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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-Q
(MARK ONE)
/x/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1996
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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COMMISSION FILE NUMBER 0-19371
PHARMCHEM LABORATORIES, INC.
(Exact name of registrant as specified in its charter)
CALIFORNIA 77-0187280
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
1505-A O'BRIEN DRIVE
MENLO PARK, CALIFORNIA 94025
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (415) 328-6200
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 X No
--- ---
As of June 30, 1996, the registrant had outstanding 5,604,838 shares of
Common Stock, no par value.
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PHARMCHEM LABORATORIES, INC.
QUARTERLY REPORT ON FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements .......................................... 3
Condensed Consolidated Interim Balance Sheets at
June 30, 1996 (unaudited) and December 31, 1995 ............... 4
Condensed Consolidated Interim Statements of Operations
(unaudited) for the Three months and the Six months
ended June 30, 1996 and 1995.................................. 5
Condensed Consolidated Interim Statements of
Cash Flows (unaudited) for the Six months ended
June 30, 1996 and 1995 ....................................... 6
Notes to Condensed Consolidated Interim Financial Statements... 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ..................................... 8
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders............ 11
Item 6. Exhibits and Reports on Form 8-K ............................. 11
SIGNATURE ............................................................... 12
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PART I. FINANCIAL INFORMATION
1. Financial Statements
The condensed consolidated interim 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 financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations, although the Company believes
that the disclosures which are made are adequate to make the information
presented not misleading. It is suggested that the condensed consolidated
interim financial statements be read in conjunction with the consolidated
financial statements and the notes thereto for the year ended December 31, 1995
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 and reflect all adjustments,
consisting only of normal recurring adjustments which, in the opinion of
management, are necessary to summarize fairly the Company's consolidated
financial position, the results of its operations and its 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.
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PHARMCHEM LABORATORIES, INC.
CONDENSED CONSOLIDATED INTERIM BALANCE SHEETS
June 30, December 31,
1996 1995
-------- ------------
(Unaudited) (Audited)
(In thousands)
ASSETS
------
CURRENT ASSETS
Cash and cash equivalents $ 134 $ 647
-------- --------
Accounts receivable 10,109 9,463
Less - allowance for doubtful accounts (519) (462)
-------- --------
Accounts receivable, net 9,590 9,001
-------- --------
Supplies inventory 1,276 1,688
Other current assets 913 700
-------- --------
TOTAL CURRENT ASSETS 11,913 12,036
-------- --------
PROPERTY AND EQUIPMENT, at cost 13,649 12,534
Less - accumulated depreciation and amortization (7,487) (7,134)
-------- --------
Property and equipment, net 6,162 5,400
-------- --------
OTHER ASSETS 1,223 1,202
-------- --------
GOODWILL 10,181 10,181
Less - accumulated amortization and write-downs (6,728) (6,636)
-------- --------
Goodwill, net 3,453 3,545
-------- --------
TOTAL ASSETS 22,751 $ 22,183
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LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Current portion of long-term debt $ 1,397 $ 1,197
Accounts payable 2,302 3,773
Accrued compensation 806 1,187
Taxes payable 85 68
Other accrued liabilities 2,486 1,528
-------- --------
TOTAL CURRENT LIABILITIES 7,076 7,753
-------- --------
LONG TERM DEBT, net of current portion 4,712 3,401
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SHAREHOLDERS' EQUITY
Common stock, no par value, 10,000 shares authorized, 5,605 and 5,587
shares issued and outstanding at June 30, 1996
and December 31, 1995, respectively 18,733 18,703
Accumulated Deficit (7,770) (7,674)
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TOTAL SHAREHOLDERS' EQUITY 10,963 11,029
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 22,751 $ 22,183
======== ========
The accompanying notes are an integral part of these condensed consolidated
interim financial statements.
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PHARMCHEM LABORATORIES, INC.
CONDENSED CONSOLIDATED INTERIM STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
1996 1995 1996 1995
-------- -------- ------- --------
(In thousands, except per share amounts)
SALES $ 10,771 $ 9,722 $ 20,638 $ 18,514
COST OF SALES 8,240 7,262 15,866 13,784
-------- -------- -------- --------
GROSS PROFIT 2,531 2,460 4,772 4,730
OPERATING EXPENSES
Selling, general and administrative 1,796 1,763 3,679 3,469
Marketing rights and research costs 463 256 914 509
Amortization of goodwill 46 61 92 123
-------- -------- -------- --------
Total operating expenses 2,305 2,080 4,685 4,101
-------- -------- -------- --------
INCOME FROM OPERATIONS 226 380 87 629
Interest expense (133) (111) (245) (233)
Other income (expense), net (11) 16 62 39
-------- -------- -------- --------
(144) (95) (183) (194)
-------- -------- -------- --------
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES 82 285 (96) 435
PROVISION FOR INCOME TAXES -- 111 -- 160
-------- -------- -------- --------
NET INCOME (LOSS) $ 82 $ 174 $ (96) $ 275
======== ======== ======== ========
INCOME (LOSS) PER SHARE $ 0.01 $ 0.03 $ (0.02) $ 0.05
======== ======== ======== ========
Weighted average number of common shares outstanding 5,791 5,751 5,598 5,673
======== ======== ======== ========
The accompanying notes are an integral part of these condensed consolidated
interim financial statements.
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PHARMCHEM LABORATORIES, INC.
CONDENSED CONSOLIDATED INTERIM STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
June 30,
----------------------
1996 1995
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(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (96) $ 275
Adjustments to reconcile net income (loss) to net cash (used for) provided by
operating activities:
Depreciation and amortization 959 1,270
Gain on disposition of property and equipment (50) --
Changes in assets and liabilities:
Accounts receivable (589) (892)
Supplies inventory 412 (69)
Other current assets (213) 88
Accounts payable and other accrued expenses (894) 1,332
Taxes payable 17 83
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Net cash (used for) provided by operating activities (454) 2,087
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CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property and equipment (1,736) (1,039)
Proceeds from sale of property and equipment 230 --
Payments for marketing rights -- (355)
Decrease (increase) in other assets (94) 145
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Net cash used for investing activities (1,600) (1,249)
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CASH FLOWS FROM FINANCING ACTIVITIES
Principal borrowings (payments) on long-term debt 516 (588)
Principal borrowings on revolver loan 995 (850)
Proceeds from exercise of stock options 30 11
------- -------
Net cash provided by (used for) financing activities 1,541 (1,427)
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NET DECREASE IN CASH AND CASH EQUIVALENTS (513) (589)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 647 989
------- -------
CASH AND EQUIVALENTS AT END OF PERIOD $ 134 $ 400
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Supplemental Cash Flow Data
The following presents supplemental cash flow data (in thousands):
Cash paid for interest $ 107 $ 260
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Cash paid for taxes $ 27 $ 20
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The accompanying notes are an integral part of these condensed consolidated
interim financial statements.
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PHARMCHEM LABORATORIES, INC.
NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
1. Net Income (Loss) per Share
Net income per share data has been computed using the weighted average
number of shares of common stock and dilutive common equivalent shares from
stock options outstanding (using the treasury stock method). Net loss per share
data has been computed only on the weighted average number of common shares
outstanding during the period. Common equivalent shares, which represent shares
issuable upon the exercise of outstanding options were excluded from the
calculation of the loss per share because the effect of including such shares in
the computation would be anti-dilutive.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain financial data:
Three Months Ended June 30, Six Months Ended June 30,
-------- -------- ------ ------ -------- -------- ------ -------
1996 1995 1996 1995 1996 1995 1996 1995
-------- -------- ------ ------ -------- -------- ------ -------
(In thousands) (As a % of sales) (In thousands) (As a % of sales)
SALES
Public and private employers $ 5,494 $ 4,947 51.0% 50.9% $ 10,091 $ 9,075 48.9% 49.0%
Criminal justice agencies 4,056 3,092 37.7 31.8 7,806 6,140 37.8 33.2
Drug rehabilitation programs 420 562 3.9 5.8 965 1,087 4.7 5.9
Medscreen 801 1,121 7.4 11.5 1,776 2,212 8.6 11.9
-------- -------- ----- ----- -------- -------- ----- -----
Total sales 10,771 9,722 100.0 100.0 20,638 18,514 100.0 100.0
COST OF SALES 8,240 7,262 76.5 74.7 15,866 13,784 76.9 74.5
-------- -------- ----- ----- -------- -------- ----- -----
GROSS PROFIT 2,531 2,460 23.5 25.3 4,772 4,730 23.1 25.5
-------- -------- ----- ----- -------- -------- ----- -----
OPERATING EXPENSES
Selling, general and administrative 1,796 1,763 16.7 18.1 3,679 3,469 17.8 18.7
Marketing rights and research costs 463 256 4.3 2.6 914 509 4.4 2.7
Amortization of goodwill 46 61 0.4 0.6 92 123 0.5 0.7
-------- -------- ----- ----- -------- -------- ----- -----
Total operating expenses 2,305 2,080 21.4 21.4 4,685 4,101 22.7 22.2
-------- -------- ----- ----- -------- -------- ----- -----
INCOME FROM OPERATIONS 226 380 2.1 3.9 87 629 0.4 3.3
======== ======== ===== ===== ======== ======== ===== =====
OTHER EXPENSE, net (144) (95) (1.3) (1.0) (183) (194) (0.9) (1.0)
======== ======== ===== ===== ======== ======== ===== =====
NET INCOME (LOSS) $ 82 $ 174 0.8% 1.8% $ (96) $ 275 (0.5)% 1.5%
======== ======== ===== ===== ======== ======== ===== =====
Sales for the three months ended June 30, 1996 were $10,771,000, 10.8%
higher than for the same period last year. Sales for the six months ended June
30, 1996 were $20,638,000, 11.5% higher than for the same period last year.
These increases were due primarily to an increase in the number of specimens
analyzed. Subsequent to the end of the second quarter, the U.S. Army bid was
awarded to another laboratory. Accordingly, revenue under this contract will
cease subsequent to July 31, 1996.
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Cost of sales for the three months ended June 30, 1996 was $8,240,000,
76.5% of sales, compared to $7,262,000, 74.7% of sales, for the same period last
year. Cost of sales for the six months ended June 30, 1996 was $15,866,000,
76.9% of sales, compared to $13,784,000, 74.5% of sales for the same period last
year. These increases in cost of sales were due primarily to labor costs,
excess capacity in the Texas laboratory and ongoing investment spending.
Selling, general and administrative (SG&A) expenses for the three
months ended June 30, 1996 were $1,796,000, 16.7% of sales, compared to
$1,763,000, 18.1% of sales, for the same period last year. SG&A expenses for the
six months ended June 30, 1996 were $3,679,000, 17.8% of sales, compared to
$3,469,000, 18.7% of sales in the same period last year. These increases in SG&A
expenses were due primarily to an increase in the staff assigned to
administrative and support functions.
Marketing rights and research costs for the three months ended June 30,
1996 were $463,000, 4.3% of sales, compared to $256,000, 2.6% of sales, for the
same period last year. Marketing rights and research costs for the six months
ended June 30, 1996 were $914,000, 4.4% of sales, compared to $509,000, 2.7% of
sales, for the same period last year. These increases were due to expensing
costs related to the PharmChekTM for the six months ended June 30, 1996. These
costs were capitalized by the Company in the same periods last year. Such costs
were written off in the fourth quarter of 1995 due to continued uncertainties
regarding the realization of the marketing rights. The Company continues to
expense such costs.
Income from operations for the three months ended June 30, 1996 was
$226,000, 2.1% of sales, compared to $380,000, 3.9% of sales, for the same
period last year. Income from operations for the six months ended June 30, 1996
was $87,000, 0.4% of sales, compared to income from operations of $629,000, 3.3%
of sales, for the same period last year. These decreases were a result of the
items described above.
Net Income for the three months ended June 30, 1996 was $82,000 or
$0.01 per share, compared to net income of $174,000, or $.03 for the same period
last year. Net loss for the six months ended June 30, 1996 was $96,000, or a
loss of $0.02 per share, compared to net income of $275,000, or $.05 per share
for the same period last year.
LIQUIDITY AND CAPITAL RESOURCES
The Company realized a net decrease in cash and cash equivalents of
$513,000 during the six months ended June 30, 1996. The Company used $454,000 in
net cash for operations during the first six months of 1996, compared to
generating net cash from operations of $2,087,000 for the same period last year.
This was offset by short-term borrowings.
At June 30, 1996 the Company had a $7,000,000 term and revolver loan
credit agreement ("Credit Agreement") with a bank, under which $3,789,000 in
borrowings were outstanding at June 30, 1996. Approximately $944,000 was
outstanding under the original $2,000,000 amortizing term loan, and $2,845,000
was outstanding under the $5,000,000 revolver line of credit as of June 30,
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1996. Borrowings under the revolver loan are limited to 75% of qualified
accounts receivable. The Credit Agreement expires on November 5, 1997. The term
loan bears interest at the bank reference rate plus 0.5% (8.75% at June 30,
1996), and the revolver loan bears interest at the bank reference rate plus 1.0%
(9.25% at June 30, 1996). As of June 30, 1996 the Company was in compliance with
all covenants related to the Credit Agreement.
The Company anticipates that existing cash balances, borrowings under
its credit agreement and funds to be generated from future operations will be
sufficient to fund operations and budgeted capital expenditures through 1996.
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Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders
At the Annual Meeting of the Company held on May 21,1996, the Company's
shareholders took the following actions:
(a) The following directors were elected to serve until the next
Annual Meeting:
Votes
Director Elected For Withheld
---------------- --- --------
Joseph W. Halligan 4,185,718 333,689
Richard Irwin 4,184,718 334,689
Thomas Volpe 4,186,718 332,689
(b) Arthur Andersen LLP was appointed the Company's Independent
Public Accountants, by a vote of 4,495,560 shares in favor,
6,687 shares against and 17,160 shares abstained.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
June 30, 1996.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
PharmChem Laboratories, Inc.
(Registrant)
Date: August 9, 1996 By: /s/ David A. Lattanzio
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David A. Lattanzio
Chief Financial Officer and Vice President,
Finance and Administration
(Principal Financial and Accounting Officer)
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