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 August 2, 1997
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 August 2, 1997 Commission file number 0-14900
PSS, Inc.
------------------------------------------------------
(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
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (206) 901-3790
------------------------------------------------------------
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, 1997:
19,473,728.
Page 1 of 12 pages
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INDEX
Page
PART I. FINANCIAL INFORMATION
1.Financial Statements 3
2.Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II. OTHER INFORMATION
1.Legal Proceedings (a)
2.Changes in Securities (a)
3.Defaults Upon Senior Securities 11
4.Submission of Matters to a Vote of Security Holders (a)
5.Other Information (a)
6.Exhibits and Reports on Form 8-K (a)
- ----------------------------------------------------------------
(a) These items are inapplicable or have a negative response and have therefore
been omitted.
2
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PSS, INC.
CONSOLIDATED STATEMENTS OF NET LIABILITIES
(LIQUIDATION BASIS)
(unaudited)
(thousands of dollars)
August 2, November 2,
1997 1996
------- -------
Assets:
Cash and short-term investments $ 327 $ 276
Investment in mortgage certificates 4,727 5,250
Accrued interest receivable 60 65
------- -------
Total assets 5,114 5,591
------- -------
Liabilities:
Borrowings under mortgage certificate
financing agreement 4,427 4,922
Accounts payable and accrued liabilities 164 143
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 1,629 1,152
Reserve for interest on PNS notes during
period of liquidation 159 636
PSS 7-1/8% debentures 22,920 22,920
Interest payable on PSS debentures 4,989 3,767
Reserve for interest on PSS debentures
during period of liquidation 407 1,629
------- -------
Total liabilities 40,040 40,517
------- -------
Net Liabilities $(34,926) $(34,926)
======= =======
The accompanying notes are an integral part of
these financial statements.
3
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PSS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN NET LIABILITIES
(LIQUIDATION BASIS)
(unaudited)
(thousands of dollars)
Three months ended
------------------
August 2, July 27,
1997 1996
------- -------
Investment income $ 95 $ 85
Interest expense (645) (636)
General and administrative expense (17) (45)
Decrease in estimated costs and interest
during period of liquidation 567 521
------- -------
Change in Net Liabilities $ 0 $ (75)
======= =======
Nine months ended
-----------------
August 2, July 27,
1997 1996
------- -------
Investment income $ 292 $ 312
Interest expense (1,913) (1,920)
General and administrative expense (81) (103)
Decrease in estimated costs and interest
during period of liquidation 1,702 1,636
------- -------
Change in Net Liabilities $ 0 $ (75)
======= =======
The accompanying notes are an integral part of
these financial statements.
4
<PAGE>
PSS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(thousands of dollars)
Nine months ended
-----------------
August 2, July 27,
1997 1996
------- -------
Cash flows from operating activities:
Change in Net Liabilities $ 0 $ (75)
Adjustments to reconcile to net cash flows
from operating activities:
Decrease in estimated costs and interest (1,702) (1,636)
Increase in accrued interest payable 1,699 1,699
Other 26 46
------- -------
Net cash provided by operating activities 23 34
------- -------
Cash flows from investing activities:
Principal repayments on mortgage certificates 523 465
------- -------
Net cash provided by investing activities 523 465
------- -------
Cash flows from financing activities:
Repayment of mortgage certificate borrowings (495) (448)
------- -------
Net cash used by financing activities (495) (448)
------- -------
Net increase in cash and short-term
investments 51 51
Cash and short-term investments -
beginning of period 276 11
------- -------
Cash and short-term investments -
end of period $ 327 $ 62
======= =======
The accompanying notes are an integral part of
these financial statements.
5
<PAGE>
PSS, INC.
Notes to Financial Statements
August 2, 1997
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, July 15, 1996, January 15, 1997 and July 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. In June 1997 the Company was advised by the trustee for the Senior
Notes that, after concluding that the Company lacks sufficient assets to pay the
Senior Notes, the trustee had petitioned a district court for the State of
Minnesota to authorize and instruct it to refrain from pursuing any default
remedy against the Company and to discharge it as trustee, and that the Court
had granted the trustee's requests.
At August 2, 1997, the Company had assets of $5.11 million and liabilities,
other than the Senior Notes and Debentures including
6
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accrued interest and liquidation costs, of approximately $4.59 million, thus
having a net difference of approximately $520,000 available for holders of
Senior Notes and Debentures. At August 2, 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, 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.
7
<PAGE>
NOTE 2 - Liquidation Basis of Accounting (continued)
- ----------------------------------------------------
A summary of significant estimates and judgements utilized in preparaton 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 July 27, 1996 financial statements.
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.
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 August 2, 1997, the Company's principal assets consisted of approximately
$4.7 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 August 2, 1997, the Company had assets of $5.11 million and liabilities,
other than the Senior Notes and Debentures including accrued interest and
liquidation costs, of approximately $4.59 million, thus having a net difference
of approximately $520,000 available for holders of Senior Notes and Debentures.
At August 2, 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, January 15, 1997 and July 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. In June 1997 the Company was advised by the trustee for the Senior
Notes that, after concluding that the Company lacks sufficient assets to pay the
Senior Notes, the trustee had petitioned a district court for the State of
Minnesota to authorize and instruct it to refrain from pursuing any default
remedy against the Company and to discharge it as trustee, and that the Court
had granted the trustee's requests.
9
<PAGE>
Liquidity and Capital Resources (continued)
- -------------------------------------------
The Company's future operating results, liquidity, capital resources and
requirements are primarily dependent upon actions which may be taken by the
trustees for the Senior Notes and the Debentures to collect amounts due
thereunder, the payment of amounts due on and purchases of Senior Notes and
Debentures and, to a lesser extent, interest rate fluctuations as they relate to
the market value of Mortgage Certificates and to the spread of interest income
therefrom over interest expense on related borrowings. The Company is
exclusively invested in Mortgage Certificates, and, accordingly, is presently
relying solely on such as its source of cash funds. It has not been determined
what course of action the Company may pursue with respect to debt service on the
Senior Notes and Debentures.
Results of Operations
- ---------------------
Interest income
---------------
Interest income increased during the three months ended August 2, 1997 as
compared to the prior year three month period due to a reduction in unrealized
appreciation of investments recorded during the prior year period.
Interest income decreased during the nine months ended August 2, 1997 as
compared to the prior year period as a result of a declining investment in
Mortgage Certificates.
Interest expense
----------------
Interest expense increased during the three months ended August 2, 1997 as
compared to the prior year period primarily due to increased interest rates.
Interest expense decreased during the nine months ended August 2, 1997 as
compared to the prior year nine month 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. On June 16, 1997 the Company was advised by the trustee for the Senior
Notes that, after concluding that the Company lacks sufficient assets to pay the
Senior Notes, the trustee had on May 21 petitioned a district court for the
State of Minnesota to authorize and instruct it to refrain from pursuing any
default remedy against the Company and to discharge it as trustee and that on
June 4, 1997, the Court had granted the trustee's requests.
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: September 16, 1997 By: /s/ MARK TODES
-------------------------
Mark Todes, President
12
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<ARTICLE> 5
<CIK> 0000793322
<NAME> PSS, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> NOV-01-1997
<PERIOD-START> NOV-03-1996
<PERIOD-END> AUG-02-1997
<CASH> 327
<SECURITIES> 4,727
<RECEIVABLES> 60
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5,114
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 5,114
<CURRENT-LIABILITIES> 4,678
<BONDS> 30,373
0
0
<COMMON> 0
<OTHER-SE> (34,926)
<TOTAL-LIABILITY-AND-EQUITY> 5,114
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<OTHER-EXPENSES> (81)
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<INTEREST-EXPENSE> (1,913)
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<INCOME-TAX> 0
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