<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended Commission File
March 31, 1998 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 91768
Pomona, California (Zip Code)
(Address of principal executive office)
Registrant's telephone number, including area code: (909) 869-6133
Indicate by check mark, whether the registrant 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 report),and has been subject to such
filing requirements for the past 90 days.
Yes x No.___
As of March 31, 1998, the registrant had outstanding 2,647,839 shares of its
Common Stock, $.01 par value per share.
<PAGE> 2
ITEM 1. FINANCIAL STATEMENTS
PCC GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
In thousands
(Unaudited)
<TABLE>
<CAPTION>
March 31, September 30,
ASSETS 1998 1997
---------------------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $996 $1,057
Securities and other negotiable assets 1,813 1,017
Accounts receivable, less allowances for
possible losses of $104,025 and $34,447 3,456 3,958
Receivable from related parties 54 368
Notes receivable - related parties 100 100
Inventory, less reserves for obsolescence
of $696,973 and $225,082 2,813 735
Prepaids and other current assets 565 230
------ -----
TOTAL CURRENT ASSETS 9,797 7,465
PROPERTY AND EQUIPMENT, Net 139 100
INVESTMENTS IN AND ADVANCES TO
JOINT VENTURES 3,105 3,004
OTHER ASSETS 18 23
------- -------
TOTAL ASSETS $13,059 $10,592
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE> 3
PCC GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
In thousands
(Unaudited) (Concluded)
<TABLE>
<Caption
LIABILITIES AND March 31, September 30,
SHAREHOLDERS EQUITY 1997 1998
-----------------------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $5,725 $4,113
Line of credit 140
Accrued liabilities 187 177
Securities margin liability 653 428
----------------------------
TOTAL CURRENT LIABILITIES 6,565 4,858
DEFERRED GAIN ON SALE OF EQUIPMENT 933 933
LONG TERM DEBT 39 18
7,537 5,809
---------------------------
SHAREHOLDERS' EQUITY
Non-convertible, Cumulative, New Series A preferred
Stock ($1,200,000 liquidation preference) - $4.80
stated value, shares authorized, issued and
Outstanding - 250,000 1,200 1,200
Common stock, $.01 stated value; shares authorized,
10,000,000; shares issued and outstanding -
2,647,839 and 2,647,839 26 26
Contributed capital in excess of stated value 1,611 1,611
Retained earnings 2,832 2,093
Treasury stock, 99,000 shares purchased at cost (147) (147)
-----------------------------
TOTAL SHAREHOLDERS' EQUITY 5,522 4,783
-----------------------------
TOTAL LIABILITIES AND SHAREHOLDERS'EQUITY $13,059 $10,592
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE> 4
PCC GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
In thousands, except per share data
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
1998 1997 1998 1997
--------------------------------------
<S> <C> <C> <C> <C>
Net sales $19,734 $13,610 $43,479 $27,289
Cost of sales 18,661 12,848 41,291 25,875
------------------- ------------------
Gross profit 1,073 762 2,188 1,414
Selling, general and administrative
Expenses 513 514 1,053 911
------------------- -----------------
Income from operations 560 248 1,135 503
Other income (expense)
Gain (loss) on sale of investments 209 (229) (274) (286)
Interest (expense) income, net (23) (46)
Other (6) 1 7 (13)
------------------- -----------------
180 (228) (313) (299)
Net income before income taxes 740 20 822 204
Income taxes 74 2 82 20
------------------ ----------------
Net income $666 $18 $740 $184
================= ===============
Income per share
Net income $0.25 $0.01 $0.28 $0.07
Dividends applicable to preferred
Stock (0.02) (0.02) (0.02) (0.03)
----------------- ----------------
Net income (loss) applicable to
Common shares $0.23 ($0.01) $0.26 $0.04
================ ===============
Average weighted number of shares 2,647,839 2,579,339 2,647,839 2,562,265
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE> 5
PCC GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
In thousands, (Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
March 31,
1998 1997
----------------
<S> <C> <C>
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES
Net income $740 $184
Depreciation and amortization 34 69
Provision for bad debts 103 60
Increase (decrease) from changes in:
Investments in securities (796) 382
Accounts receivable 502 (2,503)
Receivables from related parties 314 522
Inventory (2,078) (417)
Prepaids and other assets (330) (339)
Accounts payable and accrued liabilities 1,622 3,018
---------------
Net cash provided by (used in)
operating activities 111 876
CASH FLOW FROM INVESTING ACTIVITIES:
Capital purchases (177) (15)
Net investments in and advances to joint venture (101) (389)
--------------
Net cash provided by (used in) investing activities (278) (404)
CASH FLOW FROM FINANCING ACTIVITIES:
Change in margin liability 225 (110)
Change in line of credit (140)
Borrowings long term debt 21
-----------------
Net cash provided by (used in) financing activities 106 (110)
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (61) 362
CASH AND CASH EQUIVALENTS,
beginning of year 1,057 508
---------------
CASH AND CASH EQUIVALENTS,
end of quarter $966 $870
===============
Cash paid during the year for:
Interest $45 $15
Income taxes $0 $0
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE> 6
PCC GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
PCC Group, Inc. ("PCCG" or the "Company") is principally a wholesale
distributor of microcomputer products. The Company serves a select client
base, which includes Value Added Resellers ("VAR's"), system integrators and
dealers. Since 1993, PCCG began to establish an environmental resources
division. In connection therewith, the Company is in the process of
completing it first scrap tire recycling plant located in Dalian Peoples
Republic of China. This facility will be operated by Dalian Green Resources
Corporation ("Dalian Green"), a joint venture in which the Company holds a
fifty-five percent interest and China Dalian Materials Development
Corporation, a Chinese entity, holds a forty-five percent interest. The
Company's corporate office and warehouse is located in Pomona, California.
Note 1 - Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring adjustments) considered
necessary for fair presentation have been included. Operating results for
the six months period ended March 31, 1998, are not necessarily indicative of
the results that may be expected for the year ending September 30, 1998. For
further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's annual report on Form 10-K for
the year ended September 30, 1998.
Note 3 - Income Taxes
As of September 30, 1997, for federal income tax purposes, the Company had
approximately $2.7 million in net operating loss carryforwards expiring through
2001. The annual utilization of the operating loss carryforward may be
significantly limited due to the adverse resolution, if any, with respect to
the loss carryover provisions of Internal Revenue Code section 382 in
connection with certain stock issuances by the Company.
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Except for historical information contained herein, the matters setforth in this
report are forward-looking statements within the meaning of the "save harbor"
provisions of the Private Securities Litigation Act of 1995. These forward-
looking statements are subject to risks and uncertainties that may cause actual
results to differ materially. The company disclaims any interest or
obligations to update these forward-forward statements.
<PAGE> 7
Three Months Ended March 31, 1998 as Compared to the Three Months Ended March
31, 1997
Net sales of $19.7 million for the quarter ended March 31, 1998 increased by
$6.1 million (45%) over net sales of $13.6 million for the similar 1997 period.
This increase was due to the combined effects, on volume, on an increase in
hard disk sales, and on pricing, of continued competitive pricing.
Gross profit for the second quarter of 1998 was $1.1 million, a 40.8%
increase, when compared to $762,000 during the prior year's comparable period
reflecting a growth in unit sales along with lower profit margins. Gross
profit as a percentage of net sales slightly decreased from 5.6% in the second
quarter of 1997 to 5.4% in the second quarter of 1998 due to market oversupply
pricing pressures.
Selling, general and administrative expenses remained largely unchanged from
$513,000 in the second quarter of fiscal 1998 compared to $514,000 for the
comparable fiscal 1997 period. As a percentage of revenue, SG&A expenses
decreased from 3.8% in 1997 to 2.6% in 1998. Strict cost controls maintained
SG&A expenses in sync with prior year's levels.
Income from operations increased 126% from $248,000 in the second quarter of
fiscal 1997 to $560,000 in the comparable fiscal 1998 period, principally
reflecting increased billings and volume related SG&A expense reductions.
Operating income as a percentage of net sales increased from 1.8% in 1997 to
2.8% in the comparable 1998 quarter.
Other income increased by $408,000 in 1998 when compared to $(228,000) for the
comparable fiscal 1997 period. The variance was mainly attributable to profits
on sale of securities investments.
Net income increased to $666,000, or $0.24 per share (after preferred stock
dividend deduction), in the second quarter of fiscal 1998 compared to $18,000,
or $(0.01) per share (after preferred stock dividend deduction) for the same
fiscal 1997 quarter.
Six Months Ended March 31, 1998, as Compared to the Six Months Ended March 31,
1997
Net sales increased 59.3% from $27.3 million in 1997 to $43.5 million in 1998.
Revenue growth was primarily driven by a demand for high capacity hard disks.
Gross profits increased by 54.7% from $1.4 million in the six-month period
ended on March 31, 1997 to $2.2 million in the comparable fiscal 1998 period,
principally due new hard disk product offerings. Gross profit as a percentage
of net sales slightly decreased form 5.2% in 1997 to 5% in the similar 1998
six month period due to intense competitive pricing.
Selling, general and administrative expenses increased by $142,000 (15.6%)
during the 1998 first six-month period when compared to $911,000 for the
comparable fiscal 1997 period. As a percentage of revenue, SG&A decreased from
<PAGE> 8
3.3% in 1997 to 2.4% in 1998. Strong cost controls allowed the Company to
operate efficiently without hiring new personnel, or incurring in additional
administrative expenses.
Income from operations increased 126% from $1.1 million in 1998 to $503,000 for
the comparable fiscal 1997 period. As a percentage of net sales, operating
income increased from 1.8% in 1997, to 2.6% in 1998, mainly reflecting
increased billings and lower administrative expenses.
Other income (loss) for the 1998 period principally reflects continued losses,
in the aggregate of $(313,000), in the sale of corporate securities. During
the comparable 1997 period, the Company reported a $(299,000) loss mainly
attributable to the sale of similar investments.
Net income increased threefold to $740,000, or $0.26 per share (after preferred
stock dividend deduction), in the six months ended March 31, 1998 compared to
$184,000 for the same fiscal 1997 period.
At the end of fiscal 1997, the Company had net operating loss carryforwards
available to offset future taxable income of approximately $2.7 million. It is
not possible at this time to determine that the realization of the net deferred
tax asset as of September 30, 1997 is more likely than not; accordingly, a 100%
valuation allowance has been established.
Liquidity and Capital Resources
Since May 1994, the Company has primarily operated with internally generated
cash flow and vendor lines of credit. During the second quarter of fiscal
1997, the Company entered into a line of credit agreement, which provides
accounts receivable, and inventory based borrowings of up to $3 million.
Net cash provided by (used in) operating activities in 1998 was $111,000, as
compared to $876,000 in 1997 mainly reflects the net effects of cash provided
by accounts payable and accrued liabilities, offset by increases in
investments in securities, inventory and, prepaids and other assets. During
the quarter, corporate securities purchases totaled $8,426,222 while
divestitures amounted $9,741,930.
Net cash provided (used in) investing activities in 1998 was $(278,000), as
compared to $(404,000) in 1997 and principally consists of inter-company
activity.
Net cash provided (used in) financing activities in 1998 was $(61,000) as
compared to $362,000 in 1997 and mainly reflects changes in the use of a
securities margin credit facility and an asset-based line of credit.
The Company plans to fund the growth of its distribution business with
internally generated funds, vendor lines and asset-based financing. The
Company is pursing various alternatives intended to enhance shareholder value,
and recently retained an investment banker anticipating a cycle of accelerated
growth opportunities. The Company also intends to become an active player
within the environmental resources industry when its Dalian, PRC,
tire-recycling facility commences operations. Furthermore, the Company
<PAGE> 9
continues to explore the development of new recycling projects. There can be
no assurances that it will be successful in satisfying its diversification
objectives. For a description of the Company's investment in Dalian and its
role as a technology provider, see Note 1 to the Company's Consolidated
Financial Statements for the year ended on September 30, 1997.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has dully caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PCC GROUP, INC.
(Registrant)
Date: May 11, 1998 /s/ JACK WEN
----------------------
Jack Wen
Chairman of the Board, President and
Chief Executive Officer
Date: May 11, 1998 /s/ J. LAURO VALDOVINOS
-------------------------
J. Lauro Valdovinos
Vice President - Finance and Chief
Financial Officer (Principal
Financial and Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED STATEMENT OF INCOME AND CONSOLIDATED BALANCE SHEET AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> MAR-31-1998
<CASH> 996
<SECURITIES> 1813
<RECEIVABLES> 3352
<ALLOWANCES> 104
<INVENTORY> 2813
<CURRENT-ASSETS> 9797
<PP&E> 870
<DEPRECIATION> 731
<TOTAL-ASSETS> 13059
<CURRENT-LIABILITIES> 6565
<BONDS> 0
1200
0
<COMMON> 26
<OTHER-SE> 4296
<TOTAL-LIABILITY-AND-EQUITY> 13059
<SALES> 43479
<TOTAL-REVENUES> 43479
<CGS> 41291
<TOTAL-COSTS> 949
<OTHER-EXPENSES> 255
<LOSS-PROVISION> 104
<INTEREST-EXPENSE> 58
<INCOME-PRETAX> 822
<INCOME-TAX> 82
<INCOME-CONTINUING> 740
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 740
<EPS-PRIMARY> .28
<EPS-DILUTED> .26
</TABLE>
