-----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, I8rmhE8v1YepHVPNm05gyhjpFd33dA69iDIF+yIu5LJIeKAImSiEuquyTew+eOpc xyaS39lOJ+M6NjT+l4SMPA== 0000944209-96-000659.txt : 19961224 0000944209-96-000659.hdr.sgml : 19961224 ACCESSION NUMBER: 0000944209-96-000659 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961223 SROS: NASD 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-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-13280 FILM NUMBER: 96684987 BUSINESS ADDRESS: STREET 1: 163 UNIVERSITY PARKWAY CITY: POMONA STATE: CA ZIP: 91768 BUSINESS PHONE: 9098696133 FORMER COMPANY: FORMER CONFORMED NAME: WMD MICRO DISTRIBUTORS INC DATE OF NAME CHANGE: 19891022 10-K405 1 FORM 10-K FOR PERIOD ENDED 9/30/96 ================================================================================ 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 [NO FEE REQUIRED] For the fiscal year ended: September 30, 1996 OR [] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from _____ to ______. Commission file number: 0-13280 PCC GROUP, INC. (Exact name of registrant as specified in its charter) California 95-3815164 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 163 University Parkway Pomona, California 91768 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (909) 869-6133 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange on which ------------------------------ Title of Each class registered ------------------- ---------- None None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 par value Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such 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 19, 1996 based on the average bid and asked prices reported by NASDAQ on such date was approximately $6,450,016. Registrant's Common Stock outstanding at December 19, 1996 was 2,633,339 shares. DOCUMENTS INCORPORATED BY REFERENCE: Portions of the registrant's proxy statement for its Annual Meeting of Shareholders to be held February 14, 1997 are incorporated by reference into Part III as set forth herein. ================================================================================ PART I ITEM 1. BUSINESS. GENERAL Since its inception in 1983, PCC Group, Inc. ("PCCG" or the "Company") has been a wholesale distributor of microcomputer products. It has also manufactured and marketed PC Craft brand microcomputers. The Company serves a select client base which includes value-added resellers, system integrators and dealers. In 1993, the Company began efforts to reposition itself in the environmental resources industry. The Company was originally 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, WMD changed its name to PCC Group, Inc. RECENT CHAIN OF EVENTS In June 1993, the Company established a plan of corporate restructuring. The plan, which seeks to gradually increase the Company's profit margins and resultant net income is comprised of the following key elements: Downsizing. During 1993 and 1994 the Company closed or sold six ---------- regional branches located in Chantilly, Virginia, Des Plaines, Illinois, Fremont, California, Piscataway, New Jersey, Redmond, Washington and Richardson, Texas. In May 1994, PCCG closed its corporate office and main warehouse facility located in Brea, California and centralized its operations in Pomona, California. Downsizing enabled the Company to reduce substantially operating costs. In June 1993, the Company formed PC Craft Distribution, Inc. ("PCCD") with the purpose of having this new entity handle all activities related to the distribution of microcomputer products. The actual transfer of assets and liabilities from PCCG to PCCD occurred on October 1, 1995. Diversification. Beginning in August 1993, PCCG started to seek to --------------- reposition itself as a business in the environmental resources industry. In connection therewith, the Company obtained an exclusive license to use proprietary pyrolysis technology in seven Pacific Rim countries, including China. (For description of this license, see Note 1 to the Company's Consolidated Financial Statements). Pyrolysis is a process of thermal decomposition of tires in an oxygen deprived environment. The Company plans to build and operate several scrap-tire recycling plants. The plants will process scrap tires into recycled industrial products such as carbon black, oil fuel, scrap steel and synthetic gas. The Company's first recycling plant currently being built in the port city of Dalian, Liao Lin Province, Peoples Republic of China, was expected to commence operations in early 1996, but has experienced delays as described below. When opened, this facility will be operated by Dalian Green Resources Corporation ("Dalian Green"), a joint venture in which the Company holds a fifty-five percent interest and China Dalian Materials Development Corporation, a Chinese entity, holds a forty-five percent interest. (For a description of the financing of the Company's investment in Dalian and its proposed sale of plant machinery and equipment to Dalian Green, See Note 1 to the Company's Consolidated Financial Statements). Production output is expected to be sold in both the local and international markets. American Tire Collection, Inc. ("ATC"), a wholly-owned Delaware corporation, will be the sole U.S. provider of scrap tires to Dalian Green. It will mainly collect scrap tires from California and other Western States, and proceed to ship them, via ocean freight, to the port of Dalian. Latest Developments ------------------- Distribution - The Company plans to reenergize its microcomputer products distribution activities, which is motivated by the following circumstances: (a) significantly better operating margins attained in fiscal 1996; (b) a positive cash flow structure and (c) the growing demand for microcomputer components. Therefore, the Company presently intends to open, during fiscal 1997, regional distribution centers that would be located in the Orlando, Miami, Dallas and Atlanta metropolitan areas. The Company also intends to expand its product line to include a wide array of peripheral products such as modems, printers and keyboards. 1 Recycling Plant - The opening of the Dalian Green recycling plant has suffered delays due to (a) availability of funding from the Chinese government, (b) equipment design and installation problems and (c) incorporation of an additional conversion process. Since August, 1994, the Chinese government has severely restricted the availability of equity funding and loan financing which in turn has affected project funding flow and facility construction plans. The Company identified certain equipment design flaws within the original specifications of its licensed technology. These flaws required significant redesigning which was conceived by Company personnel and independent experts. A substantial amount of time was spent applying and testing the Company's new pyrolysis technology. The decision to incorporate a secondary process that converts carbon black into activated carbon presented a new challenge to plan operations. At the outset, the plant was engineered to produce carbon black, fuel oil, scrap steel and gas. The Company additionally decided to incorporate activated carbon production capabilities. This secondary transformation, if accomplished, will substantially increase the value of the Dalian Green facility's production stream. Upon completion of the secondary process installation and subsequent production test runs, the Company currently plans to open this facility in early 1997 (see Note 1 to the Company's Consolidated Financial Statements). Hainan Project - On April 23, 1996, the Company announced the signing of an agreement to establish Hainan Shenhai Energy Resources & Chemical Industry Co., Ltd. ("Hainan Shenhai"), a joint venture company to be located in Hainan Province, PRC. Hainan Shenhai would be owned by China Hainan Shenhai Group (45%), China Hainan Yung Tzuo Enterprise Co. (10%), China Dalian Green Resources Corp. (5%), and PCCG (40%). The purpose of the joint venture is to build a facility substantially identical to the Dalian Green project. PCCG will provide the technology, valued at $1.375 million and make an $825,000 equity contribution in cash. The Chinese investors are currently in the process of securing local and international project funding (see Note 1 to the Company's Consolidated Financial Statements). Southern California Facility - PCCG intends to build its first domestic recycling plant in the Southern California area. This prototype facility will use the Company's advanced pyrolysis technology and will have the capacity to process 2.5 million scrap tires annually. The Company is currently searching for an appropriate site located within state designated recycling zones, as well as evaluating project funding options available through the California Waste Management Board. Funding - With the advice of an investment banking firm, the Company has been exploring various alternatives intended to facilitate both its growth objectives and funding needs. For the reasons described above, the Company has determined not to proceed with its previously announced plan to divest its microcomputer product distribution business. However, the Company is continuing to explore both acquisition and financing alternatives. Opportunistic business considerations and appropriate due diligence efforts will ultimately dictate the most viable course of action for the Company. The remainder of this Item addresses the current status of the Company's existing business of distributing and manufacturing microcomputer products, mainly, in the domestic market. Distribution ------------ 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 these resellers. Hardware products offered include add-on boards, CD-ROM drives, hard disk drives, monitors, controller cards, motherboards, keyboards and power supplies. The Company offers leading microcomputer hardware products manufactured by companies such as Western Digital Corporation, Toshiba, NEC Technologies, TEAC and Adaptec. PCCG 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. Although the Company stocks approximately 50 products and accessories supplied by more than 40 vendors, more than 83% of the Company's sales in fiscal 1996 were derived from products supplied by one vendor, 2 Western Digital Corporation. The loss of the ability to distribute a particularly popular product could result in sales losses related to that product which could in turn have a materially adverse impact on the Company's business and financial results. Customers --------- PCCD regularly sells to approximately 260 select customers including VARs, systems integrators and dealers. Computer Management Corporation, a company owned by a related party and shareholder of PCCG, and MA Laboratories, a computer distributor, accounted for 9% and 7%, respectively, of net sales in fiscal 1996. No other customer accounted for more than 6.7% of the Company's net sales in fiscal 1996. 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 comprised of 3 sales representatives. Customer orders are entered into the Company's on-line 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 require ments, 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 fierce and characterized by intense pricing pressures and rapid product improvement and 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 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. Employees --------- On December 19, 1996, the Company had 19 full-time employees. 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 and main warehouse facility is located in Pomona, California. The following summarizes certain information with respect to this facility: 3
Location of Square Annual Lease Expiration Facility Function Footage Rent Date - -------------------- ----------------------- ------- -------- ---------------- Pomona, California Corporate Headquarters, 18,721 $86,400 5/3/97 Sales, Service and Distribution
ITEM 3. LEGAL PROCEEDINGS. The Company is not a party to any legal proceedings, other than various routine claims and lawsuits arising from the normal course of its business. 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 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, 1996. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The Company's common stock, $.01 par value per share, has been traded over-the-counter on the National Association of Securities Dealers Automated Quotation ("NASDAQ") System under the trading symbol PCCG since August 31, 1992. Prior thereto, the common stock was sporadically traded over-the-counter in what is commonly referred to as the "Bulletin Board." Trading in the common stock has remained sporadic since its listing on NASDAQ, and there can be no assurance that an active market will develop. The following table sets forth the high and low closing bid quotations for the Company's common stock in each of the fiscal quarters indicated. Such quotations have been obtained from NASDAQ, and reflect inter-dealer prices, do not include mark-ups, mark-downs or commissions, and may not necessarily represent actual transactions.
Fiscal Year 1995 High Low ---------------- ---- --- First Quarter $1.25 $1.00 Second Quarter $ .75 $ .75 Third Quarter $1.00 $1.00 Fourth Quarter $1.50 $1.50 Fiscal Year 1996 High Low ---------------- ---- --- First Quarter $1.50 $1.50 Second Quarter $2.50 $2.50 Third Quarter $4.50 $4.50 Fourth Quarter $4.75 $4.44
On December 19, 1996, the closing bid for the common stock as reported by NASDAQ was $3.25. As of December 19, 1996, there were approximately 2,248 holders of record of the Company's common stock. 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. 4 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, 1996. 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)
1992 1993 1994 1995 1996 ---- ---- ---- ---- ---- Net Sales $91,770 $75,088 $51,361 $40,473 $40,645 Gross Profit 8,526 6,340 3,205 1,513 1,892 Net Income 1,407 137 200 25 643 Income (Loss) Per Share: Net Income .64 .06 .09 .01 .26 Dividends Applicable to Preferred Stock (.11) (.05) (.07) (.07) (.06) Net Income (Loss) Applicable .53 .01 .02 (.06) .20 to Common Shares Dividends Declared -- -- -- -- -- Per Common Share
Balance Sheet Data ------------------ (in thousands)
1992 1993 1994 1995 1996 ------- ------- ------- ------ ------ Working Capital $ 1,672 $ 1,641 $1,582 $1,540 $2,195 Total Assets 14,532 14,306 7,874 6,016 8,421 Long-Term Debt 365 367 10 2 ---
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. YEAR ENDED SEPTEMBER 30, 1996 COMPARED TO YEAR ENDED SEPTEMBER 30, 1995 Net Sales increased slightly from $40.5 million in fiscal 1995 to $40.6 million in fiscal 1996. Product mix and unit volume for fiscal 1996 remained basically unchanged in comparison to prior year's billings. Gross profit increased 25.1% from $1.5 million in fiscal 1995 to $1.9 million in fiscal 1996 as a result of a product line mix which offered better mark ups. Gross profit as a percentage of net sales increased from 3.7% to 4.7%, principally due to the sale of certain popular hard disk products which carried higher profit margins. Selling, general and administrative expenses decreased 23.9% from $2.1 million in fiscal 1995 to $1.6 million in fiscal 1996, and decreased as a percentage of net sales from 5.3% to 4%. This decline was primarily due to the enforcement of strict cost controls. The decrease was principally attributable to the reduction of the 5 following items in the following amounts: accrual doubtful receivables, $181,912; salaries, $155,051; and professional fees, $140,796. Income (loss) from operations increased 139% from ($644,348) in 1995 to $249,711 in 1996, as a result of higher gross margins and lower selling, general and administrative expenses. Other income decreased 42.3% from $688,426 in fiscal 1995 to $396,927 in fiscal 1996. This decline principally resulted from short term corporate securities investment gains of $205,536 and a gain on sale of equipment of $426,802 to Dalian Green being recorded in 1995. In 1996, the Company recorded short term investment losses of $56,684 which were offset by a reversal of an accrued liability of $233,731. At the end of fiscal 1996, the Company had net operating loss carryforwards available to offset future taxable income of approximately $3.0 million. The income tax accrual for fiscal year 1995 principally reflects a state tax provision. The income tax receivable for fiscal 1996 pertains to overpayment of state income taxes. It is not possible at this time to determine that the realization of the net deferred tax asset as of September 30, 1996 is more likely than not; accordingly, a 100% valuation allowance has been established. YEAR ENDED SEPTEMBER 30, 1995 COMPARED TO YEAR ENDED SEPTEMBER 30, 1994 Net sales decreased 21.2% from $51.4 million in fiscal year 1994 to $40.5 million in fiscal year 1995. This decrease was due to the combined effects, on volume, of a smaller product line which principally featured hard disk drives and, on pricing, by intense competition within the microcomputer parts distribution industry. The Company intends to increase net sales for 1996 by introducing new product lines such as network components, and multimedia software and hardware products. Gross profits decreased 52.8% from $3.2 million in the prior fiscal year to $1.5 million in fiscal year 1995, reflecting the decrease in net sales in fiscal 1995. Gross profit as a percentage of net sales decreased from 6.2% in fiscal 1994 to 3.7% in fiscal 1995, due to competitive pressures on pricing as well as the sale of lower profit margin products. The Company believes that new product offerings, scheduled to be launched early next year, will significantly augment gross profit margins in fiscal 1996. Selling, general and administrative expenses decreased 32.3%, from $3.2 million in fiscal 1994 to $2.2 million in fiscal 1995, and decreased as a percentage of sales from 6.2% in fiscal 1994 to 5.3% in fiscal 1995. The absolute dollar decrease in selling, general and administrative expenses was principally attributable to the continued downsizing by the Company. The percentage decrease in selling, general and administrative expenses was the result of lower costs associated with the decrease in net sales. The decrease was principally attributable to the reduction of the following items in the following amounts: salaries and fringe benefits - $607,000; professional services -$126,000; rent - $113,000; utilities - $75,000. Income from operations decreased $663,291, from $18,943 in fiscal 1994 to a loss of $644,348 in fiscal 1995, as a result of diminished net sales and a lower gross profit margin. Other income increased 168% from $186,890 in fiscal 1994 to $688,426 in fiscal 1995, and increased as a percentage of net sales from .4% in fiscal 1994 to 1.7% in fiscal 1995. This increase is primarily due to a gain on sale of equipment to a joint venture corporation, and to a $205,536 gain on the sale of securities. 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 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. 6 LIQUIDITY AND CAPITAL RESOURCES Prior to May, 1994, the Company had historically financed its growth and cash needs primarily through cash generated from operations and from receivables and inventory-based borrowings. Since then, asset-based financing has been eliminated and replaced with vendor lines of credit. Net cash provided by operating activities in 1996 was ($873,509), as compared to $239,606 in 1995, mainly reflecting the Company's purchase of corporate securities in 1996. Net cash provided by (used in) investing activities in 1996 was ($958,684), as compared to $366,073 in 1995 and principally reflects the net effect of the following activities: (a) equipment purchased for Dalian Green, $819,315 in 1996 and (b) proceeds from the sale of tire recycling equipment of $3.2 million in 1995. Net cash provided by (used in) financing activities in 1996 was $1,528,855, as compared to ($499,934) in fiscal 1995 mainly reflecting the issuance of common shares and the use of a securities margin credit facility. During fiscal 1996, the Company issued common stock in two Regulation S offerings in the aggregate of $762,500 ($290,000 for the Offering completed on July 26, 1996 and $472,500 for the Offering completed on August 22, 1996). Subsequently, the Company issued common stock in a third Regulation S offering completed November 4, 1996 for $230,500. The Company will primarily use Regulation S proceeds to fund its tire recycling projects and for working capital allocations. The Company believes that it can fund the growth of its core business with internally generated cash flow, vendor credit lines and asset-based financing. As of September 30, 1996, the Company had made cash contributions to Dalian Green of $1,550,000 and is committed to making an additional contribution of $110,000. The Company, functioning as a technology provider, has made plant machinery and equipment purchases and, subsequently, billed such purchases to Dalian Green at cost plus a commission. The bulk of Dalian Green's contemplated equipment needs has been delivered to date. The outstanding balance as of September 30, 1996 in the amount of $2,871,574 represents part of the gain on sale of scrap tire recycling equipment. For a description of the financing of the Company's investment in Dalian and its role as technology provider, see Note 1 to the Company's Consolidated Financial Statements. The Company has been pursuing various alternatives intended to facilitate its entry into the environmental resources industry. To this end, it will continue to explore the development of new recycling projects and acquisitions along with viable funding schemes. NEW ACCOUNTING PRONOUNCEMENTS Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" (SFAS No. 121) issued by the Financial Accounting Standards Board (FASB) is effective for financial statements for fiscal years beginning after December 15, 1995. The new standard establishes new guidelines regarding when impairment losses on long-lived assets, which include plant and equipment, certain identifiable intangible assets and goodwill, should be recognized and how impairment losses should be measured. The Company does not expect adoption to have a material effect on its financial position or results of operations. Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123) issued by the Financial Accounting Standards Board (FASB) is effective for specific transactions entered into after December 15, 1995, while the disclosure requirements of SFAS No. 123 are effective for financial statements for fiscal years beginning no later than December 15, 1995. The new standard establishes a fair value method of accounting for stock-based compensation plans and for transactions in which an entity acquires goods or services from nonemployees in exchange for equity instruments. The Company does not expect adoption to have a material effect on its financial 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. 7 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. PCC Group, Inc. and Subsidiaries --------------- Report on Audited Consolidated Financial Statements For the Years Ended September 30, 1994, 1995 and 1996 --------------- -8- 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, 1995 and 1996, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended September 30, 1996. 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 did not audit the financial statements of one foreign joint venture, which the Company's investments in and advances to joint venture amounted to $1,920,517 and $2,995,248 as of September 30, 1995 and 1996. Those statements were audited by other auditors whose reports have been furnished to us, and in our opinion, insofar as it relates to the amounts included for such joint ventures, is based solely on the reports of the other auditors. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements and schedules are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements and schedules. 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 schedules. We believe that our audits provide a reasonable basis for our opinion. In our opinion, based on our audits and the reports of the other auditor, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of PCC Group, Inc. and subsidiaries as of September 30, 1995 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 1996 in conformity with generally accepted accounting principles. Also, in our opinion, the schedule presents fairly, in all material respects, the information set forth therein. /s/ BDO Seidman, LLP BDO SEIDMAN, LLP Los Angeles, California December 11, 1996 -9- PCC GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS =========================================
September 30, ---------------------- ASSETS 1995 1996 ---------- ---------- CURRENT ASSETS : Cash and cash equivalents $ 811,111 $ 507,719 Securities and other negotiable assets 82,875 1,005,509 Accounts receivable, less allowances for possible losses of $264,000 and $99,000 1,657,608 1,872,497 Receivable from related parties (Note 6) 891,974 576,282 Notes receivable - related parties (Note 6) 100,000 100,000 Income taxes receivable - 18,152 Inventory, less reserves for obsolescence of $341,000 and $371,000 198,659 1,057,247 Prepaids and other current assets 26,505 62,533 ---------- ---------- TOTAL CURRENT ASSETS 3,768,732 5,199,939 PROPERTY AND EQUIPMENT, net (Note 2) 270,420 145,303 INVESTMENT IN AND ADVANCES TO JOINT VENTURES (Note 1) 1,920,517 2,995,248 OTHER ASSETS 63,570 80,703 ---------- ---------- TOTAL ASSETS $6,023,239 $8,421,193 ========== ==========
See accompanying summary of accounting policies and notes to consolidated financial statements. -10- PCC GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (CONCLUDED) =========================================
September 30, ----------------------- LIABILITIES AND SHAREHOLDERS' EQUITY 1995 1996 -------------------- ---------- ---------- CURRENT LIABILITIES: Accounts payable $1,694,603 $2,262,026 Current portion of long-term debt (Note 5) 7,809 1,414 Accrued liabilities 424,199 127,498 Income taxes payable 19,337 - Securities margin liability 7,455 551,455 ---------- ---------- TOTAL CURRENT LIABILITIES 2,153,403 2,942,393 DEFERRED GAIN ON SALE OF EQUIPMENT (Note 1) 958,733 933,063 LONG-TERM DEBT, less current portion (Note 5) 1,750 - ---------- ---------- 3,113,886 3,875,456 ---------- ---------- COMMITMENTS AND CONTINGENCIES (Notes 1 and 4) SHAREHOLDERS' EQUITY (Notes 7 and 8): Non-convertible, Cumulative, New Series A preferred stock ($1,200,000 liquidation preference) - $4.80 stated value, shares authorized, issued and outstanding - 250,000 1,200,000 1,200,000 Common stock, $.01 stated value; shares authorized - 10,000,000; shares issued and outstanding - 2,285,375 and 2,528,117 22,854 25,281 Contributed capital in excess of stated value 587,066 1,347,085 Stock subscribed (Note 7) - 230,500 Retained earnings 1,099,433 1,742,871 ---------- ---------- TOTAL SHAREHOLDERS' EQUITY 2,909,353 4,545,737 ---------- ---------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $6,023,239 $8,421,193 ========== ==========
See accompanying summary of accounting policies and notes to consolidated financial statements. -11- PCC GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME =======================================
Year ended September 30, ---------------------------------------- 1994 1995 1996 ----------- ------------ ------------ NET SALES (Note 6) $51,360,658 $40,473,158 $40,644,767 COST OF SALES (Note 6) 48,155,581 38,959,851 38,752,351 ----------- ----------- ----------- Gross profit 3,205,077 1,513,307 1,892,416 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (Note 6) 3,186,134 2,157,655 1,642,705 ----------- ----------- ----------- Income (loss) from operations 18,943 (644,348) 249,711 ----------- ----------- ----------- OTHER INCOME (EXPENSE): Interest (expense) income, net (231,893) 25,788 6,305 Settlement with insurance companies (Note 4) 638,279 - - Write-down on unimproved land (Note 5) (66,000) - - Gain on sale of equipment to related party (Note 1) - 426,802 135,000 Gain (loss) on sale of investments - 205,536 (56,684) Gain on reversal of accrued liability - - 233,731 Other - net (153,496) 30,300 78,575 ----------- ----------- ----------- 186,890 688,426 396,927 ----------- ----------- ----------- Income before income taxes 205,833 44,078 646,638 INCOME TAXES (Note 3) (5,600) (19,337) (3,200) ----------- ----------- ----------- NET INCOME 200,233 24,741 643,438 Dividends applicable to preferred stock (160,000) (160,000) (160,000) ----------- ----------- ----------- NET INCOME (LOSS) APPLICABLE TO COMMON SHARES $ 40,233 $ (135,259) $ 483,438 =========== =========== =========== INCOME PER SHARE: Net income $ 0.09 $ 0.01 $ 0.26 Dividends applicable to preferred stock (0.07) (0.07) $ (0.06) ----------- ----------- ----------- Net income (loss) applicable to common shares $ 0.02 $ (0.06) $ 0.20 =========== =========== =========== WEIGHTED AVERAGE NUMBER OF COMMON SHARES AND COMMON EQUIVALENTS 2,245,101 2,285,375 2,466,816 =========== =========== ===========
See accompanying summary of accounting policies and notes to consolidated financial statements. -12- PCC GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEARS ENDED SEPTEMBER 30, 1994, 1995 AND 1996 ================================================================================
Contributed Capital in Preferred Stock Common Stock Excess of Stock Retained -------------------- --------------------- Shares Amount Shares Amount Stated Value Subscription Earnings Total ------- ----------- ---------- --------- ------------ ------------ ----------- ------------- BALANCE, October 1, 1993 250,000 1,200,000 2,235,375 22,354 552,566 - 874,459 2,649,379 Issuance of common stock - - 50,000 500 34,500 - - 35,000 Net income - - - - - - 200,233 200,233 ------- ----------- --------- ------- ---------- ------------ ---------- ---------- BALANCE, September 30, 1994 250,000 1,200,000 2,285,375 22,854 587,066 - 1,074,692 2,884,612 Net income - - - - - - 24,741 24,741 ------- ----------- --------- ------- ---------- ------------ ---------- ---------- BALANCE, September 30, 1995 250,000 1,200,000 2,285,375 22,854 587,066 - 1,099,433 2,909,353 Issuance of common stock - - 248,142 2,481 760,019 - - 762,500 Cancellation of common stock - - (5,400) (54) - - - (54) Stock subscribed - - - - - 230,500 - 230,500 Net income - - - - - - 643,438 643,438 ------- ----------- --------- ------- ---------- ------------ ---------- ---------- BALANCE, September 30, 1996 250,000 $1,200,000 2,528,117 $25,281 $1,347,085 $230,500 $1,742,871 $4,545,737 ======= =========== ========= ======= ========== ============ ========== ==========
See accompanying summary of accounting policies and notes to consolidated financial statements. -13- PCC GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS ===================================== INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Year ended September 30, ----------------------------------------- 1994 1995 1996 ------------ ------------ ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 200,233 $ 24,741 $ 643,438 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 214,546 130,655 124,902 Provision for bad debts 30,000 228,000 46,000 Loss (gain) on sale of fixed assets - 1,086 (6,502) Write-down on unimproved land 66,000 - - Gain on sale of equipment - (426,802) (135,000) (Gain) loss on sale of investments - (205,536) 56,684 Increase (decrease) from changes in: Purchases of investments held for trading - (3,654,041) (12,568,358) Proceeds on sales of investments held for trading - 3,776,702 11,589,040 Accounts receivable 1,918,251 (23,036) (260,889) Receivable from related parties (501,474) 401,880 315,692 Insurance company receivable 1,806,450 - - Income taxes receivable (130,000) 130,000 (18,152) Inventory 2,496,922 1,781,781 (858,588) Prepaids and other assets 351,733 24,763 (53,161) Accounts payable and accrued liabilities (2,900,357) (1,969,924) 270,722 Income taxes payable - 19,337 (19,337) ----------- ----------- ------------ Net cash provided by operating activities 3,552,304 239,606 (873,509) ----------- ----------- ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (8,398) (20,803) (72,170) Purchase of tire recycling equipment - (2,251,552) (819,315) Proceeds on sale of tire recycling equipment - 3,200,000 300,000 Additions to notes receivable - related parties (12,659) - - Proceeds on sale of fixed assets - 1,500 11,587 Principal payments on notes receivable - related parties 96,000 65,358 - Net advances (to) from joint venture 430,000 (430,000) - Capital contributions/advances to joint venture (1,250,000) (198,430) (378,786) ----------- ----------- ------------ Net cash provided by (used in) investing activities (745,057) 366,073 (958,684) ----------- ----------- ------------
See accompanying summary of accounting policies and notes to consolidated financial statements. -14- PCC GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) ===================================== INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Year ended September 30, ------------------------------------- 1994 1995 1996 ------------ ---------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Payments on line of credit (4,244,311) - - Net change - restricted cash 380,935 - - Due to related party 500,000 (500,000) - Proceeds from common stock issuance - - 993,000 Cancellation of common stock - - (54) Change in margin liability - 7,455 544,000 Principal payments on long-term debt (22,179) (7,389) (8,145) ----------- --------- ---------- Net cash provided by (used in) financing activities (3,385,555) (499,934) 1,528,801 ----------- --------- ---------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (578,308) 105,745 (303,392) CASH AND CASH EQUIVALENTS, beginning of year 1,283,674 705,366 811,111 ----------- --------- ---------- CASH AND CASH EQUIVALENTS, end of year $ 705,366 $ 811,111 $ 507,719 =========== ========= ========== Cash paid during the year for: Interest $ 234,693 $ 4,758 $ 2,700 Income taxes $ 141,243 $ 15,050 $ 3,200
See accompanying summary of accounting policies and notes to consolidated financial statements. -15- PCC GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONCLUDED) ===================================== INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES: During fiscal 1996, the Company sold additional tire-recycling equipment to a related party (Note 1). As a result, the following non-cash transaction occurred: Increase (decrease) in assets and (increase) decrease in liabilities from:
Sale of equipment: Receivable from sale of equipment $1,062,270 Non-cash portion of intercompany profit elimination (133,625) Deferred gain on sale of equipment (109,330)
During fiscal 1995, the Company sold tire-recycling equipment to a related party (Note 1). In addition, the Company defaulted on a note payable and the creditor has commenced foreclosure proceedings on the property (Note 5). As a result, the following non-cash transactions occurred: Increase (decrease) in assets and (increase) decrease in liabilities from:
Sale of equipment: Receivable from sale of equipment $ 2,130,518 Non-cash portion of intercompany profit elimination (1,171,785) Deferred gain on sale of equipment (958,733) Default on note payable and foreclosure on land: Unimproved land $ (384,000) Current portion of long-term debt 350,000 Accrued liabilities 34,000
During fiscal 1994, the Company issued 50,000 shares of stock in exchange for the rights to use recycling technology in its joint venture (Note 1). See accompanying summary of accounting policies and notes to consolidated financial statements. -16- PCC GROUP, INC. AND SUBSIDIARIES SUMMARY OF ACCOUNTING POLICIES ================================== ORGANIZATION PCC Group, Inc., a California corporation, and subsidiaries (the "Company") are primarily engaged in the business of distributing microcomputer components. The Company has also entered into a new venture to focus on the development and commercialization of certain environment-related products which will be marketed principally in the Pacific Rim markets. See Note 1. The Company is located in California and has two wholly-owned subsidiaries. The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany transactions and balances have been eliminated. ACCOUNTS RECEIVABLE AND CONCENTRATION OF CREDIT RISK The Company grants uncollateralized credit to its customers who are located in various geographical areas. The Company maintains its cash accounts in high-quality financial institutions. At September 30, 1995 and 1996, the Company had bank balances, including cash, cash equivalents and short-term investments, of approximately $811,111 and $507,719, which exceeded federally insured limits. INVENTORIES Inventories consist principally of microcomputer component parts and are stated at the lower of weighted average cost (first-in, first-out) or market. PROPERTY AND EQUIPMENT Property and equipment are stated cost. Depreciation and amortization are computed using the straight-line method over an estimated useful life of five years. Maintenance, repairs and minor renewals are charged directly to expense as incurred. Additions and betterments to property and equipment are capitalized. When assets are disposed of, the related cost and accumulated depreciation thereon are removed from the accounts and any resulting gain or loss is included in operations. INVESTMENT IN JOINT VENTURE The investment in joint venture is accounted for on the equity method of accounting. This investment has not been consolidated into these financial statements due to significant doubt about the Company's ability to control the joint venture since the tire recycling plant is in China and is subject to close government supervision. REVENUE RECOGNITION The Company recognizes revenue when the risk of loss for the product sold passes to the customer which is generally when goods are shipped. -17- PCC GROUP, INC. AND SUBSIDIARIES SUMMARY OF ACCOUNTING POLICIES (CONTINUED) ================================= INCOME TAXES Deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each fiscal year-end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. CASH AND CASH EQUIVALENTS For purposes of these statements, cash equivalents include investments with original maturities of three months or less. INCOME PER COMMON SHARE Income per common share has been determined by dividing net earnings (after deducting annual cumulative preferred stock dividends for the respective fiscal year; $160,000, $160,000 and $160,000 for the years ended September 30, 1994, 1995 and 1996) by the weighted average number of common and common equivalent shares outstanding. Weighted average shares are computed using the treasury stock method, under which common equivalent shares include exercisable stock options reduced by the number of shares which could be purchased from the proceeds. Stock options are not included for the 1995 calculation since their effect would be anti-dilutive. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts of financial instruments including cash and cash equivalents, investments, receivables, and payables approximate their fair value due to the relatively short maturity of these instruments. INVESTMENTS Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities" expands the use of fair value accounting but retains the use of amortized cost for those debt securities where there is a positive intent and ability to hold such debt securities to maturity. At acquisition, the Company is required to classify its investments in debt and equity securities into three categories: held-to- maturity, available-for-sale, or trading. Held-to-maturity investments are valued at amortized cost. Available-for-sale investments are valued at fair value with net unrealized gains or losses shown as a separate component of shareholders' equity until realized. Trading investments are also valued at fair value but net unrealized gains or losses are included in earnings. The Company has classified its investments in debt and equity securities into the trading category. The Company had gains and (losses) of $0, $205,536 and $(56,684) for the years ended September 30, 1994, 1995 and 1996. -18- PCC GROUP, INC. AND SUBSIDIARIES SUMMARY OF ACCOUNTING POLICIES (CONCLUDED) ================================== ACCOUNTING ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. RECLASSIFICATION Certain reclassifications have been made to conform the prior year's amounts to the current year's presentation. NEW ACCOUNTING PRONOUNCEMENTS Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of" (SFAS No. 121) issued by the Financial Accounting Standards Board (FASB) is effective for financial statements for fiscal years beginning after December 15, 1995. The new standard establishes new guidelines regarding when impairment losses on long-lived assets, which include plant and equipment, certain identifiable intangible assets and goodwill, should be recognized and how impairment losses should be measured. The Company does not expect adoption to have a material effect on its financial position or results of operations. Statements of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123) issued by the Financial Accounting Standards Board (FASB) is effective for specific transactions entered into after December 15, 1995, while the disclosure requirements of SFAS No. 123 are effective for financial statements for fiscal years beginning no later than December 15, 1995. The new standard establishes a fair value method of accounting for stock-based compensation plans and for transactions in which an entity acquires goods or services from nonemployees in exchange for equity instruments. The Company does not expect adoption to have a material effect on its financial position or results of operations. Statements of Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" (SFAS No. 125) issued by the Financial Accounting Standards Board (FASB) is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after December 31, 1996, and is to be applied prospectively. Earlier or retroactive applications is not permitted. The new standard provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities. The Company does not expect adoption to have a material effect on its financial position or results of operations. -19- PCC GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ========================================== NOTE 1 - INVESTMENT IN AND ADVANCES TO JOINT VENTURES DALIAN GREEN RESOURCES JOINT VENTURE The Company entered into a joint venture agreement ("Agreement") with a corporation in Dalian, China, to build a facility which recycle tires by utilizing innovative technology and converts the tires into saleable solids, liquids and gases. This facility is expected to be completed in early 1997. Under the Agreement, the Company has agreed to purchase up to 55% of the equity of Dalian Green Resources Corporation ("DGR") for $1,660,000 and the contribution by the Company of tire recycling technology. Through September 30, 1996, 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, 1995 and 1996, the Company made equity contributions of $300,000 and $378,786. The Company is required to make an equity contribution amounting to $110,000 in fiscal 1997. 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. The Company also entered into an agreement with DGR to purchase equipment on DGR's behalf for the tire recycling plant. The Company acquired and resold this equipment to DGR during fiscal 1995 and 1996. The Company recognized gain on the sale to the extent of their nonownership interest (45%) in DGR and cash received from DGR. A gain of $426,802 and $135,000 were recognized during the years ended September 30, 1995 and 1996 (see Note 6). The Company had a receivable of $2,130,517 and $2,871,574 due from DGR as of September 30, 1995 and 1996 which is included in the investment in and advances to joint venture balance. -20- PCC GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) ========================================== NOTE 1 - INVESTMENT IN AND ADVANCES TO JOINT VENTURES (Continued)
Summarized financial data of DGR consists of: September 30, --------------------------- 1995 1996 ---------- ---------- Current assets $ 486,000 $ 650,000 Non-current assets 9,106,000 11,862,000 Total assets 9,592,000 12,512,000 Current liabilities 3,349,000 3,934,000 Non-current liabilities 3,085,000 5,113,000 Equity 3,158,000 3,465,000
To date, there have been no operations at DGR. HAINAN JOINT VENTURE On April 23, 1996, the Company entered into a new joint venture with the Hainan Shenhai Energy Resources and Chemical Industry Co. Ltd., China Hainan Yung Tzuo Enterprise Co., and DGR for construction and operation of a second tire recycling plant in China. Capital contributions have yet to be made by any partners. The Company will have a 40% interest and will provide the technology and equipment worth $1.375 million along with an equity contribution of $825,000. NOTE 2 - PROPERTY AND EQUIPMENT Property and equipment consists of:
1995 1996 --------- --------- Furniture, fixtures and equipment $ 805,355 $ 810,225 Vehicles 52,820 35,872 Leasehold improvements 6,900 6,900 --------- --------- 865,075 852,997 Accumulated depreciation and amortization (594,655) (707,694) --------- --------- Property and equipment, net $ 270,420 $ 145,303 ========= =========
NOTE 3 - INCOME TAXES Income taxes are as follows:
1994 1995 1996 --------- --------- --------- Current Federal $ 68,000 $ 68,340 $ 234,672 Utilization of loss carryforwards (68,000) (68,340) (234,672) State 5,600 19,377 3,200 --------- --------- --------- $ 5,600 $ 19,377 $ 3,200 ========= ========= =========
-21- PCC GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) ========================================== NOTE 3 - INCOME TAXES (Continued) The components of the net deferred tax asset and liability are as follows:
1995 1996 ------------ ------------ Deferred tax asset $ 1,417,781 $ 1,238,308 Deferred tax liability (43,600) (98,428) Valuation allowance (1,374,181) (1,139,881) ----------- ----------- $ - $ - =========== ===========
The types of temporary differences between the tax bases of assets and liabilities and their financial reporting amounts that give rise to the net deferred tax asset and liability, and their approximate tax effects, are as follows:
Year ended September 30, -------------------------- 1995 1996 ------------ ------------ Writedown of software $ 21,895 $ - Excess tax depreciation over book (43,600) (45,507) Inventory and bad debt reserves 262,072 203,222 Accrued vacation 4,673 2,814 State taxes 6,575 1,088 Installment sales - (52,248) Other - 3,008 Net operating loss carryforwards 1,122,566 1,027,504 Valuation allowance (1,374,181) (1,139,881) ----------- ----------- $ - $ - =========== ===========
Management is unable to determine whether the realization of the net deferred tax asset is more likely than not and a 100% valuation allowance has been established. The difference between the effective tax rate and that computed under the federal statutory rate is as follows:
1994 1995 1996 ----- ----- ----- Federal statutory rate 34% 34% 34% Change in valuation allowance (3) (9) (19) Net operating loss carryforwards (34) (34) (15) State taxes 3 9 - ---- ---- ---- -% -% -% ==== ==== ====
-22- PCC GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) ========================================== NOTE 3 - INCOME TAXES (Continued) As of September 30, 1996, for federal income tax purposes, the Company had approximately $3.0 million in net operating loss carryforwards expiring through 2002. The annual utilization of the operating loss carryforward may be significantly limited due to the adverse resolution, if any, with respect to the loss carryover provisions of Internal Revenue Code section 382 in connection with the acquisition of WMD and subsequent stock ownership changes by the Company. NOTE 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, 1996 are as follows:
Year ending September 30, ------------- 1997 $116,000 1998 48,000 1999 27,000 2000 9,000 2001 9,000 -------- Total $209,000 ========
Rental expense for the years ended September 30, 1994, 1995 and 1996 was approximately $259,000, $146,000 and $148,000. ECONOMIC DEPENDENCY A majority of the Company's fiscal 1994, 1995, and 1996 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 of the Company. During fiscal 1994, the Company received a settlement of $2,445,000 from insurance companies relating to a robbery claim, including $638,000, representing the business interruption portion of the claim, and is reported as other income in the accompanying consolidated statements of income. -23- PCC GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) ========================================== NOTE 5 - LONG-TERM DEBT Long-term debt consists of:
1995 1996 ------- ------- Notes payable - other $ 9,559 $ 1,414 Current portion (7,809) (1,414) ------- ------- $ 1,750 $ - ======= =======
During fiscal 1995, the Company defaulted on a $350,000 mortgage on land held for investment purposes by not paying required principal and interest payments. During fiscal 1994 the value of the land was written down to the carrying value of the mortgage. 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 $891,974 and $576,282 as of September 30, 1995 and 1996. During fiscal 1996, the Company utilized the services of one of its related parties based in China to help assist in the assembly and maintenance of equipment which was sold to DGR. A consulting fee of $300,000 was charged against the 1996 sale of equipment to DGR (see Note 1) for the services of this related party. Included in the accompanying consolidated statements of income are sales to related parties of $4,812,224, $4,221,767 and $3,640,732 for the years ended September 30, 1994, 1995, and 1996 and purchases from related parties of $103,844 and $49,880 for the years ended September 30, 1994 and 1995. No purchases from related parties were made for the year ended September 30, 1996. 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, 1995 and 1996, the outstanding balance on this note receivable was $100,000. -24- PCC GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) ========================================== NOTE 7 - PREFERRED AND COMMON STOCK During the year ended September 30, 1992, the Company's articles of incorporation were amended and a $15,000,000 note was cancelled in exchange for 250,000 shares of Series A non-voting, non-convertible preferred stock. The preferred stock accumulated dividends at the rate of $1 per share per year and is redeemable, at the Company's option, for $60 per share. No dividends were declared by the Company during fiscal 1992. The preferred stock was given a $15,000,000 ($60 per share) liquidation preference value. On December 31, 1992, in order to more accurately reflect the financial condition of the Company and to provide a more appealing situation to potential equity investors, the Company issued 250,000 shares of a new series of preferred stock, designated New Series A preferred stock in exchange for the 250,000 shares of outstanding Series A preferred stock. The non-voting, non- convertible New Series A preferred stock accumulates dividends at the rate of $0.64 per share per year. No dividends were declared during fiscal 1994, 1995 or 1996. The New Series A preferred stock was given a liquidation preference value and a redemption price of $4.80 per share ($1,200,000 total liquidation preference) plus cumulative unpaid dividends which totalled $600,000 at September 30, 1996. The New Series A preferred stock is redeemable, at the Company's option, at any time. During fiscal year 1996, the Company had three private placement offerings. For the first two private placement offerings, 248,142 shares were issued at approximately $3.40 a share. Net proceeds received were $762,500 and expenses associated with the offerings were $80,000 which was charged to contributed capital in excess of par. As of September 30, 1996, no stock was issued for the third private placement offering. Accordingly, the net proceeds of $230,500 from the third private placement are reflected on the financial statements as Stock Subscriptions. In November 1996, 51,222 shares were issued for the third private placement offering. NOTE 8 - EMPLOYEE BENEFIT PLANS 1992 OPTION PLAN The 1992 Incentive Stock Option Plan (the "1992 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 and executive officers of the Company. Each option is exercisable over a period of up to 10 years in full or in cumulative or noncumulative installments, and each option is exercisable from the date of grant or any later date specified therein, all as determined by the Compensation Committee of the Board of Directors. The 1992 Option Plan terminates in the year 2002. -25- PCC GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONCLUDED) ========================================== The Company granted 300,000 and 95,000 options to officers and key employees during fiscal 1995 and 1996. These options were fully vested on the date of grant and were granted at 100-110% of the market price of the Company's Common Stock on the date of grant. The options are immediately exercisable and expire five to six years from the date of grant. Additional information with respect to options issued under this plan is as follows:
Number of Option Price ----------------------- Shares Per Share Total --------- ------------- -------- Outstanding at October 1, 1994 - - - Granted 300,000 $1.25 - 1.375 $384,088 ------- -------- Outstanding at September 30, 1995 300,000 $384,088 Granted 55,000 $1.50 82,500 Granted 20,000 $2.00 40,000 Granted 20,000 $3.50 70,000 ------- -------- Outstanding at September 30, 1996 395,000 $1.25 - $3.50 $576,588 ======= ========
1992 STOCK BONUS PLAN The PCC Group, Inc. 1992 Stock Bonus Plan (the "Plan") provides for the issuance of up to 200,000 shares of common stock to designated employees and executive officers of the Company. No shares have been granted to date. -26- PCC GROUP, INC. AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED SEPTEMBER 30, 1994, 1995 AND 1996 =====================================================
Amount Beginning charged Ending Description balance to expense Deductions balance - ------------------------ --------- ---------- ---------- -------- Allowance for doubtful accounts: Fiscal 1994 $245,000 $ 30,000 $179,000 $ 96,000 Fiscal 1995 $ 96,000 $228,000 $ 60,000 $264,000 Fiscal 1996 $264,000 $ 46,000 $211,000 $ 99,000 Reserve for inventory obsolescence: Fiscal 1994 $163,000 $ 75,000 $ 54,000 $184,000 Fiscal 1995 $184,000 $157,000 $ - $341,000 Fiscal 1996 $341,000 $ 30,000 $ - $371,000
-27- ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY. Information required by this item is contained in the Company's definitive proxy statement for its 1997 Annual Meeting of Shareholders scheduled to be held on February 14, 1997, and such information is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION. Information required by this item is contained in the Company's definitive proxy statement for its 1997 Annual Meeting of Shareholders scheduled to be held on February 14, 1997, and such information is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. Information required by this item is contained in the Company's definitive proxy statement for its 1997 Annual Meeting of Shareholders scheduled to be held on February 14, 1997, and such information is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information required by this item is contained in the Company's definitive proxy statement for its 1997 Annual Meeting of Shareholders scheduled to be held on February 14, 1997, and such information is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a)(1) Financial Statements. -------------------- The following consolidated financial statements of the Company and its subsidiaries are included in Part II, Item 8 of this report.
Page(s) ------- Report of Independent Certified Public Accountants 9 Consolidated Balance Sheets as of September 30, 1995 and 1996 10-11 Consolidated Statements of Income for the years ended September 30, 1994, 1995 and 1996 12 Consolidated Statements of Shareholders' Equity (Deficit) for the years ended September 30, 1994, 1995 and 1996 13 Consolidated Statements for Cash Flows for the years ended September 30, 1994, 1995 and 1996 14-16 Summary of Accounting Policies 17-19 Notes to Consolidated Financial Statements 20-26 (a)(2) Schedules to Financial Statements. --------------------------------- Schedule II - Valuation and Qualifying Accounts 27
28 (b) Reports on Form 8-K. ------------------- No reports on Form 8-K were filed by the Company during the last quarter of fiscal 1996. (c) Exhibits. -------- The following exhibits are filed as part of this report: 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)+ 29 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. 30 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PCC GROUP, INC. Date: December 20, 1996 By:/s/Jack Wen --------------------------------- Jack Wen Chairman of the Board, Chief Executive Officer and President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Date: December 20, 1996 /s/Jack Wen ------------------------------------ Jack Wen, Chairman of the Board, Chief Executive Officer and President Date: December 20, 1996 /s/J. Lauro Valdovinos ------------------------------------ J. Lauro Valdovinos, Vice President - Finance and Chief Financial Officer (Principal Financial and Principal Accounting Officer) Date: December 20, 1996 /s/Gary Blum ------------------------------------ Gary Blum, Director Date: December 20, 1996 /s/Leon C. Lai ------------------------------------ Leon C. Lai, Director Date: December 20, 1996 /s/George Rodda, Jr. ------------------------------------ George Rodda, Jr., Director 31 EXHIBIT INDEX Included Exhibit No. Description in Filing - ----------- ----------- --------- 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. 32 Included Exhibit No. Description in Filing - ----------- ----------- --------- 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. 33 EX-10.1.2 2 EXTENSION OF STANDARD INDUSTRIAL/COMMERCIAL SINGLE ULTIMATE SOUND _____________________________________________________________________________ 138 University Parkway, Pomona, CA 91768 (909) 594-2604 FAX (909) 594-0191 EXTENSION OF STANDARD INDUSTRIAL/COMMERCIAL ------------------------------------------- SINGLE-TENANT LEASE-GROSS ------------------------- DATED: May 31, 1996 RE: Lease of Building located at 163 University Parkway, Pomona, CA 91768 LESSEE: PC Craft, PCC Group, Inc., A California Corporation LESSOR: Robert C. Chiu and Cindy C. Chiu In extending the Standard Industrial/Commercial Single-Tenant Lease, the following parties agree to extend the lease effective 06/01/96 through 05/31/97. All other terms and conditions remain the same as the lease contract dated May 2, 1994. LESSOR:/s/ Robert C. Chiu LESSEE: PC Group, Inc., ------------------------ Robert C. Chiu A California Corp. LESSOR:/s/ Cindy C. Chiu LESSEE:/s/ Tina Wen ------------------------ -------------------- Cindy C. Chiu Tina Wen DATE: 5/31/96 DATE: 5/31/96 --------------------------- ---------------------- EXHIBIT 10.1.2 EX-10.3.5 3 LETTER 1132 INTERNAL REVENUE SERVICE DEPARTMENT OF THE TREASURY DISTRICT DIRECTOR 450 GOLDEN GATE AVENUE, MS 7-4-01 SAN FRANCISCO, CA 94102-7406 Employer Identification Number: Date: NOV 14, 1996 95-3815164 File Folder Number: 951015366 PCC GROUP, INC Person to Contact: 153 UNIVERSITY PARKWAY LINDA L HOH POMONA, CA 91768 Contact Telephone Number: (415) 522-6071 Plan Name: PCC GROUP, INC EMPLOYEE STOCK OWNERSHIP PLAN Plan Number: 001 Dear Applicant: We considered the information you sent us and have determined that your termination of this plan does not adversely affect its qualification for federal tax purposes. Please note that this is not a determination regarding the effect of other federal or local statutes. The enclosed document explains the significance of this favorable determination letter, points out some features that may affect the qualified status of your employee retirement plan, and provides information on the reporting requirements for your plan. It also describes some events that automatically nullify it. It is very important that you read the publication. Even though you have terminated this plan, we would like to remind you of certain filing obligations. The related tax-exempt trust, custodial account, or other payers who are responsible for making payments may be required to file information returns on Form 1099R, with Form 1096, for amounts paid or made available to any individual or beneficiary. In addition, you must continue to file a Form 5500 series return annually until all plan assets are distributed. The last return required is the one filed for the year in which distribution is completed. Be sure to write "Final Return" across the top of this return. This determination applies to the proposed termination date of September 1, 1995. This determination also applies to the proposed amendments dated September 25, 1996. This plan satisfies the nondiscrimination in amount requirement of section 1.401(a) (4)-1(b)(2) of the regulations on the basis of a design-based safe harbor described in the regulations. This letter is issued under Rev. Proc. 93-39 and considers the amendments required by the Tax Reform Act of 1986 except as otherwise specified in this letter. This plan satisfies the nondiscriminatory current availability requirements of section 1.401(a) (4)-4(b) of the regulations with respect to those Letter 1132 (DO/CG) EXHIBIT 10.3.5 -2- PCC GROUP, INC benefits, rights, and features that are currently available to all employees in the plan's coverage group. For this purpose, the plan's coverage group consists of those employees treated as currently benefiting for purposes of demonstrating that the plan satisfies the minimum coverage requirements of section 410(b) of the Code. The information on the enclosed addendum is an integral part of this determination. Please be sure to read and keep it with this letter. We have sent a copy of this letter to your representative as indicated in the Power of Attorney. Please keep this letter in your permanent records. If you have any questions concerning this matter, please contact the person whose name and telephone number are shown above. Sincerely yours, /s/ Steven A. Jensen Steven A. Jensen District Director Enclosure(s): Publication 794 Addendum Letter 1132 (DO/CG) -3- PCC GROUP, INC This determination letter is applicable for the amendment(s) adopted on September 26, 1995. Letter 1132 (DO/CG) EX-10.5 4 JOINT VENTURE CONTRACT Joint Venture Contract China Hainan Shenhai Group, China Heinan Yung Tzuo Enterprise Co., China Dalian Green Source Co. And PCC Group Inc. Based on equality and mutual benefits, have decided to establish a joint venture according to International Joint Venture Business Management Law of People's Republic of China. This contracts is made between them. Article 1 Parties of Joint Venture 1.1 China Hainan Shenhai Group (hereafter referred to as Party A), registered corporation in Heinan. Legal address: F.11, No. 73, Haifu Road, Haikou City, Hainan Province, China. Legal Representative - Name: Ming-Shan Ding Position: General Manager Nationality: China 1.2 China Hainan Yung Tzuo Enterprise Co. (Hereinafter referred to as Party B), a register corporation in Hainan Province. Legal address: Rm.4502, Jing New Village, Haishao Road, Haikou City, Hainan Province, China. Legal Representative - Name: Ray-Jung Lin Position: General Manager Nationality: China 1.3 China Dalian Green Source Corp (hereinafter referred to as Party C) a register corporation in Dalian, China. Legal address: Cheng Pung Industry, Dalian Investment Area. Legal Representative - Name: Tian-Quan Sun Position: President Nationality: China 1.4 PCC Group Inc. (hereinafter referred to as Party d) a register corporation in USA with registered no.A415655. Legal address: 640 Puente Street, Brea. California 92621 Legal Representative - Name: Zheng-Nan Wen Position: President Nationality: USA Exhibit 10.5 1 Article II Establishment of Joint Venture 2.1 Each parties according to International Joint Venture Business Management Law of People's Republic of China agree to establish joint venture business corp in Hainan Province, China. 2.2 Chinese name of the Joint Venture: (Chinese characters appear here) 2.3 English name of the Joint Venture: Hainan Shenhai Energy Resources & Chemical Industry Co., Ltd. 2.4 Legal address of the Joint Venture: Quei Lin Young Economic Technology Development Zone, Hainan Province, China. 2.5 The Joint Venture is a Chinese corporation. All of its activities must comply with the Chinese law, decree and related regulations. 2.6 The Joint Venture is organized as a liability limited company. The Joint Venture parties' responsibility is limited to the amount of each of their investment in the registered capital. Each party will share the profits, losses and risks of the Joint Venture based on the amount of investment each party put in. 2.7 The managing department of the Joint Venture: People's Government Economic Bureau, Hainan, People's Republic of China. Article III Business Purpose, Scope and Scale 3.1 The purpose of the Joint Venture: To establish an international-level business with patented and most advanced equipment based on the aspiration to enhance business cooperation and technical exchange; To utilize recycled resources to manufacture industrial raw materials and products; To obtain satisfactory economic benefits through scientific operation and management. 3.2 Business Scope: Vacuum distillation of old rubbers, deeply process coconut shell and research & develop new products. 3.3 Production Scale: Old rubber material process 6000 tons a year. Coconut shell process 15,000 tons a year. 2 Article VI Total Investment and Registered Capital 4.1 Total Investment of the Joint Venture: 18 millions US dollars. 4.2 Registered Capital: 5.5 millions US dollars, in which: 2.475 million US dollars come from Party A's investment, 45% of the registered capital; 0.55 million US dollars come from Party B's investment, 10% of the registered capital; 0.275 million US dollars come from Party C's investment, 5% of the registered capital; 2.2 million US dollars come from Party D's investment, 40% of the registered capital; 4.3 The Joint Venture parties will put in their investment in the following forms: Party A Property & cash Party B 0.55 millions US dollars in cash Party C 0.275 millions US dollars in cash Party D Patented technology and cash in US dollars. (In which: the patented technology is 1.375 million US dollars and cash is 0.825 million US dollars.) 4.4 Payment for registered capital of the Joint Venture: Four parties shall pay off their investment in installments within 120 days starting on the day the corporation is issued. After each party has paid off its investment, a certificate of investment will be issued by a Chinese CPA after the inspection as acknowledge for the receipt of the investment. If the investment is overdue and unpaid, the unpaid party will be charged 5% of the unpaid amount each month as late payment interest to the party who keeps its words. If any loss occurs due to one party's delinquency in payment, the delinquent party shall be responsible for the loss. 4.5 The Joint Venture will apply for bank loan to make up the difference between the total investment and registered capital. The interest of the loan will be accounted for as the cost. The risk of bank loan will shared by all Parties as invest ratio. 4.6 Approval from the other Joint Venture party and the original evaluation is required if one Joint Venture wishes to transfer all or part of its investment to a third party. Also, any change in the investment shall be registered with the Business Administration Bureau. 3 4.7 When one Joint Venture party wishes to transfer all or part of its investment, the other Joint Venture party has the purchase priority. 4.8 During the period of Joint Venture, the Joint Venture can not reduce the total registered capital. Any increase in the registered capital or change in investment proportion must be resolved in the Board of Directors, and shall be filed with the original evaluation agency for approval. The change shall also be registered at the original registration agency. 4.9 China Hainan Shenhai Group is responsible for all the necessary cost to establish the Joint Venture Company, and all the other parties agree that this cost is shared by the Joint Venture Company. Article V Reponsibility of Each Joint Venture Parties 5.1 Both Joint Venture parties shall do their best to effectively and economically accomplish the business principle and goal of the company. 5.2 Party A is obligated to complete the followings: 5.2.1 To obtain approval for the establishment of the Joint Venture from the related Chinese government agency; to obtain and receive certificate and to register and receive business license and etc; 5.2.2 To pay its share of investment according to the contract; 5.2.3 To take care of all formalities for requisition of land in the Development Zone for the Joint Venture; 5.2.4 To coordinate the designing and construction of the workshop and othe facilities in the Joint Venture; 5.2.5 To assist the Joint Venture in the implementation of water, electricity, transportation, communication and other fundamental facilities; 5.2.6 To assist the Joint Venture in the recruitment of management staff, technical staff, workers and other staff; 5.2.7 To assist the Joint Venture to purchase processing equipment, materials, appliances, transportation tools, communication equipment and etc. In China; 5.2.8 To assist the Joint Venture to take care of custom formalities for the equipment, raw materials imported, and take care some of the formalities for the products exported; 5.2.9 To assist foreign workers to take care of visa, work, living and travel procedures; 5.2.10 To assist the Joint Venture to take care of related loan, insurance and etc; 5.2.11 Responsible for domestic sales of all diesel oil, natural gas, old steel wire products; 4 5.2.12 To assist the Joint Venture to apply for tax reduction and exemption and other favorable treatment based on related law in China; 5.2.13 To take care of other matters entrusted by the Joint Venture. 5.3 Party B obligated to complete the following: 5.3.1 To pay its share of investment according to the contract; 5.3.2 To take care of other matters entrusted by the Joint Venture 5.4 Party C obligated to complete the following: 5.4.1 To pay its share of investment according to the contract; 5.4.2 To provide the Joint Venture with related international market product information for the products manufactured by the Joint Venture; 5.4.3 To take care of other matters entrusted by the Joint Venture. 5.5 Party D obligated to complete the following; 5.5.1 To pay its share of investment according to the contract; 5.5.2 Responsible for the quotation inquiry of the equipment's, cars and accessories needed to be imported, and to order the selected products and take care of related formalities for their shipment to Haikou Port. 5.5.3 Responsible for import old rubber material to port Haikou, if the material is insufficient in domestic market and after the Joint Venture Company apply the temporary import permission from the Environment Control Department. 5.5.4 Responsible for the sales of charcoal products in International market, if the domestic market has sales difficulty. 5.5.5 To provide the Joint Venture with related international market product information for the products manufactured by the Joint Venture; 5.5.6 responsible for the purchase of other imported materials required by the Joint Venture; 5.5.7 To take care of other matters entrusted by the Joint Venture. 5.5.8 To ensure the completeness, reliability and suitability of the vacuum distillation technology, technical procedures, equipment design, testing and inspection provided to the Joint Venture. To ensure stable production, product quality and designed capability of the equipment. 5.5.9 To guarantee to provide the Joint Venture with processing technology, design, manufacture and packaging technology and its related information. To provide the Joint Venture with related information and technical information, and improvement of the technology and deep processing technology for free; 5.5.10 To guarantee the technician and production workers of the Joint Venture will master the related technology during the training period according to the training contract. The technical training fee and etc. Expenses will be responsible by Party C; 5.5.11 Responsible for providing the necessary equipment installation, tuning and trial production technical staff and technical inspection staff. 5 Article VI Board of Directors & Management Organization 6.1 The Board of Directors is established on the date the approval certificate of the Joint Venture is issued. 6.2 The Board of Directors is constituted by 7 directors in which 3 directors are appointed by Party A and 1 director is appointed by Party B, 1 director is appointed by Party C; 2 directors are appointed by Party D. One president is appointed by Party A and one vice president is appointed by Party D. The term of the president is 4 years, can be re-appointed if agreed by the appointing party. During the appointment, If not qualified replacement is required for some reason, a written notice shall be sent to the other Joint Venture party one month in advance. However, the appointing party has the replacement power. 6.3 The Board of Directors has the highest authority in the Joint Venture. It is the decision maker for all important matters in the Joint Venture. I Amendment of the corporation articles; II Extension, termination, dissolution of the Joint Venture; III Increase and/or transfer of the registered capital; IV Merge with other business organization; Other matters shall be passed by 2/3 o the attending directors in the Board of Directors' Meeting (including directors from all parties). Any resolution conveyed through written documentation shall be passed and signed by all directors. The efficacy of the written resolutions the same as unanimous resolution by the directors in the Board of Directors' Meeting. 6.4 The president is the legal representative of the Joint Venture. If the president can not carry out his duty for some reason, he can authorize the vice president or other director to act on his behalf. 6.5 The Board of Directors' Meeting shall be held at least once an year. The meeting will be convened and directed by the President. If motioned by 1/3 of the directors, the President can convince a temporary Board of Directors' Meeting. The minutes of meeting shall be kept in file until the expiration of the Joint Venture. 6.6 The president and vice president each has only one vote. 6.7 The Joint Venture implements general manager responsibility system under the leadership of the Board of Directors. The managing organization has one general manager, and two deputy general managers. The first general manager is recommended by Party B, and two deputy general managers are recommended by Party A. There are also one chief engineer, chief economist, and chief accountant, and they are recommended by both parties after negotiation. The general manager, deputy general managers and other senior 6 officers must be appointed by the Board of Directors. Their term is four years. They can be re-appointed by the Board of Directors. 6.8 The duties of the general manager are to execute all resolutions of the Board of Directors, to organize and direct daily management operation of the Joint Venture. The deputy general managers shall assist the general manager. 6.9 If the general manager, deputy general managers or other senior officers have engaged in any malpractice or have seriously neglected their duty, they can be discharged and replaced at any time with the resolution in the Board of Directors' Meeting. Article VII Preparation Construction 7.1 The Joint Venture take full responsible for preparation construction. 7.2 The preparation center is specifically responsible for examining the construction design, signing construction contract, organizing pertinent equipment setup and processing, purchasing related materials and its inspection upon delivery, formulating construction schedule, and safekeeping and organizing the documents, pictures, files, and information during construction. 7.3 Prepare the name list, salary and expenses of the staff in the preparation center, and enter the expenditures into the budget. However, these expenditures shall be examined and approved by the Board of Directors. 7.4 The Joint Venture starts operation after the Board of Directors is established. The completion of preparation and construction transfer to the Joint Venture Company after approved by the Board of Directors. 7.5 The equipment and materials necessary for the Joint Venture Company should be purchased in domestic if it's in same condition and price as international market. 7.6 When entrusted by Joint Venture to purchase equipment from international market, other parties should be invited to involve the process. 7.7 Party A,B,C and D designates technicians to form a technical group under the instruction of the Board of Directors to review, test, examine, acceptance material and imported equipment. 7.8 The products of the Joint Venture will be sold in the domestic and overseas markets. Party A will be responsible for selling the diesel oil, natural gas and old materials in the domestic market, and party B will be responsible for 7 selling the charcoal in the overseas market. The price for the products sold in domestic and overseas markets will be determined by the general manager based on better price has priority. Article VIII Labor Management 8.1 The Joint Venture Company staff's recruit, dismiss, salary insurance, benefit should be according to "International Joint Venture Business Management Law of People's Republic of China" and the Board of Directors compiled policy, sign a work contract between Joint Venture Company and it's staff and report it to local government's labor department. 8.2 A,B,C and D four parties recommended high level management personnel's salary, insurance, benefit, travel expense should be approved by the Board of Directors. Article IX Profit Distribution and Sharing of Responsibility for Loss 9.1 The Joint Venture shall pay income tax for its total profit to China Hainan Economic Zone. It will also withdraw 10% of the "three funds" and loan payment from the profit after tax. All the parties have negotiated and decided to return the loan principle and depreciation in five years. The withdrawal ratio of the other two funds can be adjusted by the Board of directors under the premise of return the loan principle and depreciation in five years. Then, the remaining profit will be shared by all Joint Venture parties once a year according to their investment ratio in the registered capital. 9.2 The profit can not be distributed before making up for the loss of the Joint Venture in the previous year. The undistributed before making up for the loss of the Joint Venture in the previous year. The undistributed profit from the previous year can be distributed along with the current year profit. 9.3 The profit of the Joint Venture, with approval of the Board of Directors and evaluation agency, does not have to be distributed. It can be added to the capital investment to expand the production. 9.4 If the Joint Venture encounters loss, both Joint Venture parties shall bear the loss according their share in the registered capital, and each of their liability is limited to the amount of their investment. 8 Article X Tax, Finance and Auditing] 10.1 The Join Venture and its employees shall pay the required taxes according to the related regulations of People's Republic of China. 10.2 All foreign exchange related matters of the Joint Venture shall be executed according to Foreign Exchange Provisional Regulations of People's Republic of China and its related management regulations. If the condition changes and the foreign exchange appears to be unbalanced, the foreign exchange loan shall be paid in priority according to the proportion. If the profit distributed for the payment of the foreign exchange loan is insufficient, it shall be made up in the subsequent year until it is paid off. 10.3 The Joint Venture shall set up an accounting system based on Foreign Investment Business Accounting System of People's Republic of China. 10.4 The accounting year of the Joint Venture starts on October 1 and ends on September 30, next year. All vouchers, receipts, reports, account books shall be written in Chinese. 10.5 The Joint Venture shall hire a CPA registered in China to investigate and audit the accounts, and the results shall be reported to the Board of Directors and the general manager. Both Joint Venture parties have the right to inspect the accounts of the Joint Venture, and the inspecting party is responsible for the expenses incurred. Article XI Insurance 10.6 The general manager shall formulate a balance sheet, income statement and profit distribution plan for the previous accounting year within the first three months of each accounting year, and shall present these reports to the Board of directors for examination and resolution. 11.1 All insurance of the Joint Venture shall be purchased from insurance companies in China. 11.2 Insurance category value, and insured period will be determined by he Board of Directors according to the regulations of the Chinese insurance company. 9 Article XII Term of Joint Venture 12.1 The term of the Joint Venture is 12 years starting on the date the corporation license of the Joint Venture is issued. 12.2 If motioned by one party and unanimously passed in the Board of Directors' Meeting, an application for extension can be filed with the original evaluation agency six months before the Joint Venture contract expires. Article XIII Amendment and Cancellation of the Contract 13.1 The amendment of this contract and the appendix must be signed by both Joint Venture parties, and shall be reported to the original evaluation agency in order to become effective. 13.2 If one party is not able to fulfil the obligations stipulated in the contract and corporation articles, or has seriously violated the stipulations in the contract and corporation articles, and has impeded the Joint Venture from operating normally or has caused the Joint Venture to be unable to accomplish the goal of the Joint Venture, the party in violation is treated as terminating the contract by itself. The other party does not only has the right to claim indemnity from the party in violation, but also has right to file and application for termination of contract through legal proceedings with the original evaluation agency. If both parties agree to continue the business operation, the party in violation must first pay for the business loss of the Joint Venture. 13.3 If any party is not able to fulfill the contract, or has seriously violated the stipulations in the contract and corporation articles, and has impeded the Joint Venture from operating normally or has caused the Joint Venture to be unable to accomplish the goal of the Joint Venture, the party in violation is treated as terminating the contract by itself. The other party does not only has the right to claim indemnity from the party in violation, but also has right to file and application for termination of contract through legal proceedings with the original evaluation agency. If each parties agree to continued business, the party in violation must first pay for the loss of the Joint Venture. 13.4 The Joint Venture is dissolved under the following circumstances. 13.4.1 Upon expiration of the Joint Venture; 13.4.2 When the Joint Venture encounters serious loss and can not continue its operation; 13.4.3 When one Joint Venture party violates the contract and causes the company to be unable to continue its operation; 13.4.4 Due to natural disasters, wars and other force mature; 10 13.5 When the Joint Venture announces dissolution, the Board of Directors shall determine the liquidation procedures, principles, and candidates of the liquidation committee, and shall report the decision to the managing department for examination and supervision. 13.6 After the liquidation works of the Joint Venture are completed, the liquidation committee shall furnish a liquidation report and shall present it in the Board of Directors' Meeting for approval. It shall also be filed with the original evaluation agency. The dissolution of the Joint Venture shall be registered with the original registering Business Administration Bureau and the business license shall be returned to be canceled, 13.7 The properties remaining after the liquidation shall be distributed to the Joint Venture parties on their share of investment in the registered capital. After distribution, one party has the priority to purchase the assets distributed to the other party. 13.8 When the Joint Venture dissolves, the net assets and the appreciation of the registered capital are treated as profit and income tax shall be paid according to the law. 13.9 After the Joint Venture dissolves, all account books and documentation shall be kept by Party A. Article XIV Responsibility for Breaching of Contract 14.1 If this contract or its appendix is not able to be carried out partially or completely due to one party's negligence, the negligent party shall bear the responsibility for breaching the contract. If this contract can not be carried out attributable to all parties' faults, all Joint Venture parties are accountable to their respective responsibilities. 14.2 If any party in the Joint Venture is not comply with the article IV of this contract to pay the capital in time, for each delayed month, the delayed party should pay 5% of its capital amount as penalty fine to other parties. If delayed over three months, the other parties has right to suspend this contract and ask for compensation. 11 Article XV Settlement of Disputes 15.1 All disputes related to or arisen from the execution of this contract shall be negotiated and amicably resolved by both parties. If the dispute can not be resolved through negotiation, it shall be presented to China International Economics and Trade Arbitration Council. The dispute will be arbitrated by the Council through arbitration procedures of the Council. The ruling of the arbitration is final and binding to all three parties. 15.2 During the arbitration proceedings, the Joint Venture parties shall continue to carry out the stipulations in the contract and corporation articles. Article XVI Applicable Law & Language 16.1 The formulation, efficacy, interpretation, implementation of this contract agreement and the resolution of disputes are all under the jurisdiction of the law of People's Republic of China. 16.2 This contract shall be written in Chinese. It is made eight originals and eight copies. Article XVII Efficacy of Contract and Others 17.1 The appendix of this contract; after signed by both parties, is a constituent of this contract. The supplementary articles signed by both parties are a constituent of this contract. They have the same efficacy as the contract after approved by the original evaluation agency. 17.2 This contract and its appendix must be reported to the related department for approval. It becomes effective on the date the approval certificate is issued. 17.3 When both parties issue notice, for any matter relating to the authority, obligation of both parties, a written notice shall be issued immediately afterwards. The legal addresses listed in Article I are the mailing addresses of both parties. If there is any change in the address, the Party shall inform the Board of Directors within thirty days. Otherwise, the Party shall be responsible for any error its negligence incurred. 12 17.4 This contract is signed by the authorized representatives of the Joint Venture parties on March 6, 1996 at Haikou City, Hainan, China Party A China Hainan Shenhai Group Corp. Authorized Representative: Party B China Yung Tzuo Enterprise Corp. Authorized Representative: Party C China Dalian Hsing Yuan Chemical Corp. Authorized Representative Party D PCC Group Inc. Authorized Representative: Zheng-Nan Wen [NOTARY SEAL APPEARS HERE] STATE OF CALIFORNIA ) County of Los Angeles ) --------------- [NOTARY SEAL APPEARS HERE] On 12-17-96, before me, the undersigned notary public, personally appeared _____ -------- TINA WEN___________________ - -------------------------------------------------------------------------------- X personally known to me -OR- ____ Proved to me on the basis of satisfactory - --- evidence to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(ies), and that by his/her/their signature(s) on the instrument the person(s), or the entity upon behalf of which the person(s) acted, executed the instrument. WITNESS my hand and official seal. /s/ David Kuan ------------------------------------- Signature of Notary EX-21 5 LIST OF SUBSIDIARIES PCC GROUP, INC. List of Subsidiaries Name State of Incorporation - ---- ---------------------- PC Craft Distribution, Inc. Delaware American Tire Collection, Inc. Delaware Each of the above entities is 100% owned by the Registrant, PCC Group, Inc. Additionally, Registrant owns a 55% interest in Dalian Green Resources Corporation, a Chinese corporation, the other 45% of which is owned by a Chinese ------- corporation, China Dalian Materials Development Corporation. EXHIBIT 21 EX-27 6 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF INCOME AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR SEP-30-1996 OCT-01-1996 SEP-30-1996 508 1,006 1,971 99 1,057 5,200 853 708 8,421 2,942 0 1,200 0 25 3,321 8,421 40,645 40,645 38,752 1,597 (397) 46 0 646 3 643 0 0 0 643 .26 .20
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