-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, E6kVZAcGAlbyCuHUYWlTCOIbwMSyrIfrdy92563ZxTSFKvCq+tqGgF4hHmJPXZIU RdFo3/8Tr0ODIRjPMd07sA== 0000756972-99-000045.txt : 19991231 0000756972-99-000045.hdr.sgml : 19991231 ACCESSION NUMBER: 0000756972-99-000045 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991229 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PCC GROUP INC CENTRAL INDEX KEY: 0000756972 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRONIC COMPUTERS [3571] IRS NUMBER: 953815164 STATE OF INCORPORATION: CA FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-13280 FILM NUMBER: 99783335 BUSINESS ADDRESS: STREET 1: 163 UNIVERSITY PARKWAY CITY: POMONA STATE: CA ZIP: 91768 BUSINESS PHONE: 9098696133 MAIL ADDRESS: STREET 1: 163 UNIVERSITY PARKWAY CITY: POMONA STATE: CA ZIP: 91768 FORMER COMPANY: FORMER CONFORMED NAME: WMD MICRO DISTRIBUTORS INC DATE OF NAME CHANGE: 19891022 10-K 1 10-K 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 EX-27 2 WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
5 1 yr SEP-30-1999 SEP-30-1999 817,367 0 3,002,740 208,188 1,063,355 5,836,842 264,245 0 7,798,937 2,659,071 0 1,803,333 0 30,053 3,088,365 7,798,937 69,561,525 69,561,525 67,285,726 71,401,029 (206,432) 0 22,039 ( 1,637,272) 3,200 0 0 0 0 (2,024,343) (.73) (.73)
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