CORE BUSINESS UNRAVELLING
SNAPSHOT:
Business: PCC Group, Inc. is a fourth tier wholesale distributor of microcomputer components.
Product Offerings: Heavily reliant on one product. Western Digital hard drives represent approximately 85% of its sales. Computer components such as monitors, sound cards and power supplies generate 15% of revenues.
Client base: Caters principally to less than 200 Chinese-owned companies.
CORE BUSINESS - ALARMING TRENDS
PCCG's 10Q filing for the nine months period ended on June 30, 1999 reflect the following worrisome trends.
Balance Sheet:
Although net sales decreased by 30% during the latest quarter, Accounts Receivable balances more than doubled, from $3.9 million in September 30, 1999, to $7.9 million for the period ended on 6/30/99. Likewise, a five-fold increase for Bad Debts Reserves, from $34,000 at the beginning of the fiscal year to $209,000 for the period ended on 6/30/99, indicates that PCCG may be faced with massive year-end write-offs. Inventory balance more than doubled during the first nine months of fiscal 1999, from $737,000 to $1.5 million. An ominous sign.
Accounts Receivable
6/30/99 - $7,990,000
9/30/98 - $3,906,000
Variance - $4,084,000
% Increase - 105%
Allowance Bad Debts
6/30/99 - $ 208,000
9/30/98 - $ 34,000
Variance - $ 174,000
% Increase - 512%
Inventory
6/30/99 - $1,516,000
9/30/98 - $ 737,000
Variance -$ 779,000
% Increase - 106%
Notes:
(1) Nine months period ended on 6/30/99
(2) Twelve months period ended on 9/30/98
Statement of Income
Internet Division - 123cdc.com/latestfiasco
The Company's 10Q report, filed on August 16, 1999, states on page 8 "Although revenues from the new internet operations are increasing monthly, the amount of gross revenues generated by retail internet sales constituted less than __% of the Company's net sales during the fiscal quarter ended June 30, 1999." No, this is not my typo, I repeat "internet sales constituted less than __% of the Company's net sales during the fiscal quarter ended June 30, 1999." There is no beef on this one.
The Company reported a 30% decrease in sales for the three months period ending on June 30, 1999. In the prior quarter, it reported a 12% decrease in sales along with a ($48,000) loss from operations. The following key drivers reflect a sharp decline in its latest quarter and year to date results.
Three Months Ended June 30, 1999 and 1998, respectively:
Net Sales
1999 3rd quarter $12,206,000
1998 3r quarter $17,366,000
Variance - ($5,160,000) or a 30% decrease
Gross Profit
1999 3rd quarter $157,000 or 1% of net sales
1998 3rd quarter $794,000 or 5% of net sales
Variance - ($637,000) or an 80% decrease
Selling, General and Administrative Expenses
1999 3rd quarter $740,000
1998 3rd quarter $481,000
Variance - $259,000 or a 54% increase
Income (Loss) From Operations
1999 3rd quarter ($583,000)
1998 3rd quarter $313,000
Variance - ($896,000) or a 286% decrease in profitability
Nine months ended on June 30, 1999
Net Sales
1999 ytd $57,444,000
1998 ytd $60,845,000
Variance - ($3,401,000) or a 6% decrease
Gross Profit
1999 ytd $2,117,000 or 4% of sales
1998 ytd $2,980,000 or 5% of sales
Variance - ($863,000) or a 29% decrease
Selling General and Administrative Expenses
1999 ytd $2,102,000
1998 ytd $1,500,000
Variance - $602,000 or a 40% increase
Income From Operations
1999 ytd $15,000, or .3% of net sales
1998 ytd $1,480,000, or 2% of net sales
Variance - ($1,465,000) or a 99% decrease
As a note, the Company disclosed that year to date SG&A expenses included costs associated with its internet division. In a separate caption, the Company reported a $296,000 gain for services rendered to a Taiwanese company in the purchasing of equipment. These one-time services obviously had a cost, which was not disclosed by the Company. Assuming that such services had a generous 20% profit margin, the cost for services rendered would total $237,000. Since the Company stated that year to date SG&A increase, in the amount of $602,000, was due to costs associated with its internet division, it is reasonable to assume that actual internet related costs are closer to the $365,000 range ($602,000 less $237,000.)
Conclusion: Wholesale distribution activities generated an estimated operating income of $252,000 ($15,000 plus $237,000) for the nine months period ending on June 30, 1999. This represents an 83% or $1.2 million decrease from comparable 1998 same period results. In addition, internet division costs totaled an estimated $365,000, a pittance when compared to monies being spent by true internet players.
Historically, the fourth quarter has been PCCG's lowest revenue producing month. Thus, things will tend to get worse rather than better. |
