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, 2001
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OR
______TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 1-6436
--------------------------------
FRAWLEY CORPORATION
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware 95-2639686
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(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER I.D. NO.)
INCORPORATION OR ORGANIZATION)
5737 Kanan Road PMB 188, Agoura Hills, California 91301
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(818)735-6640
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(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE
Securities registered pursuant to Section 12 (b) of the Act: None
---------------
Securities registered pursuant to Section 12 (g) of the Act: None
---------------
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, 2001: $35,000
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
May , 2002.
Number of shares of Common Stock outstanding as of May 8, 2002: 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 26.
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.
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SPECIALIZED HEALTH SERVICES
Company Owned Inpatient Hospital: The Company currently leases
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 1 week and 2 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 where 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.
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
within the first six months of 2002.
Effective February 1, 2002 the Company entered into a
Settlement Agreement with a related party holding outstanding
notes payable
3
in the amount of $1,022,000 for 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 prince in the
amount of the principal of the notes ($1,022,000) and accrued
interest ($174,000). Also effective February 1, 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. The
principal amount of indebtedness was owed to Frances Swanson,
individually, and Frances Swanson, Successor Trustee of the
Frawley Family Trust. Frances Swanson is the Chairman's sister.
The Company is currently negotiating with a group of former
patients to purchase the hospital. If the negotiation fails,
then the Company will close down the hospital. The Company is
also attempting to attract a third party tenant for the leased
facility.
Company Owned Outpatient Programs: During 2001, the Company
decided to focus entirely on the inpatient services it provides
and therefore closed its two outpatient facilities.
Competition and Sources of Revenue: The hospital encounters
competition from other facilities and methods of alcohol,
cocaine, marijuana and nicotine addiction. The success of the
hospital operations substantially depends on public acceptance
of the services provided by the hospital and its ability to
attract referrals from health professionals and administrators,
which factors are influenced by the efficacy of the services
rendered, the hospital'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 hospital 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 the insured 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
4
hospital'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 hospital
are unable to be treated there, as the hospital is not a
provider in the managed care network in which that potential
patient participates. Since the hospital 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 hospital has
decreased. Another trend in the health care industry that has
affected the hosptial is the general reduction in benefits
offered by employers to employees for mental health care, which
includes 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 hospital's 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.
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
5
businesses) have impacted the hospital's ability to generate
revenue and the utilization of its health care facilities.
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REAL ESTATE
The Company's real estate consists of approximately 67 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 $1,276,000
as of the end of 2001, and are subject to mortgage debt, held
by five stockholders and aggregating approximately $2,416,000.
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).
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EMPLOYEES
Frawley Corporation and its subsidiaries employ an aggregate of
approximately 51 persons and management believes that employee
relations are satisfactory.
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ITEM 2. PROPERTIES
-------------------
The principal facilities used by Frawley Corporation and its
subsidiaries in their businesses include the one leased
property described below.
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SPECIALIZED HEALTH SERVICES:
The hospital subsidiary of the Company is in Seattle,
Washington (approximately 22,000 square feet). (For a
description of investment properties, see Item 1. Business -
Real Estate).
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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 Harley Pen Company previously owned by the
Company.
On December 31, 1991, the Company and approximately 90 other
6
companies were named in a formal complaint. The Company joined
a group of defendants, each of whom was so notified and which
is referred to as Potentially Responsible Parties (PRPs) for
the purpose of negotiating with the DTSC and for undertaking
remediation of the site.
In January 1998, the final remediation plan was approved by the
State and in January of 1999 the PRPs consented to the plan and
related allocation of costs. The consent decree was approved by
the Court.
As of December 31, 2001 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 has accrued $78,000 for a
total short-term and long-term liability in the amount of
$209,000 and $1,424,000, respectively, to cover estimated cost
related to the remediation plan.
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 sub-licensee in Greece. Pursuant to the license agreement,
the Company notified the licensee that the licensee would have
to investigate the international trademark involving "Classics
Illustrated." Management believes that there is no probable
risk of loss related to this dispute.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
------------------------------------------------------------
Not Applicable.
7
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 December 31, 2001 was 746.
No dividends have been paid in the periods shown above.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
--------------------------------------------------------------------------------
OF OPERATIONS
-------------
OVERALL SUMMARY
Net revenues from continuing operations from the Company
decreased $2,705,000, or approximately 99% in 2001 when
compared to 2000. The large decrease is due to the fact that
the Company discontinued its hospital operations during the
year. Revenue and expenses related to the hospital's operations
are classified as discontinued operations in 2001. Net loss was
$797,000 in 2001 compared to a $1,537,000 net loss in 2000.
Interest expense in 2001 was $245,000 compared to $322,000 in
2000. Selling, general and administrative expenses were
$169,000 in 2001 as compared to $1,218,000 in 2000.
--------------------------------------------------------------------------------
SPECIALIZED HEALTH SERVICES
Revenues from the hospital and contract units decreased by 13%
in 2001 compared to 2000. The Company is spending more in
outreach marketing to attract new patients. The hospital's loss
before interest expense was $120,000 in 2001 when compared to
income of $171,000 in 2000. Competition from other treatment
programs intensified during 2001 and 2000, together with
stronger emphasis by insurance carriers on outpatient treatment
instead of inpatient programs.
In 2001, the Company's Board of Directors unanimously voted to
discontinue the operations of the hospital and seek a buyer for
the division. The Company is currently in negotiations with a
group of former patients to purchase the division, but no
assurances can be given that a deal will be consummated. If a
buyer cannot be obtained, the Company will close down the
operations.
8
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REAL ESTATE
During 2001, the Company sold two parcels of land for $122,500
and $450,000 which resulted in a reduction in the Company's
reserve for real estate losses in the amount of $211,000 in
total. The Company used approximately $282,000 of the proceeds
from the two sales to retire related debt and accrued interest.
The real estate operating losses before interest expense was
$213,000 in 2001 when compared to a loss of $1,260,000 in 2000.
Real estate losses continued as the Company incurs carrying
costs.
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LIQUIDITY AND CAPITAL RESOURCES
The Company's recurring losses from continuing operations, its
decision to discontinue the hospital operations and the
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
that the operating business is unable to absorb. The required
investments in real estate are currently funded from loans.
During 2001 and 2000, the Company incurred additional debt of
$373,000 and $454,000, respectively. The notes are with related
parties, bear interest at 10%, and are due in 2002. The funds
were use to meet working capital requirements, and secured by
the Company's real estate holdings.
The Company intends to meet this obligation from real estate
sales.
The real estate division is currently in default on various
other notes payable totaling $2,416,000 which became due on
various dates in 2001.
Management intends to sell the hospital operations, continue
to sell real estate holdings and reduce non-producing assets
and overhead.
The following measurements indicate the trends in the Company's
liquidity from continuing operations:
December 31,
2001 2000
--------------- ----------------
9
Working capital deficiency $(3,386,000) $(4,105,000)
Current ratio .06 to 1 .12 to 1
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ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
-----------------------------------------------------
See the consolidated financial statements and the notes thereto
which begin on page F1.
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ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
------------------------------------------------------------------------
FINANCIAL DISCLOSURE.
---------------------
None.
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10
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.
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11
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, 2001 F2-F3
Financial Statements for the Years
Ended December 31, 2001 and 2000
Consolidated Statements of
Operations F4
Consolidated Statements of
Stockholders' Deficit F5
Consolidated Statements of
Cash Flows F6
Notes to Consolidated Financial
Statements F7-F12
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.
12
(b) Reports on Form 8-K:
The Company filed an 8K report on February 13, 2002.
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 8, 2002
---------------------------------------------------------------------------
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 8, 2002
--------------------------------------------------------------------------------
(Date)
/s/ Eileen Callahan
--------------------------------------------------------------------------------
Eileen Callahan
Vice President and Secretary
May 8, 2002
--------------------------------------------------------------------------------
(Date)
14
LaRue, Corrigan & McCormick LLP
Certified Public Accountants
5959 Topanga Canyon Boulevard, Suit 180
Woodland Hills, California 91367
Telephone 818-587-9300
Facsimile 818-347-0904
lcmcpa.com
[XXXX]
INDEPENDENT AUDITORS' 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, 2001, and the
related consolidated statements of operations, stockholders' deficit, and cash
flows for the years ended December 31, 2001 and 2000. 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 audits in accordance with auditing standards generally accepted
in the United States of America. 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, 2001, and the results of its operations and
its cash flows for the years ended December 31, 2001 and 2000 in conformity with
accounting principles generally accepted in the United States of America.
The 2001 and 2000 consolidated financial statements have been prepared assuming
the Company will continue as a going concern. As discussed in Note 3 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 3. These financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
/s/ LaRue, Corrigan & McCormick LLP
LaRue, Corrigan & McCormick LLP
Woodland Hills, California
April 8, 2002
- F1 -
FRAWLEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2001
ASSETS
------
CURRENT ASSETS
Cash (Note 1) $ 135,000
Prepaid expenses and deposits 66,000
Current assets of discontinued operations (Note 2) 542,000
--------------
TOTAL CURRENT ASSETS 743,000
--------------
OTHER ASSETS
Real estate investments (Notes 4 and 6) 1,276,000
Non-current assets of discontinued operations (Note 2) 416,000
--------------
TOTAL OTHER ASSETS 1,692,000
--------------
TOTAL ASSETS $ 2,435,000
==============
See independent auditors' report and notes to consolidated financial statements.
- F2 -
FRAWLEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2001
LIABILITIES AND STOCKHOLDERS' DEFICIT
-------------------------------------
CURRENT LIABILITIES
Notes payable to stockholders (Notes 4 and 6) $ 2,416,000
Accounts payable and accrued expenses 962,000
Environmental reserve (Note 8) 209,000
Current liabilities of discontinued operations
(Note 2) 1,481,000
---------------
TOTAL CURRENT LIABILITIES 5,068,000
LONG-TERM LIABILITIES
Environmental reserve (Note 8) 1,424,000
---------------
TOTAL LIABILITIES 6,492,000
---------------
COMMITMENTS AND CONTINGENCIES (NOTES 6, 7 and 8)
STOCKHOLDERS' DEFICIT
Preferred stock, $1.00 par value, 1,000,000
shares authorized, no shares issued -
Common stock, $1.00 par value, 6,000,000 shares
authorized, 1,414,217 shares issued 1,414,000
Capital surplus 16,986,000
Accumulated deficit (21,696,000)
---------------
(3,296,000)
Less common stock in treasury, 191,312 shares
(at cost) (761,000)
---------------
TOTAL STOCKHOLDERS' DEFICIT (4,057,000)
---------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 2,435,000
===============
See independent auditors' report and notes to consolidated financial statements.
- F3 -
FRAWLEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2001 AND 2000
2001 2000
------------- -------------
REVENUES
Net operating revenues $ 35,000 $ 2,740,000
COSTS AND EXPENSES
Cost of operations 196,000 1,792,000
Selling, general and administrative
expenses (Note 9) 169,000 1,218,000
Impairment loss on real estate - 803,000
Loss on sale of real estate - 142,000
Interest expense (Note 4) 245,000 322,000
------------- -------------
TOTAL COSTS AND EXPENSES 610,000 4,277,000
------------- -------------
LOSS FROM CONTINUING OPERATIONS (575,000) (1,537,000)
LOSS FROM DISCONTINUED OPERATIONS (222,000) -
------------- -------------
NET LOSS $ (797,000) $(1,537,000)
============= =============
LOSS PER SHARE FORM CONTINUING OPERATIONS, COMMON $ (0.47) $ (1.26)
------------- -------------
NET LOSS PER SHARE, COMMON $ (0.65) $ (1.26)
------------- -------------
FULLY DILUTED $ (0.65) $ (1.26)
------------- -------------
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 1,222,905 1,222,905
============= =============
See independent auditors' report and notes to consolidated financial statements.
- F4 -
FRAWLEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
YEARS ENDED DECEMBER 31, 2001 AND 2000
Common Stock
-------------------------- Capital Accumulated Treasury
Shares Amount Surplus Deficit Stock Total
----------- ------------ --------------- ---------------- -------------- --------------
January 1, 2000 1,414,000 $1,414,000 $16,986,000 $(19,362,000) $ (761,000) $ (1,723,000)
Net loss - - - (1,537,000) - (1,537,000)
----------- ------------ --------------- ---------------- -------------- --------------
December 31, 2000 1,414,000 1,414,000 16,986,000 (20,899,000) (761,000) (3,260,000)
Net loss - - - (797,000) - (797,000)
----------- ------------ --------------- ---------------- -------------- --------------
December 31, 2001 1,414,000 $1,414,000 $16,986,000 $(21,696,000) $ (761,000) $(4,057,000)
=========== ============ =============== ================ ============== ==============
See independent auditors' report and notes to consolidated financial statements.
- F5 -
FRAWLEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2001 AND 2000
CASH FLOWS FROM OPERATING ACTIVITIES: 2001 2000
-------------- --------------
Net Loss $ (797,000) $ (1,537,000)
-------------- --------------
Adjustments to reconcile net loss to net
cash used in operating activities:
Loss on sale of real estate investment - 142,000
Depreciation - 24,000
Net change in assets of discontinued operations 79,000 -
Net change in liabilities of discontinued operations 150,000 -
Impairment loss on real estate - 803,000
Changes in operating assets and liabilities:
Short and long-term accounts receivable, net - (40,000)
Prepaid expenses and deposits (30,000) 20,000
Accounts payable and accrued liabilities 141,000 238,000
Environmental reserve - (22,000)
Unearned revenue - (5,000)
-------------- --------------
TOTAL ADJUSTMENTS 340,000 1,160,000
-------------- --------------
NET CASH USED IN OPERATING ACTIVITIES (457,000) (377,000)
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from the sale of real estate 573,000 465,000
Payments for real estate improvements (126,000) (317,000)
-------------- --------------
NET CASH PROVIDED BY INVESTING ACTIVITIES 447,000 148,000
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Short-term debt borrowings from related party 373,000 454,000
Repayment of borrowings (282,000) (200,000)
-------------- --------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 91,000 254,000
-------------- --------------
NET INCREASE IN CASH 81,000 25,000
CASH, BEGINNING OF YEAR 54,000 29,000
-------------- --------------
CASH, END OF YEAR $ 135,000 $ 54,000
============== ==============
See independent auditors' report and notes to consolidated financial statements.
- F6 -
FRAWLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001 AND 2000
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation - The accompanying consolidated financial
---------------------------
statements include Frawley Corporation (the "Company") and its subsidiaries:
Schick Shadel Hospital, Inc. (the "Hospital"), which is accounted for as a
discontinued operation (see Note 2), and Sun Sail Development Company. All
significant intercompany profits, transactions and balances have been
eliminated.
Hospital Revenue - The Hospital primarily treats substance abuse in the
----------------
Seattle, Washington area. Certain operating revenues for the 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 ten to twenty years,
using the straight-line method. The Hospital building is depreciated over forty
years.
Unearned Revenue - The Company defers fees on its chemical dependency programs
----------------
and amortizes them into operations per the term of the program. Unearned revenue
is included in the current liabilities of discontinued operations.
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 -
FRAWLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001 AND 2000
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. The Company maintains an allowance for doubtful
accounts based on factors surrounding the credit risk of specific patients and
other information. Credit losses, when realized, have been within the range of
the Company's expectations.
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, 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 approximate fair value based on current rates for similar debt
of the same remaining maturity.
Advertising - The Company expenses advertising costs as incurred. Advertising
-----------
expense was $129,000 and $110,000 for the years ended December 31, 2001 and
2000, respectively, and is included in the loss from discontinued operations.
Reclassification - Certain accounts were reclassified from the prior year. The
----------------
purpose of the reclassification is to give a more accurate representation of the
Company's operations. The reclassifications did not effect the representation of
the Company's overall performance.
2. DISCONTINUED OPERATIONS
In December 2001, the Company's Board of Directors approved a plan to dispose of
the Hospital. Management has been negotiating the sale of the Hospital and
expects the sale to be completed during 2002. Accordingly, the Hospital has been
accounted for as a discontinued operation.
The following presents select information regarding the Hospital and its
operations for 2001 and 2000:
- F8 -
FRAWLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001 AND 2000
2001 2000
------------ ------------
Revenues, net $2,371,000 $2,719,000
Accounts receivable 1,215,000 1,118,000
Allowance for doubtful accounts (726,000) (606,000)
Property, plant & equipment, net 416,000 451,000
Other assets 53,000 75,000
Accounts payable and other liabilities 459,000 308,000
Notes payable to related parties 1,022,000 1,022,000
3. OPERATING RESULTS AND MANAGEMENT PLANS
The Company's net loss for 2001 was $797,000, including discontinued operations,
compared to a $1,537,000 net loss for 2000. Working capital and operating cash
flow continue to be negative.
Management plans for 2002 include the sale of the Hospital. In addition, the
Company will continue its efforts to sell its real estate holdings and minimize
additional investments that 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 67 acres of
largely undeveloped land in the Santa Monica Mountains, northwest of Los
Angeles. The Company is continuing to pursue various options with respect to
selling a significant portion of its real estate. 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.
4. RELATED PARTY TRANSACTIONS
The Company has borrowed funds from the Chief Executive Officer and his family
members, as needed, to meet real estate investment and working capital needs. As
of December 31, 2001 and 2000 the balances due were $2,416,000 ($3,438,000
including borrowings for the discontinued operation) and $3,277,000,
respectively (see Note 6). The notes bear interest at 10%, are secured by real
estate and became due in 2001. The Company has defaulted under the terms of the
notes. As of the date of this report, no action has been taken on the delinquent
amounts except as indicated in Note 11.
- F9 -
FRAWLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001 AND 2000
5. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for: 2001 2000
------------- -------------
Income taxes $ - $ 4,000
Interest $ 105,000 $ 116,000
6. DEBT
Short-term debt consists of $2,416,000 of notes payable to stockholders
($3,438,000 including borrowings for the discontinued operation), which became
due on various dates throughout 2001, bear interest at 10% per annum, and are
secured by the real estate holdings of the Company. The Company has defaulted
under the terms of the notes. As of the date of this report, no action has been
taken on the delinquent amounts except as indicated in Note 11.
Long-term debt consists of the environmental reserve amount of $1,424,000 (see
Note 8).
7. COMMITMENTS AND CONTINGENCIES
The Company operated its outpatient programs, which were discontinued during
2001, from leased facilities. All of the Company's leases were 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.
Operations include rent expense of $22,000 in 2001 and $80,000 in 2000.
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 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.
- F10 -
FRAWLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001 AND 2000
As of December 31, 2001, the Company had made payments totaling approximately
$570,000 into the PRP group and had a cash call contribution payable of
$131,000. The Company has accrued short-term and long-term liabilities of
$209,000 and $1,424,000, respectively, to cover future costs under the
remediation plan.
The Company is in dispute related to a license agreement entered into in 1988
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 that the licensee would have
to investigate the international trademark involving "Classics Illustrated."
Management believes that there is no probable risk of loss related to this
dispute.
9. INCOME TAXES
There is no provision for income taxes due to tax losses in 2001 and 2000, other
than provisions for minimum state income taxes that are included in selling,
general and administrative expenses.
Deferred tax assets and liabilities for federal income tax purposes at December
31, 2001 and 2000 consist of the following:
2001 2000
-------------- --------------
Net operating loss carryforwards $ 4,532,000 $ 4,376,000
Depreciation (35,000) (38,000)
Bad debt/land reserves 499,000 530,000
Toxic waste accrual 555,000 511,000
Other reserves 278,000 231,000
-------------- --------------
5,829,000 5,610,000
Less valuation allowance (5,829,000) (5,610,000)
-------------- --------------
$ - $ -
============== ==============
The Company has net operating loss carryforwards aggregating approximately
$13,328,000, for federal income tax purposes, which expire in various years
through 2016.
10. EMPLOYEE BENEFIT PLANS
The Company sponsors a 401(k) Plan covering substantially all of its employees.
Contributions to the Plan are made by participating employees.
- F11 -
FRAWLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001 AND 2000
The Company made no contributions in 2001 and 2000, as contributions are
discretionary.
11. SUBSEQUENT EVENTS
On February 1, 2002, the Hospital sold its land, building, property and
equipment to a related party who also held the outstanding notes payable. The
related party took possession of the land, building, furniture and fixtures, and
machinery and equipment of the Hospital, which had a net book value of $415,000,
in exchange for the cancellation of the outstanding notes payable and accrued
interest of $1,022,000 and $174,000, respectively. The Hospital recorded a gain
of $781,000 on the sale.
Immediately subsequent to the sale, the Company entered into a three year
operating lease with a related party whereby the Company will lease back all of
the land, building, property and equipment sold. Under the terms of the lease,
the Company has the option to purchase back the assets sold for the purchase
price of the original principal indebtedness plus accumulated interest and
attorney's fees. Monthly rent for the property and equipment is approximately
$10,000 for the first year and approximately $12,000 for the second and third
years.
- F12 -