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
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ACT OF 1934
For the fiscal year ended December 31, 2000
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OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
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EXCHANGE ACT OF 1934
Commission File Number 1-6436
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FRAWLEY CORPORATION
-------------------
(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:
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
----- -----
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, 2000: $2,740,000
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
March 29, 2000.
Number of shares of Common Stock outstanding as of March 29, 2001: 1,222,905
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
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 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 which 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 2000, the Company operated
two outpatient chemical dependency treatment centers located in the
state of Washington. The outpatient programs are designed to meet the
individual needs of the patient; and 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.
Company Owned Centers: The Company also owns and operates one center
for stop-smoking services under the name of Schick Centers. The
center operates out of the Schick Shadel Hospital in Seattle.
1
The Company is considering closing the outpatient program in 2001 due
to continued losses at the center.
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 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 that 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 affected
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 that 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 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
2
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 outpatient 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), which they are considering closing in 2001
due to continued financial losses.
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) have impacted
the Company's ability to generate revenue and the utilization of its
health care facilities.
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.
--------------------------------------------------------------------------------
Real Estate
The Company's real estate consists of approximately 127 acres of
largely undeveloped land in the Santa Monica Mountains, northwest of
Los Angeles. The properties owned by the Company represent an
3
aggregate investment of approximately $1,723,000 as of the end of
2000, and are subject to mortgage debt, held by five stockholders and
a third party, aggregating approximately $2,325,000. 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 68 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 owned property
described below. Other facilities are rented under leases expiring on
various dates through December 2001.
--------------------------------------------------------------------------------
Specialized Health Services:
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. In February 2001, an earthquake occurred in the Seattle area
and one of the outpatient facilities was relocated to the Hospital
(For a description of investment properties, see Item 1 Business -
Real Estate). No material damage occurred to the facility.
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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 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.
4
In January of 1998, the final remediation plan was approved by the
State and in January of 1999 the PRPs consented to the plan and the
related allocation of costs. The consent decree was approved by the
Court.
As of December 31, 2000, 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, to cover
estimated costs related to 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.
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Item 4: Submission of Matters to a Vote of Security Holders
-----------------------------------------------------------
(Not Applicable)
5
PART II
Item 5: Market for Registrant's Common Stock and Related Stockholders Matters
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The Company's stock was delisted by the Pacific Stock Exchange on
December 1, 1992. There is currently no public trading of the stock.
The approximate number of holders of record for Frawley Corporation's
Common Stock as of December 31, 2000 was 885.
No dividends have been paid in the periods shown above.
--------------------------------------------------------------------------------
Item 6: Management's Discussion and Analysis of Financial Condition and Results
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of Operations
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Overall Summary
Net revenues from continuing operations for the Company decreased
$96,000, or approximately 4% in 2000 when compared to 1999. Net loss
is $1,537,000 in 2000 compared to a $723,000 net loss in 1999.
Interest expense in 2000 was $322,000 compared to $284,000 in 1999.
Selling, general and administrative expenses remained the same in 2000
as in 1999 at $1,218,000.
--------------------------------------------------------------------------------
Specialized Health Services
Revenues from Specialized Health Services chemical dependency hospital
and contract units decreased by 4% in 2000 compared to 1999. The
Company is spending more in outreach marketing to attract new
patients. Specialized Health Service income before interest expense
was $171,000 in 2000 when compared to $106,000 in 1999. Competition
from other treatment programs intensified during 2000 and 1999,
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 increase the patients in the inpatient
treatment program. Schick will continue to offer educational material
regarding the addiction cycle and chemical dependency and to
popularize aversion treatment methodology.
--------------------------------------------------------------------------------
Real Estate
In August 2000, the Company sold one parcel of land for $465,000,
resulting in a loss of $142,000. The Company used approximately
$248,000 of the proceeds to retire related debt and accrued interest.
The real estate operating loss before interest expense was $1,260,000
in 2000 when compared to a loss of $290,000 in 1999. In addition, the
Company recorded an increase in the
6
reserve against the book value of the real estate in the amount of
$803,000. Real estate losses continue as the Company continues to
incur carrying costs.
--------------------------------------------------------------------------------
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 that the
operating business is unable to absorb. The required investments in
real estate are currently funded from loans.
During 2000 and 1999 the Company incurred additional debt in amounts
of $454,000 and $544,000, respectively. The notes are with related
parties, bear interest at 10%, and are due in 2001. The funds were
used to meet working capital requirements, and are secured by the
Company's real estate holdings.
The Company has settled certain lawsuits and therefore has reduced the
cash required to support these efforts. The Company has an
outstanding $131,000 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,
2000 1999
---------------------------
Working capital deficiency $(4,105,000) $(3,704,000)
Current ratio .12 to 1 .14 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.
7
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Item 8: Changes in and Disagreements with Accountants on Accounting and
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Financial Disclosure
--------------------
None.
8
PART III
Item 9: Directors, Executive Officers, Promoters and Control Persons; Compliance
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with Section 16(a) of the Exchange Act
--------------------------------------
There is hereby incorporated by reference the information that 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.
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Item 10: Executive Compensation.
--------------------------------
There is hereby incorporated by reference the information that 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 that 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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9
PART IV
Item 13: Financial Statements, Exhibits and Reports on Form 8-K
---------------------------------------------------------------
(a) 1. List of Financial Statements:
Independent Auditors' Report F1
Financial Statements
Consolidated Balance Sheet
as of December 31, 2000 F2-F3
Financial Statements for the Years Ended
December 31, 2000 and 1999:
Consolidated Statements of Operations F4
Consolidated Statement of Stockholders' Deficit F5
Consolidated Statements of Cash Flows F6
Notes to Consolidated Financial Statements F7-F13
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.
10
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)
/s/ Michael P. Frawley
--------------------------------------------------------------------------------
Michael P. Frawley
CEO and Chairman of the Board
April 30, 2001
--------------------------------------------------------------------------------
(Date)
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.
/s/ Michael P. Frawley
--------------------------------------------------------------------------------
Michael P. Frawley
CEO and Chairman of the Board
(Principal Executive, Financial and Accounting Officer)
April 30, 2001
--------------------------------------------------------------------------------
(Date)
/s/ Eileen Callahan
--------------------------------------------------------------------------------
Eileen Callahan
Vice President and Secretary
April 30, 2001
--------------------------------------------------------------------------------
(Date)
11
LaRue, Corrigan & McCormick LLP
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, 2000, and the
related consolidated statements of operations, stockholders' deficit, and cash
flows for the years ended December 31, 2000 and 1999. 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 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, 2000, and the results of its operations and
its cash flows for the years ended December 31, 2000 and 1999 in conformity with
generally accepted accounting principles.
The 2000 and 1999 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.
LaRue, Corrigan & McCormick LLP
Woodland Hills, California
February 26, 2001
- F1 -
FRAWLEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2000
ASSETS
------
CURRENT ASSETS
Cash (Note 1) $ 54,000
Accounts receivable (net of current
allowance of $484,000) (Note 1) 433,000
Prepaid expenses and deposits 93,000
-----------
TOTAL CURRENT ASSETS 580,000
-----------
OTHER ASSETS
Long-term accounts receivable (net of
allowance of $122,000) (Notes 1 and 4) 95,000
Real estate investments (Notes 3 and 6) 1,723,000
-----------
TOTAL OTHER ASSETS 1,818,000
-----------
PROPERTY AND EQUIPMENT (Note 1)
Land 111,000
Building and improvements 894,000
Machinery and equipment 665,000
Furniture and fixtures 5,000
-----------
1,675,000
Less accumulated depreciation (1,224,000)
-----------
TOTAL PROPERTY AND EQUIPMENT 451,000
-----------
TOTAL ASSETS $ 2,849,000
===========
See independent auditor's report and notes to
consolidated financial statements.
- F2 -
FRAWLEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2000
LIABILITIES AND STOCKHOLDERS' DEFICIT
-------------------------------------
CURRENT LIABILITIES
Notes payable to stockholders (Notes 3 and 6) $ 3,277,000
Accounts payable and accrued expenses 1,230,000
Environmental reserve (Note 8) 78,000
Note payable (Note 6) 70,000
Unearned revenue 30,000
------------
TOTAL CURRENT LIABILITIES 4,685,000
LONG-TERM LIABILITIES
Environmental reserve (Note 8) 1,424,000
------------
TOTAL LIABILITIES 6,109,000
------------
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 (20,899,000)
------------
(2,499,000)
Less common stock in treasury, 191,312 shares
(at cost) (761,000)
------------
TOTAL STOCKHOLDERS' DEFICIT (3,260,000)
------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 2,849,000
============
See independent auditor's report and notes to
consolidated financial statements.
- F3 -
FRAWLEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2000 AND 1999
2000 1999
----------- ----------
REVENUES
Net operating revenues $ 2,740,000 $2,644,000
COSTS AND EXPENSES
Cost of operations 1,792,000 1,751,000
Selling, general and administrative expenses (Note 9) 1,218,000 1,218,000
Impairment loss on real estate 803,000 -
Loss on sale of real estate 142,000 114,000
Interest expense, net (Note 3) 322,000 284,000
----------- ----------
TOTAL COSTS AND EXPENSES 4,277,000 3,367,000
----------- ----------
NET LOSS $(1,537,000) $ (723,000)
=========== ==========
NET LOSS PER SHARE, COMMON $ (1.26) $ (0.59)
----------- ----------
FULLY DILUTED $ (1.26) $ (0.59)
----------- ----------
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 1,222,905 1,222,905
=========== ==========
See independent auditor's report and notes to
consolidated financial statements.
- F4 -
FRAWLEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
YEARS ENDED DECEMBER 31, 2000 AND 1999
Common Stock
------------------------- Capital Accumulated Treasury
Shares Amount Surplus Deficit Stock Total
----------------------------------------------------------------------------------------
January 1, 1999 1,414,000 $1,414,000 $16,986,000 $(18,639,000) $(761,000) $(1,000,000)
Net loss - - - (723,000) - (723,000)
----------------------------------------------------------------------------------------
December 31, 1999 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)
========================================================================================
See independent auditor's report and notes to
consolidated financial statements.
- F5 -
FRAWLEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2000 AND 1999
CASH FLOWS FROM OPERATING ACTIVITIES: 2000 1999
----------- ---------
Net Loss $(1,537,000) $(723,000)
----------- ---------
Adjustments to reconcile net loss to net cash used in
operating activities:
Loss on sale of real estate investment 142,000 114,000
Depreciation 24,000 32,000
Impairment loss on real estate 803,000 -
Changes in operating assets and liabilities:
Short and long-term accounts receivable, net (40,000) 105,000
Prepaid expenses and deposits 20,000 22,000
Accounts payable and accrued liabilities 238,000 102,000
Environmental reserve (22,000) (94,000)
Unearned revenue (5,000) (49,000)
----------- ---------
TOTAL ADJUSTMENTS 1,160,000 232,000
----------- ---------
NET CASH USED IN OPERATING ACTIVITIES (377,000) (491,000)
----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from the sale of real estate 465,000 321,000
Equipment purchases - (45,000)
Payments for real estate improvements (317,000) (266,000)
----------- ---------
NET CASH PROVIDED BY INVESTING ACTIVITIES 148,000 10,000
----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Short-term debt borrowings from related party 454,000 544,000
Repayment of borrowings (200,000) (50,000)
----------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 254,000 494,000
----------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 25,000 13,000
CASH, BEGINNING OF YEAR 29,000 16,000
----------- ---------
CASH, END OF YEAR $ 54,000 $ 29,000
=========== =========
See independent auditor's report and notes to
consolidated financial statements.
- F6 -
FRAWLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000 AND 1999
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"), 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 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 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.
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.
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
- F7 -
FRAWLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000 AND 1999
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, 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.
Advertising - The Company expenses advertising costs as incurred. Advertising
-----------
expense was $110,000 and $138,000 for the years ended December 31, 2000 and
1999, respectively.
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. OPERATING RESULTS AND MANAGEMENT PLANS
The Company's net loss for 2000 was $1,537,000 compared to a $723,000 net loss
for 1999. The Company 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 2001 include seeking partners for unit operations.
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 127 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.
- F8 -
FRAWLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000 AND 1999
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. 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 family
members, as needed, to meet real estate investment and working capital needs.
As of December 31, 2000 and 1999 the balances due were $3,277,000 and
$3,023,000, respectively (see Note 6). The notes bear interest at 10%, are
secured by real estate and become due in 2001.
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: 2000 1999
-------- --------
Income taxes $ 4,000 $ 6,000
Interest $116,000 $218,000
6. DEBT
Short-term debt consists of the following:
Notes payable to stockholders, due various dates $3,277,000
throughout 2001, bearing interest at 10%, secured
by real estate holdings
Note payable to creditor, due 2001, bearing interest $ 70,000
at 10%, secured by real estate holdings
Environmental reserve 78,000
Total current debt $3,425,000
-------------------------------------------------------==========
Long-term debt consists of the environmental reserve amount of $1,424,000.
- F9 -
FRAWLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000 AND 1999
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.
The Company has future minimum rental payments required under leases that have
initial or remaining noncancelable lease terms in the amount of $40,000 through
2001.
Operations include rent expense of $80,000 in 2000 and $88,000 in 1999.
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.
As of December 31, 2000, 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
$78,000 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.
- F10 -
FRAWLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000 AND 1999
9. INCOME TAXES
There is no provision for income taxes due to tax losses in 2000 and 1999, 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, 2000 and 1999 consist of the following:
2000 1999
----------- -----------
Net operating loss carryforwards $ 4,376,000 $ 4,218,000
Depreciation (38,000) (143,000)
Bad debt/land reserves 530,000 185,000
Toxic waste accrual 511,000 518,000
Other reserves 231,000 171,000
----------- -----------
5,610,000 4,949,000
Less valuation allowance (5,610,000) (4,949,000)
----------- -----------
$ - $ -
=========== ===========
The Company has net operating loss carryforwards aggregating approximately
$12,871,000, for federal income tax purposes, which expire in various years
through 2015.
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 and two 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, 2000 and 1999 were as follows:
Specialized
Health Real Other
Services Estate Activity Consolidated
----------- -------- -------- ------------
Depreciation:
-------------
2000 $24,000 $ - $ - $ 24,000
1999 $32,000 $ - $ - $ 32,000
- F11 -
FRAWLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000 AND 1999
Capital expenditures and investments in real estate:
----------------------------------------------------
2000 $ - $317,000 $ - $317,000
1999 $45,000 $266,000 $ - $311,000
Segment information from continuing operations for the years ended December 31,
2000 and 1999 is as follows:
Specialized
Health Real Other
Services Estate Activity Consolidated
----------- ----------- --------- ------------
Year ended December 31, 2000:
-----------------------------
Net operating revenues $2,719,000 $ 20,000 $ 1,000 $ 2,740,000
========== =========== ========= ===========
Income (loss) from
operations $ 69,000 $(1,402,000) $(204,000) $(1,537,000)
========== =========== ========= ===========
Interest expense, net $ (322,000)
===========
Identifiable assets $1,117,000 $ 1,882,000 $ - $ 2,999,000
========== =========== ========= ===========
Year ended December 31, 1999:
-----------------------------
Net operating revenues $2,636,000 $ - $ 8,000 $ 2,644,000
========== =========== ========= ===========
Income (loss) from
operations $ 8,000 $ (474,000) $(257,000) $ (723,000)
========== =========== ========= ===========
Specialized
Health Real Other
Services Estate Activity Consolidated
----------- ----------- --------- ------------
Interest expense, net $ (284,000)
===========
Identifiable assets $1,086,000 $ 2,985,000 $ - $ 4,071,000
========== =========== ========= ===========
11. 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.
- F12 -
FRAWLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000 AND 1999
The Company made no contributions in 2000 and 1999, as contributions are
discretionary.
12. SUBSEQUENT EVENTS
In April 2001, the Company entered into discussions regarding the sale of the
Hospital in Seattle. No transaction has been consummated as of the date of this
report.
- F13 -