SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 1999.
or
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________.
Commission file number: 0-13280
PCC GROUP, INC.
(Exact name of registrant as specified in its charter)
California 95-3815164
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
163 University Parkway, Pomona, California 91768
(Address of principal executive offices)(Zip Code)
(909) 869-6133
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to section 12(g) of the Act:
Common Stock, $.01 par value
(Title of each class)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K (229.405 of this
chapter) is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K. [ X]
The aggregate market value of the voting stock of the
registrant held by non-affiliates of the registrant on December
27, 1999 was approximately $9,848,319, based on the closing
price reported by Nasdaq on such date. There were 3,005,339
shares of registrant's Common Stock outstanding on December 27, 1999.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of Registrant's Proxy Statement for its 1999
Annual Meeting of Shareholders, to be filed with the Securities
and Exchange Commission within 120 days after the close of the
Registrant's fiscal year, are incorporated herein by reference
in Parts III of this Report.
This report contains "forward-looking statements" within the
meaning of Section 27A of the Securities Act and Section 21E of
the Exchange Act, including, without limitation, statements that
include the words "believes," "expects," "anticipates," "plans,"
or similar expressions and statements relating to anticipated
costs savings, the Company's strategic plans, capital
expenditures, industry trends and prospects, and the Company's
financial position. Such forward-looking statements involve
known and unknown risks, uncertainties, and other factors that
may cause actual results, performance, or achievements of the
Company to differ materially from those expressed or implied by
such forward-looking statements. Although the Company believes
that its plans, intentions, and expectation reflected in such
forward-looking statements are reasonable, it can give no
assurance that such plans, intentions, or expectations will be
achieved. Important factors that could cause actual results to
differ materially from the Company's expectations are set forth
under the caption "Risk Factors" in this report and in the
Company's other SEC reports and press releases, copies of which
are available from the Company upon request. The Company assumes
no obligation to update any forward-looking statements contained
herein.
PART I
ITEM 1. BUSINESS.
General
During the past 17 years, PCC Group, Inc. has been
primarily engaged in the wholesale distribution of microcomputer
products and components. The computer hardware products and
components that the Company resells include add-on boards, CD-
ROM drives, hard disk drives, monitors, sound cards, and
keyboards. The Company purchases these products in large volume
directly from the manufacturers and sells the products to
personal computer assemblers and other resellers. Until the
fiscal year ended September 30, 1999 ("fiscal 1999"), the
Company had not marketed any products directly to end-user
customers. Although the Company has expanded its operations
beyond the wholesale distribution business, substantially all of
the Company's revenues were derived from the wholesale
distributions operations, and a majority of its revenues are
expected to continue to be derived from these operations in the
near future.
During fiscal 1999, the Company decided to diversify its
operations and to enter into Internet-based business. As its
first entry into an e-commerce business, the Company in December
1998 introduced a new internet website through which the Company
now offers and sells personal computer parts and products
directly to the retail public. The website, located at
www.123cdc.com, is operated through Computer Discount Center,
Inc., a new wholly-owned subsidiary. To date, the Company has
incurred all of the costs normally associated with the
establishment of new operations, including the addition of
overhead expenses. Although revenues from the new internet
operations are increasing monthly, the amount of gross revenues
generated by retail internet sales constituted less than 5% of
the Company's net sales during fiscal 1999.
In May 1999, the Company established a new, wholly-owned
subsidiary known as "ExecuTrade Inc." for the purpose of
engaging in various internet broker-dealer activities. In
connection with the establishment of this subsidiary, the
Company hired additional employees who have experience in
broker-dealer operations, leased new office facilities, and
purchased the computer and other equipment that will be required
for the operations. ExecuTrade, Inc. has obtained its NASD
licenses for its broker-dealer operations and currently expects
to commence its operations in January 2000. To date, however,
ExecuTrade, Inc. has not engaged in any brokerage operations.
In connection with establishing ExecuTrade as its on-line
broker-dealer subsidiary, the Company intends to establish and
operate a website that will provide investors with a broad range
of financial information and services, including investment
news, stock quotes, research, professionally moderated
investment discussion forums, investment chat rooms, and
investment education. In order to make certain of the
information contained in its website available to investors by
other means, in December 1999 the new division acquired a new
Internet-based broadcasting system that will be able to share
real time financial information across a variety of media,
including conventional message boards, real time chat rooms, e-
mail, text pagers and cellular telephones.
In August 1999, the Company commenced its third new
Internet business by launching a new automobile purchasing web-
site known as www.123adc.com. The new automobile website was
operated by the Company's Auto Discount Center division. As a
result of the Company's limited financial resources and the
funds required to finance the start-up costs of its other two
new Internet businesses, the Company in December 1999
contributed the web-site and all of the operations of Auto
Division Center to an unaffiliated buyer in exchange for 29% of
the equity of the buyer.
From 1993 to 1998, the Company's business included
investments in the environmental resource industry. The
principal investment of the Company during this period was an
investment in the Dalian Green Resources Co., Ltd. ("Dalian
Green"), a joint venture formed to own and operate a tire
recycling plant located in the city of Dalian, in the People's
Republic of China. Due in part to the Company's desire to focus
its operations on its core business of distributing computer
parts and on new evolving Internet-related businesses, and due
to the difficulties the Dalian Green joint venture was having in
commencing its operations, during the fiscal year ended
September 30, 1998, the Company sold its interest in Dalian
Green for a convertible promissory note and ceased all of its
other environmental resource operations.
The Company, a California corporation, was formed by the
merger, in September 1989, of PC Craft, Inc., a Delaware
corporation, with and into WMD Micro Distributors, Inc.
("WMD"), a California Corporation organized in 1983.
Concurrently with the merger, WMD changed its name to PCC Group,
Inc. Unless the context indicates otherwise, all references
herein to the "Company" shall refer to PCC Group, Inc. and its
subsidiaries. The Company's operations are currently conducted
through its three subsidiaries, PC Craft, Inc., Computer
Discount Center, Inc., and ExecuTrade, Inc.
Overview of Industries
Computer Distribution. The worldwide microcomputer
products distribution industry generally consists of suppliers,
who sell directly to wholesale distributors; wholesale
distributors, who sell to resellers; and resellers, who sell to
other resellers or directly to end-users.
Wholesale distributors generally purchase a wide range of
products in bulk directly from manufacturers and then ship
products in smaller quantities to various resellers. Most
manufacturers of electronic components and computer products
rely on independent authorized distributors, such as the
Company, to augment their product marketing and distributions
operations. Wholesalers assist the suppliers by providing
stocking, marketing, and financial intermediary services. The
recent rapid growth of the electronics distribution industry has
been fostered by the many suppliers and manufacturer who
recognize their authorized distributors as essential elements of
their distribution organization. In addition, faced with the
pressures of declining product prices and the increasing cost of
selling directly to a large and diverse group of resellers,
suppliers are increasingly relying upon wholesale distribution
channels for a greater proportion of their sales. Resellers are
becoming more dependent on wholesale distributors due to product
proliferation, increasingly complex technologies and rapid
changes in technology.
Resellers sell directly to end users, such as large
corporate accounts, small to medium-sized businesses, and home
users. Resellers fall into the following channel segments:
value-added reseller ("VAR"), commercial reseller or dealer, and
retailer. VARs, who comprise one of the largest channel
segments, typically add value by combining proprietary software
and/or services with off-the-shelf hardware or software. Many
of these customers of the Company require delivery of the
products they have ordered on schedules that are generally not
available on direct purchase from manufacturers, and frequently
their orders are of insufficient size to be placed directly with
manufacturers.
Computer Retail Sales. Computer retail sales currently
consist of store based sales, catalog and telephone sales, and
Internet sales. Store based sales include both computer
oriented stores (such as CompUSA and MicroCenter) that primarily
sell computer products, and non-computer retailers (such as
Circuit City and Wal-Mart) that primarily sell products other
than computers and computer components. The mail-order
retailers include PC Connection, MicroWarehouse, Insight,
Creative Computers, and CDW. Online retail sellers include
various manufacturers that sell their products through the
Internet and other means (such as Dell and Gateway) as well as
numerous Internet retailers (such as Cyberian Outpost,
Egghead.com, Buy.com, and Beyond.com).
The computer retail sales industry, which consists
primarily of the sale of computer hardware, software and
accessories to consumers and small home offices over the
Internet, is a highly fragmented, rapidly evolving and intensely
competitive industry. Jupiter Communications, a market research
firm, projects that the single largest domestic Internet retail
opportunity for the consumer and small office/home office market
place is the online sales of computer products (including
hardware, software and consumer electronics). Jupiter
Communications estimates that by the year 2002, the online
consumer market for computer products and consumer electronics
will reach approximately $9.6 billion in the United States.
Internet Broker-Dealer Industry. The market for online
investing services, including online brokerage services for day
traders and interactive securities training and discussion
forums, is a new, rapidly evolving and intensely competitive
area that has few barriers to entry. Online trading is the
fastest growing segment of the brokerage industry and is
expected to grow significantly. Industry reports indicate that
the online trading industry grew from approximately 1.5 million
accounts at the end of 1996 to approximately 5 million accounts
at the end of 1998, and that the market will grow to 8.4 million
accounts at the end of 1999 and 14.4 million accounts in 2002.
The Company believes that there are approximately 100 existing
firms that provide electronic brokerage services, including such
brokerage firms as Charles Schwab & Co., Inc., Fidelity, Inc.,
E*Trade Group, Inc., Ameritrade, Inc., and Quick & Reilly, Inc.
The electronic brokerage services business also consists of
services provided directly, or through the Internet, by well
established, full-commission brokerage firms and financial
institutions, including mutual fund sponsors and other
organizations. Most of the companies in this industry already
provide investors with the services that the Company intends to
provide, including on-line trading of equity securities through
the Internet, on-line tutorials that are designed to allow
investors to learn basic and advanced investment and trading
strategies, access to real-time stock quote and market
information, and on-line chat and discussion groups.
PC Craft's Computer Wholesale Distribution Operations
During fiscal 1999, substantially all of the Company's
sales were derived from the wholesale distribution of computer
products conducted by PC Craft, the Company's wholly-owned
subsidiary. The Company's strategy is to sell its products to
computer assemblers and resellers at prices at or near the price
that the resellers could purchase from the manufacturer in order
to increase the total amount of its sales. By increasing its
sales, the Company is able to purchase its inventory at greater
discounts from the manufacturers, thereby increasing the
Company's cost of sales margins.
The Company provides manufacturers with access to a select
client base while reducing the inventory, credit, marketing, and
overhead costs associated with maintenance of direct
relationships with resellers. Hardware products offered include
add-on boards, CD-ROM drives, hard disk drives, monitors, sound
cards, and keyboards. The Company offers microcomputer hardware
products manufactured by companies such as Western Digital
Corporation, Toshiba, NEC Technologies, TEAC, and Adaptec.
Although the Company generally stocks approximately between 100
and 200 products and accessories supplied by between 10 and 20
vendors, approximately 20% the Company's sales in fiscal 1999
were derived from products supplied by one vendor, Western
Digital Corporation. The loss of the ability to distribute
products from this supplier could result in sales losses, which
could in turn have a materially adverse impact on the Company's
business and financial results.
The Company generally enters into written agreements with
its suppliers. As is customary in the industry, these
agreements usually provide non-exclusive distribution rights and
for cancellation on short notice by the supplier, for failure to
satisfy minimum purchase requirements or otherwise. While the
Company believes that alternative sources of supply exist for
most of the products that it distributes, the loss of the right
to distribute certain products might materially and adversely
impact its operations. On the other hand, these agreements
generally provide stock balancing and price protection
provisions, which in part reduce the Company's risk of loss due
to slow-moving inventory, vendor price reductions, product
updates, or obsolescence. The Company further attempts to
reduce its inventory risk by only holding a small amount of
inventory and by rapidly reselling its inventory. In general,
the Company rotates its inventory every two to three weeks.
The Company purchases substantially all of its products in
the U.S. from U.S. based companies. Most of the inventory
purchased by the Company is delivered to the Company's warehouse
in Pomona, California. However, the Company also arranges for
inventory its purchases to be shipped directly from the
manufacturer to the Company's customers.
The wholesale computer products business has become
intensely competitive as a result of a number of factors,
including the proliferation of wholesale distributors, the
additional competition provided by Internet resellers, and the
reduction of barriers to entry. In addition, the Company
believes that the products that it resells are increasingly
becoming commodities that are bought and sold from many sources
at the lowest available price, which has further intensified
price competition and reduced margins. As a result of the
foregoing factors, the Company is attempting to diversify its
operations and reduce its dependence upon its wholesale
operations as it sole source of revenues.
Customers. The Company regularly sells to approximately
250 customers including VARs, systems integrators, and dealers.
All of the Company's customers are located in the U.S., and the
Company does not currently sell any of its products abroad.
Comtrade Electronics, a computer distributor, accounted for
15.9% of net sales in fiscal 1999. No other customer of the
Company accounted for more than 10% of the Company's sales
during fiscal 1999. The Company believes that its success in
attracting customers is attributable in large measure to its
competitive pricing and immediate product availability.
Many of the Company's customers do not have the resources
to establish a large number of direct purchasing relationships
or stock significant product inventories. Consequently, they
tend to purchase a high percentage of their products from
distributors. Large resellers, on the other hand, often
establish direct relationships with manufacturers for their more
popular products, but utilize distributors for slower-moving
products and for fill-in orders of fast-moving products which
may not be available on a timely basis from manufacturers.
Sales and Distribution. The Company's sales force is
currently comprised of six sales representatives. Customer
orders are entered into the Company's computer system. Using a
centralized database, sales representatives immediately obtain
descriptive information regarding products, check inventory
status, determine customer credit availability, and obtain
pricing and promotional information.
Upon placement of an order, the order is processed and, if
the customer meets applicable credit requirements, the order is
printed at the warehouse. The order is printed in the form of
an invoice, which is then used to identify and assemble the
products covered by the order for packing.
The Company warrants parts and labor on its products for 12
months after shipment. The Company will, in exchange for a
defective product returned by a customer within the warranty
period, ship to the customer either a pre-tested equivalent or a
new product, in most instances, within 24 to 48 hours.
Defective products are returned to vendors for repair and, in
most cases, are repaired and returned within three weeks.
Repairs made by vendors after expiration of the warranty period
are charged back to the customer.
Competition. Competition in the microcomputer component
distribution business is intense and characterized by intense
pricing pressures and rapid technological change resulting in
relatively short product lives and early product obsolescence.
Competition is driven by price, product availability, and
customer service. Competitors of the Company in the wholesale
computer distribution business include national distributors,
regional distributors, and manufacturers' direct sales
organizations, many of which have substantially greater
technical, financial, and marketing resources than the Company.
Major competitors include Merisel, Inc., Ingram Micro, Inc.,
Tech Data Corporation, Gates F/A Distributing, Inc., and Liuski
International, Inc.
Computer Discount Center's Internet Retail Sales Operations
On December 15, 1998, the Company launched its retail web
site "Computer Discount Center," located at www.123cdc.com,
through which the Company is offering a large selection of
computer hardware, software, and accessories. The Company's
goal is to develop the web site as a high volume retail outlet
to supplement its core business of wholesale redistribution of
computer components.
Prior to launching its Internet retail website, the Company
did not sell its products directly to end-users because it did
not have the organizational, marketing and financial
infrastructure that was necessary to effectively compete in the
retail market. The Company does, however, have relationships
with manufacturers and other suppliers that enable the Company
to purchase computer components and products are competitive
prices. The Company believes that the Internet permits the
Company to offer computer products to the public without
infrastructure that is necessary to operate a traditional
computer retail operation. By establishing the Computer
Discount Center, the Company seeks to leverage its purchasing
ability and its existing computer distribution facilities to
maximize its overall sales and to increase its operating
margins.
The Company's goal for Computer Discount Center is to
develop a low-cost, easy-to-shop alternative to the online
superstores by providing a broad range of products at
competitive prices. As a result, Computer Discount Center does
not maintain a warehouse, hold any inventory, or provide any
fulfillment operations. In addition, in order to limit is
expenses, and to therefore lower its costs, it has limited its
marketing budget to certain targeted online advertising sites.
Computer Discount Center obtains its products from a third party
provider. The Company has entered into a fulfillment agreement
with Ingram Micro, Inc., a major wholesaler of computer parts,
accessories and software products that has inventory at
distribution centers around the country, pursuant to which all
orders placed through the website of Computer Discount Center
are forwarded to Ingram Micro, who then ships the ordered
product directly from its facilities to the purchaser. Computer
Discount Center only maintains 10 employees and shares its
offices with those of PCC Group, Inc. By affiliating itself
with Ingram Micro, Inc., Computer Discount Center is able to
offer its customers computer hardware, software and other
related products at a price only slightly higher than the
wholesale price. In addition, Computer Discount Center does not
have to incur the expenses related to warehousing, fulfilling
and distributing products, nor does it have to bear the risk of
obsolescence that may result from the rapidly changing and
demand for computer products.
To date, the Company has not actively marketed the
www.123CDC.com website. In order to increase its visibility,
Computer Discount Center recently entered into an advertising
agreement with Lycos pursuant to which Computer Discount Center
pays approximately $3,000 per month.
Competition. Computer Discount Center is subject to
intense competition in its efforts to establish an Internet
retail outlet for computer and software products. The
microcomputer components retail industry is intensely
competitive, has low barriers to entry, and is currently
dominated by numerous well-known, well-funded businesses that
have significantly greater financial resources, customer bases,
brand recognition, and advertising resources. These competitors
include (i) various traditional computer retailers including
CompUSA and MicroCenter, (ii) various mail-order retailers
including CDW, MicroWarehouse, Insight, PC Connection, and
Creative Computers, (iii) various Internet-focused computer
retailers including Egghead.com, software.net Corporation, NECX
Direct, Buy.com, Beyond.com and Cyberian Outpost, (iv) various
manufacturers that sell directly over the Internet including
Dell, Gateway, Apple, and many software companies, and (v) a
number of online service providers including America Online and
the Microsoft Network that offer computer products directly or
in partnership with other retailers. Many of the Company's
competitors have adopted the aggressive pricing policies, which
have reduced the Company's gross margins and attracted customers
to such competitor's websites. Although the Company is
attempting to increase its visibility by recently signing
marketing agreements, the Company will not be able to match the
marketing budgets of most of its competitors. In addition, as
the use of the Internet increases for on-line retail sales,
competition is expected to increase as on-line retailers are
acquired by, receive investments from, or enter into other
commercial relationships with large, well-established and well-
financed companies. Such increase competition will result in
further reductions in operating margins, possible loss of market
share and a diminished brand franchise.
Proposed On-Line Brokerage Operations; Financial Website
During fiscal 1999, the Company established ExecuTrade,
Inc. as a wholly-owned subsidiary to provide on-line investment
services for self-directed investors. To date, ExecuTrade has
not commenced operations and its activities have been limited to
establishing its offices in San Diego, California, purchasing
the computer and electronic hardware and software required for
its proposed operations, hiring officers and employees with
experience in the securities industry, and obtaining the various
federal and state licenses and regulatory approvals that are
required to operate its proposed business. ExecuTrade received
its NASD license in December 1999 and currently anticipates that
it will commence operations during January 2000. ExecuTrade
intends to provide two types of brokerage services: one for the
traditional retail investor who now invests on-line; and the
second for the active on-line investor (the day-trader).
ExecuTrade is setting up its operations so that it can
serve the needs of the self-directed investor. These services
are to include fully automated on-line stock, option, and mutual
fund order processing and on-line portfolio tracking.
ExecuTrade will offer its services to its customers through the
Internet so that customer can directly place orders to buy and
sell Nasdaq and exchange-listed securities, as well as options
and mutual funds. ExecuTrade will charge its customers a
commission for each trade electronically executed by ExecuTrade.
The amount of the commission has not yet been determined but is
expected to be significantly less that the trading fees charged
by traditional full-commissioned brokers.
When fully implemented, ExecuTrade's brokerage services
will enable individual investors to place orders for equity
securities, to monitor the market, to review their portfolio
balances and positions, and to obtain real-time quotes.
ExecuTrade does not, currently, anticipate that it will provide
clearing and execution services for its brokerage business.
ExecuTrade currently anticipates that all clearing services,
including confirmation, receipt, settlement, delivery and the
record keeping functions involved in the processing of
securities transactions will be provided by independent broker-
dealers or other depository institutions.
In addition to providing on-line brokerage services to the
retail on-line investor, ExecuTrade also is establishing a
trading system for the self-directed active trader (the day-
trader). The system being established by ExecuTrade for the
active investor will enable the investor to execute trades on a
frequent basis and on a real-time basis. ExecuTrade has
licensed proprietary trading software from a third party
provider that ExecuTrade will rent to its customers on a monthly
basis for a fixed monthly fee. The software will enable
customers to access comprehensive information on stock, markets,
indices, and market news. The clients will be able to access
bid and ask price, charts, and research and will be able to
track their securities positions on a real-time basis. The
customer will also be able to place buy or sell orders which
the proprietary software will route directly to the trading
exchange (such as the New York Stock Exchange, American Stock
Exchange, or Nasdaq Stock Market) in a matter of seconds. In
addition to charging the clients for the use of the software,
the company will also charge its customers a fee for each trade
executed using the software.
Regulation. The securities industry is subject to
extensive regulation under both federal and state securities
laws. ExecuTrade has received its NASD licenses and most of its
state licenses. In general, as broker-dealer, ExecuTrade is
required to register with the Securities and Exchange Commission
and to be a member of the NASD. As such, ExecuTrade is subject
to the requirements of the Securities Exchange Act of 1934 and
the rules promulgated thereunder relating to broker-dealers and
to the Rules of Fair Practice of the NASD. Such regulations
establish, among other things, minimum net capital requirements
for the Company and its operating subsidiaries.
Competition. The market for security brokerage services,
particularly electronic brokerage services, is rapidly evolving
and intensely competitive, with very few barriers to entry.
ExecuTrade anticipates that it will compete, directly or
indirectly, with approximately 100 other brokerage firms, many
of which have electronic brokerage services. These competitors
include well-known names such as Charles Schwab & Co., Inc.,
Quick & Reilly, Inc., E* Trade Group, Inc. and AmeriTrade, Inc.
ExecuTrade also will compete with full-commission brokerage
firms, as well as, financial institutions, mutual fund sponsors
and other organizations. Most of these competitors of
ExecuTrade have substantially greater experience in operating
brokerage companies, substantially greater financial and
managerial resources, greater name recognition, and other
competitive advantages.
Financial Web-Sites and Other Services. In order to
provide investors additional information regarding the financial
markets and additional services to investors, the Company has
set up a new division entitled "Executive Trading Systems,"
which division will operate a new financial web-site. The web-
site, which is expected to be gradually released over the coming
months commencing in January 2000, will be a web-site that is
available to all users, not just the customers of ExecuTrade.
The web-site will provide financial information that is also
available from certain other Internet sources, such as stock
quotes, financial news stories, and market research. In
addition to this information, the Company will also provide
market research by both the Company's analysts and by third
party analysts, chat rooms, and professionally monitored
discussion forums. The monitored discussion forums are expected
to be led by one of the six market specialists that the Company
has retained for this purpose. The monitored discussion forums
are expected to be conducted during market trading hours and
will provide trading assistance and guidance that is provided by
professional brokers.. Initially, all of these services will be
available at no cost. However, the Company expects that after
the monitored discussion forums are more widely accepted, the
Company may make the discussion forums only available to paying
members.
In addition to the access currently provided to Internet
users from their personal computers, Executive Trading Systems
intends to make data access available through other means,
including personal digital assistance, text pagers and cellular
phones. In order to make these services available, in December
1999 the Company completed its purchase of an Internet-based
broadcasting system for use with Internet chat rooms and
discussion forums. The newly acquired broadcasting technology
was specifically designed for use in the financial sector and
allows for the sharing of critical real time information across
a variety of conventional mediums, including message boards,
real time chat rooms, e-mail, text pagers and cellular phones.
The system also includes data parsing technology, which can be
used to provide enhanced information management services to
users. The new technology is expected to be released during the
first calendar quarter of 2000, and is expected to support PDAs
with two-way communications and full mobile functionality.
Finally, Executive Trading Systems will attempt to provide
educational and training services to its customers in an effort
to make investing understandable to investors of all ability
levels. Executive Trading Systems intends to offer on-line
tutorials that are designed to allow investors to learn basic
and advanced trading strategies and formulate new investment
means.
Discontinued Operations--Environmental Resource Division;
Automobile Sales Web-Site
Dalian Green. In 1993, the Company identified certain
investment opportunities in the Far East in the tire recycling
business. The principal investment that the Company identified
was a recycling plant to be constructed in the city of Dalian,
in the People's Republic of China. In 1993, the Company entered
into a joint venture agreement with a Chinese governmental
organization to establish the Dalian Green Resource Co. Ltd.
("Dalian Green"). The Company invested approximately $3 million
in Dalian Green and owned a 55% economic interest in Dalian
Green. The joint venture has constructed a facility capable of
recycling scrap tires into commercial materials, including
carbon black, fuel oil, scrap steel and gas. The construction
and commencement of operations of the facility owned by Dalian
Green has been delayed by technological problems and
governmental permit restrictions, and the facility is not
currently operating. Although the Company previously also
identified other possible recycling facilities and entered into
other agreements to form tire recycling joint ventures, the
Company did not pursue these other transactions and has not
invested significant amounts into these other arrangements.
Due in part to the Company's desire to refocus its
operations on its core business of distributing computer parts,
and due to the difficulties the Dalian Green joint venture was
having in commencing its operations, during the fiscal year
ended September 30, 1998, the Company sold its interest in
Dalian Green to an unaffiliated third party. As a result of the
sale, the Company has now ceased all of its other environmental
resource operations. The sale of Dalian Green was effected by
transferring all of the Dalian Green interest to American Tire
Collection, Inc., a Delaware corporation ("American Tire"), for
$3.7 million, and by the sale of all of the outstanding share of
American Tire. The purchase price for the Dalian Green interest
was paid by the delivery of a convertible secured promissory
note (the "Note"). The Note matures on September 30, 2001,
bears interest at an annual rate of 6%, and is secured by a
first priority lien on all of the assets of American Tire and by
pledge of all of the stock of American Tire. The Note is
convertible by the Company at any time during the term of the
Note into no less than 70% of the total outstanding stock of
American Tire. The Company has been informed that American Tire
is still actively pursuing obtaining the permits required to
operate the Dalian Green recycling plant, but that the required
permits have not yet been received. The Company cannot predict
if or when the necessary permits will be received.
Automobile Discount Center. In August 1999, the Company
launched a new automobile purchasing web-site known as
www.123adc.com. The new automobile website was operated by the
Company's Auto Discount Center division. As a result of the
Company's limited financial resources and the funds required to
finance the start-up costs of its other two new Internet
businesses, the Company in December 1999 contributed the web-
site and all of the operations of Auto Division Center to an
unaffiliated buyer in exchange for 29% of the equity of the
buyer. The new buyer has agreed to fully implement the website.
Employees
On December 14, 1999, the Company had 29 full-time
employees. Of these employees, 13 were employed by PCC Group,
ten were employed by PC Craft, and six were employed by
ExecuTrade. None of the Company's employees is represented by a
labor union. The Company considers its relations with its
employees to be good.
ITEM 2. PROPERTIES.
The Company's corporate office, the main warehouse
facility, and the location of Computer Discount Center are all
located at one facility in Pomona, California. The Company is
leasing this facility (18,721 square feet) on a month to month
basis with an annual rent of $90,070. The Company believes this
facility is suitable and adequate for current operations.
ExecuTrade has leased a 3,625 square foot facility in San
Diego, California. The lease is a four-year lease that has been
guaranteed by the Company. ExecuTrade is required to pay $6,706
per month for the facility.
ITEM 3. LEGAL PROCEEDINGS.
In May 1997, in an action entitled Virgil Flanigan v. PCC
Group, Inc., Mr. Flanigan filed a complaint against the Company
in the 22nd Judicial Court of Missouri. Mr. Flanigan had
licensed certain technology to the Company for use in the Dalian
Green tire recycling facility. In consideration for the
license, the Company had agreed to pay Mr. Flanigan, among other
compensation, a percentage of profits derived from the Dalian
Green project. The Company claimed that the licensed technology
did not work as represented and had refused to pay Mr. Flanigan
certain of the compensation under the license agreement. Mr.
Flanigan asserted that the Company breached its agreement with
him and filed the lawsuit to enforce the agreement.
During the fourth quarter of fiscal 1999, the Company
settled the lawsuit with Mr. Flanigan. Pursuant to the terms of
settlement, the Company paid Mr. Flanigan $150,000 at the
closing, issued to Mr. Flanigan a secured promissory note having
a principal balance of $100,000, and issued 162,500 shares of
the Common Stock to Mr. Flanigan. The $100,000 promissory note
bears interest at a rate of 6% per annum, and is payable in two
equal annual installments of principal and interest. The
Company has the right to repurchase certain of the foregoing
shares that it issued to Mr. Flanigan at the than current market value
but not less than $4.1875 per share.
The Company is from time to time, involved in various
lawsuits generally incidental to its business operations,
consisting primarily of collection actions and vendor disputes.
The Company does not believe that such claims and lawsuits,
either individually or in the aggregate, will have an adverse
effect on its operations or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the Company's
security holders during the fourth quarter of the fiscal year
ended September 30, 1999.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
The Company's common stock, $.01 par value per share, is
traded over-the-counter on the Nasdaq SmallCap System under the
trading symbol "PCCG." The following table sets forth the high
and low closing prices as reported by Nasdaq for the Company's
common stock in each of the fiscal quarters indicated.
Fiscal Year Ended September 30, 1998 High Low
First Quarter $3.250 $2.500
Second Quarter $4.438 $2.500
Third Quarter $7.500 $4.188
Fourth Quarter $6.156 $3.625
Fiscal Year Ended September 30, 1999 High Low
First Quarter $8.625 $3.25
Second Quarter $8.031 $5.50
Third Quarter $6.688 $3.25
Fourth Quarter $4.625 $3.000
As of December 18, 1999, there were 2,111 holders of
record of the Company's common stock. The Company believes that
there are approximately 1,000 additional beneficial owners of
Common Stock whose shares are held in "street name."
The Company has not paid any dividends on its common stock
and does not intend to pay dividends in the foreseeable future.
The Board of Directors currently intends to retain any future
earnings to finance the development of its business.
ITEM 6. SELECTED FINANCIAL DATA.
The table below sets forth certain financial data of the
Company for each of its fiscal years during the five-year period
ended September 30, 1999. This information should be read in
conjunction with the financial statements and related notes
thereto included elsewhere in this report and Item 7 hereof,
"Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Statement of Operations Data
(in thousands, except for per share amounts)
1995 1996 1997 1998 1999
Net Sales $40,473 $40,645 $63,643 $79,728 $69,561
Gross Profit 1,513 1,892 2,820 3,695 2,276
NetIncome(Loss) 25 643 350 404 (1,637)
Income (Loss)
Per Share
Net Income .01 .26 .13 .16 (.59)
Dividends
Applicable to
Preferred
Stock (.07) (.06) (.06) (.06) (.14)
Net Income
(Loss)
Applicable to
Common
shares-basic (.06) (.20) .07 .10 (.73)
Balance Sheet Data
(in thousands) 1995 1996 1997 1998 1999
Working
Capital $1,540 $2,195 $2,607 $3,411 $3,178
Total Assets 6,016 8,421 10,592 14,774 7,798
Long-Term
Debt 2 - 18 35 714
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
Forward Looking Statements:
Certain of the statements contained in this section,
including those under "Liquidity and Capital Resources," are
"forward looking" statements. While the Company believes that
these estimates and statements are accurate based on information
currently available to the Company, the Company's business is
dependent upon general economic conditions and various
conditions specific to its industry, and future results of which
cannot be predicted.
Year Ended September 30, 1999 Compared to Year Ended September 30, 1998
Net Sales for the fiscal year ended September 30, 1999
("fiscal 1999") decreased by 12.7 % from $79.7 million in the
fiscal year ended September 30, 1998 to $ 69.6 million in fiscal
1999. The decrease in sales was due to lower sales volume and
lower price, both of which resulted from increased competition
from Internet companies that are well financed and who
subsidized their price cuts , thereby creating volatility in the
marketplace.
Gross profit for the fiscal year ended September 30, 1999
decreased 37.8 % from $3.7 million in the fiscal year ended
September 30, 1998 to $ 2.3 million in fiscal 1999. The decrease
was due to a reduction in sales coupled with lower gross margins
because of increased competition from Internet-based companies.
Selling, General and Administrative (SG& A expenses) for
fiscal 1999 increased 95 % from $2.1 million in the fiscal year
ended September 30,1998 to $4.1 million for fiscal 1999. The
increase resulted from two different sources. The first is the
result of a settlement agreement reached in a lawsuit with
Flanigan, a lawsuit arising out of the tire recycling business
(see, Item 3. Legal Proceedings, above). The second item is the
start-up costs associated with the Company's three new Internet
businesses (Auto Discount Center, Computer Discount Center, and
ExecuTrade Inc.), as well as the expenses related to the
Executive Trading Systems division.
Income from operations for the fiscal year ended September
30, 1999 decreased 215.1% from $ 1,598,628 in the fiscal year
ended September 30,1998 to a operating loss of ($ 1,840,504) for
fiscal 1999. The loss is due to competitive pressures from
Internet companies causing the wholesale business to lose money
in the last three quarters of the year, the settlement of a law
suit, and the start-up of three internet divisions.
Interest expense for fiscal 1999 decreased 88.1 % from
$184,715 in fiscal year ended September 30,1998, to $22,039 in
fiscal 1999. Other income for the fiscal year ended September
30, 1999 increased to $228,471 from a deficit in the fiscal year
ended September 30,1998 of $827,868. The increase was due to
a long term gain on the sale of Company's stock portfolio which
was previously deferred in 1998, of $382,991, plus a gain on
the sale of equipment purchasing activity offset by a write down
of notes receivable due from American Tire of $522,000.
As of September 30,1999 the Company has $ 3,200,000 of
federal operating loss carry forward expiring through 2019, and an
approximately $800,000 of state net operating loss carry forward
expiring through 2004. In addition the Company has $600,000 and
$300,000 of federal and state capital loss carry forwards.It is not possible
at this time to determine that the relization of the net deferred tax
asset as of September 30, 1999 is more likely than not; accordingly a 100 %
valuation allowance has been established.
Year Ended September 30, 1998 Compared to Year Ended September
30, 1997
Net sales for the fiscal year ended September 30 1999
("fiscal 1998") increased by 25.3%, from $63.6 million in the
fiscal year ended September 30, 1997 ("fiscal 1997") to $79.7
million in fiscal 1998. The increase in net sales is due to an
increase in the unit volume shipped during the fiscal year.
Gross profit increased 28.6% from $2.8 million in fiscal
1997 to $3.7 million in fiscal 1998 principally as a result of
increased sales. Gross profit as a percentage of net sales
increased from 4.4% to 4.6% due to the increased volume of
sales, as the Company's ability to purchase its inventory at a
discount is related to the volume of sales. Accordingly, as its
sales volume increases, the Company's cost of goods decreases,
and the gross profit increases.
Selling, general and administrative (SG&A) expenses
decreased by 16.7%, from $2.4 million in fiscal 1997 to $2.1
million in fiscal 1998, and decreased as a percentage of net
sales from 3.8% to 2.6%. The decrease of SG&A expenses was
principally attributable to a decrease in consulting expenses of
approximately $350,000.
Income from operations increased 394.1% from $405,635 in
1997 to $1,598,628 in 1998. The increase is due to the increase
in the Company's gross profits and the decrease in SG&A. Income
from operations as a percentage of net sales increased from 0.6%
to 2.0 %.
Interest expense increased 437% from $42,259 in fiscal 1997
to $184,715 in fiscal 1998, primarily as a result of additional
borrowings incurred to finance the increased sales level. The
Company also incurred a $557,438 loss on the sale of
investments, compared to a loss of $13,306 from the sale of
investments in the prior fiscal year. The loss is attributable
to the Company's investment in securities. During fiscal 1998,
the Company invested its excess cash in highly volatile
publicly-traded securities and incurred margin liability in such
purchases. In June 1998, the Company ended its practice of
investing in securities and sold its portfolio of existing
securities for a $1,250,000 secured promissory note. Since the
Company has ceased investing in securities, the Company does not
expect to incur such losses in the future. Other expense also
included a loss of $300,730 reflecting a partial write-down of
the investment in Dalian Green joint venture. The Company sold
its interest in the Dalian Green joint venture in September
1998.
At the end of fiscal 1998, the Company had net operating
loss carryforwards available to offset future taxable income of
approximately $1.6 million. It was not possible at that time to
determine that the realization of the net deferred tax asset as
of September 30, 1998 is more likely than not; accordingly, a
100% valuation allowance was established.
Variability of Quarterly Results and Seasonality
The Company has historically experienced variability in its
net sales and operating margins on a quarterly basis and expects
these patterns to continue in the future. Management believes
that the facts which influence quarterly trends include (i)
seasonal growth in the microcomputer industry and (ii) vendor
scheduled introduction of new products or updates of existing
products.
The Company's net sales in the first fiscal quarter of each
year have been higher than in its other three quarters.
Management believes that historical trends reflect customer
buying patterns relating to calendar year-end business purchases
and holiday period purchases.
Liquidity and Capital Resources
As of September 30, 1999, the Company had working capital
of $3,177,771 and a current ratio of $2.20 to 1. On September
30, 1998, the Company had working capital of $3,411,440 and a
current ratio of $1.36 to 1. Historically the Company has
primarily operated with internally generated cash flow and
vendor lines of credit to fund its working capital requirements.
During the second quarter of fiscal 1999, 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 $6.5 million.
The $6,500,000 credit facility, which expires on March 31, 2000,
is secured by a lien on all of the Company's personal property.
In addition to the foregoing credit facility, the Company has
obtained a $1,000,000 term loan from its bank to fund the
development expenses of the Company's new Computer Discount
Center e-commerce division. The term loan requires the Company
to make monthly payments of principal and interest from
September 1999 through August 2002, at which time the term loan
matures. In addition to the foregoing two credit facilities,
the Company has obtained a credit facility to fund it purchases
of equipment under its existing equipment purchase contract with
a Taiwanese company. This credit facility will not be available
to the Company after the equipment purchases are completed. As
of the date of this report, substantially all of the Company's
obligations under the equipment purchase agreement had been
completed, and the Company expects that the equipment purchase
arrangement and the related bank credit facility will expire
during the current fiscal quarter.In addition the company has
a $2 million revolving line of credit.The line is to issue and finance
letters of credit. The company is not in compliance with certain of
the financial covenants required by its principal lender, howver the
the company has received a letter from the lender waiving these covenants.
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. In addition to the web-site through which it is
offering computer and software parts and products for sale to
retail customers, during fiscal 1999 the Company launched a new
auto sales website and incurred substantial costs to establish
an Internet broker-dealer business Because the cost of funding
all three of these operations was significant, the Company
recently disposed of the Internet automobile sales business to a
third party buyer in exchange for a 29% equity interest in the
buyer. As a result, the Company will no longer be required to
fund the start-up costs of this business, leaving the Company
with additional funds with which it can develop its remaining
new businesses. The Company expects to fund the additional
costs associated with the new Internet businesses through
internal cash flow, and possibly additional debt or equity
financing. Although the initial start-up expenses of the web-
sites are expected to be significant, the Company believes
that it will have sufficient financial resources to maintain its
new businesses as well as continue its primary wholesale
business. However, the Company has not had any prior
experience in operating any Internet businesses or in operating
a broker-dealer business and cannot therefore accurately predict
the amount of costs it will have to incur in the operation of
these and other future E commerce operations. Accordingly, if
the Company's estimates of revenues and expenses are not
correct, the Company may not have sufficient financing to fund
all of the expenses it expects to incur, and any such shortfall
may have a material adverse effect on the Company's liquidity
and its financial results from operations. In addition, no
assurance can be given that the new Internet operations will
generate significant revenues in the future or that they will
ever be profitable.
Net cash provided by used in operating activities in 1999
was $343,647, as compared to $2,786,732 in 1998 mainly
reflects the net effects of cash provided by accounts
receivable. Provision for bad debts, issuance of stock for
services rendered and lawsuit settlement, offset by an decrease
in accounts payable, interest expense, a net operating loss.
Net cash provided by used in investing activities in 1999
was $942,590, as compared to ($68,941) in 1998, and principally
shows principal payments received on notes receivable, offset by capital
expenditures and advances to related parties.
Net cash provided by used in financing activities in 1999 was
$2,248,156 as compared to $4,264,984 in fiscal 1998. The
decrease in cash from financing activities is principally due to
repayment of the Company's credit facilities to finance its
operations, and due to redeeming the Company's Series A
preferred stock, offset by additional issuance of the Company's
common stock, issuance of preferred stock, and
additional long term borrowing..
The Company believes that its internally generated cash
flow, vendor credit lines and its currently available lines of
credit will be sufficient to fund the Company's working capital
needs for at least the next twelve months.
New Accounting standards not adopted yet
In June 1998 , The Financial Accounting Standards Board
issued Statement of Financial Standards No. 133 "Accounting for
Derivative Instruments and Hedging Activities"(SFAS No. 133).
SFAS No. 133 requires companies to recognize all derivatives
contracts as either assets or liabilities in the balance sheet
and to measure them at fair value. If certain conditions are met
a derivative may be specifically designated as a hedge, the
objective of which is to mach the timing of gain or loss
recognition on the hedging derivative with the recognition of
(I) the changes in the fair value of the hedged forecasted
transaction. For a derivative not designated as a hedging
instrument the gain or loss is recognized in income in the
period of change. SFAS No 133 is effective for all fiscal
quarters of fiscal years beginning after June 15,2000.
Historically the Company has not entered into derivative
contracts either to hedge existing risks or for speculative
purposes. Accordingly the Company does not expect the adoption
of the new standard on January 1, 2001 to affect its financial
statements.
In October 1998, Statement of Financial Accounting Standards No 134,
Accounting for Mortgage Backed Securities Retained After the Securitization
of Mortgage loans Held for Sale by a Mortgage Banking Enterprise. "(SFAS 134)
is effective for financial statements with fiscal years beginning after
December 15, 1998. (SFAS 134 amends SFAS No 65. "Accounting for Certain
Mortgage Banking Activities" which establishes accounting and reporting
standards for certain activities of mortagage banking enterprises and
other enterprises that condut operations which are substantially similar to
the primary operations of a mortgage banking enterprise. The Company does
nto expect adoption of SFAS 134 to have material effect, if any, on its
consolidated position or results of operations.
Effects of Inflation
The Company believes that inflation has not had a material
effect on its net sales and results of operations.
FACTORS THAT MAY AFFECT FUTURE RESULTS
The future success of our business depends on our ability
to successfully distribute products to meet dynamic customer
demand. Our business results depend on our ability to deal with
numerous risks and uncertainties. These include our ability to
deal with competitive pressures, make good pricing decisions,
supply certain products, supply products free of defects,
purchase products at acceptable prices, avoid losses to
inventory value, and employ quality personnel.
Industry Trends
We believe that the growth rate of personal computer
components that we distribute has declined and may remain below
the growth rate from prior years for the foreseeable future. As
a result, we could experience decreased demand for our products
and increased competition. This decline in the growth rate
could adversely affect our largest business.
Competition
All of the businesses that we expect to be engaged in
during the next year are extremely competitive and are dominated
by well funded, internationally known, major competitors. (See,
"Item 1. Business", above for a description of the competition
each of our operations will face.) In each of the markets that
we will operate, including the computer products wholesale
business, the Internet computer retail business, and the on-line
securities broker-dealer businesses, we will be either new
businesses or minor parties. As a result, we will be subject to
all of the risks associated with small companies competing
against large, well-established companies.
New Operations
During most of our prior history, we have been primarily
engaged in the wholesale distribution of certain computer parts
and products. During the last fiscal year, we have started
three new businesses, two of which we will retain and operate
(the third business we recently sold). Both of these new
businesses represents a material deviation of our prior
experience. In particular, we have no experience in the
securities brokerage business. Although we have attempted to
hire personnel that has the requisite experience, we will still
be subject to all of the risks and problems associated with
start-up businesses, including lack of adequate funding, no name
recognition, extreme competition, and the high costs of entering
a new business. As a result, there is no history by which our
expected future performance in these businesses can be measured.
Rapid Technological Change; Inventory Risk
Due to the highly volatile nature of the personal computer
industry, we are frequently required to distribute new products
and product enhancements. The success of new product
introductions is dependent on a number of factors, including
market acceptance, management of inventory levels, availability
of products in appropriate quantities, and risk that new
products may have defects. Accordingly, we cannot determine the
effect that new products will have on our sales or results of
operations.
We acquire inventory in advance of product shipments.
Accordingly, because the markets for our products are volatile
and subject to rapid technological and price changes, there is
risk that we will forecast incorrectly and stock excessive or
insufficient inventory of particular products. Price reductions
by other manufacturers or technological changes, could
materially decrease the value of our inventory. There can be no
assurance that we will be able to successfully manage our
inventory.
In our financial statements, we provide reserves against
any inventories of products that have become obsolete or are in
excess of anticipated demand, accrue cancellation fees of orders
for inventories that have been cancelled, and accrue estimated
costs to correct any product quality problems. Although we
believe our inventory and related reserves are adequate, no
assurance can be given that we will not incur additional
inventory and related charges. Significant declines in
inventory value in excess of established inventory reserves or
dramatic changes in prevailing technology have had, and may
again in the future have a material adverse effect on our
business.
Substantial Competition
The market in which we operate is highly competitive and is
characterized by aggressive pricing practices, downward pressure
on gross margins, frequent introduction of new products, short
product life cycles, continual improvement in product
price/performance characteristics, price sensitivity on the part
of consumers, and a large number of competitors. Competition is
based primarily on product availability, price, credit
availability, speed of delivery, and breadth and depth of
product lines and services. Our business has been, and in the
future may continue to be, adversely affected by industry-wide
pricing pressures and downward pressures on gross margins. Many
of our competitors have greater financial, marketing,
manufacturing, and technological resources, broader product
lines and larger customer bases. If we fail to compete
effectively, our business will be adversely affected.
Low Profit Margins
As a result of price competition, we have low gross profit
and operating margins. These low margins magnify the impact of
variations in net sales and operating costs on our operating
results . Our goal is to partially offset the effects of low
margins by increasing our net sales, trying to make large volume
purchases at a discount, and reducing expenses as a percentage
of net sales. We cannot assure you that we will be able to make
purchases with large volume discounts or otherwise increase our
margins.
Dependence on Third-Party Suppliers
Although certain components essential to our business are
generally available from multiple sources, certain products are
currently obtained from single sources. If the supply of
single-source products were to be delayed or curtailed, our
business could be adversely affected.
Marketing and Distribution
A number of uncertainties may affect the marketing and
distribution of our products. Currently, our primary means of
distribution is through third-party computer resellers. Such
resellers include value added resellers, system integrator, and
dealers. Our business and financial results could be adversely
affected if the financial condition of these resellers weakened
or if resellers discontinued the distribution of our products.
Dependence on Key Personnel
Our success depends to a significant extent upon the
continued service of key marketing, sales, and executive
personnel, and on our ability to continue to attract, retain and
motivate qualified personnel. The competition for such
employees is intense, and the loss of the services of one or
more of these key personnel could adversely affect us. We do
not maintain key man life insurance on any of our key
executives.
Possible Volatility of Stock Price
The market price of our common stock has been, and may
continue to be, highly volatile. Factors such as new product
announcements by us or competitors, quarterly fluctuations in
our operating results, and general conditions in the computer
market may have a significant impact on the market price of the
common stock. In particular, if we were to report operating
results or product development progress that did not meet the
expectations of research analysts, the market price of our
common stock could be materially adversely affected. In
addition, the stock market has often experienced extreme
volatility, which has particularly affected high technology
companies and which has often been unrelated to the business
performance of specific companies.
Year 2000 Issue
The Company uses a number of computer software programs and
operating systems in its internal operations, including
applications used in order processing, inventory management,
distribution, financial business systems and various
administrative functions. The Company has conducted an
independent audit of its internal software applications to
determine that it contains source code that is able to interpret
appropriately the upcoming calendar year 2000. Based on the
independent audit, the Company believes that its computers are
able to handle dates beyond the year 2000. Accordingly, the
Company does not anticipate that it will incur material expenses
to make its computer software programs and operating systems
"Year 2000" compliant. However, there can be no assurance that
unanticipated costs necessary to update software, or potential
systems interruptions, will not exceed the Company's present
expectations and have a material adverse effect on the Company's
business. In addition, failure by the Company's key suppliers,
customers or service providers to make their respective computer
software programs and operating systems "Year 2000" compliant
could have a material adverse effect on the Company.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We are exposed to minimal market risks. Sensitivity of results of
operaions to these risks is managed by entering into long term debt
obligations with appropriate price and term characteristics. We do not
hold or issue derivative, derivative commodity instruments or other
financial instuments for trading ppurposes.
We are exposed to interest rate risk, as additional financing is
periodically need due to the capital expenditures associated with
establishing and expanding our operations. The interest rate that we
will be able to obtain on debt financing will depend on market conditions
at that time, and may differ from the rates the company has secured on its
current debt. Additionally, the Company is exposed to interest rate risk
on amounts borrowed against its credit facilities at September 30, 1999 as
the rates charged by lenders adjusts on the basis of the lenders prime
rate.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The consolidated financial statements and the reports
thereon and notes thereto, which are attached hereto beginning
at page F-1, are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this Item will be contained in
the Company's definitive Proxy Statement for its 1999 Annual
Meeting of Shareholders, and is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this Item will be contained in
the Company's definitive Proxy Statement for its 1999 Annual
Meeting of Shareholders, and is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The information required by this Item will be contained in
the Company's definitive Proxy Statement for its 1999 Annual
Meeting of Shareholders, and is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this Item will be contained in
the Company's definitive Proxy Statement for its 1999 Annual
Meeting of Shareholders, and is incorporated herein by
reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K.
(a)(1) Financial Statements:
Report of Independent Certified Public Accountants
Consolidated Balance Sheets as of September 30, 1998
and 1999
Consolidated Statements of Operations
Consolidated Statements of Shareholders' Equity
Consolidated Statements of Cash Flows
Summary of Accounting Policies
Notes to Consolidated Financial Statements
(a)(2) Schedules:
(a)(3) Exhibits
3.1.1 Articles of Incorporation of Western Micro Distributors,
Inc. dated February 24, 1983, and filed on February 28, 1983. (1)
3.1.2 Certificate of Amendment of Articles of Incorporation of
Western Micro Distributors, Inc. dated August 9, 1983,
and filed on August 30, 1983. (2)
3.1.3 Certificate of Amendment of Articles of Western Micro
Distributors, Inc. dated September 23, 1983, and filed
on September 28, 1983. (1)
3.1.4 Certificate of Amendment of Articles of Incorporation of
Western Micro Distributors, Inc. dated October 3, 1983,
and filed on October 6, 1983. (1)
3.1.5 Certificate of Amendment of Articles of Incorporation of
Western Micro Distributors, Inc. dated March 24, 1984,
and filed on April 5, 1984. (1)
3.1.6 Certificate of Amendment of Articles of Incorporation of
WMD Micro Distributors, Inc. filed on November 2, 1984. (1)
3.1.7 Certificate of Correction of Certificate of Amendment of
WMD Micro Distributors, Inc. filed on approximately
November 21, 1984. (1)
3.1.8 Certificate of Amendment of Articles of Incorporation of
WMD Micro Distributors, Inc.
dated September 29, 1989 and filed on October 3, 1989. (1)
3.1.9 Agreement of Merger between WMD Micro Distributors, Inc.
and the Company dated
September 30, 1989 and filed October 25, 1989. (1)
3.1.10 Certificate of Determination of Rights, Privileges and
Restrictions of Series A Preferred
Stock of PCC Group, Inc. dated July 13, 1990 and filed
July 16, 1990. (2)
3.1.11 Certificate of Amendment of Certificate of Determination
of PCC Group, Inc. dated February 14, 1992 and filed
March 19, 1992. (2)
3.1.12 Certificate of Amendment of Articles of Incorporation of
PCC Group, Inc. dated February 14, 1992 and filed March
19, 1992. (2)
3.2.1 Bylaws of WMD Micro Distributors, Inc. dated March 15, 1983 (1).
3.2.2 Amendment to Bylaws of WMD Micro Distributors, Inc.
dated March 24, 1984 (1).
4.1 Specimen of the Company's Common Stock Certificate. (1)
4.2 Specimen of the Company's Series A Preferred Stock Certificate. (2)
10.1.1 Standard Industrial/Commercial
Single-Tenant-Lease-Gross, dated May 2, 1994 between
Robert C. Chiu and Cindy C. Chiu and the Company. (4)
10.1.2 Extension of Standard Industrial/Commercial
Single-Tenant-Lease-Gross dated May 31, 1996.
10.3.1 The Company's Employee Stock Bonus Plan ("ESOP") dated
October 1, 1988. (2)+
10.3.2 The Company's Incentive Stock Option Plan dated December
15, 1992. (2)+
10.3.3 The Company's Stock Bonus Plan dated December 15, 1992. (2)+
10.3.4 The Company's request dated September 29, 1995 for
determination letter from the Internal Revenue Service
for termination of the Company's ESOP. (5)+
10.3.5 Internal Revenue Service letter of November 14, 1996
providing favorable determination of termination of the
Company's ESOP.+
10.4.1 Dalian Green Resources Corporation Contract dated August
27, 1993 between China Dalian Materials Development
Corporation and the Company. (3)
10.4.2 Agreement dated March 25, 1994 between the Company and
Virgil Flanigan regarding
recycling technology together with related documents. (5)
10.5 Joint Venture Agreement dated March 6, 1996 by and
between, among others, the Company and Hainan Shenhai Group.
21 List of Subsidiaries.
27 Financial Data Schedule
- ----------------------
(1) Previously filed in the Exhibits to the Company's Annual
Report on Form 10-K dated September 30, 1989 and hereby
incorporated herein by reference.
(2) Previously filed in the Exhibits to the Company's Annual
Report on Form 10-K for the fiscal year ended September 30, 1992
and hereby incorporated herein by reference.
(3) Previously filed in the Exhibits to the Company's Annual
Report on Form 10-K for the fiscal year ended September 30, 1993
and hereby incorporated herein by reference.
(4) Previously filed in the Exhibits to the Company's Annual
Report on Form 10-K for the fiscal year ended September 30, 1994
and hereby incorporated herein by reference.
(5) Previously filed in the Exhibits to the Company's Annual
Report on Form 10-K for the fiscal year ended September 30, 1995
and hereby incorporated herein by reference.
+ Management contract, compensatory plan or arrangement.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during
the last quarter of fiscal 1998.
(c) Exhibits:
See (a)(3) above.
PCC Group, Inc. and Subsidiaries
_______________________
Report on Audited Consolidated Financial Statements
For the Years Ended September 30, 1997, 1998 and 1999
_______________________
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, 1998 and 1999, and the related consolidated
statements of income, shareholders' equity and cash flows for each
of the three years in the period ended September 30, 1999. We
have also audited the schedule listed in Item 14(a)(2) of this
Form 10-k. These consolidated financial statements and schedule
are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated
financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether
the consolidated financial statements and schedules are free of
material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the
consolidated financial statements and schedule. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
presentation of the financial statements and schedule. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of the other
auditors, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position
of PCC Group, Inc. and subsidiaries as of September 30, 1998 and
1999, and the results of their operations and their cash flows for
each of the three years in the period ended September 30, 1999 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 10, 1999
PCC GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30,
1998 1999
Assets (Note 5)
Current assets:
Cash and cash equivalents $2,466,580 $ 817,367
Accounts receivable, less allowances for
doubtful accounts of $143,359
and $208,188 3,872,253 1,317,835
Receivables from related parties (Note 6) 1,548,372 1,684,905
Notes receivable - related parties (Note 6) 867,009 125,000
Inventory, less provision for obsolescence
of $276,484 and $67,032 703,051 1,063,355
Prepaids and other current assets 273,967 185,071
Advances to vendors (Note 12) 3,034,254 643,309
Total current assets 12,765,486 5,836,842
Property and equipment, net (Note 2) 126,567 264,245
Notes receivable , less allowances for
possible losses of $0 and $522,000
(Note 1) 1,872,944 1,572,944
Other assets 9,363 124,906
Total assets $14,774,360 $7,798,937
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 5,266,736 $1,561,668
Accounts payable - related parties 648,777 394,592
Accrued liabilities 138,533 102,811
Lines of credit (Note 5) 3,300,000 200,000
Current portion of long-term debt (Note 5) - 400,000
Total current liabilities 9,354,046 2,659,071
Long-term debt less
current portion (Note 5) 35,445 714,405
Total liabilities 9,389,491 3,373,476
Commitments and contingencies (Notes 1 and
4)
Shareholders' equity (Notes 6, 8, 9 and 10):
Non-convertible, cumulative, Series A
preferred stock ($2,120,000 liquidation
preference in 1998) redeemed and retired in
1999 1,200,000 -
Convertible, cumulative, preferred stock
($795,000 liquidation preference in 1999) -
$1,000 stated value, 1,600 shares
authorized, 750 issued and outstanding - 750,000
Non-convertible, cumulative, Series C
preferred stock ($1,063,866 liquidation
preference in 1999) - $1,053 stated value
1,000 shares authorized, issued and
outstanding - 1,053,333
Common stock, $.01 stated value; shares
authorized - 10,000,000; shares issued and
outstanding - 2,705,339 and 3,005,339 27,053 30,053
Additional paid-in capital 1,721,313 3,088,365
Retained earnings (accumulated deficit) 2,497,327 (391,482)
Treasury stock, 76,500 and 87,750 shares at
cost (60,824) (104,808)
Total shareholders' equity 5,384,869 4,425,461
Total liabilities and shareholders' equity $14,774,360 $ 7,798,937
See accompanying summary of accounting policies and notes to
consolidated financial statements.
PCC GROUP, INC. AN DSUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
Year ended September 30,
1997 1998 1999
Net sales (Notes 6 and 11): $63,643,054 $79,728,294 $69,561,525
Cost of sales (Note 6) 60,823,433 76,032,955 67,285,726
Gross profit 2,819,621 3,695,339 2,275,799
Selling, general and
administrative expenses 2,413,986 2,096,711 4,116,303
Income (loss) from operations 405,635 1,598,628 (1,840,504)
Other income (expense):
Interest expense, net (42,259) (184,715) (22,039)
Gain on sale of stock portfolio
(Note 6) - - 382,991
Service Income (Note 6) - - 240,776
Loss on sale of investments (13,306) (557,438) -
Loss on sale of investment in
and advances to
joint venture (Note 1) - (300,730) -
Provision for possible losses on
notes receivable
(Note 1) - - (522,000)
Other - net 15,305 30,300 126,704
(40,260) (1,012,583) 206,432
Income (loss) before income taxes 365,375 586,045 (1,634,072)
Income taxes (Note 3) (15,000) (181,964) (3,200)
Net income (loss) 350,375 404,081 (1,637,272)
Dividends applicable to preferred
stock (160,000) (160,000) (188,867)
Deemed dividends on preferred
stock (Note 8) - - (198,204)
Net income (loss) applicable to
common shares $ 190,375 $ 244,081 $(2,024,343)
Basic income (loss) per common
share $ 0.07 $ 0.10 $(0.73)
Basic weighted average number of
common shares outstanding 2,566,144 2,563,017 2,759,002
Diluted income (loss) per common
share $0.07 $ 0.08 $(0.73)
Diluted weighted average number
of common shares outstanding 2,829,423 2,910,985 2,759,002
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 30,1997,198,AND 1999
Preferred Stock Common Stock Treasury Stock
Shares Amount Shares Amount Shares Amount
Balance, October 1, 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 - - - - - -
Balance, Sept30, 1997 250,000 1,200,000 2,647,839 26,478 99,000 (146,945)
Exercise of stock
options (Note 10) - - 57,500 575 - -
Re-issuance of treasury
stock (Note 9) - - - - (25,000) 93,750
Purchase of treasury
stock (Note 9) - - - - 2,500 (7,629)
Net income - - - - - -
Balance, Sept30, 1998 250,000 1,200,000 2,705,339 27,053 76,500 (60,824)
Issuance of preferred
stock (Note 8) 750 750,000 - - - -
Deemed dividends on
preferred stock (Note 8) - - - - - -
Redemption of Series A
preferred stock(Note 8) (250,000)(1,200,000) - - - -
Dividends on Series A
preferredstock (Note 8) - - - - - -
Issuance of Series C
preferred stock(Note 8) 1,000 1,053,333 - - - -
Issuance of common
stock (Note 8) - - 209,000 2,090 - -
Exercise of stock options
(Note 10) - - 91,000 910 - -
Purchase of treasury stock
(Note 9) - - - - 11,250 (43,984)
Net income (loss) - - - - - -
Balance, Sept. 30, 1999 1,750 $1,803,333 3,005,339 $30,053 87,750 $(104,808) $
PCC GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
FOR THE YEARS ENDED SEPTEMBER 30,1997,1998, AND 1999
(continued)
Retained
Additional Earnings
Paid in Stock (Accumulated
Capital Subscription Deficit) Total
Balance October 1,1996 $1,347,085 230,500 $1.742,871 $4,545,737
Issuance of common
stock(Note 8) 229,988 (230,500) - -
Purchase of treasury
stock (Note 9) 33,565 - - (112,695)
Net Income - - 350,375 350,375
Balance Sept. 30,1997 1,610,638 - 2,093,246 4,783,417
Exercise of stock
options(Note 10) 110,675 - - 111,250
Re-issuance of treasury
stock(Note 9) - - - 93,750
Purchase of treasury
stock (Note 9) - - - (7,629)
Net Income - - 404,081 404,081
Balance Sept. 30,1998 1,721,313 - 2,497,327 5,384,869
Issuance of preferred
stock (Note 8) - - - 750,000
Deemed dividends on
preferred stock(Note 8) 198,204 - (198,204) -
Redemption of Series A
preferred stock(Note 8) - - - (1,200,000)
Dividends on Series A
preferred stock(Note 8) - - (1,053,333) (1,053,333)
Issuance of Series C
preferred stock(Note 8) - - - 1,053,333
Issuance of common
stock (Note 10) 918,364 - - 920,454
Exercise of stock
options (Note 10) 250,484 - - 251,394
Purchase of treasury
stock (Note 9) - - - (43,984)
Net Income - - (1,637,272) (1,637,272)
Balance Sept. 30, 1999 3,3088,365 - (391,482) 4,425,461
See accompanying summary of accounting policies and notes to consolidated
financial statements.
PCC GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended September 30,
1997 1998 1999
Cash flows from operating
activities:
Net income (loss) $350,375 $404,081 $(1,637,272)
Adjustments to reconcile net
income (loss) to net cash
provided by (used in) operating
activities:
Depreciation and amortization 113,407 46,621 46,732
Provision for bad debts 152,115 159,220 642,981
Interest earned on notes
receivable - - (222,000)
Gain on sale of fixed assets - (7,949) -
Gain on sale of equipment - - (2,000)
Loss on sale of investments 13,306 557,438 -
Loss on sale of investment in
joint venture - 300,730 -
Stock issued for services rendered - - 124,430
Net loss on settlement of
litigation - - 693,550
Gain on sale of stock portfolio - - (382,991)
Increase (decrease) from changes in:
Purchases of investments held
for trading (12,015,949) (32,437,411) -
Proceeds on sales of investments
held for trading 11,991,527 30,618,220 -
Accounts receivable (2,238,154) (71,900) 2,433,437
Receivable from related parties 208,628 (1,180,718) (136,533)
Inventory 322,574 31,622 (360,304)
Prepaids and other assets (92,045) 63,854 60,353
Advances to vendors - (3,034,254) 2,390,945
Accounts payable and accrued
liabilities 1,898,759 1,763,714 (3,994,975)
Income taxes payable 2,050 - -
Net cash provided by (used in)
operating activities 706,593 (2,786,732) (343,647)
Cash flows from investing
activities:
Capital expenditures (67,810) (79,033) (186,261)
Loans to related parties - - (125,000)
Proceeds on sale of fixed assets - 13,500 3,851
Principal payments received from
notes receivable -
related parties - 100,000 1,250,000
Net advances to joint venture - (100,000) -
Capital contributions/advances to
joint venture (9,119) (3,408) -
Net cash provided by (used in)
investing activities (76,929) (68,941) 942,590
Cash flows from financing
activities:
Line of credit- borrowing 1,400,500 14,920,000 20,180,000
Line of credit - repayments (1,260,500) (11,760,000) (23,280,000)
Proceeds from common stock
issuance - 111,250 366,868
Redemption Series A preferred
stock - - (1,200,000)
Proceeds from preferred stock
issuance - - 750,000
Change in margin liability (123,797) 983,711 -
Principal payments on long-term
debt (1,413) (5,681) (40,638)
Borrowing of long-term debt 17,791 23,333 1,019,598
Purchase of treasury stock (112,695) (7,629) (43,984)
Net cash provided by (used in)
financing activities (80,114) 4,264,984 (2,248,156)
Net increase (decrease) in cash
and cash equivalents 549,550 1,409,311 (1,649,213)
Cash and cash equivalents,
beginning of year 507,719 1,057,269 2,466,580
Cash and cash equivalents,
end of year $ 1,057,269 $ 2,466,580 $ 817,367
Supplemental disclosure information:
Cash paid during the year for:
Interest $ 19,512 $ 198,702 $ 245,540
Income taxes $ 12,950 $ 106,000 $ 55,800
Supplemental disclosure of non-cash activities:
During fiscal 1999, in conjunction with the Company's redemption of
its Series A preferred stock, the Company converted $1,053,333 of
cumulative unpaid dividends payable into 1,000 shares of Series C
preferred stock (Note 8). In addition, the Company settled the
case filed against the tire recycling inventor and recorded a note
payable in the amount of $100,000 (see Notes 1 and 5). Lastly, the
Company recorded deemed dividends relating to its 8% Convertible
Preferred Stock (Note 8).
During fiscal 1998, the Company sold its investment in and advances
to a joint venture (Note 1). In addition, the Company sold its
securities and other negotiable assets (Note 6) and re-issued
treasury stock to a financial advisor (Note 10). As a result, the
following non-cash transactions occurred:
Increase (decrease) in assets and (increase) decrease in
liabilities from:
Sale of investment:
Investment in and advances to joint venture $ (2,807,007)
Notes receivable 1,872,944
Deferred gain 933,063
Accounts receivable 1,000
Sale of securities:
Securities and other negotiable assets (2,278,378)
Notes receivable - related parties 867,009
Stock margin liability 1,411,369
Treasury stock re-issuance:
Prepaid assets 93,750
During fiscal 1997, the Company had no non-cash
transactions.
See accompanying summary of accounting policies and notes to
consolidated financial statements.
PCC GROUP, INC. AND SUBSIDIARIES
SUMMARY OF ACCOUNTING POLOCIES
ORGANIZATION
PCC Group, Inc., a California corporation, and subsidiaries (the
"Company") are primarily engaged in the wholesale and retail
distribution of microcomputer products and components. Products
include add-on boards, CD-ROM drives, hard disk drives,
monitors, sound cards and keyboards. The retail operations of
the Company are conducted by a wholly-owned subsidiary, Computer
Discount Center, at 123CDC.com over the Internet. The Company
has also established a division and a subsidiary in non-computer
sales industries. Auto Discount Center, is engaged in retail
sales operations for pre-owned and new automobiles over the
Internet at 123ADC.com. The Company has also formed Executive Trading
systems, a division that develops, distributes and supports hardware and
software solutions for the online trading and brokerage industries.
Through the Executive Trading Systems Division, the company formed
a wholly owned subsidiary ExecuTrade, Inc. a start-up broker/dealer
registered with the NASD and SIPC for the purpose of offering clients
internet based investing. In 1997, the Company entered into a joint
venture to focus on the development and commercialization of certain
environment-related products was to be marketed principally in the Pacific
Rim markets. The investment in this joint venture was disposed of
during fiscal 1998. (See Note 1.) The Company is located in
California and has three wholly-owned subsidiaries. The
accompanying consolidated financial statements include the
accounts of the Company and its subsidiaries. All significant
intercompany transactions and balances have been eliminated.
REVENUE RECOGNITION
The Company recognizes revenue when the risk of loss for the
product sold passes to the customer which is generally when goods
are shipped.
ACCOUNTS RECEIVABLE AND CONCENTRATION OF CREDIT RISK
The Company grants uncollateralized credit to its customers who
are located in various geographical areas. The Company maintains
its cash accounts in high-quality financial institutions. At
September 30, 1998 and 1999, the Company had bank balances,
including cash, cash equivalents and short-term investments, of
approximately $2,466,580 and $817,367, which exceeded federally
insured limits.
INVENTORY
Inventory consist principally of microcomputer component parts and
is 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 three to five years.
Maintenance, repairs and minor renewals are charged directly to
expense as incurred. Additions and betterments to property and
equipment are capitalized. When assets are disposed of, the
related cost and accumulated depreciation thereon are removed from
the accounts and any resulting gain or loss is included in
operations.
INVESTMENT IN JOINT VENTURE
The investment in joint venture was accounted for on the equity
method of accounting. This investment has not been consolidated
into these financial statements due to significant doubt about the
Company's ability to control the joint venture since the tire
recycling plant is in China and is subject to close government
supervision. (See Note 1.)
INCOME TAXES
The Company accounts for income taxes using the liability
method, which requires an entity to recognize deferred tax
liabilities and assets. Deferred income taxes are recognized
based on the differences between the tax bases of assets and
liabilities and their reported amounts in the financial
statements which will result in taxable or deductible amounts in
future years. Further, the effects of enacted tax laws or rate
changes are included as part of deferred tax expenses or
benefits in the period that covers the enactment date. A
valuation allowance is recognized if it is more likely than not
that some portion, or all of, a deferred tax asset will not be
realized.
CASH AND CASH EQUIVALENTS
For the purpose of these statements, cash equivalents include
investments with original maturities of three months or less.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash, trade accounts receivable, notes
receivable, trade accounts payable and accrued payable are
reasonable estimates of their fair value because of the short
maturity of these items. The carrying amounts of the Company's
credit facilities approximate fair value because the interest
rates on these instruments are subject to change to market
interest rates. Other long-term notes receivable approximate
fair value because the interest rate was market at the date of
issuance. The fair value of the Company's related party
receivables cannot be determined due to the nature of
transaction.
INVESTMENTS
Statement of Financial Accounting Standards (SFAS) No. 115,
"Accounting for Certain Investments in Debt and Equity Securities"
expands the use of fair value accounting but retains the use of
amortized cost for those debt securities where there is a positive
intent and ability to hold such debt securities to maturity. The
Company classified its investments in debt and equity securities
as trading securities. The Company's trading securities are
reported at their estimated fair value with unrealized gains and
losses recognized in earnings. The Company recognized gains
(losses) on sale of trading investments of $(13,306), $(557,438)
and $0 for the years ended September 30, 1997, 1998 and 1999.
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.
EARNINGS PER SHARE
Effective September 30, 1998, the Company adopted Statement of
Financial Accounting Standards No. 128, "Earnings per Share"
("SFAS 128"). The statement replaces the calculation of primary
and fully diluted earnings (loss) per share with basic and
diluted earnings (loss) per share, the retroactive application
of this SFAS had no impact on previously reported amounts.
Basic earnings (loss) per share includes no dilution and is
computed by dividing income (loss) available to common
shareholders by the weighted average number of shares
outstanding during the period. Diluted earnings (loss) per
share reflects the potential dilution of securities that could
share in the earnings of an entity, similar to fully diluted
earnings (loss) per share.
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with U.S.
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets
and liabilities at the date of financial statements and the
reported amounts of revenue and expenses during the reporting
period. Among the more significant estimates included in these
financial statements are the provision for doubtful accounts
receivable, provision for slow moving inventory, and the
deferred income tax asset allowance. Actual results could
differ from those estimates.
RECLASSIFICATION
Certain reclassifications have been made to conform the prior
year's with the current year's presentation.
NEW ACCOUNTING STANDARDS NOT ADOPTED YET
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Standards No 133, "Accounting for Derivative
Instruments and Hedging Activities"(SFAS No 133)". SFAS No 133
requires companies to recognize all derivative contracts as either
assets or liabilities in the balance sheet and to measure them at
fair value. If certain conditions are met, a derivative may be
specifically designated as a hedge, the objective of which is to
matche the timing of gain or loss recognition on the hedging
derivative with the recognition of (i) the changes in the fair
value of the hedged asset or liabilit that are attributable to
the hedged risk or (ii) the earnings effect of the hedged
forecasted transaction. For a derivative not designated as a
hedging instrument the gain or loss is recognized in income in the
period of change. SFAS No 133 is effective for all fiscal quarters of
fiscal years beginning after June 15, 2000.
In October 1998, Statement of Financial Accounting Standards No.
134, " Accounting for Mortgage-Backed Securities Retained After
the Securitization of Mortgage Loans Held for Sale By a Mortgage
Banking Enterprise," ("SFAS 134") is effective for financial
statements with fiscal years beginning after December 15, 1998.
SFAS 134 amends SFAS No. 65. "Accounting for Certain Mortgage
Banking Activities" which establishes accounting and reporting
standards for certain activities of mortgage banking enterprises
and other enterprises that conduct operations which are
substantially similar to the primary operations of a mortgage
banking enterprise. The Company does not expect adoption of SFAS
134 to have material effect, if any, on its consolidated
financial position or results of operations.
NOTE 1 - INVESTMENT IN AND ADVANCES TO JOINT
VENTURES
Dalian Green Resources Joint Venture
The Company entered into a joint venture agreement ("Agreement")
with a corporation in Dalian, China, to build a facility which
recycles tires by utilizing innovative technology and converts the
tires into saleable solids, liquids and gases. Under the
Agreement, the Company has agreed to purchase up to 55% of the
equity of Dalian Green Resources Corporation ("DGR") for
$1,960,000 and the contribution by the Company of tire recycling
technology. Through September 30, 1998, the joint venture had no
operations and the Company had contributed tire recycling
technology and made cash equity contributions of $1,550,000.
Under the terms of the Agreement, the owners of DGR will share in
the profits of the venture according to their relative equity
ownership. During the years ended September 30, 1997, 1998 and
1999, the Company made no equity contributions.
The Company entered into a licensing agreement with an inventor of
tire recycling technology to utilize his recycling process. Under
the terms of the licensing agreement, the Company has the
exclusive right to use this technology in seven Pacific Rim
countries, including China. In return, the Company issued 50,000
shares of the Company's unregistered stock valued at $35,000 and
will issue an additional 50,000 shares of stock when the tire
recycling plant is operational. The Company has also agreed to
repurchase these shares for $3.00 per share, after the DGR plant
is completed if the stock can not be sold to unrelated parties for
at least that price. In addition, the inventor will receive an
annual payment of 20% of the Company's share of the net profits
from the venture. The Company has guaranteed that this annual
payment to the inventor will not be less than $100,000. In
addition, the inventor has the option, at all times for the
duration of the agreement, to purchase unregistered common shares
of the Company at one-third of its market value at the time of
purchase. During fiscal 1997, the Company's relationship with the
inventor deteriorated after the technology failed to perform. The
Company has filed action against the inventor for breach of
contract.
The Company also entered into an agreement with DGR to purchase
equipment on DGR's behalf for the tire recycling plant. The
Company acquired and resold this equipment to DGR during fiscal
1995 and 1996. The Company recognized a gain on the sale to the
extent of their nonownership interest (45%) in DGR and any cash
received from DGR. A gain of $135,000, was recognized during the
year ended September 30, 1996. The Company also had a deferred
gain of $933,063 and unrecognized gain of $1,827,056 stated on the
consolidated balance sheet as of September 30, 1997.
PCC GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - INVESTMENT IN AND ADVANCES TO JOINT VENTURES (Continued)
On September 29, 1998, the Company sold American Tire Collection
(ATC), a wholly owned subsidiary, and its investment in and
advances to Dalian Green Resource Co. Ltd. (Dalian) (collectively
"the Purchased Assets") to a third party in exchange for a three
year, $3,700,000 secured convertible promissory note (the Note).
The Note is secured by a first priority lien on all of the assets
of ATC, including the Purchased Assets. The Note bears interest
at 6% per annum and is convertible, at the option of the Company,
into 70% of the equity interest of ATC any time during these three
years. As a result of the sale, the Company wrote-off $300,730 of
deferred start-up costs. The gain on sale of $1,827,056 was
deferred and will be recognized on the installment method as the
Note is collected.
As of September 30, 1999, Dalian Green Resource Co. Ltd. has not
received its license to operate from the Chinese government. The
Company believes that the obtaining of this license is neither
probable nor remote, but reasonably possible. As such, due to
conservatism, the Company has established an allowance against
this receivable in the amount of $522,000. During 1999, the
Company recorded $222,000 of accrued interest on this note, and
set up an equal amount of allowance for possible loss. Note
receivable as of September 30, 1998 and 1999 is as follows:
September 30,
1998 1999
Note receivable $3,700,000 $3,700,000
Accrued Interest - 222,000
Unrecognized gain (1,827,056) (1,827,056)
Allowance for possible loss - (522,000)
Net $1,872,944 $1,572,944
NOTE 2 - PROPERTY AND EQUIPMENT
Property and equipment consists of:
September 30,
1998 1999
Furniture, fixtures and equipment $ 613,630 $ 450,879
Software 130,207 243,206
Vehicles 118,888 125,813
Leasehold improvements 6,900 11,281
869,625 831,179
Accumulated depreciation and
amortization (743,058) (566,934)
Property and equipment, net $ 126,567 $264,245
NOTE 3 - INCOME TAXES
Income taxes are as follows:
Years ended September 30,
1997 1998 1999
Current tax expense:
Federal $ - $ 33,649 $ -
State 15,000 148,315 3,200
$15,000 $181,964 $ 3,200
The components of the net deferred tax asset are as follows:
September 30,
1998 1999
Deferred tax asset $ 1,026,765 $ 1,703,781
Valuation allowance (1,026,765) (1,703,781)
$ - $ -
NOTE 3 - INCOME TAXES (Continued)
The types of temporary differences between the tax bases of assets
and liabilities and their financial reporting amounts that give
rise to the net deferred tax asset, and their approximate tax
effects, are as follows:
September 30,
1998 1999
Inventory and bad debt reserves $ 197,117 $ 317,568
State taxes 50,427 -
Shareholder's salary accrual 23,901 7,968
Capital loss carryforwards 227,138 227,138
Net operating loss carryforwards 528,034 1,151,107
Other 148 -
Valuation allowance (1,026,765) (1,703,781)
$ - $ -
Management is unable to determine whether realization of the net
deferred tax asset is more likely than not and accordingly a 100%
valuation allowance has been established.
The difference between the effective tax rate and that computed
under the federal statutory rate is as follows:
Years ended September 30,
1997 1998 1999
Federal statutory rate 34% 34% 34%
Change in valuation allowance (34) (15) (42)
State taxes, net of federal benefit 4 24 -
Effect of lower AMT rate - (14) -
Permanent differences - 2 8
4% 31% -%
During fiscal 1998, the Company utilized $1,593,229 of the net
operating loss carryforward.
As of September 30, 1999, for federal income tax purposes, the
Company had approximately $3,200,000 of federal income tax net
operating loss carryforwards expiring through 2019 and
approximately $800,000 of state net operating loss carryforwards
expiring through 2004. In addition, the Company has approximately
$600,000 and $300,000 of capital loss carryforwards for federal
and state purposes. The annual utilization of the net operating
loss carryforward may be limited due to the provisions of Internal
Revenue Code section 382 and subsequent stock ownership changes by
the Company.
NOTE 4 - 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, 1999 are as follows:
Year ending
September 30, Amount
2000 $ 134,360
2001 113,274
2002 111,225
2003 67,860
$ 426,719
Rental expense for the years ended September 30, 1997, 1998 and
1999 was approximately $104,950, $90,640 and $119,859.
Economic Dependency
A majority of the Company's fiscal 1997, 1998 and 1999 sales were
derived from products supplied by one vendor. While the Company
believes that alternative sources of supply exist, the loss of the
right to distribute products from this vendor might materially and
adversely impact its operations.
Lawsuits
The Company is, from time to time, involved in various lawsuits
generally incidental to its business operations, consisting
primarily of collection actions and vendor disputes. In the
opinion of management, the ultimate resolution of these matters,
if any, will not have a significant effect on the financial
position, operations or cash flows of the Company.
NOTE 5 - DEBT
The Company has three lines of credit agreements expiring through
March 31, 2000, which provide for borrowings of up to $8,500,000
and are collateralized by substantially all of the Company's
assets. One line is for $2 million dollars and is used to issue
and finance letters of credit.The balance outstanding under these
lines of credit at September 30, 1998 and 1999 was $3,300,000 and
$200,000. The borrowings under these agreements bear interest at
the prime rate (8.25% at September 30, 1999) plus 1% to 1.25%. The
terms of the line of credit agreements contain, among other provisions,
requirements for maintaining defined levels of working capital,
tangible net worth, annual capital expenditures and a debt-to-
equity ratio. The Company was not in compliance with the financial
covenants contained in the line of credit agreements at
September 30, 1999, however the company has recieved a letter from
the lender waiving those requirements for the fiscal year ending
September 30, 1999.
NOTE 5 - DEBT (Continued)
During September 1997, December 1997 and October 1998, the Company
entered into three equipment loans maturing through 2002, 2001 and
2002. These loans bear interest of 8.9%, 9.7% and 2.9%, and are
collateralized by certain equipment.
During February 1999, the Company borrowed $1,000,000 from its
principal lender. Principal payments of $27,778 are paid monthly
and mature through August 2002. The borrowings under this note
bear a variable interest rate equal to the prime rate (8.25% at
September 30, 1999).
In June 1999, in conjunction with the settlement of litigation
with a former employee, the Company issued a promissory note in
the amount of $100,000. This note bears interest at 6%, is
payable in two annual installments of $50,000, and matures in June
2001.
Principal aggregate amounts of notes payable are as follows:
Year ending
September 30, Amount
2000 $ 400,000
2001 380,894
2002 333,511
$ 1,114,405
NOTE 6 - 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 $1,494,355
and $279,059 as of September 30, 1998 and 1999.
Included in the accompanying consolidated statements of operations
are sales to related parties of $2,744,229, $2,693,628 and
$2,568,640 for the years ended September 30, 1997, 1998, and 1999
and purchases from related parties of $179,302, $2,182,756 and
$398,638 for the years ended September 30, 1997, 1998 and 1999.
In addition the Company has outstanding n trade receivables with
related parties, as of September 30, 1998 and 1999 of $54,017 and
$179,017. 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.
NOTE 6 - RELATED-PARTY TRANSACTIONS (Continued)
During 1992, the Company sold its 51% interest in an apparel
company to a related shareholder for $408,000, which consisted of
$204,000 in cash and a note receivable in the amount of $204,000.
In connection with the sale, the Company entered into a management
agreement to provide certain management, accounting and
administrative support services to this corporation. The note
receivable, which is collateralized by the shares of this
corporation, bears interest at 8% per annum with the principal
balance and any unpaid accrued interest due June 30, 1997. As of
September 30, 1997, the outstanding balance on this note
receivable was $100,000, and was collected during fiscal 1998.
During June 1998, the Company sold its entire portfolio of
securities and other negotiable assets to a related party (the
Seller) in exchange for a one year, $1,250,000 secured promissory
note (the Note). The Note is secured by the transferred
securities and 250,000 shares of the Company's Series A preferred
stock owned by the Seller. The Note bears interest of 8.5% and is
payable quarterly. The amount of the note exceeded the fair value
of the securities by $382,991 on the transaction date. The
Company recorded a deferred gain to be recognized as the Note was
collected. The Note receivable as of September 30, 1998 was as
follows:
September 30,1998
Note receivable $ 1,250,000
Deferred gain (382,991)
Net $ 867,009
During fiscal 1999, the balance on this note receivable was
collected and the Company recorded a gain of $382,991.
During fiscal 1998, the Company entered into an agreement with a
related party (the Party) in which the Company would acquire
certain customized equipment on behalf of the Party. As of
September 30, 1999 the Company had a receivable due from the
Party of $1,351,828. The balance is net of deferred income of
$72,000. In the course of providing services under this
agreement, the Company recorded a service income of $240,776 during
fiscal 1999.
During fiscal 1999, the Company redeemed all of its outstanding
Series A preferred stock held by a related party for $1,200,000
(see Note 8).
NOTE 7 - EARNINGS PER SHARE
The components of basic and diluted earning per share were as
follows:
Year Ended September 30,
1997 1998 1999
Numerator
Net income (loss) $ 350,375 $ 404,081 $ (1,637,272)
Preferred stock dividends (160,000) (160,000) (188,867)
Deemed dividend on
preferred stock (Note 8) - - (198,204)
Income (loss) available for
common stockholders 190,375 244,081 (2,024,343)
Denominator
Weighted average number of
common shares outstanding
during the period 2,566,144 2,563,017 2,759,002
Add: Assumed exercise of
outstandingstock options 263,279 347,968 **
Common stock and common
stock equivalents used for
diluted EPS $ 2,829,423 $ 2,910,985 $ 2,759,002
Per share amounts
Basic earnings per share $0.07 $0.10 $ (0.73)
Diluted earnings per share $0.07 $0.08 $ (0.73)
** The effect of outstanding stock options is not included as
the result would be anti-dilutive.
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. 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 1997 or 1998.
NOTE 8 - PREFERRED AND COMMON STOCK (Continued)
During fiscal 1999 the Company redeemed all of its outstanding
Series A preferred stock for $1,200,000. In conjunction with the
redemption, the cumulative unpaid dividends in arrears totaling
$1,053,333 were converted into 1,000 shares of a new series of
preferred stock, designated Series C preferred stock. The
stated value of this new stock is $1,053 per share and
accumulates dividends at a rate of 6% per annum. The non-
voting, non-convertible Series C preferred stock was given a
liquidation preference value and a redemption price of $1,000
per share ($1,053,333 total liquidation preference) plus
cumulative unpaid dividends which totaled $10,533 at September
30, 1999. The Series C preferred stock is redeemable, at the
Company's option, at any time.
During fiscal 1999, the Company's Board of Directors established
and designated 1,600 shares of convertible preferred stock, 8%
Convertible Preferred Stock. The Company issued 750 shares of
the newly designated stock. The stated value of this new stock
is $1,000 per share and accumulates dividends at a rate of 8%
per annum. The preferred shares are convertible into common
shares at a conversion price equal to the lower of the (a)
average of the three lowest sales prices as reported by Nasdaq
for the 22 consecutive trading days immediately preceding the
conversion date; and (b) 125% of the lowest closing sales price
of a share of common stock reported on Nasdaq on the date a
future registration statement becomes effective. The preferred
stock was given a liquidation preference value of $1,000 per
share ($750,000 total liquidation preference) plus cumulative
unpaid dividends which totaled $45,000 at September 30, 1999.
The preferred stock is redeemable, at the Company's option, at
120% of the stated value of the shares to be redeemed plus any
accrued and unpaid dividends, at any time.
The Company recorded deemed dividends of $198,204 during the
year ended September 30, 1999 with respect to the 8% Convertible
Preferred Stock. This amount represents the
difference between the liquidation value of the preferred stock
and the estimated market value of the common shares issuable
upon conversion as of the issue date of the preferred shares.
In conjunction with the 8 % Convertable Preferred Stock issuance,
The Company issued warrants, with an estimated value of $503,283,
to certain investment advisors as payment rendered. (Note 11).
During fiscal year 1996, the Company had three private placement
offerings. The first two private placement offerings, 248,142
shares were issued at approximately $3.40 a share. Net proceeds
received were $762,500 and expenses associated with the offerings
were $80,000 which was charged to contributed capital in excess of
par. As of September 30, 1996, no stock was issued for the third
private placement offering. Accordingly, the net proceeds of
$230,500 from the third private placement was reflected on the
financial statements as Stock Subscriptions. In November 1996,
51,222 shares were issued for the third private placement
offering.
During fiscal year 1997 and 1998 the Company was not involved in a
private offering.
During fiscal year 1998, the Company issued 57,500 shares of
common stock upon the exercise of various stock options and
warrants at prices ranging from $1.50 to $2.50, and received
proceeds of $111,250.
NOTE 8 - PREFERRED AND COMMON STOCK (Continued)
During fiscal year 1999, the Company issued 21,000 unregistered
shares to foreign investors pursuant to Regulation S under the
Securities the Act of 1933 at $5.50 per share. In addition, the
Company issued 91,000 shares of common stock upon the exercise
of various stock options and warrants at prices ranging from
$2.00 - $3.50. In fiscal 1999, the Company settled the case
filed against the tire recycling technology inventor (see
Note 1). Pursuant to the settlement of the lawsuit, the Company
issued 162,500 shares of common stock to this inventor. The
value of the shares issued, $680,550, was charged in Selling,
General, and Administrative expenses. The Company issued 25,500
shares as consideration for consulting and legal services
rendered.
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 1997, the Company repurchased 30,500 shares of
treasury stock at an average per share cost of $3.50. In prior
years the Company purchased 68,500 shares of treasury stock at an
average per share cost of $.50. The Company treated the purchase
of treasury stock as though the stock was cancelled. During
fiscal 1997, it was determined that the treasury stock was not
cancelled, and the 68,000 shares of common stock were included in
treasury stock.
During fiscal 1998, the Company repurchased 2,500 shares of
treasury stock at an average per share cost of $3.05. In
addition, the Company re-issued 25,000 shares to a financial
advisor as compensation for future services to be performed and
recorded prepaid consulting fees of $93,750.
During fiscal 1999, the Company repurchased 11,250 shares of
treasury stock at an average per share cost $3.91. The Company
has 87,750 shares of treasury stock.
NOTE 10 - STOCK OPTIONS AND WARRANTS
The Company provides a non qualified stock option plan and an
incentive stock option plan for its employees, officers and
directors.
The nonqualified 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 302,300
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. During fiscal 1999, 10,000 shares of
stock options were granted to one of the Company's employees.
NOTE 10 - STOCK OPTIONS AND WARRANTS (Continued)
The incentive stock option plan provides for the issuance of up to
250,000 shares of common stock to designated employees and
executive officers of the Company, of which, 122,700 shares were
granted to the Company's officers. During fiscal year 1998 and
1999, 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 ending September 30,
1997 1998 1999
Net income (loss) attributable to
common stockholders:
As reported $ 190,375 $ 244,081 $(2,070,561)
Pro forma 45,440 202,798 46,218
Diluted income (loss) per common
share
As reported .07 .08 (0.73)
Pro forma .02 .07 (0.75)
During March 1998, the Company entered into an Exclusive
Financial Advisor/Investment Banker Agreement. In connection
with this agreement, the Company issued warrants to purchase
300,000 shares of common stock with exercise prices ranging from
$2.50 to $5.00 per share. Of the 300,000 stock warrants issued,
100,000 are immediately exerciseable and 200,000 are exerciseable
upon certain performance objectives being met. None of the
performance requirements were fulfilled during the year. The
warrants expire one year following the grant date. The Company
has not recorded any compensation expense in connection with the
issuance of these warrants, as their value was not considered
significant.
During October 1998, the Company reissued 75,000 warrants pursuant
to the Exclusive Financial/Investment Banker Agreement detailed
above. These warrants had previously been cancelled during the
year ended September 30, 1998. The Company has not recorded any
compensation expense in connection with the issuance of these
warrants, as their value was not considered significant. During
February 1999, in conjunction with the Company's issuance of its
8% Convertible Preferred Stock, The Company granted 125,000 warrants to
certain investment advisors as payment for services received in
conjunction with this financing. The fair value of these warrants
is $503,284. (Note 8).
NOTE 10 - STOCK OPTIONS AND WARRANTS (Continued)
A summary of changes in stock options and warrants during each
year is presented below:
September 30,
1997 1998 1999
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
Options and
warrants
outstanding
at beginning
of year 395,000 $1.52 415,000 $ 1.54 575,000 $ 2.49
Options and
warrants
granted 20,000 2.00 300,000 3.81 210,000 6.34
Options and
warrants
cancelled - - (82,500) 2.64 (229,000) 4.17
Options and
warrants
exercised - - (57,500) 1.93 (91,000) 2.76
Options and
warrants at
end of year 415,000 $ 1.54 575,000 $ 2.49 465,000 $3.35
Options and
warrants
exercisable
at end of
year 292,300 1.47 252,300 1.56 465,000 3.35
Weighted-
average fair
value of
options and
warrants
granted
during the
year $ 3.10 $ .40 $ 3.90
NOTE 10 - STOCK OPTIONS AND WARRANTS (CONTINUED)
The following table summarizes information about the stock options
and warrants outstanding at September 30, 1999.
Options and
Options and Warrants Outstanding Warrants Exercisable
Weighted
Number Average Weighted Number Weighted
Outstanding Remaining Average Exerciseable Average
at Contractual Exercise at Exercise
Exercise Price 9/30/99 Life Price 9/30/99 Price
$1.25 to
$1.50 315,000 0.91 years $1.29 315,000 $1.29
$2.00 to
$3.00 25,000 2.83 years 2.20 25,000 2.20
$5.25 to
$10.52 125,000 1.92 years 8.76 125,000 8.76
$1.25 to
$10.52 465,000 1.28 years $3.35 465,000 $3.35
Options and warrants exercisable at September 30, 1999 have an
average exercise price of $3.35. The fair value of the stock
options and warrants granted during 1998 and 1999 was $120,403 and
$526,969, 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,
1998 1999
Discount rate - bond yield rate 5% 4.95 - 5.39%
Volatility 107.03% 117.94 - 127.68%
Expected life 1 year 3.25 - 5.25 years
Expected dividend yield - -
NOTE 11 - SIGNIFICANT CUSTOMER
During fiscal 1999, 1998 and 1997, 17%, 16% and 25% of the
Company's net sales were generated from one customer.
NOTE 12 - ADVANCES TO VENDORS
During 1998, the Company entered into an agreement with a related
party (the Party) in which the Company would acquire certain
customized equipment on behalf of the Party. As of September 30,
1998 and September 30, 1999 the Company made advances to vendors
in the amount of $3,034,254 and $643,309 to manufacture the
equipment. The Company has received a letter of credit in the
amount of $7 million from the related party. See Note 6 for
relevant information.
PCC GROUP, INC. AND SUBSIDIARIES
SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED SEPTEMBER 30, 1997,1998, AND 1999
Amount
Beginning Charged Ending
Description Balance to Expense Deductions Balance
Allowance for doubtful
accounts: $ 56,000 $ 730,000
Fiscal 1997 $ 99,000 $ 152,000 $216,000 $ 35,000
Fiscal 1998 $ 35,000 $ 159,000 $ 51,000 $ 143,000
Fiscal 1999 $143,000 $ 643,000 $197,000 $ 589,000
Reserve for inventory
obsolescence:
Fiscal 1997 $371,000 $ - $146,000 $ 225,000
Fiscal 1998 $225,000 $ 51,000 $ - $ 276,000
Fiscal 1999 $276,000 $ $209,000 $ 67,000
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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<PERIOD-TYPE> 1 yr
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> SEP-30-1999
<CASH> 817,367
<SECURITIES> 0
<RECEIVABLES> 3,002,740
<ALLOWANCES> 208,188
<INVENTORY> 1,063,355
<CURRENT-ASSETS> 5,836,842
<PP&E> 264,245
<DEPRECIATION> 0
<TOTAL-ASSETS> 7,798,937
<CURRENT-LIABILITIES> 2,659,071
<BONDS> 0
1,803,333
0
<COMMON> 30,053
<OTHER-SE> 3,088,365
<TOTAL-LIABILITY-AND-EQUITY> 7,798,937
<SALES> 69,561,525
<TOTAL-REVENUES> 69,561,525
<CGS> 67,285,726
<TOTAL-COSTS> 71,401,029
<OTHER-EXPENSES> (206,432)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 22,039
<INCOME-PRETAX> ( 1,637,272)
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<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,024,343)
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