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 January 31, 1998
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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 January 31, 1998 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 [ ] No [_]
The number of shares of common stock outstanding as of
March 1, 1998: 19,473,728.
Page 1 of 12
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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)
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(a) These items are inapplicable or have a negative response and have therefore
been omitted.
2
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PSS, INC.
Consolidated Statements of Net Liabilities
(Liquidation Basis)
(unaudited)
(thousands of dollars)
January 31, November 1,
1998 1997
-------- --------
Assets:
Cash and short-term investments $ 302 $ 313
Investment in mortgage certificates 4,349 4,459
Accrued interest receivable 55 57
-------- --------
Total assets $ 4,706 4,829
-------- --------
Liabilities:
Borrowings under mortgage certificate
financing agreement $ 3,940 $ 4,073
Accounts payable and accrued liabilities 171 169
Reserve for estimated costs during
period of liquidation 159 151
PNS 12-1/8% senior notes 5,258 5,258
Interest payable on PNS notes 1,947 1,788
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 5,803 5,396
Reserve for interest on PSS debentures
during period of liquidation 1,222 1,629
-------- --------
Total liabilities 41,897 42,020
-------- --------
Net Liabilities $(37,191) $(37,191)
======== ========
The accompanying notes are an integral part
of these financial statements.
3
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PSS, INC.
Consolidated Statement of Changes in Net Liabilities
(Liquidation Basis)
(unaudited)
(thousands of dollars)
Three months ended
January 31 February 1,
1998 1997
------- -------
Investment income $ 86 $ 98
Interest expense (628) (635)
General and administrative expense (16) (32)
Decrease in estimated costs and interest
during period of liquidation 558 569
----- -----
Change in Net Liabilities $ -- $ --
===== =====
The accompanying notes are an integral part
of these financial statements.
4
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PSS, INC.
Consolidated Statement of Cash Flows
(unaudited)
(thousands of dollars)
Three months ended
January 31 February 1,
1998 1997
-------- -------
Cash flows from operationg activities:
Change in Net Liabilities $ -- $ --
Adjustments to reconcile to net cash flows
from operating activities:
Decrease in estimated costs and interest
during period liquidation (558) (569)
Increase in accured interest payable 566 567
Other 4 25
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Net cash provided by operating activities 12 23
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Cash flows from investing activities:
Principal repayments on mortgage certificates 110 240
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Net cash provided by investing activities 110 240
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Cash flows from financing activities:
Repayment of mortgage certificate borrowings (133) (268)
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Net cash used by financing activities (133) (268)
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Net decrease in cash and short-term investments (11) (5)
Cash and short-term investments -
beginning of period 313 276
----- -----
Cash and short-term investments -
end of period $ 302 $ 271
===== =====
The accompanying notes are an integral part
of these financial statements.
5
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PSS, INC.
Notes to Financial Statements
January 31, 1998
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, July 15, 1997 and January 15, 1998 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. 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 Sate 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 January 31, 1998, the Company had assets of $4.71 million and liabilities,
other than the Senior Notes and Debentures including accrued interest and
liquidation costs, of $4.11 million, thus having a net difference of
approximately $600,000 available for holders of Senior Notes and Debentures. At
January 31, 1998, 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 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 on the
Senior Notes and Debentures.
6
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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
consolidated financial statements on a liquidation basis follows:
* 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.
* 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.
7
<PAGE>
NOTE 2 - Liquidation Basis of Accounting (continued)
- -----------------------------------------------------
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 January 31, 1998, the Company's principal assets consisted of approximately
$4.35 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 January 31, 1998, the Company had assets of $4.71 million and liabilities,
other than Senior Notes and Debentures including accrued interest and
liquidation costs, of $4.11 million, thus having a net difference of
approximately $600,000 available for holders of Senior Notes and Debentures. At
January 31, 1998, 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 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. 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 Sate 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.
9
<PAGE>
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 January 31, 1998 as
compared to the prior year period primarily as a result of lower balances of
investments in Mortgage Certificates.
Interest expense
----------------
Interest expense decreased during the three months ended January 31, 1998 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. 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 Sate 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.
ITEM 6 - Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits - none filed with this report.
(b) None
11
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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 17, 1998 By: /s/ Mark Todes
----------------------------
Mark Todes, President
12
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<CIK> 0000793322
<NAME> PSS, Inc.
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<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-START> NOV-02-1997
<PERIOD-END> JAN-31-1998
<CASH> 302
<SECURITIES> 4,349
<RECEIVABLES> 55
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 4,706
<CURRENT-LIABILITIES> 4,270
<BONDS> 37,627
0
0
<COMMON> 0
<OTHER-SE> (37,191)
<TOTAL-LIABILITY-AND-EQUITY> 4,706
<SALES> 0
<TOTAL-REVENUES> 86
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<OTHER-EXPENSES> (16)
<LOSS-PROVISION> 558
<INTEREST-EXPENSE> (628)
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
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