<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
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ACT OF 1934
For the quarterly period ended March 31, 1999
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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 Dr., Suite 128, Agoura Hills, California 91301
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(818)735-6622
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(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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(FORMER NAME, ADDRESS AND FISCAL YEAR, IF CHANGED SINCE LAST REPORT)
Indicated by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the close of the latest practicable date.
Class Outstanding at March 20, 1999
- -------------------------------------- --------------------------------------
Common stock, par value $1 1,222,905
Total Number of Pages 11
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FRAWLEY CORPORATION AND SUBSIDIARIES
INDEX
PART I: FINANCIAL INFORMATION PAGE NO.
Item 1: Financial Statements
Consolidated Balance Sheets -
March 31, 1999 and December 31, 1998............................3
Consolidated Statements of Operations -
Three Months Ended March 31, 1999 and 1998......................4
Consolidated Statements of Operations -
Three Months Ended March 31, 1999 and 1998......................5
Notes to Consolidated Financial Statements......................6
Item 2: Management's Discussion and Analysis
of Financial Condition and Results of Operations ...............7-8
PART II: OTHER INFORMATION
Item 1: Legal Proceedings .....................................9
Item 5: Other Information .....................................10
Item 6: Exhibits and Reports on Form 8-K.......................10
SIGNATURES...........................................................11
2
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ITEM I: FINANCIAL STATEMENTS
FRAWLEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
ASSETS 1999 1998
------ ------------ ------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash $ 62,000 $ 16,000
Accounts receivable, net 462,000 514,000
Prepaid expenses and other deposits 101,000 135,000
------------ ------------
TOTAL CURRENT ASSETS 625,000 665,000
Long-term accounts receivable, net 92,000 79,000
Real estate investments, net 3,153,000 3,134,000
Property, plant and equipment, net 458,000 463,000
------------ ------------
TOTAL ASSETS $ 4,328,000 $ 4,341,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Notes payable to stockholders $ 2,594,000 $ 2,529,000
Accounts payable and accrued expenses 1,062,000 1,040,000
Environmental reserve 154,000 121,000
Unearned revenue 188,000 84,000
------------ ------------
TOTAL CURRENT LIABILITIES 3,998,000 3,774,000
LONG TERM LIABILITIES
Notes payable 70,000 70,000
Environmental reserve 1,497,000 1,497,000
------------ ------------
TOTAL LONG TERM LIABILITIES 1,567,000 1,567,000
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 (18,876,000) (18,639,000)
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(476,000) (239,000)
Less common stock in treasury,
191,312 shares (at cost) (761,000) (761,000)
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TOTAL STOCKHOLDERS' EQUITY (1,237,000) (1,000,000)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS'EQUITY $ 4,328,000 $ 4,341,000
============ ============
</TABLE>
See notes to consolidated financial statements.
3
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FRAWLEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------
1999 1998
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<S> <C> <C>
REVENUES:
Net revenues $ 582,000 $ 645,000
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COSTS AND EXPENSES:
Cost of operations 438,000 445,000
Selling, general and administrative
expenses 315,000 271,000
Interest expense 66,000 69,000
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TOTAL COSTS AND EXPENSES 819,000 785,000
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NET LOSS $(237,000) $(140,000)
========= =========
NET LOSS PER SHARE:
Continuing operations $ (.19) $ (.11)
----------- ---------
(.19) (.11)
========== =========
Weighted average number of
common shares outstanding 1,222,905 1,222,905
========== =========
</TABLE>
See notes to consolidated financial statements
4
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FRAWLEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------
1999 1998
---------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $(237,000) $(140,000)
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Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation 7,000 8,000
Disposals of property, plant and equipment
Changes in operating assets and liabilities:
Short- and long-term accounts
receivable, net 39,000 4,000
Prepaid expenses and deposits 35,000 38,000
Accounts payable and accrued expenses 55,000 (55,000)
Unearned revenue 104,000 80,000
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TOTAL ADJUSTMENTS 240,000 75,000
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Net cash used in
operating activities 3,000 (65,000)
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CASH FLOW FROM INVESTING ACTIVITIES:
Equipment purchases (3,000) (8,000)
Refunds received on real estate (19,000)
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Net cash provided by
investing activities (22,000) (8,000)
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CASH FLOWS FROM FINANCING ACTIVITES:
Short-term debt borrowings 65,000 7,000
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Net cash provided or used by
financing activities 65,000 7,000
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NET DECREASE IN CASH AND CASH
EQUIVALENTS 46,000 (66,000)
CASH, BEGINNING OF PERIOD 16,000 73,000
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CASH, END OF PERIOD $ 62,000 $ 7,000
========= =========
</TABLE>
See notes to consolidated financial statements
5
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FRAWLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments necessary to present
fairly the financial position at March 31, 1999, the results of
operations and changes in cash flow for the three months then ended.
NOTE 2: Revenues from continued operations for the three months ended March
31, 1999 totaled $582,000.
NOTE 3: The results of operations for the three months ended March 31, 1999
and 1998 are not necessarily indicative of results to be expected for
the full year.
6
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FRAWLEY CORPORATION AND SUBSIDIARIES
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Specialized Health Services
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During the quarter ended March 31, 1999, operating revenues from Specialized
Health Services decreased by $54,000 when compared to the same period in 1998.
In 1999, the health care operation lost $77,000 as compared to a $27,000 loss in
1998. 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 March 31, 1999 was
$61,000 as compared to a loss of $51,000 for the same period in 1998. Real
estate losses continue as the company incurs carrying costs, improvements
required to sell the 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.
7
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Liquidity and Capital Resources
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The Company's recurring losses from continuing operations and difficulties in
generating cash flow sufficient to meet its obligations raise substantial doubt
about its ability to continue as a going concern.
The Seattle Hospital and outpatient treatment program reported a $77,000 loss
for the three months ended March 31, 1999 compared to a $27,000 loss for the
three months ended March 31, 1998. Management believes the results will continue
as the Company continues to experience a transition from third party
reimbursement to direct payment from patients. Debt secured by the Seattle
Hospital in the amount of $800,000 is due September 1, 1999.
The Company continues to incur legal expenses and has an obligation in 1999 to
contribute to the Chatham Brothers toxic waste cleanup lawsuit.
Servicing outstanding debt continues to be a significant burden on the Company's
operations.
The Company intends to raise capital for the health care business by seeking
partners in health care and selling real estate. The sale of real estate may
require further expenditures to prepare the land for sale which would be
financed through borrowings. The sale of the property is unpredictable and
highly uncertain and there is no assurance that the improvements will increase
the marketability of the property. The limited resources available to the
Company will be directed at revitalization of the health care business and the
continued reduction of non-producing assets.
8
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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. 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.
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 license 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 outpatient 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.
9
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ITEM 5: Other Information
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Related Party Transactions.
In 1999, Michael P. Frawley, Chairman of the Board, loaned the
Corporation funds to meet short term borrowing and operating
expenses. The loans were secured by the Company's real estate. The
following loans were made:
February 5th, 1999 $25,000.00
March 19th, 1999 40,000.00
ITEM 6: Exhibits and Reports on Form 8-K
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None
10
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FRAWLEY CORPORATION
---------------------------------------
(REGISTRANT)
Date: July 21, 1999 By: /s/ Michael P. Frawley
------------------------- -----------------------------------
Michael P. Frawley
(Authorized Officer and CEO
and Chairman of the Board)
11
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 61,000
<SECURITIES> 0
<RECEIVABLES> 1,228,000
<ALLOWANCES> 674,000
<INVENTORY> 56,000
<CURRENT-ASSETS> 46,000
<PP&E> 4,787,000
<DEPRECIATION> 1,176,000
<TOTAL-ASSETS> 4,328,000
<CURRENT-LIABILITIES> 5,565,000
<BONDS> 0
0
0
<COMMON> 1,414,000
<OTHER-SE> (2,651,000)
<TOTAL-LIABILITY-AND-EQUITY> 4,328,000
<SALES> 582,000
<TOTAL-REVENUES> 582,000
<CGS> 438,000
<TOTAL-COSTS> 438,000
<OTHER-EXPENSES> 315,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 66,000
<INCOME-PRETAX> (237,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (237,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (237,000)
<EPS-BASIC> (.19)
<EPS-DILUTED> 0
</TABLE>
