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 27, 1996
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 27, 1996 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, 1996: 19,473,728.
Page 1 of 12
<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 11
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 STATEMENTS OF NET LIABILITIES
(LIQUIDATION BASIS)
(unaudited)
(thousands of dollars)
April 27, October 28,
1996 1995
-------- --------
Assets:
Cash and short-term investments $ 82 $ 11
Investment in mortgage certificates 5,464 5,840
Accrued interest receivable 73 76
-------- --------
Total assets 5,619 5,927
-------- --------
Liabilities:
Borrowings under mortgage certificate
financing agreement $ 4,959 $ 5,278
Accounts payable and accrued liabilities 113 92
Reserve for estimated costs during
period of liquidation 40 50
PNS 12-1/8% senior notes 5,258 5,258
Interest payable on PNS notes 822 504
Reserve for interest on PNS notes during
period of liquidation 138 456
PSS 7-1/8% debentures 22,920 22,920
Interest payable on PSS debentures 2,921 2,107
Reserve for interest on PSS debentures
during period of liquidation 354 1,168
-------- --------
Total liabilities 37,525 37,833
-------- --------
Net Liabilities $(31,906) $(31,906)
======== ========
The accompanying notes are an integral part
of these financial statements.
3
<PAGE>
PSS, INC.
Consolidated Statement of Changes in Net Liabilities
(Liquidation Basis)
Consolidated Statement of Operations (Going Concern Basis)
(unaudited)
(thousands of dollars)
Three months ended
----------------------
April 27, April 29,
1996 1995
------ ------
(Liquidation (Going Concern
Basis) Basis)
Investment income $ 114 $ 110
Interest expense (638) (723)
Write off of Deferred Financing Cost
and OID (226)
General and administrative expense (25) (23)
Decrease in estimated costs and interest
during period of liquidation 549
------- -------
Change in Net Liabilities $ 0
=======
Net loss $ (862)
=======
Six Months ended
----------------------
April 27, April 29,
1996 1995
------ ------
(Liquidation (Going Concern
Basis) Basis)
Investment income $ 227 $ 243
Interest expense (1,284) (1,454)
Write off of Deferred Financing Cost
and OID (226)
General and administrative expense (58) (51)
Decrease in estimated costs and interest
during period of liquidation 1,115
------- -------
Change in Net Liabilities $ 0
=======
Net loss $(1,488)
=======
The accompanying notes are an integral part
of these financial statements.
4
<PAGE>
PSS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(thousands of dollars)
Six months ended
----------------
April 27, April 29,
1996 1995
-------- -------
Cash flows from operating activities:
Change in Net Liabilities $ 0
Net loss $(1,488)
Adjustments to reconcile to net cash flows
from operating activities:
Amortization 127
Write off of deferred financing cost and OID 226
Decrease in reserve for interest
during period of liquidation (1,132)
Increase in accrued interest payable 1,132 813
Other 14 23
------- -------
Net cash provided (used) by operating activities 14 (299)
------- -------
Cash flows from investing activities:
Proceeds from sale of mortgages 4,426
Principal repayments on mortgage certificates 376 472
------- -------
Net cash provided by investing activities 376 4,898
------- -------
Cash flows from financing activities:
Repayment of mortgage certificate borrowings (319) (4,634)
------- -------
Net cash used by financing activities (319) (4,634)
------- -------
Net increase (decrease) in cash and short-term
investments 71 (35)
Cash and short-term investments -
beginning of period 11 45
------- -------
Cash and short-term investments -
end of period $ 82 $ 10
======= =======
The accompanying notes are an integral part
of these financial statements.
5
<PAGE>
PSS, INC.
Notes to Financial Statements
April 27, 1996
NOTE 1 - The Company
- --------------------
The consolidated financial statements of PSS, Inc. ("PSS") include its direct
subsidiary, PNS Inc. ("PNS") and its subsidiary PSSC, Inc. ("PSSC"),
collectively, the "Company". The Company, through PSSC, owns pass-through and
participation certificates issued by 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 principal obligations of the Company are
PSSC borrowings secured by Mortgage Certificates, PNS 12-1/8% Senior
Subordinated Notes due July 15, 1996 (the "Senior Notes") and PSS 7-1/8%
Convertible Debentures due July 15, 2006 (the "Debentures").
The Company failed to pay interest due January 15, 1995, July 15, 1995 and
January 15, 1996 on its Debentures and such default continues. The trustee for
the Debentures has indicated to the holders of the Debentures that it does not
intend to accelerate payment of the Debentures "because it is unlikely that the
Debenture holders would receive any payment if the Debentures were accelerated."
Although PNS paid the interest due on January 15, 1995 on its Senior Notes
within the 30 day "grace" period, it failed to make the interest payment due on
July 15, 1995 and January 15, 1996 and such default continues. Claiming that PNS
is in default because it is "unable to pay its debts as the same become due" and
due to its failure to make the July 15, 1995 interest payment, the trustee for
the Senior Notes has accelerated and declared the principal and interest on the
Senior Notes immediately due and payable. The trustee has since been advised by
a representative of the holders of a substantial portion of the Senior Notes
that such holders, together with their counsel, are in the process of developing
a proposal to the Company and PNS and has asked the trustee to forbear from
taking any action for so long as discussions are pending with the Company.
Although the Company has not yet received such proposal, it has been contacted
by the representative of such holders and anticipates that such a proposal will
be forthcoming. In the interim, the trustee has taken no legal action with
respect to the default.
6
<PAGE>
NOTE 1 - The Company (continued)
- --------------------------------
At April 27, 1996, the Company had assets of $5.62 million and liabilities
secured by such assets of $5.07 million, thus having a net difference of
approximately $550,000 available for holders of Senior Notes and Debentures. At
April 27, 1996, approximately $5.26 million of Senior Notes and $22.92 million
of Debentures remain outstanding. The Company's future operating results,
liquidity, capital resources and requirements are primarily dependent upon
actions which may be taken by the trustees for the Senior Notes and the
Debentures to collect amounts due thereunder, the payment of amounts due on and
purchases of Senior Notes and Debentures and, to a lesser extent, 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. The Company is exclusively invested in Mortgage Certificates, and,
accordingly, is presently relying solely on such as its source of cash funds. It
has not been determined what course of action the Company may pursue with
respect to debt service on the Senior Notes and Debentures.
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 28, 1995, included in the Company's Annual Report on Form 10-K.
NOTE 2 - Liquidation Basis of Accounting
- ----------------------------------------
The consolidated financial statements for the first and second quarters of
fiscal 1995 were prepared on a going concern basis of accounting. Effective
October 28, 1995, the Company adopted the liquidation basis of accounting for
presenting its consolidated financial statements. Under this basis of
accounting, assets and liabilities are stated at their net realizable value and
estimated costs through the liquidation date are provided to the extent
reasonably determinable.
The liquidation basis of accounting requires the determination of significant
estimates and judgments. A summary of significant estimates and judgments
utilized in preparation of the consolidated financial statements on a
liquidation basis follows:
* The Senior Notes July 15, 1996 due date has been utilized as
the liquidation date.
* Mortgage Certificates and related interest receivable are
stated at estimated market value.
* Borrowings secured by Mortgage Certificates are stated at
face value.
7
<PAGE>
NOTE 2 - Liquidation Basis of Accounting (continued)
- ----------------------------------------------------
* The reserve for estimated costs during the period of
liquidation represents estimates of costs (primarily trustee
and legal fees), to be incurred in the future to the
liquidation date.
* Net estimated interest income to be earned on Mortgage
Certificates in excess of interest expense on related
borrowings is considered in determining the reserve for
estimated costs during the period of liquidation.
* Senior Notes and Debentures and related interest accrued
through April 27, 1996 are stated at face value.
* The reserve for interest during the period of liquidation
represents interest on Senior Notes and Debentures for the
period from April 28, 1996 to July 15, 1996.
All of the above estimates and judgments may be subject to change as facts and
circumstances change. Similarly, actual costs and expenses may differ
significantly depending on a number of factors, particularly the length of the
liquidation period.
NOTE 3 - Income Taxes
- ---------------------
As a result of losses for each of the interim periods, there was no provision
for income taxes recorded.
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
- -------------------------------
At April 27, 1996, the Company's principal assets consisted of approximately
$5.5 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.
PNS is restricted by terms of its Senior Notes Indenture from paying dividends
or making other payments to PSS, except that PNS may pay dividends to PSS in
amounts sufficient to enable PSS to meet its obligation on its Debentures when
due. PNS, like its parent company, has a stockholder's deficit.
At April 27, 1996, the Company had assets of $5.62 million and liabilities
secured by such assets of $5.07 million, thus having a net difference of
approximately $550,000 available for holders of Senior Notes and Debentures. At
April 27, 1996, approximately $5.26 million of Senior Notes and $22.92 million
of Debentures remain outstanding.
The Company failed to pay the interest due January 15, 1995, July 15, 1995 and
January 15, 1996 on its Debentures and such default continues. The trustee for
the Debentures has indicated to the holders of the Debentures that it does not
intend to accelerate payment of the Debentures "because it is unlikely that the
Debenture holders would receive any payment if the Debentures were accelerated."
Although PNS paid the interest due on January 15, 1995 on its Senior Notes
within the 30 day "grace" period, it failed to make the interest payment due on
July 15, 1995 and January 15, 1996 and such default continues. Claiming that PNS
is in default because it is "unable to pay its debts as the same become due" and
due to its failure to make the July 15, 1995 interest payment, the trustee for
the Senior Notes has accelerated and declared the principal and interest on the
Senior Notes immediately due and payable. The trustee has since been advised by
a representative of the holders of a substantial portion of the Senior Notes
that such holders, together with their counsel, are in the process of developing
a proposal to the Company and PNS and has asked the trustee to forbear from
taking any action for so long as discussions are pending with the Company.
Although the Company has not yet received such proposal, it has been contacted
by the representative of such holders and anticipates that such a proposal will
be forthcoming. In the interim, the trustee has taken no legal action with
respect to the default.
9
<PAGE>
Liquidity and Capital Resources (continued)
- -------------------------------------------
The Company's future operating results, liquidity, capital resources and
requirements are primarily dependent upon actions which may be taken by the
trustees for the Senior Notes and the Debentures to collect amounts due
thereunder, the payment of amounts due on and purchases of Senior Notes and
Debentures and, to a lesser extent, 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. The Company is
exclusively invested in Mortgage Certificates, and, accordingly, is presently
relying solely on such as its source of cash funds. It has not been determined
what course of action the Company may pursue with respect to debt service of
Senior Notes and Debentures.
Results of Operations
- ---------------------
Interest income
---------------
Interest income decreased during the six months ended April 27, 1996 as compared
to the prior year period as a result of a declining investment in Mortgage
Certificates. Interest income increased during the three months ended April 27,
1996 as compared to the prior year period as a result of higher interest rates
more than offsetting a declining investment.
Interest expense
----------------
Interest expense decreased during the three and six months ended April 27, 1996
as compared to the prior year periods, primarily due to lower investments in
Mortgage Certificates and related borrowings upon which interest expense is
incurred.
10
<PAGE>
ITEM 3 - Defaults Upon Senior Securities
-------------------------------
Although PNS paid the interest due on January 15, 1995 on its Senior Notes
within the 30 day "grace" period, it failed to make the interest payment due on
July 15, 1995 and January 15, 1996 and such default has continued beyond the 30
day "grace" period. Claiming that PNS is in default because it is "unable to pay
its debts as the same become due" and due to its failure to make the July 15,
1995 interest payment, the trustee for the Senior Notes has accelerated and
declared the principal and interest on the Senior Notes immediately due and
payable. The trustee has since been advised by a representative of the holders
of a substantial portion of the Senior Notes that such holders, together with
their counsel, are in the process of developing a proposal to the Company and
PNS and has asked the trustee to forbear from taking any action for so long as
discussions are pending with the Company. Although the Company has not yet
received such proposal, it has been contacted by the representative of such
holders and anticipates that such a proposal will be forthcoming. In the
interim, the trustee has taken no legal action with respect to the default.
ITEM 6 - Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits - none filed with this report.
(b) None
11
<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 11, 1996 By: /s/ James M. Lieb
-----------------------
James M. Lieb, Director
12
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000793322
<NAME> PSS, Inc.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> NOV-02-1996
<PERIOD-START> OCT-29-1995
<PERIOD-END> APR-27-1996
<CASH> 82
<SECURITIES> 5,464
<RECEIVABLES> 73
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 5,619
<CURRENT-LIABILITIES> 5,112
<BONDS> 32,413
0
0
<COMMON> 0
<OTHER-SE> (31,906)
<TOTAL-LIABILITY-AND-EQUITY> 5,619
<SALES> 0
<TOTAL-REVENUES> 114
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> (25)
<LOSS-PROVISION> 549
<INTEREST-EXPENSE> (638)
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
