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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 January 29, 1994
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OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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For Quarter ended January 29, 1994 Commission file number 0-14900
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PSS, INC.
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(Exact name of registrant as specified in its charter)
Delaware 91-1335798
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1511 Sixth Avenue, Seattle, WA 98101
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(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (206) 621-6938
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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
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The number of shares of common stock outstanding as of
March 1, 1994: 19,473,728.
Page 1 of 10
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INDEX
PAGE
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PART I. FINANCIAL INFORMATION
1. Financial Statements 3
2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
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)
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(a) These items are inapplicable or have a negative response and have
therefore been omitted.
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PSS, INC.
CONSOLIDATED BALANCE SHEETS
(unaudited)
(thousands of dollars)
<TABLE>
<CAPTION>
JANUARY 29, OCTOBER 30,
1994 1993
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ASSETS
<S> <C> <C>
Current Assets:
Cash and short-term investments $ 585 $ 572
Investment in mortgage certificates 124,275 133,837
Interest receivable 1,267 1,352
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Total current assets 126,127 135,761
Deferred Financing Costs 793 873
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$126,920 $136,634
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<CAPTION>
LIABILITIES AND STOCKHOLDERS' DEFICIT
<S> <C> <C>
Current Liabilities:
Borrowings under mortgage certificate
financing agreement $116,225 $124,062
Accounts payable and accrued liabilities 222 251
Interest payable 280 1,420
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Total current liabilities 116,727 125,733
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Long-term Debt 48,153 48,144
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Stockholders' Deficit:
Common stock 19,474 19,474
Additional paid-in capital 149,110 149,110
Accumulated deficit (206,544) (205,827)
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Total stockholders' deficit (37,960) (37,243)
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$126,920 $136,634
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</TABLE>
The accompanying notes are an integral part
of these financial statements.
3
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PSS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(thousands of dollars, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
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JANUARY 29, JANUARY 30,
1994 1993
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<S> <C> <C>
Interest income $ 1,544 $ 2,597
Interest expense (2,206) (4,959)
Realized loss on sale of Pacific
Enterprises common stock (25,661)
Decrease in unrealized loss on Pacific
Enterprises common stock 27,288
General and administrative expenses (55) (142)
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Loss before income taxes and
extraordinary items (717) (877)
Income tax benefit 298
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Loss before extraordinary items (717) (579)
Extraordinary items:
Gain on early extinguishment of debt,
net of income taxes of $7,427 14,417
Tax benefit resulting from utilization
of net operating loss carryforward 7,129
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Net income (loss) $ (717) $ 20,967
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Income (loss) per common share:
Loss before extraordinary items $ (0.04) $ (0.03)
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Net income (loss) $ (0.04) $ 1.08
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</TABLE>
The accompanying notes are an integral part
of these financial statements.
4
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PSS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(thousands of dollars)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JANUARY 29, JANUARY 30,
1994 1993
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<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (717) $ 20,967
Adjustments to reconcile net income
(loss) to net cash flows from
operating activities:
Extraordinary gain on early
extinguishment of debt (21,844)
Realized loss on sale of Pacific
Enterprises common stock 25,661
Decrease in unrealized loss on Pacific
Enterprises common stock (27,288)
Amortization 343 439
Increase (decrease) in accrued
interest payable (1,140) 3,248
Other 56 205
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Net cash provided (used) by
operating activities (1,458) 1,388
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Cash flows from investing activities:
Principal repayments on mortgage
certificates 9,308 13,840
Proceeds from sale of Pacific Enterprises
common stock 10,229
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Net cash provided by investing
activities 9,308 24,069
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Cash flows from financing activities:
Repayment of borrowings under mortgage
certificate financing agreement (7,837) (15,403)
Repurchases of long-term debt (206)
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Net cash used by financing activities (7,837) (15,609)
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Net increase in cash and
short-term investments 13 9,848
Cash and short-term investments -
beginning of period 572 1,871
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Cash and short-term investments -
end of period $ 585 $ 11,719
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</TABLE>
The accompanying notes are an integral part
of these financial statements.
5
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PSS, INC.
NOTES TO FINANCIAL STATEMENTS
JANUARY 29, 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
During the three months ended January 30, 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. In February 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 period, the Company's loss before income taxes and
extraordinary items would have decreased by approximately $2 million for the
three months ended January 30, 1993, due to decreased interest expense.
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NOTE 3 - 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. Subsequent to
January 30, 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 4 - INCOME TAXES
During the three months ended January 30, 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
months ended January 29, 1994, there was no provision for income taxes
recorded for such interim period.
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PSS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
At January 29, 1994, the Company's principal assets consisted of approximately
$124 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 three months ended January 29, 1994, the
Company utilized approximately $2 million cash to meet its debt service
requirements on the Debentures and Senior Notes. At January 29, 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 3.2%. The rates of interest to be
received on the Mortgage Certificates are adjustable based on general interest
rate trends with certain maximums.
At January 29, 1994, the Company had tangible assets (total assets less
deferred financing costs) of approximately $126 million and liabilities
secured by such assets of approximately $117 million, thus having a $9 million
net difference available for holders of Senior Notes and Debentures. At
January 29, 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.
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RESULTS OF OPERATIONS
INTEREST INCOME
Interest income decreased during the three months ended January 29, 1994, as
compared to the prior year period 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 5% during
the three months ended January 29, 1994, as compared to 6.1% during the three
months ended January 30, 1993.
INTEREST EXPENSE
Interest expense for the three months ended January 29, 1994, decreased over
the prior year period primarily due to (i) lower borrowings related to
investments in Mortgage Certificates and (ii) fewer Senior Notes outstanding
due to bond repurchases. The weighted average annual interest expense rate on
Mortgage Certificate related borrowings approximated 3.4% during the three
months ended January 29, 1994, as compared to 3.6% during the three months
ended January 30, 1993.
REALIZED AND UNREALIZED LOSS ON PACIFIC ENTERPRISES COMMON STOCK
During the three months ended January 30, 1993, the Company sold a portion of
its investment in PET Shares and, as a result, recorded a loss on sale of
approximately $26 million and a decrease in unrealized loss of approximately
$27 million.
EXTRAORDINARY ITEM
During the three months ended January 30, 1993, the Company purchased
approximately $40 million of Senior Notes and, as a result, after the
write-off of deferred financing costs, recorded an extraordinary gain on early
extinguishment of debt of approximately $22 million.
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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: March 4, 1994 By: /S/ Mark Brown
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Mark Brown
President, Chief Financial
and Accounting Officer
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