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 October 31, 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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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
----------------
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 October 31, 1998:
19,473,728.
Documents incorporated by reference: None.
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Page 1 of 25
<PAGE>
PART I
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ITEM 1 - BUSINESS
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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 October 31, 1998, the Company's principal assets consisted of
approximately $3.7 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.
See the Liquidity and Capital Resources section of Management's Discussion and
Analysis of Financial Conditions and Results of Operations regarding the status
of the Company's defaults on the Senior Notes and Debentures and factors upon
which the Company's future operating results, liquidity, capital resources are
primarily dependent.
ITEM 2 - PROPERTIES
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None
ITEM 3 - LEGAL PROCEEDINGS
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The Company has been named as a defendant in a case in the United States
District Court for the district of Alaska concerning allegations that a firearm
was negligently designed and manufactured resulting in injury to the plaintiff.
The Company was sued based upon a sales receipt bearing the Pay'N Save name. The
sale, however, took place after all the assets of Pay'N Save were sold by the
Company to Thrifty Corporation, a subsidiary of Pacific Enterprises. An answer
has been interposed on behalf of the Company and documents have been provided to
plaintiff's counsel to demonstrate the sale of assets and that any liabilities
subsequently arising would not be the obligations of the Company. To date,
plaintiff's counsel has been unwilling to discontinue the action. Company
counsel is involved in motion practice involving the discontinuance of the
Company from the claim. Management of the Company believes that the case will
ultimately be discontinued or dismissed as to the Company without liability,
aside from defense costs.
In the opinion of management, there are no other legal proceedings pending to
which the Company is a party or of which any of its assets is the subject.
2
<PAGE>
ITEM 4 - SUBMISSON OF MATTERS TO A VOTE OF SECURITY HOLDERS
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Not applicable.
PART II
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ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
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MATTERS
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Market Information
The Company's common stock is traded over-the-counter. High and low prices 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. The high and low prices
for the stock during the two years ended October 31, 1998 has been $0.01 per
share, except that the low prices during the last two fiscal quarters of 1998
were reported as being less than $0.01 per share.
Holders
As of December 1, 1998, 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
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ITEM 6 - SELECTED FINANCIAL DATA
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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 for periods
subsequent to October 29, 1994 is presented on a liquidation basis. Presentation
of per share information on a liquidation basis is not considered meaningful and
has been omitted.
<TABLE>
<CAPTION>
Year Ended
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October November November October October
31, 1998 1, 1997 2, 1996 28, 1995 29, 1994
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(thousands of dollars, except per share data)
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Increase in Net Liabilities $(2,265) $(2,265) $(3,020) $(4,231)
Loss before extraordinary items $(2,141)
Net income $9,568 (1)
Net income per common share 0.49
</TABLE>
(1) Includes pre-tax extraordinary gains on early extinguishment of debt of
approximately $13 million.
<TABLE>
<CAPTION>
October November November October October
31, 1998 1, 1997 2, 1996 28, 1995 29, 1994
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<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Total Assets $3,984 $4,829 $5,591 $5,927 $11,383
Short-term borrowings 3,270 4,073 4,922 5,278 10,192
Long-term debt 28,178 28,178 28,178 28,178 28,159
Total Lliabilities 43,440 42,020 40,517 37,833 39,058
Stockholders' deficit $(27,675)
Net Liabilities $(39,456) $(37,191) $(34,926) $(31,906)
</TABLE>
4
<PAGE>
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
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OF OPERATIONS
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Liquidity and Capital Resources
At October 31, 1998, the Company's principal assets consisted of approximately
$3.7 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 October 31, 1998, the Company had assets of approximately $3.98 million and
liabilities, other than Senior Notes and Debentures including accrued interest
and liquidation costs, of $3.44 million, thus having a net difference of
approximately $540,000 available for holders of Senior Notes and Debentures. At
October 31, 1998, approximately $5.26 million of Senior Notes and $22.92 million
of Debentures remain outstanding, such outstanding amounts being unchanged since
1995.
The Company failed to pay the interest due January 15 and July 15, 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 of its Senior Notes 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.
5
<PAGE>
Results of Operations
Investment income
Interest income for each of the years ended October 31, 1998, November 1, 1997,
and November 2, 1996 decreased as compared to the immediate preceding year
primarily as a result of lower balances of investments in Mortgage Certificates.
The weighted average interest income rate earned on the Mortgage Certificates
approximated 7.7%, 7.7% and 7.9% during the years ended October 31, 1998,
November 1, 1997, and November 2, 1996, respectively.
Included in investment income are unrealized gains (or losses) resulting from
increases (or decreases) in unrealized appreciation resulting from
mark-to-market adjustments on Mortgage Certificates. As a result of declines in
market values as well as due to principal repayments on Mortgage Certificates,
unrealized appreciation resulting from mark-to-market adjustments decreased
during the year ended October 31, 1998 by $47,000. Increases in market values
resulted in increases in unrealized appreciation during the years ended November
1, 1997 and November 2, 1996 of approximately $64,000 and $25,000, respectively.
Interest expense
Interest expense for each of the years ended October 31, 1998, November 1, 1997,
and November 2, 1996, decreased as compared to the immediate preceding year
primarily due to lower average balances of Mortgage Financing borrowings
outstanding during the periods. The weighted average interest expense rate on
Mortgage Certificate related borrowings approximated 6.0%, 6.0%, and 5.6% during
the years ended October 31, 1998, November 1, 1997, and November 2, 1996,
respectively.
Year 2000
The Company has contacted significant service providers to determine the extent
to which the Company may be vulnerable to third-party Year 2000 issues. Based on
current information, management believes that modifications necessary to operate
and effectively manage the Company will be performed by the Year 2000 and that
related costs will not have a material impact on the Company's results of
operations, cash flow or financial condition of future periods.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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The Company's investment in mortgage certificates is a market risk sensitive
instrument relative primarily to interest rate risk. The investment represents a
pass-through and participation certificate issued by the Federal Home Loan
Mortgage Corporation in 1990 with an original principal of approximately $11
million and a 2020 maturity date. The Company's average investment approximated
$4.1 million, $4.9 million and $5.5 million during the fiscal years ended
October 31, 1998, November 1, 1997 and November 2, 1996, respectively. The
investment in mortgage certificates has declined over the past three years due
primarily to principal repayments from the
6
<PAGE>
underlying mortgages within the mortgage certificate pool. Specifically,
principal repayments have approximated 15% to 20% of the mortgage investment
during each of the past two fiscal years. The rate of interest to be earned on
the mortgage certificates is adjustable based on general interest rate trends,
with certain maximums, including limits of 2% for annual rate changes and
interest rate maximums of approximately 13%. Interest rates on the underlying
mortgages are adjusted, as applicable, throughout the year. The weighted average
interest income rates earned on the mortgage certificates approximated 7.7%
during each of the past two fiscal years and the interest rate at October 31,
1998 approximated 7.6%.
Mortgage certificates are financed with borrowings from an investment bank, such
borrowing being secured by the mortgage certificates and payable on demand.
Borrowings bear interest at rates generally approximating the three month
Federal Funds rate plus 25 to 75 basis points. The Company's average borrowings
approximated $3.7 million, $4.6 million and $5 million during the fiscal years
ended October 31, 1998, November 1, 1997 and November 2, 1996, respectively. The
borrowings have declined over the past three years due primarily to applying
principal repayments from the mortgage certificates to repay borrowings. The
weighted average interest expense rates incurred on the borrowings approximated
6% during each of the past two fiscal years and the interest rate at October 31,
1998 approximated 6%.
Generally, a decline in interest rates would result in a decrease in interest
rates earned on mortgage certificates as underlying mortgages would likely
adjust interest rates down, however such adjustment would occur throughout the
year. Interest rates paid on borrowings would likely decline on a more immediate
basis. The timing of when interest income and expense rates are effected
historically has resulted in a short-term margin improvement during periods of
interest rate declines. The market price of mortgage certificates has
historically increased as interest rates decline. During periods of interest
rate increases, the opposite is the case.
In the Company's circumstances, whereby its future operating results and
financial condition are primarily dependent upon actions to be taken with
respect to the Company's Senior Notes and Debentures, both of which are in
default, and its financial statements are presented on a liquidation basis
utilizing a liquidation date in October 1999, additional quantitative and
qualitative disclosures about market risk, including projections of future cash
flows, have not been presented.
7
<PAGE>
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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INDEX TO FINANCIAL STATEMENTS
- -----------------------------
Financial statements Page
-------------------- ----
Report of Independent Accountants 9
Consolidated Statements of Net Liabilities 10
Consolidated Statements of Changes of Net Liabilities 11
Consolidated Statements of Cash Flows 12
Notes to Financial Statements 13
Financial statement schedules
-----------------------------
Financial statement schedule information is presented in the financial
statements.
SUPPLEMENTARY FINANCIAL INFORMATION
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Selected quarterly financial data (unaudited) 19
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8
<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 October 31, 1998 and
November 1, 1997, and the related consolidated statements of changes in net
liabilities (liquidation basis) and of cash flows for the years ended October
31, 1998, November 1, 1997 and November 2, 1996. 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 October 31, 1998 and November 1, 1997, and the changes in their
net liabilities (liquidation basis) and their cash flows for the years ended
October 31, 1997, November 1, 1997 and November 2, 1996, in conformity with
generally accepted accounting principles.
/s/ PricewaterhouseCoopers LLP
Seattle, Washington
December 14, 1998
9
<PAGE>
PSS, INC.
Consolidated Statements of Net Liabilities
(Liquidation Basis)
(thousands of dollars)
<TABLE>
<CAPTION>
October November
31, 1998 1, 1997
------------------------
<S> <C> <C>
Cash and short-term investments $239 $313
Investment in mortage certificates 3,700 4,459
Accrued interest receivable 45 57
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Total Assets 3,984 4,829
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Borrowings under mortgage certificate financing agreement 3,270 4,073
Accounts payable and accrued liabilities 177 169
Reserve for estimated costs during period of liquidation 102 151
PNS 12 1/8% senior notes 5,258 5,258
Accrued interest payable on PNS notes 2,424 1,788
Reserve for interest on PNS notes during period of liquidation 636 636
PSS 7 1/8% debentures 22,920 22,920
Accrued interest payable on PSS debentures 7,024 5,396
Reserve for interest on PSS debentures during period of liquidation 1,629 1,629
--------- ---------
Total Liabilities 43,440 42,020
--------- ---------
Net Liabilities ($39,456) ($37,191)
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
10
<PAGE>
PSS, INC.
Consolidated Statements of Changes in Net Liabilities
(Liquidation Basis)
(thousands of dollars)
<TABLE>
<CAPTION>
Year Ended
----------
October November November
31, 1998 1, 1997 2, 1996
-----------------------------------------
<S> <C> <C> <C>
Investment income $270 $446 $459
Interest expense (2,490) (2,546) (2,601)
General and administrative expense (94) (104) (197)
Decrease in reserve for estimated costs
and interest during period of liquidation 2,314 2,204 1,674
Provision for estimated costs and interest
during period of liquidation (2,265) (2,265) (2,355)
-------- -------- --------
Increase in Net Liabilities $(2,265) $(2,265) $(3,020)
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
11
<PAGE>
PSS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(thousands of dollars)
<TABLE>
<CAPTION>
Year ended
----------
October November November
31, 1998 1, 1997 2, 1996
----------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Increase in Net Liabilities $(2,265) $(2,265) $(3,020)
Decrease (increase) in unrealized appreciation 47 (64) (25)
Adjustments to reconcile to net cash flows
from operating activities:
Increase (decrease) in estimated costs and interest
during period of liquidation (49) 61 681
Increase in accrued interest payable 2,264 2,265 2,308
Other 20 34 62
---- ---- ----
Net cash provided by operating activities 17 31 6
---- ---- ----
Cash flows from investing activities:
Principal repayments on mortgage certificates 712 855 615
---- ---- ----
Net cash provided by investing activities 712 855 615
---- ---- ----
Cash flows from financing activities:
Repayment of mortgage certificate borrrowings (803) (849) (356)
----- ----- -----
Net cash used by financing activities (803) (849) (356)
----- ----- -----
Net increase (decrease) in cash and short-term investments (74) 37 265
Cash and short-term investments at beginning of year 313 $276 $11
----- ----- -----
Cash and short-term investments at end of year $239 $313 $276
===== ===== =====
</TABLE>
The accompanying notes are an integral part of these financial statements.
12
<PAGE>
PSS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - The Company
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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 and July 15, 1995, 1996,
1997 and 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."
PNS failed to pay interest due on July 15, 1995, January 15, 1996 and July 15,
1996 and failed to pay the outstanding principal on its Senior Notes 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 October 31, 1998, the Company had assets of approximately $3.98 million and
liabilities, other than the Senior Notes and Debentures including accrued
interest and liquidation costs, of approximately $3.44 million, thus having a
net difference of approximately $540,000 available for holders of Senior Notes
and Debentures. At October 31, 1998, 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
13
<PAGE>
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
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 October 31, 1998
financial statements, the October 31, 1998 fiscal year end was
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.
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.
14
<PAGE>
NOTE 2 - Liquidation Basis of Accounting (continued)
- ----------------------------------------------------
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 October 31, 1998, November 1, 1997, and November
2, 1996 the Company's actual net excess of costs incurred over net investment
income reasonably approximated the recorded reserve for such years.
Presentation of per common share information on a liquidation basis is not
considered meaningful and has been omitted.
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 an investment bank. 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.
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.
Reclassification
Certain amounts in prior period financial statements have been reclassified to
conform with current year classifications.
15
<PAGE>
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 to 75 basis points. Mortgage Financing
borrowings and related interest rates approximated $3.3 million and 6% at
October 31, 1998, and $4.1 million and 6% at November 1, 1997, respectively.
During the years ended October 31, 1998, November 1, 1997, and November 2, 1996,
the average balance of mortgage related borrowings outstanding approximated $3.7
million, $4.6 million, and $5 million, and the weighted annual average interest
expense rates approximated 6.0%, 6.0%, and 5.6%, respectively.
At October 31, 1998, the interest rate to be earned on the Mortgage Certificates
approximated 7.6% 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%, 7.7%, and 7.9%, during the years ended October 31, 1998,
November 1, 1997, and November 2, 1996, respectively.
NOTE 5 - Subordinated Debt
- --------------------------
Subordinated debt and related interest payable through the balance sheet dates
are summarized as follows (thousands of dollars):
October 31, November 1,
1998 1997
------------ ----------
PNS 12-1/8% Senior Notes $ 5,258 $ 5,258
Interest payable on Senior Notes 2,424 1,788
----- -----
$ 7,682 $ 7,046
===== =====
PSS 7-1/8% Debentures $ 22,920 $ 22,920
Interest payable on Debentures 7,024 5,396
------ ------
$ 29,944 $ 28,316
====== ======
16
<PAGE>
NOTE 5 - Subordinated Debt (continued)
- --------------------------------------
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. At October 31,
1998, the Intercompany Debenture approximated $1.4 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, 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.
NOTE 6 - Income Taxes
- ---------------------
Due to losses for each of the years ended October 31, 1998, November 1, 1997 and
November 2, 1996, there was no provision for income taxes recorded.
As of October 31, 1998, for income tax purposes, net operating loss
carryforwards, which begin to expire in 2001, approximate $144 million. 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.
17
<PAGE>
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.
NOTE 8 - Contingencies
- ----------------------
The Company has been named as a defendant in a case in the United States
District Court for the district of Alaska concerning allegations that a firearm
was negligently designed and manufactured resulting in injury to the plaintiff.
The Company was sued based upon a sales receipt bearing the Pay'N Save name. The
sale, however, took place after all the assets of Pay'N Save were sold by the
Company to Thrifty Corporation, a subsidiary of Pacific Enterprises. An answer
has been interposed on behalf of the Company and documents have been provided to
plaintiff's counsel to demonstrate the sale of assets and that any liabilities
subsequently arising would not be the obligations of the Company. To date,
plaintiff's counsel has been unwilling to discontinue the action. Company
counsel is involved in motion practice involving the discontinuance of the
Company from the claim. Management of the Company believes that the case will
ultimately be discontinued or dismissed as to the Company without liability,
aside from defense costs.
18
<PAGE>
NOTE 9 - Selected Quarterly Financial Data (Unaudited)
- ------------------------------------------------------
Selected quarterly financial data are as follows (thousands of dollars):
<TABLE>
<CAPTION>
Fiscal Quarters Ended
---------------------
October August May January
31, 1998 1, 1998 2, 1998 31, 1998
------------------------------------------------
<S> <C> <C> <C> <C>
Decrease in reserve for estimated costs and
interest during period of liquidation $578 $611 $567 $558
Provision for estimated costs and interest
during period of liquidation (2,265) --- --- ---
Increase in Net Liabilities (2,265) --- --- ---
</TABLE>
<TABLE>
<CAPTION>
Fiscal Quarters Ended
---------------------
November August May February
1, 1997 2, 1997 3, 1997 1, 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) --- --- ---
</TABLE>
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- --------------------------------------------------------------------------------
FINANCIAL DISCLOSURE
- --------------------
None.
19
<PAGE>
PART III
--------
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- ------------------------------------------------------------
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 43 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 62 Director of the Company since
Director October 1986. During 1996, Mr.
Nathanson, a private investor,
left the employ of L.Luria (a
retail company). He served as
Chief Executive Officer of US
Holographics (marketing
company for holographic
products) from April 1992 to
December 1995.
Carite L. Torpey 50 Vice President, Secretary and
Vice President, Secretary Treasurer of the Company since
and Treasurer July 1997 and Assistant
Secretary for more than 5
years prior thereto. Vice
President of TG Services, Inc.
since July 1998 and Assistant
Vice President and Assistant
Secretary since July 1996.
Employed by The Trump Group (a
private investment company)
for more than 5 years prior
hereto.
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.
20
<PAGE>
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------------------------------------------------------------------------
The following table sets forth, as of December 31, 1998, 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) 2,391,079 12.28%
Zimmerman Retailing Group Limited (a) 2,391,079 12.28%
P.O. Box 948
Route 2, Pleasant Plain Road
Fairfield, IA 52556
Seacorp, Inc. (b) 8,014,705 41.1%
P.O. Box 2573
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, 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
21
<PAGE>
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
22
<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 from
Certificate of Incorporation of Exhibit 3.2 to the
the Registrant Registration Statement.
3.3 Certificate of Amendment of Incorporated by reference from
Certificate of Incorporation Exhibit 3.1 to Quarterly
of the Registrant Report on Form 10-Q for the
quarter ended July 30, 1988.
3.4 Certificate of Amendment of Incorporated by reference from
Certificate of Incorporation Exhibit 3.4 to the Annual
of the Registrant 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 from
Inc. and United States Trust 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 from
tween the Registrant and Exhibit 4.1 to the Quarterly
United States Trust Company of Report on Form 10-Q for
quarter ended April 30, 1988.
23
<PAGE>
New York as Trustee, relating
to the 7-1/8% Convertible
Debentures due July 15, 2006.
4.3 Indenture between PNS Inc. and Incorporated by reference from
Norwest Bank Minneapolis, Nat- Exhibit 4.1 to the
ional Association as Trustee, Registration Statement on Form
relating to the 12-1/8% Senior S-1 (File No. 33-5591) of PNS
Subordinated Notes due July 15, Inc.
1996 (including the form of
Senior Subordinated Note.
4.4 First Supplemental Indenture be- Incorporated by reference from
tween PNS Inc., and Norwest Bank Exhibit 4.2 to the Quarterly
Minnesota, National Association Report on Form 10-Q for the
as Trustee, relating to the quarter ended April 30, 1988.
12-1/8% Senior Subordinated
Notes due July 15, 1996.
10.5 Letter Agreement dated Incorporated by reference from
February 9, 1990 by and among Exhibit (i) to Quarterly
PSSC Inc. and Bear Stearns & Report on form 10-Q for the
Co., Inc. for the purchase and the quarter ended February 3,
financing of adjustable-rate 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.
24
<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: December 30, 1998 By: /s/ MARK TODES
-------------------------------
Mark Todes, President and
Director
25
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000793322
<NAME> PSS,Inc.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-START> NOV-02-1997
<PERIOD-END> OCT-31-1998
<CASH> 239
<SECURITIES> 3,700
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 3,984
<CURRENT-LIABILITIES> 3,549
<BONDS> 39,891
0
0
<COMMON> 0
<OTHER-SE> (39,456)
<TOTAL-LIABILITY-AND-EQUITY> 3,549
<SALES> 0
<TOTAL-REVENUES> 270
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> (94)
<LOSS-PROVISION> (2,265)
<INTEREST-EXPENSE> (2,490)
<INCOME-PRETAX> (2,265)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,265)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,265)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
