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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, 1997
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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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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, 1997: $2,524,000
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, 1997.
Number of shares of Common Stock outstanding as of March 20, 1998: 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 28.
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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.
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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 licensed 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 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 1 to 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 one 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 and or drugs; (2) conditioned-reflex
aversion treatment; during this treatment patients are furnished
alcoholic beverages or synthetic drugs under circumstances which
produce an unpleasant reaction for the purpose of inducing an
aversion; (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.
COMPANY OWNED OUTPATIENT PROGRAMS. During 1997, 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.
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COMPANY OWNED CENTERS. The Company also owned and operated
under the name of Schick Centers one center for stop-smoking
services. The one center located in California was closed in
March 1998.
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.
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
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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.
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
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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 $3,226,000 as of the end of
1997, and are subject to mortgage debt, held by five stockholders
and a third party, aggregating approximately $1,611,000. 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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EMPLOYEES Frawley Corporation and its subsidiaries employ an aggregate of
approximately 68 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 2001. Currently, these
leased facilities include approximately 900 square feet of
office
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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 subsidiary of 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).
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 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.
The Company is also liable for its share of site study costs and
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in connection with such costs, the Company paid into the PRP
group $38,000 in 1993, $271,000 in 1994 and had an unfunded cash
call contribution of $90,000 and $107,000 in 1995 and 1996. The
Company paid $150,000 in 1997 leaving a remaining balance
$47,000.
During 1997, the Company funded $150,000 of its cash call
contributions and has a remaining unfunded cash call of
approximately $68,000. The Company expects an additional cash
call of approximately $32,000 in 1998. Therefore the Company has
classified as current $100,000, in long term $1,497,000 of the
total reserve.
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 the rights to the proceeds from the
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sale of certain property once allegedly owned by the Company and
Mr. Spinner. In November 1989, Harold Spinner cross-complained
against the Company and individuals, and in January 1990, Harold
Spinner amended the cross-complaint. The Spinners seek
approximately $4.4 million in damages and punitive damages based
on fraud. On July 8, 1990, the Company amended its complaint
against Mr. Spinner, seeking an accounting of the purchase price
and carrying costs, as well as adding a claim of fraud. In 1993,
the matter was set for trial on two occasions and was continued
at each date. On October 7, 1993, Harold Spinner filed personal
bankruptcy and listed his claim against the Company at $1
million. The filing of bankruptcy causes an automatic stay of the
state court proceedings. Mr. Spinner has been discharged from
bankruptcy. The Company filed a motion to have the case
dismissed and a hearing was held August 23, 1995 whereby an order
dismissing the complaint was signed by the court and entered on
September 6, 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. As of March 28, 1998, Shula Inc. has not paid its
interest payment
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and has announced plans to sell the property.
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 continues to recognize income from recovery of bad
debt as payments are received.
In October 1997, we were informed that our licensee for Classics
Illustrated is in trade mark dispute regarding Classics
Illustrated in Greece. We subsequently learned that the licensee
lost its case and is considering its options in Greece.
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 March 20, 1998 was 945.
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 15% in 1997 when compared to 1996. Revenues
declined in all business segments due to the difficult operating
conditions facing the Company as further described below. Net
loss is $(478,000) in 1997 compared to a $(2,028,000) net loss in
1996. Interest expense in 1997 was $255,000 compared to $286,000
in 1996. Selling, general and administrative expenses decreased
to $938,000 from $1,561,000 in 1996 due to expense reduction as a
result of closed hospital operations and overall downsizing.
SPECIALIZED Revenues from Specialized Health Services chemical
HEALTH dependency hospitals and contract units decreased by 12% in
SERVICES 1997 compared to 1996. The decrease is attributable to lower
occupancy levels at the remaining chemical dependency hospital.
Specialized Health
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Service income before interest expense was $40,000 in 1997 when
compared to $206,000 in 1996. Competition from other treatment
programs intensified during 1997 and 1996, together with stronger
emphasis by insurance carriers on outpatient treatment instead of
inpatient programs.
The Company plans to continue to improve operations through
additional reduction in overhead and increasing the patients in
both 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 There were no sales during 1997. The real estate operating loss
before interest expense was $82,000 in 1997 when compared to a
loss of $374,00 in 1996. Real estate losses continued as the
Company incurs carrying costs, improvements to property and
litigation cost associated 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 and
anticipates recovery of the required investments.
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.
________________________________________________________________________________
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
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as a going concern.
Real Estate and Corporate overhead continue to produce losses
which the operating business is unable to absorb. During 1997 the
Company received $599,000 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.
In 1996, 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 $68,000 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, 1997 1996
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Working capital (deficiency) ($2,187,000) ($1,716,000)
Current ratio (.25 to 1) (.4 to 1)
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.
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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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Independent Auditors' Report F1
Financial Statements
Consolidated Balance Sheet
as of December 31, 1997 F2-F3
Financial Statements for the Years
Ended December 31, 1997 and 1996
Consolidated Statements of
Operations F4
Consolidated Statements of
Stockholders' Deficit F5
Consolidated Statements of
Cash Flows F6
Notes to Consolidated Financial
Statements F7-F14
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.
21.1 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.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed.
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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 14, 1998
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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.
By: /s/ Patrick J. Frawley
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Patrick J. Frawley, Jr. Chairman of the Board, President and
Director (Principal Executive Officer)
May 14, 1998
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(Date)
By: /s/ Michael P. Frawley
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Michael P. Frawley, Vice President, Treasurer and Secretary
(Principal Financial and Accounting Officer)
May 14, 1998
- --------------------------------------------------------------------------------
(Date)
By: /s/ Patrick J. Frawley
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Patrick J. Frawley, Jr., Director
May 14, 1998
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(Date)
By: /s/ Michael P. Frawley
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Michael P. Frawley, Director
May 14, 1998
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(Date)
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[LETTERHEAD OF LA RUE, CORRIGAN & MCCORMICK]
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, 1997, and the
related consolidated statements of operations, stockholders' deficit, and cash
flows for the years ended December 31, 1997 and 1996. 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 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 audits provide 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, 1997, and the results of its operations and
its cash flows for the years ended December 31, 1997 and 1996 in conformity with
generally accepted accounting principles.
The 1997 and 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
Woodland Hills, California
April 15, 1998
F1
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FRAWLEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1997
<TABLE>
<S> <C>
ASSETS
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CURRENT ASSETS
Cash $ 73,000
Accounts receivable (net of
allowances of $600,000) 473,000
Prepaid expenses and deposits 173,000
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TOTAL CURRENT ASSETS 719,000
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OTHER ASSETS
Long-term accounts receivable (net of
allowance of $49,000) (Note 4) 113,000
Long-term notes receivable (Note 5) 25,000
Real estate investments, net (Notes 3, 6 and 8) 3,226,000
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TOTAL OTHER ASSETS 3,364,000
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PROPERTY AND EQUIPMENT (Note 6)
Land 111,000
Building and improvements 862,000
Machinery and equipment 613,000
Furniture and fixtures 5,000
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TOTAL 1,591,000
Less accumulated depreciation (1,136,000)
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TOTAL PROPERTY AND EQUIPMENT 455,000
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TOTAL $4,538,000
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</TABLE>
See notes to consolidated financial statements.
F2
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FRAWLEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1997
<TABLE>
<S> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
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CURRENT LIABILITIES
Notes payable to stockholders (Notes 3 and 6) $1,647,000
Accounts payable and accrued expenses 1,020,000
Environmental reserve (Note 8) 100,000
Unearned revenue 139,000
-----------
TOTAL CURRENT LIABILITIES 2,906,000
LONG TERM LIABILITIES
Notes payable to stockholders 800,000
Notes payable 70,000
Environmental reserve (Note 8) 1,497,000
-----------
TOTAL LONG TERM LIABILITIES 2,367,000
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 (18,374,000)
-----------
26,000
Less common stock in treasury,
191,312 shares (at cost) (761,000)
-----------
TOTAL STOCKHOLDERS' DEFICIT (735,000)
-----------
TOTAL $4,538,000
===========
</TABLE>
See notes to consolidated financial statements.
F3
<PAGE>
FRAWLEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
REVENUES:
Net revenues $2,524,000 $2,974,000
COSTS AND EXPENSES:
Cost of operations 1,793,000 1,900,000
Selling, general and administrative
expenses (Note 9) 954,000 1,561,000
Environmental reserve (Note 8) - 1,071,000
Write down of real estate investment - 184,000
Interest expense (Note 3) 255,000 286,000
---------- -----------
TOTAL COSTS AND EXPENSES 3,002,000 5,002,000
---------- -----------
NET (LOSS) INCOME $(478,000) $(2,028,000)
========== ===========
NET (LOSS) INCOME PER SHARE:
Continuing operations $ (0.39) $ (1.66)
---------- -----------
$ (0.39) $ (1.66)
---------- -----------
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, 1997 AND 1996
<TABLE>
<CAPTION>
Common Stock
------------ Capital Accumulated Stock in
Shares Amount Surplus Deficit Treasury Total
------ ------ ------- ------- -------- -----
<S> <C> <C> <C> <C> <C> <C>
BALANCE,
January 1, 1996 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)
Net loss for the
year (478,000) (478,000)
--------- ---------- ----------- ------------ --------- ----------
BALANCE,
December 31, 1997 1,414,217 1,414,000 16,986,000 (18,374,000) (761,000) (735,000)
========= ========== =========== ============ ========= =========
</TABLE>
See notes to consolidated financial statements.
F5
<PAGE>
FRAWLEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
--------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(478,000) $(2,028,000)
--------- -----------
Adjustments to reconcile net loss to net
cash used in operating activities:
Write down of real estate investments - 184,000
Depreciation 31,000 161,000
Changes in operating assets and liabilities:
Short and long-term accounts
receivable, net 68,000 98,000
Prepaid expenses and deposits (4,000) 15,000
Notes Receivable discount 16,000 9,000
Accounts payable and accrued expenses (343,000) (988,000)
Environmental reserve (121,000) 1,618,000
Unearned revenue 13,000 (22,000)
--------- -----------
TOTAL ADJUSTMENTS (340,000) 1,075,000
--------- -----------
Net cash used in
operating activities (818,000) (953,000)
--------- -----------
CASH FLOW FROM INVESTING ACTIVITIES:
Equipment purchases (19,000) (25,000)
Payments for real estate improvements (62,000) (110,000)
Proceeds from return on security bond - 150,000
Proceeds from return on security deposit - 168,000
--------- -----------
Net cash provided by (used in)
investing activities (81,000) 183,000
--------- -----------
CASH FLOWS FROM FINANCING ACTIVATES:
Short-term debt borrowings related party 241,000 1,045,000
Proceeds from notes receivable 599,000 113,000
Long-term-debt borrowings - 70,000
Repayment of borrowings (16,000) (780,000)
--------- -----------
Net cash provided by
financing activities 824,000 448,000
--------- -----------
NET DECREASE IN CASH AND CASH
EQUIVALENTS (75,000) (322,000)
CASH, BEGINNING OF PERIOD 148,000 470,000
--------- -----------
CASH, END OF PERIOD $ 73,000 $ 148,000
========= ===========
</TABLE>
See notes to consolidated financial statements.
F6
<PAGE>
FRAWLEY CORPORATION AND SUBSIDIARIES
- ------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
- --------------------------------------------------------------------------------
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. The hospital building is depreciated over
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.
F7
<PAGE>
Cash and Cash Equivalents - The Company considers highly liquid investments
-------------------------
with an original maturity of three months or less to be cash equivalents.
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 1997 was $478,000 compared to a $2,028,000 net
loss for 1996. The Corporation generates operating 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 1998 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. 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.
F8
<PAGE>
The value of the Company's undeveloped real estate in the Santa Monica
Mountains has generally been affected by past economic conditions unique to
California. The factors affecting the salability of the Company's property
included the lack of Southern California development activities and general
uncertainties in the economy. The economy and markets for this property
has improved recently 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 had been given informal extended terms by vendors whose
balances total approximately $154,000. The Company continued to make
payments under the arrangements with these vendors during 1997. In June of
1997, the Company settled with the various vendors and paid a total of
$43,000 toward the outstanding debt. The reduction in this liability is
reflected as a reduction in selling, general and administrative expenses.
3. RELATED PARTY TRANSACTIONS
During 1997, the Company borrowed $236,000 from the Chief Executive Officer
due in 1998, bearing interest of 10% and secured by real estate
investments. Also during the year, the Company borrowed $5,000 from the
daughter of the Chief Executive Officer due in 1998 bearing interest of 10%
and secured by real estate investment.
In 1996 and prior years, the Company borrowed $2,680,000 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 $230,000 and $159,000 during 1997 and 1996 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: 1997 1996
---- ----
Taxes paid $ 7,000 $ 4,000
Interest paid $186,000 $267,000
NOTE RECEIVABLE:
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
F9
<PAGE>
$753,000. The note receivable was collateralized by a second deed of trust
over the facility and was due in December 1996. The Company granted an
extension of the note until May 30, 1997. In consideration for the
extensions the purchaser agreed to increase the interest rate from 8% to
10% per annum. On April 11, 1997 the Company received a $50,000 principal
payment, leaving a balance of $497,000. On May 29, 1997 the Company
received the remaining balance of approximately $497,000.
The Company also received royalty payments of $7,000 in 1996 and $52,000 in
1997 on the note receivable of $100,000 from the sale of Twin Circle, and
offered a discount of $16,000 if the balance of $25,000 could be paid off
by December of 1997. The Company received the agreed payoff amount in
January 1998. The discard of $16,000 is included in selling, general and
administrative expense.
6. DEBT
Short-term debt consists of the following:
Notes payable to stockholders due in 1998, bearing
interest at 10%, secured by real estate investments
with a net book value of $3,226,000 $1,647,000
Environmental reserve 100,000
----------
Short-term debt $1,747,000
==========
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
Environmental reserve 1,497,000
----------
Long-term debt $2,367,000
==========
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 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.
F10
<PAGE>
In 1996, the Company moved from larger Corporate office facilities to
substantially smaller facilities which reflect the smaller operations. The
Company subsequently 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 prior
office premises. The total sublease income, under this agreement, was
$47,000 and $20,000 for the years ended December 31, 1997 and 1996,
respectively. The Company also continues to receive sublease rental income
from Circle Media under a 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 $107,000 and $42,000 for the years ended
December 31, 1997 and 1996, respectively. The original lease and sublease
agreements expire in May, 1998. Minimum sublease payments are expected to
be $20,000 and are expected to equal lease expenses under the original
lease.
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>
1998 $ 87,000 $0 $ 87,000
1999 76,000 0 76,000
2000 78,000 0 78,000
2001 80,000 0 80,000
-------- -- --------
Total $321,000 $0 $321,000
======== == ========
</TABLE>
Operations include rent expense of $96,000 in 1997 and $111,000 in 1996.
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.
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.
F11
<PAGE>
The Company had recorded a liability for its estimated share of the
assessments, net of insurance recovery. 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.
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. The Company paid $150,000 in 1997
leaving a remaining balance of $47,000.
During 1997, the Company funded $150,000 of its cash call contributions and
has a remaining unfunded cash call of approximately $68,000. The Company
expects an additional cash call of approximately $32,000 in 1998. Therefore
the Companyu has classified as current $100,000, in log term $1,497,000 of
the total reserve.
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. As of March 28,
1998, Shula Inc. has not paid its interest payment and has announced plans
to sell the property.
The Shula bankruptcy plan reorganization and stipulated settlement were
approved by the Bankruptcy Court on December 10, 1996. Since recovery is
doubtful the $300,000 Note is not included in the financial statements. The
Company is recognizing income from recovery on bad debt as payments are
received.
9. INCOME TAXES
There is no provision for income taxes due to the offset of a loss carry
forward in 1997 and losses in 1996, other than provisions for minimum state
income taxes, which are included in selling, general and administrative
expenses.
F12
<PAGE>
Deferred tax assets and liabilities for federal income tax purposes at
December 31, 1997 and 1996 consist of the following:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Net operating loss
carry forward $ 3,907,000 $ 3,721,000
Depreciation (141,000) (145,000)
Bad debt reserves 204,000 207,000
Toxic waste accrual 543,000 617,000
Other reserves 140,000 121,000
----------- -----------
4,653,000 4,521,000
Less valuation allowance (4,653,000) (4,521,000)
----------- -----------
$ 0 $ 0
=========== ===========
</TABLE>
There was no provision for income taxes for the year ended December 31,
1997 or 1996.
The Company has net operating loss carryforwards aggregating approximately
$11,491,000, for federal income tax purposes, which expire in various years
through 2012.
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. 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, 1997 and 1996
were:
<TABLE>
<CAPTION>
Specialized
Health Real Other
Services Estate Activity Consolidated
-------- -------- -------- ------------
<S> <C> <C> <C> <C>
Depreciation:
1997 $31,000 $ 0 $ 0 $ 31,000
1996 $32,000 $ 2,000 $127,000 $161,000
Capital expenditures and investments in real estate:
1997 $19,000 $ 62,000 $ 0 $ 81,000
1996 $25,000 $110,000 $ 0 $135,000
</TABLE>
F13
<PAGE>
Segment information from continuing operations is as follows:
<TABLE>
<CAPTION>
Specialized Corporate and
Health Real Other
Services Estate Activity Consolidated
-------- ------ -------- ------------
<S> <C> <C> <C> <C>
Year Ended December 31, 1997:
Net operating
revenues $2,469,000 $ 31,000 $ 24,000 $2,524,000
========== ========= ========== ==========
Income (loss) from
operations $ 40,000 $(82,000) $( 180,000) $ (222,000)
========== ========= ========== ==========
Interest (255,000)
----------
Identifiable
assets $1,311,000 $3,227,000 $ 0 $4,538,000
========== ========== ========== ==========
Year Ended December 31, 1996:
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
========== ========= =========== ===========
</TABLE>
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 1997 and 1996 as contributions
are discretionary.
F14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 73,000
<SECURITIES> 0
<RECEIVABLES> 1,260,000
<ALLOWANCES> 649,000
<INVENTORY> 64,000
<CURRENT-ASSETS> 109,000
<PP&E> 4,817,000
<DEPRECIATION> 1,136,000
<TOTAL-ASSETS> 4,538,000
<CURRENT-LIABILITIES> 5,273,000
<BONDS> 0
0
0
<COMMON> 1,414,000
<OTHER-SE> (2,149,000)
<TOTAL-LIABILITY-AND-EQUITY> 4,538,000
<SALES> 2,524,000
<TOTAL-REVENUES> 2,524,000
<CGS> 1,793,000
<TOTAL-COSTS> 1,793,000
<OTHER-EXPENSES> 954,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 255,000
<INCOME-PRETAX> (478,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (478,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (478,000)
<EPS-PRIMARY> (0.39)
<EPS-DILUTED> 0
</TABLE>
