Prepared by R.R. Donnelley Financial -- Form 10-Q period ending 6/30/2002
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 June 30, 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 June 30, 2002
Common stock, par value $1
  
1,222,905
 
Total Number of Pages 12
 

FRAWLEY CORPORATION AND SUBSIDIARIES
 
INDEX
 
           
Page No.
PART I:    FINANCIAL INFORMATION
    
Item 1:    Financial Statements
       
         
3
         
4
         
5
         
6
         
7
         
8-9
PART II:    OTHER INFORMATION
         
10
         
10
         
11
    
12

2

ITEM I:    FINANCIAL STATEMENTS
 
FRAWLEY CORPORATION AND SUBSIDIARIES
 
CONSOLIDATED BALANCE SHEETS
 
    
June 30,
2002
     
December 31,
2001
  
    
(Unaudited)
         
ASSETS
                 
Current assets
                  
Cash
   
$
162,000
 
   
$
135,000
 
Accounts receivable, net
   
 
6,000
 
   
 
—  
 
Prepaid expenses and other deposits
   
 
69,000
 
   
 
66,000
 
Current assets of discontinued operations
   
 
473,000
 
   
 
542,000
 
    
  
Total current assets
   
 
710,000
 
   
 
743,000
 
Real estate investments, net
   
 
1,291,000
 
   
 
1,276,000
 
Non-current assets of discontinued operations
   
 
2,000
 
   
 
416,000
 
    
  
Total assets
   
$
2,003,000
 
   
$
2,435,000
 
    
  
LIABILITIES AND STOCKHOLDERS’ DEFICIT
                  
Current liabilities
                  
Notes payable to stockholders
   
$
2,638,000
 
   
$
2,416,000
 
Accounts payable and accrued expenses
   
 
1,166,000
 
   
 
962,000
 
Environmental reserve
   
 
78,000
 
   
 
209,000
 
Current liabilities of discontinued operations
   
 
436,000
 
   
 
1,481,000
 
    
  
Total current liabilities
   
 
4,318,000
 
   
 
5,068,000
 
Long term liabilities
                  
Environmental reserve
   
 
1,424,000
 
   
 
1,424,000
 
    
  
Total liabilities
   
 
5,742,000
 
   
 
6,492,000
 
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
   
 
(21,378,000
)
   
 
(21,696,000
)
    
  
    
 
(2,978,000
)
   
 
(3,296,000
)
Less common stock in treasury, 191,312 shares (at cost)
   
 
(761,000
)
   
 
(761,000
)
    
  
Total stockholders’ deficit
   
 
(3,739,000
)
   
 
(4,057,000
)
    
  
Total liabilities and stockholders’ deficit
   
$
2,003,000
 
   
$
2,435,000
 
    
  
 
See notes to consolidated financial statements.

3

FRAWLEY CORPORATION AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF OPERATIONS
 
    
Three Months Ended
June 30,
  
    
2002
     
2001
  
    
(Unaudited)
 
Revenues:
                  
Net revenues
   
$
—  
 
   
$
690,000
 
    
  
Costs and expenses:
                  
Cost of operations
   
 
—  
 
   
 
446,000
 
Selling, general and administrative expenses
   
 
67,000
 
   
 
283,000
 
Interest expense
   
 
63,000
 
   
 
86,000
 
    
  
Total costs and expenses
   
 
130,000
 
   
 
815,000
 
    
  
Loss from continuing operations
   
 
(130,000
)
   
 
(125,000
)
Loss from discontinued operations
   
 
(105,000
)
   
 
—  
 
    
  
Net income/(loss)
   
$
(235,000
)
   
$
(125,000
)
    
  
Loss per share from continuing operations
   
$
(0.11
)
   
$
(0.10
)
    
  
Net loss per share, common
   
$
(0.19
)
   
$
(0.10
)
    
  
Fully diluted
   
$
(0.19
)
   
$
(0.10
)
    
  
Weighted average number of common shares outstanding
   
 
1,222,905
 
   
 
1,222,905
 
    
  
 
See notes to consolidated financial statements.

4

FRAWLEY CORPORATION AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF OPERATIONS
 
    
Six Months Ended
June 30,
  
    
2002
     
2001
  
    
(Unaudited)
  
Revenues:
                  
Net operating revenues
   
$
10,000
 
   
$
1,415,000
 
    
  
Costs and expenses:
                  
Cost of operations
   
 
—  
 
   
 
875,000
 
Selling, general and administrative expenses
   
 
120,000
 
   
 
595,000
 
Interest expense
   
 
123,000
 
   
 
156,000
 
    
  
Total cost and expenses
   
 
243,000
 
   
 
1,626,000
 
    
  
Loss from continuing operations
   
 
(233,000
)
   
 
(211,000
)
Income from discontinued operations
   
 
551,000
 
   
 
—  
 
    
  
Net income/(loss)
   
$
318,000
 
   
$
(211,000
)
    
  
Loss per share from continuing operations
   
$
(0.11
)
   
$
(0.17
)
    
  
Net income/(loss) per share, common
   
$
0.26
 
   
$
(0.17
)
    
  
Fully diluted
   
$
0.26
 
   
$
(0.17
)
    
  
Weighted average number of common shares outstanding
   
 
1,222,905
 
   
 
1,222,905
 
    
  
 
See notes to consolidated financial statements.

5

FRAWLEY CORPORATION AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
    
Six Months Ended
June 30,
  
    
2002
     
2001
  
    
(Unaudited)
  
CASH FLOWS FROM OPERATING ACTIVITIES:
                  
Net income/(loss)
   
$
318,000
 
   
$
(282,000
)
    
  
Adjustments to reconcile net income/(loss) to net cash used in operating activities:
                  
Gain on sale of assets
   
 
(781,000
)
   
 
—  
 
Depreciation
   
 
—  
 
   
 
16,000
 
Change in net assets of discontinued operations
   
 
70,000
 
   
 
—  
 
Change in net liabilities of discontinued operations
   
 
151,000
 
   
 
—  
 
Changes in operating assets and liabilities:
                  
Short and long-term accounts receivable, net
   
 
(6,000
)
   
 
106,000
 
Prepaid expenses and deposits
   
 
(3,000
)
   
 
(8,000
)
Accounts payable and accrued expenses
   
 
71,000
 
   
 
147,000
 
Unearned revenue
   
 
—  
 
   
 
(55,000
)
    
  
Total adjustments
   
 
(498,000
)
   
 
206,000
 
    
  
Net cash used in operating activities
   
 
(180,000
)
   
 
(76,000
)
    
  
CASH FLOWS FROM INVESTING ACTIVITIES:
                  
Real estate investments
   
 
(15,000
)
   
 
4,000
 
    
  
CASH FLOWS FROM FINANCING ACTIVITIES:
                  
Short-term debt borrowings
   
 
222,000
 
   
 
95,000
 
    
  
Net change in cash and cash equivalents
   
 
27,000
 
   
 
23,000
 
Cash, beginning of period
   
 
135,000
 
   
 
54,000
 
    
  
Cash, end of period
   
$
162,000
 
   
$
77,000
 
    
  
 
See notes to consolidated financial statements.

6

 
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 as of June 30, 2002, and the results of operations and changes in cash flows for the six months then ended.
 
NOTE 2:
 
The results of operations for the six months ended June 30, 2002 as compared to the results of 2001 are not necessarily indicative of results to be expected for the full year.

7

 
FRAWLEY CORPORATION AND SUBSIDIARIES
 
ITEM 2:
 
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Real Estate
 
For the quarter ended June 30, 2002, the real estate operating loss was $95,000 compared to a loss in 2001 of $88,000. During the first six months of this year, real estate losses were $167,000 as compared to a loss of $181,000 for the same period in 2001. Real estate losses continue as the Company incurs carrying costs and costs of 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 a year, the Board of Directors of the Company has unanimously voted to sell or close this business in 2002. The Company is currently negotiating with a group of non-related former patients who are interested in purchasing the Schick program. If these negotiations are not successful, the Company will seek another purchaser.
 
Effective February 1, 2002, the Company entered into a Settlement Agreement with a related party holding outstanding notes payable in the amount of $1,022,000, secured by the hospital property in Seattle, Washington. Under the terms of the agreement, the Company sold the hospital land, building and related property and equipment to the related party for a purchase price in the amount of the principal of the notes ($1,022,000) and accrued interest ($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 June 30, 2002, the health care discontinued operations’ loss was approximately $105,000. For the six months ended June 30, 2002, the health care discontinued operations’ net income was approximately $551,000. The net income reflects a gain from the Settlement Agreement 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. If the Company had not entered into the Settlement Agreement, the net loss for the hospital would have been $230,000 for the six months ended June 30, 2002 as compared to a loss of $17,000 for the same period 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

8

 
Company’s ability to continue as a going concern.
 
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.

9

 
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 involving 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 of the changes. 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 June 30, 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 second quarter of 2002, Michael Frawley, Chairman of the Board, loaned to Shadel Hospital Inc. DBA Schick Shadel Hospital of Seattle $55,000 to meet short term operating cash flows. The loan was secured by the hospital’s assets.
 
In the second 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

10

estate.
 
The following loans were made:
 
April 3rd, 2002
  
$  37,043.00
June 14th, 2002
  
    17,000.00
June 21st, 2002
  
  105,000.00
 
ITEM 6:    EXHIBITS AND REPORTS ON FORM 8-K
 
Exhibit 99.1—Certification of CEO and CFO
 
No reports on form 8-K were filed during the quarter ended June 30, 2002.

11

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:    August 20, 2002
      
By:
  
/s/    MICHAEL P. FRAWLEY        
               
Michael P. Frawley
President
(Authorized Officer and
Chief Financial Officer

12