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 February 1, 1997
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________
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For Quarter ended February 1, 1997 Commission file number 0-14900
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PSS, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 91-1335798
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
P.O. Box 21186, Seattle, WA 98111-3186
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(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (206) 901-3790
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Former name, former address and former fiscal year, if changed
since last report.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
---- ----
The number of shares of common stock outstanding as of
March 1, 1997: 19,473,728.
Page 1 of 12
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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 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)
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(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)
February 1, November 2,
1997 1996
------------ ------------
Assets:
Cash and short-term investments $ 271 $ 276
Investment in mortgage certificates 5,010 5,250
Accrued interest receivable 63 65
----- -----
Total assets 5,344 5,591
----- -----
Liabilities:
Borrowings under mortgage certificate
financing agreement $ 4,654 $ 4,922
Accounts payable and accrued liabilities 167 143
Reserve for estimated costs during
period of liquidation 87 90
PNS 12-1/8% senior notes 5,258 5,258
Interest payable on PNS notes 1,311 1,152
Reserve for interest on PNS notes during
period of liquidation 477 636
PSS 7-1/8% debentures 22,920 22,920
Interest payable on PSS debentures 4,174 3,767
Reserve for interest on PSS debentures
during period of liquidation 1,222 1,629
------ -------
Total liabilities 40,270 40,517
------- -------
Net Liabilities $ (34,926) $ (34,926)
======== =======
The accompanying notes are an integral part of
these financial statements.
3
<PAGE>
PSS, INC.
Consolidated Statement of Changes in Net Liabilities
(Liquidation Basis)
(unaudited)
(thousands of dollars)
Three months ended
--------------------------
February 1, January 27,
1997 1996
----------- -----------
Investment income $ 98 $ 113
Interest expense (635) (646)
General and administrative expense (32) (33)
Decrease in estimated costs and interest 569 566
during period of liquidation ----- ------
Change in Net Liabilities $ -- $ --
======= ======
The accompanying notes are an integral part
of these financial statements.
4
<PAGE>
PSS, INC.
Consolidated Statements of Cash Flows
(unaudited)
(thousands of dollars)
Three months ended
-----------------------------
February 1, January 27,
1997 1996
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Cash flows from operating activities:
Change in Net Liabilities $ -- $ --
Adjustments to reconcile to net cash flows
from operating activities:
Decrease in estimated costs and interest (569) (569)
during period of liquidation
Increase in accrued interest payable 567 566
Other 25 (4)
--- ---
Net cash provided (used) by operating activities 23 (4)
--- ---
Cash flows from investing activities:
Principal repayments on mortgage certificates 240 355
--- ---
Net cash provided by investing activities 240 355
--- ---
Cash flows from financing activities:
Repayment of mortgage certificate borrowings (268) (331)
---- ----
Net cash used by financing activities (268) (331)
---- ----
Net increase (decrease) in cash and short-term (5) 20
investments
Cash and short-term investments - 276 11
beginning of period ---- ---
Cash and short-term investments - $ 271 $ 31
end of period ===== ====
The accompanying notes are an integral part
of these financial statements.
5
<PAGE>
PSS, INC.
Notes to Financial Statements
February 1, 1997
NOTE 1 - The Company
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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, July 15, 1996 and January 15, 1997 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, 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.
At February 1, 1997, the Company had assets of $5.34 million and liabilities
secured by such assets of $4.82 million, thus having a net difference of
approximately $520,000 available for holders of Senior Notes and Debentures. At
February 1, 1997, 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,
6
<PAGE>
NOTE 1 - The Company (continued)
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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
November 2, 1996, included in the Company's Annual Report on Form 10-K.
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.
No adjustment to the reported value of assets was required as a result of
converting from the going concern basis to the liquidation basis of accounting.
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
consolidated financial statements on a liquidation basis follows:
o The Company's next fiscal year end, November 1, 1997, has
been utilized as the liquidation date for the November 2,
1996 financial statements and for financial statements as
of and for periods ending during such next fiscal year. The
Senior Notes July 15, 1996 due date was utilized as the
liquidation date for the January 27, 1996 financial
statements.
7
<PAGE>
NOTE 2 - Liquidation Basis of Accounting (continued)
- ----------------------------------------------------
o Mortgage Certificates and related interest receivable are
stated at estimated market value.
o Borrowings secured by Mortgage Certificates are stated at
face value, which approximates market value.
o The reserve for estimated costs during the period of
liquidation represents estimates of future costs to be
incurred through the liquidation date.
o 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.
o Senior Notes and Debentures and related interest accrued
are stated at face value.
o 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.
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 February 1, 1997, the Company's principal assets consisted of approximately
$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 February 1, 1997, the Company had assets of $5.34 million and liabilities
secured by such assets of $4.82 million, thus having a net difference of
approximately $520,000 available for holders of Senior Notes and Debentures. At
February 1, 1997, 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 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, 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
<PAGE>
Liquidity and Capital Resources (continued)
- -----------------------------------------------
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.
Results of Operations
- ---------------------
Interest income
---------------
Interest income decreased during the three months ended February 1, 1997 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 February 1, 1997 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, 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 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
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 14, 1997 By: /s/ Mark Todes
---------------------
Mark Todes, President
12
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<NAME> PSS, Inc.
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<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> NOV-01-1997
<PERIOD-START> NOV-03-1996
<PERIOD-END> FEB-01-1997
<CASH> 271
<SECURITIES> 5,010
<RECEIVABLES> 63
<ALLOWANCES> 0
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<CURRENT-ASSETS> 0
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<DEPRECIATION> 0
<TOTAL-ASSETS> 5,344
<CURRENT-LIABILITIES> 4,908
<BONDS> 35,362
0
0
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