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, 2006
OR
o |
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT
OF 1934
|
Commission
File Number
1-6436
FRAWLEY
CORPORATION
(EXACT
NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware
|
95-2639686
|
(STATE
OR OTHER JURISDICTION OF
|
(I.R.S.
EMPLOYER I.D. NO.)
|
INCORPORATION
OR ORGANIZATION)
|
|
5737
Kanan Road PMB 188,
|
Agoura
Hills, California 91301
|
(ADDRESS
OF PRINCIPAL EXECUTIVE OFFICES)
|
(ZIP
CODE)
|
(818)735-6640
(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
o
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
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
April 10, 2007.
Number
of
shares of Common Stock outstanding as of April 10, 2007: 1,222,900
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 31
PART
I
ITEM
1. BUSINESS
Frawley
Corporation is currently engaged in real estate development.
The
Health Services division was terminated in 2002 with the sale of the assets
and
operations on February 1, 2002 and October 1, 2002, respectively.
Frawley
Corporation is a Delaware Corporation organized in 1969. References to the
Company include references to Frawley Corporation and its
Subsidiaries.
Real
Estate
The
Company's real estate consists of approximately 36 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 $457,000
as of the end of 2006, and are subject to mortgage debt held by various
stockholders, including the Chief Executive Officer and related family members,
aggregating approximately $2,138,000. The Company continues to invest resources
in 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).
Employees
Frawley
Corporation and its Subsidiaries employ 1 person. Due to the Company’s severe
financial condition, the Company reduced its staff to Michael Frawley,
President, and one part time assistant since the third quarter of
2004.
Item
2. Properties
Frawley
Corporation and its Subsidiaries operate out of office space from a related
party at no charge. (For a description of investment properties, see Item 1.
Business - Real Estate).
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, which was 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 are 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, 2006 the Company had paid into the PRP Group approximately
$1,040,000, which includes the assignment of a $250,000 note receivable with
recourse. In addition, the Company has accrued short-term and long-term
undiscounted liabilities of $77,000 and $1,120,000 respectively, to cover future
costs under the remediation plan.
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 for 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 into a settlement agreement note in the amount of $240,000 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 be fully 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. In 2006 the PRP Group received a principal payment related to
the
assigned note of $50,000 and $8,000 in interest, compared to a $50,000 principal
payment and $12,000 in accrued interest in 2005. In March 2006, the Company
made
a payment in the amount of $150,000 related to the settlement agreement note
representing the payments due on December 31, 2004 and December 31, 2005. The
Company was unable to make the December 31, 2006 $50,000 payment. The Company
owes penalties for late payments totaling approximately $20,000 calculated
at
10% of the face value of the note payments for the years 2004, 2005 and 2006.
These late payment penalties and the 2006 and 2007 principal payments totaling
approximately $110,000 are due and payable by December 31, 2007.
If
Frawley Corporation complies with the terms of the notes, the Company will
not
be responsible for any additional payments to the Chatham Site PRP Group 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 lawsuit related to the Chatham Site Clean up Site that are not
considered in the remediation action plan approved in 1999.
In
June
2004, the Corporation received a new environmental claim against its former
Harley Pen division in the amount of approximately $99,000. The claim has been
made by the United States Environmental Toxic Agency concerning the Company’s
alleged responsibility for the Omega Chemical Superfund Site. The Company has
recorded the liability in the year ended December 31, 2004. In December 2005,
the Company received a demand for payment from the EPA and negotiated a payment
plan which required the total liability, plus interest to be paid in full by
January 2007. During 2006, the Company made payments of approximately $52,000,
leaving a balance of approximately $47,000 due in January 2007. The Company
was
unable to make the January 2007 payment. The Company reached a new agreement
with the EPA, and made its first payment under the new agreement on January
11,
2007. The second payment is due on April 11, 2007, the third payment is due
on
July 11, 2007 and the fourth and last payment is due on October 11,
2007.
Item
4. Submission of Matters to a Vote of Security Holders
Not
Applicable.
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, 2006 was 540.
No
dividends have been paid in the periods shown above.
Item
6. Management's Discussion and Analysis of Financial Condition and Results
of
Operations
Overall
Summary
The
net
loss from the Company was $86,000 in 2006 as compared to a net loss of $415,000
in 2005 (see following discussion of real estate).
Interest
expense for 2006 was $227,000 (net of $8,000 of interest income) compared to
$212,000 (net of $12,000 of interest income) for 2005. Selling, general and
administrative expenses were $169,000 for 2006 compared to $208,000 for
2005.
Real
Estate
The
real
estate operating gain before interest expense was $216,000 in 2006 as compared
to an operating loss before interest expense of $118,000 in 2005.
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 six parcels of land because of new ridgeline building
ordinances. Prior to the ordinance deadline, the Company received grandfathering
status on three of its six parcels. Because the grandfathering clause is
conditional, it is unclear whether or not the Company will be able to take
advantage of this grandfathering status until the Company completes the permit
process. 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 report
date, no decision has been made by management regarding liquidation, nor can
they determine the potential financial impact to the Company. Accordingly,
the
December 31, 2006 financial statements do not reflect any adjustments that
might
result from these new and more stringent regulations.
During
2006, the Company sold one parcel of land for $749,000 and recorded a gain
of
approximately $308,000. Proceeds from the sale were used to pay off secured
debt, provide funds to complete improvements required by the sale, make payments
on past due amounts related to the Chatham site, make partial payments related
to the Omega site, pay past due property taxes, pay other creditors including
Michael Frawley, President, and to provide operating cash.
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 Company is
having difficulty absorbing. The required investments in real estate are
currently funded from loans or contributions from related parties.
The
Company has borrowed additional funds from the Chief Executive Officer and
his
family members as needed, to meet real estate investments and working capital
needs. During 2006, the Company borrowed $169,000. As of December 31, 2006,
the
total notes due were $2,138,000. The notes bear interest at 10%, are secured
by
the Company’s real estate investments and became due on various dates ranging
from 2001 through 2007. The Company has defaulted on substantially all of the
notes under their terms. As of the date of this report, no action has been
taken
on the delinquent amounts.
Prior
to
2005, the Company received funds from the family members as an advance on
property that they intend to purchase. The specified property has not been
identified and balances for the deposits for real estate were $374,000 at
December 31, 2006 and 2005, respectively.
Management
intends to raise additional capital by selling real estate. The limited
resources available to the Company will be directed at selling real
estate.
The
following measurements indicate the trends in the Company's liquidity from
continuing operations:
December
31,
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Working
capital (deficiency)
|
|
|
($4,565,000
|
)
|
|
($4,734,000
|
)
|
Current
ratio
|
|
|
(.01
to 1
|
)
|
|
(.01
to 1
|
)
|
Item
7. Financial Statements and Supplementary Data
See
the
consolidated financial statements and the notes thereto which begin on page
F1.
Item
8. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
None.
PART
III
Item
9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with
Section 16(a) of the Exchange Act.
The
following table sets forth the names and certain other information pertaining
to
the persons elected as directors.
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|
|
|
|
|
|
Name
|
|
Age
|
|
Principal
Occupation
|
|
Became
Director
|
|
|
|
|
|
|
|
Michael
P. Frawley
|
|
53
|
|
Chairman
of the Board and President of the Company Chief Executive Officer,
Treasurer
|
|
1991
|
|
|
|
|
|
|
|
Dudley
Callahan
|
|
26
|
|
Director
and Secretary of the Company
|
|
2003
|
|
|
|
|
|
|
|
|
|
24
|
|
Director
and Secretary of the Company
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|
2007
|
|
|
|
|
|
|
|
The
Company’s Board of Directors has no committees. During 2006, the Board of
Directors held four meetings in which all of the directors attended. Michael
P.
Frawley and Dudley Callahan and received no separate compensation for acting
as
directors.
All
directors are elected annually and serve until the next annual meeting of
stockholders or until the election and qualification of their
successors.
All
executive officers serve at the discretion of our Board of Directors. The term
of office of each executive officer is until his or her respective successor
is
chosen and qualified, or until his or her death, resignation or removal.
Officers are customarily elected by the Board at a meeting held after the annual
election of directors.
On
February 9, 2007, Mr. Michael Frawley and Sheila Callahan were elected by
Written Consent from the Shareholders holding over 54% of the Common stock
outstanding.
Biographical
information for Executive officers and directors
Mr.
Michael P. Frawley has been employed by the Company since 1972. He became Vice
President of Advertising in 1986, Vice President of the Company in 1991 and
Treasurer in 1996. He became President of the Company in 1998 after the passing
of his father Patrick J. Frawley, Jr.
Mr.
Dudley Callahan was appointed to the Board on May 14, 2003 and confirmed by
a
majority of the stockholders on June 4, 2003. He was appointed Secretary of
the
Company on June 4, 2003 after the resignation of Eileen Frawley Callahan. Dudley
Callahan informed Michael Frawley of his intention to join the United States
Air-force in the fall of 2006 and suggested that Mr. Frawley seek his
replacement for the following year.
Michael
Frawley appointed Sheila Callahan, Dudley Callahan’s sister, to the Board of
Directors on February 9, 2007. On February 9, 2007, Michael Frawley and Sheila
Callahan were confirmed as members of the board of Directors by written consent
by the majority of the stockholders.
Code
of Ethics
The
Company has adopted a Code of Ethics and Conduct, which applies to all of its
directors, officers and employees. A copy of the Code of Ethics and Conduct
may
be obtained, without charge, upon written request addressed to the following
address, c/o Chief Executive Officer, Frawley Corporation, 5737 Kanan Road
PMB
188, Agoura Hills, CA 91301.
ITEM
10. Executive Compensation
Summary
Compensation Table
The
following table sets forth information for the three most recently completed
fiscal years concerning the compensation of (i) the Chief Executive Officer
and
(ii) all other executive officers of the Company who earned over $100,000 in
salary and bonus in the fiscal year ended December 31, 2006 (together the “Named
Executive Officers”).
Name
and Principal
Position
|
|
Year
|
|
Annual Compensation
|
|
Michael
P. Frawley
|
|
|
2006
|
|
$
|
-
|
|
Chief
Executive Officer
|
|
|
2005
|
|
$
|
1,080
|
|
|
|
|
2004
|
|
$
|
14,040
|
|
Option
Grants in Last Fiscal Year
None
of
the Named Executive Officers received stock option grants in fiscal 2006.
Option Exercises
in Last Fiscal Year and Fiscal Year End Option Value
None
of
the Named Executive Officers exercised stock options in fiscal 2006.
Director
Compensation
Our
directors do not currently receive any compensation for service on the Board
of
Directors.
Employment
Agreements and Change-in-Control Arrangements
None.
ITEM
11. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
The
following table sets forth certain information regarding beneficial ownership
of
the Company’s common stock as of December 31, 2006, by (i) each person or entity
who is known by the Company to own beneficially more than 5% of the outstanding
shares of the Company’s common stock, (ii) each of the directors, (iii) each of
the Named Executive Officers, and (iv) all directors and executive officers
as a
group.
Title
of Class
|
|
Name
and Address of Beneficial Owners
|
|
Amount
and Nature of Percent of Beneficial
Ownership (1)
|
|
Common
Stock
|
|
Dr.
P. Joseph Frawley (2)
436
N. Ontare St., Santa Barbara, California
|
|
161,401
|
|
13.2
|
%
|
|
|
|
|
Common
Stock
|
|
Michael
P. Frawley
5737
Kanan Rd. PMB 188, Agoura Hills, California
|
|
133,683
|
|
10.9
|
%
|
|
|
|
|
Common Stock
|
|
Mary
Louise Frawley
16161
Ventura Blvd., #347, Encino, California
|
|
140,353
|
|
11.5
|
%
|
|
|
|
|
Common
Stock
|
|
Eileen
Frawley Callahan
10910
Wellworth Ave., #102, Los Angeles, California
|
|
99,747
|
|
8.2
|
%
|
|
|
|
|
Common
Stock
|
|
Dudley
Callahan
1824
E. Gardenia, Phoenix, Arizona
|
|
0
|
|
0
|
%
|
|
|
|
|
Common
Stock
|
|
Sheila
Callahan
436
N. Ontare Rd.
Santa
Barbara California
|
|
0
|
|
0
|
%
|
|
|
|
|
Common
Stock
|
|
Joan
Frawley Desmond
7106
44th
Street, Chevy Chase, Maryland
|
|
105,976
|
|
8.7
|
%
|
|
|
|
|
Common
Stock
|
|
All
Directors and Executive
Offices
as group (2 Persons)
|
|
133,683
|
|
10.9
|
%
|
(1)
|
Except
as indicated otherwise in the following notes, shares shown as
beneficially owned are those as to which the named persons possess
sole
voting and investment power. Dr. P. Joseph Frawley, Mary Louise
Frawley,
Eileen Frawley Callahan, Joan Frawley Desmond and Michael P. Frawley
each
possess an interest in common stock of the Company that is currently
held
in the estate or trust of their deceased father, Patrick Frawley,
Jr.
These shares have not been transferred to such individuals as of
the date
of this filing. If and when such shares are transferred to such
individuals, they will each hold an additional number of shares
of common
stock as follows: Dr. P. Joseph Frawley (2432 shares), Mary Louise
Frawley
(2433 shares), Eileen Frawley Callahan (2433 shares), Joan Frawley
Desmond
(2433 shares) and Michael P. Frawley (2432 shares). Each such individual
disclaims beneficial ownership of the shares held by Patrick Frawley,
Jr.
|
(2)
|
Dr.
P. Joseph Frawley’s holdings include 22,456 shares he holds as custodian
for his children, as to which he disclaims beneficial ownership.
|
Equity
Compensation Plan Information
The
Company does not have any equity compensation plans.
ITEM
12. Certain Relationships and Related Transactions
In
2006
and prior years, the Company has borrowed a total of $2,138,000 from its
stockholders to meet real estate investment and working capital needs. The
notes
are secured by real estate investments. Interest expense to related parties
totaled $215,000 and $224,000 during 2006 and 2005, respectively.
The
Company has charged its stockholders for any employee time spent on
non-corporate matters. The Company has received from the family members as
reimbursement for payroll expenses $1,000 in 2005. These payments are accounted
for as capital contributions in the Company’s financial statements.
PART
IV
Item
13. Financial Statements, Exhibits and Reports on Form
8-K
(a) 1. List
of Financial Statements:
|
|
Page
Numbers
|
|
Independent
Auditors' Report
|
|
|
F-1
|
|
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|
|
Financial
Statements for the Years
|
|
|
|
|
Ended
December 31, 2006 and 2005
|
|
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Consolidated
Balance Sheets
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|
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F-2
–
F-3
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Consolidated
Statements of Operations
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|
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F-4
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Consolidated
Statement of Stockholders' Deficit
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F-5
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Consolidated
Statements of Cash Flows
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F-6
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Notes
to Consolidated Financial Statements
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F-7
– F-11
|
|
2. List
of
Exhibits:
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|
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.
|
|
|
31.1
|
Sarbanes-Oxley
Act section 302 Certification
|
(b) Reports
on Form 8-K:
During
2006, no 8K reports were filed.
Other
Events and Required FD Disclosure
On
March
1, 2005 the Company filed with the SEC amended forms 10K for 2003 and 2002.
These
reports on Form 10-KSB/A (“Amendment No.1”) are being filed to disclose items 9
through 12 previously omitted from Part III of the Annual Report on Form
10-KSB,
filed by the Frawley Corporation, a Delaware corporation (“the Company”)on March
18, 2004 and May 23, 2003 in compliance with General Instructions E.3 to
Form
10-KSB. Although the Company previously reported its related party transactions
that occurred during the fiscal year ended December 31, 2003, and 2002 in
the
financial statements of the Company’s 10-KSB filed on March 18, 2004 and May 23,
2003, the reports did not contain certain information pertaining to the
Company’s Officers, directors and stockholders controlling more than five
percent of the Company’s outstanding stock. This Amendment No. 1 is being filed
to disclose such information. In addition, pursuant to the rules of the
Securities and Exchange Commission (the “SEC”), we are including with this
Amendment No. 1 certain currently dated certifications.
Item
14. Controls and Procedures
(a) |
The
Company maintains disclosure controls and procedures that are designed
to
ensure that information required to be disclosed in the Company’s filings
under the Securities Act of 1934 is recorded, processed, summarized
and
reported within the periods specified in the rules and forms of the
Securities and Exchange Commission. Such information is accumulated
and
communicated to the Company’s management, including its principal
financial officer, as appropriate, to allow timely decisions regarding
disclosure. The Company’s management, including the principal executive
officer and principal accounting officer, recognized that any set
of
controls and procedures, no matter how well designed and operated,
can
provide only reasonable assurance of achieving the desired control
objectives.
|
Within
90
days prior to the filing date of this annual report 10-K, the Company carried
out an evaluation, under the supervision and with the participation of the
Company’s management, including the Company’s principal executive officer and
principal financial officer, of the effectiveness of the design and operation
of
the Company’s disclosure controls and procedures. Based on such evaluation, the
Company’s principal executive officer and principal financial officer concluded
that the Company’s disclosure controls and procedures are
effective.
|
(b) |
There
have been no significant changes in the Company’s internal controls or in
any other factors that could significantly affect the internal
controls
subsequent to the date of their evaluation in connection with the
preparation of this annual report on Form
10-K.
|
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)
|
|
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|
|
By: |
|
|
Michael P. Frawley,
CEO and Chairman of the Board
|
|
|
|
Date April
10, 2007 |
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.
|
|
|
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|
|
By: |
|
|
Michael
P. Frawley,
CEO
and Chairman of the Board
(Principal
Executive, Financial and Accounting Officer)
|
|
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|
April
10,
2007
(Date)
|
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By: |
|
|
Sheila Callahan,
Vice President and Secretary
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|
April
10,
2007
(Date)
|
LaRUE,
CORRIGAN & McCORMICK LLP
|
|
|
|
|
|
|
Certified
Public Accountants
|
|
|
|
|
|
|
|
5959
Topanga Canyon Boulevard, Suite 180
|
|
Woodland
Hills, California 91367
|
|
Telephone
818-587-9300
|
|
Facsimile
818-347-0904
|
|
lcmcpa.com
|
|
ROBERT
LaRUE
|
818-587-9302
|
MIKE
McCORMICK
|
818-587-9303
|
|
KEN
TEASDALE
|
818-587-9305
|
JACK
CORRIGAN
|
818-587-9301
|
INDEPENDENT
AUDITORS’ REPORT
Board
of
Directors and Stockholders
Frawley
Corporation
Agoura
Hills, California
We
have
audited the accompanying consolidated balance sheets of Frawley Corporation
and
subsidiaries (the "Company") as of December 31, 2006 and 2005, and the related
consolidated statements of operations, stockholders' deficit, and cash flows
for
the years then ended. 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 the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures
in
the financial statements, 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, 2006 and 2005, and the results of its operations
and its cash flows for the years then ended in conformity with accounting
principles generally accepted in the United States of America.
The
2006
and 2005 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
March
24,
2007
FRAWLEY
CORPORATION AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
DECEMBER
31, 2006 and 2005
ASSETS
|
|
|
|
2006
|
|
2005
|
|
CURRENT
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
Cash
(Note 1)
|
|
$
|
7,000
|
|
$
|
7,000
|
|
Prepaid
expenses and other current assets
|
|
|
21,000
|
|
|
24,000
|
|
|
|
|
|
|
|
|
|
TOTAL
CURRENT ASSETS
|
|
|
28,000
|
|
|
31,000
|
|
|
|
|
|
|
|
|
|
OTHER
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
estate investments (Notes 1, 2, 3 and
5)
|
|
|
457,000
|
|
|
812,000
|
|
Investment
in partnership
|
|
|
16,000
|
|
|
16,000
|
|
|
|
|
|
|
|
|
|
TOTAL
OTHER ASSETS
|
|
|
473,000
|
|
|
828,000
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$
|
501,000
|
|
$
|
859,000
|
|
See
independent auditors’ report and notes to consolidated financial
statements.
FRAWLEY
CORPORATION AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
DECEMBER
31, 2006 and 2005
|
|
2006
|
|
2005
|
|
CURRENT
LIABILITIES
|
|
|
|
|
|
Notes
payable to related parties
(Notes
3 and 5)
|
|
$
|
2,138,000
|
|
$
|
2,338,000
|
|
Interest
payable to related parties
|
|
|
1,840,000
|
|
|
1,651,000
|
|
Deposits
|
|
|
374,000
|
|
|
374,000
|
|
Accounts
payable and accrued expenses
|
|
|
164,000
|
|
|
287,000
|
|
Environmental
reserve (Note 6)
|
|
|
77,000
|
|
|
115,000
|
|
|
|
|
|
|
|
|
|
TOTAL
CURRENT LIABILITIES
|
|
|
4,593,000
|
|
|
4,765,000
|
|
|
|
|
|
|
|
|
|
LONG-TERM
LIABILITIES
|
|
|
|
|
|
|
|
Environmental
reserve(Note 6)
|
|
|
1,120,000
|
|
|
1,220,000
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES
|
|
|
5,713,000
|
|
|
5,985,000
|
|
|
|
|
|
|
|
|
|
COMMITMENTS
AND CONTINGENCIES (Notes 5 and 6)
|
|
|
|
|
|
|
|
|
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, 1,414,212 shares
|
|
|
|
|
|
|
|
issued
|
|
|
1,414,000
|
|
|
1,414,000
|
|
Capital
surplus
|
|
|
17,209,000
|
|
|
17,209,000
|
|
Accumulated
deficit
|
|
|
(23,074,000
|
)
|
|
(22,988,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
(4,451,000
|
)
|
|
(4,365,000
|
)
|
Less
common stock in treasury, 191,312
|
shares
(at cost)
|
|
|
(761,000
|
)
|
|
(761,000
|
)
|
|
|
|
|
|
|
|
|
TOTAL
STOCKHOLDERS’ DEFICIT
|
|
|
(5,212,000
|
)
|
|
(5,126,000
|
)
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ DEFICIT
|
|
$
|
501,000
|
|
$
|
859,000
|
|
See
independent auditors’ report and notes to consolidated financial
statements.
FRAWLEY
CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
FOR
THE
YEARS ENDED DECEMBER 31, 2006 AND 2005
|
|
2006
|
|
2005
|
|
REVENUES
|
|
|
|
|
|
Sale
of real estate
|
|
$
|
749,000
|
|
$
|
-
|
|
Other
income
|
|
|
2,000
|
|
|
5,000
|
|
|
|
|
|
|
|
|
|
TOTAL
REVENUE
|
|
|
751,000
|
|
|
5,000
|
|
|
|
|
|
|
|
|
|
COSTS
AND EXPENSES
|
|
|
|
|
|
|
|
Cost
of real estate sold
|
|
|
441,000
|
|
|
-
|
|
Selling,
general and administrative expenses
|
|
|
169,000
|
|
|
208,000
|
|
Interest
expense, net of interest income
(Notes 3 and 6)
|
|
|
227,000
|
|
|
212,000
|
|
|
|
|
|
|
|
|
|
TOTAL
COSTS AND EXPENSES
|
|
|
837,000
|
|
|
420,000
|
|
|
|
|
|
|
|
|
|
NET
LOSS
|
|
$
|
(86,000
|
)
|
$
|
(415,000
|
)
|
|
|
|
|
|
|
|
|
LOSS
PER SHARE FROM CONTINUING OPERATIONS, COMMON
|
|
$
|
(0.07
|
)
|
$
|
(0.34
|
)
|
|
|
|
|
|
|
|
|
NET
LOSS PER SHARE, COMMON
|
|
$
|
(0.07
|
)
|
$
|
(0.34
|
)
|
|
|
|
|
|
|
|
|
FULLY
DILUTED
|
|
$
|
(0.07
|
)
|
$
|
(0.34
|
)
|
|
|
|
|
|
|
|
|
WEIGHTED
AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
|
|
|
1,222,900
|
|
|
1,222,900
|
|
See
independent auditors’ report and notes to consolidated financial
statements.
FRAWLEY
CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENT OF STOCKHOLDERS’ DEFICIT
FOR
THE
YEARS ENDED DECEMBER 31, 2006 AND 2005
|
|
Common
Stock
|
|
Capital
|
|
Accumulated
|
|
Treasury
|
|
|
|
|
|
Shares
|
|
Amount
|
|
Surplus
|
|
Deficit
|
|
Stock
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2004
|
|
|
1,414,000
|
|
$
|
1,414,000
|
|
$
|
17,208,000
|
|
$
|
(22,573,000
|
)
|
$
|
(761,000
|
)
|
$
|
(4,712,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
contributions
|
|
|
-
|
|
|
-
|
|
|
1,000
|
|
|
-
|
|
|
-
|
|
|
1,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss, 2005
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(415,000
|
)
|
|
-
|
|
|
(415,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2005
|
|
|
1,414,000
|
|
|
1,414,000
|
|
|
17,209,000
|
|
|
(22,988,000
|
)
|
|
(761,000
|
)
|
|
(5,126,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss, 2006
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(86,000
|
)
|
|
-
|
|
|
(86,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2006
|
|
|
1,414,000
|
|
$
|
1,414,000
|
|
$
|
17,209,000
|
|
$
|
(23,074,000
|
)
|
$
|
(761,000
|
)
|
$
|
(5,212,000
|
)
|
See
independent auditors’ report and notes to consolidated financial
statements.
FRAWLEY
CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR
THE
YEARS ENDED DECEMBER 31, 2006 AND 2005
|
|
2006
|
|
2005
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
Net
loss
|
|
$
|
(86,000
|
)
|
$
|
(415,000
|
)
|
Adjustments
to reconcile net loss to
net
cash provided by/(used in) operating activities:
|
|
|
|
|
|
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
Prepaid
expenses and other current assets
|
|
|
3,000
|
|
|
6,000
|
|
Real
estate investments
|
|
|
441,000
|
|
|
-
|
|
Accounts
payable and accrued liabilities
|
|
|
(123,000
|
)
|
|
4,000
|
|
Interest
payable
|
|
|
189,000
|
|
|
224,000
|
|
Environmental
reserve
|
|
|
(138,000
|
)
|
|
(12,000
|
)
|
|
|
|
|
|
|
|
|
TOTAL
ADJUSTMENTS
|
|
|
372,000
|
|
|
222,000
|
|
|
|
|
|
|
|
|
|
NET
CASH PROVIDED BY/(USED IN) OPERATING ACTIVITIES
|
|
|
286,000
|
|
|
(193,000
|
)
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
Improvements
to real estate
|
|
|
(86,000
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
Capital
contributions
|
|
|
-
|
|
|
1,000
|
|
Short-term
debt borrowings from related party
|
|
|
169,000
|
|
|
195,000
|
|
Repayment
of borrowings
|
|
|
(369,000
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
NET
CASH (USED IN)/PROVIDED BY FINANCING ACTIVITIES
|
|
|
(200,000
|
)
|
|
196,000
|
|
|
|
|
|
|
|
|
|
NET
CHANGE IN CASH
|
|
|
-
|
|
|
3,000
|
|
|
|
|
|
|
|
|
|
CASH,
BEGINNING OF YEAR
|
|
|
7,000
|
|
|
4,000
|
|
|
|
|
|
|
|
|
|
CASH,
END OF YEAR
|
|
$
|
7,000
|
|
$
|
7,000
|
|
See
independent auditors’ report and notes to consolidated financial
statements.
FRAWLEY
CORPORATION AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE
YEARS ENDED DECEMBER 31, 2006 AND 2005
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. and Sun Sail
Development Company (Sun Sail). In addition, Sun Sail is the sole member of
Sunny Hill L.L.C. (Sunny Hill), which was formed in 2003. Sunny Hill did not
have any transactions for 2005 and 2006. All significant intercompany profits,
transactions and balances have been eliminated.
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.
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 consisted primarily of
cash.
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, other assets,
and
accounts payable and accrued expenses) 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.
FRAWLEY
CORPORATION AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE
YEARS ENDED DECEMBER 31, 2006 AND 2005
Impairment
of Long-Lived Assets
- The
Company evaluates a property for potential impairment whenever events or changes
in circumstances indicate that its carrying amount may not be recoverable.
There
was no impairment charge recognized during the years ended December 31, 2006
and
2005.
Sales
of Real Estate
- The
Company recognizes gains/losses from sales of real estate at the time of sale
using the full accrual method, provided that various criteria related to the
terms of the transactions and any subsequent involvement by the Company with
the
properties sold are met. If the criteria are not met, the Company defers the
revenue and recognizes it when the criteria are met or using the installment
or
cost recovery methods as appropriate under the circumstances.
2. OPERATING
RESULTS AND MANAGEMENT PLANS
The
Company's net loss for 2006 was $86,000 as compared to net loss for 2005 of
$415,000. Working capital continues to be negative.
Management’s
plans for 2007 will include the continued efforts to sell its real estate
holdings and minimize additional investments that require
borrowing.
The
Company's real estate investment consists of approximately 36 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.
During
the year ended December 31, 2006, the Company sold one parcel of land to a
non-related third party for $749,000 and recorded a gain of approximately
$308,000. Proceeds from the sale were used to pay off secured debt, including
accrued interest, provide funds to complete improvements required by the sale,
make payments on past due amounts related to the Chatham site, make partial
payments related to the Omega site, pay past due property taxes, pay other
creditors and to provide operating cash.
3. RELATED
PARTY TRANSACTIONS
The
Company has borrowed additional funds from the Chief Executive Officer and
his
family members as needed, to meet real estate investment and working capital
needs. During 2006, the Company borrowed an additional $169,000 from the related
parties. As of December 31, 2006 and 2005, the balances due were $2,138,000
and
$2,338,000, respectively (see Note 5). The notes bear interest at 10%, are
secured by the Company’s real estate investments and became due on various dates
ranging from 2001 through 2007. The Company has defaulted on substantially
all
of the notes under their individual terms. As of the date of this report, no
action has been taken on the delinquent amounts.
FRAWLEY
CORPORATION AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE
YEARS ENDED DECEMBER 31, 2006 AND 2005
The
Company received approximately $1,000 during 2005 from family members to help
meet payroll requirements. The funds do not have to be repaid and are accounted
for as capital contributions in accordance with AICPA Technical Practice Aids
Paragraph No. 4160, “Contributed Capital,” and SEC Staff Accounting Bulletin,
Release No. 79, “Accounting for Transactions Undertaken by a Company’s Principal
Stockholder(s) for the Benefit of the Company.”
4. SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION
|
|
2006
|
|
2005
|
|
Cash
paid during the year for:
|
|
|
|
|
|
Income
taxes
|
|
$
|
6,000
|
|
$
|
5,000
|
|
Interest
|
|
$
|
24,000
|
|
$
|
-
|
|
5. DEBT
Short-term
debt consists of $2,138,000 of notes payable to stockholders and other related
parties (see Note 3), which were due on various dates from 2001 through 2007,
bear interest at 10% per annum, and are secured by the real estate investments
of the Company. The Company has defaulted on substantially all of the notes
under their individual terms. As of the date of this report, no action has
been
taken on the delinquent amounts.
Long-term
debt consists of the environmental reserve amount of $1,120,000 (see Note
6).
6. 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 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.
FRAWLEY
CORPORATION AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE
YEARS ENDED DECEMBER 31, 2006 AND 2005
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 December 31, 2006, the Company had paid over $1,040,000, which includes
the
assignment of a $250,000 note receivable with recourse, into the PRP group.
In
addition, the Company carried accrued short-term and long-term liabilities
of
$77,000 and $1,120,000, 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 be fully 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. In 2006, the PRP Group received
a
principal payment related to the assigned note of $50,000 and interest accrued
of $8,000, compared to a $50,000 principal payment and $12,000 of accrued
interest in 2005. In March 2006, the Company made a payment in the amount of
$150,000 related to the settlement agreement note representing the payments
due
on December 31, 2004 and December 31, 2005. The Company did not make the
scheduled payment on December 31, 2006. The Company owes penalties on late
payments totaling approximately $20,000 calculated at 10% of the face value
of
the note payments for the years 2004, 2005 and 2006. These penalties are
recognized in interest expense for the year ended December 31, 2006 and the
liability is accrued as a portion of the current environmental
reserve.
If
Frawley Corporation complies with the terms of the notes, the Company 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 lawsuits 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 AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE
YEARS ENDED DECEMBER 31, 2006 AND 2005
In
June
2004 the Corporation received a new environmental claim against its former
Harley pen division in the amount of approximately $99,000. The claim has been
made by the United States Environmental Toxic Agency concerning the Company’s
alleged responsibility for the Omega Chemical Superfund Site. The Company has
recorded the liability in the year ended December 31, 2004. During 2006, the
Company agreed to pay the liability in installment payments through January
2007
and has made payments of approximately $52,000 during 2006.
7. INCOME
TAXES
The
Company does not carry a provision for income taxes due to tax losses in 2006
and 2005, 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,
2006
and 2005 consist of the following:
|
|
2006
|
|
2005
|
|
Net
operating loss carryforwards
|
|
$
|
4,714,000
|
|
$
|
4,913,000
|
|
Gain
on sale of real estate
|
|
|
(105,000
|
)
|
|
-
|
|
Bad
debt/land reserves
|
|
|
211,000
|
|
|
247,000
|
|
Toxic
waste accrual
|
|
|
407,000
|
|
|
454,000
|
|
Other
reserves
|
|
|
630,000
|
|
|
565,000
|
|
|
|
|
5,857,000
|
|
|
6,179,000
|
|
Less
valuation allowance
|
|
|
(5,857,000
|
)
|
|
(6,179,000
|
)
|
|
|
$ |
- |
|
$
|
-
|
|
The
Company has net operating loss carryforwards aggregating approximately
$13,866,000 for federal income tax purposes, which expire in various years
through 2021.