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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 July 30, 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 July 30, 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
August 26, 1994: 19,473,728.
Page 1 of 12
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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 11
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(a) These items are inapplicable or have a negative response and have therefore
been omitted.
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<TABLE>
<CAPTION>
PSS, INC.
CONSOLIDATED BALANCE SHEETS
(unaudited)
(thousands of dollars)
July 30, October 30,
1994 1993
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<S> <C> <C>
ASSETS
Current Assets:
Cash and short-term investments $ 2,800 $ 572
Investment in mortgage certificates 112,095 133,837
Interest receivable 1,200 1,352
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Total current assets 116,095 135,761
Deferred Financing Costs 633 873
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$116,728 $136,634
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<CAPTION>
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Borrowings under mortgage certificate
financing agreement $105,586 $124,062
Accounts payable and accrued liabilities 217 251
Interest payable 2,522 1,420
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Total current liabilities 108,325 125,733
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Long-term Debt 48,171 48,144
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Stockholders' Deficit:
Common stock 19,474 19,474
Additional paid-in capital 149,110 149,110
Accumulated deficit (208,352) (205,827)
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Total stockholders' deficit (39,768) (37,243)
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$116,728 $136,634
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</TABLE>
The accompanying notes are an integral part
of these financial statements.
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<TABLE>
<CAPTION>
PSS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(thousands of dollars, except per share data)
Three months ended
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July 30, July 31,
1994 1993
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<S> <C> <C>
Interest income $ 1,458 $ 2,003
Interest expense (2,402) (2,315)
General and administrative expenses (52) (54)
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Loss before income taxes and
extraordinary item (996) (366)
Income tax benefit 124
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Loss before extraordinary item (996) (242)
Extraordinary item:
Tax benefit resulting from utilization
of net operating loss carryforward (124)
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Net loss $ (996) $ (366)
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Loss per common share:
Loss before extraordinary item $ (0.05) $ (.01)
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Net loss $ (0.05) $ (.02)
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</TABLE>
The accompanying notes are an integral part
of these financial statements.
4
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<TABLE>
<CAPTION>
PSS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(thousands of dollars, except per share data)
Nine months ended
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July 30, July 31,
1994 1993
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<S> <C> <C>
Interest income $ 4,463 $ 6,862
Interest expense (6,836) (9,849)
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 (152) (297)
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Loss before income taxes and
extraordinary items (2,525) (1,262)
Income tax benefit 429
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Loss before extraordinary items (2,525) (833)
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 16,303
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Net income (loss) $ (2,525) $ 47,951
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Income (loss) per common share:
Loss before extraordinary items $ (0.13) $ (0.04)
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Net income (loss) $ (0.13) $ 2.46
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</TABLE>
The accompanying notes are an integral part
of these financial statements.
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<TABLE>
<CAPTION>
PSS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(thousands of dollars)
Nine months ended
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July 30, July 31,
1994 1993
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<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (2,525) $ 47,951
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 890 886
Increase (decrease) in interest payable 1,102 (3,809)
Other 119 512
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Net cash used by operating activities (414) (5,695)
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Cash flows from investing activities:
Principal repayments on mortgage
certificates 21,118 27,773
Proceeds from sale of Mortgage Certificates 13,220
Proceeds from sale of Pacific Enterprises
common stock 21,893
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Net cash provided by investing
activities 21,118 62,886
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Cash flows from financing activities:
Repayment of borrowings under mortgage
certificate financing agreement (18,476) (39,863)
Repurchases of long-term debt (18,568)
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Net cash used by financing activities (18,476) (58,431)
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Net increase (decrease) in cash and
short-term investments 2,228 (1,240)
Cash and short-term investments -
beginning of period 572 1,871
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Cash and short-term investments -
end of period $ 2,800 $ 631
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</TABLE>
The accompanying notes are an integral part
of these financial statements.
6
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PSS, INC.
NOTES TO FINANCIAL STATEMENTS
July 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 provided for in the January 1993
Agreements, the Company purchased such Senior Notes and Debentures in exchange
for 500,000 shares of Pacific Enterprises common stock ("PET Shares") and
approximately $23 million cash resulting in an extraordinary gain on early
extinguishment of debt of approximately $49 million during the nine months ended
July 31, 1993.
NOTE 3 - INVESTMENT IN MORTGAGE CERTIFICATES
During the nine months ended July 31, 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 nine months ended July 31, 1993, the Company exchanged 500,000 PET
Shares as partial consideration for the purchase of Senior Notes and sold its
remaining investment in PET Shares and as a result recorded a realized loss of
approximately $40 million and a decrease in unrealized loss of approximately
$42 million.
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NOTE 5 - INCOME TAXES
During the three and nine months ended July 31, 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
nine months ended July 30, 1994, there was no provision for income taxes
recorded for such interim periods.
NOTE 6 - SUBSEQUENT EVENTS
Subsequent to July 30, 1994, the Company purchased approximately $14.3 million
of Senior Notes and $5.8 million of Debentures for an aggregate purchase price
of approximately $8 million (including on account of accrued interest). As a
result, during the three months ending October 29, 1994, the Company will record
an extraordinary gain on early extinguishment of debt of approximately $12.8
million, after write-off of related deferred financing costs.
Additionally, in order to partially finance such Senior Note and Debenture
purchases, the Company sold approximately $97 million of its investment in
Mortgage Certificates and repaid related Mortgage Financing borrowings.
As a result of the foregoing transactions, and giving effect to the payment
subsequent to July 30, 1994 of interest due July 15, 1994 on the Senior Notes
and Debentures, on a proforma basis the Company's assets approximate $16.5
million of Mortgage Certificates and related receivables and Mortgage Financing
borrowings approximate $15.3 million, leaving an approximately $1.2 million net
difference available for holders of the remaining $5.3 million of Senior Notes
and $22.9 million of Debentures. Accordingly, it is not 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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PSS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
At July 30, 1994, the Company's principal assets consisted of approximately
$112 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 nine months ended July 30, 1994, the Company utilized approximately
$2 million cash for debt service requirements on the Debentures and Senior
Notes. At July 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 5.7% and the average
annual interest rate on the related borrowings approximated 4.7%. The rates of
interest to be received on the Mortgage Certificates are adjustable based on
general interest rate trends with certain maximums. The Company is exclusively
invested in Mortgage Certificates, and, accordingly, is presently relying solely
on such as its source of cash. 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. As it relates to Mortgage Certificates, 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.
Subsequent to July 30, 1994, the Company purchased approximately $14.3 million
of Senior Notes and $5.8 million of Debentures for an aggregate purchase price
of approximately $8 million (including on account of accrued interest).
Additionally, in order to partially finance such Senior Note and Debenture
purchases, the Company sold approximately $97 million of its investment in
Mortgage Certificates and repaid related Mortgage Financing borrowings.
As a result of the foregoing transactions, and giving effect to the payment
subsequent to July 30, 1994 of interest due July 15, 1994 on Senior Notes and
Debentures, on a proforma basis the Company's assets approximate $16.5 million
of Mortgage Certificates and related receivables and Mortgage
Financing borrowings approximate $15.3 million, leaving an approximately $1.2
million net difference available for holders
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of the remaining $5.3 million of Senior Notes and $22.9 million of Debentures.
Accordingly, it is not expected that the Company will have sufficient capital
resources to meet its debt service requirements and working capital needs for
the next 12 months.
RESULTS OF OPERATIONS
INTEREST INCOME
Interest income decreased during the three and nine months ended July 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 5.1% and
4.9% during three and nine months ended July 30, 1994, as compared to 5.6% and
5.9% during the three and nine months ended July 31, 1993, respectively.
INTEREST EXPENSE
Interest expense decreased during the three and nine months ended July 30, 1994,
as compared to the prior year periods, primarily due to lower borrowings related
to investments in Mortgage Certificates and, for the nine-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 4.5% and 3.8% during the three and nine months ended
July 30, 1994, as compared to 3.3% and 3.4% during the three and nine months
ended July 31, 1993, respectively.
REALIZED AND UNREALIZED LOSS ON PACIFIC ENTERPRISES COMMON
STOCK
During the nine months ended July 31, 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 nine months ended July 31, 1993, the Company purchased approximately
$14 million of Debentures and $65 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 $49 million.
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ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - None filed with this report.
(b) The Company filed a Form 8-K, the date of such report
being August 12, 1994, with respect to the purchase of Senior Notes
and sale of Mortgage Certificates.
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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: August 26, 1994 By:/s/ Mark Brown
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Mark Brown
President, Chief Financial
and Accounting Officer
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