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 May 2, 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 _______________
- --------------------------------------------------------------------------------
For Quarter ended May 2, 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 [X] No [_]
The number of shares of common stock outstanding as of June 1, 1998: 19,473,728.
Page 1 of 12
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INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 3
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II. OTHER INFORMATION
Item 3. Defaults Upon Senior Securities 11
Item 6. Exhibits and Reports on Form 8-K 11
2
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PSS, INC.
CONSOLIDATED STATEMENTS OF NET LIABILITIES
Liquidation Basis
(unaudited)
(thousands of dollars)
Assets: 2-May-98 1-Nov-97
--------- ---------
Cash and short-term investments $ 271 $ 313
Investment in mortgage certificates 4,248 4,459
Interest receivable 53 57
--------- ---------
Total Assets $ 4,572 $ 4,829
========= =========
Liabilities:
Borrowings under mortgage certificate
financing agreement $ 3,814 $ 4,073
Accounts payable and accrued liabilities 164 169
Reserve for estimated liquidation costs 158 151
PNS 12-1/8% senior notes 5,258 5,258
Interest payable on PNS notes 2,106 1,788
Reserve for interest on PNS notes 318 636
PSS 7-1/8% debentures 22,920 22,920
Interest payable on PSS debentures 6,210 5,396
Reserve for interest on PSS debentures 815 1,629
--------- ---------
Total liabilities 41,763 42,020
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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 STATEMENTS OF NET LIABILITIES
Liquidation Basis
(unaudited)
(thousands of dollars)
Three months ended
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2-May-98 3-May-97
--------- ---------
Investment income $ 84 $ 99
Interest expense (623) (633)
General and Administrative Expense (28) (32)
Decrease in reserve for estimated costs and
interest during period of liquidation 567 566
--------- ---------
Change in net liabilities $ 0 $ 0
========= =========
Six months ended
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2-May-98 3-May-97
--------- ---------
Investment income $ 170 $ 197
Interest expense (1,251) (1,268)
General and Administrative Expense (44) (64)
Decrease in reserve for estimated costs and
interest during period of liquidation 1,125 1,135
--------- ---------
Change in net liabilities $ 0 $ 0
========= =========
The accompanying notes are an integral part of these financial statements.
4
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PSS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Liquidation Basis
(unaudited)
(thousands of dollars)
Six months ended
----------------
2-May-98 3-May-97
--------- ---------
Cash flows from operating activities:
Change in net liabilities $ 0 $ 0
Adjustments to reconcile to net cash flows from
operating activities:
Decrease in estimated cost and interest during (1,125) (1,135)
liquidation period
Increase in accrued interest payable 1,132 1,133
Other (1) (17)
--------- ---------
Net cash provided by operating activities 6 15
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Cash flows from investing activites:
Principal repayments on mortgage certificates 211 328
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Net cash provided by investing activities 211 328
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Cash flows from financing activities:
Repayment of mortgage certificate borrowings (259) (285)
Net cash used by financing activities (259) (285)
Net increase (decrease) in cash and short-term (42) 58
invetments
Cash and short-term investments-
beginning of period 313 276
--------- ---------
Cash and short-term investments-
end of period $ 271 $ 334
========= =========
The accompanying notes are an integral part of these financial statements.
5
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PSS, INC.
Notes to Financial Statements
May 2, 1998
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, 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 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 May 2, 1998, the Company had assets of $4.57 million and liabilities, other
than the Senior Notes and Debentures including accrued interest and liquidation
costs, of $3.98 million, thus having a net difference of approximately $590,000
available for holders of Senior Notes and Debentures. At May 2, 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 May 2, 1998, the Company's principal assets consisted of approximately $4.25
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 May 2, 1998, the Company had assets of $4.57 million and liabilities, other
than Senior Notes and Debentures including accrued interest and liquidation
costs, of $3.98 million, thus having a net difference of approximately $590,000
available for holders of Senior Notes and Debentures. At May 2, 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 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 on the Senior Notes and
Debentures.
9
<PAGE>
Results of Operations
- ---------------------
Interest income
---------------
Interest income decreased during the three and six months ended May 2, 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 and six months ended May 2, 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>
PART II
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 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.
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: June 16, 1998 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> 6-MOS
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-START> NOV-02-1997
<PERIOD-END> MAY-02-1998
<CASH> 271
<SECURITIES> 4,248
<RECEIVABLES> 53
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 4,572
<CURRENT-LIABILITIES> 4,136
<BONDS> 37,627
0
0
<COMMON> 0
<OTHER-SE> (37,191)
<TOTAL-LIABILITY-AND-EQUITY> 4,572
<SALES> 0
<TOTAL-REVENUES> 84
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> (28)
<LOSS-PROVISION> 567
<INTEREST-EXPENSE> (623)
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
