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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
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ACT OF 1934
For the fiscal year ended December 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
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 OF (I.R.S. EMPLOYER I.D. NO.)
INCORPORATION OR ORGANIZATION)
28720 Roadside Drive. Suite 128, Agoura Hills, California 91301
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(818)735-6622
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(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE
Securities registered pursuant to Section 12 (b) of the Act: None
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Securities registered pursuant to Section 12 (g) of the Act:
Title of each class
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Common Stock, par value $1.00 per share
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Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 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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1
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Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. X
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Revenues from continuing operations as of December 31, 1996: $2,974,000
The Company's stock was de-listed by the Pacific Stock Exchange Incorporated on
December 1, 1992. Therefore, no current market value exists for the stock as of
December 31, 1996.
Number of shares of Common Stock outstanding as of May 19, 1997: 1,222,905
shares.
Documents incorporated by reference portions of the Information Statement to be
filed with the Securities and Exchange Commission in connection with the Annual
Election of Directors are incorporated by reference into Part III hereof.
Total number of pages, including cover page and exhibits 33.
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PART I
ITEM 1. BUSINESS
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Frawley Corporation is currently engaged in the operation of
inpatient and outpatient treatment of chemical dependency and
stop-smoking centers, and investment in real estate. Frawley
Corporation is a Delaware Corporation organized in 1969.
References to the Company include references to Frawley
Corporation and Subsidiaries.
________________________________________________________________________________
SPECIALIZED HEALTH SERVICES
COMPANY OWNED INPATIENT HOSPITAL. the company currently owns and
operates under the name of Schick Shadel Hospital, one hospital
located in Seattle, Washington with 63 beds. The Seattle hospital
is devoted primarily to the treatment of chemical dependency and
is not operated for general hospital purposes. This hospital is
accredited by the Joint Commission on Accreditation of Healthcare
Organizations, as well as other federal and state accrediting
authorities.
The alcohol patients usually remain for a basic treatment of
approximately 14 days consisting of an initial admission of 10
days followed by two reinforcement stays lasting 2 days each,
generally 30 days and 90 days after the initial discharge.
Additionally, patients receive two years of aftercare services
and may return for post-reinforcement treatment as needed.
Patients requiring detoxification may require two to four days
additional hospitalization during their initial admission.
Treatment consists of four principal aspects: (1) a
detoxification period, during which the patient is medically
withdrawn from alcohol; (2) conditioned-reflex aversion
treatment; during this treatment patients are furnished alcoholic
beverages under circumstances which produce an unpleasant
reaction for the purpose of inducing an aversion to alcohol; (3)
sodium pentothal interviews; and (4) professional aftercare
counseling. The hospital is under the direction of a full-time
physician. In addition, other physicians, registered nurses and
specially trained counselors are on staff.
The cocaine and marijuana addiction as a primary diagnosis drug
program is essentially similar to the alcohol programmability,
except the patient stays from 10 to 12 days for the initial
admission and then returns for 2 two-day or three-day
reinforcement follow-up stays. The initial stay is prescribed to
meet the individual needs of the patient such as multiple
dependencies; therefore, the stay could be longer.
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COMPANY OWNED OUTPATIENT PROGRAMS. During 1996, the Company
operated three outpatient chemical dependency treatment centers
located in the state of Washington. The outpatient program is
designed to meet the individual needs of the patient;
accordingly, a patient may be in a program for up to two years.
Each location is under the direction of specially trained
chemical dependency counseling staff.
COMPANY OWNED CENTERS. The Company also owns and operates under
the name of Schick Centers one center for stop-smoking services.
There is currently one center located in California.
Clients for the stop-smoking centers generally spend
approximately five hours over a period of one week receiving
conditioned-reflex aversion treatment and counseling to eliminate
their addiction to nicotine. Additionally, the stop-smoking
program includes a six-week follow-up program consisting
primarily of follow-up telephone contact by Schick instructors.
COMPETITION AND SOURCES OF REVENUE. Schick encounters competition
from other facilities and methods of alcohol, cocaine, marijuana
and nicotine addiction. The success of the Specialized Health
Services operations substantially depends on public acceptance of
the services provided by the Company and the Company's ability to
attract referrals from health professionals and administrators,
which factors are influenced by the efficacy of the services
rendered, the Company's reputation for effective results,
marketing, the cost of care and the location and scope of
services offered by the facilities. The hospital is conducting
local marketing activities with employers in its area and other
potential referral sources to increase the number of patients
referred to the hospital. The Company faces substantial
competition from companies which offer both general psychiatric
care and chemical dependency treatment.
Limitations imposed by insurance carriers on their coverage and
lower reimbursement rates for chemical dependency treatment plus
increased competition in all market areas served by the hospitals
have continued to decrease the occupancy levels. Competition from
utilization programs (which review the utilization of health care
by insureds in order to reduce unnecessary medical expenses) and
managed care systems (which systems provide health care coverage
only with certain, identified providers who have contracted with
the system to provide these services) continue to impact the
Company's ability to attract patients.
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Utilization programs have resulted in many mental health services
(including chemical dependency services) being denied for
coverage by insurance companies and either not provided to an
insured or not paid for by the insurance carrier. Managed care
systems have severely limited the ability of patients to select
the health care provider, as only treatment services provided by
the system's providers are covered by insurance. Accordingly,
many patients who seek treatment at the Company's hospitals are
unable to be treated there, as the Company is not a provider in
the managed care network in which that potential patient
participates. Since the Company has not successfully contracted
managed care systems to provide chemical dependency treatment
services to the insured covered by that system, the potential
population of patients for the Company's hospitals has decreased.
Another trend in the health care industry which has affected the
Company's Specialized Health Services is the general reduction in
benefits offered by employers to employees for mental health
care, which includes chemical dependency treatment. Furthermore,
insurance carriers are increasing their pre-authorization
admission review activities, resulting in substantially fewer
approved admissions to the hospitals. The Company believes that
these trends are escalating and are causing significant problems
to the profitability of the Company's Specialized Health Services
business. Since the individuals treated at the Company's
hospitals have significantly reduced levels of insurance
coverage, the patient's balance owing after insurance payment has
increased substantially thereby increasing collection risks.
The Company is continuing its efforts to open treatment centers
in acute care hospitals to share costs, develop networks to
attract patients and to provide chemical dependency treatment to
contracted managed care providers of the hospitals.
Additionally, insurance carriers have increased the time period
required to review claims, thereby delaying payment and
increasing the accounts receivable. Another factor affecting the
chemical dependency treatment industry is that insurance
carriers, in their efforts to manage the costs of chemical
dependency treatment, have caused an increase in the utilization
of out-patient services, due to the lower cost of providing
chemical dependency services on an outpatient basis. The Company
currently has three outpatient facilities (See Company Owned
Outpatient Programs above).
Governmental Regulation. The health care facilities operated by
the Company must comply with licensing requirements of federal,
state and local health agencies, with state certificate of need
and similar laws regulating various aspects of the operation of
health facilities and with the requirements of building codes,
health codes and local fire departments.
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Certain licensing requirements also are a prerequisite to
participation in Medicare and Medicaid programs.
Legislative, regulatory and policy changes by governmental
agencies (including reduction of budgets for payments under state
and federal governmental care reimbursement programs and the
regulation of the relationship of, physicians and health care
businesses) has impacted the Company's ability to generate
revenue and the utilization of its health care facilities.
In 1996 a new federal regulation took effect that impacts
Medicare reimbursement for drug and alcohol treatment. The law
eliminates Medicare coverage for persons who were previously
considered disabled under Social Security because of their
alcohol or drug addiction. Those individuals may apply for Social
Security disability status if they can show other sources of
disability. Medicare will continue to pay for alcohol and drug
treatment for those individuals eligible for Social Security.
The U.S. Congress and the administration continue to put forth
proposals directed at health care reform. Such proposals may
include short-term governmental price controls, a national health
care budget limiting the amount to be spent on health care
coverage and giving to federal and state governments new powers
with respect to medical fees and health care insurance premiums.
Many options under discussion would limit access to effective
treatment programs for chemical dependency. At this time it is
not possible to determine the exact nature of the present
proposals, their legislative outcome, or their likely impact on
the Company.
In addition, several states are undertaking analysis and
legislation designed to modify the financing and delivery of
health care at the state level. A variety of bills and
regulations are pending in several states proposing to regulate,
control or alter the financing of health care costs. It is not
possible at this time to predict the effect on the business of
the Company, if any, of such actions.
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REAL ESTATE the Company's real estate consists of approximately 135
acres of largely undeveloped land in the Santa Monica mountains,
northwest of Los Angeles. The properties owned by the Company
represent an aggregate investment of approximately $3,164,000 as
of the end of 1996, and are subject to mortgage debt, held by
five stockholders,
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aggregating approximately $1,406,000. The Company continues to
invest resources in the real estate and it will continue its
efforts to sell the land.
(See Item 6. Management's Discussion and Analysis of Financial
Condition and Results of Operations).
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PUBLISHING Publishing activities were comprised mainly of the publication of
two weekly newspapers, known as "Catholic Twin Circle" and "The
National Catholic Register." The assets and liabilities of Twin
Circle Publishing, a wholly owned subsidiary, were sold to Circle
Media, Inc., on July 22, 1995. The balance on the Note
Receivable from the sale was $93,000 at the end of 1996.
________________________________________________________________________________
EMPLOYEES Frawley Corporation and its subsidiaries employ an aggregate
of approximately 70 persons and management believes that employee
relations are satisfactory.
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ITEM 2. PROPERTIES
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The principal facilities used by Frawley Corporation and its
subsidiaries in their businesses include the one owned property
described below. Other facilities are rented under leases
expiring on various dates through October 1998 or in some cases
on a month-to-month basis. Currently, these leased facilities
include approximately 900 square feet of office space in Agoura,
California serving as the general offices of Frawley Corporation
and Sun Sail Development, Inc. The Corporation also subleased
approximately 6,700 square feet of office space in Encino,
California, which lease terminates in May 1998, to Circle Media
and Wilshire Cellular Inc.
SPECIALIZED HEALTH SERVICES. In addition to the general offices
described above, the hospital subsidiaries of the Company leases
one Schick Center in California for approximately 400 square
feet. The inpatient chemical dependency hospital owned and
operated by the Company is in Seattle, Washington (approximately
22,000 square feet). The outpatient chemical dependency programs
located in the state of Washington consist of three leased
locations ranging from approximately 1,300 to 2,400 square feet
each. (For a description of investment properties, see Item 1.
Business - Real Estate).
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ITEM 3. 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 PRP adjusted the
estimated cost of remediation. Soil remediation was 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 had 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 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 and has an unfunded cash call contribution
of $90,000 and $107,000 in 1995 and 1996.
In June 1989, the Company filed a lawsuit in the Los Angeles
County Superior Court, Frawley Corporation vs. Harold Spinner,
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etc. et al, which involves certain property once allegedly owned
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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
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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 caused an automatic stay of
the state court proceedings. Mr. Spinner has since 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, 1995. Mr. Spinner filed an appeal on
October 20, 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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Not Applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDERS MATTERS.
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The Company's stock was delisted by the Pacific Stock Exchange on
December 1, 1992. There is currently no public trading for the
stock.
The approximate number of holders of record for Frawley
Corporation's Common Stock as of May 19, 1997 was 943.
No dividends have been paid in the periods shown above.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
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OF OPERATIONS.
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OVERALL Net revenues from continuing operations for the Company decreased
SUMMARY approximately 46% in 1996 when compared to 1995. Revenues
declined in all business segments due to the difficult operating
conditions facing the Company as further described below. Net
loss is $(2,028,000) in 1996 compared to a $478,000 net income in
1995. Interest expense in 1996 was $286,000 compared to $347,000
in 1995. Selling, general and administrative expenses decreased
to $1,561,000 from $1,867,000 in 1995 due to additional
adjustments from closed hospital operations and overall
downsizing.
SPECIALIZED Revenues from Specialized Health Services chemical dependency
HEALTH hospitals and contract units decreased by 22% in 1996 compared to
SERVICES 1995. The decrease is attributable to lower occupancy levels at
the remaining chemical dependency hospital.
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Competition from other treatment programs intensified during 1996
and 1995, together with stronger emphasis by insurance carriers
on outpatient treatment instead of inpatient programs.
Specialized Health Service income before interest expense was
$206,000 in 1996 when compared to income before interest and the
gain on sale of the Santa Barbara hospital of $222,000 in 1995.
The profit is the result of continuing efforts to attract
patients using active marketing programs with added focus on
patients with the resources to pay for the treatment. The
Company plans to continue to improve operations through
additional reduction in overhead and increasing the patients in
both inpatient and outpatient treatment programs
REAL ESTATE There were no sales during 1996. The real estate operating loss
before interest expense was $374,000 in 1996 when compared to a
loss of $432,00 in 1995. Real estate losses continued as the
Company incurs carrying costs, 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.
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. Because collection remains doubtful, the Company is
recognizing income from recovery on bad debt as payments are
received. The $300,000 Note is not included in the financial
statements.
10
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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.
Real Estate and Corporate overhead continue to produce losses
which the operating business is unable to absorb. During 1996
the Company received refunds of $168,000 related to various real
estate projects and $113,000 from Notes Receivables. The
required investments in real estate are currently funded from
loans. The Company has finalized subleases through May of 1998,
which will benefit future periods.
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 terms for the new note are three years.
The increase of $120,000 in debt was used to pay off other loans.
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. The Company
has an outstanding $197,000 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.
The following measurements indicate the trends in the Company's
liquidity from continuing operations:
December 31, 1996 1995
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Working capital (deficiency) ($1,716,000) ($2,592,000)
Current ratio (.4 to 1) (.4 to 1)
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ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
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See the consolidated financial statements and the notes thereto which begin on
page F1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
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FINANCIAL DISCLOSURE.
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None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
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COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
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There is hereby incorporated by reference the information which will appear
under the captions "Election of Directors" and "Executive Officers" in an
Information Statement to be filed with the Securities and Exchange Commission
relating to the Company's Annual Election of Directors.
ITEM 10. EXECUTIVE COMPENSATION.
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There is hereby incorporated by reference the information which will appear
under the caption "Cash Compensation of Executive Officers" in an Information
Statement to be filed with the Securities and Exchange Commission relating to
the Company's Annual Election of Directors.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
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There is hereby incorporated by reference the information which will appear
under the caption "Ownership of the Company's Securities" in an Information
Statement to be filed with the Securities and Exchange Commission relating to
the Company's Annual Election of Directors.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
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There is hereby incorporated by reference the information which will appear
under the caption "Certain Relationships and Related Transactions" in an
Information Statement to be filed with the Securities and Exchange Commission
relating to the Company's Annual Election of Directors.
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PART IV
ITEM 13. FINANCIAL STATEMENTS, EXHIBITS AND REPORTS ON FORM 8-K.
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(a) 1. List of Financial Statements: Page Numbers
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<CAPTION>
<S> <C>
Independent Auditors' Report F1
Financial Statements
Consolidated Balance Sheet
as of December 31, 1996 F2-F3
Financial Statements for the Years
Ended December 31, 1996 and 1995
Consolidated Statements of
Operations F4
Consolidated Statements of
Stockholders' Equity F5
Consolidated Statements of
Cash Flows F6-F7
Notes to Consolidated Financial
Statements F8-F18
</TABLE>
2. List of Exhibits:
3.1 Registrant's certificate of incorporation is incorporated herein
by this reference to (A) Exhibit Item (3.1) to Registrant's
Registration Statement No. 2-36536 on form S-1, (B) the name
change amendment to said certificate of incorporation under
Section 1-02 of the Merger Agreement which is Exhibit A to the
definitive proxy material for Registrant's June 16, 1977 annual
meeting of stockholders, filed under Regulation 14A, and (C) the
amendment to certificate of incorporation which is Exhibit A to
the definitive proxy material for Registrant's June 25, 1987
Annual Meeting of Stockholders, filed under Regulation 14A.
3.2 Registrant's bylaws, as amended to date are incorporated herein
by reference to Exhibit Item (3) to Registrant's Annual Report on
Form 10-K for the year ended December 31, 1980.
21 List of Subsidiaries is incorporated herein by reference to
Exhibit Item (10) to Registrant's Annual Report on Form 10-K for
the year ended December 31, 1991.
27 Financial Data Schedule
(b) Reports on Form 8-K:
A report on Form 8-K was filed on March 18, 1997 regarding the change in
Registrant's Certifying Accountant.
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SIGNATURES
In accordance with Section 13 or 15 (d) of the Exchange Act, the Registrant
caused this Report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Frawley Corporation
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(Registrant)
By /s/ Michael P. Frawley
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Michael P. Frawley, Vice President, Treasurer and Secretary
Date May 22, 1997
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In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
/s/ Patrick J. Frawley
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Patrick J. Frawley, Jr. Chairman of the Board, President and
Director (Principal Executive Officer)
May 22, 1997
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(Date)
/s/ Michael P. Frawley
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Michael P. Frawley, Vice President, Treasurer and Secretary
(Principal Financial and Accounting Officer)
May 22, 1997
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(Date)
/s/ Patrick J. Frawley
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Patrick J. Frawley, Jr., Director
May 22, 1997
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(Date)
/s/ Michael P. Frawley
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Michael P. Frawley, Director
May 22, 1997
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(Date)
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[LETTERHEAD OF LA RUE, CORRIGAN & MCCORMICK]
INDEPENDENT AUDITOR'S REPORT
Board of Directors and Stockholders
Frawley Corporation
Agoura Hills, California
We have audited the accompanying consolidated balance sheet of Frawley
Corporation and subsidiaries (the "Company") as of December 31, 1996, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the year then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit. The consolidated statements of
operations, stockholders' equity and cash flows for the year ended December 31,
1995 were audited by other auditors whose report dated March 31, 1995 expressed
an unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Frawley Corporation
and subsidiaries as of December 31, 1996, and the results of its operations and
its cash flows for the year then ended in conformity with generally accepted
accounting principles.
The 1996 consolidated financial statements have been prepared assuming the
company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company's recurring losses from operations,
difficulties in generating sufficient cash flow to meet its obligations and
negative working capital raise substantial doubt about its ability to continue
as a going concern. The Company has relied upon financing from related parties
and sales of assets to continue its operations and is seeking sources of long-
term financing as it reorganizes its business. Management's plan concerning
these matters are also described in Note 2. These financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
/s/ La Rue, Corrigan & McCormick
La Rue, Corrigan & McCormick
Woodland Hills, California
May 22, 1997
F1
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FRAWLEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1996
<TABLE>
<CAPTION>
ASSETS
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<S> <C>
CURRENT ASSETS
Cash $ 148,000
Accounts receivable (net of
allowances of $609,000) 431,000
Note receivable (Note 5) 547,000
Prepaid expenses and deposits 169,000
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TOTAL CURRENT ASSETS 1,295,000
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OTHER ASSETS
Long-term accounts receivable (net of
allowance of $101,000) (Note 4) 223,000
Long-term notes receivable (Note 5) 93,000
Real estate investments, net (Notes 3, 6 and 8) 3,164,000
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TOTAL OTHER ASSETS 3,480,000
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PROPERTY AND EQUIPMENT (Note 6)
Land 102,000
Building and improvements 859,000
Machinery and equipment 642,000
Furniture and fixtures 7,000
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TOTAL 1,610,000
Less accumulated depreciation (1,143,000)
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TOTAL PROPERTY AND EQUIPMENT 467,000
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TOTAL $5,242,000
==========
</TABLE>
See notes to consolidated financial statements.
F2
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FRAWLEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1996
LIABILITIES AND STOCKHOLDERS' EQUITY
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<TABLE>
<CAPTION>
CURRENT LIABILITIES
<S> <C>
Notes payable to stockholders (Notes 3 and 6) $1,406,000
Accounts payable and accrued expenses 1,266,000
Environmental reserve (Note 8) 197,000
Unearned revenue 126,000
Notes payable (Note 6) 16,000
----------
TOTAL CURRENT LIABILITIES 3,011,000
LONG TERM LIABILITIES
Notes payable to stockholders 800,000
Notes payable 70,000
Environmental reserve (Note 8) 1,618,000
------------
TOTAL LONG TERM LIABILITIES 2,488,000
COMMITMENTS AND CONTINGENCIES (NOTES 6, 7, 8 AND 9)
STOCKHOLDERS' EQUITY (DEFICIT):
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
Capital surplus 16,986,000
Accumulated deficit (17,896,000)
504,000
Less common stock in treasury,
191,312 shares (at cost) (761,000)
------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (257,000)
------------
TOTAL $ 5,242,000
============
</TABLE>
See notes to consolidated financial statements.
F3
<PAGE>
FRAWLEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
----------- ----------
<S> <C> <C>
REVENUES:
Net revenues $2,974,000 $3,008,000
Loss on sale of real estate (86,000)
Gain on sale on hospital facilities 696,000
----------- ----------
TOTAL REVENUES 2,974,000 3,618,000
COSTS AND EXPENSES:
Cost of operations 1,900,000 1,954,000
Selling, general and administrative
expenses (Note 9) 1,561,000 1,867,000
Environmental reserve (Note 8) 1,071,000
Write down of real estate investment 184,000
Interest expense (Note 3) 286,000 347,000
----------- ----------
TOTAL COSTS AND EXPENSES 5,002,000 4,168,000
----------- ----------
LOSS FROM CONTINUING OPERATIONS (550,000)
DISCONTINUED OPERATIONS:
Income from discontinued operations 191,000
Gain on sale of discontinued operations 837,000
----------- ----------
NET (LOSS) INCOME $(2,028,000) $ 478,000
=========== ==========
NET (LOSS) INCOME PER SHARE:
Continuing operations $ (1.66) $ (.45)
Discontinued operations .84
----------- -----------
$ (1.66) $ 0.39
----------- -----------
Weighted average number of
common shares outstanding 1,222,905 1,222,905
=========== ===========
</TABLE>
See notes to consolidated financial statements
F4
<PAGE>
FRAWLEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
Common Stock
------------ Capital Accumulated Stock in
Shares Amount Surplus Deficit Treasury Total
------ ------ ------- ------- -------- -----
<S> <C> <C> <C> <C> <C> <C>
BALANCE,
January 1, 1995 1,414,217 $1,414,000 $16,986,000 $(16,346,000) $(761,000) $ 1,293,000
Net Gain for
the year 478,000 478,000
--------- ---------- ----------- ------------ --------- -----------
BALANCE,
December 31, 1995 1,414,217 1,414,000 16,986,000 (15,868,000) (761,000) 1,771,000
Net loss for the
year (2,028,000) (2,028,000)
--------- ---------- ----------- ------------ --------- -----------
BALANCE,
December 31, 1996 1,414,217 $1,414,000 $16,986,000 $(17,896,000) $(761,000) $ (257,000)
========= ========== =========== ============ ========= ===========
</TABLE>
See notes to consolidated financial statements
F5
<PAGE>
FRAWLEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (Loss) Income $(2,028,000) $ 478,000
----------- -----------
Adjustments to reconcile net loss to net
cash used in operating activities:
Gain on sale of hospital facilities (696,000)
Loss on sale of real estate investment 86,000
Gain on sale of discontinued operations (837,000)
Write down of real estate investments 184,000
Equity in loss (earnings) of joint ventures 42,000
Depreciation 161,000 185,000
Cash effect of sale of discontinued operations (6,000)
Changes in operating assets and liabilities:
Short and long-term accounts
receivable, net 98,000 363,000
Prepaid expenses and deposits 15,000 34,000
Notes Receivable (discount) 9,000
Accounts payable and accrued expenses (988,000) (463,000)
Environmental reserve 1,618,000
Unearned revenue (22,000) (33,000)
----------- -----------
TOTAL ADJUSTMENTS 1,075,000 (1,325,000)
----------- -----------
Net cash used in
operating activities (953,000) (847,000)
----------- -----------
CASH FLOW FROM INVESTING ACTIVITIES:
Equipment purchases (25,000) (35,000)
Proceeds from sale of hospital facilities 388,000
Proceeds from sale of discontinued operations 400,000
Proceeds from sale of real estate investment 110,000
Proceeds from dissolution of joint venture 38,000
Payments for real estate improvements (110,000) (109,000)
Proceeds from return on security bond 150,000
Proceeds from return on security deposit 168,000
----------- -----------
Net cash provided by
investing activities 183,000 792,000
----------- -----------
</TABLE>
See notes to consolidated financial statements.
F6
<PAGE>
FRAWLEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
CASH FLOWS FROM FINANCING ACTIVATES:
<S> <C> <C>
Short-term debt borrowings related party 1,045,000 300,000
Short-term debt borrowings 30,000
Proceeds from notes receivable 113,000 20,000
Long-term-debt borrowings 70,000
Repayment of borrowings (780,000) (70,000)
--------- -------
Net cash provided or (used in)
financing activities 448,000 280,000
--------- -------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS (322,000) 225,000
CASH, BEGINNING OF PERIOD 470,000 245,000
--------- --------
CASH, END OF PERIOD $ 148,000 $470,000
========= ========
</TABLE>
See notes to consolidated financial statements.
F7
<PAGE>
FRAWLEY CORPORATION AND SUBSIDIARIES
- ------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1995
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation - The accompanying consolidated financial
---------------------------
statements include Frawley Corporation (the "Company") and its
subsidiaries: Schick Laboratories, Inc., Sun Sail Development Company and
Malibu Mountain Estates, Inc. All significant intercompany profits,
transactions and balances have been eliminated.
Hospital Revenue - Certain operating revenues for the Company's Hospital
----------------
is recorded under cost reimbursement agreements, principally Medicare,
which are subject to audit and possible retroactive adjustment by third-
party payors in order to arrive at the reimbursable cost of providing the
medical services to the beneficiaries of these programs. In the opinion of
management, adequate provision has been made for any adjustments that may
result from such audits. Differences between estimated provisions and final
settlements are reflected as charges or credits to operating results in the
year in which the settlements are made.
Depreciation - The cost of property and equipment is depreciated over the
------------
estimated useful lives of the assets, which range from three to ten years,
using the straight-line method. Buildings are depreciated over lives which
range from 25 to 40 years.
Unearned Revenue - The Company defers fees on its chemical dependency
----------------
programs and amortizes them into operations per the term of the program.
Net Income (Loss) per Common Share - Net Income (loss) per common share is
----------------------------------
computed by dividing net income (loss) by the weighted average number of
common shares outstanding during the year.
Income Taxes - The Company adopted the provisions of Statement of Financial
------------
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes,"
effective January 1, 1993. Accordingly, the Company uses the liability
method of accounting for income taxes. Under the liability method,
deferred taxes are determined based on temporary differences between
financial reporting and income tax basis of assets and liabilities at the
balance sheet date multiplied by the applicable tax rates.
Malpractice Insurance Coverage - Medical malpractice claims are covered by
------------------------------
an occurrence-basis medical malpractice insurance policy, the coverage of
$5 million per occurrence is considered by the Company to be adequate for
potential claims.
F8
<PAGE>
Concentration of Credit Risk - Certain financial instruments potentially
----------------------------
subject the Company to concentrations of credit risk. These financial
instruments consist primarily of cash and accounts receivable. The company
places its cash with high-credit, quality financial institutions.
Concentrations of credit risk with respect to accounts receivable are
limited due to the Company's large patient base.
Use of Estimates - The preparation of financial statements in conformity
----------------
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
Fair Value of Financial Instruments - The carrying amounts of the Company's
-----------------------------------
financial instruments (cash, accounts receivable, note receivable, other
assets, accounts payable, accrued expenses and unearned revenue)
approximate fair value because of the short maturity of these items. The
carrying amount of the notes payable to stockholders and notes payable
approximate fair value based on current rates for similar debt of the same
remaining maturity.
Reclassifications - Certain reclassifications have been made to the prior
-----------------
period balances to conform with current year presentation.
2. OPERATING RESULTS AND MANAGEMENT PLANS
The Company's net loss for 1996 was $2,028,000 compared to a $478,000 net
income for 1995. The Corporation generates profits under the one standing
hospital but continues to have unprofitable subsidiary operations. Working
capital and operating cash flow continue to be negative.
Management plans for 1997 include seeking partners for unit operations.
The Company will continue its efforts to sell its real estate holdings and
minimize additional investments which require borrowing from the Chief
Executive Officer. Management is also seeking other sources of long-term
financing necessary for further reorganization.
The Company's real estate investment consists of approximately 135 acres of
largely undeveloped land in the Santa Monica Mountains, northwest of Los
Angeles. The undeveloped real estate market in Southern California has been
and continues to experience slow activity levels with some signs of a turn
around. The Company is continuing to pursue various options with respect
to selling a significant portion of its real estate.
F9
<PAGE>
The value of the Company's undeveloped real estate in the Santa Monica
Mountains has generally been affected by economic conditions unique to
California. The factors affecting the salability of the Company's property
include the lack of Southern California development activities and general
uncertainties in the economy. Due to the unique characteristics of the
property, there are limited comparable sales of property in the area,
however, based on the limited data available, management has estimated net
realizable value of the property to be equal to or greater than the
carrying value.
The Company has been given informal extended terms by vendors whose
balances total approximately $154,000. The Company has been paying
interest under the arrangements with these vendors and continues to explore
options related to their repayment.
3. RELATED PARTY TRANSACTIONS
During 1996, the Company borrowed $95,500 from the Chief Executive Officer
due in 1997, bearing interest of 10% and secured by real estate
investments. Also during the year, the Company repaid $100,000 to the Chief
Executive Officer related to debt incurred by the Company in prior years.
These repayments were made from the excess of the hospital's new
borrowings. Also during the year, the Company borrowed $50,000 from the
son of the Chief Executive Officer due in 1997 bearing interest of 10%.
Additionally, during 1996 the Company borrowed $900,000 from the daughter
of the Chief Executive officer consisting of two notes. One note for
$800,000 is due in 1999, bearing interest of 10% and secured by the
hospital real estate, and a second note for $100,000 is due in 1997,
bearing interest of 10% and secured by real estate investment.
In 1995 and prior years, the Company borrowed $1,635,000 from the
stockholders to meet real estate investment and working capital needs. The
notes are secured by real estate investments. Interest expense to related
parties totaled $159,000 and $121,000 during 1996 and 1995 respectively.
4. LONG-TERM ACCOUNTS RECEIVABLE
As a result of insurance reimbursement restrictions, the Company has
increasingly been forced to provide extended payment terms on the private
balance of its patient accounts receivable balances. Such terms generally
extend over one to three years and bear interest from 10% to 12%.
5. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
CASH PAID DURING THE YEAR FOR: 1996 1995
---- ----
Taxes paid $ 4,000 $ 6,000
Interest paid $267,000 350,000
F10
<PAGE>
NON CASH INVESTING AND FINANCING ACTIVITIES:
During 1995, the Company sold the Santa Barbara hospital facility. The
purchase consideration consisted of a $547,000 note receivable from the
purchaser and the repayment of long-term debt to an outside party of
$753,000. The note receivable is collateralized by a second deed of trust
over the facility and was due in December 1996. The note bears interest at
8%. The Company has granted extensions of the note until May 30, 1997. In
consideration for the extensions the purchaser agreed to continue to pay
interest at a new rate of 10% per annum. On April 11, 1997 the Company
received $50,000 principal payment, leaving a balance of $497,000.
The Company received a payoff on a note receivable from the purchaser of a
real estate property sold during 1995. The balance on the note was $115,000
at the beginning of 1996 with maturity date of 1999. A principal payment of
$6,000 was received in August of 1996 as scheduled. The company offered a
$9,000 discount to the purchaser if the principal balance could be paid by
October of 1996.
The Company also received royalty payments of $7,000 on the note receivable
of $100,000 from the sale of Twin Circle, leaving a balance of $93,000.
6. DEBT
Short-term debt consists of the following:
Notes payable to stockholders due in 1997, bearing
interest at 10%, secured by real estate investments
with a net book value of $3,164,000 $1,406,000
Note payable for legal fees bearing
interest at 10%, payable every quarter 16,000
----------
Short-term debt $1,422,000
==========
Long-term debt consists of the following:
Notes payable to stockholder due in 1999, bearing
interest at 10%, secured by all assets of the
hospital $ 800,000
Note payable to creditor due in 2001, bearing
interest at 10%, secured by real estate 70,000
----------
Long-term debt $ 870,000
==========
F11
<PAGE>
7. COMMITMENTS AND CONTINGENCIES
The Company conducts a portion of its operations from leased facilities,
which include corporate offices, general offices for its specialized health
services business, stop-smoking center and outpatients programs. All of
the Company's leases are operating leases. The rental payments under these
leases include the minimum rental expense along with the increase in the
cost of living plus, in some instances, an annual adjustment to reflect the
lessor's increased costs of operation.
During the year the Company entered into a sublease agreement with Wilshire
Cellular. Under the terms of the agreement, Wilshire Cellular is liable
for approximately 40% of the total rental expense of the Company's office
premises in Encino, California, The total sublease income, under this
agreement, is $47,000, $20,000 for the years ended December 31, 1997 and
1998 respectively. The Company also continues to receive sublease rental
income from Circle Media under the 1995 sublease agreement. Under such
agreement Circle Media is liable for approximately 60% of the total rent
expense of the Company's office premises in Encino, California. The total
sublease income, under this agreement, is $101,000 and $42,000 for the
years ended December 31, 1997 and 1998 respectively.
The following is a schedule, by year, of future minimum rental payments
required under leases that have initial or remaining noncancelable lease
terms in excess of one year:
<TABLE>
<CAPTION>
Operating Leases
Year Ending ---------------------------------
December 31 Facilities Equipment Total
- ----------- ---------- --------- --------
<S> <C> <C> <C>
1997 $252,000 $2,000 $254,000
1998 114,000 0 114,000
1999 0 0 0
2000 0 0 0
-------- ------ --------
Total $366,000 $2,000 $368,000
======== ====== ========
</TABLE>
Operations include rent expense of $111,000 in 1996 and $219,000 in 1995.
8. LITIGATION
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.
F12
<PAGE>
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 PRP adjusted the
estimated cost of remediation. Soil remediation was 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 had 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 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 and has an unfunded cash call
contribution of $90,000 and $107,000 in 1995 and 1996.
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 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 caused an automatic stay of the state court proceedings. Mr.
Spinner has since 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, 1995. Mr. Spinner filed an appeal on October 20,
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
F13
<PAGE>
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. Because collection
remains doubtful, the Company is recognizing income from recovery on bad
debt as payments are received. The $300,000 Note is not included in the
financial statements.
9. INCOME TAXES
There is no provision for income taxes due to the offset of a loss carry
forward in 1996 and losses in 1995, other than provisions for minimum state
income taxes, which are included in selling, general and administrative
expenses.
Deferred tax assets and liabilities for federal income tax purposes at
December 31, 1996 consist of the following:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Net operating loss
carry forward $ 4,080,000 $ 3,701,000
Depreciation (145,000) (149,000)
Bad debt reserves 285,000 254,000
Toxic waste accrual 715,000 297,000
Other reserves 211,000 211,000
----------- -----------
5,146,000 4,314,000
Less valuation allowance (5,146,000) (4,314,000)
----------- -----------
$ 0 $ 0
=========== ===========
</TABLE>
There was no provision for income taxes for the year ended December 31,
1996. The following is a summary of the provision for income taxes for the
year ended:
<TABLE>
<CAPTION>
1995
----
<S> <C>
Federal $ 162,000
State 29,000
---------
191,000
Effect of NOL $(191,000)
=========
</TABLE>
F14
<PAGE>
The provision for income taxes differs from the statutory federal income
tax rate for 1995 due to the following:
<TABLE>
<CAPTION>
1995
----
<S> <C>
Federal income taxes at the statutory rate $ 162,000
State income taxes, net of federal benefit 29,000
---------
191,000
Effect of NOL $(191,000)
=========
</TABLE>
The Company has net operating loss carryforwards aggregating approximately
$11,130,000, for federal income tax purposes, which expire in various years
through 2010.
10. INDUSTRY SEGMENTS
The Company operates principally in two industries: specialized health
services and real estate. The specialized health services subsidiary
operates one owned hospital, three outpatient program facilities for the
treatment of chemical dependency and one center for stop-smoking services.
The real estate segment consists principally of undeveloped land in the
Santa Monica mountains. Operating profit excludes interest expense.
Identifiable assets by industry are those assets that are used in the
Company's operations in each segment and include principally cash
(including negative book balances of the segment), property, plant and
equipment and other assets used in the corporate management operations.
Depreciation and capital expenditures from continuing operations, including
investments in real estate, for the years ended December 31, 1996 and 1995
were:
<TABLE>
<CAPTION>
Specialized
Health Real Other
Services Estate Activity Consolidated
----------- ------ -------- ------------
<S> <C> <C> <C> <C>
Depreciation:
1996 $ 32,000 $2,000 $127,000 $161,000
1995 $ 83,000 $ 0 $100,000 $183,000
Capital expenditures and investments in real estate:
1996 $ 25,000 $110,000 $ 0 $135,000
1995 $ 35,000 $109,000 $ 0 $144,000
</TABLE>
F15
<PAGE>
Segment information from continuing operations is as follows:
<TABLE>
<CAPTION>
Specialized Corporate and
Health Real Other
Services Estate Activity Consolidated
- -------------------------------------------------------------------------------
Year Ended December 31, 1996:
<S> <C> <C> <C> <C>
Net operating
revenues $2,805,000 $ 47,000 $ 122,000 $ 2,974,000
========== ========== =========== ===========
Income (loss) from
operations $ 206,000 $ (374,000) $(1,573,000) $(1,741,000)
========== ========== =========== ===========
Interest (286,000)
-----------
Identifiable
assets $1,748,000 $3,164,000 $ 330,000 $ 5,242,000
========== ========== =========== ===========
Year Ended December 31, 1995:
Net operating
revenues $2,922,000 $ (96,000) $792,000 (1) $ 3,618,000
========== ========== =========== ===========
Income (loss) from
operations $ 222,000 $ (432,000) $ 7,000 $ (203,000)
========== ========== =========== ===========
Interest (347,000)
-----------
Loss from continuing
operations $ (550,000)
===========
Identifiable
assets $ 406,000 $3,407,000 $ 2,514,000 $ 6,327,000
========== ========== ============ ===========
</TABLE>
(1) Includes the gain on sale of hospital facilities of $696,000 and $125,000,
for the year ended December 31, 1995.
F16
<PAGE>
11. EMPLOYEE BENEFIT PLANS
Thrift and Profit Sharing Plan 401(k) - The Company sponsors a 401(k) plan
-------------------------------------
covering substantially all of its employees. Contributions to the plan are
made by the Company and participating employees. The covered employee
contribution is equal to 2.5% of the employee's compensation. No
contributions were made by the Company in 1996 and 1995 as contributions
are discretionary.
F17
<PAGE>
DELOITTE & TOUCHE LLP
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Frawley Corporation
Encino, California
We have audited the accompanying consolidated balance sheet of Frawley
Corporation and subsidiaries (the "Company") as of December 31, 1995 and the
related consolidated statements of operations, stockholders' equity and cash
flows for the years ended December 31, 1995 and 1994. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Frawley Corporation and
subsidiaries as of December 31, 1995 and the results of their operations and
their cash flows for the years ended December 31, 1995 and 1994, in conformity
with generally accepted accounting principles.
The 1995 and 1994 consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company's recurring losses from operations,
difficulties in generating sufficient cash flow to meet its obligations and
negative working capital raise substantial doubt about its ability to continue
as a going concern. The Company has relied upon financing from related parties
and sales of assets to continue its operations and is seeking sources of long-
term financing as it reorganizes its business. Management's plans concerning
these matters are also described in Note 2. These financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
Deloitte & Touche LLP
Los Angeles, CA 90017-2472
March 31, 1996
F18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 148,000
<SECURITIES> 0
<RECEIVABLES> 2,004,000
<ALLOWANCES> 710,000
<INVENTORY> 79,000
<CURRENT-ASSETS> 90,000
<PP&E> 5,140,000
<DEPRECIATION> 1,509,000
<TOTAL-ASSETS> 5,242,000
<CURRENT-LIABILITIES> 5,499,000
<BONDS> 0
0
0
<COMMON> 1,414,000
<OTHER-SE> (1,671,000)
<TOTAL-LIABILITY-AND-EQUITY> 5,242,000
<SALES> 2,974,000
<TOTAL-REVENUES> 2,974,000
<CGS> 1,900,000
<TOTAL-COSTS> 1,900,000
<OTHER-EXPENSES> 2,816,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 286,000
<INCOME-PRETAX> (2,028,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,028,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
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