<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 September 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 1-6436
--------------------------------
FRAWLEY CORPORATION
- -------------------------------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware 95-2639686
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(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION)
(I.R.S. EMP I.D. NO)
28720 Roadside Drive. Suite 128, Agoura Hills, California 91301
- -------------------------------------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(818)735-6622
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(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
- --------------------------------------------------------------------------------
(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
----- -----
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 September 30, 1996
- ------------------------------ ----------------------------------------------
Common stock, par value $1 1,222,905
Total Number of Pages 12
----
<PAGE>
FRAWLEY CORPORATION AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PART I: FINANCIAL INFORMATION PAGE NO.
<S> <C>
Item 1: Financial Statements
Consolidated Balance Sheets -
September 30, 1996 and December 31, 1995............. 3
Consolidated Statements of Operations -
Three Months Ended September 30, 1996 and 1995....... 4
Consolidated Statements of Operations -
Nine Months Ended September 30, 1996 and 1995........ 5
Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 1996 and 1995........ 6
Notes to Consolidated Financial Statements........... 7
Item 2: Management's Discussion and Analysis
of Financial Condition and Results of Operations..... 8-9
PART II: OTHER INFORMATION
Item 1: Legal Proceedings........................... 10-11
Item 5: Other Information .......................... 11
Item 6: Exhibits and Reports on Form 8-K............ 11
SIGNATURES ............................................... 12
</TABLE>
2
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ITEM I: FINANCIAL STATEMENTS
FRAWLEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
ASSETS 1996 1995
- ------ ------------- ------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash $ 115,000 $ 470,000
Accounts receivable, net 545,000 613,000
Note receivable 547,000 547,000
Prepaid expenses and other deposits 187,000 184,000
Other assets 150,000
------------ ------------
TOTAL CURRENT ASSETS 1,394,000 1,964,000
Long-term accounts receivable, net 176,000 138,000
Long-term notes receivable 205,000 215,000
Real estate investments, net 3,301,000 3,407,000
Property, plant and equipment, net 496,000 603,000
------------ ------------
TOTAL ASSETS $ 5,572,000 $ 6,327,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Notes payable to stockholders $ 1,286,000 $ 1,261,000
Accounts payable and accrued expenses 1,960,000 2,451,000
Unearned revenue 93,000 148,000
Notes payable 815,000 696,000
------------ ------------
TOTAL CURRENT LIABILITIES 4,154,000 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 (16,221,000) (15,868,000)
------------ ------------
2,179,000 2,532,000
Less common stock in treasury,
191,312 shares (at cost) (761,000) (761,000)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 1,418,000 1,771,000
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS'EQUITY $ 5,572,000 $ 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
September 30,
----------------------------
1996 1995
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<S> <C> <C>
REVENUES:
Net revenue $ 840,000 $ 764,000
Loss on sale of real estate investment 16,000
---------- ----------
TOTAL REVENUES 840,000 780,000
COSTS AND EXPENSES:
Cost of operations 479,000 484,000
Selling, general and administrative
expenses 404,000 494,000
Interest expense 78,000 91,000
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TOTAL COSTS AND EXPENSES 961,000 1,069,000
---------- ----------
LOSS FROM CONTINUING OPERATIONS (121,000) (289,000)
DISCONTINUED OPERATIONS:
Loss from discontinued operations (20,000)
Gain on sale of discontinued operations 837,000
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NET LOSS $ (121,000) $ (528,000)
========== ==========
NET (LOSS) INCOME PER SHARE:
Continuing operations $ (.10) $ (.24)
Discontinued operations (.02)
Gain on sale of Publishing Company .68
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$ (.10) $ .43
========== ==========
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 STATMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------------------------
1996 1995
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<S> <C> <C>
REVENUES:
Net Revenues $2,305,000 $2,464,000
Loss on sale of real estate
investment (36,000)
---------- ----------
TOTAL REVENUES 2,305,000 2,428,000
COSTS AND EXPENSES:
Cost of operations 1,425,000 1,475,000
Selling, general and administrative expenses 1,013,000 1,585,000
Interest expense 220,000 274,000
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TOTAL COST AND EXPENSES 2,658,000 3,334,000
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LOSS FROM CONTINUING OPERATIONS (353,000) (906,000)
DISCONTINUED OPERATIONS:
Income from discontinued operations 190,000
Gain on sale of discontinued operations 837,000
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NET LOSS $ (353,000) $ 121,000
========== ==========
NET (LOSS) INCOME PER SHARE:
Continuing operations $ (0.29) $(0.74)
Discontinued operations 0.16
Gain on sale of Publishing Company 0.68
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$ (0.29) $0.10
========== ==========
Weighted average number of
common shares outstanding 1,222,905 1,222,905
========== ==========
</TABLE>
5
<PAGE>
FRAWLEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
---------------------------
1996 1995
-------------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Profit (Loss) $(353,000) $ 121,000
--------- ---------
Adjustments to reconcile net loss to net
cash used in non-operating activities:
Loss on sale of real estate investment 36,000
Gain on sale of discontinued operations (817,000)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation 117,000 139,000
Changes in operating assets and liabilities:
Short and long-term accounts
receivable, net 30,000 357,000
Prepaid expenses and deposits (4,000) (20,000)
Notes Receivable 10,000 215,000
Other assets 150,000
Accounts payable and accrued expenses (491,000) (116,000)
Unearned revenue (55,000) (600,000)
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TOTAL ADJUSTMENTS (243,000) (806,000)
--------- ---------
Net cash used in
operating activities (596,000) (685,000)
--------- ---------
CASH FLOW FROM INVESTING ACTIVITIES:
Equipment purchases (10,000) (10,000)
Proceeds from sale of real estate investment 490,000
Payments for real estate improvements (63,000) (157,000)
Refunds received on real estate 169,000
--------- ---------
Net cash provided by
investing activities 96,000 323,000
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITES:
Short-term debt borrowings 125,000 87,000
Long-term-debt borrowings 800,000
Repayment of borrowings (780,000 (198,000)
--------- ---------
Net cash provided or (used in)
financing activities 145,000 (111,000)
--------- ---------
Net cash used for continuing operations (355,000) (473,000)
--------- ---------
Net cash provided by discontinued operations 400,000
--------- ---------
NET DECREASE IN CASH AND CASH
EQUIVALENTS (355,000) (73,000)
CASH, BEGINNING OF PERIOD 470,000 245,000
--------- ---------
CASH, END OF PERIOD $ 115,000 $ 172,000
========= =========
</TABLE>
6
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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 September 30, 1996, the results of
operations and changes in cash flow for the nine months then ended.
NOTE 2: Revenues from discontinued operations for the nine months ended
September 30, 1995 totaled $190,000.
NOTE 3: The results of operations for the nine months ended September 30, 1996
and 1995 are not necessarily indicative of results to be expected for
the full year.
7
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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
---------------------------
During the quarter ended September 30, 1996, operating revenues from
Specialized Health Services decreased by $29,000 when compared to the same
period in 1995. The Company continues to face serious difficulties in
attracting patients. 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 80% for the nine months ended
September 30, 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. The non-prescription access, to stop-smoking
patches and gum products provides individuals with an option that is more
accessible and less expense.
The Company is seeking to expand the business through the development of
programs which meet the Company's standard of treatment and is also price
competitive.
Schick will continue to offer educational material regarding the addiction
cycle and chemical dependency and to popularize aversion treatment
methodology.
Real Estate
-----------
The real estate operating loss during the quarter ended September 30, 1996 was
$74,000 when compared to a loss of $224,000 for the same period in 1995. Real
estate losses continue as the company incurs carrying cost, improvements to
property and litigation cost associated with particular properties. Management
anticipates continued improvement in the real estate market and anticipates
recovery of the required investments.
The undeveloped real estate market in Southern California is showing signs of
improvement. The Company is actively advertising the undeveloped real estate
for sale. Management is confident the real estate market will continue to
improve along with overall economic conditions in Southern California.
8
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Liquidity and Capital Resources
-------------------------------
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's health care business reported a net operating profit of $224,000
for the nine months ended September 30, 1996 compared to a $142,000 loss for
the same period in 1995. The profit is the result of continuing efforts to
attract patients using innovative marketing programs with added focus on
patients with the resources to pay for the treatment. The Company plans to
continue to improve operations by additional reduction in overhead and
increasing the patients in both inpatient and outpatient treatment programs.
Real Estate and Corporate overhead continue to produce losses which the
operating business is unable to absorb. The Company has finalized subleases on
the Corporate offices resulting in a significant reduction in overhead which
will benefit future periods. During the nine months ended September 30, 1996
the Company received refunds of $169,000 related to various real estate
projects. The required investments in real estate are currently funded from
loans.
The Company finalized the refinancing of existing debt on the Seattle Hospital
replacing a $680,000 mortgage with an $800,000 mortgage. The refinancing
resulted in reducing the interest rate from 16% to 10%. The increase of
$120,000 in debt was used to pay expenses associated with the refinancing and
to pay a $100,000 note held by the Chairman of the Board. The term of the new
note is three years and required the personal guarantee of the Board Chairman.
Servicing outstanding debt continues to be a significant burden on the
Company's operations.
The Company has settled certain lawsuits and therefore has reduced the cash
required to support these efforts but continuing legal expenses are
significant to the operation and are a strain on existing resources. The
Company has an outstanding $183,000 cash call for contributions to the Chatham
Brothers toxic waste cleanup lawsuit. The Company intends to meet this
obligation from loans and real estate sales.
Management intends to raise capital for the health care business by seeking
partners in health care and selling real estate. The limited resources
available to the Company will be directed at revitalization of the health care
business and the continued elimination of non-producing assets and overhead.
9
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PART II - OTHER INFORMATION
ITEM 1: Legal Proceedings
-----------------
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 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.
10
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In 1991, the Company signed an agreement with Zack Cogen, titled
Drainage Easement Agreement. In 1994 Mr. Cogen sued the Company for
Breach of this agreement and fraud. After numerous attempts to settle
the matter, the Company began litigation. In June of 1995, the Company
filed a cross complaint charging Mr. Cogen with fraud.
In September 1995, Mr. Cogen filed a Chapter 7 bankruptcy. In November
1995, the Company received relief from stay to continue litigation.
Shortly thereafter, the Company and the U.S. Bankruptcy Trustee in
charge of Mr. Cogen's case began settlement discussions.
After many months, an agreement was reached and signed in August 1996.
On October 24, 1996, the Judge approved the settlement. Although Mr.
Cogen did not file court documents objecting to the settlement, he may
attempt to appeal the court's decision. The settlement rescinds the
"Drainage Easement." The Company agreed to give the Trustee a $70,000
First Trust Deed on Parcel Map 23732, at 10 percent interest accruing
over a five-year period. Both parties are providing a general release
to each other. To facilitate this settlement, Patrick J. Frawley
signed Subordination Agreements on First Trust Deed and notes secured
by Parcel Map 23732.
ITEM 5: Other Information
-----------------
None
ITEM 6: Exhibits and Reports on Form 8-K
--------------------------------
No reports on form 8-K were filed during the quarter ended
September 30, 1996.
11
<PAGE>
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
---------------------------------------
(REGISTRANT)
Date: November 13, 1996 By: /s/ MICHAEL P. FRAWLEY, Vice President
----------------------------- ----------------------------------
(Authorized Officer and Vice-President)
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 115,000
<SECURITIES> 0
<RECEIVABLES> 2,296,000
<ALLOWANCES> 823,000
<INVENTORY> 62,000
<CURRENT-ASSETS> 125,000
<PP&E> 6,086,000
<DEPRECIATION> 2,289,000
<TOTAL-ASSETS> 5,572,000
<CURRENT-LIABILITIES> 4,154,000
<BONDS> 0
0
0
<COMMON> 1,414,000
<OTHER-SE> 4,000
<TOTAL-LIABILITY-AND-EQUITY> 5,572,000
<SALES> 2,305,000
<TOTAL-REVENUES> 2,305,000
<CGS> 1,425,000
<TOTAL-COSTS> 1,425,000
<OTHER-EXPENSES> 1,013,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 220,000
<INCOME-PRETAX> (353,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (353,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (353,000)
<EPS-PRIMARY> (.29)
<EPS-DILUTED> 0
</TABLE>
