<PAGE>
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 ACT
- ---
OF 1934
For the fiscal year ended December 31, 1998
----------------------------------------------------
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
--------------------------------
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. 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
----
Securities registered pursuant to Section 12 (g) of the Act:
Title of each class
- -------------------
Common Stock, par value $1.00 per share
- ---------------------------------------
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
YES X NO_____
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1
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Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. X
-----
Revenues from continuing operations as of December 31, 1998: $2,853,000
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, 1998.
Number of shares of Common Stock outstanding as of March 20, 1999: 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 29.
2
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PART I
ITEM 1. BUSINESS
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Frawley Corporation is currently engaged in the operation of
inpatient and outpatient treatment of chemical dependency and
stop-smoking centers, and investment in real estate. Frawley
Corporation is a Delaware Corporation organized in 1969.
References to the Company include references to Frawley
Corporation and Subsidiaries.
- --------------------------------------------------------------------------------
Specialized Health Services
Company Owned Inpatient Hospital. The Company currently owns and
operates under the name of Schick Shadel Hospital, one hospital
located in Seattle, Washington with 63 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 2 weeks and 6 weeks 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 1998, the Company
operated three outpatient chemical dependency treatment centers
located in the state of Washington, one of which was closed at
the end of 1998. 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.
3
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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 of 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 hospital
have effected the occupancy level. 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 hospital 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 hospital 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
4
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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 hospital. 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
hospital have significantly reduced levels of insurance coverage,
the patient's balance owing after insurance payment has increased
substantially thereby increasing collection risks. 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 two 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
those individuals eligible for Social Security.
5
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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.
________________________________________________________________________________
Real Estate The Company's real estate consists of approximately 145
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 $3,134,000 as
of the end of 1998, and are subject to mortgage debt, held by
five stockholders and a third party, aggregating approximately
$1,639,000. 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).
________________________________________________________________________________
Employees Frawley Corporation and its subsidiaries employ an aggregate of
approximately 69 persons and management believes that employee
relations are satisfactory.
________________________________________________________________________________
Impact of See "Management's Discussion and Analysis of Financial
Year 2000 and Results of Operations-Impact of Year 2000."
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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
6
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described below. Other facilities are rented under leases
expiring on various dates through December 2001. Currently, these
leased facilities include approximately 900 square feet of office
space in Agoura Hills, 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, to Circle Media and Wilshire
Cellular Inc. Both the Encino lease and the related subleases
expired in May, 1998.
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 two 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.
Between 1995 and 1998, the State of California adjusted the estimated
Cost of remediation on several occasions. As a result, the Company has
increased their recorded liability to reflect their share.
In January of 1998 the final remediation plan was approved by the
State and in January of 1999 the PRP's consented to it, as well as the
allocation of costs, and the consent decree was approved by the Court.
As of December 31, 1998, the Company had paid over $500,000 into
the PRP group and had a cash call contribution Payable of $47,000. In
addition, they carried accrued short-term and long-term liabilities of
$121,000 and $1,497,000, respectively.
7
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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 was due at maturity. The note continued 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 $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 all known obligations, as of October 8,
1998.
The Company is in dispute with its 1988 licensee over the trademark
"Classics Illustrated." In 1998, The Company terminated its license
agreement for breach of contract. The licensee has objected to the
termination stating that the company failed to notify the licensee of
a potential problem with the trademark in Greece. A Greek court has
ruled against a sublicensee in Greece. In the license agreement the
Company notified the licensee that the licensee would have to
investigate the international trademark involving "Classics
Illustrated." Management does not foresee any significant risk in
connection with the case.
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 is expected to go to
trial again in late 1999. Management does not believe there to be any
merit to the case and does not foresee any significant risk. All costs
to date have been paid by the Company's insurance.
Item 4. Submission of Matters to a Vote of Security Holders
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Not Applicable.
8
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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, 1999 was 898.
No dividends have been paid in the periods shown above.
Item 6. Management's Discussion and Analysis of Financial Condition and Results
- --------------------------------------------------------------------------------
of Operations.
- --------------
Overall Net operating revenues from continuing operations for the Company
Sumary increased $329,000, or approximately 13% in 1998 when compared to
1997. Net loss is $(265,000) in 1998 compared to a $(478,000) net
loss in 1997. Interest expense in 1998 was $256,000 compared to
$255,000 in 1997. Selling, general and administrative expenses
increased to $1,060,000 from $954,000 in 1997.
Specialized Revenues from Specialized Health Services chemical dependency
Health hospital and contract units increased by 12% in 1998 compared
Services to 1997. The increase is attributable to growth in former patient
referrals, for which the Company is increasing its follow-up
efforts in re-contacting former patients. Additionally, the
Company is spending more in outreach marketing to attract new
patients. Specialized Health Service income before interest
expense was $301,000 in 1998 when compared to $40,000 in 1997,
Competition from other treatment programs intensified during 1998
and 1997, 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 In the first quarter, the Company entered into an agreement to
sell one parcel of land which sold in May 1998 for $102,000. The
Company was able to retire some related debt and recognized a
loss of $80,000 on the sale of real estate property. The real
estate operating loss before interest expense was $30,000 in 1998
when
9
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compared to a loss of $82,000 in 1997. 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.
Impact of At this time, the Company is reviewing its year 2000 compliance.
Year 2000 The Company has sought confirmation from its vendors, suppliers
and consultants that the equipment now used by the company will
go through the year 2000 without problems. Also, the Company has
tested the programs that support the 401k Plan supported and
managed by Merrill Lynch. Additionally, the Company has received
written confirmation that Merrill Lynch has tested the programs
that support the 401K investment and accounting systems and
believes that they will go through the year 2000 without any
major difficulty.
________________________________________________________________________________
Liquidity and
Capital
Resources The Company's recurring losses from continuing operations and
difficulties in generating cash flow sufficient to meet its
obligations raise substantial doubt about its ability to continue
as a going concern.
Real Estate and Corporate overhead continue to produce losses
which the operating business is unable to absorb. The required
investments in real estate are currently funded from loans.
10
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During 1998 and 1997 the Company incurred additional debt in the
amounts of $175,000 and $241,000, respectively. The notes are with
related parties, bear interest at 10%, and are due in 1999.
The funds were use to meet working capital requirements, and are
secured by the hospital and real estate investments.
The Company has settled certain lawsuits and therefore has reduced the
cash required to support these efforts. The Company has an
outstanding $47,000 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:
<TABLE>
<CAPTION>
December 31, 1998 1997
------------ ------------ ------------
<S> <C> <C>
Working capital (deficiency) ($3,109,000) ($2,187,000)
Current ratio (.18 to 1) (.25 to 1)
</TABLE>
Item 7. Financial Statements and Supplementary Data.
- -----------------------------------------------------
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
- ------------------------------------------------------------------------
Financial Disclosure.
- ---------------------
None.
11
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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.
- ---------------------------------
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.
- ---------------------------------------------------------
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.
12
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PART IV
<TABLE>
<CAPTION>
Item 13. Financial Statements, Exhibits and Reports on Form 8-K.
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<S> <C> <C> <C>
(a) 1. List of Financial Statements: Page Numbers
------------
Independent Auditors' Report F1
Financial Statements
Consolidated Balance Sheet
as of December 31, 1998 F2-F3
Financial Statements for the Years
Ended December 31, 1998 and 1997
Consolidated Statements of
Operations F4
Consolidated Statements of
Stockholders' Deficit F5
Consolidated Statements of
Cash Flows F6
Notes to Consolidated Financial
Statements F7-F15
</TABLE>
2. List of Exhibits:
3.1 Registrant's certificate of incorporation is incorporated herein
by this reference to (A) Exhibit Item (3.1) to Registrant's
Registration Statement No. 2-36536 on form S-1, (B) the name
change amendment to said certificate of incorporation under
Section 1-02 of the Merger Agreement which is Exhibit A to the
definitive proxy material for Registrant's June 16, 1977 annual
meeting of stockholders, filed under Regulation 14A, and (C) the
amendment to certificate of incorporation which is Exhibit A to
the definitive proxy material for Registrant's June 25, 1987
Annual Meeting of Stockholders, filed under Regulation 14A.
3.2 Registrant's bylaws, as amended to date are incorporated herein
by reference to Exhibit Item (3) to Registrant's Annual Report on
Form 10-K for the year ended December 31, 1980.
21.1 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.
13
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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, CEO and Chairman of the Board
Date May 6, 1999
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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/ Michael P. Frawley
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Michael P. Frawley, CEO and Chairman of the Board
(Principal Executive, Financial and Accounting Officer)
May 6, 1999
- -------------------------------------------------------------------------------
(Date)
By: /s/ Eileen Callahan
----------------------------------------------------------------------------
Eileen Callahan, Vice President and Secretary
May 6, 1999
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(Date)
14
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LaRue, Corrigan & McCormick
INDEPENDENT AUDITOR'S REPORT
Board of Directors and Stockholders
Frawley Corporation
Agoura Hills, California
We have audited the accompanying consolidated balance sheet of Frawley
Corporation and subsidiaries (the "Company") as of December 31, 1998, and the
related consolidated statements of operations, stockholders' deficit, and cash
flows for the years ended December 31, 1998 and 1997. 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, 1998, and the results of its operations and
its cash flows for the years ended December 31, 1998 and 1997 in conformity with
generally accepted accounting principles.
The 1998 and 1997 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 plans concerning
these matters are also described in Note 2. These financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
La Rue, Corrigan & McCormick
Woodland Hills, California
May 3, 1999
F1
<PAGE>
FRAWLEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1998
<TABLE>
<CAPTION>
ASSETS
------------
<S> <C>
CURRENT ASSETS
Cash $ 16,000
Accounts receivable (net of
allowances of $542,000) 514,000
Prepaid expenses and deposits 135,000
-----------
TOTAL CURRENT ASSETS 665,000
-----------
OTHER ASSETS
Long-term accounts receivable (net of
allowance of $63,000) (Note 4) 79,000
Real estate investments, net (Notes 3, 6 and 8) 3,134,000
-----------
TOTAL OTHER ASSETS 3,213,000
-----------
PROPERTY AND EQUIPMENT (Note 6)
Land 111,000
Building and improvements 862,000
Machinery and equipment 653,000
Furniture and fixtures 5,000
-----------
TOTAL 1,631,000
Less accumulated depreciation (1,168,000)
TOTAL PROPERTY AND EQUIPMENT 463,000
-----------
TOTAL $ 4,341,000
===========
</TABLE>
See notes to consolidated financial statements.
F2
<PAGE>
FRAWLEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1998
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
<TABLE>
<CAPTION>
CURRENT LIABILITIES
<S> <C>
Notes payable to stockholders (Notes 3 and 6) $ 2,529,000
Accounts payable and accrued expenses 1,040,000
Environmental reserve (Note 8) 121,000
Unearned revenue 84,000
------------
TOTAL CURRENT LIABILITIES 3,774,000
LONG-TERM LIABILITIES
Notes payable 70,000
Environmental reserve (Note 8) 1,497,000
------------
TOTAL LONG TERM LIABILITIES 1,567,000
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 (18,639,000)
(239,000)
Less common stock in treasury,
191,312 shares (at cost) (761,000)
------------
TOTAL STOCKHOLDERS' DEFICIT (1,000,000)
------------
TOTAL $ 4,341,000
============
</TABLE>
See notes to consolidated financial statements.
F3
<PAGE>
FRAWLEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
REVENUES:
<S> <C> <C>
Net operating revenues $2,853,000 $ 2,524,000
Gain on settlement of note receivable (Note 8) 150,000 -
---------- ---------------
TOTAL REVENUE 3,003,000 2,524,000
COSTS AND EXPENSES:
Cost of operations 1,793,000 1,793,000
Selling, general and administrative
expenses (Note 9) 1,060,000 954,000
Environmental remediation (Note 8) 79,000 -
Loss on sale of real estate 80,000 -
Interest expense, net (Note 3) 256,000 255,000
---------- ---------------
TOTAL COSTS AND EXPENSES 3,268,000 3,002,000
---------- ---------------
NET (LOSS) INCOME $( 265,000) $ (478,000)
========== ===============
NET (LOSS) INCOME PER SHARE:
Continuing operations $ (0.22) $ (0.39)
----------- ---------------
$ (0.22) $ (0.39)
----------- ---------------
Weighted average number of
common shares outstanding 1,222,905 1,222,905
=========== ===============
</TABLE>
See notes to consolidated financial statements.
F4
<PAGE>
FRAWLEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
Common Stock Capital Accumulated Stock in
------------
Shares Amount Surplus Deficit Treasury Total
------ ------ ------- ------- -------- -----
<S> <C> <C> <C> <C> <C> <C>
BALANCE,
January 1, 1997 1,414,217 $1,414,000 $16,986,000 $(17,896,000) $ (761,000) $ ( 257,000)
Net loss for the (478,000) (478,000)
year _________ _________ __________ ----------- ----------- -----------
BALANCE,
December 31, 1997 1,414,217 1,414,000 16,986,000 (18,374,000) (761,000) (735,000)
Net loss for the (265,000) (265,000)
year ________ _________ __________ ------------ ------------ -----------
BALANCE,
December 31, 1998 1,414,217 1,414,000 16,986,000 (18,639,000) (761,000) (1,000,000)
========= ========= ========== ========== ======= =========
</TABLE>
See notes to consolidated financial statements.
F5
<PAGE>
FRAWLEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
------------ -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ 265,000) $(478,000)
----------- ---------
Adjustments to reconcile net loss to net
cash used in operating activities:
Loss on sale of real estate investment 80,000 -
Depreciation 32,000 31,000
Changes in operating assets and liabilities:
Short and long-term accounts
receivable, net ( 7,000) 68,000
Prepaid expenses and deposits 38,000 (4,000)
Notes Receivable discount - 16,000
Accounts payable and accrued expenses 20,000 (343,000)
Environmental reserve 21,000 (121,000)
Unearned revenue (55,000) 13,000
---------- ---------
TOTAL ADJUSTMENTS 129,000 (340,000)
----------
Net cash used in
operating activities (136,000) (818,000)
---------- ---------
CASH FLOW FROM INVESTING ACTIVITIES:
Proceeds from Sale of Real estate 102,000 -
Proceeds from notes receivable 25,000 599,000
Equipment purchases (40,000) (19,000)
Payments for real estate improvements (90,000) (62,000)
---------- ---------
Net cash provided by (used in)
investing activities ( 3,000) 518,000
---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Short-term debt borrowings related party 175,000 241,000
Repayment of borrowings (93,000) (16,000)
---------- ---------
Net cash provided by
financing activities 82,000 225,000
---------- ---------
NET DECREASE IN CASH AND CASH
EQUIVALENTS (57,000) (75,000)
CASH, BEGINNING OF PERIOD 73,000 148,000
---------- ---------
CASH, END OF PERIOD $ 16,000 $ 73,000
========== =========
</TABLE>
See notes to consolidated financial statements.
F6
<PAGE>
FRAWLEY CORPORATION AND SUBSIDIARIES
____________________________________
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
________________________________________________________________________________
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
----------------
are 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 1998 was $265,000 compared to a $478,000 net
loss for 1997. 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 145 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
have improved recently due to its unique characteristics. 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.
3. RELATED PARTY TRANSACTIONS
The Company has borrowed funds from the Chief Executive Officer and his
relatives, as needed, to meet real estate investment and working capital
needs. As of December 31, 1998 and 1997 the balances due were $2,529,000
and $2,447,000, respectively.
The notes bear interest at 10%, are secured by real estate and become due
in 1999.
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: 1998 1997
---- ----
Taxes paid $ 4,000 $ 7,000
Interest paid $116,000 $186,000
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.
The entire balance was received during 1997.
The Company also received principal payments of $52,000 in 1997 on the note
receivable 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 and still allowed the
discount. The discount of $16,000 is included in selling, general and
administrative expense for the year ended December 31, 1997.
<TABLE>
<CAPTION>
6. DEBT
<S> <C>
Short-term debt consists of the following:
Notes payable to stockholders due in 1999, bearing
interest at 10%, secured by real estate investments
with a net book value of $3,134,000 $ 2,529,000
Environmental reserve 121,000
------------
Short-term debt $ 2,650,000
============
Long-term debt consists of the following:
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 1,567,000
</TABLE>
============
7. COMMITMENTS AND CONTINGENCIES
The Company conducts a portion of its operations from leased facilities,
which include corporate offices and 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 was liable
for approximately 40% of the total rental expense of the Company's prior
office premises. The total sublease income, under this agreement, was
$20,000 and $47,000 for the years ended December 31, 1998 and 1997,
respectively. The Company also continued to receive sublease rental income
from Circle Media under a 1995 sublease agreement. Under such agreement
Circle Media was 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, was $45,000 and 107,000 for the years ended
December 31, 1998 and 1997, respectively. The original lease and related
sublease agreements expired in May, 1998.
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>
1999 $ 70,000 $ 0 $ 70,000
2000 $ 72,000 $ 0 $ 72,000
2001 $ 40,000 $ 0 $ 40,000
Thereafter $ 0 $ 0 $ 0
-------- --------- --------
Total $182,000 $ 0 $182,000
======== ========= --------
</TABLE>
Operations include rent expense of $116,000 in 1998 and $96,000 in 1997.
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. Between 1995 and 1998, the State
of California adjusted the estimated Cost of remediation on several
occasions. As a result, the Company has increased their recorded liability
to reflect their share. In January, 1999, the PRP's consented decree was
approved by the Court.
F11
<PAGE>
As December 31, 1998, the Company paid over $500,000 into the PRP group and
had a cash call contribution Payable of $47,000. In addition, they carried
Accrued short-term and long-term liabilities of $120,000 and $1,497,000,
respectively.
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 $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 all known obligations, as
of October 8, 1998.
The Company is in dispute with its 1988 licensee over the trademark
"Classics Illustrated." In 1998, the Company terminated its license
agreement for breach of contract. The licensee has objected to the
termination stating that the company failed to notify the licensee of a
potential problem with the trademark in Greece. A Greek court has ruled
against a sublicensee in Greece. In the license agreement the Company
notified the licensee that the licensee would have to investigate the
international trademark involving "Classics Illustrated." Management does
not foresee any significant risk in connection with the case.
The Company is named as a defendant in a sexual harassment case involving
two of its employees at one of the out patients clinics. The case was
previously decided in the Company's favor but this was set aside in the
appeals court decision. The case is expected to go to trial again in late
1999. Management does not believe there to be any merit to the case and
does not foresee any significant risk. All costs to date have been paid by
the Company's insurance.
F12
<PAGE>
9. INCOME TAXES
There is no provision for income taxes due to losses and the offset of
loss carry forwards in 1998 and 1997, other than provisions for minimum
state income taxes, which are included in selling, general and
administrative expenses.
Deferred tax assets and liabilities for federal income tax purposes at
December 31, 1998 and 1997 consist of the following:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Net operating loss
carry forward $ 3,947,000 $ 3,907,000
Depreciation (141,000) (141,000)
Bad debt reserves 206,000 204,000
Toxic waste accrual 550,000 543,000
Other reserves 166,000 140,000
----------- -----------
4,728,000 4,653,000
Less valuation allowance (4,728,000) (4,653,000)
----------- -----------
$ 0 $ 0
=========== ===========
</TABLE>
There was no provision for income taxes for the year ended December 31,
1998 or 1997.
The Company has net operating loss carryforwards aggregating approximately
$11,608,000, for federal income tax purposes, which expire in various years
through 2013.
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, 1998 and 1997
were:
F13
<PAGE>
<TABLE>
<CAPTION>
Specialized
Health Real Other
Services Estate Activity Consolidated
----------- -------- -------- ------------
<S> <C> <C> <C> <C>
Depreciation:
1998 $32,000 $ 0 $0 $ 32,000
1997 $31,000 $ 0 $0 $ 31,000
Capital expenditures and investments in real estate:
1998 $40,000 $90,000 $0 $130,000
1997 $19,000 $62,000 $0 $ 81,000
Segment information from continuing operations is as follows:
Specialized Corporate and
Health Real Other
Services Estate Activity Consolidated
-------- ------ -------- ------------
Year Ended December 31, 1998
<S> <C> <C> <C> <C>
Net operating
revenues $2,849,000 $ 1,000 $ 3,000 $ 2,853,000
========== ========== =========== ===========
Income (loss) from
operations $ 301,000 $ (36,000) $( 274,000) $ ( 9,000)
========== ========== =========== ===========
Interest expense, net $ (256,000)
-----------
Identifiable
assets $1,177,000 $3,164,000 $ 0 $ 4,341,000
========== ========== =========== ===========
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) $ 223,000)
========== ========== =========== ===========
Interest expense, net $ (255,000)
Identifiable
assets $1,311,000 $3,227,000 $ 0 $ 4,538,000
</TABLE>
F14
<PAGE>
11. EMPLOYEE BENEFIT PLANS
Thrift and Profit Sharing Plan 401(k) - The Company sponsors a 401(k) plan
-------------------------------------
covering substantially all of its employees. Contributions to the plan are
made by the Company and participating employees. The covered employee
contribution is equal to 2.5% of the employee's compensation. No
contributions were made by the Company in 1998 and 1997 as contributions
are discretionary.
F15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 16,000
<SECURITIES> 0
<RECEIVABLES> 1,198,000
<ALLOWANCES> 605,000
<INVENTORY> 59,000
<CURRENT-ASSETS> 76,000
<PP&E> 4,765,000
<DEPRECIATION> 1,168,000
<TOTAL-ASSETS> 4,341,000
<CURRENT-LIABILITIES> 5,341,000
<BONDS> 0
0
0
<COMMON> 1,414,000
<OTHER-SE> (2,414,000)
<TOTAL-LIABILITY-AND-EQUITY> 4,341,000
<SALES> 3,003,000
<TOTAL-REVENUES> 3,003,000
<CGS> 1,793,000
<TOTAL-COSTS> 1,793,000
<OTHER-EXPENSES> 1,219,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 256,000
<INCOME-PRETAX> (265,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (265,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (265,000)
<EPS-PRIMARY> (.22)
<EPS-DILUTED> 0
</TABLE>
