SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
AMENDMENT NO. 1
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the fiscal year ended September 30, 1997.
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF
THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
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 (I.R.S. Employer
Identification No.) of incorporation or organization)
163 University Parkway, Pomona, California 91768
(Address of principal executive offices)
(Zip Code)
Registrant's telephone number, including area code:
(909) 869-61 33
Name of each exchange
Securities registered pursuant to Section 12(b)
of the Act: Title of each class on which
registered None None
Securities registered pursuant to Section 12(g)
of the Act: Common Stock, $.01 par value
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
Check mark indicates that disclosure of delinquent
filers pursuant to Item 405 of Regulation S-K 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 [ ].
The aggregate market value of the voting stock
of the registrant held by non-affiliates of the
registrant on January 12, 1998 based on the
average bid and asked prices reported by NASDAQ on
such date was approximately $9,103,270.00.
Registrant's Common Stock outstanding at January 12,
1998 was 2,647,839 shares.
DOCUMENTS INCORPORATED BY REFERENCE: Portions of
the registrant's proxy statement for its
Annual Meeting of Shareholders to be held
March 3, 1998 are incorporated by reference into
Part III as set forth herein.
PCC Group, Inc. and Subsidiaries
Report on Audited Consolidated Financial Statements
For the Years Ended September 30, 1995, 1996 and 199
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, 1996 and 1997, and
the related consolidated statements of income,
shareholders' equity and cash flows for each of
the three years in the period ended September 30,
1997. We have also audited the schedule listed
in Item 14(a)(2) of this Form 10k. 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 $2,995,248
and $3,004,367 as of September 30, 1996 and
1997. Those statements were audited by other
auditors whose reports have been furnished to us, and
in 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 auditor, 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, 1996
and 1997, and the results of their operations and
their cash flows for each of the three years in the
period ended September 30, 1997 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 5, 1997
PCC GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 1996 1997
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $507,719 $1,057,269
Securities and other
negotiable assets 1,005,509 1,016,625
Accounts receivable, less
allowances for possible
losses of$99,000 and$34,447 1,872,497 3,958,535
Receivable from related
parties (Note 7) 576,282 367,654
Notes receivable - related
parties (Note 7) 100,000 100,000
Inventory, less reserves
for obsolescence of
$371,000 and $225,082 1,057,247 734,673
Prepaids and other
current assets 80,685 230,044
TOTAL CURRENT ASSETS 5,199,939 7,464,800
PROPERTY AND EQUIPMENT,
net (Note 2) 145,303 99,706
INVESTMENT IN AND ADVANCES TO
JOINT VENTURE (Note 1) 2,995,248 3,004,367
OTHER ASSETS 80,703 23,391
TOTAL ASSETS $8,421,193 $10,592264
See accompanying summary of accounting policies
and notes to consolidated financial
statements.
PCC GROUP, INC.AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Concluded)
September 30, 1996 1997
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $2,262,026 $4,113,545
Current portion of long-term
debt (Note 6) 1,414 -
Accrued liabilities 127,498 176,788
Securities margin liability
(Note 3) 551,455 427,658
Line of credit (Note 6) - 140,000
TOTAL CURRENT LIABILITIES 2,942,393 4,857,991
DEFERRED GAIN ON SALE OF
EQUIPMENT (Note 1) 933,063 933,063
LONG-TERM DEBT, (Note 6) - 17,793
3,875,456 5,808,847
COMMITMENTS AND CONTINGENCIES (Notes 1 and 5)
SHAREHOLDERS' EQUITY (Notes 8 and 9):
Non-convertible, Cumulative,
New Series A preferred stock
($1,800,000 and $1,960,000
liquidation preference in
1996and1997)-$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 -
2,528,117 and 2,647,839 25,281 26,478
Contributed capital in
excess of stated value 1,347,085 1,610,638
Stock subscribed (Note 8) 230,500 -
Retained earnings 1,742,871 2,093,246
Treasury stock, 99,000
shares purchased at cost - (146,945)
TOTAL SHAREHOLDERS' EQUITY 4,545,737 4,783,417
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 8,421,193 $10,592,264
See accompanying summary of accounting policies
and notes to consolidated financial statements.
PCC GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Year ended September 30, 1995 1996 1997
NET SALES (Note 7) $40,473,158 $40,644,767 $63,643,054
COST OF SALES(Note7) 38,959,851 38,752,351 60,823,433
Gross profit 1,513,307 1,892,416 2,819,621
SELLING, GENERAL AND
ADMIN. EXPENSES 2,157,655 1,642,705 2,413,986
Income(loss)from
operations (644,348) 249,711 405,635
OTHER INCOME (EXPENSE):
Interest(expense)income 25,788 6,305 (42,259)
Gain on sale of equipment
to related party (Note 1) 426,802 135,000 -
Gain (loss) on sale of
investments 205,536 (56,684) (13,306)
Gain on reversal
of accrued liability - 233,731 -
Other - net 30,300 78,575 15,305
688,426 396,927 (40,260)
Income before taxes 44,078 646,638 365,375
INCOME TAXES (Note 4) (19,337) (3,200) (15,000)
NET INCOME 24,741 643,438 350,375
Dividends applicable
to preferred stock (160,000) (160,000) (160,000)
NET INCOME(LOSS) APPLICABLE
TO COMMON SHARES $(135,259) $ 483,438 $190,375
INCOME PER SHARE:
Net income(loss)applicable
to common shares $ (0.06) $ 0.20 $.07
WEIGHTED AVERAGE NUMBER
OF COMMON SHARES AND
COMMON EQUIVALENTS 2,285,375 2,466,816 2,566,144
See accompanying summary of accounting policies
and notes to consolidated financial statements.
PCC GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1995, 1996 AND 1997
Contributed
Capital in
Preferred Stock Common Stock Treasury Stock
Shares Amount Shares Amount Shares Amount
BALANCE, October 1, 1994 250,000 $1,200,000 2,285,375 $22,854 - $ -
Net income - - - - - -
BALANCE,September 30,1995 250,000 1,200,000 2,285,375 22,854 - -
Issuance of common stock - - 248,142 2,481 - -
Canceln of common stock - - (5,400) (54) - -
Stock subscribed - - - - - -
Net income - - - - - -
BALANCE,September 30,1996 250,000 1,200,000 2,528,117 25,281 - -
Issuance of common stock
(Note 8) - - 51,222 512 - -
Purchase of treasury
stock (Note 9) - - 68,500 685 99,000 (146,945)
Net income - - - - -
BALANCESeptember30,1997 250,000 $1,200,000 2,647,839$26,478 99,000 $(146,945)
(Continued)
Contributed
Capital in
Excess of Stock Retained
Stated Value Subscription Earnings Total
Balance,October 1,1994 $587,066 $ - $1,074,692 $2,884,612
Net Income - - 24,741 24,741
Balance Sept. 30,1995 587,066 - 1,099,433 2,909,353
Issuance common stock 760,019 - - 762,500
Cancellation com.stk. - - - (54)
Stock subscribed - 230,500 - 230,500
Net income - - 643,438 643,438
Balance Sept. 30,1996 1,347,085 230,500 1,742,871 4,545,737
Issuance of common stk 229,303 (230,500) - -
Purchase of treasury
stock (note 9 ) 34,250 - - (112,695)
Net Income - - 350,375 350,375
Balance Sept. 30, 1997 $1,610,638 - $2,093,246 $4,783,417
See accompanying summary of accounting policies
and notes to consolidated financial statements.
PCC GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
Year ended September30, 1995 1996 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 24,741 $643,438 $350,375
Adjustments to reconcile net
income to net cash provided
by (used in) operating activities:
Depreciation and amortization 130,655 124,902 113,407
Provision for bad debts 228,000 46,000 152,115
Loss (gain) on sale of fixed assets 1,086 (6,502) -
Gain on sale of equipment (426,802) (135,000) -
(Gain) loss on sale of investments (205,536) 56,684 13,306
Increase (decrease) from changes in:
Purchases ofinvestments held
for trading (3,654,041) (12,568,358)(12,015,949)
Proceeds on sales of investments
held for trading 3,776,702 11,589,040 11,991,527
Accounts receivable (23,036) (260,889) (2,238,154)
Receivable from related parties 401,880 315,692 208,628
Income taxes receivable 130,000 - -
Inventory 1,781,781 (858,588) 322,574
Prepaids and other assets 24,763 (71,313 (92,045)
Accounts payable and accrued
liabilities (1,969,924) 270,722 1,898,759
Income taxes payable 19,337 (19,337) 2,050
Net cash provided by (used in)
operating activities 239,606 (873,509) 706,593
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (20,803) (72,170) (67,810)
Purchase of tire recycling equipment (2,251,552) (819,315) -
Proceeds on sale of tire recycling
equipment 3,200,000 300,000 -
Proceeds on sale of fixed assets 1,500 11,587 -
Principal payments on notes receivable -
related parties 65,358 - -
Net advances (to) from joint venture (430,000) - -
Capital contributions/advances to
joint venture (198,430) (378,786 (9,119)
Net cash provided by (used in)
investing activities 366,073 (958,684 (76,929)
See accompanying summary of accounting policies
and notes to consolidated financial
statements. PCC GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH
FLOWS (Continued)
Increase (Decrease) in Cash and Cash
Equivalents
Year ended September 30, 1995 1996 1997
CASH FLOWS FROM FINANCING ACTIVITIES:
Line of credit - borrowing - - 1,400,500
Line of credit - repayments - - (1,260,500)
Due to related party (500,000) - -
Proceeds from common stock issuance - 993,000 -
Cancellation of common stock - (54) -
Change in margin liability 7,455 544,000 (123,797)
Principal payments on long-term debt (7,389) (8,145) (1,413)
Borrowing of long-term debt - - 17,791
Purchase of treasury stock - - (112,695)
Net cash provided by (used
in) financing activities (499,934) 1,528,801 (80,114)
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 105,745 (303,392 549,550
CASH AND CASH EQUIVALENTS,
beginning of year 705,366 811,111 507,719
CASH AND CASH EQUIVALENTS,
end of year $811,111 $507,719 $1,057,269
Cash paid during the year for:
Interest $ 4,758 $ 2,700 $19,512
Income taxes $ 15,050 $ 3,200 $12,950
See accompanying summary of accounting policies
and notes to consolidated financial
statements. PCC GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH
FLOWS (Concluded)
Increase (Decrease) in Cash and Cash
Equivalents
SUPPLEMENTAL DISCLOSURE OF NON-CASH
ACTIVITIES:
During fiscal 1997, the Company did not have
non-cash transactions.
During fiscal 1996, the Company sold additional 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
Non-cash portion of intercompany
profit elimination (133,625)
Deferred gain on sale of
equipment (109,330)
During fiscal 1995, the Company sold tire-recycling
equipment to a related party (Note 1). In
addition, the Company defaulted on a note
payable and the creditor has commenced foreclosure
proceedings on the property (Note 5). As a result,
the following non-cash transactions occurred:
Increase (decrease) in assets and (increase)
decrease in liabilities from:
Sale of equipment:
Receivable from sale of equipment $ 2,130,518
Non-cash portion of intercompany
profit elimination (1,171,785)
Deferred gain on sale of equipm (958,733)
Default on note payable and
foreclosure on land: Unimproved land $(384,000)
Current portion of long-term debt 350,000
Accrued liabilities 34,000
See accompanying summary of accounting policies
and notes to consolidated financial statements.
PCC GROUP, INC. AND SUBSIDIARIES
SUMMARY OF ACCOUNTING POLICIES
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.
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, 1996 and 1997, the Company had
bank balances, including cash, cash equivalents and
short-term investments, of approximately $507,719
and $1,057,269, 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 is 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.
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.
PCC GROUP, INC. AND SUBSIDIARIES
SUMMARY OF ACCOUNTING POLICIES
(Continued)
INCOME TAXES
Deferred income taxes are recognized for tax
consequences in future years of differences between
the tax bases of assets and liabilities and their
financial reporting amounts at each fiscal year-end
based on enacted tax laws and statutory tax
rates applicable to the periods in which the
differences are expected to affect taxable income.
Valuation allowances are established when necessary
to reduce deferred tax assets to the amount expected
to be realized.
CASH AND CASH EQUIVALENTS
For the purpose of these statements, cash
equivalents include investments with original
maturities of three months or less.
INCOME (LOSS) PER COMMON SHARE
Income (loss) per common share has been determined
by dividing net earnings (loss) (after deducting
annual cumulative preferred stock dividends for
the respective fiscal year; $160,000, $160,000 and
$160,000 for the years ended September 30, 1995, 1996
and 1997) by the weighted average number of common
and common equivalent shares outstanding. Weighted
average shares are computed using the treasury
stock method, under which common equivalent shares
include exercisable stock options reduced by the
number of shares which could be purchased from
the proceeds. Stock options are not included for
the 1995 calculation since their effect would be
anti-dilutive.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of financial instruments
including cash and cash equivalents, investments,
receivables, and payables approximate their fair value
due to the relatively short maturity of these
instruments.
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 had gains
(losses) on sale of investments of $205,536, $(56,684)
and $(13,306) for the years ended September 30, 1995,
1996 and 1997.
PCC GROUP, INC. AND SUBSIDIARIES
SUMMARY OF ACCOUNTING POLICIES
(Continued)
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 instruments. 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.
ACCOUNTING ESTIMATES
The preparation of financial statements in
conformity with generally accepted accounting
principles requires management to make estimates and
assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent
assets and liabilities at the date of the
financial statements and the reported amounts of
revenues and expenses during the reporting period.
Actual results could differ from those estimates.
RECLASSIFICATION
Certain reclassifications have been made to conform
the prior year's amounts to the current year's
presentation.
NEW ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standard No. 128,
(SFAS No. 128), "Earnings Per Share," issued by the
Financial Accounting Standards Board is effective for
financial statements issued for the periods ending
after December 15, 1997, including interim periods.
The SFAS 128 requires restatement of all periods
EPS data presented. The new standard also requires a
reconciliation of the numerator and denominator of
the basic EPS computation to the numerator and
denominator of the diluted EPS computation. The
Company has not determined the effect on its EPS
calculation from the adoption of this statement.
Statement of Financial Accounting Standard No. 129
(SFAS No. 129), "Disclosure of Information about
Capital Structure," issued by the Financial
Accounting Standards Board is effective for
financial statements issued ending after December 15,
1997. The new standard reinstates various
securities disclosure requirements previously in
effect under Accounting Principles Board Opinion
No. 15, which has been superseded by SFAS No. 129.
The Company does not expect adoption of SFAS No. 129
to have a material effect, if any, on its financial
position or results of operations.
PCC GROUP, INC. AND SUBSIDIARIES
SUMMARY OF ACCOUNTING POLICIES
(Concluded)
NEW ACCOUNTING PRONOUNCEMENTS (Continued)
Statement of Financial Accounting Standard No. 130 (SFAS No.
130), "Reporting Comprehensive Income," issued by the
Financial Accounting Standards Board is effective for financial
statements with fiscal years beginning after December 15, 1997.
Earlier application is permitted. SFAS No. 130 establishes
standards for reporting and display of comprehensive income and
its components in a full set of general-purpose financial
statements. The Company has not determined the effect on its
financial position or results of operations, if any, from the
adoption of this statement.
Statement of Financial Accounting Standard No. 131 (SFAS No. 131),
"Disclosure about Segments of an Enterprise and Related
Information," issued by the Financial Accounting Standards Board
is effective for financial statements with fiscal years beginning
after December 15, 1997. The new standard requires that public
business enterprises report certain information about operating
segments in complete sets of financial statements of the
enterprises and in condensed financial statements of interim
periods issued to shareholders. It also requires that public
business enterprises report certain information about their
products and services, the geographic areas in which they operate
and their major customers. The Company has not determined the
effect on its financial position or results of operations, if any,
from the adoption of this statement.
PCC GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED 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.
This facility is expected to be completed in early 1998. 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, 1997, 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, 1996 and 1997,
the Company made equity contributions of $378,786 and $0. The
Company is required to make an equity contribution amounting to
$110,000 in fiscal 1998.
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 gain on the sale to
the extent of their nonownership interest (45%) in DGR and cash
received from DGR. A gain of $426,802, $135,000 and $0 were
recognized during the years ended September 30, 1995, 1996 and
1997 (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
$2,871,574 and $2,880,693 due from DGR as of September 30, 1996
and 1997 which is included in the investment in and advances to
joint venture balance.
The investment in and advances to DGR compose of as follows:
September 30, 1996 1997
Investment in DGR $1,550,000 $1,550,000
Start-up costs 300,740 300,740
Accounts receivable 2,871,574 2,880,693
Advance to DGR 100,000 100,000
Unrecognized gain (1,827,066) (1,827,066)
$2,995,248 $ 3,004,367
PCC GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 1 - INVESTMENT IN AND ADVANCES TO JOINT VENTURES (Continued)
In addition, summarized financial data of DGR consists of:
September 30, 1996 1997
Current assets $650,000 $81,000
Non-current assets 11,862,000 14,253,000
Total assets 12,512,000 14,334,000
Current liabilities 3,934,000 3,940,000
Non-current liabilities 5,113,000 7,057,000
Equity 3,465,000 3,337,000
To date, there have been no operations at DGR.
Hainan Joint Venture
On April 23, 1996, the Company entered into a new joint venture
with the Hainan Shenhai Energy Resource and Chemical Industry
Co. Ltd., China Hainan Yung Tzuo Enterprise Co., and DGR for
construction and operation of a second tire recycling plant in
China. Capital contributions have yet to be made by any partners.
The Company will have a 40% interest and will provide the
technology and equipment worth $1.375 million along with an equity
contribution of $825,000.
NOTE 2 - PROPERTY AND EQUIPMENT
Property and equipment consists of:
September 30, 1996 1997
Furniture, fixtures and equipment $810,225 $743,398
Vehicles 35,872 61,966
Leasehold improvements 6,900 8,457
852,997 813,821
Accumulated depreciation and amortization (707,694) (714,115)
Property and equipment, net $145,303 $99,706
NOTE 3 - MARGIN LIABILITY
The Company invests excess cash in various securities on a short
term margin basis. The investments are made for trading purposes
which involve 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, 1996 and 1997, the Company had
securities margin liability of $551,455 and $427,658. The
national value of the securities owned by the Company at September
30, 1997 was $1,090,592.
PCC GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 4 - INCOME TAXES
Income taxes are as follows:
Year ended September 30, 1994 1995 1996 Current
Federal $ - $ - $ -
State 19,377 3,200 15,000
$19,377 $3,200 $15,000
The components of the net deferred tax asset and
liability are as follows:
September 30, 1996 1997
Deferred tax asset $1,238,307 $1,034,539
Deferred tax liability (98,428) (78,571)
Valuation allowance (1,139,881) (955,968)
$ - $ -
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, 1996 1997
Excess tax depreciation over book $(45,507) $(23,338)
Inventory and bad debt reserves 203,222 77,881
Accrued vacation 2,814 3,585
State taxes 1,088 1,621
Installment sales (52,248) (52,248)
Other 3,008 -
Net operating loss carryforwards 1,027,504 948,467
Valuation allowance (1,139,881) (955,968)
$ - $ -
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.
PCC GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 4 - INCOME TAXES (Continued)
The difference between the effective tax rate and that computed
under the federal statutory rate is as follows:
1995 1996 1997
Federal statutory rate 34% 34% 34%
Federal utilization of net
operating loss carryforwards (34) (34) (34)
State taxes, net of federal benefit - - 4.1
-% -% 4.1%
During fiscal 1997, the Company utilized tax benefit of
$350,375 from the net operating loss carryforward.
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 the acquisition of WMD 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, 1997 are as follows:
Year ending
September 30,
1998 $ 73,978
1999 31,021
2000 13,018
2001 13,018
2002 3,328
$134,363
Rental expense for the years ended September 30, 1995, 1996 and
1997 was approximately $146,000, $148,000 and $104,950.
Economic Dependency
A majority of the Company's fiscal 1995, 1996, and 1997 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.
PCC GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 5 - COMMITMENTS AND CONTINGENCIES (Continued)
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
During the year, the Company entered into a line of credit
agreement expiring May 19, 1998, which provides for
borrowings of up to $3,000,000 which is collateralized by certain
inventory and accounts receivable. The balance outstanding under
this line of credit at September 30, 1997 was $140,000. The
borrowings under this agreement bear interest at the prime rate
(8.5% at September 30, 1997) plus 1.25%. The terms of the line of
credit agreement 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 agreement at September 30, 1997.
In addition, during September 1997, the Company entered into
an equipment loan maturing through 2002. This loan bears
interest of 8.9% and is 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 $576,282 and $367,654 as of September 30, 1996 and
1997. 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 $4,221,767, $3,640,732 and $2,744,229
for the years ended September 30, 1995, 1996, and 1997 and
purchases from related parties of $103,844, $49,880 and
$179,302 for the years ended September 30, 1995, 1996 and 1997.
In additional the Company has an outstanding loan with a related
party, as of September 30, 1996 and 1997, in the amount of $0 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, 1996 and 1997, the outstanding balance
on this note receivable was $100,000.
PCC GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 8 - 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 1995, 1996 or 1997.
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 $600,000 and $760,000 at September 30,
1996 and 1997. The New Series A preferred stock is redeemable, at
the Company's option, at any time. During fiscal year 1996, the
Company had three private placement offerings. For 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 are 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 the Company was not involved in a private
offering.
NOTE 9 - 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 year 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. Thus the 68,000 shares of common stock were
included in treasury stock. The Company holds a total of 99,000
shares of treasury stock which may be used for any corporate
purpose.
PCC GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 10 - STOCK OPTION PLAN
The Company provides a non qualified stock options 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. 122,700 shares were granted to
the Company's officers. During fiscal year 1997, the Company did
not issue additional stock options under the incentive stock
option plan.
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 ended September 30, 1996 1997
Net income attributable to
common stockholders: As reported 643,438 350,374
Pro forma 510,288 205,439
Net income applicable to common shares
As reported .02 .07
Pro forma .12 .02
PCC GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Concluded)
NOTE 10 - STOCK OPTION PLAN (Continued)
The stock option plan summary and changes during each year is
presented below:
Year ended September 30,
1995 1996 1997
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
Options outstanding at
beginning of year 300,000 $1.15 300,000 $ 1.15 395,000 $1.52
Options granted - - 95,000 2.70 20,000 2.00
Options cancelled - - - - - -
Options exercised - - - - - -
Options at end of
year 300,000 $1.15 395,000 $ 1.52 415,000 $1.54
Options exercisable
at end of year 117,300 1.12 212,300 1.87 292,300 1.47
Weighted-average fair
value of options
granted during the
year $ - $ .52 $ 3.10
The following table summarizes information about the
stock options outstanding at September 30, 1997.
Options Outstanding Options Exercisable
Number Weighted Average Weighted Number Weighted
Range of Outstanding Remaining Average Exercisable Average
Exer.Price at 9/30/97 Contractual Life Exercise
Price at 9/30/97 Exer. Price
$1.12 to 1.50 355,000 5.5 years $ 1.20 232,300 $1.21
$2.00 to 3.50 60,000 5.0 years 2.50 60,000 2.50
$1.12 to 3.50 415,000 5.7 years $1.90 292,300 $1.47
PCC GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Concluded)
NOTE 10 - STOCK OPTION PLAN (Continued)
Options exercisable at September 30, 1997 have an
average exercise price of $1.86. The fair value
of the stock options granted during 1997 and 1996
was $62,000 and $50,214, 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, 1996 1997
Discount rate - bond yield rate 6% 6%
Volatility 75.34% 75.34%
Expected life 5 years 5 years
Expected dividend yield - -
NOTE 11 - SIGNIFICANT CUSTOMER
During fiscal 1997, 25% of the Company's net sales
were generated from one customer. During fiscal
1995 and 1996 the Company did not have any
significant customers.
PCC GROUP, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED SEPTEMBER 30, 1995, 1996 and 1997
Amount
Beginning charged Ending
Description balance to expense Deductions balance
Allowance for doubtful
accounts:
Fiscal 1995 $ 96,000 $228,000 $ 60,000 $264,000
Fiscal 1996 $264,000 $ 46,000 $211,000 $ 99,000
Fiscal 1997 $ 99,000 $152,000 $216,000 $ 35,000
Reserve for inventory
obsolescence:
Fiscal 1995 $184,000 $157,000 $ - $341,000
Fiscal 1996 $341,000 $ 30,000 $ - $371,000
Fiscal 1997 $371,000 $ - $146,000 $225,000
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d)
of the Securities Exchange Act of 1934, the
Registrant has duly caused this Amendment No. 1
to be signed on its behalf by the undersigned,
thereunto duly authorized.
Dated: September 4, 1998
PCC GROUP, INC.
By: /s/ Jack Wen
Jack Wen
Chairman of the Board,
Chief Executive Officer and President
November 25, 1997
DALIAN GREEN RESOURCES CO. LTD.
____________________________
REPORT ON AUDITED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1996 AND 1997
_____________________________
Dalian Green Resources Co. Ltd.
Index to Financial Statements
Report of Independent Certified Public Accountants F-2
Financial Statements
Balance Sheets F-3
Statements of Operations F-4
Statement of Investor Equity F-5
Statements of Cash Flows F-6
Summary of Accounting Policies F-7
Notes to Financial Statements F-
Dalian North Certified Public Accountants Office
Golden Horse Road, North Accounting Company Building, Dalian Development Zone
Telephone: 86-411-765-5664; Fax: 86-411-761-1017
Reference: Enterprise with Foreign Investment (1997) 297
The Board of Directors
Dalian Green Resources Co. Ltd.
We have audited the accompanying balance sheets and cash flow statements of
Dalian Green Resources Co. Ltd. as of September 30, 1996 and 1997. These
financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements.
We conducted our audit in accordance with independent audit standards for
certified public accountants in China. During the process of audit, we
implemented all necessary audit procedures including examining accounting
records on a sampling basis.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position and changes in financial
position as of September 30, 1996 and 1997 in conformity with Accounting
Standards for Enterprises and Accounting Regulation for Enterprises with
Foreign Investment in China on a consistent basis.
Dalian North Certified Public Accountants Office
Chinese Certified Public Accountants:
Zhao Yong and Liu Hongtao
November 25, 1997
RMB RMB US$
September 30,, 1996 1997 1997
Assets
Current assets:
Cash and cash equivalents 4,916,000 151,000 $18,189
Other receivable 244,000 129,000 15,539
Inventory (Note 1) 235,000 394,000 47,460
Total current assets 5,395,000 674,000 81,188
Property, plant and
equipment, net (Note 2) 1,816,000 1,401,000 168,761
Construction in progress 87,246,000 106,121,000 12,783,044
Land usage rights 6,449,000 6,449,000 776,829
Organizational expenses 2,967,000 4,355,000 524,591
Total assets 103,873,000 119,000,000 $14,334,413
Liabilities and Investors' Equity
Current liabilities:
Bank loan (Note 3) 3,800,000 1,000,000 $120,457
Rel. party loan (Note 5) 830,000 1,679,000 202,247
Tax payable (40,000) (44,000) (5,300)
Accounts payable(Note 5) 24,262,000 24,301,000 2,977,232
Accrued liabilities 3,811,000 5,777,000 695,882
Total current liabilities 32,663,000 32,713,000 3,940,518
Long-term
bank loan (Note 4) 20,339,000 20,299,000 2,445,162
Long-term related
party loan (Note 5) 21,482,000 37,568,000 4,525,338
Deferred exchange gain 621,000 710,000 85,525
Total liabilities 75,105,000 91,290,000 10,996,543
Commitments and contingencies
Investors equity:
Paid-in capital 23,199,000 23,199,000 4,070,000
Additional
paid-in capital 5,569,000 4,511,000 -
Retained earnings - - -
Translation adjustments (732,129)
Total investors' equity 28,768,000 27,710,000 3,337,871
Total liabilities and
investors' equity 103,873,000 119,000,000 $14,334,413
See accompanying summary of accounting policies and notes
to consolidated financial statements
Dalian Green Resources Co. Ltd.
Statement of operations
RMB RMB US$
Years ended September 30, 1996 1997 1997
Net sales - - $-
Cost of sales - - -
Gross profit - - -
Selling expense - - -
General and adminis. expense - - -
Income from operations - - -
Other income (expense) - - -
Income before income taxes - - -
Income taxes - - -
Net income - - $-
See accompanying summary of accounting policies and
notes to consolidated financial statements.
Dalian Green Resources co. ltd.
Investors Equity
Paid in Capital
Dalian Additional
Material PCC Paid-in Retained
Development Group, Inc. Capital Earnings Total
Jan. 1, 1996 14,364,000 7,125,000 4,784,000 - 26,273,000
Capital
injection
in 9/96 1,710,000 785,000 2,495,000
Dec. 31, 1996 14,364,000 8,835,000 5,569,000 - 28,768,000
Reverse overpaid additional
paid-in capital by Chinese
partner (1,058,000) (1,058,000)
Dec. 31, 1997 14,364,000 8,835,000 4,511,000 - 27,710,000
See accompanying summary of accounting policies and
notes to consolidated financial statements.
Dalian Green Resources ltd.
Statemetns of Cash Flows
Increase(Decrease) in Cash and Cash Equivalents
RMB RMB
Year ended September 30, 1996 1997
Cash flows from operating activities:
Net income - -
Adjustments to reconcile net
loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 150,000 253,000
Gain on disposal of fixed assets - (38,000)
Increase (decrease) from changes in:
Other receivable 47,000 115,000
Inventory (235,000) (159,000)
Tax refund receivable (39,000) (4,000)
Accounts payable 6,189,000 39,000
Accrued liabilities 3,213,000 1,966,000
Net cash provided by (used in)
operating activities 9,325,000 2,172,000
Cash flows from investing activities
Proceeds of selling of vehicle - 200,000
Purchase of equipment and mach. (847,000) -
Additions to const. in prog. (20,100,000) (18,875,000)
Additions to land usage rights (363,000) -
Increase in organize expenses (1,502,000) (1,388,000)
Net cash used in
investing activities: (22,872,000) (20,063,000)
Cash flows from financing activities:
Repayment of short-term
bank loan (4,559,000) (2,800,000)
Repayment of long-term
bank loans - (40,000)
Proceeds of contrib. capital 2,495,000 -
Proceeds of short-term
related party loans - 849,000
Proceeds of long-term
related party loans 12,560,000 15,028,000
Proceeds of long-term
bank loans 4,117,000 -
Net cash provided by
financing activities 14,613,000 13,037,000
Effect of exchange rate
changes on cash 97,000 89,000
Net increase in cash and
cash equivalents 1,163,000 (4,765,000)
Cash and cash equivalents,
beginning of year 3,753,000 4,916,000
Cash and cash equivalents,
end of year 4,916,000 151,000
Non-cash transaction:
Additional paid-in capital - (1,058,000)
Long-term related party loans - 1,058,000
See accompanying summary of accounting policies and
notes to consolidated financial statements.
Basis of Presentation
Dalian Green Resources Co. Ltd. (the Company) is a foreign
investment joint venture with registered capital of
US$5.6 million and established under the law of People's
Republic of China on July 27, 1993. Among the equity
interest of the Company, PPC Group, Inc., accounted for 55%
and Dalian Material Development Co. Ltd. accounted for 45%.
In accordance with the joint venture agreement, PCC Group,
should invest US$1,660,000 in cash and invest the innovative
technology and know-how with an equivalent of US$1,420,000
whereas Dalian Material Development Co. Ltd. should invest
all US$2,520,000 in cash.
The Company has been building a facility that recycles used
tires by utilizing innovative technology and converts
used tires into saleable solids, liquids and gases.
The facility was in a status close to starting commercial
operation as of September 30, 1997, however, the Company has
been waiting for obtaining government permits to import
used tires from the U.S. Consequently, the Company has not
started commercial operation yet.
Basis of Accounting
The financial statements are prepared in accordance with
Accounting Standards for Enterprises and Accounting
Regulation for Enterprises with Foreign Investments in China.
The financial statements are presented in
Renminbi Yuan.
Statements of Operations
As the Company has not started operation yet,
there is no activity shown on statements of operations.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an
original maturity of three months or less to be cash
equivalents.
Inventory Valuation
Inventory consists mainly of used tires and is stated at
the lower of cost or market. Inventory is valued at the lower
of cost (first-in-first-out basis) or net realizable value.
Foreign Currency Translation and Transactions
The financial position and results of operations of the
Company are determined using local currency as the
functional currency. Assets and liabilities denominated
by foreign currency are translated at the prevailing
exchange rate in effect at each year end. Contributed capital
accounts are translated using the historical rate of
exchange when capital was actually injected. Gains and losses
resulting from foreign currency transactions are
included in other expense. The financial position of
September 30, 1997 was converted into U.S. dollar amount.
The relevant translation adjustments arising from the use of
different exchange rates from period to period are
included in the cumulative translation adjustment account
in investors' equity. However, the gain and loss
resulting from foreign currency transaction during start-up
period was recorded as a deferred item per Chinese
accounting regulation.
Property, Plant and Equipment
Property, plant and equipment are stated at cost.Depreciation
is computed primarily utilizing the straight-line method
over the estimated useful lives of the assets as follows:
Estimated Useful Life
(in years)
Plant and building 20
Machinery and equipment 10
Computer, office equipment and furniture 5
Vehicles 5
Maintenance, repairs and minor renewals are charged directly
to expenses as incurred. Additions and betterment 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 the statement of income.
Construction in Progress
Construction in progress represents the recycle facility
located in Dalian Development Zone in China. The construction
in progress is stated at cost.All direct costs relating to the
construction of the plant are capitalized as long-term assets.
A total of RMB 15,880,000 of interest has been capitalized.
Organizational expenses
Organizational expenses represents costs incurred in connection
with the setting up of the Company and its plant in order to
operate on a commercial basis. Such costs are capitalized and
amortized over a period of five years from the date of
commencement of business.
Use of Estimates
The preparation of financial statements in conformity with
Accounting Standards for Enterprises and Accounting
Regulation for Enterprises with Foreign Investment in China
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. Actual results
could differ from those estimates.
Dalian Green Resources Co. Ltd.
Notes to Financial Statements
Note 1. Inventory
September 30, 1996 1997
Used tires 235,000 235,000
Spare parts / others - 161,000
Total 235,000 394,000
Note 2. Property, Plant and Equipment
Property, plant and equipment consists of:
September 30, 1996 1997
Computer, office equip. and furniture 4,000 4,000
Vehicles 2,005,000 1,796,000
2,009,000 1,800,000
Accumulated
depreciation and amortization (193,000) (399,000)
Property, plant and equipment, net 1,816,000 1,401,000
Note 3. Bank Loan
A summary of short-term bank loans
September 30, 1996 1997
Construction Bank of China:
Line of credit with the maximum
principal of RMB 1,000,000
interest rate at 17.85% per annum
and due June 25, 1997 and
renewed on the annual basis 1,000,000 1,000,000
Investment Bank of China:
Loan 1, principal of RMB 800,000,
interest rate at 18% per annum
and due March 20, 1997. The loan
was paid off in March, 1997 800,000 -
Loan 2,Principal of RMB 1,400,000,
interest rate at 18% per annum
and due at April 20, 1997. The loan
was paid off in April, 1997 1,400,000 -
Loan 3, principal of RMB 600,000,
interest rate at 18% per annum
and due at June 20, 1997. The loan
was paid off in June, 1997 600,000 -
3,800,000 1,000,000
Note 4. Long-Term Bank Loan
In October, 1994 the Company entered into a long-term foreign
currency loan agreement with a commercial bank to obtain a
principal of US$1,900,000 with a floating interest rate around
11% which would mature on March 15, 1996. During November, 1995,
the Company obtained another US$500,000 from the same bank with
the same term. The Company failed to repay this loan on a timely
basis. During April, 1996, the Company renegotiated the loan with
the Bank. The Bank agreed to extend the loan until the Company
has necessary cash flow after its commercial operation starts
and charge a penal interest rate of 14% on the accumulated unpaid
interest during the extended period. The change of panel interest
rate is subject to the central bank's notice in China.
The outstanding balance of this loan at September 30, 1996 and
1997 was RMB 20,339,000 and 20,299,000, respectively. During
the fiscal year of 1997, the Company paid back RMB 40,000.
Note 5. Related Party Transactions
Short-term related party loans
In December 1995, PCC Group, Inc. advanced US$100,000 to the
Company. This related party loan did not have any specified
interest rate and mature term. The relevant RMB amount as of
September 30, 1996 and 1997 was 830,000 and 829,000,
respectively, due to charge of exchange rates.
In February and March, 1997, Dalian Material Development Co.
Ltd. provided a loan of RMB 200,000 and 650,000 respectively.
The loan contracts specified that the interest rate on these
two loans shall be similar to the interest rate charged by
any commercial bank and should be repaid within one year.
Long-term related party loans
Starting from June 1994, Dalian Material Development Co.
Ltd. on behalf of the Company entered into various loan
contracts with different Chinese commercial banks to obtain
necessary funding for the Company. The most of these bank
loans were guaranteed by Dalian Material Development Co.
Ltd. Since the Company has not started its expected
commercial operation yet, the most of these loans were
overdue and subject to the penal interest rate imposed
on the interest calculation. On the aggregate basis,
the interest rate was around 18% per annum. The change
of penal interest rate is subject to the central bank's
notice in China. The following table summarized the
outstanding long-term related party loans as of
September 30, 1996 and 1997.
September 30, 1996 1997
Long-term related party loans 21,482,000 37,568,000
Dalian Green Resources Co. ltd.
Notes to Financial Statements
Purchase of equipment from PCC Group, Inc.
In 1995, the Company purchased a set of tire recycle
equipment from PCC Group, Inc. with the total purchase
price of US$5,330,518 and paid US$3,200,000 with an
outstanding balance payable to PCC Group, Inc. of
US$2,130,518, approximately RMB 17,683,299 which
was included in accounts payable balance as of September
30, 1995.
In 1996, the Company purchase a set of activated carbon
black equipment from PCC Group, Inc. with total price of
US$1,062,270 and paid US$300,000. In addition, the Company
received a price discount of US$21,214 for the equipment
purchased in 1995. Consequently, the total outstanding
balance payable to PCC Group, Inc. was US$2,871,574,
approximately RMB 23,834,064 which was included in
accounts payable balance as of September 30, 1996.
In 1997, the Company received a price adjustment of
US$9,118 for the equipment purchased in 1996 and the
outstanding balance payable to PCC Group, Inc. was
US$2,880,693, approximately RMB 23,909, 752 which was
included in accounts payable balance as of September 30, 1997.
Note 6. Reconciliation to U.S. GAAP
In July 1992, Chinese government implemented the new
Accounting Standards for Enterprises and revised its
Accounting Regulation for Enterprises with Foreign
Investment. Based on these new Chinese GAAP and
accounting regulation, the gap of accounting
practice between China and the U.S. was decreased
significantly. In the audited financial statements of
Dalian Green Resources Co., Ltd. as of September 30,
1996 and 1997, there were no significant difference
between Chinese GAPP and the U.S. GAAP as the Company
has not started its commercial operation yet.
