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 27, 1996
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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 __________
- --------------------------------------------------------------------------------
For Quarter ended July 27, 1996 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
------------------------------- ----------------
(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
September 1, 1996: 19,473,728.
Page 1 of 13
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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 10
PART II. OTHER INFORMATION
1. Legal Proceedings (a)
2. Changes in Securities (a)
3. Defaults Upon Senior Securities 12
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.
2
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PSS, INC.
Consolidated Statements of Net Liabilities
(Liquidation Basis)
(unaudited)
(thousands of dollars)
July 27, October 28,
1996 1995
-------- --------
Assets:
Cash and short-term investments $ 62 $ 11
Investment in mortgage certificates 5,355 5,840
Accrued interest receivable 68 76
-------- --------
Total assets 5,485 5,927
-------- --------
Liabilities:
Borrowings under mortgage certificate
financing agreement $ 4,830 $ 5,278
Accounts payable and accrued liabilities 110 92
Reserve for estimated costs during
period of liquidation 38 50
PNS 12-1/8% senior notes 5,258 5,258
Interest payable on PNS notes 981 504
Reserve for interest on PNS notes during
period of liquidation -- 456
PSS 7-1/8% debentures 22,920 22,920
Interest payable on PSS debentures 3,329 2,107
Reserve for interest on PSS debentures
during period of liquidation -- 1,168
-------- --------
Total liabilities 37,466 37,833
-------- --------
Net Liabilities $(31,981) $(31,906)
======== ========
The accompanying notes are an integral part
of these financial statements.
3
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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
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July 27, July 29,
1996 1995
------------ ------------
(Liquidation (Going Concern
Basis) Basis)
Investment income $ 85 $ 119
Interest expense (636) (657)
General and administrative expense (45) (18)
Decrease in estimated costs and interest
during period of liquidation 521
----- -----
Increase in Net Liabilities $ (75)
=====
Net loss $(556)
=====
Nine months ended
------------------
July 27, July 29,
1996 1995
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(Liquidation (Going Concern
Basis) Basis)
Investment income $ 312 $ 362
Interest expense (1,920) (2,111)
Write off of Deferred Financing Cost
and OID -- (226)
General and administrative expense (103) (69)
Decrease in estimated costs and interest
during period of liquidation 1,636
------- -------
Increase in Net Liabilities $ (75)
=======
Net loss $(2,044)
=======
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)
Nine months ended
-----------------
July 27, July 29,
1996 1995
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Cash flows from operating activities:
Increase in Net Liabilities $ (75)
Net loss $(2,044)
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 (1,636)
Increase in accrued interest payable 1,699 1,379
Other 46 19
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Net cash provided (used) by operating activities 34 (293)
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Cash flows from investing activities:
Proceeds from sale of mortgages 4,426
Principal repayments on mortgage certificates 465 497
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Net cash provided by investing activities 465 4,923
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Cash flows from financing activities:
Repayment of mortgage certificate borrowings (448) (4,651)
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Net cash used by financing activities (448) (4,651)
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Net increase (decrease) in cash and short-term
investments 51 (21)
Cash and short-term investments -
beginning of period 11 45
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Cash and short-term investments -
end of period $ 62 $ 24
======= =======
The accompanying notes are an integral part
of these financial statements.
5
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PSS, INC.
Notes to Financial Statements
July 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, January
15, 1996 and July 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 failed to pay the outstanding principal
which became due on July 15, 1996. All such defaults continue. 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. The Company has met with the representative of such holders
and is in the process of exploring a possible restructuring. In the interim, the
trustee has taken no legal action with respect to the default.
6
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NOTE 1 - The Company (continued)
- --------------------------------
At July 27, 1996, the Company had assets of $5.49 million and liabilities
secured by such assets of $4.94 million, thus having a net difference of
approximately $550,000 available for holders of Senior Notes and Debentures. At
July 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 three 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 July 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 October 28, 1995 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.
As described above and in the Company's October 28, 1995 audited finanical
statements included in the Company's Annual Report on Form 10-K, the liquidation
data utilized for purposes of presenting liquidation basis financial statements
has been July 15, 1996, the Senior Notes due date. In accordance with principles
followed when presenting liquidation basis financial statements, costs and
expenses are accrued through the liquidation date. Inasmuch as the liquidation
date, July 15, 1996, has past, to the extent that costs and expenses continue,
such amounts relating to periods subsequent to July 15, 1996 would increase the
Company's net liabilities from the $31.9 million reported since October 28,
1995.
Liquidation reserves recorded at October 28, 1995 were estimates of costs and
expenses, net of investment income, to be incurred or accrued through July 15,
1996. Total recorded reserves were $1.62 million for interest on Senior Notes
and Debentures and $50,000 for general and administrative costs, net of
investment income. Interest expense on Senior Notes and Debentures for the
period July 16 through July 27 approximates $75,000, and, as a result of
accruing interest payable and recording interest expense, net liabilities as
reported in the Company's financial statements increased by such amount. During
the liquidation period, estimated expenses have reasonably approximated amounts
incurred and accrued. Net investment income during the liquidation period has
exceeded the amount estimated due to favorable interest rate market conditions.
The effect of net investment income exceeding amounts estimated and, to a lesser
extent, recorded expenses being less than estimated, the Company still has a
reserve for estimated costs
8
<PAGE>
during the period of liquidation remaining at July 27, 1996.
In the absence of actions taken with respect to Senior Notes and Debentures and
due to the close proximity of the July 15, 1996 liquidation date to the
Company's July 27, 1996 third quarter reporting period date, the Company has not
revised the liquidation date for purposes of presenting July 27, 1996 financial
statements. To the extent of interest on Senior Notes and Debentures for the
period beyond the liquidation date, approximately $75,000, such amount has been
recorded and has resulted in reporting an increase in net liabilities over the
amount reported since the Company's fiscal year end. No effect on net
liabilities has been reported relating to other costs and expenses, net of
investment income, as the initially recorded reserve has, through the reporting
date, been sufficient to provide for such net amounts. The Company intends to
readdress the determination of a liquidation date to be utilized in its
financial statements in connection with its 1996 fiscal year end.
NOTE 3 - Income Taxes
- ---------------------
As a result of losses for each of the interim periods, there was no provision
for income taxes recorded.
9
<PAGE>
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Liquidity and Capital Resources
- -------------------------------
At July 27, 1996, the Company's principal assets consisted of approximately $5.4
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 July 27, 1996, the Company had assets of $5.49 million and liabilities
secured by such assets of $4.94 million, thus having a net difference of
approximately $550,000 available for holders of Senior Notes and Debentures. At
July 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,
January 15, 1996 and July 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 failed to pay the outstanding principal
which became due on July 15, 1996. All such defaults continue. 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. The Company has met with the representative of such holders
and is in the process of exploring a possible restructuring. In the interim, the
trustee has taken no legal action with respect to the default.
10
<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 and nine months ended July 27, 1996
as compared to the prior year periods as a result of a declining investment in
Mortgage Certificates, which was offset somewhat due to modestly higher interest
rates earned.
Interest expense
----------------
Interest expense decreased during the three and nine months ended July 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.
11
<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 failed to pay the outstanding principal
which became due on July 15, 1996. All such defaults continue. 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. The Company has met with the representative of such holders
and is in the process of exploring a possible restructuring. 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
12
<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: September 10, 1996 By: /s/ Mark Todes
---------------------
Mark Todes, President
13
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<ARTICLE> 5
<CIK> 0000793322
<NAME> PSS, Inc.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> NOV-02-1996
<PERIOD-START> OCT-29-1995
<PERIOD-END> JUL-27-1996
<CASH> 62
<SECURITIES> 5,355
<RECEIVABLES> 68
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 5,485
<CURRENT-LIABILITIES> 4,978
<BONDS> 32,488
0
0
<COMMON> 0
<OTHER-SE> (31,981)
<TOTAL-LIABILITY-AND-EQUITY> 5,485
<SALES> 0
<TOTAL-REVENUES> 85
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> (45)
<LOSS-PROVISION> 521
<INTEREST-EXPENSE> (636)
<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>
