For the quarterly period ended 06/30/2004
Table of Contents

U.S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 


 

FORM 10-Q

 


 

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2004

 

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from              to             

 

Commission File Number 1-6436

 


 

FRAWLEY CORPORATION

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

 


 

Delaware   95-2639686

(STATE OR OTHER JURISDICTION

OF INCORPORATION)

 

(I.R.S. EMP

I.D. NO)

5737 Kanan Rd. PMB # 188, Agoura Hills, California   91301
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)   (ZIP CODE)

 

(818) 735-6640

(REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE)

 

 

(FORMER NAME, ADDRESS AND FISCAL YEAR, IF CHANGED SINCE LAST REPORT)

 


 

Indicated by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES  x     NO  ¨

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the close of the latest practicable date.

 

Common stock, par value $1


 

1,222,905


(Class)   (Outstanding at June 30, 2004)

 

Total Number of Pages 14

 


 


Table of Contents

FRAWLEY CORPORATION AND SUBSIDIARIES

 

INDEX

 

          PAGE NO.

PART I: FINANCIAL INFORMATION

    
    

Item 1: Financial Statements

    
    

Consolidated Balance Sheets June 30, 2004 and December 31, 2003

   3
    

Consolidated Statements of Operations Three Months ended June 30, 2004 and 2003

   4
    

Consolidated Statements of Operations Six Months Ended June 30, 2004 and 2003

   5
    

Consolidated Statements of Cash Flows Six Months Ended June 30, 2004 and 2003

   6
    

Notes to Consolidated Financial Statements

   7
    

Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations

   8

PART II: OTHER INFORMATION

    
    

Item 1: Legal Proceedings

   9 - 10
    

Item 5: Other Information

   10
    

Item 6: Exhibits and Reports on Form 8-K

   10

SIGNATURES

   11

 

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ITEM I: FINANCIAL STATEMENTS

FRAWLEY CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

    

JUNE 30,

2004


    DECEMBER 31,
2003


 
     (Unaudited)        
ASSETS                 

CURRENT ASSETS

                

Cash

   $ 20,000     $ 18,000  

Accounts receivable, net

     3,000       —    

Prepaid expenses and other assets

     3,000       32,000  
    


 


TOTAL CURRENT ASSETS

     26,000       50,000  

Real estate investments, net

     1,052,000       1,052,000  

Investment in partnership

     16,000       16,000  
    


 


TOTAL ASSETS

   $ 1,094,000     $ 1,118,000  
    


 


LIABILITIES AND STOCKHOLDERS’ DEFICIT                 

CURRENT LIABILITIES

                

Notes payable to stockholders

   $ 2,437,000     $ 2,437,000  

Accounts payable and accrued expenses

     160,000       184,000  

Environmental reserve

     139,000       139,000  

Interest payable to related parties

     1,308,000       1,192,000  

Deposits

     368,000       269,000  
    


 


TOTAL CURRENT LIABILITIES

     4,412,000       4,221,000  

LONG TERM LIABILITIES

                

Environmental reserve

     1,224,000       1,224,000  
    


 


TOTAL LIABILITIES

     5,636,000       5,445,000  
    


 


STOCKHOLDERS’ DEFICIT:

                

Preferred stock, par value $1 per share: Authorized, 1,000,000 shares; none issued

                

Common stock, par value $1 per share; Authorized, 6,000,000 shares, issued 1,414,217 shares

     1,414,000       1,414,000  

Capital surplus

     17,187,000       17,140,000  

Accumulated deficit

     (22,382,000 )     (22,120,000 )
    


 


       (3,781,000 )     (3,566,000 )

Less common stock in treasury, 191,312 shares (at cost)

     (761,000 )     (761,000 )
    


 


TOTAL STOCKHOLDERS’ DEFICIT

     (4,542,000 )     (4,327,000 )
    


 


TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT

   $ 1,094,000     $ 1,118,000  
    


 


 

See notes to consolidated financial statements.

 

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FRAWLEY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

    

Three Months Ended

June 30,


 
     2004

    2003

 

REVENUES:

                

Net revenues

   $ —       $ 14,000  
    


 


COSTS AND EXPENSES:

                

Selling, general and administrative expenses

     71,000       99,000  

Interest expense

     57,000       61,000  
    


 


TOTAL COSTS AND EXPENSES

     128,000       160,000  
    


 


NET LOSS

   $ (128,000 )   $ (146,000 )
    


 


NET LOSS PER SHARE, COMMON

   $ (0.10 )   $ (0.12 )
    


 


FULLY DILUTED

   $ (0.10 )   $ (0.12 )
    


 


Weighted average number of Common shares outstanding

     1,222,905       1,222,905  
    


 


 

See notes to consolidated financial statements.

 

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FRAWLEY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

    

Six Months Ended

June 30,


 
     2004

    2003

 

REVENUES:

                

Net revenues

   $ —       $ 14,000  
    


 


COSTS AND EXPENSES:

                

Selling, general and administrative expenses

     145,000       186,000  

Interest expense

     117,000       121,000  
    


 


TOTAL COSTS AND EXPENSES

     262,000       307,000  
    


 


NET LOSS

   $ (262,000 )   $ (293,000 )
    


 


NET LOSS PER SHARE, COMMON

   $ (0.21 )   $ (0.24 )
    


 


FULLY DILUTED

   $ (0.21 )   $ (0.24 )
    


 


Weighted average number of Common shares outstanding

     1,222,905       1,222,905  
    


 


 

See notes to consolidated financial statements.

 

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FRAWLEY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

    

Six Months Ended

June 30,


 
     2004

    2003

 

CASH FLOWS FROM OPERATING ACTIVITIES:

                

Net loss

   $ (262,000 )   $ (293,000 )
    


 


Changes in operating assets and liabilities:

                

Short and long-term accounts receivable, net

     (3,000 )     1,000  

Prepaid expenses and other assets

     29,000       39,000  

Accounts payable and accrued expenses

     191,000       208,000  
    


 


TOTAL ADJUSTMENTS

     217,000       248,000  
    


 


NET CASH USED IN OPERATING ACTIVITIES

     (45,000 )     (45,000 )
    


 


CASH FLOWS FROM FINANCING ACTIVITIES:

                

Capital contributions

     47,000       39,000  
    


 


NET CHANGE IN CASH AND CASH EQUIVALENTS

     2,000       (6,000 )

CASH, BEGINNING OF PERIOD

     18,000       38,000  
    


 


CASH, END OF PERIOD

   $ 20,000     $ 32,000  
    


 


 

See notes to consolidated financial statements.

 

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FRAWLEY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1: In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments necessary to present fairly the financial position as of June 30, 2004, and the results of operations and changes in cash flows for the six months then ended.

 

NOTE 2: The results of operations for the six months ended June 30, 2004 as compared to the results of 2003 are not necessarily indicative of results to be expected for the full year.

 

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FRAWLEY CORPORATION AND SUBSIDIARIES

 

ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Real Estate

 

For the quarter ended June 30, 2004, the real estate operating loss was $83,000 compared to a loss in 2003 of $77,000. During the first six months of this year, real estate losses were $167,000 as compared to a loss of $156,000 for the same period in 2003. Real estate losses continue as the Company incurs carrying costs and costs of improvements required to sell the property.

 

In February 2004, the Company received notice from Los Angeles County that the County intends to severely restrict grading permits and may require condition use permits for grading on the Company’s property. In addition, the County of Los Angeles announced its intention to restrict the building of residences on three of the Company’s eight parcels of land because of new ridgeline building ordinances. In May of 2004 Los Angeles County Regional Planning approved the Grading Ridgeline Ordinance. The Los Angeles County Board of Supervisors is scheduled to hear the Ordinance in late September 2004. The above regulations potentially require multi-year processing to reach the point that a parcel can be sold to a third party.

 

If an agreement cannot be reached with Los Angeles County, these new regulations may force the Company to liquidate its real estate, make settlements with its lenders and close down its real estate development business. As of the date of this filing, no decision has been made by management regarding liquidation, nor can they determine the potential financial impact to the Company. Accordingly, the June 30, 2004 financial statements do not reflect any adjustments that might result from these new and more stringent regulations.

 

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 are producing losses that the real-estate business is unable to absorb. The required investments in real estate are currently funded from loans.

 

The Company intends to meet its obligations through real estate sales. The limited resources available to the Company will be directed at reducing operating expenses and selling real estate.

 

The Company continues to incur legal expenses and has an obligation in 2004 to contribute to the Chatham Brothers toxic waste cleanup lawsuit.

 

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PART II - OTHER INFORMATION

 

ITEM 1: Legal Proceedings

 

The Company is named as a defendant in the Chatham Brothers toxic waste Cleanup lawsuit. In February 1991, the Company was identified as one of any “Potentially Responsible Parties” (PRPs) in the Chatham Brothers Toxic Waste cleanup site case, filed by the State of California Environmental Protection Agency, Department of Toxic Substances Control (DTSC) and involving the Hartley Pen Company previously owned by the Company.

 

On December 31, 1991, the Company and approximately 90 other companies were named in a formal complaint. The Company joined a group of defendants, each of whom was so notified and which are referred to as Potentially Responsible Parties (PRPs) for the purpose of negotiating with the DTSC and for undertaking remediation of the site. Between 1995 and 1998, the State of California adjusted the estimated cost of remediation on several occasions. As a result, the Company has increased their recorded liability to reflect their share of the changes. In January of 1998, the final remediation plan was approved by the State and in January of 1999, the PRP’s consented to it, as well as the allocation of costs, and the consent decree was approved by the Court. As of June 30, 2004, the Company had paid over $840,000, which includes the assignment of a $250,000 note receivable with recourse, into the PRP group and had a cash call contribution payable of $61,000. In addition, the Company carried accrued short-term and long-term liabilities of $139,000 and $1,224,000, respectively.

 

During the past several years, the Company has requested a Hardship Withdrawal Settlement with the PRP Group due to the Company’s financial condition. The PRP group has continually denied the Company’s request. In December 2003, the Company again formally requested a Hardship Withdrawal Settlement with the PRP Group. The Company’s proposal was a payment of $240,000 over four years in exchange for complete release from all further legal and financial responsibility related to the environmental liability. On July 16, 2004, the Company entered in a settlement agreement with the Chatham Site PRP Group Trust for a $240,000 payment to be paid as follows: $100,000 on December 31, 2004, $50,000 on December 31, 2005, $50,000 on December 31, 2006 and $40,000 on December 31, 2007. The Company will not fully be released from the environmental liability until the settlement agreement note of $240,000 and the assigned note in the amount of $250,000 are paid in full.

 

Frawley Corporation will not be responsible for any additional payments to the Chatham Site PRP Group Trust for the financing of the remediation action plan approved by the State of California in 1999. However, the PRP Group refused to indemnify Frawley Corporation for any third party law suits related to the Chatham site clean up or for any new claims by the State of California involving the Chatham site that are not considered in the remediation action plan approved in 1999. Frawley Corporation’s financial statements have not been adjusted to reflect this settlement at this time.

 

In June 2004 the Corporation received a new environmental claim against its former Harley pen division in the amount of $98,503. The claim has been

 

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made by the United States Environmental Toxic Agency concerning the Company’s alleged responsibility for the Omega Chemical Superfund Site. The Company is attempting to gather more information about this claim but has no direct knowledge of any involvement. No adjustments for this claim have been made on the June 30, 2004 financial statements at this time.

 

The Company is in dispute with its 1988 licensee over the trademark “Classics Illustrated.” In 1998, the Company terminated its license agreement for breach of contract. The licensee has objected to the termination stating that the Company failed to notify the licensee of a potential problem with the trademark in Greece. A Greek court has ruled against a sublicensee in Greece. The Company believes that the license agreement supports that it adequately notified the licensee but would have to investigate the international trademark involving “Classics Illustrated.” Management believes that there is no probable risk of loss related to this dispute.

 

ITEM 5: Other Information

 

Related Party Transactions

 

During the Second Quarter ended June 30, 2004 the Company received approximately $46,000 from the Frawley Family Trust as an advance on property that they intend to purchase. The specific property has not been identified and the terms of the purchase have not been finalized. The advance is included in deposits.

 

The Company has charged its stockholders for any employee time spent on non-corporate matters. The Company has received $21,000 from the Frawley Family members as reimbursement for payroll expenses during the Second Quarter ended June 30, 2004. The funds do not have to be repaid and are accounted for as capital contributions in the financial statements.

 

ITEM 6: Exhibits and Reports on Form 8-K

 

Exhibit 31.1 – Certification of CEO and CFO

Exhibit 32.1 – Certification of CEO and CFO

 

   No reports on form 8-K were filed during the quarter ended June 30, 2004.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

    FRAWLEY CORPORATION
              (REGISTRANT)
Date: August 5, 2004   By:  

/s/ Michael P. Frawley


       

MICHAEL P. FRAWLEY, President

(Authorized Officer and

Chief Financial Officer)

 

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