SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 1998.
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: 0-13280
PCC GROUP, INC.
(Exact name of registrant as specified in its charter)
California 95-3815164
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
163 University Parkway, Pomona, California 91768
(Address of principal executive offices) (Zip Code)
(909) 869-6133
(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:
Common Stock, $.01 par value
(Title of each class)
Indicate 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
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (s229.405 of this chapter) is not contained herein, and
will not 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-K or any amendment to this Form 10-K. [ X]
The aggregate market value of the voting stock of the registrant held by non
- -affiliates of the registrant on December 28, 1998 was approximately.
$18,768,289, based on the closing price reported by Nasdaq on such date.There
were 2,705,339 shares of registrant's Common Stock outstanding on
December 28, 1998.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of Registrant's Proxy Statement for its 1999 Annual Meeting of
Shareholders, to be filed with the Securities and Exchange Commission within
120 days after the close of the Registrant's fiscal year, are incorporated
herein by reference in Parts III of this Report.
TABLE OF CONTENTS
Part I
1. Business 3
2. Properties 7
3. Legal Proceedings 7
4. Submission of Matters to a Vote of Security Holders 8
Part II
5. Market for Registrant's Common Equity and Related Stockholder Matters 8
6. Selected Financial Data 9
7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
7A. Quantitative and Qualitative Disclosures About Market Risk 14
8. Consolidated Financial Statements and Supplementary Data 15
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 15
Part III
10. Directors and Executive Officers of the Registrant 15
11. Executive Compensation 15
12. Security Ownership of Certain Beneficial Owners and Management 15
13. Certain Relationships and Related Transactions 15
Part IV
14. Exhibits, Consolidated Financial Statement Schedule, and
Reports on Form 8-K 15
This report contains "forward-looking statements" within the meaning of Sec-
tion 27A of the Securities Act and Section 21E of the Exchange Act, including,
without limitation, statements that include the words "believes,""expects,""
anticipates," "plans," or similar expressions and statements relating to
anticipated costs savings, the Company's strategic plans, capital
expenditures, industry trends and prospects, and the Company's financial
position. Such forward-looking statements involve known and unknown risks,
uncertainties, and other factors that may cause actual results, performance,
or achievements of the Company to differ materially from those expressed or
implied by such forward-looking statements. Although the Company believes
that its plans, intentions, and expectation reflected in such forward-looking
statements are reasonable, it can give no assurance that such plans,
intentions, or expectations will be achieved. Important factors that could
cause actual results to differ materially from the Company's expectations are
set forth under the caption "Risk Factors" in this report and in the Company's
other SEC reports and press releases, copies of which are available from the
Company upon request. The Company assumes no obligation to update any
forward-looking statements contained herein.
PART I
ITEM 1. BUSINESS.
General
During the past 16 years, PCC Group, Inc. has been primarily engaged in the
wholesale distribution of microcomputer products and components. The
computer hardware products and components that the Company resells include
add-on boards, CD-ROM drives, hard disk drives, monitors, sound cards, and
keyboards. The Company purchases these products in large volume directly
from the manufacturers and sells the products to personal computer assemblers
and other resellers. Until recently, the Company has not marketed any
products directly to end-user customers.
Since 1993, the Company's business included investments in the environmental
resource industry. The principal investment of the Company was an investment
in the Dalian Green Resources Co., Ltd. ("Dalian Green"), a joint venture
formed to own and operate a tire recycling plant located in the city of Dalian,
in the People's Republic of China. Due in part to the Company's desire to
refocus its operations on its core business of distributing computer parts,
and due to the difficulties the Dalian Green joint venture was having in
commencing its operations, during the fiscal year ended September 30, 1998,
the Company sold its interest in Dalian Green and ceased all of its other
environmental resource operations.
On December 15, 1998, the Company launched its retail web site "Computer
Discount Center," located at www.123cdc.com, through which the Company is
offering a large selection of computer hardware, software, and accessories.
The Company plans to develop the web site as a high volume retail outlet to
supplement its core business of wholesale redistribution of computer
components. The web site, however, is still in the development stage.
The Company, a California corporation, was formed by the merger, in September
1989, of PC Craft, Inc., a Delaware corporation, with and into WMD
Micro Distributors, Inc. ("WMD"), a California Corporation organized in 1983.
Concurrently with the merger, WMD changed its name to PCC Group, Inc. Unless
the context indicates otherwise, all references herein to the "Company" shall
refer to PCC Group, Inc. and its subsidiaries.
The Industry-Overview
Computer Distribution. The worldwide microcomputer products distribution
industry generally consists of suppliers, who sell directly to wholesale
distributors; wholesale distributors, who sell to resellers; and resellers,
who sell to other resellers or directly to end-users.
Wholesales distributors generally purchase a wide range of products in bulk
directly form manufacturers and then ship products in smaller quantities to
various resellers. Most manufacturers of electronic components and computer
products rely on independent authorized distributors, such as the Company, to
augment their product marketing and distributions operations. Wholesalers
assist the suppliers by providing stocking, marketing, and financial
intermediary services. The recent rapid growth of the electronics distribution
industry has been fostered by the many suppliers and manufacturer who recognize
their authorized distributors as essential elements of their distribution
organization. In addition, faced with the pressures of declining product
prices and the increasing cost of selling directly to a large and diverse group
of resellers, suppliers are increasingly relying upon wholesale distribution
channels for a greater proportion of their sales. Resellers are becoming
more dependent on wholesale distributors due to product proliferation,
increasingly complex technologies and rapid changes in technology.
Resellers sell directly to end users, such as large corporate accounts,
small to medium-sized businesses, and home users. Resellers fall into the
following channel segments: value-added reseller ("VAR"), commercial
reseller or dealer, and retailer. VARs, who comprise one of the largest channel
segments, typically add value by combining proprietary software and/or
services with off-the-shelf hardware or software. Many of these customers of
the Company require delivery of the products they have ordered on schedules that
are generally not available on direct purchase from manufacturers, and
frequently their orders are of insufficient size to be placed directly with
manufacturers.
Computer Retail Sales. Computer retail sales currently include store based
sales, catalog and telephone sales, and Internet sales. Store based sales
include both computer oriented stores (such as CompUSA and MicroCenter) that
primarily sell computer products, and non-computer retailers (such as Circuit
City and Wal-Mart) that primarily sell products other than computers and
computer components. The mail-order retailers include PC Connection,
MicroWarehouse and CDW. The online market for computer products is rapidly
growing and evolving. Online retail sellers include various manufacturers that
sell their products through the Internet and other means (such as Dell and
Gateway) as well as numerous Internet retailers (such as Cyberian Outpost).
Wholesale Distribution
During fiscal 1998, all of the Company's sales were derived from the
wholesale distribution of computer products. During the past fiscal year,
the Company has refocused its microcomputer products distribution activities,
motivated by its ability to improve its operating margins and the industry-wide
growing demand for microcomputer components. The Company's strategy is to sell
its products at prices at or near the price that the reseller could purchase
from the manufacturer in order to increase the total amount of its sales. By
increasing its sales, the Company is able to purchase its inventory at greater
discounts from the manufacturers, thereby increasing the Company's
cost of sales margins.
The Company provides manufacturers with access to a select client base while
reducing the inventory, credit, marketing, and overhead costs associated with
maintenance of direct relationships with resellers. Hardware products offered
include add-on boards, CD-ROM drives, hard disk drives, monitors, sound cards,
and keyboards.The Company offers microcomputer hardware products manufactured
by companies such as Western Digital Corporation, Toshiba, NEC Technologies,
TEAC, and Adaptec. Although the Company generally stocks approximately between
100 and 200 products and accessories supplied by between 10 and 20 vendors,
approximately 70% the Company's sales in fiscal 1998 were derived from products
supplied by one vendor, Western Digital Corporation. The loss of the ability
to distribute products from this supplier could result in sales losses, which
could in turn have a materially adverse impact on the Company's business and
financial results.
The Company generally enters into written agreements with its suppliers. As
is customary in the industry, these agreements usually provide non-exclusive
distribution rights and for cancellation on short notice by the supplier, for
failure to satisfy minimum purchase requirements or otherwise. While the
Company believes that alternative sources of supply exist for most of the
products that it distributes, the loss of the right to distribute certain
products might materially and adversely impact its operations. On the other
hand, these agreements generally provide stock balancing and price protection
provisions, which in part reduce the Company's risk of loss due to slowmoving
inventory, vendor price reductions, product updates, or obsolescence. The
Company further attempts to reduce its inventory risk by only holding a small
amount of inventory and by rapidly reselling its inventory. In general, the
Company rotates its inventory every two to three weeks.
The Company purchases substantially all of its products in the U.S. from U.S.
based companies. Most of the inventory purchased by the Company is delivered
to the Company's warehouse in Pomona, California. However, the Company also
arranges for inventory its purchases to be shipped directly from the
manufacturer to the Company's customers. In 1998, the Company closed its
regional distribution center in Florida, and discontinued plans to open
distribution centers in Atlanta and Dallas.
Customers
The Company regularly sells to approximately 250 customers including VARs,
systems integrators, and dealers. All of the Company's customers are located
in the U.S., and the Company does not currently sell any of its products
abroad. Comtrade Electronics, a computer distributor, accounted for 15.9% of
net sales in fiscal 1998. No other customer of the Company accounted for more
than 10% of the Company's sales during fiscal 1998. The Company believes
that its success in attracting customers is attributable in large measure to
its competitive pricing and immediate product availability.
Many of the Company's customers do not have the resources to establish a
large number of direct purchasing relationships or stock significant product
inventories. Consequently, they tend to purchase a high percentage of their
products from distributors. Large resellers, on the other hand, often
establish direct relationships with manufacturers for their more popular
products, but utilize distributors for slower-moving products and for fill-in
orders of fast-moving products which may not be available on a timely basis
from manufacturers.
Sales and Distribution
The Company's sales force is comprised of six sales representatives.
Customer orders are entered into the Company's computer system. Using a
centralized database, sales representatives immediately obtain descriptive
information regarding products, check inventory status, determine customer
credit availability, and obtain pricing and promotional information.
Upon placement of an order, the order is processed and, if the customer
meets applicable credit requirements, the order is printed at the warehouse.
The order is printed in the form of an invoice, which is then used to
identify and assemble the products covered by the order for packing.
The Company warrants parts and labor on its products for 12 months after
shipment. The Company will, in exchange for a defective product returned by
a customer within the warranty period, ship to the customer either a
pre-tested equivalent or a new product,in most instances, within 24 to 48
hours. Defective products are returned to vendors for repair and, in most
cases, are repaired and returned within three weeks. Repairs made by vendors
after expiration of the warranty period are charged back to the customer.
Internet Retail Sales
On December 15, 1998, the Company launched its retail web site "Computer
Discount Center," located at www.123cdc.com, through which the Company is
offering a large selection of computer hardware, software, and accessories.
The Company plans to develop the web site as a high volume retail outlet to
supplement its core business of wholesale redistribution of computer components.
Prior to launching its Internet retail website, the Company did not sell its
products directly to end-users because it did not have the organizational,
marketing and financial infrastructure that was necessary to effectively
compete in the retail market. The Company does, however, have relationships
with manufacturers and other suppliers that enable the Company to purchase
computer components and products are competitive prices. The Company believes
that the Internet permits the Company to offer computer products to the
public without infrastructure that is necessary to operate a traditional
computer retail operation. By establishing the Computer Discount Center, the
Company seeks to leverage its purchasing ability and its existing computer
distribution facilities to maximize its overall sales and to increase its
operating margins.
The Company has hired six employees to operate its Internet business. The
Company plans to forward orders placed through the website to suppliers,
rather than ship the ordered product from the Company's inventory. The
Company will rely on one major supplier for the vast majority of orders.
The Company's website has only recently been initiated, and the Company is
still in the process of developing its marketing and promotional plans.
The Company is in the process of establishing strategic relationships to
promote, advertise or otherwise increase the visibility of its website on the
Internet. Since the success of the website will, to a large degree, be
determined by its ability to attract Internet traffic to the site, the impact
of the new website on the Company's overall future operations and financial
results cannot be currently estimated.
Competition
Competition in the microcomputer component distribution business is intense
and characterized by intense pricing pressures and rapid technological change
resulting in relatively short product lives and early product obsolescence.
Competition is driven by price, product availability, and customer service.
Competitors of the Company include national distributors, regional distributors
, and manufacturers' direct sales organizations, many of which have
substantially greater technical, financial, and marketing resources than the
Company. Major competitors include Merisel, Inc., Ingram Micro, Inc., Tech
Data Corporation, Gates F/A Distributing, Inc., and Liuski International, Inc.
The Company also expects to encounter intense competition in its efforts to
establish an Internet retail outlet. The microcomputer components retail
industry is intensely competitive. These competitors include (i) various
traditional computer retailers including CompUSA and MicroCenter, (ii) various
mail-order retailers including CDW, MicroWarehouse, Insight, PC Connection,
and Creative Computers, (iii) various Internet-focused computer retailers
including Egghead.com, software.net Corporation, NECX Direct, and Cyberian
Outpost, (iv) various manufacturers that sell directly over the Internet
including Dell, Gateway, Apple, and many
software companies, and (v) a number of online service providers including
America Online and the Microsoft Network that offer computer products
directly or in partnership with other retailers.
Discontinued Operations--Environmental Resource Division
In 1993, the Company identified certain investment opportunities in the Far
East in the tire recycling business. The principal investment that the
Company identified was a recycling plant to be constructed in the city of
Dalian, in the People's Republic of China. In 1993, the Company entered into a
joint venture agreement with a Chinese governmental organization to establish
the Dalian Green Resource Co. Ltd. ("Dalian Green"). The Company invested
approximately $3 million in Dalian Green and owned a 55% economic interest in
Dalian Green. The joint venture has constructed a facility capable of
recycling scrap tires into commercial materials, including carbon black, fuel
oil, scrap steel and gas. The construction and commencement of operations of
the facility owned by Dalian Green has been delayed by technological problems
and governmental permit restrictions, and the facility is not currently
operating. Although the Company previously also identified other possible
recycling facilities and entered into other agreements to form tire recycling
joint ventures, the Company did not pursue these other transactions and has not
invested significant amounts into these other arrangements.
Due in part to the Company's desire to refocus its operations on its core
business of distributing computer parts, and due to the difficulties the
Dalian Green joint venture was having in commencing its operations, during
the fiscal year ended September 30, 1998, the Company sold its interest in
Dalian Green to an unaffiliated third party. As a result of the sale, the
Company has now ceased all of its other environmental resource operations.
The sale of Dalian Green was effected by transferring all of the Dalian Green
interest to American Tire Collection, Inc., a Delaware corporation ("American
Tire"), for $3.7 million, and by the sale of all of the outstanding share of
American Tire. The purchase price for the Dalian Green interest was paid by
the delivery of a convertible secured promissory note (the "Note"). The Note
matures on September 30, 2001, bears interest at an annual rate of 6%, and is
secured by a first priority lien on all of the assets of American Tire and by
pledge of all of the stock of American Tire. The Note is convertible by the
Company at any time during the term of the Note into no less than 70% of the
total outstanding stock of American Tire. The Company has been informed that
American Tire is actively pursuing obtaining the permits required to operate
the Dalian Green recycling plant.
Employees
On December 18, 1998, the Company had 28 full-time employees. None of the
Company's employees is represented by a labor union. The Company considers
its relations with its employees to be good.
ITEM 2. PROPERTIES.
The Company's corporate office and main warehouse facility is located in
Pomona, California. The company is leasing this facility (18,721 square feet)
on a month to month basis with an annual rent of $86,400.The Company believes
this facility is suitable and adequate for current operations.
ITEM 3. LEGAL PROCEEDINGS.
In May 1997, in an action entitled Virgil Flanigan v. PCC Group, Inc., Mr.
Flanigan filed a complaint against the Company in the 22nd Judicial Court of
Missouri. Mr. Flanigan licensed certain technology to the Company for use
in the Dalian Green tire recycling facility. In consideration for the license,
the Company agreed to pay Mr. Flanigan, among other compensation, a
percentage of profits derived from the Dalian Green project. The Company
claims that the licensed technology did not work as represented and has
refused to pay Mr. Flanigan certain of the compensation under the license
agreement. Mr. Flanigan asserts that the Company has breached its agreement
with him and is suing to enforce the agreement. The Company believes that it is
not obligated to pay Mr. Flanigan any additional amounts due to Mr. Flanigan's
breach. The Company intends to vigorously defend this action.
The Company is from time to time, involved in various lawsuits generally
incidental to its business operations, consisting primarily of collection
actions and vendor disputes. The Company does not believe that such claims
and lawsuits, either individually or in the aggregate, will have an adverse
effect on its operations or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the Company's security holders during
the fourth quarter of the fiscal year ended September 30, 1998.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
The Company's common stock, $.01 par value per share, is traded over-the-
counter on the Nasdaq SmallCap System under the trading symbol "PCCG." The
following table sets forth the high and low closing prices as reported by
Nasdaq for the Company's common stock in each of the fiscal quarters indicated.
Fiscal Year Ended September 30, 1997 High Low
First Quarter $4.750 $3.750
Second Quarter $4.625 $3.250
Third Quarter $4.000 $3.125
Fourth Quarter $4.125 $2.500
Fiscal Year Ended September 30, 1998 High Low
First Quarter $3.250 $2.500
Second Quarter $4.438 $2.500
Third Quarter $7.500 $4.188
Fourth Quarter $6.156 $3.625
As of December 18, 1998, there were 2,131 holders of record of the Company's
common stock. The Company believes that there are approximately 1,000
additional beneficial owners of Common Stock whose shares are held in "street
name."
The Company has not paid any dividends on its common stock and does not intend
to pay dividends in the foreseeable future. The Board of Directors currently
intends to retain any future earnings to finance the development of its
business.
ITEM 6. SELECTED FINANCIAL DATA.
The table below sets forth certain financial data of the Company for each of
its fiscal years during the five-year period ended September 30, 1998. This
information should be read in conjunction with the financial statements and
related notes thereto included elsewhere in this report and Item 7 hereof,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Statement of Operations Data
(in thousands, except for per share amounts)
1994 1995 1996 1997 1998
Net Sales $51,361 $40,473 $40,645 $63,643 $79,728
Gross Profit 3,205 1,513 1,892 2,820 3,695
Net Income 200 25 643 350 404
Income (Loss)
Per Share
Net Income .09 .01 .26 .13 .13
Dividends
Applicable to
Preferred Stock (.07) (.07) (.06) (.06) (.05)
Net Income (Loss)
Applicable to
Common shares .02 (.06) .20 .07 .08
Balance Sheet Data
(in thousands)
1994 1995 1996 1997 1998
Working Capital $1,582 $1,540 $2,195 $2,607 $3,411
Total Assets 7,874 6,016 8,421 10,592 14,774
Long-Term Debt 10 2 -- 18 35
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
Forward Looking Statements:
Certain of the statements contained in this section, including those under
"Liquidity and Capital Resources," are "forward looking" statements. While
the Company believes that these estimates and statements are accurate
based on information currently available to the Company, the Company's business
is dependent upon general economic conditions and various conditions
specific to its industry, and future results of which cannot be predicted.
Year Ended September 30, 1998 Compared to Year Ended September 30, 1997
Net sales for the fiscal year ended September 30 1999 ("fiscal 1998")
increased by 25.3%, from $63.6 million in the fiscal year ended September 30,
1997 ("fiscal 1997") to $79.7 million in fiscal 1998. The increase in net
sales is due to an increase in the unit volume shipped during the fiscal year.
Gross profit increased 28.6% from $2.8 million in fiscal 1997 to $3.7 million
in fiscal 1998 principally as a result of increased sales. Gross profit as a
percentage of net sales increased from 4.4% to 4.6% due to the increased
volume of sales, as the Company's ability to purchase its inventory at a
discount is related to the volume of sales. Accordingly, as its sales
volume increases, the Company's cost of goods decreases, and the gross profit
increases.
Selling, general and administrative (SG&A) expenses decreased by 16.7%, from
$2.4 million in fiscal 1997 to $2.1 million in fiscal 1998, and decreased as
a percentage of net sales from 3.8% to 2.6%. The decrease of SG&A expenses
was principally attributable to a decrease in consulting expenses of
approximately $350,000.
Income from operations increased 394.1% from $405,635 in 1997 to $1,598,628 in
1998. The increase is due to the increase in the Company's gross profits and
the decrease in SG&A. Income from operations as a percentage of net sales
increased from 0.6% to 2.0 %.
Interest expense increased 437% from $42,259 in fiscal 1997 to $184,715 in
fiscal 1998, primarily as a result of additional borrowings incurred to
finance the increased sales level. The Company also incurred a $557,438 loss
on the sale of investments, compared to a loss of $13,306 from the sale of
investments in the prior fiscal year. The loss is attributable to the
Company's investment in securities. During fiscal 1998, the Company invested
its excess cash in highly volatile publicly-traded securities and incurred
margin liability in such purchases. In June 1998, the Company ended its
practice of investing in securities and sold its portfolio of existing
securities for a $1,250,000 secured promissory note. Since the Company has
ceased investing in securities, the Company does not expect to incur such
losses in the future. Other expense also included a loss of $300,730
reflecting a partial write-down of the investment in Dalian Green joint
venture. The Company sold its interest in the Dalian Green joint venture in
September 1998.
At the end of fiscal 1998, the Company had net operating loss carryforwards
available to offset future taxable income of approximately $1.6 million. It
is not possible at this time to determine that the realization of the net
deferred tax asset as of September 30, 1998 is more likely than not;
accordingly, a 100% valuation allowance has been established.
Year Ended September 30, 1997 Compared to Year Ended September 30, 1996
Net sales in increased 56.6% from $40.6 million in the fiscal year ended
September 30, 1996 ("fiscal 1996") to $63.6 million in fiscal 1997. Product
mix for fiscal 1997 remained basically unchanged. However, unit volume
significantly increased compared to fiscal 1996.
Gross profit increased 49% from $1.9 million in fiscal 1996 to $2.8 million in
fiscal 1997 as a result of the increased sales volume. Gross profit as a
percentage of net sales decreased from 4.7% to 4.0%, principally due to the
sale in fiscal 1997 of certain popular hard disk products which carried lower
profit margins.
Selling, general and administrative expenses increased 46.9% from $1.6 million
in fiscal 1996 to $2.4 million in fiscal 1997, and decreased as a percentage
of net sales from 4% to 3.8%. The increase of SG & A expenses was principally
attributable to increases in the following items by the following amounts:
consulting services $375,893; professional fees $165,774; accrual for doubtful
receivables $152,118; travel and entertainment $70,664; and miscellaneous
expenses $38,059.
Income from operations increased 62.4% from $249,711 in fiscal 1996 to
$405,635 in fiscal 1997. However, as a percentage of net sales income from
operations remained unchanged in both fiscal periods at 0.6%.
Other income (expense) decreased from $396,927 of income in fiscal 1996 to a
loss of $(40,260) in fiscal 1997. This decline was mainly due to the
following non-recurring entries recorded in fiscal 1996: (a) Gain on sale of
equipment to related parties of $135,000; and (b) a gain on reversal of accrued
liability amounting to $233,731 .
At the end of fiscal 1997, the Company had net operating loss carryforwards
available to offset future taxable income of approximately $2.7 million. The
income tax receivable for fiscal 1996 pertains to overpayment of state income
taxes. Because of the uncertainty regarding the Company's ability to realize on
the net deferred tax asset as of September 30, 1996, a 100% valuation allowance
was established.
Variability of Quarterly Results and Seasonality
The Company has historically experienced variability in its net sales and opera
ting margins on a quarterly basis and expects these patterns to continue in
the future. Management believes that the facts which influence quarterly
trends include (i) seasonal growth in the microcomputer industry and (ii)
vendor scheduled introduction of new products or updates of existing products.
The Company's net sales in the first fiscal quarter of each year have been
higher than in its other three quarters. Management believes that historical
trends reflect customer buying patterns relating to calendar year-end
business purchases and holiday period purchases.
Liquidity and Capital Resources
To date, the Company had financed its operations primarily from internally
generated cash and from bank and vendor lines of credit. During the second
quarter of fiscal 1997, the Company entered into a line of credit agreement
that provides the Company with accounts receivable and inventory based
borrowings of up to $3 million. In fiscal 1998 the Company entered into a
loan agreement with Imperial Bank for $5,000,000 Export-Import Bank loan.
The loan has restrictive covenants with regard to additional loans, acquisitions
, capital expenditures. The Company is presently in compliance with all loan
covenants.
Net cash provided by (used in) operating activities in 1998 was $(2,786,732)
, as compared to $706,593 in 1997 mainly reflects the net effects of cash
provided by accounts payable and gain on sale of investment, write down of
investment, gain on sale of equipment, inventory, offset by an increase in
accounts receivable, advances to vendors, and purchases of investments held for
trading.
Net cash provided by (used in) investing activities in 1998 was ($68,941), as
compared to ($76,929) in 1997, and principally shows principal payments on
notes receivable, and capital expenditures, offset by advances to the
Dalian Green joint venture.
Net cash provided by financing activities in 1998 was $4,264,984 as compared to
$(80,114) in fiscal 1997. The increase in cash from financing activities is
principally due to increased borrowings under the Company's credit facilities
to finance its operations, and due to a change in the use of a securities
margin credit facility in the amount of $983,711.
The Company believes that its internally generated cash flow, vendor credit
lines and its currently available lines of credit will be sufficient to fund
the Company's working capital needs for at least the next twelve months.
New Accounting standards not adopted yet
In February 1998 Statement of Financial Accounting Standards No.132,
"Employer's Disclosures about Pensions and Other Post-retirement benefits
" (SFAS No 132) amended the disclosure requirements for pensions and other
post-retirement benefits. The Company would not expect the adoption to have
significant change on the Company's financial statement disclosures.
In June 1998 , The Financial Accounting Standards Board issued Statement of
Financial Standards No. 133 "Accounting for Derivative Instruments and
Hedging Activities"(SFAS No. 133). SFAS No. 133 requires companies to
recognize all derivatives contracts as either assets or liabilities in the
balance sheet and to measure them at fair value. If certain conditions are
met a derivative may be specifically designated as a hedge, the objective of
which is to mach the timing of gain or loss recognition on the hedging
derivative with the recognition of (I) the changes in the fair value of the
hedged forecasted transaction. For a derivative not designated as a
hedging instrument the gain or loss is recognized in income in the period of
change. SFAS No 133 is effective for all fiscal quarters of fiscal years
beginning after June 15,1999.
Historically the Company has not entered into derivative contracts either
to hedge existing risks or for speculative purposes. Accordingly the Company
does not expect the adoption of the new standard on January 01, 2000 to
affect its financial statements.
Effects of Inflation
The Company believes that inflation has not had a material effect on its net
sales and results of operations.
FACTORS THAT MAY AFFECT FUTURE RESULTS
The future success of our business depends on our ability to successfully
distribute products to meet dynamic customer demand. Our business results
depend on our ability to deal with numerous risks and uncertainties. These
include our ability to deal with competitive pressures, make good pricing
decisions, supply certain products, supply products free of defects, purchase
products at acceptable prices, avoid losses to inventory value, and
employ quality personnel.
Industry Trends
We believe that the growth rate of worldwide personal computer sales has
declined and may remain below the growth rate from prior years for the
foreseeable future. As a result, we could experience decreased demand for
our products and increased competition. This decline in the growth rate could
adversely affect our business.
Rapid Technological Change; Inventory Risk
Due to the highly volatile nature of the personal computer industry, we are
frequently required to distribute new products and product enhancements. The
success of new product introductions is dependent on a number of factors,
including market acceptance, management of inventory levels, availability of
products in appropriate quantities, and risk that new products may have
defects. Accordingly, we cannot determine the effect that new products will
have on our sales or results of operations.
We acquire inventory in advance of product shipments. Accordingly, because the
markets for our products are volatile and subject to rapid technological and
price changes, there is risk that we will forecast incorrectly and stock
excessive or insufficient inventory of particular products. Price reductions by
other manufacturers or technological changes, could materially decrease the
value of our inventory. There can be no assurance that we will be able to
successfully manage our inventory.
In our financial statements, we provide reserves against any inventories of
products that have become obsolete or are in excess of anticipated demand,
accrue cancellation fees of orders for inventories that have been cancelled,
and accrue estimated costs to correct any product quality problems. Although
we believe our inventory and related reserves are adequate, no assurance can be
given that we will not incur additional inventory and related charges.
Significant declines in inventory value in excess of established inventory
reserves or dramatic changes in prevailing technology have had, and may again
in the future have a material adverse effect on our business.
Substantial Competition
The market in which we operate is highly competitive and is characterized by
aggressive pricing practices, downward pressure on gross margins, frequent
introduction of new products, short product life cycles, continual
improvement in product price/performance characteristics, price sensitivity on
the part of consumers, and a large number of competitors. Competition is
based primarily on product availability, price, credit availability,
speed of delivery, and breadth and depth of product lines and services. Our
business has been, and in the future may continue to be, adversely affected
by industry-wide pricing pressures and downward pressures on gross margins.
Many of our competitors have greater financial, marketing, manufacturing, and
technological resources, broader product lines and larger customer bases. If we
fail to compete effectively, our business will be adversely affected.
Low Profit Margins
As a result of price competition, we have low gross profit and operating
margins. These low margins magnify the impact of variations in net sales and
operating costs on our operating results . Our goal is to partially offset
the effects of low margins by increasing our net sales, trying to make large
volume purchases at a discount, and reducing expenses as a percentage of net
sales. We cannot assure you that we will be able to make purchases with
large volume discounts or otherwise increase our margins.
Dependence on Third-Party Suppliers
Although certain components essential to our business are generally available
from multiple sources, certain products are currently obtained from single
sources. If the supply of single-source products were to be delayed or
curtailed, our business could be adversely affected.
Marketing and Distribution
A number of uncertainties may affect the marketing and distribution of our
products. Currently, our primary means of distribution is through third-
party computer resellers. Such resellers include value added resellers,
system integrator, and dealers. Our business and financial results could be
adversely affected if the financial condition of these resellers weakened or
if resellers discontinued the distribution of our products.
Dependence on Key Personnel
Our success depends to a significant extent upon the continued service of key
marketing, sales, and executive personnel, and on our ability to continue to
attract, retain and motivate qualified personnel. The competition for such
employees is intense, and the loss of the services of one or more of these key
personnel could adversely affect us. We do not maintain key man life
insurance on any of our key executives.
Possible Volatility of Stock Price
The market price of our common stock has been, and may continue to be, highly
volatile. Factors such as new product announcements by us or competitors,
quarterly fluctuations in our operating results, and general conditions in
the computer market may have a significant impact on the market price of the
common stock. In particular, if we were to report operating results or
product development progress that did not meet the expectations of research
analysts, the market price of our common stock could be materially adversely
affected. In addition, the stock market has often experienced extreme
volatility, which has particularly affected high technology companies and
which has often been unrelated to the business performance of specific
companies.
Year 2000 Issue
The Company uses a number of computer software programs and operating systems
in its internal operations, including applications used in order processing,
inventory management, distribution, financial business systems and various
administrative functions. The Company has conducted an independent audit of
its internal software applications to determine that it contains source code
that is able to interpret appropriately the upcoming calendar year 2000.
Based on the independent audit, the Company believes that its computers are
able to handle dates beyond the year 2000. Accordingly, the Company does not
anticipate that it will incur material expenses to make its computer software
programs and operating systems "Year 2000" compliant. However, there can be
no assurance that unanticipated costs necessary to update software, or
potential systems interruptions, will not exceed the Company's present
expectations and have a material adverse effect on the Company's business.
In addition, failure by the Company's key suppliers, customers or service
providers to make their respective computer software programs and operating
systems "Year 2000" compliant could have a material adverse effect on the
Company.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The consolidated financial statements and the reports thereon and notes thereto
, which are attached hereto beginning at page F-1, are incorporated herein by
reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this Item will be contained in the Company's
definitive Proxy Statement for its 1999 Annual Meeting of Shareholders, and
is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this Item will be contained in the Company's
definitive Proxy Statement for its 1999 Annual Meeting of Shareholders, and
is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The information required by this Item will be contained in the Company's
definitive Proxy Statement for its 1999 Annual Meeting of Shareholders, and
is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this Item will be contained in the Company's
definitive Proxy Statement for its 1999 Annual Meeting of Shareholders, and
is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8-K.
(a)(1) Financial Statements:
Report of Independent Certified Public Accountants x
Consolidated Balance Sheets as of September 30, 1997 and 1998 x
Consolidated Statements of Operations x
Consolidated Statements of Shareholders' Equity x
Consolidated Statements of Cash Flows x
Summary of Accounting Policies x
Notes to Consolidated Financial Statements x
(a)(2) Schedules:
(a)(3) Exhibits
3.1.1 Articles of Incorporation of Western Micro Distributors, Inc. dated
February 24, 1983, and filed on February 28, 1983. (1)
3.1.2 Certificate of Amendment of Articles of Incorporation of Western Micro
Distributors, Inc. dated August 9, 1983, and filed on August 30, 1983. (2)
3.1.3 Certificate of Amendment of Articles of Western Micro Distributors,
Inc. dated September 23, 1983, and filed on September 28, 1983. (1)
3.1.4 Certificate of Amendment of Articles of Incorporation of Western Micro
Distributors, Inc. dated October 3, 1983, and filed on October 6, 1983. (1)
3.1.5 Certificate of Amendment of Articles of Incorporation of Western Micro
Distributors, Inc. dated March 24, 1984, and filed on April 5, 1984. (1)
3.1.6 Certificate of Amendment of Articles of Incorporation of WMD Micro
Distributors, Inc. filed on November 2, 1984. (1)
3.1.7 Certificate of Correction of Certificate of Amendment of WMD Micro
Distributors, Inc. filed on approximately November 21, 1984. (1)
3.1.8 Certificate of Amendment of Articles of Incorporation of WMD Micro
Distributors, Inc. dated September 29, 1989 and filed on October 3, 1989. (1)
3.1.9 Agreement of Merger between WMD Micro Distributors, Inc. and the
Company dated September 30, 1989 and filed October 25, 1989. (1)
3.1.10 Certificate of Determination of Rights, Privileges and Restrictions of
Series A Preferred Stock of PCC Group, Inc. dated July 13, 1990 and filed
July 16, 1990. (2)
3.1.11 Certificate of Amendment of Certificate of Determination of PCC Group,
Inc. dated February 14, 1992 and filed March 19, 1992. (2)
3.1.12 Certificate of Amendment of Articles of Incorporation of PCC Group,
Inc. dated February 14, 1992 and filed March 19, 1992. (2)
3.2.1 Bylaws of WMD Micro Distributors, Inc. dated March 15, 1983 (1).
3.2.2 Amendment to Bylaws of WMD Micro Distributors, Inc. dated March 24, 1984
(1).
4.1 Specimen of the Company's Common Stock Certificate. (1)
4.2 Specimen of the Company's Series A Preferred Stock Certificate. (2)
10.1.1 Standard Industrial/Commercial Single-Tenant-Lease-Gross, dated May 2,
1994 between Robert C. Chiu and Cindy C. Chiu and the Company. (4)
10.1.2 Extension of Standard Industrial/Commercial Single-Tenant-Lease-Gross
dated May 31, 1996.
10.3.1 The Company's Employee Stock Bonus Plan ("ESOP") dated October 1,
1988. (2)+
10.3.2 The Company's Incentive Stock Option Plan dated December 15, 1992. (2)+
10.3.3 The Company's Stock Bonus Plan dated December 15, 1992. (2)+
10.3.4 The Company's request dated September 29, 1995 for determination
letter from the Internal Revenue Service for termination of the Company's
ESOP. (5)+
10.3.5 Internal Revenue Service letter of November 14, 1996 providing
favorable determination of termination of the Company's ESOP.+
10.4.1 Dalian Green Resources Corporation Contract dated August 27, 1993
between China Dalian Materials Development Corporation and the Company. (3)
10.4.2 Agreement dated March 25, 1994 between the Company and Virgil
Flanigan regarding recycling technology together with related documents. (5)
10.5 Joint Venture Agreement dated March 6, 1996 by and between, among others,
the Company and Hainan Shenhai Group.
21 List of Subsidiaries.
27 Financial Data Schedule
- ----------------------
(1) Previously filed in the Exhibits to the Company's Annual Report on
Form 10-K dated September 30, 1989 and hereby incorporated herein by reference.
(2) Previously filed in the Exhibits to the Company's Annual Report on Form
10-K for the fiscal year ended September 30, 1992 and hereby incorporated
herein by reference.
(3) Previously filed in the Exhibits to the Company's Annual Report on Form
10-K for the fiscal year ended September 30, 1993 and hereby incorporated
herein by reference.
(4) Previously filed in the Exhibits to the Company's Annual Report on Form
10-K for the fiscal year ended September 30, 1994 and hereby incorporated
herein by reference.
(5) Previously filed in the Exhibits to the Company's Annual Report on Form
10-K for the fiscal year ended September 30, 1995 and hereby incorporated
herein by reference.
+ Management contract, compensatory plan or arrangement.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the last quarter of
fiscal 1998.
(c) Exhibits:
See (a)(3) above.
PCC Group, Inc. and Subsidiaries
_______________________
Report on Audited Consolidated Financial Statements
For the Years Ended September 30, 1996, 1997 and 1998
_______________________
Report of Independent Certified Public Accountants
The Shareholders of
PCC Group, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of PCC Group, Inc.
(a California corporation) and subsidiaries as of September 30,1997 and 1998,
and the related consolidated statements of income, shareholders' equity and
cash flows for each of the three years in the period ended September 30, 1998.
We have also audited the schedule listed in Item 14(a)(2) of this Form 10-k.
These consolidated financial statements and schedule are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements and schedule based on our audits. We
did not audit the financial statements of one foreign joint venture, which
the Company's investments in and advances to joint venture amounted to
$3,004,367 as of September 30, 1997. Those statements were audited by other
auditors whose reports have been furnished to us, and our opinion, insofar as
it relates to the amounts included for such joint ventures, is based solely
on the reports of the other auditors.
We conducted our audits in accordance with generally accepted auditing standards
. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements and
schedules are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements and schedule. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the financial
statements and schedule. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, based on our audits and the reports of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of PCC Group, Inc. and subsidiaries
as of September 30, 1997 and 1998, and the results of their operations and
their cash flows for each of the three years in the period ended September 30,
1998 in conformity with generally accepted accounting principles.
Also, in our opinion, the schedule presents fairly, in all material respects,
the information set forth therein.
BDO SEIDMAN, LLP
Los Angeles, California
December 8, 1998
September 30,
1997 1998
Assets (Note 6)
Current assets:
Cash and cash equivalents $1,057,269 $2,466,580
securities and other negotiable assets 1,016,625 -
Accounts receivable, less allowances for
possible losses of $34,447 and $143,359 3,958,535 3,872,253
Receivables from related parties (Note 7) 367,654 1,548,372
Notes receivable - related parties (Note 7) 100,000 867,009
Inventory, less reserves for obsolescence of
$225,082 and $276,484 734,673 703,051
Prepaids and other current assets 230,044 273,967
Advances to vendors (Note 13) - 3,034,254
Total current assets 7,464,800 12,765,486
Property and equipment, net (Note 2) 99,706 126,567
Investment in and advances to joint venture
(Note 1) 3,004,367 -
Note receivable (Note 1) - 1,872,944
Other assets 23,391 9,363
Total assets $10,592,264 $14,774,360
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $4,113,545 $5,915,513
Accrued liabilities 176,788 138,533
Securities margin liability (Note 3) 427,658 -
Lines of credit (Note 6) 140,000 3,300,000
Total current liabilities 4,857,991 9,354,046
Deferred gain on sale of equipment (Note 1) 933,063 -
Long-term debt (Note 6) 17,793 35,445
Total liabilities 5,808,847 9,389,491
Commitments and contingencies (Notes 1 and 5)
Shareholders' equity (Notes 7, 9, 10 and 11):
Non-convertible, Cumulative, New Series A
preferred stock ($1,960,000 and $2,120,000
liquidation preference in 1997 and 1998) -
$4.80 stated value, shares authorized,
issued and outstanding - 250,000 1,200,000 1,200,000
Common stock, $.01 stated value; shares
authorized - 10,000,000; shares issued
and outstanding - 2,647,839 and 2,705,339 26,478 27,053
Additional paid-in capital 1,610,638 1,721,313
Retained earnings 2,093,246 2,497,327
Treasury stock, 99,000 and 76,500
shares purchased at cost (146,945) (60,824)
Total shareholders' equity 4,783,417 5,384,869
Total liabilities and shareholders' equity $10,592,264 $14,774,360
See accompanying summary of accounting policies and notes to consolidated
financial statements.
Year ended September 30, 1996 1997 1998
Net sales (Notes 7 and 12): $40,644,767 $63,643,054 $79,728,294
Cost of sales (Note 7) 38,752,351 60,823,433 76,032,955
Gross profit 1,892,416 2,819,621 3,695,339
Selling, general and
administrative expenses 1,642,705 2,413,986 2,096,711
Income from operations 249,711 405,635 1,598,628
Other income (expense):
Interest (expense) income, net 6,305 (42,259) (184,715)
Gain on sale of equipment to
related party (Note 1) 135,000 - -
Gain (loss) on sale of investments (56,684) (13,306) (557,438)
Gain on reversal of accrued liability 233,731 - -
Loss on sale of investment in and
advances tojoint venture (Note 1) - - (300,730)
Other - net 78,575 15,305 30,300
396,927 (40,260) (1,012,583)
Income before income taxes 646,638 365,375 586,045
Income taxes (Note 4) (3,200) (15,000) (181,964)
Net income 643,438 350,375 404,081
Dividends applicable to
preferred stock (160,000) (160,000) (160,000)
Net income applicable to
common shares $ 483,438 $ 190,375 $ 244,081
Basic income per common share $ 0.21 $ 0.07 $ 0.10
Basic weighted average number of
common shares outstanding 2,319,568 2,566,144 2,563,017
Diluted income per common share $ 0.20 $ 0.07 $ 0.08
Diluted weighted average number of
common shares outstanding 2,466,816 2,829,423 2,910,985
See accompanying summary of accounting policies and notes to consolidated
financial statements.
Additional
Preferred Stock Common Stock Treasury Stock Paid-In
Shares Amount Shares Amount Shares Amount Capital
Balance,
Oct. 1,1995 250,000 $1,200,000 2,285,375 $22,854 - $ - $ 587,066
Issuance of
common stock - - 248,142 2,481 - - 760,019
Cancellation of
common stock - - (5,400) (54) - - -
Stock subscribed- - - - - -
Net income - - - - - -
Balance,
Sep 30, 1996 250,000 1,200,000 2,528,117 25,281 - - 1,347,085
Issuance of common stock
(Note 8) - - 51,222 512 - - 229,303
Purchase of treasury stock
(Note 9) - - 68,500 685 99,000 (146,945) 34,250
Net income - - - - - - -
Balance, Sep
30, 1997 250,000 1,200,000 2,647,839 26,478 99,000 (146,945 ) 1,610,638
Exercise of stock options
(Note 9) - - 57,500 575 - - 110,675
Re-issuance of treasury stock
(Note 9) - - - - (25,000) 93,750 -
Purchase of treasury stock
(Note 9) - - - - 2,500 (7,629) -
Net income - - - - - - -
Balance, Sep
30, 1998 250,000 $1,200,000 2,705,339 $27,053 76,500 $(60,824) $1,721,313
PCC Group, Inc. and Subsidiaries
Consolidated Statements of shareholders Equity
for the years ended September 30,1995,1996,1997 &1998
(Continued)
Additional
Paid-in Stock Retained
Capital Subscription Earnings Total
Balance Oct.01.1995 $587,006 - $1,099,433 $2,909,353
Issuance common stk. 760,019 - - 762,500
Cancellation of
common stock - - - (54)
Stock subscribed - 230,500 230,500
Net Income - - 643,438 643,438
Balance Sep 30,1996 1,347,085 230,500 1,742,871 4,545,737
Issuance common stk. 229,303 (230,500) - -
Purchase treasury stk. 34,250 - - (112,695)
Net Income 350,375 350,375
Balance Sep 30,1997 1,610,638 - 2,093,246 4,783,417
Exercise stk. options 110,675 111,250
RE-issue Treasury stk.
(note 9) 93,750
Purchase Treasury stk.
(note (9) (7,629)
Net Income 404,081 404,081
Balance Sep 30,1998 1,721,313 - $ 2,497,327 $5,384,869
See accompanying summary of accounting policies and notes to consolidated
financial statements.
Year ended September 30,
1996 1997 1998
Cash flows from operating activities:
Net income $643,438 $350,375 $404,081
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation and amortization 124,902 113,407 46,621
Provision for bad debts 46,000 152,115 159,220
Loss (gain) on sale of fixed assets (6,502) - (7,949)
Gain on sale of equipment (135,000) - -
(Gain) loss on sale of investments 56,684 13,306 557,438
Loss on sale of investment in
joint venture - - 300,730
Increase (decrease) from changes in:
Purchases of investments held
for trading (12,568,358) (12,015,949)(32,437,411)
Proceeds on sales of investments
held for trading 11,589,040 11,991,527 30,618,220
Accounts receivable (260,889) (2,238,154) (71,900)
Receivable from related parties 315,692 208,628 (1,180,718)
Inventory (858,588) 322,574 31,622
Prepaids and other assets (71,313) (92,045) 63,854
Advances to vendors - - (3,034,254)
Accounts payable and accrued
liabilities 270,722 1,898,759 1,763,714
Income taxes payable (19,337) 2,050 -
Net cash provided by (used in)
operating activities (873,509) 706,593 (2,786,732)
Cash flows from investing activities:
Capital expenditures (72,170) (67,810) (79,033)
Purchase of tire recycling equip. (819,315) - -
Proceeds on sale of tire recycling
equipment 300,000 - -
Proceeds on sale of fixed assets 11,587 - 13,500
Principal payments received from
notes receivable -related parties - - 100,000
Net advances (to) from joint venture - - (100,000)
Capital contributions/advances
to joint venture (378,786) (9,119) (3,408)
Net cash (used in) investing
activities (958,684) (76,929) (68,941)
Cash flows from financing activities:
Line of credit- borrowing - 1,400,500 14,920,000
Line of credit - repayments - (1,260,500) (11,760,000)
Proceeds from common stock issue 993,000 - 111,250
Cancellation of common stock (54) - -
Change in margin liability 544,000 (123,797) 983,711
Principal payments on
long-term debt (8,145) (1,413) (5,681)
Borrowing of long-term debt - 17,791 23,333
Purchase of treasury stock - (112,695) (7,629)
Net cash provided by (used in)
financing activities 1,528,801 (80,114) 4,264,984
Net increase (decrease) in
cash and cash equivalents (303,392) 549,550 1,409,311
Cash and cash equivalents,
beginning of year 811,111 507,719 1,057,269
Cash and cash equivalents,
end of year $507,719 $1,057,269 $2,466,580
Supplemental disclosure information:
Cash paid during the year for:
Interest $2,700 $ 19,512 $ 198,702
Income taxes $3,200 $ 12,950 $ 106,000
Supplemental disclosure of non-cash activities:
During fiscal 1998, the Company sold its investment in and advances to a joint
venture (Note 1). In addition, the Company sold its securities and other
negotiable assets (Note 7) and re-issued treasury stock to a financial
advisor (Note 10). As a result, the following non-cash transactions occurred:
Increase (decrease) in assets and (increase) decrease in liabilities from:
Sale of investment:
Investment in and advances to joint venture $(2,807,007)
Notes receivable 1,872,944
Deferred gain 933,063
Accounts receivable 1,000
Sale of securities:
Securities and other negotiable assets (2,278,378)
Notes receivable - related parties 867,009
Stock margin liability 1,411,369
Treasury stock re-issuance:
Prepaid assets 93,750
During fiscal 1997, the Company had no non-cash transactions.
During fiscal 1996, the Company sold tire-recycling equipment to a related party
(Note 1). As a result, the following non-cash transaction occurred:
Increase (decrease) in assets and (increase) decrease in liabilities from:
Sale of equipment:
Receivable from sale of equipment 1,062,270
Intercompany profit elimination (133,625)
Deferred gain on sale of equipment (109,330)
See accompanying summary of accounting policies and notes to consolidated
financial statements.
ORGANIZATION
PCC Group, Inc., a California corporation, and subsidiaries (the "Company") are
primarily engaged in the business of distributing microcomputer components.
The Company has also entered into a new venture to focus on the development
and commercialization of certain environment-related products which will be
marketed principally in the Pacific Rim markets. (See Note 1.) The Company is
located in California and has four wholly-owned subsidiaries. The
accompanying consolidated financial statements include the accounts of the
Company and its subsidiaries. All significant intercompany transactions and
balances have been eliminated.
REVENUE RECOGNITION
The Company recognizes revenue when the risk of loss for the product sold
passes to the customer which is generally when goods are shipped.
ACCOUNTS RECEIVABLE AND CONCENTRATION OF CREDIT RISK
The Company grants uncollateralized credit to its customers who are located in
various geographical areas. The Company maintains its cash accounts in high-
quality financial institutions. At September 30, 1997 and 1998, the Company
had bank balances, including cash, cash equivalents and short-term investments,
of approximately $1,057,269 and $2,466,580, which exceeded federally insured
limits.
INVENTORIES
Inventories consist principally of microcomputer component parts and are stated
at the lower of weighted average cost (first-in, first-out) or market.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization are
computed using the straight-line method over an estimated useful life of five
years.
Maintenance, repairs and minor renewals are charged directly to expense as
incurred. Additions and betterments to property and equipment are
capitalized. When assets are disposed of, the related cost and accumulated
depreciation thereon are removed from the accounts and any resulting gain or
loss is included in operations.
INVESTMENT IN JOINT VENTURE
The investment in joint venture was accounted for, based on the equity method of
accounting. This investment has not been consolidated into these financial
statements due to significant doubt about the Company's ability to control
the joint venture since the tire recycling plant is in China and is subject to
close government supervision.
(See Note 1.)
INCOME TAXES
The Company accounts for income taxes using the liability method, which requires
an entity to recognize deferred tax liabilities and assets. Deferred income
taxes are recognized based on the differences between the tax bases of assets
and liabilities and their reported amounts in the financial statements which
will result in taxable or deductible amounts in future years. Further, the
effects of enacted tax laws or rate changes are included as part of deferred
tax expenses or benefits in the period that covers the enactment date. A
valuation allowance is recognized if it is more likely than not that some
portion, or all of, a deferred tax asset will not be realized.
CASH AND CASH EQUIVALENTS
For the purpose of these statements, cash equivalents include investments with
original maturities of three months or less.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash, trade accounts receivable, notes receivable, trade
accounts payable and accrued payable are reasonable estimates of their fair
value because of the short maturity of these items. The carrying amounts of
the Company's credit facilities approximate fair value because the interest
rates on these instruments are subject to change to market interest rates.
Other long-term notes receivable approximate fair value because the interest
rate was market at the date of issuance which was September 29, 1998. The
fair value of the Company's related party receivables cannot be determined due
to the nature of transaction.
INVESTMENTS
Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for
Certain Investments in Debt and Equity Securities" expands the use of fair
value accounting but retains the use of amortized cost for those debt
securities where there is a positive intent and ability to hold such debt
securities to maturity. The Company has classified its investments in debt
and equity securities into the trading category. The Company's trading
securities are reported at their estimated fair value with unrealized gains and
losses recognized in earnings. The Company recognized gains (losses) on sale
of trading investments of $(56,684), $(13,306) and $(557,438) for the years
ended September 30, 1996, 1997 and 1998.
STOCK BASED COMPENSATION
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
based Compensation" SFAS 123, establishes a fair value method of accounting
for stock-based compensation plans and for transactions in which a company
acquires goods or services from non-employees in exchange for equity instrument
. The Company adopted this accounting standard on October 1, 1996. SFAS 123
also gives the option to account for stock-based employee compensation in
accordance with Accounting Principles Board Opinion No. 25 (APB 25),
"Accounting for Stock issued to Employees," or SFAS 123. The Company elected
to follow APB 25 which measures compensation cost for employee stock options as
the excess, if any, of the fair market price of the Company's stock at the
measurement date over the amount an employee must pay to acquire stock.
EARNINGS PER SHARE
Effective September 30, 1998, the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"). The statement
replaces the calculation of primary and fully diluted earnings (loss) per
share with basic and diluted earnings (loss) per share, the retroactive
application of this SFAS had no impact on previously reported amounts. Basic
earnings (loss) per share includes no dilution and is computed by dividing
income (loss) available to common shareholders by the weighted
average number of shares outstanding during the period. Diluted earnings (loss)
per share reflects the potential dilution of securities that could share in
the earnings of an entity, similar to fully diluted earnings (loss) per share.
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with U.S. 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 financial
statements and the reported amounts of revenue and expenses during the
reporting period. Among the more significant estimates included in these
financial statements are the estimated allowance for doubtful accounts
receivable, provision for slow moving inventory, and the deferred income tax
asset allowance. Actual results could differ from those estimates.
RECLASSIFICATION
Certain reclassifications have been made to conform the prior year's amounts to
the current year's presentation.
NEW ACCOUNTING STANDARDS NOT ADOPTED YET
In February 1998, Statement of Financial Accounting Standards No. 132,
"Employer's Disclosures about Pensions and Other Postretirement Benefits"
(SFAS No. 132) amended the disclosure requirements for pensions and other
postretirement benefits. The Company would not expect the adoption to have
significant change on the Company's financial statement disclosures.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Standards No. 133, "Accounting for Derivative Instruments and
Hedging Activities" (SFAS No. 133). SFAS No. 133 requires companies to
recognize all derivatives contracts as either assets or liabilities in the
balance sheet and to measure them at fair value. If certain conditions are
met, a derivative may be specifically designated as a hedge, the objective
of which is to match the timing of gain or loss recognition on the hedging
derivative with the recognition of (i) the changes in the fair value of the
hedged asset or liability that are attributable to the hedged risk or (ii)
the earnings effect of the hedged forecasted transaction. For a derivative
not designated as a hedging instrument, the gain or loss is recognized in
income in the period of change. SFAS No. 133 is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999.
Historically, the Company has not entered into derivatives contracts either to
hedge existing risks or for speculative purposes. Accordingly, the Company
does not expect adoption of the new standard on January 1, 2000 to affect its
financial statements.
NOTE 1 - INVESTMENT IN AND ADVANCES TO JOINT VENTURES
Dalian Green Resources Joint Venture
The Company entered into a joint venture agreement ("Agreement") with a
corporation in Dalian, China, to build a facility which recycles tires by
utilizing innovative technology and converts the tires into saleable solids,
liquids and gases. Under the Agreement, the Company has agreed to purchase up
to 55% of the equity of Dalian Green Resources Corporation ("DGR") for
$1,660,000 and the contribution by the Company of tire recycling technology.
Through September 30, 1998, the joint venture had no operations and the Company
had contributed tire recycling technology and made cash equity contributions of
$1,550,000. Under the terms of the Agreement, the owners of DGR will share
in the profits of the venture according to their relative equity ownership.
During the years ended September 30, 1997 and 1998, the Company made no equity
contributions.
The Company entered into a licensing agreement with an inventor of tire
recycling technology to utilize his recycling process. Under the terms of
the licensing agreement, the Company has the exclusive right to use this
technology in seven Pacific Rim countries, including China. In return, the
Company issued 50,000 shares of the Company's unregistered stock valued at
$35,000 and will issue an additional 50,000 shares of stock when the tire
recycling plant is operational. The Company has also agreed to repurchase
these shares for $3.00 per share, after the DGR plant is completed if the stock
can not be sold to unrelated parties for at least that price. In addition, the
inventor will receive an annual payment of 20% of the Company's share of the
net profits from the venture. The Company has guaranteed that this annual
payment to the inventor will not be less than $100,000. In addition, the
inventor has the option, at all times for the duration of the agreement, to
purchase unregistered common shares of the Company at one-third of its market
value at the time of purchase. During fiscal 1997, the Company's
relationship with the inventor deteriorated after the technology failed to
perform. The Company has filed action against the inventor for breach of
contract.
The Company also entered into an agreement with DGR to purchase equipment on
DGR's behalf for the tire recycling plant. The Company acquired and resold
this equipment to DGR during fiscal 1995 and 1996. The Company recognized
a gain on the sale to the extent of their nonownership interest (45%) in DGR and
any cash received from DGR. A gain of $135,000, $0 and $0 were recognized
during the years ended September 30, 1996, 1997 and 1998 (see Note 7). The
Company deferred $933,063 of gain from sale of equipment which will be
recognized when the accounts receivable from DGR is collected. The Company had
a receivable of $2,880,693 due from DGR as of September 30, 1997 which is
included in the investment in and advances to joint venture balance.
The investment in and advances to DGR were as follows:
September 30,
1997
Investment in DGR $1,550,000
Start-up costs 300,730
Accounts receivable 2,880,693
Advance to DGR 100,000
Unrecognized gain (1,827,056)
$3,004,367
NOTE 1 - INVESTMENT IN AND ADVANCES TO JOINT VENTURES (Continued)
In addition, summarized financial data of DGR consisted of:
September 30,
1997
Current assets $ 81,000
Non-current assets 14,253,000
Total assets 14,334,000
Current liabilities 3,940,000
Non-current liabilities 7,057,000
Equity 3,337,000
To date, there have been no operations at DGR.
On September 29, 1998, the Company sold American Tire Collection (ATC), a wholly
owned subsidiary, and its investment in and advances to Dalian Green Resource
Co. Ltd. (Dalian) (collectively "the Purchased Assets") to a third party in
exchange for a three year, $3,700,000 secured convertible promissory note
(the Note) plus 1,000 shares of common stock of ATC. The Note is secured by
a first priority lien on all of the assets of ATC, including the Purchased
Assets. The Note bears interest at 6% per annum and is convertible, at the
option of the Company, into 70% of the equity interest of ATC any time during
these three years. As a result of the sale, the Company wrote-off $300,730
of deferred start-up costs. The gain on sale of $1,827,056 will be deferred
and recognized on the installment method as the Note is collected. Note
receivable as of September 30, 1998 is as follows:
September 30,
1998
Note receivable $3,700,000
Unrecognized gain (1,827,056)
Net $1,872,944
NOTE 2 - PROPERTY AND EQUIPMENT
Property and equipment consists of:
September 30,
1997 1998
Furniture, fixtures and equipment $743,398 $743,837
Vehicles 61,966 118,888
Leasehold improvements 8,457 6,900
813,821 869,625
Accumulated depreciation and amortization (714,115) (743,058)
Property and equipment, net $ 99,706 $126,567
NOTE 3 - MARGIN LIABILITY
Until June 20, 1998, the Company invested excess cash in various securities on a
short term margin basis. The investments were made for trading purposes
which involved varying degrees of market risk in excess of amounts recognized
in the balance sheet. In a margin transaction, brokers extend credit to
customers, subject to various regulatory margin requirements, which allow
customers to purchase securities in excess of the underlying collateral.
Margin requirements may not be sufficient to fully cover losses which customers
may incur. Such transactions may expose the Company to significant off-balance-
sheet risk in the event that the value of the securities decline. As of
September 30, 1997, the Company had a securities margin liability of $427,658.
The notional value of the securities owned by the Company as of September 30,
1997 was $1,090,592. On June 20, 1998, the Company sold its entire
investment in securities to a related party (see Note 7). Consequently, the
Company had no securities margin liability as of September 30, 1998.
NOTE 4 - INCOME TAXES
Income taxes are as follows:
Year ended September 30,
1996 1997 1998
Current tax expense:
Federal $ - $ - $ 33,649
State 3,200 15,000 148,315
$ 3,200 $15,000 $181,964
The components of the net deferred tax asset and liability are as follows:
September 30,
1997 1998
Deferred tax asset $1,034,539 $1,026,765
Deferred tax liability (78,571) -
Valuation allowance (955,968) (1,026,765)
$ - $ -
NOTE 4 - INCOME TAXES (Continued)
The types of temporary differences between the tax bases of assets and
liabilities and their financial reporting amounts that give rise to the net
deferred tax asset and liability, and their approximate tax effects, are as
follows:
Year ended September 30,
1997 1998
Excess tax depreciation over book $(23,338) $ -
Inventory and bad debt reserves 77,881 197,117
Accrued vacation 3,585 -
State taxes 1,621 50,427
Installment sales (52,248) -
Shareholder's wages accrual - 23,901
Other - 148
Capital loss carryforwards - 227,138
Net operating loss carryforwards 948,467 528,034
Valuation allowance (955,968) (1,026,765)
$ - $ -
Management is unable to determine whether the realization of the net deferred
tax asset is more likely than not and a 100% valuation allowance has been
established.
The difference between the effective tax rate and that computed under the
federal statutory rate is as follows:
1996 1997 1998
Federal statutory rate 34% 34% 34%
Change in valuation allowance (34) (34) (15)
State taxes, net of federal benefit - 4 24
Effect of lower AMT rate - - (14)
Permanent differences - - 2
-% 4% 31%
During fiscal 1998, the Company utilized $1,492,373 of the net operating loss
carryforward.
As of September 30, 1998, for federal income tax purposes, the Company had
approximately $1.6 million of federal income tax net operating loss
carryforwards expiring through 2001. The annual utilization of the net
operating loss carryforward may be limited due to the provisions of Internal
Revenue Code section 382 and subsequent stock ownership changes by the Company.
NOTE 5 - COMMITMENTS AND CONTINGENCIES
Commitments
The Company leases a building and equipment under noncancelable operating
leases expiring at various dates through 2001. Future minimum rental
payments required under operating leases that have an initial or a remaining
noncancelable lease term in excess of one year at September 30, 1998 are as
follows:
Year ending
September 30, Amount
1999 $44,525
2000 4,440
2001 4,440
2002 4,070
$57,475
Rental expense for the years ended September 30, 1996, 1997 and 1998 was
approximately $148,000, $104,950 and $90,640.
Economic Dependency
A majority of the Company's fiscal 1996, 1997, and 1998 sales were derived from
products supplied by one vendor. While the Company believes that alternative
sources of supply exist, the loss of the right to distribute products from
this vendor might materially and adversely impact its operations.
Lawsuits
The Company is, from time to time, involved in various lawsuits generally
incidental to its business operations, consisting primarily of collection
actions and vendor disputes. In the opinion of management, the ultimate
resolution of these matters, if any, will not have a significant effect on the
financial position, operations or cash flows of the Company.
NOTE 6 - DEBT
The Company has two line of credit agreements expiring April 30, 1999, which
provide for borrowings of up to $8,000,000 which are collateralized by
substantially all of the Company's assets. The balance outstanding under
these lines of credit at September 30, 1997 and 1998 was $140,000 and $3,300,000
, respectively. The borrowings under these agreements bear interest at the
prime rate (8.5% at September 30, 1998) plus 1%. The terms of the line of
credit agreements contain, among other provisions, requirements for
maintaining defined levels of working capital, tangible net worth, annual
capital expenditures and a debt-to-equity ratio. The Company was in
compliance with the financial covenants contained in the line of credit
agreements at September 30, 1998.
During September 1997 and December 1997, the Company entered into two equipment
loans maturing through 2002 and 2001, respectively. These loans bear interest
of 8.9% and 9.7%, respectively, and are collateralized by certain equipment.
NOTE 7 - RELATED-PARTY TRANSACTIONS
The Company conducts business with certain companies that are owned wholly or in
part by certain shareholders of the Company. On the accompanying
consolidated balance sheets, receivables from related parties consist of
trade accounts receivable of $313,637 and $1,494,355 as of September 30, 1997
and 1998. During fiscal 1996, the Company utilized the services of one of
its related parties based in China to help assist in the assembly and
maintenance of equipment which was sold to DGR. A consulting fee of $300,000 was
charged against the 1996 sale of equipment to DGR (see Note 1) for the
services of this related party.
Included in the accompanying consolidated statements of income are sales to
related parties of $3,640,732, $2,744,229 and $2,693,628 for the years ended
September 30, 1996, 1997, and 1998 and purchases from related parties of
$49,880, $179,302 and $2,182,756 for the years ended September 30, 1996, 1997
and 1998. In addition the Company has an outstanding loan with a related
party, as of September 30, 1997 and 1998 of $54,017 and $54,017. Consulting
fees of $300,000 were paid to a related party during fiscal 1997, for
administrating and designing the technology of the tire recycling plant.
During 1992, the Company sold its 51% interest in an apparel company to a
related shareholder for $408,000, which consisted of $204,000 in cash and a
note receivable in the amount of $204,000. In connection with the sale, the
Company entered into a management agreement to provide certain management,
accounting and administrative support services to this corporation. The note
receivable, which is collateralized by the shares of this corporation, bears
interest at 8% per annum with the principal balance and any unpaid accrued
interest due June 30, 1997. As of September 30, 1997, the outstanding balance
on this note receivable was $100,000, and was collected during fiscal 1998.
During June 1998, the Company sold its entire portfolio of securities and other
negotiable assets to a related party (the Seller) in exchange for a one year,
$1,250,000 secured promissory note (the Note). The Note is secured by the
transferred securities and 250,000 shares of the Company's Series A preferred
stock owned by the Seller. The Note bears interest of 8.5% and is payable
quarterly. The amount of the note exceeded the fair value of the securities
by $382,991 on the transaction date. The Company has recorded a deferred gain
which will be recognized as the Note is collected. The Note receivable as of
September 30, 1998 is as follows:
September 30,
1998
Note receivable $ 1,250,000
Deferred gain (382,991)
Net $ 867,009
NOTE 8 - EARNINGS PER SHARE
The components of basic and diluted earning per share were as follows:
Year Ended September 30,
1996 1997 1998
Numerator
Net income $643,438 $350,375 $404,081
Preferred stock dividends (160,000) (160,000) (160,000)
Income available for common stockholders $483,438 $190,375 $244,081
Denominator
Weighted average number of common
shares outstanding during the period 2,319,568 2,566,144 2,563,017
Add: Assumed exercise of outstanding
stock options 147,248 263,279 347,968
Common stock and common stock
equivalents used for diluted EPS 2,466,816 2,829,423 2,910,985
Per share amounts
Basic earnings per share $ 0.21 $ 0.07 $ 0.10
Diluted earnings per share $ 0.20 $ 0.07 $ 0.08
NOTE 9 - PREFERRED AND COMMON STOCK
During the year ended September 30, 1992, the Company's articles of
incorporation were amended and a $15,000,000 note was cancelled in exchange
for 250,000 shares of Series A non-voting, non-convertible preferred stock.
The preferred stock accumulated dividends at the rate of $1 per share per year
and is redeemable, at the Company's option, for $60 per share. No dividends
were declared by the Company during fiscal 1992. The preferred stock was
given a $15,000,000 ($60 per share) liquidation preference value.
On December 31, 1992, in order to more accurately reflect the financial
condition of the Company and to provide a more appealing situation to
potential equity investors, the Company issued 250,000 shares of a new series of
preferred stock, designated New Series A preferred stock in exchange for the
250,000 shares of outstanding Series A preferred stock. The non-voting,
non-convertible New Series A preferred stock accumulates dividends at the
rate of $0.64 per share per year. No dividends were declared during fiscal
1996, 1997 or 1998.
The New Series A preferred stock was given a liquidation preference value and a
redemption price of $4.80 per share ($1,200,000 total liquidation preference)
plus cumulative unpaid dividends which totalled $760,000 and $920,000 at
September 30, 1997 and 1998. The New Series A preferred stock is redeemable, at
the Company's option, at any time.
NOTE 9 - PREFERRED AND COMMON STOCK (Continued)
During fiscal year 1996, the Company had three private placement offerings. The
first two private placement offerings, 248,142 shares were issued at
approximately $3.40 a share. Net proceeds received were $762,500 and
expenses associated with the offerings were $80,000 which was charged to
contributed capital in excess of par. As of September 30, 1996, no stock was
issued for the third private placement offering. Accordingly, the net
proceeds of $230,500 from the third private placement was reflected on the
financial statements as Stock Subscriptions. In November 1996, 51,222
shares were issued for the third private placement offering.
During fiscal year 1997 and 1998 the Company was not involved in a private
offering.
During fiscal year 1998, the Company issued 57,500 shares of common stock upon
the exercise of various stock options and warrants at prices ranging from $1.50
to $2.50.
NOTE 10 - TREASURY STOCK
From time to time, the Company's Board of Directors has authorized the
repurchase of shares of the Company's common stock in the open market.
During fiscal 1997, the Company repurchased 30,500 shares of treasury stock at
an average per share cost of $3.50. In prior years the Company purchased
68,500 shares of treasury stock at an average per share cost of $.50. The
Company treated the purchase of treasury stock as though the stock was cancelled
. During fiscal 1997, it was determined that the treasury stock was not
cancelled, and the 68,000 shares of common stock were included in treasury
stock.
During fiscal 1998, the Company repurchased 2,500 shares of treasury at an
average per share cost of $3.05. In addition, the Company re-issued 25,000
shares to a financial advisor as compensation for future services to be
performed and recorded prepaid consulting fees of $93,750. The Company has
76,500 shares of treasury stock which may be used for any corporate purpose.
NOTE 11 - STOCK OPTIONS AND WARRANTS
The Company provides a non qualified stock option plan and an incentive stock
option plan for its employees, officers and directors.
The non qualified stock option plan authorizes the granting of options to
purchase up to an aggregate maximum of 500,000 shares of common stock, with
an exercise price at least equal to the fair market value of the shares at
the date of grant, to designated employees, executive officers and directors of
the Company. The stock option term is for a period of ten years from the
date of grant or such shorter period as is determined by the Board of
Directors. Each stock option may provide that it is exercisable in full or in
cumulative or noncumulative installments, and each stock option is
exercisable from the date of grant or any later date specified therein, all as
determined by the Board of Directors. This plan terminates in the year 2002. To
date 292,300 shares of stock options were issued to employees, officers and
directors under the non qualified stock option plan. During fiscal year 1997,
20,000 shares of stock options were granted to one of the Company's directors.
The incentive stock option plan provides for the issuance of up to 200,000
shares of common stock to designated employees and executive officers of the
Company, of which, 122,700 shares were granted to the Company's officers.
During fiscal year 1997 and 1998, the Company did not issue additional stock
options under the incentive stock option plan.
NOTE 11 - STOCK OPTIONS AND WARRANTS (CONTINUED)
The Company applies APB Opinion No. 25 and related interpretations in accounting
for its stock option plans. Accordingly, no compensation cost has been
recognized for its stock option plans. Had compensation cost for the
Company's stock option plans been determined consistent with FASB No. 123, the
Company's net income and earning per share would have been reduced to the pro
forma amounts included below:
Year ending September 30,
1996 1997 1998
Net income attributable to
common stockholders:
As reported $ 483,438 $ 190,375 $ 244,081
Pro forma 350,438 45,440 202,798
Diluted income per common share
As reported .20 .07 .08
Pro forma .14 .02 .07
During March 1998, the Company entered into an Exclusive Financial Advisor/
Investment Banker Agreement. In connection with this agreement, the Company
issued warrants to purchase 300,000 shares of common stock with exercise
prices ranging from $2.50 to $5.00 per share. Of the 300,000 stock warrants
issued, 100,000 are immediately exerciseable and 200,000 are exerciseable upon
certain performance objectives being met. None of the performance requirements
were fulfilled during the year. The warrants expire one year following the
grant date. The Company has not recorded any compensation expense in
connection with the issuance of these warrants, as their value was not
considered significant.
A summary of changes in stock options and warrants during each year is
presented below:
Year ended September 30,
1996 1997 1998
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
Options and warrants
outstanding at
beg. of year 300,000 $1.15 395,000 $1.52 415,000 $1.54
Options and warrants
granted 95,000 2.70 20,000 2.00 300,000 3.81
Options and warrants
cancelled - - - - (82,500) 2.64
Options and warrants
exercised - - - - (57,500 ) 1.93
Options and warrants at
end of year 395,000 $ 1.52 415,000 $ 1.54 575,000 $ 2.49
Options and warrants
exercisable at end of
year 212,300 1.87 292,300 1.47 252,300 1.56
Weighted-average fair
value of options and
warrants granted
during the year $ .52 $ 3.10 $ .40
NOTE 11 - STOCK OPTIONS AND WARRANTS (CONTINUED)
The following table summarizes information about the stock options and warrants
outstanding at September 30, 1998.
Options and
Options and Warrants Outstanding Warrants Exercisable
Weighted
Number Average Weighted Number Weighted
Outstanding Remaining Average Exerciseable Average
at Contractual Exercise at Exercise
Exec.Price 9/30/98 Life Price 9/30/98 Price
$1.25 to
$1.50 315,000 1.9 years $1.29 192,300 $1.27
$2.00 to
$3.50 110,000 2.04 years 2.95 60,000 2.50
$4.50 to
$5.00 150,000 0.4 years 4.67 - -
$1.25 to
$5.00 575,000 1.55 years $2.49 252,300 $1.56
Options and warrants exercisable at September 30, 1998 have an average exercise
price of $1.56. The fair value of the stock options and warrants granted
during 1998 and 1997 was $50,214 and $120,403, respectively, on the date of
grant using the Black Scholes option-pricing model. The weighted-average
assumptions used were as follows:
Year ended September 30,
1997 1998
Discount rate - bond yield rate 6% 5%
Volatility 75.34% 107.03%
Expected life 5 years 1 year
Expected dividend yield - -
NOTE 12 - SIGNIFICANT CUSTOMER
During fiscal 1998 and 1997, 16% and 25% of the Company's net sales were
generated from one customer. During fiscal 1996, the Company did not have any
significant customers.
NOTE 13 - ADVANCES TO VENDORS
During 1998, the Company entered into an agreement with a related party
(the Party) in which the Company would acquire certain customized equipment on
behalf of the Party. As of September 30, 1998 the Company made an advance to
a vendor of $3,034,254 to manufacture the equipment. The Company has
received a letter of credit in the amount of $3,830,000 from the related
party.
Amount
Beginning Charged Ending
Description Balance to Expense Deductions Balance
Allowance for doubtful accounts:
Fiscal 1996 $ 264,000 $ 46,000 $ 211,000 $ 99,000
Fiscal 1997 $ 99,000 $152,000 $ 216,000 $ 35,000
Fiscal 1998 $ 35,000 $159,000 $ 51,000 $143,000
Reserve for inventory obsolescence:
Fiscal 1996 $341,000 $ 30,000 $ - $371,000
Fiscal 1997 $371,000 $ - $ 146,000 $225,000
Fiscal 1998 $225,000 $ 51,000 $ $276,000
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
PCC GROUP, INC.
Date: December ___, 1998 By:_________________________
Jack Wen
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
__________________________ Chairman of the Board and December ___, 1998
Jack Wen Chief Executive Officer
__________________________ Vice President and December ___, 1998
Donald Johnson Chief Financial Officer
(Principal Financial and
Principal Accounting Officer)
__________________________ Director December ___, 1998
Gary Blum
__________________________ Director December ___, 1998
George Rodda, Jr.
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
PCC GROUP, INC. AND SUBSIDIARIES
We hereby consent to the incorporation by reference in the Registration
Statement (Form S-3 No. 333-57607) , of our report dated December 08,, 1998,
with respect to the consolidated financial statements and schedule of PCC
Group, Inc and Subsidiaries Inc. included in the Company's Annual Report
(Form 10-K) for the year ended September 30, 1998.
Los Angeles, California BDO SEIDMAN, LLP
December _08 1998
F-1
PCC GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
F-4
PCC GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
PCC GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1995, 1996 AND 1997
PCC GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
F-6
PCC GROUP, INC. AND SUBSIDIARIES
SUMMARY OF ACCOUNTING POLICIES
F-9
PCC GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-14
PCC GROUP, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1997 AND 1998
F-20
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