<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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 March 31, 1996
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OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
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EXCHANGE ACT OF 1934
For the transition period from ___________________ to ____________________
Commission File Number 1-6436
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FRAWLEY CORPORATION
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware 95-2639686
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(STATE OR OTHER JURISDICTION (I.R.S. EMP I.D. NO)
OF INCORPORATION OR ORGANIZATION)
15760 Ventura Boulevard, Suite 1201, Encino, California 91436
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(818) 382-3682
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(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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(FORMER NAME, ADDRESS AND FISCAL YEAR, IF CHANGED SINCE LAST REPORT)
Indicated 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 reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the close of the latest practicable date.
Class Outstanding at March 31, 1996
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Common stock, par value $1 1,222,905
Total Number of Pages 11
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FRAWLEY CORPORATION AND SUBSIDIARIES
INDEX
PART I: FINANCIAL INFORMATION PAGE NO.
Item 1: Financial Statements
Consolidated Balance Sheets -
March 31, 1996 and December 31, 1995........................... 3
Consolidated Statements of Operations -
Three Months Ended March 31, 1996 and 1995..................... 4
Consolidated Statements of Cash Flows -
Three Months Ended March 31, 1996 and 1995..................... 5
Notes to Consolidated Financial Statements..................... 6
Item 2: Management's Discussion and Analysis
of Financial Condition and Results of Operations............... 7-8
PART II: OTHER INFORMATION
Item 1: Legal Proceedings..................................... 9-10
Item 5: Other Information .................................... 10
Item 6: Exhibits and Reports on Form 8-K...................... 10
SIGNATURES.......................................................... 11
2
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ITEM I: FINANCIAL STATEMENTS
FRAWLEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1995
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(Unaudited)
<S> <C> <C>
ASSETS
------
CURRENT ASSETS
Cash $ 324,000 $ 470,000
Accounts receivable, net 672,000 613,000
Note receivable 547,000 547,000
Prepaid expenses and other deposits 162,000 184,000
Other assets 0 150,000
------------ ------------
TOTAL CURRENT ASSETS 1,705,000 1,964,000
Long-term accounts receivable, net 119,000 138,000
Long-term notes receivable 215,000 215,000
Real estate investments, net 3,253,000 3,407,000
Property, plant and equipment, net 568,000 603,000
------------ ------------
TOTAL ASSETS $ 5,860,000 $ 6,327,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Notes payable to stockholders $ 1,261,000 $ 1,261,000
Accounts payable and accrued expenses 2,087,000 2,451,000
Unearned revenue 126,000 148,000
Notes payable 696,000 696,000
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TOTAL CURRENT LIABILITIES 4,170,000 4,556,000
STOCKHOLDERS' EQUITY:
Preferred stock, par value $1 per share:
Authorized, 1,000,000 shares; none issued
Common stock, par value $1 per share;
Authorized, 6,000,000 shares, issued
1,414,217 shares 1,414,000 1,414,000
Capital surplus 16,986,000 16,986,000
Accumulated deficit (15,949,000) (15,868,000)
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2,451,000 2,532,000
Less common stock in treasury,
191,312 shares (at cost) (761,000) (761,000)
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TOTAL STOCKHOLDERS' EQUITY 1,690,000 1,771,000
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 5,860,000 $ 6,327,000
============ ============
</TABLE>
See notes to consolidated financial statements.
3
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FRAWLEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------
1996 1995
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<S> <C> <C>
REVENUES:
Net revenues $ 721,000 $ 860,000
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COSTS AND EXPENSES:
Cost of operations 484,000 503,000
Selling, general and administrative
expenses 251,000 536,000
Interest expense 67,000 93,000
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TOTAL COSTS AND EXPENSES 802,000 (1,132,000)
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LOSS FROM CONTINUING OPERATIONS (81,000) (272,000)
DISCONTINUED OPERATIONS:
Loss from discontinued operations (16,000)
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NET LOSS $ (81,000) $ (288,000)
========== ===========
NET LOSS PER SHARE:
Continuing operations $ (.07) $ (.22)
Discontinued operations (.01)
-----------
(.07) (.23)
========== ===========
Weighted average number of
common shares outstanding 1,222,905 1,222,905
========== ===========
</TABLE>
See notes to consolidated financial statements
4
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FRAWLEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------
1996 1995
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $ (81,000) $(288,000)
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Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation 39,000 45,000
Changes in operating assets and liabilities:
Short- and long-term accounts
receivable, net (40,000) 47,000
Prepaid expenses and deposits 22,000 (18,000)
Other assets 150,000
Accounts payable and accrued expenses (364,000) (108,000)
Unearned revenue (22,000) 8,000
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TOTAL ADJUSTMENTS (215,000) (26,000)
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Net cash used in
operating activities (296,000) (314,000)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Equipment purchases (4,000)
Refunds received on real estate
investments 154,000
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Payments for real estate investments (13,000)
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Net cash provided by (used in)
investing activities 150,000 (13,000)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term debt borrowings 107,000
Repayment of borrowings (16,000)
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Net cash provided by
financing activities 91,000
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NET DECREASE IN CASH AND CASH
EQUIVALENTS (146,000) (236,000)
CASH, BEGINNING OF PERIOD 470,000 245,000
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CASH, END OF PERIOD $ 324,000 $ 9,000
========= =========
</TABLE>
See notes to consolidated financial statements.
5
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FRAWLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments necessary to present
fairly the financial position at March 31, 1996, the results of
operations and changes in cash flow for the three months then ended.
NOTE 2: Revenues from discontinued operations during the quarter ended March
31, 1995 totaled $482,000.
NOTE 3: The results of operations for the three months ended March 31, 1996
and 1995 are not necessarily indicative of results to be expected for
the full year.
6
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FRAWLEY CORPORATION AND SUBSIDIARIES
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Specialized Health Services
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During the quarter ended March 31, 1996, operating revenues from Specialized
Health Services declined 13% or $100,000 when compared to the same period in
1995. The decline is primarily due to the continued decline in census
experienced by the free standing hospital and the outpatient programs. There is
a decreasing number of insurance carriers providing benefits for inpatient
treatment and in many HMO plans there is little coverage for chemical dependency
treatment. Emphasis by insurance carriers on less expensive outpatient treatment
programs makes the Company's inpatient treatment less accessible to many
potential patients. The Company continues to present a strong argument for the
success rate of the Schick program, compared to other programs, but a more
prevalent theme in health care today is the cost of a program not the efficacy
of the treatment. The Company will continue to explore more effective ways of
attracting patients to the inpatient program, expanding the program through unit
operation and outpatient treatment programs.
Revenues from stop smoking centers decreased for the three months ended March
31, 1996 when compared to the same period in 1995. The Company is competing with
less expensive programs and the success of the treatment does not appear to be a
factor. Expansion of the stop smoking program will be considered as more
resources become available.
The Company is seeking to expand the business through the development of
programs which meet the Company's standard of treatment and is also cost
competitive.
Schick will continue to offer educational material regarding the addiction cycle
and chemical dependency and to popularize aversion treatment methodology.
The sale of two of the free standing hospitals permits the Company to actively
seek partners that have compatible programs with available space to offer the
Schick Program.
Real Estate
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The real estate operating loss during the quarter ended March 31, 1996 was
$27,000 as compared to a loss of $198,000 for the same period in 1995. Real
estate losses result from lack of sales, carrying costs, improvements required
to sell the property and litigation cost.
The undeveloped real estate market in Southern California has shown some
improvement during the first quarter of 1996. Los Angeles residents continue to
flee the increasing congestion of the City. Many are
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exchanging convenience for a safer environment offered by properties located
further from the City. The Company owned real estate offers these
characteristics and management is confident the market will continue to gain
momentum during 1996.
Liquidity and Capital Resources
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The Company's recurring losses from continuing operations and difficulties in
generating cash flow sufficient to meet its obligations raise substantial doubt
about its ability to continue as a going concern.
The Company has made significant reductions in overhead expense and is
proceeding with other operational changes intended to restore profitability.
The Seattle Hospital and outpatient treatment program reported a $75,000 profit
for the three months ended March 31, 1996 compared to a $45,000 profit for the
three months ended March 31, 1995. Management believes the positive results will
continue.
The Company has retired some debt obligations but continues to struggle to
service remaining debt.
The settlement of certain legal matters has removed cash requirements to support
litigation which was generally funded by loans.
The Company plans to raise needed capital by forming alliances with other health
care providers and selling real estate. The sale of real estate may require
further expenditures to prepare the land for sale which would be financed
through borrowings. After improvements, the sale of the property is
unpredictable and highly uncertain.
8
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PART II - OTHER INFORMATION
ITEM 1: Legal Proceedings
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The Company is named as a defendant in the Chatham Brothers toxic
waste cleanup lawsuit. In February 1991, the Company was identified as
one of many "Potentially Responsible Parties" (PRPs) in the Chatham
Brothers toxic waste cleanup site case, filed by the State of
California - Environmental Protection Agency, Department of Toxic
Substances Control (DTSC) and involved the Hartley Pen Company
previously owned by the Company. On December 31, 1991, the Company and
approximately 90 other companies were named in a formal complaint. The
Company joined a group of defendants, each of whom was so notified and
which are referred to as Potentially Responsible Parties (PRPs) for
the purpose of negotiating with the DTSC and for undertaking
remediation of the site. During 1995, the State of California adjusted
the estimated cost of remediation. Soil remediation is estimated at
$2,000,000 with the Company's participation at 3.8% or $76,000. Water
clean up is estimated at $6,000,000 with the Company's share at 5.67%
or $340,000. The Company has recorded a liability for its estimated
share of the assessments, net of insurance recovery, in the
accompanying financial statements. These amounts are estimates and in
1996, the PRPs will finalize a new contract with the DTSC on total
cost of remediation. The Company is also liable for its share of site
study costs and in connection with such costs, the Company paid into
the PRP group $38,000 in 1993, $271,000 in 1994 and has an unfunded
cash call contribution of $90,000 in 1995 and an estimated
contribution in 1996 of $93,000. The Company continues to incur legal
cost for representation in this matter.
In June 1989, the Company filed a lawsuit in the Los Angeles County
Superior Court, Frawley Corporation vs. Harold Spinner, etc. et al,
---------------------------------------------------
which involves the rights to the proceeds from the sale of certain
property once allegedly owned by the Company and Mr. Spinner. In
November 1989, Harold Spinner cross-complained against the Company and
individuals, and in January 1990, Harold Spinner amended the cross-
complaint. The Spinners seek approximately $4.4 million in damages and
punitive damages based on fraud. On July 8, 1990, the Company amended
its complaint against Mr. Spinner, seeking an accounting of the
purchase price and carrying costs, as well as adding a claim of fraud.
In 1993, the matter was set for trial on two occasions and was
continued at each date. On October 7, 1993, Harold Spinner filed
personal bankruptcy and listed his claim against the Company at $1
million. The filing of bankruptcy causes an automatic stay of the
state court proceedings. Mr. Spinner has been discharged from
bankruptcy. The Company filed a motion to have the case dismissed and
a hearing was held August 23, 1995 whereby an order dismissing
9
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the complaint was signed by the court and entered on September 6,
1994. Mr. Spinner filed an appeal on October 29, 1995. Due to court
congestion it generally takes 18 months to two years from the time
notice of appeal is filed to the issuance of written decision. The
Company expects the appeal court to uphold the original decision for
dismissal.
ITEM 5: Other Information
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None
ITEM 6: Exhibits and Reports on Form 8-K
--------------------------------
27 -- Financial Data Schedule.
No reports on form 8-K were filed during the quarter ended March 31,
1996.
10
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SIGNATURES
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.
FRAWLEY CORPORATION
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(REGISTRANT)
Date: May 15, 1996 By: /s/ Betty R. Hurn
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BETTY R. HURN, Vice President
(Authorized Officer and Chief
Financial Officer)
11
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 324,000
<SECURITIES> 0
<RECEIVABLES> 2,200,000
<ALLOWANCES> 647,000
<INVENTORY> 61,000
<CURRENT-ASSETS> 101,000
<PP&E> 6,032,000
<DEPRECIATION> 2,211,000
<TOTAL-ASSETS> 5,860,000
<CURRENT-LIABILITIES> 4,170,000
<BONDS> 0
0
0
<COMMON> 1,414,000
<OTHER-SE> 276,000
<TOTAL-LIABILITY-AND-EQUITY> 5,860,000
<SALES> 721,000
<TOTAL-REVENUES> 721,000
<CGS> 484,000
<TOTAL-COSTS> 484,000
<OTHER-EXPENSES> 251,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 67,000
<INCOME-PRETAX> (81,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (81,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (81,000)
<EPS-PRIMARY> (.07)
<EPS-DILUTED> 0
</TABLE>
