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 July 31, 1999
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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 July 31, 1999 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
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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 September 1, 1999:
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.
2
<PAGE>
PSS, INC.
CONSOLIDATED STATEMENTS OF NET LIABILITIES
LIQUIDATION BASIS
(unaudited)
(thousands of dollars)
<TABLE>
<CAPTION>
Assets: 31-Jul-99 31-Oct-98
---------- ----------
<S> <C> <C>
Cash and short-term investments $176 $239
Investment in mortgage certificates 3,085 3,700
Interest receivable 36 45
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Total Assets 3,297 3,984
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Liabilities:
Borrowings under mortgage certificate financing agreement 2,673 3,270
Accounts payable and accrued liabilities 150 177
Reserve for estimated liquidation costs 40 102
PNS 12-1/8% senior notes 5,258 5,258
Interest payable on PNS notes 2,901 2,424
Reserve for interest on PNS notes 159 636
PSS 7-1/8% debentures 22,920 22,920
Interest payable on PSS debentures 8,244 7,024
Reserve for interest on PSS debentures 408 1,629
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Total liabilities 42,753 43,440
---------- ----------
Net liabilities ($39,456) ($39,456)
========== ==========
</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
------------------
31-Jul-99 1-Aug-98
--------- --------
<S> <C> <C>
Investment income $10 $28
Interest expense (605) (621)
General and administrative expense (9) (18)
Decrease in reserve for estimated costs and interest during
period of liquidation 604 611
-------- --------
Change in net liabilities $0 $0
======== ========
Nine months ended
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31-Jul-99 1-Aug-98
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Investment income $108 $198
Interest expense (1,825) (1,872)
General and administrative expense (43) (62)
Decrease in reserve for estimated costs and interest during
period of liquidation 1,760 1,736
-------- --------
Change in net liabilities $0 $0
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
PSS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
LIQUIDATION BASIS
(unaudited)
(thousands of dollars)
Nine months ended
-----------------
31-Jul-99 1-Aug-98
----------- ----------
<S> <C> <C>
Cash flows from operating activities:
Change in net liabilities $0 $0
Adjustments to reconcile to net cash flows from operating activities:
Decrease in unrealized appreciation on MBSI 79 45
Decrease in estimated costs and interest
during liquidation period (1,760) (1,736)
Increase in accrued interest payable 1,698 1,698
Other (19) 7
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Net cash provided (used) by operating activities (2) 14
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Cash flows from investing activities:
Principal repayments on mortgage certificates 536 593
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Net cash provided by investing activities 536 593
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Cash flows from financing activities:
Repayment of mortgage certificate borrowings (597) (664)
-------- --------
Net cash used by financing activities (597) (664)
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Net decrease in cash and short-term investments (63) (57)
Cash and short-term investments-
beginning of period 239 313
-------- --------
Cash and short-term investments-
end of period $176 $256
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
PSS, INC.
Notes to Financial Statements
July 31, 1999
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, 1995, 1996, 1997,
1998, and 1999 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."
PNS failed to pay interest 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 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 July 31, 1999, the Company had assets of approximately $3.30 million and
liabilities, other than the Senior Notes and Debentures including accrued
interest and liquidation costs, of approximately $2.82 million, thus having a
net difference of approximately $480,000 available for holders of Senior Notes
and Debentures. At July 31, 1999, 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 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
<PAGE>
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.
A summary of significant estimates and judgments utilized in preparation of the
consolidated financial statements on a liquidation basis follows:
o The Company's next fiscal year end, October 30, 1999, has been
utilized as the liquidation date for the July 31, 1999
financial statements and the October 31, 1998 fiscal year end
was utilized as the liquidation date for the August 1, 1998
financial statements
o Mortgage Certificates and related interest receivable are
stated at estimated market value.
o Borrowings secured by Mortgage Certificates are stated at face
value, which approximates market value.
o The reserve for estimated costs during the period of
liquidation represents estimates of future costs to be
incurred through the liquidation date.
o Net estimated interest income to be earned on Mortgage
Certificates in excess of interest expense on related
borrowings has been considered in determining the reserve for
estimated costs during the period of liquidation.
o Senior Notes and Debentures and related interest accrued are
stated at face value.
o The reserve for interest during the period of liquidation
represents interest on Senior Notes and Debentures for the
period from the date of the Consolidated Statements of Net
Liabilities to the estimated liquidation date, 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.
Presentation of per common share information on a liquidation basis is not
considered meaningful and has been omitted.
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>
PSS, Inc.
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Liquidity and Capital Resources
- -------------------------------
At July 31, 1999, the Company's principal assets consisted of approximately
$3.09 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 July 31, 1999, approximately $5.26 million of Senior Notes and $22.92 million
of Debentures remain outstanding. At July 31, 1999, the Company had assets of
approximately $3.30 million and liabilities, other than Senior Notes and
Debentures including accrued interest and liquidation costs, of approximately
$2.82 million, thus having a net difference of approximately $480,000 available
for holders of Senior Notes and Debentures. The net difference has decreased
during fiscal 1999 primarily as a result of decreases in unrealized appreciation
of Mortgage Certificates due to declines in market prices and principal
repayments.
The Company failed to pay interest due January 15 and July 15, 1995, 1996, 1997,
1998 and 1999 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."
PNS failed to pay interest 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 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
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Interest income
---------------
Interest income decreased during the three months ended July 31, 1999 as
compared to the prior year period primarily due to decreases in unrealized
appreciation of investments in Mortgage Certificates, most of which resulted
from a decline in market prices. Interest income decreased during the nine
months ended July 31, 1999 as compared to the prior year due to lower average
balances of investments in Mortgage Certificates and decreases in unrealized
appreciation of investment in Mortgage Certificates.
Interest expense
----------------
Interest expense decreased during the three and nine months ended July 31, 1999
as compared to prior year periods primarily due to lower average balances of
Mortgage Financing borrowings outstanding during 1999 periods.
9
<PAGE>
ITEM 3 - Defaults Upon Senior Securities
-------------------------------
PNS failed to pay interest 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 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 14, 1999 By: /s/ MARK TODES
----------------------------------
Mark Todes, President
11
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> OCT-30-1999
<PERIOD-START> NOV-01-1998
<PERIOD-END> JUL-31-1999
<CASH> 176
<SECURITIES> 3,085
<RECEIVABLES> 36
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 3,297
<CURRENT-LIABILITIES> 2,863
<BONDS> 39,890
0
0
<COMMON> 0
<OTHER-SE> (39,456)
<TOTAL-LIABILITY-AND-EQUITY> 3,297
<SALES> 0
<TOTAL-REVENUES> 108
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> (43)
<LOSS-PROVISION> 1,760
<INTEREST-EXPENSE> (1,825)
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
