<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- ---
ACT OF 1934
For the quarterly period ended June 30, 1998
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OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ---
EXCHANGE ACT OF 1934
For the transition period from _____________________ to ___________________
Commission File Number 1-6436
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FRAWLEY CORPORATION
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware 95-2639686
- -------------------------------- -------------------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMP I.D. NO)
INCORPORATION OR ORGANIZATION)
28720 Roadside Drive, Suite 128, Agoura HIlls, California 91301
- -------------------------------------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(818)735-6622
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(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
- --------------------------------------------------------------------------------
(FORMER NAME, ADDRESS AND FISCAL YEAR, IF CHANGED SINCE LAST REPORT)
Indicated by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the close of the latest practicable date.
Class Outstanding at June 30, 1998
- -------------------------------- -----------------------------------------
Common stock, par value $1 1,222,905
Total Number of Pages 12
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FRAWLEY CORPORATION AND SUBSIDIARIES
INDEX
PART I: FINANCIAL INFORMATION PAGE NO.
Item 1: Financial Statements
Consolidated Balance Sheets -
June 30, 1998 and December 31, 1997.............................. 3
Consolidated Statements of Operations -
Three Months Ended June 30, 1998 and 1997........................ 4
Consolidated Statements of Operations -
Six Months Ended June 30, 1998 and 1997.......................... 5
Consolidated Statements of Cash Flows -
Six Months Ended June 30, 1998 and 1997.......................... 6
Notes to Consolidated Financial Statements....................... 7
Item 2: Management's Discussion and Analysis
of Financial Condition and Results of Operations................. 8-9
PART II: OTHER INFORMATION
Item 1: Legal Proceedings........................................ 10
Item 5: Other Information........................................ 11
Item 6: Exhibits and Reports on Form 8-K......................... 11
SIGNATURES ............................................................ 12
2
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ITEM I: FINANCIAL STATEMENTS
FRAWLEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31,
ASSETS 1998 1996
------ ------------- -------------
(Unaudited)
CURRENT ASSETS
Cash $ 40,000 $ 73,000
Accounts receivable, net 480,000 473,000
Prepaid expenses and other deposits 143,000 173,000
------------ ------------
TOTAL CURRENT ASSETS 663,000 719,000
Long-term accounts receivable, net 72,000 113,000
Long-term notes receivable 25,000
Real estate investments, net 3,060,000 3,226,000
Property, plant and equipment, net 456,000 455,000
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TOTAL ASSETS $ 4,251,000 $ 4,538,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Notes payable to stockholders $ 1,661,000 $ 1,647,000
Accounts payable and accrued expenses 914,000 1,020,000
Environmental Reserve 100,000 100,000
Unearned revenue 168,000 139,000
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TOTAL CURRENT LIABILITIES 2,843,000 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 (18,598,000) (18,374,000)
------------ ------------
(198,000) 26,000
Less common stock in treasury,
191,312 shares (at cost) (761,000) (761,000)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY (959,000) (735,000)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 4,251,000 $ 4,538,000
============ ============
See notes to consolidated financial statements.
3
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FRAWLEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended
June 30,
----------------------
1998 1997
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REVENUES:
Net revenues $ 754,000 $675,000
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COSTS AND EXPENSES:
Cost of operations 416,000 458,000
Selling, general and administrative
expenses 360,000 145,000
Interest expense 62,000 65,000
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TOTAL COSTS AND EXPENSES 838,000 668,000
--------- ---------
PROFIT (LOSS) FROM CONTINUING OPERATIONS (84,000) 7,000
NET PROFIT (LOSS) $ (84,000) $ 7,000
========= =========
NET PROFIT (LOSS) PER SHARE:
Continuing operations $ (.07) $ .01
========= =========
Weighted average number of
common shares outstanding 1,222,905 1,222,905
========= =========
See notes to consolidated financial statements
4
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FRAWLEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Six Months Ended
June 30,
-------------------------
1998 1997
----------- -----------
REVENUES:
Net Revenues $1,399,000 $1,277,000
---------- ----------
TOTAL REVENUES 1,399,000 1,277,000
COSTS AND EXPENSES:
Cost of operations 861,000 886,000
Selling, general and administrative
expenses 631,000 453,000
Interest expense 131,000 128,000
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TOTAL COST AND EXPENSES 1,623,000 1,467,000
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NET LOSS $ (224,000) (190,000)
========== ==========
NET (LOSS) INCOME PER SHARE:
Continuing operations $ (0.18) $ (0.16)
========== ==========
Weighted average number of
common shares outstanding 1,222,905 1,222,905
========== ==========
See notes to consolidated financial statements
5
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FRAWLEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Six Months Ended
June 30,
------------------------
1998 1997
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $(224,000) $(190,000)
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Adjustments to reconcile net loss to net
cash used in operating activities:
Loss on sale of real estate property 79,000
Write down of long term debt (11,000)
Write down of Advertising expense (156,000)
Depreciation 16,000 15,000
Changes in operating assets and liabilities:
Short- and long-term accounts
receivable, net 59,000 53,000
Prepaid expenses and deposits 30,000 (18,000)
Other assets
Accounts payable and accrued expenses (106,000) (262,000)
Unearned revenue 29,000 14,000
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TOTAL ADJUSTMENTS 107,000 (365,000)
--------- ---------
Net cash used in
operating activities (117,000) (555,000)
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CASH FLOW FROM INVESTING ACTIVITIES:
Equipment purchases (17,000) (8,000)
Long term debt paydown (87,000) (5,000)
Payments for environmental reserve (150,000)
Payments for real estate investments (16,000) (33,000)
Proceeds from sale of real estate properties 103,000
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Net cash provided by
investing activities (17,000) 196,000
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CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term debt borrowings 101,000 137,000
Short-term notes receivable 547,000
Long-term notes receivable 12,000
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Net cash provided or used by
financing activities 101,000 696,000
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Net cash used for continuing operations (33,000) (55,000)
--------- ---------
NET DECREASE IN CASH AND CASH
EQUIVALENTS (33,000) (55,000)
CASH, BEGINNING OF PERIOD 73,000 148,000
--------- ---------
CASH, END OF PERIOD $ 40,000 $ 93,000
========= =========
See notes to consolidated financial statements
6
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FRAWLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments necessary to present
fairly the financial position at June 30, 1998, the results of
operations and changes in cash flow for the six months then ended.
NOTE 2: Revenues from continued operations for the six months ended June 30,
1998 totaled $1,399,000.
NOTE 3: The results of operations for the six months ended June 30, 1998 and
1997 are not necessarily indicative of results to be expected for the
full year.
7
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FRAWLEY CORPORATION AND SUBSIDIARIES
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Specialized Health Services
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During the quarter ended June 30, 1998, operating revenues from Specialized
Health Services increased by $154,000 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
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The real estate operating loss during the quarter ended June 30, 1998 was
$204,000 as compared to a loss of $136,000 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 a agreement to sell one
small parcel of land which sold in May of 1998 for $102,000.
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.
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.
8
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The Seattle Hospital and outpatient treatment program reported a $93,000
profit for the six months ended June 30, 1998 compared to a $38,000 loss for the
six months ended June 30, 1997. Management believes the results will continue as
the company goes through the 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.
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 expenditure to prepare the land for sale, which would be
financed through borrowings. The sale of the property is unpredictable and
highly uncertain and there is no assurance that the improvements will increase
the marketability of the property. The limited resources available to the
Company will be directed at revitalization of the health care business and the
continued reduction of non-producing assets.
9
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PART II - OTHER INFORMATION
ITEM 1: Legal Proceedings
-----------------
The Company is named as a defendant in the Chatham Brothers toxic
waste cleanup lawsuit. In February 1991, the Company was identified as
one of many "Potentially Responsible Parties" (PRPs) in the Chatham
Brothers toxic waste cleanup site case, filed by the State of California
-Environmental Protection Agency, Department of Toxic Substances Control
(DTSC) and involved the Hartley Pen Company previously owned by the
Company. On December 31, 1991, the Company and approximately 90 other
companies were named in a formal complaint. The Company joined a group
of defendants, each of whom was so notified and which are referred to as
Potentially Responsible Parties (PRPs) for the purpose of negotiating
with the DTSC and for undertaking remediation of the site. During 1995,
the State of California adjusted the estimated cost of remediation. Soil
remediation is estimated at $2,000,000 with the Company's participation
at 3.8% or $76,000. Water clean up is estimated at $6,000,000 with the
Company's share at 5.67% or $340,000. The Company has recorded a
liability for its estimated share of the assessments, net of insurance
recovery, in the accompanying financial statements. In 1996, the PRP
Group revised the cleanup estimate cost of the site over a 30-year
period and included a cost for overhead and State oversight costs for
the same period of time. Also at the end of 1996, the PRP Group
announced that the allocation percentage would be changing. Although
nothing has officially been released the Company has increased its
reserve to reflect the higher cost estimate and the higher expected
percentage based on discussion with PRP legal counsel and site
management. The result was that the Company increased its 1995 reserve
from $744,000 to $1,815,000 in 1996. Because of the long term nature of
these expenses the Company has reclassified the liability into short
term for $197,000, which the Company paid $150,000 in May 1997, and long
term for $1,618,000. The Company is also liable for its share of site
study costs and in connection with such costs, the Company paid into the
PRP group $38,000 in 1993, $271,000 in 1994 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.
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
10
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$2,000. Since collection remains doubtful the Company will recognize
income from recovery of bad debt as payments are received.
ITEM 5: Other Information
-----------------
None
ITEM 6: Exhibits and Reports on Form 8-K
--------------------------------
No reports on form 8-K were filed during the quarter ended
June 30, 1998.
11
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FRAWLEY CORPORATION
---------------------------------------
(REGISTRANT)
Date: December 7, 1998 By: /s/Michael P. Frawley
---------------------------- ---------------------------
MICHAEL P. FRAWLEY, President
(Authorized Officer and Chief
Financial Officer)
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 40,000
<SECURITIES> 0
<RECEIVABLES> 1,328,000
<ALLOWANCES> 776,000
<INVENTORY> 66,000
<CURRENT-ASSETS> 77,000
<PP&E> 4,668,000
<DEPRECIATION> 1,152,000
<TOTAL-ASSETS> 4,251,000
<CURRENT-LIABILITIES> 5,210,000
<BONDS> 0
0
0
<COMMON> 1,414,000
<OTHER-SE> (2,373,000)
<TOTAL-LIABILITY-AND-EQUITY> 4,251,000
<SALES> 1,399,000
<TOTAL-REVENUES> 1,399,000
<CGS> 861,000
<TOTAL-COSTS> 861,000
<OTHER-EXPENSES> 631,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 131,000
<INCOME-PRETAX> (224,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (224,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (224,000)
<EPS-PRIMARY> (.18)
<EPS-DILUTED> 0
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