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SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549




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FORM 10-Q

(Mark One)

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


For the quarterly period ended September 30, 2003

OR

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


For the transition period fromto

Commission File Number 0-19371

(PHARMCHEM LOGO)

(Exact name of registrant as specified in its charter)


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)


Registrants telephone number, including area code: (817) 605-5300

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.



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TABLE OF CONTENTS



|                              |                                                                                               |                                                                  |  |  |  |  |  | 
|----------------------------- | --------------------------------------------------------------------------------------------- | ---------------------------------------------------------------- |  |  |  |  |  | 
|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                 



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##### Table of Contents



PHARMCHEM, INC.

QUARTERLY REPORT ON FORM 10-Q

INDEX

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


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|        |                      
|------- | ---------------------
|PART I. | Financial Information



|        |                                            
|------- | -------------------------------------------
|Item 1. | Condensed Consolidated Financial Statements

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.

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

September 30,
    
    December 31,2003
    
    2002ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    1,581
    
    
    $
    4,213Accounts receivable, net of allowances for doubtful accounts of $236
and $197
    
    
    3,999
    
    
    
    3,792Inventories
    
    
    975
    
    
    
    1,318Prepaid expenses
    
    
    241
    
    
    
    501TOTAL CURRENT ASSETS
    
    
    6,796
    
    
    
    9,824PROPERTY AND EQUIPMENT, net
    
    
    10,859
    
    
    
    12,074OTHER ASSETS
    
    
    74
    
    
    
    40GOODWILL, net of amortization of $1,892
    
    
    729
    
    
    
    729TOTAL ASSETS
    
    $
    18,458
    
    
    $
    22,667LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIES:Revolving line of credit
    
    $
    
    
    
    $
    3,334Current portion of long-term debt
    
    
    1,221
    
    
    
    2,388Accounts payable
    
    
    1,889
    
    
    
    2,918Accrued compensation
    
    
    410
    
    
    
    837Accrued collectors and other liabilities
    
    
    1,999
    
    
    
    2,017TOTAL CURRENT LIABILITIES
    
    
    5,519
    
    
    
    11,494LONG-TERM DEBT, net of current portion
    
    
    3,579
    
    
    
    814TOTAL LIABILITIES
    
    
    9,098
    
    
    
    12,308STOCKHOLDERS 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
    
    
    
    6Additional paid-in capital
    
    
    19,630
    
    
    
    19,589Accumulated deficit
    
    
    (10,276
    )
    
    
    (9,236
    )TOTAL STOCKHOLDERS EQUITY
    
    
    9,360
    
    
    
    10,359TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    18,458
    
    
    $
    22,667


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

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

Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2003
    
    2002
    
    2003
    
    2002NET SALES
    
    $
    6,942
    
    
    $
    7,316
    
    
    $
    20,391
    
    
    $
    22,858COST OF SALES
    
    
    5,278
    
    
    
    5,790
    
    
    
    15,948
    
    
    
    17,707GROSS PROFIT
    
    
    1,664
    
    
    
    1,526
    
    
    
    4,443
    
    
    
    5,151OPERATING EXPENSES:Selling, general and administrative
    
    
    1,984
    
    
    
    2,193
    
    
    
    5,766
    
    
    
    6,139Total operating expenses
    
    
    1,984
    
    
    
    2,193
    
    
    
    5,766
    
    
    
    6,139LOSS 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
    
    
    
    82569
    
    
    
    (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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    359Gain on disposition, net of applicable income taxes of
$1,116
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,277NET INCOME (LOSS)
    
    $
    249
    
    
    $
    (825
    )
    
    $
    (1,039
    )
    
    $
    3,293NET INCOME (LOSS) PER COMMON SHARE:BASIC: Continuing operations
    
    $
    0.04
    
    
    $
    (0.14
    )
    
    $
    (0.18
    )
    
    $
    (0.23
    )Discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.79Net income (loss)
    
    $
    0.04
    
    
    $
    (0.14
    )
    
    $
    (0.18
    )
    
    $
    0.56DILUTED:Continuing operations
    
    $
    0.04
    
    
    $
    (0.14
    )
    
    $
    (0.18
    )
    
    $
    (0.23
    )Discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.79Net income (loss)
    
    $
    0.04
    
    
    $
    (0.14
    )
    
    $
    (0.18
    )
    
    $
    0.56WEIGHTED AVERAGE SHARES OUTSTANDING:BASIC
    
    
    5,853
    
    
    
    5,853
    
    
    
    5,853
    
    
    
    5,853DILUTED
    
    
    5,923
    
    
    
    5,853
    
    
    
    5,853
    
    
    
    5,853


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

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

Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2003
    
    2002
    
    2003
    
    2002NET INCOME (LOSS)
    
    $
    249
    
    
    $
    (825
    )
    
    $
    (1,039
    )
    
    $
    3,293OTHER COMPREHENSIVE INCOME (LOSS):Foreign currency translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (53
    )Reclassification adjustment for realized foreign
currency exchange loss included in net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    332
    
    
    
    
    
    
    
    
    
    
    
    279COMPREHENSIVE INCOME (LOSS)
    
    $
    249
    
    
    $
    (825
    )
    
    $
    (1,039
    )
    
    $
    3,572


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

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PHARMCHEM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

Nine Months EndedSeptember 30,2003
    
    2002CASH FLOWS FROM OPERATING ACTIVITIESNet income (loss)
    
    $
    (1,039
    )
    
    $
    3,293Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:Income from discontinued operations
    
    
    
    
    
    
    (359
    )Depreciation and amortization
    
    
    1,576
    
    
    
    1,698Gain on payoff of subordinated debt
    
    
    (665
    )
    
    
    Amortization of discount on subordinated debt
    
    
    86
    
    
    
    130Provision for doubtful accounts
    
    
    39
    
    
    
    95Gain on sale of disposition of subsidiary, net of tax
    
    
    
    
    
    
    (4,277
    )Changes in operating assets and liabilities:Accounts receivable
    
    
    (246
    )
    
    
    1,137Inventories
    
    
    343
    
    
    
    849Prepaids and other current assets
    
    
    260
    
    
    
    97Other assets
    
    
    (33
    )
    
    
    34Accounts payable and other accrued liabilities
    
    
    (1,474
    )
    
    
    (1,981
    )Net cash provided by (used in) operating activities of continuing
operations
    
    
    (1,153
    )
    
    
    716Net cash provided by operating activities of discontinued
operations
    
    
    
    
    
    
    161CASH FLOWS FROM INVESTING ACTIVITIESPurchases of property and equipment
    
    
    (364
    )
    
    
    (1,183
    )Proceeds from sale of discontinued operations
    
    
    
    
    
    
    10,000Increase in restricted cash
    
    
    
    
    
    
    (500
    )Net cash provided by investing activities of continuing
operations
    
    
    (364
    )
    
    
    8,317Net cash used in investing activities of discontinued operations
    
    
    
    
    
    
    (40
    )CASH FLOWS FROM FINANCING ACTIVITIESPrincipal 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
    )
    
    
    3,958CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
    
    
    4,213
    
    
    
    197CASH AND CASH EQUIVALENTS AT END OF PERIOD
    
    $
    1,581
    
    
    $
    4,155


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

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PHARMCHEM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. Summary of Significant Accounting Policies

Basis of Presentation, General and Business

PharmChem, Inc. is a leading independent laboratory that provides
integrated drug testing services. Our customers include private and public
employers, criminal justice agencies and drug treatment programs in the United
States who seek to detect and deter the use of illegal drugs and alcohol. The
consolidated financial statements include the accounts of PharmChem and
Medscreen Limited (Medscreen), a United Kingdom company. Medscreen was sold
on March 25, 2002 and, as a result, is presented as discontinued operations in
the accompanying financial statements for all periods presented. Medscreens
financial statements were translated based on the month-end spot rate for the
balance sheets and a weighted average of the spot rates for the statements of
operations.

The accompanying condensed consolidated financial statements are prepared
in accordance with the instructions to Form 10-Q, are unaudited and do not
include all the information and disclosures required by accounting principles
generally accepted in the United States of America for complete financial
statements. We have made certain reclassifications to prior year amounts to
conform to current year presentation. All adjustments that, in the opinion of
management, are necessary for a fair presentation of the results of operations
for the interim periods have been made and are of a recurring nature unless
otherwise disclosed herein. The results of operations for such interim periods
are not necessarily indicative of results of operations for a full year.

In the first quarter of 2002, we implemented Financial Accounting
Standards Board Statement No. 142 (SFAS 142), Goodwill and Other Intangible
Assets.SFAS 142 requires goodwill and intangible assets with indefinite
useful lives no longer be amortized, but instead tested for impairment at least
annually in accordance with the provisions of SFAS 142. This Statement further
requires intangible assets with definite useful lives to be amortized over
their respective estimated useful lives to their estimated residual values, and
reviewed for impairment in accordance with SFAS 144, Accounting for the
Impairment or Disposal of Long-Lived Assets.As permitted by SFAS 142, we
implemented the impairment provisions in the second quarter of 2002. On an
ongoing basis, the amortization of goodwill noted in the Condensed Consolidated
Statements of Operations was eliminated beginning January 1, 2002.

Stock-Based Compensation

In December 2002, the Financial Accounting Standards Board issued SFAS No.
148, Accounting for Stock-Based CompensationTransition and Disclosurean
amendment of SFAS No. 123.This statement amends SFAS No. 123, Accounting for
Stock-Based Compensation,to provide alternative methods of transition for a
voluntary change to the fair valued based method of accounting for stock-based
employee compensation. In addition, this Statement amends the disclosure
requirements of SFAS No. 123 to require prominent disclosures in both annual
and interim financial

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statements about the method of accounting for stock-based employee compensation
and the effect of the method used on reported results. We continue to account
for stock-based compensation using Accounting Principles Boards (APB) Opinion
No. 25, Accounting for Stock Issued to Employees, and have not adopted the
recognition provisions of SFAS No. 123, as amended by SFAS No. 148. However,
we have adopted the disclosure provisions for the current fiscal year. The
exercise price of options granted under our stock option plans is equal to the
market price of our stock on the date of grant. Therefore, we have not
recorded compensation cost under APB No. 25.

We continue to apply APB No. 25 in accounting for our stock-based
compensation plans. Accordingly, no compensation cost has been recorded in the
consolidated statements of operations for the stock option plans. If we had
determined compensation cost for all of our stock-based compensation plans in
accordance with the fair value method prescribed by SFAS No. 123, our proforma
net income (loss) and income (loss) per share for the three months and nine
months ended September 30 would have been as follows (in thousands, except per
share amounts):

3 Mos. Ended September 30,
    
    9 Mos. Ended September 30,2003
    
    2002
    
    2003
    
    2002Net income (loss), as reported
    
    $
    249
    
    
    $
    (825
    )
    
    $
    (1,039
    )
    
    $
    3,293Stock-based employee compensation expense,
net of related tax effects
    
    
    (34
    )
    
    
    (16
    )
    
    
    (101
    )
    
    
    (84
    )Net income (loss), proforma
    
    $
    215
    
    
    $
    (841
    )
    
    $
    (1,140
    )
    
    $
    3,209Basic income (loss) per share, as reported
    
    $
    0.04
    
    
    $
    (0.14
    )
    
    $
    (0.18
    )
    
    $
    0.56Basic income (loss) per share, pro forma
    
    $
    0.04
    
    
    $
    (0.14
    )
    
    $
    (0.19
    )
    
    $
    0.55Diluted income (loss) per share, as reported
    
    $
    0.04
    
    
    $
    (0.14
    )
    
    $
    (0.18
    )
    
    $
    0.56Diluted income (loss) per share, pro forma
    
    $
    0.04
    
    
    $
    (0.14
    )
    
    $
    (0.19
    )
    
    $
    0.55


2. Discontinued Operations

On March 25, 2002, we completed the sale of Medscreen for approximately
$10.0 million. In connection with the sale, Medscreens two loan facilities
totaling approximately $1,663,000 were fully repaid. Closing and other
settlement costs totaled approximately $324,000 and approximately $989,000 was
used to repay debt. The remainder of the proceeds have been and will be used
for general corporate purposes.

Net sales of the discontinued operations were $1,949,000 for the nine
months ended September 30, 2002. We recorded a gain on the sale of Medscreen
of $0.73 per diluted share.

3. Net Income (Loss) per Share

We compute and disclose our income (loss) per share in accordance with
Statement of Financial Accounting Standards No. 128, Earnings Per Share,
which requires the presentation of basic and diluted income per share. Basic
income (loss) per share is calculated using the weighted average number of
common shares outstanding during the period. Diluted income per share is
calculated using the weighted average number of common shares and dilutive
potential common shares outstanding

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during the period. Dilutive potential common shares represent shares issuable
upon the exercise of outstanding options and warrants and are calculated using
the treasury stock method.

Options and warrants to purchase 1,150,000 shares of our common stock for
the the nine months ended September 30, 2003, and 1,185,000 shares of our
common stock for the three months and nine months ended September 30, 2002,
were not included in the computation of diluted income per share because their
effect would have been anti-dilutive.

4. Inventories

Inventories include laboratory materials, collection materials and
products and are stated at the lower of cost or market. Cost is determined
using standard costs, including freight, that approximate actual costs on a
first-in, first-out basis. Inventory consisted of the following at September
30, 2003 and December 31, 2002 (in thousands):

2003
    
    2002Laboratory materials
    
    $
    132
    
    
    $
    225Collection materials
    
    
    529
    
    
    
    542Products
    
    
    314
    
    
    
    551$
    975
    
    
    $
    1,318


5. Debt

Our debt at September 30, 2003 and December 31, 2002 consisted of the
following (in thousands):

2003
    
    2002Revolving line of credit
    
    $
    2,468
    
    
    $
    3,334Term loan
    
    
    1,375
    
    
    
    Subordinated debt, net of discount of $129 at December 31, 2002
(paid July 2, 2003)
    
    
    
    
    
    
    1,371Obligations under capitalized leases, due in monthly installments
through 2005, secured by laboratory equipment, office
equipment
and computer software, interest rates ranging from 8% to 9%
    
    
    957
    
    
    
    1,8314,800
    
    
    
    6,536Less: current portion and, in 2002, revolving line of credit
    
    
    (1,221
    )
    
    
    (5,722
    )Long-term portion
    
    $
    3,579
    
    
    $
    814


On June 26, 2003, the Company entered into a Loan and Security Agreement
(the Agreement) with a new lender replacing its existing credit agreement.
The new Agreement provides for a revolving line of credit of $3,500,000,
permits borrowing at 80% of eligible receivables, has a term of three years,
bears interest at prime plus 1% (5.0% as of September 30, 2003), has a one-time
commitment fee of $10,000, a monthly collateral monitoring fee of $1,000, an
unused line fee of 0.50% per annum, and requires the Company to maintain
certain financial ratios. In addition, the Agreement provides for a term loan
of up to $1,500,000 which bears interest at prime plus 3% (7.0% as of September
30, 2003), has a one-time commitment fee of $15,000 and is repayable monthly
over 36 months. The initial draw down under this term loan facility was
$900,000. These facilities funded on July 2, 2003 at which time our

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prior credit facility was fully paid and terminated. The remaining $600,000
balance of the term loan was drawn down on August 12, 2003.

The new Agreement is secured by a lien on a significant portion of our
assets and permits up to $1,500,000 of the revolving line of credit to be used
to repurchase our common stock under our common stock repurchase program and
permits the declaration and distribution of a dividend in connection with our
stockholder rights plan. Should the revolving line of credit be paid off prior
to the end of the term, there would be a prepayment penalty of $35,000.

As of September 30, 2003, the calculated maximum that could be borrowed
and the amount outstanding were $3,213,000 and $2,468,000, respectively.

As of June 30, 2003, the Companys subordinated debt holders agreed to an
early payoff of the subordinated debt at a 50% discount. The subordinated
debt, as discounted, was repaid from proceeds of the term loan facility. The
Company agreed to a reduction in the exercise price of the 150,000 warrants
held by the subordinated debt holders from $3.00 to $0.29 (the average of the
closing prices for the 30 days ending June 26, 2003). The warrants continue to
expire on September 30, 2006.

As a result of the foregoing, the Company reported a gain on the early
extinguishment of debt in the current quarter of approximately $665,000, or
$0.11 per diluted share, which includes reductions for the unamortized discount
(established when the subordinated debt was issued) and the fair value of
re-pricing the warrants.

6. Restructuring Charge

During the second quarter of 2001, our Board of Directors approved a plan
to close our Menlo Park, California corporate headquarters, main laboratory and
distribution center and relocate these operations to Texas. These expenses
were accrued and recorded in continuing operations for the three months ended
June 30, 2001. Detail of the payment activity and ending accrual balance
related to the restructuring is presented in the following table (in
thousands):

Accrual
    
    
    
    
    
    AccrualAs of
    
    2003
    
    As ofDecember 31, 2002
    
    Payments
    
    September 30, 2003Severance and related benefits
    
    $
    26
    
    
    $
    (10
    )
    
    $
    16Clean-up and remediation
    
    
    171
    
    
    
    (1
    )
    
    
    170Repairs
    
    
    9
    
    
    
    
    
    
    
    9Legal and other
    
    
    28
    
    
    
    (3
    )
    
    
    25Total
    
    $
    234
    
    
    $
    (14
    )
    
    $
    220


The restructuring plan was designed to provide for costs associated with
leaving our facilities in Menlo Park, California. The restructuring expenses
represent estimated and actual costs related to workforce reductions, clean-up,
repairs and legal services. As part of the workforce reduction, we recorded
severance and related fringe benefits costs for approximately 160 employees
from operations and administration, of which 158 employees were terminated as
of September 30, 2003. The clean-up

11



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and remediation includes removal of a previously unknown storage vault and
potential restoration of the facility per the lease agreement. Repairs include
sewer line repair or replacement as contractually provided for in the lease
agreement. The accrual balance of $220,000 is classified as a component in
Accrued collectors and other liabilities on the balance sheet. Costs for
relocation were expensed as incurred.

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. On April 30, 2003, the Companys attorneys received a
second letter together with a draft complaint from the landlords counsel
reiterating these allegations and requesting that the parties meet and confer
to resolve the matter; otherwise the complaint will be filed. On May 14, 2003,
the Companys attorneys met with the landlords counsel. It was agreed that
the complaint will not be filed while discussions are ongoing. However, the
landlords counsel has not pursued this matter with the Companys attorneys in
any respect since May, 2003. The Company and its counsel are continuing to
review the details of this claim and the Company will defend itself vigorously.




Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations

Forward Looking Statements

Managements Discussion and Analysis of Financial Condition and Results
of Operations contains forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934 and Section 27A of the
Securities Act of 1933, which are subject to the safe harbor created by these
Sections. Our actual future results could differ materially from those
projected in the forward-looking statements. Some factors which could cause
future actual results to differ materially from our recent results and those
projected in the forward-looking statements are described in our Annual Report
on Form 10-K for the year ended December 31, 2002. We assume no obligation to
update the forward-looking statements or such factors.

Recent Events

The Administrative Office of U.S. Courts (AOUSC) has awarded its drug
testing program to three other laboratories. Heretofore, the Company had
performed nearly all of the drug testing for AOUSC and has done so for nearly
15 years. The current contract between AOUSC and the Company originally
expired late last year after running for five years. During this time, the
AOUSC requested and the Company granted several extensions of the term of the
existing contract, the last of which ends on November 30, 2003. However, the
Company continues to perform drug testing for AOUSC on a national basis and it
is unclear when the transition will commence.

The Company believes that it has grounds to protest the award and filed a
protest with the Government Accounting Office on October 23, 2003. If the
protest is not successful, the loss of this customer will result in a
significant adverse effect on the Companys operations and will require it to
engage in significant cost reduction measures, including sizable layoffs.

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##### Table of Contents



During the first nine months of 2003, sales to AOUSC comprised nearly $5.8
million, or 28% of the Companys sales. It is unlikely the Company will be
able to replace this business in the near future.

On October 14, 2003, the Company received a waiver until January, 2004 of
the Nasdaq $1.00 minimum bid price requirement. The waiver was granted as a
result of a resolution adopted by the Board of Directors whereby the
stockholders of the Company will be asked to consider a reverse stock split at
a special stockholder meeting. Pursuant to the waiver, the Company must
evidence a closing bid price of at least $1.00 per share on or before January
14, 2004 and, immediately thereafter, a closing bid price of at least $1.00 per
share for a minimum of ten consecutive trading days. In order to comply with
the terms of the waiver, the Company must also be able to demonstrate
compliance with all other requirements for continued listing on The Nasdaq
SmallCap Market. During this waiver period, the Companys stock trades under
the symbol PCHMC.

See Note 5 (Debt) to the Notes to Condensed Consolidated Financial
Statements for information regarding a Loan and Security Agreement entered into
on June 26, 2003 between the Company and a new lender.

The Company implemented further cost reduction initiatives that took
effect in September 2003. Layoffs and delaying indefinitely the filling of
open positions have reduced administrative headcount by nine. In addition, the
salaries of officers and highly compensated employees were reduced by 5% to 25%
and their merit increases were temporarily suspended. These steps will reduce
costs by over $500,000 on an annualized basis.

While the Company believes its operations in its Haltom City, Texas
laboratory have experienced significant efficiencies, current volume levels and
the possible loss of the AOUSC business have and may offset the continued
realization of such benefits.

Critical Accounting Policies and Estimates

The discussion and analysis of our financial condition and results of
operations are based upon PharmChems consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States of America. The preparation of these financial statements
requires us to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses and related disclosure of contingent
assets and liabilities. On an on-going basis, we evaluate these estimates,
including those related to bad debts, inventories, goodwill, restructuring
accruals, contingencies, revenue recognition, specimen collector accruals and
litigation. We base our estimates on historical experience and on various
other assumptions that are believed to be reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates under different
assumptions or conditions.

PharmChem believes the following critical accounting policies affect its
more significant judgments and estimates used in the preparation of the
consolidated financial statements. We maintain allowances for doubtful
accounts for estimated losses resulting from the inability of our customers to
make required payments. If the financial condition of our customers were to
deteriorate, resulting in an

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##### Table of Contents



impairment of their ability to make payments, additional allowances may be
required. We estimate the quantity and value of our unused specimen collection
kit inventory existing at our customer and contract specimen collector field
locations using a model that considers actual shipments to these locations,
specimens returned to our laboratory for processing, replacement costs and
estimates of shrinkage. If the estimated value of this inventory decreases
beyond our expectations of recovery, additional inventory write-downs may be
required.

Continued adverse changes in market conditions or poor operating results
of our operations could result in additional losses or an inability to recover
the carrying value of the related goodwill, thereby possibly requiring an
impairment charge in the future. Revenue is recognized upon the communication
of results from laboratory analysis of specimens submitted by our customers, at
the time of shipment for products and at the completion of rendered services.
We accrue expected payments to specimen collectors who perform specimen
collection services on behalf of our managed customers. The specimen collector
accrual calculation is based on a combination of our reporting of results from
laboratory analysis of specimens and cost information maintained in our
internal systems for each specimen collector. We include in the accrual
estimates of retroactive rate increases and services performed but not reported
to customers.

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##### Table of Contents



Results of Operations

Refer to Note 2, Discontinued Operations, to the accompanying Notes to
Condensed Consolidated Financial Statements for further information on the sale
of Medscreen in March 2002. The following table sets forth for the periods
indicated certain financial data (dollars in thousands):

Three Months Ended September 30,
    
    Nine Months Ended September 30,2003
    
    2002
    
    2003
    
    2002
    
    2003
    
    2002
    
    2003
    
    2002(As a % of net sales)
    
    
    
    
    
    
    
    
    
    (As a % of net sales)NET SALES:Workplace employers analysis
    
    $
    1,946
    
    
    $
    1,913
    
    
    
    28.0
    %
    
    
    26.2
    %
    
    $
    5,668
    
    
    $
    6,626
    
    
    
    27.8
    %
    
    
    29.0
    %Criminal justice agencies analysis
    
    
    3,173
    
    
    
    3,628
    
    
    
    45.7
    
    
    
    49.6
    
    
    
    9,797
    
    
    
    11,360
    
    
    
    48.0
    
    
    
    49.7Other analysis
    
    
    83
    
    
    
    61
    
    
    
    1.2
    
    
    
    0.8
    
    
    
    253
    
    
    
    151
    
    
    
    1.2
    
    
    
    0.7Products and other
    
    
    1,740
    
    
    
    1,714
    
    
    
    25.1
    
    
    
    23.4
    
    
    
    4,673
    
    
    
    4,721
    
    
    
    23.0
    
    
    
    20.6COST OF SALES
    
    
    5,278
    
    
    
    5,790
    
    
    
    76.0
    
    
    
    79.1
    
    
    
    15,948
    
    
    
    17,707
    
    
    
    78.2
    
    
    
    77.5GROSS PROFIT
    
    
    1,664
    
    
    
    1,526
    
    
    
    24.0
    
    
    
    20.9
    
    
    
    4,443
    
    
    
    5,151
    
    
    
    21.8
    
    
    
    22.5OPERATING EXPENSES:Selling, general and administrative
    
    
    1,984
    
    
    
    2,193
    
    
    
    28.6
    
    
    
    30.0
    
    
    
    5,766
    
    
    
    6,139
    
    
    
    28.3
    
    
    
    26.8LOSS FROM OPERATIONS
    
    
    (320
    )
    
    
    (667
    )
    
    
    (4.6
    )
    
    
    (9.1
    )
    
    
    (1,323
    )
    
    
    (988
    )
    
    
    (6.5
    )
    
    
    (4.3
    )GAIN ON PAYOFF OF SUBORDINATED
DEBT
    
    
    665
    
    
    
    
    
    
    
    9.6
    
    
    
    
    
    
    
    665
    
    
    
    
    
    
    
    3.3
    
    
    
    OTHER EXPENSE, net
    
    
    (96
    )
    
    
    158
    
    
    
    (1.4
    )
    
    
    2.2
    
    
    
    (381
    )
    
    
    424
    
    
    
    (1.9
    )
    
    
    1.8BENEFIT FROM INCOME TAXES
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (69
    )
    
    
    
    
    
    
    (0.3
    )INCOME (LOSS) FROM CONTINUING
OPERATIONS
    
    
    249
    
    
    
    (825
    )
    
    
    3.6
    
    
    
    (11.3
    )
    
    
    (1,039
    )
    
    
    (1,343
    )
    
    
    (5.1
    )
    
    
    (5.8
    )DISCONTINUED OPERATIONSIncome from discontinued operations,
net of applicable income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    359
    
    
    
    
    
    
    
    1.5Gain on sale of disposition, net of
applicable income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,277
    
    
    
    
    
    
    
    18.7NET INCOME (LOSS)
    
    $
    249
    
    
    $
    (825
    )
    
    
    3.6
    %
    
    
    (11.3
    )%
    
    $
    (1,039
    )
    
    $
    3,293
    
    
    
    (5.1
    )%
    
    
    14.4
    %


Third Quarter 2003 vs. 2002

Net salesfor the three months ended September 30, 2003 were $6,942,000, a
decrease of 5.1% from last years third quarter sales of $7,316,000. In this
years third quarter, laboratory specimen volume fell by nearly 9.6% from the
same period a year ago, the smallest quarterly percentage decrease since 2001.
Volume from workplace customers was slightly higher than last years levels in
advance of hiring for the winter holidays. Volume from criminal justice
customers was down 15.3% as fewer tests are being performed due to governmental
budgetary restraints. The weak economy continues to exert a negative pressure
on drug testing. Average selling prices of laboratory analysis rose slightly
in the current quarter but this is a function of customer and service mix as
there have been no significant price increases in 2003. Sales of products and
other services were higher by 1.5%. The Company shipped its first random
generator system to one of its customers in the current quarter. This system
was developed by the Company to assist customers in randomly selecting
candidates for their random testing programs.

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Cost of salesfor the three months ended September 30, 2003 was $5,278,000
(76.0% of net sales), a decrease of 8.8% from last years third quarter cost of
sales of $5,790,000 (79.1% of net sales). The lower cost of sales this year is
a result of lower specimen volume coupled with operating efficiencies and lower
overtime. Fixed overhead was lower by 12% in spite of higher depreciation
related to systems and equipment at the new facility being placed into service.
Gross profit as a percentage of net sales increased to 24.0% in 2003 from
20.9% in 2002.

Selling, General & Administrative (SG&A)expenses for the three months
ended September 30, 2003 decreased to $1,984,000 in 2003 from $2,193,000 in
2002. The decrease of 9.5% partially reflects lower travel, marketing and
consulting expenses offset by higher legal costs. SG&A expenses as a
percentage of net sales decreased to 28.6% in 2003 from 30.0% in 2002.

Gain on Payoff of Subordinated Debtrepresents the early payoff of such
debt at a 50% discount less deductions for the unamortized discount
(established when the subordinated debt was issued) and the fair value of
re-pricing the warrants for 150,000 shares held by the subordinated debt
holders from $3.00 to $0.29.

Net incomefrom continuing operations for the three months ended September
30, 2003 was $249,000 or $0.04 per share compared to a net loss of $825,000 or
$0.14 per share in 2002. This years net income includes the gain on payoff of
subordinated debt of $665,000, or $0.11 per share.

Nine Months 2003 vs. 2002

Net salesfor the nine months ended September 30, 2003 decreased 10.8% to
$20,391,000 in 2003 from $22,858,000 in 2002. Specimen volume was down in all
customer classes with criminal justice volume down significantly more than
workplace. Sales of products and other services were lower by only 1.0%.

Cost of salesfor the nine months ended September 30, 2003 decreased 9.9%
to $15,948,000 in 2003 (78.2% of net sales) from $17,707,000 in 2002 (77.5% of
net sales). This reduction is attributable to lower specimen volume, operating
efficiencies and cost control, particularly of overtime and reagents. Nearly
all cost components were lower with the exception of health insurance and
depreciation. Gross profit as a percentage of net sales decreased to 21.8% in
2003 from 22.5% in 2002. Lower volume this year has not been sufficient to
absorb all fixed expenses.

Selling, General & Administrative (SG&A)expenses for the nine months
ended September 30, 2003 decreased 6.1% to $5,766,000 in 2003 (28.3% of net
sales) from $6,139,000 in 2002 (26.8% of net sales). This years SG&A expenses
reflect a reduction in costs related to sales, marketing, customer service and
information systems.

Gain on Payoff of Subordinated Debtrepresents the early payoff of such
debt at a 50% discount less deductions for the unamortized discount
(established when the subordinated debt was issued) and the fair value of
re-pricing the warrants for 150,000 shares held by the subordinated debt
holders from $3.00 to $0.29.

Discontinued Operationsfor the nine months ended September 30, 2002
resulted in net income of $4,636,000 (or $0.79 per diluted share), which is
comprised of net income from Medscreens operations

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##### Table of Contents



for three months of $359,000 (or $0.06 per diluted share) and the gain on the
sale of Medscreen of $4,277,000 (or $0.73 per diluted share).

Net Lossfrom continuing operations for the nine months ended September
30, 2003 was $1,039,000 or $0.18 per share compared to a net loss in 2002 of
$1,343,000 or $0.23 per share. The net income for the nine months ended
September 30, 2002, including discontinued operations, was $3,293,000, or $0.56
per diluted share. This years net income includes the gain on payoff of
subordinated debt of $665,000, or $0.11 per share.

Liquidity and Capital Resources

Our continuing operations during the nine-month periods ended September 30
used and provided cash of $1,153,000 and $716,000 in 2003 and 2002,
respectively. The decrease in cash flow from operations between 2003 and 2002
principally reflects higher receivables and the sale of Medscreen in 2002. As
of September 30, 2003, we had $1,581,000 in cash and cash equivalents. During
the nine months ended September 30, 2003, we used approximately $364,000 in
cash to purchase property and equipment, principally for information systems
development and facility-related expenditures for our new Haltom City, Texas
location.

On June 26, 2003, the Company entered into a Loan and Security Agreement
(the Agreement) with a new lender replacing its existing credit agreement.
The new Agreement provides for a revolving line of credit of $3,500,000,
permits borrowing at 80% of eligible receivables, has a term of three years,
bears interest at prime plus 1% (5.0% as of September 30, 2003), has a one-time
commitment fee of $10,000, a monthly collateral monitoring fee of $1,000, an
unused line fee of 0.50% per annum, and requires the Company to maintain
certain financial ratios. In addition, the Agreement provides for a term loan
of up to $1,500,000 which bears interest at prime plus 3% (7.0% as of September
30, 2003), has a one-time commitment fee of $15,000 and is repayable monthly
over 36 months. The initial draw down under this term loan facility was
$900,000. These facilities funded on July 2, 2003 at which time our prior
credit facility was fully paid and terminated. The remaining $600,000 balance
of the term loan was drawn down on August 12, 2003.

The new Agreement is secured by a lien on a significant portion of our
assets and permits up to $1,500,000 of the revolving line of credit to be used
to repurchase our common stock under our common stock repurchase program and
permits the declaration and distribution of a dividend in connection with our
stockholder rights plan. Should the revolving line of credit be paid off prior
to the end of the term, there would be a prepayment penalty of $35,000.

As of September 30, 2003, the calculated maximum that could be borrowed
and the amount outstanding were $3,213,000 and $2,468,000, respectively.

On June 30, 2003, the Companys subordinated debt holders agreed to an
early payoff of the subordinated debt at a 50% discount. The subordinated
debt, as discounted, was repaid from proceeds of the term loan facility. The
Company agreed to a reduction in the exercise price of the 150,000 warrants
held by the subordinated debt holders from $3.00 to $0.29 (the average of the
closing prices for the 30 days ending June 26, 2003). The warrants continue to
expire on September 30, 2006.

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As a result of the foregoing, the Company reported a gain on the early
extinguishment of debt in the current quarter of approximately $665,000, or
$0.11 per diluted share, which includes reductions for the unamortized discount
(established when the subordinated debt was issued) and the fair value of
re-pricing the warrants.

We anticipate the existing cash balances, amounts available under existing
and future credit agreements and funds to be generated from future operations
will be sufficient to fund operations and forecasted capital expenditures
through the foreseeable future. However, as more fully disclosed on pages 12
and 13, the possible loss of the AOUSC business could severely limit the
generation of funds from operations.

Impact of Recent Accounting Pronouncements

In June 2001, the FASB issued Statement No. 143 (SFAS 143), Accounting for
Asset Retirement Obligations.SFAS 143 requires liability recognition for
obligations associated with the retirement of tangible long-lived assets and
the associated asset retirement costs. We adopted the provisions of SFAS 143
effective January 1, 2003. The adoption of this standard did not have a
material effect on our consolidated financial position or results of
operations.

In November 2002, the FASB issued FASB Interpretation No. 45 (FIN 45),
Guarantors Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others. FIN 45 requires that a
liability be recorded in the guarantors balance sheet upon issuance of certain
guarantees. FIN 45 also requires disclosure about certain guarantees that an
entity has issued. The Company has implemented the disclosure requirements
required by FIN 45, which were effective for fiscal years ending after December
15, 2002. The Company will apply the recognition provisions of FIN 45
prospectively to guarantees issued after December 31, 2002. The Company does
not expect FIN 45 to have a material effect on its financial condition and
results of operations.

In May 2003, the Financial Accounting Standards board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 150, Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and
Equity.SFAS No. 150 requires that certain financial instruments, which under
previous guidance were accounted for as equity, must now be accounted for as
liabilities. The financial instruments affected include mandatorily redeemable
stock, certain financial instruments that require or may require the issuer to
buy back some of its shares in exchange for cash or other assets and certain
obligations that can be settled with shares of stock. SFAS No. 150 is
effective for financial instruments entered into or modified after May 31,
2003, and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. PharmChem does not expect SFAS No. 150 to have
a material effect on its financial condition or results of operations.

In January 2003, the Financial Accounting Standards Board (FASB) issued
FASB Interpretation No. 46 (FIN 46), Consolidation of Variable Interest
Entities, an Interpretation of ARB No. 51. FIN 46 requires certain variable
interest entities to be consolidated by the primary beneficiary of the entity
if the equity investors in the entity do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial
support from other parties. FIN 46 is effective for all new variable interest

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entities created or acquired after January 31, 2003. For variable interest
entities created or acquired prior to February 1, 2003, the provisions of FIN
46 must be applied for the first interim or annual period beginning after June
15, 2003. PharmChem does not expect FIN 46 to have a material effect on its
financial condition or results of operations.

In November 2002, the FASBs Emerging Issues Task Force (EITF) reached a
consensus on Issue No. 00-21, Revenue Arrangements with Multiple Deliverables.
EITF Issue No. 00-21 provides guidance on how to account for arrangements that
involved the delivery or performance of multiple products, services and/or
rights to use assets. The provisions of EITF Issue No. 00-21 will apply to
revenue arrangements entered into in fiscal periods beginning after June 15,
2003. PharmChem does not expect EITF Issue No. 00-21 to have a material effect
on its financial condition or results of operations.




Item 3. Quantitative and Qualitative Disclosures About Market Risk

We are subject to market risk with respect to our debt outstanding. Our
new revolving credit agreement carries interest at the prime rate plus 1.0% for
the revolving line of credit and prime plus 3% for the term loan. As the prime
rate increases, we will incur higher relative interest expense and similarly, a
decrease in the prime rate will reduce relative interest expense. A 1.0%
change in the prime rate would not materially change interest expense assuming
levels of debt consistent with historical amounts. The market risks are not
considered significant and, therefore, we do not intend to engage in
significant hedging transactions.




Item 4. Controls and Procedures

Under the supervision and with the participation of management, including
our Chief Executive Officer and our Chief Financial Officer, we have evaluated
the effectiveness of the design and operation of our disclosure controls and
procedures as of September 30, 2003. Based upon that evaluation, our Chief
Executive Officer and our Chief Financial Officer have concluded that our
disclosure controls and procedures are effective to ensure that information
required to be disclosed by us in reports that we file or submit under the
Securities Exchange Act of 1934 is recorded, processed, summarized and
reported, within the time periods specified in the rules and forms of the
Securities and Exchange Commission. There has not been any change in our
internal control over financial reporting in connection with the evaluation
required by Rule 13a-15(d) under the Exchange Act that occurred during the
quarter ended September 30, 2003 that has materially affected, or is reasonably
likely to materially affect, our internal control over financing reporting.

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PART II. Other Information




Item 4. Submission of Matters to a Vote of Security Holders

None




Item 6. Exhibits and Reports on Form 8-K



| | (a) |  | Exhibits:
| | --- |  | ---------

31.1
    
    -
    
    Certification of
Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    -
    
    Certification of
Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    -
    
    Certification of
Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to section 906 of
the Sarbanes-Oxley Act of 2002.32.2
    
    -
    
    Certification of
Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.




| | (b) |  | Reports on Form 8-K:
| | --- |  | --------------------

Press release dated November 14, 2003 reporting third quarter 2003
financial results.

Press release dated October 16, 2003 reporting Nasdaq waiver of
delisting and loss of customer.

Press release dated October 15, 2003 reporting a change in
certifying accountant.

Press release issued on August 11, 2003 reporting second quarter
2003 financial results.

Press release issued on July 2, 2003 announcing a new loan and
security agreement and the early payoff of subordinated debt.

20



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##### Table of Contents






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,
Inc.
(Registrant)Date: November 14, 2003
    
    By:
    
    /S/ David A. LattanzioDavid A. Lattanzio
Chief Financial Officer and Vice President,
Finance and Administration
(Principal Financial and Accounting Officer)


21



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##### Table of Contents






EXHIBIT INDEX

31.1
    
    -
    
    Certification of Chief Executive Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.31.2
    
    -
    
    Certification of Chief Financial Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.32.1
    
    -
    
    Certification of Chief Executive Officer Pursuant to 18
U.S.C. Section 1350, As Adopted Pursuant to section 906 of
the Sarbanes-Oxley Act of 2002.32.2
    
    -
    
    Certification of Chief Financial Officer Pursuant to 18
U.S.C. Section 1350, As Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.