
	Condensed Consolidated Statements of Comprehensive Income (Loss) (unaudited) for the Three and Nine Months ended September 30, 2003 and 2002		6
	Condensed Consolidated Statements of Cash Flows (unaudited) for the Nine Months ended September 30, 2003 and 2002		7
	Notes to Condensed Consolidated Financial Statements (unaudited)		8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		12
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		19
Item 4.	Controls and Procedures		19
Part II.	Other Information
Item 4.	Submission of Matters to a Vote of Security Holders		20
Item 6.	Exhibits and Reports on Form 8-K		20
Signature			21

The condensed consolidated financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in complete financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures made are adequate to make the information presented not misleading. It is suggested that the condensed consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto for the year ended December 31, 2002 included in the Company’s Annual Report on Form 10-K.

These financial statements have been prepared in all material respects in conformity with the standards of accounting measurements set forth in Accounting Principles Board Opinion No. 28, “Interim Financial Reporting,” and the rules and regulations as specified by the Securities and Exchange Commission and reflect all adjustments, consisting only of normal recurring adjustments which, in the opinion of management, are necessary to summarize fairly our consolidated financial position and the results of operations and cash flows for the periods presented. The results of operations for such interim periods are not necessarily indicative of the results to be expected for the full year.

PHARMCHEM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except par value)


					September 30,			December 31,
					2003			2002

				ASSETS
CURRENT ASSETS:
	Cash and cash equivalents				$	1,581		$	4,213
	Accounts receivable, net of allowances for doubtful accounts of $236 and $197					3,999			3,792
	Inventories					975			1,318
	Prepaid expenses					241			501

		TOTAL CURRENT ASSETS				6,796			9,824

PROPERTY AND EQUIPMENT, net						10,859			12,074
OTHER ASSETS						74			40
GOODWILL, net of amortization of $1,892						729			729

		TOTAL ASSETS			$	18,458		$	22,667

			LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
	Revolving line of credit				$	—		$	3,334
	Current portion of long-term debt					1,221			2,388
	Accounts payable					1,889			2,918
	Accrued compensation					410			837
	Accrued collectors and other liabilities					1,999			2,017

		TOTAL CURRENT LIABILITIES				5,519			11,494
LONG-TERM DEBT, net of current portion						3,579			814

		TOTAL LIABILITIES				9,098			12,308

STOCKHOLDERS’ EQUITY:
	Common stock, $0.001 par value, 25,000 shares authorized, 5,853 shares issued and outstanding at September 30, 2003 and December 31, 2002					6			6
	Additional paid-in capital					19,630			19,589
	Accumulated deficit					(10,276	)		(9,236	)

		TOTAL STOCKHOLDERS’ EQUITY				9,360			10,359

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY					$	18,458		$	22,667

The accompanying notes are an integral part of these condensed consolidated financial statements.

PHARMCHEM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts)


				Three Months Ended						Nine Months Ended
				September 30,						September 30,

				2003			2002			2003			2002

NET SALES				$	6,942		$	7,316		$	20,391		$	22,858
COST OF SALES					5,278			5,790			15,948			17,707

GROSS PROFIT					1,664			1,526			4,443			5,151

OPERATING EXPENSES:
	Selling, general and administrative				1,984			2,193			5,766			6,139

		Total operating expenses			1,984			2,193			5,766			6,139

LOSS FROM OPERATIONS					(320	)		(667	)		(1,323	)		(988	)

Gain on payoff of subordinated debt					665			—			665			—
Interest expense					(100	)		(167	)		(403	)		(506	)
Other income					4			9			22			82

					569			(158	)		284			(424	)

INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES					249			(825	)		(1,039	)		(1,412	)
BENEFIT FROM INCOME TAXES					—			—			—			(69	)

INCOME (LOSS) FROM CONTINUING OPERATIONS					249			(825	)		(1,039	)		(1,343	)
DISCONTINUED OPERATIONS:
	Income from discontinued operations, net of applicable income taxes of $184				—			—			—			359
	Gain on disposition, net of applicable income taxes of $1,116				—			—			—			4,277

NET INCOME (LOSS)				$	249		$	(825	)	$	(1,039	)	$	3,293

NET INCOME (LOSS) PER COMMON SHARE:
	BASIC: Continuing operations			$	0.04		$	(0.14	)	$	(0.18	)	$	(0.23	)
			Discontinued operations		—			—			—			0.79

			Net income (loss)	$	0.04		$	(0.14	)	$	(0.18	)	$	0.56

	DILUTED:
			Continuing operations	$	0.04		$	(0.14	)	$	(0.18	)	$	(0.23	)
			Discontinued operations		—			—			—			0.79

			Net income (loss)	$	0.04		$	(0.14	)	$	(0.18	)	$	0.56

WEIGHTED AVERAGE SHARES OUTSTANDING:
	BASIC				5,853			5,853			5,853			5,853

	DILUTED				5,923			5,853			5,853			5,853

The accompanying notes are an integral part of these condensed consolidated financial statements.

PHARMCHEM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(In thousands)


		Three Months Ended					Nine Months Ended
		September 30,					September 30,

		2003		2002			2003			2002

NET INCOME (LOSS)		$	249	$	(825	)	$	(1,039	)	$	3,293
OTHER COMPREHENSIVE INCOME (LOSS):
	Foreign currency translation		—		—			—			(53	)
	Reclassification adjustment for realized foreign currency exchange loss included in net income		—		—			—			332

			—		—			—			279

COMPREHENSIVE INCOME (LOSS)		$	249	$	(825	)	$	(1,039	)	$	3,572

The accompanying notes are an integral part of these condensed consolidated financial statements.


					Nine Months Ended
					September 30,

					2003			2002

CASH FLOWS FROM OPERATING ACTIVITIES
	Net income (loss)				$	(1,039	)	$	3,293
	Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
			Income from discontinued operations			—			(359	)
			Depreciation and amortization			1,576			1,698
			Gain on payoff of subordinated debt			(665	)		—
			Amortization of discount on subordinated debt			86			130
			Provision for doubtful accounts			39			95
			Gain on sale of disposition of subsidiary, net of tax			—			(4,277	)
	Changes in operating assets and liabilities:
			Accounts receivable			(246	)		1,137
			Inventories			343			849
			Prepaids and other current assets			260			97
			Other assets			(33	)		34
			Accounts payable and other accrued liabilities			(1,474	)		(1,981	)

				Net cash provided by (used in) operating activities of continuing operations		(1,153	)		716

				Net cash provided by operating activities of discontinued operations		—			161

CASH FLOWS FROM INVESTING ACTIVITIES
		Purchases of property and equipment				(364	)		(1,183	)
		Proceeds from sale of discontinued operations				—			10,000
		Increase in restricted cash				—			(500	)

				Net cash provided by investing activities of continuing operations		(364	)		8,317

				Net cash used in investing activities of discontinued operations		—			(40	)

CASH FLOWS FROM FINANCING ACTIVITIES
		Principal payments on long-term debt				(1,000	)		(2,346	)
		Proceeds from new revolving line of credit				2,840			—
		Payoff of former revolving line of credit				(2,827	)
		Payoff of subordinated debt				(750	)		—
		Repayments on revolving line of credit, net				(878	)		(863	)
		Borrowings on term loan				1,500			—

				Net cash used in financing activities of continuing Operations		(1,115	)		(3,209	)
				Net cash used in financing activities of discontinued operations		—			(1,987	)

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS						(2,632	)		3,958
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD						4,213			197

CASH AND CASH EQUIVALENTS AT END OF PERIOD					$	1,581


Delaware		77-0187280
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification Number)

4600 North Beach Street Haltom City, Texas		76137
(Address of principal executive offices)		(Zip Code)

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents


ü		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


PART I. Financial Information
		CONDENSED CONSOLIDATED BALANCE SHEETS
		CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
		CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
		CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
		NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3. Quantitative and Qualitative Disclosures About Market Risk
	Item 4. Controls and Procedures
PART II. Other Information
	Item 4. Submission of Matters to a Vote of Security Holders
	Item 6. Exhibits and Reports on Form 8-K
Signature
EXHIBIT INDEX
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2