<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended April 30, 1994
--------------------------
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
---------------- ---------------
- - ------------------------------------------------------------------
For Quarter ended April 30, 1994 Commission file number 0-14900
------------------ -------
PSS, Inc.
- - -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 91-1335798
- - ---------------------------------------- -----------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1511 Sixth Avenue, Seattle, WA 98101
- - ---------------------------------------- ----------------------------------
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (206) 621-6938
--------------
- - -------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed
since last report.
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
---- ----
The number of shares of common stock outstanding as of
June 1, 1994: 19,473,728.
Page 1 of 11
<PAGE>
INDEX
Page
PART I. FINANCIAL INFORMATION
1. Financial Statements 3
2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II. OTHER INFORMATION
1. Legal Proceedings (a)
2. Changes in Securities (a)
3. Defaults Upon Senior Securities (a)
4. Submission of Matters to a Vote of Security Holders (a)
5. Other Information (a)
6. Exhibits and Reports on Form 8-K (a)
- - -------------------------------------------------------------------------------
(a) These items are inapplicable or have a negative response and have therefore
been omitted.
2
<PAGE>
PSS, INC.
CONSOLIDATED BALANCE SHEETS
(unaudited)
(thousands of dollars)
<TABLE>
<CAPTION>
April 30, October 30,
1994 1993
----------- -----------
ASSETS
<S> <C> <C>
Current Assets:
Cash and short-term investments $ 543 $ 572
Investment in mortgage certificates 117,916 133,837
Interest receivable 1,216 1,352
------- -------
Total current assets 119,675 135,761
Deferred Financing Costs 713 873
------- -------
$120,388 $136,634
------- -------
------- -------
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Borrowings under mortgage certificate
financing agreement $109,375 $124,062
Accounts payable and accrued liabilities 221 251
Interest payable 1,402 1,420
------- -------
Total current liabilities 110,998 125,733
------- -------
Long-term Debt 48,162 48,144
------- -------
Stockholders' Deficit:
Common stock 19,474 19,474
Additional paid-in capital 149,110 149,110
Accumulated deficit (207,356) (205,827)
------- -------
Total stockholders' deficit (38,772) (37,243)
-------- -------
$120,388 $136,634
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part
of these financial statements.
3
<PAGE>
PSS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(thousands of dollars, except per share data)
<TABLE>
<CAPTION>
Three months ended
------------------------
April 30, May 1,
1994 1993
----------- ----------
<S> <C> <C>
Interest income $ 1,461 $ 2,262
Interest expense (2,228) (2,575)
Realized loss on sale of Pacific
Enterprises common stock (14,548)
Decrease in unrealized loss on Pacific
Enterprises common stock 14,548
Gain on sale of Mortgage Certificates 395
General and administrative expenses (45) (101)
-------- --------
Loss before income taxes and
extraordinary items (812) (19)
Income tax benefit 7
-------- --------
Loss before extraordinary items (812) (12)
Extraordinary items:
Gain on early extinguishment of debt,
net of income taxes of $9,305 18,064
Tax benefit resulting from utilization
of net operating loss carryforward 9,298
-------- --------
Net income (loss) $ (812) $ 27,350
-------- --------
-------- --------
Income (loss) per common share:
Loss before extraordinary items $ (0.04) $ (.00)
-------- --------
-------- --------
Net income (loss) $ (0.04) $ 1.40
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part
of these financial statements.
4
<PAGE>
PSS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(thousands of dollars, except per share data)
<TABLE>
<CAPTION>
Six months ended
-------------------------
April 30, May 1,
1994 1993
----------- ------------
<S> <C> <C>
Interest income $ 3,005 $ 4,859
Interest expense (4,434) (7,534)
Realized loss on sale of Pacific
Enterprises common stock (40,209)
Decrease in unrealized loss on
Pacific Enterprises common stock 41,836
Gain on sale of Mortgage Certificates 395
General and administrative expenses (100) (243)
------- -------
Loss before income taxes and
extraordinary items (1,529) (896)
Income tax benefit 305
-------- -------
Loss before extraordinary items (1,529) (591)
Extraordinary items:
Gain on early extinguishment of debt,
net of income taxes of $16,732 32,481
Tax benefit resulting from utilization
of net operating loss carryforward 16,427
------- -------
Net income (loss) $ (1,529) $ 48,317
-------- --------
-------- --------
Income (loss) per common share:
Loss before extraordinary items $ (0.08) $ (0.03)
-------- --------
-------- --------
Net income (loss) $ (0.08) $ 2.48
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part
of these financial statements.
5
<PAGE>
PSS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(thousands of dollars)
<TABLE>
<CAPTION>
Six months ended
------------------------
April 30, May 1,
1994 1993
----------- -----------
Cash flows from operating activities:
<S> <C> <C>
Net income (loss) $ (1,529) $ 48,317
Adjustments to reconcile net income
(loss) to net cash flows from
operating activities:
Extraordinary gain on early
extinguishment of debt (49,213)
Realized loss on sale of Pacific
Enterprises common stock 40,209
Decrease in unrealized loss on Pacific
Enterprises common stock (41,836)
Gain on sale of Mortgage Certificates (395)
Amortization 640 673
Decrease in accrued interest payable (18) (2,714)
Other 107 477
------- -------
Net cash used by operating activities (800) (4,482)
------- -------
Cash flows from investing activities:
Principal repayments on mortgage
certificates 15,458 19,721
Proceeds from sale of Mortgage Certificates 13,220
Proceeds from sale of Pacific Enterprises
common stock 21,893
------- ------
Net cash provided by investing
activities 15,458 54,834
------- -------
Cash flows from financing activities:
Repayment of borrowings under mortgage
certificate financing agreement (14,687) (32,955)
Repurchases of long-term debt (18,568)
------- -------
Net cash used by financing activities (14,687) (51,523)
------- -------
Net decrease in cash and
short-term investments (29) (1,171)
Cash and short-term investments -
beginning of period 572 1,871
------- -------
Cash and short-term investments -
end of period $ 543 $ 700
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part
of these financial statements.
6
<PAGE>
PSS, INC.
NOTES TO FINANCIAL STATEMENTS
APRIL 30, 1994
NOTE 1 - BASIS OF PRESENTATION
The financial statements present the consolidated financial position and results
of operations of PSS, Inc. ("PSS") and its subsidiaries, including its direct
subsidiary, PNS Inc. ("PNS"), collectively, the "Company". The Company owns
pass-through and participation certificates issued by the Federal National
Mortgage Association and the Federal Home Loan Mortgage Corporation backed by
whole pool real estate mortgages ("Mortgage Certificates"), and as a result, is
primarily engaged in the business of owning mortgages and other liens on and
interests in real estate. The Mortgage Certificates are financed with
borrowings, payable on demand, secured by the Mortgage Certificates (the
"Mortgage Financing").
The financial statements presented herein include all adjustments which are, in
the opinion of management, necessary to present fairly the operating results for
the interim periods reported. The financial statements should be read in
conjunction with the audited, annual financial statements for the year ended
October 30, 1993, included in the Company's Annual Report on Form 10-K.
NOTE 2 - DEBT
In January 1993, the Company entered into agreements (the "January 1993
Agreements") to purchase approximately $64 million of PNS 12 1/8% Senior
Subordinated Notes (the "Senior Notes") and $14 million of PSS 7-1/8%
Convertible Debentures (the "Debentures"). As a part of the January 1993
Agreements, during the three months ended January 30, 1993, the Company
purchased approximately $39 million of Senior Notes in exchange for 500,000
shares of Pacific Enterprises common stock ("PET Shares") and approximately
$10 million cash resulting in an extraordinary gain on early extinguishment of
debt of approximately $22 million. During the three months ended May 1, 1993,
the Company purchased the remaining $25 million of Senior Notes and $14 million
of Debentures, for cash of approximately $13 million resulting in an
extraordinary gain on early extinguishment of debt of approximately $27
million. On a pro forma basis determined as if the Company acquired all of the
Senior Notes and Debentures as provided for in the January 1993 Agreements as
of the beginning of the six-month period ended May 1, 1993, the Company's loss
before income taxes and extraordinary items would have decreased by
approximately $2 million due to decreased interest expense.
7
<PAGE>
NOTE 3 - INVESTMENT IN MORTGAGE CERTIFICATES
During the three months ended May 1, 1993, the Company realized a gain of
approximately $395,000 on the sale of approximately $13 million of Mortgage
Certificates.
NOTE 4 - INVESTMENT IN PACIFIC ENTERPRISES COMMON STOCK
During the three months ended January 30, 1993, the Company sold approximately
520,000 PET Shares and entered into an agreement to exchange 500,000 PET Shares
as partial consideration for the purchase of Senior Notes; as a result, the
Company recorded a realized loss of approximately $26 million and a decrease in
unrealized loss of approximately $27 million. During the three months ended
May 1, 1993, the Company sold its remaining investment in PET Shares and as a
result recorded a realized loss and a decrease in unrealized loss of
approximately $15 million.
NOTE 5 - INCOME TAXES
During the three and six months ended May 1, 1993, the Company recognized an
income tax benefit as a result of income taxes provided on the extraordinary
gain on early extinguishment of debt. The Company also recorded a provision for
income taxes representing a charge in lieu of income taxes that would have been
provided in the absence of net operating loss carryforwards. The income tax
benefit resulting from utilization of net operating loss carryforwards is
presented as an extraordinary item. Due to losses reported for the three and
six months ended April 30, 1994, there was no provision for income taxes
recorded for such interim periods.
8
<PAGE>
PSS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
At April 30, 1994, the Company's principal assets consisted of approximately
$118 million of Mortgage Certificates from which interest income is earned and
its principal obligations consisted of Mortgage Financing borrowings, Debentures
and Senior Notes upon which interest expense is incurred. Principal payments on
the Debentures and Senior Notes are not scheduled to commence until 1996.
The Mortgage Certificates are financed with borrowings payable on demand
provided against the Mortgage Certificates. Net earnings from the Mortgage
Certificates are generally utilized to repay related borrowings. By withdrawing
a portion of accumulated net earnings from the Mortgage Certificates portfolio,
during the six months ended April 30, 1994, the Company utilized approximately
$2 million cash to meet its debt service requirements on the Debentures and
Senior Notes. At April 30, 1994, the average annual interest rate to be earned
on the Mortgage Certificates, as determined on the basis that interest rates do
not change and before amortization of premiums, approximated 5.6% and the
average annual interest rate on the related borrowings approximated 4%. The
rates of interest to be received on the Mortgage Certificates are adjustable
based on general interest rate trends with certain maximums.
At April 30, 1994, the Company had tangible assets (total assets less deferred
financing costs) of approximately $120 million and liabilities secured by such
assets of approximately $111 million, thus having a $9 million net difference
available for holders of Senior Notes and Debentures. At April 30, 1994,
approximately $29 million of Debentures and $20 million of Senior Notes remain
outstanding, and interest thereon, in the absence of additional repurchases,
approximates $4.4 million annually. The Company's future operating results,
liquidity, capital resources and requirements are primarily dependent upon,
among other factors, interest rate fluctuations as they relate to the market
value of Mortgage Certificates and to the spread of interest income therefrom
over interest expense on related borrowings, and upon issuances or repurchases,
if any, by the Company of its debt or capital stock. The Company is exclusively
invested in Mortgage Certificates, and, accordingly, is presently relying solely
on such as its source of cash funds. The Company may obtain funds from its
investment in Mortgage Certificates by withdrawing accumulated net earnings from
such portfolio to the extent permitted pursuant to terms of Mortgage Financing
agreements. It is expected that the Company will have sufficient capital
resources to meet its debt service requirements and working capital needs for
the next 12 months.
9
<PAGE>
RESULTS OF OPERATIONS
INTEREST INCOME
Interest income decreased during the three and six months ended April 30, 1994,
as compared to the prior year periods, as a result of a declining investment in
mortgage certificates (due to principal repayments) and to a lesser extent due
to the effect of interest rate declines on the adjustable rate mortgage
certificates. The weighted average annual interest income rate earned on the
Mortgage Certificates, net of amortization of premiums, approximated 4.9% during
each of the three and six months ended April 30, 1994, as compared to 5.8% and
6% during the three and six months ended May 1, 1993, respectively.
INTEREST EXPENSE
Interest expense decreased during the three and six months ended April 30, 1994,
as compared to the prior year periods, primarily due to lower borrowings related
to investments in Mortgage Certificates and, for the six-month period also due
to fewer Debentures and Senior Notes outstanding due to bond repurchases. The
weighted average annual interest expense rate on Mortgage Certificate related
borrowings approximated 3.6% and 3.5% during the three and six months ended
April 30, 1994, as compared to 3.3% and 3.5% during the three and six months
ended May 1, 1993, respectively.
REALIZED AND UNREALIZED LOSS ON PACIFIC ENTERPRISES COMMON
STOCK
During the six months ended May 1, 1993, the Company sold its remaining
investment in PET Shares and, as a result, recorded a loss on sale of
approximately $40 million and a decrease in unrealized loss of approximately
$42 million.
EXTRAORDINARY ITEM
During the three months ended May 1, 1993, the Company purchased approximately
$14 million and $25 million of Debentures and Senior Notes, respectively; during
the preceding three months, the Company purchased approximately $40 million of
Senior Notes. As a result, after the write-off of deferred financing costs, the
Company recorded an extraordinary gain on early extinguishment of debt of
approximately $22 million and $49 million for the three and six months ended
May 1, 1993, respectively.
10
<PAGE>
SIGNATURE
Pursuant to the requirements 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.
PSS, INC.
(Registrant)
Date: June 4, 1994 By: /s/ Mark Brown
-------------------------------
Mark Brown
President, Chief Financial
and Accounting Officer
