<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 September 30, 1998
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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
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 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)
- --------------------------------------------------------------------------------
(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 September 30, 1998
- ----------------------------------- -------------------------------------------
Common stock, par value $1 1,222,905
Total Number of Pages 12
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FRAWLEY CORPORATION AND SUBSIDIARIES
INDEX
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<CAPTION>
PART I: FINANCIAL INFORMATION PAGE NO.
<S> <C> <C>
Item 1: Financial Statements
Consolidated Balance Sheets -
September 30, 1998 and December 31, 1997............................3
Consolidated Statements of Operations -
Three Months Ended September 30, 1998 and 1997......................4
Consolidated Statements of Operations -
Nine Months Ended September 30, 1998 and 1997.......................5
Consolidated Statements of Cash Flows -
Nine Months Ended September 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..........................................10-11
Item 5: Other Information..........................................11
Item 6: Exhibits and Reports on Form 8-K...........................11
SIGNATURES...............................................................12
</TABLE>
2
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ITEM I: FINANCIAL STATEMENTS
FRAWLEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
ASSETS 1998 1997
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(Unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash $ 63,000 $ 73,000
Accounts receivable, net 439,000 473,000
Prepaid expenses and other deposits 161,000 173,000
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TOTAL CURRENT ASSETS 663,000 719,000
Long-term accounts receivable, net 54,000 113,000
Long-term notes receivable 25,000
Real estate investments, net 3,079,000 3,226,000
Property, plant and equipment, net 470,000 455,000
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TOTAL ASSETS $ 4,266,000 $ 4,538,000
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<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
CURRENT LIABILITIES
Notes payable to stockholders $ 1,650,000 $ 1,647,000
Accounts payable and accrued expenses 900,000 1,020,000
Environmental reserve 100,000 100,000
Unearned revenue 169,000 139,000
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TOTAL CURRENT LIABILITIES 2,819,000 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
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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 (18,559,000) (18,374,000)
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(159,000) 26,000
Less common stock in treasury,
191,312 shares (at cost) (761,000) (761,000)
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TOTAL STOCKHOLDERS' EQUITY (920,000) (735,000)
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TOTAL LIABILITIES AND STOCKHOLDERS'EQUITY $ 4,266,000 $ 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
September 30,
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1998 1997
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<S> <C> <C>
REVENUES:
Net revenue $ 845,000 $ 538,000
(Loss) from sale of real estate (80,000)
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TOTAL REVENUES 765,000 538,000
COSTS AND EXPENSES:
Cost of operations 492,000 474,000
Selling, general and administrative
expenses 167,000 309,000
Interest expense 67,000 63,000
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TOTAL COSTS AND EXPENSES 726,000 846,000
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NET INCOME(LOSS) $ 39,000 $ (308,000)
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NET INCOME(LOSS) PER SHARE:
Continuing operations $ .03 $ (.25)
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Weighted average number of
common shares outstanding 1,222,905 1,222,905
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</TABLE>
See notes to consolidated financial statements
4
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FRAWLEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
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1998 1997
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<S> <C> <C>
REVENUES:
Net Revenues $2,244,000 $1,815,000
(Loss) from sale of real estate (80,000)
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TOTAL REVENUES 2,164,000 1,815,000
COSTS AND EXPENSES:
Cost of operations 1,353,000 1,360,000
Selling, general and administrative
expenses 798,000 762,000
Interest expense 198,000 191,000
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TOTAL COST AND EXPENSES 2,349,000 2,313,000
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NET LOSS $ (185,000) $ (498,000)
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NET (LOSS) PER SHARE:
Continuing operations $ (0.15) $ (0.41)
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Weighted average number of
common shares outstanding 1,222,905 1,222,905
========== ==========
</TABLE>
5
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FRAWLEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
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1998 1997
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Profit (Loss) $(185,000) $(498,000)
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Adjustments to reconcile net loss to net
cash used in non-operating activities:
Loss on sale of real estate investment 80,000 38,000
Write down of assets
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation 24,000 (15,000)
Changes in operating assets and liabilities:
Short and long-term accounts
receivable, net 118,000 82,000
Prepaid expenses and deposits 12,000 (7,000)
Notes Receivable
Other assets
Accounts payable and accrued expenses (120,000) (295,000)
Notes payable write down (11,000)
Unearned revenue 30,000 30,000
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TOTAL ADJUSTMENTS 144,000 (178,000)
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Net cash used in
operating activities (41,000) (676,000)
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CASH FLOW FROM INVESTING ACTIVITIES:
Equipment purchases (39,000) (12,000)
Long term debt paydown (5,000)
Environmental reserve paydown (150,000)
Payments for real estate improvements (35,000) (42,000)
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Net cash provided by
investing activities (74,000) 209,000)
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CASH FLOWS FROM FINANCING ACTIVITES:
Short-term debt borrowings 101,000 137,000
Long-term-debt borrowings 569,000
Proceeds from sale of real estate 103,000
Repayment of borrowings (99,000)
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Net cash provided or (used in)
financing activities 105,000 706,000
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NET DECREASE IN CASH AND CASH
EQUIVALENTS (10,000) (179,000)
CASH, BEGINNING OF PERIOD 73,000 148,000
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CASH, END OF PERIOD $ 63,000 $ (31,000)
========= =========
</TABLE>
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 September 30, 1998, the results of
operations and changes in cash flow for the nine months then ended.
NOTE 2: Revenues from continued operations for the nine months ended September
30, 1998 totaled $2,244,000.
NOTE 3: The results of operations for the nine months ended September 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 September 30, 1998, operating revenues from Specialized
Health Services increased by $213,000 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 September 30, 1998 was
$165,000 when compared to a loss of $195,000 for the same period in 1997. Real
estate losses continue as the company incurs carrying costs, improvements
required to sell the properties, and litigation cost associated with particular
properties.
In the first quarter, the Company entered into an agreement to sell one parcel
of land which sold in May 1998 for $103,000. The Company was able to retire some
related debt and recognized a loss of $80,000 on the sale of real estate
property.
The undeveloped real estate market in Southern California is showing signs of
improvement. The Company is actively advertising the undeveloped real estate for
sale.
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
8
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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 programs reported a net operating
profit of $137,000 for the nine months ended September 30, 1998 compared to a
$185,000 loss for the same period in 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 made
a contribution of $50,000 in September 1998 that was incurred in 1997.
Real Estate and Corporate overhead continue to produce losses which the
operating business is unable to absorb. The sale of real estate may require
further expenditure to prepare the land for sale, which would be financed
through borrowings. The sale of real estate 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
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The Company is named as a defendant in the Chatham Brothers toxic waste
cleanup lawsuit. In February 1991, the Company was identified as one of
many "Potentially Responsible Parties" (PRPs) in the Chatham Brothers
toxic waste cleanup site case, filed by the State of California -
Environmental Protection Agency, Department of Toxic Substances Control
(DTSC) and involved the Hartley Pen Company previously owned by the
Company. On December 31, 1991, the Company and approximately 90 other
companies were named in a formal complaint. The Company joined a group
of defendants, each of whom was so notified and which are referred to as
Potentially Responsible Parties (PRPs) for the purpose of negotiating
with the DTSC and for undertaking remediation of the site. During 1995,
the State of California adjusted the estimated cost of remediation. Soil
remediation is estimated at $2,000,000 with the Company's participation
at 3.8% or $76,000. Water clean up is estimated at $6,000,000 with the
Company's share at 5.67% or $340,000. The Company has recorded a
liability for its estimated share of the assessments, net of insurance
recovery, in the accompanying financial statements. In 1996, the PRP
Group revised the cleanup estimate cost of the site over a 30-year
period and included a cost for overhead and State oversight costs for
the same period of time. Also at the end of 1996, the PRP Group
announced that the allocation percentage would be changing. Although
nothing has officially been released the Company has increased its
reserve to reflect the higher cost estimate and the higher expected
percentage based on discussion with PRP legal counsel and site
management. The result was that the Company increased its 1995 reserve
from $744,000 to $1,815,000 in 1996. Because of the long term nature of
these expenses the Company has reclassified the liability into short
term for $197,000, which the Company paid $150,000 in May 1997, and long
term for $1,618,000. The Company is also liable for its share of site
study costs and in connection with such costs, the Company paid into the
PRP group $38,000 in 1993, $271,000 in 1994, $150,000 in 1997, $50,000
in 1998 with a cash call contribution payable balance of $18,000.
Currently the Company carries a short-term liability of $100,000 and
long-term liability of $1,497,000.
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
10
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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 remained doubtful the Company recognized income
from recovery of bad debt as interest payments were received through
February of 1998. In September 1998 the Company entered into an
agreement to accept a discount if payment of $150,000 was received the
Company would in turn issue a Full Reconveyance. The Shula property was
sold in October 1998 and the Company received $100,000 in September and
$50,000 in October 1998. Sun Sail Development Company has released Shula
Inc. from any and all known obligations, as of October 8, 1998.
The Company is named as a defendant in a sexual Harassment case
involving two of its employees at one of the Out patient Clinics. The
case was previously decided in the Company's favor but this was set
aside in the Appeals Court decision. The case will go trial again late
1999.
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 September 30,
1998.
Note however that on November 12, 1998 an 8K was filed covering the
recent death of the former Chairman of the Board Patrick J. Frawley.
11
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FRAWLEY CORPORATION
---------------------------------------
(REGISTRANT)
Date: January 11, 1999 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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 63,000
<SECURITIES> 0
<RECEIVABLES> 1,190,000
<ALLOWANCES> 697,000
<INVENTORY> 61,000
<CURRENT-ASSETS> 100,000
<PP&E> 4,709,000
<DEPRECIATION> 1,160,000
<TOTAL-ASSETS> 4,266,000
<CURRENT-LIABILITIES> 5,186,000
<BONDS> 0
0
0
<COMMON> 1,414,000
<OTHER-SE> (2,334,000)
<TOTAL-LIABILITY-AND-EQUITY> 4,266,000
<SALES> 2,164,000
<TOTAL-REVENUES> 2,164,000
<CGS> 1,353,000
<TOTAL-COSTS> 1,353,000
<OTHER-EXPENSES> 798,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 198,000
<INCOME-PRETAX> (185,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (185,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (185,000)
<EPS-PRIMARY> (.15)
<EPS-DILUTED> 0
</TABLE>
