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 1, 1997
OR
[_] 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
--------------
- - --------------------------------------------------------------------------------
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, 1997: $270,000.
The number of shares of common stock outstanding as of November 1, 1997:
19,473,728.
Documents incorporated by reference: None.
<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 1, 1997, the Company's principal assets consisted of
approximately $4.46 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.
ITEM 2 - PROPERTIES
- - -------------------
None
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 1, 1997 were as
follows:
Quarter ended High Low
------------- ---- ---
January 27, 1996 .02 .01
April 27, 1996 .01 .01
July 27, 1996 .01 .01
November 2, 1996 .01 .01
February 1, 1997 .01 .01
May 3, 1997 .01 .01
August 2, 1997 .01 .01
November 1, 1997 .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, 1997, 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 1, 1997, 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 1, November 2, October 28, October 29, October 30,
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(thousands of dollars, except per share data)
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Increase in net liabilities $ (2,265) $ (3,020) $ (4,231)
Loss before extraordinary items $ (2,141) $ (1,161)
Net income (1) 9,568 47,454
Net income per common share 0.49 2.44
Balance Sheet Data:
Total assets $ 4,829 $ 5,591 $ 5,927 $ 11,383 $136,634
Short-term borrowings 4,073 4,922 5,278 10,192 124,062
Long-term debt 28,178 28,178 28,178 28,159 48,144
Total liabilities 42,020 40,517 37,833 39,058 173,877
Stockholders' deficit (27,675) (37,243)
Net liabilities (37,191) (34,926) (31,906)
</TABLE>
(1) Includes pre-tax extraordinary gains on early extinguishment of debt of
approximately $13 million and $49 million during the years ended October
29, 1994 and October 30, 1993, respectively.
4
<PAGE>
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- - --------------------------------------------------------------------------------
OF OPERATIONS
- - -------------
Liquidity and Capital Resources
- - -------------------------------
At November 1, 1997, the Company's principal assets consisted of approximately
$4.46 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 1, 1997, the Company had assets of $4.83 million and liabilities,
other than Senior Notes and Debentures including accrued interest and
liquidation costs, of $4.24 million, thus having a net difference of
approximately $590,000 available for holders of Senior Notes and Debentures. At
November 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, January 15, 1997, July 15, 1997 and January 15,
1998 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.
The Company's future operating results, liquidity, capital resources and
requirements are primarily dependent upon actions which may be taken by the
trustee for 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.
5
<PAGE>
Results of Operations
- - ---------------------
Interest income
---------------
Interest income for each of the years ended November 1, 1997, November 2, 1996,
and October 28, 1995 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 1, 1997 and November
2, 1996 is approximately $64,000 and $25,000, respectively, of unrealized gains
resulting from mark-to-market adjustments. The weighted average interest income
rate earned on the Mortgage Certificates approximated 7.7%, 7.9%, and 7.3%
during the years ended November 1, 1997, November 2, 1996, and October 28, 1995,
respectively.
Interest expense
----------------
Interest expense for each of the years ended November 1, 1997, November 2, 1996,
and October 28, 1995, 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
6.0%, 5.6%, and 6.0% during the years ended November 1, 1997, November 2, 1996,
and October 28, 1995, respectively. Interest expense also decreased during the
year ended October 28, 1995 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>
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- - ----------------------------------------------------
INDEX TO FINANCIAL STATEMENTS
- - -----------------------------
Financial statements Page
-------------------- ----
Report of Independent Accountants 8
Consolidated Statements of Net Liabilities 9
Consolidated Statement of Changes of Net Liabilities 10
Consolidated Statements of Cash Flows 11
Notes to Financial Statements 12
Financial statement schedules
Financial statement schedule information is presented in
the financial statements.
SUPPLEMENTARY FINANCIAL INFORMATION
- - -----------------------------------
Selected quarterly financial data (unaudited) 18
---------------------------------------------
7
<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 1, 1997 and
November 2, 1996, and the related consolidated statements of changes in net
liabilities (liquidation basis) and of cash flows (liquidation basis) for the
years ended November 1, 1997, November 2, 1996 and October 28, 1995. 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 1, 1997 and November 2, 1996, and the changes in their
net liabilities (liquidation basis) and their cash flows (liquidation basis) for
the years ended November 1, 1997, November 2, 1996 and October 28, 1995, in
conformity with generally accepted accounting principles.
PRICE WATERHOUSE LLP
Seattle, Washington
January 15, 1998
8
<PAGE>
PSS, INC.
Consolidated Statements of Net Liabilities
(Liquidation Basis)
(thousands of dollars)
November 1, November 2,
1997 1996
-------- --------
Assets:
Cash and short-term investments $ 313 $ 276
Investment in mortgage certificates 4,459 5,250
Accrued interest receivable 57 65
-------- --------
Total assets 4,829 5,591
-------- --------
Liabilities:
Borrowings under mortgage certificate
financing agreement 4,073 4,922
Accounts payable and accrued liabilities 169 143
Reserve for estimated costs during
period of liquidation 151 90
PNS 12-1/8% senior notes 5,258 5,258
Interest payable on PNS notes 1,788 1,152
Reserve for interest on PNS notes
during period of liquidation 636 636
PSS 7-1/8% debentures 22,920 22,920
Interest payable on PSS debentures 5,396 3,767
Reserve for interest on PSS debentures
during period of liquidation 1,629 1,629
-------- --------
Total liabilities 42,020 40,517
-------- --------
Net Liabilities $(37,191) $(34,926)
======== ========
The accompanying notes are an integral part
of these financial statements.
9
<PAGE>
PSS, INC.
Consolidated Statements of Changes in Net Liabilities
(Liquidation Basis)
(thousands of dollars)
Year ended
-----------------------------------
November 1, November 2, October 28,
1997 1996 1995
------- ------- -------
Investment income $ 446 $ 459 $ 582
Interest expense (2,546) (2,601) (2,765)
Write off of deferred financing
costs and original issue discount (226)
General and administrative expense (104) (197) (148)
Decrease in reserve for estimated
costs and interest during
period of liquidation 2,204 1,674
Provision for estimated costs and
interest during period of liquidation (2,265) (2,355) (1,674)
------- ------- -------
Increase in Net Liabilities $(2,265) $(3,020) $(4,231)
======= ======= =======
The accompanying notes are an integral part
of these financial statements.
10
<PAGE>
PSS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(thousands of dollars)
<TABLE>
<CAPTION>
Year ended
--------------------------------------
November 1, November 2, October 28,
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Increase in Net Liabilities $(2,265) $(3,020) $(4,231)
Adjustments to reconcile to net cash flows
from operating activities:
Amortization 127
Write off of deferred financing
costs and original issue discount 226
Increase in estimated costs and interest during
period of liquidation 61 681 1,674
Decrease in accrued interest receivable 8 11 36
Increase (decrease) in accrued interest payable 2,265 2,308 1,945
Other (38) 26 (49)
------- ------- -------
Net cash provided (used) by operating activities 31 6 (272)
------- ------- -------
Cash flows from investing activities:
Proceeds from sale of mortgage certificates 4,426
Principal repayments on mortgage certificates 855 615 726
------- ------- -------
Net cash provided by investing activities 855 615 5,152
------- ------- -------
Cash flows from financing activities:
Repayment of borrowings under mortgage
certificates financing agreement (849) (356) (4,914)
------- ------- -------
Net cash used by financing activities (849) (356) (4,914)
------- ------- -------
Net increase (decrease) in cash and short-term investments 37 265 (34)
Cash and short-term investments at
beginning of year 276 11 45
------- ------- -------
Cash and short-term investments at
end of year $ 313 $ 276 $ 11
======= ======= =======
</TABLE>
The accompanying notes are an integral part
of these financial statements.
11
<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 13%, 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, January 15, 1997, July 15, 1997 and January 15,
1998 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 November 1, 1997, the Company had assets of approximately $4.83 million and
liabilities, other than the Senior Notes and Debentures including accrued
interest and liquidation costs, of approximately $4.24 million, thus having a
net difference of approximately $590,000 available for holders of Senior Notes
and Debentures. At November 1, 1997, approximately $5.26 million of Senior Notes
and $22.92 million of Debentures 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 trustee for 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
12
<PAGE>
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 1, 1997, November 2, 1996 and October 28, 1995 consolidated financial
statements on a liquidation basis follows:
o The Company's next fiscal year end, October 31, 1998, has
been utilized as the liquidation date for the November 1,
1997 financial statements and the November 1, 1997 fiscal
year end was utilized as the liquidation date for the
November 2, 1996 financial statements. The Senior Notes
July 15, 1996 due date was utilized as the liquidation
date for the October 28, 1995 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.
13
<PAGE>
NOTE 2 - LIQUIDATION BASIS OF ACCOUNTING (continued)
- - ----------------------------------------------------
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.
During the fiscal years ended November 1, 1997 and 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 November
2, 1996 and October 28, 1995 financial statements, respectively. 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 years ended November 1, 1997 and November 2, 1996
included 12 months of interest, which resulted in actual interest expense in
excess of estimated amounts reserved.
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.
14
<PAGE>
Basis of Presentation
- - ---------------------
Effective October 28, 1995, the Company adopted the liquidation basis of
accounting for presenting its consolidated financial statements.
Accounting Estimates
- - --------------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management 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 statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those amounts.
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 the three
month Federal Funds Rate plus 25 basis points. Mortgage Financing borrowings and
related interest rates approximated $4.1 million and 6.0% at November 1, 1997
and $4.9 million and 5.5% at November 2, 1996, respectively. During the years
ended November 1, 1997, November 2, 1996, and October 28, 1995, the average
balance of mortgage related borrowings outstanding approximated $4.6 million, $5
million, and $5 million, and the weighted annual average interest expense rates
approximated 6.0%, 5.6%, and 6.0%, respectively.
At November 1, 1997, the interest rate to be earned on the Mortgage Certificates
approximated 8.0% 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 7.7%, 7.9%, and 7.3% during the years ended November 1, 1997,
November 2, 1996, and October 28, 1995, respectively.
The Company sold approximately $1 million of Mortgage Certificates during the
year ended October 28, 1995.
15
<PAGE>
NOTE 5 - SUBORDINATED DEBT
- - --------------------------
Subordinated debt and related interest payable through the balance sheet dates
are summarized as follows (thousands of dollars):
November 1, November 2,
1997 1996
------- -------
PNS 12-1/8% Senior Notes $ 5,258 $ 5,258
Interest payable on Senior Notes 1,788 1,152
------- -------
$ 7,046 $ 6,410
======= =======
PSS 7-1/8% Debentures $22,920 $22,920
Interest payable on Debentures 5,396 3,767
------- -------
$28,316 $26,687
======= =======
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 1, 1997, the Intercompany Debenture approximated $4.0
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.
The indentures for the Senior Notes and Debentures contain certain restrictive
covenants which,
16
<PAGE>
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.
Interest paid approximated $319,000 during the year ended October 28, 1995.
NOTE 6 - INCOME TAXES
- - ---------------------
Due to losses for each of the years ended November 1, 1997, November 2, 1996 and
October 28, 1995, there was no provision for income taxes recorded.
As of November 1, 1997, for income tax purposes, net operating loss
carryforwards, which begin to expire in 2001, approximate $140 million, and
capital loss carryforwards approximate $45 million, all of which expire in 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.
NOTE 7 - 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.
17
<PAGE>
NOTE 8 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected quarterly financial data are as follows (thousands of dollars):
<TABLE>
<CAPTION>
Fiscal quarters ended
-----------------------------------------------
November 1, August 2, May 3, February 1,
1997 1997 1997 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Decrease in reserve for estimated costs and
interest during period of liquidation $ 502 $ 567 $ 566 $ 569
Provision for estimated costs and interest
during period of liquidation (2,265)
Increase in net liabilities (2,265) 0 0 0
Fiscal quarters ended
-----------------------------------------------
November 2, July 27, April 27, January 27,
1996 1996 1996 1996
------- ------- ------- -------
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
</TABLE>
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- - --------------------------------------------------------------------------------
FINANCIAL DISCLOSURE
- - --------------------
None.
18
<PAGE>
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
Name and Position Occupation or Employment
With the Company Age and Five Year Employment History
---------------- --- --------------------------------
Mark Todes 42 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 52 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.
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.
19
<PAGE>
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- - ------------------------------------------------------------------------
The following table sets forth, as of December 31, 1997, 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 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) 2,563,962 13.17%
Zimmerman Retailing Group Limited (a) 2,563,962 13.17%
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
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,
20
<PAGE>
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.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- - --------------------------------------------------------
None
21
<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 referenced
Incorporation of the Registrant 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 reference
Certificate of Incorporation of from Exhibit 3.2 to the
the Registrant Registration Statement.
3.3 Certificate of Amendment of Incorporated by reference
Certificate of Incorporation from Exhibit 3.1 to
of the Registrant Quarterly Report on Form
10-Q for the quarter ended
July 30, 1988.
3.4 Certificate of Amendment of Incorporated by reference
Certificate of Incorporation from Exhibit 3.4 to the
of the Registrant Annual Report on Form 10-K
for the year ended October
31, 1992.
3.5 By-Laws of the Registrant Incorporated by reference
from Exhibit 3.3 to the
Registration Statement.
4.1 Indenture between the Registrant Incorporated by reference
Inc. and United States Trust from Exhibit 4.1 to the
Company of New York, as Trustee, Registration Statement.
relating to the 7-1/8%
Convertible Debentures due July 15,
2006 (including the form of
Convertible Debenture).
4.2 First Supplemental Indenture be- Incorporated by reference
tween the Registrant and from Exhibit 4.1 to the
United States Trust Company of Quarterly Report on Form
New York as Trustee, relating 10-Q for quarter ended April
to the 7-1/8% Convertible De- 30, 1988.
bentures due July 15, 2006.
22
<PAGE>
4.3 Indenture between PNS Inc. and Incorporated by reference
Norwest Bank Minneapolis, Nat- from Exhibit 4.1 to the
ional Association as Trustee, Registration Statement on
relating to the 12-1/8% Senior Form S-1 (File No. 33-5591)
Subordinated Notes due July 15, of PNS Inc.
1996 (including the form of
Senior Subordinated Note.
4.4 First Supplemental Indenture be- Incorporated by reference
tween PNS Inc., and Norwest Bank from Exhibit 4.2 to the
Minnesota, National Association Quarterly Report on Form
as Trustee, relating to the 10-Q for the quarter ended
12-1/8% Senior Subordinated April 30, 1988.
Notes due July 15, 1996.
10.5 Letter Agreement dated Incorporated by reference
February 9, 1990 by and among from Exhibit (i) to
PSSC Inc. and Bear Stearns & Quarterly Report on form
Co., Inc. for the purchase and 10-Q for the quarter ended
the financing of adjustable-rate February 3, 1990.
mortgages.
22.1 Subsidiaries of the Registrant. Incorporated by reference
from Exhibit 22.to the
Annual Report on Form 10-K
for the year ended October
31, 1992.
23
<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: January29, 1998 By: /s/ MARK TODES
---------------------
Mark Todes, President
24
<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 29, 1998 Director
-----------------------
Gerald Nathanson
January 29, 1998 Director /s/ MARK TODES
-----------------------
Mark Todes
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000793322
<NAME> PSS, Inc.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> NOV-01-1997
<PERIOD-START> NOV-03-1996
<PERIOD-END> NOV-01-1997
<CASH> 313
<SECURITIES> 4,459
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 4,829
<CURRENT-LIABILITIES> 4,393
<BONDS> 37,627
0
0
<COMMON> 0
<OTHER-SE> (37,191)
<TOTAL-LIABILITY-AND-EQUITY> 4,829
<SALES> 0
<TOTAL-REVENUES> 446
<CGS> 0
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<OTHER-EXPENSES> (104)
<LOSS-PROVISION> (2,265)
<INTEREST-EXPENSE> (2,546)
<INCOME-PRETAX> (2,265)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,265)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,265)
<EPS-PRIMARY> 0
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</TABLE>
