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 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 January 27, 1996 Commission file number 0-14900
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
-------------------------------- -----------------
(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
March 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)
<TABLE>
<CAPTION>
January 27, October 28,
1996 1995
----------- -----------
<S> <C> <C>
Assets:
Cash and short-term investments $ 31 $ 11
Investment in mortgage certificates 5,485 5,840
Accrued interest receivable 73 76
------- -------
Total assets 5,589 5,978
------- -------
Liabilities:
Borrowings under mortgage certificate
financing agreement $ 4,947 $ 5,278
Accounts payable and accrued liabilities 90 92
Reserve for estimated costs during
period of liquidation 45 50
PNS 12-1/8% senior notes 5,258 5,258
Interest payable on PNS notes 663 504
Reserve for interest on PNS notes during
period of liquidation 297 456
PSS 7-1/8% debentures 22,920 22,920
Interest payable on PSS debentures 2,514 2,107
Reserve for interest on PSS debentures
during period of liquidation 761 1,168
------- -------
Total liabilities 37,495 37,833
------- -------
Net Liabilities $ (31,906) $ (31,906)
======= =======
</TABLE>
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)
<TABLE>
<CAPTION>
Three months ended
---------------------------
January 27, January 28,
1996 1995
------------ --------------
(Liquidation (Going Concern
Basis) Basis)
<S> <C> <C>
Investment income $ 113 $ 133
Interest expense (646) (731)
General and administrative expense (33) (28)
Decrease in estimated costs and interest
during period of liquidation 566
-------- --------
Change in Net Liabilities $ --
========
Net loss $ (626)
========
</TABLE>
The accompanying notes are an integral part
of these financial statements.
4
<PAGE>
PSS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(thousands of dollars)
<TABLE>
<CAPTION>
Three months ended
----------------------------
January 27, January 28,
1996 1995
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Change in Net Liabilities $ --
Net loss $ (626)
Adjustments to reconcile to net cash flows
from operating activities:
Amortization 64
Decrease in estimated costs and interest
during period of liquidation (566)
Increase in accrued interest payable 566 566
Other 44 34
------- -------
Net cash provided (used) by operating activities (44) 38
------- -------
Cash flows from investing activities:
Proceeds from sale of mortgages 4,426
Principal repayments on mortgage certificates 355 447
------- -------
Net cash provided by investing activities 355 4,873
------- -------
Cash flows from financing activities:
Repayment of mortgage certificate borrowings (331) (4,596)
------- -------
Net cash used by financing activities (331) (4,596)
------- -------
Net increase in cash and short-term
investments 20 315
Cash and short-term investments -
beginning of period 11 45
------- -------
Cash and short-term investments -
end of period $ 31 $ 360
======= =======
</TABLE>
The accompanying notes are an integral part
of these financial statements.
5
<PAGE>
PSS, INC.
NOTES TO FINANCIAL STATEMENTS
JANUARY 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. However, 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 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 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 a 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.
At January 27, 1996, the Company had assets of $5.59 million and
liabilities secured by such assets of $5.04 million, thus having a net
difference of approximately $550,000 available for holders of Senior
Notes and Debentures. At January 27, 1996, approximately $5.26 million
of Senior Notes and $22.92 million of Debentures
6
<PAGE>
NOTE 1 - THE COMPANY (CONTINUED)
- --------------------------------
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 quarter 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.
* 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.
7
<PAGE>
NOTE 2 - LIQUIDATION BASIS OF ACCOUNTING (CONTINUED)
- ----------------------------------------------------
* 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 January 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 January 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 January 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 January 27, 1996, the Company had assets of $5.59 million and liabilities
secured by such assets of $5.04 million, thus having a net difference of
approximately $550,000 available for holders of Senior Notes and Debentures. At
January 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 Convertible Debentures and such default continues.
However, the trustee for the Convertible 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 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 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 a 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 three months ended January 27, 1996 as
compared to the prior year period as a result of a declining investment in
Mortgage Certificates.
Interest expense
----------------
Interest expense decreased during the three months ended January 27, 1996 as
compared to the prior year period 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 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 a 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: March 11, 1996 By: /s/ James Lieb
--------------------------
James M. Lieb, Director
12
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000793322
<NAME> PSS, Inc.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> NOV-02-1996
<PERIOD-START> OCT-29-1995
<PERIOD-END> JAN-27-1996
<CASH> 31
<SECURITIES> 5,485
<RECEIVABLES> 73
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 5,589
<CURRENT-LIABILITIES> 5,082
<BONDS> 32,413
0
0
<COMMON> 0
<OTHER-SE> (31,906)
<TOTAL-LIABILITY-AND-EQUITY> 5,589
<SALES> 0
<TOTAL-REVENUES> 113
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> (33)
<LOSS-PROVISION> 566
<INTEREST-EXPENSE> (646)
<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>
