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 1, 1998
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 August 1, 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 2573 Seattle, WA 98111-2573
- ---------------------------------------- -------------
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (206) 901-3790
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P.O. Box 21186, Seattle WA 98111-3186
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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 September 1, 1998:
19,473,728.
Page 1 of 11
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INDEX
Page
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PART I. FINANCIAL INFORMATION
1. Financial Statements 3
2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II. OTHER INFORMATION
1. Legal Proceedings (a)
2. Changes in Securities (a)
3. Defaults Upon Senior Securities 10
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.
<PAGE>
PSS, INC.
Consolidated Statements of Net Liabilities
Liquidation Basis
(unaudited)
(thousands of dollars)
<TABLE>
<CAPTION>
1-Aug-98 1-Nov-97
--------- ---------
<S>
Assets: <C> <C>
Cash and short-term investments $256 $313
Investment in mortgage certificates 3,817 4,459
Interest receivable 48 57
--------- ---------
Total Assets $4,121 $4,829
--------- ---------
Liabilities:
Borrowings under mortgage certificate financing agreement $3,409 $4,073
Accounts payable and accrued liabilities 163 169
Reserve for estimated costs during period of liquidation 113 151
PNS 12-1/8% senior notes 5,258 5,258
Interest payable on PNS notes 2,265 1,788
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 6,617 5,396
Reserve for interest on PSS debentures during period of liquidation 408 1,629
--------- ---------
Total liabilities 41,312 42,020
--------- ---------
Net liabilities ($37,191) ($37,191)
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
PSS, INC.
Consolidated Statements of Changes in Net Liabilities
Liquidation Basis
(unaudited)
(thousands of dollars)
<TABLE>
<CAPTION>
Three months ended
------------------
1-Aug-98 2-Aug-97
-------- --------
<S> <C> <C>
Investment income $28 $95
Interest expense (621) (645)
General and administrative expense (18) (17)
Decrease in reserve for estimated costs and interest during
period of liquidation 611 567
--- ---
Change in net liabilities $0 $0
=== ===
Nine months ended
-----------------
1-Aug-98 2-Aug-97
-------- --------
Investment income $198 $292
Interest expense (1,872) (1,913)
General and administrative expense (62) (81)
Decrease in reserve for estimated costs and interest during
period of liquidation 1,736 1,702
----- -----
Change in net liabilities $0 $0
===== =====
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
PSS, INC.
Consolidated Statements of Cash Flows
(unaudited)
(thousands of dollars)
<TABLE>
<CAPTION>
Nine months ended
-----------------
1-Aug-98 2-Aug-97
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Change in net liabilities $0 $0
Decrease in unrealized appreciation on mortgage certificates 45 --
Adjustments to reconcile to net cash flows from
operating activities:
Decrease in estimated costs and interest
during period of liquidation (1,736) (1,702)
Increase in accrued interest payable 1,698 1,699
Other 7 26
-------- --------
Net cash provided by operating activities 14 23
-------- --------
Cash flows from investing activities:
Principal repayments on mortgage certificates 593 523
-------- --------
Net cash provided by investing activities 593 523
-------- --------
Cash flows from financing activities:
Repayment of mortgage certificate borrowings (664) (495)
-------- --------
Net cash used by financing activities (664) (495)
-------- --------
Net increase (decrease) in cash and short-term investments (57) 51
-------- --------
Cash and short-term investments-
beginning of period 313 276
-------- --------
Cash and short-term investments-
end of period $256 $327
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
PSS, INC.
Notes to Financial Statements
August 1, 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 and July 15 of 1995, 1996,
1997 and 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."
PNS failed to pay interest due 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 1, 1998, the Company had assets of approximately $4.12 million and
liabilities, other than the Senior Notes and Debentures including accrued
interest and liquidation costs, of approximately $3.57 million, thus having a
net difference of approximately $550,000 available for holders of Senior Notes
and Debentures. At August 1, 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.
The financial statements presented herein include all adjustments which are of a
normal recurring nature and, in the opinion of management, necessary to present
fairly 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 1, 1997, included in the Company's Annual
Report on Form 10-K. Operating results for 1998 interim periods are not
necessarily indicative of results to be expected for the entire year.
-6-
<PAGE>
NOTE 2 - Liquidation Basis of Accounting
- ----------------------------------------
The Company's consolidated financial statements are presented utilizing the
liquidation basis of accounting. 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 and in
this regard the Company has accrued future liabilities and estimated future net
revenues from interest and other income associated with mortgage certificates to
the liquidation date. The presentation of per share information on a liquidation
basis is not considered meaningful and has been omitted.
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 and interim 1998 financial
statements and the November 1, 1997 fiscal year end was utilized as the
liquidation date for the interim 1997 financial statements.
The reserve for estimated costs during the period of liquidation
represents estimates of future costs to be incurred through the
liquidation date.
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 through the 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.
7
<PAGE>
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Liquidity and Capital Resources
- -------------------------------
At August 1, 1998, the Company's principal assets consisted of approximately
$3.71 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 1, 1998, the Company had assets of approximately $4.12 million and
liabilities, other than Senior Notes and Debentures including accrued interest
and liquidation costs, of approximately $3.57 million, thus having a net
difference of approximately $550,000 available for holders of Senior Notes and
Debentures. At August 1, 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 and July 15 of 1995, 1996,
1997 and 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."
PNS failed to pay interest due 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.
8
<PAGE>
Results of Operations
- ---------------------
Investment income
-----------------
As a result of declines in market values as well as due to principal repayments
on mortgage certificates, unrealized appreciation on Mortgage Certificates
decreased by $45,000 during the three months ended August 1, 1998, which
represents the most significant reason for decreases in investment income during
the 1998 interim periods as compared to 1997 periods. In addition, interest
income decreased during the three and nine months ended August 1, 1998 as
compared to comparative prior year periods as a result of lower average balances
of investments in Mortgage Certificates.
Interest expense
----------------
Interest expense decreased during the three and nine months ended August 1, 1998
as compared to comparative prior year periods primarily due to lower average
balance of Mortgage Financing borrowings outstanding during the periods.
9
<PAGE>
PART II
ITEM 3 - Defaults Upon Senior Securities
-------------------------------
PNS failed to pay interest due 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
10
<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 15, 1998 By: /s/ MARK TODES
---------------------
Mark Todes, President
11
<TABLE> <S> <C>
<ARTICLE> 5
<NAME> PSS, Inc.
<CIK> 0000793322
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-START> NOV-02-1997
<PERIOD-END> AUG-02-1998
<CASH> 256
<SECURITIES> 3,817
<RECEIVABLES> 48
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 4,121
<CURRENT-LIABILITIES> 3,685
<BONDS> 37,627
0
0
<COMMON> 0
<OTHER-SE> (37,191)
<TOTAL-LIABILITY-AND-EQUITY> 4,121
<SALES> 0
<TOTAL-REVENUES> 28
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> (18)
<LOSS-PROVISION> 611
<INTEREST-EXPENSE> (621)
<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>
