<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 June 30, 1997
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OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
___
ACT OF 1934
For the transition period from_____________________ to _________________________
Commission File Number 1-6436
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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_____
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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 June 30, 1997
- ------------------------------------ ------------------------------------
Common stock, par value $1 1,222,905
Total Number of Pages 12
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FRAWLEY CORPORATION AND SUBSIDIARIES
INDEX
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<CAPTION>
PART I: FINANCIAL INFORMATION PAGE NO.
<S> <C>
Item 1: Financial Statements
Consolidated Balance Sheets -
June 30, 1997 and December 31, 1996.....................................3
Consolidated Statements of Operations -
Three Months Ended June 30, 1997 and 1996...............................4
Consolidated Statements of Operations -
Six Months Ended June 30, 1997 and 1996.................................5
Consolidated Statements of Cash Flows -
Six Months Ended June 30, 1997 and 1996.................................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
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>
JUNE 30, DECEMBER 31,
ASSETS 1997 1996
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(Unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash $ 93,000 $ 148,000
Accounts receivable, net 510,000 431,000
Note receivable 547,000
Prepaid expenses and other deposits 187,000 169,000
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TOTAL CURRENT ASSETS 790,000 1,295,000
Long-term accounts receivable, net 91,000 223,000
Long-term notes receivable 81,000 93,000
Real estate investments, net 3,197,000 3,164,000
Property, plant and equipment, net 460,000 467,000
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TOTAL ASSETS $ 4,619,000 $ 5,242,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Notes payable to stockholders $ 1,543,000 $ 1,406,000
Accounts payable and accrued expenses 848,000 1,266,000
Environmental Reserve 47,000 197,000
Unearned revenue 139,000 126,000
Notes payable 16,000
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TOTAL CURRENT LIABILITIES 2,577,000 3,011,000
LONG TERM LIABILITIES
Notes Payable to Stockholders 800,000 800,000
Notes Payable 70,000 70,000
Environmental Reserve 1,618,000 1,618,000
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TOTAL LONG TERM LIABILITIES 2,488,000 2,488,000
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 (18,085,000) (17,896,000)
------------ ------------
315,000 504,000
Less common stock in treasury,
191,312 shares (at cost) (761,000) (761,000)
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TOTAL STOCKHOLDERS' EQUITY (446,000) 257,000
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 4,619,000 $ 5,242,000
============ ============
</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
June 30,
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1997 1996
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<S> <C> <C>
REVENUES:
Net revenues $ 675,000 $ 744,000
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COSTS AND EXPENSES:
Cost of operations 458,000 461,000
Selling, general and administrative
expenses 145,000 386,000
Interest expense 65,000 74,000
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TOTAL COSTS AND EXPENSES 668,000 921,000
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PROFIT (LOSS) FROM CONTINUING OPERATIONS 7,000 (177,000)
NET PROFIT (LOSS) $ 7,000 $(177,000)
========= =========
NET PROFIT (LOSS) PER SHARE:
Continuing operations $ .01 $ (.14)
========= =========
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 OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-----------------------------
1997 1996
-----------------------------
<S> <C> <C>
REVENUES:
Net Revenues $1,277,000 $1,464,000
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TOTAL REVENUES 1,277,000 1,464,000
COSTS AND EXPENSES:
Cost of operations 886,000 946,000
Selling, general and administrative
expenses 453,000 609,000
Interest expense 128,000 141,000
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TOTAL COST AND EXPENSES 1,467,000 1,696,000
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NET LOSS $ (190,000) (232,000)
========== ==========
NET (LOSS) INCOME PER SHARE:
Continuing operations $ (0.16) $ (0.19)
========== ==========
Weighted average number of
common shares outstanding 1,222,905 1,222,905
========== ==========
</TABLE>
See notes to consolidated financial statements
5
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FRAWLEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-----------------------
1997 1996
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $(190,000) $(232,000)
--------- ---------
Adjustments to reconcile net loss to net
cash used in operating activities:
Write down of long-term debt (11,000)
Write down of Advertising expense (156,000)
Depreciation 15,000 78,000
Changes in operating assets and liabilities:
Short- and long-term accounts
receivable, net 53,000 7,000
Prepaid expenses and deposits (18,000) (14,000)
Other assets 150,000
Accounts payable and accrued expenses (418,000) (480,000)
Unearned revenue 14,000 (40,000)
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TOTAL ADJUSTMENTS (365,000) (299,000)
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Net cash used in
operating activities (555,000) (531,000)
--------- ---------
CASH FLOW FROM INVESTING ACTIVITIES:
Equipment purchases (8,000) (8,000)
Long term debt paydown (5,000)
Payments for environmental reserve (150,000)
Payments for real estate investments (33,000) (51,000)
Refunds received on real estate 153,000
---------
Net cash provided by
investing activities (196,000) 94,000
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CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term debt borrowings 137,000 76,000
Short-term notes receivable 547,000
Long-term notes receivable 12,000
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Net cash provided or used by
financing activities 696,000 76,000
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Net cash used for continuing operations (55,000) (361,000)
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NET DECREASE IN CASH AND CASH
EQUIVALENTS (55,000) (361,000)
CASH, BEGINNING OF PERIOD 148,000 470,000
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CASH, END OF PERIOD $ 93,000 $ 109,000
========= =========
</TABLE>
See notes to consolidated financial statements
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 June 30, 1997, the results of
operations and changes in cash flow for the six months then ended.
NOTE 2: Revenues from continued operations for the six months ended June 30,
1995 totaled $1,277,000.
NOTE 3: The results of operations for the six months ended June 30, 1997 and
1996 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
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During the quarter ended June 30, 1997, operating revenues from Specialized
Health Services decreased by $218,000 when compared to the same period in 1996.
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.
The Company plans to continue to improve operations through additional reduction
in overhead and increasing patients in both the inpatient and outpatient
treatment programs. Schick will continue to offer educational material regarding
the addiction cycle and chemical dependency and to popularize aversion treatment
methodology.
Real Estate
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The real estate operating loss during the quarter ended June 30, 1997 was
$136,000 as compared to a loss of $73,000 for the same period in 1996. Real
estate losses continue as the company incurs carrying costs, improvements
required to sell the property, and litigation cost with particular properties.
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.
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 Seattle Hospital and outpatient treatment program reported a $38,000 loss
for the six months ended June 30, 1997 compared to a $167,000 profit for the six
months ended June 30, 1996. Management believes the negative results will
continue as the company goes through the transition from third party
reimbursement to direct payment from patients.
8
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The Company received a payoff from the Bankers Mortgage Note Receivable for the
sale of the Schick Hospital in Santa Barbara in May 1997. Proceeds funded a
contribution of $150,000 to the Chatham Brothers toxic waste cleanup lawsuit.
The Company has also retired some debt for prior years advertising, and legal
expenses; settlements provided savings of $156,000 for advertising and $11,000
for legal long term debt respectively. Total debt settlements therefore reduced
the Company's loss in the second quarter of 1997.
Although the Company has retired some debt obligations, it continues to
encounter a significant burden in servicing remaining debt.
The Company plans to raise capital for the health care business by seeking
partners in health care and selling real estate. The sale of real estate may
require further expenditure to prepare the land for sale, which would be
financed through borrowings. The sale of the property is unpredictable and
highly uncertain and there is no assurance that the improvements will increase
the marketability of the property. 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
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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. In 1996, the PRP Group revised the
cleanup estimate cost of the site over a 30-year period and included a
cost for overhead and State oversight costs for the same period of
time. Also at the end of 1996, the PRP Group announced that the
allocation percentage would be changing. Although nothing has
officially been released the Company has increased its reserve to
reflect the higher cost estimate and the higher expected percentage
based on discussion with PRP legal counsel and site management. The
result was that the Company increased its 1995 reserve from $744,000
to $1,815,000 in 1996. Because of the long term nature of these
expenses the Company has reclassified the liability into short term
for $197,000, which the Company paid $150,000 in May 1997, and long
term for $1,618,000. 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, $150,000 in 1997 with
a remaining cash call contribution of $47,000.
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
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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
10
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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, 1995.
Mr. Spinner filed an appeal on October 29, 1995. On May 2, 1997, the
Appeals Court rendered a decision in support of the lower Court; Mr.
Spinner did not file an appeal to the State Supreme Court.
In 1991, Sun Sail Development Company sold 23 acres to Shula Inc. for
$1,000,000, $600,000 in cash and a $400,000 note secured by a second
Deed of Trust on the 23 acres. In 1994 Shula Inc. filed for protection
under Chapter 11 Bankruptcy Code. Sun Sail Development wrote off the
$400,000 note due to the bankruptcy filing. In 1996 Shula attempted to
disallow Sun Sail as a secured creditor. Also in 1996, Sun Sail
Development settled the matter by agreeing to a $300,000 note due in
eight years at 10% interest payable in installments of $2,000 per
month. The balance of the interest and principal is due at maturity.
The note continues to be secured by a second Deed of Trust behind a
$875,000 first Deed of Trust.
The Shula bankruptcy plan reorganization and stipulated settlement
were approved by the Bankruptcy Court on December 10, 1996. In April
1997 Shula Inc. made a principal payment of $15,000 and interest of
$2,000. Since collection remains doubtful the Company will recognize
income from recovery of bad debt as payments are received.
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 June 30,
1997.
11
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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
---------------------------------------
(REGISTRANT)
Date: September 12, 1997 By: /s/ Michael P. Frawley
------------------------------ --------------------------
Vice President
(Authorized Officer and Chief
Financial Officer)
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 93,000
<SECURITIES> 0
<RECEIVABLES> 1,395,000
<ALLOWANCES> 712,000
<INVENTORY> 76,000
<CURRENT-ASSETS> 110,000
<PP&E> 4,777,000
<DEPRECIATION> 1,120,000
<TOTAL-ASSETS> 4,619,000
<CURRENT-LIABILITIES> 5,065,000
<BONDS> 0
0
0
<COMMON> 1,414,000
<OTHER-SE> (1,860,000)
<TOTAL-LIABILITY-AND-EQUITY> 4,619,000
<SALES> 1,277,000
<TOTAL-REVENUES> 1,277,000
<CGS> 886,000
<TOTAL-COSTS> 886,000
<OTHER-EXPENSES> 453,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 128,000
<INCOME-PRETAX> (190,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (190,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (190,000)
<EPS-PRIMARY> ( .16)
<EPS-DILUTED> 0
</TABLE>
