-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SrFTL6R2ZmFElNptLZupW7QsIHk8ixTFyiwVlMynmf7JkZgSsPjSXm7LiwCBoVHO FHFKC7sOQThvIij6QjOwLA== 0000898430-99-001943.txt : 19990511 0000898430-99-001943.hdr.sgml : 19990511 ACCESSION NUMBER: 0000898430-99-001943 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990510 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FRAWLEY CORP CENTRAL INDEX KEY: 0000038824 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-HOSPITALS [8060] IRS NUMBER: 952639686 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB SEC ACT: SEC FILE NUMBER: 001-06436 FILM NUMBER: 99615729 BUSINESS ADDRESS: STREET 1: 28720 ROADSIDE DRIVEUITE 1201 STREET 2: SUITE 128 CITY: AGOURA HILLS STATE: CA ZIP: 91301 BUSINESS PHONE: 8183823640 MAIL ADDRESS: STREET 1: 28720 ROADSIDE DRIVE STREET 2: SUITE 128 CITY: AGOURA HILLS STATE: CA ZIP: 91301 FORMER COMPANY: FORMER CONFORMED NAME: FRAWLEY ENTERPRISES INC DATE OF NAME CHANGE: 19780107 10KSB 1 FORM 10-KSB 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 - ----- EXCHANGE ACT OF 1934 Commission File Number 1-6436 -------------------------------- FRAWLEY CORPORATION - -------------------------------------------------------------------------------- (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 - -------------------------------------------------------------------------------- (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) (818)735-6622 - -------------------------------------------------------------------------------- (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_____ ----- 1 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 PART I ITEM 1. BUSINESS - ---------------- 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 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 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 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." - -------------------------------------------------------------------------------- Item 2. Properties - ------------------- The principal facilities used by Frawley Corporation and its subsidiaries in their businesses include the one owned property 6 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 - ------------------------ 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 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 - ------------------------------------------------------------ Not Applicable. 8 PART II Item 5. Market for Registrant's Common Stock and Related Stockholders Matters. - ------------------------------------------------------------------------------- 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 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 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:
December 31, 1998 1997 ------------ ------------ ------------ Working capital (deficiency) ($3,109,000) ($2,187,000) Current ratio (.18 to 1) (.25 to 1)
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 PART III Item 9. Directors, Executive Officers, Promoters and Control Persons; - ---------------------------------------------------------------------- Compliance with Section 16(a) of the Exchange Act. - -------------------------------------------------- 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. - ------------------------------------------------------------------------- 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 PART IV
Item 13. Financial Statements, Exhibits and Reports on Form 8-K. - ----------------------------------------------------------------------------------------------------- (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
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 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 - -------------------------------------------------------------------------------- (Registrant) By: /s/ Michael P. Frawley ---------------------------------------------------------------------------- Michael P. Frawley, CEO and Chairman of the Board Date May 6, 1999 --------------------------------------------------------------------------- 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 ----------------------------------------------------------------------------- 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 - ------------------------------------------------------------------------------- (Date) 14 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 FRAWLEY CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET DECEMBER 31, 1998
ASSETS ------------ 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 ===========
See notes to consolidated financial statements. F2 FRAWLEY CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET DECEMBER 31, 1998 LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------
CURRENT LIABILITIES 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 ============
See notes to consolidated financial statements. F3 FRAWLEY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1998 AND 1997
REVENUES: 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 =========== ===============
See notes to consolidated financial statements. F4 FRAWLEY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) YEARS ENDED DECEMBER 31, 1998 AND 1997
Common Stock Capital Accumulated Stock in ------------ Shares Amount Surplus Deficit Treasury Total ------ ------ ------- ------- -------- ----- 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) ========= ========= ========== ========== ======= =========
See notes to consolidated financial statements. F5 FRAWLEY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1998 AND 1997
1998 1997 ------------ ----------- 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 ========== =========
See notes to consolidated financial statements. F6 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 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 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 $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.
6. DEBT 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
============ 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 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:
Operating Leases Year Ending --------------------------------------- December 31 Facilities Equipment Total ----------- ---------- --------- -------- 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 ======== ========= --------
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 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 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:
1998 1997 ------------ ------------ 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 =========== ===========
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
Specialized Health Real Other Services Estate Activity Consolidated ----------- -------- -------- ------------ 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 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
F14 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 EX-27 2 FINANCIAL DATA SCHEDULE
5 12-MOS DEC-31-1998 JAN-01-1998 DEC-31-1998 16,000 0 1,198,000 605,000 59,000 76,000 4,765,000 1,168,000 4,341,000 5,341,000 0 0 0 1,414,000 (2,414,000) 4,341,000 3,003,000 3,003,000 1,793,000 1,793,000 1,219,000 0 256,000 (265,000) 0 (265,000) 0 0 0 (265,000) (.22) 0
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