UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[x] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2001
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from ____________ to ____________
Commission file number _________________________________
SHC CORP.
(Exact name of small business issuer as specified in its charter)
ILLINOIS 36-3971950
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
390 South Eight Street, 2nd Floor, West Dundee, Illinois 60118
(Address of principal executive offices)
(847) 428-8684
(Issuer's telephone number)
------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section l2, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date.
Class Outstanding at August 17, 2001
----- ------------------------------
Common Stock, Par Value $0.001 112,355,815 Shares
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PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
SHC CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 2001 AND DECEMBER 31, 2000
(UNAUDITED)
ASSETS JUNE 30, DECEMBER 31,
2001 2000
-------------- ---------------
CURRENT ASSETS
Cash $ $ 102,547
Accounts receivable, net of allowance for doubtful
accounts of $120,000 and $175,000 respectively 495,433 675,722
Notes receivable 4,196 4,196
Prepaid expenses 29,456 37,816
-------------- ---------------
TOTAL CURRENT ASSETS 529,085 820,281
FIXED ASSETS
Property and equipment 420,799 419,073
Less: accumulated depreciation (251,159) (223,246)
--------------- ---------------
NET FIXED ASSETS 169,640 195,827
OTHER ASSETS
Security deposits and other assets 46,817 37,861
-------------- ---------------
TOTAL ASSETS $ 745,542 $ 1,053,969
============== ===============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Checks written in excess of cash in bank 90,521 --
Accounts payable and accrued liabilities $ 1,328,860 $ 1,427,307
Current portion of notes payable 2,758,515 2,269,109
-------------- ---------------
TOTAL CURRENT LIABILITIES 4,177,896 3,696,416
LONG-TERM PORTION OF NOTES PAYABLE 260,413 350,685
-------------- ---------------
TOTAL LIABILITIES 4,438,309 4,047,101
STOCKHOLDERS' DEFICIT
Preferred stock, par value $.001; 20,000,000 shares
authorized; none issued -- --
Common stock, par value $.001; 250,000,000
shares authorized; 111,495,815 and 97,032,287
shares issued and outstanding, respectively 111,495 97,032
Additional paid-in capital 5,100,784 4,632,319
Accumulated deficit (8,905,046) (7,722,483)
--------------- ---------------
TOTAL STOCKHOLDERS' DEFICIT (3,692,767) (2,993,132)
--------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 745,542 $ 1,053,969
============== ===============
See accompanying notes to unaudited condensed consolidated financial statements.
2
SHC CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------------------------- ---------------------------------
2001 2000 2001 2000
-------------- -------------- -------------- ---------------
NET REVENUES 972,621 738,745 $ 1,496,363 $ 1,490,346
COST OF STORE OPERATIONS 849,067 537,454 1,192,786 1,155,356
-------------- -------------- -------------- ---------------
GROSS PROFIT 123,554 201,291 303,577 334,990
OPERATING EXPENSES
Selling, general and administrative 673,387 1,049,362 1,309,794 1,727,782
Reserve for store closings -- -- 60,000 250,000
-------------- -------------- -------------- ---------------
LOSS FROM OPERATIONS (549,833) (848,071) 1,066,217 (1,642,792)
OTHER EXPENSES
Interest expense 51,609 46,744 116,346 93,404
-------------- -------------- -------------- ---------------
NET LOSS (601,442) (894,815) $ (1,182,563) $ (1,736,196)
============== ============== ============== ===============
BASIC AND DILUTED LOSS
PER COMMON SHARE $ (0.01) $ 0.01 $ (0.01) $ (0.02)
============== ============== ============== ===============
BASIC AND DILUTED WEIGHTED AVERAGE
COMMON SHARES OUTSTANDING 100,161,234 83,114,327 103,797,506 81,380,333
============== ============== ============== ===============
See accompanying notes to unaudited condensed consolidated financial statements.
3
SHC CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE SIX
MONTHS
ENDED JUNE 30,
--------------
2001 2000
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (1,182,563) $ (1,736,197)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 45,953 69,064
Provision for store closings 60,000 250,000
Shares issued for services and compensation 4,080 385,196
Change in operating assets and liabilities:
Accounts receivable 180,289 29,687
Prepaid expenses 8,360 (8,239)
Other Operating 83,106 --
Accounts payable and accrued liabilities (38,451) 326,662
------------- -------------
NET CASH FROM OPERATING ACTIVITIES (839,226) (683,827)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (1,726) (32,915)
Increase in security deposits and other assets 8,956 (1,560)
------------- -------------
NET CASH FROM INVESTING ACTIVITIES 7,230 (34,475)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Checks in excess of cash in bank 90,521
Proceeds from equity transactions 482,928 676,455
Proceeds from notes payable 156,000 160,000
Principal payments of notes payable -- (57,926)
------------- -------------
NET CASH FROM FINANCING ACTIVITIES 729,449 778,529
------------- -------------
NET INCREASE (DECREASE) IN CASH (102,547) 60,227
CASH, BEGINNING OF PERIOD 102,547 14,242
------------- -------------
CASH, END OF PERIOD $ -- $ 74,469
============= =============
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid $ 8,515 $ 24,758
============= =============
NON-CASH TRANSACTIONS
Payments of accrued expenses made by shareholder $ -- $ 71,039
============= =============
Liabilities exchanged for equity $ 344,377 $ 276,560
============= =============
Write-off of property and equipment of closed stores $ -- $ 150,803
============= =============
Shares issued under subscription agreement and unpaid $ -- $ 40,000
============= =============
See accompanying notes to unaudited condensed consolidated financial statements.
4
NOTE 1 - INTERIM FINANCIAL STATEMENTS
The accompanying financial statements have been prepared by SHC Corp., or the
Company, and are unaudited. In the opinion of management, the accompanying
unaudited financial statements contain all necessary adjustments for fair
presentation, consisting of normal recurring adjustments except as disclosed
herein.
The accompanying unaudited financial statements have been condensed pursuant to
the rules and regulations of the Securities and Exchange Commission; therefore,
certain information and disclosures generally included in financial statements
have been condensed or omitted. These financial statements should be read in
connection with the Company's annual financial statements included in the
Company's annual report on Form 10-KSB as of December 31, 2000. The financial
position and results of operations of the interim periods presented are not
necessarily indicative of the results to be expected for the year ended December
31, 2001.
GOING CONCERN - The accompanying consolidated financial statements have been
prepared assuming the Company will continue as a going concern. The Company has
incurred $8.9 million of losses from operations since inception and is highly
reliant on obtaining continued financing to satisfy its liquidity requirements.
These factors raise substantial doubt about the ability of the Company to
continue as a going concern. Management has undertaken measures to reduce its
operating costs and has closed several unprofitable stores. Concurrently,
management is negotiating with third party lenders and equity investors in an
effort to obtain sufficient financing to meet its operating needs.
There can be no assurances that these cost reduction measures will be adequate
or that the additional financing, if any, will be sufficient to enable the
Company to continue as a going concern.
STORE CLOSINGS - As described in its annual Form 10-KSB report, the Company has
decided to suspend its expansion program due to a shortage of capital and has
elected to close certain store locations instead. Management has closed 6 stores
through August 17, 2001 and has contracts to sell 3 other stores. For these
closures, the Company has increased its reserve for closed stores by $60,000.
The Company will continue to monitor its store program as it seeks to raise more
capital.
EQUITY TRANSACTIONS - During the first six months ended June 30, 2001, the
Company issued approximately 13.1 million shares of common stock. The
following unaudited amounts indicate the purpose of the issuance, the
approximate number of shares issued, and the approximate amount of
consideration received: conversion of debt; 5.6 million shares for $175,000;
payment to creditors on amounts owed, 7.5 million shares for approximately
$306,000.
EARNINGS PER SHARE - The Company has a complex capital structure as defined
under SFAS No. 128. Consequently, the generation of earnings results in a dual
presentation of basic and diluted EPS. The Company had a loss for the first six
months of 2001 and 2000 and, accordingly, potential common stock equivalents
have been excluded from the weighted average share computations because their
inclusion would have been anti-dilutive.
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NOTE 2 - LEGAL PROCEEDINGS
Except as set forth below, the Company is not party to any material legal
proceedings.
In May 1998, the Company and certain of its officers entered into a settlement
agreement with a former president, CEO and director of the Company to settle all
claims and issues between the parties. The terms of the agreement provided for
certain payments to be made by or on behalf of the Company to the former
president, CEO and director in exchange for the delivery and release to an
escrow agent and voting trust of 12,632,568 shares of Company stock held by the
former president, CEO and director. A third party
ultimately delivered $650,000 representing the Company's obligation to the
escrow agent, and in exchange for such funds was assigned the Company's rights
in and to certain of the escrowed shares. In November 1999, the former
president, CEO and director filed a motion in the United States District Court
for the Eastern District of Illinois, case number 98 C 1697, seeking to compel
distribution of the remaining escrowed shares and alleging that he may be
entitled to certain additional shares of the Company's stock based on alleged
anti-dilution provisions contained in the Settlement Agreement. In the fourth
quarter of 2000, the Company and the former president, CEO and director and the
Company entered into a subsequent settlement agreement that provides for: (i)
distribution of the shares which remained in escrow and (ii) the issuance of
approximately 1,300,000 shares of the Company's common stock in exchange for a
dismissal of the litigation and complete and mutual release of any and all
claims between the parties. The shares were issued in February 2001 and the case
has been dismissed.
In a related matter, during the second quarter of 2000, the Company negotiated a
settlement agreement with its prior counsel (and escrow agent under the
aforementioned settlement agreement) pursuant to which such prior counsel
resigned as escrow agent and returned 1,000,000 shares of the Company's stock to
the Company which had been previously issued to such counsel in exchange for a
execution of a mutual general release of claims and payment of $20,000 for fees
incurred in acting as escrow agent in the above matter.
The Company owns 80% of the outstanding capital stock of Payday. Prior to
January 1999, the remaining 20% was held by Argent Enterprises, Inc., an
Illinois corporation ("Argent"). Sonoma and Argent are parties to an agreement
restricting transfer of the Payday stock. Such agreement grants each party the
right of first refusal to purchase any stock of Payday before any such stock may
be transferred by a shareholder to any third party. In January 1999, Sonoma and
Payday received notice from a third party that such third party was a 20%
shareholder of Payday based on a transaction with Argent whereby it acquired
such interest. The Company and Payday are currently in the process of
investigating such purported transaction in order to determine whether such
third party is a shareholder of Payday and whether such purported transaction
violated the terms of the shareholders' agreement.
In May 1998, Payday entered into an agreement with a third party which allegedly
owned 20% of 1825 Corp., a former Payday subsidiary which owned and operated
several Payday stores. Pursuant to the agreement, such third party was to sell
and assign all of its 20% interest to Payday in consideration of certain
payments by Payday consisting of cash and stock of the Company. Part of the
consideration was delivered to and accepted by such third party and part of the
consideration was rejected. The parties were in dispute as to whether the
contract was breached and by whom. The third party commenced litigation in the
Circuit Court of Will County, Illinois, case number 99 L 596. On September 20,
2000, the third party and the Company entered into a settlement agreement
pursuant to which the third party released its claims in exchange for the
issuance of 450,000 shares of the Company's stock and the payment of an
aggregate of $125,000 on an installment basis plus its attorney fees of $6,000.
The agreement further provides that a default in payments will accelerate all
amounts due. In the second quarter of 2001, the Company received a letter from
the shareholder indicating that the Company had defaulted on the payments and
that
6
112,000, constituting all amounts then remaining under the settlement agreement,
were immediately due and payable. Subsequent to receipt of that letter, the
Company has made efforts to make payments to such shareholder and is in the
process of attempting to negotiate a resolution to this matter.
On November 4, 1998, an investor in the Company filed a lawsuit in the Circuit
Court of Kane County, Illinois, case number LKA 98 580, seeking $250,000 in
damages. The plaintiff asserted that he exercised a "put" option with respect to
1,000,000 shares owned by plaintiff, which would allegedly entitled him to "put"
such shares to the Company in exchange for $250,000. The plaintiff claimed that
the Company breached an agreement between the parties by failing to honor the
put and pay $250,000 to plaintiff and received a judgment to such effect in May
2000. The parties entered into a settlement agreement pursuant to which the
Company agreed to deliver to such party, in exchange for a release of all
claims, $100,000 and 1,500,000 shares of the Company's common stock. The Company
performed its obligations under the settlement agreement and the case has been
dismissed.
Payday was a defendant in a number of federal class action cases asserting
various violations of the Truth in Lending Act, 15 U.S.C. Section 1601, ET SEQ.
("TILA"), Fair Debt Collection Practices Act ("FDCPA"), state consumer fraud
claims and unconscionability claims, Sandra Brown et al. v. Payday Check
Advance, Incorporated, et al., United States District Court Case No. 99 C 2074,
7th Circuit Case No. 99-3110; Marguerite Mitchem v. Payday Check Advance, Inc.
et al., United States District Court Case No. 99 C 1869, 7th Circuit Case No.
99-3110; Earl Terry v. Payday Check Advance, Inc., et al., Case No. 99 C 2486;
Lizabeth Maccagno, et al. v. Payday Check Advance, LLC, et al., Case No. 99 C
2579; Latanda Allen, et al. v. Payday Check Advance, Inc. Case No. 99 C 7656.
The cases have all been dismissed or settled during the year 2000 for an
aggregate of $21,600.
Two of these cases, consolidated for appeal purposes, were dismissed by the
respective federal district court judges before whom they were pending. The
Court of Appeals for the Seventh Circuit affirmed the dismissals. The Plaintiffs
filed an appeal with the United States Supreme Court, which appeal was denied.
In April 1999, the Company entered into a settlement agreement with a judgment
creditor of the Company, Circuit Court of Cook County, Illinois, Case No. 99 CH
00625, pursuant to which the Company was obligated to make installment payments
in the aggregate amount of $100,000 to the creditor, with all remaining sums due
on or before October 15, 1999. In addition, the Company issued 10,000 shares of
common stock to the creditor as part of the settlement. On May 12, 2000 the
parties entered into a second settlement agreement pursuant to which the Company
issued 990,000 shares of the Company's common stock in exchange for a full
release of claims (including the judgment) and the return of the 10,000 shares
previously delivered to the judgment creditor. These 10,000 shares were
subsequently cancelled by the Company.
The Company filed, and subsequently withdrew, a lien suit against a former
director seeking the return of 3 million shares of the Company's common stock
which the Company alleged was issued in error to such former director as part of
a comprehensive buyout of such director's shares. The former director claims the
shares were not issued in error. The parties have commenced a dialogue to
determine whether any such shares should be returned to the Company. To date,
the Company agrees that 500,000 shares were properly issued, leaving 2.5 million
shares in dispute. In the event that the parties cannot reach resolution of this
matter, the Company may reinstitute the lawsuit.
During 2000 and 2001, the Company received funds totaling $350,000 from a
shareholder. The Company and the shareholder never reached an agreement as to
the nature, terms and documentation of the funding. On April 10, 2001, the
shareholder made demands on the Company in connection with the funding based on
alleged defaults. In May, 2001, the shareholder brought suit against the Company
seeking repayment of the funds advanced plus accrued interest, as well as
repayment of funds loaned under a separate promissory note for $50,000 which is
due in 2003 and approximately $46,000 advanced pursuant to a personal guaranty
issued by the shareholder on the Company's behalf (Circuit Court of Cook County,
Illinois, County Department-Law Division Case No. 01 L 5533). The Company is
7
currently in the process of preparing an answer to the complaint. Management
cannot predict with any certainty what the outcome of any such litigation would
be.
In the first quarter of 2001, a creditor of the Company, on behalf of itself and
a group of related creditors, made a demand for payment of certain promissory
notes issued by the Company aggregating approximately $250,000, plus accrued
interest. The Company is attempting to negotiate a repayment plan or an
extension of the maturity of the notes. Management cannot say whether they will
successfully negotiate an acceptable repayment plan or an extension of the
maturity of the notes.
In April, 2000, the Company issued a promissory note in the original principal
amount of $56,000 to a private lender, which note became due on August 12, 2001.
A portion of the interest due was paid, but certain interest and the principal
remain unpaid.
In connection with store closings, the Company has been named as a defendant in
numerous lawsuits brought by landlords for alleged damages for unpaid rent.
ITEM 2. Management Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis should be read in conjunction with the
Company's consolidated financial statements and the notes thereto contained
elsewhere in this report. The discussion of these results should not be
construed to imply any conclusion that any condition or circumstance discussed
herein will necessarily continue in the future. When used in this report, the
words "believes," "anticipates," "expects," and similar expressions are intended
to identify forward-looking statements. Those statements are subject to certain
risks and uncertainties that could cause actual results to differ materially
from those that are modified by such statements. Readers are cautioned not to
place undue reliance on these forward-looking statements, which speak only as of
the date hereof. The Company undertakes no obligation to publicly release the
results of any revisions to these forward-looking statements that may be made to
reflect events or circumstances after the date of this report, or to reflect the
occurrence of unanticipated events.
COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 2001 TO THE THREE
MONTHS ENDED JUNE 30, 2000
NET REVENUES. SHC Corp. and its subsidiaries ("Company") generated revenues of
$1,496,363 for the six months ended June 30, 2001. This represented a 0.4%
increase from $1,490,346 in revenues generated in the six months ended June 30,
2000. The principal reason that the revenues are flat from last year is better
production from existing stores but the company has fewer stores than during the
same period last year.
COST OF STORE OPERATIONS. The Company incurred expenses of $1,192,786 for
operating its stores during the six months ended June 30, 2001, which
represented an increase of 3% from the expenses that were incurred during the
six months ended June 30, 2001. This increase was the result of normal cost of
living increases.
GROSS PROFIT. For the six months ended June 30, 2001, the Company reported gross
profit of $303,577. This was a decrease of 9.5% from the prior year's amount of
$334,990. This was due to increases in certain operating expenses as stores were
closed, while Company's loan base and associated revenues declined at a slower
rate.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Expenses related to these
activities were $1,172,255 during the six months ended June 30, 2001 which is
a 24% reduction to the $1,727,782 for the similar period ended June 30, 2000.
The decrease was due primarily to the company's store reductions and general
cost containment measures.
RESERVE FOR STORE CLOSINGS. The Company increased its provision for stores
closed during calendar year 2001. These additional closures became necessary as
the Company continued to review its operations, in light of its available cash,
and determined that it needed to concentrate its limited resources into those
stores that present the best opportunity to generate the most profit.
NOTES PAYABLE. The Company executed two new notes payable during the six
months ended June 30, 2001. The first note payable was executed on April 12,
2001 and carries an interest rate of 12% per month. This note was due on
August 12, 2001 with no extensions allowed. This note is now in default. The
balance due on the note was $79,068 at the maturity date. The Company has had
no negotiations with the note holder to extend this loan. The second note
payable was executed on May 14, 2001 and is due on August 22, 2001 with the
principal and accrued interest due of $122,500. There is no stated rate of
interest on this note; however, interest accrues at $7,500 per month. The
principal amount is $100,000.
INTEREST EXPENSE. This expense increased by 28% from $93,404 in 2000 to $116,346
in 2001. This was due to increased bank borrowings and other notes payable.
NET LOSS. The Company reported a lower net loss in 2001 from a year earlier for
those reasons cited previously.
8
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
The information required by Part II, Item 1 of Form 10-QSB is hereby
incorporated by reference to Note 2 to SHC Corp.'s Consolidated Balance Sheets
for the three months ended June 30, 2001, included in Item 1 of Part 1 of this
Form 10-QSB.
ITEM 5. Other Information
As of June 30, 2001 and December 31, 2000, the Company had a negative working
capital position of $3,648,807 and $2,876,135. The Company was able to fund its
operations during the first six months through the issuance of various notes and
a partial liquidation of its loan portfolio.
The Company realizes it needs to strengthen its working capital position and
over all financial condition. Through August 17, 2001, it has closed 6 stores to
reduce the losses and to improve its cash position and has contracts to sell 3
other stores. The Company started a franchising program in the first quarter it
has sold 3 franchises to date totalling $100,000 to date. In addition, the
Company has letters of intent to sell an additional 13 franchise stores
totalling $378,000. It is in talks with several groups regarding additional cash
infusions via equity or debt capital. If such talks are successful, the Company
will receive funds for operating capital. If the discussions are not successful,
the Company will need to examine various options, such as, closing additional
stores and/or financial restructuring.
In an effort to reduce debt, the Company has negotiated with four noteholders to
exchange their notes for common stock in fiscal 2001 and any unpaid interest.
The outstanding amount of these notes was $175,000, of which, all was converted
by March 31, 2001.
It is management's intention to offer a conversion of debt-for-stock to other
noteholders or creditors since the Company's common stock has been re-listed
again on the OTC Bulletin Board. Management does not know how many noteholders
or creditors, if any, will agree to convert the amount owed them, but believes
there will be some conversions.
9
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.
SHC CORP.
By: /s/ Terrence L. Donati
--------------------------------------------------
Terrence L. Donati, President, Principal
Financial Officer and Principal Accounting Officer
Date: August 20, 2001
By: /s/ Terrence L. Donati
--------------------------------------------------
Terrence L. Donati, Director
Date: August 20, 2001
By: /s/ John Annerino
--------------------------------------------------
John Annerino, Director
Date: August 20, 2001
10