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, 1999 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, 1999, the registrant had outstanding 2,751,339 shares of
its Common Stock, $.01 par value per share.
PCC GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
In thousands
(Unaudited)
March September
31, 30,
ASSETS 1999 1998
CURRENT ASSETS:
Cash and cash equivalents $943 $2,467
Accounts receivable, less allowances for
possible losses of $206,963 &34,447 2,811 3,872
Receivable from related parties 771 1,548
Notes receivable - related parties 867
Inventory, less reserves for
obsolescence of $277,684 & $166,484 444 703
Prepaids and other current assets 511 274
Advances to Vendors 3,398 3,034
TOTAL CURRENT ASSETS 8,878 12,765
PROPERTY AND EQUIPMENT, Net 167 126
INVESTMENTS IN AND ADVANCES TO
JOINT VENTURES 1,874 1,872
OTHER ASSETS 203 9
TOTAL ASSETS $11,122 $14,774
.
PCC GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
In thousands
(Unaudited) (Concluded)
LIABILITIES AND March 31, September
30,
SHAREHOLDERS EQUITY 1999 1998
CURRENT LIABILITIES:
Accounts payable $2,983 $5,916
Line of credit 900 3,300
Accrued liabilities 139 65
TOTAL CURRENT LIABILITIES 3,948 9,354
LONG TERM DEBT 29 35
Total Liabilities 3,977 9,389
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 1,250 1,200
Convertible preferred stock 8%
(see separate note for Conversion rates.) 750
Common stock, $.01 stated value; shares authorized
10,000,000; shares issued and outstanding -
2,647,839and 2,751,339 27 27
Contributed capital in excess of stated value 1,961 1,721
Retained earnings 3,307 2,497
Treasury stock, 99,000 shares purchased at cost (100) (60)
TOTAL SHAREHOLDERS' EQUITY 7,145 5,385
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $11,122 $14,774
PCC GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
In thousands, except per share data
(Unaudited)
Three Months Ended Six Months Ended
March 31 March 31,
1999 1998 1999 1998
Net sales $17,445 $19,734 $45,238 $43,479
Cost of sales 16,732 18,661 43,278 41,291
Gross profit 713 1,073 1,960 2,188
Selling, general and administrative
Expenses 761 513 1,355 1,053
Income from operations (48) 560 605 1,135
Other income (expense)
Gain (loss) on sale of 383 209 383 (274)
investments
Interest (expense) income, net (71) (23) (152) (46)
Other (6) 6 7
312 180 237 (313)
Net income before income taxes 264 740 842 822
Income taxes (27) 74 32 82
Net income $291 $666 $810 $740
Income per share
Net income $.11 $.25 $0.30 $0.28
Dividends applicable to preferred (.02) (.02) (0.02) (0.02)
stock
Net income (loss) applicable to $.09 $.23 $0.28 $0.26
common Shares
Average weighted number of shares 2,742,039 2,647,839 2,727,979 2,647,839
Diluted Income per share $.08 $.22 $.27 $.25
Average number of diluted shares
of Common stock outstanding 2,915,247 2,852,985 2,915,247 2,852,985
PCC GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
In thousands, (Unaudited)
Six Months Ended
March 31,
1999 1998
NET CASH PROVIDED (USED) BY OPERATING
ACTIVITIES
Net income $ 840 $ 740
Depreciation and amortization 34 34
Provision for bad debts (172) 103
Increase (decrease) from changes in:
Investment in Securities (796)
Accounts receivable 1,233 502
Receivables from related parties 1,644 314
Inventory 259 (2,078)
Prepaids and other assets (938) (330)
Accounts payable and accrued
Liabilities (3,012) 1,622
Net cash provided by (used in)
Operating activities (112) 111
CASH FLOW FROM INVESTING ACTIVITIES:
Capital purchases (177)
Net investments in and advances to joint (2) (101)
venture
Net cash provided by (used in) investing (2) (278)
activities
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from common stock issuance 990
Change in line of credit (2,400) (119)
Change in margin liability 225
Net cash provided by (used in)
Financing activities (1,410) 106
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS ($1,524) 50
CASH AND CASH EQUIVALENTS,
Beginning of year 2,467 1,057
CASH AND CASH EQUIVALENTS,
end of quarter $ 943 $ 966
Cash paid during the year for:
Interest $81 $45
Income taxes $0 $0
The accompanying notes are an integral part of these consolidated
consolidated financial statements.
PCC GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 three month period ended March 31, 1999, are not
necessarily indicative of the results that may be expected for the year
ending September 30, 1999. 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 2 - Income Taxes
As of September 30, 1998, for federal income tax purposes, the Company
had approximately $1.6 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 "safe 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-
looking statements.
Three Months Ended March 31, 1999 as Compared to the Three Months Ended
March 31, 1998
Net sales for the quarter ended March 31, 1999 decreased by $2.3
million (12%) over net sales of $19.7 million for the similar 1998 fiscal
quarter. This decrease was due to a decrease in PC hardware sales in March
and part of February.
Gross profit for the second quarter of 1999 was $.7 million, an 33.6%
decrease from the second quarter of 1998. The decrease in gross profit was
the result of a soft market in PC hardware. Gross profit as a percentage
of net sales decreased from 5.4% in the second quarter of 1999 to 4.0% in
the second quarter of 1999. The reduction was due to market oversupply of
hard disk drives which resulted in pricing pressures that required the
Company to reduce its gross margins.
Selling, general and administrative expenses increased to $761,000 in
the second quarter of fiscal 1999 compared to $513,000 for the comparable
fiscal 1998 period. As a percentage of revenue, SG&A expenses increased
from 2.6% in 1998 to 4.4% in 1999. The increase in SG&A was due to the
increased overhead associated with the start-up of the company's new inter-
net business.
Income from operations decreased 56.6% to $(48,000) in the second
quarter of fiscal 1999 from $560,000 in the comparable fiscal 1998 period.
The decrease in income from operations was due to competittive market in PC
hardware, and the overhead associated with the start-up of the company's
new inter-net business..
Other income/expense increased to $312,000 in 1999 when compared to
$180,000 for the comparable fiscal 1998 period. The increase was
attributable to recognizing a gain on the stock portfolio. The Company
collected a receivable during the current quarter for its stock portfolio
which it sold in 1998, the sale was reserved at that time reflecting the
sold its portfolio of securities during the fiscal year ended September 30,
1998. Since the company sold it stock portfolio it will no longer
experience gains or losses attributable to securities transactions.
Net income decreased to $291,000, or $0.09 per share (after preferred
stock dividend deduction), in the second quarter of fiscal 1999 compared to
$666,000, or $.23 per share (after preferred stock dividend deduction) for
the same fiscal 1998 quarter. The decrease in net income is the result of
a soft market in PC hardware resulting in competitive price pressures
and, the overhead associated with the new internet business offset by the
recognition of gain on the securities portfolio.
Six Months ended March 31, 1999 as compared to the Six months ended March
31,1998
Net sales for the six months ended March 31, 1999 increased by $1.7
million (4%) over net sales of $43.5 million for the similar 1998 period.
This increase primarily reflects the fluctuations in the hard disk drive
market.
Gross profit for the first six months of 1999 was $2.0 million, a
10.% decrease from the six months of 1998. The decrease in gross profit
was the result of pricing pressures. Gross profit as a percentage of net
sales decreased from 5.0% in the first six months of 1998 to 4.3% in the
first six months of 1999. The reduction was due to market oversupply of
certain products which resulted in pricing pressures that required the
Company to reduce its gross margins.
Selling, general and administrative expenses increased to $1,355,000
in the first six months of fiscal 1999 compared to $1,053,000 for the
comparable fiscal 1998 period. As a percentage of revenue, SG&A expenses
increased from 2.4% in 1998 to 3.0% in 1999. The increase in SG&A was due
to start up costs associated with the company's new internet division.
Income from operations decreased 53% to $605,000 in the first six
months of fiscal 1999 from $1,135,000 in the comparable fiscal 1998 period.
The decrease in income from operations is due to two factors. The soft
market in PC hardware , the start-up cost associated with a new division..
Other income/expense increased to $237,000 in 1999 when compared to
($313,000) for the comparable fiscal 1998 period. The variance was mainly
attributable to the gain on the stock portfolio sold by the Company in
1998, that was recognized in the current period. The Company sold its
portfolio of securities during the fiscal year ended September 30, 1998.
Net income increased to $810,000, or $0.28 per share (after preferred
stock dividend deduction), in the first six months of fiscal 1999 compared
to $740,000, or $.26 per share (after preferred stock dividend deduction)
for the same fiscal 1998 quarter. The increase in net income is the result
of increased sales and, in particular, the effect of the securities
transactions gain experienced in 1998 which adversely affected last year's
net income.
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 with an
institutional lender. The credit facility provides the Company with both
accounts receivable and inventory based borrowings of up to $3 million.
Net cash provided by (used in) operating activities in the fiscal
quarter ended March 31, 1999 $(112,000), as compared to $111,000 in the
same quarter is 1998 mainly reflects the net effects of cash provided by
operations, augmented by decreases in accounts receivable and, inventory
and related party receivables, offset by an increase in prepaids and
decreases in accounts payable.
Net cash provided (used in) investing activities in the current
quarter was $(2,000), principally representing inter-company activity.
Net cash provided (used in) financing activities in the current
quarter was
($ 1,410,000) as compared to $106,000 in last year's period, and mainly
reflects a reduction in the asset-based line of credit. The Company also
entered into an agreement to issue $1.6 million in preferred stock,
$750,000 of which was received in the current period, in addition to common
stock issuance .
In addition to the Company's cash balances as of December 31, 1998,
the Company issued shares of a new class of preferred stock in January 1999
for $750,000. See, Item 2 below. The holders of the new preferred stock
are also required to purchase an additional $850,000 of the preferred stock
if certain conditions are met. Accordingly, the Company's liquidity has
been augmented, and may be further supplemented, with the sale of the
preferred stock.
The Company expects to fund the working capital needs of its
distribution business with internally generated funds, vendor lines of
credit and its current asset-based financing facility. Based on the
amount of credit available to the Company, its current cash balances, and
its current operations, the Company believes that it has sufficient capital
to finance its working capital needs for the next 12-month period. The
Company recently launched a website through which it is offering computer
parts and components for sale to retail customers. The Company expects to
fund the additional costs associated with the website through the proceeds
of the preferred stock sale, internal cash flow, and possibly additional
debt or equity financing. Although the initial start-up expenses of the
website are expected to be significant, the Company does not believe that
the ongoing operational expenses related to the new website will materially
adversely affect the Company's future liquidity and capital resources.
However, the Company has not had any prior experience in operating such a
website and cannot therefore accurately predict the amount of costs it will
have to incur in the operation of the website. In addition, no assurance
can be given that the new website operations will generate cash in the
future or be profitable.
Item 2. Changes in Securities and use of Proceeds
In January 1999, the Company sold $750,000 of its new 8% Convertible
Preferred Stock (the "Preferred Stock") to two institutional investors.
Pursuant to the securities purchase agreement that the Company entered into
with the two institutional investors, the investors are obligated to
purchase an additional $850,000 of the Preferred Stock on the date that the
Securities and Exchange Commission declares effective a registration
statement that registers for resale the shares of the Company's common
stock that are issuable upon the conversion of the Preferred Stock. The
Company has filed a registration statement on Form S-3 to register the
underlying common stock. The holders of the Preferred Stock are entitled to
receive dividends in cash at a rate of 8% per annum, compounded annually
and payable semi-annually on the first day of July and January of each
year, commencing on July 1, 1999. The Preferred Stock is convertible into
shares of the Company's common stock at a conversion price equal to stated
value of the Preferred Stock multiplied by the lower of (a) 125% of the
closing sales price of the common stock on the date that the registration
statement is declared effective, or (b) the average of the three lowest
closing sales prices of the common stock for the 22 consecutive trading
days immediately preceding the conversion date. The holders of the
Preferred Stock may not convert any shares of the Preferred Stock until May
19, 1999, and thereafter, the holders can only convert 20% of the Preferred
Stock during any subsequent 30-day period. The holders also may not
convert the Preferred Stock if such conversion would result in any of the
holders being deemed to be the beneficial owner of more than 5% of the then
outstanding shares of common stock of the Company or if the shares of
common stock, when added to the number of shares of common stock previously
issued by the Company upon conversion of the Preferred Stock would equal or
exceed 20% of the number of shares of common stock that were issued and
outstanding on the date of the original issuance of the Preferred Stock.
The Preferred Stock has not voting rights, other than as may be required
pursuant to the laws of the State of California.
Item 3. Exhibits and Reports on Form 8-K
(a) 4 Certificate of Determination of Rights, Preferences,
Privileges and Restrictions of 8% Convertible Preferred Stock,
filed as an exhibit to the company's registration statement on
Form S-3 C File no. 333-72743 and incorporated herein be reference.
27 Financial Data Schedule
(b) The Company did file and reports on Form 8-K during the fiscal
quarter ended March 31, 1999.
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 10, 1999 /s/ JACK WEN
Jack Wen
Chairman of the Board, President and
Chief Executive Officer
Date: May 10, 1999 _______/s/ DONALD JOHNSON ___
Donald Johnson
Vice President - Finance and Chief
Financial Officer (Principal
Financial and Accounting Officer)
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<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>
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