<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
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EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
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OR
_____TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXHCANGE ACT OF 1934
For the transition period from_____________________ to _________________________
Commission File Number 1-6436
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FRAWLEY CORPORATION
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware 95-2639686
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(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION)
(I.R.S. EMP I.D. NO)
28720 Roadside Dr., 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)
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(FORMER NAME, ADDRESS AND FISCAL YEAR, IF CHANGED SINCE LAST REPORT)
Indicated by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the close of the latest practicable date.
Class Outstanding at March 20, 1998
- ----------------------------------- -------------------------------------------
Common stock, par value $1 1,222,905
Total Number of Pages 11
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FRAWLEY CORPORATION AND SUBSIDIARIES
INDEX
PART I: FINANCIAL INFORMATION PAGE NO.
Item 1: Financial Statements
Consolidated Balance Sheets -
March 31, 1998 and December 31, 1997............................3
Consolidated Statements of Operations -
Three Months Ended March 31, 1998 and 1997......................4
Consolidated Statements of Cash Flows -
Three Months Ended March 31, 1998 and 1997......................5
Notes to Consolidated Financial Statements......................6
Item 2: Management's Discussion and Analysis
of Financial Condition and Results of Operations ...............7-8
PART II: OTHER INFORMATION
Item 1: Legal Proceedings .....................................9-10
Item 5: Other Information .....................................10
Item 6: Exhibits and Reports on Form 8-K.......................10
SIGNATURES ..........................................................11
2
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ITEM I: FINANCIAL STATEMENTS
FRAWLEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
ASSETS 1998 1997
------ ----------- ------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash $ 7,000 $ 73,000
Accounts receivable, net 529,000 473,000
Prepaid expenses and other deposits 135,000 173,000
------------ ------------
TOTAL CURRENT ASSETS 671,000 719,000
Long-term accounts receivable, net 78,000 113,000
Long-term notes receivable 0 25,000
Real estate investments, net 3,234,000 3,226,000
Property, plant and equipment, net 447,000 455,000
------------ ------------
TOTAL ASSETS $ 4,430,000 $ 4,538,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
<S> <C> <C>
Notes payable to stockholders $ 1,654,000 $ 1,647,000
Accounts payable and accrued expenses 965,000 1,020,000
Environmental reserve 100,000 100,000
Unearned revenue 219,000 139,000
------------ ------------
TOTAL CURRENT LIABILITIES 2,938,000 2,906,000
LONG TERM LIABILITIES
Notes payable to Stockholders 800,000 800,000
Notes payable 70,000 70,000
Environmental reserve 1,497,000 1,497,000
------------ ------------
TOTAL LONG TERM LIABILITIES 2,367,000 2,367,000
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 (18,514,000) (18,374,000)
(114,000) 26,000
Less common stock in treasury,
191,312 shares (at cost) (761,000) (761,000)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY (875,000) (735,000)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS'EQUITY $ 4,430,000 $ 4,538,000
============ ============
</TABLE>
See notes to consolidated financial statements.
3
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FRAWLEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------
1998 1997
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<S> <C> <C>
REVENUES:
Net revenues $ 645,000 $ 602,000
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COSTS AND EXPENSES:
Cost of operations 445,000 428,000
Selling, general and administrative
expenses 271,000 308,000
Interest expense 69,000 63,000
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TOTAL COSTS AND EXPENSES 785,000 799,000
--------- ---------
NET LOSS $(140,000) $(197,000)
========= =========
NET LOSS PER SHARE:
Continuing operations $ (.11) $ (.16)
--------- --------
(.11) (.16)
========= ========
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>
Three Months Ended
March 31,
-----------------------
1998 1997
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $(140,000) $(197,000)
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Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation 8,000 (31,000)
Disposals of property, plant and equipment 36,000
Changes in operating assets and liabilities:
Short- and long-term accounts
receivable, net 4,000 58,000
Prepaid expenses and deposits 38,000 22,000
Accounts payable and accrued expenses (55,000) (84,000)
Unearned revenue 80,000 (21,000)
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TOTAL ADJUSTMENTS 75,000 (20,000)
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Net cash used in
operating activities ( 65,000) (217,000)
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CASH FLOW FROM INVESTING ACTIVITIES:
Equipment purchases (8,000) (2,000)
Refunds received on real estate
Net cash provided by
investing activities (8,000) (2,000)
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CASH FLOWS FROM FINANCING ACTIVITES:
Short-term debt borrowings 7,000 6,000
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Net cash provided or used by
financing activities 7,000 6,000
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NET DECREASE IN CASH AND CASH
EQUIVALENTS ( 66,000) (213,000)
CASH, BEGINNING OF PERIOD 73,000 148,000
--------- ---------
CASH, END OF PERIOD $ 7,000 $ (65,000)
========= =========
</TABLE>
See notes to consolidated financial statements
5
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FRAWLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments necessary to present
fairly the financial position at March 31, 1998, the results of
operations and changes in cash flow for the three months then ended.
NOTE 2: Revenues from continued operations for the three months ended March
31, 1998 totaled $645,000.
NOTE 3: The results of operations for the three months ended March 31, 1998
and 1997 are not necessarily indicative of results to be expected for
the full year.
6
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FRAWLEY CORPORATION AND SUBSIDIARIES
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Specialized Health Services
---------------------------
During the quarter ended March 31, 1998, operating revenues from Specialized
Health Services increased by $45,000 when compared to the same period in 1997.
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
-----------
The real estate operating loss during the quarter ended March 31, 1998 was
$62,000 as compared to a loss of $106,000 for the same period in 1997. 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. In the first quarter, the Company entered into an agreement to sell
one small parcel of land which sold in May of 1998 for $102,000. Also, the
President and Chairman of the Board agreed to finance the construction of a
water mainline in Lobo Canyon adjacent to some of the Company's property which
will improve the properties marketability.
Los Angeles County Regional Planning Commission which governs real estate
development has announced that they will have public hearings to review a plan
to down zone undeveloped land in the Santa Monica Mountains. The effect of
this plan is not clear yet.
7
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Liquidity and Capital Resources
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The Company's recurring losses from continuing operations and difficulties in
generating cash flow sufficient to meet its obligations raise substantial
doubt about its ability to continue as a going concern.
The Seattle Hospital and outpatient treatment program reported a $27,000 loss
for the three months ended March 31, 1998 compared to a $24,000 loss for the
three months ended March 31, 1997. Management believes the results will
continue as the Company continues to experience a transition from third party
reimbursement to direct payment from patients. Debt secured by the Seattle
Hospital in the amount of $800,000 is due September 1, 1999.
The Company continues to incur legal expenses and has an obligation in 1998 to
contribute to the Chatham Brothers toxic waste cleanup lawsuit.
Servicing outstanding debt continues to be a significant burden on the
Company's operations.
The Company intends 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 expenditures 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 reduction of non-producing assets.
8
<PAGE>
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 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 and a cash call contribution
of $190,000 in May of 1997.
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.
9
<PAGE>
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. The last
payment received was in February 1998.
ITEM 5: Other Information
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None
ITEM 6: Exhibits and Reports on Form 8-K
--------------------------------
None
10
<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: September 22, 1998 By: /s/ Michael P. Frawley
------------------------------ ----------------------------------
Michael P. Frawley, Vice President
(Authorized Officer and Chief
Financial Officer)
11
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 7,000
<SECURITIES> 0
<RECEIVABLES> 1,331,000
<ALLOWANCES> 724,000
<INVENTORY> 65,000
<CURRENT-ASSETS> 70,000
<PP&E> 4,825,000
<DEPRECIATION> 1,144,000
<TOTAL-ASSETS> 4,430,000
<CURRENT-LIABILITIES> 5,305,000
<BONDS> 0
0
0
<COMMON> 1,414,000
<OTHER-SE> (2,289,000)
<TOTAL-LIABILITY-AND-EQUITY> 4,430,000
<SALES> 645,000
<TOTAL-REVENUES> 645,000
<CGS> 445,000
<TOTAL-COSTS> 445,000
<OTHER-EXPENSES> 271,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 69,000
<INCOME-PRETAX> (140,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (140,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (140,000)
<EPS-PRIMARY> (.11)
<EPS-DILUTED> 0
</TABLE>
