Prepared by R.R. Donnelley Financial -- Form 10-Q
Table of Contents
 
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
 
FORM 10-Q
 
(Mark One)
x
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 2002
 
 
OR
 
¨
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from                              to                         
 
Commission File Number 1-6436
 
 
FRAWLEY CORPORATION
(Exact name of registrant as specified in its charter)
 
Delaware
  
95-2639686
(State or other jurisdiction of incorporation)
  
(I.R.S. Emp I.D. No.)
 
5737 Kanan Rd. PMB 188, Agoura Hills, California
  
91301
(Address of principal executive offices)
  
(Zip Code)
 
(818) 735-6640
(Registrant’s telephone number, including area code)
 
(Former name, address and fiscal year, if changed since last report)
 
Indicated by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  x No  ¨
 
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 31, 2002
Common stock, par value $1
  
1,222,905
 
 

Table of Contents
FRAWLEY CORPORATION AND SUBSIDIARIES
 
INDEX
 
    
Page No.
PART I:    FINANCIAL INFORMATION
     
Item 1:    Financial Statements
     
  
3
  
4
  
5
  
6
  
7-8
PART II:    OTHER INFORMATION
     
Item 1:     Legal Proceedings
   
9
Item 5:     Other Information
   
9
  
10
  
11

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Table of Contents
ITEM I:    FINANCIAL STATEMENTS
 
FRAWLEY CORPORATION AND SUBSIDIARIES
 
CONSOLIDATED BALANCE SHEETS
 
    
March 31,
2002
     
December 31, 2001
  
    
(Unaudited)
         
ASSETS
                  
CURRENT ASSETS
                  
Cash
   
$
208,000
 
   
$
135,000
 
Accounts receivable, net
   
 
7,000
 
   
 
—  
 
Prepaid expenses and other deposits
   
 
36,000
 
   
 
66,000
 
Current assets of discontinued operations
   
 
531,000
 
   
 
542,000
 
    
  
TOTAL CURRENT ASSETS
   
 
782,000
 
   
 
743,000
 
Real estate investments, net
   
 
1,290,000
 
   
 
1,276,000
 
Non-current assets of discontinued |operations
   
 
—  
 
   
 
416,000
 
    
  
TOTAL ASSETS
   
$
2,072,000
 
   
$
2,435,000
 
    
  
LIABILITIES AND STOCKHOLDERS’ DEFICIT
                  
CURRENT LIABILITIES
                  
Notes payable to stockholders
   
$
2,479,000
 
   
$
2,416,000
 
Accounts payable and accrued expenses
   
 
1,142,000
 
   
 
962,000
 
Environmental reserve
   
 
78,000
 
   
 
209,000
 
Current liabilities of discontinued
                  
operations
   
 
453,000
 
   
 
1,481,000
 
    
  
TOTAL CURRENT LIABILITIES
   
 
4,152,000
 
   
 
5,068,000
 
LONG TERM LIABILITIES
                  
Environmental reserve
   
 
1,424,000
 
   
 
1,424,000
 
    
  
STOCKHOLDERS’ 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
 
   
 
1,414,000
 
Capital surplus
   
 
16,986,000
 
   
 
16,986,000
 
Accumulated deficit
   
 
(21,143,000
)
   
 
(21,696,000
)
    
  
    
 
(2,743,000
)
   
 
(3,296,000
)
Less common stock in treasury, 191,312 shares (at cost)
   
 
(761,000
)
   
 
(761,000
)
    
  
TOTAL STOCKHOLDERS’ DEFICIT
   
 
(3,504,000
)
   
 
(4,057,000
)
    
  
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT
   
$
2,072,000
 
   
$
2,435,000
 
    
  
 
See notes to consolidated financial statements

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Table of Contents
 
FRAWLEY CORPORATION AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
    
Three Months Ended
March 31,
  
    
2002
     
2001|
  
REVENUES:
                  
Net operating revenues
   
$
10,000
 
   
$
665,000
 
    
  
COSTS AND EXPENSES:
                  
Cost of operations
   
 
—  
 
   
 
492,000
 
Selling, general and administrative expenses
   
 
53,000
 
   
 
246,000
 
Interest expense
   
 
60,000
 
   
 
84,000
 
    
  
TOTAL COSTS AND EXPENSES
   
 
113,000
 
   
 
822,000
 
    
  
LOSS FROM CONTINUING OPERATIONS
   
 
(103,000
)
   
 
(157,000
)
INCOME FROM DISCONTINUED OPERATIONS
   
 
656,000
 
   
 
—  
 
    
  
NET INCOME/(LOSS)
   
$
553,000
 
   
$
(157,000
)
    
  
LOSS PER SHARE FROM CONTINUING OPERATIONS, COMMON:
   
$
(.08
)
   
$
(.13
)
    
  
NET INCOME/(LOSS) PER SHARE, COMMON
   
$
.45
 
   
$
(.13
)
    
  
FULLY DILUTED
   
$
.45
 
   
$
(.13
)
    
  
Weighted average number of common shares outstanding
   
 
1,222,905
 
   
 
1,222,905
 
    
  
 
 
See notes to consolidated financial statements

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Table of Contents
 
FRAWLEY CORPORATION AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
    
Three Months Ended March 31,
  
    
2002
     
2001
  
CASH FLOWS FROM OPERATING ACTIVITIES:
                  
Net income/(loss)
   
$
553,000
 
   
$
(157,000
)
    
  
Adjustments to reconcile net income/(loss) to net cash provided by/(used in) operating activities:
                  
Gain on sale of assets
   
 
(781,000
)
   
 
—  
 
Depreciation
   
 
—  
 
   
 
8,000
 
Change in net assets of discontinued operations
   
 
12,000
 
   
 
—  
 
Change in net liabilities of discontinued operations
   
 
168,000
 
   
 
—  
 
Changes in operating assets and liabilities:
                  
Short—and long-term accounts receivable, net
   
 
(7,000
)
   
 
(32,000
)
Prepaid expenses and deposits
   
 
30,000
 
   
 
24,000
 
Accounts payable and accrued expenses
   
 
49,000
 
   
 
68,000
 
Unearned revenue
   
 
—  
 
   
 
63,000
 
    
  
TOTAL ADJUSTMENTS
   
 
(529,000
)
   
 
131,000
 
    
  
NET CASH PROVIDED BY/(USED IN) OPERATING ACTIVITIES
   
 
24,000
 
   
 
(26,000
)
    
  
CASH FLOW FROM INVESTING ACTIVITIES:
                  
Real estate investments
   
 
(14,000
)
   
 
—  
 
    
  
CASH FLOWS FROM FINANCING ACTIVITIES:
                  
Short-term debt borrowings
   
 
63,000
 
   
 
26,000
 
    
  
NET CHANGE IN CASH AND CASH EQUIVALENTS
   
 
73,000
 
   
 
—  
 
CASH, BEGINNING OF PERIOD
   
 
135,000
 
   
 
54,000
 
    
  
CASH, END OF PERIOD
   
$
208,000
 
   
$
54,000
 
    
  
 
 
See notes to consolidated financial statements

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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, 2002, the results of operations and changes in cash flows for the three months then ended.
 
NOTE 2:
 
The results of operations for the three months ended March 31, 2002 and 2001 are not necessarily indicative of results to be expected for the full year.

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Item 2:     Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Real Estate
 
The real estate operating loss during the quarter ended March 31, 2002 was approximately $73,000 as compared to a loss of $93,000 for the same period in 2001. Real estate losses continue as the Company incurs carrying costs and improvements required to sell the property.
 
Specialized Health Services
 
Due to the Hospital’s continued losses and its inability to pay interest on its secured $1,022,000 loan on the hospital property for more than one year, the Board of Directors of the Company unanimously voted in December 2001 to sell or close this business within the first six months of 2002.
 
The Company currently is seeking an investor to fund marketing and expansion of the health care services or a purchaser for this subsidiary. No assurance can be made that an investor or purchaser will be found.
 
Effective February 1, 2002 the Company entered into a Settlement Agreement with a related party who held outstanding notes payable in the amount of $1,022,000, secured by the hospital property in Seattle, Washington. Under terms of the agreement, the Company sold the hospital’s land, building, and property and equipment to the related party for a purchase price in the amount of the principal of the notes and accrued interest of $174,000. Also effective February 1st, 2002, the Company entered into a lease agreement with the related party whereby the company is permitted to lease the hospital facility for 36 months, with an option to repurchase the property from the related party at an amount equal to the original principal indebtedness plus accumulated interest and attorney’s fees.
 
During the quarter ended March 31, 2002, the health care discontinued operations net income was approximately $656,000. The net income reflects a gain of $781,000, which resulted from the reduction of debt in the amount of $1,022,000 and accrued interest of $174,000 less the net book value of assets sold for $415,000. Operating loss for the Hospital for the three months ended March 31, 2002 was $125,000 compared to a loss of $32,000 in 2001. These results are not necessarily an indication of the future quarters operating results.
 
Liquidity and Capital Resources
 
The Company’s recurring losses from continuing operations led to its decision to discontinue the hospital operations. Difficulties in generating cash flow sufficient to meet its obligations raise substantial doubt about the Company’s ability to continue as a going concern.

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Real Estate and Corporate overhead continue to produce losses that the operating business is unable to absorb. The required investments in real estate are currently funded by loans.
 
The Company continues to incur legal expenses and has an obligation in 2002 to contribute to the Chatham Brothers toxic waste cleanup lawsuit.
 
Servicing outstanding debt continues to be a significant burden on the Company’s operations.

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PART II—OTHER INFORMATION
 
Item 1:     Legal Proceedings
 
The Company is named as a defendant in the Chatham Brothers toxic waste cleanup lawsuit. In February 1991, the Company was identified as one of many “Potentially Responsible Parties” (PRPs) in the Chatham Brothers toxic waste cleanup site case, filed by the State of California—Environmental Protection Agency, Department of Toxic Substances Control (DTSC) and involved the Hartley Pen Company previously owned by the Company.
 
On December 31, 1991, the Company and approximately 90 other companies were named in a formal complaint. The Company joined a group of defendants, which were notified and which are referred to as PRPs for the purpose of negotiating with the DTSC and for undertaking remediation of the site. 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 March 31, 2002, the Company had paid over $570,000 into the PRP group and had a cash call contribution payable of $131,000. In addition, the Company carried accrued short-term and long-term liabilities of $78,000 and $1,424,000, 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. The Company believes that the license agreement supports that it adequately notified the licensee but would have to investigate the international trademark involving “Classics Illustrated.” Management believes that there is no probable risk of loss related to this dispute.
 
Item 5:     Other Information
 
Related Party Transactions
 
In the first quarter of 2002, Frances Swanson, Trustee of the Frawley Family Trust loaned the Corporation funds to meet short-term operating expenses. The loans were secured by the Company’s real estate.
 
The following loans were made:
 
        
February 1st 2002
   
$
13,705.32
    
February 19th 2002
   
 
10,000.00
    
February 21st 2002
   
 
19,000.00
    
March 22nd 2002
   
 
20,879.61
    

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Item 6:     Exhibits and Reports on Form 8-K
 
Exhibit 7—Financial Data Schedule
 
On February 13, 2002, the Company filed an 8K report.

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SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
FRAWLEY CORPORATION
    (Registrant)
By:
  
/s/    MICHAEL P. FRAWLEY      
   
Michael P. Frawley
(Authorized Officer and CEO and Chairman of the Board)
 
Date: July 19, 2002

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