SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended November 2, 1996
OR
[X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________________ to _________________
- --------------------------------------------------------------------------------
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.)
P.O. Box 21186, Seattle, WA 98111-3186
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (206) 901-3790
---------------
1511 Sixth Avenue, Seattle WA 98101
--------------------------------------------------------------
Former name, former address and former fiscal year, if changed
since last report.
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act:
Common stock - $1.00 par value
7-1/8% Convertible Debentures due July 15, 2006
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 [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Aggregate market value of the registrant's voting stock held by nonaffiliates of
the registrant as of December 1, 1996: $270,000.
The number of shares of common stock outstanding as of November 2, 1996:
19,473,728.
Documents incorporated by reference: None.
Page 1 of 30
<PAGE>
PART I
ITEM 1 - BUSINESS
- -----------------
PSS, Inc. ("PSS"), through its wholly owned subsidiary, PNS Inc. ("PNS"), owns
PSSC Inc. ("PSSC"); together, PSS, PNS and PSSC are referred to collectively as
the "Company".
The Company 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. At November 2, 1996, the Company's principal assets consisted of
approximately $5.25 million of Mortgage Certificates from which interest income
is earned. The Mortgage Certificates are financed with borrowings, payable on
demand, secured by the Mortgage Certificates (the "Mortgage Financing"). The
principal obligations of the Company are the Mortgage Financing borrowings, the
PNS 12-1/8% Senior Subordinated Notes due July 15, 1996 (the "Senior Notes") and
the PSS 7-1/8% Convertible Debentures due July 15, 2006 (the "Debentures"), upon
which interest expense is incurred.
From July 1986, when the Company was organized, until June 1988, subsidiaries of
PNS (the "Sellers") operated retail stores that sold a variety of traditional
drugstore and general merchandise items. In June 1988, pursuant to an Agreement
for the Purchase and Sale of Assets the Sellers sold substantially all of their
assets, comprising the Sellers' entire retail operations, to Thrifty Corporation
(a subsidiary of Pacific Enterprises). In consideration for such sale of assets
(the "Asset Sale"), the Sellers received 5.2 million shares of Pacific
Enterprises common stock (the "PET Shares"). During 1990 through 1993, the
Company sold its PET Shares for the purpose of servicing and repurchasing some
of the Debentures and Senior Notes.
ITEM 2 - PROPERTIES
- -------------------
As a result of the Asset Sale, the Company disposed of all its properties.
ITEM 3 - LEGAL PROCEEDINGS
- --------------------------
In the opinion of management, there are no material legal proceedings pending to
which the Company is a party or of which any of its assets is the subject.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
Not applicable.
2
<PAGE>
PART II
ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
- --------------------------------------------------------------
STOCKHOLDER MATTERS
- -------------------
MARKET INFORMATION
The Company's common stock is traded over-the-counter. The high and low prices
for the stock by quarter for the two years ended November 2, 1996 were as
follows:
Quarter ended High Low
------------- ---- ---
January 27, 1995 .02 .01
April 28, 1995 .04 .01
July 28, 1995 .04 .01
October 28, 1995 .02 .01
January 27, 1996 .02 .01
April 27, 1996 .01 .01
July 27, 1996 .01 .01
November 2, 1996 .01 .01
The high and low prices for each quarter are the high and low bids as reported
by National Quotation Bureau, Inc., which are those quoted by dealers to each
other, exclusive of markups, markdowns or commissions, and do not represent
actual transactions.
HOLDERS
As of December 1, 1996, there were 968 holders of record of the Company's common
stock.
DIVIDENDS ON COMMON STOCK
The Company has never paid a dividend and does not anticipate paying dividends
for the foreseeable future. The indentures governing the Company's Senior Notes
and Debentures contain covenants which restrict the ability of the Company to
pay dividends (see Note 5 to the financial statements).
3
<PAGE>
ITEM 6 - SELECTED FINANCIAL DATA
- --------------------------------
The following selected financial data should be read in conjunction with the
financial statements and related notes and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" included elsewhere herein. As
explained in Note 2 to the financial statements, information relating to
November 2, 1996 and October 28, 1995 is presented on a liquidation basis, which
reports an excess of liabilities over assets. Presentation of per share
information on a liquidation basis is not considered meaningful and has been
omitted.
<TABLE>
<CAPTION>
Year ended
-------------------------------------------------------------------
November 2, October 28, October 29, October 30, October 31,
1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- -----------
(thousands of dollars, except per share data)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Increase in net liabilities $ (3,020) $ (4,231)
Loss before extraordinary items (1) $ (2,141) $ (1,161) $(32,913)
Net income (2) 9,568 47,454 27,665
Net income per common share 0.49 2.44 1.42
BALANCE SHEET DATA:
Total assets $ 5,591 $ 5,927 $ 11,383 $136,634 $217,489
Short-term borrowings 4,922 5,278 10,192 124,062 171,089
Long-term debt 28,178 28,178 28,159 48,144 126,634
Total liabilities 40,517 37,833 39,058 173,877 302,186
Stockholders' deficit (27,675) (37,243) (84,697)
Net liabilities (34,926) (31,906)
</TABLE>
(1) Includes net realized and unrealized losses on Pacific Enterprises common
stock of approximately $37 million during the year ended October 31, 1992.
(2) Includes pre-tax extraordinary gains on early extinguishment of debt of
approximately $13 million, $49 million, and $77 million during the years
ended October 29, 1994, October 30, 1993, and October 31, 1992,
respectively.
4
<PAGE>
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
- ----------------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
- -----------------------------------
LIQUIDITY AND CAPITAL RESOURCES
At November 2, 1996, the Company's principal assets consisted of approximately
$5.25 million of Mortgage Certificates from which interest income is earned and
its principal obligations consisted of Mortgage Financing borrowings, Senior
Notes and Debentures 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 November 2, 1996, the Company had assets of $5.59 million and liabilities,
other than Senior Notes and Debentures including accrued interest and
liquidation costs, of $5.06 million, thus having a net difference of
approximately $530,000 available for holders of Senior Notes and Debentures. At
November 2, 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, July 15, 1996 and January 15, 1997 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, January 15, 1996 and July 15, 1996 and failed to pay the
outstanding principal which became due on July 15, 1996. All such defaults
continue. The trustee has 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.
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
5
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES (continued)
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 for each of the years ended November 2, 1996, October 28, 1995,
and October 29, 1994 decreased as compared to the immediate preceding year
primarily as a result of lower balances of investments in Mortgage Certificates.
Included in investment income for the years ended November 2, 1996 and October
28, 1995 is approximately $25,000 and $100,000, respectively, of unrealized
gains resulting from mark-to-market adjustments. The weighted average interest
income rate earned on the Mortgage Certificates approximated 7.9%, 7.3%, and
5.0% during the years ended November 2, 1996, October 28, 1995, and October 29,
1994, respectively.
Interest expense
----------------
Interest expense for each of the years ended November 2, 1996, October 28, 1995,
and October 29, 1994 decreased as compared to the immediate preceding year
primarily due to lower investments in Mortgage Certificates and related
borrowings upon which interest expense is incurred. The weighted average
interest expense rate on Mortgage Certificate related borrowings approximated
5.6%, 6.0%, and 3.9% during the years ended November 2, 1996, October 28, 1995,
and October 29, 1994, respectively. Interest expense also decreased during each
of the years ended October 28, 1995 and October 29, 1994 as compared to the
preceding year as a result of having fewer Debentures and Senior Notes
outstanding due to bond repurchases.
Write off of deferred financing costs and original issue discount
-----------------------------------------------------------------
As a result of the continued default due to the non-payment of interest on the
Debentures and Senior Notes, during the year ended October 28, 1995 the Company
expensed remaining deferred financing costs and original issue discount.
6
<PAGE>
Extraordinary items
-------------------
During the year ended October 29, 1994, the Company purchased approximately $14
million and $6 million of its Senior Notes and Debentures, respectively, and as
a result, after the write-off of related deferred financing costs, recorded an
extraordinary gain on early extinguishment of debt, before income taxes, of
approximately $13 million.
7
<PAGE>
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------
INDEX TO FINANCIAL STATEMENTS
- -----------------------------
Financial statements Page
-------------------- ----
Report of Independent Accountants 9
Consolidated Statements of Net Liabilities 10
Consolidated Statements of Change in Net Liabilities 11
Consolidated Statement of Operations 11
Consolidated Statements of Cash Flows 12
Notes to Financial Statements 13
Financial statement schedules
-----------------------------
Financial statement schedule information is presented in the
financial statements.
SUPPLEMENTARY FINANCIAL INFORMATION
Selected quarterly financial data (unaudited) 20
8
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of PSS, Inc.:
We have audited the accompanying consolidated statements of net liabilities
(liquidation basis) of PSS, Inc. and its subsidiaries as of November 2, 1996 and
October 28, 1995, and the related consolidated statements of changes in net
liabilities (liquidation basis) and of cash flows (liquidation basis) for the
years ended November 2, 1996 and October 28, 1995. In addition, we have audited
the consolidated statements of operations and of cash flows for the year ended
October 29, 1994. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements audited by us present
fairly, in all material respects, the financial position of PSS, Inc. and its
subsidiaries at November 2, 1996 and October 28, 1995, and the changes in their
net liabilities (liquidation basis) and their cash flows (liquidation basis) for
the years ended November 2, 1996 and October 28, 1995, and the results of
operations and their cash flows for the year ended October 29, 1994, in
conformity with generally accepted accounting principles.
/s/ PRICE WATERHOUSE LLP
PRICE WATERHOUSE LLP
Seattle, Washington
January 31, 1997
9
<PAGE>
PSS, INC.
Consolidated Statement of Net Liabilities
(Liquidation Basis)
(thousands of dollars)
November 2, October 28,
1996 1995
-------- --------
Assets:
Cash and short-term investments $ 276 $ 11
Investment in mortgage certificates 5,250 5,840
Accrued interest receivable 65 76
-------- --------
Total assets 5,591 5,927
-------- --------
Liabilities:
Borrowings under mortgage certificate
financing agreement 4,922 5,278
Accounts payable and accrued liabilities 143 92
Reserve for estimated costs during
period of liquidation 90 50
PNS 12-1/8% senior notes 5,258 5,258
Interest payable on PNS notes 1,152 504
Reserve for interest on PNS notes
during period of liquidation 636 456
PSS 7-1/8% debentures 22,920 22,920
Interest payable on PSS debentures 3,767 2,107
Reserve for interest on PSS debentures
during period of liquidation 1,629 1,168
-------- --------
Total liabilities 40,517 37,833
-------- --------
Net Liabilities $(34,926) $(31,906)
======== ========
The accompanying notes are an integral part
of these financial statements.
10
<PAGE>
PSS, INC.
Consolidated Statements of Changes in Net Liabilities
(Liquidation Basis)
Consolidated Statement of Operations (Going Concern Basis)
(thousands of dollars)
<TABLE>
<CAPTION>
Year ended
-----------------------------------------------
November 2, October 28, October 29,
1996 1995 1994
------------- ------------- -------------
(Liquidation Basis) (Going Concern
Basis)
<S> <C> <C> <C>
Investment income $ 459 $ 582 $ 4,804
Interest expense (2,601) (2,765) (7,841)
Write off of deferred financing
costs and original issue discount (226)
General and administrative expense (197) (148) (207)
Decrease in reserve for estimated
costs and interest during
period of liquidation 1,674
Provision for estimated costs and
interest during period of liquidation (2,355) (1,674)
------- ------- -------
Increase in Net Liabilities $(3,020) $(4,231)
======= =======
Loss before income taxes and
extraordinary items (3,244)
Income tax benefit 1,103
-------
Loss before extraordinary items (2,141)
Extraordinary items:
Gain on early extinguishment of
debt, net of income taxes of $4,356 8,456
Tax benefit resulting from
utilization of net operating
loss carryforwards 3,253
-------
Net income $ 9,568
=======
</TABLE>
The accompanying notes are an integral part
of these financial statements.
11
<PAGE>
PSS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(thousands of dollars)
<TABLE>
<CAPTION>
Year ended
-----------------------------------
November 2, October 28, October 29,
1996 1995 1994
--------- --------- ---------
<S> <C> <C>
Cash flows from operating activities:
Increase in Net Liabilities $ (3,020) $ (4,231)
Net income $ 9,568
Adjustments to reconcile to net cash flows
from operating activities:
Extraordinary gain on early extinguishment of debt (12,812)
Amortization 127 963
Write off of deferred financing
costs and original issue discount 226
Increase in estimated costs and interest during
period of liquidation 681 1,674
Decrease in accrued interest receivable 11 36 1,240
Increase (decrease) in accrued interest payable 2,308 1,945 (754)
Other 26 (49) (208)
--------- --------- ---------
Net cash provided (used) by operating activities 6 (272) (2,003)
--------- --------- ---------
Cash flows from investing activities:
Proceeds from sale of mortgage certificates 4,426 98,653
Principal repayments on mortgage certificates 615 726 23,664
--------- --------- ---------
Net cash provided by investing activities 615 5,152 122,317
--------- --------- ---------
Cash flows from financing activities:
Repayment of borrowings under mortgage
certificates financing agreement (356) (4,914) (113,870)
Repurchases of long-term debt (6,971)
--------- --------- ---------
Net cash used by financing activities (356) (4,914) (120,841)
--------- --------- ---------
Net increase (decrease) in cash and short-term investments 265 (34) (527)
Cash and short-term investments at
beginning of year 11 45 572
--------- --------- ---------
Cash and short-term investments at
end of year $ 276 $ 11 $ 45
========= ========= =========
</TABLE>
The accompanying notes are an integral part
of these financial statements.
12
<PAGE>
PSS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - THE COMPANY
- --------------------
The consolidated financial statements of PSS, Inc. ("PSS"), includes its direct
subsidiary PNS Inc. ("PNS") and its subsidiary PSSC, Inc. ("PSSC"),
collectively, the "Company". The Company is principally owned by Seacorp, Inc.
("Seacorp") and Zimmerman Retailing Group Limited ("Zimco"). Seacorp and Zimco
own approximately 41% and 24%, respectively, of the Company's outstanding common
stock, with the remainder publicly owned.
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 the interest due January 15, 1995, July 15, 1995,
January 15, 1996, July 15, 1996 and January 15, 1997 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, January 15, 1996 and July 15, 1996 and failed to pay the
outstanding principal which became due on July 15, 1996. All such defaults
continue. The trustee has 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. 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.
At November 2, 1996, the Company had assets of approximately $5.59 million and
liabilities, other than the Senior Notes and Debentures including accrued
interest and liquidation costs, of approximately $5.06 million, thus having a
net difference of approximately $530,000 available for holders of Senior Notes
and Debentures. At November 2, 1996, approximately $5.26 million of Senior Notes
and $22.92 million of Debentures
13
<PAGE>
NOTE 1 - THE COMPANY (continued)
- --------------------------------
remain outstanding and, annual interest thereon, in the absence of additional
repurchases, approximates $636,000 and $1.63 million, respectively. 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.
NOTE 2 - LIQUIDATION BASIS OF ACCOUNTING
- ----------------------------------------
Effective October 28, 1995, the Company adopted the liquidation basis of
accounting for presenting its consolidated financial statements. This basis of
accounting is considered appropriate when, among other things, liquidation of a
company appears imminent and the net realizable value of its assets are
reasonably determinable. 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 net effect of converting from the going concern basis to the liquidation
basis of accounting as of October 28, 1995 was an increase in net liabilities of
approximately $1.7 million, as a result of recording estimated costs and
interest expense to the liquidation date. No adjustment to the reported value of
assets was required. Under the liquidation basis, the Company accrued future
liabilities and estimated future net revenues from interest and other income
associated with mortgage certificates to the liquidation date.
A summary of significant estimates and judgments utilized in preparation of the
November 2, 1996 and October 28, 1995 consolidated financial statements on a
liquidation basis follows:
* The Company's next fiscal year end, November 1, 1997, has been
utilized as the liquidation date for the November 2, 1996 financial
statements. The Senior Notes July 15,
14
<PAGE>
NOTE 2 - LIQUIDATION BASIS OF ACCOUNTING (continued)
- ----------------------------------------------------
1996 due date was utilized as the liquidation date for the October 28,
1995 financial statements.
* Mortgage Certificates and related interest receivable are stated at
estimated market value.
* Borrowings secured by Mortgage Certificates are stated at face value,
which approximates market value.
* The reserve for estimated costs during the period of liquidation
represents estimates of future costs to be incurred through the
liquidation date.
* Net estimated interest income to be earned on Mortgage Certificates in
excess of interest expense on related borrowings has been considered
in determining the reserve for estimated costs during the period of
liquidation.
* Senior Notes and Debentures and related interest accrued 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 the date
of the Consolidated Statements of Net Liabilities to the estimated
liquidation date, as applicable.
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.
During the fiscal year ended November 2, 1996, the Company's actual net excess
of costs incurred over net investment income reasonably approximated the reserve
for estimated costs provided in the October 28, 1995 financial statements.
Inasmuch as July 15, 1996 was utilized as the liquidation date, the October 28,
1995 reserve for interest was for a period of approximately 8.5 months whereas
interest expense for the fiscal year ended November 2, 1996 included 12 months
of interest, which resulted in actual interest expense in excess of estimated
amounts reserved.
15
<PAGE>
NOTE 3 - SUMMARY OF ACCOUNTING PRINCIPLES
- -----------------------------------------
Cash and Short-Term Investments
- -------------------------------
Cash and short-term investments, having maturities of three months or less when
purchased, are primarily comprised of interest-bearing short-term bank deposits.
Investment in Mortgage Certificates
- -----------------------------------
The investment in Mortgage Certificates is recorded at estimated fair value,
based upon market prices obtained from traders. Gains and losses realized on
sale are determined utilizing the specific identification method. Premiums paid
are amortized utilizing the interest method. Gains and losses realized upon sale
of Mortgage Certificates and unrealized gains and losses resulting from
mark-to-market adjustments are included in investment income.
Income (loss) per Common Share
- ------------------------------
As explained in Note 2, effective October 28, 1995, the Company adopted the
liquidation basis of accounting, which reports an excess of liabilities over
assets. Accordingly, the presentation of per common share information on a
liquidation basis is not considered meaningful and has been omitted.
Basis of Presentation
- ---------------------
Effective October 28, 1995, the Company adopted the liquidation basis of
accounting for presenting its consolidated financial statements. The
consolidated financial statements for fiscal 1994 were prepared on a going
concern basis of accounting which contemplates realization of assets and
satisfaction of liabilities in the normal course of business.
Accounting Estimates
- --------------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires manangement to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statments and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those amounts.
16
<PAGE>
NOTE 4 - INVESTMENT IN MORTGAGE CERTIFICATES
- --------------------------------------------
Mortgage Certificates are financed with borrowings provided by an investment
bank pursuant to a letter agreement (the "Financing Agreement"). Borrowings
pursuant to the Financing Agreement (the "Mortgage Financing") are secured by
the Mortgage Certificates. In the event of a decrease in the aggregate market
value of the Mortgage Certificates below the requirements of the Financing
Agreement, additional collateral is required. Principal and interest payments
received on Mortgage Certificates are maintained in an interest earning account
and are released to the Company, at its request, after all interest and any
"mark-to-market" indebtedness then due have been paid. The Mortgage Financing is
payable on demand and generally bears interest at rates approximating LIBOR plus
10 basis points. Mortgage Financing borrowings and related interest rates
approximated $4.9 million and 5.5% at November 2, 1996 and $5.3 million and 6.0%
at October 28, 1995, respectively. During the years ended November 2, 1996,
October 28, 1995, and October 29, 1994, the average balance of mortgage related
borrowings outstanding approximated $5 million, $5 million, and $91 million, and
the weighted annual average interest expense rates approximated 5.6%, 6.0%, and
3.9%,respectively.
At November 2, 1996, the annual interest rate to be earned on the Mortgage
Certificates approximated 7.7% as determined on a basis that interest rates do
not change. The rate of interest on the Mortgage Certificates is adjustable
based on general interest rate trends with certain maximums, including limits of
2% for annual interest rate changes and interest rate maximums of approximately
13%. The weighted average interest income rates earned on the Mortgage
Certificates approximated 7.9%, 7.3% and 5.0% during the years ended November 2,
1996, October 28, 1995 and October 29, 1994, respectively.
The Company sold approximately $1 million and $99 million of Mortgage
Certificates during the years ended October 28, 1995 and October 29, 1994,
respectively.
17
<PAGE>
NOTE 5 - SUBORDINATED DEBT
- --------------------------
Subordinated debt and related interest payable through the balance sheet dates
are summarized as follows (thousands of dollars):
November 2, October 28,
1996 1995
------- -------
PNS 12-1/8% Senior Notes $ 5,258 $ 5,258
Interest payable on Senior Notes 1,152 504
------- -------
$ 6,410 $ 5,762
======= =======
PSS 7-1/8% Debentures $22,920 $22,920
Interest payable on Debentures 3,767 2,107
------- -------
$26,687 $25,027
======= =======
In July 1986, the Company completed three public securities offerings (the
"Public Offerings"). PNS issued $150 million of Senior Notes (at a price of
98.6%) and PSS sold 3.25 million shares of its common stock and issued at par
$150 million of Debentures convertible to PSS common stock at $19.68 per share
(the conversion price is subject to adjustment in the case of dilution). PSS
invested the net proceeds from its two offerings in PNS, in the form of a
contribution to capital and an intercompany debenture between PNS and PSS (the
"Intercompany Debenture") in the amount of $150 million with substantially the
same interest rate and redemption provisions as the Debentures. Debt financing
costs and the discount on the Senior Notes have been amortized over the term of
the borrowings. As explained in Note 1, the Company is in default on the Senior
Notes and Debentures, and as a result, during the year ended October 28, 1995
the Company expensed remaining deferred financing costs and original issue
discount. At November 2, 1996, the Intercompany Debenture approximated $6.5
million.
The indenture governing the Senior Notes restricts the ability of PNS and its
subsidiaries to pay dividends or make other payments to PSS. The Senior Notes
indenture permits PNS to pay dividends to PSS in amounts sufficient to enable
PSS to meet its obligations on the Debentures when due (to the extent payments
are not made to PSS when due pursuant to the Intercompany Debenture), provided
that no event of default (as defined in the Senior Notes indenture) has occurred
and is continuing. PNS, like its parent company, has a stockholder's deficit.
The Senior Notes and Debentures provide for semiannual interest payments and are
unsecured. Principal repayment on the Senior Notes was due in full on July 15,
1996. The Debentures require annual principal payments of approximately $11
million commencing July 15, 1996 until July 15, 2006 when the balance is due; by
utilizing Debentures which the Company has previously acquired, there will be no
scheduled maturity payments required before 2006.
18
<PAGE>
NOTE 5 - SUBORDINATED DEBT (continued)
- --------------------------------------
The indentures for the Senior Notes and Debentures contain certain restrictive
covenants which, among other things, limit dividends and similar distributions
to stockholders, essentially prohibit redemptions and retirements of the
Company's equity, limit the Company's ability to incur debt, and restrict action
and agreements by the Company that would prohibit dividends and similar
distributions to the Company from its subsidiaries.
During the year ended October 29, 1994, the Company purchased approximately $14
million of Senior Notes and $6 million of Debentures and, as a result, after the
write-off of related deferred financing costs, recorded an extraordinary gain on
early extinguishment of debt of approximately $13 million.
Interest paid approximated $319,000 and $8 million during the years ended
October 28, 1995 and October 29, 1994, respectively.
NOTE 6 - RELATIONSHIP WITH AFFILIATES
- -------------------------------------
Prior to fiscal 1995, affiliates of Seacorp provided the Company with
accounting, legal, tax and other services. Fees for services approximated
$56,000 for the year ended October 29, 1994.
NOTE 7 - INCOME TAXES
- ---------------------
Due to losses for each of the years ended November 2, 1996 and October 28, 1995,
there was no provision for income taxes recorded. During the year ended October
29, 1994, 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.
AS of November 2, 1996, for income tax purposes, net operating loss
carryforwards, which begin to expire in 2001, approximate $140 million, and
capital loss carryforwards approximate $120 million, $115 million of which
expire in 1997 and 1998. If certain substantial changes in the Company's
ownership should occur, there would be an annual limitation on the amount of the
carryforwards which could be utilized.
19
<PAGE>
NOTE 8 - STOCKHOLDERS' DEFICIT
- ------------------------------
The Company's common stock consists of 60 million authorized shares, $1 par
value, 19,473,728 shares of which are issued and outstanding. The Company also
has 10 million authorized shares of preferred stock, $1 par value, none of which
have been issued. There have been no changes in common stock or additional paid
in capital since October 29, 1994. Effective October 28, 1995 as a result of
presenting financial statements on the liquidation basis, changes in components
of stockholders' deficit are not presented. The Company's stockholders' deficit
and the changes therein during the year ended October 29, 1994, are summarized
as follows (thousands of dollars):
<TABLE>
<CAPTION>
Total
Additional Stock-
Common Paid-in Accumulated holders'
Stock Capital Deficit Deficit
<S> <C> <C> <C> <C>
Balances at October 30, 1993 $ 19,474 $149,110 $(205,827) $(37,243)
Net income 9,568 9,568
------- ------- -------- ------
Balances at October 29, 1994 $ 19,474 $149,110 $(196,259) $(27,675)
======= ======= ======== =======
</TABLE>
NOTE 9 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
- ------------------------------------------------------
Selected quarterly financial data are as follows (thousands of dollars):
<TABLE>
<CAPTION>
Fiscal quarters ended
--------------------------------------------
November 2, July 27, April 27, January 27,
1996 1996 1996 1996
----------- --------- -------- ----------
<S> <C> <C> <C> <C>
Decrease in reserve for estimated costs and
interest during period of liquidation $ 38 $ 521 $ 549 $ 566
Provision for estimated costs and interest
during period of liquidation (2,355)
Increase in net liabilities (2,945) (75) 0 0
Fiscal quarters ended
--------------------------------------------
October 28, July 29, April 29, January 28,
1995 1995 1995 1995
----------- --------- -------- ----------
Loss from operations $ (513) $ (556) $ (862) $ (626)
Provision for estimated costs and interest
during period of liquidation (1,674)
Increase in net liabilities (2,187)
Net loss (556) (862) (626)
</TABLE>
20
<PAGE>
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- --------------------------------------------------------------------------------
FINANCIAL DISCLOSURE
- --------------------
None.
PART III
--------
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- ------------------------------------------------------------
DIRECTORS OF THE COMPANY
The following table sets forth certain information concerning each of the
directors and executive officers of the Company. All directors will serve until
the next Annual Meeting of Shareholders and until his respective successor is
elected or appointed. Each director of the Company is also a director of PNS.
Present Principal
Occupation or Employment
Name and Position and Five Year
with the Company Age Employment History
- ---------------- --- ------------------
Mark Todes 41 President and Director of the
President and Director Company since May 1996. President
of City Realty, Inc. since May 1996
and Vice President of 200 West
Holdings, Ltd. (a real estate
holding company and a subsidiary of
City Realty) for more than 5 years
prior thereto. Vice President of
Seacorp since July 1996.
Gerald P. Nathanson 51 Director of the Company since
Director October 1986. During 1996, Mr.
Nathanson left the employ of
L.Luria (a retail company). Chief
Executive Officer, US Holographics
(marketing company for holographic
products) from April 1992 to
December 1995. Managing Director,
C4 Marketing (an import company)
until January 1992.
21
<PAGE>
Pursuant to the terms of the Subscription and Stockholders' Agreement, dated May
7, 1986 (the "Stockholders' Agreement"), as amended as of November 25, 1987 (the
"November 1987 Agreement" and, as amended, the "Amended Stockholders'
Agreement"), between the Company's two major stockholders, Zimco and Seacorp,
Seacorp was, subject to certain conditions, entitled to nominate as directors
one-half the Company's Nonindependent Directors (as defined in the Company's
Restated Certificate of Incorporation) plus one, and Zimco was entitled to
nominate one-half the Nonindependent Directors minus one. The Amended
Stockholders' Agreement terminated in accordance with its terms on October 31,
1995. See the discussion under Item 13 - Certain Relationships and Related
Transactions.
ITEM 11 - EXECUTIVE COMPENSATION
- --------------------------------
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS
The Company has no employees. There are currently no arrangements under which
any officer or director of the Company will receive compensation for serving as
such; however, other arrangements may be made in the future.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
- -------------------------------------------------------------
MANAGEMENT
- ----------
The following table sets forth, as of December 31, 1996, information concerning
the beneficial ownership of the common stock of the Company by (i) persons known
by the Company to own beneficially more than 5% of its outstanding common stock,
(ii) each of the directors of the Company and (iii) all directors and executive
officers of the Company as a group. Except as set forth in the footnotes to the
table, the stockholders have sole voting and investment power over such shares.
Unless otherwise specified, the
22
<PAGE>
address for all directors is the address of the Company's executive offices. The
address for Messrs. Julius and Eddie Trump is the address set forth below for
Seacorp. The address for Mr. Christopher Podoll is the address set forth below
for Zimmerman Retailing Group Limited.
Amount and Nature
of Beneficial Percent
Name Ownership of Class
- ---- --------- --------
Christopher Podoll (a) 4,603,962 23.64%
Zimmerman Retailing Group Limited (a) 4,603,962 23.64%
P.O. Box 948
Route 2, Pleasant Plain Road
Fairfield, IA 52556
Seacorp, Inc. (b) 8,014,705 41.1%
P.O. Box 21186
Seattle, WA 98111-3186
Eddie Trump (b) 8,014,705 41.1%
Julius Trump (b) 8,014,705 41.1%
All Directors and Executive Officers as
a Group (2 persons) 0 0%
(a) According to the Schedule 13D, as amended (the "Zimco Amended 13D"), filed
with the Securities and Exchange Commission (the "Commission"), Zimco is an
Iowa limited partnership, the sole general partner of which is Soma 2 L.P.,
a Delaware limited partnership ("Soma 2"). Soma 2 has as its general
partner ZRG Co., Inc., a Delaware corporation ("ZRG"), for which Mr. Podoll
serves as the sole executive officer and director. Mr. Podoll is a manager
of investments of the William Zimmerman family. Amounts include 8,079
shares issuable upon conversion of Debentures beneficially owned by Zimco.
Amounts do not include the ownership of 6,000 shares and 3,810 shares
issuable upon conversion of Debentures owned by the Surya Financial Inc.
Retirement Plan, a retirement plan for the benefit of various employees of
Surya Financial Inc., an affiliate of Zimco.
(b) According to the Schedule 13D, as amended, filed with the Commission by
Julius Trump, Eddie Trump and Seacorp, Seacorp is, and Messrs. Julius and
Eddie Trump may be deemed to be, the beneficial owner(s) of 8,014,705
shares of common stock. Such amount includes 8,079 shares issuable upon
conversion of Debentures beneficially owned by an affiliate of Seacorp. As
set forth in the Schedule 13D, Seacorp is a Delaware corporation and does
not presently have any business other than the ownership of shares of
common stock of the Company. Seacorp is indirectly controlled by Messrs.
Julius and Eddie Trump.
23
<PAGE>
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------
Stockholders' Agreement
- -----------------------
GENERAL. On May 7, 1986, Zimco, Seacorp and the Company entered into the
Stockholders' Agreement. Under the Stockholders' Agreement, Zimco and Seacorp
exchanged all of their common stock in Pay'n Save for all of the issued and
outstanding Common Stock of the Company. Subsequently, in consideration of
Seacorp causing to be made available short-term borrowing facilities aggregating
$20 million to the Company, Seacorp, Zimco and certain related parties entered
into an agreement amending the Stockholders' Agreement (the "November 1987
Amendment") in certain respects. In connection with the Amended Stockholders'
Agreement, the parent of Seacorp guaranteed Company borrowings by Pay'n Save
under such short-term borrowing facilities (which have since expired) in an
amount up to $15 million.
The Stockholders' Agreement and the November 1987 Amendment were entered into by
Seacorp and Zimco and certain of its related parties on their own behalf and on
behalf of their respective permitted transferees, for the exclusive benefit of
Seacorp and its permitted transferees (the "Seacorp Group"), and Zimco and its
permitted transferees and certain of its related parties (the "Zimco Group").
The Amended Stockholders' Agreement also contained certain indemnities in favor
of (and for the benefit of) the Company. The Amended Stockholders' Agreement
terminated in accordance with its terms on October 31, 1995.
Pursuant to separate agreements, the Company has granted certain registration
rights to each group and certain of each group's transferees, including Zimco,
with respect to the shares of common stock acquired pursuant to the
Stockholders' Agreement.
NOMINATION OF DIRECTORS. The Stockholders' Agreement had provided that each
group would nominate and vote for an equal number of nominees on the Company's
Board of Directors and vote as stockholders in favor of each matter previously
approved by a majority of the directors nominated by Zimco and Seacorp and vote
against each matter not so approved. However, if at any time one group owned
less than one-third the number of shares of common stock owned by the other, the
group with the greater number of shares of common stock would be entitled to
nominate one additional director and the other group would be entitled to
nominate one less director. The November 1987 Amendment amended the
Stockholders' Agreement to provide that so long as Julius or Eddie Trump or
their affiliates or certain related parties and certain other designated parties
(collectively, the "Trump Group") remain the beneficial owners, directly or
indirectly, of at least a majority of the shares of common stock owned by
Seacorp as of November 25, 1987, Seacorp would be entitled to nominate as
directors one-half the number of Nonindependent Directors plus one and Zimco
would be
24
<PAGE>
entitled to nominate one-half the number of Nonindependent Directors minus one,
and that at all times at least four seats on the Company's Board of Directors
would be reserved for Nonindependent Directors. At such time as the Trump Group
was no longer the beneficial owner of a majority of shares of common stock owned
by Seacorp on November 25, 1987, the provision in the Stockholders' Agreement
prior to the November 1987 Agreement relating to the election of directors would
be applicable so that each of Seacorp and Zimco would nominate and vote for an
equal number of nominees on the Company's Board of Directors.
The Company's Certificate of Incorporation provides that actions by the
Company's Board of Directors generally require the affirmative vote of that
number of directors equal to the sum of (i) the number of Independent Directors
(as defined) plus (ii) a majority of the Nonindependent Directors.
CERTAIN VOTING ARRANGEMENTS. The Amended Stockholders' Agreement provided that
Seacorp and the Zimco Group would use their best efforts to cause the Seacorp
Directors and the Zimco Directors to vote against any issuance of capital stock
of the Company or its subsidiaries (i) to any affiliate of Seacorp unless the
Zimco Group was first offered the opportunity to purchase a portion of such
shares pro rata in accordance with their then ownership of shares of common
stock, for the same consideration that was to be paid by such affiliate, or (ii)
to any entity not affiliated with Seacorp without the consent or approval of the
holders of a majority of the outstanding shares of common stock, subject in each
case to waiver by the Zimco Directors.
Compensation Committee Interlocks and Insider Participation
- -----------------------------------------------------------
The Company does not have a compensation or similar committee.
25
<PAGE>
PART IV. OTHER INFORMATION
--------------------------
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
- ----------------------------------------------------------------
FORM 8-K
- --------
(a) See the section entitled "Index to Financial Statements" appearing under
Item 8 of this Annual Report on Form 10-K.
(b) Not applicable
(c) Exhibits:
3.1 Restated Certificate of Incorporated by
Incorporation of Pay'n Save Inc. reference from Exhibit
3.1 to the Registration
Statement on Form S-1 (File
No. 33-5560) of the
Company (the "Registration
Statement").
3.2 Certificate of Amendment of Incorporated by
Certificate of Incorporation reference from
of Pay'n Save Inc. Exhibit 3.2 to the
Registration
Statement.
3.3 Certificate of Amendment of Incorporated by
Certificate of Incorporation reference from
of Pay'n Save Inc. Exhibit 3.1 to Quarterly
Report on Form 10-Q for the
quarter ended July 30, 1988.
3.4 Certificate of Amendment of Incorporated by
Certificate of Incorporation reference from
of PSS, Inc. Exhibit 3.4 to the Annual
Report on Form 10-K for the
year ended October 31, 1992.
3.5 By-Laws of Pay'n Save Inc. Incorporated by reference
from Exhibit 3.3 to the
Registration Statement.
4.1 Indenture between Pay'n Save Incorporated by reference
Inc. and United States Trust from
26
<PAGE>
Company of New York, as Trustee, Exhibit 4.1 to the
relating to the 7-1/8% Con- Registration Statement.
vertible Debentures due July 15,
2006 (including the form of
Convertible Debenture).
4.2 First Supplemental Indenture be- Incorporated by
tween Pay'n Save Inc., and reference from
United States Trust Company of Exhibit 4.1 to the
New York as Trustee, relating Quarterly Report on
to the 7-1/8% Convertible De- Form 10-Q for the
bentures due July 15, 2006. quarter ended April
30, 1988.
4.3 Indenture between PNS Inc. and Incorporated by
Norwest Bank Minneapolis, Nat- reference from
ional Association as Trustee, Exhibit 4.1 to the
relating to the 12-1/8% Senior Registration State-
Subordinated Notes due July 15, ment on Form S-1
1996 (including the form of (File No. 33-5591)
Senior Subordinated Note). of PNS Inc.
4.4 First Supplemental Indenture be- Incorporated by
tween PNS Inc., and Norwest Bank reference from
Minnesota, National Association Exhibit 4.2 to the
as Trustee, relating to the Quarterly Report on
12-1/8% Senior Subordinated Form 10-Q for the
Notes due July 15, 1996. quarter ended April
30, 1988.
10.4 Agreement for purchase and sale Incorporated by
of assets by and among Pay'n reference from
Save Stores, Inc., The Bi-Mart Exhibit 2.1 to
Company, Pay'n Save Drugs Inc. Form 8-K dated
and Thrifty Corporation, dated May 13, 1988.
as of May 12, 1988.
10.5 Letter Agreement dated Incorporated by
February 9, 1990 by and among reference from
PSSC Inc. and Bear Stearns & Exhibit (i) to
Co., Inc. for the purchase and the Quarterly
financing of adjustable-rate Report on Form
mortgages. 10-Q for the quarter
ended February 3, 1990.
10.6 Agreements dated as of Incorporated by
January 14, 1993 with respect reference from
to the acquisition by PSS, Inc. Exhibit 10.7 to the
and PNS Inc. of up to $64.475 Annual Report on
million of Senior Notes and Form 10-K for
27
<PAGE>
$14 million of Debentures. the year ended October
31, 1992.
22.1 Subsidiaries of the Registrant. Incorporated by
reference from Exhibit
22.1 to the Annual
Report on Form 10-K
for the year ended
October 31, 1992.
28
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: January 31, 1997 By: /s/ Mark Todes
------------------- ---------------------------
Mark Todes, President
29
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Date Title Signature
---- ----- ---------
January 31, 1997 Director By:
------------------------------
Gerald Nathanson
January 31, 1997 Director By: /s/ Mark Todes
------------------------------
Mark Todes
30
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000793322
<NAME> PSS, Inc.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> NOV-02-1996
<PERIOD-START> OCT-29-1995
<PERIOD-END> NOV-02-1996
<CASH> 276
<SECURITIES> 5,250
<RECEIVABLES> 65
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 5,591
<CURRENT-LIABILITIES> 5,155
<BONDS> 35,362
0
0
<COMMON> 0
<OTHER-SE> (34,926)
<TOTAL-LIABILITY-AND-EQUITY> 5,591
<SALES> 0
<TOTAL-REVENUES> 459
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> (197)
<LOSS-PROVISION> (2,355)
<INTEREST-EXPENSE> (2,601)
<INCOME-PRETAX> (3,020)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,020)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,020)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
